Note 2: Acquisitions

On October 9, 2015, we completed the acquisition of Bancshares, through the merger of Bancshares with and into us. The Bancshares Merger was consummated pursuant to the Bancshares Merger Agreement dated as of May 27, 2015. The Bancshares Merger expanded our presence in the Oklahoma City metro area with five additional banking centers, increasing our total to ten. It also expanded our geographic footprint to Colorado with three full-service banking centers and one loan production office in Denver.

Under the terms of the Bancshares Merger Agreement, at the effective time of the Bancshares Merger, all outstanding shares of Bancshares common stock were converted into the right to receive an aggregate merger consideration of $41.8 million, 51% paid in shares of our common stock, representing an aggregate 1,213,985 shares of our common stock, plus cash in lieu of any fractional shares, and 49% paid in cash in an aggregate amount equal to $20.4 million.

The Bancshares Merger added $301.5 million in assets, $202.4 million in loans, $245.2 million in deposits, $12.3 million in goodwill, and $2.7 million in core deposit intangible.

In connection with the Bancshares Merger, First Commercial Bank was merged with and into Bank SNB, with Bank SNB the surviving bank, and all systems, products, and services were successfully integrated to our platform.

The following is a reconciliation of cash received from the acquisition of Bancshares as of the acquisition date:


(Dollars in thousands)
Fair value of assets acquired	$	301,499
Liabilities assumed		(259,718)
Net assets acquired		41,781
Stock issued as consideration		(21,366)
Cash acquired		(32,699)
Cash received in business combination, net of cash paid	$	(12,284)

The acquisition of the net assets of Bancshares constitutes a business combination as defined by the FASB ASC Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their fair values as required. Fair values were determined based on the requirements of FASB ASC Topic 820, Fair Value Measurements. In many cases, the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. The following schedule is a breakdown of the assets acquired and liabilities assumed as of the acquisition date:


	First Commercial Bancshares, Inc.
		Acquired from Bancshares		Fair Value Adjustments		Fair Value
(Dollars in thousands)
Assets, Acquired
Cash and due from banks	$	5,874	$	-	$	5,874
Interest-bearing deposits with other banks		17,196		-		17,196
Federal funds sold		9,629		-		9,629
Cash and cash equivalents		32,699		-		32,699
Investment securities		34,762		(184)		34,578
Loans		210,223		(7,790)		202,433
Allowance for loan losses		4,298		(4,298)		-
Total loans receivable		205,925		(3,492)		202,433
Bank premises and equipment, net		4,241		1,341		5,582
Cash value of life insurance		7,153		-		7,153
Accrued interest receivable		790		-		790
Deferred tax asset		1,650		15		1,665
Core deposit intangible		55		2,646		2,701
Other assets		1,644		-		1,644
Total assets acquired	$	288,919	$	326	$	289,245

Liabilities, Assumed
Deposits
Demand and non-interest bearing	$	101,464	$	-	$	101,464
Savings and interest-bearing transaction accounts		59,356		-		59,356
Time deposits		84,410		-		84,410
Total Deposits		245,230		-		245,230
Other borrowings		7,180		-		7,180
Accrued interest payable and other liabilities		1,833		320		2,153
Subordinated debentures		5,155		-		5,155
Total liabilities assumed		259,398		320		259,718

Equity
Equity		31,158		(31,158)		-
Total equity assumed		31,158		(31,158)		-

Total liabilities and equity assumed	$	290,556	$	(30,838)	$	259,718

Net assets acquired						29,527
Purchase price						41,781
Goodwill					$	12,254

The following is a description of the methods used to determine the fair values of significant assets and liabilities presented above:

Cash and due from banks, interest-bearing deposits with other banks and federal funds sold– The carrying amount of these assets is a reasonable estimate of fair value based on the short-term nature of these assets.

Investment securities – Investment securities were acquired from Bancshares with a $0.2 million adjustment to market value based upon quoted market prices or other observable inputs.

Loans – Fair values for loans were based on a discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and current discount rates. The discount rates used for loans are based on current market rates for new originations of comparable loans and include adjustments for liquidity concerns.

We evaluated $200.0 million of the loans purchased in conjunction with the acquisition in accordance with the provisions of FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs, and those loans were recorded with a $4.5 million discount. As a result, the fair value discount on these loans is being accreted into interest income over the weighted average life of the loans using a constant yield method. The remaining $7.8 million of loans evaluated were considered purchased credit impaired loans within the provisions of FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, and were recorded with a $3.3 million discount. These purchased credit impaired loans will recognize interest income through accretion of the difference between the carrying amount of the loans and the expected cash flows.

Bank premises and equipment – Bank buildings and land were acquired with an adjustment to fair value. Other bank premises and equipment were acquired at the carrying amount of the assets.

Cash value of life insurance – Cash value of life insurance was acquired at market value.

Accrued interest receivable – Accrued interest receivable was acquired at market value.

Deferred tax asset – The current and deferred income tax assets and liabilities are recorded to reflect the differences in the carrying values of the acquired assets and assumed liabilities for financial reporting purposes and the cost basis for federal income tax purposes, at our estimated federal income tax rate of 36.00%.

Goodwill – The consideration paid as a result of the acquisition exceeded the fair value of the net assets acquired; therefore, the Company recorded $12.3 million of goodwill. Goodwill established prior to the acquisition was written off.

Core deposit intangible – This intangible asset represents the value of the relationships that Bancshares had with its deposit customers. The fair value of this intangible asset was estimated based on a discounted cash flow methodology that gave appropriate consideration to expected customer attrition rates, cost of the deposit base, and the net maintenance cost attributable to customer deposits. The Company recorded $2.7 million of gross core deposit intangible.

Other assets – Other assets were acquired at carrying value, which approximates market value.

Deposits – The fair values used for the demand and savings deposits that comprise the transaction accounts acquired, by definition equal the amount payable on demand at the acquisition date. No fair value adjustment was applied for time deposits because the weighted average interest rate of Bancshare’s certificates of deposits were at the market rates for similar funding at the time of acquisition

Other borrowings – The fair value of other borrowings is estimated based on borrowing rates currently available to us for borrowings with similar terms and maturities.

Accrued interest payable and other liabilities – The fair value used represents the adjustment of certain estimated liabilities from Bancshares.

Subordinated debentures – Subordinated debentures were acquired at carrying value, which approximates market value.

The following unaudited pro forma condensed financial information presents our results of operations, including the effects of the purchase accounting adjustments and acquisition expenses, had the acquisition taken place at the beginning of the period presented:


		For the year ended December 31,
		2015(1)		2014
(Dollars in thousands except per share data)
Interest income	$	84,399	$	84,710
Interest expense		8,049		8,236
Net interest income		76,350		76,474

Provision for loan losses		(3,080)		(6,398)

Non-interest income		16,292		21,439
Non-interest expense (2)		68,860		67,779
Income before taxes		26,862		36,532
Income taxes		9,601		13,646
Net income		17,261		22,886

Earnings allocated to participating securities		(258)		(253)
Numerator for earnings per common share	$	17,003	$	22,633

Earnings per share:
Basic	$	0.90	$	1.10
Diluted		0.89		1.09

Basic weighted average shares outstanding		18,975,450		20,631,471
Diluted weighted average shares outstanding		19,129,533		20,774,348

(1) Subsequent to the Bancshares Merger date, activity related to Bancshares contributed pre-tax revenues of $2.9 million and incurred pre-tax expenses of $1.2 million, resulting in $1.1 million total contribution to our net income. We incurred pre-tax non-recurring expenses totaling $1.9 million, including: $0.5 million in personnel related expenses, $0.4 million in data processing expenses, $0.5 million in legal, accounting and investment banker expenses, and $0.5 million in marketing and other expenses.

(2) The 2015 pro forma non-interest expense is adjusted to exclude $2.5 million of pre-tax non-recurring expenses incurred by Bancshares prior to the Bancshares Merger date attributed to the following: $0.7 million in employee related expenses, $0.4 million in legal expenses, and $1.4 million to discount a loan pursuant to a provision of the Bancshares Merger Agreement.

Acquired Loans. Changes in the carrying amounts and accretable yields for all ASC 310.30 loans were as follows for the year ended December 31, 2016 and 2015.



	For the year ended December 31,
	2016				2015
			Carrying				Carrying
	Accretable		amount		Accretable		amount
(Dollars in thousands)	Yield		of loans		Yield		of loans
Balance at beginning of period	$	807	$	7,914	$	540	$	4,971
Acquisition		-		-		(11)		4,396
Payments received		-		(2,964)		1		(1,814)
Transfers to other real estate / repossessed assets		-		-		541		-
Net charge-offs		(11)		(318)		-		(81)
Net reclassifications to / from nonaccretable amount		-		-		240		-
Accretion		(166)		-		(504)		442
Balance at end of period	$	630	$	4,632	$	807	$	7,914