Note 5 – Acquisition of Owens Realty Mortgage, Inc.

On November 7, 2018, the Company entered into an Agreement and Plan of Merger as amended, (the “Merger Agreement”) with ORM, a specialty finance company that focused on the origination, investment, and management of commercial real estate loans, primarily in the Western U.S. Pursuant to the Merger Agreement, the Company would acquire ORM in a stock-for-stock transaction with an aggregate purchase price equal to 99.0% of ORM’s book value determined in accordance with the Merger Agreement. Upon the closing, each outstanding share of ORM’s common stock was converted into the right to receive 1.441 shares of the Company common stock, based on a fixed exchange ratio.

On March 29, 2019, the Company completed the acquisition of ORM, through a merger of ORM with and into a wholly owned subsidiary of the Company, in exchange for approximately 12.2 million shares of the Company’s common stock. In accordance with the Merger Agreement, the number of shares of the Company’s common stock issued was based on an exchange ratio of 1.441 per share. The total purchase price for the merger of $179.3 million consisted exclusively of the Company’s common stock issued in exchange for shares of ORM common stock and cash paid in lieu of fractional shares of the Company’s common stock, and was based on the $14.67 closing price of the Company’s common stock on March 29, 2019. Upon the closing of the transaction, the Company’s historical stockholders owned approximately 72% of the combined company’s stock, while historical ORM stockholders owned approximately 28% of the combined company’s stock.

The following table summarizes the fair value of assets acquired and liabilities assumed from the merger:


(In Thousands)	March 29, 2019
Assets
Cash and cash equivalents	$	10,822
Loans, net		130,449
Real estate acquired in settlement of loans, held for sale		67,973
Investment in unconsolidated joint ventures		8,619
Other assets
Deferred tax assets		4,660
Accrued interest		1,209
Other		379
Total assets acquired	$	224,111
Liabilities
Secured borrowings		12,713
Accounts payable and other accrued liabilities		1,000
Due to Manager		228
Deferred tax liabilities		123
Total liabilities assumed	$	14,064
Net assets acquired	$	210,047

For acquired loan receivables, the gross contractual unpaid principal acquired is $134.8 million and we expect to collect all contractual amounts.

The aggregate consideration transferred, net assets acquired, and the related bargain purchase gain was as follows:


Total consideration transferred (in thousands, except share and per share data)
FV of net assets acquired	$	210,047

ORM shares outstanding at March 29, 2019		8,482,880
Exchange ratio	x	1.441
Shares issued		12,223,830
Market price as of March 29, 2019	$	14.67
Total consideration transferred based on value of shares issued	$	179,324

Bargain purchase gain	$	30,728

Based on the calculation, the Company has determined the transaction resulted in a bargain purchase gain, which is predominantly the result of changes in the market price of the Company’s common stock between the determination date and the closing date of the transaction. This gain is reflected separately within the unaudited interim consolidated statements of income under gain on bargain purchase.

In a business combination, the initial allocation of the purchase price is considered preliminary and, therefore, is subject to change until the end of the measurement period. The final determination must occur within one year of the acquisition date. Because the measurement period is still open, certain fair value estimates may change once all information necessary to make a final fair value assessment has been received.

Acquisition-related costs directly attributable to the ORM Merger, including legal, accounting, valuation, and other professional or consulting fees, totaling $0.1 million and $6.1 million for the three and nine months ended September 30, 2019, respectively, were expensed as incurred and are reflected separately within the unaudited interim consolidated statements of income.

The following pro-forma income and earnings (unaudited) of the combined company are presented for the three and nine months ended September 30, 2018, as if the merger had occurred on January 1, 2018:


		For the three months ended		For the nine months ended
(In Thousands)		September 30, 2018		September 30, 2018
Selected Financial Data
Interest income	$	47,725	$	132,710
Interest expense		(29,636)		(79,832)
Provision for loan losses		(558)		(363)
Non-interest income		45,419		131,927
Non-interest expense		(42,086)		(122,970)
Income before provision for income taxes		20,864		61,472
Provision for income (taxes) benefit		(1,046)		(4,439)
Net income	$	19,818	$	57,033

Non-recurring pro-forma transaction costs directly attributable to the merger were $0.1 million and $9.0 million for the three and nine months ended September 30, 2019, respectively, and have been deducted from the non-interest expense amount above. The Company excluded the bargain purchase gain of $30.7 million from the amount above.