Note 2 - Bank Acquisition

3 Months Ended

Mar. 31, 2023

Notes to Financial Statements

Business Combination Disclosure [Text Block]

(2) Bank Acquisition

Commonwealth Bancshares, Inc.

On March 7, 2022, Bancorp completed its acquisition of Commonwealth Bancshares, Inc. in a combined stock and cash transaction for total consideration of $168 million. Bancorp acquired 15 retail branches, including nine in Jefferson County, four in Shelby County, and two in Northern Kentucky.

The following table provides a summary of the fair value of the assets acquired and liabilities assumed by Bancorp as of the acquisition date, the previously reported preliminary fair value adjustments necessary to adjust those acquired assets and assumed liabilities to fair value, final provisional period adjustments to those previously reported preliminary values, and the final fair values of those assets and liabilities as recorded by Bancorp.

	As Recorded			Fair Value				Classification			Provisional Period		As Recorded
(in thousands)	By CB			Adjustments (1)				Adjustments (2)			Adjustments (1)		by Bancorp
Assets aquired:
Cash and due from banks	$	380,450		$	—			$	—		$	—	$	380,450
Mortgage loans held for sale		3,559			—				—			—		3,559
Available for sale debt securities		247,209			(416	)	a		(161,819	)		—		84,974
Held to maturity debt securities (2)		—			—		a		161,819			—		161,819
Federal Home Loan Bank stock, at cost		4,436			—				—			—		4,436
Loans		645,551			(13,147	)	b		—			—		632,404
Allowance for credits losses on loans		(16,102	)		6,152		c		—			—		(9,950	)
Net loans		629,449			(6,995	)			—			—		622,454
Premises and equipment, net		28,784			4,009		d		—			—		32,793
Accrued interest receivable		1,973			—				—			—		1,973
Goodwill		5,412			(5,412	)	e		—			—		—
Core deposit intangible		—			12,724		f		—			—		12,724
Customer list intangibles		—			14,360		g		—			—		14,360
Mortgage servicing rights		9,387			3,289		h		—			—		12,676
Deferred income taxes, net		—			(3,727	)	i		—			—		(3,727	)
Other assets		9,389			(1,065	)	j		—			—		8,324
Total assets acquired	$	1,320,048		$	16,767			$	-		$	-	$	1,336,815
Liabilities assumed:
Deposits:
Non-interest bearing	$	302,098		$	—			$	—		$	—	$	302,098
Interest bearing		818,334			371		k		—			—		818,705
Total deposits		1,120,432			371				—			—		1,120,803
SSUAR		66,220			—				—			—		66,220
Subordinated debentures		26,806			(794	)	l		—			—		26,012
Line of credit		3,200			—				—			—		3,200
Accrued interest payable		243			—				—			—		243
Other liabilities		17,822			1,296		m		—			—		19,118
Total liabilities assumed		1,234,723			873				—			—		1,235,596
Net assets acquired	$	85,325		$	15,894			$	-		$	-	$	101,219
Consideration for common stock													$	133,825
Cash consideration paid														30,994
Non-controlling interest of acquired entity														3,094
Total consideration													$	167,913
Goodwill													$	66,694

(1) See the following page for explanations of individual fair value/provisional period adjustments.

(2)  As of acquisition date, securities with a fair value of $162 million were classified by Bancorp as HTM.

Explanation of fair value/provisional period adjustments:

a. Adjustment to investment securities based on Bancorp’s evaluation of the acquired portfolio.

b. Adjustments to loans to reflect estimated fair value adjustments, including the following:

(in thousands)
Fair value adjustment - acquired non PCD loans	$	(9,216	)
Fair value adjustment - acquired PCD loans		(4,094	)
Eliminate unrecognized loan fees on acquired loans and fair value hedge		163
Net loan fair value adjustments	$	(13,147	)

c. The net adjustment to ACL for loans includes the following:

(in thousands)
Reversal of historical CB ACL for loans	$	(16,102	)
Estimate of lifetime credit losses for PCD loans		9,950
Net change in ACL for loans	$	(6,152	)

d. Adjustment to premises and equipment to reflect the estimated fair value of acquired premises and equipment and right of use assets.

e. Elimination of the historical CB goodwill.

f. Calculation of CDI related to the acquisition.

g. Calculation of CLI related to the acquisition.

h. Adjustment to reflect the estimated fair value of MSRs.

i. Adjustment to net DTAs associated with the effects of the purchase accounting adjustments.

j. Adjustment to other assets to reflect the estimated fair value of prepaid and other assets.

k. Adjustment to deposits to reflect the estimated fair value of time deposits in interest rates, which was based on an analysis of market interest rates and maturity dates at the time of acquisition.

l. Adjustment to reflect the estimated fair value of subordinated debentures for differences in interest rates, which was based primarily on an analysis of market interest rates and maturity dates at the time of acquisition.

m. Adjustment to other liabilities to establish the reserve for unfunded loan commitments under CECL, operating lease liabilities and various accrual adjustments.

Goodwill of approximately $67 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, was recorded in the CB acquisition and is the result of expected operational synergies and other factors. This goodwill is attributable to the Company’s Commercial Banking and Wealth Management & Trust segments. Goodwill related to the CB acquisition is not deductible for tax purposes, as the transaction was structured as stock sale.

Loans acquired that were not subject to guidance relating to PCD loans include loans with a fair value and gross contractual amounts receivable of $540 million and $549 million at the date of acquisition.

Total revenue, defined as net interest income and non-interest income, attributed to CB totaled approximately $10.7 million and $3.2 million for the three months ended March 31, 2023 and 2022, respectively. The significant increase between the three months ended March 31, 2023 and 2022 is the result of the prior year period including only a partial month of activity given the March 7, 2022 acquisition date.

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

(in thousands)	Three months ended March 31, 2022
Net interest income	$	53,793
Provision for credit losses (1)		(2,150	)
Non-interest income		22,143
Non-interest expense (2)		47,289
Income before income tax expense		30,797
Income tax expense		6,467
Net income		24,330
Less net income attributed to non-controlling interest		51
Net income available to stockholders	$	24,279
Earnings per share
Basic	$	0.84
Diluted		0.83
Basic weighted average shares outstanding		29,056
Diluted weighted average shares outstanding		29,364

(1) - Excludes $4.4 million in merger related credit loss expense for the three months ended March 31, 2022. 

(2) - Excludes $24.1 million in merger expenses for the three months ended March 31, 2022.