Note 10 - Business Combination

3 Months Ended

Mar. 31, 2023

Notes to Financial Statements

Business Combination Disclosure [Text Block]

NOTE 10 – BUSINESS COMBINATION

As described in Note 1, On December 1, 2022, the Company completed its merger with Liberty Bancshares, Inc. (“Liberty’), pursuant to a previously announced definitive merger agreement. The Company accounted for the Liberty acquisition using the acquisition method of accounting and accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair value on the acquisition date, in accordance with purchase accounting. The Company relied on the income approach to estimate the value of the loans. The loans’ underlying characteristics (account types, remaining terms (in months), annual interest rates or coupons, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures and remaining balance) were considered. Various assumptions were applied regarding credit, interest, and prepayment risks for the loans based on loan types, payment types and fixed or variable classifications. Due to the timing of the merger, the estimated fair value measurements remain preliminary. Management will continue to review the estimated fair values and expects to finalize its analysis of the acquired assets and assumed liabilities in the transaction within one year of the merger. As the Company finalizes its analysis of these assets, there may be adjustments to the recorded carrying values. Any adjustments to carrying values will be recorded in goodwill. The calculation of goodwill is subject to change for up to one year after closing date of the transaction as additional information relative to closing date estimates and uncertainties becomes available.  

The Company also recorded an identifiable intangible asset representing the core deposit base of Liberty. The discounted cash flow method was used in valuing this intangible. This method is based upon the principle of future benefits; economic value is based on anticipated future benefits as measured by cash flows expected to occur in the future. The estimated future cash flows are converted to a value indicator by determining the present value of the cash flows using a discount rate. The discount rate is based on the nature of the business, the level of risk, and the expected stability of the estimated future cash flows. The higher the risk, the higher the discount rate, and the lower the value indicator.

Time deposit fair values were estimated using an income approach. The methodology entailed discounting the contractual cash flows of the instruments over their remaining contractual lives at prevailing market rates. Interest and principal payments were projected for each category of CDs over the period from the valuation date to the maturity date. These payments represent future cash flows to be paid to depositors until maturity. Using appropriate market interest rates for each category of CDs, the future cash flows were discounted to their present value equivalents.

Middlefield recorded goodwill and intangibles associated with the purchase of Liberty totaling $16.7 million. Goodwill is not amortized, but is periodically evaluated for impairment. Middlefield Bank did not recognize any impairment during the quarter ended March 31, 2023.

Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. During the year ended December 31, 2022, no such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible which is being amortized over the estimated useful life of 10 years. The gross carrying amount of the core deposit intangible acquired in the Liberty merger that closed in 2022 was $6.4 million at March 31, 2023 with $254,000 accumulated amortization as of that date.

The following table summarizes the purchase of Liberty as of December 1, 2022: 

(In Thousands, Except Per Share Data)
Purchase Price Consideration in Common Stock
Middlefield Banc Corp. shares issued		2,561,513
Value assigned to Middlefield Banc Corp. common shares	$	28.60
Purchase price assigned to Liberty common shares exchanged for					73,259
Purchase Price Consideration in Cash
Cash paid in lieu of fractional shares					6
Total Purchase Price					73,265
Net Assets Acquired:
Liberty shareholders equity	$	49,041
Adjustments to reflect assets acquired at fair value:
Loans
Allowance for credit loss		4,497
Loans - interest rate		646
Loans - general credit		(3,433	)
Core deposit intangible		6,669
Investments		(1,461	)
Mortgage servicing rights		830
Other		94
Adjustments to reflect liabilities acquired at fair value:
Time deposits		(228	)
Deferred taxes		(54	)
Total net assets acquired					56,601
Goodwill resulting from merger				$	16,664

The following condensed statement reflects the amounts recognized as of the acquisition date for each major class of asset acquired and liability assumed, at fair value:

(In Thousands)
Total purchase price				$	73,265
Assets (liabilities) acquired:
Net assets acquired:
Cash	$	18,406
Loans and loans held for sale		312,618
Investments		57,907
Premises and equipment, net		6,087
Accrued interest receivable		1,563
Bank-owned life insurance		16,290
Core deposit intangible		6,670
Mortgage servicing rights		1,680
Other assets		3,111
Time deposits		(69,278	)
Non-time deposits		(294,684	)
Accrued interest payable		(246	)
Other liabilities		(3,523	)
Total net assets acquired					56,601
Goodwill resulting from the Liberty merger				$	16,664

As of March 31, 2023, the current year and estimated future amortization expense for the core deposit intangible associated with this merger is as follows:

(Dollar amounts in thousands)
Remaining 2023	$	572
2024		750
2025		733
2026		714
2027		691
Thereafter		2,954
Total	$	6,414

The following table presents supplemental pro forma information as if the acquisition had occurred on January 1, 2022. The unaudited pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed date.

	For the three months ended
	March 31, 2022
	(in thousands, except per share data)
Net interest income	$	14,979
Noninterest income		2,156
Net income	$	4,777
Pro forma earnings per share:
Basic	$	0.57
Diluted	$	0.57