BUSINESS COMBINATIONS

12 Months Ended

Dec. 31, 2020

BUSINESS COMBINATIONS

BUSINESS COMBINATIONS

NOTE C – BUSINESS COMBINATIONS

The Company accounts for its business combinations using the acquisition method. Acquisition accounting requires the total purchase price to be allocated to the estimated fair values of assets acquired and liabilities assumed, including certain intangible assets that must be recognized. Typically, this allocation results in the purchase price exceeding the fair value of net assets acquired, which is recorded as goodwill. Core deposit intangibles are a measure of the value of checking, money market and savings deposits acquired in business combinations accounted for under the acquisition method. Core deposit intangibles and other identified intangibles with finite useful lives are amortized using the straight-line method over their estimated useful lives of up to ten years. Loans that the Company acquires in connection with acquisitions are recorded at fair value with no carryover of the related allowance for credit losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The excess or deficit of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount or amortizable premium and is recognized into interest income over the remaining life of the loan.

Acquisitions

Southwest Georgia Financial Corporation

On April 3, 2020, the Company completed its acquisition of SWG, and immediately thereafter merged its wholly-owned subsidiary, Southwest Georgia Bank with and into The First.  The Company paid a total consideration of $47.9 million to the SWG shareholders as consideration in the merger, which included 2,546,967 shares of Company common stock and approximately $2 thousand in cash.  As a result of the acquisition, the Company will have an opportunity to increase its deposit base and reduce transaction costs.  The Company also expects to reduce costs through economies of scale.

In connection with the acquisition, the Company recorded a $7.8 million bargain purchase gain and $4.6 million core deposit intangible.  The bargain purchase gain was generated as a result of the estimated fair value of net assets acquired exceeding the merger consideration, based on provisional fair values, which is reflected as an adjustment to retained earnings.  The bargain purchase gain is considered non-taxable for income taxes purposes.  The core deposit intangible will be amortized to expense over 10 years.

The Company acquired the $394.6 million loan portfolio at an estimated fair value discount of $2.3 million.  The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

Expenses associated with the SWG acquisition were $2.5 million and $257 thousand for the twelve months period ended December 31, 2020 and 2019, respectively.  These costs included system conversion and integrating operations charges and legal and consulting expenses, which have been expensed as incurred.

The assets acquired and liabilities assumed and consideration paid in the acquisition of SWG were recorded at their estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment for up to one year after the closing date of the acquisition.  While the fair values are not expected to be materially different from the estimates, accounting guidance provides that an acquirer must recognize adjustments to provisional amounts that are identified during the measurement period, which runs through April 3, 2021 in respect of SWG, in the measurement period in which the adjustment amounts are determined.  The acquirer must record in the financial statements, the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of changes to the provisional amounts, calculated as if the accounting had been

completed at the acquisition date.  The items most susceptible to adjustment are the credit fair value adjustments on loans, core deposit intangible and the deferred income tax assets resulting from the acquisition.

The following table summarizes the provisional fair values of the assets acquired and liabilities assumed and the goodwill (bargain purchase gain) generated from the transaction ($ in thousands):

Purchase price:
Cash and stock	$	47,860
Total purchase price		47,860
Identifiable assets:
Cash and due from banks	$	29,247
Investments		89,737
Loans		392,292
Core deposit intangible		4,556
Personal and real property		18,558
Bank owned life insurance		6,963
Other assets		3,402
Total assets		544,755
Liabilities and equity:
Deposits		476,099
Borrowed funds		9,500
Other liabilities		3,461
Total liabilities		489,060
Net assets acquired		55,695
Bargain purchase gain	$	(7,835)

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets as of the date of acquisition and at December 31, 2020, are as follows ($ in thousands):

Outstanding principal balance	$	297,528
Carrying amount		295,772

PCI loans are discussed more fully under Part II – Item 8.  Financial Statements and Supplementary Data – Note E – Loans of this report.

First Florida Bancorp, Inc.

On November 1, 2019, the Company completed its acquisition of FFB, and immediately thereafter merged its wholly-owned subsidiary, First Florida Bank with and into The First.  The Company paid a total consideration of $89.5 million in stock to the FFB shareholders as consideration in the merger, which included 1,682,889 shares of Company common stock and approximately $34.1 million in cash.

In connection with the acquisition, the Company recorded approximately $38.4 million of goodwill and $3.7 million of core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.

The Company acquired the $248.9 million loan portfolio at an estimated fair value discount of $1.7 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

Expenses associated with the acquisition were $668 thousand and $2.4 million for the twelve months period ended December 31, 2020 and 2019, respectively.  These costs included system conversion and integrating operations charges and legal and consulting expenses, which have been expensed as incurred.

The following table summarizes the finalized fair values of the assets acquired and liabilities assumed on November 1, 2019, along with valuation adjustments that have been made since initially reported ($ in thousands):

			Measurement
	As Initially		Period
	Reported		Adjustments		As Adjusted
Identifiable assets:
Cash and due from banks	$	50,169	$	—		50,169
Investments		122,084		—		122,084
Loans		247,263		—		247,263
Core deposit intangible		3,745		—		3,745
Personal and real property		4,991		—		4,991
Other assets		2,283		1,336		3,619
Total assets		430,535		1,336		431,871
Liabilities and equity:
Deposits		373,908		—		373,908
Borrowed funds		5,527		—		5,527
Other liabilities		1,619		(295)		1,324
Total liabilities		381,054		(295)		380,759
Net assets acquired		49,481		1,631		51,112
Consideration paid		89,520		—		89,520
Goodwill resulting from acquisition	$	40,039	$	(1,631)	$	38,408

The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheets at December 31, 2020, are as follows ($ in thousands):

Outstanding principal balance	$	160,641
Carrying amount		159,628

PCI loans are discussed more fully under Part II – Item 8. Financial Statements and Supplementary Data – Note E – Loans of this report.

FPB Financial Corp.

On March 2, 2019, the Company completed its acquisition of FPB, and immediately thereafter merged its wholly-owned subsidiary, Florida Parishes Bank with and into The First.  The Company paid a total consideration of $78.2 million in stock to the FPB shareholders as consideration in the merger, which included 2,377,501 shares of Company common stock and $5 thousand in cash.

In connection with the acquisition, the Company recorded approximately $28.8 million of goodwill and $6.6 million of core deposit intangible. Goodwill is not deductible for income taxes. The core deposit intangible will be amortized to expense over 10 years.

The Company acquired the $247.8 million loan portfolio at an estimated fair value discount of $3.1 million. The discount represents expected credit losses, adjusted for market interest rates and liquidity adjustments.

Expenses associated with the acquisition were $77 thousand and $2.3 million for the twelve months period ended December 31, 2020 and 2019, respectively.  These costs included system conversion and integrating operations charges and legal and consulting expenses, which have been expensed as incurred.

Supplemental Pro Forma Information

The following table presents certain supplemental pro forma information, for illustrative purposes only, for the years December 31, 2020 and 2019 as if the FPB, FFB and SWG acquisitions had occurred on January 1, 2019.  The pro forma financial information is not necessarily indicative of the results of operations had the acquisitions been effective as of this date.

	Pro Forma for the Year Ended
	December 31,
	2020		2019
($ in thousands)	(unaudited)		(unaudited)
Net interest income	$	158,241	$	158,179
Non-interest income		43,077		35,342
Total revenue		201,318		193,521
Income before income taxes		66,283		84,666

Supplemental pro-forma earnings were adjusted to exclude acquisition costs incurred.

Non-credit impaired loans acquired in the acquisitions were accounted for in accordance with ASC 310-20, Receivables-Nonrefundable Fees and Other Costs. Purchased credit impaired loans acquired in the FPB, FFB and SWG acquisitions were accounted for in accordance with ASC 310-30 Accounting for Purchased Loans with Deteriorated Credit Quality.