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Note 2 - Acquisition | 6 Months Ended
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Jun. 30, 2022
Notes to Financial Statements |
Business Combination Disclosure [Text Block] |
(2) | Bank Acquisitions
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. As provided for under GAAP, management has up to 12 months following the date of acquisition to finalize the fair values of the acquired assets and assumed liabilities. The preliminary fair value adjustments and the preliminary fair values shown in the following table continue to be evaluated by management and may be subjected to further adjustment through March 7, 2023.
|  | As Recorded |  |  | Fair Value |  |  |  | Provisional Period |  |  | As Recorded |
(in thousands) |  | By CB |  |  | Adjustments (1) |  |  |  | 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 (2) |  |  | 247,209 |  |  |  | (416 | ) | a |  |  | — |  |  |  | 246,793 |
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 |
Securities sold under agreements to repurchase |  |  | 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 |
Noncontrolling interest of acquired entity |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 3,094 |
Total consideration |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 167,913 |
Goodwill |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 66,694 |
| (1) | See the following page for explanations for individual fair value and provisional period adjustments (if applicable).
| (2) | As of acquisition date, securities with a fair value of $162 million were classified by Bancorp as HTM.
Explanation of fair value 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 allowance for credit losses includes the following:
(in thousands) |  |  |  |
Reversal of historical CB allowance for credit losses on loans |  | $ | (16,102 | )
Estimate of lifetime credit losses for PCD loans |  |  | 9,950 |
Net change in allowance for credit losses |  | $ | (6,152 | )
d. | Adjustment to premises and equipment to reflect the estimated fair value of acquired premises and equipment and right of use assets. Bancorp expects to make provisional period adjustments to premises and equipment during the third quarter of 2022 based on the sale of acquired buildings.
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. To the extent that management revises any of the above fair value adjustments as a result of its continuing evaluation, the amount of goodwill recorded in the CB acquisition will change. 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 $11.7 million and $14.9 million for the three and six months ended June 30, 2022, respectively. 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. Further, the pro forma condensed combined financial information presented below for the three and six month periods ended June 30, 2021 also assumes that the KB acquisition took place at the beginning of the period.
(in thousands) |  | Three months ended June 30, 2022 |  |  | Three months ended June 30, 2021 |
Net interest income |  | $ | 56,984 |  |  | $ | 55,595 |
Provision for credit losses |  |  | (200 | ) |  |  | (3,167 | )
Non-interest income |  |  | 21,940 |  |  |  | 29,396 |
Non-interest expense |  |  | 44,675 |  |  |  | 52,563 |
Income before taxes |  |  | 34,449 |  |  |  | 35,595 |
Income tax expense |  |  | 7,547 |  |  |  | 6,735 |
Net income |  |  | 26,902 |  |  |  | 28,860 |
Less net income attributed to noncontrolling interest |  |  | 108 |  |  |  | 94 |
Net income available to stockholders |  | $ | 26,794 |  |  | $ | 28,766 |
Earnings per share |  |  |  |  |  |  |  |
Basic |  | $ | 0.92 |  |  | $ | 0.99 |
Diluted |  |  | 0.91 |  |  |  | 0.98 |
Basic weighted average shares outstanding |  |  | 29,131 |  |  |  | 29,049 |
Diluted weighted average shares outstanding |  |  | 29,346 |  |  |  | 29,288 |
(in thousands) |  | Six months ended June 30, 2022 |  |  | Six months ended June 30, 2021 |
Net interest income |  | $ | 110,777 |  |  | $ | 111,106 |
Provision for credit losses (1) |  |  | (2,350 | ) |  |  | (4,242 | )
Non-interest income |  |  | 44,083 |  |  |  | 59,430 |
Non-interest expense (2) |  |  | 91,964 |  |  |  | 102,993 |
Income before taxes |  |  | 65,246 |  |  |  | 71,785 |
Income tax expense |  |  | 14,014 |  |  |  | 13,676 |
Net income |  |  | 51,232 |  |  |  | 58,109 |
Less net income attributed to noncontrolling interest |  |  | 159 |  |  |  | 174 |
Net income available to stockholders |  | $ | 51,073 |  |  | $ | 57,935 |
Earnings per share |  |  |  |  |  |  |  |
Basic |  | $ | 1.76 |  |  | $ | 2.00 |
Diluted |  |  | 1.74 |  |  |  | 1.98 |
Basic weighted average shares outstanding |  |  | 29,094 |  |  |  | 29,022 |
Diluted weighted average shares outstanding |  |  | 29,355 |  |  |  | 29,263 |
(1) - Excludes $4.4 million in merger related credit loss expense for the six months ended June 30, 2022.Excludes $7.4 million in merger related credit loss expense for the three and six months ended June 30, 2021, respectively. (2) - Excludes $24.1 million in pre-tax merger expenses for the six months ended June 30, 2022. Excludes $18.1 million and $18.5 million in pre-tax merger expenses for the three and six months ended June 30, 2021, respectively. Kentucky Bancshares, Inc. On May 31, 2021, Bancorp completed its acquisition of Kentucky Bancshares, Inc. in a combined stock and cash transaction for total consideration of $233 million. Bancorp acquired 19 branches in 11 communities throughout central and eastern Kentucky, including the Lexington, Kentucky metropolitan statistical area and contiguous counties, and also acquired a captive insurance subsidiary. Effective March 31, 2022, management finalized the fair values of the acquired assets and assumed liabilities in advance of the 12 month post-acquisition date, as allowed by GAAP. 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 |  |  |  | Provisional Period |  |  |  | As Recorded |
(in thousands) |  | By KB |  |  | Adjustments (1) |  |  |  | Adjustments (1) |  |  |  | by Bancorp |
Assets aquired: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks |  | $ | 53,257 |  |  | $ | — |  |  |  | $ | — |  |  |  | $ | 53,257 |
Mortgage loans held for sale |  |  | 3,071 |  |  |  | — |  |  |  |  | — |  |  |  |  | 3,071 |
Available for sale debt securities |  |  | 396,157 |  |  |  | (295 | ) | a |  |  | — |  |  |  |  | 395,862 |
Federal Home Loan Bank stock, at cost |  |  | 7,072 |  |  |  | — |  |  |  |  | — |  |  |  |  | 7,072 |
Loans |  |  | 755,932 |  |  |  | (757 | ) | b |  |  | — |  |  |  |  | 755,175 |
Allowance for credits losses on loans |  |  | (9,491 | ) |  |  | 2,734 |  | c |  |  | — |  |  |  |  | (6,757 | )
Net loans |  |  | 746,441 |  |  |  | 1,977 |  |  |  |  | — |  |  |  |  | 748,418 |
Premises and equipment, net |  |  | 27,401 |  |  |  | (6,361 | ) | d |  |  | — |  |  |  |  | 21,040 |
Bank owned life insurance |  |  | 18,909 |  |  |  | — |  |  |  |  | — |  |  |  |  | 18,909 |
Accrued interest receivable |  |  | 4,939 |  |  |  | — |  |  |  |  | — |  |  |  |  | 4,939 |
Goodwill |  |  | 14,001 |  |  |  | (14,001 | ) | e |  |  | — |  |  |  |  | — |
Core deposit intangible |  |  | — |  |  |  | 3,404 |  | f |  |  | 999 |  | f |  |  | 4,403 |
Other real estate owned |  |  | 674 |  |  |  | (123 | ) | g |  |  | — |  |  |  |  | 551 |
Mortgage servicing rights |  |  | 1,628 |  |  |  | 34 |  | h |  |  | — |  |  |  |  | 1,662 |
Deferred income taxes, net |  |  | 1,856 |  |  |  | 715 |  | i |  |  | (230 | ) | i |  |  | 2,341 |
Other assets |  |  | 6,421 |  |  |  | (1,866 | ) | j |  |  | (70 | ) | j |  |  | 4,485 |
Total assets acquired |  | $ | 1,281,827 |  |  | $ | (16,516 | ) |  |  | $ | 699 |  |  |  | $ | 1,266,010 |
Liabilities assumed: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Non-interest bearing |  | $ | 359,544 |  |  | $ | — |  |  |  | $ | — |  |  |  | $ | 359,544 |
Interest bearing |  |  | 678,528 |  |  |  | 1,146 |  | k |  |  | — |  |  |  |  | 679,674 |
Total deposits |  |  | 1,038,072 |  |  |  | 1,146 |  |  |  |  | — |  |  |  |  | 1,039,218 |
Securities sold under agreements to repurchase |  |  | 11,360 |  |  |  | — |  |  |  |  | — |  |  |  |  | 11,360 |
Federal Home Loan Bank advances |  |  | 88,581 |  |  |  | 2,490 |  | l |  |  | — |  |  |  |  | 91,071 |
Accrued interest payable |  |  | 505 |  |  |  | — |  |  |  |  | — |  |  |  |  | 505 |
Other liabilities |  |  | 16,231 |  |  |  | (2,004 | ) | m |  |  | — |  |  |  |  | 14,227 |
Total liabilities assumed |  |  | 1,154,749 |  |  |  | 1,632 |  |  |  |  | — |  |  |  |  | 1,156,381 |
Net assets acquired |  | $ | 127,078 |  |  | $ | (18,148 | ) |  |  | $ | 699 |  |  |  | $ | 109,629 |
Consideration for common stock |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 204,670 |
Cash consideration paid |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 28,276 |
Total consideration |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 232,946 |
Goodwill |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | $ | 123,317 |
| (1) | See the following page for explanations for individual fair value and provisional period adjustments.
Explanation of fair value adjustments:
a. | Adjustment based on Bancorp’s evaluation of the acquired investment portfolio. Bancorp sold approximately $91 million in AFS debt securities shortly after acquisition.
b. | Adjustments to loans to reflect estimated fair value adjustments, including the following:
(in thousands) |  |  |  |
Fair value adjustment - acquired non PCD loans |  | $ | 228 |
Fair value adjustment - acquired PCD loans |  |  | (735 | )
Eliminate unrecognized loan fees on acquired loans and fair value hedge |  |  | (250 | )
Net loan fair value adjustments |  | $ | (757 | )
c. | The net adjustment to allowance for credit losses includes the following:
(in thousands) |  |  |  |
Reversal of historical KB allowance for credit losses on loans |  | $ | 9,491 |
Estimate of lifetime credit losses for PCD loans |  |  | (6,757 | )
Net change in allowance for credit losses |  | $ | 2,734 |
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 KB goodwill.
f. | Calculation of CDI related to the acquisition. During the third quarter of 2021, a provisional period adjustment of $999,000 was recorded based on revised inputs used in the CDI calculation.
g. | Adjustment to reflect the estimated fair value of other real estate owned.
h. | Adjustment to reflect the estimated fair value of mortgage servicing rights.
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. During the third quarter of 2021, a provisional period adjustment of $70,000 was recorded for the write off of miscellaneous mortgage servicing fees.
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 Federal Home Loan Bank advances for differences in interest rates, which was based primarily on an analysis of current market interest rates and maturity dates. All KB FHLB advances were paid off immediately after 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 $123 million, which is the excess of the acquisition consideration over the fair value of net assets acquired, was recorded in the KB acquisition and is the result of expected operational synergies and other factors. This goodwill is all attributable to the Company’s Commercial Banking segment. Goodwill related to the KB 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 $724 million and $723 million at the date of acquisition. Total revenue, defined as net interest income and non-interest income, attributed to KB totaled approximately $4.5 million and for both the three and six months ended June 30, 2021, respectively. 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 KB acquisition taken place at the beginning of the period:
(in thousands) |  | Three months ended June 30, 2021 |
Net interest income |  | $ | 47,465 |
Provision for credit losses (1) |  |  | (3,167 | )
Non-interest income |  |  | 18,078 |
Non-interest expense (2) |  |  | 37,257 |
Income before taxes |  |  | 31,453 |
Income tax expense |  |  | 6,026 |
Net income |  |  | 25,427 |
Less net income attributed to noncontrolling interest |  |  | - |
Net income available to stockholders |  | $ | 25,427 |
Earnings per share |  |  |  |
Basic |  | $ | 0.95 |
Diluted |  |  | 0.94 |
Basic weighted average shares outstanding |  |  | 26,687 |
Diluted weighted average shares outstanding |  |  | 26,926 |
(in thousands) |  | Six months ended June 30, 2021 |
Net interest income |  | $ | 94,043 |
Provision for credit losses (1) |  |  | (4,542 | )
Non-interest income |  |  | 36,090 |
Non-interest expense (2) |  |  | 71,803 |
Income before taxes |  |  | 62,872 |
Income tax expense |  |  | 11,979 |
Net income |  |  | 50,893 |
Less net income attributed to noncontrolling interest |  |  | - |
Net income available to stockholders |  | $ | 50,893 |
Earnings per share |  |  |  |
Basic |  | $ | 1.91 |
Diluted |  |  | 1.89 |
Basic weighted average shares outstanding |  |  | 26,670 |
Diluted weighted average shares outstanding |  |  | 26,911 |
(1) - Excludes $7.4 million in merger related credit loss expense for the three and six months ended June 30, 2021, respectively.
(2) - Excludes $18.1 million and $18.5 million in pre-tax merger expenses for the three and six months ended June 30, 2021, respectively.

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