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Business Combination and Asset Purchase | 9 Months Ended
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Sep. 30, 2021
Business Combinations [Abstract] |
Business Combination and Asset Purchase | NOTE 2 BUSINESS COMBINATION AND ASSET PURCHASE On April 30, 2021, the Company acquired Ossian Financial Services, Inc., (OSFI), the bank holding company for Ossian State Bank, a community bank based in Ossian, Indiana. Ossian State Bank operated two full-service offices in the northeast Indiana communities of Ossian and Bluffton. Shareholders of OSFI received $67.71 in cash for each share. OSFI had 295,388 shares outstanding on April 30, 2021. Total consideration for the acquisition was approximately $20.0 million in cash. As a result of the acquisition, the Company has increased its deposit base and is working to reduce transaction costs. The Company also expects to reduce costs through economies of scale. In 2020, the Company incurred $42.5 thousand of third-party acquisition-related costs. The expenses recognized in 2020 related to other general and administration expenses of $30.0 thousand and consulting fees of $12.5 thousand. These acquisition expenses were included in the Company’s 2020 consolidated statement of income. In 2021, the Company has incurred additional third-party acquisition-related costs of $2.1 million. These expenses are comprised of employee benefits of $694.1 thousand, data processing costs of $938.9 thousand, consulting fees of $255.2 thousand, ATM expense of $13.8 thousand and other general and administrative expense of $241.3 thousand in the Company’s consolidated statement of income for the nine months ended September 30, 2021. For the quarter ended September 30, 2021, the Company incurred third-party acquisition related costs of $1.2 million. These expenses are comprised of employee benefits of $152.6 thousand, data processing costs of $938.9 thousand, consulting fees of $10.3 thousand, ATM expense of $2.6 thousand and other general and administrative expense of $61.5 thousand in the Company’s consolidated statement of income for the three months ended September 30, 2021. Under the acquisition method of accounting, the total purchase was allocated to net tangible and intangible assets based on their current estimated fair values on the date of acquisition. Of the total purchase price of $20.0 million, $980.2 thousand has been allocated to core deposit intangible included in other assets and will be amortized over seven years on a straight line basis. Goodwill of $7.9 million which resulted from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and Ossian State Bank and is deductible for tax purposes over 15 years. The following table summarizes the consideration paid for Ossian State Bank and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.
Fair Value of Consideration Transferred |  |  |  |
|  | (In Thousands) |
Cash |  | $ | 20,001 |
Total |  | $ | 20,001 |
Recognized amounts of identifiable assets acquired and liabilities assumed |  |  |  |
Assets |  |  |  |
Cash and cash equivalents |  | $ | 20,229 |
Interest-bearing time deposits |  |  | 20,226 |
Securities - available-for-sale |  |  | 30,243 |
Other securities, at cost |  |  | 281 |
Loans, net |  |  | 52,403 |
Premises and equipment |  |  | 494 |
Goodwill |  |  | 7,874 |
Other assets |  |  | 5,308 |
Total Assets Purchased |  | $ | 137,058 |
Liabilities |  |  |  |
Deposits |  |  |  |
Noninterest bearing |  | $ | 34,509 |
Interest bearing |  |  | 81,535 |
Total deposits |  |  | 116,044 |
Accrued expenses and other liabilities |  |  | 1,013 |
Total Liabilities Assumed |  | $ | 117,057 |
The fair value of the assets acquired includes loans with a fair value of $52.4 million. The gross principal and contractual interest due under the contracts is $58.6 million, of which $1.1 million is expected to be uncollectible. The loans have a weighted average life of 52 months. The fair value of building and land included in premises and equipment was written down by $596 thousand with $244 thousand attributable to buildings and will be accreted over the useful life of 39 years, The fair value for certificates of deposit incorporates a valuation amount of $59 thousand which will be accreted over 1.4 years. Certain transferred loans evidenced deterioration of credit quality since origination and management deemed it probable, at acquisition, that all contractually required payments would not be collected. Loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered to be credit impaired. Evidence of credit quality deterioration as of the purchase date may include information such as past-due and nonaccrual status, borrower credit scores and recent loan to value percentages. Purchased credit-impaired loans are accounted for under the accounting guidance for loans and debt securities acquired with deteriorated credit quality (ASC 310-30) and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over and recorded at the acquisition date. Management estimated the cash flows expected to be collected at acquisition using our internal risk models, which incorporate the estimate of current key assumptions, such as default rates, severity and prepayment speeds. The carrying amount of those loans is included in loans, net on the balance sheet at September 30. The amounts of loans at April 30, 2021 and September 30, 2021 are as follows:
|  | 2021 |
|  | (In Thousands) |
Balance - April 30, 2021 |  |  |  |
Consumer Real Estate |  | $ | 24 |
Agricultural Real Estate |  |  | 981 |
Commercial Real Estate |  |  | 315 |
Commercial & Industrial |  |  | 314 |
Carrying amount, net of fair value adjustment of $325 |  | $ | 1,309 |
Balance - September 30, 2021 |  |  |  |
Consumer Real Estate |  | $ | 23 |
Agricultural Real Estate |  |  | - |
Commercial Real Estate |  |  | 234 |
Commercial & Industrial |  |  | 293 |
Carrying amount, net of fair value adjustment of $325 |  | $ | 225 |
Loans acquired during 2021 for which it was probable at acquisition that all contractually required payments would not be collected are as follows:
|  | (In Thousands) |
Contractually required payments receivable at acquisition |  |  |  |
Consumer Real Estate |  | $ | 28 |
Agricultural Real Estate |  |  | 1,142 |
Commercial Real Estate |  |  | 527 |
Commercial & Industrial |  |  | 360 |
Total required payments receivable |  | $ | 2,057 |
Cash flows expected to be collected at acquisition |  | $ | 1,309 |
Basis in acquired loans at acquisition |  | $ | 1,634 |
During the third quarter, two agricultural real estate purchased credit impaired loans were paid off in full. Changes in accretable yield, or income expected to be collected, are as follows:
|  | Three Months Ended September 30, 2021 |  |  | Nine Months Ended September 30, 2021 |
|  | (In Thousands) |  |  | (In Thousands) |
Beginning Balance |  | $ | 733 |  |  | $ | - |
Additions |  |  | - |  |  |  | 762 |
Accretion |  |  | (44 | ) |  |  | (73 | )
Reclassification from nonaccretable difference |  |  | - |  |  |  | - |
Disposals |  |  | - |  |  |  | - |
Ending Balance |  | $ | 689 |  |  | $ | 689 |
The results of operations of Ossian State Bank have been included in the Company’s consolidated financial statements since the acquisition date of April 30, 2021. The following schedule includes pro-forma results for the three and nine months ended September 30, 2021 and 2020 as if the Ossian State Bank acquisitions had occurred as of the beginning of the comparable prior reporting period.
|  | (in thousands of dollars, except per share data) |  |  | (in thousands of dollars, except per share data) |
|  | Three Months Ended |  |  | Nine Months Ended |
|  | September 30, 2021 |  |  | September 30, 2020 |  |  | September 30, 2021 |  |  | September 30, 2020 |
Summary of Operations |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Net Interest Income - Before Provision for Loan Losses |  | $ | 18,450 |  |  | $ | 15,909 |  |  | $ | 50,482 |  |  | $ | 46,387 |
Provision for Loan Losses |  |  | 659 |  |  |  | 1,988 |  |  |  | 3,001 |  |  |  | 4,989 |
Net Interest Income After Provision for Loan Losses |  |  | 17,791 |  |  |  | 13,921 |  |  |  | 47,481 |  |  |  | 41,398 |
Noninterest Income |  |  | 4,074 |  |  |  | 4,814 |  |  |  | 13,302 |  |  |  | 11,363 |
Noninterest Expense |  |  | 12,880 |  |  |  | 13,062 |  |  |  | 38,010 |  |  |  | 35,666 |
Income Before Income Taxes |  |  | 8,985 |  |  |  | 5,673 |  |  |  | 22,773 |  |  |  | 17,095 |
Income Taxes |  |  | 1,892 |  |  |  | 1,093 |  |  |  | 4,566 |  |  |  | 3,273 |
Net Income |  | $ | 7,093 |  |  | $ | 4,580 |  |  | $ | 18,207 |  |  | $ | 13,822 |
Basic and Diluted Earnings Per Share |  | $ | 0.63 |  |  | $ | 0.41 |  |  | $ | 1.63 |  |  | $ | 1.24 |
The pro-forma information includes adjustments for interest income on loans, amortization of intangibles arising from the transaction, interest expense on deposits acquired, premises expense for the branches acquired and the related income tax effects. The pro-forma information for the quarter ended September 30, 2021 includes approximately $348 thousand, net of tax, of operating revenue from Ossian State Bank since January 1, 2021. The pro-forma financial information is presented for informational purposes only and is not indicative of the results of operations that actually would have been achieved had the acquisition been consummated as of that time, nor is it intended to be a projection of future results. On January 1, 2019, the Company acquired Limberlost Bancshares, Inc. (“Limberlost”), the bank holding company for Bank of Geneva, a community bank based in Geneva, Indiana. Bank of Geneva operated six full-service offices in the northeast Indiana communities of Geneva, Berne, Decatur, Monroe, Portland and Monroeville. Shareholders of Limberlost received 1,830 shares of FMAO common stock and $8,465.00 in cash for each share. Limberlost had 1,000 shares outstanding on January 1, 2019. The share price of Farmers & Merchants Bancorp, Inc. (FMAO) stock on January 1, 2019 was $38.49. Total consideration for the acquisition was approximately $78.9 million consisting of $8.5 million in cash and $70.4 million in stock. As a result of the acquisition, the Company has had an opportunity to increase its deposit base and reduce transaction costs. The Company has also reduced costs through economies of scale. Under the acquisition method of accounting, the total purchase was allocated to net tangible and intangible assets based on their current estimated fair values on the date of acquisition. Of the total purchase price of $78.9 million, $3.9 million has been allocated to core deposit intangible included in other assets and is being amortized over seven years on a straight line basis. Goodwill of $43.3 million resulting from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and Bank of Geneva. Of that total amount, none of the purchase price is deductible for tax purposes. Changes in accretable yield, or income expected to be collected, for the three and nine months ended are as follows:
|  | Three Months Ended September 30, 2021 |  |  | Three Months Ended September 30, 2020 |  |  | Nine Months Ended September 30, 2021 |  |  | Nine Months Ended September 30, 2020 |
|  | (In Thousands) |  |  | (In Thousands) |  |  | (In Thousands) |  |  | (In Thousands) |
Beginning Balance |  | $ | 1,439 |  |  | $ | 1,871 |  |  | $ | 1,653 |  |  | $ | 2,021 |
Additions |  |  | 3 |  |  |  | - |  |  |  | 8 |  |  |  | 2 |
Accretion |  |  | (108 | ) |  |  | (107 | ) |  |  | (323 | ) |  |  | (321 | )
Reclassification from nonaccretable difference |  |  | - |  |  |  | - |  |  |  | - |  |  |  | 62 |
Disposals |  |  | - |  |  |  | (5 | ) |  |  | (4 | ) |  |  | (5 | )
Ending Balance |  | $ | 1,334 |  |  | $ | 1,759 |  |  | $ | 1,334 |  |  | $ | 1,759 |
As mentioned previously, the acquisition of Bank of Geneva resulted in the recognition of $3.9 million in core deposit intangible assets which is being amortized over its remaining life of 7 years on a straight line basis. The amortization expense for the nine months ended September 30, 2020 was $546 thousand of which $84 thousand was related to the purchase of the Custar office in December of 2013. Of the $653 thousand to be expensed in 2021, $478 thousand has been expensed for the nine months ended September 30, 2021. Annual amortization of core deposit intangible assets is as follows:
|  | (In Thousands) |  |  | (In Thousands) |  |  | (In Thousands) |
|  | Geneva |  |  | Ossian |  |  | Total |
2021 |  | $ | 560 |  |  | $ | 93 |  |  | $ | 653 |
2022 |  |  | 560 |  |  |  | 140 |  |  |  | 700 |
2023 |  |  | 560 |  |  |  | 140 |  |  |  | 700 |
2024 |  |  | 560 |  |  |  | 140 |  |  |  | 700 |
2025 |  |  | 560 |  |  |  | 140 |  |  |  | 700 |
Thereafter |  |  | - |  |  |  | 327 |  |  |  | - |
|  | $ | 2,800 |  |  | $ | 980 |  |  |  | 3,453 |
On November 16, 2020, FM Investment Services, a division of the Bank, purchased the assets and clients of Adams County Financial Resources (ACFR), a full-service registered investment advisory firm located in Geneva, Indiana. ACFR was founded in 1994 by R. Lee Flueckiger and provides clients and their families with financial confidence through personalized investment planning and services. As of November 30, 2020, ACFR had approximately $83 million of assets under management and over 450 clients. Total consideration for the purchase was $825 thousand which consisted of 40,049 shares of stock. As a result of this purchase, the Company expects an increase to noninterest income of approximately $500 thousand in 2021 with the majority of the income to be recognized in the second half of the year. Under the acquisition method of accounting, the total purchase is allocated to net tangible and intangible assets based on their current estimated fair values on the date of acquisition. Of the total purchase price of $825 thousand, $800 thousand has been allocated to customer list intangible, included in other assets, to be amortized over 6.5 years on a straight line basis. The following table summarizes the consideration paid for ACFR and the amounts of the assets acquired:
Fair Value of Consideration Transferred |  |  |  |
|  | (In Thousands) |
Common Shares (40,049 shares) |  | $ | 825 |
Total |  | $ | 825 |
Recognized amounts of identifiable assets acquired |  |  |  |
Assets |  |  |  |
Premises and equipment |  | $ | 25 |
Customer list intangible |  |  | 800 |
Total Assets Purchased |  | $ | 825 |
Of the $123 thousand to be expensed in 2021, $92 thousand has been expensed for the nine months ended September 30, 2021. Annual amortization expense of customer list intangible is as follows:
|  | (In Thousands) |
|  | Adams County Financial Resources |
2021 |  | $ | 123 |
2022 |  |  | 123 |
2023 |  |  | 123 |
2024 |  |  | 123 |
2025 |  |  | 123 |
Thereafter |  |  | 169 |
|  | $ | 784 |

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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