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Note 3 - Acquisition

9 Months Ended

Sep. 30, 2020

Business Combination Disclosure [Text Block]

NOTE 3 – ACQUISITION

PGB Holdings, Inc. Acquisition:

On January 10, 2020, the Company acquired all the assets and assumed all the liabilities of PGBH and its wholly owned bank subsidiary, in exchange for cash of $32.9 million. PGBH operated three branches in the Chicago, Illinois metropolitan area. The Company acquired PGBH to strategically establish a presence in the Chicago area. Goodwill in the amount of $10.7 million was recognized in this acquisition. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. Goodwill is not deductible for income tax purposes.

The following table represents the assets acquired and liabilities assumed of PGBH as of January 10, 2020 and the fair value adjustments and amounts recorded by the Company in 2020 under the acquisition method of accounting:

	*PGBH*			*Fair Value*			*Fair*
*(dollars in thousands)*	*Book Value*			*Adjustments*			*Value*
Assets acquired
Cash and cash equivalents	$	17,033		$	—		$	17,033
Fed funds sold		8,300			—			8,300
Interest-bearing deposits in other financial Institutions		14,186			—			14,186
Investments - held to maturity		—			—			—
Investments - available for sale		—			—			—
Mortgage loans held for sale		—			—			—
Loans, gross		172,443			666			173,109
Allowance for loan losses		(2,265	)		2,265			—
Bank premises and equipment		6,394			1,639			8,033
Mortgage servicing rights		—			—			—
Core deposit premium		—			491			491
Investment in trust		155			—			155
Other assets		1,687			(194	)		1,493
Total assets acquired	$	217,933		$	4,867		$	222,800

Liabilities assumed
Deposits	$	187,393		$	969		$	188,362
Escrow Payable		4,277			—			4,277
Subordinated debentures		5,155			(763	)		4,392
Deferred income taxes		1,016			1,721			2,737
Other liabilities		1,211			(384	)		827
Total liabilities assumed		199,052			1,543			200,595
Excess of assets acquired over liabilities assumed		18,881			3,324			22,205
	$	217,933		$	4,867
Cash paid								32,885
Goodwill recognized							$	10,680

The fair values are estimates and are subject to adjustment for up to one year after the merger date.

The Company accounted for these transactions under the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires purchased assets and liabilities assumed to be recorded at their respective fair values at the date of acquisition.

The loan portfolio of PGBH was recorded at fair value at the date of acquisition with the assistance of a third-party valuation. A valuation of PGBH’s loan portfolio was performed as of the acquisition date to assess the fair value of the loan portfolio. The loan portfolio was segmented into two groups; loans with credit deterioration and loans without credit deterioration, and then split further by loan type. The fair value was calculated on an individual loan basis using a discounted cash flow analysis. The discount rate utilized was based on a weighted average cost of capital, considering the cost of equity and cost of debt. Also factored into the fair value estimates were loss rates, recovery period and prepayment rates based on industry standards.

The Company also determined the fair value of the core deposit intangible, securities and deposits with the assistance of third-party valuations.

The core deposit intangible on non-maturing deposits was determined by evaluating the underlying characteristics of the deposit relationships, including customer attrition, deposit interest rates, service charge income, overhead expense and costs of alternative funding. Since the fair value of intangible assets are calculated as if they were stand-alone assets, the presumption is that a hypothetical buyer of the intangible asset would be able to take advantage of potential tax benefits resulting from the asset purchase. The value of the benefit is the present value over the period of the tax benefit, using the discount rate applicable to the asset.

In determining the fair value of certificates of deposit, a discounted cash flow analysis was used, which involved present valuing the contractual payments over the remaining life of the certificates of deposit at market-based interest rates.

For loans acquired from PGBH, the contractual amounts due, expected cash flows to be collected, interest component and fair value as of the respective acquisition dates were as follows:

	*PGBH Acquired Loans*
Contractual amounts due	$	195,227
Cash flows not expected to be collected		5,176
Expected cash flows		190,051
Interest component of expected cash flows		16,942
Fair value of acquired loans	$	173,109

The operating results of the Company for the nine months ended September 30, 2020 include the operating results of PGBH since its acquisition date. The following table presents the net interest and other income, net income and earnings per share as if the acquisition of PGBH was effective as of January 1, 2020. There were no material, nonrecurring adjustments to the pro forma net interest and other income, net income and earnings per share presented below:

	*Three Months Ended*				*Nine Months Ended*
	*September 30, 2020*		*September 30, 2019*		*September 30, 2020*		*September 30, 2019*
Net interest and other income	$	29,978	$	28,715	$	85,662	$	92,856
Net income		8,520		8,531		20,615		30,432
Basic earnings per share		0.43		0.43		1.04		1.52
Diluted earnings per share		0.43		0.42		1.03		1.49

Third-party acquisition related expenses are recognized as incurred and continue until the acquired system is converted and operational functions become fully integrated. The Company incurred third-party acquisition related expenses in the consolidated statements of income for the periods indicated in the Statements of Income in the expense item “Merger and conversion expenses”.