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Business Combinations | 9 Months Ended
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Sep. 30, 2024
Business Combinations |
Business Combinations | ​ 2. Business Combinations: ​ On July 1, 2024 (the “Acquisition Date”), the Company completed the acquisition of FNCB Bancorp, Inc., a Pennsylvania corporation (“FNCB”), in accordance with the definitive Agreement and Plan of Merger dated as of September 27, 2023 (the “Merger Agreement”), by and among the Company and FNCB. Pursuant to the Merger Agreement, on the Acquisition Date, FNCB merged with and into Peoples, with Peoples continuing as the surviving corporation, and immediately following the merger, FNCB Bank, a Pennsylvania-chartered bank (“FNCB Bank”), merged with and into Peoples Bank, with Peoples Bank as the surviving bank (collectively, the “merger”). The primary reasons for the merger included: expansion of the branch network and commanding market share positions in northeastern Pennsylvania; attractive low-cost funding base; strong cultural alignment and a deep commitment to shareholders, customers, employees, and communities served by Peoples and FNCB; meaningful value creation to shareholders; increased trading liquidity; and increased dividends for People’s shareholders. ​ In connection with the completion of the merger, former FNCB shareholders received 0.1460 shares of the Company’s common stock per share of FNCB common stock. The value of the total transaction consideration was approximately $133.7 million. The consideration included the issuance of 2,935,456 shares of the Company’s common stock, valued at $45.54 per share, which was the closing price of the Company’s common stock on June 28, 2024, the last trading day prior to the consummation of the merger. Also included in the total consideration was cash in lieu of any fractional shares, which was effectively settled upon closing. ​ The acquisition of FNCB was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid are recorded at estimated fair values on the Acquisition Date. The excess consideration paid over the fair value of the net assets acquired has been reported as goodwill in the Company’s consolidated statements of financial condition. The $13.6 million of goodwill created from the merger is not amortizable or deductible for tax purposes. The amount of goodwill represents an asset attributed to the future benefits arising from other assets acquired in a business combination. Future benefits consist largely of the synergies and economies of scale expected from combining the operations of FNCB and Peoples. Peoples does not currently provide segment reporting for GAAP, therefore the goodwill will be assigned to the whole operating company. ​ The Company considers its valuations of acquired loans and other assets to be preliminary, as management continues to identify and assess information regarding the nature of these assets acquired and liabilities assumed, including extended information gathering, management review procedures, and any new information that may arise as a result of integration activities. Accordingly, the amounts recorded for current and deferred taxes are also considered preliminary, as the Company continues to evaluate the nature and extent of permanent and temporary differences between the book and tax bases of these other assets acquired and other liabilities assumed. While the Company believes that the information available as of September 30, 2024, provides a reasonable basis for estimating fair value, it is possible that additional information may become available during the remainder of the measurement period that could result in changes to the fair values presented. ​ The Company will continue to keep the measurement of goodwill open for any additional adjustments to the fair value of certain accounts, for example loans, that may arise during the Company’s final review procedures of any updated information. If considered necessary, any subsequent adjustments to the fair value of assets acquired and liabilities assumed, identifiable intangible assets, or other purchase accounting adjustments will result in adjustments to goodwill within the first twelve months following the Acquisition Date. ​ As a result of the integration of operations of FNCB, it is not practicable to determine revenue or net income included in the Company’s consolidated operating results relating to FNCB since the Acquisition Date, as FNCB’s results cannot be separately identified. ​ Comparative pro-forma financial statements for the prior year period were not presented, as adjustments to those statements would not be indicative of what would have occurred had the acquisition taken place on January 1, 2023. In particular, adjustments that would have been necessary to be made to record the loans at fair value, the provision for credit losses or the core deposit intangible would not be practical to estimate. ​ In connection with the acquisition, the consideration paid, and the fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition are summarized in the following table: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
(Dollars in thousands) | ​ | ​ |  | ​ | ​ |  | ​ | ​
Purchase Price Consideration | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
FNCB Bancorp, Inc. common shares settled for stock | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 20,110,771
Exchange Ratio | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 0.146
Peoples Financial Services Corp. shares issued | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 2,935,456
Price per share of Peoples Financial Services Corp. common stock on June 28, 2024 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 45.54
Purchase price consideration for common stock | ​ | ​ | ​ | ​ | ​ | ​ | $ | 133,681
Cash in lieu of fractional shares | ​ | ​ | ​ | ​ | ​ | ​ | ​ | 32
Total purchase price consideration | ​ | ​ | ​ | ​ | ​ | ​ | $ | 133,713
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | FNCB Bancorp, Inc. Book Value 6/30/2024 | ​ | ​ | Fair Value Adjustments | ​ | ​ | FNCB Bancorp, Inc. Fair Value 6/30/2024
Total purchase price consideration | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | $ | ​ | ​ | $ | ​ | ​ | $ | 133,713
Recognized amounts of identifiable assets acquired and liabilities assumed | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Cash and cash equivalents | ​ | 28,843 | ​ | ​ | ​ | ​ | ​ | 28,843
Investment securities | ​ | 426,107 | ​ | ​ | (4,180) | ​ | ​ | 421,927
Loans held for investment | ​ | 1,267,330 | ​ | ​ | (71,579) | ​ | ​ | 1,195,751
Allowance for credit losses | ​ | (13,921) | ​ | ​ | 12,353 | ​ | ​ | (1,568)
Loans held for investment, net of allowance | ​ | 1,253,409 | ​ | ​ | (59,226) | ​ | ​ | 1,194,183
Restricted stock | ​ | 9,934 | ​ | ​ | ​ | ​ | ​ | 9,934
Premises and equipment, net | ​ | 13,960 | ​ | ​ | 593 | ​ | ​ | 14,553
Accrued interest receivable | ​ | 7,448 | ​ | ​ | ​ | ​ | ​ | 7,448
Core deposit intangibles | ​ | ​ | ​ | ​ | 36,629 | ​ | ​ | 36,629
Wealth management customer list intangible | ​ | ​ | ​ | ​ | 988 | ​ | ​ | 988
Deferred tax asset | ​ | 14,415 | ​ | ​ | 5,083 | ​ | ​ | 19,498
Operating lease right of use asset | ​ | 2,821 | ​ | ​ | 263 | ​ | ​ | 3,084
Other assets | ​ | 62,728 | ​ | ​ | (3,483) | ​ | ​ | 59,245
Total identifiable assets acquired | ​ | 1,819,665 | ​ | ​ | (23,333) | ​ | ​ | 1,796,332
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Deposits | ​ | 1,429,406 | ​ | ​ | (2,405) | ​ | ​ | 1,427,001
Borrowings | ​ | 227,135 | ​ | ​ | (851) | ​ | ​ | 226,284
Trust preferred | ​ | 10,310 | ​ | ​ | (2,318) | ​ | ​ | 7,992
Accrued interest payable | ​ | 1,966 | ​ | ​ | ​ | ​ | ​ | 1,966
Operating lease liability | ​ | 3,082 | ​ | ​ | ​ | ​ | ​ | 3,082
Other liabilities | ​ | 9,704 | ​ | ​ | 178 | ​ | ​ | 9,882
Total liabilities assumed | ​ | 1,681,603 | ​ | ​ | (5,396) | ​ | ​ | 1,676,207
Total identifiable net assets | ​ | $ 138,062 | ​ | ​ | ($ 17,937) | ​ | ​ | $ 120,125
Goodwill | ​ | ​ | ​ | ​ | ​ | ​ | ​ | $ 13,588
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ The following is a discussion of the valuation methodologies used to estimate the fair value of major categories of assets acquired and liabilities assumed in the FNCB merger. The Company used an independent valuation specialist to assist with the determination of fair values of certain acquired assets and assumed liabilities. Cash and cash equivalents ​ The estimated fair value was determined to approximate the carrying amount of these assets. ​ Investment securities ​ All acquired investments were classified as available for sale. The balance sheet adjustment of $4.1 million reflects the fair value adjustment related to certain securities that were sold shortly after closing and was determined by the actual market price. Additional information is included in Note 5. ​ Loans ​ The acquired loan portfolio was valued utilizing Level 3 inputs and included the use of a discounted cash flow methodology applied on a pooled basis for accruing loans and on an individual basis for nonaccruing loans and incorporated assumptions that marketplace participants would use in estimating fair values. In the fair value process, accruing loans were grouped by characteristics such as loan type, term, collateral and rate. The Company developed assumptions as to credit risk, expected lifetime losses, qualitative factors, collateral values, discount rates, expected payments and expected prepayments. In instances where reliable market information was not available, the Company used its own assumptions in an effort to determine reasonable fair value. Specifically, the Company created three separate fair value adjustments which a market participant would employ in estimating the total fair value adjustment. The three fair valuation adjustments used were: (i) interest rate loan fair value adjustment; (ii) general credit fair value adjustment; and (iii) specific credit fair value adjustment. ​ To prepare the interest rate fair value adjustment, market discount rates for similar loans were obtained from various data sources to develop market participant assumptions. The general credit fair value adjustment was calculated using a two-part general credit fair value adjustment: (i) expected lifetime losses and (ii) estimated fair value adjustment for qualitative factors. The expected lifetime losses were calculated using historical losses of the acquired bank and Pennsylvania peer banks. The adjustment related to qualitative factors was impacted by general economic conditions and the risk related to lack of experience with the originator’s underwriting process. ​ Acquired loans are classified into three categories: purchased credit deteriorated (“PCD”) accruing loans (“PCD Accruing loans”), purchased credit deteriorated nonaccruing loans (“PCD Nonaccruing loans”) and non-PCD loans. PCD loans are defined as a loan or group of loans that have experienced more than insignificant credit deterioration since origination. The Company considers various factors in connection with the identification of more-than-insignificant deterioration in credit, including but not limited to nonperforming status, delinquency, risk ratings, and other qualitative factors that indicate deterioration in credit quality since origination. Non-PCD loans will have an allowance established subsequent to the Acquisition Date, which is recognized as an expense through the provision for credit losses. For PCD loans, the loans were recorded at their amortized cost, less an allowance for credit losses of $1.8 million on the Acquisition Date. There is no provision for credit loss expense recognized on PCD loans because the initial allowance is established by grossing-up the amortized cost of the PCD loans. The remaining difference between the net of the amortized cost basis and the allowance for credit losses and the fair value allocated to the loans on the date of acquisition is recognized as a non-credit-related discount that will be accreted into interest income over the life of the loans. ​ The following table provides details related to the fair value of acquired PCD loans.
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Dollars in thousands |  | ​ | Unpaid Principal Balance |  | ​ | Non-credit Discount at Acquisition |  | ​ | PCD Allowance for Credit Losses at Acquisition |  | ​ | Fair Value of PCD Loans at Acquisition
PCD Accruing |  | $ | 95,851 |  | $ | (3,626) |  | $ | 1,841 |  | $ | 94,066
PCD Nonaccruing | ​ | ​ | 10,470 | ​ | ​ | (2,898) | ​ | ​ | ​ | ​ | ​ | 7,572
Total PCD loans | ​ | $ | 106,321 | ​ | $ | (6,524) | ​ | $ | 1,841 | ​ | $ | 101,638
​ A Day 1 allowance for credit losses on non-PCD loans of $14.3 million was recorded through the provision for credit losses within the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). At the Acquisition Date, of the $1.3 billion loans acquired from FNCB, $1.2 billion, or 91.5%, of FNCB’s loan portfolio was accounted for as non-PCD loans. ​ Premises and equipment ​ The estimated fair value of premises were measured based upon appraisals from independent third parties. The estimated fair value of equipment was determined to approximate the carrying amount of these assets. ​ Core Deposit Intangible ​ Fair value was determined by using income approach under ASC topic 820. This present value analysis calculates the expected after-tax cash flow benefits of each acquired core deposits type versus the cost of obtaining an alternative source of funding (brokered deposits and FHLB borrowings) over the expected life of each acquired core deposits type, discounted at a long-term market oriented after-tax rate of return. The valuation also included assumptions related to expected account attrition, interest costs, and deposit maintenance cost and deposit fee income. The core deposit intangible was valued at $36.6 million or 5.1% of core deposits. The core deposit intangible asset is being amortized on an accelerated basis over 10 years based upon the period over which the estimated economic benefits are estimated to be received. Amortization expense for three months ended September 30, 2024, was $1.7 million. Additional information is included in Note 6. ​ Deferred Tax Asset ​ The Company recorded a net deferred income tax asset of $19.5 million related to tax attributes of FNCB, along with the effects of fair value adjustments resulting from applying the purchase method of accounting. ​ Time Deposits ​ The estimated fair value of time deposits was determined using a discounted cash flow approach. The fair value of time deposit accounts was determined by compiling individual account data into groups of equal remaining maturities with corresponding calculated weighted average rates. Each maturity group’s weighted average rate was compared to market rates for similar maturities and then priced to current market interest rates offered on time deposits with similar terms and maturities. ​ Borrowings and Subordinated Debt ​ The estimated fair value of short-term borrowings was determined to approximate the stated value. Subordinated debentures were valued using a discounted cash flow approach incorporating a discount rate that incorporated similar terms, maturity and credit rating. ​ Merger-related Expenses Costs related to the acquisition totaled $9.7 million and $11.2 million during the three and nine months ended September 30, 2024. These amounts were expensed as incurred and are recorded as merger-related expenses in the Consolidated Statements of Income (Loss) and Comprehensive Income (Loss). The following table details the costs identified and classified as merger-related expenses of the acquisition. ​
​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Three Months Ended | ​ | Nine Months Ended
​ | ​ | September 30, 2024 | ​ | September 30, 2024
Severance expenses | ​ | $ | 187 | ​ | $ | 187
System termination and integration fees | ​ | ​ | 8,375 | ​ | ​ | 8,551
Financial advisory fees | ​ | ​ | 582 | ​ | ​ | 1,173
Legal and professional fees | ​ | ​ | 87 | ​ | ​ | 772
Other merger related expenses | ​ | ​ | 422 | ​ | ​ | 527
Total | ​ | $ | 9,653 | ​ | $ | 11,210
​

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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://www.xbrl.org/2003/role/disclosureRef -Topic 805 -SubTopic 20 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org/1943274/2147479907/805-20-50-5 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 805 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org/805/tableOfContent + Details
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