XML 184 R9.htm IDEA: XBRL DOCUMENT

Business Combinations

12 Months Ended

Dec. 31, 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 Security Bank and Trust , with the Bank as the surviving institution (collectively, the “merger”). The primary reasons for the merger included: expansion of the branch network and commanding market share positions in northeastern Pennsylvania; an 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 for each share of FNCB common stock they held. 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 $12.6 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 has one reportable segment for GAAP, therefore the goodwill is 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 December 31, 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

(Dollars in thousands)		FNCB Bancorp, Inc. Book Value 6/30/2024			Initially Reported Fair Value Adjustments			FNCB Bancorp, Inc. Initially Reported Fair Value 6/30/2024			Measurement Period Adjustments			FNCB Bancorp, Inc. Adjusted Fair Value 6/30/2024
Total purchase price consideration	$			$			$	133,713		$			$	133,713

Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents		28,843						28,843						28,843
Investment securities		426,107			(4,180)			421,927						421,927
Loans held for investment		1,267,330			(71,306)			1,196,024						1,196,024
Allowance for credit losses		(13,921)			12,080			(1,841)						(1,841)
Loans held for investment, net of allowance		1,253,409			(59,226)			1,194,183						1,194,183
Restricted stock		9,934						9,934						9,934
Premises and equipment, net		13,960			593			14,553						14,553
Accrued interest receivable		7,448						7,448						7,448
Core deposit intangibles					36,629			36,629						36,629
Wealth management customer list intangible					988			988						988
Deferred tax asset		14,415			5,083			19,498			(164)			19,334
Operating lease right of use asset		2,821			263			3,084						3,084
Other assets		62,728			(3,483)			59,245			1,540			60,785
Total identifiable assets acquired		1,819,665			(23,333)			1,796,332			1,376			1,797,708

Deposits		1,429,406			(2,405)			1,427,001						1,427,001
Borrowings		227,135			(851)			226,284						226,284
Trust preferred		10,310			(2,318)			7,992						7,992
Accrued interest payable		1,966						1,966						1,966
Operating lease liability		3,082						3,082						3,082
Other liabilities		9,704			178			9,882			404			10,286
Total liabilities assumed		1,681,603			(5,396)			1,676,207			404			1,676,611
Total identifiable net assets	$	138,062		$	(17,937)		$	120,125		$	972		$	121,097
Goodwill							$	13,588		$	(972)		$	12,616

Measurement period adjustments

The preliminary purchase price allocation was based upon a preliminary valuation, and the Company’s estimates and assumptions are subject to change within the measurement period (defined as one year following the acquisition date). Adjustments during the three months ended December 31, 2024 resulted from new information about conditions that existed at the acquisition date, not subsequent events or changes in market conditions. The measurement period adjustments do not impact earnings that had been recorded in previous reporting periods.

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 $4.2 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 3.

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 nonaccrual 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 nonaccrual loans (“PCD Nonaccrual 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			Total Discount at Acquisition			Gross-up for 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 Nonaccrual			10,470			(2,898)						7,572
Total PCD loans		$	106,321		$	(6,524)		$	1,841		$	101,638

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 percent 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 through December 31, 2024, was $3.3 million. Additional information is included in Note 9.

Deferred Tax Asset

The Company recorded a net deferred income tax asset of $19.3 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 $16.2 million and $1.8 million, respectively at December 31, 2024 and 2023. These amounts were expensed as incurred and are recorded as merger-related expenses in the Consolidated Statements of Income and Comprehensive Income (Loss). The following table details the costs identified and classified as merger-related expenses of the acquisition.


		Year Ended			Year Ended
(Dollars in thousands)		December 31, 2024			December 31, 2023
Severance expenses		$	1,583		$
System termination and integration fees			10,600
Financial advisory fees			1,795			1,098
Legal and professional fees			866			647
Other merger related expenses			1,356			71
Total		$	16,200		$	1,816