XML 19 R10.htm IDEA: XBRL DOCUMENT
v3.23.2

Acquisition of HV Bancorp, Inc. | 6 Months Ended
--- | ---
Jun. 30, 2023
Acquisition of HV Bancorp, Inc. [Abstract] |
Acquisition of HV Bancorp, Inc. | Note 2 – Acquisition of HV Bancorp, Inc. In the fourth quarter of 2022, the Company announced the signing of a definitive merger agreement to acquire 100% of the outstanding equity interest of HV Bancorp, Inc. (“HVBC”) for $30.50 per share in cash and stock. HVBC was a Pennsylvania Corporation that conducted its business primarily through, its wholly owned subsidiary Huntingdon Valley Bank (“HVB”), which operated from a main office in Doylestown, Pennsylvania, and had five service branches, four mortgage production office and one business banking office. The transaction closed on June 16, 2023, with HVB having been merged into First Citizens Community Bank, with First Citizens Community Bank as the surviving entity. The acquisition established the Company’s presence in the Montgomery, Bucks and Philadelphia counties markets. Under the terms of the merger agreement, the Company acquired all of the outstanding shares of HVBC for a total purchase price of approximately $76,665,000. As a result of the acquisition, the Company issued 693,858 common shares and $16.5 million in cash to the former shareholders of HVBC. The shares were issued with a value of $86.67 per share, which was based on the closing price of the Company’s stock on June 16, 2023. The following table summarizes the purchase of HVB as of June 16, 2023:
(In Thousands, Except Per Share Data) |  |  |  |  |  |
Purchase Price Consideration in Common Stock |  |  |  |  |  |
Citizens Financial Services, Inc. shares issued |  |  | 693,858 |  |  |  |
Value assigned to Citizens Financial Services, Inc. common share |  | $ | 86.67 |  |  |  |
Purchase price assigned to HVBC common shares exchanged for Citizens Financial Services, Inc. |  |  |  |  |  | $ | 60,137 |
Purchase Price Consideration - Cash for Common Stock |  |  |  |  |  |  |  |
Purchase price assigned to HVBC’s common shares exchanged for cash |  |  |  |  |  |  | 13,112 |
Purchase Price Related to Cash Payout of Stock Options |  |  |  |  |  |  | 3,416 |
Total Purchase Price |  |  |  |  |  |  | 76,665 |
Net Assets Acquired: |  |  |  |  |  |  |  |
HVBC shareholders’ equity |  | $ | 40,630 |  |  |  |  |
Adjustments to reflect assets acquired at fair value: |  |  |  |  |  |  |  |
Investments |  |  | 31 |  |  |  |  |
Loans |  |  |  |  |  |  |  |
Interest rate |  |  | (24,097 | ) |  |  |  |
General credit |  |  | (1,834 | ) |  |  |  |
Credit - PCD Loans |  |  | (2,042 | ) |  |  |  |
Core deposit intangible |  |  | 2,770 |  |  |  |  |
Owned premises |  |  | 67 |  |  |  |  |
Other assets |  |  | (193 | ) |  |  |  |
Deferred tax assets |  |  | 3,737 |  |  |  |  |
Adjustments to reflect liabilities acquired at fair value: |  |  |  |  |  |  |  |
Time deposits |  |  | 586 |  |  |  |  |
Borrowings |  |  | 3,017 |  |  |  |  |
Other liabilities |  |  | 611 |  |  |  |  |
|  |  |  |  |  |  | 23,283 |
Goodwill resulting from merger |  |  |  |  |  | $ | 53,382 |
The following condensed statement reflects the amounts recognized as of the acquisition date for each major class of asset acquired and liability assumed:
(In Thousands, Except Per Share Data) |  |  |  |  |  |
Total purchase price |  |  |  |  |  | 76,665 |
Fair value of assets acquired |  |  |  |  |  |  |
Cash and due from banks |  |  | 18,017 |  |  |  |  |
Investment securities |  |  | 79,248 |  |  |  |  |
Loans held for sale |  |  | 10,750 |  |  |  |  |
Loans |  |  | 475,338 |  |  |  |  |
Premises and equipment |  |  | 2,310 |  |  |  |  |
Intangible assets |  |  | 2,972 |  |  |  |  |
Bank owned life insurance |  |  | 10,387 |  |  |  |  |
Interest receivable |  |  | 2,226 |  |  |  |  |
Deferred taxes |  |  | 8,392 |  |  |  |  |
Other assets |  |  | 18,213 |  |  |  |  |
Total assets acquired |  |  | 627,853 |  |  |  |  |
Fair value of liabilities assumed |  |  |  |  |  |  |  |
Deposits |  |  | 533,364 |  |  |  |  |
Borrowings |  |  | 58,647 |  |  |  |  |
Accrued interest payable |  |  | 885 |  |  |  |  |
Other liabilities |  |  | 11,674 |  |  |  |  |
Total liabilities assumed |  |  | 604,570 |  |  |  |  |
Total fair value of identifiable net assets |  |  |  |  |  |  | 23,283 |
Goodwill resulting from merger |  |  |  |  |  |  | 53,382 |
The Company determined that this acquisition constitutes a business combination and therefore was accounted for using the acquisition method of accounting. Accordingly, as of the date of the acquisition, the Company recorded the assets acquired, liabilities assumed and consideration paid at fair value. The $53.4 million excess of the consideration paid over the fair value of assets acquired was recorded as goodwill and is not amortizable or deductible for tax purposes. The amount of goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company with HVBC. The fair value of the 693,858 common shares issued was determined based on the $86.67 closing market price of the Company’s common shares on the acquisition date, June 16, 2023. While the valuation of the acquired assets and liabilities is substantially complete, fair value estimates are subject to adjustment during the provisional period, which may last up to twelve months subsequent to the acquisition date. During this period, the Company may obtain additional information to refine the valuations and adjust the recorded fair value, although such adjustments are not expected to be significant. Valuations subject to adjustments include, but are not limited to, the fair value of acquired loans, deposits, land and building, core deposit intangible and other assets and liabilities. The following is a description of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed. The Company used an independent valuation specialist to assist with the determination of fair values for certain acquired assets and assumed liabilities.
| • | Cash and due from banks - The estimated fair value was determined to approximate the carrying amount of these assets.
| • | Investment securities - The estimated fair value of the investment portfolio was based on quoted market prices, dealer quotes, and pricing obtained from independent pricing services.
| • | Loans - The estimated fair value of loans were based on a discounted cash flow methodology applied on a pooled basis for nonpurchased credit-deteriorated (“non-PCD”) loans and on an individual basis for purchased credit-deteriorated (“PCD”) loans. The valuation considered underlying characteristics including loan type, term, rate, payment schedule and credit rating. Other factors included assumptions related to prepayments, probability of default and loss given default. The discount rates applied were based on a build-up approach considering the funding mix, servicing costs, liquidity premium and factors related to performance risk.
| • | Premise and equipment - The estimated fair value of land and buildings were determined by independent market-based appraisals.
| • | Core deposit intangible - The core deposit intangible was valued utilizing the cost savings method approach, which recognizes the cost savings represented by the expense of maintaining the core deposit base versus the cost of an alternative funding source. The valuation incorporates assumptions related to account retention, discount rates, deposit interest rates, deposit maintenance costs and alternative funding rates.
| • | Time deposits - The estimated fair value of time deposits was determined using a discounted cash flow approach incorporating a discount rate equal to current market interest rates offered on time deposits with similar terms and maturities.
| • | Borrowings - The estimated fair value of short-term borrowings was determined to approximate stated value. The estimated fair value of long-term borrowings from the FHLB were determined using a discounted cash flow approach incorporating a discount rate equal to current market interest rates offered on borrowings with similar terms and maturities. Subordinated debentures were valued using a discounted cash flow approach incorporating a discount rate that incorporated similar terms, maturity and credit rating.
Accounting for Acquired Loans Acquired loans are classified into two categories: PCD 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. Non-PCD loans will have an allowance established on acquisition date, which is recognized as an expense through provision for credit losses. For PCD loans, an allowance is recognized on day 1 by adding it to the fair value of the loan, which is the “Day 1 amortized cost”. 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 loan. A Day 1 allowance for credit losses on non-PCD loans of $4.6 million was recorded through the provision for credit losses within the Consolidated Statements of Income. At the date of acquisition, of the $506.9 million of loans acquired from HVB, $18.0 million, or 3.6%, of HVB’s loan portfolio, was accounted for as PCD loans. The following table provides details related to the fair value of acquired PCD loans (in thousands):
|  | Unpaid principal balance |  |  | PCD Allowance for Credit Loss at Acquisition |  |  | (Discount) Premium on Acquired Loans |  |  | Fair Value of PCD Loans at Acquisition |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |
Mortgages |  | $ | 2,398 |  |  | $ | (108 | ) |  | $ | - |  |  | $ | 2,290 |
Home Equity |  |  | 34 |  |  |  | - |  |  |  | (4 | ) |  |  | 30 |
Commercial |  |  | 4,774 |  |  |  | (39 | ) |  |  | (507 | ) |  |  | 4,228 |
Construction |  |  | 4,278 |  |  |  | (37 | ) |  |  | (293 | ) |  |  | 3,948 |
Consumer |  |  | 1,343 |  |  |  | (677 | ) |  |  | (271 | ) |  |  | 395 |
Other commercial loans |  |  | 5,214 |  |  |  | (828 | ) |  |  | (48 | ) |  |  | 4,338 |
|  | $ | 18,041 |  |  | $ | (1,689 | ) |  | $ | (1,123 | ) |  | $ | 15,229 |
The following table provides details related to the fair value and Day 1 provision related to the acquired non-PCD loans (in thousands):
|  | Unpaid principal balance |  |  | (Discount)Premium on Acquired Loans |  |  | Fair Value of Non-PCD Loans at Acquisition |  |  | Day 1 Provision for Credit Losses- Non-PCD Loans |
Real estate loans: |  |  |  |  |  |  |  |  |  |  |  |
Mortgages |  | $ | 155,799 |  |  | $ | (17,506 | ) |  | $ | 138,293 |  |  | $ | 1,015 |
Home Equity |  |  | 2,165 |  |  |  | (55 | ) |  |  | 2,110 |  |  |  | 15 |
Commercial |  |  | 203,638 |  |  |  | (9,226 | ) |  |  | 194,412 |  |  |  | 1,968 |
Construction |  |  | 76,703 |  |  |  | (1,420 | ) |  |  | 75,283 |  |  |  | 747 |
Consumer |  |  | 2,794 |  |  |  | (222 | ) |  |  | 2,572 |  |  |  | 159 |
Other commercial loans |  |  | 47,753 |  |  |  | (314 | ) |  |  | 47,439 |  |  |  | 687 |
|  | $ | 488,852 |  |  | $ | (28,743 | ) |  | $ | 460,109 |  |  | $ | 4,591 |
Amounts recognized separately from the acquisition include primarily legal fees, investment banking fees, system conversion costs, severance costs and contract termination costs. These costs were included in merger and acquisition expenses within non-interest expenses on the Consolidated Statement of Income and amounted to approximately $8,646,000 for the quarter ended June 30, 2023. Results of operations for HVBC prior to the acquisition date are not included in the Consolidated Statement of Income for the quarter ended June 30, 2023. The following table presents financial information regarding the former HVBC Bancorp Inc. operations included in our Consolidated Statement of Income from the date of acquisition through June 30, 2023 under the column “Actual from Acquisition Date through June 30, 2023”. In addition, the following table presents unaudited pro forma information as if the acquisition of HV Bancorp Inc. had occurred on January 1, 2022 under the “Pro Forma” columns. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited proforma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of the integration and consolidation of the acquisition. Merger and acquisition integration costs and amortization of fair value adjustments are included in the numbers below.
|  | Actual from Acquisition Date Through June 30, 2023 |  |  | Unaudited Pro Forma for |
|  |  |  | Three Months Ended |  |  | Six Months Ended |
|  |  |  | June 30, |  |  | June 30, |
(In Thousand s, Except Per Share Data) |  |  |  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Net interest income |  | $ | 917 |  |  | $ | 18,901 |  |  | $ | 23,572 |  |  | $ | 38,004 |  |  | $ | 44,960 |
Non-interest income |  |  | 34 |  |  |  | 2,280 |  |  |  | 4,488 |  |  |  | 4,454 |  |  |  | 10,241 |
Net (loss) income |  |  | 590 |  |  |  | (3,461 | ) |  |  | 8,587 |  |  |  | 4,124 |  |  |  | 13,557 |
Pro forma (loss) earnings per share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  |  |  |  | $ | (0.72 | ) |  | $ | 1.84 |  |  |  | 0.87 |  |  | $ | 2.91 |
Diluted |  |  |  |  |  | $ | (0.72 | ) |  | $ | 1.84 |  |  | $ | 0.87 |  |  | $ | 2.91 |

X
- 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
Name: | us-gaap_BusinessCombinationDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | dtr-types:textBlockItemType
Balance Type: | na
Period Type: | duration

X
- References No definition available. + Details
Name: | us-gaap_BusinessCombinationsAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration