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Note 8 - Business Combination, Goodwill and Other Intangible Assets

12 Months Ended

Dec. 31, 2021

Goodwill and Intangible Assets Disclosure [Text Block]

Note 8.

Business Combination, Goodwill and Other Intangible Assets

Acquisition of Prime Bank

The Company’s acquisitions are accounted for under the acquisition method of accounting in accordance with ASC 805, Business Combinations. Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. At date of acquisition fair values are generally preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding fair values becomes available.

On May 10, 2018, the Company completed its acquisition of Prime Bank, a Connecticut bank headquartered in Orange, CT. The closing of the transaction added a new Patriot branch located in the Town of Orange, New Haven County, Connecticut.

The assets acquired and liabilities assumed from Prime Bank were recorded at their estimated fair value as of the closing date of the acquisition. Goodwill of $2.1 million was recorded at the time of the acquisition, and was adjusted to $1.7 million as of December 31, 2018, primarily due to updating of fair value of the core deposit intangibles and adjustment of cash and contingent considerations. The goodwill was further adjusted to $1.1 million as a result of reducing the estimated amount to be paid pursuant to certain problem loans pending resolution by $621,000 as of May 10, 2019.

For the year ended December 31, 2020, a purchase price adjustment of $556,000 was recognized to project expenses on the consolidated statements of operations. The charge represented an adjustment to the earlier estimate of the final purchase price upon preliminary settlement of the litigation related to a dispute over the final purchase price in 2020. There were no income statement effects resulting from the recorded measurement period adjustments for the year ended December 31, 2019. There was no further adjustment for Goodwill in 2021. The goodwill is all deductible for income taxes over 15 years.

Information on goodwill for the year ended December 31, 2021, 2020 and 2019 is as follows:

	Year Ended December 31,
(In thousands)	2021		2020		2019
Balance, beginning of period	$	1,107	$	1,107	$	1,728
Measurement period adjustments		-		-		(621	)
Balance, end of period	$	1,107	$	1,107	$	1,107

Goodwill is evaluated for impairment annually or whenever we identify certain triggering events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors, supply costs, unanticipated competitive activities, and acts by governments and courts.

Management estimates the fair value of the reporting unit by considering multiple valuation techniques, which include subjective assumptions about the future cash flows of the Company, assumptions within the capitalization rate, valuation multiples, and market data used. The fair value of each reporting unit is compared to the carrying amount of such reporting unit in order to determine if impairment is indicated.

The Company performed a quantitative assessment as of October 31, 2021, the Company’s annual goodwill impairment measurement date, and concluded that the goodwill was not impaired as of December 31, 2021.

CDI was recorded as part of the Prime Bank business combination in May 2018. The CDI is amortized over a 10-year period using the straight-line method. For the year ended December 31, 2021, 2020 and 2019 the amortization was $47,000, $74,000 and 75,000, respectively. An impairment charge of $206,000 was recorded for the year ended December 31, 2020 due to impairment test performed in 2020. The Company performed a quantitative assessment for CDI as of October 31, 2021, and concluded that the CDI was not impaired as of December 31, 2021. The amortization expense and impairment charge were included in the other operating expenses on the consolidated statements of operations.

The table below provides information regarding the carrying amounts and accumulated amortization of amortized intangible assets as of the dates set forth below.

(In thousands)

As of December 31,

2021

2020

Gross carrying amount
$ 748 $ 748

Accumulated amortization
(246 ) (199 )

Impairment
(206 ) (206 )

Net carrying amount
$ 296 $ 343

Merger and acquisition with American Challenger

On November 15, 2021, the Company and American Challenger Development Corp., a Delaware corporation (“American Challenger”), entered into an Agreement and Plan of Merger (the “Original Merger Agreement”), which was subsequently amended on January 26, 2022 and February 28, 2022 (the Original Merger Agreement, as amended, referred to as the “Merger Agreement”). Pursuant to the Merger Agreement, American Challenger will merge with and into PNBK (the "Merger"). Following the Merger, Patriot Bank will adopt a consolidated business plan and will operate as two divisions. The Patriot Bank Division will continue to operate the existing business model. The American Challenger Division will execute the high-growth component of the consolidated business plan. In connection with the merger, the Company incurred $1.9 million of project expenses for the year ended December 31, 2021.

The pending acquisition is subject to several material conditions including obtaining regulatory and shareholder approval.