Business Combination

12 Months Ended

Dec. 31, 2021

Business Combination

Business Combination

NOTE 2:  Business Combination

On January 1, 2020, the Corporation completed its acquisition of Peoples Bankshares, Incorporated (Peoples).  Peoples shareholders received 0.5366 shares of the Corporation’s common stock and $27.00 in cash for each share of Peoples common stock, with cash paid in lieu of any fractional shares of the Corporation’s common stock.  In connection with the

transaction, the Corporation paid aggregate cash consideration of $10.58 million and issued 209,871 shares of its common stock to the shareholders of Peoples.  

The Corporation accounted for the acquisition using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under the acquisition method of accounting, the assets acquired and liabilities assumed in the acquisition and the common stock of the Corporation issued as consideration were recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, particularly related to the loan portfolio, is inherently subjective and involves significant judgment regarding the methods and assumptions used to estimate fair value.    

The following table presents as of January 1, 2020 the total consideration paid by the Corporation in connection with the acquisition of Peoples, the fair values of the assets acquired and liabilities assumed, and the resulting goodwill.

	Amounts
	Recognized as of
(Dollars in thousands)	January 1, 2020
Purchase price:
Cash paid	$	10,579
Common stock issued		11,612
Total purchase price	$	22,191
Identifiable assets acquired:
Cash and cash equivalents	$	29,680
Securities available for sale		17,169
Loans		124,195
Accrued interest receivable		430
Corporate premises and equipment		3,105
Other real estate owned		281
Core deposit intangible asset		1,711
Bank-owned life insurance		3,591
Investment in small business investment company		1,493
Other receivables		5,234
Other assets		3,658
Total identifiable assets acquired		190,547
Identifiable liabilities assumed:
Demand and savings deposits		94,798
Time deposits		77,018
Borrowings		4,245
Accrued interest payable		260
Salaries, benefits and deferred compensation		2,054
Other liabilities		747
Total identifiable liabilities assumed		179,122
Net identifiable assets acquired	$	11,425
Goodwill resulting from acquisition	$	10,766

In connection with the acquisition, the Corporation recorded approximately $10.77 million of goodwill and $1.71 million of other intangible assets related to the core deposits of Peoples.  The goodwill arising from the acquisition of Peoples is not deductible for income taxes.  The core deposit intangible asset (CDI) will be amortized over a period of 15 years using a declining balance method.

Loans acquired from Peoples had aggregate outstanding principal of $131.92 million and an estimated fair value of $124.20 million.  The discount between the outstanding principal balance and fair value represents expected credit losses and adjustments for market interest rates.  Under the acquisition method, the allowance for loan losses recorded in the books of Peoples in the amount of $2.87 million was not carried over into the books of the Corporation.  Loans that have evidence

of deterioration in credit quality since origination are categorized as purchased credit impaired (PCI).  PCI loans acquired from Peoples included medical student loans with an outstanding principal balance of $4.28 million and a fair value of $635,000 at January 1, 2020, which were purchased by Peoples and the performance of which was previously backed by surety bonds.  The surety bonds were terminated in 2018 when the issuer of the bond was placed into liquidation by its insurance regulator, and replacement surety bond coverage was not obtained.  The Bank subsequently sold these medical student loans during the year ended December 31, 2020.

Information about PCI loans acquired from Peoples as of January 1, 2020 is as follows:

(Dollars in thousands)	January 1, 2020
Contractual principal and interest due	$	20,310
Nonaccretable difference		(7,679)
Expected cash flows		12,631
Accretable yield		(3,372)
Purchased credit impaired loans - estimated fair value	$	9,259

Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:

Loans:  The acquired loans were recorded at fair value at the acquisition date without carryover of People's allowance for loan losses. The fair value of the loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and then discounting those cash flows based on a discount rate that would be required by a market participant. In this regard, the acquired loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, loan purpose and loan structure. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), updated loan-to-value ratios and lien position, and past loan performance. For valuation purposes, these pools were further disaggregated by maturity and pricing characteristics (e.g., fixed-rate, adjustable-rate, balloon maturities).

Core Deposit Intangible: The fair value of the CDI was determined based on a discounted cash flow analysis using a discount rate based on the estimated cost of equity capital for a market participant. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through the Federal Home Loan Bank (FHLB). The life of the deposit base and projected deposit attrition rates were determined using Peoples’ historical deposit data. The CDI was estimated at $1.71 million or 1.8% of non-maturity deposits.

Deposits:  The fair value adjustment of deposits represents a premium over the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar term certificates of deposit. The resulting estimated fair value adjustment of certificates of deposit ranging in maturity from three months to five years is a $557,000 premium and is being amortized into income over a period of two years.

The following table presents certain unaudited pro forma information as if the acquisition had taken place on January 1, 2019. These results combine the historical results of Peoples and the Corporation for the period prior to the merger.  While certain adjustments were made for estimated effects resulting from the application of the acquisition method, including certain fair value adjustments, this pro forma information is not indicative of what would have occurred had the acquisition actually taken place on January 1, 2019. Pro forma adjustments for the year ended December 31, 2019 include the net impact of accretion of loan discounts related to market interest rates, amortization of premiums on deposits and borrowings, amortization of intangible assets and related income taxes.  Unaudited pro forma net income for the year ended December 31, 2019 includes after tax merger related expenses of $2.76 million, or $(0.75) per share.  These amounts include $2.11 million recorded by Peoples, which was primarily related to pre-existing employment agreements, contract termination costs paid to Peoples’ core processing provider, and fees for legal and financial advisors.  Unaudited pro forma net income also includes provision for loan losses recorded by Peoples for loans that were recorded by the Corporation at fair value upon acquisition and have no allowance for loan losses in the books of the Corporation.  Additionally, the Corporation has achieved certain operational cost savings and other efficiencies as a result of the acquisition and integration of Peoples which are not reflected in the unaudited pro forma amounts below.

	Unaudited Pro Forma
	Year Ended
(Dollars in thousands, except per share amounts)	December 31, 2019
Total revenues (net interest income plus nonintererest income)	$	120,173
Net income	$	18,261
Net income per share, basic and diluted	$	4.99

The revenue and earnings amounts specific to Peoples that are included in the consolidated results for 2020 are not readily determinable.  Disclosure of these amounts is impracticable due to the merging of certain processes and systems at the acquisition date.

The Corporation recorded merger related expenses in connection with the acquisition of Peoples of $1.40 million ($1.13 million after income taxes) for the year ended December 31, 2020 and $709,000 ($653,000, after income taxes) for the year ended December 31, 2019.  The Corporation recorded aggregate merger related expenses of $2.10 million ($1.78 million after income taxes) during 2019 and 2020, including the integration of systems and operations and legal and consulting expenses, which were expensed as incurred.