ACQUISITION OF GIBRALTAR BANK

12 Months Ended

Dec. 31, 2022

NOTE 2 – ACQUISITION OF GIBRALTAR BANK

On February 28, 2021, the Company completed its acquisition of Gibraltar Bank, pursuant to which Gibraltar Bank merged with and into the Bank, with the Bank as the surviving entity. Under the terms of the merger agreement, depositors of Gibraltar Bank became depositors of the Bank and have the same rights and privileges in Bogota Financial MHC as if their accounts had been established at the Bank on the date established at Gibraltar Bank. The Company issued 1,267,916 shares of its common stock to Bogota Financial, MHC in conjunction with the acquisition for no cash consideration.

NOTE 2 – ACQUISITION OF GIBRALTAR BANK (Continued)

The assets acquired and liabilities assumed have been accounted for under the acquisition method of accounting. The assets and liabilities, both tangible and intangible, were recorded at their fair values as of February 28, 2021 based on management’s best estimate using the information available as of the merger date. The application of the acquisition method of accounting resulted in the recognition of a bargain purchase gain of $2.0 million and a core deposit intangible of $400,000.

Merger-related expenses of $392,000 for 2021 are recorded in the Consolidated Statements of Income and were expensed as incurred. The following table sets forth assets acquired and liabilities assumed in the acquisition of the Gibraltar Bank, at their estimated fair values as of the closing date of the transaction:


	As recorded by Gibraltar Bank			Fair value adjustments				As recorded at acquisition
Fair value of equity acquired									11,500,000
Assets Acquired
Cash and cash equivalents	$	19,393,090		$	—				19,393,090
Securities held to maturity		7,250,000			(208,051	)	(a)		7,041,949
Federal Home Loan Bank stock and other restricted stock		603,500			—				603,500
Loans receivable		77,683,903			(920,497	)	(b)		76,763,406
Allowance for loan loss		(640,232	)		640,232		(c)		-
Accrued interest receivable		302,927			—				302,927
Premises and equipment, net		348,714			1,079,647		(d)		1,428,361
Core deposit intangible		—			400,000		(e)		400,000
Deferred taxes		913,303			(167,400	)	(f)		745,903
Other assets		362,636			(278,355	)	(g)		84,281
Total assets acquired	$	106,217,841		$	545,576				106,763,417

Liabilities assumed
Deposits	$	81,558,612		$	386,865		(h)		81,945,477
Borrowings		10,000,000			273,721		(i)		10,273,721
Advance payments by borrowers for taxes and insurance		646,661			—				646,661
Accrued expenses and other liabilities		446,588			—				446,588
Total liabilities assumed	$	92,651,861		$	660,586				93,312,447
Net assets acquired									13,450,970
Bargain purchase gain recorded at merger									1,950,970

Explanation of certain fair value related adjustments:


(a)	Represents the fair value adjustments on investment securities at the acquisition date.
(b)	Represents the fair value adjustments on the net book value of loans, which includes an interest rate mark and credit mark adjustment and the reversal of deferred fees/costs which will be amortized over the remaining life of the loans.


(c)	Represents the elimination of Gibraltar Bank allowance for loan losses.
(d)	Represents the fair value adjustments to reflect the fair value of land and buildings and premises and equipment, which will be amortized on a straight-line basis over the estimated useful lives of the individual assets.


(e)	Represents the intangible assets recorded to reflect the fair value of core deposits. The core deposit asset was recorded as an identifiable intangible asset and will be amortized on an accelerated basis over the estimated average life of the deposit base.
(f)	Represents an adjustment to net deferred tax assets resulting from the fair value adjustments related to the acquired assets, liabilities assumed and identifiable intangible assets recorded.


(g)	Represents an adjustment to other assets acquired.
(h)	Represents fair value adjustments on time deposits, which will be treated as a reduction of interest expense over the remaining term of the time deposits.


(i)	Represents FHLB borrowing calculation to prepay borrowings, which will be treated as a reduction of interest expense over the remaining life of the debt

NOTE 2 – ACQUISITION OF GIBRALTAR BANK (Continued)

The fair value of loans acquired from Gibraltar Bank was estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. There was no carryover of Gibraltar Bank's allowance for loan losses associated with the loans that were acquired. The core deposit intangible asset recognized is being amortized over its estimated useful life of approximately 10 years utilizing the sum-of-the-years digits method (see Note 7 for details). The acquisition was accounted for under the acquisition method of accounting in accordance with ASC Topic 805, Business Combinations. Accordingly, the Company recognizes amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair value.

The fair value of PCI loans was $6.1 million on the date of acquisition. The gross contractual amounts receivable relating to the PCI loans was $8.3 million.

Certain PCI loans, for which specific credit-related deterioration was identified, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on a reasonable expectation of the timing and amount of cash flows to be collected. The timing of the sale of loan collateral was estimated for acquired loans deemed impaired and considered collateral dependent. For these collateral dependent impaired loans, the excess of the future expected cash flows over the present value of the future expected cash flows represents the accretable yield, which will be accreted into interest income over the estimated liquidation period using the effective interest method.

The following table details the PCI loans that are accounted for in accordance with FASB ASC 310-30 as of March 1, 2021:

(in thousands)


Contractually required principal and interest at acquisition	$	8,346
Contractual cash flows not expected to be collected (nonaccretable difference)		(1,412	)
Expected cash flows at acquisition		6,934
Interest component of expected cash flows (accretable discount)		(846	)
Fair value of acquired PCI loans	$	6,088

The following table details the acquired loans that are not PCI as of March 1, 2021
Contractually required principal at acquisition	$	91,906
Contractual cash flows not expected to be collected (credit mark)		(9,978	)
Expected cash flows at acquisition		81,928
Interest component of expected cash flows (accretable premium)		143
Fair value of acquired loans accounted for under FASB ASC 310-30	$	82,071

Changes in the amortizable yield for purchased credit-impaired loans were as follows for the twelve months ended December 31, 2022 and 2021:


	2022			2021
Balance at beginning of period	$	170,075		$	—
Addition of purchased credit-impaired loans		—			217,789
Accretion		(24,027	)		(47,714	)
Balance at end of period		146,048			170,075

NOTE 2 – ACQUISITION OF GIBRALTAR BANK (Continued)

The following table presents actual operating results attributable to Gibraltar Bank from the March 1, 2021 acquisition date through December 31, 2021. This information does not include purchase accounting adjustments or acquisition integration costs.


	Gibraltar March 1, 2021 to December 31, 2021
Net interest income	$	1,479
Non-interest income		1,050
Non-interest expense		357
Pre-tax income		2,172
Income tax expense		611
Net Income	$	1,561

The fair value of retail demand and interest bearing deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was estimated by discounting the contractual future cash flows using market rates offered for time deposits of similar remaining maturities. The fair value of borrowings was based on the FHLB calculation to prepay borrowings with associated penalties.