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Acquisition of HV Bancorp, Inc.
 9 Months Ended
Sep. 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 HVBC 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, accruing purchased credit-deteriorated loans and on an individual basis for nonaccruing purchased credit-deteriorated (“PCD”) loans. The valuation considered underlying characteristics including loan type, term, rate, payment schedule and credit rating. The discounted cash flow methodology involved assumptions and judgements as to credit risk, expected lifetime losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments.
 
•
Premises 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 a discounting cash flow method approach, which recognizes the cost savings represented by the expense of maintaining the core deposit base (net of deposit fee income) 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 $9,269,000 for the nine months ended September 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 September 30, 2023.


The following table presents financial information regarding the former HVBC operations included in our Consolidated Statement of Income from the date of acquisition through September 30, 2023 under the column “Actual from Acquisition Date through September 30, 2023”.  In addition, the following table presents unaudited pro forma information as if the acquisition of HVBC 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 September 30, 2023
    
Unaudited Pro Forma for
  
 
      
Three Months Ended
    
Nine Months Ended
  
 
      
September 30,
    
September 30,
  
(In Thousands, Except Per Share Data)
      
2023
    
2022
    
2023
    
2022
  
Net interest income
  
$
8,046
    
$
21,775
    
$
25,369
    
$
68,025
    
$
70,329
  
Non-interest income
    
600
      
3,797
      
4,372
      
10,502
      
14,638
  
Net income
    
3,140
      
7,061
   
9,070
      
8,008
      
22,652
  
Pro forma earnings per share:
                                        
Basic
          
$
1.31
 
$
1.93
      
1.61
    
$
4.82
  
Diluted
          
$
1.31
 
$
1.93
    
$
1.61
    
$
4.82