Note 2 - Business Combinations

9 Months Ended

Sep. 30, 2025

Notes to Financial Statements

Business Combination [Text Block]

2.         Business Combinations

On August 1, 2025 (the “Acquisition Date”), the Company completed the acquisition of Northumberland Bancorp ("NUBC"), in accordance with the definitive agreement that was entered into on September 24, 2024, as amended on December 4, 2024, by and among the Company and NUBC. The primary reasons for the merger included: expansion of the branch network and increased market share positions in central Pennsylvania; attractive low-cost funding base; strong cultural alignment and a deep commitment to shareholders, customers, employees, and communities served by Steele and NUBC, meaningful value creation to shareholders; and increased trading liquidity for both companies and increased dividends for NUBC shareholders. In connection with the completion of the merger, former NUBC shareholders received 1.185 shares of the Company’s common stock. The value of the total transaction consideration was approximately $40.4 million. The consideration included the issuance of 1,546,725 shares of the Company’s common stock, which had a value of $26.00 per share, which was the closing price of the Company’s common stock on July 31, 2025, the last trading day prior to the consummation of the acquisition. Also included in the total consideration were cash in lieu of any fractional shares and the cash paid for dissenter's rights effectively settled upon closing.

The acquisition of NUBC was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid are recorded at estimated fair values on the Acquisition Date. The provisional amount of bargain purchase gain as of the Acquisition Date was approximately $17.8 million. The exchange ratio was determined at the time of announcement with mergers of equals as a consideration between the Company and NUBC. The exchange ratio and lower than book value stock price of the Company was the primary driver in recording a bargain purchase gain on this transaction. The Company will continue to keep the measurement of bargain purchase gain open for any additional adjustments to the fair value of certain accounts, for example loans, that may arise during the Company’s final review procedures of any updated information. If considered necessary, any subsequent adjustments to the fair value of assets acquired and liabilities assumed, identifiable intangible assets, or other purchase accounting adjustments will result in adjustments to bargain purchase gain within the first 12 months following the Acquisition Date. The bargain purchase gain is not expected to be included as taxable income for tax purposes.

As a result of the integration of operations of NUBC, it is not practicable to determine revenue or net income included in the Company’s consolidated operating results relating to NUBC since the Acquisition Date, as NUBC’s results cannot be separately identified. Comparative pro-forma financial statements for the prior year period were not presented, as adjustments to those statements would not be indicative of what would have occurred had the acquisition taken place on January 1, 2025. In particular, adjustments that would have been necessary to be made to record the loans at fair value, the provision of credit losses or the core deposit intangible would not be practical to estimate.

The following table summarizes the consideration paid for NUBC and the amounts of the assets acquired and liabilities assumed
recognized at the acquisition date of August 1, 2025:
(in thousands, Except Share and Per Share Data)
Purchase Price Consideration
Mifflinburg Bancorp, Inc. shares to be issued		1,546,725
Per share value assigned to shares issued	$	26.00
Total purchase price assigned to shares issued				$	40,215
Cash in lieu of fractional shares					3
Dissenter's shares (1)		6,493
Fair value of Dissenter's shares	$	28.80
Total fair value of Dissenter's shares					187
Fair value of total consideration transferred				$	40,405
Recognized amounts of identifiable assets acquired and liabilities assumed, at fair value
Cash and cash equivalents	$	43,589
Securities, available for sale		165,660
Loans held for sale		61
Loans gross		427,066
Allowance for credit losses		(725	)
Loans, net of allowance		426,341
Bank owned life insurance		14,848
Premises		9,226
Furniture, fixtures and equipment		515
Accrued interest receivable		2,261
Restricted investment in bank stock		2,948
Deferred tax asset		2,849
Core deposit intangible		14,662
Customer list intangibles		1,406
Operating lease right of use asset		132
Other assets		3,679
Total identifiable assets acquired at fair value	$	688,177
Deposits	$	597,060
Borrowings		20,117
Subordinated debt		9,753
Accrued interest payable		554
Operating lease liability		132
Other liabilities		2,329
Total liabilities assumed	$	629,945
Total identifiable net assets, at fair value				$	58,232
Preliminary bargain purchase gain				$	17,827

(1) NUBC stockholder with 6,493 shares exercised their Dissenter’s rights. The Company made a settlement with the stockholder and paid a cash settlement of $28.80 per share for a total payment of $187 thousand. 

The Company recorded all loans acquired at the estimated fair value on the acquisition date with no carryover of the related allowance for loan losses. The Company determined the net discounted value of cash flows on gross loans totaling $427.1 million, including 5,023 of Non-Purchase Credit Deteriorated ("PCD") loans and 379 PCD loans. The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-loan value ratios, loss exposures, and remaining balances. These Non-PCD loans were segregated into pools based on loan and payment type. The effect of the valuation process was a total net discount $19.6 million at the Acquisition Date.

Management made significant estimates and exercised significant judgement in accounting for the acquisition of NUBC. The following is a brief description of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed. The Company utilized a valuation specialist to assist with the determination of fair values for certain acquired assets and assumed liabilities.

Cash and equivalents

Included in cash and equivalents are an investment in time deposits of other financial institutions, valued at the present value of the expected contractual payments discounted at market rates for instruments with similar terms.

Securities

The estimated fair value of the acquired portfolio of debt securities was based on quoted market prices. The Company sold available-for-sale securities with a total par value of $52.8 million of the acquired portfolio upon completion of the acquisition.  

Loans

The fair valuation process identified loans with credit risk indicators that qualified for “purchase credit deteriorated” (“PCD”) status. PCD and non-PCD loans were then evaluated for credit risk and other fair value indicators. Consistent with GAAP, FCB’s related allowance for credit losses on loans and deferred fees and costs were not recorded.

Credit risk was quantified using a probability of default (“PD”)/loss given default(“LGD”) methodology from a market participant perspective and applied to each loan’s outstanding principal balance. PD/LGD rates were tailored to PCD or non-PCD status. Other fair value indicators were quantified using a discounted cash flow methodology, with discounts applied for current market rates, credit risk and liquidity. Cash flows were generated based upon the loans’ underlying characteristics and estimated prepayment speeds.

The following table provides information on PCD and non-PCD loans as of the Acquisition Date:

August 1, 2025
(Dollars in Thousands)	PCD Loans			Non-PCD Loans
Number of loans		379			5,023
NUBC recorded value	$	53,676		$	392,745
Discount for credit risk		(194	)		(4,474	)
Discount for non-credit factors		(1,238	)		(13,396	)
Fair value	$	52,244		$	374,875

Premises and equipment

The fair value of premises acquired was based on a recent third-party appraisal. Acquired equipment was based on the remaining net book value of NUBC, which approximated fair value.

Core Deposit Intangible

Core deposit relationships provide a stable source of funds for lending and contribute to profitability. The core deposit intangible was valued using an income approach focused on cost savings, 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.

Leases: right of use asset, lease liability and fair value

Right of use assets (included in other assets) and lease liabilities (included in other liabilities) for branch locations were measured at the acquisition date. The fair value of leases was determined by applying a discounted cash flow methodology discounted by current lease rates within the appropriate market.

Deposits

Deposits were valued using methods appropriate to their characteristics. The fair value of noninterest bearing demand deposits, interest bearing demand deposits, money market and savings deposit accounts were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Time deposits were valued at the present value of the expected contractual payments discounted at market rates for instruments with similar terms.

Borrowings

The estimated fair value of borrowings was determined by obtaining payoff quotes from the lender. Borrowings were paid off upon completion of the acquisition.

Subordinated Debt

The estimated fair value of subordinated debt was determined by the present value of the expected contractual payments discounted by market rates for similar subordinated debt market rates estimate.  

Customer List Intangible Asset ("CLI")

The customer list intangible asset fair value is derived from the revenues generated by NUBC's Trust and Financial Services Divisions.  

Mortgage Servicing Rights

The estimated fair value of mortgage servicing rights was determined through a discounted cash flow analysis and calculated using a computer pricing model. 

Deferred Tax Asset

Application of fair value measurements resulted in an increase to the deferred tax asset, included in other assets.