Note 2 - Business Combination

6 Months Ended

Jun. 30, 2024

Notes to Financial Statements

Business Combination Disclosure [Text Block]

Note 2: Business Combination

On June 1, 2024 (the “Acquisition Date”), the Company completed its acquisition of Frontier Community Bank (“FCB”), a Virginia chartered commercial bank, in accordance with the definitive merger agreement that was entered into on January 23, 2024, by and among the Company, the Bank and FCB. Upon completion of the merger, former FCB shareholders received a combination of common stock and cash.

The acquisition of FCB was accounted for as a business combination using the acquisition method of accounting.  Assets acquired, liabilities assumed, and consideration paid were recorded at estimated fair value on the Acquisition Date. The excess of the purchase price over the fair value of the net assets was recorded as provisional goodwill and represents the benefit from the transaction that is not otherwise quantifiable, including expected management and operational synergies and intangible assets that do not qualify for separate recognition. The Company will keep the measurement of goodwill open for twelve months following the Acquisition Date in order to reflect any adjustments to the fair value of assets acquired and liabilities assumed that may arise during the Company’s final review procedures of any updated information. The Company does not expect that any portion of goodwill will be deductible.

The following table presents the calculation of the purchase price and the fair value of the identifiable assets and liabilities.

June 1, 2024	As Recorded by FCB			Estimated Fair Value Adjustments			Estimated Fair Values as Recorded by NBI
Purchase Price Consideration:
Stock consideration(1)							$	14,299
Cash consideration (2)								2,050
Total purchase price consideration							$	16,349
Identifiable assets:
Cash and cash equivalents	$	8,993		$	(59	)	$	8,934
Securities		9,325			(5	)		9,320
Loans, gross, purchased performing		115,589			(7,720	)		107,869
Loans, gross, purchased credit deteriorated		11,157			(822	)		10,335
Loans in process		539			-			539
Deferred fees and costs on loans		34			(34	)		-
Allowance for credit losses on loans		(881	)		881			-
Premises and equipment		3,003			449			3,452
Core deposit intangible		-			2,100			2,100
Other assets		4,998			966			5,964
Total identifiable assets acquired	$	152,757		$	(4,244	)	$	148,513
Identifiable Liabilities
Deposits		130,323			(606	)	$	129,717
Borrowings		5,250			(20	)		5,230
Other liabilities		1,960			131			2,091
Total identifiable liabilities assumed	$	137,533		$	(495	)	$	137,038
Provisional fair value of net assets acquired							$	11,475
Provisional goodwill							$	4,874

(1) The Company issued 464,855 shares of its common stock valued at $30.76 per share, which was the closing price of the Company’s common stock on May 31, 2024, the last day of trading prior to the consummation of the acquisition.

(2) Cash consideration was paid for shareholder elections, fractional shares and to settle outstanding vested stock options. The merger agreement provided for up to 10% of consideration to be paid in cash of $14.48 per FCB common share, at the shareholders’ election. Payments for shareholder elections and fractional shares totaled $1,769. Outstanding and vested options were settled at the difference between $14.48 and the strike price and totaled $281.

Management made significant estimates and exercised significant judgement in accounting for the acquisition of FCB. 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. All of the acquired portfolio was sold 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:

June 1, 2024	PCD Loans			Non-PCD Loans
Number of loans		46			498
FCB recorded value	$	11,157		$	115,589
Discount for credit risk		(295	)		(498	)
Discount for non-credit factors		(527	)		(7,222	)
Fair value	$	10,335		$	107,869

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 FCB, 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.

Deferred Tax Asset

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