Business Combinations

9 Months Ended

Sep. 30, 2020

BUSINESS COMBINATIONS

On July 17, 2020, the Corporation completed its previously announced acquisition of Bank of Akron ("Akron"), pursuant to that certain Agreement and Plan of Merger, dated as of December 18, 2019 (the "Merger Agreement"), by and among the Corporation, CNB Bank and Akron. Under the terms of the Merger Agreement, Akron merged with and into CNB Bank (the "Merger"), with CNB Bank continuing as the surviving entity. Banking offices of Akron will operate under the trade name BankOnBuffalo, a division of CNB Bank.

Pursuant to the Merger Agreement, for each share of Akron common stock, Akron shareholders were entitled to elect to receive either (x) $215.00 in cash or (y) 6.6729 shares of the Corporation's common stock and shall receive cash in lieu of fractional shares. Elections were subject to proration procedures whereby at least 75% of the shares of Akron common stock were exchanged for shares of the Corporation's common stock. Based on the elections and proration procedures, the total consideration payable to Akron shareholders was approximately $40.8 million, comprised of approximately $16.1 million in cash and 1,501,321 shares of the Corporation's common stock, net of fractional shares, valued at approximately $24.7 million based on the July 17, 2020 closing price of $16.43 per share of the Corporation's common stock.

Akron's results of operations were included in the Corporation's results beginning July 17, 2020. The Corporation incurred $3.4 million and $3.9 million of merger-related expenses during the three and nine months ended September 30, 2020, consisting largely of professional services of attorneys, accountants, investment bankers and other advisors. There were no merger-related expenses incurred during three and nine months ended September 30, 2019.


	July 17, 2020
Merger consideration
Value of stock consideration assigned to Akron common shares exchanged for stock paid to shareholders	$	24,667
Value of cash consideration for Akron common stock exchanged for cash	16,126
Total merger consideration	$	40,793

Core deposit intangible ("CDI") of $613 thousand and goodwill of $6.0 million were recognized as a result of the acquisition. Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized and is attributable to synergies expected to be derived from the combination of the two entities. Goodwill recognized in this transaction is not deductible for income tax purposes.


	July 17, 2020
Identifiable net assets acquired, at fair value
Assets acquired
Cash and due from banks	$	78,830
Interest bearing deposits with other banks	10,148
Investment securities	29,407
Loans	319,063
Premises and equipment, net	4,265
Core deposit intangible	613
Deferred tax assets	1,751
Bank owned life insurance	8,187
Accrued interest receivable and other assets	5,309
Total assets acquired	$	457,573
Liabilities assumed
Deposits	$	419,476
Accrued interest payable and other liabilities	3,348
Total liabilities assumed	422,824
Total fair value of identifiable net assets	34,749
Total merger consideration	40,793
Goodwill recognized	$	6,044

The Corporation accounted for this transaction under the acquisition method of accounting in accordance with ASC 805, Business Combinations, which requires purchased assets and liabilities assumed and consideration exchanged to be recorded at their respective estimated fair values at the date of acquisition. The determination of estimated fair values required management to make certain estimates about discount rates, future expected cash flows, market conditions at the time of the acquisition and other future events that are highly subjective in nature and subject to refinement for up to one year after the closing date of acquisition as additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier.

As of September 30, 2020, the final purchase price remains subject to final adjustments and fair value measurements remain preliminary due to the timing of the acquisition. The Corporation continues to review information relating to events or circumstances existing at the acquisition date and expects to finalize its analysis of the acquired assets and assumed liabilities over the next few months, but not later than one year after the acquisition. Management anticipates that this review could result in adjustments to the acquisition date valuation amounts presented herein but does not anticipate that these adjustments, if any, would be material.

Securities

The estimated fair values of the securities were calculated utilizing Level 2 inputs. The securities acquired are bought and sold in active markets. Prices for these instruments were obtained through security industry sources that actively participate in the buying and selling of securities.

Loans

Akron’s loan portfolio was recorded at fair value at the date of acquisition. A valuation of Akron’s loan portfolio was performed as of the acquisition date in accordance with ASC 820 to assess the fair value of the loan portfolio, considering adjustments for market discount rates, credit, and liquidity. The loan portfolio was segmented into two groups: non-purchase credit impaired ("PCI") loans and PCI loans. The non-PCI loans were pooled based on similar characteristics, such as loan type, fixed or adjustable interest rates, payment type, index rate and caps/floors, and non-accrual status. The PCI loans were valued at the loan level with similar characteristics noted above. The fair value was calculated using a discounted cash flow analysis. Non-PCI loans and PCI loans had a fair value of $314.7 million and $4.4 million, respectively, at the acquisition date, resulting in a combined fair value credit discount of $7.6 million and a combined fair value interest rate premium of $1.9 million. The related contractual principal balances totaled $318.8 million and $6.0 million, for non-PCI loans and PCI loans, respectively. In accordance with U.S. GAAP, there was no carryover of the allowance for credit losses that had been previously recorded by Akron.

Premises and Equipment

Fair values are based upon appraisal values. In addition to owned properties, Akron operated one property subject to a lease agreement.

Core deposit intangible

The CDI on non-maturing deposits was determined by evaluating the underlying characteristics of the deposit relationships, including customer attrition, deposit interest rates and maintenance costs, fee income and costs of alternative funding using the discounted cash flow approach. The core deposit intangibles represent the costs saved by the Corporation between maintaining the existing deposits and obtaining alternative funds over the life of the deposit base.

Fixed maturity deposits

In determining the fair value of certificates of deposit, the cash flows of the contractual interest payments during the specific period of the certificates of deposit and scheduled principal payout were discounted to present value at market-based interest rates.

Supplemental Pro Forma Financial Information

The following table presents certain unaudited pro forma financial information for illustrative purposes only, for the three and nine months ended September 30, 2020 and 2019, respectively, as if Akron had been acquired on January 1, 2019. This unaudited pro forma information combines the historical results of Akron with the Corporation’s consolidated historical results and includes certain adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition occurred as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision expense resulting from recording loan assets at fair value, cost savings or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented and the differences could be significant.


	Three Months Ended				Nine Months Ended
	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Net interest income	$	34,903	$	30,617	$	96,266	$	88,601
Net income	$	7,974	$	10,923	$	26,164	$	31,294
Basic earnings per common share	$	0.47	$	0.66	$	1.55	$	1.88
Diluted earnings per common share	$	0.47	$	0.66	$	1.55	$	1.88