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Note 3 - Business Combination and Pending Acquisition | 12 Months Ended
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Dec. 31, 2019
Notes to Financial Statements |
Business Combination Disclosure [Text Block] | 3. BUSINESS COMBINATION AND PENDING ACQUISITION Business Combination – Acquisition of Monument Bancorp, Inc. On April 1, 2019, the Corporation completed its acquisition of 100% of the common stock of Monument. Monument was the parent company of Monument Bank, a commercial bank which operated two community bank offices and one lending office in Bucks County, Pennsylvania. Pursuant to the merger, Monument was merged into Citizens & Northern Corporation and Monument Bank was merged into C&N Bank. Management believes the acquisition provides an opportunity to leverage the Corporation’s capital and deposits in a higher growth market and aligns with the Corporation’s focus to proactively deploy capital to enhance long-term shareholder value. The consolidated financial statements include the formerly separate Monument operations from April 1, 2019 through December 31, 2019. Since the activities of the former Monument operations have been combined with those of the Corporation, separate disclosure of Monument-related financial information included in the consolidated financial statements is not practicable. Total purchase consideration was $42,651,000, including cash paid to former Monument shareholders totaling $9,517,000 and 1,279,825 shares of Corporation common stock issued with a value of $32,953,000, (net of costs directly related to stock issuance of $181,000 included in the cash portion of merger consideration transferred in the table below). The merger was accounted for using the acquisition method of accounting and, accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The fair value measurements of assets acquired and liabilities assumed are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values become available. In the fourth quarter 2019, the Corporation recorded an adjustment to the initial fair value measurements of miscellaneous receivables and accrued liabilities made as of April 1, 2019. The adjustment resulted in an increase in other assets of $216,000 and a decrease in other liabilities of $14,000, with a corresponding reduction in goodwill of $230,000. The fair value of assets acquired (as adjusted in the fourth quarter 2019 ), excluding goodwill, totaled $375,138,000, while the fair value of liabilities assumed totaled $348,933,000. Goodwill represents consideration transferred in excess of the fair value of the net assets acquired. At December 31, 2019, goodwill associated with the acquisition was $16,446,000. The goodwill resulting from the acquisition represents the value expected from the expansion of the Corporation’s market into Southeastern Pennsylvania. Goodwill acquired in the Monument merger is not deductible for tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes. The following table summarizes the consideration paid for Monument and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
( In Thousands) |  |  |  |
Fair value of consideration transferred: |  |  |  |
Cash |  | $ | 9,698 |
Common stock issued |  |  | 32,953 |
Total consideration transferred |  | $ | 42,651 |
Estimated fair values of assets acquired and (liabilities) assumed:
(I n Thousands) |  |  |  |
Cash and cash equivalents |  | $ | 7,920 |
Available-for-sale debt securities |  |  | 94,568 |
Loans receivable |  |  | 259,295 |
Accrued interest receivable |  |  | 1,593 |
Bank premises and equipment |  |  | 1,465 |
Foreclosed assets held for sale |  |  | 1,064 |
Deferred tax asset, net |  |  | 771 |
Core deposit intangible |  |  | 1,461 |
Goodwill |  |  | 16,446 |
Other assets |  |  | 7,001 |
Deposits |  |  | (223,303 | )
Short-term borrowings |  |  | (111,568 | )
Subordinated debt |  |  | (12,375 | )
Accrued interest and other liabilities |  |  | (1,687 | )
Estimated excess fair value of assets acquired over liabilities assumed |  | $ | 42,651 |
In the consolidated statements of cash flows, noncash investing and financing activities include the issuance of common stock as part of the merger consideration as well as the following categories of assets acquired and liabilities assumed from Monument as reflected in the table above: available-for-sale debt securities, loans receivable, bank premises and equipment, foreclosed assets held for sale, core deposit intangible, goodwill, Federal Home Loan Bank of Pittsburgh stock of $5,478,000 (included in other assets above), deposits, short-term borrowings and subordinated debt. Acquisition date fair values for available-for-sale securities were determined using Level 1 inputs consistent with the methods discussed further in Note 21. The Corporation sold the acquired securities in April 2019 for approximately no realized gain or loss. The determination of estimated fair values of the acquired loans required the Corporation to make certain estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature. Based on such factors as past due status, nonaccrual status, bankruptcy status, and credit risk ratings, the acquired loans were evaluated, and four loans (from three relationships) displayed evidence of credit quality deterioration. These loans are accounted for under ASC 310 - 30 (purchased credit impaired, or “PCI”). The majority of the purchased loans did not display evidence of impairment, and thus are accounted for under ASC 310 - 20. Expected cash flows, both principal and interest, were estimated based on key assumptions covering such factors as prepayments, default rates and severity of loss given default. These assumptions were developed based on the portfolio characteristics as of the acquisition date as well as available market research. The fair value estimates for acquired loans were based on the amount and timing of expected principal, interest and other cash flows, including expected prepayments, discounted at prevailing market interest rates applicable to the types of acquired loans, which the Corporation considers Level 3 fair value measurements. Loans acquired from Monument were measured at fair value at the acquisition date with no carryover of an allowance for loan losses. The following table presents performing and PCI loans acquired, by loan segment and class, at April 1, 2019:
(In Thousands) |  |  |  |  |  |  |  |  |  |  |  |
|  | Performing |  |  | PCI |  |  | Total |
Residential mortgage: |  |  |  |  |  |  |  |  |  |  |  |
Residential mortgage loans - first liens |  | $ | 107,645 |  |  | $ | 77 |  |  | $ | 107,722 |
Residential mortgage loans - junior liens |  |  | 2,433 |  |  |  | 0 |  |  |  | 2,433 |
Home equity lines of credit |  |  | 2,674 |  |  |  | 0 |  |  |  | 2,674 |
1-4 Family residential construction |  |  | 510 |  |  |  | 0 |  |  |  | 510 |
Total residential mortgage |  |  | 113,262 |  |  |  | 77 |  |  |  | 113,339 |
Commercial: |  |  |  |  |  |  |  |  |  |  |  |
Commercial loans secured by real estate |  |  | 113,821 |  |  |  | 364 |  |  |  | 114,185 |
Commercial and industrial |  |  | 7,571 |  |  |  | 0 |  |  |  | 7,571 |
Commercial construction and land |  |  | 4,617 |  |  |  | 0 |  |  |  | 4,617 |
Loans secured by farmland |  |  | 267 |  |  |  | 0 |  |  |  | 267 |
Multi-family (5 or more) residential |  |  | 17,493 |  |  |  | 0 |  |  |  | 17,493 |
Other commercial loans |  |  | 835 |  |  |  | 0 |  |  |  | 835 |
Total commercial |  |  | 144,604 |  |  |  | 364 |  |  |  | 144,968 |
Consumer |  |  | 988 |  |  |  | 0 |  |  |  | 988 |
Total |  | $ | 258,854 |  |  | $ | 441 |  |  | $ | 259,295 |
The following table presents the preliminary fair value adjustments made to the amortized cost basis of loans acquired at April 1, 2019:
(In Thousands) |  |  |  |
Gross amortized cost at acquisition |  | $ | 263,334 |
Market rate adjustment |  |  | (1,807 | )
Credit fair value adjustment on non-credit impaired loans (accretable) |  |  | (1,914 | )
Credit fair value adjustment on impaired loans (non-accretable) |  |  | (318 | )
Estimated fair value of acquired loans |  | $ | 259,295 |
The market rate adjustment represents the movement in interest rates, irrespective of credit adjustments, compared to the contractual rates of the acquired loans. The credit adjustment made on non-PCI loans represents changes in credit quality of the underlying borrowers from loan inception to the acquisition date. The credit adjustment on PCI loans is derived in accordance with ASC 310 - 30 and represents the portion of the loan balances that have been deemed uncollectible for each loan. The PCI loans are secured by real estate and the fair value of each loan was determined based on the estimated proceeds to be derived from selling the collateral, net of selling costs. The PCI loans were placed into nonaccrual status upon acquisition (and remained in nonaccrual status at December 31, 2019) as the Corporation cannot reasonably estimate cash flows expected to be collected in order to compute yield on the loans. The Corporation recognized a core deposit intangible of $1,461,000. The core deposit intangible represents the estimated value of lower-cost funding provided by the nonmaturity deposits assumed in comparison with the Corporation’s estimated cost of borrowing funds in the market. The core deposit intangible will be amortized over a weighted-average life of 4.4 years. Deposit liabilities assumed were segregated into two categories: ( 1 ) nonmaturity deposits (checking, savings and money market), and ( 2 ) time deposits (deposit accounts with a stated maturity). The fair values of both categories of deposits were determined using level 2 fair value measurements. For nonmaturity deposits, the acquisition date outstanding balance of the assumed demand deposit accounts approximates fair value. In determining the fair value of time deposits, the Corporation discounted the contractual cash flows of the deposit accounts using prevailing market interest rates for time deposit accounts of similar type and duration. Short-term borrowings assumed consisted of advances from the Federal Home Loan Bank of Pittsburgh. The fair value of short-term borrowings was determined using Level 2 measurements by discounting the contractual cash flows of the borrowings using Federal Home Loan Bank interest rates available April 1, 2019 for advances to the same maturities as those of the deposits assumed. Subordinated debt assumed included two issues: ( 1 ) agreements with par values totaling $5,375,000 which were redeemed on April 1, 2019; and ( 2 ) agreements with par values totaling $7,000,000, maturing April 1, 2027 and which may be redeemed at par beginning April 1, 2022. The fair value of subordinated debt was determined using Level 2 measurements by comparing the interest rates on the debt to the rates on similar recent issues of comparable size by other similar-sized banking companies. In the fourth quarter 2019, the Corporation redeemed subordinated debt with a par value of $500,000, resulting in a loss of $10,000 (included in other noninterest expense in the consolidated statements of income). Merger-related expenses associated with the Monument transaction totaled of $3,812,000 in 2019 and $328,000 in 2018. Merger-related expenses include costs associated with termination of data processing contracts, conversion of Monument’s customer accounting data into the Corporation’s core system, severance and similar expenses, legal and other professional fees and various other costs. The following table presents pro forma information as if the merger between the Corporation and Monument had been completed on January 1, 2018. The pro forma information does not necessarily reflect the results of operations that would have occurred had the merger taken place at the beginning of 2018. The supplemental pro forma information excludes the after-tax cost of merger-related expenses totaling $3,270,000 in 2019 and $305,000 in 2018. The pro forma information does not include the impact of possible business model changes nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies or other factors.
(In Thousands Except Per Share Data) |  | Year Ended |
|  | Dec. 31, |  |  | Dec. 31, |
|  | 2019 |  |  | 2018 |
Interest income |  | $ | 68,817 |  |  | $ | 66,528 |
Interest expense |  |  | 11,517 |  |  |  | 10,516 |
Net interest income |  |  | 57,300 |  |  |  | 56,012 |
Provision for loan losses |  |  | 894 |  |  |  | 1,059 |
Net interest income after provision for loan losses |  |  | 56,406 |  |  |  | 54,953 |
Noninterest income |  |  | 19,300 |  |  |  | 18,712 |
Net gains on securities |  |  | 23 |  |  |  | 2,763 |
Other noninterest expenses |  |  | 47,178 |  |  |  | 46,586 |
Income before income tax provision |  |  | 28,551 |  |  |  | 29,842 |
Income tax provision |  |  | 4,954 |  |  |  | 4,812 |
Net income |  | $ | 23,597 |  |  | $ | 25,030 |
Earnings per common share - basic |  | $ | 1.65 |  |  | $ | 1.84 |
Earnings per common share - diluted |  | $ | 1.64 |  |  | $ | 1.84 |
Pending Acquisition of Covenant Financial , Inc. In December 2019, the Corporation announced a plan of merger to acquire Covenant Financial, Inc. (“Covenant”) in a transaction valued on December 18, 2019 at approximately $77 million. Under the terms of the definitive agreement, the Corporation will pay cash for 25% of the Covenant shares and will convert 75% of Covenant shares to the Corporation’s common stock. Covenant is the holding company for Covenant Bank, which operates banking offices in Bucks and Chester Counties of PA. Covenant had total assets of $516 million, liabilities of $474 million and stockholders’ equity of $42 million at December 31, 2019. The merger is subject to satisfaction of customary closing conditions, including receipt of regulatory approvals and approval of Covenant’s shareholders. The merger is expected to close in the third quarter 2020. In 2019, the Corporation incurred merger-related expenses totaling $287,000 related to the planned acquisition of Covenant. Management estimates pre-tax merger-related expenses associated with the Covenant acquisition will total approximately $8 million ( $6.6 million, net of tax), with most of the expenses expected to be incurred in the third quarter 2020.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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