XML 70 R11.htm IDEA: XBRL DOCUMENT
v3.20.4

BUSINESS COMBINATIONS | 12 Months Ended
--- | ---
Dec. 31, 2020
BUSINESS COMBINATIONS |
BUSINESS COMBINATIONS | ​ 3. BUSINESS COMBINATIONS Acquisition of Covenant Financial, Inc. On July 1, 2020, the Corporation completed its acquisition of Covenant Financial, Inc. (“Covenant”). Covenant was the holding company for Covenant Bank, which operated banking offices in Bucks and Chester Counties of Pennsylvania. Management believes the acquisition provides an opportunity to expand the Corporation’s presence in a higher growth market and further leverage the Corporation’s capital to enhance long-term shareholder value. The consolidated financial statements include the formerly separate Covenant operations from July 1, 2020 through December 31, 2020. Since the activities of the former Covenant operations have been combined with those of the Corporation, separate disclosure of Covenant-related financial information included in the consolidated financial statements is not practicable. Total purchase consideration was $63,266,000, including cash paid to former Covenant shareholders totaling $21,654,000 and 2,047,819 shares of Corporation common stock issued with a value of $41,612,000. In the table below, the cash portion of merger consideration includes $183,000 of costs directly related to issuance of stock, and the equity portion of merger consideration has been reduced by these costs. 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 becomes available. As adjusted in the fourth quarter 2020, the fair value of assets acquired, excluding goodwill, totaled $608,485,000, while the fair value of liabilities assumed totaled $569,336,000. Goodwill represents consideration transferred in excess of the fair value of the net assets acquired. At December 31, 2020, goodwill associated with the acquisition was $24,117,000. The goodwill resulting from the acquisition represents the value expected from the further expansion of the Corporation’s market penetration into Southeastern Pennsylvania, adding to the base established in the acquisition of Monument Bancorp, Inc. in 2019. Goodwill acquired in the Covenant merger is not deductible for tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes. In the fourth quarter 2020, the Corporation recorded adjustments to the initial fair value measurements of certain assets and liabilities that resulted in a net decrease in goodwill of $21,000, summarized as follows: ​
​ | ​ | ​ | ​
(In Thousands) | ​ | ​ | ​
Preliminary goodwill balance, September 30, 2020 | ​ | $ | 24,138
Adjustments in fourth quarter 2020: | ​ | ​ | ​
Write-down purchased credit impaired loan | ​ | ​ | 556
Increase deferred tax asset, net | ​ | ​ | (410)
Decrease other liabilities | ​ | ​ | (167)
Goodwill balance, December 31, 2020 | ​ | $ | 24,117
​ The following table summarizes the consideration paid for Covenant and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date: ​
​ | ​ | ​ | ​
(In Thousands) |  | ​ |
Fair value of consideration transferred: | ​ | ​ | ​
Cash | ​ | $ | 21,837
Common stock issued | ​ |  | 41,429
Total consideration transferred | ​ | $ | 63,266
​ | ​ | ​ | ​
Estimated fair value of assets acquired and (liabilities) assumed: | ​ | ​ | ​
Cash and cash equivalents | ​ | $ | 97,792
Available-for-sale debt securities | ​ |  | 10,754
Loans receivable | ​ |  | 464,236
Bank-owned life insurance | ​ |  | 11,170
Accrued interest receivable | ​ |  | 1,922
Bank premises and equipment | ​ |  | 3,250
Foreclosed assets held for sale | ​ |  | 860
Deferred tax asset, net | ​ |  | 1,879
Core deposit intangible | ​ |  | 3,144
Goodwill | ​ |  | 24,117
Other assets | ​ |  | 13,478
Deposits | ​ |  | (481,796)
Short-term borrowings | ​ |  | (33,950)
Long-term borrowings | ​ |  | (30,025)
Subordinated debt | ​ |  | (10,091)
Accrued interest and other liabilities | ​ | ​ | (13,474)
Estimated excess fair value of assets acquired over liabilities assumed | ​ | $ | 63,266
​ In the consolidated statements of cash flows, investing and financing activities exclude the following noncash items: the issuance of common stock as part of the merger consideration as well as the following categories of assets acquired and liabilities assumed from Covenant as reflected in the table above: available-for-sale debt securities, loans receivable, bank-owned life insurance, bank premises and equipment, foreclosed assets held for sale, core deposit intangible, goodwill, other assets (including Federal Home Loan Bank of Pittsburgh stock of $2,939,000), deposits, short-term borrowings, long-term borrowings, subordinated debt and accrued interest and other liabilities. Acquisition date fair values for available-for-sale securities were determined using Level 1 inputs consistent with the methods discussed further in Note 22. 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 twenty-four loans 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 using both Covenant’s historical experience and 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 Covenant 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, as adjusted, at July 1, 2020: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
(In Thousands) | ​ | Performing | ​ | ​ | PCI | ​ | Total
Residential mortgage: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Residential mortgage loans - first liens | ​ | $ | 65,883 | ​ | ​ | $ | 0 | ​ | $ | 65,883
Residential mortgage loans - junior liens | ​ | ​ | 4,141 | ​ | ​ | ​ | 75 | ​ | ​ | 4,216
Home equity lines of credit | ​ | ​ | 8,368 | ​ | ​ | ​ | 0 | ​ | ​ | 8,368
1-4 Family residential construction | ​ | ​ | 11,437 | ​ | ​ | ​ | 0 | ​ | ​ | 11,437
Total residential mortgage | ​ | ​ | 89,829 | ​ | ​ | ​ | 75 | ​ | ​ | 89,904
Commercial: | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Commercial loans secured by real estate | ​ | ​ | 240,482 | ​ | ​ | ​ | 4,152 | ​ | ​ | 244,634
Commercial and industrial | ​ | ​ | 39,068 | ​ | ​ | ​ | 806 | ​ | ​ | 39,874
Commercial construction and land | ​ | ​ | 63,740 | ​ | ​ | ​ | 0 | ​ | ​ | 63,740
Loans secured by farmland | ​ | ​ | 73 | ​ | ​ | ​ | 0 | ​ | ​ | 73
Multi-family (5 or more) residential | ​ | ​ | 23,065 | ​ | ​ | ​ | 1,615 | ​ | ​ | 24,680
Other commercial loans | ​ | ​ | 952 | ​ | ​ | ​ | 0 | ​ | ​ | 952
Total commercial | ​ | ​ | 367,380 | ​ | ​ | ​ | 6,573 | ​ | ​ | 373,953
Consumer | ​ | ​ | 379 | ​ | ​ | ​ | 0 | ​ | ​ | 379
Total | ​ | $ | 457,588 | ​ | ​ | $ | 6,648 | ​ | $ | 464,236
​ The following table presents the updated fair value adjustments made to the amortized cost basis of loans acquired on July 1, 2020: ​
​ | ​ | ​ | ​
(In Thousands) | ​ | ​ | ​
Gross amortized cost at acquisition | ​ | $ | 472,012
Fair value adjustments: | ​ | ​ | ​
Market rates | ​ | ​ | 2,909
Credit adjustment on non-impaired loans | ​ | ​ | (7,219)
Credit adjustment on impaired loans | ​ | ​ | (3,466)
Fair value at acquisition | ​ | $ | 464,236
​ 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 or other collateral, 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, 2020) 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 $3,144,000. 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 valuation assumptions to determine the core deposit intangible were comprised of level 2 and level 3 inputs. The core deposit intangible will be amortized over a weighted-average life of 5.4 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 and long-term borrowings assumed consisted of advances from the Federal Home Loan Bank of Pittsburgh. The fair value of borrowings was determined using Level 2 measurements by discounting the contractual cash flows of the borrowings using Federal Home Loan Bank interest rates available July 1, 2020 for advances to the same maturities as those of the deposits assumed. Subordinated debt assumed included two issues: (1) agreements with par values totaling $8,000,000, maturing in June 2026, redeemable at par beginning in June 2021 and bearing interest at 6.25%; and (2) an agreement with a par value of $2,000,000, maturing in July 2027, redeemable at par beginning in July 2022 and bearing interest at 6.50%. 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. The Corporation incurred merger-related expenses associated with the Covenant transaction of $7,708,000 in 2020 and $287,000 in 2019. Merger-related expenses include severance and similar expenses, costs associated with termination of data processing contracts and conversion of Covenant’s customer accounting data into the Corporation’s core system, legal and other professional fees and various other costs. The following table presents pro forma information as if the merger between the Corporation and Covenant had been completed on January 1, 2019. 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 2019. The supplemental pro forma information excludes merger-related expenses totaling $9,061,000 in 2020 (including $1,353,000 incurred by Covenant), or $7,245,000 net of tax (including $1,111,000 incurred by Covenant). The pro forma also excludes a tax benefit of $600,000 that Covenant realized from stock-based compensation vested upon completion of the merger. 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. ​
​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Year Ended
​ | ​ | Dec. 31, | ​ | Dec. 31,
(In Thousands Except Per Share Data) | ​ | 2020 | ​ | 2019
Interest income | ​ | $ | 88,379 | ​ | $ | 88,830
Interest expense | ​ | ​ | 13,407 | ​ | ​ | 15,156
Net interest income | ​ | ​ | 74,972 | ​ | ​ | 73,674
Provision for loan losses | ​ | ​ | 4,013 | ​ | ​ | 1,309
Net interest income after provision for loan losses | ​ | ​ | 70,959 | ​ | ​ | 72,365
Noninterest income | ​ | ​ | 24,657 | ​ | ​ | 20,550
Net gains on securities | ​ | ​ | 169 | ​ | ​ | 23
Loss on prepayment of borrowings | ​ | ​ | 1,636 | ​ | ​ | 0
Other noninterest expenses | ​ | ​ | 60,094 | ​ | ​ | 62,377
Income before income tax provision | ​ | ​ | 34,055 | ​ | ​ | 30,561
Income tax provision | ​ | ​ | 6,227 | ​ | ​ | 5,311
Net income | ​ | $ | 27,828 | ​ | $ | 25,250
Earnings per common share - basic | ​ | $ | 1.75 | ​ | $ | 1.64
Earnings per common share - diluted | ​ | $ | 1.75 | ​ | $ | 1.63
​ Business Combination – Acquisition of Monument Bancorp, Inc. On April 1, 2019, the Corporation completed its acquisition of 100% of the common stock of Monument Bancorp, Inc. (“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. Total purchase consideration was $42.7 million, including cash paid to former Monument shareholders totaling $9.6 million and 1,279,825 shares of Corporation common stock issued with a value of $33.1 million, net of costs directly related to stock issuance of $181,000. In connection with the transaction, the Corporation recorded goodwill of $16.4 million and a core deposit intangible asset of $1.5 million. Total loans acquired on April 1, 2019 were valued at $259.3 million, while total deposits assumed were valued at $223.3 million, borrowings were valued at $111.6 million and subordinated debt was valued at $12.4 million. The subordinated debt included an instrument with a fair value of $5.4 million that was redeemed on April 1, 2019 with no realized gain or loss. The Corporation acquired available-for-sale debt securities valued at $94.6 million and sold the securities in early April for approximately no realized gain or loss. The assets purchased and liabilities assumed in the merger were recorded at their estimated fair values at the time of closing, subject to refinement for up to one year after the closing date. There were no adjustments to the fair value measurements of assets or liabilities in 2020. Merger-related expenses associated with the Monument acquisition, including legal and professional expenses and conversion of Monument’s customer accounting data into the Corporation’s core system, were $3,812,000 in 2019.

X
- 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
Name: | us-gaap_BusinessCombinationDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration

X
- References No definition available. + Details
Name: | us-gaap_BusinessCombinationsAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration