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ACQUISITION OF FNB | 12 Months Ended
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Dec. 31, 2016
ACQUISITION OF FNB [Abstract] |
ACQUISITION OF FNB | 20. ACQUISITION OF FNB In the second quarter of 2015, the Company announced the signing of a definitive merger agreement to acquire 100% of the outstanding equity interest of FNB for $630 per share in cash and stock. FNB was a Pennsylvania bank that conducted its business from a main office in Lebanon County, Pennsylvania with four branches in Lebanon County, two branches in Schuylkill County, Pennsylvania, and one Branch in Berks County, Pennsylvania. The transaction closed on December 11, 2015, with FNB having been merged into First Citizens Community Bank, with First Citizens Community Bank as the surviving entity. The acquisition established the Company's presence in the Lebanon, Berks and Schuylkill Counties, Pennsylvania markets. Under the terms of the merger agreement, the Company acquired all of the outstanding shares of FNB for a total purchase price of approximately $21,603,000. As a result of the acquisition, the Company issued 336,515 common shares and $5.6 million in cash to the former shareholders of FNB. The shares were issued with a value of $47.50 per share, which was based on the close price of the Company's stock on December 11, 2015. The acquired assets and assumed liabilities were measured at estimated fair values. Management made significant estimates and exercised significant judgment in accounting for the acquisition. Management measured loan fair values based on loan file reviews, appraised collateral values, expected cash flows, and historical loss factors of FNB. Real estate acquired through foreclosure was primarily valued based on appraised collateral values. The Company also recorded an identifiable intangible asset representing the core deposit base of FNB based on management's evaluation of the cost of such deposits relative to alternative funding sources. The Company also recorded an identifiable intangible asset representing a covenant not-to-compete with the former President of FNB. Management used significant estimates including the average lives of depository accounts, future interest rate levels, and the cost of servicing various depository products. Management used market quotations to determine the fair value of investment securities. The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration. FNB's loans were deemed to have credit impairment at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality. Such loans were fair valued and the difference between contractually required payments at the acquisition date and cash flows expected to be collected was recorded as a non-accretable difference. At the acquisition date, the Company recorded $3,809,000 of purchased credit-impaired loans. The method of measuring carrying value of purchased loans differs from loans originated by the Company (originated loans), and as such, the Company identifies purchased loans and purchased loans with a credit quality discount and originated loans at amortized cost. FNB's loans without evidence of credit deterioration were fair valued by discounting both expected principal and interest cash flows using an observable discount rate for similar instruments that a market participant would consider in determining fair value. Additionally, consideration was given to management's best estimates of default rates and pre-payment speeds. The following table summarizes the purchase of FNB as of December 11, 2015:
(In Thousands, Except Per Share Data) |  |  |  |  |  |
Purchase Price Consideration in Common Stock |  |  |  |  |  |
Citizens Financial Services, Inc. shares issued |  |  | 336,515 |  |  |  |
Value assigned to Citizens Financial Services, Inc. common share |  | $ | 47.50 |  |  |  |
Purchase price assigned to FNB common shares exchanged for Citizens Financial Services, Inc. |  |  |  |  |  | $ | 15,984 |
Purchase Price Consideration - Cash for Common Stock |  |  |  |  |  |  |  |
Purchase price assigned to The First National Bank of Fredericksburg common shares exchanged for cash |  |  |  |  |  |  | 5,619 |
Total Purchase Price |  |  |  |  |  |  | 21,603 |
Net Assets Acquired: |  |  |  |  |  |  |  |
The First National Bank of Fredericksburg shareholders' equity |  | $ | 12,298 |  |  |  |  |
Adjustments to reflect assets acquired at fair value: |  |  |  |  |  |  |  |
Loans |  |  |  |  |  |  |  |
Interest rate |  |  | 31 |  |  |  |  |
General credit |  |  | (1,362 | ) |  |  |  |
Specific credit - non-amortizing |  |  | (2,495 | ) |  |  |  |
Specific credit - amortizing |  |  | (665 | ) |  |  |  |
Core deposit intangible |  |  | 1,641 |  |  |  |  |
Covenant not to compete |  |  | 125 |  |  |  |  |
Premises and equipment |  |  | 1,203 |  |  |  |  |
Leased premises contracts |  |  | (359 | ) |  |  |  |
Other assets |  |  | (358 | ) |  |  |  |
Deferred tax assets |  |  | 785 |  |  |  |  |
Adjustments to reflect liabilities acquired at fair value: |  |  |  |  |  |  |  |
Time deposits |  |  | (74 | ) |  |  |  |
|  |  |  |  |  |  | 10,770 |
Goodwill resulting from merger |  |  |  |  |  | $ | 10,833 |
The following condensed statement reflects the amounts recognized as of the acquisition date for each major class of asset acquired and liability assumed:
(In Thousands) |  |  |  |  |  |
Total purchase price |  |  |  |  | $ | 21,603 |
Assets (liabilities) acquired: |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 83,514 |  |  |  |  |
Interest bearing time deposits with other banks |  |  | 1,236 |  |  |  |  |
Securities available for sale |  |  | 23,831 |  |  |  |  |
Loans |  |  | 115,211 |  |  |  |  |
Premises and equipment, net |  |  | 4,743 |  |  |  |  |
Accrued interest receivable |  |  | 282 |  |  |  |  |
Bank-owned life insurance |  |  | 4,598 |  |  |  |  |
Intangibles |  |  | 1,981 |  |  |  |  |
Deferred tax asset |  |  | 2,979 |  |  |  |  |
Other assets |  |  | 2,332 |  |  |  |  |
Time deposits |  |  | (42,675 | ) |  |  |  |
Deposits other than time deposits |  |  | (182,555 | ) |  |  |  |
Accrued interest payable |  |  | (14 | ) |  |  |  |
Other liabilities |  |  | (4,693 | ) |  |  |  |
|  |  |  |  |  |  | 10,770 |
Goodwill resulting from the FNB merger |  |  |  |  |  | $ | 10,833 |
The Company recorded goodwill and other intangibles associated with the purchase of FNB totaling $12,814,000. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did not recognize any impairment from December 11, 2015 to December 31, 2016. None of the goodwill acquired is expected to be deductible for tax purposes. Identifiable intangibles are amortized to their estimated residual values over the expected useful lives. Such lives are also periodically reassessed to determine if any amortization period adjustments are required. For the period from December 11, 2015 to December 31, 2016, no such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible, covenant not to compete intangible and MSRs which are being amortized on an accelerated basis over the useful life of such assets. See footnote 6 for additional information on the identifiable intangible assets. Amounts recognized separately from the acquisition include primarily legal fees, investment banking fees, system conversion costs, severance costs and contract termination costs. These costs were included in merger and acquisition expenses within non-interest expenses on the Consolidated Statement of Income and amounted to approximately $1,103,000 for the year ended December 31, 2015. Results of operations for FNB prior to the acquisition date are not included in the Consolidated Statement of Income for the year ended December 31, 2015. Due to the significant amount of fair value adjustments, historical results of FNB are not relevant to the Company's results of operations. Therefore, no pro forma information is presented. The following table presents financial information regarding the former FNB operations included in our Consolidated Statement of Income from the date of acquisition through December 31, 2015 under the column "Actual from Acquisition Date through December 31, 2015". In addition, the following table presents unaudited pro forma information as if the acquisition of FNB had occurred on January 1, 2014 under the "Pro Forma" columns. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited proforma information does not reflect management's estimate of any revenue-enhancing opportunities nor anticipated cost savings as a result of the integration and consolidation of the acquisition. Merger and acquisition integration costs and amortization of fair value adjustments are included in the numbers below.
|  |  |  |  | Pro Formas |
|  | Actual from Acquisition Date Through December 31, 2015 |  |  | Twelve Months Ended December 31, |
(In Thousands, Except Per Share Data) |  |  | 2016 |  |  |  | 2015 |  |  |  | 2014 |
Net interest income |  | $ | 401 |  |  | $ | 35,837 |  |  | $ | 37,736 |  |  | $ | 37,634 |
Non-interest income |  |  | 21 |  |  |  | 7,899 |  |  |  | 8,576 |  |  |  | 8,184 |
Net income |  |  | (22 | ) |  |  | 12,073 |  |  |  | 8,640 |  |  |  | 14,019 |
Pro forma earnings per share: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  |  |  |  | $ | 3.61 |  |  | $ | 2.57 |  |  | $ | 4.15 |
Diluted |  |  |  |  |  | $ | 3.61 |  |  | $ | 2.57 |  |  | $ | 4.15 |

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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://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1497-128463 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1490-128463 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1392-128463 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7008-128479 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1486-128463 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6927-128479 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4845-128472 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1524-128463 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e7000-128479 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4922-128472 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4934-128472 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=73530397&loc=d3e4926-128472 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 20 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=73530397&loc=SL65897772-128472 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=65885119&loc=d3e1383-128463 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=35744584&loc=d3e6996-128479 + Details
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