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Acquisition of UpState New York Bancorp, Inc. and USNY Bank. | 9 Months Ended
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Sep. 30, 2020
Acquisition of UpState New York Bancorp, Inc. and USNY Bank. [Abstract] |
Acquisition of UpState New York Bancorp, Inc. and USNY Bank. | 12. Acquisition of UpState New York Bancorp, Inc. and USNY Bank. On January 8, 2020, the Company and the Bank, and UpState and its wholly owned subsidiary, USNY Bank entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which UpState would merge with and into the Company, with the Company as the surviving corporation (“the Merger”). The Merger was completed on July 7, 2020. Pursuant to the terms of the Merger Agreement, UpState was merged with and into the Company, with the Company as the surviving corporation of the Merger. Immediately following the Merger, USNY Bank was merged with and into Wayne Bank, with Wayne Bank as the surviving entity. USNY Bank conducted its business from two Bank of the Finger Lakes offices in Geneva and Penn Yan, New York, and two Bank of Cooperstown offices in Cooperstown and Oneonta, New York. At June 30, 2020, UpState had total assets of $463.8 million, total deposits of $412.8 million and total stockholders’ equity of $44.8 million. Pursuant to the terms of the Merger Agreement, shareholders of UpState elected to receive for each share of UpState common stock they owned, either 0.9390 shares of the Company’s common stock or $33.33 in cash, or a combination of both. All shareholder elections were subject to the allocation and proration procedures set forth in the Merger Agreement which were intended to ensure that 90% of the shares of UpState would be exchanged for the Company’s common stock and 10% of the shares of UpState would be exchanged for cash. In addition, under the terms of the Merger Agreement, UpState shareholders received an additional $0.67 per share in cash for each share of UpState common stock held. In the aggregate, the merger consideration paid to UpState shareholders consisted of approximately $8,845,198 in cash and 1,865,738 shares of the Company’s common stock. The senior management of the Company and Wayne Bank remained the same following the completion of the Merger. UpState directors Jeffrey S. Gifford and Alexandra K. Nolan have been appointed to the boards of directors of the Company and Wayne Bank. In addition, the remaining former directors of UpState have been invited to join a regional advisory board. UpState President and CEO R. Michael Briggs has entered into a consulting agreement with Wayne Bank. The Company has retained the brand names of USNY Bank’s two units, Bank of the Finger Lakes and Bank of Cooperstown, and has also retained USNY Bank’s administration center in Geneva, New York. Scott D. White, unit President of Bank of Cooperstown, and Jeffrey E. Franklin, unit President of Bank of the Finger Lakes, will also remain in place as executives of their units. The acquired assets and assumed liabilities were measured at estimated fair values. Management made significant estimates and exercised significant judgement 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. The Company also recorded and identifiable asset representing the core deposit base of UpState based on management’s evaluation of the cost of such deposits relative to alternative funding sources. 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. UpState loans were deemed impaired 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 $15,410,000 of purchased credit-impaired loans subject to a non-accretable difference of $5,213,000. 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. UpState’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 payment speeds. At acquisition, UpState’s loan portfolio without evidence of deterioration totaled $400,127,000 and was recorded at a fair value of $393,580,000. The following table summarizes the purchase of UpState as of July 7, 2020:
(Dollars in Thousands, Except Per Share Data) |  |  |  |  |
Purchase Price Consideration in Common Stock
UpState New York Bancorp, Inc. common shares settled for stock |  | 1,987,206 |  |  |
Exchange Ratio |  | 0.9390 |  |  |
Norwood Financial Corp shares issued |  | 1,865,738 |  |  |
Value assigned to each Norwood Financial Corp common share | $ | 24.30 |  |  |
Purchase price assigned to UpState New York Bancorp, Inc. common shares |  |  |  | $ | 45,337
exchanged for Norwood Financial Corp shares |  |  |  |  |
Purchase Price Consideration - Cash for Common Stock |  |  |  |  |
UpState New York Bancorp, Inc. shares exchanged for cash, excluding fractional shares |  | 220,794 |  |  |
Purchase price paid to each UpState New York Bancorp, Inc. common share exchanged for cash | $ | 33.33 |  |  |
Purchase price assigned to UpState New York Bancorp, Inc. common shares exchanged for cash |  |  |  | $ | 7,359
Purchase price additional cash consideration per share |  |  |  |  | 1,479
Purchase price consideration - Cash-in-lieu of Fractional Shares |  |  |  |  | 6
Total Purchase Price |  |  |  | $ | 54,181
Net Assets Acquired: |  |  |  |  |
UpState New York Bancorp, Inc. shareholders' equity | $ | 44,803 |  |  |
UpState New York Bancorp, Inc. goodwill and intangibles |  | - |  |  |
Total tangible equity |  | 44,803 |  |  |
Adjustments to reflect assets acquired at fair value: |  |  |  |  |
Investments |  | (112) |  |  |
Loans |  |  |  |  |
Interest rate |  | 3,982 |  |  |
General credit |  | (10,529) |  |  |
Specific credit - non-amortizing |  | (5,213) |  |  |
Specific credit - amortizing |  | (1,724) |  |  |
Core deposit intangible |  | 409 |  |  |
Deferred loan fees |  | (812) |  |  |
Premises and equipment |  | (1,211) |  |  |
Allowance for loan and lease losses |  | 5,982 |  |  |
Deferred tax assets |  | 2,526 |  |  |
Other |  | (48) |  |  |
Adjustments to reflect liabilities acquired at fair value: |  |  |  |  |
Time deposits |  | (2,754) |  |  |
Net assets acquired |  |  |  |  | 35,299
Goodwill resulting from merger |  |  |  | $ | 18,882
The fo llowing condensed statement reflects the values assigned to UpState New York Bancorp, Inc. net assets as of the acquisition date:
(In Thousands) |  |  |  |  |
Total purchase price |  |  |  | $ | 54,181
Net assets acquired: |  |  |  |  |
Cash | $ | 24,037 |  |  |
Securities available for sale |  | 13,836 |  |  |
Loans |  | 405,221 |  |  |
Premises and equipment, net |  | 4,318 |  |  |
Regulatory stock |  | 2,487 |  |  |
Accrued interest receivable |  | 1,426 |  |  |
Core deposit intangible |  | 564 |  |  |
Other assets |  | 4,194 |  |  |
Deposits |  | (414,113) |  |  |
Accrued interest payable |  | (175) |  |  |
Other liabilities |  | (6,496) |  |  |
Total identifiable net assets acquired |  |  |  |  | 35,299
Goodwill resulting from UpState New York Bancorp, Inc. Merger |  |  |  | $ | 18,882
The Company recorded goodwill and other intangibles associated with the acquisition of UpState New York Bancorp, Inc. totaling $19,291,000. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did no t recognize any impairment during the nine months ended September 30, 2020. The carrying amount of the goodwill at September 30, 2020 related to the UpState acquisition was $18,882,000. 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. During the nine months ended September 30, 2020, no such adjustments were recorded. The identifiable intangible assets consist of a core deposit intangible which is being amortized on an accelerated basis over the useful life of such asset. The gross carrying amount of the core deposit intangible at September 30, 2020 was $409,000 with $19,000 accumulated depreciation as of that date. As of September 30, 2020, the current year and estimated future amortization expense for the core deposit intangible associated with the UpState acquisition is:
(In thousands) |  |
2020 | $ | 37
2021 |  | 71
2022 |  | 63
2023 |  | 56
2024 |  | 48
After five years |  | 134
| $ | 409
The following table presents financial information for the former UpState included in the Consolidated Statements of Income from the date of acquisition through September 30, 2020:
|  | Actual From
|  | Acquisition Date
|  | Through
|  | September 30,2020
|  | (in thousands)
Net interest income after provision for loan losses | $ | 3,522
Noninterest income | $ | 151
The following table presents pro forma information for the nine and three-month periods ended September 30, 2020 and 2019, as if the acquisition of UpState had occurred on January 1, 2019. This table has been prepared for comparative purposes only, and is not 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:
|  | Pro Forma |  |  | Pro Forma
|  | Nine Months Ended September 30, |  |  | Three Months Ended September 30,
(In Thousands, Except Per Share Data) |  | 2020 |  | 2019 |  |  | 2020 |  | 2019
Net interest income after provision for loan losses |  | $ | 38,632 |  | $ | 38,658 |  |  | $ | 13,480 |  | $ | 13,236
Noninterest income |  |  | 5,443 |  |  | 5,704 |  |  |  | 2,072 |  |  | 2,089
Net income |  |  | 14,434 |  |  | 14,759 |  |  |  | 5,304 |  |  | 5,287
Pro forma earnings per share: |  |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 1.80 |  | $ | 1.84 |  |  | $ | 0.66 |  | $ | 0.66
Diluted |  | $ | 1.79 |  | $ | 1.83 |  |  | $ | 0.66 |  | $ | 0.66

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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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