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Acquisition of UpState New York Bancorp, Inc. and USNY Bank. | 9 Months Ended
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Sep. 30, 2021
Acquisition of UpState New York Bancorp, Inc. and USNY Bank. [Abstract] |
Acquisition of UpState New York Bancorp, Inc. and USNY Bank. | 13. 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 the Bank, with the 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 The Bank remained the same following the completion of the Merger. UpState directors Jeffrey S. Gifford and Alexandra K. Nolan were appointed to the boards of directors of the Company and the 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 entered into a consulting agreement with the 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, have also remained 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 allocation of purchase consideration related to the Merger was considered preliminary, primarily with respect to certain tax-related assets and liabilities. Subsequent to the closing date of the acquisition, final tax returns were prepared and filed for UpState, which are expected to result in tax refunds, which relate to the operations of UpState and USNY Bank. In accordance with ASC 805 the acquiring Company shall adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of that date. A provisional amount is necessary when the buyer must issue financial statements prior to completing its accounting for the business combination (i.e. prior to the end of the measurement period). The measurement period begins on the acquisition date and ends on the earlier of either: (a) the buyer obtaining the information needed to finish the accounting for the business combination or (b) one year from the acquisition date. Adjustments to preliminary allocations related to certain tax-related assets and liabilities occurred in the fourth quarter of 2020. The change to provisional amounts resulted in a reduction in goodwill of $923,000 and no impact to results of operations during the fourth quarter. During the second quarter of 2021, the Company recorded final measurement period adjustments to goodwill which resulted in a $24,000 decrease, net, in the carrying value. The final adjustments were related to tax-related assets and liabilities and an unrecorded liability. The adjustments had no impact on the results of operations. The following table summarizes the purchase of UpState as of July 7, 2020: (Dollars in Thousands, Except Per Share Data) Purchase Price Consideration in Common StockUpState common shares settled for stock 1,987,206 Exchange Ratio 0.9390 Norwood Financial Corp shares issued 1,865,738 Value assigned to each Norwood Financial Corp common share$ 24.30 Purchase price assigned to UpState common shares $ 45,337 exchanged for Norwood Financial Corp shares Purchase Price Consideration - Cash for Common Stock UpState shares exchanged for cash, excluding fractional shares 220,794 Purchase price paid to each UpState common share exchanged for cash$ 33.33 Purchase price assigned to UpState common shares exchanged for cash $ 7,359Purchase price additional cash consideration per share 1,479Purchase price consideration - Cash-in-lieu of Fractional Shares 6Total Purchase Price $ 54,181 Net Assets Acquired: UpState shareholders' equity$ 44,803 UpState 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 3,730 Other (48) Adjustments to reflect liabilities acquired at fair value: Deposits (3,011) Net assets acquired 36,246Goodwill resulting from merger $ 17,935 The following condensed statement reflects the values assigned to UpState 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 5,398 Deposits (414,370) Accrued interest payable (175) Other liabilities (6,496) Total identifiable net assets acquired 36,246 Goodwill resulting from UpState Merger $ 17,935 The Company recorded goodwill associated with the acquisition of UpState totaling $17,935,000. Goodwill is not amortized, but is periodically evaluated for impairment. The Company did not recognize any impairment during the nine months ended September 30, 2021. 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, 2021, 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, 2021 was $409,000, with $91,000 accumulated amortization as of that date. As of September 30, 2021, the current year and estimated future amortization expense for the core deposit intangible associated with the UpState acquisition is: (In thousands) 2021$172022 632023 562024 482025 41After five years 93 $318

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