Acquisition of MidCoast Community Bancorp, Inc

9 Months Ended

Sep. 30, 2020

Acquisition of MidCoast Community Bancorp, Inc [Abstract]

Acquisition of MidCoast Community Bancorp, Inc

Note 10 – Acquisition of MidCoast Community Bancorp, Inc.

In the third quarter of 2019, the Company announced the signing of a definitive merger agreement to acquire 100% of the outstanding equity interest of MidCoast Community Bancorp, Inc. (“MidCoast”) for $6.50 per share in cash and stock. MidCoast was a Pennsylvania Corporation that conducted its business primarily through, its wholly owned subsidiary MidCoast Community Bank, which operated from a main office in Wilmington, Delaware, and two branches in Wilmington, Delaware, and one branch in Dover, Delaware.

The transaction closed on April 17, 2020, with MidCoast Community Bank 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 Wilmington and Dover, Delaware markets.

Under the terms of the merger agreement, the Company acquired all of the outstanding shares of MidCoast for a total purchase price of approximately $26,843,000.  As a result of the acquisition, the Company issued 373,356 common shares and $7.6 million in cash to the former shareholders of MidCoast. The shares were issued with a value of $51.50 per share, which was based on the close price of the Company’s stock on April 17, 2020.

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 MidCoast.  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 MidCoast 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.

The business combination resulted in the acquisition of loans with and without evidence of credit quality deterioration. MidCoast’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 $4,869,000 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.

MidCoast’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 MidCoast as of April 17, 2020:

(In Thousands, Except Per Share Data)
Purchase Price Consideration in Common Stock
Citizens Financial Services, Inc. shares issued		373,356
Value assigned to Citizens Financial Services, Inc. common share	$	51.50
Purchase price assigned to MidCoast common shares exchanged for Citizens Financial Services, Inc.				$	19,227
Purchase Price Consideration - Cash for Common Stock
Purchase price assigned to The First National Bank of Fredericksburg common shares exchanged for cash					7,616
Total Purchase Price					26,843
Net Assets Acquired:
MidCoast Community Bancorp, Inc shareholders’ equity	$	24,330
Adjustments to reflect assets acquired at fair value:
Investments
Loans
Interest rate		1,424
General credit		(4,375	)
Specific credit - non-amortizing		(2,135	)
Specific credit - amortizing		(966	)
Core deposit intangible		157
Owned premises		(426	)
Other assets		65
Deferred tax assets		2,217
Adjustments to reflect liabilities acquired at fair value:
Time deposits		(1,018	)
Borrowings		(497	)
Other liabilities		(13	)
					18,763
Goodwill resulting from merger				$	8,080

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				$	26,843
Net assets acquired:
Cash and cash equivalents	$	8,637
Loans		223,235
Premises and equipment, net		1,787
Accrued interest receivable		586
Bank-owned life insurance		3,766
Intangibles		157
Deferred tax asset		3,402
Other assets		2,878
Time deposits		(123,841	)
Deposits other than time deposits		(84,985	)
Accrued interest payable		(164	)
Borrowings		(15,497	)
Other liabilities		(1,198	)
					18,763
Goodwill resulting from the MidCoast merger				$	8,080

The Company recorded goodwill and other intangibles associated with the acquisition of MidCoast totaling $8,237,000.  Goodwill is not amortized, but is periodically evaluated for impairment.  The Company did not recognize any impairment from April 17, 2020 to September 30, 2020. 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 April 17, 2020 to September 30, 2020, no such adjustments were recorded.  The identifiable intangible asset consists of core deposit intangibles which are being amortized on an accelerated basis over the useful life of such assets.  The gross carrying amount of the core deposit intangible at September 30, 2020 was $157,000, with $12,000 accumulated amortization, respectively, as of that date.

As of September 30, 2020, the current year and estimated future amortization expense for the core deposit intangibles was (in thousands):

	Core deposit intangibles
Three months ended September 30, 2020 (actual)	$	7
Nine months ended September 30, 2020 (actual)		12
Estimate for year ending December 31,
Remaining 2020		7
2021		27
2022		24
2023		21
2024		18
Thereafter		48
Total	$	145

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 $2,179,000 for the nine months ended September 30, 2020.

Results of operations for MidCoast prior to the acquisition date are not included in the Consolidated Statement of Income for the nine months ended September 30, 2020. 

The following table presents financial information regarding the former MidCoast operations included in our Consolidated Statement of Income from the date of acquisition through September 30, 2020 under the column “Actual from Acquisition Date through September 30, 2020”.  In addition, the following table presents unaudited pro forma information as if the acquisition of MidCoast had occurred on January 1, 2019 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 Forma for
	Actual from Acquisition		Three Months Ended				Nine Months Ended
	Date Through		September 30,				September 30,
(In Thousands, Except Per Share Data)	September 30, 2020		2020		2019		2020		2019
Net interest income	$	5,387	$	16,052	$	15,404	$	47,642	$	44,918
Non-interest income		107		3,538		2,239		7,779		6,416
Net income		3,035		7,678		5,849		16,306		16,649
Pro forma earnings per share:
Basic			$	1.96	$	1.49	$	4.16	$	4.23
Diluted			$	1.96	$	1.49	$	4.16	$	4.23