ACQUISITION OF CITIZENS BANK OF CAPE VINCENT

12 Months Ended

Sep. 30, 2023

ACQUISITION OF CITIZENS BANK OF CAPE VINCENT

ACQUISITION OF CITIZENS BANK OF CAPE VINCENT

NOTE 3 – ACQUISITION OF CITIZENS BANK OF CAPE VINCENT

Effective as of end of business September 16, 2022, Gouverneur completed its acquisition of Citizens Bank of Cape Vincent (“CBCV”). At the effective date of the merger, CBCV was merged with and into Gouverneur Savings and Loan Association and each CBCV stockholder became entitled to receive $1,056.11 in cash for each share of CBCV common stock that they held at the effective date of the acquisition, which resulted in the Company paying $8.4 million in cash for the acquisition. CBCV was a commercial bank with three branches in Jefferson County, New York, located in the villages of Cape Vincent, Chaumont, and LaFargeville, New York. The fair value of the assets acquired as a result of the acquisition totaled $81.9 million; loans totaled $37.0 million and deposits totaled $77.2 million. Goodwill recorded in the acquisition was $4.2 million. The Bank completed the acquisition to further expand the Bank’s footprint and competitive position in Jefferson County and the Lake Ontario, St. Lawrence River communities, offer expanded products and services to the CBCV and Gouverneur customer base, and to enhance its operational opportunities and future earnings.

The acquisition of CBCV was accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at estimated fair values on the acquisition date.

In accordance with ASC 805-10-25, the Company utilized the one-year measurement period permitted to adjust the deferred tax balances associated with the September 2022 acquisition of Citizens Bank of Cape Vincent. As a result of this

adjustment, the 2023 net deferred tax balance included in other assets was reduced by ($281,000) and goodwill was therefore increased by $281,000.

The following table summarizes the consideration paid for CBCV and the fair value of assets acquired and liabilities assumed as of the acquisition date:

Purchase Price Consideration
Cash Consideration Paid:	$	8,449
Allocation of Purchase Price:
Fair Value of Assets Acquired
Cash and cash equivalents	$	9,485
Securities available-for-sale		31,166
Loans receivable		37,015
Land, premises and equipment		709
Core deposit intangible		2,542
Other assets		978
Total Assets		81,895
Fair Value of Liabilities Assumed:
Deposits	$	77,188
Other liabilities		495
Total Liabilities		77,683
Net Assets Acquired		4,212
Goodwill Recorded in Acquisition	$	4,237

Pursuant to the accounting requirements, the Company assigned a fair value to the assets acquired and liabilities assumed of CBCV.

Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:

Securities available-for-sale

The estimated fair values of the investment securities available for sale, primarily comprised of U.S. Government agency mortgage-backed securities, U.S. government agencies and treasuries, and municipal bonds, were determined using Level 2 inputs in the fair value hierarchy. The fair values were determined using independent pricing services, calculated based on market prices of similar securities, using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded and values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.

Loans Receivable

Acquired loans (impaired and non-impaired) are initially recorded at their acquisition-date fair values using Level 3 inputs. Fair values are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, expected life time losses, environmental factors, collateral values, discount rates, expected payments and expected

prepayments. No impaired loans were identified in the analysis so a specific credit fair value adjustment for purchased credit impaired loans subject to ASC 310-30 procedures was not applicable. The acquired loans were recorded at fair value at the acquisition date without carryover of CBCV’s previously established allowance for loan losses. The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $38,220,000. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired (dollars in thousands).

Gross amortized cost basis at September 16, 2022	$	38,220
Interest rate fair value adjustment on pools of homogeneous loans		(834)
Credit fair value adjustment on pools of homogeneous loans		(371)
Credit fair value adjustment on purchased credit impaired loans		—
Fair value of acquired loans at September 16, 2022	$	37,015

For loans acquired without evidence of credit quality deterioration, the Bank prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into homogeneous pools by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value discount of $834,000.

Additionally for loans acquired without credit deterioration, a credit fair value adjustment was calculated using a two-part credit fair value analysis: 1) an interest rate mark; and 2) credit mark. The interest rate mark was based on an account level discounted cash flow analysis. The credit mark applied to the loans was provided by the Bank’s management for CBCV’s general reserve and specific reserve pool based upon due diligence conducted by the Bank’s management. A credit fair value discount of $371,000 was determined. Both the interest rate and credit fair value adjustments relate to loans acquired with evidence of credit quality deterioration will be substantially recognized as interest income on a level yield amortization method over the expected life of the loans.

Land, premises and equipment

The Company acquired three branches of CBCV. The fair value of CBCV’s premises, including land, buildings, and improvements, was determined based upon the most recent tax assessment in the market in which the premises are located.

Core deposit intangible

The fair value of the core deposit intangible was determined using a two-step analytical approach. The first is the estimation of the useful life of the deposits, or attrition rate. All other things being equal, higher attrition rates would translate into a lower deposit intangible. The second step is to determine the net alternative funding cost for the core deposit as well as assumptions regarding costs of servicing core deposit accounts (using a noninterest expense analysis), fee income derived from core deposit accounts, taxes, and a discount rate used to establish a present value for cash flows.

Deferred income taxes

The transaction is treated for tax purposes as a merger and accordingly, the assets acquired and the liabilities assumed are recorded at “carryover” tax basis equal to CBCV’s tax carrying value immediately preceding the merger. Consequently, deferred tax assets or liabilities are required for each asset or liability for which there is a difference between carryover tax basis and fair value on the transaction date.

Deposits

Carrying value on the date of acquisition was determined to be fair value.

Acquisition-Related Expenses

Acquisition-related expenses incurred by the Company associated with the acquisition of CBCV were $558,000 for fiscal year ended September 30, 2022. Such costs include legal and accounting fees, contract termination expenses, system conversion, operations integration, and employee non-compete agreements, which have been expensed as incurred.