XML 25 R10.htm IDEA: XBRL DOCUMENT
v3.19.1

MERGERS AND ACQUISITIONS | 12 Months Ended
--- | ---
Dec. 31, 2018
Business Combinations [Abstract] |
MERGERS AND ACQUISITIONS | MERGERS AND ACQUISITIONS Mercersburg Financial Corporation On October 1, 2018, we acquired 100% of the outstanding common shares of Mercersburg Financial Corporation and its wholly-owned subsidiary, First Community Bank of Mercersburg, headquartered in Mercersburg, Pennsylvania. We acquired Mercersburg to further expand our operations in Franklin County, Pennsylvania. Pursuant to the merger agreement, we issued 1,052,635 shares of our common stock and paid $4,866,000 in cash for all outstanding shares of Mercersburg stock. In accordance with the merger agreement, each outstanding share of Mercersburg common stock was converted into 1.5291 shares of the Company's common stock and $40.00 in cash. Based on our $23.80 closing stock price on Friday, September 28, 2018, the consideration paid to acquire Mercersburg totaled $29,919,000. The fair value of assets acquired, excluding goodwill, totaled $181,430,000, including loans totaling $141,103,000 and investment securities available for sale totaling $7,352,000. The fair value of liabilities assumed totaled $163,384,000, including deposits totaling $160,433,000. Goodwill represents consideration transferred in excess of the fair value of the net assets acquired. At December 31, 2018, the Company recognized $11,873,000 in initial goodwill associated with the Mercersburg acquisition. The goodwill resulting from the acquisition represents the value expected from the expansion of our market in south central Pennsylvania and the enhancement of our operations through customer synergies and efficiencies, thereby providing enhanced customer service. Goodwill acquired in the Mercersburg acquisition is not deductible for tax purposes. The Mercersburg acquisition was accounted for using the acquisition method of accounting and, accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The fair value measurements of assets acquired and liabilities assumed are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values become available. The Company continues to finalize the fair values of loans and, as a result, the fair value adjustment is preliminary and may change as information becomes available. The following table summarizes the consideration paid for Mercersburg and the estimated fair values of the assets acquired and liabilities assumed recognized at the acquisition date:
(Dollars in thousands) |
Fair value of consideration transferred: |
Cash | $ | 4,866
Common stock issued | 25,053
Total consideration transferred | $ | 29,919
Estimated fair values of assets acquired and (liabilities) assumed: |
Cash and cash equivalents | $ | 17,273
Securities available for sale | 7,352
Loans | 141,103
Premises and equipment | 2,232
Core deposit intangible | 3,840
Goodwill | 11,873
Cash surrender value of life insurance | 6,252
Deferred tax asset, net | 1,323
Other assets | 2,055
Deposits | (160,433)
Other liabilities | (2,951)
| $ | 29,919
The determination of estimated fair values of the acquired loans required the Company to make certain estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature. Based on such factors as past due status, nonaccrual status, bankruptcy status, and credit risk ratings, the acquired loans were divided into loans with evidence of credit quality deterioration, which are accounted for under ASC 310-30 (purchased credit impaired), and loans that do not meet this criteria, which are accounted for under ASC 310-20 (purchased non-impaired). Expected cash flows, both principal and interest, were estimated based on key assumptions covering such factors as prepayments, default rates and severity of loss given default. These assumptions were developed using both Mercersburg's historical experience and the portfolio characteristics as of the acquisition date as well as available market research. The fair value estimates for acquired loans were based on the amount and timing of expected principal, interest and other cash flows, including expected prepayments, discounted at prevailing market interest rates applicable to the types of acquired loans, which we considered to be level 3 fair value measurements. Deposit liabilities assumed in the Mercersburg acquisition were segregated into two categories: time-deposits (i.e., deposit accounts with a stated maturity) and demand deposits, both using level 2 fair value measurements. In determining fair value of time deposits, the Company discounted the contractual cash flows of the deposit accounts using prevailing market interest rates for time deposit accounts of similar type and duration. For demand deposits, the acquisition date outstanding balance of the assumed demand deposit accounts approximates fair value. Acquisition date fair values for securities available for sale were determined using Level 1 or Level 2 inputs consistent with the methods discussed further in “Note 18 - Fair Value.” The remaining acquisition date fair values represent either Level 2 fair value measurements or Level 3 fair value measurements (premises and equipment and core deposit intangible). We recognized a core deposit intangible of $3,840,000, which will be amortized using an accelerated method over a 10-year amortization period, consistent with expected future cash flows. Loans acquired with Mercersburg were measured at fair value at the acquisition date with no carryover of any ALL. Loans were segregated into those loans considered to be performing and those considered PCI. The following table presents performing and PCI loans acquired, by loan class, at October 1, 2018.
(in thousands) | Performing |  | PCI |  | Total
Commercial real estate: |  |  |  |  |
Owner-occupied | $ | 10,336 |  | $ | 1,800 |  | $ | 12,136
Non-owner occupied | 4,405 |  | 672 |  | 5,077
Multi-family | 3,005 |  | 722 |  | 3,727
Acquisition and development: |  |  |  |  |
1-4 family residential construction | 878 |  | 0 |  | 878
Commercial and land development | 2,044 |  | 269 |  | 2,313
Commercial and industrial | 22,433 |  | 5,696 |  | 28,129
Municipal | 1,862 |  | 0 |  | 1,862
Residential mortgage: |  |  |  |  |
First lien | 75,034 |  | 3,103 |  | 78,137
Home-equity - term | 2,258 |  | 23 |  | 2,281
Home equity - lines of credit | 3,144 |  | 0 |  | 3,144
Installment and other loans | 3,233 |  | 186 |  | 3,419
Total loans acquired | $ | 128,632 |  | $ | 12,471 |  | $ | 141,103
The following table presents the fair value adjustments made to the amortized cost basis of loans acquired at October 1, 2018.
(in thousands) |
Gross amortized cost basis at acquisition | $ | 149,162
Market rate adjustment | (3,464)
Credit fair value adjustment on non-credit impaired loans | (1,400)
Credit fair value adjustment on impaired loans | (3,195)
Estimated fair value of acquired loans | $ | 141,103
The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the contractual rates of the acquired loans. The credit adjustment made on non-PCI loans represents the changes in credit quality of the underlying borrowers from loan inception to the acquisition date. The credit adjustment on PCI loans is derived in accordance with ASC 310-30 and represents the portion of the loan balance that has been deemed uncollectible based on our expectations of future cash flows for each respective loan. The following table provides information about acquired PCI loans at October 1, 2018.
(in thousands) |
Contractually required principal and interest at acquisition | $ | 21,587
Contractual cash flows not expected to be collected (nonaccretable discount) | (6,873)
Expected cash flows at acquisition | 14,714
Interest component of expected cash flows (accretable discount) | (2,243)
Estimated fair value of acquired PCI loans | $ | 12,471
Unaudited pro forma net income for the years ended December 31, 2018 and 2017 would have totaled $15,717,000 and $8,929,000, respectively, and revenues would have totaled $92,996,000 and $79,659,000 for the same years, respectively, had the Mercersburg acquisition occurred January 1, 2017. Merger related costs totaling $3,197,000 have been excluded from the unaudited pro forma net income for 2018. Hamilton Bancorp, Inc. On October 23, 2018, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Hamilton Bancorp, Inc., a Maryland corporation ("Hamilton") and the holding company for Hamilton Bank, based in Towson, Maryland. At December 31, 2018, Hamilton reported $496,254,000 in assets, $369,457,000 in loans, $384,171,000 in deposits and 3,416,414 common shares outstanding. The Merger Agreement provides that, subject to the terms and conditions thereof, Hamilton will merge with and into the Company, with the Company as the surviving corporation, and that Hamilton Bank will merge with and into Orrstown Bank, with Orrstown Bank as the surviving bank. The merger is expected to close in the second quarter of 2019, subject to receipt of regulatory approvals, the approval of Hamilton's shareholders, and the satisfaction of other customary closing conditions. The acquisition will introduce the Company's operations into the Greater Baltimore area of Maryland. Pursuant to the Merger Agreement, for each share of Hamilton common stock outstanding as of the effective date, the Company will issue $4.10 in cash, without interest, and 0.54 shares of of the Company's common stock, no par value per share. The cash consideration is subject to reduction based on potential losses, write-downs, or reserves related to certain identified loans. In connection with the Mercersburg and Hamilton acquisitions, we incurred merger related expenses totaling $3,197,000 for the year ended December 31, 2018, which are included in noninterest expenses. The expenses consisted primarily of $1,502,000 of investment banking, legal and consulting fees; $1,065,000 of information systems expense, including canceling of contracts; and $630,000 of other expenses.

X
- 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
Name: | us-gaap_BusinessCombinationDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration

X
- References No definition available. + Details
Name: | us-gaap_BusinessCombinationsAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration