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MERGERS AND ACQUISITIONS | 6 Months Ended
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Jun. 30, 2019
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 issued 1,052,635 shares of our common stock and paid $4,866,000 in cash for all outstanding shares of Mercersburg stock. 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. The Company recognized $11,873,000 in initial goodwill, representing consideration transferred in excess of the fair value of the net assets acquired in 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. 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. No material measurement period adjustments were made in the six months ended June 30, 2019. The results of operations for the Company include Mercersburg's results from and after October 1, 2018. Hamilton Bancorp, Inc. On May 1, 2019, we acquired 100% of the outstanding common shares of Hamilton Bancorp, Inc., and its wholly-owned subsidiary, Hamilton Bank, based in Towson, Maryland. We acquired Hamilton to introduce our banking and financial services into the Greater Baltimore area of Maryland. Pursuant to the merger agreement, we issued 1,765,704 shares of our common stock and paid $14,197,000 in cash for all outstanding shares of Hamilton stock and options vesting upon acquisition. Based on our closing stock price of $20.74 on Tuesday, April 30, 2019, the consideration paid to acquire Hamilton totaled approximately $50,819,000. The fair value of assets acquired, excluding goodwill, totaled $493,194,000, including loans totaling $347,667,000. The fair value of liabilities assumed totaled $449,405,000, including deposits totaling $388,246,000. Goodwill represents consideration transferred in excess of the fair value of the net assets acquired. At May 1, 2019, the Company recognized $7,030,000 in initial goodwill associated with the Hamilton acquisition. The goodwill resulting from the acquisition represents the value expected from the expansion of our market in the Greater Baltimore area and the enhancement of our operations through customer synergies and efficiencies, thereby providing enhanced customer service. Goodwill acquired in the Hamilton acquisition is not deductible for tax purposes. The Hamilton 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, intangible assets, other assets, income taxes and liabilities. As a result, the fair value adjustments are preliminary and may change as information becomes available. Fair value adjustments will be finalized no later than May 2020. The results of operations for the Company include Hamilton's results from and after May 1, 2019. The following table summarizes the consideration paid for Hamilton 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 |  | $ | 14,197
Common stock issued |  | 36,622
Total consideration transferred |  | $ | 50,819
Estimated fair values of assets acquired and (liabilities) assumed: |  |
Cash and cash equivalents |  | $ | 43,140
Securities available for sale |  | 60,882
Restricted investments in bank stocks |  | 2,658
Loans |  | 347,667
Premises and equipment |  | 3,749
Core deposit intangible |  | 4,550
Goodwill |  | 7,030
Cash surrender value of life insurance |  | 17,948
Deferred tax asset, net |  | 5,838
ROU lease asset |  | 2,746
Other assets |  | 4,016
Total assets acquired |  | 500,224
Deposits |  | (388,246)
Borrowings |  | (51,393)
Other liabilities |  | (9,766)
Total liabilities assumed |  | (449,405)
|  | $ | 50,819
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 Hamilton'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 Hamilton 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 12 - 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 $4,550,000, which will be amortized using an accelerated method over a 10-year amortization period, consistent with expected future cash flows. Loans acquired with Hamilton 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 May 1, 2019. Upon completion of the acquisition, the Company sold the acquired investment portfolio and paid off acquired borrowings at the indicated fair value amounts in conjunction with its asset/liability management strategies.
(in thousands) | Performing |  | PCI |  | Total
Commercial real estate: |  |  |  |  |
Owner-occupied | $ | 42,148 |  | $ | 6,324 |  | $ | 48,472
Non-owner occupied | 45,401 |  | 770 |  | 46,171
Multi-family | 10,773 |  | 0 |  | 10,773
Acquisition and development: |  |  |  |  |
1-4 family residential construction | 7,450 |  | 0 |  | 7,450
Commercial and land development | 4,528 |  | 0 |  | 4,528
Commercial and industrial | 32,316 |  | 1,702 |  | 34,018
Residential mortgage: |  |  |  |  |
First lien | 152,657 |  | 10,800 |  | 163,457
Home-equity - term | 4,478 |  | 1 |  | 4,479
Home equity - lines of credit | 13,657 |  | 0 |  | 13,657
Installment and other loans | 14,467 |  | 195 |  | 14,662
Total loans acquired | $ | 327,875 |  | $ | 19,792 |  | $ | 347,667
The following table presents the fair value adjustments made to the amortized cost basis of loans acquired at May 1, 2019.
(in thousands) |
Gross amortized cost basis at acquisition | $ | 362,125
Market rate adjustment | (5,309)
Credit fair value adjustment on non-credit impaired loans | (3,947)
Credit fair value adjustment on impaired loans | (5,202)
Estimated fair value of acquired loans | $ | 347,667
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 May 1, 2019.
(in thousands) |
Contractually required principal and interest at acquisition | $ | 31,599
Nonaccretable difference | (8,310)
Expected cash flows at acquisition | 23,289
Accretable yield | (3,497)
Estimated fair value of acquired PCI loans | $ | 19,792
Unaudited pro forma net income for the three and six months ended June 30, 2018, would have totaled $3,557,000 and $2,516,000, and revenues would have totaled $34,878,000 and $58,695,000 for the same period had the Mercersburg and Hamilton acquisitions occurred January 1, 2018. Unaudited pro forma net income for the three and six months ended June 30, 2019, would have totaled $6,152,000 and $9,710,000, and revenues would have totaled $27,607,000 and $50,923,000 for the same period had the Hamilton acquisition occurred January 1, 2019. In connection with the Mercersburg and Hamilton acquisitions, we incurred merger related expenses totaling $6,860,000 and $7,505,000 for the three and six months ending June 30, 2019, which are included in noninterest expenses. The expenses consisted primarily of $1,649,000 and $1,967,000 of investment banking, legal and consulting fees; $3,492,000 and $3,619,000 of information systems expense, including canceling of contracts; and $1,719,000 and $1,919,000 of other expenses, including payout of employee termination contracts.

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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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