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MERGERS AND ACQUISITIONS | 9 Months Ended
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Sep. 30, 2020
Business Combinations [Abstract] |
MERGERS AND ACQUISITIONS | MERGERS AND ACQUISITIONS Hamilton Bancorp, Inc. On May 1, 2019, the Company acquired 100% of the outstanding common shares of Hamilton Bancorp, Inc., and its wholly-owned subsidiary, Hamilton Bank, based in Towson, Maryland. The Company acquired Hamilton to introduce our banking and financial services into the Greater Baltimore area of Maryland. Pursuant to the merger agreement, the Company issued 1,765,704 shares of its common stock and paid $14.2 million in cash for all outstanding shares of Hamilton stock and options vesting upon acquisition. Based on the Company's closing stock price of $20.74 on April 30, 2019, the consideration paid to acquire Hamilton totaled approximately $50.8 million. The fair value of assets acquired, excluding goodwill, totaled $494.0 million, including loans totaling $347.1 million. The fair value of liabilities assumed totaled $449.4 million, including deposits totaling $388.2 million. Goodwill represents consideration transferred in excess of the fair value of the net assets acquired. At May 1, 2019, the Company recognized $6.1 million in 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 becomes available. The Company finalized the fair values of loans, intangible assets, other assets, income taxes and liabilities associated with Hamilton as of May 1, 2020. Measurement period adjustments made from the date of acquisition through May 1, 2020 are summarized in Note 6 - Goodwill and Other Intangible Assets. 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:
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 |  | 347,143 |
Premises and equipment |  | 3,749 |
Core deposit intangible |  | 4,550 |
Goodwill |  | 6,132 |
Cash surrender value of life insurance |  | 17,948 |
Deferred tax asset, net |  | 7,257 |
ROU lease asset |  | 2,793 |
Other assets |  | 3,925 |
Total assets acquired |  | 500,177 |
Deposits |  | (388,246) |
Borrowings |  | (51,393) |
Other liabilities |  | (9,719) |
Total liabilities assumed |  | $ | (449,358) |
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 the Company 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 13 - 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). 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. The Company recognized a core deposit intangible of $4.6 million, which is being 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:
| Performing |  | PCI |  | Total
Commercial real estate: |  |  |  |  |
Owner-occupied | $ | 42,148 |  |  | $ | 5,894 |  |  | $ | 48,042 |
Non-owner occupied | 45,401 |  |  | 770 |  |  | 46,171 |
Multi-family | 10,773 |  |  | — |  |  | 10,773 |
Acquisition and development: |  |  |  |  |
1-4 family residential construction | 7,450 |  |  | — |  |  | 7,450 |
Commercial and land development | 4,528 |  |  | — |  |  | 4,528 |
Commercial and industrial | 32,316 |  |  | 1,914 |  |  | 34,230 |
Residential mortgage: |  |  |  |  |
First lien | 152,657 |  |  | 10,494 |  |  | 163,151 |
Home-equity - term | 4,478 |  |  | 1 |  |  | 4,479 |
Home equity - lines of credit | 13,657 |  |  | — |  |  | 13,657 |
Installment and other loans | 14,467 |  |  | 195 |  |  | 14,662 |
Total loans acquired | $ | 327,875 |  |  | $ | 19,268 |  |  | $ | 347,143 |
The following table presents the fair value adjustments made to the amortized cost basis of loans acquired at May 1, 2019:
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 PCI loans | (5,726) |
Estimated fair value of acquired loans | $ | 347,143 |
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 fair value adjustment made on non-credit impaired loans represents the changes in credit quality of the underlying borrowers from loan inception to the acquisition date. The credit fair value adjustment on PCI loans is derived in accordance with ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, 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:
Contractually required principal and interest at acquisition | $ | 31,599 |
Nonaccretable difference | (8,834) |
Expected cash flows at acquisition | 22,765 |
Accretable yield | (3,497) |
Estimated fair value of acquired PCI loans | $ | 19,268 |
Unaudited pro forma net income for the Company for the three and nine months ended September 30, 2019, would have totaled $7.6 million and $13.4 million, respectively, and revenues would have totaled $38.7 million and $95.7 million for the same periods had the Hamilton acquisition occurred on January 1, 2019. In connection with the Mercersburg and Hamilton acquisitions, the Company incurred merger related expenses totaling $0.5 million and $8.0 million for the three and nine months ending September 30, 2019, which are included in noninterest expenses on the unaudited condensed statements of income. The Company did not incur any merger related expenses for the three and nine months ended September 30, 2020.

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