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MERGERS AND ACQUISITIONS AND BRANCH CONSOLIDATIONS | 12 Months Ended
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Dec. 31, 2020
Business Combinations [Abstract] |
MERGERS AND ACQUISITIONS AND BRANCH CONSOLIDATIONS | MERGERS AND ACQUISITIONS AND BRANCH CONSOLIDATIONS Mercersburg Financial Corporation On October 1, 2018, the Company 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. The Company issued 1,052,635 shares of its common stock and paid $4.9 million in cash for all outstanding shares of Mercersburg stock. Based on the Company's $23.80 closing stock price on Friday, September 28, 2018, the consideration paid to acquire Mercersburg totaled $29.9 million. The fair value of assets acquired, excluding goodwill, totaled $181.4 million, including loans totaling $141.1 million and investment securities available for sale totaling $7.4 million. The fair value of liabilities assumed totaled $163.4 million, including deposits totaling $160.4 million. The Company recognized $11.9 million 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 client synergies and efficiencies, thereby providing enhanced client 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 were subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values became available. No material measurement period adjustments were made in the year ended December 31, 2020. The results of operations for the Company include Mercersburg's results from and after October 1, 2018. 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 Tuesday, April 30, 2019, the consideration paid to acquire Hamilton totaled $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 client synergies and efficiencies, thereby providing enhanced client 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 7 - Goodwill and Other Intangible Assets. 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 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 these 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 20 - Fair Value. The remaining acquisition date fair values represent either Level 2 or Level 3 fair value measurements (premises and equipment and core deposit intangible). 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 from 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 Hamilton 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.
| 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 impaired 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 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 |
Contractual cash flows not expected to be collected (nonaccretable discount) | (8,834) |
Expected cash flows at acquisition | 22,765 |
Interest component of expected cash flows (accretable discount) | (3,497) |
Estimated fair value of acquired PCI loans | $ | 19,268 |
Unaudited pro forma net income for the year ended December 31, 2019, would have totaled $20.9 million, and revenues would have totaled $102.5 million for the same period had the Hamilton acquisitions occurred January 1, 2019. In connection with the Mercersburg and Hamilton acquisitions, the Company incurred merger related expenses. Mercersburg related merger expenses totaled $280 thousand during the year ended December 31, 2019. which is included in merger related and branch consolidation expenses on the consolidated statements of income. For December 31, 2019, the expenses consisted primarily of $81 thousand of investment banking, legal and consulting fees; and $199 thousand of information systems expense, including canceling of contracts. Hamilton related merger expenses totaled $7.7 million for the year ended December 31, 2019, which is included in merger related and branch consolidation expenses on the consolidated statements of income. For December 31, 2019, these expenses consisted primarily $1.9 million of investment banking, legal and consulting fees; $3.7 million of information systems expense, including canceling of contracts; and $2.2 million of other expenses, including payout of employee termination contracts. Branch Consolidation During the year ended December 31, 2020, the Company recognized charges associated with the consolidation of six branch locations, the discontinuance of three loan production offices, a reduction in back-office real estate and staffing model adjustments. These actions were initiated due to evolving client preferences for the digital delivery of products and services. In addition, the anticipated future cost reductions resulting from these actions will prepare the Company for a challenging operating environment in 2021. A charge of $1.6 million was recorded in the year ended December 31, 2020, which included $1.3 million related to branch consolidations. In October, 2019, the Company announced the consolidation of five branches in Franklin and Perry Counties, Pennsylvania, into other, larger branches of the Bank, as part of its ongoing evaluation of branch profitability. The Company also announced the sale/leaseback of an operations center facility to eliminate approximately 50,000 square feet of excess back office space. The branch consolidations were completed in January 2020, and the sale of the operations center facility was completed in the second quarter of 2020. In conjunction with the consolidation and operations center facility sale/leaseback, the Company recorded $988 thousand in expenses in the fourth quarter of 2019, consisting of $762 thousand in fixed asset write downs, $126 thousand in lease termination costs, and $100 thousand in severance and other costs. At December 31, 2019, fixed assets included in this consolidation, with an estimated fair value of $4.9 million, were held for sale and carried in other assets on the consolidated balances sheets.

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