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MERGER | 9 Months Ended
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Sep. 30, 2024
Business Combination, Asset Acquisition, and Joint Venture Formation [Abstract] |
MERGER | MERGER On July 1, 2024, Orrstown completed the previously announced merger of equals (the “Merger”) with Codorus Valley, pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of December 12, 2023, by and between Orrstown and Codorus Valley. At the effective time of the Merger (the “Effective Time”), Codorus Valley was merged with and into Orrstown, with Orrstown as the surviving corporation, which was promptly followed by the merger of Codorus Valley’s wholly-owned bank subsidiary, PeoplesBank, A Codorus Valley Company, with and into Orrstown Bank, a wholly-owned subsidiary of Orrstown, with Orrstown Bank as the surviving bank. Pursuant to the terms of the Merger Agreement, each share of Codorus Valley common stock, $2.50 par value per share (“Codorus Common Stock”), outstanding immediately prior to the Effective Time was canceled and converted into the right to receive 0.875 shares (the “Exchange Ratio”) of Orrstown common stock, no par value per share (“Orrstown Common Stock”), with an amount in cash, without interest, to be paid in lieu of fractional shares. In addition, at the Effective Time, (i) each option to purchase Codorus Valley common stock issued under Codorus Valley’s 2007 Long-Term Incentive Plan, as amended, 2017 Long-Term Incentive Plan, as amended, and any other similar plan (collectively, the “Codorus Valley Equity Plans”), outstanding immediately prior to the Effective Time was automatically converted into an option to purchase a number of shares of Orrstown common stock equal to the product of the number of shares of Codorus Valley common stock subject to such stock option immediately prior to the Effective Time and the Exchange Ratio, at an exercise price per share (rounded up to the nearest whole cent) equal to (a) the exercise price per share of Codorus Valley common stock of such stock option immediately prior to the Effective Time divided by (b) the Exchange Ratio; (ii) all time-based restricted stock awards and time-based restricted stock unit awards granted under the Codorus Valley Equity Plans were vested in full; and (iii) all performance-based restricted stock awards and performance-based restricted stock unit awards granted under the Codorus Valley Equity Plans were vested in full. In addition, the 2007 Codorus Valley Bancorp, Inc. Restated Employee Stock Purchase Plan was terminated prior to the closing date of the Merger. Each outstanding share of Orrstown Common Stock remained outstanding and was unaffected by the Merger. PeoplesBank operated 22 full-service branches and eight limited purpose branches in Pennsylvania and Maryland. Following the Merger, Orrstown operated 51 branches as of July 1, 2024. On August 5, 2024, Orrstown announced the Bank intends to close six of its branches, including three branches owned by the Bank, which the land and buildings were transferred to held-for-sale. These branch closures were completed in the fourth quarter of 2024. After these branch closures are complete, the Bank will have 38 full-service branches and seven limited purpose branches. The total aggregate consideration delivered to holders of Codorus Valley common stock was 8,532,038 shares of Orrstown common stock. The issuance of shares of Orrstown common stock in connection with the Merger was registered under the Securities Act on a registration statement initially filed by Orrstown with the SEC on March 29, 2024 and declared effective on April 23, 2024 (the “Registration Statement”). The consideration transferred at the close of the transaction was $233.4 million based on the closing market price of Orrstown common stock of $27.36 on June 28, 2024. The Merger accomplishes the Company’s objectives of providing increased market opportunities and expanding its branch network through a contiguous footprint in Central and Eastern Pennsylvania and the Greater Baltimore, Maryland area. Further, the Merger creates an expanded product suite based on the complementary nature of the products and customers of both companies and increases lending capacity, which will support growth of the existing client base and is expected to provide an opportunity to mitigate risks and increase potential returns. The following tables summarize the purchase price consideration paid for Codorus Valley and the fair value of the assets acquired and liabilities assumed recognized at the acquisition date.
(dollars are in thousands, except per share data) |  |
Number of shares of Codorus Valley common stock outstanding |  | 9,751,323 |
Per common share exchange ratio |  | 0.875
Expected shares of Codorus Valley common stock to be issued |  | 8,532,408 |
Fractional shares of common stock to be paid in cash |  | (370) |
Number of shares of Orrstown common stock - as exchanged |  | 8,532,038 |
Orrstown common stock price per common share - closing stock price as of June 28, 2024 |  | $ | 27.36 |
Purchase price merger consideration for Codorus Valley |  | $ | 233,437 |
Under the acquisition method of accounting, the total merger consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of Codorus Valley based on their estimated fair value as of the closing of the Merger. The excess of the merger consideration over the fair value of assets acquired and liabilities assumed, if any, is allocated to goodwill. The Company recorded goodwill of $51.9 million in connection with the Merger, which is not amortized for financial reporting purposes, but is subject to annual impairment testing.
| Codorus Valley Book Value |  | Fair Value Adjustment |  | Codorus Valley Fair Value
| July 1, 2024 |  |  |  | July 1, 2024
Total purchase price consideration |  |  |  |  | $ | 233,437 |
Recognized amounts of identifiable assets acquired and liabilities assumed |  |
Cash and cash equivalents | $ | 45,290 |  |  | $ | — |  |  | $ | 45,290 |
Restricted investments in bank stocks | 1,168 |  |  | — |  |  | 1,168 |
Securities available for sale | 331,032 |  |  | (3,672) |  |  | 327,360 |
Loans, net of allowance for credit losses ("ACL") | 1,715,761 |  |  | (72,368) |  |  | 1,643,393 |
Premises and equipment, net | 17,553 |  |  | 6,550 |  |  | 24,103 |
Cash surrender value of life insurance | 62,817 |  |  | — |  |  | 62,817 |
Accrued interest receivable | 8,138 |  |  | 79 |  |  | 8,217 |
Goodwill | 2,301 |  |  | (2,301) |  |  | — |
Other intangible assets, net | — |  |  | 46,260 |  |  | 46,260 |
Deferred income tax asset, net | 16,969 |  |  | 3,190 |  |  | 20,159 |
Other assets | 21,024 |  |  | (218) |  |  | 20,806 |
Total identifiable assets acquired | 2,222,053 |  |  | (22,480) |  |  | 2,199,573 |
Deposits | 1,948,467 |  |  | (3,218) |  |  | 1,945,249 |
Securities sold under agreements to repurchase | 7,943 |  |  | — |  |  | 7,943 |
FHLB advances and other borrowings | 1,195 |  |  | (803) |  |  | 392 |
Subordinated notes and trust preferred debt | 41,195 |  |  | (4,983) |  |  | 36,212 |
Other liabilities | 25,030 |  |  | 3,241 |  |  | 28,271 |
Total liabilities assumed | 2,023,830 |  |  | (5,763) |  |  | 2,018,067 |
Total identifiable net assets | $ | 198,223 |  |  | $ | (16,717) |  |  | $ | 181,506 |
Goodwill |  |  |  |  | $ | 51,931 |
The following are descriptions of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed from the Merger. The Company used independent valuation specialists to assist with the determination of fair values for certain acquired assets and assumed liabilities. The Company acquired core deposit intangibles of $35.9 million and customer relationship intangible assets associated with wealth and brokerage businesses totaling $10.4 million from the Merger, both valued utilizing the income approach, which is based on the present value of the cash flows that can be expected to be generated in the future. The core deposit intangible and customer relationship intangible assets are amortized based on the sum-of-the-years digits method over the expected life of 10 years. The Company increased the fair value of premises by $6.6 million with a corresponding decrease to goodwill based upon updated independent market-based appraisals for buildings, land and land improvements. The fair value adjustments will depreciated based on the estimated useful life of 40 years. Pursuant to the Merger, the Company acquired operating lease assets and operating lease liabilities both with a fair value of $5.1 million based on the income approach, which considered the lease contracts current rental rates, escalation terms and expiration periods. The Company also acquired a finance lease asset and liability with a fair value of $392 thousand. At July 1, 2024, the Company recorded negative fair value adjustments of $1.1 million and $133 thousand to operating lease assets and finance lease assets, respectively, which are amortized over the remaining lease terms. An adjustment of $3.2 million was recorded to reflect the fair value of the time deposits assumed, which was determined using a discounted cash flow approach that utilized a discount rate equal to current market interest rates for instruments with similar terms and maturities. The fair value adjustment for time deposits will be amortized over the remaining maturities. Subordinated notes and trust preferred debt were valued using a discounted cash flow approach, which applied a discount rate based upon other issuances with comparable terms. Fair value adjustments of $2.4 million and $2.7 million were recorded for the subordinated notes and trust preferred debt, respectively, which will be amortized over their remaining maturities. The Company evaluated and classified the acquired loans between non-PCD or PCD. The PCD loans include loans which experienced more-than-insignificant credit deterioration since origination. PCD loans included loans on nonaccrual status, past due 60 days or greater at any time since loan origination or having a risk rating of watch, special mention, substandard, doubtful or loss based on the Company's internal risk rating system. For PCD loans, an ACL is recorded on day 1 and added to the fair value of the loan for its amortized cost. At day 1, a provision for credit loss is not recorded on PCD loans. The following table presents details related to the fair value of acquired PCD loans at the acquisition date:
| Unpaid Principal Balance |  | PCD ACL |  | Non-Credit Discount |  | Fair Value of Acquired Loans
Commercial real estate | $ | 74,319 |  |  | $ | (1,321) |  |  | $ | (5,531) |  |  | $ | 67,467 |
Acquisition and development | 24,232 |  |  | (2,535) |  |  | (781) |  |  | 20,915 |
Commercial and industrial | 33,454 |  |  | (1,949) |  |  | (4,954) |  |  | 26,551 |
Residential mortgage | 16,720 |  |  | (104) |  |  | (1,936) |  |  | 14,679 |
Installment and other loans | 117 |  |  | (10) |  |  | (11) |  |  | 96 |
| $ | 148,842 |  |  | $ | (5,920) |  |  | $ | (13,213) |  |  | $ | 129,708 |
The following table presents selected pro forma information as if the Merger had occurred at January 1, 2023. The unaudited pro forma information includes the estimated impact of certain fair value adjustments and other merger-related activity. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been affected on the assumed dates. In addition, the unaudited pro forma information does not reflect management's estimate of any revenue-enhancing opportunities or anticipated cost savings as a result of the integration.
| Three Months Ended September 30, |  | Nine Months Ended September 30,
| 2024 |  | 2023 |  | 2024 |  | 2023
Net interest income | $ | 50,873 |  |  | $ | 51,281 |  |  | $ | 148,877 |  |  | $ | 155,784 |
Net Income | 20,856 |  |  | 17,792 |  |  | 56,456 |  |  | 56,088 |

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