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Acquisition of New Windsor Bancorp, Inc. | 9 Months Ended
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Sep. 30, 2017
Business Combinations [Abstract] |
Acquisition of New Windsor Bancorp, Inc. | Acquisition of New Windsor Bancorp, Inc. On July 1, 2017, ACNB completed its previously-announced acquisition of NW Bancorp of Taneytown, Maryland. NW Bancorp was a locally owned and managed institution with seven locations in north central Maryland that complemented, enhanced and expanded ACNB’s physical presence in north central Maryland. ACNB transacted the merger to enhance its competitive strategic position, potential prospective business opportunities, operations, management, prospective financial condition, future earnings and business prospects. Specifically, ACNB believes that the merger will enhance its business opportunities in Northern Maryland due to the combined company having a greater market share, market presence and the ability to offer more diverse (i.e. Trust Services) and more profitable products, as well as a broader based and geographically diversified branch system to enhance deposit collection and potentially improve funding costs. The fair value of total assets acquired as a result of the merger totaled $319.8 million, loans totaled $263.5 million and deposits totaled $293.3 million. Goodwill recorded in the merger was $13.3 million. In accordance with the terms of the Reorganization Agreement, dated November 21, 2016, as amended, NW Bancorp shareholders received, in aggregate, $4.5 million in cash and 938,360 shares or approximately 13% of the post transaction outstanding shares of the Corporation’s common stock. The transaction was valued at $33.3 million based on the Corporation’s June 30, 2017 closing price of $30.50 as quoted on NASDAQ. The results of the combined entity’s operations are included in the Corporation’s Consolidated Financial Statements from the date of acquisition. The acquisition of NW Bancorp is being accounted for as a business combination using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration paid were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition. The following table summarizes the consideration paid for NW Bancorp and the fair value of assets acquired and liabilities assumed as of the acquisition date: Purchase Price Consideration in Common Stock
NW Bancorp shares outstanding |  | 1,003,703 |
Shares paid cash consideration |  | 150,555 |
Cash consideration (per NW Bancorp share) |  | $ | 30.00 |
Cash portion of purchase price |  | $ | 4,519,995 |
NW Bancorp shares outstanding |  | 1,003,703 |
Shares paid stock consideration |  | 853,148 |
Exchange ratio |  | 1.10 |
Total ACNB shares issued |  | 938,360 |
ACNB’s share price for purposes of calculation |  | $ | 30.50 |
Equity portion of purchase price |  | $ | 28,619,980 |
Cost of shares owned by buyer |  | $ | 150,000 |
Total consideration paid |  | $ | 33,289,975 |
Allocation of Purchase Price |  | In thousands |  |
Total Purchase Price |  |  |  | $ | 33,290 |
Fair Value of Assets Acquired |  |  |  |
Cash and cash equivalents |  | 10,964 |  |  |
Investment securities |  | 21,624 |  |  |
Loans held for sale |  | 1,463 |  |  |
Loans |  | 263,450 |  |  |
Restricted stock |  | 486 |  |  |
Premises and equipment |  | 8,624 |  |  |
Core deposit intangible asset |  | 2,418 |  |  |
Other assets |  | 10,792 |  |  |
Total assets |  | 319,821 |  |  |
Fair Value of Liabilities Assumed |  |  |  |
Non-interest bearing deposits |  | 80,006 |  |  |
Interest bearing deposits |  | 213,327 |  |  |
Subordinated debt |  | 4,688 |  |  |
Other liabilities |  | 1,782 |  |  |
Total liabilities |  | 299,803 |  |  |
Net Assets Acquired |  |  |  | 20,018 |
Goodwill Recorded in Merger |  |  |  | $ | 13,272 |
Pursuant to the accounting requirements, the Corporation assigned a fair value to the assets acquired and liabilities assumed of NW Bancorp. ASC 820 defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the closing date estimates and uncertainties become available. Goodwill and core deposit intangibles are allocated to the banking business segment. Fair values of the major categories of assets acquired and liabilities assumed were determined as follows: Investment securities available-for-sale The estimated fair values of the investment securities available for sale, primarily comprised of U.S. Government agency mortgage-backed securities, U.S. government agencies and municipal bonds, were determined using Level 2 inputs in the fair value hierarchy. The fair values were determined using independent pricing services. The Corporation’s independent pricing service utilized matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific security but rather relying on the security’s relationship to other benchmark quoted prices. Management reviewed the data and assumptions used in pricing the securities. A fair value premium of $361,000 was recorded and will be amortized over the estimated life of the investments using the interest rate method. Loans Acquired loans (impaired and non-impaired) are initially recorded at their acquisition-date fair values using Level 3 inputs. Fair values are based on a discounted cash flow methodology that involves assumptions and judgments as to credit risk, expected life time losses, environmental factors, collateral values, discount rates, expected payments and expected prepayments. Specifically, the Corporation has prepared three separate loan fair value adjustments that it believed a market participant might employ in estimating the entire fair value adjustment necessary under ASC 820-10 for the acquired loan portfolio. The three-separate fair valuation methodology employed are: 1) an interest rate loan fair value adjustment (analysis available at request of the Corporation), 2) a general credit fair value adjustment (analysis available at request of the Corporation), and 3) a specific credit fair value adjustment for purchased credit impaired loans subject to ASC 310-30 procedures. The acquired loans were recorded at fair value at the acquisition date without carryover of NWSB’s previously established allowance for loan losses. The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $272,646,000. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired. The credit adjustment on purchased credit impaired loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that has been deemed uncollectible based on the Corporation’s expectations of future cash flows for each respective loan.
In thousands |  |
Gross amortized cost basis at July 1, 2017 |  | $ | 272,646 |
Interest rate fair value adjustment on pools of homogeneous loans |  | (731 | )
Credit fair value adjustment on pools of homogeneous loans |  | (4,501 | )
Credit fair value adjustment on purchased credit impaired loans |  | (3,964 | )
Fair value of acquired loans at July 1, 2017 |  | $ | 263,450 |
For loans acquired without evidence of credit quality deterioration, ACNB prepared the interest rate loan fair value and credit fair value adjustments. Loans were grouped into homogeneous pools by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various internal and external data sources and reviewed by management for reasonableness. The average of these rates was used as the fair value interest rate a market participant would utilize. A present value approach was utilized to calculate the interest rate fair value discount of $731,000. Additionally for loans acquired without credit deterioration, a credit fair value adjustment was calculated using a two-part credit fair value analysis: 1) expected lifetime credit migration losses; and 2) estimated fair value adjustment for certain qualitative factors. The expected lifetime losses were calculated using historical losses observed at the Bank, NWSB and peer banks. ACNB also estimated an environmental factor to apply to each loan type. The environmental factor represents potential discount which may arise due to general credit and economic factors. A credit fair value discount of $4.5 million was determined. Both the interest rate and credit fair value adjustments relate to loans acquired with evidence of credit quality deterioration will be substantially recognized as interest income on a level yield amortization method over the expected life of the loans. The following table presents the acquired purchased credit impaired loans receivable at the Acquisition Date:
In thousands |  |
Contractual principal and interest at acquisition |  | $ | 13,439 |
Nonaccretable difference |  | (5,651 | )
Expected cash flows at acquisition |  | 7,788 |
Accretable yield |  | (1,458 | )
Fair value of purchased impaired loans |  | $ | 6,330 |
Bank Premises The Corporation acquired seven branches of NWSB. The fair value of NWSB’s premises, including land, buildings, and improvements, was determined based upon independent third-party appraisals performed by licensed appraisers in the market in which the premises are located. The Corporation prepared an internal analysis to compare the lease contract obligations to comparable market rental rates. The Corporation believed that the leased contract rates were in a reasonable range of market rental rates and concluded that no fair market value adjustment related to leasehold interest was necessary. Core Deposit Intangible The fair value of the core deposit intangible was determined based on a discounted cash flow analysis using a discount rate commensurate with market participants. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through national brokered CD offering rates. The projected cash flows were developed using projected deposit attrition rates. The core deposit intangible will be amortized over ten years using the sum-of-years digits method. Time Deposits The fair value adjustment for time deposits represents a discount from the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The time deposit discount of approximately $847,500 is being amortized into income on a level yield amortization method over the contractual life of the deposits. Long-term Borrowings The Corporation assumed a trust preferred subordinated debt in connection with the merger. The fair value of the trust preferred subordinated debt was determined based upon an estimated fair value from an independent brokerage firm. The trust preferred capital note was valued at discount of $312,500, which is being amortized into income on a level yield amortization method based upon the assumed market rate, and the term of the trust preferred subordinated debt instrument. The following table presents certain pro forma information as if NWSB had been acquired on December 31, 2016. These results combine the historical results of the Corporation in the Corporation’s Consolidated Statements of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on December 31, 2016. In particular, no adjustments have been made to eliminate the amount of NWSB’s provision for loan losses that would not have been necessary had the acquired loans been recorded at fair value as of December 31, 2016. The Corporation expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below:
In thousands |  | For the Year Ended December 31, 2016
Total revenues (net interest income plus noninterest income) |  | $ | 102,891 |
Net Income |  | 13,591 |
Acquisition-related expenses associated with the acquisition of NWSB were $4.3 million for the three months ended September 30, 2017 and $4.7 million for the nine months ended September 30, 2017. Such costs include legal and accounting fees, lease and contract termination expenses, system conversion, operations integration, and employee severances, which have been expensed as incurred.

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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://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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