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Merger | 9 Months Ended
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Sep. 30, 2021
Business Combination and Asset Acquisition [Abstract] |
Merger | Merger Bancorp completed its merger with American River Bankshares ("AMRB") on August 6, 2021 (the "merger date"), with Bancorp continuing as the surviving entity, followed thereafter at 12:05 a.m. on August 7, 2021 by the merger of American River Bank ("ARB") with and into Bank of Marin (collectively, the "Merger"), with Bank of Marin surviving. On August 6, 2021, each share of AMRB's common stock issued and outstanding immediately prior to the Merger was converted into 0.575 shares of Bancorp's common stock resulting in the issuance of 3,441,235 shares of Bancorp common stock. In addition, merger consideration included cash paid for outstanding stock options and cash paid in lieu of fractional shares, as summarized in the following table.
(in thousands) | Merger Consideration
Value of common stock consideration paid to shareholders (0.575 fixed exchange ratio, stock price $36.15) | $ | 124,401 |
Cash consideration for stock options | 63
Cash paid in lieu of fractional shares | 13
Total merger consideration | $ | 124,477 |
Bancorp accounted for the Merger using the acquisition method of accounting in accordance with ASC 805, Business Combinations. We recorded the estimated fair values of acquired assets and liabilities based on initial valuations as of August 6, 2021. Under ASC 805, during the measurement period of up to one year, the acquirer is allowed to adjust the amounts recognized at the acquisition date and may recognize additional assets or liabilities to reflect new information obtained from facts and circumstances that existed as of the merger date that, if known, would have affected the measurement of the amounts recognized as of that date. Measurement period adjustments are recognized in the reporting period in which they are determined. As such, the estimated fair values are considered preliminary as of September 30, 2021 and subject to adjustment for up to one year after August 6, 2021. Fair value amounts subject to change include, but are not limited to, loans, certain deposits, deferred tax assets and liabilities and certain other assets and other liabilities. The following table presents the preliminary fair values of the assets acquired and liabilities assumed, and the resulting goodwill as of August 6, 2021.
(in thousands) |
Total merger consideration | $ | 124,477 |
Assets acquired: |
Cash and cash equivalents | 140,577 |
Investment securities | 297,797 |
Loans | 419,435 |
Bank-owned life insurance | 16,259 |
Operating lease right-of-use assets | 2,376 |
Bank premises and equipment, net | 2,891 |
Core deposit intangible | 3,909 |
Other real estate owned | 800 |
Interest receivable and other assets | 14,377 |
Total assets acquired | 898,421 |
Liabilities assumed: |
Deposits: |
Non-interest bearing | 331,459 |
Interest bearing | 458,563 |
Total deposits | 790,022 |
FHLB borrowings | 13,885 |
Operating lease liabilities | 2,798 |
Interest payable and other liabilities | 9,853 |
Total liabilities assumed | 816,558 |
Fair value of net assets acquired | 81,863 |
Goodwill | $ | 42,614 |
We recorded $42.6 million in goodwill, which represents the excess of the total merger consideration paid over the fair value of the assets acquired, net of the fair values of liabilities assumed. Goodwill mainly reflects expected value created through the combined operations of AMRB and Bancorp. It is evaluated for impairment annually. The following are descriptions of the methods used to determine the fair values of significant assets and liabilities presented above. Cash and cash equivalents - The carrying amount of cash and cash equivalents is a reasonable estimate of fair value based on the short-term nature of these assets. Investment securities - Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair value estimates are based on observable inputs including quoted market prices for similar instruments, quoted market prices that are not in an active market or other inputs that are observable in the market. In the absence of observable inputs, fair value is estimated based on pricing models and/or discounted cash flow methodologies. Loans - The loan valuation methodology was based on a discounted cash flow approach that considered factors including the type of loan, risk classification status, fixed or variable interest rates, term, amortization status and current discount rates. Loans were grouped according to similar credit risk characteristics when applying various valuation techniques. The discount rates applied were based on current market rates for new originations of comparable loans and included adjustments for interest rate risk, equity return, servicing, credit and liquidity risk. ARB's allowance for credit losses and any existing deferred fees or costs and premiums and discounts were not carried over at the merger date. Bank-owned life insurance - The cash surrender values of bank-owned life insurance policies approximated fair value. Operating lease right-of-use assets and lease liabilities - Operating lease right-of-use assets were measured at the present value of the remaining lease payments, as if the acquired leases commenced on the merger date, and adjusted to reflect favorable and unfavorable terms of the leases when compared to current market terms. Lease liabilities were measured at the present value of the remaining lease payments. Bank premises and equipment - The value of the land and buildings acquired were based on independent third-party appraisals. The fair values of other premises and equipment, such as tenant improvements, furniture and fixtures and equipment, approximated their carrying values. Core deposit Intangible - The core deposit intangible ("CDI") represents the estimated future benefits of acquired deposits and is recorded separately from the related deposits. The value of the core deposit intangible asset was calculated using a discounted cash flow approach to arrive at the cost differential between the core deposits (non-maturity deposits such as transaction, savings and money market accounts) and alternative funding sources. It was calculated as the present value of the difference in cash flows between maintaining the core deposits (interest and net maintenance costs) and the cost of an equal amount of funds with a similar term from an alternative source. The core deposit intangible is amortized on an accelerated basis over an estimated ten-year life, and is evaluated periodically for impairment. We recorded a core deposit intangible asset of $3.9 million at acquisition, of wh ich $129 thousand was amortized from the merger date to September 30, 2021. The future amortization expense for the CDI arising from the Merger is as follows:
(in thousands) | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total
Core deposit intangible amortization | $ | 189 |  | $ | 707 |  | $ | 630 |  | $ | 552 |  | $ | 475 |  | $ | 1,227 |  | $ | 3,780 |
Other real estate owned - The value of other real estate owned was based on an independent third-party appraisal. Deposits - The fair values for the demand and savings deposits equaled the amount payable on demand at the merger date. The fair values for time deposits were estimated using a discounted cash flow calculation that applied interest rates currently being offered to the contractual interest rates on such time deposits. FHLB borrowings - The carrying value of Federal Home Loan Bank borrowings was adjusted to reflect prepayment fees, which approximated fair value. Pro Forma Results of Operations AMRB's unaudited contributions to net interest income and net income from the August 6, 2021 merger date to September 30, 2021 included in the consolidated statements of comprehensive income are presented in the following table.
(in thousands) |
Net interest income 1 | $ | 3,427 |
Net loss 1 | $ | (2,993) |
1 AMRB's net interest income and net loss include merger-related costs incurred from the merger date to September 30, 2021, accretion of the net purchase discount on acquired loans, premises fair value adjustment depreciation, CDI amortization and time deposit premium amortization, as applicable. The pro forma net loss does not include allowance for credit losses adjustments related to acquired loans.
The following table presents certain unaudited pro forma net interest income and net income for illustrative purposes only for the three and nine months ended September 30, 2021 and 2020 as if AMRB was acquired on January 1, 2020. This unaudited pro forma information combines Bancorp's and AMRB's historical results and includes adjustments reflecting the estimated impact of certain fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisition consummated as of the beginning of the year prior to the acquisition. The unaudited pro forma information does not consider any changes to the provision for credit losses resulting from recording loans at fair value, cost savings, or business synergies. As a result, actual amounts would have differed from the unaudited pro forma information presented, and the differences could be significant.
| Three months ended |  | Nine months ended
(in thousands) | September 30, 2021 | September 30, 2020 |  | September 30, 2021 | September 30, 2020
Net interest income - Pro forma | $ | 30,488 |  | $ | 31,386 |  |  | $ | 91,240 |  | $ | 92,791 |
Net interest income - Actual | $ | 27,753 |  | $ | 24,566 |  |  | $ | 74,318 |  | $ | 73,060 |
Net income - Pro forma 1 | $ | 9,953 |  | $ | 9,182 |  |  | $ | 33,422 |  | $ | 19,638 |
Net income - Actual | $ | 5,282 |  | $ | 7,491 |  |  | $ | 23,514 |  | $ | 22,125 |
1 The 2021 pro forma combined net income was adjusted to exclude merger-related costs of $5.4 million incurred by Bancorp and $3.6 million incurred by AMRB. These merger-related costs were included in the combined net income for the nine months ended September 30, 2020 as if the merger occurred on January 1, 2020.
Merger-related one time and conversion costs are recognized as incurred and continue until all systems have been converted and operational functions are fully integrated. Bancorp's merger-related costs reflected in the consolidated statements of comprehensive income are summarized in the following table.
| Three months ended |  | Nine months ended
(in thousand, unaudited) | September 30, 2021 | September 30, 2020 |  | September 30, 2021 | September 30, 2020
Personnel and severance | $ | 2,668 |  | $ | — |  |  | $ | 2,668 |  | $ | — |
Professional services | 1,778 |  | — |  |  | 1,979 |  | — |
Data processing | 433 |  | — |  |  | 433 |  | — |
Other expense | 263 |  | — |  |  | 279 |  | — |
Total merger-related one-time and conversion costs | $ | 5,142 |  | $ | — |  |  | $ | 5,359 |  | $ | — |

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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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