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Business Combinations and Asset Acquisitions
 3 Months Ended
Mar. 31, 2023
Business Combination and Asset Acquisition [Abstract]  
Business Combination Disclosure Acquisition
On January 31, 2023, the Company completed its acquisition of Centric Financial Corporation (“Centric”) and its banking subsidiary, Centric Bank, for consideration of 9,688,478 shares of the Company's common stock. Through the acquisition, the Company obtained seven full-service banking offices and one loan production office in the Harrisburg, Philadelphia and Lancaster Metropolitan Service Areas ("MSAs").
The table below summarizes the preliminary net assets acquired (at fair value) and consideration transferred in connection with the Centric acquisition (dollars in thousands):
Consideration paid
     Cash paid to shareholders - fractional shares$1 
     Shares issued to shareholders (9,688,478 shares)
141,355 
            Total consideration paid$141,356 
Fair value of assets acquired
    Cash and due from banks14,492 
    Investment securities34,302 
    FHLB stock7,658 
    Loans925,948 
    Premises and equipment12,123 
    Core deposit intangible16,671 
    Bank owned life insurance4,502 
    Other assets18,875 
             Total assets acquired1,034,571 
Fair value of liabilities assumed
    Deposits757,003 
    Borrowings186,716 
    Other liabilities6,582 
             Total liabilities assumed950,301 
Total fair value of identifiable net assets84,270 
Goodwill$57,086 
The Company determined that this acquisition constitutes a business combination and therefore was accounted for using the acquisition method of accounting. Accordingly, as of the date of the acquisition, the Company recorded the assets acquired, liabilities assumed and consideration paid at fair value. The $57.1 million excess of the consideration paid over the fair value of assets acquired was recorded as goodwill and is not amortizable or deductible for tax purposes. The amount of goodwill arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company with Centric.
The fair value of the 9,688,478 common shares issued was determined based on the $14.59 closing market price of the Company's common shares on the acquisition date, January 31, 2023. While the valuation of the acquired assets and liabilities is substantially complete, fair value estimates are subject to adjustment during the provisional period, which may last up to twelve months subsequent to the acquisition date. During this period, the Company may obtain additional information to refine the valuations and adjust the recorded fair value, although such adjustments are not expected to be significant. Valuations subject to adjustments include, but are not limited to, the fair value of acquired loans, deposits, land and building, core deposit intangible and other assets and liabilities.
The following is a description of the valuation methodologies used to estimate the fair values of major categories of assets acquired and liabilities assumed. The Company used an independent valuation specialist to assist with the determination of fair values for certain acquired assets and assumed liabilities.
Cash and due from banks - The estimated fair value was determined to approximate the carrying amount of these assets.
Investment securities - The estimated fair value of the investment portfolio was based on quoted market prices, dealer quotes, and pricing obtained from independent pricing services.
Loans - The estimated fair value of loans were based on a discounted cash flow methodology applied on a pooled basis for non purchased credit-deteriorated ("non-PCD") loans and on an individual basis for purchased credit-deteriorated ("PCD") loans. The valuation considered underlying characteristics including loan type, term, rate, payment schedule and credit rating. Other factors included assumptions related to prepayments, probability of default and loss given default. The discount rates applied were based on a build-up approach considering the funding mix, servicing costs, liquidity premium and factors related to performance risk.
Premise and equipment - The estimated fair value of land and buildings were determined by independent market-based appraisals.
Core deposit intangible - The core deposit intangible was valued utilizing the cost savings method approach, which recognizes the cost savings represented by the expense of maintaining the core deposit base versus the cost of an alternative funding source. The valuation incorporates assumptions related to account retention, discount rates, deposit interest rates, deposit maintenance costs and alternative funding rates.
Time deposits - The estimated fair value of time deposits was determined using a discounted cash flow approach incorporating a discount rate equal to current market interest rates offered on time deposits with similar terms and maturities.
Borrowings - The estimated fair value of short-term borrowings was determined to approximate stated value. Subordinated debentures were valued using a discounted cash flow approach incorporating a discount rate that incorporated similar terms, maturity and credit rating.
Accounting for Acquired Loans
Acquired loans are classified into two categories PCD loans and non-PCD loans. PCD loans are defined as a loan or group of loans that have experienced more than insignificant credit deterioration since origination. Non-PCD loans will have an allowance established on acquisition date, which is recognized as an expense through provision for credit losses. For PCD loans, an allowance is recognized on day 1 by adding it to the fair value of the loan, which is the “Day 1 amortized cost”. There is no provision for credit loss expense recognized on PCD loans because the initial allowance is established by grossing-up the amortized cost of the PCD loan.
A day 1 allowance for credit losses on non-PCD loans of $10.7 million was recorded through the provision for credit losses within the Consolidated Statements of Income. At the date of acquisition, of the $977.1 million of loans acquired from Centric, $302.4 million, or 30.9%, of Centric's loan portfolio, was accounted for as PCD loans.
The following table provides details related to the fair value of acquired PCD loans.
Unpaid Principal BalancePCD Allowance for Credit Loss at Acquisition(Discount) Premium on Acquired LoansFair Value of PCD Loans at Acquisition
(dollars in thousands)
Commercial, financial, agricultural and other$82,639 $(15,949)$(84)$66,606 
Time and demand82,639 (15,949)(84)66,606 
Real estate construction29,947 (287)(479)29,181 
Construction other16,978 (227)(179)16,572 
Construction residential12,969 (60)(300)12,609 
Residential real estate16,564 (527)(496)15,541 
Residential first lien13,740 (197)(264)13,279 
Residential junior lien/home equity2,824 (330)(232)2,262 
Commercial real estate173,143 (5,313)(6,193)161,637 
Multifamily13,169 (234)(1,413)11,522 
Nonowner occupied97,037 (2,739)(1,902)92,396 
Owner occupied62,937 (2,340)(2,878)57,719 
Loans to individuals62 (3)(3)56 
Automobile and recreational vehicles62 (3)(3)56 
Total loans and leases$302,355 $(22,079)$(7,255)$273,021 
The following table provides details related to the fair value and Day 1 provision related to the acquired non-PCD loans.
Unpaid Principal Balance(Discount) premium on acquired loansFair Value of Non-PCD Loans at AcquisitionDay 1 Provision for Credit Losses - Non-PCD Loans
(dollars in thousands)
Commercial, financial, agricultural and other$167,509 $(5,451)$162,058 $3,482 
Time and demand165,781 (5,342)160,439 3,436 
Equipment finance4 — 4 — 
Time and demand other1,724 (109)1,615 46 
Real estate construction52,773 (1,126)51,647 1,638 
Construction other34,801 (971)33,830 1,146 
Construction residential17,972 (155)17,817 492 
Residential real estate75,041 (2,593)72,448 614 
Residential first lien53,612 (1,981)51,631 437 
Residential junior lien/home equity21,429 (612)20,817 177 
Commercial real estate378,777 (12,607)366,170 4,911 
Multifamily45,475 (1,203)44,272 514 
Nonowner occupied182,793 (5,660)177,133 2,111 
Owner occupied150,509 (5,744)144,765 2,286 
Loans to individuals640 (36)604 8 
Automobile and recreational vehicles449 (25)424 4 
Consumer other191 (11)180 4 
Total loans and leases$674,740 $(21,813)$652,927 $10,653 
Costs related to the acquisition totaled $8.5 million. These amounts were expensed as incurred and are recorded as a merger and acquisition related expense in the Consolidated Statements of Income.
As a result of the full integration of the operations of Centric, it is not practicable to determine revenue or net income included in the Company's operating results relating to Centric since the date of acquisition as Centric results cannot be separately identified.