ACQUISITION OF NUVO BANK & TRUST COMPANY

6 Months Ended

Jun. 30, 2016

ACQUISITION OF NUVO BANK & TRUST COMPANY

ACQUISITION OF NUVO BANK & TRUST COMPANY

NOTE 3: ACQUISITION OF NUVO BANK & TRUST COMPANY

On December 4, 2015, the Company completed the acquisition of NUVO Bank & Trust Company (“NUVO”), Springfield, Massachusetts.  NUVO's banking business operates as a division of Merchants Bank. Total consideration paid by Merchants for NUVO's outstanding stock comprised 517,109 shares of common stock and $5.109 million in cash.  Merchants also paid an aggregate of $878,718 to cash out NUVO stock options and a portion of its common stock warrants and issued replacement warrants to purchase an aggregate of 90,474 shares of Merchants common stock on adjusted terms, consisting of warrants expiring in 2017 to purchase 56,104 shares at an exercise price of $20.69 and warrants expiring in 2018 to purchase 34,370 shares at an exercise price of $41.39 per share.  The results of NUVO’s operations are included in the Company’s unaudited consolidated statements of income for the period ended June 30, 2016.

The acquisition of NUVO expands the Company’s New England footprint beyond Vermont and into the Springfield and greater Western Massachusetts commercial banking market. The Company now has 32 banking locations, including the new office in Springfield, Massachusetts.

The acquisition of NUVO was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed and consideration paid were recorded at their estimated fair values as of the acquisition date. The excess of consideration paid of $6.872 million over the fair value of net assets acquired has been reported as goodwill in the Company’s unaudited consolidated statements of financial condition as of June 30, 2016. Goodwill created in the acquisition is not deductible for income tax purposes. This goodwill consists largely of the synergies and cost savings arising from the combining of the operations of the two companies.

The assets acquired and liabilities assumed in the acquisition of NUVO were recorded at their preliminary estimated fair values based on management’s best estimates using information available at the date of the acquisition and are subject to adjustment.

In connection with the acquisition, the consideration paid and the fair value of identifiable assets acquired and liabilities assumed as of the date of acquisition are summarized in the following table:

(In thousands)
Consideration paid:
Common stock issued in exchange for NUVO shares	$	16,889
Cash paid for NUVO shares		5,988
Stock warrants issued		470
Total consideration paid	$	23,347
Assets acquired:
Cash and cash equivalents	$	7,070
Interest bearing time deposits with banks		110
Investments		4,365
Restricted investment in bank stock		376
Loans		149,360
Premises and equipment , net		580
Accrued interest receivable		369
Core deposit intangible		1,377
Deferred tax asset		1,926
Other assets		355
Total assets acquired		165,888
Liabilities assumed:
Deposits		144,482
Federal Home Loan Bank advances		4,001
Accrued interest payable		42
Tax effect of acquisition fair value adjustments		705
Other liabilities		183
Total liabilities assumed		149,413
Net assets acquired	$	16,475
Goodwill	$	6,872

The following table details the changes in fair value of the consideration paid and the net assets acquired as of December 4, 2015 from the amounts originally reported in the Company’s Form 10-K for the year ended December 31, 2015:

(In thousands)
Goodwill reported as of December 31, 2015	$	6,967
Effect of adjustments to:
Consideration paid:
Stock warrants issued		(74)
Assets acquired:
Investments		21
Adjusted goodwill as of June 30, 2016	$	6,872

The changes to goodwill during the six months ended June 30, 2016 are primarily due to changes in the final market value for assets acquired and consideration paid. In many cases, the fair values of assets acquired and liabilities assumed were determined by estimating the cash flows expected to result from those assets and liabilities and discounting them at appropriate market rates. These changes had no impact on current quarter or previously reported income.