ACQUISITION OF NUVO BANK & TRUST COMPANY

12 Months Ended

Dec. 31, 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 $5.11 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 90,756 shares of Merchants common stock on adjusted terms, consisting of warrants expiring in April 2017 to purchase 56,386 shares at an exercise price of $20.69 and warrants expiring in April 2018 to purchase 34,370 shares at an exercise price of $41.39 per share. 

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 acquisition of NUVO was accounted for using the purchase 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 $7.01 million over the fair value of net assets acquired has been reported as goodwill in the Company’s consolidated statements of financial condition as of December 31, 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.

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)		Amount
Consideration paid:
Common stock issued in exchange for NUVO shares	$	16,889
Cash paid for NUVO shares		5,988
Stock warrants issued		656
Total consideration paid	$	23,533
Assets acquired:
Cash and cash equivalents	$	7,070
Interest bearing time deposits with banks		110
Investments		4,344
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		1,993
Other assets		356
Total assets acquired		165,935
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	$	16,522
Goodwill	$	7,011

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 2015 Form 10-K:

(In thousands)		Amount
Goodwill reported as of December 31, 2015	$	6,967
Effect of adjustments to:
Stock warrants issued		112
Deferred tax asset		(68)
Adjusted goodwill as of December 31, 2016	$	7,011

The changes to goodwill during the year ended December 31, 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 year or previously reported income.

The following table presents pro forma information as if the acquisition had occurred at the beginning of 2014. The pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates.

(In thousands except per share data)	2015		2014
Net interest income	$	53,275	$	51,732
Net income		14,073		11,512
Basic earnings per share		2.05		1.68
Diluted earnings per share	$	2.05	$	1.68