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Business Combinations

12 Months Ended

Dec. 31, 2020

The Company incurred merger related expenses of $15.9 million, $10.5 million, and $26.9 million for the years ended December 31, 2020, 2019, and 2018, respectively. The following table summarizes the merger related expenses for the years ended December 31, 2020, 2019 and 2018 was as follows:


	For the Year Ended December 31,
	2020		2019		2018
	(in thousands)
Data processing fees	$	3,758	$	2,514	$	6,017
Professional fees	3,638		4,239		4,414
Employee severance payments	7,727		2,942		15,660
Other/miscellaneous fees	824		808		820
Merger related expenses	$	15,947	$	10,503	$	26,911

Two River Bancorp Acquisition

On January 1, 2020, the Company completed its acquisition of Two River Bancorp (“Two River”), which after purchase accounting adjustments added $1.11 billion to assets, $940.1 million to loans, and $941.8 million to deposits. Total consideration paid for Two River was $197.1 million, including cash consideration of $48.4 million. Two River was merged with and into the Company on the date of acquisition.

The acquisition was accounted for under the acquisition method of accounting. Under this method of accounting, the purchase price has been allocated to the respective assets acquired and liabilities assumed based upon their estimated fair values, net of tax. The excess of consideration paid over the estimated fair value of the net assets acquired has been recorded as goodwill.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Two River, net of total consideration paid (in thousands):


	At January 1, 2020
		Estimated Fair Value
Total purchase price:		$	197,050
Assets acquired:
Cash and cash equivalents		$	51,102
Securities		64,381
Loans		940,072
Accrued interest receivable		2,382
Bank owned life insurance		22,440
Deferred tax assets, net		3,158
Other assets		15,956
Core deposit intangible		12,130
Total assets acquired		1,111,621
Liabilities assumed:
Deposits		(941,750)

Other liabilities		(59,026)
Total liabilities assumed		(1,000,776)
Net assets acquired		$	110,845
Goodwill recorded in the merger		$	86,205

The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the estimates and uncertainties used to determine fair value as of the closing date become available. As of January 1, 2021, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value.

Country Bank Holding Company, Inc. Acquisition

On January 1, 2020, the Company completed its acquisition of Country Bank Holding Company, Inc. (“Country Bank”), which after purchase accounting adjustments added $793.7 million to assets, $618.4 million to loans, and $652.7 million to deposits. Total consideration paid for Country Bank was $112.8 million. Country Bank was merged with and into the Company on the date of acquisition.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Country Bank, net of total consideration paid (in thousands):


	At January 1, 2020
		Estimated Fair Value
Total purchase price:		$	112,836
Assets acquired:
Cash and cash equivalents		$	20,799
Securities		144,499
Loans		618,408
Accrued interest receivable		1,779

Deferred tax assets, net		(3,117)
Other assets		9,195
Core deposit intangible		2,117
Total assets acquired		793,680
Liabilities assumed:
Deposits		(652,653)

Other liabilities		(67,240)
Total liabilities assumed		(719,893)
Net assets acquired		$	73,787
Goodwill recorded in the merger		$	39,049

Capital Bank of New Jersey Acquisition

On January 31, 2019, the Company completed its acquisition of Capital Bank of New Jersey (“Capital Bank”), which after purchase accounting adjustments added $494.4 million to assets, $307.3 million to loans, and $449.0 million to deposits. Total consideration paid for Capital Bank was $76.8 million, including cash consideration of $353,000. Capital Bank was merged with and into the Company on the date of acquisition.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the acquisition for Capital Bank, net of total consideration paid (in thousands):


	At January 31, 2019
		Estimated Fair Value
Total Purchase Price:		$	76,834
Assets acquired:
Cash and cash equivalents		$	59,748
Securities		103,775
Loans		307,300
Accrued interest receivable		1,390
Bank owned life insurance		10,460
Deferred tax assets, net		4,101
Other assets		4,980
Core deposit intangible		2,662
Total assets acquired		494,416
Liabilities assumed:
Deposits		(449,018)

Other liabilities		(5,210)
Total liabilities assumed		(454,228)
Net assets acquired		$	40,188
Goodwill recorded in the merger		$	36,646

The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative to the estimates and uncertainties used to determine fair value as of the closing date become available. On January 31, 2020, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value.

Sun Bancorp. Inc Acquisition

On January 31, 2018, the Company completed its acquisition of Sun Bancorp, Inc. (“Sun”), which after purchase accounting adjustments, added $2.0 billion to assets, $1.5 billion to loans, and $1.6 billion to deposits. Total consideration paid for Sun was $474.9 million, including cash consideration of $72.4 million. Sun was merged with and into the Company on the date of acquisition.

The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the date of the

acquisition for Sun, net of the total consideration paid (in thousands):


	At January 31, 2018
	Estimated Fair Value
Total Purchase Price:	$	474,930
Assets acquired:
Cash and cash equivalents	$	68,632
Securities	254,522
Loans	1,517,345
Accrued interest receivable	5,621
Bank owned life insurance	85,238
Deferred tax assets, net	57,597
Other assets	43,202
Core deposit intangible	11,897
Total assets acquired	2,044,054
Liabilities assumed:
Deposits	(1,616,073)
Borrowings	(127,727)
Other liabilities	(13,242)
Total liabilities assumed	(1,757,042)
Net assets acquired	$	287,012
Goodwill recorded in the merger	$	187,918

The calculation of goodwill is subject to change for up to one year after the date of acquisition as additional information relative

to the estimates and uncertainties used to determine fair value as of the closing date become available. On January 31, 2019, the Company finalized its review of the acquired assets and liabilities and will not be recording any further adjustments to the carrying value.

Supplemental Pro Forma Financial Information

The following table presents financial information regarding the former Sun operations included in the Consolidated Statements of Income from the date of the acquisition (January 31, 2018) through December 31, 2018; regarding the former Capital Bank operations included in the Consolidated Statements of Income from the date of the acquisition (January 31, 2019) through December 31, 2019; and regarding Two River and Country Bank operations included in the Consolidated Statements of Income from the date of the acquisition (January 1, 2020) through December 31, 2020. In addition, the table provides condensed pro forma financial information assuming the Two River, Country Bank, Sun and Capital Bank acquisitions had been completed as of January 1, 2018, for the year ended December 31, 2018, and January 1, 2019 for the year ended December 31, 2019. The table has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisitions occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the pro forma information does not reflect management’s estimate of any revenue-enhancing opportunities nor anticipated cost savings that may have occurred as a result of the integration and consolidation of Two River’s, Country Bank’s, Sun’s and Capital Bank’s operations. The pro forma information reflects adjustments related to certain purchase accounting fair value adjustments, amortization of core deposit and other intangibles, and related income tax effects.


	Two River Actual from January 1, 2020 to December 31, 2020		Country Bank Actual from January 1, 2020 to December 31, 2020		Capital Bank Actual from January 31, 2019 to December 31, 2019		Sun Actual from January 31, 2018 to December 31, 2018		Pro forma Year ended December 31, 2019		Pro forma Year ended December 31, 2018
(in thousands, except per share amounts)	(unaudited)
Net interest income	$	41,978	$	27,411	$	17,090	$	63,889	$	329,327	$	337,118
Credit loss expense	6,117		4,481		385		1,215		2,686		4,545
Non-interest income	2,688		45		1,456		7,961		47,484		43,677
Non-interest expense	27,431		17,993		12,482		35,184		240,913		258,072
Provision for income taxes	2,686		1,204		1,193		7,090		23,870		21,098
Net income	$	8,432	$	3,778	$	4,486	$	28,361	$	109,342	$	97,080
Fully diluted earnings per share									$	1.79	$	1.56

Core Deposit Intangible

The estimated future amortization expense for the core deposit intangible over the next five years and thereafter is as follows (in thousands):


For the Year Ended December 31,	Amortization Expense
2021	$	5,452
2022	4,718
2023	3,984
2024	3,250
2025	2,516
Thereafter	3,748
Total	$	23,668

Fair Value Measurement of Assets Acquired and Liabilities Assumed

The methods used to determine the fair value of the assets acquired and liabilities assumed in the Two River, Country Bank, Sun and Capital Bank acquisitions were as follows. Refer to Note 15 Fair Value Measurements, for a discussion of the fair value hierarchy.

Securities

The estimated fair values of the securities were calculated utilizing Level 2 inputs. The securities acquired are bought and sold in active markets. Prices for these instruments were obtained through security industry sources that actively participate in the buying and selling of securities.

Loans

The acquired loan portfolio was valued utilizing Level 3 inputs and included the use of present value techniques employing cash flow estimates and incorporated assumptions that marketplace participants would use in estimating fair values. In instances where reliable market information was not available, the Company used its own assumptions in an effort to determine reasonable fair value. Specifically, the Company utilized three separate fair value analyses which a market participant would employ in estimating the total fair value adjustment. The three separate fair valuation methodologies used were: (1) interest rate loan fair value analysis; (2) general credit fair value adjustment; and (3) specific credit fair value adjustment.

To prepare the interest rate fair value analysis, loans were grouped by characteristics such as loan type, term, collateral and rate. Market rates for similar loans were obtained from various external data sources and reviewed by the Company’s 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 adjustment.

The general credit fair value adjustment was calculated using a two-step analysis: (1) expected lifetime losses and (2) estimated fair value adjustments for qualitative factors. The expected lifetime losses were calculated using an average of historical losses of the acquired bank or historical loss experiences of peer groups where deemed appropriate. The adjustment related to

qualitative factors, if any, was impacted by general economic conditions and the risk related to lack of experience with the originator’s underwriting process.

To calculate the specific credit fair value adjustment, subsequent to January 1, 2020, the Company identified loans that experienced more-than-insignificant deterioration in credit quality since origination. Loans meeting this criteria were reviewed by comparing the contractual cash flows to expected collectible cash flows. The aggregate expected cash flows less the acquisition date fair value resulted in an accretable yield amount which will be recognized over the life of the loans on a level yield basis as an adjustment to yield.

Premises and Equipment

Fair value estimates were based upon appraisals from independent third parties. In addition to owned properties, Two River operated 14 properties, Country Bank operated five properties, Sun operated 21 properties, and Capital Bank operated one property, subject to lease agreements.

Deposits and Core Deposit Premium

Core deposits were considered to be non-interest-bearing demand deposits, interest-bearing checking, money market and saving accounts acquired as part of the acquisitions. The core deposit premium value represents the future economic benefit, including the present value of future tax benefits, of the potential cost saving from acquiring the core deposits as part of an acquisition compared to the cost of alternative funding sources and was valued utilizing Level 2 inputs. The core deposit premiums totaled $12.1 million, $2.1 million, $2.7 million and $11.9 million, for the acquisitions of Two River, Country Bank, Sun and Capital Bank, respectively, and is being amortized over its estimated useful life of approximately 10 years under an accelerated method.

Time deposits are not considered to be core deposits as they are assumed to have a low expected average life upon acquisition. The fair value of time deposits were determined by calculating the present value of the expected contractual payments discounted by market rates for similar time deposits and is valued utilizing Level 2 inputs.

Borrowings

Fair value estimates were based on discounting contractual cash flows using rates which approximate the rates offered for borrowings of similar remaining maturities.