Business Combination

6 Months Ended

Jun. 30, 2017

Business Combination [Abstract]

Business Combination

Note 2 – Business Combination

Northwest Bank Branch Acquisition

On May 19, 2017, the Bank purchased three branches from Northwest Bank (“NWBI”) located in Arbutus, Elkridge, and Owings Mills, Maryland. Pursuant to the transaction, the Bank acquired $122.5 million in loans and $212.5 million in deposits, as well as the branch premises and equipment. In connection with its purchase of the branches from Northwest, the Bank received a cash payment from Northwest of $62.7 million, which was net of a premium paid on deposits of $17.2 million. This acquisition provides the Bank with the opportunity to enhance its footprint in Maryland by extending its branch network across the Eastern Shore to the greater Baltimore area communities of Elkridge, Owings Mills and Arbutus.

The Company has accounted for the branch purchases under the acquisition method of accounting in accordance with FASB ASC topic 805, “Business Combinations,” whereby the acquired assets and liabilities were recorded by the Bank at their estimated fair values as of their acquisition date.

The acquired assets and assumed liabilities of the NWBI branches were measured at estimated fair value. Management made significant estimates and exercised significant judgement in accounting for the acquisition of the NWBI branches. Management evaluated expected cash flows, prepayment speeds and estimated loss factors to measure fair values for loans. However,pursuant to the purchase and assumption agreement, the Bank has the option to require the repurchase or exchange of any purchased loans that become nonperforming during the 75 day period following the May 19, 2017 closing. Deposits were valued based upon interest rates, original and remaining terms and maturities, as well as current rates for similar funds in the same markets. Premises were based on recent appraised values, whereas equipment was acquired based on the remaining book value from NWBI, which approximated fair value.

The statement of net assets acquired and the resulting goodwill recorded is presented in the following tables. As explained in the notes that accompany the following table, the purchased assets, assumed liabilities and identifiable assets were recorded at the acquisition date fair value.

	Acquired				Acquired
	Balances as		Fair		Balances as
	Recorded By		Value		Recorded By
	Northwest Bank		Adjustments		Shore United Bank
Cash and due from banks	$	81,231	$	-	$	81,231
Loans		125,131		(2,269)		122,862
Less: allowance for credit losses		-		-		-
Loans, net		125,131		(2,269)		122,862
						-
Premises and equipment, net		5,363		963		6,326
Core deposit intangible		-		3,954		3,954
Total assets	$	211,725	$	2,648	$	214,373
Deposits:
Noninterest-bearing	$	34,481	$	-	$	34,481
Interest-bearing		177,237		738		177,975
Total deposits		211,718		738		212,456
Other liabilities		7		-		7
Total liabilities	$	211,725	$	738	$	212,463
Net assets acquired	$	-	$	1,910	$	1,910

The following table summarizes the acquired assets and assumed liabilities in the purchase as of the acquisition date, and the resulting goodwill of $15.3 million resulting from the transaction (in thousands):

Assets acquired at fair value:
Cash and cash equivalents	$	81,231
Loans		122,862
Premises and equipment, net		6,326
Core deposit intangible		3,954
Total fair value of assets acquired	$	214,373
Liabilities assumed at fair value:
Deposits	$	212,456
Other liabilities		7
Total fair value of liabilities assumed	$	212,463
Net assets acquired at fair value:	$	1,910
Transaction consideration paid to Northwest Bank	$	17,186
Amount of goodwill resulting from acquisition	$	15,276

The total amount of goodwill arising from this transaction of $15.3 million is expected to be deductible for tax purposes, pursuant to section 197 of the Internal Revenue Code.

Acquired loans

The following table outlines the contractually required payments receivable, cash flows we expect to receive, and the accretable yield for all NWBI loans as of the acquisition date.

	Contractually
	Required		Cash Flows				Carrying Value
	Payments		Expected To Be		Accretable FMV		of Loans
	Receivable		Collected		Adjustments		Receivable
Performing loans acquired	$	125,131		125,131		2,269	$	122,862

The Company recorded all loans acquired at the estimated fair value on the purchase date with no carryover of the related allowance for loan losses. The Company only acquired loans which were deemed to be performing loans with no signs of credit deterioration.

The Company determined the net discounted value of cash flows on approximately 864 performing loans totaling $125.1 million. The valuation took into consideration the loans’ underlying characteristics, including account types, remaining terms, annual interest rates, interest types, past delinquencies, timing of principal and interest payments, current market rates, loan-to-value ratios, loss exposures, and remaining balances. These performing loans were segregated into pools based on loan and payment type. The effect of this fair valuation process was a net accretable discount adjustment of $2.3 million at acquisition.