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Business Combinations

12 Months Ended

Jun. 30, 2021

Note 4 — Business Combinations

Acquisition of Fidelity Savings and Loan Association of Bucks County

On May 1, 2020, The Bank completed its acquisition of Fidelity pursuant to the terms of the Agreement and Plan of Merger, dated as of December 5, 2019, by and between William Penn, MHC, the Company, the Bank and Fidelity (the “Fidelity Merger Agreement”). At the effective time of the merger, Fidelity was merged with and into the Bank, with the Bank as the surviving institution, and the depositors of Fidelity became depositors of the Bank, with the same rights and privileges in William Penn, MHC as if their accounts

had been established at the Bank on the date established at Fidelity. As part of the transaction, pursuant to the terms of the Fidelity Merger Agreement, the Company issued 831,976 shares of its common stock to William Penn, MHC.

The acquisition of Fidelity increased the Company’s market share in southeastern Pennsylvania and provided the Company with one new branch location. The results of Fidelity’s operations are included in the Company’s Consolidated Statements of Income for the period beginning on May 1, 2020, the date of the acquisition, through June 30, 2021.

The acquisition of Fidelity was accounted for using the acquisition method of accounting for a mutual-to-mutual merger and, accordingly, assets acquired, liabilities assumed, and equity were recorded at their estimated fair values as of the acquisition date. The excess of the fair value of net assets acquired over the fair value of the equity acquired was recorded as a gain on bargain purchase in the amount of $613 thousand, which was recognized immediately as income in the Company’s consolidated statements of income. The gain on bargain purchase was primarily due to lower estimated discounted future cash flows used to calculate the estimated fair value of equity due to the uncertainty of the COVID-19 pandemic, as well as a decline in public peer bank stocks pricing used to estimate change of control premium fair values when estimating the fair value of equity due to the COVID-19 pandemic. The assets purchased and liabilities assumed in the merger were recorded at their estimated fair values at the time of closing, subject to refinement for up to one year after the closing date. There were no adjustments to the fair value measurements of assets or liabilities in fiscal 2021.

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


(Dollars in thousands)
Fair value of equity	$	11,377
Assets acquired:
Cash and due from financial institutions	$	26,867
Interest-bearing time deposits		462
Loans receivable, net		55,949
Premises and equipment		747
Regulatory stock		334
Deferred income taxes		564
Other real estate owned		100
Core deposit intangible		65
Accrued interest receivable		209
Other assets		272
Total assets	$	85,569
Liabilities assumed:
Deposits	$	(66,409)
Advances from Federal Home Loan Bank		(5,688)
Accrued interest payable		(5)
Other liabilities		(1,477)
Total liabilities	$	(73,579)
Net assets acquired		11,990
Gain on bargain purchase	$	(613)

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. The most significant category of assets for which this procedure was used was acquired loans. The excess of expected cash flows above the fair value of loans will be accreted to interest income over the remaining lives of the loans in accordance with FASB ASC 310-20.

Certain loans, for which specific credit-related deterioration was identified, are recorded at fair value, reflecting the present value of the amounts expected to be collected. Income recognition on these loans is based on a reasonable expectation of the timing and amount of cash flows to be collected. The timing of the sale of loan collateral was estimated for acquired loans deemed impaired and considered collateral dependent. For these collateral dependent impaired loans, the excess of the future expected cash flow over the present value of the future expected cash flow represents the accretable yield, which will be accreted into interest income over the estimated liquidation period using the effective interest method.

The following table details the loans that are accounted for in accordance with FASB ASC 310-30 as of May 1, 2020:


(Dollars in thousands)
Contractually required principal and interest at acquisition	$	619
Contractual cash flows not expected to be collected (nonaccretable difference)		431
Expected cash flows at acquisition		188
Interest component of expected cash flows (accretable discount)		27
Fair value of acquired loans accounted for under FASB ASC 310-30	$	161

Acquired loans not subject to the requirements of FASB ASC 310-30 are recorded at fair value. The fair value mark on each of these loans will be accreted into interest income over the remaining life of the loan. The following table details loans that are not accounted for in accordance with FASB ASC 310-30 as of May 1, 2020:


(Dollars in thousands)
Contractually required principal at acquisition	$	56,785
Contractual cash flows not expected to be collected (credit mark)		1,240
Expected cash flows at acquisition		55,545
Interest rate premium mark		243
Fair value of acquired loans not accounted for under FASB ASC 310-30	$	55,788

In accordance with GAAP, there was no carryover of the allowance for loan losses that had been previously recorded by Fidelity.

In connection with the acquisition of Fidelity, the Company recorded a net deferred income tax asset of $564 thousand related to tax attributes of the acquired company, along with the tax effects of fair value adjustments resulting from applying the acquisition method of accounting.

The fair value of savings and transaction deposit accounts acquired from Fidelity provide value to the Company as a source of stable and low-cost funds. The fair value of the core deposit intangible (“CDI”) was determined based on a discounted cash flow analysis. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available to the Company. The life of the deposit base and projected deposit attrition rates were determined using industry historical deposit data. The CDI was valued at $65 thousand or 0.17% of acquired core deposits. The intangible asset is being amortized on an accelerated basis over ten years. Amortization for the years ended June 30, 2021 and 2020 was $12 thousand and $2 thousand, respectively.

Certificates of deposit accounts were valued by comparing the contractual cost of the portfolio to an alternative deposit portfolio bearing current market rates. The portfolio was segregated into pools based on remaining maturity. For each pool, the projected cash flows from maturing certificates were then calculated based on contractual rates and prevailing market rates. The valuation adjustment for each pool is equal to the present value of the difference of these two cash flows, discounted at the assumed market rate for a certificate with a corresponding maturity. This valuation adjustment was valued at $393 thousand and is being amortized in line with the expected cash flows driven by maturities of these deposits over the next five years. Amortization for the years ended June 30, 2021 and 2020 was $171 thousand and $35 thousand, respectively, recorded as a reduction to interest expense.

Borrowings from the Federal Home Loan Bank (FHLB) of Pittsburgh were valued comparing the contractual cost of the borrowings to current market rates. The future cash flows for each borrowing was calculated based on contractual rates and prevailing market rates. The valuation adjustment for each borrowing is equal to the present value of the difference of these two cash flows, discounted at an assumed market rate for the borrowing. This valuation adjustment was valued at $433 thousand and is being amortized over the remaining life of the individual borrowings. Amortization for the years ended June 30, 2021 and 2020 was $8 thousand and $17 thousand, respectively, recorded as a reduction to interest expense.

The following table presents actual operating results attributable to Fidelity since the May 1, 2020 acquisition date through June 30, 2020. This information does not include purchase accounting adjustments or acquisition integration costs.


	Fidelity May 1, 2020
(Dollars in thousands)	to June 30, 2020
Net interest income	$	313
Non-interest income		17
Non-interest expense		(331)
Pre-tax income	$	(1)
Income tax expense		—
Net income	$	(1)

The following table presents unaudited pro forma information as if the acquisition of Fidelity had occurred on July 1, 2018. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles and related income tax effects. Acquisition costs expensed by The Bank of $1.5 million and Fidelity of $227 thousand were estimated to have been incurred during the year ended June 30, 2019.

The pro forma information does not necessarily reflect the results of operations that would have occurred had the acquisition of Fidelity occurred on July 1, 2018. Expected cost savings are not reflected in the pro forma amounts.


	Pro Forma for the Year Ended
(Dollars in thousands)	June 30, 2020		June 30, 2019
Net interest income	$	17,352	$	17,478
Provision for loan losses		(695)		(105)
Non-interest income		1,672		1,915
Non-interest expense		(16,005)		(14,819)
Pre-tax income	$	2,324	$	4,469
Income tax expense		488		938
Net income	$	1,836	$	3,531
Earnings per share basic and diluted	$	0.13	$	0.24

Acquisition of Washington Savings Bank

On May 1, 2020, the Bank also completed its acquisition of Washington pursuant to the terms of the Agreement and Plan of Merger, dated as of December 5, 2019, by and between William Penn, MHC, the Company, the Bank and Washington (the “Washington Merger Agreement”). At the effective time of the merger, Washington was merged with and into the Bank, with the Bank as the surviving institution, and the depositors of Washington became depositors of the Bank, with the same rights and privileges in William Penn, MHC as if their accounts had been established at the Bank on the date established at Washington. As part of the transaction, pursuant to the terms of the Washington Merger Agreement, the Company issued 827,222 shares of its common stock to William Penn, MHC.

The acquisition of Washington increased the Company’s market share in southeastern Pennsylvania and provided the Company with four new branch locations. The results of Washington’s operations are included in the Company’s consolidated statements of income for the period beginning on May 1, 2020, the date of the acquisition, through June 30, 2021.

The acquisition of Washington was accounted for using the acquisition method of accounting for a mutual-to-mutual merger and, accordingly, assets acquired, liabilities assumed, and equity were recorded at their estimated fair values as of the acquisition date. The excess of the fair value of net assets acquired over the fair value of the equity acquired was recorded as a gain on bargain purchase in the amount of $133 thousand, which was recognized immediately as income in the Company’s consolidated statements of income. The gain on bargain purchase was primarily due to lower estimated discounted future cash flows used to calculate the estimated fair value of equity due to the uncertainty of the COVID-19 pandemic, as well as a decline in public peer bank stocks pricing used to estimate change of control premium fair values when estimating the fair value of equity due to the COVID-19 pandemic. The assets purchased and liabilities assumed in the merger were recorded at their estimated fair values at the time of closing, subject to refinement for up to one year after the closing date. There were no adjustments to the fair value measurements of assets or liabilities in fiscal 2021.

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


(Dollars in thousands)
Fair value of equity	$	9,165
Assets acquired:
Cash and due from financial institutions	$	21,981
Securities available for sale		1,996
Interest-bearing time deposits		100
Loans receivable, net		121,520
Premises and equipment		6,356
Regulatory stock		1,214
Deferred income taxes		2,154
Bank-owned life insurance		3,208
Core deposit intangible		197
Accrued interest receivable		413
Other assets		146
Total assets	$	159,285
Liabilities assumed:
Deposits	$	(135,546)
Advances from Federal Home Loan Bank		(11,281)
Accrued interest payable		(145)
Other liabilities		(3,015)
Total liabilities	$	(149,987)
Net assets acquired		9,298
Gain on bargain purchase	$	(133)

The following table details the loans that are accounted for in accordance with FASB ASC 310-30 as of May 1, 2020:


(Dollars in thousands)

Contractually required principal and interest at acquisition	$	420
Contractual cash flows not expected to be collected (nonaccretable difference)		230
Expected cash flows at acquisition		190
Interest component of expected cash flows (accretable discount)		27
Fair value of acquired loans accounted for under FASB ASC 310-30	$	163


(Dollars in thousands)

Contractually required principal at acquisition	$	125,491
Contractual cash flows not expected to be collected (credit mark)		2,440
Expected cash flows at acquisition		123,051
Interest rate discount mark		1,694
Fair value of acquired loans not accounted for under FASB ASC 310-30	$	121,357

In accordance with GAAP, there was no carryover of the allowance for loan losses that had been previously recorded by Washington.

In connection with the acquisition of Washington, the Company recorded a net deferred income tax asset of $2.2 million related to a net operating loss carryforward and other tax attributes of the acquired company, along with the tax effects of fair value adjustments resulting from applying the acquisition method of accounting.

The fair value of savings and transaction deposit accounts acquired from Washington provide value to the Company as a source of stable and low-cost funds. The fair value of the core deposit intangible (“CDI”) was determined based on a discounted cash flow analysis. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available to the Company. The life of the deposit base and projected deposit attrition rates were determined using industry historical deposit data. The CDI was valued at $197 thousand or 0.26% of acquired core deposits. The intangible asset is being amortized on an accelerated basis over ten years. Amortization for the years ended June 30, 2021 and 2020 was $35 thousand and $6 thousand, respectively.

Certificates of deposit accounts were valued by comparing the contractual cost of the portfolio to an alternative deposit portfolio bearing current market rates. The portfolio was segregated into pools based on remaining maturity. For each pool, the projected cash flows from maturing certificates were then calculated based on contractual rates and prevailing market rates. The valuation adjustment for each pool is equal to the present value of the difference of these two cash flows, discounted at the assumed market rate for a certificate with a corresponding maturity. This valuation adjustment was valued at $1.2 million and is being amortized in line with the expected cash flows driven by maturities of these deposits over the next five years. Amortization for the years ended June 30, 2021 and 2020 was $529 thousand and $116 thousand, respectively, recorded as a reduction to interest expense.

Borrowings from the FHLB of Pittsburgh were valued comparing the contractual cost of the borrowings to current market rates. The future cash flows for each borrowing was calculated based on contractual rates and prevailing market rates. The valuation adjustment for each borrowing is equal to the present value of the difference of these two cash flows, discounted at an assumed market rate for the borrowing. This valuation adjustment was valued at $281 thousand and is being amortized over the remaining life of the individual borrowings. Amortization for the years ended June 30, 2021 and 2020 was $15 thousand and $29 thousand, respectively, recorded as a reduction to interest expense.

The following table presents actual operating results attributable to Washington since the May 1, 2020 acquisition date through June 30, 2020. This information does not include purchase accounting adjustments or acquisition integration costs.


	Washington May 1, 2020
(Dollars in thousands)	to June 30, 2020

Net interest income	$	591
Non-interest income		67
Non-interest expense		(628)
Pre-tax income	$	30
Income tax expense		(6)
Net income	$	24

The following table presents unaudited pro forma information as if the acquisition of Washington had occurred on July 1, 2018. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles and related income tax effects. Acquisition costs expensed by The Bank of $1.8 million and Washington of $312 thousand were estimated to have been incurred during the year ended June 30, 2019.

The pro forma information does not necessarily reflect the results of operations that would have occurred had the acquisition of Washington occurred on July 1, 2018. Expected cost savings are not reflected in the pro forma amounts.


	Pro Forma for the Year Ended
(Dollars in thousands)	June 30, 2020		June 30, 2019
Net interest income	$	19,112	$	20,149
Provision for loan losses		(752)		(196)
Non-interest income		2,409		1,715
Non-interest expense		(17,392)		(18,223)
Pre-tax income	$	3,377	$	3,445
Income tax expense		709		723
Net income	$	2,668	$	2,722
Earnings per share basic and diluted	$	0.18	$	0.19