(2) Merger

On March 1, 2015, Mid Penn consummated the merger with Phoenix Bancorp, Inc. (“Phoenix”), a Pennsylvania corporation. Under the terms of a merger agreement between the parties, Phoenix merged with, and into Mid Penn, with Mid Penn continuing as the surviving entity. Simultaneously with the consummation of the foregoing merger, Miners Bank (“Miners”), a Pennsylvania-state chartered bank and wholly-owned subsidiary of Phoenix, merged with and into Mid Penn Bank, a Pennsylvania-state chartered bank and wholly-owned subsidiary of Mid Penn.

As part of this transaction, Phoenix shareholders received either 3.167 shares of Mid Penn’s common stock or $51.60 in cash in exchange for each share of Phoenix common stock. Holders of contingent rights issued by Phoenix received approximately 0.414 shares of Mid Penn’s common stock as settlement of such rights. As a result, Mid Penn issued 723,851 shares of common stock with an acquisition date fair value of approximately $11,292,000, based on Mid Penn’s closing stock price of $15.60 on February 27, 2015, and cash of $2,949,000. Including an insignificant amount of cash paid in lieu of fractional shares, the fair value of total consideration paid was $14,241,000.

Additionally, as part of this transaction, on March 1, 2015, Mid Penn assumed all of the liabilities and obligations of Phoenix with respect to 1,750 shares of Phoenix’s preferred stock issued to the United States Treasury (“Treasury”) in connection with the Small Business Lending Fund and issued 1,750 shares of Mid Penn’s Senior Non-Cumulative Perpetual Preferred Stock, Series C, having a $1,000 liquidation preference per share (the “SBLF Preferred Shares”), to the Treasury. The SBLF Preferred Shares qualify as Tier 1 Capital and have terms and conditions identical to those shares of preferred stock issued by Phoenix to the Treasury.

The assets and liabilities of Miners and Phoenix were recorded on the consolidated balance sheet at their estimated fair value as of March 1, 2015, and their results of operations have been included in the consolidated income statement since such date.

Included in the purchase price was goodwill and a core deposit intangible of $2,597,000 and $578,000, respectively. The core deposit intangible will be amortized over a ten-year period using a sum of the year’s digits basis. The goodwill will not be amortized, but will be measured annually for impairment or more frequently if circumstances require. Core deposit intangible amortization expense projected for the succeeding five years beginning 2015 is estimated to be $88,000, $96,000, $86,000, $75,000, and $65,000 per year, respectively, and $168,000 in total for years after 2019.

The allocation of the purchase price is as follows:


(Dollars in thousands)
Purchase price assigned to Phoenix common shares exchanged for 723,851 Mid Penn common shares	$	11,292
Purchase price assigned to Phoenix common shares exchanged for cash		2,949
Total purchase price		14,241
Phoenix net assets acquired:
Tangible Common Equity		12,292
Estimated adjustments to reflect assets acquired and liabilities assumed at fair value:
Total fair value adjustments		(982)
Associated deferred income taxes		334
Fair value adjustment to net assets acquired, net of tax		(648)
Total Phoenix net assets acquired		11,644
Goodwill resulting from the merger	$	2,597

While Mid Penn believes that the accounting for the merger is complete, ASC 805 allows for adjustments to goodwill for a period of up to one year after the merger date for information that becomes available that reflects circumstances at the merger date. The following table summarizes the estimated fair value of the assets acquired and liabilities and equity assumed.


(Dollars in thousands)
Total purchase price	$	14,241

Net assets acquired:
Cash and cash equivalents		11,067
Investment securities		11,331
Restricted stock		509
Loans		110,707
Bank owned life insurance		3,673
Premises and equipment		1,792
Accrued interest receivable		388
Core deposit and other intangibles		578
Other assets		933
Deposits		(123,238)
FHLB borrowings		(3,570)
Accrued interest payable		(32)
Other liabilities		(744)
Preferred stock		(1,750)
		11,644
Goodwill	$	2,597

The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $113,090,000. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired.


(Dollars in thousands)
Gross amortized cost basis at March 1, 2015	$	113,090
Market rate adjustment		222
Credit fair value adjustment on pools of homogeneous loans		(1,462)
Credit fair value adjustment on impaired loans		(1,143)
Fair value of purchased loans at March 1, 2015	$	110,707

The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the started rates of the acquired loans. The credit adjustment made on pools of homogeneous loans represents the changes in credit quality of the underlying borrowers from the loan inception to the acquisition date. The credit adjustment on impaired loans is derived in accordance with ASC 310-30-30 and represents the portion of the loan balance that has been deemed uncollectible based on our expectations of future cash flows for each respective loan.

The information about the acquired Phoenix impaired loan portfolio as of March 1, 2015 is as follows:


(Dollars in thousands)
Contractually required principal and interest at acquisition	$	3,548
Contractual cash flows not expected to be collected (nonaccretable discount)		(663)
Expected cash flows at acquisition		2,885
Interest component of expected cash flows (accretable discount)		(480)
Fair value of acquired loans	$	2,405

The following table presents pro forma information as if the merger between Mid Penn and Phoenix had been completed on January 1, 2014. The pro forma information does not necessarily reflect the results of operations that would have occurred had Mid Penn merged with Phoenix at the beginning of 2014. Supplemental pro forma earnings for 2015 were adjusted to exclude $909,000 of merger related costs incurred in the first three months of 2015; the results for the first three months of 2014 were adjusted to include these charges. The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies, or other factors.


(Dollars in thousands)	March 31, 2015		March 31, 2014
Net interest income after loan loss provision	$	7,374	$	7,050
Noninterest income		1,014		1,129
Noninterest expense		6,815		7,548
Net income available to common shareholders		1,276		543
Net income per common share		0.30		0.13

The amount of total revenue, consisting of interest income plus noninterest income, as well as the net income specifically related to Phoenix for the period beginning March 1, 2015, included in the consolidated statements of income of Mid Penn for the three months ended March 31, 2015, was $495,000 and $50,000, respectively.