(2) Merger

On March 1, 2015, Phoenix Bancorp, Inc. (“Phoenix”) merged with, and into, the Company, with the Company 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 the Bank.

As part of this transaction, Phoenix shareholders received either 3.167 shares of the Company’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 the Company’s common stock as settlement of such rights. As a result, the Company issued 723,851 shares of common stock with an acquisition date fair value of approximately $11,292,000, based on the closing stock price of the Company’s common stock on February 27, 2015 of $15.60, 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, the Company 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 the Company’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 $2,902,000 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		(1,456)
Associated deferred income taxes		503
Fair value adjustment to net assets acquired, net of tax		(953)
Total Phoenix net assets acquired		11,339
Goodwill resulting from the merger	$	2,902

While Mid Penn believes that the accounting for the merger is complete, Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, 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. Adjustments to certain amounts associated with the merger were made during the current quarter and were not considered significant. 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		11,044
Investment securities		11,331
Restricted stock		509
Loans		110,363
Bank owned life insurance		3,673
Premises and equipment		1,792
Accrued interest receivable		388
Core deposit and other intangibles		578
Other assets		1,127
Deposits		(123,238)
FHLB borrowings		(3,570)
Accrued interest payable		(32)
Other liabilities		(876)
Preferred stock		(1,750)
		11,339
Goodwill	$	2,902

The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $112,816,000. 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	$	112,816
Market rate adjustment		270
Credit fair value adjustment on pools of homogeneous loans		(1,461)
Credit fair value adjustment on impaired loans		(1,262)
Fair value of purchased loans at March 1, 2015	$	110,363

The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the stated 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)		(804)
Expected cash flows at acquisition		2,744
Interest component of expected cash flows (accretable discount)		(458)
Fair value of acquired loans	$	2,286

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 $784,000 of merger related costs incurred for the three and nine months ended September 30, 2015; the results for the first three and nine 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, except per share data)	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Net interest income after loan loss provision	$	7,924	$	7,439	$	23,484	$	22,257
Noninterest income		1,085		980		3,192		3,057
Noninterest expense		7,353		7,318		20,934		18,982
Net income available to common shareholders		1,251		1,568		4,403		4,812
Net income per common share		0.30		0.37		1.04		1.14

The amount of total revenue, consisting of interest income plus noninterest 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 and nine months ended September 30, 2015, was $1,329,000 and $3,157,000, respectively. 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 and nine months ended September 30, 2015, was $243,000 and $540,000, respectively.