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Merger | 6 Months Ended
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Jun. 30, 2018
Business Combinations [Abstract] |
Merger |
(2) | Merger
On January 8, 2018, The Scottdale Bank & Trust Company (“Scottdale”) merged with and into Mid Penn Bank, with Mid Penn Bank continuing as the surviving entity. Pursuant to the Merger Agreement, each share of Scottdale common stock issued and outstanding immediately prior to January 8, 2018 converted into the right to receive (i) $1,166 in cash without interest or (ii) 38.88 shares of Mid Penn common stock. As a result, Mid Penn issued 1,878,827 shares of Mid Penn common stock with an acquisition date fair value of approximately $64,181,000, based on the closing stock price of Mid Penn’s common stock on January 8, 2018 of $34.16, and cash of $2,792,000. Including an insignificant amount of cash paid in lieu of fractional shares, the fair value of total consideration paid was $66,973,000. The assets and liabilities of Scottdale were recorded on the consolidated balance sheet of the Company at their estimated fair value as of January 8, 2018, and their results of operations have been included in the consolidated income statement of the Company since such date. Scottdale has been fully integrated into Mid Penn, therefore the amount of revenue and earnings of Scottdale included in the consolidated income statement since the acquisition date is impracticable to provide. Included in the purchase price was goodwill of $19,189,000 and a core deposit intangible of $4,940,000. The core deposit intangible will be amortized over a ten-year period using a sum of the years’ 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 related to the Scottdale acquisition for the five years beginning 2018 through 2022 is estimated to be $898,000, $808,000, $719,000, $629,000, and $539,000 per year, respectively, and $1,347,000 in total for the five years after 2022. The allocation of the purchase price is as follows:
(Dollars in thousands) |  |
Assets acquired: |  |  |  |
Cash and cash equivalents |  | $ | 67,817 |
Investment securities |  |  | 114,039 |
Restricted stock |  |  | 97 |
Loans |  |  | 70,769 |
Goodwill |  |  | 19,189 |
Core deposit intangible |  |  | 4,940 |
Premises and equipment |  |  | 1,496 |
Foreclosed assets |  |  | 11 |
Deferred income taxes |  |  | 1,050 |
Accrued interest receivable |  |  | 989 |
Other assets |  |  | 266 |
Total assets acquired |  |  | 280,663 |
Liabilities assumed: |  |  |  |
Deposits |  |  | 209,981 |
Accrued interest payable |  |  | 16 |
Other liabilities |  |  | 3,693 |
Total liabilities assumed |  |  | 213,690 |
Consideration paid |  | $ | 66,973 |
Cash paid |  | $ | 2,792 |
Fair value of common stock issued |  |  | 64,181 |
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. The goodwill recorded related to the Scottdale acquisition was adjusted in the second quarter of 2018 by $579,000, primarily to reflect updated acquisition date deferred tax asset amounts as a substantial portion of the final tax return preparation for Scottdale was completed by June 30, 2018. The following table summarizes the preliminary estimated fair value of the assets acquired and liabilities and equity assumed.
(Dollars in thousands) |  |
Total purchase price |  | $ | 66,973 |
Net assets acquired: |  |  |  |
Cash and cash equivalents |  |  | 67,817 |
Investment securities |  |  | 114,039 |
Restricted stock |  |  | 97 |
Loans |  |  | 70,769 |
Core deposit intangible |  |  | 4,940 |
Premises and equipment |  |  | 1,496 |
Foreclosed assets |  |  | 11 |
Deferred income taxes |  |  | 1,050 |
Accrued interest receivable |  |  | 989 |
Other assets |  |  | 266 |
Deposits |  |  | (209,981 | )
Accrued interest payable |  |  | (16 | )
Other liabilities |  |  | (3,693 | )
|  |  | 47,784 |
Goodwill |  | $ | 19,189 |
In general, factors contributing to goodwill recognized as a result of the Scottdale acquisition include expected cost savings from combined operations, opportunities to expand into several new markets, and growth and profitability potential from the repositioning of short-term investments into higher-yielding loans. The goodwill acquired as a result of the Scottdale acquisition is not tax deductible. The fair value of the financial assets acquired included loans receivable with a net amortized cost basis of $70,769,000. 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 January 8, 2018 |  | $ | 71,809 |
Market rate adjustment |  |  | 601 |
Credit fair value adjustment on pools of homogeneous loans |  |  | (995 | )
Credit fair value adjustment on impaired loans |  |  | (646 | )
Fair value of purchased loans at January 8, 2018 |  | $ | 70,769 |
The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the contractual 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 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 Scottdale impaired loan portfolio as of January 8, 2018 is as follows:
(Dollars in thousands) |  |
Contractually required principal and interest at acquisition |  | $ | 2,586 |
Contractual cash flows not expected to be collected (nonaccretable discount) |  |  | (1,010 | )
Expected cash flows at acquisition |  |  | 1,576 |
Interest component of expected cash flows (accretable discount) |  |  | (305 | )
Fair value of acquired loans |  | $ | 1,271 |
The following table presents pro forma information as if the merger between Mid Penn Bank and Scottdale had been completed on January 1, 2017. The pro forma information does not necessarily reflect the results of operations that would have occurred had Mid Penn Bank merged with Scottdale at the beginning of 2017. The supplemental pro forma earnings for six months ended June 30, 2018 exclude both (i) adjustments to estimate the eight day impact of Scottdale due to immateriality and impracticality and (ii) $1,262,000 of merger related costs incurred in 2018 related to the Scottdale acquisition, which included approximately $518,000 of severance and retention bonus expenses. The results for the six months ended June 30, 2017 were adjusted to include $1,262,000 of merger related costs which would have been incurred if the merger had been completed January 1, 2017. 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 June 30, |  |  | Six Months Ended June 30, |
|  | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |
Net interest income after loan loss provision |  | $ | 11,414 |  |  | $ | 10,883 |  |  | $ | 22,167 |  |  | $ | 1,448 |
Noninterest income |  |  | 1,559 |  |  |  | 1,486 |  |  |  | 3,206 |  |  |  | 1,585 |
Noninterest expense |  |  | 9,753 |  |  |  | 10,275 |  |  |  | 19,663 |  |  |  | 2,544 |
Net income |  |  | 2,768 |  |  |  | 1,529 |  |  |  | 4,831 |  |  |  | 357 |
Net income per common share |  |  | 0.45 |  |  |  | 0.25 |  |  |  | 0.79 |  |  |  | 0.06 |

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
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