(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 $18,610,000 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		70,686
Goodwill		18,610
Core deposit intangible		4,940
Premises and equipment		1,496
Foreclosed assets		11
Deferred income taxes		621
Accrued interest receivable		989
Other assets		266
Total assets acquired		279,572
Liabilities assumed:
Deposits		209,981
Accrued interest payable		16
Other liabilities		2,602
Total liabilities assumed		212,599

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 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		70,686
Core deposit intangible		4,940
Premises and equipment		1,496
Foreclosed assets		11
Deferred income taxes		621
Accrued interest receivable		989
Other assets		266
Deposits		(209,981	)
Accrued interest payable		(16	)
Other liabilities		(2,602	)
		48,363
Goodwill	$	18,610

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 gross amortized cost basis of $70,686,000. 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		(1,078	)
Credit fair value adjustment on impaired loans		(646	)
Fair value of purchased loans at January 8, 2018	$	70,686

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	$	2,587
Contractual cash flows not expected to be collected (nonaccretable discount)		(1,010	)
Expected cash flows at acquisition		1,577
Interest component of expected cash flows (accretable discount)		(305	)
Fair value of acquired loans	$	1,272

The following table presents pro forma information as if the merger between Mid Penn 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 merged with Scottdale at the beginning of 2017. The supplemental pro forma earnings for 2018 reflect actual first quarter earnings, as the amount of Scottdale related income for eight days is immaterial, adjusted to exclude $1,273,000 of merger related costs incurred for the Scottdale acquisition. The results for the three months ended March 31, 2017 were adjusted to include the $1,273,000 of merger related costs. 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 March 31,
	2018		2017
Net interest income after loan loss provision	$	10,753	$	10,498
Noninterest income		1,647		1,585
Noninterest expense		9,910		10,346
Net income		2,054		1,268
Net income per common share		0.34		0.21