mpb-10q_20180630.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number 1-13677

MID PENN BANCORP, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Pennsylvania

 

25-1666413

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

 

349 Union Street

Millersburg, Pennsylvania

 

17061

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code 1.866.642.7736

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One).

 

Large accelerated filer  

Accelerated filer  

Non-accelerated filer  

Smaller reporting company  

Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

 

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

As of August 7, 2018, the registrant had 8,450,893 shares of common stock outstanding.

 

 

 


MID PENN BANCORP, INC.

 

FORM 10-Q

TABLE OF CONTENTS

 

PART 1 – FINANCIAL INFORMATION

2

 

 

 

 

Item 1 – Financial Statements

2

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 (Unaudited)

2

 

 

 

 

 

 

Consolidated Statements of Income for the Three and  Six Months Ended June 30, 2018 and June 30, 2017 (Unaudited)

3

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and  Six Months Ended June 30, 2018 and June 30, 2017 (Unaudited)

4

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2018 and June 30, 2017 (Unaudited)

5

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and June 30, 2017 (Unaudited)

6

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

8

 

 

 

 

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

38

 

 

 

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

55

 

 

 

 

Item 4 – Controls and Procedures

55

 

 

PART II – OTHER INFORMATION

56

 

 

 

 

Item 1 – Legal Proceedings

56

 

 

 

 

Item 1A – Risk Factors

56

 

 

 

 

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

57

 

 

 

 

Item 3 – Defaults upon Senior Securities

57

 

 

 

 

Item 4 – Mine Safety Disclosures

57

 

 

 

 

Item 5 – Other Information

57

 

 

 

 

Item 6 – Exhibits

57

 

 

 

 

Signatures

58

 

Unless the context otherwise requires, the terms “Mid Penn”, “we”, “us”, and “our” refer to Mid Penn Bancorp, Inc. and its consolidated subsidiaries.

 

1


 

MID PENN BANCORP, INC.

 

 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

(Dollars in thousands, except share data)

 

June 30, 2018

 

 

December 31, 2017

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

25,436

 

 

$

19,795

 

Interest-bearing balances with other financial institutions

 

 

4,775

 

 

 

3,028

 

Federal funds sold

 

 

9,196

 

 

 

691

 

Total cash and cash equivalents

 

 

39,407

 

 

 

23,514

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale, at fair value

 

 

111,691

 

 

 

93,465

 

Investment securities held to maturity, at amortized cost (fair value $150,016 and $100,483)

 

 

153,321

 

 

 

101,356

 

Loans held for sale

 

 

1,185

 

 

 

1,040

 

Loans and leases, net of unearned interest

 

 

1,036,479

 

 

 

910,404

 

Less:  Allowance for loan and lease losses

 

 

(8,189

)

 

 

(7,606

)

Net loans and leases

 

 

1,028,290

 

 

 

902,798

 

 

 

 

 

 

 

 

 

 

Bank premises and equipment, net

 

 

23,905

 

 

 

16,168

 

Cash surrender value of life insurance

 

 

13,171

 

 

 

13,042

 

Restricted investment in bank stocks

 

 

2,765

 

 

 

4,384

 

Foreclosed assets held for sale

 

 

912

 

 

 

189

 

Accrued interest receivable

 

 

5,372

 

 

 

4,564

 

Deferred income taxes

 

 

2,540

 

 

 

1,888

 

Goodwill

 

 

23,107

 

 

 

3,918

 

Core deposit and other intangibles, net

 

 

4,878

 

 

 

434

 

Other assets

 

 

5,103

 

 

 

3,594

 

Total Assets

 

$

1,415,647

 

 

$

1,170,354

 

 

 

 

 

 

 

 

 

 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$

207,013

 

 

$

163,714

 

Interest-bearing demand

 

 

349,109

 

 

 

349,241

 

Money Market

 

 

273,215

 

 

 

246,220

 

Savings

 

 

171,845

 

 

 

62,770

 

Time

 

 

235,336

 

 

 

201,623

 

Total Deposits

 

 

1,236,518

 

 

 

1,023,568

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

 

 

 

 

34,611

 

Long-term debt

 

 

12,241

 

 

 

12,352

 

Subordinated debt

 

 

17,342

 

 

 

17,338

 

Accrued interest payable

 

 

1,186

 

 

 

645

 

Other liabilities

 

 

6,585

 

 

 

6,137

 

Total Liabilities

 

 

1,273,872

 

 

 

1,094,651

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity:

 

 

 

 

 

 

 

 

Common stock, par value $1.00; authorized 10,000,000 shares; 6,124,517 and 4,246,216

 

 

 

 

 

 

 

 

shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively

 

 

6,125

 

 

 

4,242

 

Additional paid-in capital

 

 

103,498

 

 

 

40,970

 

Retained earnings

 

 

35,386

 

 

 

32,565

 

Accumulated other comprehensive loss

 

 

(3,234

)

 

 

(2,074

)

Total Shareholders’ Equity

 

 

141,775

 

 

 

75,703

 

Total Liabilities and Shareholders' Equity

 

$

1,415,647

 

 

$

1,170,354

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

2


 

MID PENN BANCORP, INC.

 

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

2018

 

 

 

2017

 

 

 

2018

 

 

 

2017

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans and leases

 

$

12,073

 

 

$

9,949

 

 

$

23,410

 

 

$

19,651

 

Interest on interest-bearing balances

 

 

17

 

 

 

5

 

 

 

26

 

 

 

7

 

Interest on federal funds sold

 

 

153

 

 

 

23

 

 

 

321

 

 

 

74

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and government agencies

 

 

884

 

 

 

574

 

 

 

1,636

 

 

 

1,019

 

State and political subdivision obligations, tax-exempt

 

 

517

 

 

 

264

 

 

 

1,059

 

 

 

580

 

Other securities

 

 

76

 

 

 

64

 

 

 

248

 

 

 

107

 

Total Interest Income

 

 

13,720

 

 

 

10,879

 

 

 

26,700

 

 

 

21,438

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

1,997

 

 

 

1,277

 

 

 

3,777

 

 

 

2,481

 

Interest on short-term borrowings

 

 

 

 

 

13

 

 

 

12

 

 

 

13

 

Interest on long-term and subordinated debt

 

 

309

 

 

 

179

 

 

 

619

 

 

 

359

 

Total Interest Expense

 

 

2,306

 

 

 

1,469

 

 

 

4,408

 

 

 

2,853

 

Net Interest Income

 

 

11,414

 

 

 

9,410

 

 

 

22,292

 

 

 

18,585

 

PROVISION FOR LOAN AND LEASE LOSSES

 

 

 

 

 

100

 

 

 

125

 

 

 

225

 

Net Interest Income After Provision for Loan and Lease Losses

 

 

11,414

 

 

 

9,310

 

 

 

22,167

 

 

 

18,360

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from fiduciary activities

 

 

286

 

 

 

200

 

 

 

526

 

 

 

396

 

Service charges on deposits

 

 

222

 

 

 

174

 

 

 

425

 

 

 

379

 

Net gain on sales of investment securities

 

 

4

 

 

 

12

 

 

 

102

 

 

 

20

 

Earnings from cash surrender value of life insurance

 

 

65

 

 

 

66

 

 

 

129

 

 

 

131

 

Mortgage banking income

 

 

205

 

 

 

225

 

 

 

361

 

 

 

416

 

ATM debit card interchange income

 

 

326

 

 

 

232

 

 

 

591

 

 

 

456

 

Merchant services income

 

 

93

 

 

 

92

 

 

 

171

 

 

 

166

 

Net gain on sales of SBA loans

 

 

152

 

 

 

157

 

 

 

409

 

 

 

441

 

Other income

 

 

206

 

 

 

204

 

 

 

492

 

 

 

393

 

Total Noninterest Income

 

 

1,559

 

 

 

1,362

 

 

 

3,206

 

 

 

2,798

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,542

 

 

 

4,159

 

 

 

9,606

 

 

 

8,389

 

Occupancy expense, net

 

 

870

 

 

 

593

 

 

 

1,667

 

 

 

1,241

 

Equipment expense

 

 

544

 

 

 

370

 

 

 

952

 

 

 

751

 

Pennsylvania bank shares tax expense

 

 

171

 

 

 

160

 

 

 

342

 

 

 

330

 

FDIC Assessment

 

 

93

 

 

 

194

 

 

 

321

 

 

 

388

 

Legal and professional fees

 

 

256

 

 

 

189

 

 

 

480

 

 

 

366

 

Marketing and advertising expense

 

 

230

 

 

 

131

 

 

 

419

 

 

 

238

 

Software licensing

 

 

512

 

 

 

370

 

 

 

1,026

 

 

 

699

 

Telephone expense

 

 

156

 

 

 

133

 

 

 

303

 

 

 

259

 

Loss on sale or write-down of foreclosed assets

 

 

1

 

 

 

6

 

 

 

3

 

 

 

88

 

Intangible amortization

 

 

248

 

 

 

24

 

 

 

496

 

 

 

53

 

Merger and acquisition expense

 

 

222

 

 

 

14

 

 

 

1,916

 

 

 

224

 

Other expenses

 

 

1,897

 

 

 

1,215

 

 

 

3,394

 

 

 

2,334

 

Total Noninterest Expense

 

 

9,742

 

 

 

7,558

 

 

 

20,925

 

 

 

15,360

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

 

3,231

 

 

 

3,114

 

 

 

4,448

 

 

 

5,798

 

Provision for income taxes

 

 

452

 

 

 

769

 

 

 

665

 

 

 

1,459

 

NET INCOME

 

$

2,779

 

 

$

2,345

 

 

$

3,783

 

 

$

4,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PER COMMON SHARE DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings Per Common Share

 

$

0.45

 

 

$

0.55

 

 

$

0.63

 

 

$

1.02

 

Cash Dividends Paid

 

$

0.15

 

 

$

0.13

 

 

$

0.40

 

 

$

0.36

 

 

The accompanying notes are an integral part of these consolidated financial statements. 

3


 

MID PENN BANCORP, INC.

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 

(Dollars in thousands)

 

Three Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Net income

 

$

2,779

 

 

$

2,345

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized losses arising during the period on available-for-sale

 

 

 

 

 

 

 

 

securities, net of income taxes of ($88) and $763, respectively

 

 

(333

)

 

 

1,480

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for net gain on sales of available-for-sale securities

 

 

 

 

 

 

 

 

included in net income, net of income taxes of ($1) and ($4), respectively  (a)

 

 

(3

)

 

 

(8

)

 

 

 

 

 

 

 

 

 

Change in defined benefit plans, net of income taxes of $277 and ($1), respectively  (b)

 

 

1,043

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

 

707

 

 

 

1,471

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

3,486

 

 

$

3,816

 

 

(Dollars in thousands)

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,783

 

 

$

4,339

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains arising during the period on available-for-sale

 

 

 

 

 

 

 

 

securities, net of income tax impact of ($564) and $958, respectively

 

 

(2,156

)

 

 

1,859

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for net gain on sales of available-for-sale securities

 

 

 

 

 

 

 

 

included in net income, net of income tax impact of $(21) and $(7), respectively  (a)

 

 

(81

)

 

 

(13

)

 

 

 

 

 

 

 

 

 

Change in defined benefit plans, net of income tax impact of $277 and ($2), respectively  (b)

 

 

1,042

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

 

(1,195

)

 

 

1,842

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

2,588

 

 

$

6,181

 

 

 

(a)

Amounts are included in net gain on sales of investment securities on the Consolidated Statements of Income as a separate element within total noninterest income.

 

(b)

Amounts are included in the computation of net periodic benefit cost and are included in salaries and employee benefits on the Consolidated Statements of Income as a separate element within total noninterest expense.

The accompanying notes are an integral part of these consolidated financial statements.

 

 

4


 

 

 

 

MID PENN BANCORP, INC.

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

 

For the Six Months Ended June 30, 2018 and 2017

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Shareholders'

 

 

 

Stock

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Equity

 

Balance, January 1, 2018

 

$

4,242

 

 

$

40,970

 

 

$

32,565

 

 

$

(2,074

)

 

$

75,703

 

Impact of adoption of new accounting standard (a)

 

 

 

 

 

 

 

 

(44

)

 

 

35

 

 

 

(9

)

Balance at January 1, 2018, adjusted

 

 

4,242

 

 

 

40,970

 

 

 

32,521

 

 

 

(2,039

)

 

 

75,694

 

Net income

 

 

 

 

 

 

 

 

3,783

 

 

 

 

 

 

3,783

 

Total other comprehensive loss, net of taxes

 

 

 

 

 

 

 

 

 

 

 

(1,195

)

 

 

(1,195

)

Common stock issued to Scottdale shareholders

(1,878,827 shares) (b)

 

 

1,879

 

 

 

62,302

 

 

 

 

 

 

 

 

 

64,181

 

Employee Stock Purchase Plan (1,655 shares)

 

 

2

 

 

 

54

 

 

 

 

 

 

 

 

 

56

 

Director Stock Purchase Plan (1,819 shares)

 

 

2

 

 

 

59

 

 

 

 

 

 

 

 

 

61

 

Common stock dividends declared

 

 

 

 

 

 

 

 

(918

)

 

 

 

 

 

(918

)

Restricted stock activity

 

 

 

 

 

113

 

 

 

 

 

 

 

 

 

113

 

Balance, June 30, 2018

 

$

6,125

 

 

$

103,498

 

 

$

35,386

 

 

$

(3,234

)

 

$

141,775

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2017

 

$

4,233

 

 

$

40,688

 

 

$

28,399

 

 

$

(2,853

)

 

$

70,467

 

Net income

 

 

 

 

 

 

 

 

4,339

 

 

 

 

 

 

4,339

 

Total other comprehensive income, net of taxes

 

 

 

 

 

 

 

 

 

 

 

1,842

 

 

 

1,842

 

Employee Stock Purchase Plan (1,940 shares)

 

 

2

 

 

 

50

 

 

 

 

 

 

 

 

 

52

 

Common stock dividends declared

 

 

 

 

 

 

 

 

(1,101

)

 

 

 

 

 

(1,101

)

Restricted stock activity

 

 

 

 

 

37

 

 

 

 

 

 

 

 

 

37

 

Balance, June 30, 2017

 

$

4,235

 

 

$

40,775

 

 

$

31,637

 

 

$

(1,011

)

 

$

75,636

 

 

 

(a)

Represents the impact of adopting Accounting Standard Update ASU 2016-01. See Note 3 to the consolidated financial statements for more information.

 

(b)

Shares issued on January 8, 2018 as a result of the acquisition of The Scottdale Bank & Trust Company (“Scottdale”).  See Note 2 to the consolidated financial statements for more information.

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

5


MID PENN BANCORP, INC.

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

(Dollars in thousands)

 

Six Months Ended June 30,

 

 

 

 

2018

 

 

 

2017

 

Operating Activities:

 

 

 

 

 

 

 

 

Net Income

 

$

3,783

 

 

$

4,339

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Provision for loan and lease losses

 

 

125

 

 

 

225

 

Depreciation

 

 

1,000

 

 

 

715

 

Amortization of intangibles

 

 

496

 

 

 

53

 

Net amortization (accretion) of security discounts/premiums

 

 

451

 

 

 

(742

)

Gain on sales of investment securities

 

 

(102

)

 

 

(20

)

Earnings on cash surrender value of life insurance

 

 

(129

)

 

 

(131

)

Mortgage loans originated for sale

 

 

(22,596

)

 

 

(23,234

)

Proceeds from sales of mortgage loans originated for sale

 

 

22,812

 

 

 

23,240

 

Gain on sale of mortgage loans

 

 

(361

)

 

 

(416

)

SBA loans originated for sale

 

 

(5,056

)

 

 

(5,605

)

Proceeds from sales of SBA loans originated for sale

 

 

5,465

 

 

 

6,046

 

Gain on sale of SBA loans

 

 

(409

)

 

 

(441

)

Loss on disposal of property, plant, and equipment

 

 

64

 

 

 

26

 

Loss on sale or write-down of foreclosed assets

 

 

3

 

 

 

88

 

Stock compensation expense

 

 

113

 

 

 

37

 

Deferred income tax benefit (expense)

 

 

1,981

 

 

 

(65

)

Decrease (increase) in accrued interest receivable

 

 

181

 

 

 

(63

)

Increase in other assets

 

 

(1,242

)

 

 

(193

)

Increase in accrued interest payable

 

 

525

 

 

 

273

 

(Decrease) increase in other liabilities

 

 

(2,186

)

 

 

381

 

Net Cash Provided By Operating Activities

 

 

4,918

 

 

 

4,513

 

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

 

 

Proceeds from the sale of available-for-sale securities

 

 

102,816

 

 

 

37,667

 

Proceeds from the maturity or call of available-for-sale securities

 

 

5,654

 

 

 

3,579

 

Purchases of available-for-sale securities

 

 

(21,533

)

 

 

(13,827

)

Proceeds from the maturity or call of held-to-maturity securities

 

 

11,625

 

 

 

 

Purchases of held-to-maturity securities

 

 

(57,850

)

 

 

(72,684

)

Net cash received from acquisition

 

 

65,025

 

 

 

 

Redemptions (purchases) of restricted investment in bank stock

 

 

1,716

 

 

 

(1,542

)

Net increase in loans and leases

 

 

(55,732

)

 

 

(48,078

)

Proceeds from the sale of bank premises and equipment held for sale

 

 

 

 

 

2,201

 

Purchases of bank premises and equipment

 

 

(7,305

)

 

 

(1,164

)

Proceeds from the sale of foreclosed assets

 

 

169

 

 

 

136

 

Net Cash Provided by (Used In) Investing Activities

 

 

44,585

 

 

 

(93,712

)

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

 

 

Net increase in deposits

 

 

2,969

 

 

 

52,095

 

Net (decrease) increase in short-term borrowings

 

 

(34,611

)

 

 

21,468

 

Common stock dividends paid

 

 

(1,978

)

 

 

(1,101

)

Employee Stock Purchase Plan

 

 

56

 

 

 

52

 

Director Stock Purchase Plan

 

 

61

 

 

 

 

Long-term debt repayment

 

 

(107

)

 

 

(109

)

Net Cash (Used In) Provided By Financing Activities

 

 

(33,610

)

 

 

72,405

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

15,893

 

 

 

(16,794

)

Cash and cash equivalents, beginning of period

 

 

23,514

 

 

 

45,973

 

Cash and cash equivalents, end of period

 

$

39,407

 

 

$

29,179

 

 

 

6


MID PENN BANCORP, INC.

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)

 

 

(Dollars in thousands)

 

Six Months Ended June 30,

 

 

 

 

2018

 

 

 

2017

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest paid

 

$

3,867

 

 

$

2,580

 

Income taxes paid

 

$

1,425

 

 

$

2,190

 

 

 

 

 

 

 

 

 

 

Supplemental Noncash Disclosures:

 

 

 

 

 

 

 

 

Loan transfers to foreclosed assets held for sale

 

$

884

 

 

$

 

 

Assets, Liabilities, and Equity in Connection with Merger:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Six Months Ended June 30,

 

 

 

 

2018

 

 

 

2017

 

Assets Acquired:

 

 

 

 

 

 

 

 

Securities

 

$

114,039

 

 

$

 

Loans

 

 

70,769

 

 

 

 

Restricted stock

 

 

97

 

 

 

 

Property and equipment

 

 

1,496

 

 

 

 

Foreclosed assets

 

 

11

 

 

 

 

Deferred income taxes

 

 

1,050

 

 

 

 

Accrued interest receivable

 

 

989

 

 

 

 

Core deposit intangible

 

 

4,940

 

 

 

 

Other assets

 

 

266

 

 

 

 

 

 

$

193,657

 

 

$

 

 

 

 

 

 

 

 

 

 

Liabilities Assumed:

 

 

 

 

 

 

 

 

Deposits

 

$

209,981

 

 

$

 

Accrued interest payable

 

 

16

 

 

 

 

Other liabilities

 

 

3,693

 

 

 

 

 

 

$

213,690

 

 

$

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 


7


MID PENN BANCORP, INC.

 

 

 

(1)

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Mid Penn Bancorp, Inc. (the “Company”) and its wholly-owned subsidiary, Mid Penn Bank (the “Bank”). All material intercompany accounts and transactions have been eliminated in consolidation.

Certain information and disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Mid Penn believes the information presented is not misleading and the disclosures are adequate.  For comparative purposes, the June 30, 2017 and December 31, 2017 balances have been reclassified, when, and if necessary, to conform to the 2018 presentation.  Such reclassifications had no impact on net income. The results of operations for interim periods are not necessarily indicative of operating results expected for the full year.  In the opinion of management, all adjustments necessary for fair presentation of the periods presented have been reflected in the accompanying consolidated financial statements.  All such adjustments are of a normal, recurring nature.  These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.  

On January 8, 2018, Mid Penn completed its acquisition of The Scottdale Bank & Trust Company (“Scottdale”), a Pennsylvania bank and trust company, through the merger of Scottdale with and into Mid Penn Bank pursuant to the previously announced Agreement and Plan of Merger, dated as of March 29, 2017, among Mid Penn, Mid Penn Bank and Scottdale.  Refer to Note 2, Merger, as well as the Company’s Current Report on Form 8-K filed on January 8, 2018, for more information. The comparability of the financial condition and results of operations as of and for the three and six months ended June 30, 2018 and 2017, in general, have been impacted by the acquisition of Scottdale.  

On January 16, 2018, Mid Penn entered into an Agreement and Plan of Merger with First Priority Financial Corp. (“First Priority”) pursuant to which First Priority would merge with and into Mid Penn (the “Merger”), with Mid Penn being the surviving corporation in the Merger. On July 31, 2018, Mid Penn completed its acquisition of First Priority. Refer to Note 14, Subsequent Events, as well as the Company’s Current Report on Form 8-K filed on August 1, 2018, for more information.

Mid Penn has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2018, for items that should potentially be recognized or disclosed in these consolidated financial statements.  The evaluation was conducted through the date these consolidated financial statements were issued.

 

 

(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.

 


8


MID PENN BANCORP, INC.

 

 

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.

 


9


MID PENN BANCORP, INC.

 

 

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

 

 

(3)

Investment Securities

Securities to be held for indefinite periods, but not intended to be held to maturity, are classified as available-for-sale and carried at fair value.  Securities held for indefinite periods include securities that management intends to use as part of its asset and liability management strategy and that may be sold in response to liquidity needs, changes in interest rates, resultant prepayment risk, pledging requirements, and other factors related to effective portfolio management.  Securities to be held to maturity are carried at amortized cost.

For available-for-sale debt securities, realized gains and losses on dispositions are based on the net proceeds and the amortized cost of the securities sold, using the specific identification method.  Unrealized gains and losses on debt securities are based on the difference between the amortized cost and fair value of each security as of the respective reporting date. Unrealized gains and losses are credited or charged to other comprehensive income, whereas realized gains and losses flow through Mid Penn’s consolidated statements of income for the respective period.


10


MID PENN BANCORP, INC.

 

 

ASC Topic 320, Investments – Debt and Equity Securities, clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired.  For debt securities, management must assess, in addition to the credit condition of the underlying issuer, whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery.  These steps are done before assessing whether the entity will recover the cost basis of the investment.

In instances when a determination is made that other-than-temporary impairment exists but the investor does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, this guidance changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment related to all other factors.  The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings.  The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

Mid Penn had no securities considered by management to be other-than-temporarily impaired as of June 30, 2018,  December 31, 2017, or June 30, 2017, and did not record any securities impairment charges in the respective periods ended on these dates.  Mid Penn does not consider the securities with unrealized losses on the respective dates to be other-than-temporarily impaired as the unrealized losses were deemed to relate to changes in interest rates, and not erosion of credit quality.

 

Beginning January 1, 2018, upon adoption of ASU 2016-01, equity securities with readily determinable fair values are stated at fair value within other assets on the balance sheet, with realized and unrealized gains and losses reported in other expense on the income statement. For periods prior to January 1, 2018, equity securities were classified as available-for-sale and stated at fair value within investment securities available-for-sale on the balance sheet, with unrealized gains and losses reported as a separate component of accumulated other comprehensive loss, net of tax. Equity securities without readily determinable fair values are recorded at cost less any impairment.

The amortized cost, fair value, and unrealized gains and losses on investment securities at June 30, 2018 and December 31, 2017 are as follows:

 

(Dollars in thousands)

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government agencies

 

$

40,597

 

 

$

 

 

$

2,257

 

 

$

38,340

 

Mortgage-backed U.S. government agencies

 

 

43,713

 

 

 

1

 

 

 

1,288

 

 

 

42,426

 

State and political subdivision obligations

 

 

31,551

 

 

 

3

 

 

 

1,980

 

 

 

29,574

 

Corporate debt securities

 

 

1,350

 

 

 

1

 

 

 

 

 

 

1,351

 

Total available-for-sale debt securities

 

 

117,211

 

 

 

5

 

 

 

5,525

 

 

 

111,691

 

Held-to-maturity debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government agencies

 

 

10,985

 

 

 

 

 

 

201

 

 

 

10,784

 

Mortgage-backed U.S. government agencies

 

 

66,512

 

 

 

4

 

 

 

1,649

 

 

 

64,867

 

State and political subdivision obligations

 

 

75,824

 

 

 

57

 

 

 

1,516

 

 

 

74,365

 

Total held-to-maturity debt securities

 

 

153,321

 

 

 

61

 

 

 

3,366

 

 

 

150,016

 

Total

 

$

270,532

 

 

$

66

 

 

$

8,891

 

 

$

261,707

 

 

(Dollars in thousands)

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government agencies

 

$

40,125

 

 

$

 

 

$

1,395

 

 

$

38,730

 

Mortgage-backed U.S. government agencies

 

 

26,398

 

 

 

2

 

 

 

569

 

 

 

25,831

 

State and political subdivision obligations

 

 

27,775

 

 

 

7

 

 

 

739

 

 

 

27,043

 

Corporate debt securities

 

 

1,350

 

 

 

5

 

 

 

 

 

 

1,355

 

Total available-for-sale debt securities

 

 

95,648

 

 

 

14

 

 

 

2,703

 

 

 

92,959

 

Available-for-sale equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

550

 

 

 

 

 

 

44

 

 

 

506

 

Total available-for-sale equity securities

 

 

550

 

 

 

 

 

 

44

 

 

 

506

 

Held-to-maturity debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government agencies

 

 

10,984

 

 

 

 

 

 

90

 

 

 

10,894

 

Mortgage-backed U.S. government agencies

 

 

53,472

 

 

 

 

 

 

523

 

 

 

52,949

 

State and political subdivision obligations

 

 

36,900

 

 

 

41

 

 

 

301

 

 

 

36,640

 

Total held-to-maturity debt securities

 

 

101,356

 

 

 

41

 

 

 

914

 

 

 

100,483

 

Total

 

$

197,554

 

 

$

55

 

 

$

3,661

 

 

$

193,948

 

11


MID PENN BANCORP, INC.

 

 

 

Estimated fair values of debt securities are based on quoted market prices, where applicable.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments, adjusted for differences between the quoted instruments and the instruments being valued.  Please refer to Note 5, Fair Value Measurement, for more information on the fair value of investment securities.

 

Equity securities consist of Community Reinvestment Act funds and, as of June 30, 2018 and December 31, 2017, Mid Penn had $492,000 and $506,000, respectively, in equity securities recorded at fair value. Prior to January 1, 2018, equity securities were stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive loss, net of tax.  At December 31, 2017, net unrealized gains of $44,000 had been recognized in accumulated other comprehensive loss. On January 1, 2018, with the adoption of ASU 2016-01, these unrealized gains and losses were reclassified out of accumulated other comprehensive loss and into retained earnings and subsequent changes in fair value are now recognized in net income and the fair value of securities is presented in other assets.  No equity securities were sold during the three and six months ended June 30, 2018.

Investment securities having a fair value of $158,363,000 at June 30, 2018 and $141,465,000 at December 31, 2017 were pledged to secure public deposits, some trust account holdings, and certain other borrowings.

Gross realized gains and losses on sales of available-for-sale debt securities for the three and six months ended June 30, 2018 and 2017 are shown in the table below.

 

(Dollars in thousands)

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Realized gains

 

$

11

 

 

 

$

77

 

 

 

$

111

 

 

$

200

 

Realized losses

 

 

(7

)

 

 

 

(65

)

 

 

 

(9

)

 

 

(180

)

Net gains

 

$

4

 

 

 

$

12

 

 

 

$

102

 

 

$

20

 

The following tables present gross unrealized losses and fair value of debt security investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2018 and December 31, 2017.

 

(Dollars in thousands)

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

 

 

Number

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

 

of

 

Fair

 

 

Unrealized

 

 

of

 

Fair

 

 

Unrealized

 

 

of

 

Fair

 

 

Unrealized

 

June 30, 2018

 

Securities

 

Value

 

 

Losses

 

 

Securities

 

Value

 

 

Losses

 

 

Securities

 

Value

 

 

Losses

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government agencies

 

3

 

$

4,453

 

 

$

231

 

 

19

 

$

33,887

 

 

$

2,026

 

 

22

 

$

38,340

 

 

$

2,257

 

Mortgage-backed U.S. government agencies

 

15

 

 

23,474

 

 

 

407

 

 

15

 

 

18,916

 

 

 

881

 

 

30

 

 

42,390

 

 

 

1,288

 

State and political subdivision obligations

 

15

 

 

8,094

 

 

 

356

 

 

41

 

 

18,486

 

 

 

1,624

 

 

56

 

 

26,580

 

 

 

1,980

 

Total temporarily impaired available-for-sale debt securities

 

33

 

 

36,021

 

 

 

994

 

 

75

 

 

71,289

 

 

 

4,531

 

 

108

 

 

107,310

 

 

 

5,525

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government agencies

 

3

 

 

8,793

 

 

 

191

 

 

1

 

 

1,991

 

 

 

10

 

 

4

 

 

10,784

 

 

 

201

 

Mortgage-backed U.S. government agencies

 

37

 

 

54,276

 

 

 

1,324

 

 

7

 

 

8,825

 

 

 

325

 

 

44

 

 

63,101

 

 

 

1,649

 

State and political subdivision obligations

 

134

 

 

53,362

 

 

 

1,461

 

 

3

 

 

1,486

 

 

 

55

 

 

137

 

 

54,848

 

 

 

1,516

 

Total temporarily impaired held-to-maturity debt securities

 

174

 

 

116,431

 

 

 

2,976

 

 

11

 

 

12,302

 

 

 

390

 

 

185

 

 

128,733

 

 

 

3,366

 

Total

 

207

 

$

152,452

 

 

$

3,970

 

 

86

 

$

83,591

 

 

$

4,921

 

 

293

 

$

236,043

 

 

$

8,891

 

 

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MID PENN BANCORP, INC.

 

 

(Dollars in thousands)

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

 

 

Number

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

 

of

 

Fair

 

 

Unrealized

 

 

of

 

Fair

 

Unrealized

 

 

of

 

Fair

 

 

Unrealized

 

December 31, 2017

 

Securities

 

Value

 

 

Losses

 

 

Securities

 

Value

 

Losses

 

 

Securities

 

Value

 

 

Losses

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government agencies

 

3

 

$

5,008

 

 

$

184

 

 

18

 

$

33,722

 

 

$

1,211

 

 

21

 

$

38,730

 

 

$

1,395

 

Mortgage-backed U.S. government agencies

 

4

 

 

5,267

 

 

 

75

 

 

15

 

 

20,497

 

 

 

494

 

 

19

 

 

25,764

 

 

 

569

 

State and political subdivision obligations

 

11

 

 

6,144

 

 

 

102

 

 

40

 

 

19,091

 

 

 

637

 

 

51

 

 

25,235

 

 

 

739

 

Equity securities

 

0

 

 

 

 

 

 

 

1

 

 

506

 

 

 

44

 

 

1

 

 

506

 

 

 

44

 

Total temporarily impaired available-for-sale securities

 

18

 

$

16,419

 

 

$

361

 

 

74

 

$

73,816

 

 

$

2,386

 

 

92

 

$

90,235

 

 

$

2,747

 

Held-to-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government agencies

 

0

 

 

 

 

 

 

 

4

 

 

10,894

 

 

 

90

 

 

4

 

 

10,894

 

 

 

90

 

Mortgage-backed U.S. government agencies

 

0

 

 

 

 

 

 

 

35

 

 

52,949

 

 

 

523

 

 

35

 

 

52,949

 

 

 

523

 

State and political subdivision obligations

 

0

 

 

 

 

 

 

 

77

 

 

29,976

 

 

 

301

 

 

77

 

 

29,976

 

 

 

301

 

Total temporarily impaired held to maturity securities

 

0

 

 

 

 

 

 

 

116

 

 

93,819

 

 

 

914

 

 

116

 

 

93,819

 

 

 

914

 

Total

 

18

 

$

16,419

 

 

$

361

 

 

190

 

$

167,635

 

 

$

3,300

 

 

208

 

$

184,054

 

 

$

3,661

 

 

Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such additional evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than amortized cost and the financial condition and near term prospects of the issuer.  In addition, for debt securities, Mid Penn considers (a) whether management has the intent to sell the security, (b) it is more likely than not that management will be required to sell the security prior to its anticipated recovery, and (c) whether management expects to recover the entire amortized cost basis.  For equity securities, management considers the intent and ability to hold securities until recovery of unrealized losses.

The majority of the investment portfolio is comprised of securities issued by U.S. government agencies and state and political subdivision obligations.  For the investment securities with an unrealized loss, Mid Penn has concluded that, based on its analysis, the unrealized losses were primarily caused by the movement of interest rates and not due to an erosion of credit quality of the underlying issuers.

At both June 30, 2018 and December 31, 2017, the majority of available-for-sale securities and held-to-maturity securities in an unrealized loss position were obligations of state and political subdivisions, U.S. Treasury and agency securities, and mortgage-backed U.S. government agencies.

The table below illustrates the maturity distribution of investment securities at amortized cost and fair value as of June 30, 2018.

 

(Dollars in thousands)

 

Available-for-sale

 

 

Held-to-maturity

 

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

June 30, 2018

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Due in 1 year or less

 

$

1,460

 

 

$

1,460

 

 

$

2,001

 

 

$

1,991

 

Due after 1 year but within 5 years

 

 

18,711

 

 

 

18,050

 

 

 

11,705

 

 

 

11,494

 

Due after 5 years but within 10 years

 

 

43,730

 

 

 

41,041

 

 

 

71,195

 

 

 

69,796

 

Due after 10 years

 

 

9,597

 

 

 

8,714

 

 

 

1,909

 

 

 

1,868

 

 

 

 

73,498

 

 

 

69,265

 

 

 

86,810

 

 

 

85,149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

43,713

 

 

 

42,426

 

 

 

66,511

 

 

 

64,867

 

 

 

$

117,211

 

 

$

111,691

 

 

$

153,321

 

 

$

150,016

 

 

(4)

Loans and Allowance for Loan and Lease Losses

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the

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MID PENN BANCORP, INC.

 

 

unpaid principal balance.  Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans, generally being amortized over the contractual life of the loan.  Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective yield method.

The loan portfolio is segmented into commercial and consumer loans.  Commercial loans consist of the following classes:  commercial and industrial, commercial real estate, commercial real estate-construction and lease financing.  Consumer loans consist of the following classes:  residential mortgage loans, home equity loans and other consumer loans.

For all classes of loans, the accrual of interest generally is discontinued when the contractual payment of principal or interest has become 90 days or more past due, or management has serious doubts about further collectability of principal or interest even though the loan is currently performing.  A loan past due 90 days or more may remain on accrual status if it is in the process of collection and is either guaranteed or well secured.  When a loan is placed on nonaccrual status, unpaid interest is credited to income.  Interest received on nonaccrual loans, including impaired loans, is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal.  Nonaccrual loans may be restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally, at least nine consecutive months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt.  The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

Commercial and Industrial

Mid Penn originates commercial and industrial loans.  Most of the Bank’s commercial and industrial loans have been extended to finance local and regional businesses and include short-term loans to finance machinery and equipment purchases, inventory, and accounts receivable.  Commercial loans also involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies.

The maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment.  Generally, the maximum term on non-mortgage lines of credit is one year.  The loan-to-value ratio on such loans and lines of credit generally may not exceed 80 percent of the value of the collateral securing the loan.  The Bank’s commercial business lending policy includes credit file documentation and analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as an evaluation of conditions affecting the borrower.  Analysis of the borrower’s past, present, and future cash flows is also an important aspect of the Bank’s current credit analysis.  Nonetheless, such loans are believed to carry higher credit risk than other extensions of credit.

Commercial and industrial loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.  As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself, which, in turn, is likely to be dependent upon the general economic environment.  Mid Penn’s commercial and industrial loans are usually, but not always, secured by business assets and personal guarantees.  However, the collateral securing the loans may depreciate over time, may be difficult to appraise, and may fluctuate in value based on the success of the business.

Commercial Real Estate and Commercial Real Estate - Construction

Commercial real estate and commercial real estate construction loans generally present a higher level of risk than loans secured by one-to-four family residences.  This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans.  In addition, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project.  If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

Residential Mortgage

Mid Penn offers a wide array of residential mortgage loans for both permanent structures and those under construction.  The Bank’s residential mortgage originations are secured primarily by properties located in its primary market and surrounding areas.  Residential mortgage loans have terms up to a maximum of 30 years and with loan-to-value ratios up to 100 percent of the lesser of the appraised value of the security property or the contract price.  Private mortgage insurance is generally required in an amount sufficient to reduce the Bank’s exposure to at or below the 85 percent loan to value level.  Residential mortgage loans generally do not include prepayment penalties.

In underwriting residential mortgage loans, the Bank evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan.  Most properties securing real estate loans made by Mid Penn are appraised by independent fee appraisers.  The Bank generally requires borrowers to obtain title insurance and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan.  Real estate loans originated by the Bank generally contain a “due on sale” clause allowing the Bank to declare the unpaid principal balance due and payable upon the sale of the security property.

The Bank underwrites residential mortgage loans to the standards established by the secondary mortgage market, i.e., Fannie Mae, Ginnie Mae, Freddie Mac, or Pennsylvania Housing Finance Agency standards, with the intention of selling the majority of residential mortgages originated into the secondary market.  In the event that the facts and circumstances surrounding a residential mortgage application do not meet all underwriting conditions of the secondary mortgage market, the Bank will evaluate the failed conditions and evaluate the potential

14


MID PENN BANCORP, INC.

 

 

risk of holding the residential mortgage in the Bank’s portfolio rather than rejecting the loan request.  In the event that the loan is held in the Bank’s portfolio, the interest rate on the residential mortgage would be increased to compensate for the added portfolio risk.

Consumer, Including Home Equity

Mid Penn offers a variety of secured consumer loans, including home equity, automobile, and deposit secured loans.  In addition, the Bank offers other secured and unsecured consumer loans.  Most consumer loans are originated in Mid Penn’s primary market and surrounding areas.

The largest component of Mid Penn’s consumer loan portfolio consists of fixed rate home equity loans and variable rate home equity lines of credit.  Substantially all home equity loans and lines of credit are secured by junior lien mortgages on principal residences.  The Bank will lend amounts, which, together with all prior liens, typically may be up to 85 percent of the appraised value of the property securing the loan.  Home equity term loans may have maximum terms up to 20 years, while home equity lines of credit generally have maximum terms of five years.

Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower.  The underwriting standards employed by the Bank for consumer loans include an application, a determination of the applicant’s payment history on other debts, and an assessment of ability to meet existing obligations and payments on the proposed loan.  Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, in relation to the proposed loan amount.

Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment.  In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance.  In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.  Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a higher security position in the case of foreclosure liquidation of collateral to extinguish the debt.  Generally, foreclosure actions could become more prevalent if the real estate market weakens and property values deteriorate.

Allowance for Loan and Lease Losses

The allowance for credit losses (“allowance”) consists of (i) the allowance for loan and lease losses, and (ii) the reserve for unfunded lending commitments. The allowance for loan and lease losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet.  The reserve for unfunded lending commitments was $108,000 at June 30, 2018 and $105,000 at December 31, 2017.  The allowance is increased by the provision for loan and lease losses, and decreased by charge-offs, net of recoveries.  Loans deemed to be uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance.  All, or part, of the principal balance of loans are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.  Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible.  Because all identified losses are immediately charged off, no portion of the allowance is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The allowance is maintained at a level considered by management to be adequate to provide for losses that can be reasonably anticipated. Management performs a monthly evaluation of the adequacy of the allowance.  The allowance is based on Mid Penn’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions, and other relevant factors.  This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

The allowance consists of specific, general and unallocated components.  The specific component relates to loans that are classified as impaired.  For loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan.

The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans.  These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors.  These qualitative risk factors include changes in economic conditions, fluctuations in loan quality measures, changes in collateral values, changes in the experience of the lending staff and loan review systems, changes in lending policies and procedures (including underwriting standards), changes in the mix and volume of loans originated, the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing loan portfolio, shifting industry or portfolio concentrations, and other relevant factors.

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MID PENN BANCORP, INC.

 

 

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation.  Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

 

The unallocated component of the allowance for loan and lease losses covers several considerations that are not specifically measureable through either the specific and general components. For example, we believe that we could face increasing credit risks and uncertainties, not yet reflected in recent historical losses or qualitative factor assessments, associated with unpredictable changes in economic growth or business conditions in our markets or for certain industries in which we have commercial loan borrowers, or unanticipated stresses to the values of real estate held as collateral.  Any or all of these additional issues can adversely affect our borrowers’ ability to timely repay their loans. Additionally, we have experienced continued strong commercial loan growth, including growth in newer markets where we have less of a loss history. Also, the unallocated component allocation recognizes the inherent imprecision in our allowance for loan and lease loss methodology, or any alternative methodology, for estimating specific and general loan losses, including the unpredictable timing and amounts of charge-offs, the fact that historical loss averages don’t necessarily correlate to future loss trends, and unexpected changes to specific-credit or general portfolio future cash flows and collateral values which could negatively impact unimpaired portfolio loss factors.

Mid Penn generally considers a commercial loan (consisting of commercial and industrial, commercial real estate, commercial real estate-construction, and lease financing loan classes) to be impaired when it becomes 90 days or more past due and not in the process of collection or sooner when it is probable that Mid Penn will be unable to collect all contractual principal and interest due.  This methodology assumes the borrower cannot or will not continue to make additional payments.  At that time the loan would generally be considered collateral dependent as the discounted cash flow method would generally indicate no operating income available for evaluating the collateral position; therefore, most impaired loans are deemed to be collateral dependent.

In addition, Mid Penn’s rating system assumes any loans classified as nonaccrual, included in the substandard rating, to be impaired, and most of these loans are considered collateral dependent; therefore, most of Mid Penn’s impaired loans, whether reporting a specific allocation or not, are considered collateral dependent.

Mid Penn evaluates loans for charge-off on a monthly basis.  Policies that govern the recommendation for charge-off are unique to the type of loan being considered.  Commercial loans rated as substandard nonaccrual or lower will first have a collateral evaluation completed in accordance with the guidance on impaired loans.  Once the collateral evaluation has been completed, a specific allocation of allowance is made based upon the results of the evaluation.  The remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured).  In the event the loan is unsecured, the loan would have been charged-off at the recognition of impairment.  Commercial real estate loans rated as impaired will also have an initial collateral evaluation completed in accordance with the guidance on impaired loans.  An updated real estate valuation is ordered and the collateral evaluation is modified to reflect any variations in value.  A specific allocation of allowance is made for any anticipated collateral shortfall. The remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured).  The process of charging off a residential mortgage loan begins when a loan becomes delinquent for 90 days and is not in the process of collection.  The existing appraisal is reviewed and a lien search is obtained to determine lien position and any instances of intervening liens.  A new appraisal of the property will be ordered if deemed necessary by management and a collateral evaluation is completed. The loan will then be charged down to the value indicated in the evaluation.  Consumer loans (including home equity loans and other consumer loans) are recommended for charge-off after reaching delinquency of 90 days and the loan is not well-secured or otherwise not probable for collection.  The collateral shortfall of the consumer loan is recommended for charge-off at this point.

As noted above, Mid Penn assesses a specific allocation for commercial loans and commercial real estate loans.  The remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured).  In addition, Mid Penn takes a preemptive step when any commercial loan becomes classified under its internal classification system.  A preliminary collateral evaluation, in accordance with the guidance on impaired loans, is prepared using the existing collateral information in the loan file.  This process allows Mid Penn to review both the credit and documentation files to determine the status of the information needed to make a collateral evaluation.  This collateral evaluation is preliminary, but allows Mid Penn to determine if any potential collateral shortfalls exist.

It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate as soon as practically possible following the credit being classified as substandard nonaccrual.  Prior to receipt of the updated real estate valuation, Mid Penn will use any existing real estate valuation to determine any potential allowance issues; however, no allowance recommendation will be made until such time Mid Penn is in receipt of the updated valuation.  The Asset Recovery department employs an electronic tracking system to monitor the receipt of and need for updated appraisals.  To date, there have been no material time lapses noted with the above processes.

In some instances Mid Penn is not holding real estate as collateral and is relying on business assets (personal property) for repayment.  In these circumstances a collateral inspection is performed by Mid Penn personnel to determine an estimated value.  The value is based on net book value, as provided by the financial statements, and discounted accordingly based on determinations made by management.  Occasionally, Mid Penn will employ an outside service to provide a fair estimate of value based on auction sales or private sales.  Management reviews the estimates of these third parties and discounts them accordingly based on management’s judgment, if deemed necessary.

For impaired loans with no valuation allowance required, Mid Penn’s practice of obtaining independent third party market valuations on the subject property as soon as practically possible following the credit being placed on nonaccrual status sometimes indicates that the loan

16


MID PENN BANCORP, INC.

 

 

to value ratio is sufficient to obviate the need for a specific allocation in spite of significant deterioration in real estate values in Mid Penn’s primary market area.  These circumstances are determined on a case by case analysis of the impaired loans.

Mid Penn actively monitors the values of collateral on impaired loans.  This monitoring may require the modification of collateral values over time or changing circumstances by some factor, either positive or negative, from the original values.  All collateral values will be assessed by management at least every 12 months for possible revaluation by an independent third party.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, Mid Penn does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.

Loans whose terms are modified are classified as troubled debt restructurings if the borrowers have been granted concessions and it is deemed that those borrowers are experiencing financial difficulty.  Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date.  Nonaccrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for nine consecutive months after modification.  Loans classified as troubled debt restructurings are designated as impaired.

The allowance calculation methodology includes further segregation of loan classes into risk rating categories.  The borrower’s overall financial condition, repayment sources, guarantors, and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments.  Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss.  Loans criticized as special mention have potential weaknesses that deserve management’s close attention.  If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects.  Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.  Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses.  Any loans not classified as noted above are rated pass.

In addition, Federal and State regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance and may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management.  Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

Acquired Loans

Loans that Mid Penn acquires in connection with business combinations are recorded at fair value with no carryover of the existing related allowance for loan losses.  Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan.  The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount.  These loans are accounted for under the ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.  The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the loan.  Subsequent decreases to the expected cash flows will require Mid Penn to evaluate the need for an additional allowance.  Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount which Mid Penn will then reclassify as accretable discount that will be recognized into interest income over the remaining life of the loan.

Loans acquired through business combinations that meet the specific criteria of ASC 310-30 are individually evaluated each period to analyze expected cash flows.  To the extent that the expected cash flows of a loan have decreased due to credit deterioration, Mid Penn establishes an allowance.

Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30 are accounted for under ASC 310-20.  These loans are initially recorded at fair value, and include credit and interest rate marks associated with acquisition accounting adjustments.  Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans.  There is no allowance for loan losses established at the acquisition date for acquired performing loans.  An allowance for loan losses is recorded for any credit deterioration in these loans subsequent to acquisition.

Acquired loans that met the criteria for impaired or nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if Mid Penn expects to fully collect the new carrying value (i.e. fair value) of the loans.  As such, Mid Penn may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount.  In addition, charge-offs on such loans would be first applied to the nonaccretable difference portion of the fair value adjustment.

17


MID PENN BANCORP, INC.

 

 

The classes of the loan portfolio, summarized by the pass rating (net of deferred fees and costs of $479,000 as of June 30, 2018 and $464,000 as of December 31, 2017), and the classified ratings of special mention and substandard within Mid Penn’s internal risk rating system as of June 30, 2018 and December 31, 2017, are as follows:

 

(Dollars in thousands)

 

 

 

Special

 

 

 

 

 

 

June 30, 2018

 

Pass

 

 

Mention

 

 

Substandard

 

 

Total

 

Commercial and industrial

 

$

197,102

 

 

$

2,420

 

 

$

5,202

 

 

$

204,724

 

Commercial real estate

 

 

565,517

 

 

 

1,807

 

 

 

8,632

 

 

 

575,956

 

Commercial real estate - construction

 

 

82,323

 

 

 

 

 

 

367

 

 

 

82,690

 

Lease financing

 

 

153

 

 

 

 

 

 

 

 

 

153

 

Residential mortgage

 

 

118,779

 

 

 

262

 

 

 

1,219

 

 

 

120,260

 

Home equity

 

 

47,732

 

 

 

4

 

 

 

79

 

 

 

47,815

 

Consumer

 

 

4,881

 

 

 

 

 

 

 

 

 

4,881

 

 

 

$

1,016,487

 

 

$

4,493

 

 

$

15,499

 

 

$

1,036,479

 

 

(Dollars in thousands)

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Pass

 

 

Mention

 

 

Substandard

 

 

Total

 

Commercial and industrial

 

$

182,168

 

 

$

453

 

 

$

5,412

 

 

$

188,033

 

Commercial real estate

 

 

505,397

 

 

 

1,435

 

 

 

8,180

 

 

 

515,012

 

Commercial real estate - construction

 

 

61,667

 

 

 

182

 

 

 

487

 

 

 

62,336

 

Lease financing

 

 

229

 

 

 

 

 

 

 

 

 

229

 

Residential mortgage

 

 

97,814

 

 

 

157

 

 

 

1,062

 

 

 

99,033

 

Home equity

 

 

41,479

 

 

 

105

 

 

 

309

 

 

 

41,893

 

Consumer

 

 

3,868

 

 

 

 

 

 

 

 

 

3,868

 

 

 

$

892,622

 

 

$

2,332

 

 

$

15,450

 

 

$

910,404

 

 

Mid Penn had no loans classified as doubtful as of June 30, 2018 and December 31, 2017.

 

 


18


MID PENN BANCORP, INC.

 

 

Impaired loans by loan portfolio class as of June 30, 2018 and December 31, 2017 are summarized as follows:

 

 

 

June 30, 2018

 

 

December 31, 2017

 

(Dollars in thousands)

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

 

$

 

 

$

 

 

$

 

 

$

13

 

 

$

 

Commercial real estate

 

 

1,711

 

 

 

2,357

 

 

 

 

 

 

3,424

 

 

 

4,056

 

 

 

 

Commercial real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

728

 

 

 

852

 

 

 

 

 

 

760

 

 

 

877

 

 

 

 

Home equity

 

 

8

 

 

 

107

 

 

 

 

 

 

260

 

 

 

295

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded and acquired with credit deterioration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

23

 

 

$

23

 

 

$

 

 

$

 

 

$

 

 

$

 

Commercial real estate

 

 

1,466

 

 

 

1,466

 

 

 

 

 

 

555

 

 

 

555

 

 

 

 

Commercial real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

493

 

 

 

493

 

 

 

 

 

 

306

 

 

 

306

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

4,324

 

 

$

4,410

 

 

$

282

 

 

$

4,434

 

 

$

4,460

 

 

$

136

 

Commercial real estate

 

 

550

 

 

 

602

 

 

 

238

 

 

 

1,423

 

 

 

1,589

 

 

 

293

 

Commercial real estate - construction

 

 

367

 

 

 

370

 

 

 

54

 

 

 

487

 

 

 

492

 

 

 

100

 

Lease financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Impaired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

4,347

 

 

$

4,433

 

 

$

282

 

 

$

4,434

 

 

$

4,473

 

 

$

136

 

Commercial real estate

 

 

3,727

 

 

 

4,425

 

 

 

238

 

 

 

5,402

 

 

 

6,200

 

 

 

293

 

Commercial real estate - construction

 

 

367

 

 

 

370

 

 

 

54

 

 

 

487

 

 

 

492

 

 

 

100

 

Lease financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

1,221

 

 

 

1,345

 

 

 

 

 

 

1,066

 

 

 

1,183

 

 

 

 

Home equity

 

 

8

 

 

 

107

 

 

 

 

 

 

260

 

 

 

295

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19


MID PENN BANCORP, INC.

 

 

The average recorded investment of impaired loans and related interest income recognized for the three and six months ended June 30, 2018 and 2017 are summarized as follows:

 

 

 

Three Months Ended

 

 

 

June 30, 2018

 

 

June 30, 2017

 

(Dollars in thousands)

 

Average Recorded Investment

 

 

Interest Income Recognized

 

 

Average Recorded Investment

 

 

Interest Income Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

 

$

 

 

$

36

 

 

$

 

Commercial real estate

 

 

2,650

 

 

 

3

 

 

 

644

 

 

 

110

 

Commercial real estate - construction

 

 

 

 

 

 

 

 

473

 

 

 

 

Lease financing

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

699

 

 

 

7

 

 

 

860

 

 

 

7

 

Home equity

 

 

95

 

 

 

 

 

 

90

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded and acquired with credit deterioration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

23

 

 

$

 

 

$

 

 

$

 

Commercial real estate

 

 

1,455

 

 

 

7

 

 

 

644

 

 

 

110

 

Commercial real estate - construction

 

 

 

 

 

 

 

 

326

 

 

 

2

 

Lease financing

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

639

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

4,349

 

 

$

 

 

$

 

 

$

 

Commercial real estate

 

 

1,029

 

 

 

 

 

 

2,792

 

 

 

 

Commercial real estate - construction

 

 

367

 

 

 

 

 

 

240

 

 

 

 

Lease financing

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

 

 

 

 

 

 

66

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Impaired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

4,372

 

 

$

 

 

$

36

 

 

$

 

Commercial real estate

 

 

5,134

 

 

 

10

 

 

 

4,080

 

 

 

220

 

Commercial real estate - construction

 

 

367

 

 

 

 

 

 

1,039

 

 

 

2

 

Lease financing

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

1,338

 

 

 

7

 

 

 

926

 

 

 

7

 

Home equity

 

 

95

 

 

 

 

 

 

90

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


20


MID PENN BANCORP, INC.

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 2018

 

 

June 30, 2017

 

(Dollars in thousands)

 

Average Recorded Investment

 

 

Interest Income Recognized

 

 

Average Recorded Investment

 

 

Interest Income Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

 

$

 

 

$

18

 

 

$

 

Commercial real estate

 

 

2,306

 

 

 

3

 

 

 

524

 

 

 

279

 

Commercial real estate - construction

 

 

17

 

 

 

 

 

 

313

 

 

 

 

Lease financing

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

796

 

 

 

14

 

 

 

843

 

 

 

18

 

Home equity

 

 

208

 

 

 

 

 

 

101

 

 

 

2

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded and acquired with credit deterioration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

20

 

 

$

 

 

$

 

 

$

 

Commercial real estate

 

 

2,001

 

 

 

14

 

 

 

738

 

 

 

110

 

Commercial real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

Lease financing

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

1,086

 

 

 

 

 

 

350

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,519

 

 

$

 

 

$

 

 

$

 

Commercial real estate

 

 

1,367

 

 

 

 

 

 

2,660

 

 

 

 

Commercial real estate - construction

 

 

366

 

 

 

 

 

 

144

 

 

 

 

Lease financing

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

 

 

 

 

 

 

40

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Impaired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

3,539

 

 

$

 

 

$

18

 

 

$

 

Commercial real estate

 

 

5,674

 

 

 

17

 

 

 

3,922

 

 

 

389

 

Commercial real estate - construction

 

 

383

 

 

 

 

 

 

457

 

 

 

 

Lease financing

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

1,882

 

 

 

14

 

 

 

1,233

 

 

 

18

 

Home equity

 

 

208

 

 

 

 

 

 

101

 

 

 

2

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans by loan portfolio class as of June 30, 2018 and December 31, 2017 are summarized as follows:

 

(Dollars in thousands)

 

June 30, 2018

 

 

December 31, 2017

 

Commercial and industrial

 

$

4,347

 

 

$

4,434

 

Commercial real estate

 

 

3,215

 

 

 

4,902

 

Commercial real estate - construction

 

 

367

 

 

 

487

 

Residential mortgage

 

 

675

 

 

 

492

 

Home equity

 

 

8

 

 

 

260

 

 

 

$

8,612

 

 

$

10,575

 

 

21


MID PENN BANCORP, INC.

 

 

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.  As of June 30, 2018 and December 31, 2017 Mid Penn had no accruing loans past due greater than 90 days. The classes of the loan portfolio summarized by the past due status as of June 30, 2018 and December 31, 2017 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

30-59

 

 

60-89

 

 

Greater

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days Past

 

 

Days Past

 

 

than 90

 

 

Total Past

 

 

 

 

 

 

 

 

 

June 30, 2018

 

Due

 

 

Due

 

 

Days

 

 

Due

 

 

Current

 

 

Total Loans

 

Commercial and industrial

 

$

193

 

 

$

5

 

 

$

4,324

 

 

$

4,522

 

 

$

200,179

 

 

$

204,701

 

Commercial real estate

 

 

757

 

 

 

1,468

 

 

 

276

 

 

 

2,501

 

 

 

571,989

 

 

 

574,490

 

Commercial real estate - construction

 

 

859

 

 

 

-

 

 

 

367

 

 

 

1,226

 

 

 

81,464

 

 

 

82,690

 

Lease financing

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

153

 

 

 

153

 

Residential mortgage

 

 

183

 

 

 

62

 

 

 

164

 

 

 

409

 

 

 

119,358

 

 

 

119,767

 

Home equity

 

 

35

 

 

 

-

 

 

 

-

 

 

 

35

 

 

 

47,780

 

 

 

47,815

 

Consumer

 

 

-

 

 

 

9

 

 

 

-

 

 

 

9

 

 

 

4,872

 

 

 

4,881

 

Loans acquired with credit deterioration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

-

 

 

 

23

 

 

 

-

 

 

 

23

 

 

 

-

 

 

 

23

 

Commercial real estate

 

 

-

 

 

 

25

 

 

 

901

 

 

 

926

 

 

 

540

 

 

 

1,466

 

Commercial real estate - construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Lease financing

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Residential mortgage

 

 

20

 

 

 

10

 

 

 

198

 

 

 

228

 

 

 

265

 

 

 

493

 

Home equity

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

2,047

 

 

$

1,602

 

 

$

6,230

 

 

$

9,879

 

 

$

1,026,600

 

 

$

1,036,479

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

30-59

 

 

60-89

 

 

Greater

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days Past

 

 

Days Past

 

 

than 90

 

 

Total Past

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Due

 

 

Due

 

 

Days

 

 

Due

 

 

Current

 

 

Total Loans

 

Commercial and industrial

 

$

4,439

 

 

$

16

 

 

$

-

 

 

$

4,455

 

 

$

183,578

 

 

$

188,033

 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

3,669

 

 

 

3,669

 

 

 

510,788

 

 

 

514,457

 

Commercial real estate - construction

 

 

-

 

 

 

-

 

 

 

487

 

 

 

487

 

 

 

61,849

 

 

 

62,336

 

Lease financing

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

229

 

 

 

229

 

Residential mortgage

 

 

310

 

 

 

467

 

 

 

177

 

 

 

954

 

 

 

97,773

 

 

 

98,727

 

Home equity

 

 

54

 

 

 

98

 

 

 

250

 

 

 

402

 

 

 

41,491

 

 

 

41,893

 

Consumer

 

 

3

 

 

 

-

 

 

 

-

 

 

 

3

 

 

 

3,865

 

 

 

3,868

 

Loans acquired with credit deterioration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial real estate

 

 

500

 

 

 

-

 

 

 

55

 

 

 

555

 

 

 

-

 

 

 

555

 

Commercial real estate - construction

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Lease financing

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Residential mortgage

 

 

-

 

 

 

31

 

 

 

193

 

 

 

224

 

 

 

82

 

 

 

306

 

Home equity

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Consumer

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total

 

$

5,306

 

 

$

612

 

 

$

4,831

 

 

$

10,749

 

 

$

899,655

 

 

$

910,404

 

22


MID PENN BANCORP, INC.

 

 

The following tables summarize the allowance and recorded investments in loans receivable.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of, and for the

three months ended,

June 30, 2018

 

Commercial and industrial

 

 

Commercial real estate

 

 

Commercial real estate - construction

 

 

Lease financing

 

 

Residential mortgage

 

 

Home equity

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 1, 2018

 

$

1,977

 

 

$

4,653

 

 

$

183

 

 

$

-

 

 

$

452

 

 

$

391

 

 

$

4

 

 

$

6

 

 

$

7,666

 

Charge-offs

 

 

(129

)

 

 

-

 

 

 

(40

)

 

 

-

 

 

 

(3

)

 

 

(91

)

 

 

(4

)

 

 

-

 

 

 

(267

)

Recoveries

 

 

-

 

 

 

788

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

790

 

Provisions

 

 

272

 

 

 

(718

)

 

 

3

 

 

 

-

 

 

 

(8

)

 

 

120

 

 

 

2

 

 

 

329

 

 

 

-

 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

$

2,120

 

 

$

4,723

 

 

$

146

 

 

$

-

 

 

$

441

 

 

$

420

 

 

$

4

 

 

$

335

 

 

$

8,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of, and for the

six months ended,

June 30, 2018

 

Commercial

and

industrial

 

 

Commercial real estate

 

 

Commercial real estate - construction

 

 

Lease financing

 

 

Residential mortgage

 

 

Home equity

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2018

 

$

1,795

 

 

$

4,435

 

 

$

178

 

 

$

-

 

 

$

428

 

 

$

423

 

 

$

3

 

 

$

344

 

 

$

7,606

 

Charge-offs

 

 

(129

)

 

 

-

 

 

 

(40

)

 

 

-

 

 

 

(5

)

 

 

(167

)

 

 

(10

)

 

 

-

 

 

 

(351

)

Recoveries

 

 

-

 

 

 

805

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

-

 

 

 

809

 

Provisions

 

 

454

 

 

 

(517

)

 

 

8

 

 

 

-

 

 

 

18

 

 

 

164

 

 

 

7

 

 

 

(9

)

 

 

125

 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

2,120

 

 

 

4,723

 

 

 

146

 

 

 

-

 

 

 

441

 

 

 

420

 

 

 

4

 

 

 

335

 

 

 

8,189

 

Individually evaluated for impairment

 

 

282

 

 

 

238

 

 

 

54

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

574

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

$

1,838

 

 

$

4,485

 

 

$

92

 

 

$

-

 

 

$

441

 

 

$

420

 

 

$

4

 

 

$

335

 

 

$

7,615

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

204,724

 

 

$

575,956

 

 

$

82,690

 

 

$

153

 

 

$

120,260

 

 

$

47,815

 

 

$

4,881

 

 

$

-

 

 

$

1,036,479

 

Ending balance: Individually evaluated for impairment

 

 

4,324

 

 

 

2,261

 

 

 

367

 

 

 

-

 

 

 

728

 

 

 

8

 

 

 

-

 

 

 

-

 

 

 

7,688

 

Ending balance:
Acquired with credit deterioration

 

 

23

 

 

 

1,466

 

 

 

-

 

 

 

-

 

 

 

493

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,982

 

Ending balance: Collectively evaluated for impairment

 

$

200,377

 

 

$

572,229

 

 

$

82,323

 

 

$

153

 

 

$

119,039

 

 

$

47,807

 

 

$

4,881

 

 

$

-

 

 

$

1,026,809

 

23


MID PENN BANCORP, INC.

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

Commercial

and

industrial

 

 

Commercial real estate

 

 

Commercial real estate - construction

 

 

Lease financing

 

 

Residential mortgage

 

 

Home equity

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2017

 

$

1,795

 

 

$

4,435

 

 

$

178

 

 

$

-

 

 

$

428

 

 

$

423

 

 

$

3

 

 

$

344

 

 

$

7,606

 

Ending balance: Individually evaluated for impairment

 

 

136

 

 

 

293

 

 

 

100

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

529

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

$

1,659

 

 

$

4,142

 

 

$

78

 

 

$

-

 

 

$

428

 

 

$

423

 

 

$

3

 

 

$

344

 

 

$

7,077

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2017

 

$

188,033

 

 

$

515,012

 

 

$

62,336

 

 

$

229

 

 

$

99,033

 

 

$

41,893

 

 

$

3,868

 

 

$

-

 

 

$

910,404

 

Ending balance: Individually evaluated

for impairment

 

 

4,434

 

 

 

4,847

 

 

 

487

 

 

 

-

 

 

 

760

 

 

 

260

 

 

 

-

 

 

 

-

 

 

 

10,788

 

Ending balance:
Acquired with credit deterioration

 

 

-

 

 

 

555

 

 

 

-

 

 

 

-

 

 

 

306

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

861

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated

for impairment

 

$

183,599

 

 

$

509,610

 

 

$

61,849

 

 

$

229

 

 

$

97,967

 

 

$

41,633

 

 

$

3,868

 

 

$

-

 

 

$

898,755

 

24


MID PENN BANCORP, INC.

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of, and for the

three months ended,

June 30, 2017

 

Commercial and industrial

 

 

Commercial real estate

 

 

Commercial real estate - construction

 

 

Lease financing

 

 

Residential mortgage

 

 

Home equity

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 1, 2017

 

$

1,630

 

 

$

4,715

 

 

$

101

 

 

$

1

 

 

$

532

 

 

$

364

 

 

$

3

 

 

$

274

 

 

$

7,620

 

Charge-offs

 

 

-

 

 

 

(30

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(10

)

 

 

-

 

 

 

(40

)

Recoveries

 

 

3

 

 

 

22

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

5

 

 

 

1

 

 

 

-

 

 

 

33

 

Provisions

 

 

(5

)

 

 

274

 

 

 

39

 

 

 

-

 

 

 

5

 

 

 

35

 

 

 

10

 

 

 

(258

)

 

 

100

 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

$

1,628

 

 

$

4,981

 

 

$

140

 

 

$

1

 

 

$

539

 

 

$

404

 

 

$

4

 

 

$

16

 

 

$

7,713

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of, and for the

six months ended,

June 30, 2017

 

Commercial

and industrial

 

 

Commercial real estate

 

 

Commercial real estate - construction

 

 

Lease financing

 

 

Residential mortgage

 

 

Home equity

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2017

 

$

1,580

 

 

$

4,323

 

 

$

144

 

 

$

1

 

 

$

541

 

 

$

379

 

 

$

3

 

 

$

212

 

 

$

7,183

 

Charge-offs

 

 

(12

)

 

 

(30

)

 

 

-

 

 

 

-

 

 

 

(18

)

 

 

-

 

 

 

(16

)

 

 

-

 

 

 

(76

)

Recoveries

 

 

7

 

 

 

361

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

5

 

 

 

4

 

 

 

-

 

 

 

381

 

Provisions

 

 

53

 

 

 

327

 

 

 

(4

)

 

 

-

 

 

 

12

 

 

 

20

 

 

 

13

 

 

 

(196

)

 

 

225

 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

1,628

 

 

 

4,981

 

 

 

140

 

 

 

1

 

 

 

539

 

 

 

404

 

 

 

4

 

 

 

16

 

 

 

7,713

 

Ending balance: Individually evaluated for impairment

 

 

-

 

 

 

893

 

 

 

70

 

 

 

-

 

 

 

66

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,029

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collectively evaluated for impairment

 

$

1,628

 

 

$

4,088

 

 

$

70

 

 

$

1

 

 

$

473

 

 

$

404

 

 

$

4

 

 

$

16

 

 

$

6,684

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

181,368

 

 

$

482,141

 

 

$

53,305

 

 

$

307

 

 

$

102,637

 

 

$

38,671

 

 

$

3,878

 

 

$

-

 

 

$

862,307

 

Ending balance: Individually evaluated for impairment

 

 

-

 

 

 

3,651

 

 

 

571

 

 

 

-

 

 

 

968

 

 

 

327

 

 

 

-

 

 

 

-

 

 

 

5,517

 

Ending balance:
Acquired with credit deterioration

 

 

-

 

 

 

573

 

 

 

-

 

 

 

-

 

 

 

324

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

897

 

Ending balance: Collectively evaluated for impairment

 

$

181,368

 

 

$

477,917

 

 

$

52,734

 

 

$

307

 

 

$

101,345

 

 

$

38,344

 

 

$

3,878

 

 

$

-

 

 

$

855,893

 

 

 

 

 


25


MID PENN BANCORP, INC.

 

 

The recorded investments in troubled debt restructured loans at June 30, 2018 and December 31, 2017 are as follows:

 

(Dollars in thousands)

Pre-Modification

 

 

Post-Modification

 

 

 

 

June 30, 2018

Outstanding Recorded Investment

 

 

Outstanding Recorded Investment

 

 

Recorded Investment

 

Commercial and industrial

$

4,110

 

 

$

4,460

 

 

$

4,324

 

Commercial real estate

 

2,670

 

 

 

2,571

 

 

 

1,984

 

Residential mortgage

 

677

 

 

 

675

 

 

 

528

 

Home equity

 

14

 

 

 

14

 

 

 

3

 

 

$

7,471

 

 

$

7,720

 

 

$

6,839

 

 

(Dollars in thousands)

Pre-Modification

 

 

Post-Modification

 

 

 

 

December 31, 2017

Outstanding Recorded Investment

 

 

Outstanding Recorded Investment

 

 

Recorded Investment

 

Commercial and industrial

$

4,110

 

 

$

4,460

 

 

$

4,434

 

Commercial real estate

 

5,735

 

 

 

5,581

 

 

 

4,593

 

Residential mortgage

 

677

 

 

 

675

 

 

 

540

 

Home equity

 

14

 

 

 

14

 

 

 

4

 

 

$

10,536

 

 

$

10,730

 

 

$

9,571

 

 

Mid Penn entered into forbearance or modification agreements on all loans currently classified as troubled debt restructures and all of these agreements have resulted in additional principal repayment.  The terms of these forbearance agreements vary whereby principal payments have been decreased, interest rates have been reduced and/or the loan will be repaid as collateral is sold.

Mid Penn had troubled debt restructured loans at June 30, 2018 totaling $6,839,000, and included four loans totaling $531,000 representing accruing impaired loans to unrelated borrowers in compliance with the terms of the modification, with three loans being accruing impaired residential mortgages to unrelated borrowers totaling $528,000 and one loan being an accruing impaired home equity loan of $3,000.  The remaining $6,308,000 of troubled debt restructurings is attributable to nine loans among five relationships which were classified as nonaccrual impaired based upon a collateral evaluation in accordance with the guidance on impaired loans.  Two large relationships accounted for $5,747,000 of the total $6,308,000 in nonaccrual impaired troubled debt restructured loans.

At December 31, 2017, Mid Penn’s troubled debt restructured loans totaled $9,571,000, and included four loans totaling $544,000 representing accruing impaired loans in compliance with the terms of the modification, with three loans being accruing impaired residential mortgages to unrelated borrowers totaling $540,000, and one loan being an accruing impaired home equity loan of $4,000.  The remaining $9,027,000 of troubled debt restructured loans is attributable to fifteen loans among seven relationships, which were classified as nonaccrual impaired based upon a collateral evaluation in accordance with the guidance on impaired loans.  Two large relationships accounted for $7,284,000 of the $9,027,000 in nonaccrual impaired troubled debt restructured loans.  As of December 31, 2017, there was $66,000 of charge-offs associated with troubled debt restructured loans while under a forbearance agreement.  As of December 31, 2017, there were no defaulted troubled debt restructured loans, as all troubled debt restructured loans were current with respect to their associated forbearance agreements.  There were also no defaults on troubled debt restructured loans within twelve months of restructure during 2017.  

There were no troubled debt restructured loans added during the three or six months ended June 30, 2018 and 2017.  As a result of management evaluations at June 30, 2018, June 30, 2017, and December 31, 2017, any specific allocations and charge-offs have been taken as appropriate. There were no charge-offs associated with existing troubled debt restructured loan relationships for the three or six months ended June 30, 2018 or 2017. There were no troubled debt restructured loans that defaulted within twelve months of restructure during the three and six months ended June 30, 2018 and 2017.

As of June 30, 2018, Mid Penn had $912,000 of residential real estate held in other real estate owned. There were four consumer mortgage loans secured by residential real estate properties totaling $274,000 for which formal foreclosure proceedings were in process.  As of December 31, 2017, Mid Penn had $42,000 of residential real estate held in other real estate owned, and $308,000 in loans for which formal foreclosure proceedings were in process.

 


26


MID PENN BANCORP, INC.

 

 

The following tables provide activity for the accretable yield of acquired impaired loans from both the Phoenix Bancorp, Inc. (2015) and Scottdale (2018) acquisitions for the three and six months ended June 30, 2018.

 

(Dollars in thousands)

 

 

Accretable yield, April 1, 2018

 

$

336

 

Accretable yield amortized to interest income

 

 

(36

)

Reclassification from nonaccretable difference (a)

 

 

-

 

Accretable yield, June 30, 2018

 

$

300

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

Accretable yield, January 1, 2018

 

$

67

 

Acquisition of impaired loans

 

$

305

 

Accretable yield amortized to interest income

 

 

(72

)

Reclassification from nonaccretable difference (a)

 

 

-

 

Accretable yield, June 30, 2018

 

$

300

 

 

 

(a)

Reclassification from non-accretable difference represents an increase to the estimated cash flows to be collected on the underlying portfolio.

 

(5)

Fair Value Measurement

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.  This guidance provides additional information on determining when the volume and level of activity for the asset or liability has significantly decreased.  The guidance also includes information on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability.  When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.

This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly.  In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly.  The guidance provides a list of circumstances that may indicate that a transaction is not orderly.  A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

Inputs to valuation techniques refer to the assumptions that market participants would use in measuring the fair value of an asset or liability.  Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own belief about the assumptions market participants would use in pricing the asset or liability based upon the best information available in the circumstances.  Fair value measurement and disclosure guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement or disclosure.  The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 Inputs - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 Inputs - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

There were no transfers of assets between fair value Level 1 and Level 2 during the six months ended June 30, 2018 or 2017.

27


MID PENN BANCORP, INC.

 

 

The following tables illustrate the assets measured at fair value on a recurring basis segregated by hierarchy fair value levels.

 

 

 

 

 

 

 

Fair value measurements at June 30, 2018 using:

 

(Dollars in thousands)

 

Total carrying value at

 

 

Quoted prices in active markets

 

 

Significant other

observable inputs

 

 

Significant

unobservable

inputs

 

Assets:

 

June 30, 2018

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government agencies

 

$

38,340

 

 

$

-

 

 

$

38,340

 

 

$

-

 

Mortgage-backed U.S. government agencies

 

 

42,426

 

 

 

-

 

 

 

42,426

 

 

 

-

 

State and political subdivision obligations

 

 

29,574

 

 

 

-

 

 

 

29,574

 

 

 

-

 

Corporate debt securities

 

 

1,351

 

 

 

-

 

 

 

1,351

 

 

 

-

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

492

 

 

 

492

 

 

 

-

 

 

 

-

 

Loans held for sale

 

 

1,185

 

 

 

1,185

 

 

 

-

 

 

 

-

 

Total

 

$

113,368

 

 

$

1,677

 

 

$

111,691

 

 

$

-

 

 

 

 

 

 

 

 

Fair value measurements at December 31, 2017 using:

 

(Dollars in thousands)

 

Total carrying value at

 

 

Quoted prices in active markets

 

 

Significant other

observable inputs

 

 

Significant

unobservable

inputs

 

Assets:

 

December 31, 2017

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and U.S. government agencies

 

$

38,730

 

 

$

-

 

 

$

38,730

 

 

$

-

 

Mortgage-backed U.S. government agencies

 

 

25,831

 

 

 

-

 

 

 

25,831

 

 

 

-

 

State and political subdivision obligations

 

 

27,043

 

 

 

-

 

 

 

27,043

 

 

 

-

 

Corporate debt securities

 

 

1,355

 

 

 

-

 

 

 

1,355

 

 

 

-

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

506

 

 

 

506

 

 

 

-

 

 

 

-

 

Loans held for sale

 

 

1,040

 

 

 

1,040

 

 

 

-

 

 

 

-

 

Total

 

$

94,505

 

 

$

1,546

 

 

$

92,959

 

 

$

-

 

 

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

The following tables illustrate the assets measured at fair value on a nonrecurring basis segregated by hierarchy fair value levels.

 

 

 

 

 

 

 

Fair value measurements at June 30, 2018 using:

 

(Dollars in thousands)

 

Total carrying value at

 

 

Quoted prices in active markets

 

 

Significant other

observable inputs

 

 

Significant

unobservable

inputs

 

Assets:

 

June 30, 2018

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Impaired Loans

 

$

4,689

 

 

$

-

 

 

$

-

 

 

$

4,689

 

Foreclosed Assets Held for Sale

 

 

29

 

 

 

-

 

 

 

-

 

 

 

29

 

Mortgage Servicing Rights

 

 

111

 

 

 

-

 

 

 

-

 

 

 

111

 

 

 

 

 

 

 

 

Fair value measurements at December 31, 2017 using:

 

(Dollars in thousands)

 

Total carrying value at

 

 

Quoted prices in active markets

 

 

Significant other

observable inputs

 

 

Significant

unobservable

inputs

 

Assets:

 

December 31, 2017

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Impaired Loans

 

$

6,090

 

 

$

-

 

 

$

-

 

 

$

6,090

 

Foreclosed Assets Held for Sale

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Mortgage Servicing Rights

 

 

126

 

 

 

-

 

 

 

-

 

 

 

126

 

28


MID PENN BANCORP, INC.

 

 

 

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Mid Penn has utilized Level 3 inputs to determine the fair value.

 

(Dollars in thousands)

 

Quantitative Information about Level 3 Fair Value Measurements

 

June 30, 2018

 

Fair Value Estimate

 

 

Valuation Technique

 

Unobservable Input

 

Range

 

Weighted Average

 

Impaired Loans

 

$

4,689

 

 

Appraisal of collateral (a)

 

Appraisal adjustments (b)

 

16% - 63%

 

27%

 

Foreclosed Assets Held for Sale

 

 

29

 

 

Appraisal of collateral (a), (c)

 

Appraisal adjustments (b)

 

29% - 29%

 

29%

 

Mortgage Servicing Rights

 

 

111

 

 

Multiple of annual service fee

 

Estimated prepayment speed based on rate and term

 

70% - 100%

 

99%

 

 

(Dollars in thousands)

 

Quantitative Information about Level 3 Fair Value Measurements

 

December 31, 2017

 

Fair Value Estimate

 

 

Valuation Technique

 

Unobservable Input

 

Range

 

Weighted Average

 

Impaired Loans

 

$

6,090

 

 

Appraisal of collateral (a)

 

Appraisal adjustments (b)

 

6% - 51%

 

28%

 

Foreclosed Assets Held for Sale

 

 

-

 

 

Appraisal of collateral (a), (c)

 

Appraisal adjustments (b)

 

0% - 0%

 

0%

 

Mortgage Servicing Rights

 

 

126

 

 

Multiple of annual service fee

 

Estimated prepayment speed based on rate and term

 

70% - 100%

 

98%

 

 

 

(a)

Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes various level 3 inputs which are not observable.

 

(b)

Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses.  The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.  Higher downward adjustments are caused by negative changes to the collateral or conditions in the real estate market, actual offers or sales contracts received, or age of the appraisal.

 

(c)

Includes qualitative adjustments by management and estimated liquidation expenses.

 

Mid Penn uses the following methodologies and assumptions to estimate the fair value of certain assets and liabilities.

Cash and Cash Equivalents:

The carrying value of cash and cash equivalents is considered to be a reasonable estimate of fair value.

Interest-bearing Balances with other Financial Institutions:

The estimate of fair value was determined by comparing the present value of quoted interest rates on like deposits with the weighted average yield and weighted average maturity of the balances.

Securities Available for Sale:

The fair value of securities classified as available-for-sale is determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather, relying on the securities’ relationship to other benchmark quoted prices.

 

Held-to-Maturity Securities:

The fair values of held-to-maturity securities are based on a market approach using observable inputs such as benchmark yields and securities, reported trades, issuer spreads, current bids and offers, monthly payment information and collateral performance.

 


29


MID PENN BANCORP, INC.

 

 

Loans Held for Sale:

The fair values of mortgage loans originated and intended for sale in the secondary market are carried at fair value, as determined by outstanding commitments from investors.

Impaired Loans (included in “Net Loans and Leases” in the following tables):

Mid Penn’s rating system assumes any loans classified as substandard and nonaccrual to be impaired, and all of these loans are considered collateral dependent; therefore, all of Mid Penn’s impaired loans, whether reporting a specific allowance allocation or not, are considered collateral dependent.

 

It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate within 30 days of the credit being classified as substandard nonaccrual.  Prior to receipt of the updated real estate valuation Mid Penn will use any existing real estate valuation to determine any potential allowance for loan loss issues; however, no allowance recommendation will be made until Mid Penn is in receipt of the updated valuation.

In some instances Mid Penn is not holding real estate as collateral and is relying on business assets (personal property) for repayment.  In these circumstances a collateral inspection is performed by Mid Penn personnel to determine an estimated value.  The value is based on net book value, as provided by the financial statements, and discounted accordingly based on determinations made by management.  Occasionally, Mid Penn will employ an outside service to provide a fair estimate of value based on auction sales or private sales.  Management reviews the estimates of these third parties and discounts them accordingly based on management’s judgment, if deemed necessary. Mid Penn considers the estimates used in its impairment analysis to be Level 3 inputs.

Mid Penn actively monitors the values of collateral on impaired loans.  This monitoring may require the modification of collateral values, either in a positive or negative way, due to the passage of time or some other change in one or more valuation inputs.  Collateral values for impaired loans will be reassessed by management at least every 12 months for possible revaluation by an independent third party.

Loans:

Loan fair values as of June 30, 2018 are estimated using an exit price approach, which incorporates discounts for credit risk and prepayment risk and considers the value indicated by current market expectations in the estimated fair value of the loan portfolio.

 

Loan fair values as of December 31, 2017 were calculated using the entrance price approach.  Under this approach, variable rate loans that reprice frequently and which entail no significant changes in credit risk had a fair value approximating carrying value.  The fair value of other loans was estimated by calculating the present value of the cash flow difference between the current rate and the market rate, for the average maturity, discounted quarterly at the market rate.

Foreclosed Assets Held for Sale:

Certain assets included in foreclosed assets held for sale are carried at fair value and accordingly is presented as measured on a non-recurring basis.  Values are estimated using Level 3 inputs, based on appraisals that consider the sales prices of property in the proximate vicinity.

Accrued Interest Receivable and Payable:

The carrying amount of accrued interest receivable and payable approximates their fair values.

Restricted Investment in Bank Stocks:

The carrying amount of required and restricted investment in correspondent bank stock approximates fair value, and considers the limited marketability of such securities.

Mortgage Servicing Rights:

The fair value of servicing rights is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and maturity date.

Deposits:

The fair value for demand deposits (e.g., interest and noninterest checking, savings, and money market deposit accounts) is, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).  Fair value for fixed-rate certificates of deposit was estimated using a discounted cash flow calculation by combining all fixed-rate certificates into a pool with a weighted average yield and a weighted average maturity for the pool and comparing the pool with interest rates currently being offered on a similar maturity.

Short-term Borrowings:

Because of time to maturity, the estimated fair value of short-term borrowings approximates the book value.

Long-term and Subordinated Debt:

The estimated fair values of long-term and subordinated debt were determined using discounted cash flow analysis, based on currently available borrowing rates for similar types of borrowing arrangements.

30


MID PENN BANCORP, INC.

 

 

Commitments to Extend Credit and Letters of Credit:

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms and present creditworthiness of the counterparties.  The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements.

The following table summarizes the carrying value and fair value of financial instruments at June 30, 2018 and December 31, 2017.

 

(Dollars in thousands)

June 30, 2018

 

 

December 31, 2017

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

Value

 

 

Value

 

 

Value

 

 

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

39,407

 

 

$

39,407

 

 

$

23,514

 

 

$

23,514

 

Available-for-sale investment securities

 

111,691

 

 

 

111,691

 

 

 

93,465

 

 

 

93,465

 

Held-to-maturity investment securities

 

153,321

 

 

 

150,016

 

 

 

101,356

 

 

 

100,483

 

Loans held for sale

 

1,185

 

 

 

1,185

 

 

 

1,040

 

 

 

1,040

 

Net loans and leases

 

1,028,290

 

 

 

1,034,131

 

 

 

902,798

 

 

 

917,081

 

Restricted investment in bank stocks

 

2,765

 

 

 

2,765

 

 

 

4,384

 

 

 

4,384

 

Accrued interest receivable

 

5,372

 

 

 

5,372

 

 

 

4,564

 

 

 

4,564

 

Mortgage servicing rights

 

111

 

 

 

111

 

 

 

126

 

 

 

126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

$

1,236,518

 

 

$

1,236,604

 

 

$

1,023,568

 

 

$

1,026,830

 

Short-term borrowings

 

-

 

 

 

-

 

 

 

34,611

 

 

 

34,611

 

Long-term debt

 

12,241

 

 

 

11,978

 

 

 

12,352

 

 

 

11,692

 

Subordinated debt

 

17,342

 

 

 

17,245

 

 

 

17,338

 

 

 

17,358

 

Accrued interest payable

 

1,186

 

 

 

1,186

 

 

 

645

 

 

 

645

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Financial standby letters of credit

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of Mid Penn’s financial instruments as of June 30, 2018 and December 31, 2017.  Carrying values approximate fair values for cash and cash equivalents, interest-bearing time balances with other financial institutions, loans held for sale, restricted investment in bank stocks, mortgage servicing rights, accrued interest receivable and payable, and short-term borrowings.  Other than cash and cash equivalents, which are considered Level 1 Inputs and mortgage servicing rights, which are Level 3 Inputs, these instruments are Level 2 Inputs. These tables exclude financial instruments for which the carrying amount approximates fair value, not previously disclosed.

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in Active Markets

 

 

 

 

 

Significant

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

for Identical Assets

 

 

Significant Other

 

 

Unobservable

 

 

 

Carrying

 

 

 

 

 

 

or Liabilities

 

 

Observable Inputs

 

 

Inputs

 

June 30, 2018

 

Amount

 

 

Fair Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Financial instruments - assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity investment

   securities

 

$

153,321

 

 

$

150,016

 

 

$

-

 

 

$

150,016

 

 

$

-

 

Net loans and leases

 

 

1,028,290

 

 

 

1,034,131

 

 

 

-

 

 

 

-

 

 

 

1,034,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments -

   liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,236,518

 

 

$

1,236,604

 

 

$

-

 

 

$

1,236,604

 

 

$

-

 

Long-term debt

 

 

12,241

 

 

 

11,978

 

 

 

-

 

 

 

11,978

 

 

 

-

 

Subordinated debt

 

 

17,342

 

 

 

17,245

 

 

 

-

 

 

 

17,245

 

 

 

-

 

31


MID PENN BANCORP, INC.

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in Active Markets

 

 

 

 

 

Significant

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

for Identical Assets

 

 

Significant Other

 

 

Unobservable

 

 

 

Carrying

 

 

 

 

 

 

or Liabilities

 

 

Observable Inputs

 

 

Inputs

 

December 31, 2017

 

Amount

 

 

Fair Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Financial instruments - assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity investment

   securities

 

$

101,356

 

 

$

100,483

 

 

$

-

 

 

$

100,483

 

 

$

-

 

Net loans and leases

 

 

902,798

 

 

 

917,081

 

 

 

-

 

 

 

-

 

 

 

917,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments -

   liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,023,568

 

 

$

1,026,830

 

 

$

-

 

 

$

1,026,830

 

 

$

-

 

Long-term debt

 

 

12,352

 

 

 

11,692

 

 

 

-

 

 

 

11,692

 

 

 

-

 

Subordinated debt

 

 

17,338

 

 

 

17,358

 

 

 

 

 

 

 

17,358

 

 

 

 

 

 

 

(6)

Guarantees and Commitments

In the normal course of business, Mid Penn makes various commitments and incurs certain contingent liabilities which are not reflected in the accompanying consolidated financial statements.  The commitments include various guarantees and commitments to extend credit.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Mid Penn evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the customer.  Standby letters of credit and financial guarantees written are conditional commitments to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.  Mid Penn had $20,647,000 and $20,496,000 standby letters of credit outstanding as of June 30, 2018 and December 31, 2017, respectively.  Mid Penn does not anticipate any losses because of these transactions.  The amount of the liability as of June 30, 2018 and December 31, 2017 for payment under standby letters of credit issued was not material.

 

As of June 30, 2018, Mid Penn had entered into a commitment to purchase a limited partnership interest in a low-income housing project to construct thirty-seven apartments and common amenities in Dauphin County, Pennsylvania.  All of the units will qualify for Federal Low-Income Housing Tax Credits (“LIHTCs”) as provided for in Section 42 of the Internal Revenue Code of 1986, as amended.  Mid Penn’s limited partner capital contribution commitment is $7,593,000 which will be paid in installments over the course of construction of the low-income housing facilities.  The investment in the limited partnership will be reported in other assets on the balance sheet and amortized over a ten year period.  The project has been conditionally awarded $863,000 in annual LIHTCs by the Pennsylvania Housing Finance Agency, with a total anticipated LIHTC amount of $8,629,000 to be delivered to Mid Penn over the ten year amortization period.  Mid Penn’s commitment to purchase the limited partnership interest is conditional upon (i) the review and approval of all closing document, (ii) an opinion letter for tax counsel to the Partnership that the project qualifies for the LIHTCs, and (iii) review and approval by Mid Penn of other documents it may deem necessary.

 

(7)

Subordinated Debt

Subordinated Debt Issued December 2017

On December 19, 2017, Mid Penn entered into agreements with investors to purchase $10,000,000 aggregate principal amount of its Subordinated Notes due 2028 (the “2017 Notes”). The 2017 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes.  The offering closed in December 2017.

The 2017 Notes bear interest at a rate of 5.25% per year for the first five years and then float at the Wall Street Journal’s Prime Rate plus 0.50%, provided that the interest rate applicable to the outstanding principal balance will at no times be less than 5.0%. Interest is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018, for the first five years after issuance and will be payable quarterly in arrears thereafter on January 15, April 15, July 15, and October 15. The 2017 Notes will mature on January 1, 2028 and are redeemable in whole or in part, without premium or penalty, at any time on or after December 21, 2022, and prior to January 1, 2028. Additionally, Mid Penn may redeem the 2017 Notes in whole at any time, or in part from time to time, upon at least 30 days’ notice if: (i) a change or prospective change in law occurs that could prevent Mid Penn from deducting interest payable on the 2017 Notes for U.S. federal income tax purposes; (ii) an event occurs that precludes the 2017 Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) Mid Penn becomes required to register as an investment company under the Investment Company Act of 1940, as amended. In the event of a redemption described in the previous sentence, Mid Penn will redeem the 2017 Notes at 100% of the principal amount of the 2017 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption.

32


MID PENN BANCORP, INC.

 

 

Holders of the 2017 Notes may not accelerate the maturity of the 2017 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar event of Mid Penn or Mid Penn Bank, its principal banking subsidiary.  

Subordinated Debt Issued December 2015

On December 9, 2015, Mid Penn sold $7,500,000 aggregate principal amount of Subordinated Debt (the “2015 Notes”) due 2025.  The 2015 Notes are treated as Tier 2 capital for regulatory capital purposes.

The 2015 Notes bear interest at a rate of 5.15% per year for the first five years and then float at the Wall Street Journal’s Prime Rate plus 0.50%, provided that the interest rate applicable to the outstanding principal balance will at no time be less than 4.0%.  Interest is payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, beginning on January 1, 2016. The 2015 Notes will mature on December 9, 2025 and are redeemable in whole or in part, without premium or penalty, at any time on or after December 9, 2020, and prior to December 9, 2025.  Additionally, Mid Penn may redeem the 2015 Notes in whole at any time, or in part from time to time, upon at least 30 days’ notice if:  (i) a change or prospective change in law occurs that could prevent Mid Penn from deducting interest payable on the 2015 Notes for U.S. federal income tax purposes; (ii) an event occurs that precludes the 2015 Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) Mid Penn becomes required to register as an investment company under the Investment Company Act of 1940, as amended, in each case at 100% of the principal amount of the 2015 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption.

Holders of the 2015 Notes may not accelerate the maturity of the 2015 Notes, except upon Mid Penn’s or Mid Penn Bank’s bankruptcy, insolvency, liquidation, receivership or similar event.

ASC Subtopic 835-30, Simplifying the Presentation of Debt Issuance Costs, requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability.  The unamortized debt issuance costs associated with the 2015 Notes and the 2017 Notes were collectively $158,000 at June 30, 2018 and $162,000 at December 31, 2017.

 

 

(8)

Defined Benefit Plans

Mid Penn has an unfunded noncontributory defined benefit retirement plan for directors.  The plan provides defined benefits based on years of service.  Mid Penn also sponsors a defined benefit health care plan that provides post-retirement medical benefits and life insurance to qualifying full-time employees.  These health care and life insurance plans are noncontributory and each plan uses a December 31 measurement date.  

As a result of the acquisition of Scottdale on January 8, 2018, Mid Penn has assumed a noncontributory defined benefit pension plan covering certain former employees of Scottdale.  Mid Penn estimates it will contribute $600,000 to the defined benefit pension plan in 2018.  A December 31 measurement date for the plan is used.

The components of net periodic benefit costs from these defined benefit plans are as follows:

 

 

Three Months Ended June 30,

 

(Dollars in thousands)

Pension Benefits

 

 

Other Benefits

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Service cost

$

153

 

 

$

9

 

 

$

1

 

 

$

1

 

Interest cost

 

205

 

 

 

11

 

 

 

5

 

 

 

5

 

Expected return on plan assets

 

(211

)

 

 

-

 

 

 

-

 

 

 

-

 

Amortization (accretion) of prior service cost

 

4

 

 

 

4

 

 

 

(5

)

 

 

(6

)

Settlement gain

 

(380

)

 

 

-

 

 

 

-

 

 

 

-

 

Net periodic benefit (income) expense

$

(229

)

 

$

24

 

 

$

1

 

 

$

-

 

 

 

Six Months Ended June 30,

 

(Dollars in thousands)

Pension Benefits

 

 

Other Benefits

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Service cost

$

161

 

 

$

18

 

 

$

2

 

 

$

2

 

Interest cost

 

215

 

 

 

22

 

 

 

9

 

 

 

10

 

Expected return on plan assets

 

(211

)

 

 

-

 

 

 

-

 

 

 

-

 

Amortization (accretion) of prior service cost

 

8

 

 

 

7

 

 

 

(10

)

 

 

(12

)

Settlement gain

 

(380

)

 

 

-

 

 

 

-

 

 

 

-

 

Net periodic benefit (income) expense

$

(207

)

 

$

47

 

 

$

1

 

 

$

-

 

    

33


MID PENN BANCORP, INC.

 

 

(9)

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, net of taxes, are as follows:

 

(Dollars in thousands)

 

Unrealized Loss

on Securities

 

 

Defined Benefit

Plans

 

 

Accumulated Other

Comprehensive

Loss

 

Balance - June 30, 2018

 

$

(4,361

)

 

$

1,127

 

 

$

(3,234

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2017

 

$

(2,159

)

 

$

85

 

 

$

(2,074

)

 

(10)

Restricted Common Stock

On May 6, 2014, Mid Penn shareholders approved the 2014 Restricted Stock Plan (the “Plan”), which authorizes the issuance of awards that shall not exceed, in the aggregate, 100,000 shares of common stock.  Awards under the Plan are limited to employees and directors of the Company and the Bank selected by the Compensation Committee of the Board of Directors, to advance the best interest of Mid Penn and its shareholders.  

Share-based compensation expense relating to restricted stock is recognized on a straight-line basis over the vesting periods of the awards and is a component of salaries and benefits expense.  As of June 30, 2018, a total of 25,995 restricted shares were granted under the Plan, with 6,986 of the granted shares being vested, while the remaining 19,009 granted shares remain unvested.  490 shares were forfeited due to voluntary termination of an employee during the three and six months ended June 30, 2018, while no shares were forfeited during the same periods in 2017.  The Plan shares granted and vested resulted in $55,000 in compensation expense for the three months ended June 30, 2018, while $19,000 of share-based compensation expense was recorded for the three months ended June 30, 2017.  Compensation expense related to the Plan was $113,000 for the six months ended June 30, 2018, while it was $37,000 for the same period in 2017.     

 

(11)

Revenue Recognition

 

Mid Penn recognizes revenues when earned based upon (i) contractual terms as transactions occur, or (ii) as related services are provided and collectability is reasonably assured. The largest source of revenue for Mid Penn is interest income, which is primarily recognized on an accrual basis according to a written contract, such as loan and lease agreements or investment securities contracts.  Mid Penn earns noninterest income through a variety of financial and transactional services such as trust and wealth management services, deposit account transaction fees, ATM debit card fees, and mortgage banking fees.  Revenue is recorded for noninterest income based on the contractual terms for the service or transaction performed. In certain circumstances, noninterest income is reported net of associated expenses.

 

On January 1, 2018, Mid Penn adopted FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU establishes principles for reporting information about the nature, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts to provide goods and services to customers.  ASU 2014-09 applies primarily to transactional-based non-interest income revenue streams and excludes mortgage banking income, earnings from cash surrender value of life insurance, and gains on SBA loans.  

 

Mid Penn’s non-interest income revenue streams of income from fiduciary activities, service charges on deposits, ATM debit charge interchange income, merchant service fees and components of other income are within the scope of Topic 606.  Within these various non-interest income streams, Mid Penn enters into business contracts with customers to perform a variety of services. These services include but not limited to (i) agreed-upon tasks (e.g. initiating a wire transfer or trust and investment management services), (ii) service of standing ready to provide goods and services (e.g. letter of credit arrangements), and (iii) arranging for another party to transfer goods or services to a customer (e.g. check order fees).  Typically, contracts are approved in writing, but can also be approved in accordance with other customary business practices.  The majority of the performance obligations at Mid Penn are distinct and are satisfied at a point in time and typically the transaction prices are fixed and are documented in either a fee schedule, such as non-sufficient funds fees or wire fees, or calculated as a percentage of assets under management for trust and wealth management income streams.  The transaction price is not recognized in revenue until the service has occurred, or monthly in arrears for assets under management.  Mid Penn does not exercise significant judgements in the recognition of income, as typically income is not recognized until the performance obligation has been satisfied.  Mid Penn has not recognized any assets from the costs to obtain or fulfill a contract with customers for revenue streams that fall within the guidance of Topic 606.


34


MID PENN BANCORP, INC.

 

 

(12)

Earnings per Common Share

Earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during each of the years presented.  The following data show the amounts used in computing basic earnings per common share.

The computations of basic earnings per common share follow:

 

(Dollars in thousands, except per share data)

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2018

 

 

 

2017

 

 

2018

 

 

 

2017

 

Net income

$

2,779

 

 

$

2,345

 

 

$

$

3,783

 

 

$

4,339

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

6,122,757

 

 

 

4,234,291

 

 

 

 

6,049,261

 

 

 

4,234,525

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per common share

$

0.45

 

 

$

0.55

 

 

$

$

0.63

 

 

$

1.02

 

 

The increase in the weighted average shares outstanding at June 30, 2018 was impacted by the issuance of 1,878,827 shares of Mid Penn common stock on January 8, 2018 in connection with the Scottdale acquisition.  Mid Penn had no dilutive instruments outstanding during the periods ended June 30, 2018 and 2017.

 

(13)

Recent Accounting Pronouncements

ASU 2016-13:  The FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.

The ASU requires credit losses on most financial assets measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (“CECL”) model).  Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.

The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities.  The allowance for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”) should be determined in a similar manner to other financial assets measured on an amortized cost basis.  However, upon initial recognition, the allowance is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis.  The subsequent accounting for PCD financial assets is the same expected loss model described above.

Further, the ASU made certain targeted amendments to the existing impairment model for available-for-sale debt securities.  For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.  Certain incremental disclosures are required.

The Update has tiered effective dates, with early adoption permitted for all entities as of the fiscal year beginning after December 15, 2018.  For public business entities that are SEC filers, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  For all other public business entities, the amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.  For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through 965 on plan accounting, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021.

Mid Penn is currently evaluating the details of this ASU and the impact the guidance will have on Mid Penn’s consolidated financial statements.  Mid Penn expects that it is possible that the ASU may result in an increase in the allowance for credit losses resulting from the change to expected losses for the estimated life of the financial asset, including an allowance for debt securities.  The amount of the change in the allowance for credit losses, if any, resulting from the new guidance will be impacted by the portfolio composition and asset quality at the adoption date, as well as economic conditions and forecasts at the time of adoption.

ASU 2016-02:  The FASB issued ASU 2016-02, Leases.

The new leases standard applies a right-of-use (“ROU”) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments.  For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability.  At inception, lessees must classify all leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification.


35


MID PENN BANCORP, INC.

 

 

The new leases standard requires a lessor to classify leases as either sales-type, direct financing or operating, similar to existing U.S. GAAP.  Classification depends on the same five criteria used by lessees plus certain additional factors.  The subsequent accounting treatment for all three lease types is substantially equivalent to existing U.S. GAAP for sales-type leases, direct financing leases, and operating leases.  However, the new standard updates certain aspects of the lessor accounting model to align it with the new lessee accounting model, as well as with the new revenue standard under Topic 606.

Lessees and lessors are required to provide certain qualitative and quantitative disclosures to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.  The new leases standard addresses other considerations including identification of a lease, separating lease and non-lease components of a contract, sale and leaseback transactions, modifications, combining contracts, reassessment of the lease term, and re-measurement of lease payments. It also contains comprehensive implementation guidance with practical examples.

On July 30, 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an option to apply the transition provisions of the new standard at the adoption date instead of the earliest comparative period presented.  Additionally, the ASU provides a practical expedient permitting lessors to not separate non-lease components from the associated lease component if certain conditions are met.

The amendments for both ASUs are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Specific transition requirements apply.

The amendments are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Specific transition requirements apply.

Mid Penn occupies certain offices under non-cancelable operating lease agreements, which currently are not reflected in its consolidated statement of condition.  Mid Penn expects to recognize lease liabilities and ROU assets associated with these lease agreements as required by the ASU; however, the extent of the prospective impact on Mid Penn’s consolidated financial statements and the materiality will be dependent upon the extent and type of lease arrangements involving Mid Penn at the time of the adoption of this standard.

ASU 2018-07: The FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting

The ASU makes certain changes to the accounting for nonemployee awards to alight the accounting for share-based payment awards issued to employees and nonemployees.  The changes require that the compensation expense associated with nonemployee equity awards with performance conditions be recognized when the achievement of the performance condition is probable, rather than upon achievement of the performance condition.  Additionally, the new ASU requires that equity-classified share-based payment awards issued to nonemployees be measured on the grant date, versus the previous GAAP requirement to re-measure the awards through the performance completion date.  The current requirement to reassess the classification (equity or liability) for the nonemployee awards upon vesting will be eliminated.

The amendments are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.  Early adoption is permitted, including interim periods.

Mid Penn currently issues restricted stock awards to nonemployee directors through the 2014 Restricted Stock Plan (the “Plan”).  The single performance condition of the award is that the individual remain a director of Mid Penn through the duration of the vesting period.  Mid Penn is currently evaluating the details of this ASU and expects that the adoption of this ASU will not have a material impact on our consolidated financial statements as the compensation expense related to nonemployee equity awards is immaterial to Mid Penn’s overall financial condition.  

 

(14)

Subsequent Events

Merger – First Priority Financial Corp.

After the close of business on July 31, 2018, Mid Penn completed its acquisition of First Priority Financial Corp. (“First Priority”), through the merger of First Priority with and into Mid Penn pursuant to the previously announced Agreement and Plan of Merger (the “Merger Agreement”), dated as of January 16, 2018, between Mid Penn and First Priority. In connection with this acquisition, First Priority Bank, First Priority’s wholly owned bank subsidiary, was merged with and into Mid Penn Bank.  Pursuant to the Merger Agreement, shareholders of First Priority received 0.3481 shares of Mid Penn common stock for each share of First Priority common stock they owned. Additionally, in accordance with the Merger Agreement, outstanding options to purchase First Priority common stock at the time of the merger were converted to the right to receive cash at a per-option value of $11.07 less the exercise price, without interest.  As a result of the acquisition, Mid Penn’s fulfillment of the merger consideration requirements resulted in the issuance of approximately 2.3 million shares of Mid Penn common stock, and the payment of cash related to options of approximately $3.9 million.  Mid Penn also issued 3,404 shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series D, having a fixed dividend rate of 9 percent per annum, in exchange for the 3,404 shares of First Priority preferred shares outstanding as of the closing of the merger.  The acquisition expands Mid Penn’s footprint into southeastern Pennsylvania, including Chester, Berks, Montgomery, and Bucks counties. Based upon the total merger consideration from Mid Penn, the transaction was valued at approximately $79,904,000. At June 30, 2018, and thirty days prior to the acquisition transaction, First Priority Bank reported total assets of $627,428,000, total loans of $522,036,000, and total deposits of $513,582,000 on a Call Report filed with federal banking regulators.

36


MID PENN BANCORP, INC.

 

 

Given that the initial purchase accounting for the acquisition in accordance with generally accepted accounting principles for this business combination is not yet completed, Mid Penn is not yet able to disclose the preliminary fair value of the First Priority assets acquired and liabilities assumed.

Litigation

In connection with the merger acquisition of First Priority (the “Merger”), on May 31, 2018, Mid Penn and First Priority filed with the Securities and Exchange Commission (the “SEC”) a Joint Proxy Statement/Prospectus on Form S-4 (SEC File No. 333- 225304) that was declared effective by the SEC on June 19, 2018 (the “Joint Proxy Statement/Prospectus”). The Joint Proxy Statement/Prospectus was first mailed to the shareholders of First Priority on or about June 20, 2018.

On July 13, 2018, counsel for Mid Penn and First Priority received notification that a complaint was filed in the Court of Common Pleas of Chester County, Pennsylvania, against members of the board of directors of First Priority, First Priority and Mid Penn. The lawsuit, which is captioned Parshall v. Sparks, et al., Case No. 2018-07025-MJ, alleges claims brought directly by one First Priority shareholder, Paul Parshall, but purports to state class claims on behalf of all First Priority shareholders. The lawsuit is based on allegations that the First Priority directors breached their fiduciary duty through material misstatements and/or omissions in the proxy statement/prospectus distributed to shareholders of First Priority and Mid Penn in connection with the pending merger of First Priority with and into Mid Penn. The lawsuit further alleges that the merger consideration is inadequate. Mid Penn is alleged to have aided and abetted the First Priority directors’ alleged breaches of their fiduciary duties. The lawsuit seeks, among other remedies, to enjoin the merger or, in the event the merger is completed, rescission of the merger or rescissory damages; unspecified damages; and costs of the lawsuit, including attorneys’ and experts’ fees. Mid Penn believes that the lawsuit is without merit as there are substantial legal and factual defenses to the claims asserted and intends to vigorously defend the lawsuit.  It is not possible at this time to estimate reasonably possible losses, or even a range of reasonably possible losses, in connection with the litigation.

37


MID PENN BANCORP, INC.

 

 

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following is Management’s Discussion of Consolidated Financial Condition as of June 30, 2018, compared to year-end 2017, and the Results of Operations for the three and six months ended June 30, 2018, compared to the same period in 2017.  For comparative purposes, the June 30, 2018 and December 31, 2017 balances have been reclassified, when, and if necessary, to conform to the 2018 presentation.  Such reclassifications had no impact on net income.  This discussion should be read in conjunction with the financial tables, statistics, and the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (the “2017 Annual Report”).  The results of operations for interim periods are not necessarily indicative of operating results expected for the full year.

 

Caution About Forward-Looking Statements

 

Forward-looking statements involve risks, uncertainties and assumptions.  Although Mid Penn generally does not make forward-looking statements unless Mid Penn’s management believes its management has a reasonable basis for doing so, Mid Penn cannot guarantee the accuracy of any forward-looking statements.  Actual results may differ materially from those expressed in any forward-looking statements due to a number of uncertainties and risks, including the risks described in this Quarterly Report on Form 10-Q, the 2017 Annual Report, and other unforeseen risks.  You should not put undue reliance on any forward-looking statements.  These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by us on Mid Penn’s website or otherwise, and Mid Penn undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

 

Certain of the matters discussed in this document and in documents incorporated by reference herein, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Mid Penn to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.  The words “expect”, “anticipates”, “intend”, “plan”, “believe”, “estimate”, and similar expressions are intended to identify such forward-looking statements.  Mid Penn’s actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:

 

 

the effects of potentially slowing or volatile future economic conditions on Mid Penn and its customers;

 

governmental monetary and fiscal policies, as well as legislative and regulatory changes;

 

future actions or inactions of the United States government, including a failure to increase the government debt limit or a prolonged shutdown of the federal government;

 

an increase in the Pennsylvania Bank Shares Tax to which Mid Penn Bank’s capital stock is currently subject, or imposition of any additional taxes on Mid Penn or Mid Penn Bank;

 

impacts of the capital and liquidity requirements imposed by the Basel III standards and other regulatory pronouncements and rules;

 

the effect of changes in accounting policies and practices, as may be adopted by the supervisory agencies, as well as the Public Company Accounting Oversight Board, Financial Accounting Standards Board, and other accounting standard setters;

 

the risks of changes in interest rates on the level and composition of deposits and other funding sources, loan demand and yields, values of loan collateral, securities and yields, and interest rate protection agreements;

 

the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in Mid Penn’s market area and elsewhere, including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet;

 

the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;

 

technological changes;

 

our ability to implement business strategies, including our acquisitions of First Priority Financial Corp. (“First Priority”) and The Scottdale Bank and Trust Company (“Scottdale”), and other business acquisition activities and organic branch, product and service expansion strategies;

 

our current and future acquisition strategies may not be successful in locating or acquiring advantageous targets at favorable prices;

 

our ability to successfully integrate any banks, companies, assets, liabilities, customers, systems and management personnel we acquire into our operations, including those related to our acquisitions of First Priority and Scottdale, and our ability to realize related revenue synergies and cost savings within expected time frames;

 

potential goodwill impairment charges, future impairment charges and fluctuations in the fair values of reporting units or of assets in the event projected financial results are not achieved within expected time frames;

 

our ability to attract and retain qualified management and personnel;

 

our ability to maintain the value and image of our brand and protect our intellectual property rights;

 

results of regulatory examination and supervision processes;

 

our ability to maintain compliance with the exchange rules of The NASDAQ Stock Market LLC;

 

the failure of assumptions underlying the establishment of reserves for loan and lease losses and estimations of values of collateral and various financial assets and liabilities;

 

acts of war or terrorism; disruptions due to flooding, severe weather, or other natural disasters or Acts of God; and

 

volatility in the securities markets.

 

The above list of factors that may affect future performance is illustrative, but by no means exhaustive.  Accordingly, all forward-looking statements should be evaluated with this understanding of inherent uncertainty.

 

38


MID PENN BANCORP, INC.

 

 

Critical Accounting Estimates

 

Mid Penn’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and conform to general practices within the banking industry.  Application of these principles involves significant judgments and estimates by management that have a material impact on the carrying value of certain assets and liabilities.  The judgments and estimates that we used are also based on historical experiences and other factors, which are believed to be reasonable under the circumstances.  Because of the nature of the judgments and estimates that we have made, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of our operations.  Management of the Company considers the accounting judgments relating to the allowance, the evaluation of the Company’s investment securities for other-than-temporary impairment, the valuation of the Company’s goodwill and other merger-related intangible assets for impairment, and the valuation of assets acquired and liabilities assumed in business combinations, to be the accounting areas that require the most subjective and complex judgments.

 

The allowance represents management’s estimate of probable incurred credit losses inherent in the loan and lease portfolio.  Determining the amount of the allowance is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.  The loan and lease portfolio also represents the largest asset type on the consolidated balance sheet.  Throughout the remainder of this report, the terms “loan” or “loans” refers to both loans and leases.

 

Valuations for the investment portfolio are determined using quoted market prices, where available.  If quoted market prices are not available, investment valuation is based on pricing models, quotes for similar investment securities, and observable yield curves and spreads.  In addition to securities valuation, management must assess whether there are any declines in value below the carrying value of the investments that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of the loss in the consolidated statement of income.

 

Certain intangible assets generated in connection with acquisitions are periodically assessed for impairment.  Goodwill is tested annually for impairment, and if certain events occur which indicate goodwill might be impaired between annual tests, goodwill must be tested when such events occur.  In making this assessment, Mid Penn considers a number of factors including operating results, business plans, economic projections, anticipated future cash flows, current market data, stock price, etc.  Similarly, the amortized basis of the core deposit intangible asset is periodically assessed for impairment.  There are inherent uncertainties related to these factors and Mid Penn’s judgment in applying them to the analysis of core deposit intangible and goodwill impairment.  Changes in economic and operating conditions could result in goodwill and core deposit intangible impairment in future periods.  

 

Valuations of assets acquired and liabilities assumed in business combinations are measured at fair value as of the acquisition date.  In many cases, determining the fair value of the assets acquired and liabilities assumed requires Mid Penn to estimate cash flows expected to result from these assets and liabilities and to discount these cash flows at appropriate rates of interest, which require the utilization of significant estimates and judgment in accounting for the acquisition.

 

Results of Operations

 

Overview

 

Net income was $2,779,000 or $0.45 per common share, for the quarter ended June 30, 2018, compared to net income of $2,345,000 or $0.55 per common share, for the quarter ended June 30, 2017.  During the six months ended June 30, 2018, net income was $3,783,000,000 or $0.63 per common share, versus $4,339,000 or $1.02 per common share, for the six months ended June 30, 2017.  

 

Net income as a percent of (i) average assets (return on average assets, or “ROA”) and (ii) shareholders' equity (return on average equity, or “ROE”) were as follows (calculated and reported on an annualized basis):

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Return on average assets

 

0.79

%

 

 

0.86

%

 

 

0.55

%

 

 

0.82

%

Return on average equity

 

7.90

%

 

 

12.74

%

 

 

5.34

%

 

 

12.05

%

 

Net Interest Income/Funding Sources

Net interest income, Mid Penn’s primary source of revenue, is the amount by which interest income on loans and investments exceeds interest incurred on deposits and borrowings.  The amount of net interest income is affected by changes in interest rates and changes in the volume and mix of interest-sensitive assets and liabilities.  Net interest income and corresponding yields are presented in the analysis below on a taxable-equivalent basis.  Income from tax-exempt assets, primarily loans to or securities issued by state and local governments, is adjusted by an amount equivalent to the federal income taxes which would have been paid if the income received on these assets was taxable at the statutory rate of 21 percent for the three and six months ended June 30, 2018 and 34 percent for the three and six months ended June 30, 2017.  The decrease in the statutory rate to 21 percent, which became effective January 1, 2018, was a result of the Tax Cuts and Jobs Act enacted December 22, 2017.

 

 

 

39


MID PENN BANCORP, INC.

 

 

The following tables include average balances, amounts, and rates of interest income and expense, interest rate spread, and net interest margin for the three and six months ended June 30, 2018 and 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balances, Income and Interest Rates on a Taxable Equivalent Basis

 

 

 

For the Three Months Ended

 

(Dollars in thousands)

 

June 30, 2018

 

 

June 30, 2017

 

 

 

Average

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

Average

 

 

 

Balance

 

 

Interest

 

 

Rates

 

 

Balance

 

 

Interest

 

 

Rates

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Balances

 

$

 

4,755

 

 

$

 

17

 

 

 

1.43

%

 

$

 

2,663

 

 

$

 

5

 

 

 

0.75

%

Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

 

163,247

 

 

 

 

913

 

 

 

2.24

%

 

 

 

122,661

 

 

 

 

604

 

 

 

1.98

%

Tax-Exempt

 

 

 

95,868

 

 

 

 

695

 

(a)

 

2.91

%

 

 

 

50,052

 

 

 

 

401

 

(a)

 

3.21

%

Total Securities

 

 

 

259,116

 

 

 

 

1,608

 

 

 

2.49

%

 

 

 

172,713

 

 

 

 

1,005

 

 

 

2.33

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds Sold

 

 

 

34,137

 

 

 

 

153

 

 

 

1.80

%

 

 

 

8,766

 

 

 

 

23

 

 

 

1.05

%

Loans and Leases, Net

 

 

 

1,017,666

 

 

 

 

12,137

 

(b)

 

4.78

%

 

 

 

848,980

 

 

 

 

10,060

 

(b)

 

4.75

%

Restricted Investment in Bank Stocks

 

 

 

2,825

 

 

 

 

47

 

 

 

6.67

%

 

 

 

2,702

 

 

 

 

33

 

 

 

4.90

%

Total Earning Assets

 

 

 

1,318,499

 

 

 

 

13,962

 

 

 

4.25

%

 

 

 

1,035,824

 

 

 

 

11,126

 

 

 

4.31

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Due from Banks

 

 

 

23,112

 

 

 

 

 

 

 

 

 

 

 

 

 

21,728

 

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

70,354

 

 

 

 

 

 

 

 

 

 

 

 

 

33,831

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

 

1,411,965

 

 

 

 

 

 

 

 

 

 

 

$

 

1,091,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing Demand

 

$

 

358,192

 

 

 

 

527

 

 

 

0.59

%

 

$

 

335,556

 

 

 

 

294

 

 

 

0.35

%

Money Market

 

 

 

275,320

 

 

 

 

587

 

 

 

0.86

%

 

 

 

249,928

 

 

 

 

357

 

 

 

0.57

%

Savings

 

 

 

172,815

 

 

 

 

75

 

 

 

0.17

%

 

 

 

63,372

 

 

 

 

10

 

 

 

0.06

%

Time

 

 

 

223,744

 

 

 

 

808

 

 

 

1.45

%

 

 

 

193,688

 

 

 

 

616

 

 

 

1.28

%

Total Interest-bearing Deposits

 

 

 

1,030,071

 

 

 

 

1,997

 

 

 

0.78

%

 

 

 

842,544

 

 

 

 

1,277

 

 

 

0.61

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term Borrowings

 

 

 

 

 

 

 

 

 

 

0.00

%

 

 

 

4,472

 

 

 

 

13

 

 

 

1.17

%

Long-term Debt

 

 

 

12,269

 

 

 

 

74

 

 

 

2.42

%

 

 

 

13,496

 

 

 

 

80

 

 

 

2.38

%

Subordinated Debt

 

 

 

17,339

 

 

 

 

235

 

 

 

5.44

%

 

 

 

7,417

 

 

 

 

99

 

 

 

5.35

%

Total Interest-bearing Liabilities

 

 

 

1,059,679

 

 

 

 

2,306

 

 

 

0.87

%

 

 

 

867,929

 

 

 

 

1,469

 

 

 

0.68

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing Demand

 

 

 

199,299

 

 

 

 

 

 

 

 

 

 

 

 

 

138,423

 

 

 

 

 

 

 

 

 

 

Other Liabilities

 

 

 

13,353

 

 

 

 

 

 

 

 

 

 

 

 

 

11,188

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

139,634

 

 

 

 

 

 

 

 

 

 

 

 

 

73,843

 

 

 

 

 

 

 

 

 

 

Total Liabilities & Shareholders' Equity

 

$

 

1,411,965

 

 

 

 

 

 

 

 

 

 

 

$

 

1,091,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income (taxable equivalent basis)

 

 

 

 

 

 

$

 

11,656

 

 

 

 

 

 

 

 

 

 

 

$

 

9,657

 

 

 

 

 

Taxable Equivalent Adjustment

 

 

 

 

 

 

 

 

(242

)

 

 

 

 

 

 

 

 

 

 

 

 

(247

)

 

 

 

 

Net Interest Income

 

 

 

 

 

 

$

 

11,414

 

 

 

 

 

 

 

 

 

 

 

$

 

9,410

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Yield on Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

4.25

%

 

 

 

 

 

 

 

 

 

 

 

 

4.31

%

Rate on Supporting Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

0.87

%

 

 

 

 

 

 

 

 

 

 

 

 

0.68

%

Average Interest Spread

 

 

 

 

 

 

 

 

 

 

 

 

3.37

%

 

 

 

 

 

 

 

 

 

 

 

 

3.63

%

Net Interest Margin

 

 

 

 

 

 

 

 

 

 

 

 

3.55

%

 

 

 

 

 

 

 

 

 

 

 

 

3.74

%

 

(a)

Includes tax-equivalent adjustments on interest from tax-free municipal securities of $178,000 and $136,000 for the three months ended June 30, 2018 and 2017, respectively.  Tax-equivalent adjustments were calculated using statutory tax rates of 21% and 34% at June 30, 2018 and 2017, respectively.

 

(b)

Includes tax-equivalent adjustments on interest from tax-free municipal loans of $64,000 and $111,000 for the three months ended June 30, 2018 and 2017, respectively.  Tax-equivalent adjustments were calculated using statutory tax rates of 21% and 34% at June 30, 2018 and 2017, respectively.

 

 

 

40


MID PENN BANCORP, INC.

 

 

 

 

Three months ended

 

 

 

June 30, 2018 vs. 2017

 

(Dollars in thousands on a Taxable Equivalent Basis)

 

Increase (decrease)

 

 

 

Volume

 

 

Rate

 

 

Net

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Balances

 

$

4

 

 

$

8

 

 

$

12

 

Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

200

 

 

 

109

 

 

 

309

 

Tax-Exempt

 

 

367

 

 

 

(73

)

 

 

294

 

Total Securities

 

 

567

 

 

 

36

 

 

 

603

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds Sold

 

 

67

 

 

 

63

 

 

 

130

 

Loans and Leases, Net

 

 

1,999

 

 

 

78

 

 

 

2,077

 

Restricted Investment Bank Stocks

 

 

2

 

 

 

12

 

 

 

14

 

Total Interest Income

 

 

2,639

 

 

 

197

 

 

 

2,836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Demand

 

 

80

 

 

 

153

 

 

 

233

 

Money Market

 

 

145

 

 

 

85

 

 

 

230

 

Savings

 

 

69

 

 

 

(4

)

 

 

65

 

Time

 

 

383

 

 

 

(191

)

 

 

192

 

Total Interest Bearing Deposits

 

 

677

 

 

 

43

 

 

 

720

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term Borrowings

 

 

(52

)

 

 

39

 

 

 

(13

)

Long-term Debt

 

 

(29

)

 

 

23

 

 

 

(6

)

Subordinated Debt

 

 

531

 

 

 

(395

)

 

 

136

 

Total Interest Expense

 

 

1,127

 

 

 

(290

)

 

 

837

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

$

1,512

 

 

$

487

 

 

$

1,999

 

Taxable-equivalent net interest income was $11,656,000 for the three months ended June 30, 2018, an increase of $1,999,000 or 21 percent compared to the three months ended June 30, 2017.  Net interest income in the second quarter of 2018 was positively impacted by $71,809,000 of loans and $114,039,000 of investment securities acquired in the purchase of Scottdale on January 8, 2018.    

For the three months ended June 30, 2018, Mid Penn’s tax-equivalent net interest margin was 3.55% compared to 3.74% for the three months ended June 30, 2017. The decrease in the net interest margin year over year was attributed to both an increase in the cost of funds and a lower yield earned on the loan portfolio. The cost of funds increased to 0.87% for the second quarter of 2018, versus 0.68% for the second quarter of 2017, primarily as a result of the impact of the Federal Open Market Committee (“FOMC”) rate increases in the past twelve months.  For the three months ended June 30, 2018, the overall loan portfolio yield was 4.78%, compared to a loan portfolio yield of 4.75% for the same period in 2017.  The loan yield for the second quarter of 2018 reflects the impact of Scottdale loans acquired at fair value on January 8, 2018.  

 

 

 

41


MID PENN BANCORP, INC.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balances, Income and Interest Rates on a Taxable Equivalent Basis

 

 

 

For the Six Months Ended

 

(Dollars in thousands)

 

June 30, 2018

 

 

June 30, 2017

 

 

 

Average

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

Average

 

 

 

Balance

 

 

Interest

 

 

Rates

 

 

Balance

 

 

Interest

 

 

Rates

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Balances

 

$

 

4,273

 

 

$

 

26

 

 

 

1.23

%

 

$

 

2,462

 

 

$

 

7

 

 

 

0.57

%

Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

 

158,381

 

 

 

 

1,751

 

 

 

2.23

%

 

 

 

109,670

 

 

 

 

1,070

 

 

 

1.97

%

Tax-Exempt

 

 

 

95,644

 

 

 

 

1,341

 

(a)

 

2.83

%

 

 

 

52,511

 

 

 

 

879

 

(a)

 

3.38

%

Total Securities

 

 

 

254,025

 

 

 

 

3,092

 

 

 

2.45

%

 

 

 

162,181

 

 

 

 

1,949

 

 

 

2.42

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds Sold

 

 

 

39,284

 

 

 

 

321

 

 

 

1.65

%

 

 

 

15,976

 

 

 

 

74

 

 

 

0.93

%

Loans and Leases, Net

 

 

 

997,749

 

 

 

 

23,534

 

(b)

 

4.76

%

 

 

 

836,702

 

 

 

 

19,885

 

(b)

 

4.79

%

Restricted Investment in Bank Stocks

 

 

 

2,875

 

 

 

 

133

 

 

 

9.33

%

 

 

 

2,518

 

 

 

 

56

 

 

 

4.48

%

Total Earning Assets

 

 

 

1,298,206

 

 

 

 

27,106

 

 

 

4.21

%

 

 

 

1,019,839

 

 

 

 

21,971

 

 

 

4.34

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Due from Banks

 

 

 

28,916

 

 

 

 

 

 

 

 

 

 

 

 

 

18,647

 

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

68,297

 

 

 

 

 

 

 

 

 

 

 

 

 

34,268

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

 

1,395,546

 

 

 

 

 

 

 

 

 

 

 

$

 

1,072,754

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing Demand

 

$

 

360,768

 

 

 

 

1,020

 

 

 

0.57

%

 

$

 

329,617

 

 

 

 

570

 

 

 

0.35

%

Money Market

 

 

 

265,208

 

 

 

 

1,081

 

 

 

0.82

%

 

 

 

250,396

 

 

 

 

705

 

 

 

0.57

%

Savings

 

 

 

170,589

 

 

 

 

150

 

 

 

0.18

%

 

 

 

62,455

 

 

 

 

18

 

 

 

0.06

%

Time

 

 

 

215,651

 

 

 

 

1,526

 

 

 

1.43

%

 

 

 

188,988

 

 

 

 

1,188

 

 

 

1.27

%

Total Interest-bearing Deposits

 

 

 

1,012,216

 

 

 

 

3,777

 

 

 

0.75

%

 

 

 

831,456

 

 

 

 

2,481

 

 

 

0.60

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term Borrowings

 

 

 

1,518

 

 

 

 

12

 

 

 

1.59

%

 

 

 

2,256

 

 

 

 

13

 

 

 

1.16

%

Long-term Debt

 

 

 

12,297

 

 

 

 

149

 

 

 

2.44

%

 

 

 

13,525

 

 

 

 

161

 

 

 

2.40

%

Subordinated Debt

 

 

 

17,337

 

 

 

 

470

 

 

 

5.47

%

 

 

 

7,416

 

 

 

 

198

 

 

 

5.38

%

Total Interest-bearing Liabilities

 

 

 

1,043,368

 

 

 

 

4,408

 

 

 

0.85

%

 

 

 

854,653

 

 

 

 

2,853

 

 

 

0.67

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing Demand

 

 

 

195,597

 

 

 

 

 

 

 

 

 

 

 

 

 

134,000

 

 

 

 

 

 

 

 

 

 

Other Liabilities

 

 

 

13,472

 

 

 

 

 

 

 

 

 

 

 

 

 

11,492

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

142,982

 

 

 

 

 

 

 

 

 

 

 

 

 

72,609

 

 

 

 

 

 

 

 

 

 

Total Liabilities & Shareholders' Equity

 

$

 

1,395,546

 

 

 

 

 

 

 

 

 

 

 

$

 

1,072,754

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income (taxable equivalent basis)

 

 

 

 

 

 

$

 

22,698

 

 

 

 

 

 

 

 

 

 

 

$

 

19,118

 

 

 

 

 

Taxable Equivalent Adjustment

 

 

 

 

 

 

 

 

(406

)

 

 

 

 

 

 

 

 

 

 

 

 

(533

)

 

 

 

 

Net Interest Income

 

 

 

 

 

 

$

 

22,292

 

 

 

 

 

 

 

 

 

 

 

$

 

18,585

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Yield on Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

4.21

%

 

 

 

 

 

 

 

 

 

 

 

 

4.34

%

Rate on Supporting Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

0.85

%

 

 

 

 

 

 

 

 

 

 

 

 

0.67

%

Average Interest Spread

 

 

 

 

 

 

 

 

 

 

 

 

3.36

%

 

 

 

 

 

 

 

 

 

 

 

 

3.67

%

Net Interest Margin

 

 

 

 

 

 

 

 

 

 

 

 

3.53

%

 

 

 

 

 

 

 

 

 

 

 

 

3.78

%

 

 

(a)

Includes tax-equivalent adjustments on interest from tax-free municipal securities of $281,000 and $299,000 for the six months ended June 30, 2018 and 2017, respectively.  Tax-equivalent adjustments were calculated using statutory tax rates of 21% and 34% at June 30, 2018 and 2017, respectively.

 

 

(b)

Includes tax-equivalent adjustments on interest from tax-free municipal loans of $124,000 and $234,000 for the six months ended June 30, 2018 and 2017, respectively.  Tax-equivalent adjustments were calculated using statutory tax rates of 21% and 34% at June 30, 2018 and 2017, respectively.

42


MID PENN BANCORP, INC.

 

 

 

 

Six months ended

 

 

 

June 30, 2018 vs. 2017

 

(Dollars in thousands on a Taxable Equivalent Basis)

 

Increase (decrease)

 

 

 

Volume

 

 

Rate

 

 

Net

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Balances

 

$

5

 

 

$

14

 

 

$

19

 

Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

476

 

 

 

205

 

 

 

681

 

Tax-Exempt

 

 

723

 

 

 

(261

)

 

 

462

 

Total Securities

 

 

1,199

 

 

 

(56

)

 

 

1,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds Sold

 

 

107

 

 

 

140

 

 

 

247

 

Loans and Leases, Net

 

 

3,825

 

 

 

(176

)

 

 

3,649

 

Restricted Investment Bank Stocks

 

 

8

 

 

 

69

 

 

 

77

 

Total Interest Income

 

 

5,144

 

 

 

(9

)

 

 

5,135

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Demand

 

 

54

 

 

 

396

 

 

 

450

 

Money Market

 

 

42

 

 

 

334

 

 

 

376

 

Savings

 

 

32

 

 

 

100

 

 

 

132

 

Time

 

 

168

 

 

 

170

 

 

 

338

 

Total Interest Bearing Deposits

 

 

296

 

 

 

1,000

 

 

 

1,296

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term Borrowings

 

 

(4

)

 

 

3

 

 

 

(1

)

Long-term Debt

 

 

(15

)

 

 

3

 

 

 

(12

)

Subordinated Debt

 

 

265

 

 

 

7

 

 

 

272

 

Total Interest Expense

 

 

542

 

 

 

1,013

 

 

 

1,555

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

$

4,602

 

 

$

(1,022

)

 

$

3,580

 

During the six months ended June 30, 2018, taxable-equivalent net interest income increased $3,580,000 or 19 percent to $22,698,000 from $19,118,000 during the six months ended June 30, 2017.  Net interest income in the first half of 2018 was positively impacted by $70,769,000 of loans and $114,039,000 of investment securities acquired in the Scottdale acquisition on January 8, 2018.    

For the six months ended June 30, 2018, Mid Penn’s tax-equivalent net interest margin was 3.53% compared to 3.78% for the six months ended June 30, 2017. The decrease in the net interest margin year over year was attributed to both an increase in the cost of funds and a lower yield earned on the loan portfolio. The cost of funds increased to 0.85% for the first half of 2018, versus 0.67% for the first half of 2017, primarily as a result of the impact of the FOMC rate increases in the past twelve months.  For the six months ended June 30, 2018, the overall loan portfolio yield was 4.76%, compared to a loan portfolio yield of 4.79% for the same period in 2017.  The loan yield for the first quarter of 2018 reflects the impact of Scottdale loans acquired at fair value on January 8, 2018.  

Although the effective interest rate impact on earning assets and funding sources can be reasonably estimated at current interest rate levels, the interest-bearing product and pricing options selected by customers, and the future mix of the loan, investment, and deposit products in the Bank's portfolios, may significantly change the estimates used in Mid Penn’s asset and liability management and related interest rate risk simulation models.  In addition, our net interest income may be impacted by further interest rate actions of FOMC.

Provision for Loan Losses

The provision for loan and lease losses is the expense necessary to maintain the allowance at a level adequate to absorb management’s estimate of probable losses in the loan and lease portfolio.  Mid Penn’s provision for loan and lease losses is based upon management’s monthly review of the loan portfolio.  The purpose of the review is to assess loan quality, identify impaired loans and leases, analyze delinquencies, ascertain loan and lease growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets Mid Penn serves.

Mid Penn has maintained the allowance in accordance with Mid Penn’s assessment process, which takes into consideration, among other relevant factors, the risk characteristics of the loan portfolio, the growth in the loan portfolio during the first six months of 2018, and shifting collateral values from December 31, 2017 to June 30, 2018.

43


MID PENN BANCORP, INC.

 

 

Management performs a monthly evaluation of the adequacy of the loan and lease loss allowance and based on this evaluation, no loan loss provision was recorded for the three months ended June 30, 2018, compared to a loan loss provision of $100,000 for the three months ended June 30, 2017. During the six months ended June 30, 2018, the provision for loan and lease losses was $125,000 compared to $225,000 for the six months ended June 30, 2017.  The amount of loan loss provision for the first six months of 2018 was less than the same period in 2017 as Mid Penn had net loan recoveries of $458,000 in the first six months of 2018 which substantially increased the allowance for loan loss balance.  The allowance for loan and lease losses as a percentage of total loans was 0.79% at June 30, 2018, compared to 0.84% at December 31, 2017, and 0.89% at June 30, 2017.  This ratio reflects the impact of the entire portfolio of Scottdale loans being added at fair value with no accompanying loan and lease loss allowance in accordance with purchase accounting GAAP.  For further discussion of factors affecting the provision for loan and lease losses please see Credit Quality, Credit Risk, and Allowance for Loan and Lease Losses in the Financial Condition section of this Management’s Discussion and Analysis.

 

Noninterest Income

 

During the three months ended June 30, 2018, noninterest income was $1,559,000 reflecting an increase of $197,000 or 14 percent compared to noninterest income of $1,362,000 for the three months ended June 30, 2017.  For the six months ended June 30, 2018, noninterest income totaled $3,206,000, an increase of $408,000 or 15 percent, compared to noninterest income of $2,798,000 for the same period in 2017.

The following components of noninterest income showed significant changes:

(Dollars in Thousands)

Three Months Ended June 30,

 

 

2018

 

 

2017

 

 

$ Variance

 

 

% Variance

 

Income from fiduciary activities

$

286

 

 

$

200

 

 

$

86

 

 

 

43

%

Service charges on deposits

 

222

 

 

 

174

 

 

 

48

 

 

 

28

%

Net gain on sales of investment securities

 

4

 

 

 

12

 

 

 

(8

)

 

 

-67

%

Mortgage banking income

 

205

 

 

 

225

 

 

 

(20

)

 

 

-9

%

ATM debit card interchange income

 

326

 

 

 

232

 

 

 

94

 

 

 

41

%

 

(Dollars in Thousands)

Six Months Ended June 30,

 

 

2018

 

 

2017

 

 

$ Variance

 

 

% Variance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from fiduciary activities

$

526

 

 

$

396

 

 

$

130

 

 

 

33

%

Service charges on deposits

 

425

 

 

 

379

 

 

 

46

 

 

 

12

%

Net gain on sales of investment securities

 

102

 

 

 

20

 

 

 

82

 

 

 

410

%

Mortgage banking income

 

361

 

 

 

416

 

 

 

(55

)

 

 

-13

%

ATM debit card interchange income

 

591

 

 

 

456

 

 

 

135

 

 

 

30

%

Other income

 

492

 

 

 

393

 

 

 

99

 

 

 

25

%

 

Income from fiduciary activities was $526,000 for the six months ended June 30, 2018, an increase of $130,000 or 33 percent compared to fiduciary income of $396,000 for the six months ended June 30, 2017. These additional revenues were attributed to continued growth in trust assets under management as a result of successful business development efforts by Mid Penn’s wealth management team.

 

For the six months ended June 30, 2018, service charges on deposits were $425,000, an increase of $46,000 or 12 percent, compared to service charges of $379,000 for the six months ended June 30, 2017.  This increase was driven by an increase in the volume of transactional deposit accounts, including acquired deposit accounts from the Scottdale acquisition, and an increase in charges collected.

 

Net gains on sales of securities were $102,000 for the six months ended June 30, 2018, an increase of $82,000 compared to net gains on sales of securities of $20,000 during the same period of 2017. Some investment securities acquired from Scottdale were subsequently sold to ensure the overall portfolio was in greater alignment with Mid Penn’s investment management objectives.

 

ATM debit card interchange income was $591,000 for the six months ended June 30, 2018, an increase of $135,000 or 30 percent compared to interchange income of $456,000 for the same period in 2017. The additional income is a result of an increased volume of checking accounts, and an increase in Mid Penn Bank ATM and debit card activity, which included an increase in transaction volume resulting from accounts added from the Scottdale acquisition.

 

Other income was $492,000 for the six months ended June 30, 2018, an increase of $99,000 or 25 percent compared to other income of $393,000 for the same period of 2017.  The increase in other income was primarily driven by increases in letter of credit renewal fees and other service fees.

 

Mortgage banking income was $361,000 for the six months ended June 30, 2018, a decrease of $55,000 or 13 percent compared to the six months ended June 30, 2017. Rising longer-term interest rates have resulted in a lower volume of mortgage refinance activity in the first half of 2018 when compared to the same period in 2017.

 


44


MID PENN BANCORP, INC.

 

 

Noninterest Expense

During the three months ended June 30, 2018, noninterest expenses totaled $9,742,000, an increase of $2,184,000 or 29 percent compared to noninterest expenses of $7,558,000 for the three months ended June 30, 2017.  Noninterest expense for the six months ended June 30, 2018 totaled $20,925,000, an increase of $5,565,000 or 36 percent compared to noninterest expenses of $15,360,000 for the first six months of 2017.  

The changes were primarily a result of the following components of noninterest expense, which had notable variances when comparing results for periods ending in 2018 versus the similar period in 2017:

 

(Dollars in Thousands)

Three Months Ended June 30,

 

 

2018

 

 

2017

 

 

$ Variance

 

 

% Variance

 

Salaries and employee benefits

$

4,542

 

 

$

4,159

 

 

$

383

 

 

 

9

%

Occupancy expense, net

 

870

 

 

 

593

 

 

 

277

 

 

 

47

%

Equipment expense

 

544

 

 

 

370

 

 

 

174

 

 

 

47

%

FDIC Assessment

 

93

 

 

 

194

 

 

 

(101

)

 

 

-52

%

Legal and professional fees

 

256

 

 

 

189

 

 

 

67

 

 

 

35

%

Marketing and advertising expense

 

230

 

 

 

131

 

 

 

99

 

 

 

76

%

Software licensing

 

512

 

 

 

370

 

 

 

142

 

 

 

38

%

Telephone expense

 

156

 

 

 

133

 

 

 

23

 

 

 

17

%

Intangible amortization

 

248

 

 

 

24

 

 

 

224

 

 

 

933

%

Merger and acquisition expense

 

222

 

 

 

14

 

 

 

208

 

 

 

1486

%

Other expenses

 

1,897

 

 

 

1,215

 

 

 

682

 

 

 

56

%

 

(Dollars in Thousands)

Six Months Ended June 30,

 

 

2018

 

 

2017

 

 

$ Variance

 

 

% Variance

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

$

9,606

 

 

$

8,389

 

 

$

1,217

 

 

 

15

%

Occupancy expense, net

 

1,667

 

 

 

1,241

 

 

 

426

 

 

 

34

%

Equipment expense

 

952

 

 

 

751

 

 

 

201

 

 

 

27

%

FDIC Assessment

 

321

 

 

 

388

 

 

 

(67

)

 

 

-17

%

Legal and professional fees

 

480

 

 

 

366

 

 

 

114

 

 

 

31

%

Marketing and advertising expense

 

419

 

 

 

238

 

 

 

181

 

 

 

76

%

Software licensing

 

1,026

 

 

 

699

 

 

 

327

 

 

 

47

%

Telephone expense

 

303

 

 

 

259

 

 

 

44

 

 

 

17

%

Intangible amortization

 

496

 

 

 

53

 

 

 

443

 

 

 

836

%

Merger and acquisition expense

 

1,916

 

 

 

224

 

 

 

1,692

 

 

 

755

%

Other expenses

 

3,394

 

 

 

2,334

 

 

 

1,060

 

 

 

45

%

 

During the first half of 2018, merger and acquisition expenses of $1,916,000 were incurred in connection with (i) the completed acquisition of Scottdale on January 8, 2018 and the subsequent systems conversion activities, with such expenses including severance costs, legal and professional fees, investment banking fees, and information technology costs; and (ii) the planned acquisition of First Priority, with such expenses including primarily investment banking fees, merger-related legal expenses, and professional fees related to the preparation and filing of merger documents.  Merger and acquisition expenses of $224,000 recorded during the first half of 2017 were investment banking and legal fees related to the initial stages of the Scottdale acquisition.

 

Salaries and employee benefits expense increased $1,217,000 or 15 percent during the six months ended June 30, 2018, versus the same period in 2017, with the increase attributable to (i) the retail staff additions at the five retail locations added through the Scottdale acquisition and the opening of the Halifax, PA branch, all effective January 8, 2018, and (ii) the addition of commercial lending personnel and credit support staff in alignment with Mid Penn’s core banking growth.

 

Occupancy expenses increased $426,000 or 34 percent during the first six months of 2018 compared to the same period in 2017.  Similarly, equipment expense increased $201,000 or 27 percent during the first six months of 2018 compared to the first six months of 2017.  These increases were driven by (i) the facility operating costs and increased depreciation expense for building, furniture, and equipment associated with the addition of the above-noted Scottdale market and Halifax, PA branch offices, and (ii) depreciation and occupancy costs related to Mid Penn’s move to new administrative facilities in the Capital Region.  

 

FDIC assessment expense was $321,000 for the six months ended June 30, 2018, a decrease of $67,000 or 17 percent compared to $388,000 for the six months ended June 30, 2017.  As a result of the Scottdale acquisition and successful workouts of non-performing assets, Mid Penn has reported more favorable capital and asset quality ratios, resulting in a lower FDIC Assessment rate for the second quarter of 2018.

 

Legal and professional fees for the six months ended June 30, 2018 increased by $114,000 or 31 percent compared to the same period in 2017 due to increased third-party services for wealth management, audit, and public relations activities.

45


MID PENN BANCORP, INC.

 

 

Marketing and advertising expense increased 76 percent, from $238,000 for the six months ended June 30, 2017 to $419,000 for the same period in 2018.  The increased costs were a result of increased marketing and branding initiatives related to the Scottdale acquisition, and market-specific business development promotions across Mid Penn’s footprint.  

 

Software licensing costs were $1,026,000 during the six months ended June 30, 2018, an increase of $327,000 or 47 percent compared to $699,000 for the six months ended June 30, 2017. The increase is a result of additional costs to license all the Scottdale locations and new branches, upgrades to internal systems to enhance data management and storage capabilities given the larger company profile, and increases in certain core processing fees as our customer base and transaction volume continues to grow.

 

Intangible amortization increased from $53,000 during the six months ended June 30, 2017 to $496,000 during the same period in 2018. As a result of the Scottdale acquisition, Mid Penn added a core deposit intangible (CDI) asset of $4,940,000 which will amortize using the sum of the years’ digit method over a ten year period.  The resulting additional amortization recorded during the first half of 2018, related to the Scottdale CDI, was $449,000.

 

Other expense was $3,394,000 during the six months ended June 30, 2018, an increase of $1,060,000 or 45 percent compared to other expense of $2,334,000 for the same period in 2017.  Several categories within other expense drove this overall increase, including but not limited to: (i) increases to stationary and supplies, printing, postage, and insurance costs as a result of additional branches added since June 30, 2017;  (ii) increased loan collection costs and foreclosed real estate expenses; and (iii) higher subscription, travel and lodging, and employee relations costs, as both the Scottdale acquisition and organic growth have increased the organization’s geographic profile and employee base.  

Income Taxes

The provision for income taxes was $452,000 for the three months ended June 30, 2018 compared to $769,000 for the three months ended June 30, 2017.  The effective tax rate for the three months ended June 30, 2018 was 14.0 percent compared to 24.7 percent for the three months ended June 30, 2017.   The provision for income taxes was $665,000 for the six months ended June 30, 2018 compared to $1,459,000 for the six months ended June 30, 2017.  The effective tax rate for the six months ended June 30, 2018 was 15.0 percent compared to 25.2 percent for the six months ended June 30, 2017.   The decrease in the provision for income taxes was largely driven by the decrease in the statutory tax rate from 34 percent to 21 percent as a result of the Tax Cuts and Jobs Act enacted December 22, 2017.  The statutory rate change was effective January 1, 2018.  Contributing to the decrease in the provision for income taxes was a one-time income tax benefit of $92,000 recorded in the second quarter of 2018 as a result of amended 2014 through 2016 tax returns, as corrected K-1 statements were received related to Mid Penn’s investment in a limited partnership which provides low-income housing in Enola, Pennsylvania.

Generally, Mid Penn’s effective tax rate is below the statutory rate due to earnings on tax-exempt loans, investments, and BOLI, as well as the impact of tax credits.  The realization of Mid Penn’s deferred tax assets is dependent on future earnings.  Mid Penn currently anticipates that future earnings will be adequate to fully realize the currently recorded deferred tax assets.

Financial Condition

 

Overview

 

Mid Penn’s total assets were $1,415,647,000 as of June 30, 2018, an increase of $245,293,000 or 21 percent compared to total assets of $1,170,354,000 as of December 31, 2017.  Asset growth during the first half of 2018 includes the acquired loans, investments, cash, facilities, goodwill and core deposit intangible recorded from the legal closing of the Scottdale transaction.

 

Loans

 

Total loans at June 30, 2018 were $1,036,479,000 compared to $910,404,000 at December 31, 2017, an increase of $126,075,000 or over 13 percent since year-end 2017.  As a result of the Scottdale acquisition, on January 8, 2018, Mid Penn added to its loan portfolio, primarily within the residential mortgage and commercial real estate mortgage categories.  As of June 30, 2018, the outstanding balance of Scottdale acquired loans was $65,231,000.  The majority of Mid Penn’s organic loan growth in legacy markets continues to be commercial loans, including both commercial and industrial financing, and commercial real estate credits.

 

(Dollars in thousands)

June 30, 2018

 

 

December 31, 2017

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Commercial and industrial

$

204,724

 

 

 

19.8

%

 

$

188,033

 

 

 

20.7

%

Commercial real estate

 

575,956

 

 

 

55.6

%

 

 

515,012

 

 

 

56.6

%

Commercial real estate - construction

 

82,690

 

 

 

8.0

%

 

 

62,336

 

 

 

6.8

%

Lease financing

 

153

 

 

 

0.0

%

 

 

229

 

 

 

0.0

%

Residential mortgage

 

120,260

 

 

 

11.6

%

 

 

99,033

 

 

 

10.9

%

Home equity

 

47,815

 

 

 

4.6

%

 

 

41,893

 

 

 

4.6

%

Consumer

 

4,881

 

 

 

0.5

%

 

 

3,868

 

 

 

0.3

%

 

$

1,036,479

 

 

 

100.0

%

 

$

910,404

 

 

 

100.0

%

 

46


MID PENN BANCORP, INC.

 

 

Credit Quality, Credit Risk, and Allowance for Loan and Lease Losses

For the six months ended June 30, 2018, Mid Penn had net recoveries of $458,000 compared to net recoveries of $305,000 during the same period of 2017.  The primary reason for this favorable net recovery amount was that, during the second quarter of 2018, Mid Penn recovered $777,000 of principal from the successful workout of a commercial real estate relationship that originally had a partial charge-off in 2009.  Similarly, during the first quarter of 2017, Mid Penn recovered $318,000 of principal, as well as collected $279,000 in interest income, from the successful workout of a commercial real estate relationship that was partially charged-off in 2010.  

Loans charged off during the first six months of 2018 totaled $351,000 and included two home equity loans for $167,000, one commercial and industrial loan for $129,000, one commercial real estate (construction) loan for $40,000, one residential mortgage loan for $5,000, one consumer loan for $3,000, and $7,000 in deposit account charge-offs.  Mid Penn may need to make future adjustments to the allowance and the provision for loan and lease losses if economic conditions or loan credit quality differs substantially from the assumptions used in making Mid Penn’s evaluation of the level of the allowance for loan losses as compared to the balance of outstanding loans.

Changes in the allowance for the six months ended June 30, 2018 and 2017 are summarized as follows:

 

(Dollars in thousands)

Six Months Ended June 30,

 

 

2018

 

 

2017

 

Balance, beginning of period

$

7,606

 

 

$

7,183

 

 

 

 

 

 

 

 

 

Loans charged off during period

 

(351

)

 

 

(76

)

Recoveries of loans previously charged off

 

809

 

 

 

381

 

Net recoveries

 

458

 

 

 

305

 

 

 

 

 

 

 

 

 

Provision for loan and lease losses

 

125

 

 

 

225

 

Balance, end of period

$

8,189

 

 

$

7,713

 

 

 

 

 

 

 

 

 

Ratio of net loans recovered to average loans outstanding, annualized

 

-0.09

%

 

 

-0.07

%

 

 

 

 

 

 

 

 

Ratio of allowance for loan losses to net loans at end of period

 

0.79

%

 

 

0.89

%

 

Other than as described herein, Mid Penn does not believe there are any trends or events at this time that are reasonably expected to have a material impact on future results of operations, liquidity, or capital resources.  Further, based on known information, Mid Penn believes that the effects of current and past economic conditions and other unfavorable business conditions may influence certain borrowers’ abilities to comply with their repayment terms.  Mid Penn continues to monitor closely the financial strength of these borrowers.  Mid Penn does not engage in practices which may be used to artificially shield certain borrowers from the negative economic or business cycle effects that may compromise their ability to repay.  Mid Penn does not normally structure construction loans with interest reserve components.  Mid Penn has not in the past performed any commercial real estate or other type of loan workouts whereby an existing loan was restructured into multiple new loans.  Also, Mid Penn does not extend loans at maturity solely due to the existence of guarantees, without recognizing the credit as impaired.  While the existence of a guarantee may be a mitigating factor in determining the proper level of allowance once impairment has been identified, the guarantee does not affect the impairment analysis.

47


MID PENN BANCORP, INC.

 

 

The following table presents the change in nonperforming asset categories as of June 30, 2018, December 31, 2017, and June 30, 2017.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

June 30, 2017

 

Nonperforming Assets:

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans

$

8,612

 

 

$

10,575

 

 

$

5,218

 

Accruing troubled debt restructured loans

 

531

 

 

 

544

 

 

 

557

 

Total nonperforming loans

 

9,143

 

 

 

11,119

 

 

 

5,775

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreclosed real estate

 

912

 

 

 

189

 

 

 

-

 

Total non-performing assets

 

10,055

 

 

 

11,308

 

 

 

5,775

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing loans 90 days or more past due

 

-

 

 

 

-

 

 

 

57

 

Total risk elements

$

10,055

 

 

$

11,308

 

 

$

5,832

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans as a % of total

 

 

 

 

 

 

 

 

 

 

 

loans outstanding

 

0.88

%

 

 

1.22

%

 

 

0.67

%

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming assets as a % of total

 

 

 

 

 

 

 

 

 

 

 

loans outstanding and other real estate

 

0.97

%

 

 

1.24

%

 

 

0.67

%

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

to nonperforming loans

 

89.57

%

 

 

68.41

%

 

 

133.56

%

 

In the table above, troubled debt restructured loans that are no longer accruing interest are included in nonaccrual loans.  The decrease in nonperforming assets is primarily due to (i) the successful workout of one nonaccrual loan relationship during the second quarter which decreased the total nonaccrual loan pool by $1,094,000 and (ii) the sale of some collateral in an existing nonaccrual loan relationship resulting in total principal pay-down of $1,393,000.  Two loan relationships which account for $5,746,000 of the non-performing loan balance are discussed in more detail below.

 

Loan relationship no. 1 – At June 30, 2018, the contractual outstanding principal balance of this loan relationship was $4,410,000.  A $282,000 specific allowance allocation was assigned to this relationship. As part of the workout process, this loan was modified as a troubled debt restructured loan during 2017.  Management is pursuing diligent workout efforts, including proceeds from the sale of pledged collateral not associated with the primary operation of the business, to restore the loan to current status and to collect the remaining outstanding balance.

 

Loan relationship no. 2 – At June 30, 2018, the contractual outstanding principal balance of this loan relationship was $1,423,000 and was comprised of five loans collateralized primarily by commercial real estate, as well as certain machinery and equipment.  As part of the workout process, the loans in this relationship were modified as a troubled debt restructured loans during 2017.  During the second quarter of 2018, collateral was sold resulting in the principal payoff of three loans within this loan relationship totaling $1,393,000.  Given that the fair value of the remaining collateral exceeds the outstanding principal balance, no specific allowance allocation has been assigned to this relationship.  Management expects to recover the remaining outstanding balance through the sale of real estate collateral pledged in support of the loans.

 


48


MID PENN BANCORP, INC.

 

 

Mid Penn assesses a specific allocation for both commercial loans and commercial real estate loans prior to charging down or charging off the loan.  Once the charge down is taken, the remaining balance remains a nonperforming loan with the original terms and interest rate intact and is not treated as a restructured credit.  The following table provides additional analysis of partially charged-off loans.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

June 30, 2018

 

 

December 31, 2017

 

Period ending total loans outstanding

$

1,036,479

 

 

$

910,404

 

Allowance for loan and lease losses

 

8,189

 

 

 

7,606

 

Total Nonperforming loans

 

9,143

 

 

 

11,119

 

Nonperforming and impaired loans with partial charge-offs

 

315

 

 

 

1,701

 

 

 

 

 

 

 

 

 

Ratio of nonperforming loans with partial charge-offs

 

 

 

 

 

 

 

to total loans

 

0.03

%

 

 

0.19

%

 

 

 

 

 

 

 

 

Ratio of nonperforming loans with partial charge-offs

 

 

 

 

 

 

 

to total nonperforming loans

 

3.45

%

 

 

15.30

%

 

 

 

 

 

 

 

 

Coverage ratio net of nonperforming loans with

 

 

 

 

 

 

 

partial charge-offs

 

92.76

%

 

 

80.76

%

 

 

 

 

 

 

 

 

Ratio of total allowance to total loans less

 

 

 

 

 

 

 

nonperforming loans with partial charge-offs

 

0.79

%

 

 

0.84

%

 

Mid Penn considers a commercial loan or commercial real estate loan to be impaired when it becomes 90 days or more past due and not well-secured or otherwise not probable for collection.  This methodology assumes the borrower cannot or will not continue to make additional payments.  At that time the loan would be considered collateral dependent as the discounted cash flow method indicates no operating income is available for evaluating the collateral position; therefore, most impaired loans are deemed to be collateral dependent.

Mid Penn evaluates loans for charge-off on a monthly basis.  Policies that govern the recommendation for charge-off are unique to the type of loan being considered.  Commercial loans rated as nonaccrual or lower will first have a collateral evaluation completed in accordance with the guidance on impaired loans.  Once the collateral evaluation has been completed, a specific allocation of allowance is made based upon the results of the evaluation.  The balance remains a nonperforming loan with the original terms and interest rate intact (not restructured).  In the event the loan is unsecured, the loan would have been charged-off at the recognition of impairment.  Commercial real estate loans rated as impaired will also have an initial collateral evaluation completed in accordance with the guidance on impaired loans.  An updated real estate valuation is ordered and the collateral evaluation is modified to reflect any variation in value.  A specific allocation of allowance is made for any anticipated collateral shortfall.  The balance remains a nonperforming loan with the original terms and interest rate intact (not restructured).  The process of charge-off for residential mortgage loans begins upon a loan becoming delinquent for 90 days and not in the process of collection.  The existing appraisal is reviewed and a lien search is obtained to determine lien position and any instances of intervening liens.  A new appraisal of the property will be ordered if deemed necessary by management and a collateral evaluation is completed. The loan will then be charged down to the value indicated in the evaluation.  Consumer loans are recommended for charge-off after reaching delinquency of 90 days and the loan is not well-secured or otherwise not probable for collection.  The collateral shortfall of the consumer loan is recommended for charge-off at this point.

As noted above, Mid Penn assesses a specific allocation for both commercial loans and commercial real estate loans.  The balance remains a nonperforming loan with the original terms and interest rate intact (not restructured).  In addition, Mid Penn takes a preemptive step when any commercial loan or commercial real estate loan becomes classified under its internal classification system.  A preliminary collateral evaluation in accordance with the guidance on impaired loans is prepared using the existing collateral information in the loan file.  This process allows Mid Penn to review both the credit and documentation files to determine the status of the information needed to make a collateral evaluation.  This collateral evaluation is preliminary, but allows Mid Penn to determine if any potential collateral shortfalls exist.

Larger groups of small-balance loans, such as residential mortgages and consumer installment loans are collectively evaluated for impairment.  Accordingly, individual consumer and residential loans are not separately identified for impairment disclosures unless such loans are the subject of a restructuring agreement.

Mid Penn’s rating system assumes any loans classified as substandard nonaccrual to be impaired, and most of these loans are considered collateral dependent; therefore, most of Mid Penn’s impaired loans, whether reporting a specific allocation or not, are considered collateral dependent.

It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate as soon as practically possible following the credit being classified as substandard nonaccrual.  Prior to receipt of the updated real estate valuation Mid Penn will use any existing real estate valuation to determine any potential allowance issues; however, no allowance recommendation will be made until such time Mid Penn is in receipt of the updated valuation.  The Asset Recovery department employs an electronic tracking system to monitor the receipt of and need for updated appraisals.  To date, there have been no material time lapses noted with the above processes.

49


MID PENN BANCORP, INC.

 

 

In some instances Mid Penn is not holding real estate as collateral and is relying on business assets (personal property) for repayment.  In these circumstances a collateral inspection is performed by Mid Penn personnel to determine an estimated value.  The value is based on net book value, as provided by the financial statements, and discounted accordingly based on determinations made by management.  Occasionally, Mid Penn will employ an outside service to provide a fair estimate of value based on auction or private sales.  Management reviews the estimates of these third parties and discounts them accordingly based on management’s judgment, if deemed necessary.

For impaired loans with no valuation allowance required, Mid Penn’s practice of obtaining independent third party market valuations on the subject property as soon as practically possible of being placed on nonaccrual status sometimes indicates that the loan to value ratio is sufficient to obviate the need for a specific allocation in spite of significant deterioration in real estate values in Mid Penn’s primary market area.  These circumstances are determined on a case by case analysis of the impaired loans.

Mid Penn actively monitors the values of collateral on impaired loans.  This monitoring may require the modification of collateral values over time or changing circumstances by some factor, either positive or negative, from the original values.  All collateral values will be assessed by management at least every 12 months for possible revaluation by an independent third party.

Mid Penn had $9,670,000 loans deemed impaired at June 30, 2018.  Excluding $1,982,000 in loans acquired with credit deterioration from the Phoenix Bancorp, Inc. (“Phoenix”) and Scottdale acquisitions, Mid Penn had several loan relationships deemed impaired with an aggregate carrying balance of $7,688,000.  This pool of loans was further broken down into a group of loans with an aggregate carrying balance of $5,241,000 for which specific allocations totaling $574,000 were included within the loan loss reserve for these loans.  The remaining $2,447,000 of loans required no specific allocation within the loan loss reserve.  Of the $7,688,000 of impaired loan relationships, excluding the loans acquired with credit deterioration from the Phoenix and Scottdale acquisitions, $4,324,000 were commercial and industrial relationships, $2,261,000 were commercial real estate relationships, $728,000 were residential relationships, $367,000 were commercial real estate – construction relationships, and $8,000 were home equity relationships.  There were specific loan loss reserve allocations of $282,000 against the commercial and industrial relationships, $238,000 against the commercial real estate relationships, and $54,000 against the commercial real estate – construction relationships.  Management currently believes that the specific reserves are adequate to cover probable future losses related to these relationships.

The allowance is a reserve established in the form of a provision expense for loan and lease losses and is reduced by loan charge-offs net of recoveries.  In conjunction with an internal loan review function that operates independently of the lending function, management monitors the loan portfolio to identify risk on a monthly basis so that an appropriate allowance is maintained.  Based on an evaluation of the loan portfolio, management presents a monthly review of the allowance to the Board of Directors, indicating any changes in the allowance since the last review.  In making the evaluation, management considers the results of recent regulatory examinations, which typically include a review of the allowance an integral part of the examination process.  As part of the examination process, federal or state regulatory agencies may require Mid Penn to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management.

In establishing the allowance, management evaluates on a quantitative basis individual classified loans and nonaccrual loans, and determines an aggregate reserve for those loans based on that review.  In addition, an allowance for the remainder of the loan and lease portfolio is determined based on historical loss experience within certain components of the portfolio.  These allocations may be modified if current conditions indicate that loan and lease losses may differ from historical experience.

In addition, a portion of the allowance is established for losses inherent in the loan and lease portfolio which have not been identified by the quantitative processes described above.  This determination inherently involves a higher degree of subjectivity, and considers risk factors that may not have yet manifested themselves in historical loss experience.  These factors include:

 

changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments;

 

changes  in  the  volume  and  severity  of  past  due  loans,  the  volume  of nonaccrual loans, and the volume and severity of adversely classified or graded loans;

 

changes in the value of underlying collateral for collateral-dependent loans;

 

changes in the experience, ability, and depth of lending management and other relevant staff;

 

changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses;

 

changes in the quality of the institution's loan review system;

 

changes in the nature and volume of the portfolio and in the terms of loans;

 

the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution's existing portfolio; and

 

the existence and effect of any concentrations of credit and changes in the level of such concentrations.

50


MID PENN BANCORP, INC.

 

 

While the allowance is maintained at a level believed to be adequate by management to provide for probable losses inherent in the loan and lease portfolio, determination of the allowance is inherently subjective, as it requires estimates, all of which may be susceptible to significant change.  The unallocated component of the allowance for loan and lease losses covers several considerations that are not specifically measurable through either the specific and general components. For example, we believe that we could face increasing credit risks and uncertainties, not yet reflected in recent historical losses or qualitative factor assessments, associated with unpredictable changes in economic growth or business conditions in our markets or for certain industries in which we have commercial loan borrowers, or unanticipated stresses to the values of real estate held as collateral.  Any or all of these additional issues can adversely affect our borrowers’ ability to timely repay their loans. Additionally, we have experienced continued strong commercial loan growth, including growth in newer markets where we have less of a loss history. Also, the unallocated component allocation recognizes the inherent imprecision in our allowance for loan and lease loss methodology, or any alternative methodology, for estimating specific and general loan losses, including the unpredictable timing and amounts of charge-offs, the fact that historical loss averages don’t necessarily correlate to future loss trends, and unexpected changes to specific-credit or general portfolio future cash flows and collateral values which could negatively impact unimpaired portfolio loss factors. Changes from these various other uncertainties and considerations may impact the provisions charged to expense in future periods.

Management believes, based on information currently available, that the allowance of $8,189,000 is adequate as of June 30, 2018 to cover specifically identifiable loan losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.

Liquidity

Mid Penn’s objective is to maintain adequate liquidity to meet funding needs at a reasonable cost and to provide contingency plans to meet unanticipated funding needs or a loss of funding sources, while minimizing interest rate risk.  Adequate liquidity provides resources for credit needs of borrowers, for depositor withdrawals, and for funding corporate operations.  Sources of liquidity are as follows:

 

a growing core deposit base;

 

proceeds from the sale or maturity of investment securities;

 

proceeds from interest-bearing time deposits with other financial institutions;

 

payments received on loans and mortgage-backed securities;

 

overnight correspondent bank borrowings on various credit lines; and

 

borrowing capacity available from the FHLB, the Federal Reserve Discount Window, and other lines of credit currently available to Mid Penn.

The major sources of cash received in the first six months of 2018 came from the $102,816,000 in proceeds from the sales of available-for-sale investment securities and the $65,025,000 in net cash received from the acquisition of Scottdale.

Major uses of cash in the first six months of 2018 were $79,383,000 for investment purchases, $55,732,000 to fund loan growth, and $34,611,000 to pay down short-term borrowings.

Mid Penn believes its core deposits are generally stable even in periods of changing interest rates.  Liquidity is measured and monitored daily, allowing management to better understand and react to balance sheet trends.  These measurements indicate that liquidity generally remains stable and exceeds our minimum defined levels of adequacy.  Other than the trends of continued competitive pressures and volatile interest rates, there are no known demands, commitments, events, or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way.

On a quarterly basis, a comprehensive liquidity analysis is reviewed by the Asset Liability Committee and Board of Directors.  The analysis provides a summary of the current liquidity measurements, projections, and future liquidity positions given various levels of liquidity stress.  Management also maintains a detailed Contingency Funding Plan designed to respond to overall stress in the financial condition of the banking industry or a liquidity problem specific to Mid Penn.


51


MID PENN BANCORP, INC.

 

 

Subordinated Debt

Subordinated Debt Issued December 2017

On December 19, 2017, Mid Penn entered into agreements with investors to purchase $10,000,000 aggregate principal amount of its Subordinated Notes due 2028 (the “2017 Notes”). The 2017 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes.  The offering closed in December 2017.

The 2017 Notes bear interest at a rate of 5.25% per year for the first five years and then float at the Wall Street Journal’s Prime Rate plus 0.50%, provided that the interest rate applicable to the outstanding principal balance will at no times be less than 5.0%. Interest is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018, for the first five years after issuance and will be payable quarterly in arrears thereafter on January 15, April 15, July 15, and October 15. The 2017 Notes will mature on January 1, 2028 and are redeemable in whole or in part, without premium or penalty, at any time on or after December 21, 2022, and prior to January 1, 2028. Additionally, Mid Penn may redeem the 2017 Notes in whole at any time, or in part from time to time, upon at least 30 days’ notice if: (i) a change or prospective change in law occurs that could prevent Mid Penn from deducting interest payable on the 2017 Notes for U.S. federal income tax purposes; (ii) an event occurs that precludes the 2017 Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) Mid Penn becomes required to register as an investment company under the Investment Company Act of 1940, as amended. In the event of a redemption described in the previous sentence, Mid Penn will redeem the 2017 Notes at 100% of the principal amount of the 2017 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption.

Holders of the 2017 Notes may not accelerate the maturity of the 2017 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar event of Mid Penn or Mid Penn Bank, its principal banking subsidiary.  

Subordinated Debt Issued December 2015

On December 9, 2015, Mid Penn sold $7,500,000 aggregate principal amount of Subordinated Debt (the “2015 Notes”) due 2025.  The 2015 Notes are treated as Tier 2 capital for regulatory capital purposes.

The 2015 Notes bear interest at a rate of 5.15% per year for the first five years and then float at the Wall Street Journal’s Prime Rate plus 0.50%, provided that the interest rate applicable to the outstanding principal balance will at no time be less than 4.0%.  Interest is payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, beginning on January 1, 2016. The 2015 Notes will mature on December 9, 2025 and are redeemable in whole or in part, without premium or penalty, at any time on or after December 9, 2020, and prior to December 9, 2025.  Additionally, Mid Penn may redeem the 2015 Notes in whole at any time, or in part from time to time, upon at least 30 days’ notice if:  (i) a change or prospective change in law occurs that could prevent Mid Penn from deducting interest payable on the 2015 Notes for U.S. federal income tax purposes; (ii) an event occurs that precludes the 2015 Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) Mid Penn becomes required to register as an investment company under the Investment Company Act of 1940, as amended, in each case at 100% of the principal amount of the 2015 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption.

Holders of the 2015 Notes may not accelerate the maturity of the 2015 Notes, except upon Mid Penn’s or Mid Penn Bank’s bankruptcy, insolvency, liquidation, receivership or similar event.

Regulatory Capital Changes

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.  The phase-in period for community banking organizations began January 1, 2016.  The final rules implemented higher minimum capital requirements, added a new common equity Tier 1 capital requirement, and established criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital.  Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements, which amount (when fully phased in) must be greater than 2.5% of total risk-weighted assets at January 1, 2019.  The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations began on January 1, 2016 at the initial rate of 0.625%.  A summary of the payout restrictions based on the capital conservation buffer is as follows:

 

Capital Conservation Buffer

(as a % of risk-weighted assets)

 

Maximum Payout

(as a % of eligible retained income)

 

> 2.5%

 

No payout limitation applies

 

≤2.5% and >1.875%

 

 

60%

 

≤1.875% and >1.25%

 

 

40%

 

≤1.25% and >0.625%

 

 

20%

 

≤0.625%

 

 

0%

 

 

52


MID PENN BANCORP, INC.

 

 

Implementation of the deductions and other adjustments to common equity Tier 1 capital began on January 1, 2016 and will be phased-in over a three-year period.  The final rules called for the following minimum capital requirements to be considered “well-capitalized” (which include the impact of the capital conservation buffer that was effective January 1, 2016):

 

 

 

As of January 1,

 

 

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

Minimum common equity Tier 1 capital ratio

 

 

 

4.5

%

 

 

4.5

%

 

 

4.5

%

 

 

4.5

%

Common equity Tier 1 capital conservation buffer

 

 

 

0.625

%

 

 

1.25

%

 

 

1.875

%

 

 

2.5

%

Minimum common equity Tier 1 capital ratio plus capital conservation buffer

 

 

 

5.125

%

 

 

5.75

%

 

 

6.375

%

 

 

7.0

%

Phase-in of most deductions from common equity Tier 1 capital

 

 

 

60

%

 

 

80

%

 

 

100

%

 

 

100

%

Minimum Tier 1 capital ratio

 

 

 

6.0

%

 

 

6.0

%

 

 

6.0

%

 

 

6.0

%

Minimum Tier 1 capital ratio plus capital conservation buffer

 

 

 

6.625

%

 

 

7.25

%

 

 

7.875

%

 

 

8.5

%

Minimum total capital ratio

 

 

 

8.0

%

 

 

8.0

%

 

 

8.0

%

 

 

8.0

%

Minimum total capital ratio plus capital conservation buffer

 

 

 

8.625

%

 

 

9.25

%

 

 

9.875

%

 

 

10.5

%

 

The final rules allowed community banks to make a one-time election not to include the additional components of accumulated other comprehensive income (“AOCI”) in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital.  Mid Penn made the election not to include the additional components of AOCI in regulatory capital.

The final rules permanently grandfathered non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the Tier 1 capital of banking organizations with total consolidated assets less than $15 billion as of December 31, 2009 and banking organizations that were mutual holding companies as of May 19, 2010.

Consistent with the Dodd-Frank Act, the new rules replaced the ratings-based approach to securitization exposures, which is based on external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights for these exposures.  Alternatively, banking organizations may use the existing gross-ups approach to assign securitization exposures to a risk weight category or choose to assign such exposures a 1,250% risk weight.

Under the new rules, mortgage servicing assets (“MSAs”) and certain deferred tax assets (“DTAs”) are subject to stricter limitations than those applicable under the current general risk-based capital rule.  The new rules also increase the risk weights for past-due loans, certain risk weights and credit conversion factors.

Mid Penn has implemented these changes in determining and reporting the regulatory ratios of Mid Penn and the Bank, and has concluded that the new rules do not have a material adverse effect on Mid Penn’s financial condition.

Capital Resources

Shareholders' equity, or capital, is evaluated in relation to total assets and the risk associated with those assets.  The greater a corporation’s capital resources, the more likely it is to meet its cash obligations and absorb unforeseen losses.  Too much capital, however, indicates that not enough of the corporation’s earnings have been invested in the continued growth of the business or paid to shareholders.  An excess capital position may make it difficult for a corporation to offer a competitive return on the shareholders’ capital going forward.  For these reasons capital adequacy and capital management have been, and will continue to be, of paramount importance.

 

Shareholders’ equity increased by $66,072,000 or 87 percent, from $75,703,000 at December 31, 2017 to $141,775,000 at June 30, 2018.  The increase during the six months ended June 30, 2018 was attributed to (i) the issuance of 1,878,827 shares of Mid Penn common stock in connection with the acquisition of Scottdale, and (ii) growth in retained earnings through year-to-date net income.  These increases were partially offset by other comprehensive losses primarily due to the after-tax impact of the overall net unrealized decline in fair value of the available-for-sale investment portfolio since December 31, 2017.  Regulatory capital ratios for both Mid Penn and the Bank exceeded regulatory “well-capitalized” levels at both June 30, 2018 and 2017.

 

Banks are evaluated for capital adequacy based on the ratio of capital to risk-weighted assets and total assets.  The minimum capital to risk-weighted assets requirements, including the capital conservation buffers, which became effective for Mid Penn and the Bank on January 1, 2016 are illustrated below.  At June 30, 2018, regulatory capital ratios for both Mid Penn and the Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective action, and exceeded the minimum capital requirements under Basel III.


53


MID PENN BANCORP, INC.

 

 

Mid Penn and Mid Penn Bank maintained the following regulatory capital levels, leverage ratios, and risk-based capital ratios as of June 30, 2018 and December 31, 2017:

 

Capital Adequacy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To Be Well-Capitalized

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Under Prompt

 

 

 

 

 

 

 

 

 

 

Minimum Capital

 

 

Corrective

 

 

Actual:

 

 

Required (1):

 

 

Action Provisions:

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of  June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

117,137

 

 

 

8.4

%

 

$

55,582

 

 

 

4.000

%

 

N/A

 

 

N/A

 

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

117,137

 

 

 

11.4

%

 

 

65,734

 

 

 

6.375

%

 

N/A

 

 

N/A

 

Tier 1 Capital (to Risk Weighted Assets)

 

117,137

 

 

 

11.4

%

 

 

81,201

 

 

 

7.875

%

 

N/A

 

 

N/A

 

Total Capital (to Risk Weighted Assets)

 

142,776

 

 

 

13.8

%

 

 

101,823

 

 

 

9.875

%

 

N/A

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of  June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

132,632

 

 

 

9.5

%

 

$

55,567

 

 

 

4.000

%

 

$

69,458

 

 

 

5.0

%

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

132,632

 

 

 

12.9

%

 

 

65,723

 

 

 

6.375

%

 

 

67,012

 

 

 

6.5

%

Tier 1 Capital (to Risk Weighted Assets)

 

132,632

 

 

 

12.9

%

 

 

81,187

 

 

 

7.875

%

 

 

82,476

 

 

 

8.0

%

Total Capital (to Risk Weighted Assets)

 

140,929

 

 

 

13.7

%

 

 

101,806

 

 

 

9.875

%

 

 

103,095

 

 

 

10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of  December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

74,417

 

 

 

6.5

%

 

$

45,857

 

 

 

4.000

%

 

N/A

 

 

N/A

 

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

74,417

 

 

 

8.4

%

 

 

50,661

 

 

 

5.750

%

 

N/A

 

 

N/A

 

Tier 1 Capital (to Risk Weighted Assets)

 

74,417

 

 

 

8.4

%

 

 

6,377

 

 

 

7.250

%

 

N/A

 

 

N/A

 

Total Capital (to Risk Weighted Assets)

 

99,466

 

 

 

11.3

%

 

 

81,498

 

 

 

9.250

%

 

N/A

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of  December 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

88,294

 

 

 

7.7

%

 

$

45,846

 

 

 

4.000

%

 

$

57,308

 

 

 

5.0

%

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

88,294

 

 

 

10.0

%

 

 

50,661

 

 

 

5.750

%

 

 

57,269

 

 

 

6.5

%

Tier 1 Capital (to Risk Weighted Assets)

 

88,294

 

 

 

10.0

%

 

 

63,877

 

 

 

7.250

%

 

 

70,485

 

 

 

8.0

%

Total Capital (to Risk Weighted Assets)

 

96,005

 

 

 

10.9

%

 

 

81,498

 

 

 

9.250

%

 

 

88,106

 

 

 

10.0

%

 

(1) The minimum amounts and ratios as of June 30, 2018 include the third year phase in of the capital conservation buffer of 1.875% required by the Basel III framework.  At December 31, 2017, the minimum amounts and ratios included the second year phase in of the capital conservation buffer of 1.25 percent required by the Basel III framework.

54


MID PENN BANCORP, INC.

 

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a financial institution, Mid Penn’s primary source of market risk is interest rate risk.  Interest rate risk is the exposure to fluctuations in Mid Penn’s future earnings (earnings at risk) resulting from changes in interest rates.  This exposure or sensitivity is a function of the repricing characteristics of Mid Penn's portfolio of assets and liabilities.  Each asset and liability reprices either at maturity or during the life of the instrument.  Interest rate sensitivity is measured as the difference between the volume of assets and liabilities that are subject to repricing in a future period of time.

The principal purpose of asset-liability management is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements.  Net interest income is increased by increasing the net interest margin and by volume growth.  Thus, the goal of interest rate risk management is to maintain a balance between risk and reward such that net interest income is maximized while risk is maintained at an acceptable level.

Mid Penn utilizes an asset-liability management model to measure the impact of interest rate movements on its interest rate sensitivity position.  Mid Penn’s management also reviews the traditional maturity gap analysis regularly.  Mid Penn does not always attempt to achieve an exact match between interest sensitive assets and liabilities because it believes that an actively managed amount of interest rate risk is inherent and appropriate in the management of Mid Penn’s profitability.

Modeling techniques and simulation analysis involve assumptions and estimates that inherently cannot be measured with complete precision.  Key assumptions in the analyses include maturity and repricing characteristics of assets and liabilities, prepayments on amortizing assets, non-maturing deposit sensitivity, and loan and deposit pricing.  These assumptions are inherently uncertain due to the timing, magnitude and frequency of rate changes and changes in market conditions and management strategies, among other factors.  However, the analyses are useful in quantifying risk and provide a relative gauge of Mid Penn’s interest rate risk position over time.

Management reviews interest rate risk on a quarterly basis.  This analysis includes earnings scenarios whereby interest rates are increased and decreased by 100, 200, and 300 basis points. These scenarios, detailed in the table below, indicate that Mid Penn would experience enhanced net interest income over a one-year time frame due to upward interest rate changes, while a reduction in interest rates would result in a decline in net interest income over a one-year time frame; however, actual results could vary significantly from the calculations prepared by management.  At June 30, 2018, all interest rate risk levels according to the model were within the tolerance limits of the Board-approved policy.

 

June 30, 2018

 

December 31, 2017

 

 

% Change in

 

 

 

 

 

 

% Change in

 

 

 

Change in

 

Net Interest

 

 

Policy

 

Change in

 

Net Interest

 

 

Policy

Basis Points

 

Income

 

 

Risk Limit

 

Basis Points

 

Income

 

 

Risk Limit

300

 

10.09%

 

 

≥ -20%

 

300

 

7.83%

 

 

≥ -20%

200

 

6.69%

 

 

≥ -15%

 

200

 

5.12%

 

 

≥ -15%

100

 

3.30%

 

 

≥ -10%

 

100

 

2.41%

 

 

≥ -10%

0

 

 

 

 

 

 

 

0

 

 

 

 

 

 

(100)

 

-2.84%

 

 

≥ -10%

 

(100)

 

-1.49%

 

 

≥ -10%

(200)

 

-7.65%

 

 

≥ -15%

 

(200)

 

-6.19%

 

 

≥ -15%

(300)

 

-12.71%

 

 

≥ -20%

 

(300)

 

-11.37%

 

 

≥ -20%

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Mid Penn maintains controls and procedures designed to ensure that information required to be disclosed in the reports that Mid Penn files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Based upon their evaluation of those controls and procedures as of June 30, 2018, Mid Penn’s management, with the participation of the Principal Executive Officer and Principal Financial Officer, concluded that the disclosure controls and procedures were effective as of such date.

Changes in Internal Controls

During the three and six months ended June 30, 2018, there were no changes in Mid Penn’s internal control over financial reporting that have materially affected, or are reasonable likely to materially affect, Mid Penn’s internal control over financial reporting.

 

 

55


MID PENN BANCORP, INC.

 

 

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

Information regarding legal proceedings is included in Note 14, Subsequent Events, Litigation, under Part I, Item 1, Notes to Consolidated Financial Statements (Unaudited) and incorporated herein by reference.  At the time and based on information currently available, management is not aware of any litigation that would reasonably be expected to have a material adverse effect on the consolidated financial position of Mid Penn or its subsidiaries taken as a whole.  In addition, management does not know of any material proceedings contemplated by governmental authorities against Mid Penn or any of its properties.

 

ITEM 1A – RISK FACTORS

Management has reviewed the risk factors that were previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2017, to determine if there were material changes applicable to the six months ended June 30, 2018.  In addition tothe risk factors previously disclosed in the Annual Report on Form 10-K, investors should consider the following:

Mid Penn may be unable to successfully integrate First Priority’s operations and retain First Priority’s employees. 

The merger acquisition of First Priority involves the integration of two companies that have previously operated independently. The difficulties of combining the operations of the two companies include, among other things: integrating personnel with diverse business backgrounds; combining different corporate cultures; and retaining key employees. 

The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of the business and the loss of key personnel. The integration of the two companies will require the experience and expertise of certain key employees of First Priority who are expected to be retained by Mid Penn. Mid Penn may not be successful in retaining these employees for the time period necessary to successfully integrate First Priority’s operations with those of Mid Penn. The diversion of management’s attention and any delays or difficulties encountered in connection with the merger and the integration of the two companies’ operations could have an adverse effect on the business and results of operations of Mid Penn following the merger. 

Additionally, Mid Penn may not be able to successfully achieve the level of cost savings and other synergies that it expects, and may not be able to capitalize upon the existing customer relationships of First Priority to the extent anticipated, or it may take longer, or be more difficult or expensive than expected to achieve these goals. This could have an adverse effect on Mid Penn’s business, results of operation and stock price. 

The recently completed First Priority and Scottdale acquisitions may increase the risks associated with each of these mergers, as well as place a strain on Mid Penn’s financial and personnel resources that could adversely impact Mid Penn’s business.

On January 8, 2018, Mid Penn completed its acquisition of Scottdale and on July 31, 2018, Mid Penn completed its acquisition of First Priority. The recent completion mergers will cause Mid Penn to continue to incur significant expenditures and will require substantial attention and effort from Mid Penn’s management and other personnel. Mid Penn’s current and planned operations, personnel, facility size and configuration, systems and internal procedures and controls might be inefficient or inadequate to support these efforts at the same time. The increased risks and obligations associated with the mergers could place a strain on Mid Penn’s financial position and personnel resources, which may adversely affect Mid Penn’s stock price, revenues, results of operations and/or financial condition. 

We may fail to realize all of the anticipated benefits of the First Priority merger. 

The success of the First Priority merger will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining the businesses of Mid Penn and First Priority. However, to realize these anticipated benefits and cost savings, which include increased Mid Penn lending limits and access to stable core deposits, we must successfully combine the businesses of Mid Penn and First Priority. If we are not able to achieve these objectives, the anticipated benefits and cost savings of the merger may not be realized fully or at all, or may take longer to realize than expected. 

Another expected benefit from the merger is an expected increase in the revenues of the combined company from anticipated sales of Mid Penn’s greater variety of financial products, and from increased lending out of Mid Penn’s substantially larger capital base, to former First Priority customers and to new customers in First Priority’s market area who may be attracted by the combined company’s enhanced offerings. An inability to successfully market Mid Penn’s products to First Priority’s customer base could cause the earnings of the combined company to be less than anticipated. 

Unanticipated costs relating to the First Priority merger could reduce Mid Penn’s future earnings per share. 

Mid Penn believes that it has reasonably estimated the likely incremental costs of the combined operations of Mid Penn and First Priority following the merger. However, it is possible that unexpected transaction costs such as taxes, fees or professional expenses or unexpected future operating expenses such as unanticipated costs to integrate the two businesses, increased personnel costs or increased taxes, as well as other types of unanticipated adverse developments, including negative changes in the value of the legacy First Priority loan portfolio, could have a material adverse effect on the results of operations and financial condition of Mid Penn following the merger. In addition, if actual costs are materially different than expected costs, the merger could have a significant dilutive effect on Mid Penn’s earnings per share. 

56


MID PENN BANCORP, INC.

 

 

Pending litigation relating to the merger could require us to incur significant costs and suffer management distraction. 

Mid Penn is not currently able to predict the outcome of any suit arising out of or relating to the First Priority merger that is currently pending or may be filed in the future.

Mid Penn is currently, and could be subject to additional, demands or litigation related to the merger. Such actions may create additional uncertainty relating to the merger, and responding to such demands and defending such actions may be costly and distracting to management. Although there can be no assurance as to the ultimate outcome of any pending or threatened demand or litigation related to the First Priority merger, based on information available to Mid Penn management at this time, Mid Penn believes that the resolution of such demands or litigation will not have a material adverse effect on its respective financial position, results of operations or cash flows.  

For additional information regarding pending litigation related to the First Priority merger, refer to Note 14, Subsequent Events, Litigation, under Part I, Item 1, Notes to Consolidated Financial Statements (Unaudited) included in this filing.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 – MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5 – OTHER INFORMATION

None

ITEM 6 – EXHIBITS

 

Exhibit 3(i) – The Registrant’s amended Articles of Incorporation (Incorporated by reference to Exhibit 3(i) to Registrant’s Registration Statement on Form S-4 (File No. 333-199740) filed with the SEC on October 31, 2014.)

 

Exhibit 3(ii) – The Registrant’s By-laws (Incorporated by reference to Exhibit 3(ii) to Registrant’s Current Report on Form 8-K filed with the SEC on August 30, 2010.)

 

Exhibit 11 – Statement re:  Computation of Per Share Earnings.  (Incorporated by reference to Part I Item 1 of this Quarterly Report on Form 10-Q.)

 

Exhibit 31.1 – Certification of Principal Executive Officer Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 31.2 - Certification of Principal Financial Officer Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 32 – Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 101.INS – XBRL Instance Document

 

Exhibit 101.SCH – XBRL Taxonomy Extension Schema

 

Exhibit 101.CAL – XBRL Taxonomy Extension Calculation Linkbase

 

Exhibit 101.DEF – XBRL Taxonomy Extension Definition Linkbase

 

Exhibit 101.LAB – XBRL Taxonomy Extension Label Linkbase

 

Exhibit 101.PRE – XBRL Taxonomy Extension Presentation Linkbase

 

57


MID PENN BANCORP, INC.

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

Mid Penn Bancorp, Inc.

(Registrant)

 

 

 

By:

 

/s/ Rory G. Ritrievi

 

 

Rory G. Ritrievi

 

 

President and CEO

 

 

(Principal Executive Officer)

 

 

 

Date:

 

August 7, 2018

 

 

 

 

 

 

 

 

 

By:

 

/s/ Michael D. Peduzzi, CPA

 

 

Michael D. Peduzzi, CPA

 

 

Chief Financial Officer

 

 

 

Date:

 

August 7, 2018

 

 

58