20150930-10Q-Q3

 

 

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 September 30, 2015

 

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 or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One).

Large accelerated filer       Accelerated Filer       Non-accelerated Filer       Smaller Reporting Company 

 

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

 

As of November 13, 2015, the registrant had 4,225,720 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 September 30, 2015 and December 31, 2014 (Unaudited)

2

 

 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and September 30,  2014 (Unaudited)

3

 

 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and September 30,  2014 (Unaudited)

4

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months Ended September 30, 2015 and September 30,  2014 (Unaudited)

5

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and September 30,  2014 (Unaudited)

6

 

 

Notes to Consolidated Financial Statements (Unaudited)

8

 

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

36

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

47

 

Item 4 – Controls and Procedures

47

 

PART II – OTHER INFORMATION

48

 

Item 1 – Legal Proceedings

48

 

Item 1A – Risk Factors

48

 

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

48

 

Item 3 – Defaults upon Senior Securities

48

 

Item 4 – Mine Safety Disclosures

48

 

Item 5 – Other Information

48

 

Item 6 – Exhibits

48

 

Signatures

49

 

 

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.                                                                    Consolidated Balance Sheets (Unaudited)

 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

September 30, 2015

 

December 31, 2014

ASSETS

 

 

 

 

 

 Cash and due from banks

$

17,153 

 

$

8,869 

 Interest-bearing balances with other financial institutions

 

2,081 

 

 

1,013 

   Total cash and cash equivalents

 

19,234 

 

 

9,882 

 Interest-bearing time deposits with other financial institutions

 

5,313 

 

 

5,772 

 Available for sale investment securities

 

133,696 

 

 

141,634 

 Loans and leases, net of unearned interest

 

719,085 

 

 

571,533 

   Less:  Allowance for loan and lease losses

 

(6,984)

 

 

(6,716)

 Net loans and leases

 

712,101 

 

 

564,817 

 Bank premises and equipment, net

 

14,196 

 

 

12,225 

 Restricted investment in bank stocks

 

3,919 

 

 

3,181 

 Foreclosed assets held for sale

 

990 

 

 

565 

 Accrued interest receivable

 

3,415 

 

 

3,058 

 Deferred income taxes

 

2,976 

 

 

2,125 

 Goodwill

 

3,918 

 

 

1,016 

 Core deposit and other intangibles, net

 

699 

 

 

187 

 Cash surrender value of life insurance

 

12,446 

 

 

8,575 

 Other assets

 

2,362 

 

 

2,620 

      Total Assets

$

915,265 

 

$

755,657 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

 Deposits:

 

 

 

 

 

   Noninterest bearing demand

$

96,916 

 

$

60,613 

   Interest bearing demand

 

255,672 

 

 

222,712 

   Money Market

 

204,928 

 

 

197,418 

   Savings

 

56,032 

 

 

32,394 

   Time

 

161,602 

 

 

124,785 

       Total Deposits 

 

775,150 

 

 

637,922 

 Short-term borrowings

 

5,712 

 

 

578 

  Long-term debt

 

51,363 

 

 

52,961 

  Accrued interest payable

 

605 

 

 

349 

  Other liabilities

 

6,915 

 

 

4,717 

     Total Liabilities

 

839,745 

 

 

696,527 

 Shareholders' Equity:

 

 

 

 

 

   Series B Preferred stock, par value $1.00; liquidation value $1,000; authorized 5,000 shares;

 

 

 

 

 

       7% non-cumulative dividend; 5,000 shares issued and outstanding at September 30, 2015

 

 

 

 

 

       and at December 31, 2014; total redemption value $5,100,000

 

5,000 

 

 

5,000 

   Series C Preferred stock, par value $1.00; liquidation value $1,000; authorized 1,750 shares; 1%

 

 

 

 

 

       non-cumulative dividend; 1,750 shares issued and outstanding at September 30, 2015 and 0

 

 

 

 

 

       shares issued and outstanding at December 31, 2014; total redemption value $1,750,000

 

1,750 

 

 

 -

   Common stock, par value $1.00; authorized 10,000,000 shares; 4,225,720 shares issued and

 

 

 

 

 

       outstanding at September 30, 2015 and 3,497,829 at December 31, 2014

 

4,226 

 

 

3,498 

   Additional paid-in capital

 

40,535 

 

 

29,902 

   Retained earnings

 

22,569 

 

 

19,217 

   Accumulated other comprehensive income

 

1,440 

 

 

1,513 

 Total Shareholders’ Equity

 

75,520 

 

 

59,130 

       Total Liabilities and Shareholders' Equity

$

915,265 

 

$

755,657 

 

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 September 30,

 

Nine Months Ended September 30,

 

2015

 

2014

 

2015

 

2014

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 Interest & fees on loans and leases

$

8,448 

 

$

6,657 

 

$

24,345 

 

$

20,122 

 Interest on interest-bearing balances

 

12 

 

 

11 

 

 

34 

 

 

31 

 Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

 

 

   U.S. Treasury and government agencies

 

293 

 

 

359 

 

 

928 

 

 

994 

   State and political subdivision obligations, tax-exempt

 

484 

 

 

563 

 

 

1,532 

 

 

1,618 

   Other securities

 

102 

 

 

43 

 

 

301 

 

 

118 

 Interest on federal funds sold and securities purchased under

 

 

 

 

 

 

 

 

 

 

 

 agreements to resell

 

 -

 

 

 -

 

 

 

 

 -

     Total Interest Income 

 

9,339 

 

 

7,633 

 

 

27,141 

 

 

22,883 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 Interest on deposits

 

987 

 

 

953 

 

 

2,881 

 

 

2,921 

 Interest on short-term borrowings

 

14 

 

 

 

 

36 

 

 

26 

 Interest on long-term debt

 

149 

 

 

131 

 

 

511 

 

 

369 

     Total Interest Expense 

 

1,150 

 

 

1,089 

 

 

3,428 

 

 

3,316 

     Net Interest Income 

 

8,189 

 

 

6,544 

 

 

23,713 

 

 

19,567 

PROVISION FOR LOAN AND LEASE LOSSES

 

265 

 

 

395 

 

 

865 

 

 

1,217 

Net Interest Income After Provision for Loan and Lease Losses

 

7,924 

 

 

6,149 

 

 

22,848 

 

 

18,350 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 Income from fiduciary activities

 

120 

 

 

120 

 

 

367 

 

 

445 

 Service charges on deposits

 

186 

 

 

154 

 

 

503 

 

 

417 

 Net gain on sales of investment securities

 

138 

 

 

 -

 

 

315 

 

 

150 

 Earnings from cash surrender value of life insurance

 

71 

 

 

50 

 

 

198 

 

 

152 

 Mortgage banking income

 

106 

 

 

95 

 

 

326 

 

 

208 

 ATM debit card interchange income

 

189 

 

 

138 

 

 

540 

 

 

403 

 Merchant services income

 

64 

 

 

65 

 

 

175 

 

 

198 

 Net gain on sales of SBA loans

 

73 

 

 

19 

 

 

216 

 

 

97 

 Other income

 

138 

 

 

100 

 

 

487 

 

 

339 

    Total Noninterest Income 

 

1,085 

 

 

741 

 

 

3,127 

 

 

2,409 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 Salaries and employee benefits

 

3,471 

 

 

2,635 

 

 

10,231 

 

 

8,026 

 Occupancy expense, net

 

498 

 

 

282 

 

 

1,448 

 

 

986 

 Equipment expense

 

346 

 

 

297 

 

 

1,081 

 

 

908 

 Pennsylvania Bank Shares tax expense

 

106 

 

 

64 

 

 

337 

 

 

272 

 FDIC Assessment

 

166 

 

 

134 

 

 

470 

 

 

405 

 Legal and professional fees

 

151 

 

 

101 

 

 

455 

 

 

366 

 Director fees and benefits expense

 

92 

 

 

83 

 

 

267 

 

 

238 

 Marketing and advertising expense

 

137 

 

 

95 

 

 

372 

 

 

227 

 Software licensing

 

380 

 

 

238 

 

 

1,103 

 

 

687 

 Telephone expense

 

169 

 

 

108 

 

 

432 

 

 

304 

 Loss on sale/write-down of foreclosed assets

 

47 

 

 

52 

 

 

64 

 

 

109 

 Intangible amortization

 

26 

 

 

 

 

61 

 

 

22 

 Loan collection costs

 

67 

 

 

76 

 

 

235 

 

 

229 

 Merger and acquisition expense

 

 -

 

 

11 

 

 

784 

 

 

11 

  Other expenses

 

913 

 

 

745 

 

 

2,511 

 

 

1,945 

    Total Noninterest Expense 

 

6,569 

 

 

4,929 

 

 

19,851 

 

 

14,735 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

2,440 

 

 

1,961 

 

 

6,124 

 

 

6,024 

 Provision for income taxes

 

546 

 

 

366 

 

 

1,223 

 

 

1,211 

NET INCOME

 

1,894 

 

 

1,595 

 

 

4,901 

 

 

4,813 

 Series B preferred stock dividends

 

88 

 

 

88 

 

 

263 

 

 

263 

 Series C preferred stock dividends

 

 

 

 -

 

 

 

 

 -

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

$

1,802 

 

$

1,507 

 

$

4,630 

 

$

4,550 

 

 

 

 

 

 

 

 

 

 

 

 

PER COMMON SHARE DATA:

 

 

 

 

 

 

 

 

 

 

 

 Basic Earnings Per Common Share

$

0.43 

 

$

0.43 

 

$

1.14 

 

$

1.30 

 Cash Dividends

$

0.12 

 

$

0.10 

 

$

0.32 

 

$

0.25 

 

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

 

 

3


 

MID PENN BANCORP, INC.                            Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Three Months Ended September 30,

 

2015

 

2014

 

 

 

 

 

 

Net income

$

1,894 

 

$

1,595 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains arising during the period on available for sale

 

 

 

 

 

securities, net of income taxes of $464 and $40, respectively

 

898 

 

 

77 

 

 

 

 

 

 

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

 

 

 

 

 

included in net income, net of income taxes of ($47) and $0, respectively   (1) (3)

 

(91)

 

 

 -

 

 

 

 

 

 

Change in defined benefit plans, net of income taxes of $2 and $3, respectively   (2) (3)

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

809 

 

 

81 

 

 

 

 

 

 

Total comprehensive income

$

2,703 

 

$

1,676 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Nine Months Ended September 30,

 

2015

 

2014

 

 

 

 

 

 

Net income

$

4,901 

 

$

4,813 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains arising during the period on available for sale

 

 

 

 

 

securities, net of income taxes of $66 and $1,171, respectively

 

128 

 

 

2,270 

 

 

 

 

 

 

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

 

 

 

 

 

included in net income, net of income taxes of ($107) and ($51), respectively   (1) (3)

 

(208)

 

 

(99)

 

 

 

 

 

 

Change in defined benefit plans, net of income taxes of $4 and $6, respectively   (2) (3)

 

 

 

10 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

(73)

 

 

2,181 

 

 

 

 

 

 

Total comprehensive income

$

4,828 

 

$

6,994 

 

 

 

 

(1)

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

 

(2)

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

 

(3)

Income tax amounts are included in the provision for income taxes in the Consolidated Statements of Income

 

 

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 NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

Preferred

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Shareholders'

 

Stock

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

Equity

Balance, January 1, 2015

$

5,000 

 

$

3,498 

 

$

29,902 

 

$

19,217 

 

$

1,513 

 

$

59,130 

   Net income

 

 -

 

 

 -

 

 

 -

 

 

4,901 

 

 

 -

 

 

4,901 

   Total other comprehensive loss, net of taxes

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(73)

 

 

(73)

   Employee Stock Purchase Plan (3,166 shares)

 

 -

 

 

 

 

47 

 

 

 -

 

 

 -

 

 

50 

   Common stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(1,278)

 

 

 -

 

 

(1,278)

   Series B preferred stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(263)

 

 

 -

 

 

(263)

   Series C preferred stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(8)

 

 

 -

 

 

(8)

   SBLF preferred stock in connection with Phoenix acquisition

 

1,750 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,750 

   Common stock issued to Phoenix shareholders

 

 -

 

 

724 

 

 

10,568 

 

 

 -

 

 

 -

 

 

11,292 

   Restricted stock purchase (875 shares)

 

 -

 

 

 

 

 -

 

 

 -

 

 

 -

 

 

   Restricted stock compensation expense

 

 -

 

 

 -

 

 

18 

 

 

 -

 

 

 -

 

 

18 

Balance, September 30, 2015

$

6,750 

 

$

4,226 

 

$

40,535 

 

$

22,569 

 

$

1,440 

 

$

75,520 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2014

$

5,000 

 

$

3,494 

 

$

29,853 

 

$

15,441 

 

$

(872)

 

$

52,916 

   Net income

 

 -

 

 

 -

 

 

 -

 

 

4,813 

 

 

 -

 

 

4,813 

   Total other comprehensive income, net of taxes

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,181 

 

 

2,181 

   Employee Stock Purchase Plan (2,519 shares)

 

 -

 

 

 

 

35 

 

 

 -

 

 

 -

 

 

38 

   Common stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(874)

 

 

 -

 

 

(874)

   Series B Preferred stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(263)

 

 

 -

 

 

(263)

Balance, September 30, 2014

$

5,000 

 

$

3,497 

 

$

29,888 

 

$

19,117 

 

$

1,309 

 

$

58,811 

 

 

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)

Nine Months Ended September 30,

 

2015

 

2014

Operating Activities:

 

 

 

 

 

   Net Income

$

4,901 

 

$

4,813 

   Adjustments to reconcile net income to net cash

 

 

 

 

 

       provided by operating activities:

 

 

 

 

 

           Provision for loan and lease losses

 

865 

 

 

1,217 

           Depreciation

 

1,082 

 

 

934 

           Amortization of intangibles

 

66 

 

 

46 

           Net amortization of security premiums

 

1,867 

 

 

925 

   Gain on sales of investment securities

 

(315)

 

 

(150)

           Earnings on cash surrender value of life insurance

 

(198)

 

 

(152)

           SBA loans originated for sale

 

(2,915)

 

 

(943)

           Proceeds from sales of SBA loans originated for sale

 

3,131 

 

 

1,040 

           Gain on sale of loans

 

(216)

 

 

(97)

           Loss on disposal of property, plant, and equipment

 

 -

 

 

           Loss on sale / write-down of foreclosed assets

 

64 

 

 

109 

           Restricted stock compensation expense

 

19 

 

 

 -

           Deferred income tax (benefit) expense

 

(300)

 

 

71 

           Decrease (increase) in accrued interest receivable

 

31 

 

 

(296)

           Decrease (increase) in other assets

 

882 

 

 

(94)

           Increase in accrued interest payable

 

224 

 

 

253 

           Increase (decrease) in other liabilities

 

1,322 

 

 

(621)

Net Cash Provided By Operating Activities 

 

10,510 

 

 

7,063 

Investing Activities:

 

 

 

 

 

   Net decrease in interest-bearing time deposits with other financial institutions

 

459 

 

 

1,741 

    Proceeds from the maturity of investment securities

 

8,080 

 

 

10,497 

    Proceeds from the sale of investment securities

 

33,962 

 

 

7,199 

   Purchases of investment securities

 

(24,446)

 

 

(40,511)

   Net cash received from acquisition

 

8,095 

 

 

 -

   Purchases of restricted investment in bank stock

 

(229)

 

 

(426)

   Net increase in loans and leases

 

(38,671)

 

 

(23,613)

   Purchases of bank premises and equipment

 

(1,261)

 

 

(776)

   Proceeds from sale of foreclosed assets

 

396 

 

 

798 

Net Cash Used In Investing Activities 

 

(13,615)

 

 

(45,091)

Financing Activities:

 

 

 

 

 

   Net increase in deposits

 

13,990 

 

 

37,867 

    Net increase (decrease) in short-term borrowings

 

5,134 

 

 

(1,979)

   Series B preferred stock dividend paid

 

(263)

 

 

(263)

   Series C preferred stock dividend paid

 

(8)

 

 

 -

   Common stock dividend paid

 

(1,278)

 

 

(874)

Employee Stock Purchase Plan

 

50 

 

 

38 

Proceeds from long-term debt borrowings

 

 -

 

 

10,000 

   Long-term debt repayment

 

(5,168)

 

 

(137)

Net Cash Provided By Financing Activities 

 

12,457 

 

 

44,652 

Net increase in cash and cash equivalents

 

9,352 

 

 

6,624 

Cash and cash equivalents, beginning of year

 

9,882 

 

 

8,623 

Cash and cash equivalents, end of year

$

19,234 

 

$

15,247 

 

 

6


 

MID PENN BANCORP, INC.                                                 Consolidated Statements of Cash Flows (Unaudited)

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

   Interest paid

$

3,173 

 

$

3,063 

   Income taxes paid

$

930 

 

$

870 

 

 

 

 

 

 

Supplemental Noncash Disclosures:

 

 

 

 

 

   Loan transfers to foreclosed assets held for sale

$

885 

 

$

791 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets, Liabilities, and Equity in Connection with Merger:

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Assets Acquired:

 

 

 

 

 

Securities

$

11,331 

 

$

 -

Loans

 

110,363 

 

 

 -

Restricted stock

 

509 

 

 

 -

Property and equipment

 

1,792 

 

 

 -

Accrued interest receivable

 

388 

 

 

 -

Core deposit and other intangible assets

 

578 

 

 

 -

Bank-owned life insurance

 

3,673 

 

 

 -

Other assets

 

1,127 

 

 

 -

 

$

129,761 

 

$

 -

 

 

 

 

 

 

Liabilities Assumed:

 

 

 

 

 

Deposits

$

123,238 

 

$

 -

Accrued interest payable

 

32 

 

 

 -

Long-term debt

 

3,570 

 

 

 -

Other liabilities

 

876 

 

 

 -

 

$

127,716 

 

$

 -

 

 

 

 

 

 

Equity Acquired:

 

 

 

 

 

Preferred stock

$

1,750 

 

$

 -

 

 

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

 

 

 

7


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

(1)          Basis of Presentation

 

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

 

Certain information and footnote 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 September 30,  2014 and December 31, 2014 balances have been reclassified, when, and if necessary, to conform to the 2015 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.  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, 2014.

 

Mid Penn has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2015, 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 March 1, 2015, Phoenix Bancorp, Inc. (“Phoenix”) merged with, and into, the Company, with the Company continuing as the surviving entity.  Simultaneously with the consummation of the foregoing merger, Miners Bank (“Miners”), a Pennsylvania-state chartered bank and wholly-owned subsidiary of Phoenix, merged with and into the Bank.

 

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

 

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

 

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

 

Included in the purchase price was goodwill and a core deposit intangible of $2,902,000 and $578,000, respectively.  The core deposit intangible will be amortized over a ten-year period using a sum of the year’s digits basis.  The goodwill will not be amortized, but will be measured annually for impairment or more frequently if circumstances require.  Core deposit intangible amortization expense projected for the succeeding five years beginning 2015 is estimated to be $88,000,  $96,000,  $86,000,  $75,000, and $65,000 per year, respectively, and $168,000 in total for years after 2019.

 

 

8


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

The allocation of the purchase price is as follows:

 

 

 

 

 

(Dollars in thousands)

 

Purchase price assigned to Phoenix common shares exchanged for 723,851 Mid Penn common shares

$

11,292 

Purchase price assigned to Phoenix common shares exchanged for cash

 

2,949 

Total purchase price

 

14,241 

Phoenix net assets acquired:

 

 

Tangible Common Equity

 

12,292 

Estimated adjustments to reflect assets acquired and liabilities assumed at fair value:

 

 

Total fair value adjustments

 

(1,456)

Associated deferred income taxes

 

503 

Fair value adjustment to net assets acquired, net of tax

 

(953)

Total Phoenix net assets acquired

 

11,339 

Goodwill resulting from the merger

$

2,902 

 

While Mid Penn believes that the accounting for the merger is complete, Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, allows for adjustments to goodwill for a period of up to one year after the merger date for information that becomes available that reflects circumstances at the merger date.  Adjustments to certain amounts associated with the merger were made during the current quarter and were not considered significant.  The following table summarizes the estimated fair value of the assets acquired and liabilities and equity assumed.

 

 

 

 

 

(Dollars in thousands)

 

Total purchase price

$

14,241 

 

 

 

Net assets acquired:

 

 

Cash and cash equivalents

 

11,044 

Investment securities

 

11,331 

Restricted stock

 

509 

Loans

 

110,363 

Bank owned life insurance

 

3,673 

Premises and equipment

 

1,792 

Accrued interest receivable

 

388 

Core deposit and other intangibles

 

578 

Other assets

 

1,127 

Deposits

 

(123,238)

FHLB borrowings

 

(3,570)

Accrued interest payable

 

(32)

Other liabilities

 

(876)

Preferred stock

 

(1,750)

 

 

11,339 

Goodwill

$

2,902 

 

The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $112,816,000.  The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired.

 

 

 

 

 

(Dollars in thousands)

 

Gross amortized cost basis at March 1, 2015

$

112,816 

Market rate adjustment

 

270 

Credit fair value adjustment on pools of homogeneous loans

 

(1,461)

Credit fair value adjustment on impaired loans

 

(1,262)

Fair value of purchased loans at March 1, 2015

$

110,363 

 

 

 

9


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

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

 

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

 

 

 

 

 

(Dollars in thousands)

 

Contractually required principal and interest at acquisition

$

3,548 

Contractual cash flows not expected to be collected (nonaccretable discount)

 

(804)

Expected cash flows at acquisition

 

2,744 

Interest component of expected cash flows (accretable discount)

 

(458)

Fair value of acquired loans

$

2,286 

 

The following table presents pro forma information as if the merger between Mid Penn and Phoenix had been completed on January 1, 2014.  The pro forma information does not necessarily reflect the results of operations that would have occurred had Mid Penn merged with Phoenix at the beginning of 2014.  Supplemental pro forma earnings for 2015 were adjusted to exclude $784,000 of merger related costs incurred for the three and nine months ended September 30, 2015; the results for the first three and nine months of 2014 were adjusted to include these charges.  The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies, or other factors.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2015

 

2014

 

2015

 

2014

Net interest income after loan loss provision

$

7,924 

 

$

7,439 

 

$

23,484 

 

$

22,257 

Noninterest income

 

1,085 

 

 

980 

 

 

3,192 

 

 

3,057 

Noninterest expense

 

7,353 

 

 

7,318 

 

 

20,934 

 

 

18,982 

Net income available to common shareholders

 

1,251 

 

 

1,568 

 

 

4,403 

 

 

4,812 

Net income per common share

 

0.30 

 

 

0.37 

 

 

1.04 

 

 

1.14 

 

The amount of total revenue, consisting of interest income plus noninterest income specifically related to Phoenix for the period beginning March 1, 2015, included in the consolidated statements of income of Mid Penn for the three and nine months ended September 30, 2015, was $1,329,000 and $3,157,000, respectively.  The net income specifically related to Phoenix for the period beginning March 1, 2015, included in the consolidated statements of income of Mid Penn for the three and nine months ended September 30, 2015, was $243,000 and $540,000, respectively.

 

 

(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, and other factors related to interest rate and resultant prepayment risk changes.

 

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 investment securities available for sale are based on the difference between amortized cost and fair value of each security.  These 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.

 

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 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.

 

 

10


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

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.

 

In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intent and ability to hold the securities until recovery of unrealized losses.

 

At September 30, 2015 and December 31, 2014, amortized cost, fair value, and unrealized gains and losses on investment securities are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

Value

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

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

$

26,323 

 

$

1,060 

 

$

41 

 

$

27,342 

Mortgage-backed U.S. government agencies

 

36,136 

 

 

170 

 

 

117 

 

 

36,189 

State and political subdivision obligations

 

65,630 

 

 

1,482 

 

 

230 

 

 

66,882 

Equity securities

 

3,266 

 

 

90 

 

 

73 

 

 

3,283 

 

$

131,355 

 

$

2,802 

 

$

461 

 

$

133,696 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

Value

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

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

$

26,343 

 

$

752 

 

$

29 

 

$

27,066 

Mortgage-backed U.S. government agencies

 

33,763 

 

 

190 

 

 

177 

 

 

33,776 

State and political subdivision obligations

 

77,482 

 

 

2,007 

 

 

318 

 

 

79,171 

Equity securities

 

1,584 

 

 

60 

 

 

23 

 

 

1,621 

 

$

139,172 

 

$

3,009 

 

$

547 

 

$

141,634 

 

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.

 

Investment securities having a fair value of $127,025,000 at September 30, 2015 and $134,740,000 at December 31, 2014, were pledged to secure public deposits and other borrowings.

 

Mid Penn realized gross gains of $138,000 and $0 on sales of securities available for sale during the three months ended September 30, 2015 and September 30, 2014.  For the nine months ended September 30, 2015 and September 30, 2014, Mid Penn realized $315,000 and $150,000, respectively, on sales of securities available for sale.  Mid Penn realized gross losses on the sale of securities available for sale of $0 during the three and nine months ended September 30, 2015 and September 30, 2014.

 

The following table presents gross unrealized losses and fair value of investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2015 and December 31, 2014.

 

11


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Less Than 12 Months

 

12 Months or More

 

Total

September 30, 2015

Number of

 

Fair

 

Unrealized

 

Number of

 

Fair

 

Unrealized

 

Number of

 

Fair

 

Unrealized

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

3

 

$

2,895 

 

$

29 

 

2

 

$

1,456 

 

$

12 

 

5

 

$

4,351 

 

$

41 

Mortgage-backed U.S. government agencies

8

 

 

8,276 

 

 

46 

 

7

 

 

4,128 

 

 

71 

 

15

 

 

12,404 

 

 

117 

State and political subdivision obligations

31

 

 

14,564 

 

 

120 

 

4

 

 

2,936 

 

 

110 

 

35

 

 

17,500 

 

 

230 

Equity securities

1

 

 

997 

 

 

 

3

 

 

1,196 

 

 

70 

 

4

 

 

2,193 

 

 

73 

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    available for sale securities

43

 

$

26,732 

 

$

198 

 

16

 

$

9,716 

 

$

263 

 

59

 

$

36,448 

 

$

461 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Less Than 12 Months

 

12 Months or More

 

Total

December 31, 2014

Number of

 

Fair

 

Unrealized

 

Number of

 

Fair

 

Unrealized

 

Number of

 

Fair

 

Unrealized

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

5

 

$

6,059 

 

$

29 

 

 -

 

$

 -

 

$

 -

 

5

 

$

6,059 

 

$

29 

Mortgage-backed U.S. government agencies

15

 

 

9,511 

 

 

62 

 

5

 

 

4,416 

 

 

115 

 

20

 

 

13,927 

 

 

177 

State and political subdivision obligations

9

 

 

4,444 

 

 

33 

 

28

 

 

13,947 

 

 

285 

 

37

 

 

18,391 

 

 

318 

Equity securities

 -

 

 

 -

 

 

 -

 

2

 

 

583 

 

 

23 

 

2

 

 

583 

 

 

23 

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    available for sale securities

29

 

$

20,014 

 

$

124 

 

35

 

$

18,946 

 

$

423 

 

64

 

$

38,960 

 

$

547 

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis; and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, and the financial condition and near term prospects of the issuer.  In addition, for debt securities, the Corporation 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 mortgage-backed U.S. government agencies and state and political subdivision obligations with school districts and municipal authorities throughout the U.S.  For the investment securities with an unrealized loss, Mid Penn has concluded, based on its analysis, that the unrealized losses in the investments are primarily caused by the movement of interest rates, and the contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment.

 

At September 30, 2015, 55 debt securities and 4 equity securities with unrealized losses totaling $461,000 depreciated 1.26% from their amortized cost basis.  At September 30, 2015, 13 debt securities and 3 equity securities had unrealized losses for twelve months or longer totaling $266,000, of which the largest loss was attributed to state and political subdivision obligations with $110,000 in unrealized losses.  At December 31, 2014, 62 debt securities and 2 equity securities with unrealized losses totaling $547,000 depreciated 1.40% from their amortized cost basis.  At December 31, 2014, 33 debt securities and 2 equity securities had unrealized losses for twelve months or longer totaling $423,000, of which the majority was attributed to mortgage-backed U.S. government agencies and state and political subdivision obligations with $115,000 and $285,000 in unrealized losses, respectively. 

 

Because Mid Penn does not intend to sell these investments and it is not likely it will be required to sell these investments before a recovery of fair value, which may be maturity, Mid Penn does not consider the securities with unrealized losses to be other-than-temporarily impaired as losses relate to changes in interest rates and not erosion of credit quality.

 

The table below is the maturity distribution of investment securities at amortized cost and fair value.

 

 

 

 

 

 

 

 

12


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

(Dollars in thousands)

September 30, 2015

 

Amortized

 

Fair

 

Cost

 

Value

Due in 1 year or less

$

7,483 

 

$

7,600 

Due after 1 year but within 5 years

 

26,240 

 

 

27,301 

Due after 5 years but within 10 years

 

47,628 

 

 

48,882 

Due after 10 years

 

10,602 

 

 

10,441 

 

 

91,953 

 

 

94,224 

Mortgage-backed securities

 

36,136 

 

 

36,189 

Equity securities

 

3,266 

 

 

3,283 

 

$

131,355 

 

$

133,696 

 

 

 

(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 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. These amounts are 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 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 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 credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan and lease losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are 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 six 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% 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 more traditional investments.

 

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.

 

13


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

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% 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% 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 an attorney’s title opinion or 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 the potential 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 second mortgages on principal residences.  The Bank will lend amounts, which, together with all prior liens, typically may be up to 85% 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 continues to be weak and property values deteriorate.

 

14


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

Allowance for Loan and Lease Losses

 

The allowance for credit losses consists of the allowance for loan and lease losses and the reserve for unfunded lending commitments. The allowance for loan and lease losses (“allowance”) 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 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, or 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 for credit losses is maintained at a level that management considered 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, including loans classified as troubled debt restructurings, 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 the experience of the lending staff and loan review systems, growth or changes in the mix of loans originated, and shifting industry or portfolio concentrations.

 

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.

 

Mid Penn 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.  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 (“DCF”) method indicates no operating income is available for evaluating the collateral position; therefore, all impaired loans are deemed to be collateral dependent.

 

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

 

 

15


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

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.  In the event the loan is unsecured, the loan would have been charged-off at the recognition of impairment.  If the loan is secured, it will undergo a 90 day waiting period to ensure the collateral shortfall identified in the evaluation is accurate and then charged down by the specific allocation. Once the charge down is taken, the remaining balance remains an impaired loan with the original terms and interest rate intact (not restructured).  Commercial loans secured by real estate 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 and a 90 day waiting period begins to ensure the accuracy of the collateral shortfall.  The loan is then charged down by the specific allocation.  Once the charge down is taken, the remaining balance remains an impaired 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 (including home equity loans and other consumer loans) are recommended for charge-off after reaching delinquency of 90 days and the loan is not in the process of collection.  The entire balance of the consumer loan is recommended for charge-off at this point.

 

As noted above, Mid Penn assesses a specific allocation for commercial 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 (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 within 30 days of the credit being classified as impaired.  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 which time Mid Penn is in receipt of the updated valuation.  The credit department employs an electronic tracking system to monitor the receipt of and need for updated appraisals.  To date, there have been no significant 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 within 30 days of being placed on non-accrual 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 18 months for possible revaluation by an independent third party.

 

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

 

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.

 

 

16


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

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. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification.   Loans classified as troubled debt restructurings are designated as impaired.

 

In addition, Federal and State regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan and lease losses 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 acquisitions 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.  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 for credit losses.  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. 

 

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. 

 

Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30, but for which a discount is attributable at least in part to credit quality, are also accounted for in accordance with this guidance.  As a result, related discounts are recognized subsequently through accretion based on the contractual cash flows of the acquired loans.

 

The classes of the loan portfolio, summarized by the aggregate pass rating and the classified ratings of special mention, substandard, and doubtful within Mid Penn’s internal risk rating system as of September 30, 2015 and December 31, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

Special

 

 

 

 

 

 

September 30, 2015

Pass

 

Mention

 

Substandard

 

Doubtful

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

159,219 

 

$

1,497 

 

$

705 

 

$

 -

 

$

161,421 

Commercial real estate

 

337,917 

 

 

2,256 

 

 

10,574 

 

 

 -

 

 

350,747 

Commercial real estate - construction

 

65,785 

 

 

3,167 

 

 

 -

 

 

 -

 

 

68,952 

Lease financing

 

804 

 

 

 -

 

 

 -

 

 

 -

 

 

804 

Residential mortgage

 

99,335 

 

 

478 

 

 

1,272 

 

 

 -

 

 

101,085 

Home equity

 

32,587 

 

 

278 

 

 

300 

 

 

 -

 

 

33,165 

Consumer

 

2,911 

 

 

 -

 

 

 -

 

 

 -

 

 

2,911 

 

$

698,558 

 

$

7,676 

 

$

12,851 

 

$

 -

 

$

719,085 

 

 

17


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

Special

 

 

 

 

 

 

December 31, 2014

Pass

 

Mention

 

Substandard

 

Doubtful

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

117,166 

 

$

654 

 

$

1,190 

 

$

 -

 

$

119,010 

Commercial real estate

 

280,817 

 

 

4,859 

 

 

11,681 

 

 

 -

 

 

297,357 

Commercial real estate - construction

 

55,834 

 

 

242 

 

 

 -

 

 

 -

 

 

56,076 

Lease financing

 

1,121 

 

 

 -

 

 

 -

 

 

 -

 

 

1,121 

Residential mortgage

 

64,900 

 

 

252 

 

 

1,290 

 

 

 -

 

 

66,442 

Home equity

 

28,167 

 

 

138 

 

 

201 

 

 

 -

 

 

28,506 

Consumer

 

3,021 

 

 

 -

 

 

 -

 

 

 -

 

 

3,021 

 

$

551,026 

 

$

6,145 

 

$

14,362 

 

$

 -

 

$

571,533 

 

 

Impaired loans by loan portfolio class as of September 30, 2015 and December 31, 2014 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

(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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

17 

 

$

51 

 

$

 -

 

$

395 

 

$

430 

 

$

 -

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

969 

 

 

1,948 

 

 

 -

 

 

1,971 

 

 

4,481 

 

 

 -

Acquired with credit deterioration*

 

927 

 

 

927 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Residential mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

770 

 

 

854 

 

 

 -

 

 

1,146 

 

 

1,286 

 

 

 -

Acquired with credit deterioration*

 

419 

 

 

419 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Home equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

20 

 

 

37 

 

 

 -

 

 

29 

 

 

88 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

123 

 

$

134 

 

$

58 

 

$

223 

 

$

231 

 

$

137 

Commercial real estate

 

5,355 

 

 

6,402 

 

 

1,531 

 

 

6,954 

 

 

7,255 

 

 

1,382 

Residential mortgage

 

31 

 

 

31 

 

 

23 

 

 

 -

 

 

 -

 

 

 -

Home equity

 

165 

 

 

168 

 

 

129 

 

 

211 

 

 

213 

 

 

115 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

140 

 

$

185 

 

$

58 

 

$

618 

 

$

661 

 

$

137 

Commercial real estate

 

7,251 

 

 

9,277 

 

 

1,531 

 

 

8,925 

 

 

11,736 

 

 

1,382 

Residential mortgage

 

1,220 

 

 

1,304 

 

 

23 

 

 

1,146 

 

 

1,286 

 

 

 -

Home equity

 

185 

 

 

205 

 

 

129 

 

 

240 

 

 

301 

 

 

115 

 

 

* Loans acquired with credit deterioration are presented net of credit fair value adjustment.

 

18


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

Average recorded investment of impaired loans and related interest income recognized for the three and nine months ended September 30, 2015 and September 30, 2014 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

September 30, 2015

 

September 30, 2014

(Dollars in thousands)                    

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

 

Interest Income Recognized

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

18 

 

$

 -

 

$

48 

 

$

 -

Acquired with credit deterioration

 

 -

 

 

100 

 

 

 -

 

 

 -

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

991 

 

 

14 

 

 

2,057 

 

 

 -

Acquired with credit deterioration

 

926 

 

 

 -

 

 

 -

 

 

 -

Residential mortgage:

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

735 

 

 

 

 

908 

 

 

 -

Acquired with credit deterioration

 

426 

 

 

 -

 

 

 -

 

 

 -

Home equity:

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

21 

 

 

 -

 

 

31 

 

 

 -

Acquired with credit deterioration

 

 -

 

 

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

124 

 

$

 -

 

$

133 

 

$

 -

Commercial real estate

 

5,167 

 

 

 -

 

 

6,930 

 

 

 -

Residential mortgage

 

31 

 

 

 -

 

 

 -

 

 

 -

Home equity

 

182 

 

 

 -

 

 

112 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

142 

 

$

100 

 

$

181 

 

$

 -

Commercial real estate

 

7,084 

 

 

14 

 

 

8,987 

 

 

 -

Residential mortgage

 

1,192 

 

 

 

 

908 

 

 

 -

Home equity

 

203 

 

 

 

 

143 

 

 

 -

 

 

19


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30, 2015

 

September 30, 2014

(Dollars in thousands)                    

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

 

Interest Income Recognized

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

22 

 

$

 -

 

$

51 

 

$

 -

Acquired with credit deterioration

 

 -

 

 

205 

 

 

 -

 

 

 -

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

1,072 

 

 

14 

 

 

2,127 

 

 

346 

Acquired with credit deterioration

 

947 

 

 

347 

 

 

 -

 

 

 -

Residential mortgage:

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

673 

 

 

 

 

930 

 

 

 -

Acquired with credit deterioration

 

427 

 

 

 -

 

 

 -

 

 

 -

Home equity:

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

22 

 

 

 -

 

 

54 

 

 

 -

Acquired with credit deterioration

 

 -

 

 

 

 

 -

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

127 

 

$

 -

 

$

135 

 

$

 -

Commercial real estate

 

5,077 

 

 

 -

 

 

7,008 

 

 

 -

Residential mortgage

 

19 

 

 

 -

 

 

 -

 

 

 -

Home equity

 

178 

 

 

 -

 

 

115 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

149 

 

$

205 

 

$

186 

 

$

 -

Commercial real estate

 

7,096 

 

 

361 

 

 

9,135 

 

 

346 

Residential mortgage

 

1,119 

 

 

 

 

930 

 

 

 -

Home equity

 

200 

 

 

 

 

169 

 

 

 -

 

Non-accrual loans by loan portfolio class as of September 30, 2015 and December 31, 2014 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

September 30, 2015

 

December 31, 2014

 

 

 

 

 

 

Commercial and industrial

$

78 

 

$

267 

Commercial real estate

 

5,938 

 

 

7,249 

Residential mortgage

 

1,089 

 

 

1,152 

Home equity

 

185 

 

 

239 

 

$

7,290 

 

$

8,907 

 

 

20


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

The performance and credit quality of the loan portfolio is also monitored by the analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.  The classes of the loan portfolio summarized by the past due status as of September 30, 2015 and December 31, 2014 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

30-59 Days Past Due

 

60-89 Days Past Due

 

Greater than 90 Days

 

Total Past Due

 

Current

 

Total Loans

 

Loans Receivable > 90 Days and Accruing

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

 -

 

$

219 

 

$

78 

 

$

297 

 

$

161,124 

 

$

161,421 

 

$

 -

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

1,128 

 

 

865 

 

 

4,052 

 

 

6,045 

 

 

343,775 

 

 

349,820 

 

 

 -

Acquired with credit deterioration

 

 -

 

 

 -

 

 

53 

 

 

53 

 

 

874 

 

 

927 

 

 

53 

Commercial real estate - construction:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate - construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

68,952 

 

 

68,952 

 

 

 -

Lease financing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease financing

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

804 

 

 

804 

 

 

 -

Residential mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

75 

 

 

480 

 

 

715 

 

 

1,270 

 

 

99,396 

 

 

100,666 

 

 

 -

Acquired with credit deterioration

 

117 

 

 

 -

 

 

218 

 

 

335 

 

 

84 

 

 

419 

 

 

 -

Home equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

20 

 

 

 -

 

 

139 

 

 

159 

 

 

33,006 

 

 

33,165 

 

 

 -

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 -

 

 

 -

 

 

 

 

2,906 

 

 

2,911 

 

 

 -

            Total

$

1,345 

 

$

1,564 

 

$

5,255 

 

$

8,164 

 

$

710,921 

 

$

719,085 

 

$

53 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

30-59 Days Past Due

 

60-89 Days Past Due

 

Greater than 90 Days

 

Total Past Due

 

Current

 

Total Loans

 

Loans Receivable > 90 Days and Accruing

Commercial and industrial

$

172 

 

$

290 

 

$

87 

 

$

549 

 

$

118,461 

 

$

119,010 

 

$

 -

Commercial real estate

 

403 

 

 

197 

 

 

6,585 

 

 

7,185 

 

 

290,172 

 

 

297,357 

 

 

 -

Commercial real estate - construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

56,076 

 

 

56,076 

 

 

 -

Lease financing

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,121 

 

 

1,121 

 

 

 -

Residential mortgage

 

328 

 

 

82 

 

 

1,117 

 

 

1,527 

 

 

64,915 

 

 

66,442 

 

 

 -

Home equity

 

93 

 

 

63 

 

 

157 

 

 

313 

 

 

28,193 

 

 

28,506 

 

 

 -

Consumer

 

 

 

 -

 

 

 -

 

 

 

 

3,015 

 

 

3,021 

 

 

 -

            Total

$

1,002 

 

$

632 

 

$

7,946 

 

$

9,580 

 

$

561,953 

 

$

571,533 

 

$

 -

 

 

21


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

The following tables summarize the allowance for loan and lease losses and recorded investments in loans receivable.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of, and for the periods ended, September 30, 2015

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,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 1, 2015

$

1,748 

 

$

3,891 

 

$

40 

 

$

 

$

481 

 

$

611 

 

$

40 

 

$

38 

 

$

6,851 

  Charge-offs

 

(130)

 

 

 -

 

 

 -

 

 

 -

 

 

(34)

 

 

(7)

 

 

(2)

 

 

 -

 

 

(173)

  Recoveries

 

10 

 

 

 

 

 -

 

 

 -

 

 

23 

 

 

 -

 

 

 

 

 -

 

 

41 

  Provisions

 

(67)

 

 

237 

 

 

86 

 

 

(1)

 

 

33 

 

 

22 

 

 

(7)

 

 

(38)

 

 

265 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

$

1,561 

 

$

4,133 

 

$

126 

 

$

 

$

503 

 

$

626 

 

$

34 

 

$

 -

 

$

6,984 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2015

$

1,393 

 

$

3,925 

 

$

33 

 

$

 

$

450 

 

$

653 

 

$

35 

 

$

225 

 

$

6,716 

  Charge-offs

 

(130)

 

 

(505)

 

 

 -

 

 

 -

 

 

(35)

 

 

(36)

 

 

(13)

 

 

 -

 

 

(719)

  Recoveries

 

10 

 

 

48 

 

 

 -

 

 

 -

 

 

23 

 

 

29 

 

 

12 

 

 

 -

 

 

122 

  Provisions

 

288 

 

 

665 

 

 

93 

 

 

(1)

 

 

65 

 

 

(20)

 

 

 -

 

 

(225)

 

 

865 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

$

1,561 

 

$

4,133 

 

$

126 

 

$

 

$

503 

 

$

626 

 

$

34 

 

$

 -

 

$

6,984 

Ending balance: individually evaluated for impairment

$

58 

 

$

1,531 

 

$

 -

 

$

 -

 

$

23 

 

$

129 

 

$

 -

 

$

 -

 

$

1,741 

Ending balance: collectively evaluated for impairment

$

1,503 

 

$

2,602 

 

$

126 

 

$

 

$

480 

 

$

497 

 

$

34 

 

$

 -

 

$

5,243 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

161,421 

 

$

350,747 

 

$

68,952 

 

$

804 

 

$

101,085 

 

$

33,165 

 

$

2,911 

 

$

 -

 

$

719,085 

Ending balance: individually evaluated  for impairment

$

140 

 

$

6,324 

 

$

 -

 

$

 -

 

$

801 

 

$

185 

 

$

 -

 

$

 -

 

$

7,450 

Ending balance: collectively evaluated for impairment

$

161,281 

 

$

343,496 

 

$

68,952 

 

$

804 

 

$

99,865 

 

$

32,980 

 

$

2,911 

 

$

 -

 

$

710,289 

Ending balance: acquired with credit deterioration

$

 -

 

$

927 

 

$

 -

 

$

 -

 

$

419 

 

$

 -

 

$

 -

 

$

 -

 

$

1,346 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of, and for the periods ended, September 30, 2014

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,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 1, 2014

$

1,341 

 

$

3,458 

 

$

19 

 

$

 

$

592 

 

$

483 

 

$

63 

 

$

173 

 

$

6,130 

  Charge-offs

 

(21)

 

 

(72)

 

 

 -

 

 

 -

 

 

(47)

 

 

 -

 

 

(5)

 

 

 -

 

 

(145)

  Recoveries

 

 

 

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

14 

 

 

 -

 

 

31 

  Provisions

 

(9)

 

 

209 

 

 

 -

 

 

 -

 

 

(39)

 

 

189 

 

 

(10)

 

 

55 

 

 

395 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

$

1,318 

 

$

3,604 

 

$

19 

 

$

 

$

506 

 

$

673 

 

$

62 

 

$

228 

 

$

6,411 

 

 

22


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2014

$

1,187 

 

$

4,006 

 

$

 

$

 -

 

$

581 

 

$

441 

 

$

72 

 

$

21 

 

$

6,317 

  Charge-offs

 

(62)

 

 

(934)

 

 

 -

 

 

 -

 

 

(133)

 

 

(43)

 

 

(31)

 

 

 -

 

 

(1,203)

  Recoveries

 

13 

 

 

11 

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

55 

 

 

 -

 

 

80 

  Provisions

 

180 

 

 

521 

 

 

10 

 

 

 

 

58 

 

 

274 

 

 

(34)

 

 

207 

 

 

1,217 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

$

1,318 

 

$

3,604 

 

$

19 

 

$

 

$

506 

 

$

673 

 

$

62 

 

$

228 

 

$

6,411 

Ending balance: individually evaluated for impairment

$

73 

 

$

1,162 

 

$

 -

 

$

 -

 

$

 -

 

$

 

$

 -

 

$

 -

 

$

1,243 

Ending balance: collectively evaluated for impairment

$

1,245 

 

$

2,442 

 

$

19 

 

$

 

$

506 

 

$

665 

 

$

62 

 

$

228 

 

$

5,168 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

116,563 

 

$

294,803 

 

$

55,189 

 

$

1,215 

 

$

68,450 

 

$

27,895 

 

$

4,046 

 

$

 -

 

$

568,161 

Ending balance: individually evaluated  for impairment

$

171 

 

$

8,921 

 

$

 -

 

$

 -

 

$

877 

 

$

141 

 

$

 -

 

$

 -

 

$

10,110 

Ending balance: collectively evaluated for impairment

$

116,392 

 

$

285,882 

 

$

55,189 

 

$

1,215 

 

$

67,573 

 

$

27,754 

 

$

4,046 

 

$

 -

 

$

558,051 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

1,393 

 

$

3,925 

 

$

33 

 

$

 

$

450 

 

$

653 

 

$

35 

 

$

225 

 

$

6,716 

Ending balance: individually evaluated for impairment

$

137 

 

$

1,382 

 

$

 -

 

$

 -

 

$

 -

 

$

115 

 

$

 -

 

$

 -

 

$

1,634 

Ending balance: collectively evaluated for impairment

$

1,256 

 

$

2,543 

 

$

33 

 

$

 

$

450 

 

$

538 

 

$

35 

 

$

225 

 

$

5,082 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

119,010 

 

$

297,357 

 

$

56,076 

 

$

1,121 

 

$

66,442 

 

$

28,506 

 

$

3,021 

 

$

 -

 

$

571,533 

Ending balance: individually evaluated  for impairment

$

618 

 

$

8,925 

 

$

 -

 

$

 -

 

$

1,146 

 

 

240 

 

$

 -

 

$

 -

 

$

10,929 

Ending balance: collectively evaluated for impairment

$

118,392 

 

$

288,432 

 

$

56,076 

 

$

1,121 

 

$

65,296 

 

$

28,266 

 

$

3,021 

 

$

 -

 

$

560,604 

 

 

23


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

The recorded investments in troubled debt restructured loans at September 30, 2015 and December 31, 2014 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)                

Pre-Modification

 

Post-Modification

 

 

September 30, 2015

Outstanding Recorded Investment

 

Outstanding Recorded Investment

 

Recorded Investment

Commercial and industrial

$

40 

 

$

35 

 

$

15 

Commercial real estate

 

7,528 

 

 

6,558 

 

 

5,726 

Residential mortgage

 

733 

 

 

727 

 

 

570 

 

$

8,301 

 

$

7,320 

 

$

6,311 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)                

Pre-Modification

 

Post-Modification

 

 

December 31, 2014

Outstanding Recorded Investment

 

Outstanding Recorded Investment

 

Recorded Investment

Commercial and industrial

$

40 

 

$

35 

 

$

23 

Commercial real estate

 

11,189 

 

 

9,443 

 

 

8,005 

Residential mortgage

 

903 

 

 

897 

 

 

713 

Home equity

 

50 

 

 

 

 

 

$

12,182 

 

$

10,382 

 

$

8,746 

 

Mid Penn entered into forbearance 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’s troubled debt restructured loans at September 30, 2015 totaled $6,311,000, of which four loans totaling $483,000 represented accruing impaired loans in compliance with the terms of the modification.  Of the $483,000, three are accruing impaired residential mortgages to unrelated borrowers totaling $66,000 and the other loan is an accruing impaired commercial real estate loan for $417,000.  The remaining $5,828,000, representing 11 loans among six relationships, are nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired loans.  Two large relationships account for $4,535,000 of the $5,828,000 nonaccrual impaired troubled debt restructured loan total.

 

At December 31, 2014, Mid Penn’s troubled debt restructured loans totaled $8,746,000, of which six loans totaling $2,035,000, represented accruing impaired loans in compliance with the terms of the modification.  Of the $2,035,000, three are accruing impaired residential mortgages to unrelated borrowers totaling $71,000 and the other three are accruing impaired commercial real estate loans spread among two relationships totaling $1,964,000.  The remaining $6,711,000, representing 14 loans among nine relationships, are nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired loans.  Two large relationships account for $4,680,000 of the $6,711,000 nonaccrual impaired troubled debt restructured loan total.

 

As a result of the evaluations at September 30, 2015 and September 30, 2014, a specific allocation and, subsequently, charge-offs have been taken as appropriate.  As of September 30, 2015 and September 30, 2014, charge-offs associated with troubled debt restructured loans while under forbearance agreement totaled $0.  There were no troubled debt restructured loans that defaulted within twelve months of restructure for the three months ended September 30, 2015 and 2014.  There were two troubled debt restructured loans to unrelated borrowers that defaulted within twelve months of restructure totaling $3,404,000 for the nine months ended September 30, 2015, while there were none for the nine months ended September 30, 2014.  As of September 30, 2015, one forbearance agreement was negotiated during 2008, nine forbearance agreements were negotiated during 2009, three forbearance agreements were negotiated in 2013, and two forbearance agreements were negotiated during 2014.

 

 

24


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

There were no new loans modified during the three months ended September 30, 2015 or 2014, nor were there any during the nine months ended September 30, 2015 that resulted in troubled debt restructurings.  The table below lists the new loans modified during the nine months ended September 30, 2014 that resulted in troubled debt restructurings. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

(Dollars in thousands)               

 

 

Pre-Modification

 

Post-Modification

 

 

September 30, 2014

Number of Contracts

 

Outstanding Recorded Investment

 

Outstanding Recorded Investment

 

Recorded Investment

Commercial real estate

2

 

$

1,057 

 

$

757 

 

$

742 

Residential mortgage

2

 

 

718 

 

 

683 

 

 

669 

Home equity

1

 

 

50 

 

 

 

 

 

5

 

$

1,825 

 

$

1,447 

 

$

1,417 

 

 

There were no  consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at September 30, 2015 and $485,000 at December 31, 2014.

 

The following table provides activity for the accretable yield of purchased impaired loans for the three and nine months ended September 30, 2015.

 

 

 

 

 

(Dollars in thousands)

 

Accretable yield, July 1, 2015

$

286 

Acquisition of impaired loans

 

 -

Accretable yield amortized to interest income

 

(72)

Reclassification from nonaccretable difference (1)

 

 -

Accretable yield, September 30, 2015

$

214 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Accretable yield, January 1, 2015

$

 -

Acquisition of impaired loans

 

458 

Accretable yield amortized to interest income

 

(244)

Reclassification from nonaccretable difference (1)

 

 -

Accretable yield, September 30, 2015

$

214 

 

(1) 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.

 

25


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the 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 for the three and nine months ended September 30, 2015. 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements at September 30, 2015 using:

(Dollars in thousands)

 

Total carrying value at

 

Quoted prices in active markets

 

Significant other observable inputs

 

Significant unobservable inputs

Assets:

 

September 30, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

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

 

$

27,342 

 

$

 -

 

$

27,342 

 

$

 -

Mortgage-backed U.S. government agencies

 

 

36,189 

 

 

 -

 

 

36,189 

 

 

 -

State and political subdivision obligations

 

 

66,882 

 

 

 -

 

 

66,882 

 

 

 -

Equity securities

 

 

3,283 

 

 

1,195 

 

 

2,088 

 

 

 -

 

 

$

133,696 

 

$

1,195 

 

$

132,501 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements at December 31, 2014 using:

(Dollars in thousands)

 

Total carrying value at

 

Quoted prices in active markets

 

Significant other observable inputs

 

Significant unobservable inputs

Assets:

 

December 31, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

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

 

$

27,066 

 

$

 -

 

$

27,066 

 

$

 -

Mortgage-backed U.S. government agencies

 

 

33,776 

 

 

 -

 

 

33,776 

 

 

 -

State and political subdivision obligations

 

 

79,171 

 

 

 -

 

 

79,171 

 

 

 -

Equity securities

 

 

1,621 

 

 

561 

 

 

1,060 

 

 

 -

 

 

$

141,634 

 

$

561 

 

$

141,073 

 

$

 -

 

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).

 

 

26


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements at September 30, 2015 using:

(Dollars in thousands)

 

Total carrying value at

 

Quoted prices in active markets

 

Significant other observable inputs

 

Significant unobservable inputs

Assets:

 

September 30, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

Impaired Loans

 

$

4,476 

 

$

 -

 

$

 -

 

$

4,476 

Foreclosed Assets Held for Sale

 

 

205 

 

 

 -

 

 

 -

 

 

205 

Mortgage Servicing Rights

 

 

182 

 

 

 -

 

 

 -

 

 

182 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements at December 31, 2014 using:

(Dollars in thousands)

 

Total carrying value at

 

Quoted prices in active markets

 

Significant other observable inputs

 

Significant unobservable inputs

Assets:

 

December 31, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

Impaired Loans

 

$

6,664 

 

$

 -

 

$

 -

 

$

6,664 

Foreclosed Assets Held for Sale

 

 

142 

 

 

 -

 

 

 -

 

 

142 

Mortgage Servicing Rights

 

 

187 

 

 

 -

 

 

 -

 

 

187 

 

 

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 as of September 30, 2015 and December 31, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Quantitative Information about Level 3 Fair Value Measurements

September 30, 2015

 

Fair Value Estimate

 

Valuation Technique

 

Unobservable Input

 

Range

 

Weighted Average

Impaired Loans

 

$

4,476 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

10% - 50% 

 

29%

Foreclosed Assets Held for Sale

 

 

205 

 

Appraisal of collateral (1), (3)

 

Appraisal adjustments (2)

 

27% - 59% 

 

33%

Mortgage Servicing Rights

 

 

182 

 

Multiple of annual service fee

 

Estimated prepayment speed based on rate and term

 

240% - 400% 

 

352%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2014

 

Fair Value Estimate

 

Valuation Technique

 

Unobservable Input

 

Range

 

Weighted Average

Impaired Loans

 

$

6,664 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

10% - 95% 

 

32%

Foreclosed Assets Held for Sale

 

 

142 

 

Appraisal of collateral (1), (3)

 

Appraisal adjustments (2)

 

15% - 40% 

 

27%

Mortgage Servicing Rights

 

 

187 

 

Multiple of annual service fee

 

Estimated prepayment speed based on rate and term

 

210% - 400% 

 

353%

 

(1)

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

 

(2)

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.

 

(3)

Includes qualitative adjustments by management and estimated liquidation expenses.

 

27


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

The following methodologies and assumptions were used to estimate the fair value of Mid Penn’s financial instruments:

 

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. 

 

Impaired Loans:

Mid Penn’s rating system assumes any loans classified as substandard and non-accrual to be impaired, and all of these loans are considered collateral dependent; therefore, all 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 within 30 days of the credit being classified as substandard non-accrual.  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 which time 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 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 18 months for possible revaluation by an independent third party.

 

Loans:

For variable rate loans that reprice frequently and which entail no significant changes in credit risk, carrying values approximated fair value.  The fair value of other loans are 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.

 

 

28


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

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 Debt:

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

 

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 credit worthiness 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 September 30, 2015 and December 31, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

September 30, 2015

 

December 31, 2014

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Value

 

Value

 

Value

 

Value

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

19,234 

 

$

19,234 

 

$

9,882 

 

$

9,882 

Interest-bearing time balances with other financial institutions

 

5,313 

 

 

5,313 

 

 

5,772 

 

 

5,772 

Investment securities

 

133,696 

 

 

133,696 

 

 

141,634 

 

 

141,634 

Net loans and leases

 

712,101 

 

 

720,133 

 

 

564,817 

 

 

572,487 

Restricted investment in bank stocks

 

3,919 

 

 

3,919 

 

 

3,181 

 

 

3,181 

Accrued interest receivable

 

3,415 

 

 

3,415 

 

 

3,058 

 

 

3,058 

Mortgage servicing rights

 

171 

 

 

171 

 

 

187 

 

 

187 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

$

775,150 

 

$

776,679 

 

$

637,922 

 

$

639,226 

Short-term borrowings

 

5,712 

 

 

5,712 

 

 

578 

 

 

578 

Long-term debt

 

51,363 

 

 

50,581 

 

 

52,961 

 

 

52,514 

Accrued interest payable

 

605 

 

 

605 

 

 

349 

 

 

349 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet financial instruments:

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

$

 -

 

$

 -

 

$

 -

 

$

 -

Financial standby letters of credit

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

29


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of Mid Penn’s financial instruments as of September 30, 2015 and December 31, 2014.  Carrying values approximate fair values for cash and cash equivalents, interest-bearing time balances with other financial institutions, 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

 

in Active Markets

 

 

 

Significant

(Dollars in thousands)

 

 

 

 

 

 

 

for Identical Assets

 

Significant Other

 

Unobservable

 

 

Carrying

 

 

 

 

or Liabilities

 

Observable Inputs

 

Inputs

September 30, 2015

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial instruments - assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans and leases

 

$

712,101 

 

$

720,133 

 

$

 -

 

$

 -

 

$

720,133 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments - liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

775,150 

 

$

776,679 

 

$

 -

 

$

776,679 

 

$

 -

Long-term debt

 

 

51,363 

 

 

50,581 

 

 

 -

 

 

50,581 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2014

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial instruments - assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans and leases

 

$

564,817 

 

$

572,487 

 

$

 -

 

$

 -

 

$

572,487 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments - liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

637,922 

 

$

639,226 

 

$

 -

 

$

639,226 

 

$

 -

Long-term debt

 

 

52,961 

 

 

52,514 

 

 

 -

 

 

52,514 

 

 

 -

 

 

 

 

(6)          Guarantees

 

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 credit-worthiness 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 $14,604,000 and $9,837,000 standby letters of credit outstanding as of September 30, 2015 and December 31, 2014, respectively.  Mid Penn does not anticipate any losses because of these transactions.  The current amount of the liability as of September 30, 2015 for payment under standby letters of credit issued was not material.

 

 

30


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

(7)          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.  In addition, Mid Penn 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.  A December 31 measurement date for the plans is used.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

(Dollars in thousands)

Pension Benefits

 

Other Benefits

 

2015

 

2014

 

2015

 

2014

Service cost

$

 

$

 

$

 

$

Interest cost

 

11 

 

 

13 

 

 

 

 

Amortization of prior service cost

 

 

 

 

 

 -

 

 

       Net periodic benefit cost

$

23 

 

$

27 

 

$

11 

 

$

13 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

(Dollars in thousands)

Pension Benefits

 

Other Benefits

 

2015

 

2014

 

2015

 

2014

Service cost

$

25 

 

$

25 

 

$

 

$

10 

Interest cost

 

34 

 

 

38 

 

 

24 

 

 

28 

Amortization of prior service cost

 

11 

 

 

15 

 

 

 -

 

 

       Net periodic benefit cost

$

70 

 

$

78 

 

$

33 

 

$

39 

 

 

 

(8)           Accumulated Other Comprehensive Income

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Unrealized Gain on Securities

 

Defined Benefit Plans Liabilities

 

Accumulated Other Comprehensive Income

 

 

 

 

 

 

 

 

 

Balance - September 30, 2015

$

1,546 

 

$

(106)

 

$

1,440 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2014

$

1,626 

 

$

(113)

 

$

1,513 

 

 

 

 

(9)           Common Stock

 

On May 6, 2014, the Mid Penn Bancorp, Inc. 2014 Restricted Stock Plan (the “Plan”) was approved by shareholders.  The Plan provides that awards 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.  Current outstanding awards under the Plan require recipients to acquire specified ownership interest levels in Mid Penn in order for such award to vest.  and thereby encouraging them to contribute to the success of the company.  As of September 30, 2015,  8,975 shares have been granted under the plan, which resulted in $19,000 of compensation expense, while there was no compensation expense in 2014.  On August 27, 2015, 875 of the granted shares vested.

 

 

31


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

(10)         Preferred Stock

 

Small Business Lending Fund

 

On March 1, 2015, the Company assumed all of the issued and outstanding shares of Phoenix with respect to 1,750 shares of Phoenix’s preferred stock issued to the Treasury in connection with the Small Business Lending Fund and issued 1,750 shares of SBLF Preferred Shares, having a $1,000 liquidation preference per share, to the Treasury.  The SBLF Preferred Shares qualify as Tier 1 capital and have terms and conditions identical to those shares of preferred stock issued by Phoenix to the Treasury.  Mid Penn will pay noncumulative dividends payable quarterly on January 1, April 1, July 1, and October 1 of each year.  The current dividend rate is 1.00% per annum for payment dates up to January 19, 2016.  From and after this date, the dividend rate will increase to 9% per annum thereafter.  

 

The SBLF Preferred Shares may be redeemed at any time at the option of Mid Penn, subject to the approval of the appropriate federal banking agency.  All redemptions must be made at a per share redemption price equal to 100% of the liquidation preference, plus accrued and unpaid dividends as of the date of the redemption (“Redemption Date”) for the quarter that includes the Redemption Date, and a pro rata portion of any lending incentive fee.  All redemptions must be in amounts equal to at least 25% of the number of originally issued shares, or 100% of the then outstanding shares, if less than 25% of the number of originally issued shares.

 

Stock Issued Under Private Placement Offering

 

Between September 26, 2012 and December 31, 2012, the Company sold 4,880 shares of its 7% Non-Cumulative Non-Voting Non-Convertible Perpetual Preferred Stock, Series B (“Series B Preferred Stock”) pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, for total gross proceeds of $4,880,000, which offset issuance costs of $50,000.  On January 3, 2013, 120 additional shares were sold resulting in total gross proceeds of $5,000,000 for the offering.  No additional shares of Series B Preferred Stock have been sold by the Company since January 3, 2013.

 

The following table summarizes the Series B Preferred Stock shares sold and the gross proceeds received through the private placement offering as of September 30, 2015:

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Period

 

Shares

 

Gross Proceeds

September 26, 2012 - September 30, 2012

 

345 

 

$

345,000 

October 1, 2012 - December 31, 2012

 

4,535 

 

 

4,535,000 

January 1, 2013 - December 31, 2013

 

120 

 

 

120,000 

January 1, 2014 - December 31, 2014

 

 -

 

 

 -

January 1, 2015 - September 30, 2015

 

 -

 

 

 -

Total

 

5,000 

 

$

5,000,000 

 

The annual dividend rate for the Series B Preferred Stock is 7% per annum of the liquidation preference of the Series B Preferred Stock, or $70.00 per annum for each share of Series B Preferred Stock.  The Board of Directors must approve each dividend payment from legally available funds.  Dividends are payable to holders of record of the Series B Preferred Stock as they appear on our books on the record dates fixed by our Board of Directors.  Dividends on any of Series B Preferred Stock are non-cumulative.  If and when dividends are declared, they will be paid on February 15, May 15, August 15, and November 15 of each year.  If a dividend payment date is not a business day, the dividend will be paid on the immediately preceding business day but no additional dividend payment will be prorated from the date of purchase to the first dividend payment date over a quarterly dividend period of 90 days.

 

Mid Penn may redeem shares of its Series B Preferred Stock at its option, in whole or in part, at any time subject to prior approval of the Federal Reserve Board, if then required, at a redemption price of $1,020 per share of Series B Preferred Stock plus an amount equal to any declared but unpaid dividends and in accordance with the terms and conditions set forth in a Certificate of Designations for the Series B Preferred Stock as filed with the Pennsylvania Department of State.

 

 

32


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

(11)         Earnings per Common Share

 

Earnings per share are computed by dividing net income available to common shareholders 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 and diluted earnings per share.

 

The computations of basic earnings per common share follow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2015

 

2014

 

2015

 

2014

Net Income

$

1,894 

 

$

1,595 

 

$

4,901 

 

$

4,813 

Less:  Dividends on Series B preferred stock

 

88 

 

 

88 

 

 

263 

 

 

263 

         Dividends on Series C preferred stock

 

 

 

 -

 

 

 

 

 -

Net income available to common shareholders

$

1,802 

 

$

1,507 

 

$

4,630 

 

$

4,550 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

4,224,040 

 

 

3,496,063 

 

 

4,066,384 

 

 

3,495,293 

Basic earnings per common share

$

0.43 

 

$

0.43 

 

$

1.14 

 

$

1.30 

 

Mid Penn did not have dilutive securities outstanding as of September 30, 2015 and 2014.

 

 

(12)         Recent Accounting Pronouncements 

 

ASU 2014-09:  The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). 

 

The amendments in this Update establish a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps:  (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

 

The ASU is effective for annual periods beginning after December 15, 2016, including interim periods therein. Three basic transition methods are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. Under the this alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application (e.g. January 1, 2017) and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings. That is, prior years would not be restated and additional disclosures would be required to enable users of the financial statements to understand the impact of adopting the new standard in the current year compared to prior years that are presented under legacy U.S. GAAP. Early adoption is prohibited. In July 2015, the FASB approved a one-year delay of the effective date of the revenue recognition standard.  The deferral would require public entities to apply the new revenue standard for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein.  Public entities would be permitted to elect to early adopt for annual reporting periods beginning after December 15, 2016. 

 

ASU 2014-17: The FASB issued ASU 2014-17, Business Combinations (Topic 805):  Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force).

 

The ASU amends Topic 805 so that a reporting entity that is a business or nonprofit activity (an “acquiree”) has the option to apply pushdown accounting to its separate financial statements when an acquirer obtains control of the acquiree.  The option is available for each individual change-in-control event.  Control has the same meaning as a “controlling financial interest” under Topic 810, such that pushdown accounting may be applied if an acquirer obtains control through a simple majority of the outstanding voting shares of the acquiree (e.g., 51%).  Similarly, a Variable Interest Entity is considered an “acquiree” of its primary beneficiary and may also elect pushdown accounting.

 

 

33


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

If the acquiree elects to apply pushdown accounting, it must do so as of the acquisition date of the change-in-control event.  Further, any subsidiary of the acquiree may elect to apply pushdown accounting to its separate financial statements, regardless of whether the acquiree elects to apply pushdown accounting.  Upon election, the acquiree would adjust its standalone financial statements to reflect the acquirer’s new basis in the acquired entity’s assets and liabilities, and would provide relevant disclosures under Topic 805 to enable users to evaluate the effect of pushdown accounting.  The ASU became effective upon issuance on November 18, 2014.  After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event.

 

ASU 2015-03:  The FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.

 

The ASU requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability, consistent with the presentation of debt discounts.  Prior to the amendments, debt issuance costs were presented as a deferred charge (i.e., an asset) on the balance sheet.  The ASU provides examples illustrating the balance sheet presentation of notes net of their related discounts and debt issuance costs.  Further, the amendments require the amortization of debt issuance costs to be reported as interest expense.  Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt.

 

The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  The amendments are effective for all other entities for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. The amendments must be applied retrospectively.  All entities have the option of adopting the new requirements as of an earlier date for financial statements that have not been previously issued.

 

ASU 2015-08:  The FASB issued ASU 2015-08, Business Combinations (Topic 805):  Pushdown Accounting—Amendments to SEC Paragraphs Pursuant to Staff Accounting Bulletin No. 115 (SEC Update).

 

This ASU amends the FASB ASC pursuant to SEC Staff Accounting Bulletin (SAB) 115, which rescinds certain SEC guidance in order to conform with ASU 2014-17, Pushdown Accounting.  ASU 2014-17 was issued in November 2014 and provides a reporting entity that is a business or nonprofit activity (an “acquiree”) the option to apply pushdown accounting to its separate financial statements when an acquirer obtains control of the acquiree. 

 

SAB 115 became effective November 21, 2014 upon issuance.

 

The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  The amendments are effective for all other entities for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. The amendments must be applied retrospectively.  All entities have the option of adopting the new requirements as of an earlier date for financial statements that have not been previously issued.

 

ASU 2015-14:  The FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.

 

The ASU defers the effective date of the new revenue recognition standard by one year. As such, it now takes effect for public entities in fiscal years beginning after December 15, 2017.  All other entities have an additional year.  However, early adoption is permitted for any entity that chooses to adopt the new standard as of the original effective date.  Public business entities will adopt the standard for annual reporting periods beginning after December 15, 2017, including interim periods within that year.  Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.  All other entities will adopt the standard for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019.  Early adoption is permitted as of either an annual reporting period beginning after December 15, 2016, including interim periods within that year, or an annual reporting period beginning after December 15, 2016 and interim periods within annual reporting periods beginning one year after the annual period in which an entity first applies the new standard. 

 

ASU 2015-16:  The FASB issued ASU 2015-16, Business Combination (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments).

 

The ASU requires adjustments to provisional amounts that are identified during the measurement period to be recognized in the reporting period in which the adjustment amounts are determined.  This includes any effect on earnings of changes in depreciation, amortization, or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.

 

 

34


 

MID PENN BANCORP, INC.                                          Notes to Consolidated Financial Statements (Unaudited)

 

In addition, the amendments in the proposed Update would require an entity to disclose (either on the face of the income statement or in the notes) the nature and amount of measurement-period adjustments recognized in the current period, including separately the amounts in current-period income statement line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.

 

The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017.  Early adoption is permitted.  The amendments in this Update should be applied prospectively to measurement-period adjustments that occur after the effective date of this Update.

 

Mid Penn is currently evaluating the effects these Updates will have on its consolidated financial statements.

 

 

(13)         Subsequent Event

 

On November 9, 2015, Mid Penn entered into agreements with investors to purchase $7,500,000 aggregate principal amount of its Subordinated Notes due 2025 (the “Notes”).  The Notes, when issued, will be treated as Tier 2 capital for regulatory capital purposes.  Closing of the offering is expected to occur on December 9, 2015. 

 

The Notes will 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 times be less than 4.00%.  Interest will be payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, beginning on January 1, 2016.  The 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 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 Notes for U.S. federal income tax purposes; (ii) an event occurs that precludes the 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 subordinated notes, plus accrued and unpaid interest thereon to but excluding the date of redemption. 

 

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

 

Also on November 9, 2015, Mid Penn called for redemption all of its issued and outstanding shares of its Series B Preferred Stock on December 9, 2015, at a price equal to $1,024.67 per share, which is equal to $1,020.00 per share plus an amount equal to declared but unpaid dividends, if any, to the date fixed for redemption.

 

Mid Penn intends to use the proceeds from the offering of the Notes to redeem the Series B Preferred Stock with the balance available for general corporate purposes, including the redemption, if approved by the appropriate federal banking regulators, of all of its issued and outstanding SBLF Preferred Shares, which are held by the U.S. Department of Treasury and issued pursuant to its Small Business Lending Fund program.

 

 

 

 

35


 

MID PENN BANCORP, INC.                                                                       Management’s Discussion and Analysis

 

 

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 September 30, 2015, compared to year-end 2014, and the Results of Operations for the three and nine months ended September 30, 2015, compared to the same period in 2014.  The comparability of the financial condition and results of operations as of and for the three and nine month periods ended September 30, 2015 and 2014, in general, have been impacted by the acquisition of Phoenix.  The recorded amounts of assets purchased and liabilities assumed in the Phoenix acquisition may be adjusted for up to one year subsequent to the acquisition.  Such adjustments, if any, are not expected to be significant.

 

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, 2014 (the “2014 Annual Report”).  The results of operations for interim periods are not necessarily indicative of operating results expected for the full year.

 

Forward-looking statements involve risks, uncertainties and assumptions.  Although Mid Penn 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 their accuracy.  Actual results may differ materially from those expressed in these forward-looking statements due to a number of uncertainties and risks, including the risks described in the 2014 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 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;

·

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

·

the effect of changes in accounting policies and practices, as may be adopted by the regulatory 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, loan demand, and the values of loan collateral, securities and interest rate protection agreements, as well as interest rate risks;

·

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 acquisition strategy;

·

our acquisition strategy may not be successful in locating advantageous targets or acquiring targets at advantageous prices;

·

our ability to successfully integrate any banks, companies, assets, liabilities, customers, systems and management personnel we acquire into our operations 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;

·

results of the regulator examination and supervision process;

·

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;

·

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

 

36


 

MID PENN BANCORP, INC.                                                                       Management’s Discussion and Analysis

·

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

·

disruptions due to flooding, severe weather, or other natural disasters of Acts of God;

·

volatilities in the securities markets; and

·

slow economic conditions.

 

This 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.

 

Critical Accounting Estimates

 

Mid Penn’s consolidated financial statements are prepared in accordance with 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 Mid Penn used are 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 Mid Penn has 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 Mid Penn considers the accounting judgments relating to the allowance for loan and lease losses, the evaluation of the Corporation’s investment securities for other-than-temporary impairment, and the valuation of assets acquired and liabilities assumed to be the accounting areas that require the most subjective and complex judgments.

 

The allowance for loan and lease losses represents management’s estimate of probable incurred credit losses inherent in the loan and lease portfolio. Determining the amount of the allowance for loan and lease losses 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 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.

 

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 

 

The comparability of the financial condition and results of operations as of and for the three and nine month periods ended September 30, 2015 and 2014, in general, have been impacted by the acquisition of Phoenix.

 

Overview

 

Net income available to common shareholders was $1,802,000, $0.43 basic earnings per common share, for the quarter ended September 30, 2015, as compared to net income available to common shareholders of $1,507,000, or $0.43 basic earnings per common share, for the quarter ended September 30, 2014, a 19.6%  increase.  During the nine months ended September 30, 2015, net income available to common shareholders was $4,630,000, or $1.14 basic earnings per common share, versus $4,550,000, or $1.30 basic earnings per common share for the nine months ended September 30, 2014, a 1.8%  increase.  Excluding merger and acquisition expenses incurred in conjunction with the acquisition of Phoenix Bancorp, Inc. (“Phoenix”), and the corresponding tax impact, net income available to common shareholders for the nine months ended September 30, 2015 would have been $5,181,000, an increase of 13.9% over the unadjusted results for the nine months ended September 30, 2014. 

Net interest income increased $1,645,000, or 25.1%, to $8,189,000 for the quarter ended September 30, 2015 from $6,544,000 during the quarter ended September 30, 2014.  Through the first nine months of 2015, net interest income increased $4,146,000, or 21.2%, to $23,713,000 from $19,567,000 during the first nine months of 2014

The provision for loan and lease losses in the third quarter of 2015 was $265,000, compared to $395,000 in the third quarter of 2014.  During the nine months ended September 30, 2015, the provision for loan and lease losses was $865,000, compared to $1,217,000 for the nine months ended September 30, 2014.

 

37


 

MID PENN BANCORP, INC.                                                                       Management’s Discussion and Analysis

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2015

 

2014

 

2015

 

2014

Return on average assets

0.79%

 

0.84%

 

0.71%

 

0.89%

Return on average equity

9.60%

 

10.73%

 

8.79%

 

11.39%

 

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 34%.

 

For the three months ended September 30, 2015, Mid Penn’s taxable-equivalent net interest margin increased to 4.00%, from 3.93%, for the three months ended September 30, 2014.  For the nine months ended September 30, 2015, Mid Penn’s taxable-equivalent net interest margin increased to 4.06% from 4.03% for the nine months ended September 30, 2014.  The increases in both the three and nine months ended September 30, 2015 were mainly the result of the additional loan interest income provided by the Phoenix loan portfolio, as well as the recognition of income for the successful resolution of legacy Phoenix loans acquired with credit deterioration.  Included in the three months ended September 30, 2015 was the recognition of $100,000 from the successful resolution of a legacy Phoenix loan acquired with credit deterioration.  Included in the nine months ended September 30, 2015 was $552,000 in income from the successful resolution of four legacy Phoenix loans acquired with credit deterioration.  The addition of Phoenix’s low-cost deposit products also aided in improving Mid Penn’s taxable equivalent net interest margin by reducing the overall cost of funds.  For the three months ended September 30, 2015, Mid Penn’s cost of funds decreased by 0.06%, to 0.63% compared to the three months ended September 30, 2014 and by 0.08%, to 0.64%, for the nine months ended September 30, 2015, versus the same period in 2014.

 

Although the effective interest rate impact on earning assets and funding sources can be reasonably estimated at current interest rate levels, the 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 the simulation models.  In addition, our net interest income may be impacted by further interest rate actions of the Federal Reserve Bank.

 

Provision for Loan Losses

 

The provision for loan and lease losses is the expense necessary to maintain the allowance for loan and lease losses 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 for loan and lease losses in accordance with Mid Penn’s assessment process, which takes into consideration the risk characteristics of the loan portfolio, the growth in the loan portfolio during the first nine months of 2015, and shifting collateral values from December 31, 2014 to September 30, 2015. 

 

Following its model for loan and lease loss allowance adequacy, management recorded a $265,000 provision for the three months ended September 30, 2015, as compared to a provision of $395,000 for the three months ended September 30, 2014.  During the nine months ended September 30, 2015, the provision for loan and lease losses was $865,000, as compared to $1,217,000 for the nine months ended September 2014.  The allowance for loan and lease losses as a percentage of total loans was 0.97% at September 30, 2015, compared to 1.18% at December 31, 2014.  This decrease was mainly due to the addition of the Miners loan portfolio without a corresponding allowance for loan and lease losses in conformity with purchase accounting treatment.  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.

 

 

38


 

MID PENN BANCORP, INC.                                                                       Management’s Discussion and Analysis

 

Noninterest Income

 

Noninterest income increased $344,000, or 46.4%, during the third quarter of 2015 versus the same period in 2014.  During the nine months ended September 30, 2015, noninterest income increased $718,000, or 29.8%, versus the same period in 2014.  The following components of noninterest income showed significant changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

Three Months Ended September 30,

 

2015

 

2014

 

$ Variance

 

% Variance

Net gain on sales of investment securities

 

138 

 

 

 -

 

 

138 

 

NA

ATM debit card interchange income

 

189 

 

 

138 

 

 

51 

 

37.0% 

Net gain on sales of SBA loans

 

73 

 

 

19 

 

 

54 

 

284.2% 

Other income

 

138 

 

 

100 

 

 

38 

 

38.0% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

Nine Months Ended September 30,

 

 

2015

 

 

2014

 

 

$ Variance

 

% Variance

Net gain on sales of investment securities

 

315 

 

 

150 

 

 

165 

 

110.0% 

Mortgage banking income

 

326 

 

 

208 

 

 

118 

 

56.7% 

ATM debit card interchange income

 

540 

 

 

403 

 

 

137 

 

34.0% 

Net gain on sales of SBA loans

 

216 

 

 

97 

 

 

119 

 

122.7% 

Other income

 

487 

 

 

339 

 

 

148 

 

43.7% 

 

During the three and nine months ended September 30, 2015, Mid Penn took advantage of opportunities within its investment portfolio to better align the portfolio for a rising interest rate environment thereby realizing gains on sales of investments of $138,000 and $315,000, respectively.  Mortgage banking income increased $118,000 in the nine months ended September 30, 2015 over September 30, 2014.  Improved real estate activity throughout Mid Penn’s footprint and favorable interest rate conditions have contributed to increasing revenue from this business line.  ATM debit card interchange income increased $51,000 and $137,000 during the three and nine months ended September 30, 2015 over the same periods in 2014, due to the acquisition of the Phoenix card portfolio.    Mid Penn has experienced significant activity in Small Business Administration (“SBA”) loans during the quarter and year-to-date as we see more qualified borrowers and take advantage of Mid Penn’s Preferred Lender status with the SBA. 

 

Noninterest Expenses

 

Noninterest expenses increased $1,640,000, or 33.3%, during the third quarter of 2015, versus the same period in 2014.  During the nine months ended September 30, 2015, noninterest expenses increased $5,116,000, or 34.7%, versus the same period in 2014.  The changes were primarily a result of the following components of noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

Three Months Ended September 30,

 

2015

 

2014

 

$ Variance

 

% Variance

Salaries and employee benefits

$

3,471 

 

$

2,635 

 

$

836 

 

31.7% 

Occupancy expense, net

 

498 

 

 

282 

 

 

216 

 

76.6% 

Software licensing

 

380 

 

 

238 

 

 

142 

 

59.7% 

Other expenses

 

913 

 

 

745 

 

 

168 

 

22.6% 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

Nine Months Ended September 30,

 

2015

 

2014

 

$ Variance

 

% Variance

Salaries and employee benefits

$

10,231 

 

$

8,026 

 

$

2,205 

 

27.5% 

Occupancy expense, net

 

1,448 

 

 

986 

 

 

462 

 

46.9% 

Equipment expense

 

1,081 

 

 

908 

 

 

173 

 

19.1% 

Marketing and advertising expense

 

372 

 

 

227 

 

 

145 

 

63.9% 

Software licensing

 

1,103 

 

 

687 

 

 

416 

 

60.6% 

Merger and acquisition expense

 

784 

 

 

11 

 

 

773 

 

NA

Other expenses

 

2,511 

 

 

1,945 

 

 

566 

 

29.1% 

 

 

39


 

MID PENN BANCORP, INC.                                                                       Management’s Discussion and Analysis

 

Salaries and employee benefits increased during the three and nine months ended September 30, 2015 by $836,000 and $2,205,000, respectively, versus the same periods in 2014.  The increase was driven by the addition of the Phoenix employees to Mid Penn’s employee pool, an increase in staffing levels due to Mid Penn’s entry into the Lancaster County and Mechanicsburg markets, and an increase in lending personnel and support staff to augment the expanding reach of Mid Penn.  Occupancy expenses for the three and nine months ended September 30, 2015 increased by $216,000 and $462,000, respectively.  This increase was impacted by the inclusion of rent for the new Corporate Administration offices on North Front Street in Harrisburg, the new Elizabethtown branch office, and the new Simpson Ferry Road branch office.  Equipment, marketing and advertising, software licensing, and other expenses all saw increases related to the inclusion of Phoenix’s normal operating expenses to Mid Penn’s expense stream during the quarter and year-to-date.  Merger and acquisition expenses of $784,000 in connection with the acquisition of Phoenix were incurred during the nine months ended September 30, 2015.

 

Income Taxes

 

The provision for income taxes was $546,000 for the three months ended September 30, 2015, as compared to the provision for income taxes of $366,000 in the same period last year.  The effective tax rate for the three months ended September 30, 2015 was 22.4%, compared to 18.7% for the three months ended September 30, 2014.  This increase was due to a higher net income in the third quarter of 2015 versus the same period in 2014The provision for income taxes for the nine months ended September 30, 2015 was $1,223,000, compared to $1,211,000 during the same period in 2014.  The effective tax rate for the nine months ended September 30, 2015 was 20.0%, compared to 20.1% for the nine months ended September 30, 2014.  Generally, Mid Penn’s effective tax rate is below the statutory rate due to earnings on tax-exempt loans, investments, and bank-owned life insurance, as well as the impact of tax credits.  The realization of deferred tax assets is dependent on future earnings.  Mid Penn currently anticipates that future earnings will be adequate to fully utilize deferred tax assets.

 

Financial Condition

 

Overview

 

The increase in Mid Penn’s total assets during the first nine months of 2015 was impacted by the inclusion of assets and liabilities from Phoenix on the balance sheet.  Total loans at September 30, 2015 were $719,085,000 compared to $571,533,000 at December 31, 2014, an increase of $147,552,000, or 25.8%.  Along with the addition of Phoenix’s’ loan portfolio, the other main driver of Mid Penn’s loan growth came as a result of business development efforts by a more experienced loan team.  Mid Penn’s investment portfolio decreased $7,938,000 from December 31, 2014 to September 30, 2015, to provide liquidity to fund loan growth and to better align the portfolio for a rising rate environment thereby realizing gains on sales of investment securities.  Total deposits increased $137,228,000 from $637,922,000 at December 31, 2014 to $775,150,000 at September 30, 2015.  The largest increases over this period were in the noninterest and interest bearing demand, as well as in time deposits, increasing $106,080,000 from December 31, 2014 to September 30, 2015, mainly due to the inclusion of Phoenix’s’ deposits, but also from strong cash management efforts.  Short-term borrowings increased $5,134,000 from $578,000 at December 31, 2014 to $5,712,000 at September 30, 2015, while long-term debt decreased $1,598,000 from $52,961,000 at December 31, 2014 to $51,363,000 at September 30, 2015.

 

Loans

 

During the first nine months of 2015, Mid Penn experienced an increase in loans outstanding of $147,552,000, or 25.8%, with Phoenix contributing $110,707,000 of the increase, mainly in the commercial real estate, commercial and industrial and residential mortgage categories.  Overall, commercial real estate, commercial and industrial, and residential mortgage loans accounted for the majority of Mid Penn’s loan growth as noted in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

September 30, 2015

 

December 31, 2014

 

Amount

 

%

 

Amount

 

%

Commercial and industrial

$

161,421 

 

22.4% 

 

$

119,010 

 

20.8% 

Commercial real estate

 

350,747 

 

48.8% 

 

 

297,357 

 

52.0% 

Commercial real estate - construction

 

68,952 

 

9.6% 

 

 

56,076 

 

9.8% 

Lease financing

 

804 

 

0.1% 

 

 

1,121 

 

0.2% 

Residential mortgage

 

101,085 

 

14.1% 

 

 

66,442 

 

11.6% 

Home equity

 

33,165 

 

4.6% 

 

 

28,506 

 

5.0% 

Consumer

 

2,911 

 

0.4% 

 

 

3,021 

 

0.6% 

 

$

719,085 

 

100.0% 

 

$

571,533 

 

100.0% 

 

 

40


 

MID PENN BANCORP, INC.                                                                       Management’s Discussion and Analysis

 

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

 

During the first nine months of 2015, Mid Penn had net charge-offs of $597,000 compared to net charge-offs of $1,123,000 during the same period of 2014.  Loans charged off during the first nine months of 2015 were comprised of 13 loans among 11 relationships.  There were four commercial real estate loans among three relationships totaling $505,000, with one relationship accounting for $450,000 of the total.  There were also two commercial and industrial loans comprising one relationship totaling $130,000, one home equity loan for $36,000, and five residential real estate loans to unrelated borrowers totaling $35,000.  The remaining $13,000 was comprised of consumer loans and 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 loan and lease losses for the three and nine months ended September 30, 2015 and 2014 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Nine Months Ended September 30,

 

2015

 

2014

Average total loans outstanding (net of unearned interest)

$

615,607 

 

$

549,038 

Period ending total loans outstanding (net of unearned interest)

 

719,085 

 

 

568,161 

 

 

 

 

 

 

Balance, beginning of period

 

6,716 

 

 

6,317 

 

 

 

 

 

 

    Loans charged off during period

 

(719)

 

 

(1,203)

    Recoveries of loans previously charged off

 

122 

 

 

80 

Net chargeoffs

 

(597)

 

 

(1,123)

 

 

 

 

 

 

Provision for loan and lease losses

 

865 

 

 

1,217 

Balance, end of period

$

6,984 

 

$

6,411 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of net loans charged off to average loans outstanding (annualized)

 

0.13% 

 

 

0.27% 

 

 

 

 

 

 

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

 

0.97% 

 

 

1.13% 

 

Other than as described herein, Mid Penn does not believe there are any trends, events or uncertainties 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 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.

 

 

41


 

MID PENN BANCORP, INC.                                                                       Management’s Discussion and Analysis

 

At September 30, 2015, total nonperforming loans amounted to $7,773,000, or 1.08% of loans and leases net of unearned income, as compared to levels of $10,942,000, or 1.91%, at December 31, 2014 and $10,684,000, or 1.88%, at September 30, 2014.  The inclusion of the Phoenix loan portfolio aided in decreasing Mid Penn’s nonperforming ratios.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

 

September 30, 2014

Nonperforming Assets:

 

 

 

 

 

 

 

 

   Nonaccrual loans

$

7,290 

 

$

8,907 

 

$

8,613 

   Accruing troubled debt restructured loans

 

483 

 

 

2,035 

 

 

2,071 

        Total nonperforming loans

 

7,773 

 

 

10,942 

 

 

10,684 

 

 

 

 

 

 

 

 

 

   Foreclosed real estate

 

990 

 

 

565 

 

 

849 

       Total non-performing assets

 

8,763 

 

 

11,507 

 

 

11,533 

 

 

 

 

 

 

 

 

 

   Accruing loans 90 days or more past due

 

53 

 

 

 -

 

 

 -

       Total risk elements

$

8,816 

 

$

11,507 

 

$

11,533 

 

 

 

 

 

 

 

 

 

Nonperforming loans as a % of total

 

 

 

 

 

 

 

 

    loans outstanding

 

1.08% 

 

 

1.91% 

 

 

1.88% 

Nonperforming assets as a % of total

 

 

 

 

 

 

 

 

    loans outstanding and other real estate

 

1.22% 

 

 

2.01% 

 

 

2.03% 

Ratio of allowance for loan losses

 

 

 

 

 

 

 

 

    to nonperforming loans

 

89.85% 

 

 

61.37% 

 

 

60.01% 

 

In the table above, loans renegotiated with borrowers represent Mid Penn’s accruing troubled debt restructured loans.  Troubled debt restructured loans that are no longer accruing interest are included in nonaccrual loans.

 

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)

 

 

 

 

 

 

September 30, 2015

 

December 31, 2014

Period ending total loans outstanding (net of unearned interest)

$

719,085 

 

$

571,533 

Allowance for loan and lease losses

 

6,984 

 

 

6,716 

Total Nonperforming loans

 

7,773 

 

 

10,942 

Nonperforming and impaired loans with partial charge-offs

 

1,954 

 

 

2,441 

 

 

 

 

 

 

Ratio of nonperforming loans with partial charge-offs

 

 

 

 

 

    to total loans

 

0.27% 

 

 

0.43% 

 

 

 

 

 

 

Ratio of nonperforming loans with partial charge-offs

 

 

 

 

 

    to total nonperforming loans

 

25.14% 

 

 

22.31% 

 

 

 

 

 

 

Coverage ratio net of nonperforming loans with

 

 

 

 

 

    partial charge-offs

 

120.02% 

 

 

79.00% 

 

 

 

 

 

 

Ratio of total allowance to total loans less

 

 

 

 

 

    nonperforming loans with partial charge-offs

 

0.97% 

 

 

1.18% 

 

Mid Penn had one loan at September 30, 2015 for $7,000 and none at December 31, 2014, that received an additional charge-offs for which a partial charge-off had originally been taken.

 

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 in the process of 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 DCF method indicates no operating income is available for evaluating the collateral position; therefore, all impaired loans are deemed to be collateral dependent. 

 

42


 

MID PENN BANCORP, INC.                                                                       Management’s Discussion and Analysis

 

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.  In the event the loan is unsecured, the loan would have been charged-off at the recognition of impairment.  If the loan is secured, it will undergo a 90 day waiting period to ensure the collateral shortfall identified in the evaluation is accurate and then charged down by the specific allocation. Once the charge down is taken, the remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured).  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 and a 90-day waiting period begins to ensure the accuracy of the collateral shortfall.  The loan is then charged down by the specific allocation.  Once the charge down is taken, the remaining 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 in the process of collection.  The entire balance 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 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 (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 and non-accrual to be impaired, and all of these loans are considered collateral dependent; therefore, all 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 within 30 days of the credit being classified as substandard non-accrual.  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 which time Mid Penn is in receipt of the updated valuation.  The credit department employs an electronic tracking system to monitor the receipt of and need for updated appraisals.  To date, there have been no significant 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 within 30 days of being placed on non-accrual 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. 

 

 

43


 

MID PENN BANCORP, INC.                                                                       Management’s Discussion and Analysis

 

Excluding the loans acquired with credit deterioration of which none were subsequently impaired after being acquired as of September 30, 2015, Mid Penn had several loan relationships, with an aggregate carrying balance of $7,450,000, deemed impaired.  This pool of loans was further broken down into a group of loans with an aggregate carrying balance of $5,674,000 for which specific allocations totaling $1,741,000 were included within the loan loss reserve for these loans.  The remaining $1,776,000 of loans required no specific allocation within the loan loss reserve.  The $7,450,000 pool of impaired loan relationships was comprised of $6,324,000 in commercial real estate relationships, $801,000 in residential relationships, $185,000 in home equity relationships, and $140,000 in commercial and industrial relationships.  There were specific allocations of $1,531,000 against the commercial real estate relationships with $1,168,000 of this total to one borrower.  There was also $129,000 against the home equity relationships, $58,000 against the commercial and industrial relationships, and $23,000 against residential relationships.  Management currently believes that the specific reserves are adequate to cover probable future losses related to these relationships.

 

The allowance for loan losses 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 for loan and lease losses 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 for loan and lease losses an integral part of the examination process.  

 

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 local, regional, and national economic and business conditions affecting the collectability of the portfolio, the values of underlying collateral, and 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 loans.

·

Changes in the experience, ability, and depth of lending management and other relevant staff as well as the quality of the institution’s loan review system.

·

Changes in the nature and volume of the portfolio and the terms of loans generally offered.

·

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

 

While the allowance for loan and lease losses is maintained at a level believed to be adequate by management for covering estimated losses 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.  Changes in these estimates may impact the provisions charged to expense in future periods. 

 

Management believes, based on information currently available, that the allowance for loan and lease losses of $6,984,000 is adequate as of September 30, 2015.

 

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.

 

Major sources of cash in the nine months of 2015 came from the sale of investment securities of $33,962,000 and the $13,990,000 net increase in deposits.

 

Major uses of cash in the first nine months of 2015 were the increase in net loans and leases of $38,671,000 and the purchases of investment securities of $24,446,000.

 

44


 

MID PENN BANCORP, INC.                                                                       Management’s Discussion and Analysis

 

Major sources of cash in the first nine months of 2014 came from the increase in deposits totaling $37,867,000, proceeds from the maturity of investment securities of $10,497,000, and long-term debt borrowings of $10,000,000.

 

Major uses of cash in the first nine months of 2014 were the purchases of investment securities of $40,511,000 and the net increase in loans and leases of $23,613,000.

 

Mid Penn believes its core deposits are 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 an overall decline in the financial condition of the banking industry or a problem specific to Mid Penn.

 

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.  The buildup makes it difficult for a corporation to offer a competitive return on the shareholders’ capital going forward.  For these reasons capital adequacy has been, and will continue to be, of paramount importance.

 

Shareholders’ equity increased during the nine months ended September 30, 2015 by $16,390,000, or 27.7%, from December 31, 2014.  Capital has been positively impacted in 2015 by positive earnings available to common shareholders of $4,630,000.  Also positively impacting capital during the nine months ended September 30, 2015 was the issuance of 723,851 shares of common stock to fund the acquisition of Phoenix.  This transaction added an additional $11,292,000 to shareholders’ equity.  As part of the acquisition, Mid Penn also issued SBLF preferred stock totaling $1,750,000.    All of Mid Penn’s investment securities are classified as available for sale, making this portion of the balance sheet more sensitive to the changing market value of investments.

 

Banks are evaluated for capital adequacy based on the ratio of capital to risk-weighted assets and total assets.  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, 2015.  The final rules generally implement higher minimum capital requirements, add a new common equity Tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital.  As of January 1, 2015, the new minimum capital to risk-adjusted assets requirements are a common equity Tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and a Tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered “well capitalized”); the total capital (including Tier 1 capital) ratio remains at 8.0% under the new rules (10.0% to be considered “well capitalized”).  At September 30, 2015, Mid Penn Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective action.

 

 

45


 

MID PENN BANCORP, INC.                                                                       Management’s Discussion and Analysis

 

The following table illustrates the Bank’s capital ratios, which are not materially different from Mid Penn’s ratios.  As noted below, the Bank maintained the following regulatory capital levels, leverage ratios, and risk-based capital ratios as of September 30, 2015 and December 31, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Capital Adequacy

 

 

 

 

 

 

 

 

 

 

 

To Be Well-Capitalized

 

 

 

 

 

 

 

 

 

 

 

Under Prompt

 

 

 

 

 

 

Minimum Capital

 

Corrective

 

Actual:

 

Required:

 

Action Provisions:

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

69,356 

 

7.7% 

 

$

35,875 

 

4.0% 

 

$

44,843 

 

5.0% 

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

69,356 

 

10.1% 

 

 

40,359 

 

4.5% 

 

 

58,296 

 

6.5% 

Tier 1 Capital (to Risk Weighted Assets)

 

69,356 

 

10.1% 

 

 

41,393 

 

6.0% 

 

 

55,191 

 

8.0% 

Total Capital (to Risk Weighted Assets)

 

76,435 

 

11.1% 

 

 

55,191 

 

8.0% 

 

 

68,989 

 

10.0% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

56,647 

 

7.5% 

 

$

30,360 

 

4.0% 

 

$

37,950 

 

5.0% 

Tier 1 Capital (to Risk Weighted Assets)

 

56,647 

 

10.2% 

 

 

22,295 

 

4.0% 

 

 

33,442 

 

6.0% 

Total Capital (to Risk Weighted Assets)

 

63,423 

 

11.4% 

 

 

44,590 

 

8.0% 

 

 

55,737 

 

10.0% 

 

Regulatory Capital Changes

 

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 must be greater than 2.5% of total risk-weighted assets at January 1, 2019.  The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016.

 

The final rules permanently grandfather 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.

 

The proposed rules would have modified the risk-weight framework applicable to residential mortgage exposures to require banking organizations to divide residential mortgage exposures into two categories in order to determine the applicable risk weight. In response to commenter concerns about the burden of calculating the risk weights and the potential negative effect on credit availability, the final rules do not adopt the proposed risk weights but retain the current risk weights for mortgage exposures under the general risk-based capital rules.

 

Consistent with the Dodd-Frank Act, the new rules replace 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.

 

The Federal Reserve adopted a new policy statement, effective May 15, 2015, that changes the definition of “small bank holding company” from those under $500 million in total assets to those under $1 billion in total assets.  Small bank holding companies are not subject to holding company level capital requirements, although their subsidiary banks are still subject to all capital requirements.  Since the Company is currently under $1 billion in total assets, this policy statement will give the Company greater flexibility to issue instruments that do not qualify as capital under the Federal Reserve’s regulations, if it chooses to do so.

 

Small Business Lending Fund Program Participation

 

On March 1, 2015, Mid Penn assumed all of the issued and outstanding shares of Phoenix with respect to 1,750 shares of Phoenix’s preferred stock issued to the Treasury in connection with the Small Business Lending Fund and issued 1,750 shares of Mid Penn’s SBLF Preferred Shares, having a $1,000 liquidation preference per share, to the Treasury.  The SBLF Preferred Shares qualify as Tier 1 Capital and have terms and conditions identical to those shares of preferred stock issued by Phoenix to Treasury.

 

 

46


 

MID PENN BANCORP, INC. 

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There has been no material change in market risk since December 31, 2014, as reported in Mid Penn’s Form 10-K filed with the SEC on March 20, 2015.

 

 

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 September 30, 2015, Mid Penn’s management, with the participation of the Principal Executive Officer and Principal Financial and Accounting Officer, concluded that the disclosure controls and procedures were effective as of such date.

 

Changes in Internal Controls

 

During the three and nine months ended September 30, 2015, 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.

 

 

47


 

MID PENN BANCORP, INC. 

 

PART II – OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEDINGS

 

Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position of Mid Penn or its subsidiaries taken as a whole.  There are no proceedings pending other than ordinary routine litigation occurring in the normal course of business. 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, 2014.  There are no material changes from the risk factors as previously disclosed in the Form 10-K.

 

 

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 3.1 to Registrant’s Registration Statement on Form S-4 (File No. 333-199740) filed with the Securities and Exchange Commission on October 31, 2014.)

·

Exhibit 3(ii) – Certificate of Designation of Senior Non-Cumulative Perpetual Preferred Stock, Series C of Mid Penn Bancorp, Inc. (Incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on March 5, 2015.)

·

Exhibit 3(iii) – The Registrant’s By-laws (Incorporated by reference to Exhibit 3(ii) to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission 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.LAB – XBRL Taxonomy Extension Label Linkbase

·

Exhibit 101.PRE – XBRL Taxonomy Extension Presentation Linkbase

·

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

 

 

48


 

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:

November 13, 2015

By:

/s/ Edward P. Williams

 

Edward P. Williams

 

Interim Principal Financial Officer

 

 

Date:

November 13, 2015

 

 

 

 

49


 

MID PENN BANCORP, INC.

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

CERTIFICATION

 

I, Rory G. Ritrievi, certify that:

 

 

1.I have reviewed this report on Form 10-Q of Mid Penn Bancorp, Inc.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

 

 

 

By:

/s/ Rory G. Ritrievi

 

President and CEO

Date:

November 13, 2015

 

 

50


 

MID PENN BANCORP, INC.

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

CERTIFICATION

 

I, Edward P. Williams, certify that:

 

 

1.I have reviewed this report on Form 10-Q of Mid Penn Bancorp, Inc.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

 

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

 

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 

 

 

 

 

 

 

By:

/s/ Edward P. Williams

 

Interim Principal Financial Officer

Date:

November 13, 2015

 

 

51


 

MID PENN BANCORP, INC.

 

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

 

 

In connection with the annual report of Mid Penn Bancorp, Inc. (the “Corporation”) on Form 10-Q for the period ending September 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rory G. Ritrievi, President and CEO, and I, Edward P. Williams, Interim Principal Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as added pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 

1.

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

 

2.

To my knowledge, the information contained in the Report fairly presents, in all material respects the financial condition and results of operations of Mid Penn Bancorp, Inc. as of the dates and for the periods expressed in the Report. 

 

 

 

 

 

 

 

 

 

 

By:

/s/ Rory G. Ritrievi

 

President and CEO

Date:

November 13, 2015

 

 

 

 

 

 

 

 

 

 

 

By:

/s/ Edward P. Williams

 

Interim Principal Financial Officer

Date:

November 13, 2015

 

 

 

 

52