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MID PENN BANCORP INC - Quarter Report: 2010 March (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended March 31, 2010

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 001-13677

 

 

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)

(717) 692-2133

(Registrant’s Telephone Number, Including Area Code)

 

 

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

Large accelerated filer ¨            Accelerated filer x            Non-accelerated filer ¨            Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes ¨    No x

As of May 7, 2010, there were 3,479,780 shares of the registrant’s common stock outstanding, par value $1.00 per share.

 

 

 


Table of Contents

Index

 

PART I – FINANCIAL INFORMATION

   2

Item 1 – Financial Statements

   2

Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009 (Unaudited)

   2

Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and March  31, 2009 (Unaudited)

   3

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March  31, 2010 and March 31, 2009 (Unaudited)

   4

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and March  31, 2009 (Unaudited)

   5

Notes to Consolidated Financial Statements

   6

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

   16

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

   25

Item 4 – Controls and Procedures

   25

PART II – OTHER INFORMATION

   25

Item 1 – Legal Proceedings

   25

Item 1A – Risk Factors

   25

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

   25

Item 3 – Defaults upon Senior Securities

   25

Item 4 – (Removed and Reserved)

   26

Item 5 – Other Information

   26

Item 6 – Exhibits

   26

Signatures

   27

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

 

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Table of Contents
MID PENN BANCORP, INC.   Consolidated Balance Sheets (Unaudited)

PART I – FINANCIAL INFORMATION

ITEM 1 – Financial Statements

 

(Dollars in thousands, except share data)

   March 31,
2010
    December 31,
2009
 

ASSETS

    

Cash and due from banks

   $ 6,289      $ 7,526   

Interest-bearing balances with other financial institutions

     898        1,434   

Federal funds sold

     19,897        —     
                

Total cash and cash equivalents

     27,084        8,960   
                

Interest-bearing time deposits with other financial institutions

     37,729        38,604   

Available for sale investment securities

     50,232        47,345   

Loans and leases, net of unearned interest

     474,107        480,385   

Less: Allowance for loan and lease losses

     (7,446     (7,686
                

Net loans and leases

     466,661        472,699   
                

Bank premises and equipment, net

     13,279        12,904   

Restricted investment in bank stocks

     4,029        4,029   

Foreclosed assets held for sale

     506        663   

Accrued interest receivable

     2,652        2,781   

Deferred income taxes

     2,322        2,257   

Goodwill

     1,016        1,016   

Core deposit and other intangibles, net

     356        369   

Cash surrender value of life insurance

     7,436        7,368   

Other assets

     6,953        7,015   
                

Total Assets

   $ 620,255      $ 606,010   
                

LIABILITIES & SHAREHOLDERS’ EQUITY

    

Deposits:

    

Noninterest bearing demand

   $ 57,432      $ 55,943   

Interest bearing demand

     53,471        42,148   

Money Market

     147,243        107,295   

Savings

     27,761        26,169   

Time

     250,817        268,460   
                

Total Deposits

     536,724        500,015   

Short-term borrowings

     3,054        16,044   

Long-term debt

     28,014        38,057   

Accrued interest payable

     1,899        1,750   

Other liabilities

     3,422        3,440   
                

Total Liabilities

     573,113        559,306   

Shareholders’ Equity:

    

Preferred stock, par value $1,000; authorized 10,000,000 shares; 5% cumulative dividend;
10,000 shares issued and outstanding at March 31, 2010 and December 31, 2009

     10,000        10,000   

Common stock, par value $1 per share; 10,000,000 shares authorized; 3,479,780
shares issued and outstanding at March 31, 2010 and December 31, 2009

     3,480        3,480   

Additional paid-in capital

     29,821        29,824   

Retained earnings

     3,237        2,627   

Accumulated other comprehensive income

     604        773   
                

Total Shareholders’ Equity

     47,142        46,704   
                

Total Liabilities and Shareholders’ Equity

   $ 620,255      $ 606,010   
                

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

 

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

 

     Three Months Ended
March 31,
 

(Dollars in thousands, except per share data)

   2010    2009  

INTEREST INCOME

     

Interest & fees on loans and leases

   $ 6,712    $ 6,643   

Interest on interest-bearing balances with financial institutions

     216      456   

Interest and dividends on investment securities:

     

U.S. Treasury and government agencies

     163      176   

State and political subdivision obligations, tax-exempt

     257      285   

Other securities

     3      4   

Interest on federal funds sold and securities purchased under agreements to resell

     3      1   
               

Total Interest Income

     7,354      7,565   
               

INTEREST EXPENSE

     

Interest on deposits

     2,472      2,902   

Interest on short-term borrowings

     11      19   

Interest on long-term debt

     370      688   
               

Total Interest Expense

     2,853      3,609   
               

Net Interest Income

     4,501      3,956   

PROVISION FOR LOAN AND LEASE LOSSES

     160      933   
               

Net Interest Income After Provision for Loan and Lease Losses

     4,341      3,023   
               

NONINTEREST INCOME

     

Trust department income

     54      61   

Service charges on deposits

     332      351   

Earnings from cash surrender value of life insurance

     68      72   

Gain on life insurance proceeds

     —        158   

Mortgage banking income

     70      42   

Other income

     292      257   
               

Total Noninterest Income

     816      941   
               

NONINTEREST EXPENSE

     

Salaries and employee benefits

     2,106      2,100   

Occupancy expense, net

     255      205   

Equipment expense

     358      238   

Pennsylvania Bank Shares tax expense

     102      101   

FDIC Assessment

     201      128   

Legal and professional fees

     138      139   

Director fees and benefits expense

     76      77   

Marketing and advertising expense

     68      194   

Computer expense

     136      60   

Telephone expense

     87      77   

Loss on sale/write-down of foreclosed assets

     132      32   

Intangible amortization

     16      16   

Other expenses

     594      501   
               

Total Noninterest Expense

     4,269      3,868   
               

INCOME BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES

     888      96   

Provision for (benefit from) income taxes

     153      (117
               

NET INCOME

     735      213   

Preferred stock dividends and discount accretion

     128      128   
               

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

   $ 607    $ 85   
               

PER COMMON SHARE DATA:

     

Basic Earnings Per Common Share

   $ 0.17    $ 0.02   

Diluted Earnings Per Common Share

   $ 0.17    $ 0.02   

Cash Dividends

   $ —      $ 0.20   

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

 

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MID PENN BANCORP, INC.    Consolidated Statements of Changes in Shareholder’s Equity (Unaudited)

 

FOR THREE MONTHS ENDED MARCH 31, 2010 AND 2009

 

(Dollars in thousands, except share data)

   Preferred
Stock
   Common
Stock
   Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total
Shareholders’
Equity
 

Balance, December 31, 2009

   $ 10,000    $ 3,480    $ 29,824      $ 2,627      $ 773      $ 46,704   

Comprehensive income:

              

Net income

     —        —        —          735        —          735   

Change in net unrealized gain on securities available for sale, net of tax effects

     —        —        —          —          (173     (173

Defined benefit plans, net of tax effects

     —        —        —          —          4        4   
                    

Total comprehensive income

                 566   
                    

Preferred dividends

     —        —        —          (125     —          (125

Amortization of warrant cost

     —        —        (3     —          —          (3
                                              

Balance, March 31, 2010

   $ 10,000    $ 3,480    $ 29,821      $ 3,237      $ 604      $ 47,142   
                                              

Balance, December 31, 2008

   $ 10,000    $ 3,480    $ 29,838      $ 7,168      $ 404      $ 50,890   

Comprehensive income:

              

Net income

     —        —        —          213        —          213   

Change in net unrealized gain on securities available for sale, net of tax effects

     —        —        —          —          81        81   

Defined benefit plans, net of tax effects

     —        —        —          —          100        100   
                    

Total comprehensive income

                 394   
                    

Cash dividends ($0.20 per share)

             (696       (696

Preferred dividends

     —        —        —          (122     —          (122

Amortization of warrant cost

     —        —        (3     —          —          (3
                                              

Balance, March 31, 2009

   $ 10,000    $ 3,480    $ 29,835      $ 6,563      $ 585      $ 50,463   
                                              

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

 

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

 

     Three Months Ended
March 31,
 

(Dollars in thousands)

   2010     2009  

Operating Activities:

    

Net Income

   $ 735      $ 213   

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

    

Provision for loan and lease losses

     160        933   

Depreciation

     319        247   

Amortization of core deposit intangible

     13        17   

Net amortization of securities premiums

     42        19   

Earnings on cash surrender value of life insurance

     (68     (72

Gain from life insurance proceeds

     —          (158

Loss on sale / write-down of foreclosed assets

     132        32   

Deferred income tax expense (benefit)

     28        (92

Decrease (increase) in accrued interest receivable

     129        (9

Decrease (increase) in other assets

     59        (98

Increase in accrued interest payable

     149        316   

Decrease in other liabilities

     (18     (26
                

Net Cash Provided by Operating Activities

     1,680        1,322   
                

Investing Activities:

    

Net decrease in interest-bearing time deposits

     875        10,537   

Proceeds from the maturity of investment securities

     2,411        11,121   

Purchases of investment securities

     (5,602     —     

Purchase of restricted investment in bank stock

     —          (115

Net decrease (increase) in loans and leases

     5,725        (14,619

Purchases of bank premises and equipment

     (694     (816

Proceeds from sale of foreclosed assets

     178        413   

Proceeds from cash surrender value of life insurance

     —          507   
                

Net Cash Provided by Investing Activities

     2,893        7,028   
                

Financing Activities:

    

Net increase in demand deposits and savings accounts

     54,352        1,985   

Net (decrease) increase in time deposits

     (17,643     12,760   

Net decrease in short-term borrowings

     (12,990     (16,841

Preferred stock dividend paid

     (125     (78

Common stock dividend paid

     —          (696

Long-term debt repayment

     (10,043     (5,041
                

Net Cash Provided by (Used in) Financing Activities

     13,551        (7,911
                

Net increase in cash and cash equivalents

     18,124        439   

Cash and cash equivalents, beginning of period

     8,960        8,448   
                

Cash and cash equivalents, end of period

   $ 27,084      $ 8,887   
                

Supplemental Disclosures of Cash Flow Information:

    

Interest paid

   $ 2,704      $ 3,293   

Income taxes paid

     —          —     

Supplemental Noncash Disclosures:

    

Transfers to foreclosed assets held for sale

   $ 153      $ 138   

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

 

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MID PENN BANCORP, INC.   Notes to Consolidated Financial Statements

1. Basis of Presentation

The consolidated financial statements for 2010 and 2009 include the accounts of Mid Penn Bancorp, Inc. (“Mid Penn”), and its subsidiaries Mid Penn Bank (the “Bank”), Mid Penn Insurance Services, LLC, and Mid Penn Investment Corporation (collectively the “Corporation”). 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”). We believe the information presented is not misleading and the disclosures are adequate. For comparative purposes, the March 31, 2009 balances have been reclassified to conform to the 2010 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 financial statements and notes thereto included in Mid Penn’s Annual Report on Form 10-K for the year ended December 31, 2009.

Mid Penn has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 2010, 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. Short-term Borrowings

Short-term borrowings as of March 31, 2010 and December 31, 2009 consisted of:

 

(Dollars in thousands)

   March 31,
2010
   December 31,
2009

Federal funds purchased

   $ —      $ 12,886

Securities sold under repurchase agreements

     2,588      2,839

Treasury, tax and loan notes

     466      319
             
   $ 3,054    $ 16,044
             

Federal funds purchased represent overnight funds. Securities sold under repurchase agreements generally mature between one day and one year. Treasury tax and loan notes are open-ended interest bearing notes payable to the U.S. Treasury upon call. All tax deposits accepted by the Bank are placed in the Treasury note option account.

3. Long-term Debt

During the three months ended March 31, 2010, the Bank entered into no additional long-term borrowings with the Federal Home Loan Bank of Pittsburgh. During the three months ended March 31, 2010, the Bank repaid two $5,000,000 borrowings with the Federal Home Loan Bank of Pittsburgh with a weighted average cost of 6.50%.

4. 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 our plans is used.

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

 

     Three Months Ended March 31,  
     Pension Benefits    Other Benefits  

(Dollars in thousands)

   2010    2009    2010     2009  

Service cost

   $ 6    $ 5    $ 5      $ 4   

Interest cost

     13      14      11        8   

Amortization of prior service cost

     5      5      —          —     

Amortization of net gain

     —        —        (3     (3
                              

Net periodic benefit cost

   $ 24    $ 24    $ 13      $ 9   
                              

 

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MID PENN BANCORP, INC.   Notes to Consolidated Financial Statements

 

5. Earnings per Common Share

Earnings per common share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each of the periods presented giving retroactive effect to stock dividends and stock splits. The following data show the amounts used in computing basic and diluted earnings per common share. As shown in the table that follows, diluted earnings per common share is computed using weighted average common shares outstanding, plus weighted average common shares available from the exercise of all dilutive stock warrants issued to the U.S. Treasury under the provisions of the Capital Purchase Program, based on the average share price of Mid Penn’s common stock during the period.

The computations of basic earnings per common share follow:

 

     Three Months Ended
March 31,
 

(Dollars in thousands, except per share data)

   2010     2009  

Net Income

   $ 735      $ 213   

Less: Dividends on preferred stock

     (125     (125

Accretion of preferred stock discount

     (3     (3
                

Net income available to common shareholders

   $ 607      $ 85   

Weighted average common shares outstanding

     3,479,780        3,479,780   

Basic earnings per common share

   $ 0.17      $ 0.02   

The computations of diluted earnings per common share follow:

 

     Three Months Ended
March 31,

(Dollars in thousands, except per share data)

   2010    2009

Net income available to common shareholders

   $ 607    $ 85

Weighted average number of common shares outstanding

     3,479,780      3,479,780

Dilutive effect of potential common stock arising from stock warrants:

     

Exercise of outstanding stock warrants issued to U.S. Treasury under the Capital Repurchase Program

     —        —  
             

Adjusted weighted-average common shares outstanding

     3,479,780      3,479,780

Diluted earnings per common share

   $ 0.17    $ 0.02

As of March 31, 2010, Mid Penn had 73,099 warrants that were anti-dilutive because the fair value of the common stock was below the $20.52 exercise price of these warrants.

6. Comprehensive Income

Accounting principles generally accepted in the United States of America require that recognized revenue, expenses, gains, and losses be included in net income. Changes in certain assets and liabilities such as unrealized gains (losses) on securities available for sale and the liability associated with defined benefit plans, are reported as a separate component of the shareholders’ equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The components of other comprehensive income (loss), and the related tax effects are as follows:

 

     Three Months Ended
March 31,
 

(Dollars in thousands)

   2010      2009  

Change in unrealized holding gains on available for sale securities

   $ (262    $ 123   

Less reclassification adjustment for gains realized in income

     —           —     
                 

Net unrealized gains (losses)

     (262      123   
                 

Change in defined benefit plans

     6         152   
                 

Other comprehensive (loss) income

     (256      275   

Income tax effect

     87         (94
                 

Net of tax amount

   $ (169    $ 181   
                 

 

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MID PENN BANCORP, INC.   Notes to Consolidated Financial Statements

 

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

 

(Dollars in thousands)

   Unrealized Gain
on Securities
   Defined Benefit
Plan Liability
    Accumulated
Other
Comprehensive
Income

Balance—March 31, 2010

   $ 644    $ (40   $ 604
                     

Balance—December 31, 2009

   $ 817    $ (44   $ 773
                     

Balance—March 31, 2009

   $ 635    $ (50   $ 585
                     

7. 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 $11,860,000 and $10,697,000 of standby letters of credit outstanding as of March 31, 2010 and December 31, 2009, respectively. Mid Penn does not anticipate any losses because of these transactions. The current amount of the liability as of March 31, 2010 for payment under standby letters of credit issued was not material.

8. Fair Value Measurements

Mid Penn adopted Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures” effective January 1, 2008 for financial assets and financial liabilities and on January 1, 2009, for non-financial assets and non-financial liabilities. This guidance defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements.

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.

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. 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;

 

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MID PENN BANCORP, INC.   Notes to Consolidated Financial Statements

 

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. These valuation methodologies were applied to all of Mid Penn’s financial assets and financial liabilities carried at fair value effective January 1, 2008.

There were no transfers of assets between fair value Level 1 and Level 2 for the three months ended March 31, 2010. The following table illustrates the financial instruments measured at fair value on a recurring basis segregated by hierarchy fair value levels:

 

          Fair value measurements at March 31, 2010 using:

(Dollars in thousands)

 

Assets:

   Total carrying value  at
March 31, 2010
   Quoted prices in  active
markets
(Level 1)
   Significant other
observable  inputs
(Level 2)
   Significant unobservable
inputs
(Level 3)

Securities available for sale

   $ 50,232    $ 245    $ 49,987    $ —  
           Fair value measurements at December 31, 2009 using:

(Dollars in thousands)

 

Assets:

   Total carrying value at
December 31, 2009
   Quoted prices in active
markets

(Level 1)
   Significant other
observable inputs
(Level 2)
   Significant unobservable
inputs

(Level 3)

Securities available for sale

   $ 47,345    $ 245    $ 47,100    $ —  

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

The following table illustrates the financial instruments measured at fair value on a nonrecurring basis segregated by hierarchy fair value levels:

 

          Fair value measurements at March 31, 2010 using:

(Dollars in thousands)

 

Assets:

   Total carrying value  at
March 31, 2010
   Quoted prices in  active
markets
(Level 1)
   Significant other
observable  inputs

(Level 2)
   Significant unobservable
inputs
(Level 3)

Impaired Loans

   $ 5,637    $ —      $ —      $ 5,637

Foreclosed Assets

     506      —        —        506
          Fair value measurements at December 31, 2009 using:

(Dollars in thousands)

 

Assets:

   Total carrying value at
December 31, 2009
   Quoted prices in active
markets

(Level 1)
   Significant other
observable inputs
(Level 2)
   Significant unobservable
inputs
(Level 3)

Impaired Loans

   $ 2,036    $ —      $ —      $ 2,036

Foreclosed Assets

     663      —        —        663

Certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. As stated above, this guidance was applicable to these fair value measurements beginning January 1, 2009 and were not significant at March 31, 2010.

ASC Topic 825, “Financial Instruments”, requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.

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.

 

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MID PENN BANCORP, INC.   Notes to Consolidated Financial Statements

 

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:

Certain loans are evaluated for impairment using practical expedients including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). The value of the collateral is determined through appraisals performed by independent licensed appraisers. When the value of the collateral, less estimated costs to sell, is less than the principal balance of the loan, a specific reserve is established. Mid Penn considers the appraisals used in its impairment analysis to be Level 3 inputs. Impaired loans are reviewed and evaluated as needed for additional impairment, and reserves are adjusted accordingly.

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:

Assets included in foreclosed assets held for sale are carried at the lower of carrying value or fair value and accordingly are 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 amounts of accrued interest receivable and payable approximate 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.

Deposits:

The fair value for demand deposits (e.g., interest and noninterest checking, savings and money market deposit accounts) are 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.

 

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MID PENN BANCORP, INC.   Notes to Consolidated Financial Statements

 

The following table summarizes the carrying value and fair value of financial instruments at March 31, 2010 and December 31, 2009.

 

(Dollars in thousands)

   March 31, 2010    December 31, 2009
   Book
Value
   Fair
Value
   Book
Value
   Fair
Value

Financial assets:

           

Cash and cash equivalents

   $ 27,084    $ 27,084    $ 8,960    $ 8,960

Interest-bearing balances with other financial institutions

     37,729      37,729      38,604      38,604

Investment securities

     50,232      50,232      47,345      47,345

Net loans and leases

     466,661      480,383      472,699      487,476

Restricted investment in bank stocks

     4,029      4,029      4,029      4,029

Accrued interest receivable

     2,652      2,652      2,781      2,781

Financial liabilities:

           

Deposits

   $ 536,724    $ 542,778    $ 500,015    $ 506,616

Short-term borrowing

     3,054      3,054      16,044      16,044

Long-term debt

     28,014      28,810      38,057      39,578

Accrued interest payable

     1,899      1,899      1,750      1,750

Off-balance sheet financial instruments:

           

Commitments to extend credit

   $ —      $ —      $ —      $ —  

Financial standby letters of credit

     —        —        —        —  

9. Preferred Stock

On December 19, 2008, Mid Penn entered into and closed a Letter Agreement with the United States Department of the Treasury (the “Treasury”) pursuant to which the Treasury invested $10,000,000 in Mid Penn under the Treasury’s Capital Purchase Program (the “CPP”).

Under the CPP, the Treasury received (1) 10,000 shares of Series A Fixed Rate Cumulative Perpetual Preferred Stock, $1,000 liquidation preference, and (2) Warrants to purchase up to 73,099 shares of Mid Penn’s common stock at an exercise price of $20.52 per share. The $10,000,000 in new capital is treated as Tier 1 Capital.

The Series A Preferred Stock pays cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. Pursuant to the American Recovery and Reinvestment Act of 2009, the Secretary of the Treasury is required to permit, subject to consultation with the appropriate Federal banking agency, Mid Penn to redeem the Series A Preferred Stock. Mid Penn may do so without regard to the source of the funds to be used to redeem the Series A Preferred Stock or any minimum waiting period. If Mid Penn elects to redeem the Series A Preferred Stock prior to February 15, 2012, and receives approval from the Treasury and the Board of Governors of the Federal Reserve System, it must redeem at least $2,500,000 of the Series A Preferred Stock. Upon redemption of the Series A Preferred Stock, the Secretary of the Treasury must liquidate the warrants associated with Mid Penn’s participation in the CPP at the current market price. Upon the appropriate approval, Mid Penn may redeem the Series A Preferred Stock at the original purchase price plus accrued but unpaid dividends, if any. The related Warrants expire in ten years and are immediately exercisable upon their issuance.

To participate in the program, Mid Penn is required to meet certain standards, including; (1) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risk that threaten the value of Mid Penn; (2) requiring a clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (3) prohibiting Mid Penn from making any golden parachute payment to a senior executive based on applicable Internal Revenue Code provisions; and (4) agreeing not to deduct for tax purposes executive compensation in excess of $500,000 for each senior executive.

Based on the Program term sheet provided by the Treasury, the following are the effects on holders of common stock from the issuance of Senior Preferred stock to the Treasury under the Program:

Restrictions on Dividends

For as long as any Senior Preferred shares are outstanding, no dividends can be declared or paid on common shares, nor can Mid Penn repurchase or redeem any common shares, unless all accrued and unpaid dividends for all past dividend periods on the Senior Preferred shares have been fully paid. In addition, the consent of the Treasury is required for any increase in the per share dividends on common shares until the third anniversary of the

 

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MID PENN BANCORP, INC.   Notes to Consolidated Financial Statements

 

date of the Senior Preferred investment unless prior to such third anniversary, the Senior Preferred shares have been redeemed in whole or the Treasury has transferred all of the Senior Preferred shares to third parties.

Repurchases

The Treasury’s consent is required for any share repurchases (other than (1) repurchases of the Senior Preferred shares and (2) repurchases of common shares in connection with any benefit plan in the ordinary course of business consistent with past practice) until the third anniversary of the date of this investment unless prior to such third anniversary the Senior Preferred shares have been redeemed in whole or the Treasury has transferred all of the Senior Preferred shares to third parties. In addition, there can be no share repurchases of common shares if prohibited as described under “Restrictions on Dividends” above.

Voting Rights

The Senior Preferred shares are non-voting, other than class voting rights on (1) any authorization or issuance of shares ranking senior to the Senior Preferred shares, (2) any amendment to the rights of Senior Preferred, or (3) any merger, exchange or similar transaction which would adversely affect the rights of the Senior Preferred. If dividends on the Senior Preferred shares are not paid in full for six dividend periods, whether or not consecutive, the Senior Preferred shareholder(s) have the right to elect two directors. The right to elect directors would end when full dividends have been paid for four consecutive dividend periods.

10. 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 adjusted book value 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 book value 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 the Mid Penn’s results of operations.

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. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.

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.

 

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MID PENN BANCORP, INC.   Notes to Consolidated Financial Statements

 

At March 31, 2010 and December 31, 2009, amortized cost, fair value, and unrealized gains and losses on investment securities are as follows:

 

(Dollars in thousands)

   Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
   Fair
Value

March 31, 2010

           

Available-for-sale securities:

           

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

   $ 15,273    $ 378    $ 11    $ 15,640

Mortgage-backed U.S. government agencies

     6,841      63      —        6,904

State and political subdivision obligations

     26,892      649      98      27,443

Equity securities

     250      —        5      245
                           
   $ 49,256    $ 1,090    $ 114    $ 50,232
                           

(Dollars in thousands)

   Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
   Fair
Value

December 31, 2009

           

Available-for-sale securities:

           

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

   $ 15,291    $ 409    $ —      $ 15,700

Mortgage-backed U.S. government agencies

     4,522      97         4,619

State and political subdivision obligations

     26,044      828      91      26,781

Equity securities

     250      —        5      245
                           
   $ 46,107    $ 1,334    $ 96    $ 47,345
                           

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.

Included in equity securities is an investment in Access Capital Strategies, an equity fund that invests in low to moderate income financing projects. This investment was purchased in 2004 to help fulfill the Bank’s regulatory requirement of the Community Reinvestment Act and at March 31, 2010 and December 31, 2009, is reported at fair value.

Investment securities having a fair value of $37,235,000 at March 31, 2010, and $37,434,000 at December 31, 2009, were pledged to secure public deposits and other borrowings.

 

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MID PENN BANCORP, INC.   Notes to Consolidated Financial Statements

 

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 March 31, 2010 and December 31, 2009.

 

      Less Than 12 Months    12 Months or More    Total

(Dollars in thousands)

   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses

March 31, 2010

                 

Available-for-sale securities:

                 

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

   $ 4,500    $ 11    $ —      $ —      $ 4,500    $ 11

State and political subdivision obligations

     7,144      98      —        —        7,144      98

Equity securities

     —        —        245      5      245      5
                                         

Total temporarily impaired available for sale securities

   $ 11,644    $ 109    $ 245    $ 5    $ 11,889    $ 114
                                         
      Less Than 12 Months    12 Months or More    Total

(Dollars in thousands)

   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses

December 31, 2009

                 

Available-for-sale securities:

                 

State and political subdivision obligations

   $ 4,321    $ 91    $ —      $ —      $ 4,321    $ 91

Equity securities

     —        —        245      5      245      5
                                         

Total temporarily impaired available for sale securities

   $ 4,321    $ 91    $ 245    $ 5    $ 4,566    $ 96
                                         

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, Mid Penn considers (a) whether management has the intent to sell the security, (b) it is more likely than not that management will be required to sell the security prior to its anticipated recovery, and (c) whether management expects to recover the entire amortized cost basis. For equity securities, management considers the intent and ability to hold securities until recovery of unrealized losses.

At March 31, 2010, Mid Penn had 15 debt securities with unrealized losses. These securities have depreciated 0.93% from their amortized cost basis. At December 31, 2009, 8 debt securities with unrealized losses had depreciated 2.07% from the amortized cost basis. These securities are issued by either the U.S. Government or other governmental agencies. These unrealized losses were determined principally by reference to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the U.S. Government or its agencies issued the securities, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. Based on the above conditions management has determined that no declines are deemed to be other-than-temporary.

The table below is the maturity distribution of investment securities at amortized cost and fair value at March 31, 2010 and December 31, 2009:

 

      March 31, 2010    December 31, 2009

(Dollars in thousands)

   Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value

Due in 1 year or less

   $ 520    $ 522    $ 1,022    $ 1,026

Due after 1 year but within 5 years

     11,362      11,592      11,878      12,121

Due after 5 years but within 10 years

     18,419      19,055      17,662      18,417

Due after 10 years

     11,864      11,914      10,773      10,917
                           
     42,165      43,083      41,335      42,481
                           

Mortgage-backed securities (avg. life 2.9 years)

     6,841      6,904      4,522      4,619

Equity securities

     250      245      250      245
                           
   $ 49,256    $ 50,232    $ 46,107    $ 47,345
                           

 

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MID PENN BANCORP, INC.   Notes to Consolidated Financial Statements

 

11. Recent Accounting Pronouncements

ASU 2009-16:

In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-16, Transfers and Servicing (Topic 860) – Accounting for Transfers of Financial Assets. This Update amends the Codification for the issuance of FASB Statement No. 166, Accounting for Transfers of Financial Assets-an amendment of FASB Statement No. 140.

The amendments in this Update improve financial reporting by eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, the amendments require enhanced disclosures about the risks that a transferor continues to be exposed to because of its continuing involvement in transferred financial assets. Comparability and consistency in accounting for transferred financial assets will also be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting.

This guidance became effective January 1, 2010, and did not have a significant impact on Mid Penn’s financial condition or results of operations.

ASU 2010-06:

The FASB has issued ASU 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This ASU requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:

 

   

A reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and

 

   

In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.

In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:

 

   

For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and

 

   

A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

ASU 2010-06 is effective for interim and annual reporting periods beginning after January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Mid Penn adopted the required provisions of ASU 2010-06, with no significant impact on its financial condition or results of operations.

ASU 2010-09:

The FASB has issued ASU 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature.

In addition, the amendments in the ASU require an entity that is a conduit bond obligor for conduit debt securities that are traded in a public market to evaluate subsequent events through the date of issuance of its financial statements and must disclose such date.

All of the amendments in the ASU were effective upon issuance (February 24, 2010) except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. Mid Penn adopted the required provisions of ASU 2010-09, with no significant impact on its financial condition or results of operations.

 

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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 March 31, 2010, compared to year-end 2009, and the Results of Operations for the three months ended March 31, 2010, compared to the same period in 2009.

This discussion should be read in conjunction with the financial tables, statistics, and the audited financial statements and notes thereto included in Mid Penn’s Annual Report on Form 10-K for the year ended December 31, 2009. The results of operations for interim periods are not necessarily indicative of operating results expected for the full year.

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;

 

   

The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the 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 economic deterioration on current customers, specifically the effect of the economy on loan customers’ ability to repay loans;

 

   

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;

 

   

Acquisitions and integration of acquired businesses;

 

   

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;

 

   

Volatilities in the securities markets;

 

   

Deteriorating economic conditions.

Mid Penn undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review the risk factors described in the documents that we periodically file with the SEC, including Mid Penn’s Annual Report on Form 10-K for the year ended December 31, 2009.

Critical Accounting Estimates

Mid Penn’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and conform to general practices within the banking industry. Application of these principles involves significant judgments and estimates by management that have a material impact on the carrying value of certain assets and liabilities. The judgments and estimates that we used are based on historical experiences and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and estimates that we have made, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of our operations.

Management of the Mid Penn considers the accounting judgments relating to the allowance for loan and lease losses and the evaluation of Mid Penn’s investment securities for other-than-temporary impairment 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,

 

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

 

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 operations.

Results of Operations

Overview

Net income available to common shareholders was $607,000 or $0.17 per common share for the quarter ended March 31, 2010, as compared to net income available to common shareholders of $85,000 or $0.02 per common share for the quarter ended March 31, 2009.

The net interest margin compression experienced throughout 2009 has begun to abate somewhat with net interest income increasing to $4,501,000 during the three months ended March 31, 2010 from $3,956,000 during the same period in 2009. These increases have been spurred by a moderating cost of funds and increasing levels of average earning assets.

The provision for loan and lease losses in the first quarter of 2010 was $160,000, as compared to $933,000 in the first quarter of 2009. The decreased provision reflects the efforts undertaken in the fourth quarter of 2009 to aggressively identify potential problem credits and take proactive steps to properly provision against these credits.

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 March 31,  
         2010             2009      

Return on average assets

   0.49   0.15

Return on average equity

   6.32   1.54

Total assets increased to $620,255,000 at March 31, 2010, from $606,010,000 at December 31, 2009. This asset increase was driven by strong core deposit growth to this point of 2010 with total deposits of $536,724,000 at March 31, 2010 compared to $500,015,000 at December 31, 2009, an increase of approximately $37 million. This growth in core deposits led to an increase in federal funds sold and is being deployed into loans and investments to maximize the return on these new funds.

The funding side of Mid Penn has continued the transformation begun in 2009. Deposit growth was strong, as noted above, during the first three months of 2010. This increase in deposits was primarily caused by successfully securing two long-term deposit relationships with local school districts and the building of relationship-based core deposit accounts from the extensive portfolio of commercial real estate borrowers. In addition to the ongoing efforts to place these funds into loans and investments, during the first three months of 2010, $10,000,000 of long-term FHLB debt has matured and been replaced with core deposits at a more advantageous rate structure. These strategies have improved the cost of funds and energized the net interest margin despite increasing levels of nonaccrual loans.

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%. The following table includes average balances, rates, interest income and expense, interest rate spread, and net interest margin:

 

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

 

Average Balances, Effective Interest Differential and Interest Yields

Interest rates and interest differential – taxable equivalent basis

 

     For the Three Months Ended
March 31, 2010
    For the Three Months Ended
March 31, 2009
 

(Dollars in thousands)

   Average
Balance
   Interest    Rate (%)     Average
Balance
   Interest    Rate (%)  

ASSETS:

                

Interest Earning Balances

   $ 37,306    $ 216    2.35   $ 45,506    $ 456    4.06

Investment Securities:

                

Taxable

     21,185      166    3.18     25,905      178    2.79

Tax-Exempt

     24,506      304    5.03     25,151      432    6.97
                        

Total Investment Securities

     45,691           51,056      
                        

Federal Funds Sold

     6,528      3    0.19     728      1   

Loans and Leases, Net:

                

Taxable

     459,245      6,531    5.77     427,812      6,488    6.15

Tax-Exempt

     16,402      214    5.29     13,253      235    7.19
                        

Total Loans and Leases, Net

     475,647           441,065      

Restricted Investment in Bank Stocks

     4,029      —      0.00     3,723      1    0.11
                                

Total Earning Assets

     569,201      7,434    5.30     542,078      7,791    5.83

Cash and Due from Banks

     8,351           6,580      

Other Assets

     26,484           23,591      
                        

Total Assets

   $ 604,036         $ 572,249      
                        

LIABILITIES & SHAREHOLDERS’ EQUITY:

                

Interest Bearing Deposits:

                

NOW

   $ 41,594      7    0.07   $ 35,576      8    0.09

Money Market

     125,917      446    1.44     76,413      359    1.91

Savings

     26,789      4    0.06     25,858      6    0.09

Time

     262,665      2,015    3.11     256,542      2,529    4.00

Short-term Borrowings

     8,159      11    0.55     14,537      19    0.53

Long-term Debt

     31,646      370    4.74     53,924      688    5.17
                                

Total Interest Bearing Liabilities

     496,770      2,853    2.33     462,850      3,609    3.16

Demand Deposits

     54,550           47,993      

Other Liabilities

     5,538           5,418      

Shareholders’ Equity

     47,178           55,988      
                        

Total Liabilities and Shareholders’ Equity

   $ 604,036         $ 572,249      
                        

Net Interest Income

      $ 4,581         $ 4,182   
                        

Net Yield on Interest Earning Assets:

                

Total Yield on Earning Assets

         5.30         5.83

Rate on Supporting Liabilities

         2.33         3.16

Average Interest Spread

         2.97         2.67

Net Interest Margin

         3.26         3.13

For the three months ended March 31, 2010, Mid Penn’s taxable-equivalent net interest margin increased to 3.26% from 3.13% as compared to the three months ended March 31, 2009, driven primarily by a reduction in cost of supporting liabilities. Net interest income, on a taxable-equivalent basis, in the first three months of 2010 increased to $4,581,000 from $4,182,000 in the first three months of 2009, helped by the growth in average earning assets, which increased 5.00% from March 31, 2009 to March 31, 2010.

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.

 

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

 

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 we serve.

During the first three months of 2010, Mid Penn continued to experience a challenging economic and operating environment. Given the economic pressures that impact some borrowers, Mid Penn has increased the allowance for loan and lease losses in accordance with Mid Penn’s assessment process, which took into consideration the decrease in collateral values from December 31, 2009 to March 31, 2010. The provision for loan and lease losses was $160,000 for the three months ended March 31, 2010, as compared to $933,000 for the three months ended March 31, 2009. For further discussion of factors affecting the provision for loan and lease losses please see Credit Quality, Credit Risk, and Allowance for Loan and Lease Losses in the Financial Condition section of this Management’s Discussion and Analysis.

Noninterest Income

Noninterest income decreased $125,000, or 13.3% during the first quarter of 2010 versus the first quarter of 2009. The following components of noninterest income showed significant changes:

 

      Three Months Ended March 31,  

(Dollars in Thousands)

   2010    2009    $ Variance     % Variance  

Gain on life insurance proceeds

   $ —      $ 158    $ (158   -100.0

The gain on life insurance proceeds in the first quarter of 2009 was the result of recognition of insurance proceeds due to the death of a former Director.

Noninterest Expenses

Noninterest expenses increased by $401,000, or 10.4% during the first quarter of 2010, versus the same period in 2009. The increases were primarily a result of the following components of noninterest expense:

 

      Three Months Ended March 31,  

(Dollars in Thousands)

   2010    2009    $ Variance     % Variance  

Occupancy expense, net

   $ 255    $ 205    $ 50      24.4

Equipment expense

     358      238      120      50.4

FDIC Assessment

     201      128      73      57.0

Marketing and advertising expense

     68      194      (126   -64.9

Computer expense

     136      60      76      126.7

Loss on sale/write-down of foreclosed assets

     132      32      100      312.5

Other expenses

     594      501      93      18.6

The increase in occupancy expense was primarily due to the escalating cost of utilities and snow removal costs incurred in January and February 2010. Another area of impact was the opening in April 2009 of Mid Penn’s new operations facility in Halifax and the fourth quarter 2009 renovations of the Millersburg office. These projects increased equipment expense, primarily depreciation costs, but provided much needed space for current operations and future growth. The increase in FDIC Assessment was driven by the increase in assessment rates which was experienced by all FDIC insured institutions. The computer expense increase was the result of increased license and service contacts associated with expansions in hardware and software infrastructure necessary to improve products and service levels to customers. Also during the first quarter of 2010, Mid Penn wrote down the value of several foreclosed assets to better reflect current economic conditions. The “other” expenses category was negatively impacted by increased levels of loan collection costs. A positive variance was the decrease in marketing and advertising expense. This is reflective of the ongoing focus on spending only mission critical dollars.

Income Taxes

The provision for income taxes was $153,000 for the three months ended March 31, 2010, as compared to a benefit from income taxes of ($117,000) in the same period last year. The effective tax rate, for the three months ended March 31, 2010, was 17.2 % compared to (121.9)% for the three months ended March 31, 2009. Generally, our effective tax rate is below the statutory rate due to earnings on tax-exempt loans, investments, and bank-owned life insurance, and the impact of tax credits. The realization of deferred tax assets is dependent on future earnings. As a result of Mid Penn’s adoption of ASC Topic 740, “Income Taxes”, no significant income tax uncertainties were identified; therefore, Mid Penn recognized no

 

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

 

adjustment for unrealized income tax benefits for the periods ended March 31, 2010 and March 31, 2009. We currently anticipate that future earnings will be adequate to fully utilize deferred tax assets.

Financial Condition

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

During the first three months of 2010, Mid Penn had net charge-offs of $400,000 as compared to net charge-offs of $174,000 during the same period of 2009. 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.

Analysis of the Allowance for Loan and Lease Losses:

 

(Dollars in thousands)

   Three Months Ended
March  31, 2010
    Three Months Ended
March  31, 2009
 

Average total loans outstanding (net of unearned income)

   $ 475,647      $ 441,065   

Period ending total loans outstanding (net of unearned income)

   $ 474,107      $ 448,950   

Balance, beginning of period

   $ 7,686      $ 5,505   

Loans charged off during period

     (436     (210

Recoveries of loans previously charged off

     36        36   
                

Net chargeoffs

     (400     (174
                

Provision for loan and lease losses

     160        933   
                

Balance, end of period

   $ 7,446      $ 6,264   
                

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

     0.34     0.16

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

     1.57     1.40

Other than as described herein, we do 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, we believe 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.

At March 31, 2010, total nonperforming loans amounted to $20,383,000, or 4.30% of loans and leases net of unearned income, as compared to levels of $15,241,000, or 3.17%, at December 31, 2009 and $3,562,000, or 0.79%, at March 31, 2009.

 

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

 

Schedule of Nonperforming Assets:

 

(Dollars in thousands)

   March 31,
2010
    December 31,
2009
    March 31,
2009
 

Nonperforming Assets:

      

Nonaccrual loans

   $ 20,078      $ 14,933      $ 3,443   

Loans renegotiated with borrowers

     305        308        119   
                        

Total nonperforming loans

     20,383        15,241        3,562   

Foreclosed real estate

     506        663        1,209   

Other repossessed property

     —          —          53   
                        

Total non-performing assets

     20,889        15,904        4,824   

Accruing loans 90 days or more past due

     150        661        366   
                        

Total risk elements

   $ 21,039      $ 16,565      $ 5,190   
                        

Nonperforming loans as a % of total loans outstanding

     4.30     3.17     0.79

Nonperforming assets as a % of total loans outstanding and other real estate

     4.40     3.31     1.07

Ratio of allowance for loan losses to nonperforming loans

     36.53     50.43     175.86

Mid Penn considers a loan or lease to be impaired when, based upon current information and events, it is probable that all interest and principal payments due according to the contractual terms of the loan or lease agreement will not be collected. An insignificant delay or shortfall in the amounts of payments would not cause a loan or lease to be considered impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan or lease and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. 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 determines the fair value of impaired loans on a case-by-case basis based primarily upon the fair value of the underlying collateral using Level 3 inputs comprised of customized collateral value discounting analyses.

As of March 31, 2010, Mid Penn had several unrelated loan relationships, with an aggregate carrying balance of $18,276,000, deemed impaired that have been placed in nonaccrual status. This pool of loans is further broken down into a group of loans with an aggregate carrying balance of $8,044,000 for which specific allocations totaling $2,407,000 have been included within the loan loss reserve for these loans. The remaining $10,232,000 of loans requires no specific allocation within the loan loss reserve. The $18,276,000 pool of impaired loan relationships is comprised of $10,027,000 in real estate secured commercial relationships and $8,249,000 in business relationships. The Bank has specific allocations against the real estate secured pool totaling $593,000, of which $280,000 is with one large relationship. The remaining $313,000 is spread among five relationships composed primarily of customers engaged in real estate investment activities. The group of impaired business relationships with specific allocations is made up of ten relationships primarily engaged in various forms of manufacturing and a specific allocation of $1,814,000 has been set aside against these credits. Three manufacturing relationships account for $1,016,000 of the specific allocations due to the negative effects of the economy on their businesses and the subsequent collateral devaluation. One additional large commercial participation loan in this pool has shown exceptional collateral devaluation and is responsible for a specific allocation of $400,000 of the total pool attributable to this segment. Management currently believes that the specific reserves are adequate to cover potential 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. When loans are deemed to be uncollectible, they are charged off. Management has established a reserve that it believes is adequate for probable losses in the loan and lease portfolio. 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

 

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

 

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 $7,446,000 is adequate as of March 31, 2010.

Liquidity

Mid Penn Bank’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 certificates of deposit in other financial institutions;

 

   

Payments received on loans and mortgage-backed securities; and,

 

   

Overnight correspondent bank borrowings on various credit lines; and,

 

   

Borrowing capacity available from the FHLB.

We believe that our core deposits are stable even in periods of changing interest rates. Liquidity and funds management are governed by policies and are measured on a monthly basis. 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.

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 paid to shareholders and 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.

Capital growth is achieved primarily by retaining more earnings than are paid out to shareholders. Shareholders’ equity increased during the quarter ended March 31, 2010 by $438,000 or 0.94%, from December 31, 2009. Capital was negatively impacted in 2009 by the net loss of $2,809,000 and the payment of cash dividends to common shareholders of $1,809,000. Capital was positively impacted in 2008 by the addition of $10,000,000 from the U.S. Treasury’s Capital Purchase Program. The program was designed to provide well-capitalized, secure financial institutions with additional capital in order to increase the flow of credit into the economy. The program details are discussed in the following section.

The FDIC also adopted a prepayment of projected deposit insurance premiums for a three-year period that was paid on December 30, 2009. The prepayment was $2,903,000 for Mid Penn. The prepayment will be carried as a prepaid expense in other assets on the balance sheet and amortized into expense in the operating period to which it applies.

Certain restrictions exist regarding the ability of the Bank to transfer funds to Mid Penn in the form of cash dividends, loans or advances. At March 31, 2010, $0 of undistributed earnings of the Bank included in the consolidated shareholders’ equity was available for distribution to Mid Penn as dividends without prior regulatory approval, subject to regulatory capital requirements below.

 

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

 

Mid Penn maintained the following regulatory capital levels, leverage ratios, and risk-based capital ratios in its bank subsidiary as of March 31, 2010, and December 31, 2009, as follows:

 

(Dollars in thousands)

   Capital Adequacy  
   Actual:     Minimum
Capital
Required:
    To Be Well-
Capitalized
Under Prompt
Corrective

Action
Provisions:
 
   Amount    Ratio     Amount    Ratio     Amount    Ratio  

As of March 31, 2010:

               

Tier 1 Capital (to Average Assets)

   $ 45,113    7.5   $ 23,972    4.0   $ 29,965    5.0

Tier 1 Capital (to Risk Weighted Assets)

     45,113    9.3     19,424    4.0     29,135    6.0

Total Capital (to Risk Weighted Assets)

     51,201    10.5     38,847    8.0     48,559    10.0

As of December 31, 2009:

               

Tier 1 Capital (to Average Assets)

   $ 44,434    7.4   $ 23,913    4.0   $ 29,892    5.0

Tier 1 Capital (to Risk Weighted Assets)

     44,434    9.2     19,329    4.0     28,993    6.0

Total Capital (to Risk Weighted Assets)

     50,496    10.4     38,658    8.0     48,322    10.0

Capital Purchase Program Participation

On December 19, 2008, Mid Penn entered into an agreement (including the Securities Purchase Agreement – Standard Terms) (the “Purchase Agreement”) with the United States Department of the Treasury (the “Treasury”) pursuant to which the Treasury invested $10,000,000 in Mid Penn under the Treasury’s Capital Purchase Program (the “CPP”).

Under the Purchase Agreement, the Treasury received (1) 10,000 shares of Series A Fixed Rate Cumulative Perpetual Preferred Stock, $1,000 liquidation preference, and (2) Warrants to purchase up to 73,099 shares of the Mid Penn’s common stock at an exercise price of $20.52 per share.

The preferred shares pay cumulative dividends at a rate of 5% per annum for the first five years and 9% per annum thereafter. The preferred shares are non-voting, other than class voting rights on certain matters that could adversely affect the preferred shares. If dividends on the preferred shares have not been paid for an aggregate of six quarterly dividend periods or more, whether consecutive or not, Mid Penn’s authorized number of directors will automatically be increased by two, and holders of the preferred stock, voting together with holders of any then outstanding parity stock, will have the right to elect those directors at Mid Penn’s next annual meeting of shareholders or special meeting of shareholders called for that purpose. These preferred share directors would be elected annually and serve until all accrued and unpaid dividends on the preferred shares have been paid.

Pursuant to the American Recovery and Reinvestment Act of 2009 (“ARRA”), the Secretary of the Treasury is required to permit, subject to consultation with the appropriate Federal banking agency, Mid Penn to redeem the Series A Preferred Stock. Mid Penn may do so without regard to the source of the funds to be used to redeem the Series A Preferred Stock or any minimum waiting period. If Mid Penn elects to redeem the Series A Preferred Stock prior to February 15, 2012, and receives approval from the Treasury and the Board of Governors of the Federal Reserve System, it must redeem at least $2,500,000 of the Series A Preferred Stock. Upon redemption of the Series A Preferred Stock, the Secretary of the Treasury is required to liquidate the warrants associated with Mid Penn’s participation in the CPP at the current market price. Any redemption is subject to the consent of the Board of Governors of the Federal Reserve System. Until December 19, 2011, or such earlier time as all preferred shares have been redeemed by Mid Penn or transferred by Treasury to third parties that are not affiliated with Treasury, Mid Penn may not, without Treasury’s consent, increase its dividend rate per share of common stock above the per share quarterly amount in effect immediately prior to October 14, 2008 ($0.20 per share) or, with certain limited exceptions, repurchase its common stock.

The warrants are immediately exercisable and have a 10-year term. The exercise price and number of shares subject to the warrants are both subject to anti-dilution adjustments. Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the warrants; however, this agreement not to vote the shares does not apply to any person who may acquire such shares.

The preferred shares and the warrants were issued in a private placement exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. Mid Penn has filed a shelf registration statement covering the preferred shares, the warrants, and the common stock underlying the warrants. Treasury and other future holders of the preferred shares, the warrants, or the common stock issued pursuant to the warrants also have piggyback and demand registration rights with respect to these securities. None of the preferred shares, the warrants, or the shares issuable upon exercise of the warrants are subject to any contractual restrictions on transfer.

In the Purchase Agreement, Mid Penn agreed that, until such time as the Treasury ceases to own any securities acquired from Mid Penn pursuant to the Purchase Agreement, Mid Penn will take all necessary action to ensure that benefit plans with respect to our senior executive officers comply with

 

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

 

Section 111(b) of the Emergency Economic Stability Act of 2008 (the “EESA”) and applicable guidance or regulations issued by the Secretary of the Treasury. The applicable executive compensation requirements apply to the compensation of Mid Penn’s Chief Executive Officer, Chief Financial Officer, and certain other highly compensated executive officers.

These requirements, the compliance of which must be annually certified by Mid Penn’s chief executive officer and chief financial officer, include:

 

  1. limits on compensation that exclude incentives for senior executive officers of Mid Penn to take unnecessary and excessive risks that threaten the value of Mid Penn during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding;

 

  2. a provision for the recovery by Mid Penn of any bonus, retention award, or incentive compensation paid to a senior executive officer and any of the next 20 most highly-compensated employees of Mid Penn based on statements of earnings, revenues, gains, or other criteria that are later found to be materially inaccurate;

 

  3. a prohibition on Mid Penn making any golden parachute payment to a senior executive officer or any of the next five most highly-compensated employees of Mid Penn during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding;

 

  4. a prohibition on Mid Penn paying or accruing any bonus, retention award, or incentive compensation to the most highly compensated employees of Mid Penn during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding, except that any prohibition shall not apply to the payment of long-term restricted stock by Mid Penn, provided that such long-term restricted stock –

 

  i. Does not fully vest during the period in which any obligation arising from financial assistance provided to Mid Penn remains outstanding;

 

  ii. Has a value in an amount that is not greater than one-third of the total amount of annual compensation of the employee receiving the stock; and

 

  iii. Is subject to such other terms and conditions as the Secretary of the Treasury may determine is in the public interest;

 

  5. a prohibition on any compensation plan that would encourage manipulation of the reported earnings of Mid Penn to enhance the compensation of any of its employees; and

 

  6. a requirement that Mid Penn’s compensation committee remains entirely independent and meets at least semiannually to discuss and evaluate employee compensation plans in light of an assessment of any risk posed to Mid Penn from such plans.

In compliance with the EESA and ARRA, on February 27, 2009, Rory G. Ritrievi entered into a Capital Purchase Plan Executive Compensation Restriction Agreement with Mid Penn Bancorp, Inc. and Mid Penn Bank. The agreement prohibits, during the period which any obligation to the Federal Government remains outstanding, any payment to Mr. Ritrievi (including bonus payments and payments upon a termination) which would violate the EESA and ARRA, despite Mr. Ritrievi having an employment agreement requiring payments upon certain terminations.

In addition to these requirements, Mid Penn must have in place a company-wide policy regarding excessive or luxury expenditures and must permit a separate nonbinding shareholder vote to approve the compensation of executives as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission. Mid Penn has adopted such a luxury and expense policy and it appears on Mid Penn’s website at www.midpennbank.com.

 

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MID PENN BANCORP, INC.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

No material changes in the market risk strategy occurred during the current period and no material changes have been noted in Mid Penn’s equity value at risk. A detailed discussion of market risk is provided in the Form 10-K for the year ended December 31, 2009. Mid Penn enjoys a closely balanced position that does not place it at undue risk under any interest rate scenario. Deposit dollars in transaction accounts are discretionarily priced so management maintains significant pricing flexibility.

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 March 31, 2010, 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 months ended March 31, 2010, 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.

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position of Mid Penn. There are no proceedings pending other than the ordinary routine litigation incident to the business of Mid Penn. 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

There have been no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2009.

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

None

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None

 

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MID PENN BANCORP, INC.

ITEM 4 – (Removed and Reserved)

ITEM 5 – OTHER INFORMATION

None

ITEM 6 – EXHIBITS

 

   

Exhibit 3(i) – The Registrant’s Amended and Restated Articles of Incorporation (Incorporated by reference to Exhibit 3(i) to Registrant’s Quarterly Report on form 10-Q filed with the Securities and Exchange Commission on May 11, 2009.)

 

   

Exhibit 3(ii) – Statement with Respect to Shares for Series A Preferred Stock. (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 December 22, 2008.)

 

   

Exhibit 3(iii) – The Registrant’s Amended and Restated By-laws (Incorporated by reference to Exhibit 3(iii) to Registrant’s Quarterly Report on form 10-Q filed with the Securities and Exchange Commission on May 11, 2009.)

 

   

Exhibit 4 – Warrants for Purchase of Shares of Common Stock. (Incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on December 22, 2008.)

 

   

Exhibit 11 – Statement regarding the 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.

 

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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: May 7, 2010
By   /S/    KEVIN W. LAUDENSLAGER        
 

Kevin W. Laudenslager

Treasurer

(Principal Financial Officer)

Date: May 7, 2010

 

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