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MID PENN BANCORP INC - Annual Report: 2014 (Form 10-K)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

  (Mark One)

 

 

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

 

For the fiscal year ended December 31, 2014

OR

 

 

 

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

 

For the transition period from              to             

 

Commission file number 1-13677

 

MID PENN BANCORP, INC.

(Exact Name of Registrant as Specified in its Charter) 

  

 

 

 

 

 

 

Pennsylvania

 

25-1666413

(State or Other Jurisdiction of 

Incorporation or Organization) 

 

(I.R.S. Employer 

Identification Number) 

 

 

349 Union Street

Millersburg, Pennsylvania

 

17061

(Address of Principal Executive Offices) 

 

(Zip Code) 

 

Registrant’s telephone number, including area code 1.866.642.7736

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

 

 

 

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $1.00 par value per share

 

The NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes       No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes       No  

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  

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

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

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

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

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates computed by reference to the closing price of the common equity of $15.82 per share, as reported by NASDAQ, on June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter was approximately $55,307,574.

As of March 6, 2015, the registrant had 4,221,680 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive proxy statement to be used in connection with the 2015 Annual Meeting of Shareholders is incorporated herein by reference in partial response to Part III, hereof.

 


 

MID PENN BANCORP, INC.

 

 FORM 10-K

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

  

 

  

PAGE

PART I

  

 

  

 

Item 1 -

  

Business

  

 

 

 

Item 1A -

  

Risk Factors

  

12 

 

 

 

Item 1B -

  

Unresolved Staff Comments

  

17 

 

 

 

Item 2 -

  

Properties

  

18 

 

 

 

Item 3 -

  

Legal Proceedings

  

19 

 

 

 

Item 4 -

  

Mine Safety Disclosures

  

19 

 

 

 

PART II

  

 

  

 

Item 5 -

  

Market for Registrant’s Common Equity, Related Shareholder Matters And Issuer Purchases of Equity Securities

  

19 

 

 

 

Item 6 -

  

Selected Financial Data

  

21 

 

 

 

Item 7 -

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

22 

 

 

 

Item 7A -

  

Quantitative and Qualitative Disclosure About Market Risk

  

41 

 

 

 

Item 8 -

  

Financial Statements and Supplementary Data

  

42 

 

 

 

Item 9 -

  

Changes In and Disagreements With Accountants on Accounting and Financial Disclosure

  

88 

 

 

 

Item 9A -

  

Controls and Procedures

  

88 

 

 

 

Item 9B -

  

Other Information

  

88 

 

 

 

PART III

  

  

 

Item 10 -

  

Directors, Executive Officers and Corporate Governance

  

89 

 

 

 

Item 11 -

  

Executive Compensation

  

89 

 

 

 

Item 12 -

  

Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters

  

89 

 

 

 

Item 13 -

  

Certain Relationships and Related Transactions, and Director Independence

  

89 

 

 

 

Item 14 -

  

Principal Accountant Fees and Services

  

89 

 

 

 

PART IV

  

 

  

 

Item 15 -

  

Exhibits and Financial Statement Schedules

  

90 

 

 

 

 

 

 

 

 

Signatures

  

92 

 

 

EXHIBITS

  

93 

 

 

 

2


 

MID PENN BANCORP, INC.

 

 

PART I

 

ITEM 1.    BUSINESS

 

The disclosures set forth in this Item are qualified by the section captioned “Special Cautionary Notice Regarding Forward-Looking Statements” contained in Part II, Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other cautionary statements set forth elsewhere in this report.

 

Mid Penn Bancorp, Inc.

 

Mid Penn Bancorp, Inc. is a one-bank holding company, incorporated in the Commonwealth of Pennsylvania in August 1991.  Mid Penn Bancorp, Inc. and its wholly owned subsidiaries are collectively referred to herein as “Mid Penn” or the “Corporation.”  On December 31, 1991, Mid Penn acquired, as part of the holding company formation, all of the outstanding common stock of Mid Penn Bank (the “Bank”), and the Bank became a wholly owned subsidiary of Mid Penn.  Mid Penn’s primary business is to supervise and coordinate the business of its subsidiaries and to provide them with capital and resources.

 

Mid Penn Insurance Services, LLC is a wholly-owned subsidiary of Mid Penn Bank that provides a wide range of personal and commercial insurance products.

 

Mid Penn’s consolidated financial condition and results of operations consist almost entirely of that of Mid Penn Bank, which is managed as a single business segment.  At December 31, 2014, Mid Penn had total consolidated assets of $755,657,000, total deposits of $637,922,000, and total shareholders’ equity of $59,130,000.

 

As of December 31, 2014, Mid Penn Bancorp, Inc. did not own or lease any properties.  Mid Penn Bank owns or leases the banking offices as identified in Part I, Item 2. 

 

All Mid Penn employees are employed by the Bank.  At December 31, 2014, the Bank had 187 full-time and 16 part-time employees.  The Bank and its employees are not subject to a collective bargaining agreement, and the Bank believes it enjoys good relations with its personnel.

 

Mid Penn Bank

 

Millersburg Bank, the predecessor to the Bank, was organized in 1868, and became a state chartered bank in 1931, obtaining trust powers in 1935, at which time its name was changed to Millersburg Trust Company.  In 1971, Millersburg Trust Company adopted the name “Mid Penn Bank.”  On March 1, 2015, in connection with the acquisition of Phoenix Bancorp, Inc. (“Phoenix”) by Mid Penn, Miners Bank, Phoenix’s wholly-owned banking subsidiary, merged with and into the Bank, with the Bank surviving and Miners Bank’s four branches operating as “Miners Bank, a Division of Mid Penn Bank”.  The Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation (the “FDIC”) supervise the Bank. Mid Penn’s and the Bank’s legal headquarters are located at 349 Union Street, Millersburg, Pennsylvania 17061.  The Bank presently has 19 offices located in Cumberland, Dauphin, Lancaster, Luzerne, Northumberland, and Schuylkill Counties, Pennsylvania. 

 

Mid Penn’s primary business consists of attracting deposits and loans from its network of community banking offices operated by the Bank.  The Bank engages in full-service commercial banking and trust business, making available to the community a wide range of financial services, including, but not limited to, installment loans, personal loans, mortgage and home equity loans, secured and unsecured commercial and consumer loans, lines of credit, construction financing, farm loans, community development and local government loans and various types of time and demand deposits.  Deposits of the Bank are insured by the Deposit Insurance Fund (the “DIF”) of the FDIC to the maximum extent provided by law. In addition, the Bank provides a full range of trust and retail investment services.  The Bank also offers other services such as Internet banking, telephone banking, cash management services, automated teller services and safe deposit boxes.

 

Acquisition of Phoenix Bancorp, Inc.

 

On March 1, 2015, Mid Penn acquired Phoenix, a bank holding company headquartered in Pottsville, Pennsylvania, by merger.  Phoenix shareholders received either 3.167 shares of Mid Penn’s common stock or $51.60 in cash in exchange for each share of Phoenix common stock.  Holders of contingent rights issued by Phoenix received approximately 0.414 shares of Mid Penn’s common stock as settlement of such rights.  As a result, Mid Penn issued approximately 724,000 shares of common stock with an acquisition date fair value of approximately $11,294,000, based on Mid Penn’s closing stock price of $15.60 on February 27, 2015, and cash of approximately $2,949,000.  Based on the merger agreement, outstanding stock appreciation rights of Phoenix were settled in cash in accordance with their terms.  Including an insignificant amount of cash paid in lieu of fractional shares, the fair value of total consideration paid was approximately $14,243,000.  The acquisition of Phoenix significantly expanded Mid Penn’s presence in Schuylkill County, Pennsylvania and established a presence in Luzerne County, Pennsylvania.

 

 

3


 

MID PENN BANCORP, INC.

 

Business Strategy

 

The Bank’s services are provided to small and middle-market businesses, consumers, nonprofit organizations, municipalities, and real estate investors through 19 full service banking facilities.  Mid Penn’s primary market currently, and historically, has lower unemployment than the U.S. as a whole.  This is due in part to a diversified manufacturing and services base and the presence of state government offices, which help shield the primary market from national trends.  At December 31, 2014, the seasonally adjusted unemployment rate for the Harrisburg/Carlisle area, Mid Penn’s primary market area, was 4.2% versus the seasonally adjusted national unemployment rate of 5.6% 

 

The Bank seeks to develop long-term customer relationships, maintain high quality service and provide quick responses to customer needs.  Mid Penn believes that an emphasis on local relationship building and its conservative approach to lending are important factors in the success and growth of Mid Penn.

 

The Bank seeks credit opportunities of good quality within its target market that exhibit positive historical trends, stable cash flows and secondary sources of repayment from tangible collateral.  The Bank extends credit for the purpose of obtaining and continuing long-term relationships.  Lenders are provided with detailed underwriting policies for all types of credit risks accepted by the Bank and must obtain appropriate approvals for credit extensions in excess of conservatively assigned lending limits.  The Bank also maintains strict documentation requirements and extensive credit quality assurance practices in order to identify credit portfolio weaknesses as early as possible so any exposures that are discovered might be reduced.

 

Lending Activities

 

The Bank offers a variety of loan products to its customers, including loans secured by real estate and commercial and consumer loans.  The Bank’s lending objectives are as follows:

 

·

to establish a diversified commercial loan portfolio; and

·

to provide a satisfactory return to Mid Penn’s shareholders by properly pricing loans to include the cost of funds, administrative costs, bad debts, local economic conditions, competition, customer relationships, the term of the loan, credit risk, collateral quality and a reasonable profit margin.

 

Credit risk is managed through portfolio diversification, underwriting policies and procedures and loan monitoring practices. The Bank generally secures its loans with real estate with such collateral values dependent and subject to change based on real estate market conditions within its market area.  As of December 31, 2014, the Bank’s highest concentration of credit is in commercial real estate.  Most of the Bank’s business activity with customers is located in Central Pennsylvania, specifically in Dauphin, southern Northumberland, western Schuylkill, and eastern Cumberland Counties.

 

Investment Activities

 

Mid Penn’s investment portfolio is used to improve earnings through investments of funds in higher-yielding assets than overnight funding alternatives, while maintaining asset quality, which provides the necessary balance sheet liquidity for Mid Penn.  Mid Penn does not have any significant concentrations within investment securities.

 

Mid Penn’s entire portfolio of investment securities is considered available for sale.  As such, the investments are recorded on the balance sheet at fair value.  Mid Penn’s investments include US Treasury, agency and municipal securities that derive fair values relative to investments of the same type with similar maturity dates.  As the interest rate environment changes, Mid Penn’s fair value of existing securities will change.  This difference in value, or unrealized gain, amounted to $2,462,000 as of December 31, 2014.  A majority of the investments are high quality United States and municipal securities that, if held to maturity, are expected to result in no loss to the Bank.

 

For additional information with respect to Mid Penn’s business activities, see Part II, Item 7 of this report, which is incorporated herein by reference.

 

Sources of Funds

 

The Bank primarily uses deposits and borrowings to finance lending and investment activities.  Borrowing sources include advances from the Federal Home Loan Bank of Pittsburgh (the “FHLB”) and overnight borrowings from the Bank’s customers and correspondent banks.  All borrowings, except for lines of credit with the Bank’s correspondent banks, require collateral in the form of loans or securities.  Collateral levels, therefore, limit borrowings and the available lines of credit extended by the Bank’s creditors.  As a result, deposits remain critical to the future funding and growth of the business.  Deposit growth within the banking industry has been subject to strong competition from a variety of financial services companies.  This competition may require financial institutions to adjust their product offerings and pricing to adequately grow deposits.

 

 

4


 

MID PENN BANCORP, INC.

 

Competition

 

The banking business is highly competitive, and the profitability of Mid Penn depends principally upon the Bank’s ability to compete in its market area.  The Bank actively competes with other financial services companies for deposit, loan, and trust business.  Competitors include other commercial banks, credit unions, savings banks, savings and loan associations, insurance companies, securities brokerage firms, finance companies, mutual funds, and service alternatives via the Internet.  Financial institutions compete primarily on the quality of services rendered, interest rates on loans and deposits, service charges, the convenience of banking facilities, location and hours of operation and, in the case of loans to larger commercial borrowers, relative lending limits.

Many competitors are significantly larger than the Bank and have significantly greater financial resources, personnel and locations from which to conduct business.  In addition, the Bank is subject to banking regulations while certain competitors may not be.  There are relatively few barriers for companies wanting to enter into the financial services industry.  For more information, see the “Supervision and Regulation” section below.

 

Mid Penn has been able to compete effectively with other financial institutions by emphasizing customer service.  Mid Penn’s customer service model is based on convenient hours, efficient and friendly employees, local decision making, and quality products.  The Gramm-Leach-Bliley Act (“GLB”), which broke down many barriers between the banking, securities and insurance industries, has significantly affected the competitive environment in which Mid Penn operates.

 

The flow of cash into mutual funds, much of which is made through tax deferred investment vehicles such as 401(k) plans, have, until recently, had been a popular savings vehicle for investors.  The recent economic turmoil has negatively impacted the returns on many of these investments and impacted the manner in which investors distribute their funds across investment alternatives.  The safety of traditional bank products has again become an attractive option during this period of market volatility.  Mid Penn’s ability to attract funds in the future will be impacted by the public’s appetite for the safety of insured or local investments versus the returns offered by alternative choices as part of their personal investment mix.

 

Supervision and Regulation

 

General

 

Bank holding companies and banks are extensively regulated under both Federal and state laws.  The regulation and supervision of Mid Penn and the Bank are designed primarily for the protection of depositors, the DIF, and the monetary system, and not Mid Penn or its shareholders.  Enforcement actions may include the imposition of a conservator or receiver, cease-and-desist orders and written agreements, the termination of insurance on deposits, the imposition of civil money penalties, and removal and prohibition orders.  If a banking regulator takes any enforcement action, the value of an equity investment in Mid Penn could be substantially reduced or eliminated.

 

Federal and state banking laws contain numerous provisions affecting various aspects of the business and operations of Mid Penn and the Bank.  Mid Penn is subject to, among others, the regulations of the Securities and Exchange Commission and the Board of Governors of the Federal Reserve System (the “Federal Reserve”), and the Bank is subject to, among others, the regulations of the Pennsylvania Department of Banking and Securities and the FDIC.  The insurance activities of Mid Penn Insurance Services, LLC are subject to regulations by the insurance departments of the various states in which it conducts business including principally the Pennsylvania Department of Insurance.  The descriptions below of, and references to, applicable statutes and regulations are not intended to be complete descriptions of these provisions or their effects on Mid Penn or the Bank.  They are summaries only and are qualified in their entirety by reference to such statutes and regulations.

 

Holding Company Regulation

 

Mid Penn is a registered bank holding company subject to supervision and regulation by the Federal Reserve.  As such, it is subject to the Bank Holding Company Act of 1956 (“BHCA”) and many of the Federal Reserve’s regulations promulgated thereunder.  The Federal Reserve has broad enforcement powers over bank holding companies, including the power to impose substantial fines and civil penalties.

 

The BHCA requires Mid Penn to file an annual report with the Federal Reserve regarding the holding company and its subsidiary bank.  The Federal Reserve Board also makes examinations of the holding company.  The Bank is not a member of the Federal Reserve System; however, the Federal Reserve possesses cease-and-desist powers over bank holding companies and their subsidiaries where their actions would constitute an unsafe or unsound practice or violation of law.  The Federal Reserve Board also makes policy that guides the declaration and distribution of dividends by bank holding companies.

 

The BHCA restricts a bank holding company’s ability to acquire control of additional banks.  In addition, the BHCA restricts the activities in which bank holding companies may engage directly or through non-bank subsidiaries.

 

 

5


 

MID PENN BANCORP, INC.

 

Gramm-Leach-Bliley Financial Modernization Act

 

Under GLB, bank holding companies, such as Mid Penn, that meet certain management, capital, and Community Reinvestment Act standards, are permitted to become financial holding companies and, by doing so, to affiliate with securities firms and insurance companies and to engage in other activities that are financial in nature, incidental to such financial activities, or complementary to such activities.  A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized under the FDIC Improvement Act’s prompt corrective action provisions, is well managed and has at least a satisfactory rating under the Community Reinvestment Act.  The required filing is a declaration that the bank holding company wishes to become a financial holding company and meets all applicable requirements.  Mid Penn has not elected to become a financial holding company at this time.

 

No prior regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities permitted under GLB. Activities cited by GLB as being financial in nature include:

 

·

securities underwriting, dealing and market making;

·

sponsoring mutual funds and investment companies;

·

insurance underwriting and agency;

·

merchant banking activities; and

·

activities that the Federal Reserve has determined to be closely related to banking.

 

In addition to permitting financial services providers to enter into new lines of business, the law allows firms the freedom to streamline existing operations and to potentially reduce costs.  The Act may increase both opportunity as well as competition. Many community banks are less able to devote the capital and management resources needed to facilitate broad expansion of financial services including insurance and brokerage services.

 

Bank Regulation

 

The Bank, a Pennsylvania-chartered institution, is subject to supervision, regulation and examination by the Pennsylvania Department of Banking and Securities and the FDIC.  The deposits of the Bank are insured by the FDIC to the maximum extent provided by law.  The FDIC assesses deposit insurance premiums the amount of which depends in part on the condition of the Bank. Moreover, the FDIC may terminate deposit insurance of the Bank under certain circumstances.  The federal and state banking regulatory agencies have broad enforcement powers over depository institutions under their jurisdiction, including the power to terminate deposit insurance, to impose fines and other civil and criminal penalties, and to appoint a conservator or receiver if any of a number of conditions is met.  In addition, the Bank is subject to a variety of local, state and federal laws that affect its operations.

 

Banking regulations include, but are not limited to, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans, compensation standards, payment of dividends, and the safety and soundness of banking practices.

 

Capital Requirements

 

Under risk-based capital requirements for bank holding companies, Mid Penn is required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance-sheet activities, such as standby letters of credit) of eight percent.  Through December 31, 2014, at least half of the total capital is to be composed of common equity, retained earnings and qualifying perpetual preferred stock, less goodwill (“Tier 1 Capital” and together with Tier 2 Capital, “Total Capital”).  The remainder may consist of subordinated debt, non-qualifying preferred stock and a limited amount of the loan loss allowance (“Tier 2 Capital”).

 

In addition, the Federal Reserve has established minimum leverage ratio requirements for bank holding companies.  These requirements provide for a minimum leverage ratio of Tier 1 Capital to adjusted average quarterly assets (“leverage ratio”) equal to 3% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating.  All other bank holding companies will generally be required to maintain a leverage ratio of at least 4-5%.  The requirements also provide that bank holding companies experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets.  Furthermore, the requirements indicate that the Federal Reserve will continue to consider a “Tangible Tier 1 Leverage Ratio” (deducting all intangibles) in evaluating proposals for expansion or new activity.  The Federal Reserve has not advised Mid Penn of any specific minimum Tier 1 leverage ratio.

 

In January 2015, the Federal Reserve proposed to raise the asset size threshold for determining the applicability of its Small Bank Holding Company Policy Statement, as required by recent federal legislation adopted in December 2014, from $500 million to $1 billion and, so long as certain qualitative factors are met, to be regulated under such policy, which allows simplified reporting requirements and less stringent capital standards that reflect the traditional banking services provided by such smaller banks.

 

The Bank is subject to similar capital requirements adopted by the FDIC. The FDIC has not advised the Bank of any specific minimum leverage ratios.

 

 

6


 

MID PENN BANCORP, INC.

 

The capital ratios of Mid Penn and the Bank are described in Note 16 to Mid Penn’s Consolidated Financial Statements, which are included herein.

 

Banking regulators continue to indicate their desire to further develop capital requirements applicable to banking organizations.  Changes to capital requirements could materially affect the profitability of Mid Penn or the fair value of Mid Penn stock.

 

Regulatory Capital Changes

 

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).  The phase-in period for community banking organizations begins January 1, 2015.  The final rules call for the following capital requirements:

 

·

A minimum ratio of common tier 1 capital to risk-weighted assets of 4.5%.

·

A minimum ratio of tier 1 capital to risk-weighted assets of 6%.

·

A minimum ratio of total capital to risk-weighted assets of 8% (no change from the current rule).

·

A minimum leverage ratio of 4%.

 

In addition, the final rules establishes a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all banking organizations.  If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it will be subject to certain restrictions on capital distributions and discretionary bonus payments.  The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations will begin on January 1, 2016.

 

Under the proposed rules, accumulated other comprehensive income (“AOCI”) would have been included in a banking organization’s common equity tier 1 capital.  The final rules allow community banks to make a one-time election not to include these additional components of AOCI in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital.  The opt-out election must be made in the first call report or FR Y-9 series report that is filed after the financial institution becomes subject to the final rule.

 

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

 

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

 

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

 

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

 

Mid Penn has assessed the impact of these changes on the regulatory ratios of Mid Penn and the Bank on the capital, operations, liquidity and earnings of Mid Penn and the Bank, and concluded that the new rules will not have a material negative effect.

 

Safety and Soundness Standards

 

The federal banking regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards for depository institutions such as the Bank.  The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits.  In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines.  The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder.  In addition, the agencies adopted regulations that authorize an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan.  If the institution fails to submit an acceptable compliance plan or fails to implement an accepted plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions be taken, including restricting asset growth, restricting interest rates paid on deposits, and requiring an increase in the institution’s ratio of tangible equity to assets.

 

7


 

MID PENN BANCORP, INC.

 

 

Payment of Dividends and Other Restrictions

 

Mid Penn is a legal entity separate and distinct from its subsidiary, the Bank.  There are various legal and regulatory limitations on the extent to which the Bank can, among other things, finance, or otherwise supply funds to, Mid Penn.  Specifically, dividends from the Bank are the principal source of Mid Penn’s cash funds and there are certain legal restrictions under Pennsylvania law and Pennsylvania banking regulations on the payment of dividends by state-chartered banks.  The relevant regulatory agencies also have authority to prohibit Mid Penn and the Bank from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound banking practice.  The payment of dividends could, depending upon the financial condition of Mid Penn and the Bank, be deemed to constitute such an unsafe or unsound practice. 

 

Prompt Corrective Action

 

In addition to the required minimum capital levels described above, federal law establishes a system of “prompt corrective actions” which federal banking agencies are required to take, and certain actions which they have discretion to take, based upon the capital category into which a federally regulated depository institution falls.  Regulations set forth detailed procedures and criteria for implementing prompt corrective action in the case of any institution, which is not adequately capitalized.  Under the rules, an institution will be deemed to be “adequately capitalized” if it exceeds the minimum federal regulatory capital requirements.  However, it will be deemed “undercapitalized” if it fails to meet the minimum capital requirements, “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 3.0%, or a leverage ratio that is less than 3.0%, and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2.0%.

 

The prompt corrective action rules require an undercapitalized institution to file a written capital restoration plan, along with a performance guaranty by its holding company or a third party.  In addition, an undercapitalized institution becomes subject to certain automatic restrictions including a prohibition on payment of dividends, a limitation on asset growth and expansion, in certain cases, a limitation on the payment of bonuses or raises to senior executive officers, and a prohibition on the payment of certain “management fees” to any “controlling person”. Institutions that are classified as undercapitalized are also subject to certain additional supervisory actions, including increased reporting burdens and regulatory monitoring, a limitation on the institution’s ability to make acquisitions, open new branch offices, or engage in new lines of business, obligations to raise additional capital, restrictions on transactions with affiliates, and restrictions on interest rates paid by the institution on deposits.  In certain cases, bank regulatory agencies may require replacement of senior executive officers or directors, or sale of the institution to a willing purchaser.  If an institution is deemed “critically undercapitalized” and continues in that category for four quarters, the statute requires, with certain narrowly limited exceptions, that the institution be placed in receivership.

 

Deposit Insurance

 

The FDIC insures deposits of the Bank through the DIF. The FDIC maintains the DIF by assessing depository institutions an insurance premium.  The amount each institution is assessed is based upon a variety of factors that include the balance of insured deposits as well as the degree of risk the institution poses to the insurance fund.  The FDIC insures deposits up to $250,000.  The Bank pays an insurance premium into the DIF based on the quarterly average daily deposit liabilities net of certain exclusions.  The FDIC uses a risk-based premium system that assesses higher rates on those institutions that pose greater risks to the DIF.  The FDIC places each institution in one of four risk categories using a two-step process based first on capital ratios (the capital group assignment) and then on other relevant information (the supervisory group assignment).  Subsequently, the rate for each institution within a risk category may be adjusted depending upon different factors that either enhance or reduce the risk the institution poses to the DIF, including the unsecured debt, secured liabilities and brokered deposits related to each institution.  Finally, certain risk multipliers may be applied to the adjusted assessment. 

 

Beginning with the second quarter of 2011, as mandated by the Dodd-Frank Act, the assessment base that the FDIC will use to calculate assessment premiums will be a bank’s average assets minus average tangible equity.   As the asset base of the banking industry is larger than the deposit base, the range of assessment rates will change to a low of 2.5 basis points through a high of 45 basis points, per $100 of assets; however, the dollar amount of total actual premiums is expected to be roughly the same.    

 

The FDIC is required under the Dodd-Frank Act to establish assessment rates that will allow the DIF to achieve a reserve ratio of 1.35% of Insurance Fund insured deposits by September 2020.  In addition, the FDIC has established a “designated reserve ratio” of 2.0%, a target ratio that, until it is achieved, will not likely result in the FDIC reducing assessment rates.  In attempting to achieve the mandated 1.35% ratio, the FDIC is required to implement assessment formulas that charge banks over $10 billion in asset size more than banks under that size.  Those new formulas began in the second quarter of 2011, but did not affect the Bank.  Under the Dodd-Frank Act, the FDIC is authorized to make reimbursements from the insurance fund to banks if the reserve ratio exceeds 1.50%, but the FDIC has adopted the “designated reserve ratio” of 2.0% and has announced that any reimbursements from the fund are indefinitely suspended. 

 

Consumer Protection Laws

 

A number of laws govern the relationship between the Bank and its customers.  For example, the Community Reinvestment Act is designed to encourage lending by banks to persons in low and moderate income areas. The Home Mortgage Disclosure Act and the Equal Credit Opportunity Act attempt to minimize lending decisions based on impermissible criteria, such as race or gender. The Truth-in-Lending Act and

 

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the Truth-in-Savings Act require banks to provide certain disclosure of relevant terms related to loans and savings accounts, respectively.  Anti-tying restrictions (which prohibit conditioning the availability or terms of credit on the purchase of another banking product) further restrict the Bank’s relationships with its customers.

 

Privacy Laws

 

The federal banking regulators have issued a number of regulations governing the privacy of consumer financial and customer information.  The regulations limit the disclosure by financial institutions, such as Mid Penn and the Bank, of nonpublic personal information about individuals who obtain financial products or services for personal, family, or household purposes.  Subject to certain exceptions allowed by law, the regulations cover information sharing between financial institutions and nonaffiliated third parties.  More specifically, the regulations require financial institutions to:

 

·

provide initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal financial information to nonaffiliated third parties and affiliates;

·

provide annual notices of their privacy policies to their current customers;

·

provide a reasonable method for consumers to “opt out” of disclosures to nonaffiliated third parties.

 

Affiliate Transactions

 

Transactions between Mid Penn and the Bank and its affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An “affiliate” of a bank or savings institution is any company or entity that controls, is controlled by, or is under common control with the bank or savings institution.  Generally, a subsidiary of a depository institution that is not also a depository institution is not treated as an affiliate of the bank for purposes of Sections 23A and 23B. Sections 23A and 23B are intended to protect insured depository institutions from suffering losses arising from transactions with non-insured affiliates, by limiting the extent to which a bank or its subsidiaries may engage in covered transactions with any one affiliate and with all affiliates of the bank in the aggregate, and requiring that such transactions be on terms that are consistent with safe and sound banking practices.

 

The USA Patriot Act

 

In 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot Act”) was signed into law.  The USA Patriot Act broadened the application of anti-money laundering regulations to apply to additional types of financial institutions, such as broker-dealers, and strengthened the ability of the U.S. government to detect and prosecute international money laundering and the financing of terrorism.  The principal provisions of Title III of the USA Patriot Act require that regulated financial institutions, including state-chartered banks:

 

·

establish an anti-money laundering program that includes training and audit components;

·

comply with regulations regarding the verification of the identity of any person seeking to open an account;

·

take additional required precautions with non-U.S. owned accounts; and

·

perform certain verification and certification of money laundering risk for their foreign correspondent banking relationships.

 

The USA Patriot Act also expanded the conditions under which funds in a U.S. interbank account may be subject to forfeiture and increased the penalties for violation of anti-money laundering regulations.  Failure of a financial institution to comply with the USA Patriot Act’s requirements could have serious legal and reputational consequences for the institution.  The Bank has adopted policies, procedures and controls to address compliance with the requirements of the USA Patriot Act under the existing regulations and will continue to revise and update its policies, procedures and controls to reflect changes required by the USA Patriot Act and implementing regulations.

 

Anti-Money Laundering and Anti-Terrorism Financing

 

Under Title III of the USA Patriot Act, also known as the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial institutions, including Mid Penn and the Bank, are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions.  Additional information-sharing among financial institutions, regulators, and law enforcement authorities is encouraged for financial institutions that comply with this provision and the authorization of the Secretary of the Treasury to adopt rules to further encourage cooperation and information-sharing.  The effectiveness of a financial institution in combating money-laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act, which applies to the Bank.

 

 

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JOBS Act 

 

In 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) became law.  The JOBS Act is aimed at facilitating capital raising by smaller companies and banks and bank holding companies by implementing the following changes:

 

·

raising the threshold requiring registration under the Securities Exchange Act of 1934 (the "Exchange Act") for banks and bank holdings companies from 500 to 2,000 holders of record;

·

raising the threshold for triggering deregistration under the Exchange Act for banks and bank holding companies from 300 to 1,200 holders of record;

·

raising the limit for Regulation A offerings from $5 million to $50 million per year and exempting some Regulation A offerings from state blue sky laws;

·

permitting advertising and general solicitation in Rule 506 and Rule 144A offerings;

·

allowing private companies to use "crowdfunding" to raise up to $1 million in any 12-month period, subject to certain conditions; and

·

creating a new category of issuer, called an "Emerging Growth Company," for companies with less than $1 billion in annual gross revenue, which will benefit from certain changes that reduce the cost and burden of carrying out an equity IPO and complying with public company reporting obligations for up to five years.

 

While the JOBS Act is not expected to have any immediate application to Mid Penn, management will continue to monitor the implementation rules for potential effects which might benefit the Corporation.

 

Dodd-Frank Act

 

The Dodd-Frank Act, which became law in July 2010, significantly changes regulation of financial institutions and the financial services industry, including:  creating a Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation; centralizing responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, which will be responsible for implementing, examining and enforcing compliance with federal consumer financial laws; permanently raising the current standard maximum deposit insurance amount to $250,000; establishing strengthened capital standards for banks, and disallowing certain trust preferred securities from qualifying as Tier 1 capital (subject to certain grandfather provisions for existing trust preferred securities); establishing new minimum mortgage underwriting standards; granting the Federal Reserve the power to regulate debit card interchange fees; and implementing corporate governance changes.  Many aspects of the Dodd-Frank Act are subject to rulemaking that will take effect over several years, thus making it difficult to assess the impact of the statute on the financial industry, including Mid Penn, at this time.

 

It is difficult to predict at this time the specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks.  Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial institutions’ operations is presently unclear.  The changes resulting from the Dodd-Frank Act may impact the profitability of our business activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business.  These changes may also require us to invest significant management attention and resources to evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.

 

Small Business Lending Fund

 

In connection with its acquisition of Phoenix, Mid Penn issued 1,750 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series C, having a $1,000 liquidation preference per share (the “SBLF Preferred Shares”), to the U.S. Department of the Treasury (“Treasury”).  The SBLF Preferred Shares qualify as Tier 1 Capital.

 

The terms of the SBLF Preferred Shares impose limits on the ability of Mid Penn to pay dividends and repurchase shares of common stock. Under the terms of the SBLF Preferred Shares, no repurchases may be effected, and no dividends may be declared or paid on preferred shares ranking pari passu with the SBLF Preferred Shares (such as Mid Penn’s 7% Non-Cumulative, Non-Voting, Non-Convertible Perpetual Preferred Stock, Series B), junior preferred shares, or other junior securities (including the common stock) during the current quarter and for the next three quarters following the failure to declare and pay dividends on the SBLF Preferred Shares, except that, in any such quarter in which the dividend is paid, dividend payments on shares ranking pari passu may be paid to the extent necessary to avoid any resulting material covenant breach.

 

Under the terms of the SBLF Preferred Shares, Mid Penn may only declare and pay a dividend on the common stock or other stock junior to the SBLF Preferred Shares, or repurchase shares of any such class or series of stock, if, after payment of such dividend, the dollar amount of Mid Penn’s Tier 1 Capital would be at least $9.7 million, excluding any subsequent net charge-offs and any redemption of the SBLF Preferred Shares (the “Tier 1 Dividend Threshold”).  

 

Dividends are payable quarterly on January 1, April 1, July 1 and October 1 of each year. The dividend rate on the SBLF Preferred will remain fixed at 1.00% until January 2016, when it will increase to 9.00%.

 

 

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Effects of Government Policy and Potential Changes in Regulation

 

Changes in regulations applicable to Mid Penn or the Bank, or shifts in monetary or other government policies, could have a material effect on our business. Mid Penn’s and the Bank’s business is also affected by the state of the financial services industry in general.  As a result of legal and industry changes, management believes that the industry will continue to experience an increased rate of change as the financial services industry strives for greater product offerings, market share and economies of scale.

 

From time to time, legislation is enacted that has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions.  Proposals to change the laws and regulations governing the operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, and before various bank regulatory agencies.  Mid Penn cannot predict the likelihood of any major changes or the impact such changes might have on Mid Penn and/or the Bank.  Various congressional bills and other proposals have proposed a sweeping overhaul of the banking system, including provisions for: limitations on deposit insurance coverage; changing the timing and method financial institutions use to pay for deposit insurance; expanding the power of banks by removing the restrictions on bank underwriting activities; and tightening the regulation of bank derivatives activities; and allowing commercial enterprises to own banks.

 

Mid Penn’s earnings are, and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies.  The monetary policies of the Federal Reserve have had, and will likely continue to have, an impact on the operating results of commercial banks because of the Federal Reserve’s power to implement national monetary policy to, among other things, curb inflation or combat recession.  The Federal Reserve has a major impact on the levels of bank loans, investments and deposits through its open market operations in United States government securities and through its regulation of, among other things, the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature and impact of future changes in monetary and fiscal policies.

 

From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of Mid Penn and the Bank.  As a consequence of the extensive regulation of commercial banking activities in the United States, the Bank’s business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing business.  Congress is currently debating major legislation that may fundamentally change the regulatory oversight of banking institutions in the United States.  Whether any legislation will be enacted or additional regulations will be adopted, and how they might impact Mid Penn cannot be determined at this time.

 

Environmental Laws

 

Management does not anticipate that compliance with environmental laws and regulations will have any material effect on Mid Penn’s capital, expenditures, earnings, or competitive position.  However, environmentally related hazards have become a source of high risk and potentially unlimited liability for financial institutions.

 

Additionally, the Pennsylvania Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act provides, among other things, protection to lenders from environmental liability and remediation costs under the environmental laws for releases and contamination caused by others.  A lender who engages in activities involved in the routine practices of commercial lending, including, but not limited to, the providing of financial services, holding of security interests, workout practices, foreclosure or the recovery of funds from the sale of property shall not be liable under the environmental acts or common law equivalents to the Pennsylvania Department of Environmental Resources or to any other person by virtue of the fact that the lender engages in such commercial lending practice.  A lender, however, will be liable if it, its employees or agents, directly cause an immediate release or directly exacerbate a release of regulated substance on or from the property, or known and willfully compelled the borrower to commit an action which caused such release or violate an environmental act.  The Pennsylvania Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act does not limit federal liability which still exists under certain circumstances.

 

Corporate Governance

 

The Sarbanes-Oxley Act of 2002 and related regulations adopted by the SEC and Nasdaq address the following other issues:  corporate governance, auditor independence and accounting standards, executive compensation, insider loans, whistleblower protection, and enhanced and timely disclosure of corporate information.  Mid Penn has prepared policies, procedures, and systems designed to ensure compliance with these regulations. 

 

Available Information

 

Mid Penn’s common stock is registered under Section 12(b) of the Securities Exchange Act of 1934 and is traded on the NASDAQ Stock Market under the trading symbol MPB.  Mid Penn is subject to the informational requirements of the Exchange Act, and, accordingly, files reports, proxy statements and other information with the Securities and Exchange Commission.  The reports, proxy statements and other information filed with the SEC are available for inspection and copying at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549.  You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

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Mid Penn is an electronic filer with the SEC.  The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s Internet site address is www.sec.gov.

 

Mid Penn’s headquarters are located at 349 Union Street, Millersburg, Pennsylvania 17061, and its telephone number is 1-866-642-7736.  Mid Penn’s Internet address is midpennbank.com.  Mid Penn makes available through its website, free of charge, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after filing with the Securities and Exchange Commission.  Mid Penn has adopted a Code of Ethics that applies to all employees.  This document is also available on Mid Penn’s website.  The information included on our website is not a part of this document.

 

 

ITEM 1A.    RISK FACTORS

 

Mid Penn is subject to interest rate risk

 

Mid Penn’s earnings and cash flows are largely dependent upon its net interest income.  Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds.  Interest rates are highly sensitive to many factors that are beyond Mid Penn’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System.  Changes in monetary policy, including changes in interest rates, could influence not only the interest Mid Penn receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) Mid Penn’s ability to originate loans and obtain deposits, (ii) the fair value of Mid Penn’s financial assets and liabilities, and (iii) the average duration of Mid Penn’s mortgage-backed securities portfolio.  If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, Mid Penn’s net interest income, and therefore earnings, could be adversely affected.  Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

 

Management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on Mid Penn’s results of operations.  Any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on Mid Penn’s financial condition and results of operations.

 

Mid Penn is subject to lending risk

 

As of December 31, 2014, approximately 72.0% of Mid Penn’s loan portfolio consisted of commercial and industrial, construction and commercial real estate loans.  These types of loans are generally viewed as having more risk of default than residential real estate loans or consumer loans.  These types of loans are also typically larger than residential real estate loans and consumer loans.  Because Mid Penn’s loan portfolio contains a significant number of commercial and industrial, construction and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans.  An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for possible loan and lease losses and an increase in loan charge-offs, all of which could have a material adverse effect on Mid Penn’s financial condition and results of operations.

 

Mid Penn’s allowance for possible loan and lease losses may be insufficient

 

Mid Penn maintains an allowance for possible loan and lease losses, which is a reserve established through provisions for possible losses charged to expense, that represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans.  The allowance, in the judgment of management, is necessary to reserve for estimated loan and lease losses and risks inherent in the loan portfolio.  The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio.  The determination of the appropriate level of the allowance for possible loan and lease losses inherently involves a high degree of subjectivity and requires Mid Penn to make significant estimates of current credit risks and future trends, all of which may undergo material changes.  Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem credits and other factors, both within and outside of Mid Penn’s control, may require an increase in the allowance.  In addition, bank regulatory agencies periodically review Mid Penn’s allowance for possible loan and lease losses and may require an increase in the provision for possible loan and lease losses or the recognition of further loan charge-offs, based on judgments different than those of management.  In addition, if charge-offs in future periods exceed the allowance, Mid Penn may need additional provisions to increase the allowance for possible loan and lease losses.  Any increases in the allowance will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on Mid Penn’s financial condition and results of operations.

 

Competition from other financial institutions may adversely affect Mid Penn’s profitability

 

Mid Penn’s banking subsidiary faces substantial competition in originating both commercial and consumer loans.  This competition comes principally from other banks, credit unions, savings institutions, mortgage banking companies and other lenders.  Many of its competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office

 

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locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs.  This competition could reduce Mid Penn’s net income by decreasing the number and size of loans that its banking subsidiary originates and the interest rates it may charge on these loans.

 

In attracting business and consumer deposits, its banking subsidiary faces substantial competition from other insured depository institutions such as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds. Many of Mid Penn’s competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand recognition, and more convenient branch locations.  These competitors may offer higher interest rates than Mid Penn, which could decrease the deposits that Mid Penn attracts or require Mid Penn to increase its rates to retain existing deposits or attract new deposits.  Increased deposit competition could adversely affect Mid Penn’s ability to generate the funds necessary for lending operations.  As a result, Mid Penn may need to seek other sources of funds that may be more expensive to obtain and could increase its cost of funds.

 

Mid Penn’s banking subsidiary also competes with non-bank providers of financial services, such as brokerage firms, consumer finance companies, credit unions, insurance agencies and governmental organizations, which may offer more favorable terms.  Some of its non-bank competitors are not subject to the same extensive regulations that govern its banking operations.  As a result, such non-bank competitors may have advantages over Mid Penn’s banking subsidiary in providing certain products and services.  This competition may reduce or limit Mid Penn’s margins on banking services, reduce its market share and adversely affect its earnings and financial condition.

 

We have shares of preferred stock outstanding which have preference over the common stock as to dividends and liquidation distributions, among other preferential rights

 

As of the date hereof, we have issued and outstanding 5,000 shares of 7% Non-Cumulative, Non-Voting, Non-Convertible Perpetual Preferred Stock, Series B, par value $1.00 per share (the “Series B Preferred Stock”) and, in connection with the acquisition of Phoenix, the SBLF Preferred Shares.  The Series B Preferred Stock and the SBLF Preferred Shares afford holders thereof a preference to assets upon liquidation and an annual dividend which rights impact the outstanding shares of common stock.    The dividends declared on the Series B Preferred Stock and the SBLF Preferred Shares reduce income available to common shareholders and Mid Penn’s earnings per common share.  In the event of a liquidation of Mid Penn's assets, holders of Series B Preferred Stock and the SBLF Preferred Shares will have a right to receive as a liquidation payment any remaining assets of Mid Penn prior to any distributions to holders of the common stock, and the holders of the Series B Preferred Stock and the SBLF Preferred Shares may be able to block actions otherwise approved by the holders of the common stock if such action is adverse to their rights.

 

The Basel III capital requirements may require us to maintain higher levels of capital, which could reduce our profitability

 

Basel III targets higher levels of base capital, certain capital buffers and a migration toward common equity as the key source of regulatory capital.  Although the new capital requirements are phased in over the next decade and may change substantially before final implementation, Basel III signals a growing effort by domestic and international bank regulatory agencies to require financial institutions, including depository institutions, to maintain higher levels of capital.  The direction of the Basel III implementation activities or other regulatory viewpoints could require additional capital to support our business risk profile prior to final implementation of the Basel III standards.  If Mid Penn is required to maintain higher levels of capital, Mid Penn may have fewer opportunities to invest capital into interest-earning assets, which could limit the profitable business operations available to Mid Penn and adversely impact our financial condition and results of operations.

 

If Mid Penn’s information systems are interrupted or sustain a breach in security, those events may negatively affect Mid Penn’s financial performance and reputation

 

In conducting its business, Mid Penn relies heavily on its information systems.  Maintaining and protecting those systems is difficult and expensive, as is dealing with any failure, interruption, or breach in security of these systems, whether due to acts or omissions by Mid Penn or by a third party, and whether intentional or not.  Any such failure, interruption, or breach could result in failures or disruptions in Mid Penn’s customer relationship management, general ledger, deposit, loan and other systems.  A breach of Mid Penn’s information security may result from fraudulent activity committed against Mid Penn or its clients, resulting in financial loss to Mid Penn or its clients, or privacy breaches against Mid Penn’s clients.  Such fraudulent activity may consist of check fraud, electronic fraud, wire fraud, “phishing”, social engineering or other deceptive acts.  The policies, procedures, and technical safeguards put in place by Mid Penn to prevent or limit the effect of any failure, interruption, or security breach of its information systems may be insufficient to prevent or remedy the effects of any such occurrences.  The occurrence of any failures, interruptions, or security breaches of Mid Penn’s information systems could damage Mid Penn’s reputation, cause Mid Penn to incur additional expenses, result in online services or other businesses, subject Mid Penn to regulatory sanctions or additional regular scrutiny, or expose Mid Penn to civil litigation and possible financial liability, any of which could have a material adverse effect on Mid Penn’s financial condition and results of operations.

 

Mid Penn’s controls and procedures may fail or be circumvented

 

Management periodically reviews and updates Mid Penn’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures.  Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met.  Any failure or circumvention of Mid Penn’s controls and

 

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procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on Mid Penn’s business, results of operations, and financial condition.

 

Mid Penn’s ability to pay dividends on its common stock, Series B Preferred Stock and SBLF Preferred Shares depends primarily on dividends from its banking subsidiary, which is subject to regulatory limits

 

Mid Penn is a bank holding company and its operations are conducted by its subsidiaries.  Its ability to pay dividends on its common stock, Series B Preferred Stock and SBLF Preferred Shares depends on its receipt of dividends from the Bank.  Dividend payments from its banking subsidiary are subject to legal and regulatory limitations, generally based on net profits, and retained earnings, imposed by the various banking regulatory agencies.  The ability of the Bank to pay dividends is also subject to their profitability, financial condition, capital expenditures and other cash flow requirements.  There is no assurance that Mid Penn’s subsidiaries will be able to pay dividends in the future or that Mid Penn will generate adequate cash flow to pay dividends in the future.  Federal Reserve policy, which applies to Mid Penn as a registered bank holding company, also provides that dividends by bank holding companies should generally be paid out of current earnings looking back over a one-year period.  Mid Penn’s failure to pay dividends on its common stock could have a material adverse effect on the market price of its common stock.

 

The terms of the SBLF Preferred Shares impose limits on the ability of Mid Penn to pay dividends and repurchase shares of common stock.  Under the terms of the SBLF Preferred Shares, no repurchases may be effected, and no dividends may be declared or paid on preferred shares ranking pari passu with the SBLF Preferred Shares (such as the Series B Preferred Stock), junior preferred shares, or other junior securities (including the common stock) during the current quarter and for the next three quarters following the failure to declare and pay dividends on the SBLF Preferred Shares, except that, in any such quarter in which the dividend is paid, dividend payments on shares ranking pari passu may be paid to the extent necessary to avoid any resulting material covenant breach.

 

Under the terms of the SBLF Preferred Shares, Mid Penn may only declare and pay a dividend on the common stock or other stock junior to the SBLF Preferred Shares, or repurchase shares of any such class or series of stock, if, after payment of such dividend, the dollar amount of Mid Penn’s Tier 1 Capital would be at least $9.7 million, excluding any subsequent net charge-offs and any redemption of the SBLF Preferred Shares.

 

The 1.00% dividend rate on the SBLF Preferred Shares will remain fixed at this level until January 2016, when it will increase to 9.00%

 

The per annum dividend rate on the SBLF Preferred Shares is fixed at 1.00% until January 2016, when it will increase to 9.00%.  Depending on Mid Penn’s financial condition at the time, this increase in the dividend rate could have a material negative effect on its liquidity and results of operations.

 

Mid Penn’s profitability depends significantly on economic conditions in central Pennsylvania

 

Unlike larger or regional lenders that are more geographically diversified, Mid Penn’s success is dependent to a significant degree on economic conditions in central Pennsylvania, especially in eastern Cumberland, Dauphin, northwestern Lancaster, western Luzerne, southern Northumberland, and Schuylkill Counties, which Mid Penn defines as our primary market.  The banking industry is affected by general economic conditions including the effects of inflation, recession, unemployment, real estate values, trends in the national and global economics, and other factors beyond our control.  An economic recession or a delayed recovery over a prolonged period of time in Central Pennsylvania area could cause an increase in the level of the Bank’s non-performing assets and loan and lease losses, thereby causing operating losses, impairing liquidity, and eroding capital. Mid Penn cannot assure you that adverse changes in the local economy would not have a material adverse effect on Mid Penn’s consolidated financial condition, results of operations, and cash flows.

 

Mid Penn may not be able to attract and retain skilled people

 

Mid Penn’s success depends, in large part, on its ability to attract and retain key people.  Competition for the best people in most activities engaged in by Mid Penn can be intense and Mid Penn may not be able to hire people or to retain them.  The unexpected loss of services of one or more of Mid Penn’s key personnel could have a material adverse impact on Mid Penn’s business because of their skills, knowledge of Mid Penn’s market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.

 

Mid Penn is subject to claims and litigation pertaining to fiduciary responsibility

 

From time to time, customers make claims and take legal action pertaining to Mid Penn’s performance of its fiduciary responsibilities.  Whether customer claims and legal action related to Mid Penn’s performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to Mid Penn they may result in significant financial liability and/or adversely affect the market perception of Mid Penn and its products and services as well as impact customer demand for those products and services.  Any financial liability or reputation damage could have a material adverse effect on Mid Penn’s business, which, in turn, could have a material adverse effect on Mid Penn’s financial condition and results of operations.

 

 

14


 

MID PENN BANCORP, INC.

 

The trading volume in Mid Penn’s common stock is less than that of other larger financial services companies

 

Mid Penn’s common stock is listed for trading on NASDAQ; the trading volume in its common stock, however, is less than that of other larger financial services companies.  A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of Mid Penn’s common stock at any given time.  This presence depends on the individual decisions of investors and general economic and market conditions over which Mid Penn has no control.  Given the lower trading volume of Mid Penn’s common stock, significant sales of Mid Penn’s common stock, or the expectation of these sales, could cause Mid Penn’s stock price to fall.

 

Mid Penn operates in a highly regulated environment and may be adversely affected by changes in federal, state and local laws and regulations

 

Mid Penn is subject to extensive regulation, supervision and examination by federal and state banking authorities.  Any change in applicable regulations or federal, state or local legislation could have a substantial impact on Mid Penn and its operations.  Additional legislation and regulations that could significantly affect Mid Penn’s powers, authority and operations may be enacted or adopted in the future, which could have a material adverse effect on its financial condition and results of operations.  Further, regulators have significant discretion and authority to prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their supervisory and enforcement duties.  The exercise of regulatory authority may have a negative impact on Mid Penn’s results of operations and financial condition.

 

The potential exists for additional federal or state laws and regulations, or changes in policy, affecting many aspects of our operations, including capital levels, lending and funding practices, and liquidity standards.  New laws and regulations may increase our costs of regulatory compliance and of doing business and otherwise affect our operations, and may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge and our ongoing operations, costs and profitability.

 

The soundness of other financial institutions may adversely affect Mid Penn

 

Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships.  Mid Penn has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional clients.  Many of these transactions expose Mid Penn to credit risk in the event of a default by a counterparty or client.  In addition, Mid Penn’s credit risk may be exacerbated when the collateral held by Mid Penn cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to Mid Penn.  Any such losses could have a material adverse effect on the Mid Penn’s financial condition and results of operations.

 

Prior levels of market volatility were unprecedented and future volatility may have materially adverse effects on our liquidity and financial condition

 

In the recent past, the capital and credit markets experienced extreme volatility and disruption for more than two years.  In some cases, the markets exerted downward pressure on stock prices, security prices, and credit availability for certain issuers without regard to their underlying financial strength.  If such levels of market disruption and volatility return, there can be no assurance that we will not experience adverse effects, which may be material, on our liquidity, financial condition, and profitability.

 

Mid Penn’s banking subsidiary may be required to pay higher FDIC insurance premiums or special assessments which may adversely affect its earning

 

Poor economic conditions and the resulting bank failures have increased the costs of the FDIC and depleted the DIF.  Additional bank failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue special assessments.  Mid Penn generally is unable to control the amount of premiums or special assessments that its subsidiary is required to pay for FDIC insurance.  Any future changes in the calculation or assessment of FDIC insurance premiums may have a material adverse effect on our results of operations, financial condition, and our ability to continue to pay dividends on our common stock at the current rate or at all.

 

Pennsylvania Business Corporation Law and various anti-takeover provisions under our articles and bylaws could impede the takeover of Mid Penn

 

Various Pennsylvania laws affecting business corporations may have the effect of discouraging offers to acquire Mid Penn, even if the acquisition would be advantageous to shareholders.  In addition, we have various anti-takeover measures in place under our articles of incorporation and bylaws, including a supermajority vote requirement for mergers, a staggered board of directors, and the absence of cumulative voting.  Any one or more of these measures may impede the takeover of Mid Penn without the approval of our board of directors and may prevent our shareholders from taking part in a transaction in which they could realize a premium over the current market price of our common stock.

 

 

15


 

MID PENN BANCORP, INC.

 

Mid Penn may need to or be required to raise additional capital in the future, and capital may not be available when needed and on terms favorable to current shareholders

 

Federal banking regulators require Mid Penn and its subsidiary bank to maintain adequate levels of capital to support their operations.  These capital levels are determined and dictated by law, regulation, and banking regulatory agencies.  In addition, capital levels are also determined by Mid Penn’s management and board of directors, based on capital levels that they believe are necessary to support Mid Penn’s business operations.

 

If Mid Penn raises capital through the issuance of additional shares of its common stock or other securities, it would likely dilute the ownership interests of current investors and could dilute the per share book value and earnings per share of its common stock.  Furthermore, a capital raise through issuance of additional shares may have an adverse impact on Mid Penn’s stock price.  New investors also may have rights, preferences and privileges senior to Mid Penn’s current shareholders, which may adversely impact its current shareholders.

 

Mid Penn’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of its control, and on its financial performance.  Accordingly, Mid Penn cannot be certain of its ability to raise additional capital on acceptable terms and acceptable time frames or to raise additional capital at all.  If Mid Penn cannot raise additional capital in sufficient amounts when needed, its ability to comply with regulatory capital requirements could be materially impaired.  Additionally, the inability to raise capital in sufficient amounts may adversely affect Mid Penn’s financial condition and results of operations.

 

If we conclude that the decline in the value of any of our investment securities is other than temporary, we are required to write down the value of that security through a charge to earnings

 

We review our investment securities portfolio at each quarter-end reporting period to determine whether the fair value is below the current carrying value.  When the fair value of any of our investment securities has declined below its carrying value, we are required to assess whether the decline is other than temporary.  If we conclude that the decline is other than temporary, we are required to write down the value of that security through a charge to earnings.  Changes in the expected cash flows of these securities and/or prolonged price declines have resulted and may result in our concluding in future periods that there is additional impairment of these securities that is other than temporary, which would require a charge to earnings to write down these securities to their fair value.  Due to the complexity of the calculations and assumptions used in determining whether an asset is impaired, the impairment disclosed may not accurately reflect the actual impairment in the future.

 

Mid Penn’s operations of its business, including its interaction with customers, are increasingly done via electronic means, and this has increased its risks related to cyber security

 

Mid Penn is exposed to the risk of cyber-attacks in the normal course of business.  In general, cyber incidents can result from deliberate attacks or unintentional events.  Mid Penn has observed an increased level of attention in the industry focused on cyber-attacks that include, but are not limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption.  To combat against these attacks, policies and procedures are in place to prevent or limit the effect of the possible security breach of its information systems and it has insurance against some cyber-risks and attacks.  While Mid Penn has not incurred any material losses related to cyber-attacks, nor is it aware of any specific or threatened cyber-incidents as of the date of this report, it may incur substantial costs and suffer other negative consequences if it falls victim to successful cyber-attacks.  Such negative consequences could include remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused; deploying additional personnel and protection technologies, training employees, and engaging third party experts and consultants; lost revenues resulting from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; litigation; and reputational damage adversely affecting customer or investor confidence.

 

Mid Penn is subject to environmental liability risk associated with lending activities

 

A significant portion of Mid Penn’s loan portfolio is secured by real property.  During the ordinary course of business, Mid Penn may foreclose on and take title to properties securing certain loans.  In doing so, there is a risk that hazardous or toxic substances could be found on these properties.  If hazardous or toxic substances are found, Mid Penn may be liable for remediation costs, as well as for personal injury and property damage.  Environmental laws may require Mid Penn to incur substantial expenses and may materially reduce the affected property’s value or limit Mid Penn’s ability to use or sell the affected property.  In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws, may increase Mid Penn’s exposure to environmental liability.  Although Mid Penn has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards.  The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on Mid Penn’s financial condition and results of operations.

 

Mid Penn’s financial performance may suffer if its information technology is unable to keep pace with its growth or industry developments

 

Effective and competitive delivery of Mid Penn’s products and services is increasingly dependent upon information technology resources and processes, both those provided internally as well as those provided through third party vendors.  In addition to better serving customers, the effective use of technology increases efficiency and enables Mid Penn to reduce costs.  Mid Penn’s future success will depend, in part, upon its

 

16


 

MID PENN BANCORP, INC.

 

ability to address the needs of its customers by using technology to provide products and services to enhance customer convenience, as well as to create additional efficiencies in its operations.  Many of Mid Penn’s competitors have greater resources to invest in technological improvements.  Additionally, as technology in the financial services industry changes and evolves, keeping pace becomes increasingly complex and expensive for Mid Penn.  There can be no assurance that Mid Penn will be able to effectively implement new technology-driven products and services, which could reduce its ability to compete effectively.

 

Future credit downgrades of the United States Government due to issues relating to debt and the deficit may adversely affect the Mid Penn

 

As a result of failure of the federal government to reach agreement over federal debt and the ongoing issues connected with the debt ceiling, certain rating agencies placed the United States government’s long-term sovereign debt rating on their equivalent of negative watch and announced the possibility of a rating downgrade.   The rating agencies, due to constraints related to the rating of the United States, also placed government-sponsored enterprises in which Mid Penn invests and receives lines of credit on negative watch and a downgrade of the United States’ credit rating would trigger a similar downgrade in the credit rating of these government sponsored enterprises.  Furthermore, the credit rating of other entities, such as state and local governments, may also be downgraded should the United States credit rating be downgraded.  The impact that a credit rating downgrade may have on the national and local economy could have an adverse effect on Mid Penn’s financial condition and results of operations.

 

 

ITEM 1B.    UNRESOLVED STAFF COMMENTS

 

None

 

 

17


 

MID PENN BANCORP, INC.

 

 

ITEM 2.    PROPERTIES

 

With the exception of the Market Square Office, Derry Street Loan Administrative Office, River Chase Administrative Office, Simpson Ferry Road Office, and the Elizabethtown Office, the Bank owns the properties listed below, as well as certain parking facilities related to its banking offices, all of which are free and clear of any lien.  The Bank’s main office and all branch offices are located in Pennsylvania.  All of these properties are in good condition and are deemed by management to be adequate for the Bank’s purposes.  The table below sets forth the location of each of the Bank’s properties at December 31, 2014.

 

 

 

 

 

 

 

 

 

Property Location

 

Description of Property

 

Property Location

 

Description of Property

 

 

 

 

 

 

 

Millersburg Office

 

 

 

Lykens Office

 

 

349 Union Street

 

Main Office &

 

550 Main Street

 

Branch Office

Millersburg, PA  17061

 

Branch Office

 

Lykens, PA  17048

 

 

 

 

 

 

 

 

 

Elizabethville Office

 

 

 

Allentown Boulevard Office

 

 

4642 State Route 209

 

Branch Office

 

5500 Allentown Boulevard

 

Branch Office

Elizabethville, PA  17023

 

 

 

Harrisburg, PA  17112

 

 

 

 

 

 

 

 

 

Dalmatia Office

 

 

 

Market Square Office

 

 

132 School House Road

 

Branch Office

 

17 N. Second Street

 

Branch Office

Dalmatia, PA  17017

 

 

 

Harrisburg, PA  17101

 

 

 

 

 

 

 

 

 

Carlisle Pike Office

 

 

 

Steelton Office

 

 

4622 Carlisle Pike

 

Branch Office

 

51 South Front Street

 

Branch Office

Mechanicsburg, PA  17050

 

 

 

Steelton, PA  17113

 

 

 

 

 

 

 

 

 

Derry Street Office

 

 

 

Middletown Office

 

 

4509 Derry Street

 

Branch Office

 

1100 Spring Garden Drive

 

Branch Office

Harrisburg, PA 17111

 

 

 

Middletown, PA  17057

 

 

 

 

 

 

 

 

 

Front Street Office

 

 

 

Camp Hill Office

 

 

2615 North Front Street

 

Branch Office

 

2101 Market Street

 

Branch Office

Harrisburg, PA  17110

 

 

 

Camp Hill, PA  17011

 

 

 

 

 

 

 

 

 

Tower City Office

 

 

 

Operations Center

 

 

545 East Grand Avenue

 

Branch Office

 

894 N. River Road

 

Operations Center

Tower City, PA  17980

 

 

 

Halifax, PA  17032

 

 

 

 

 

 

 

 

 

Dauphin Office                                     

 

 

 

River Chase Administrative Office

 

 

1001 Peters Mountain Road           

 

Branch Office

 

4311 North Front Street, Ste. 101

 

Administrative Office

Dauphin, PA  17018

 

 

 

Harrisburg, PA  17110

 

 

 

 

 

 

 

 

 

Derry Street Loan  Administrative

 

 

 

Elizabethtown Office

 

 

Office

 

Administrative Office

 

2305 South Market Street

 

Branch Office

4099 Derry Street

 

 

 

Elizabethtown, PA  17022

 

 

Harrisburg, PA  17111

 

 

 

 

 

 

 

 

 

 

 

 

 

Simpson Ferry Road Office*

 

 

 

 

 

 

5288 Simpson Ferry Road

 

 

 

 

 

 

Mechanicsburg, PA  17055

 

 

 

 

 

 



*  Mid Penn anticipates opening a branch at this location in May 2015.

 

 

18


 

MID PENN BANCORP, INC.

 

 

ITEM 3.    LEGAL PROCEEDINGS

 

Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Corporation. Mid Penn and the Bank have no proceedings pending other than ordinary routine litigation occurring in the normal course of business.  In addition, management does not know of any material proceedings contemplated by governmental authorities against Mid Penn or the Bank or any of its properties.

 

 

ITEM 4.    MINE SAFETY DISCLOSURES

 

Not Applicable

 

 

PART II

 

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER     PURCHASES OF EQUITY SECURITIES

 

The Corporation’s common stock is traded on the NASDAQ Stock Market under the symbol MPB.  The following table shows the range of high and low sale prices for the Corporation’s stock and cash dividends paid for the quarters indicated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

High

 

Low

 

Cash Dividends Paid

Quarter Ended:

 

 

 

 

 

 

 

 

March 31, 2014

$

14.97 

 

$

13.25 

 

$

0.05 

June 30, 2014

 

16.00 

 

 

14.00 

 

 

0.10 

September 30, 2014

 

16.33 

 

 

15.05 

 

 

0.10 

December 31, 2014

 

15.95 

 

 

15.06 

 

 

0.20 

 

 

 

 

 

 

 

 

 

March 31, 2013

$

11.60 

 

$

10.15 

 

$

 -

June 30, 2013

 

11.34 

 

 

9.80 

 

 

0.05 

September 30, 2013

 

12.70 

 

 

10.80 

 

 

0.05 

December 31, 2013

 

14.85 

 

 

11.38 

 

 

0.15 

 

 

Transfer Agent:  Computershare, Attn: Shareholder Services, P.O. Box 30170, College Station, TX  77842-3170.  Phone:  1-800-368-5948.

 

Number of Shareholders:  As of March 6, 2015, there were approximately 1,611 shareholders of record of Mid Penn’s common stock.

 

Dividends:  Cash dividends of $0.45 were paid in 2014, while $0.25 was paid in both 2013 and 2012. 

 

Dividend Reinvestment and Stock Purchases:  Shareholders of Mid Penn may acquire additional shares of common stock by reinvesting their cash dividends under the Dividend Reinvestment Plan without paying a brokerage fee.  Voluntary cash contributions may also be made under the Plan.  For additional information about the Plan, contact the Transfer Agent.

 

Annual Meeting:  The Annual Meeting of the Shareholders of Mid Penn is expected to be held at 10:00 a.m. on Tuesday, May 12, 2015, at 31 Bunker Hill Road, Halifax, PA  17032.

 

Accounting, Auditing and Internal Control Complaints:  Information on how to report a complaint regarding accounting, internal accounting controls or auditing matters is available at Mid Penn's website:  midpennbank.com.

 

 

19


 

MID PENN BANCORP, INC.

 

Stock Performance Graph

 

\\W2k-fs-1\f\Documents\edwardw\MPB 10K Files\2014 10K\2014 Stock Performance Graph.JPG

 

 

 

Period Ending

Index

12/31/09

12/31/10

12/31/11

12/31/12

12/31/13

12/31/14

Mid Penn Bancorp, Inc.

100.00 
72.89 
75.04 
114.24 
149.43 
166.80 

Russell 3000

100.00 
116.93 
118.13 
137.52 
183.66 
206.72 

Mid-Atlantic Custom Peer Group*

100.00 
109.30 
109.36 
127.36 
150.73 
164.07 

 

 

 

 

 

 

 

*Mid-Atlantic Custom Peer Group consists of Mid-Atlantic commercial banks with assets less than $1B.

 

 

 

 

 

 

 

Source : SNL Financial LC, Charlottesville, VA

 

 

 

 

© 2015

 

 

 

 

 

 

www.snl.com

 

 

 

 

 

 

 

A detailed list of the Banks comprising the Mid-Atlantic Custom Peer Group is incorporated herein by reference to Exhibit 99.1, which is attached to this Annual Report on Form 10-K.

 

20


 

MID PENN BANCORP, INC.

 

 

ITEM 6.    SELECTED FINANCIAL DATA

 

Summary of Selected Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

 

2011

 

2010

INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Interest Income

$

30,627 

 

$

28,983 

 

$

30,366 

 

$

31,545 

 

$

30,148 

Total Interest Expense

 

4,427 

 

 

5,057 

 

 

7,125 

 

 

9,522 

 

 

10,642 

Net Interest Income

 

26,200 

 

 

23,926 

 

 

23,241 

 

 

22,023 

 

 

19,506 

Provision for Loan and Lease Losses

 

1,617 

 

 

1,685 

 

 

1,036 

 

 

1,205 

 

 

2,635 

Noninterest Income

 

3,248 

 

 

3,290 

 

 

3,683 

 

 

2,996 

 

 

3,414 

Noninterest Expense

 

20,668 

 

 

19,391 

 

 

19,693 

 

 

18,048 

 

 

17,121 

Income Before Provision for Income Taxes

 

7,163 

 

 

6,140 

 

 

6,195 

 

 

5,766 

 

 

3,164 

Provision for Income Taxes

 

1,462 

 

 

1,201 

 

 

1,244 

 

 

1,223 

 

 

416 

Net Income

 

5,701 

 

 

4,939 

 

 

4,951 

 

 

4,543 

 

 

2,748 

Series A Preferred Stock Dividends and Discount Accretion

 

 -

 

 

14 

 

 

514 

 

 

514 

 

 

514 

Series B Preferred Stock Dividends

 

350 

 

 

309 

 

 

 -

 

 

 -

 

 

 -

Net Income Available to Common Shareholders

 

5,351 

 

 

4,616 

 

 

4,437 

 

 

4,029 

 

 

2,234 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMMON STOCK DATA PER SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Common Share (Basic)

$

1.53 

 

$

1.32 

 

$

1.27 

 

$

1.16 

 

$

0.64 

Earnings Per Common Share (Fully Diluted)

 

1.53 

 

 

1.32 

 

 

1.27 

 

 

1.16 

 

 

0.64 

Cash Dividends

 

0.45 

 

 

0.25 

 

 

0.25 

 

 

0.20 

 

 

 -

Book Value Per Common Share

 

15.48 

 

 

13.71 

 

 

13.57 

 

 

12.47 

 

 

10.98 

Tangible Book Value Per Common Share

 

15.13 

 

 

13.35 

 

 

13.19 

 

 

12.10 

 

 

10.58 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AVERAGE SHARES OUTSTANDING (BASIC)

 

3,495,705 

 

 

3,491,653 

 

 

3,486,543 

 

 

3,481,414 

 

 

3,479,780 

AVERAGE SHARES OUTSTANDING (FULLY DILUTED)

 

3,495,705 

 

 

3,491,653 

 

 

3,486,543 

 

 

3,481,414 

 

 

3,479,780 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

AT YEAR-END:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available For Sale Investment Securities

$

141,634 

 

$

122,803 

 

$

154,295 

 

$

159,043 

 

$

70,702 

Loans and Leases, Net of Unearned Interest

 

571,533 

 

 

546,462 

 

 

484,220 

 

 

482,717 

 

 

467,735 

Allowance for Loan and Lease Losses

 

6,716 

 

 

6,317 

 

 

5,509 

 

 

6,772 

 

 

7,061 

Total Assets

 

755,657 

 

 

713,125 

 

 

705,200 

 

 

715,383 

 

 

637,457 

Total Deposits

 

637,922 

 

 

608,130 

 

 

625,461 

 

 

634,055 

 

 

554,982 

Short-term Borrowings

 

578 

 

 

23,833 

 

 

 -

 

 

 -

 

 

1,561 

Long-term Debt

 

52,961 

 

 

23,145 

 

 

22,510 

 

 

22,701 

 

 

27,883 

Shareholders' Equity

 

59,130 

 

 

52,916 

 

 

52,220 

 

 

53,452 

 

 

48,201 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RATIOS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on Average Assets

 

0.78% 

 

 

0.71% 

 

 

0.69% 

 

 

0.66% 

 

 

0.44% 

Return on Average Shareholders' Equity

 

9.95% 

 

 

9.37% 

 

 

8.78% 

 

 

8.96% 

 

 

5.71% 

Cash Dividend Payout Ratio

 

29.41% 

 

 

18.94% 

 

 

19.69% 

 

 

17.24% 

 

 

0.00% 

Allowance for Loan and Lease Losses to Loans and Leases

 

1.18% 

 

 

1.16% 

 

 

1.14% 

 

 

1.40% 

 

 

1.51% 

Average Shareholders' Equity to Average Assets

 

7.80% 

 

 

7.56% 

 

 

7.98% 

 

 

7.37% 

 

 

7.73% 

 

 

 

 

 

 

21


 

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

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain of the matters discussed in this document 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,” “anticipate,” “intend,” “plan,” “believe,” “estimate,” and similar expressions are intended to identify such forward-looking statements.

 

Mid Penn’s actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:

 

·

the effects of future economic conditions on Mid Penn and its customers;

·

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

·

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

·

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

·

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

·

the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities and interest rate protection agreements, as well as interest rate risks;

·

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

·

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

·

technological changes;

·

acquisitions and integration of acquired businesses, including Phoenix, which may take longer or be more costly to complete than anticipated, including as a result of unexpected factors or events;

·

the anticipated cost savings and other synergies of acquisitions, including Phoenix, may take longer to be realized or may not be achieved in their entirety, and attrition in key client, partner and other relationships relating to such acquisition may be greater than expected;

·

results of the regulatory examination and supervision process;

·

loss of certain key officers;

·

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

·

acts of war or terrorism;

·

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

·

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

·

volatilities in the securities markets;

·

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

·

slow economic conditions.

 

All written or oral forward-looking statements attributable to Mid Penn are expressly qualified in their entirety by these cautionary statements.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of Mid Penn’s consolidated financial statements and should be read in conjunction with the Consolidated Financial Statements of the Corporation and Notes thereto and other detailed information appearing elsewhere in this Annual Report.  Mid Penn is not aware of any known trends, events, uncertainties or of any current recommendations by the regulatory authorities which, if they were to be implemented, would have a material effect on Mid Penn’s liquidity, capital resources or operations.

 

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.

 

22


 

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

 

Management of the Corporation considers the accounting judgments relating to the allowance for loan and lease losses and the evaluation of the Corporation’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, investment valuation is based on pricing models, quotes for similar investment securities, and observable yield curves and spreads.  In addition to valuation, management must assess whether there are any declines in value below the carrying value of the investments that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of the loss in the consolidated statement of income.

 

Financial Summary

 

The consolidated earnings of Mid Penn are derived primarily from the operations of its wholly owned subsidiary, Mid Penn Bank.

 

2014 versus 2013

 

Mid Penn’s net income available to common shareholders of $5,351,000 for the year 2014 reflects an increase of $735,000, or 15.9%, over the $4,616,000 for the year 2013.  This represents net income in 2014 of $1.53 per common share compared to $1.32 per common share in 2013.

 

Net income available to common shareholders for both the fourth quarter and year of 2014 was impacted by $573,000 in merger and acquisition expenses incurred in conjunction with the acquisition of Phoenix Bancorp, Inc.  Excluding these charges and the corresponding tax impact, net income available to common shareholders for the twelve months ended December 31, 2014 would have been $5,760,000, an increase of $1,144,000, or 24.8%, over the twelve months ended December 31, 2013. 

 

Total assets of Mid Penn grew $42,532,000, or 6.0% in 2014 to close the year at $755,657,000, compared to $713,125,000 at the end of 2013.  The majority of the asset growth was centered in the loan portfolio, which increased $25,071,000, or 4.6%, to $571,533,000.  Mid Penn’s investment portfolio also increased $18,831,000, or 15.3%, to $141,634,000.

 

Total deposits increased $29,792,000, or 4.9%, from $608,130,000 at the end of 2013 to $637,922,000 at December 31, 2014.  This was part of a comprehensive effort to improve Mid Penn’s overall funding mix by reducing reliance on higher-priced money market and certificate of deposit funds and placing greater emphasis on less expensive demand deposits and savings balances.  As a result of these efforts, demand deposits and savings comprise 49.5% of total deposits at the end of 2014 versus 45.9% of total deposits at the end of 2013.  Mid Penn also had increased its long-term debt by $29,816,000, or 128.8%, to $52,961,000 by the end of 2014 to take advantage of low long-term borrowing rates and to provide funds to increase earning assets.  This increase in long-term debt reduced Mid Penn’s short-term borrowing position $23,255,000, or 97.6%, to $578,000 at the end of 2014.

 

Mid Penn’s return on average shareholders’ equity, (“ROE”), a widely recognized performance indicator in the financial industry, was 9.95% in 2014 and 9.37% in 2013.  Return on average assets (“ROA”), another performance indicator, was 0.78% in 2014 and 0.71% in 2013.

 

Mid Penn’s performance during 2014 improved over the results reported in 2013.  This improvement was the result of increasing earning assets, improving cost of funds, improvement in nonperforming loans, and consistent management of controllable expenses throughout 2014.

 

Net interest margin improved to 3.99% in 2014 from 3.80% in 2013.  This improvement was driven by a 15 basis point improvement in the rate on supporting liabilities to 0.71% in 2014 from 0.86% in 2013.  This improvement allowed average interest spread to increase to 3.91% from 3.70% in 2013 and net interest income on a tax equivalent basis to increase to $27,968,000 in 2014 from $25,250,000 in 2013. This increase was achieved in spite of the substantial pool of nonperforming loans being carried on the balance sheet.  The amount of interest income lost on this pool of troubled loans in 2014 amounted to $798,000.  Further discussion of net interest margin can be found in the Net Interest Income section below.

 

Total nonperforming assets decreased $1,168,000 from $12,675,000 in 2013 to $11,507,000 at the end of 2014.  Decreasing nonaccrual loans were the leading source of improvement in nonperforming assets.  Further discussion of these components can be found in the Credit Quality, Credit Risk, and Allowance for Loan and Lease Losses section below.

 

 

23


 

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

Net charge-offs increased to $1,218,000 in 2014 from $877,000 during 2013, mainly due to the impact of two large recoveries in 2013 totaling $429,000.  Gross charge-offs fell $145,000 from $1,473,000 in 2013 to $1,328,000 in 2014.  Mid Penn decreased provision for loan and lease losses from $1,685,000 in 2013 to $1,617,000 in 2014.  This was largely driven by decreasing balances of nonperforming assets within the portfolio.  Further discussion of these issues can be found in the Provision for Loan and Lease Losses section below.

 

The Mid Penn’s tier one capital (to risk weighted assets) of $56,560,000, or 10.1%, and total capital (to risk weighted assets) of $63,336,000, or 11.4%, at December 31, 2014, are above the regulatory requirements.  Tier one capital consists primarily of the Bank’s shareholders' equity and any qualifying preferred stock. Total capital also includes qualifying subordinated debt, if any, and the allowance for loan and lease losses, within permitted limits.  Risk-weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet activities.

 

2013 versus 2012

 

Mid Penn’s net income available to common shareholders of $4,616,000 for the year 2013 reflected an increase of $179,000, or 4.0%, over the $4,437,000 for the year 2012.  This represented net income in 2013 of $1.32 per common share compared to $1.27 per common share in 2012.

 

Total assets of Mid Penn grew $7,925,000, or 1.1%, in 2013 to close the year at $713,125,000, compared to $705,200,000 at year-end 2012.  The majority of the asset growth was centered in the loan portfolio, which increased $62,242,000, or 12.9%, to $546,462,000.  This loan growth was supported by a decrease in investments, which fell to $122,803,000, or 20.4%, from $154,295,000 at the end of 2012.

 

Total deposits decreased $17,331,000, or 2.8%, from $625,461,000 at the end of 2012 to $608,130,000 at December 31, 2013.  This was part of a comprehensive effort to improve Mid Penn’s overall funding mix by reducing reliance on higher-priced money market and certificate of deposit funds and placing greater emphasis on less expensive demand deposits and savings balances.  As a result of these efforts, demand deposits and savings comprised 45.9% of total deposits at the end of 2013 versus 40.2% of total deposits at the end of 2012.  Mid Penn also had shifted to a short-term borrowing position of $23,833,000 as part of its funding strategy by the end of 2013.

 

Mid Penn’s ROE, a widely recognized performance indicator in the financial industry, was 9.37% in 2013 and 8.78% in 2012.  ROA, another performance indicator, was 0.71% in 2013 and 0.69% in 2012.

 

Mid Penn’s performance during 2013 improved over the results reported in 2012.  This improvement was the result of increased loan production, improving cost of funds, improvement in nonperforming loans, and consistent management of controllable expenses throughout 2013.

 

Net interest margin improved to 3.80% in 2013 from 3.63% in 2012.  This improvement was driven by a 34 basis point improvement in the rate on supporting liabilities to 0.86% in 2013 from 1.20% in 2012.  This improvement allowed average interest spread to increase to 3.70% from 3.49% in 2012 and net interest income on a tax equivalent basis to increase to $25,250,000 in 2013 from $24,494,000 in 2012. This increase was achieved in spite of the substantial pool of nonperforming loans being carried on the balance sheet.  The amount of interest income lost on this pool of troubled loans in 2013 amounted to $861,000. 

 

Total nonperforming assets decreased $425,000 from $13,100,000 in 2012 to $12,675,000 at the end of 2013.  Decreasing nonaccrual loans were the leading source of improvement in nonperforming assets. 

 

Net charge-offs decreased to $877,000 in 2013 from $2,299,000 during 2012.  Mid Penn increased provision for loan and lease losses from $1,036,000 in 2012 to $1,685,000 in 2013.  This was largely driven by the increase in loans in the overall portfolio. 

 

Mid Penn’s tier one capital (to risk weighted assets) of $52,693,000, or 9.9%, and total capital (to risk weighted assets) of $59,100,000, or 11.1%, at December 31, 2013, are above the regulatory requirements. 

 

 

 

24


 

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

Net Interest Income

 

Net interest income, Mid Penn's primary source of revenue, represents the difference between interest income and interest expense.  Net interest income is affected by changes in interest rates and changes in average balances (volume) in the various interest-sensitive assets and liabilities.

 

TABLE 1:  AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Income and Rates on a Taxable Equivalent Basis for Years Ended

 

December 31, 2014

 

December 31, 2013

 

December 31, 2012

 

Average

 

 

 

Average

 

Average

 

 

 

Average

 

Average

 

 

 

 

Average

 

Balance

 

Interest

 

Rates

 

Balance

 

Interest

 

Rates

 

Balance

 

Interest

 

Rates

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest Earning Balances

$

6,839 

 

$

41 

 

0.60% 

 

$

14,818 

 

$

109 

 

0.74% 

 

$

26,092 

 

$

236 

 

0.90% 

  Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Taxable

 

62,214 

 

 

1,501 

 

2.41% 

 

 

68,524 

 

 

617 

 

0.90% 

 

 

99,906 

 

 

1,154 

 

1.16% 

     Tax-Exempt

 

74,508 

 

 

3,303 

 

4.43% 

 

 

66,147 

 

 

2,911 

 

4.40% 

 

 

55,033 

 

 

2,609 

 

4.74% 

       Total Securities

 

136,722 

 

 

 

 

 

 

 

134,671 

 

 

 

 

 

 

 

154,939 

 

 

 

 

 

  Federal Funds Sold

 

30 

 

 

 -

 

0.00% 

 

 

3,580 

 

 

11 

 

0.31% 

 

 

6,197 

 

 

16 

 

0.26% 

  Loans and Leases, Net

 

554,970 

 

 

27,427 

 

4.94% 

 

 

508,638 

 

 

26,639 

 

5.24% 

 

 

483,977 

 

 

27,599 

 

5.70% 

  Restricted Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     in Bank Stocks

 

3,063 

 

 

123 

 

4.02% 

 

 

2,545 

 

 

20 

 

0.79% 

 

 

2,772 

 

 

 

0.18% 

  Total Earning Assets

 

701,624 

 

 

32,395 

 

4.62% 

 

 

664,252 

 

 

30,307 

 

4.56% 

 

 

673,977 

 

 

31,619 

 

4.69% 

  Cash and Due from Banks

 

8,460 

 

 

 

 

 

 

 

8,156 

 

 

 

 

 

 

 

8,057 

 

 

 

 

 

  Other Assets

 

24,152 

 

 

 

 

 

 

 

25,472 

 

 

 

 

 

 

 

24,422 

 

 

 

 

 

Total Assets

$

734,236 

 

 

 

 

 

 

$

697,880 

 

 

 

 

 

 

$

706,456 

 

 

 

 

 

LIABILITIES &

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Interest Bearing Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     NOW

$

216,656 

 

 

777 

 

0.36% 

 

$

182,118 

 

 

659 

 

0.36% 

 

$

126,171 

 

 

458 

 

0.36% 

     Money Market

 

201,281 

 

 

1,088 

 

0.54% 

 

 

202,393 

 

 

1,194 

 

0.59% 

 

 

236,434 

 

 

1,992 

 

0.84% 

     Savings

 

30,953 

 

 

16 

 

0.05% 

 

 

29,597 

 

 

15 

 

0.05% 

 

 

28,632 

 

 

14 

 

0.05% 

     Time

 

127,071 

 

 

1,971 

 

1.55% 

 

 

148,863 

 

 

2,568 

 

1.73% 

 

 

180,356 

 

 

3,683 

 

2.04% 

  Short-term Borrowings

 

14,813 

 

 

55 

 

0.37% 

 

 

10,533 

 

 

26 

 

0.25% 

 

 

1,044 

 

 

 

0.29% 

  Long-term Debt

 

30,889 

 

 

520 

 

1.68% 

 

 

16,268 

 

 

595 

 

3.66% 

 

 

22,605 

 

 

975 

 

4.31% 

  Total Interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Bearing Liabilities

 

621,663 

 

 

4,427 

 

0.71% 

 

 

589,772 

 

 

5,057 

 

0.86% 

 

 

595,242 

 

 

7,125 

 

1.20% 

  Demand Deposits

 

49,814 

 

 

 

 

 

 

 

49,318 

 

 

 

 

 

 

 

47,670 

 

 

 

 

 

  Other Liabilities

 

5,491 

 

 

 

 

 

 

 

6,051 

 

 

 

 

 

 

 

7,184 

 

 

 

 

 

  Shareholders' Equity

 

57,268 

 

 

 

 

 

 

 

52,739 

 

 

 

 

 

 

 

56,360 

 

 

 

 

 

Total Liabilities and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

$

734,236 

 

 

 

 

 

 

$

697,880 

 

 

 

 

 

 

$

706,456 

 

 

 

 

 

Net Interest Income

 

 

 

$

27,968 

 

 

 

 

 

 

$

25,250 

 

 

 

 

 

 

$

24,494 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Yield on Interest Earning Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Yield on Earning Assets

 

 

 

 

 

 

4.62% 

 

 

 

 

 

 

 

4.56% 

 

 

 

 

 

 

 

4.69% 

Rate on Supporting Liabilities

 

 

 

 

 

 

0.71% 

 

 

 

 

 

 

 

0.86% 

 

 

 

 

 

 

 

1.20% 

Average Interest Spread

 

 

 

 

 

 

3.91% 

 

 

 

 

 

 

 

3.70% 

 

 

 

 

 

 

 

3.49% 

Net Interest Margin

 

 

 

 

 

 

3.99% 

 

 

 

 

 

 

 

3.80% 

 

 

 

 

 

 

 

3.63% 

 

Interest and average rates are presented on a fully taxable equivalent basis, using an effective tax rate of 34%.  For purposes of calculating loan yields, average loan balances include nonaccrual loans.

 

Loan fees of $749,000, $1,020,000, and $1,148,000 are included with interest income in Table 1 for the years 2014, 2013 and 2012, respectively.

 

 

25


 

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

TABLE 2:  VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

2014 Compared to 2013

 

2013 Compared to 2012

 

Increase (Decrease) Due to Change In:

 

Increase (Decrease) Due to Change In:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable Equivalent Basis

Volume

 

Rate

 

Net

 

Volume

 

Rate

 

Net

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Balances

$

(59)

 

$

(9)

 

$

(68)

 

$

(102)

 

$

(25)

 

$

(127)

Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Taxable

 

(57)

 

 

941 

 

 

884 

 

 

(363)

 

 

(174)

 

 

(537)

  Tax-Exempt

 

368 

 

 

24 

 

 

392 

 

 

527 

 

 

(225)

 

 

302 

Total Investment Securities

 

311 

 

 

965 

 

 

1,276 

 

 

164 

 

 

(399)

 

 

(235)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds Sold

 

(11)

 

 

 -

 

 

(11)

 

 

(7)

 

 

 

 

(5)

Loans and Leases, Net

 

2,427 

 

 

(1,639)

 

 

788 

 

 

1,406 

 

 

(2,366)

 

 

(960)

Restricted Investment Bank Stocks

 

 

 

99 

 

 

103 

 

 

 -

 

 

15 

 

 

15 

Total Interest Income

 

2,672 

 

 

(584)

 

 

2,088 

 

 

1,462 

 

 

(2,774)

 

 

(1,312)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  NOW

 

125 

 

 

(7)

 

 

118 

 

 

203 

 

 

(2)

 

 

201 

  Money Market

 

(6)

 

 

(100)

 

 

(106)

 

 

(286)

 

 

(512)

 

 

(798)

  Savings

 

 -

 

 

 

 

 

 

 -

 

 

 

 

  Time

 

(376)

 

 

(221)

 

 

(597)

 

 

(643)

 

 

(472)

 

 

(1,115)

 Total Interest Bearing Deposits

 

(257)

 

 

(327)

 

 

(584)

 

 

(726)

 

 

(985)

 

 

(1,711)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term Borrowings

 

11 

 

 

18 

 

 

29 

 

 

27 

 

 

(4)

 

 

23 

Long-term Debt

 

535 

 

 

(610)

 

 

(75)

 

 

(273)

 

 

(107)

 

 

(380)

Total Interest Expense

 

289 

 

 

(919)

 

 

(630)

 

 

(972)

 

 

(1,096)

 

 

(2,068)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

$

2,383 

 

$

335 

 

$

2,718 

 

$

2,434 

 

$

(1,678)

 

$

756 

 

The effect of changing volume and rate has been allocated entirely to the rate column.  Tax-exempt income is shown on a tax equivalent basis assuming a federal income tax rate of 34%.

 

During 2014, taxable equivalent net interest income increased $2,718,000, or 10.8%, as compared to an increase of $756,000, or 3.1%, in 2013.  The average balances, effective interest differential, and interest yields for the years ended December 31, 2014, 2013, and 2012 and the components of net interest income, are presented in Table 1.  A comparative presentation of the changes in net interest income for 2014 compared to 2013, and 2013 compared to 2012, is provided in Table 2.  This analysis indicates the changes in interest income and interest expense caused by the volume and rate components of interest earning assets and interest bearing liabilities.

 

The yield on earning assets increased to 4.62% in 2014 from 4.56% in 2013.  The yield on earning assets for 2012 was 4.69%.  The change in the yield on earning assets was due primarily to increases in market interest rates on investment securities and loan volume in 2014.  The increase in loan volume masked the decline in the average rate, which decreased from 5.24% in 2013 to 4.94% in 2014.  The average “prime rate” for 2014, 2013, and 2012 was 3.25%.  The yield on earning assets in 2014 was also negatively impacted by the loss of interest on nonperforming loans.  During 2014, this loss of interest amounted to $798,000.  Had this interest been included in Mid Penn’s earnings, the yield on earning assets would have increased by 12 basis points.

 

Interest expense decreased by $630,000, or 12.5%, in 2014 as compared to a decrease of $2,068,000, or 29.0%, in 2013.  The cost of interest bearing liabilities decreased to 0.71% in 2014 from 0.86% in 2013.  The cost of interest bearing liabilities for 2012 was 1.20%.  The reduction in the cost of interest bearing liabilities was due to changes in market interest rates and Mid Penn’s ability to replace higher-cost time deposits with lower-cost demand deposits.

 

Included in the net interest income increase for the year ended December 31, 2014 is $324,000 in recaptured nonaccrual interest from two large commercial real estate loans to a commercial borrower that were returned to accruing status in June 2014, and does not have a material impact on Mid Penn’s consolidated financial statements.

 

Net interest margin, on a tax equivalent basis was 3.99% in 2014 compared to 3.80% in 2013 and 3.63% in 2012.  The interest rate impact of earning assets and funding sources due to changes in interest rates can be reasonably estimated at current interest rate levels, the options selected

 

26


 

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

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.  Management continues to monitor the net interest margin closely.

 

Provision for Loan and Lease 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.

 

Mid Penn has maintained the allowance for loan and lease losses in accordance with Mid Penn’s assessment process, which took into consideration the risk characteristics of the loan and lease portfolio and shifting collateral values from December 31, 2013 to December 31, 2014.  For the year ended December 31, 2014, the provision for loan and lease losses was $1,617,000, as compared to $1,685,000 for the year ended December 31, 2013.  The allowance for loan and lease losses as a percentage of total loans was 1.18% at December 31, 2014, compared to 1.16% at December 31, 2013 and 1.14% at December 31, 2012. 

 

For the year ended December 31, 2014, Mid Penn had net charge-offs of $1,218,000 compared to net charge-offs of $877,000 during the year ended December 31, 2013.  Loans charged off during 2014 were comprised of 15 commercial real estate loans totaling $1,057,000.  Eight of these loans totaling $441,000 were to three borrowers with the remaining loans to unrelated borrowers.  In addition, there were charge-offs for five residential real estate loans to unrelated borrowers totaling $133,000, three commercial and industrial loans to unrelated borrowers totaling $62,000, and one home equity loan representing $43,000 of the total charged off during 2014.  The remaining $33,000 was comprised of various consumer loans to unrelated borrowers. 

 

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.

 

Several factors contributed to the decrease in provision expense in 2014.  The first element was the required quantitative allowance on loans deemed impaired within the portfolio.  While total impaired loans increased $17,000, from $10,912,000 at December 31, 2013 to $10,929,000 at December 31, 2014, the specific reserves required on these impaired loans decreased $299,000, from $1,933,000 at December 31, 2013 to $1,634,000 at December 31, 2014 due to improved collateral coverage within this group of loans.  The second element was the required quantitative allowance on classified loans within the portfolio that are not deemed to be impaired.  Loans internally classified as special mention increased from $4,214,000 at December 31, 2013 to $6,145,000 at December 31, 2014, or an increase of $1,931,000.  Loans internally classified as substandard but not impaired decreased $527,000 from $3,960,000 at December 31, 2013 to $3,433,000 at December 31, 2014.  These changes resulted in a net increase in special mention and classified loans of $1,404,000 during 2014.  This increase was coupled with an increase in the historical loss experience within these segments of the portfolio based upon current experience in the portfolio, which resulted in an increase in the quantitative allowance for classified loans of $422,000.  The final element was the qualitative segment of the allowance for loan and lease losses increased $87,000 to $3,769,000 at December 31, 2014, from $3,682,000 at December 31, 2013.  This increase was primarily the result of the growth in the overall loan and lease portfolio.  The combination of the shifting components and migrating loss experience resulted in an overall increase of $210,000 in required balances in the allowance for loan and lease losses.  The impact of the required reserves, coupled with the specific mix of loan charge-off and recoveries during the year led to a slight decline in the provision for loan and lease losses during 2014 versus 2013.

 

 

27


 

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

A summary of charge-offs and recoveries of loans and leases are presented in Table 3.

 

TABLE 3:  ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Years ended December 31,

 

2014

 

2013

 

2012

 

2011

 

2010

Balance, beginning of year

$

6,317 

 

$

5,509 

 

$

6,772 

 

$

7,061 

 

$

7,686 

Loans and leases charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate, construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  and land development

 

1,057 

 

 

936 

 

 

499 

 

 

545 

 

 

1,413 

Commercial, industrial and agricultural

 

62 

 

 

183 

 

 

834 

 

 

546 

 

 

787 

Real estate - residential

 

133 

 

 

167 

 

 

195 

 

 

310 

 

 

858 

Consumer

 

76 

 

 

187 

 

 

860 

 

 

142 

 

 

146 

Leases

 

 -

 

 

 -

 

 

 -

 

 

44 

 

 

230 

Total loans and leases charged off

 

1,328 

 

 

1,473 

 

 

2,388 

 

 

1,587 

 

 

3,434 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries on loans and leases previously

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate, construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  and land development

 

13 

 

 

286 

 

 

15 

 

 

26 

 

 

21 

Commercial, industrial and agricultural

 

14 

 

 

193 

 

 

31 

 

 

10 

 

 

Real estate - residential

 

20 

 

 

23 

 

 

 -

 

 

19 

 

 

70 

Consumer

 

63 

 

 

92 

 

 

43 

 

 

32 

 

 

80 

Leases

 

 -

 

 

 

 

 -

 

 

 

 

 -

Total loans and leases recovered

 

110 

 

 

596 

 

 

89 

 

 

93 

 

 

174 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net charge-offs

 

1,218 

 

 

877 

 

 

2,299 

 

 

1,494 

 

 

3,260 

Provision for loan and lease losses

 

1,617 

 

 

1,685 

 

 

1,036 

 

 

1,205 

 

 

2,635 

Balance, end of year

$

6,716 

 

$

6,317 

 

$

5,509 

 

$

6,772 

 

$

7,061 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31,

 

2014

 

2013

 

2012

 

2011

 

2010

Ratio of net charge-offs during the year

 

 

 

 

 

 

 

 

 

  to average loans and leases outstanding during

 

 

 

 

 

 

 

 

 

  the year, net of unearned discount

0.22% 

 

0.17% 

 

0.48% 

 

0.31% 

 

0.69% 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses as a percentage

 

 

 

 

 

 

 

 

 

  of total loans and leases at December 31

1.18% 

 

1.16% 

 

1.14% 

 

1.40% 

 

1.51% 

 

 

 

 

 

 

 

 

 

 

Allowance for loan and lease losses as a percentage

 

 

 

 

 

 

 

 

 

  of non-performing assets at December 31

58.36% 

 

49.84% 

 

42.05% 

 

50.91% 

 

35.05% 

 

 

28


 

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

Noninterest Income

 

2014 versus 2013

 

Income from fiduciary activities for 2014 was $552,000, a $60,000, or 12.2% increase from $492,000 in 2013.  This revenue source is comprised of fees generated by Mid Penn’s Trust department and fees from the sale of third-party mutual funds and annuities to the Bank’s retail and commercial customers.  Assets under management in the areas of Trust and Wealth Management increased from $26,054,000 at the end of 2013 to $46,859,000 at the end of 2014 due to more active marketing of these services to potential customers.  This increase in assets under management, which are not a component of Mid Penn’s consolidated balance sheets, accounted for the increased fee income during 2014.

 

Mid Penn recognized gains on sale of investment securities in 2014 of $168,000 as a result of efforts to position the portfolio to provide improved earnings and cash flow in support of future loan growth, down $52,000 from the $220,000 recorded in 2013.

 

Mortgage refinancing activity decreased $35,000 or 10.1% to $313,000 during 2014 from $348,000 in 2013 due to mortgage rate increases.  While home purchase activity improved throughout the year, it did not rebound enough to compensate for the decline throughout our market area during the first quarter of 2014 due to harsh winter weather conditions.

 

Merchant services revenue, which is derived from the interchange fee income received as a result of customers utilizing Mid Penn as their credit card processor, decreased to $254,000 in 2014, a decline of $76,000, or 23.0%, compared to $330,000 in 2013.  The decrease was mainly due to increased competition in this business line as more financial institutions pursued additional revenue sources, which hindered Mid Penn’s ability to price as it did in 2013.

 

During 2014, Mid Penn began selling the guaranteed portion of Small Business Association (“SBA”) loans in the secondary market.  This new business activity generated $119,000 in fee income during the year.

 

The decline in other income of $72,000, or 12.3% from 2013 can be traced to the recognition in 2013 of a refund of collection costs on a previously troubled loan and a refund of previously paid sales taxes.

 

2013 versus 2012

 

Income from fiduciary activities for 2013 was $492,000, an $83,000, or 14.4%, decrease from $575,000 in 2012.  Fees from third-party mutual fund and annuity sales were $267,000 in 2013 and $389,000 in 2012. This decline in fee revenue was responsible for the variance from 2012.

 

Mid Penn recognized gains on sale of investment securities in 2013 of $220,000 and $267,000 in 2012 as a result of efforts to position the portfolio to provide improved earnings and cash flow in support of future loan growth.

 

Mortgage banking income suffered from increasing mortgage rates earlier in the year, which effectively shut off the flow of customers seeking to refinance their existing mortgages from higher rates.  Mortgage banking income for 2013 was $348,000, a decrease of $327,000, or 48.4%, from $675,000 in 2012.

 

Merchant services revenue increased to $330,000 in 2013, an increase of $74,000, or 28.9%, compared to $256,000 for 2012.  Sales efforts in this area were also very positive in 2013, adding to the enhanced revenue.

 

TABLE 4:  NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Years ended December 31,

 

2014

 

2013

 

2012

Income from fiduciary activities

$

552 

 

$

492 

 

$

575 

Service charges on deposits

 

584 

 

 

576 

 

 

565 

Net gain on sales of investment securities

 

168 

 

 

220 

 

 

267 

Earnings from cash surrender value of life insurance

 

201 

 

 

231 

 

 

247 

Mortgage banking income

 

313 

 

 

348 

 

 

675 

ATM debit card interchange income

 

544 

 

 

508 

 

 

472 

Merchant services income

 

254 

 

 

330 

 

 

256 

Gain on sales of SBA loans

 

119 

 

 

 -

 

 

 -

Other income

 

513 

 

 

585 

 

 

626 

Total Noninterest Income

$

3,248 

 

$

3,290 

 

$

3,683 

 

 

29


 

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

Noninterest Expense

 

2014 versus 2013

 

Occupancy expense increased $185,000 to $1,313,000 in 2014.  This expense area was negatively impacted by harsh weather conditions during the first and early second quarters of 2014.  Increased snow removal and heating costs were incurred during this period.

 

Pennsylvania Bank Shares tax expense decreased $99,000 to $365,000 in 2014 due to a statutory change in the calculation method.

 

Legal and professional fees decreased from $705,000 in 2013 to $516,000 in 2014, due to a decrease in consultant expenses over the same period last year, which included one-time set-up fees associated with the migration of Mid Penn’s core banking data from an in-house environment to a service bureau hosted platform in 2013. 

 

Loss (gain) on sale/write-down of foreclosed assets went from $302,000 of income in 2013 to $204,000 of expense in 2014 due to the write-down of foreclosed assets as a result of updated appraisals on subject properties within the portfolio during 2014 and the recognition of a $340,000 gain on the sale of a property during the second quarter of 2013.

 

One-time merger and acquisition expenses of $573,000 in connection with the acquisition of Phoenix were incurred during 2014.

 

2013 versus 2012

 

Salaries and employee benefits represented the major component of noninterest expense.  During 2013, increases in the workforce primarily included adding experienced team members to add depth to the sales and support areas of Mid Penn.  In 2013, Mid Penn also recognized a full year of salary and employee benefits expense from the 2012 additions within the support functions throughout the Corporation to enhance controls and support future growth.  Commissions paid to employees in the retail investment and mortgage banking lines of business in 2013 were down $192,000 from 2012 due to reduced activity in both of these business lines.

 

FDIC assessment decreased $548,000 to $486,000 in 2013.  Prior to 2011, assessments were calculated based on the total deposits of a financial institution.  Beginning in the second quarter of 2011, the assessment base was changed from deposits to average total assets less tangible equity.  This resulted in significant savings for Mid Penn.  In addition, 2013 reflects the recognition of a refund of $139,000 in overbillings from the FDIC due to an error by the FDIC in Mid Penn’s assessment calculation.

 

Legal and professional fees increased to $705,000 in 2013 from $604,000 in 2012.  This increase was primarily related to consultants used in the information technology area to improve the Bank’s network capabilities and successfully migrate to a service bureau processing environment.

 

Software licensing increased from $648,000 in 2012 to $947,000 in 2013.  During 2013, Mid Penn incurred one-time charges of $26,000 associated with the migration its core banking data processing software from an in-house environment to a service bureau hosted platform.  This migration allowed for staffing reductions in the information technology and operations areas of $39,000 for part of the year in 2013.  The remaining increase was due to new service contracts on software to comply with various regulatory requirements and to expand the Bank’s online loan and deposit application capabilities.

 

Mid Penn recognized a gain on sale or write-down on foreclosed assets of $302,000 in 2013.  During 2013, Mid Penn recognized a gain of $340,000 on the sale of a repossessed property.  This gain was offset by Mid Penn’s ongoing analysis of the carrying values of repossessed properties and the adjustment of their values to current market rates.

 

Loan collection costs decreased to $214,000 in 2013 from $369,000 in 2012.  Other real estate owned (“OREO”) expense increased to $290,000 in 2013 from $253,000 in 2012.  These items represented the costs associated with working through collection efforts on the pool of nonperforming assets within the loan portfolio.  While decreasing in total during 2013, they continued to be at historically elevated levels due to the size and nature of the nonperforming assets pool.

 

ATM debit card processing and internet banking expenses both increased in recent years due to increasing customer demand for these banking services.

 

 

 

30


 

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

TABLE 5:  NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Years ended December 31,

 

2014

 

2013

 

2012

Salaries and employee benefits

$

10,879 

 

$

10,788 

 

$

10,518 

Occupancy expense, net

 

1,313 

 

 

1,128 

 

 

1,077 

Equipment expense

 

1,205 

 

 

1,299 

 

 

1,234 

Pennsylvania Bank Shares tax expense

 

365 

 

 

464 

 

 

462 

FDIC Assessment

 

542 

 

 

486 

 

 

1,034 

Legal and professional fees

 

516 

 

 

705 

 

 

604 

Director fees and benefits expense

 

377 

 

 

319 

 

 

335 

Marketing and advertising expense

 

308 

 

 

253 

 

 

378 

Software licensing

 

965 

 

 

947 

 

 

648 

Telephone expense

 

467 

 

 

436 

 

 

411 

Loss (gain) on sale/write-down of foreclosed assets

 

204 

 

 

(302)

 

 

96 

Intangible amortization

 

27 

 

 

29 

 

 

45 

Loan collection costs

 

288 

 

 

214 

 

 

369 

Merger and acquisition expense

 

573 

 

 

 -

 

 

 -

ATM debit card processing expense

 

310 

 

 

202 

 

 

171 

Internet banking expense

 

319 

 

 

252 

 

 

240 

Meals, travel, and lodging expense

 

273 

 

 

271 

 

 

266 

Data processing

 

251 

 

 

130 

 

 

102 

Insurance

 

141 

 

 

129 

 

 

126 

OREO expense

 

172 

 

 

290 

 

 

253 

Investor services

 

72 

 

 

68 

 

 

76 

Other expenses

 

1,101 

 

 

1,283 

 

 

1,248 

Total Noninterest Expense

$

20,668 

 

$

19,391 

 

$

19,693 

 

Investments

 

Mid Penn’s investment portfolio is utilized to provide liquidity and managed to maximize return within reasonable risk parameters. 

 

Mid Penn’s entire portfolio of investment securities is considered available for sale.  As such, the investments are recorded at fair value. Our investments are valued at a market price relative to investments of the same type with similar maturity dates.  As the interest rate environment of these securities changes, the value of securities changes accordingly. 

 

As of December 31, 2014, the unrealized gain on investment securities resulted in an increase in shareholders’ equity of $1,625,000 (unrealized gain on securities of $2,462,000 less deferred income taxes of $837,000).  At December 31, 2013, the unrealized loss on investment securities resulted in a decrease in shareholders’ equity of $747,000 (unrealized loss on securities of $1,132,000 less deferred income taxes of $385,000).  Mid Penn does not have any significant concentrations within its portfolio of investment securities.  Table 6 provides a summary of our available for sale investment securities.

 

TABLE 6:  FAIR VALUE OF INVESTMENT SECURITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

December 31,

 

2014

 

2013

 

2012

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

$

27,066 

 

$

12,834 

 

$

17,740 

Mortgage-backed U.S. government agencies

 

33,776 

 

 

39,392 

 

 

66,686 

State and political subdivision obligations

 

79,171 

 

 

69,038 

 

 

69,479 

Equity securities

 

1,621 

 

 

1,539 

 

 

390 

 

$

141,634 

 

$

122,803 

 

$

154,295 

 

 

31


 

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

Maturity and yield information relating to debt securities is shown in Table 7.

 

TABLE 7:  INVESTMENT MATURITY AND YIELD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

After One

 

After Five

 

 

 

 

 

 

As of December 31, 2014

One Year

 

Year thru

 

Years thru

 

After Ten

 

 

 

 

and Less

 

Five Years

 

Ten Years

 

Years

 

Total

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

$

 -

 

$

8,841 

 

$

18,225 

 

$

 -

 

$

27,066 

Mortgage-backed U.S. government agencies

 

 -

 

 

1,802 

 

 

3,821 

 

 

28,153 

 

 

33,776 

State and political subdivision obligations

 

2,201 

 

 

7,050 

 

 

29,271 

 

 

40,649 

 

 

79,171 

 

$

2,201 

 

$

17,693 

 

$

51,317 

 

$

68,802 

 

$

140,013 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After One

 

After Five

 

 

 

 

 

One Year

 

Year thru

 

Years thru

 

After Ten

 

 

Weighted Average Yields

and Less

 

Five Years

 

Ten Years

 

Years

 

Total

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

 -

 

3.60% 

 

2.48% 

 

 -

 

2.85% 

Mortgage-backed U.S. government agencies

 -

 

3.94% 

 

3.64% 

 

3.63% 

 

3.65% 

State and political subdivision obligations

7.29% 

 

4.88% 

 

4.76% 

 

4.77% 

 

4.85% 

 

7.29% 

 

4.14% 

 

3.87% 

 

4.30% 

 

4.17% 

 

Loans

 

At December 31, 2014, loans and leases totaled $571,533,000, a $25,071,000 or 4.6% increase from December 31, 2013.  During 2014, Mid Penn experienced a net increase in commercial real estate and commercial/industrial loans of approximately $28,178,000.  This increase was attributed to the increase in lending opportunities to credit-worthy borrowers within the markets Mid Penn serves as well as enhancements to the lending sales team during 2014. 

 

At December 31, 2014, loans, net of unearned income, represented 79.0% of earning assets as compared to 80.2% on December 31, 2013, and 72.4% on December 31, 2012.

 

The Bank's loan portfolio is diversified among individuals and small and medium-sized businesses generally located within the Bank's trading area of eastern Cumberland, Dauphin, northwestern Lancaster, western Luzerne, southern Northumberland, and Schuylkill Counties.  Commercial real estate, construction and land development loans are collateralized mainly by mortgages on the income-producing real estate or land involved.  Commercial, industrial and agricultural loans are made to business entities and may be secured by business assets, including commercial real estate, or may be unsecured.  Residential real estate loans are secured by liens on the residential property.  Consumer loans include installment loans, lines of credit and home equity loans.  The Bank has no concentration of credit to any one borrower.  The Bank’s highest concentration of credit is in Commercial Real Estate financings.

 

 

32


 

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

A distribution of the Bank's loan portfolio according to major loan classification is shown in Table 8.

 

TABLE 8:  LOAN PORTFOLIO

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

December 31,

 

 

2014

 

2013

 

2012

 

2011

 

2010

 

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

 

Amount

 

%

Commercial real estate,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  construction and land

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  development

 

$

289,378 

 

50.6 

 

$

274,279 

 

50.2 

 

$

255,231 

 

52.7 

 

$

249,204 

 

51.6 

 

$

252,915 

 

54.0 

Commercial, industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  and agricultural

 

 

120,326 

 

21.0 

 

 

107,492 

 

19.7 

 

 

79,228 

 

16.4 

 

 

78,656 

 

16.3 

 

 

70,295 

 

15.0 

Real estate - residential

 

 

159,004 

 

27.8 

 

 

160,294 

 

29.3 

 

 

143,243 

 

29.6 

 

 

146,846 

 

30.4 

 

 

136,048 

 

29.1 

Consumer

 

 

3,018 

 

0.6 

 

 

4,646 

 

0.8 

 

 

6,770 

 

1.4 

 

 

8,327 

 

1.7 

 

 

8,922 

 

1.9 

Total Loans

 

 

571,726 

 

100.0 

 

 

546,711 

 

100.0 

 

 

484,472 

 

100.0 

 

 

483,033 

 

100.0 

 

 

468,180 

 

100.0 

Unearned income

 

 

(193)

 

 

 

 

(249)

 

 

 

 

(252)

 

 

 

 

(316)

 

 

 

 

(445)

 

 

Loans net of unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  discount

 

 

571,533 

 

 

 

 

546,462 

 

 

 

 

484,220 

 

 

 

 

482,717 

 

 

 

 

467,735 

 

 

Allowance for loan and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  lease losses

 

 

(6,716)

 

 

 

 

(6,317)

 

 

 

 

(5,509)

 

 

 

 

(6,772)

 

 

 

 

(7,061)

 

 

Net loans

 

$

564,817 

 

 

 

$

540,145 

 

 

 

$

478,711 

 

 

 

$

475,945 

 

 

 

$

460,674 

 

 

 

 

Mid Penn’s maturity and rate sensitivity information related to the loan portfolio is reflected in Table 9.

 

TABLE 9:  LOAN MATURITY AND INTEREST SENSITIVITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

After One

 

 

 

 

 

 

As of December 31, 2014

One Year

 

Year thru

 

After Five

 

 

 

 

and Less

 

Five Years

 

Years

 

Total

Commercial real estate, construction

 

 

 

 

 

 

 

 

 

 

 

  and land development

$

23,085 

 

$

33,987 

 

$

232,306 

 

$

289,378 

Commercial, industrial and

 

 

 

 

 

 

 

 

 

 

 

  agricultural

 

3,561 

 

 

29,742 

 

 

87,023 

 

 

120,326 

Real estate - residential mortgages

 

4,326 

 

 

15,069 

 

 

139,609 

 

 

159,004 

Consumer

 

35 

 

 

1,344 

 

 

1,446 

 

 

2,825 

 

$

31,007 

 

$

80,142 

 

$

460,384 

 

$

571,533 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rate Sensitivity

 

 

 

 

 

 

 

 

 

 

 

Predetermined rate

$

30,890 

 

$

67,607 

 

$

377,563 

 

$

476,060 

Floating or adjustable rate

 

117 

 

 

12,535 

 

 

82,821 

 

 

95,473 

 

$

31,007 

 

$

80,142 

 

$

460,384 

 

$

571,533 

 

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

 

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.  Mid Penn does not engage in practices which may be used to artificially shield certain borrowers from the negative economic or business cycle effects that may compromise their ability to repay.  Mid Penn does not normally structure construction loans with interest reserve components.  Mid Penn has not in the past performed any commercial real estate or other type loan workouts whereby an existing loan was restructured into multiple new loans.  Also, Mid Penn does not extend loans at maturity solely due to the existence of guarantees, without recognizing the credit as impaired.  While the existence of a guarantee may be a mitigating factor in determining the proper level of allowance once impairment has been identified, the guarantee does not affect the impairment analysis.

 

33


 

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

TABLE 10:  NONPERFORMING ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

December 31,

                                      

2014

 

2013

 

2012

 

2011

 

2010

Nonperforming Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Nonaccrual loans

$

8,907 

 

$

10,877 

 

$

11,831 

 

$

11,800 

 

$

17,228 

   Accruing troubled debt restructured loans

 

2,035 

 

 

833 

 

 

426 

 

 

571 

 

 

2,323 

        Total nonperforming loans

 

10,942 

 

 

11,710 

 

 

12,257 

 

 

12,371 

 

 

19,551 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Foreclosed real estate

 

565 

 

 

965 

 

 

843 

 

 

931 

 

 

596 

       Total nonperforming assets

 

11,507 

 

 

12,675 

 

 

13,100 

 

 

13,302 

 

 

20,147 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Accruing loans 90 days or more past due

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

19 

       Total risk elements

$

11,507 

 

$

12,675 

 

$

13,100 

 

$

13,302 

 

$

20,166 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans as a % of total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    loans outstanding

 

1.91% 

 

 

2.14% 

 

 

2.53% 

 

 

2.56% 

 

 

4.18% 

Nonperforming assets as a % of total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    loans outstanding and other real estate

 

2.01% 

 

 

2.32% 

 

 

2.71% 

 

 

2.76% 

 

 

4.31% 

Ratio of allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    to nonperforming loans

 

61.37% 

 

 

53.94% 

 

 

44.95% 

 

 

54.74% 

 

 

36.12% 

 

Mid Penn assesses a specific allocation for both commercial loans and commercial real estate loans prior to charging down or charging off the loan.  Once the charge down is taken, the remaining balance remains a nonperforming loan with the original terms and interest rate intact and is not treated as a restructured credit.  During 2014, nonperforming loans declined $768,000 from $11,710,000 at December 31, 2013.  This improvement has been the result of slight improvement in some sectors of the general economy and maintaining a close relationship with troubled borrowers as they navigate their plan toward a resolution of credit issues.

 

Mid Penn’s troubled debt restructured loans at December 31, 2014 totaled $8,746,000 of which, $2,035,000 are accruing loans in compliance with the terms of the modification.  $6,711,000 of the troubled debt restructured loans are included in nonaccrual loans.  As a result of the evaluation, a specific allocation and, subsequently, charge offs have been taken as appropriate.  Further discussion of troubled debt restructured loans can be found in Note 7 to Mid Penn’s Consolidated Financial Statements, which are included in Item 8.  As of December 31, 2014, there were no defaulted troubled debt restructured loans as all troubled debt restructured loans were current with respect to their associated forbearance agreements.

 

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

 

 

34


 

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

The following table provides additional analysis of partially charged-off loans:

 

TABLE 11:  PARTIALLY CHARGED OFF LOANS

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

Period ending total loans outstanding (net of unearned income)

$

571,533 

 

$

546,462 

Allowance for loan and lease losses

 

6,716 

 

 

6,317 

Total Nonperforming loans

 

10,942 

 

 

11,710 

Nonperforming and impaired loans with partial charge-offs

 

2,441 

 

 

2,103 

 

 

 

 

 

 

Ratio of nonperforming loans with partial charge-offs

 

 

 

 

 

    to total loans

 

0.43% 

 

 

0.38% 

 

 

 

 

 

 

Ratio of nonperforming loans with partial charge-offs

 

 

 

 

 

    to total nonperforming loans

 

22.31% 

 

 

17.96% 

 

 

 

 

 

 

Coverage ratio net of nonperforming loans with

 

 

 

 

 

    partial charge-offs

 

79.00% 

 

 

65.75% 

 

 

 

 

 

 

Ratio of total allowance to total loans less

 

 

 

 

 

    nonperforming loans with partial charge-offs

 

1.18% 

 

 

1.16% 

 

 

Mid Penn has not experienced any additional charge-offs on loans for which a partial charge-off had originally been taken.

 

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

 

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

 

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

 

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

 

 

35


 

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

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

It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate within 30 days of the credit being classified as sub-standard non-accrual.  Prior to receipt of the updated real estate valuation Mid Penn will use any existing real estate valuation to determine any potential allowance issues; however no allowance recommendation will be made until which time Mid Penn is in receipt of the updated valuation.  The credit department employs an electronic tracking system to monitor the receipt of and need for updated appraisals.  To date, there have been no significant time lapses noted with the above processes. 

 

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

 

For impaired loans with no valuation allowance required, Mid Penn’s practice of obtaining independent third party market valuations on the subject property within 30 days of being placed on non-accrual status sometimes indicates that the loan to value ratio is sufficient to obviate the need for a specific allocation in spite of significant deterioration in real estate values in Mid Penn’s primary market area.  These circumstances are determined on a case by case analysis of the impaired loans.

 

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

 

As of December 31, 2014, Mid Penn had several unrelated loan relationships, with an aggregate carrying balance of $10,929,000, deemed impaired.  This pool of loans was further broken down into a group of loans with an aggregate carrying balance of $7,388,000 for which specific allocations totaling $1,634,000 were included within the loan loss reserve for these loans.  The remaining $3,541,000 of loans required no specific allocation within the loan loss reserve.  The $10,929,000 pool of impaired loan relationships was comprised of $8,925,000 in commercial real estate relationships, $1,146,000 in residential relationships, $618,000 in commercial and industrial relationships, and $240,000 in home equity relationships.  There were specific allocations of $1,382,000 against the commercial real estate relationships.  $885,000 of this total was between two unrelated relationships.  There was also $137,000 against the commercial and industrial relationships and $115,000 against the home equity relationships.  Management currently believes that the specific reserves are adequate to cover probable future losses related to these relationships

 

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

 

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

 

36


 

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

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

 

·

changes in local, regional, and national economic and business conditions affecting the collectability of the portfolio, the values of underlying collateral, and the condition of various market segments;

·

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

·

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

·

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

·

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 to provide for probable losses inherent in the loan and lease portfolio, determination of the allowance is inherently subjective, as it requires estimates, all of which may be susceptible to significant change.  Changes in these estimates may impact the provisions charged to expense in future periods. 

 

Management believes, based on information currently available, that the allowance for loan and lease losses of $6,716,000 as of December 31, 2014 is adequate to cover specifically identifiable loan losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.

 

The allocation of the allowance for loan and lease losses among the major classifications is shown in Table 12 as of December 31 of each of the past five years.

   

TABLE 12:  ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

December 31,

 

2014

 

2013

 

2012

 

2011

 

2010

Commercial real estate, construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  and land development

$

3,958 

 

$

4,015 

 

$

3,122 

 

$

3,567 

 

$

3,775 

Commercial, industrial and agricultural

 

1,395 

 

 

1,187 

 

 

1,299 

 

 

2,276 

 

 

2,448 

Real estate - residential

 

450 

 

 

581 

 

 

635 

 

 

362 

 

 

219 

Consumer

 

688 

 

 

513 

 

 

444 

 

 

424 

 

 

424 

Unallocated

 

225 

 

 

21 

 

 

 

 

143 

 

 

195 

 

$

6,716 

 

$

6,317 

 

$

5,509 

 

$

6,772 

 

$

7,061 

 

The growth in the loan portfolio during 2014, as well as increases in historical loss factors in the special mention and substandard portions of the portfolio, necessitated a larger allowance in 2014.  See also the discussion in the Provision for Loan and Lease Losses section.

 

The allowance for loan and lease losses at December 31, 2014 was $6,716,000, or 1.18%, of total loans less unearned discount as compared to $6,317,000, or 1.16%, at December 31, 2013, and $5,509,000, or 1.14%, at December 31, 2012.

 

Deposits and Other Funding Sources

 

Mid Penn's primary source of funds are deposits.  Total deposits at December 31, 2014 increased by $29,792,000, or 4.9%, over December 31, 2013, which decreased by $17,331,000, or 2.8%, over December 31, 2012.  Average balances and average interest rates applicable to the major classifications of deposits for the years ended December 31, 2014, 2013, and 2012 are presented in Table 13.

 

Average short-term borrowings for 2014 were $14,813,000 as compared to $10,533,000 in 2013.  These borrowings consisted of federal funds purchased. 

 

At December 31, 2014, the Bank had $4,462,000 in brokered deposits, an increase of $1,712,000, or 62.3%, over December 31, 2013, which decreased by $1,378,000, or 33.4%, over the same period in 2012.

 

 

37


 

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

TABLE 13:  DEPOSITS BY MAJOR CLASSIFICATION

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

December 31,

 

2014

 

2013

 

2012

 

Average

 

Average

 

Average

 

Average

 

Average

 

Average

 

Balance

 

Rate

 

Balance

 

Rate

 

Balance

 

Rate

Noninterest-bearing demand deposits

$

49,814 

 

0.00% 

 

$

49,318 

 

0.00% 

 

$

47,670 

 

0.00% 

Interest-bearing demand deposits

 

216,656 

 

0.36% 

 

 

182,118 

 

0.36% 

 

 

126,171 

 

0.36% 

Money market

 

201,281 

 

0.54% 

 

 

202,393 

 

0.59% 

 

 

236,434 

 

0.84% 

Savings

 

30,953 

 

0.05% 

 

 

29,597 

 

0.05% 

 

 

28,632 

 

0.05% 

Time

 

127,071 

 

1.55% 

 

 

148,863 

 

1.73% 

 

 

180,356 

 

2.04% 

 

$

625,775 

 

0.62% 

 

$

612,289 

 

0.72% 

 

$

619,263 

 

0.99% 

 

The maturity distribution of time deposits of $100,000 or more is reflected in Table 14.

 

TABLE 14:  MATURITY OF TIME DEPOSITS $100,000 OR MORE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

December 31,

 

2014

 

2013

 

2012

Three months or less

$

4,506 

 

$

4,745 

 

$

7,207 

Over three months to twelve months

 

21,308 

 

 

16,953 

 

 

18,340 

Over twelve months

 

22,604 

 

 

24,230 

 

 

32,763 

 

$

48,418 

 

$

45,928 

 

$

58,310 

 

Capital Resources

 

Shareholders' equity, or capital, is evaluated in relation to total assets and the risk associated with those assets.  The detailed computation of the Bank’s regulatory capital ratios can be found in Note 16 of Item 8, Notes to Consolidated Financial Statements.  The greater a corporation’s capital resources, the more likely it is to meet its cash obligations and absorb unforeseen losses.  Too much capital, however, indicates that not enough of the corporation’s earnings have been invested in the continued growth of the business or paid to shareholders.  The buildup makes it difficult for a corporation to offer a competitive return on the shareholders’ capital going forward.  For these reasons capital adequacy has been, and will continue to be, of paramount importance.

 

Shareholders’ equity increased in 2014 by $6,214,000, or 11.7%, following an increase in 2013 of $696,000, or 1.3%, and a decrease in 2012 of $1,232,000, or 2.3%.  Capital was positively impacted in 2014 by the net income available to common shareholders of $5,351,000 and the increase in accumulated other comprehensive (loss) income of $2,385,000.  Capital was positively impacted in 2013 by the net income available to common shareholders of $4,616,000; however, the increase was muted by an increase in accumulated other comprehensive loss.  Capital was negatively impacted in 2012 by the repayment and redemption of the $10,000,000 in the Series A preferred stock, but the impact was softened by the net income available to common shareholders of $4,437,000 and the issuance of the $4,880,000 in Series B preferred stock in 2012.  Subsequently, the Series B preferred stock offering of $5,000,000 was completed on January 3, 2013. 

 

Mid Penn’s normal intent for dividend payout is to provide quarterly cash returns to shareholders and earnings retention at a level sufficient to finance future growth.  The dividends paid on common shares totaled $0.45 for the year ended December 31, 2014, and $0.25 for the years ended December 31, 2013 and December 31, 2012.

 

The dividend payout ratio, which represents the percentage of annual net income returned to shareholders in the form of cash dividends, was 29.41% for 2014 and 18.94% for 2013.

 

 

38


 

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

Mid Penn maintained the following regulatory capital levels, leverage ratios, and risk-based capital ratios as of December 31, 2014, and 2013, as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Capital Adequacy

 

 

 

 

 

 

 

 

 

 

 

To Be Well-Capitalized

 

 

 

 

 

 

 

 

 

 

 

Under Prompt

 

 

 

 

 

 

Minimum Capital

 

Corrective

 

Actual

 

Required

 

Action Provisions

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

56,560 

 

7.4% 

 

$

30,429 

 

4.0% 

 

$

N/A

 

N/A

Tier 1 Capital (to Risk Weighted Assets)

 

56,560 

 

10.1% 

 

 

22,295 

 

4.0% 

 

 

N/A

 

N/A

Total Capital (to Risk Weighted Assets)

 

63,336 

 

11.4% 

 

 

44,590 

 

8.0% 

 

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

56,647 

 

7.5% 

 

$

30,360 

 

4.0% 

 

$

37,950 

 

5.0% 

Tier 1 Capital (to Risk Weighted Assets)

 

56,647 

 

10.2% 

 

 

22,295 

 

4.0% 

 

 

33,442 

 

6.0% 

Total Capital (to Risk Weighted Assets)

 

63,423 

 

11.4% 

 

 

44,590 

 

8.0% 

 

 

55,737 

 

10.0% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

52,693 

 

7.5% 

 

$

28,031 

 

4.0% 

 

$

N/A

 

N/A

Tier 1 Capital (to Risk Weighted Assets)

 

52,693 

 

9.9% 

 

 

21,234 

 

4.0% 

 

 

N/A

 

N/A

Total Capital (to Risk Weighted Assets)

 

59,100 

 

11.1% 

 

 

42,467 

 

8.0% 

 

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

52,598 

 

7.5% 

 

$

28,041 

 

4.0% 

 

$

35,051 

 

5.0% 

Tier 1 Capital (to Risk Weighted Assets)

 

52,598 

 

9.9% 

 

 

21,234 

 

4.0% 

 

 

31,850 

 

6.0% 

Total Capital (to Risk Weighted Assets)

 

59,005 

 

11.1% 

 

 

42,467 

 

8.0% 

 

 

53,084 

 

10.0% 

 

Capital Purchase Program Participation

 

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

 

On December 28, 2012, Mid Penn entered into a letter agreement with the Treasury pursuant to which Mid Penn repurchased from the Treasury all 10,000 shares of the Series A Preferred Stock issued to the Treasury, which constitutes all of the issued and outstanding shares of Series A Preferred Stock.  Mid Penn repurchased the Series A Preferred Stock for a purchase price equal to the aggregate liquidation amount of the Preferred Stock of $10,000,000, plus accrued but unpaid dividends of $59,722.  All 10,000 shares of Series A Preferred Stock have subsequently been cancelled.

 

On January 23, 2013, Mid Penn entered into a letter agreement with the Treasury pursuant to which Mid Penn repurchased from the Treasury on that date the Warrants for $58,479.  The Warrants have subsequently been cancelled.

 

As of December 31, 2014, Mid Penn has no further financial obligations under the Series A Preferred Stock, the Warrants, or the Treasury’s CPP.

 

Federal Income Taxes

 

Federal income tax expense for 2014 was $1,462,000 compared to $1,201,000 in 2013 and $1,244,000 in 2012.  The effective tax rate was 20% for 2014, 2013 and 2012.

 

 

39


 

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

Liquidity

 

Mid Penn's asset-liability management policy addresses the management of Mid Penn's liquidity position and its ability to raise sufficient funds to meet deposit withdrawals, fund loan growth and meet other operational needs.  Mid Penn utilizes its investments as a source of liquidity, along with deposit growth and increases in repurchase agreements and borrowings.  (See Deposits and Other Funding Sources which appears earlier in this discussion.)  Liquidity from investments is provided primarily through investments and interest-bearing balances with maturities of one year or less. 

 

The Bank has a line of credit commitment from the FHLB for overnight borrowings up to $40,000,000.  This line is collateralized by certain qualifying loans and investment securities of the Bank.  The Bank also has unused lines of credit with correspondent banks amounting to $12,500,000 at December 31, 2014.

 

Major sources of cash in 2014 came from the increase in demand deposits and savings accounts of $37,380,000, the proceeds from long-term debt borrowings of $30,000,000, and $27,314,000 from the maturities and sales of investment securities.

 

Major uses of cash in 2014 were the purchases of investment securities of $43,633,000, the increase in loans of $27,170,000, and the net decrease in short-term borrowings of $23,255,000.

 

Major sources of cash in 2013 came from the maturity of investment securities and interest-bearing time deposits totaling $53,151,000, the increase in short-term borrowings of $23,833,000, and the sale of investment securities of $15,118,000.

 

Major uses of cash in 2013 were the increase in net loans and leases of $65,896,000, the purchases of investment securities of $27,881,000 and decrease in time deposits of $31,280,000.

 

Aggregate Contractual Obligations

 

Table 15 represents Mid Penn’s on-and-off balance sheet aggregate contractual obligations to make future payments as of December 31, 2014.

 

TABLE 15:  AGGREGATE CONTRACTUAL OBLIGATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

Payments Due by Period

 

Financial Statements Note Reference

 

Total

 

One Year or Less

 

One to Three Years

 

Three to Five Years

 

More than Five Years

Certificates of deposit

9

 

$

124,785 

 

$

61,178 

 

$

41,559 

 

$

20,870 

 

$

1,178 

Long-term debt

11

 

 

52,961 

 

 

15,000 

 

 

25,000 

 

 

10,000 

 

 

2,961 

Operating lease obligations

18

 

 

2,958 

 

 

411 

 

 

880 

 

 

793 

 

 

874 

Payments under benefit plans

13

 

 

1,646 

 

 

149 

 

 

321 

 

 

334 

 

 

842 

 

 

 

$

182,350 

 

$

76,738 

 

$

67,760 

 

$

31,997 

 

$

5,855 

 

We are not aware of any other commitments or contingent liabilities which may have a material adverse impact on Mid Penn’s liquidity or capital resources.

 

Effects of Inflation

 

A bank's asset and liability structure is substantially different from that of an industrial company in that virtually all assets and liabilities of a bank are monetary in nature.  Management believes the impact of inflation on its financial results depends principally upon Mid Penn's ability to manage the balance sheet sensitivity to changes in interest rates and, by such reaction, mitigate the inflationary impact on performance.  Interest rates do not necessarily move in the same direction or at the same magnitude as the prices of other goods and services.  As discussed previously, Management seeks to manage the relationship between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

 

Information shown elsewhere in this Annual Report will assist in the understanding of how Mid Penn is positioned to react to changing interest rates and inflationary trends.  In particular, the summary of net liabilities, as well as the composition of loans, investments and deposits should be considered.

 

40


 

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

Off-Balance Sheet Items

 

Mid Penn makes contractual commitments to extend credit and extends lines of credit, which are subject to Mid Penn's credit approval and monitoring procedures.

 

As of December 31, 2014, commitments to extend credit amounted to $125,279,000 as compared to $141,616,000 as of December 31, 2013. 

 

Mid Penn also issues standby letters of credit to its customers.  The risk associated with standby letters of credit is essentially the same as the credit risk involved in loan extensions to customers.  Standby letters of credit increased to $9,837,000 at December 31, 2014, from $8,458,000 at December 31, 2013.

 

 

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

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

 

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

 

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

 

Management reviews interest rate risk on a quarterly basis.  This analysis includes earnings scenarios whereby interest rates are increased and decreased by 100, 200, and 300 basis points. These scenarios, detailed in Table 16, indicate that Mid Penn would experience enhanced net interest income over a one-year time frame due to upward interest rate changes, while a reduction in interest rates would result in a decline in net interest income over a one-year time frame; however, actual results could vary significantly from the calculations prepared by Management.  At December 31, 2014, all interest rate risk levels according to the model were within the tolerance limits of the Board approved policy, except for the (100) and (200) scenarios.  Management will continue to monitor these scenarios. 

 

TABLE 16:  EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

 

% Change in

 

 

 

 

 

% Change in

 

 

Change in

 

Net Interest

 

 

 

Change in

 

Net Interest

 

 

Basis Points

 

Income

 

Risk Limit

 

Basis Points

 

Income

 

Risk Limit

300

 

18.89%

 

≥ -25%

 

300

 

22.98%

 

≥ -25%

200

 

14.52%

 

≥ -15%

 

200

 

15.20%

 

≥ -15%

100

 

10.10%

 

≥ -10%

 

100

 

7.21%

 

≥ -10%

0

 

 

 

 

 

0

 

 

 

 

(100)

 

-10.66%

 

≥ -10%

 

(100)

 

-5.32%

 

≥ -10%

(200)

 

-16.09%

 

≥ -15%

 

(200)

 

-10.37%

 

≥ -15%

(300)

 

-21.32%

 

≥ -25%

 

(300)

 

-15.43%

 

≥ -25%

 

 

 

 

 

41


 

MID PENN BANCORP, INC.

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The following audited financial statements are set forth in this Annual Report of Form 10-K on the following pages:

 

 

 

 

Index to Financial Statements and Supplementary Data

 

 

 

 

 

Reports of Independent Registered Public Accounting Firms

43 

 

 

 

 

Consolidated Balance Sheets

45 

 

 

 

 

Consolidated Statements of Income

46 

 

 

 

 

Consolidated Statements of Comprehensive Income

47 

 

 

 

 

Consolidated Statements of Changes in Shareholders' Equity

48 

 

 

 

 

Consolidated Statements of Cash Flows

49 

 

 

 

 

Notes to Consolidated Financial Statements

50 

 

 

 

 

 

 

42


 

 

Report of Independent Registered Public Accounting Firm

 

 

 

 

 

 

Board of Directors and Shareholders

Mid Penn Bancorp, Inc.

Millersburg, Pennsylvania

We have audited the accompanying consolidated balance sheets of Mid Penn Bancorp, Inc. and subsidiaries, (the “Corporation”) as of December 31, 2014 and 2013 and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the two-year period ended December 31, 2014. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mid Penn Bancorp, Inc. and subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.

 

 

 

/s/ BDO USA, LLP

 

Harrisburg, Pennsylvania

March 20, 2015

 

 

43


 

 

Report of Independent Registered Public Accounting Firm

 

 

 

 

 

 

To the Board of Directors and Shareholders

Mid Penn Bancorp, Inc.

 

We have audited the accompanying consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows of Mid Penn Bancorp, Inc. and subsidiaries (the “Corporation”) for the year ended December 31, 2012.  The Corporation’s management is responsible for these consolidated financial statements.  Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Corporation is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the Corporation’s results of operations and cash flows for the year ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.

 

 

 

/s/ Baker Tilly Virchow Krause, LLP

 

Pittsburgh, Pennsylvania

March 25, 2013

 

 

 

 

44


 

MID PENN BANCORP, INC.                                                              Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except share and per share data)

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

ASSETS

 

 

 

 

 

 Cash and due from banks

$

8,869 

 

$

7,407 

 Interest-bearing balances with other financial institutions

 

1,013 

 

 

1,216 

   Total cash and cash equivalents

 

9,882 

 

 

8,623 

 Interest-bearing time deposits with other financial institutions

 

5,772 

 

 

7,513 

 Available for sale investment securities

 

141,634 

 

 

122,803 

 Loans and leases, net of unearned interest

 

571,533 

 

 

546,462 

   Less:  Allowance for loan and lease losses

 

(6,716)

 

 

(6,317)

 Net loans and leases

 

564,817 

 

 

540,145 

 Bank premises and equipment, net

 

12,225 

 

 

12,469 

 Restricted investment in bank stocks

 

3,181 

 

 

2,969 

 Foreclosed assets held for sale

 

565 

 

 

965 

 Accrued interest receivable

 

3,058 

 

 

2,704 

 Deferred income taxes

 

2,125 

 

 

3,235 

 Goodwill

 

1,016 

 

 

1,016 

 Core deposit and other intangibles, net

 

187 

 

 

249 

 Cash surrender value of life insurance

 

8,575 

 

 

8,374 

 Other assets

 

2,620 

 

 

2,060 

      Total Assets

$

755,657 

 

$

713,125 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

 Deposits:

 

 

 

 

 

   Noninterest bearing demand

$

60,613 

 

$

48,346 

   Interest bearing demand

 

222,712 

 

 

201,090 

   Money Market

 

197,418 

 

 

196,736 

   Savings

 

32,394 

 

 

29,585 

   Time

 

124,785 

 

 

132,373 

       Total Deposits 

 

637,922 

 

 

608,130 

 Short-term borrowings

 

578 

 

 

23,833 

  Long-term debt

 

52,961 

 

 

23,145 

  Accrued interest payable

 

349 

 

 

393 

  Other liabilities

 

4,717 

 

 

4,708 

     Total Liabilities

 

696,527 

 

 

660,209 

 Shareholders' Equity:

 

 

 

 

 

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

 

 

 

 

 

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

 

 

 

 

 

       December 31, 2014 and at December 31, 2013; total redemption value $5,100,000

 

5,000 

 

 

5,000 

   Common stock, par value $1.00; authorized 10,000,000 shares; 3,497,829 shares

 

 

 

 

 

       issued and outstanding at December 31, 2014 and 3,494,397 at December 31, 2013

 

3,498 

 

 

3,494 

   Additional paid-in capital

 

29,902 

 

 

29,853 

   Retained earnings

 

19,217 

 

 

15,441 

   Accumulated other comprehensive income (loss)

 

1,513 

 

 

(872)

 Total Shareholders’ Equity

 

59,130 

 

 

52,916 

       Total Liabilities and Shareholders' Equity

$

755,657 

 

$

713,125 

 

 

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

 

 

 

45


 

MID PENN BANCORP, INC.                      Consolidated Statements of Comprehensive Income

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

Years Ended December 31,

 

2014

 

2013

 

2012

INTEREST INCOME

 

 

 

 

 

 

 

 

  Interest & fees on loans and leases

$

26,905 

 

$

26,305 

 

$

27,233 

 Interest on interest-bearing balances

 

41 

 

 

109 

 

 

236 

 Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

   U.S. Treasury and government agencies

 

1,346 

 

 

591 

 

 

1,137 

   State and political subdivision obligations, tax-exempt

 

2,180 

 

 

1,921 

 

 

1,722 

   Other securities

 

155 

 

 

46 

 

 

22 

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

 

 -

 

 

11 

 

 

16 

     Total Interest Income 

 

30,627 

 

 

28,983 

 

 

30,366 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 Interest on deposits

 

3,852 

 

 

4,436 

 

 

6,147 

 Interest on short-term borrowings

 

55 

 

 

26 

 

 

 Interest on long-term debt

 

520 

 

 

595 

 

 

975 

     Total Interest Expense 

 

4,427 

 

 

5,057 

 

 

7,125 

     Net Interest Income 

 

26,200 

 

 

23,926 

 

 

23,241 

PROVISION FOR LOAN AND LEASE LOSSES

 

1,617 

 

 

1,685 

 

 

1,036 

Net Interest Income After Provision for Loan and Lease Losses

 

24,583 

 

 

22,241 

 

 

22,205 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 Income from fiduciary activities

 

552 

 

 

492 

 

 

575 

 Service charges on deposits

 

584 

 

 

576 

 

 

565 

 Net gain on sales of investment securities

 

168 

 

 

220 

 

 

267 

 Earnings from cash surrender value of life insurance

 

201 

 

 

231 

 

 

247 

 Mortgage banking income

 

313 

 

 

348 

 

 

675 

 ATM debit card interchange income

 

544 

 

 

508 

 

 

472 

 Merchant services income

 

254 

 

 

330 

 

 

256 

 Gain on sales of SBA loans

 

119 

 

 

 -

 

 

 -

 Other income

 

513 

 

 

585 

 

 

626 

    Total Noninterest Income 

 

3,248 

 

 

3,290 

 

 

3,683 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 Salaries and employee benefits

 

10,879 

 

 

10,788 

 

 

10,518 

 Occupancy expense, net

 

1,313 

 

 

1,128 

 

 

1,077 

 Equipment expense

 

1,205 

 

 

1,299 

 

 

1,234 

 Pennsylvania Bank Shares tax expense

 

365 

 

 

464 

 

 

462 

 FDIC Assessment

 

542 

 

 

486 

 

 

1,034 

 Legal and professional fees

 

516 

 

 

705 

 

 

604 

 Director fees and benefits expense

 

377 

 

 

319 

 

 

335 

 Marketing and advertising expense

 

308 

 

 

253 

 

 

378 

 Software licensing

 

965 

 

 

947 

 

 

648 

 Telephone expense

 

467 

 

 

436 

 

 

411 

 Loss (gain) on sale/write-down of foreclosed assets

 

204 

 

 

(302)

 

 

96 

 Intangible amortization

 

27 

 

 

29 

 

 

45 

 Loan collection costs

 

288 

 

 

214 

 

 

369 

 Merger and acquisition expense

 

573 

 

 

 -

 

 

 -

  Other expenses

 

2,639 

 

 

2,625 

 

 

2,482 

    Total Noninterest Expense 

 

20,668 

 

 

19,391 

 

 

19,693 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

7,163 

 

 

6,140 

 

 

6,195 

 Provision for income taxes

 

1,462 

 

 

1,201 

 

 

1,244 

NET INCOME

 

5,701 

 

 

4,939 

 

 

4,951 

 Series A preferred stock dividends and discount accretion

 

 -

 

 

14 

 

 

514 

 Series B preferred stock dividends

 

350 

 

 

309 

 

 

 -

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

$

5,351 

 

$

4,616 

 

$

4,437 

PER COMMON SHARE DATA:

 

 

 

 

 

 

 

 

 Basic Earnings Per Common Share

$

1.53 

 

$

1.32 

 

$

1.27 

 Diluted Earnings Per Common Share

 

1.53 

 

 

1.32 

 

 

1.27 

 Cash Dividends Per Common Share

 

0.45 

 

 

0.25 

 

 

0.25 

 

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

 

46


 

MID PENN BANCORP, INC.                      Consolidated Statements of Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

December 31,

 

2014

 

2013

 

2012

 

 

 

 

 

 

 

 

 

Net income

$

5,701 

 

$

4,939 

 

$

4,951 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

securities, net of income taxes of $1,280, ($1,563), and $291, respectively

 

2,482 

 

 

(3,033)

 

 

565 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for net gain on sales of available for sale

 

 

 

 

 

 

 

 

securities included in net income, net of income taxes of ($57), ($75),

 

 

 

 

 

 

 

 

and ($91), respectively  (1) (3)

 

(111)

 

 

(145)

 

 

(176)

 

 

 

 

 

 

 

 

 

Change in defined benefit plans, net of income taxes of $7, $7, and ($6),

 

 

 

 

 

 

 

 

   respectively  (2) (3)

 

14 

 

 

13 

 

 

(12)

 

 

 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

2,385 

 

 

(3,165)

 

 

377 

 

 

 

 

 

 

 

 

 

Total comprehensive income

$

8,086 

 

$

1,774 

 

$

5,328 

 

 

(1)

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

 

(2)

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

 

(3)

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

 

 

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

 

 

 

 

 

47


 

MID PENN BANCORP, INC.       Consolidated Statements of Changes in Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

Preferred

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Shareholders'

 

Stock

 

Stock

 

Capital

 

Earnings

 

(Loss) Income

 

Equity

Balance, January 1, 2012

$

10,000 

 

$

3,484 

 

$

29,830 

 

$

8,222 

 

$

1,916 

 

$

53,452 

   Net income

 

 -

 

 

 -

 

 

 -

 

 

4,951 

 

 

 -

 

 

4,951 

   Total other comprehensive income, net of taxes

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

377 

 

 

377 

   Common stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(872)

 

 

 -

 

 

(872)

   Employee Stock Purchase Plan (5,175 shares)

 

 -

 

 

 

 

50 

 

 

 -

 

 

 -

 

 

56 

   Series A Preferred stock redemption

 

(10,000)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(10,000)

   Series A Preferred stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(560)

 

 

 -

 

 

(560)

   Series B Preferred stock issuance, net of costs

 

4,880 

 

 

 -

 

 

(50)

 

 

 -

 

 

 -

 

 

4,830 

Amortization of warrant cost

 

 -

 

 

 -

 

 

(14)

 

 

 -

 

 

 -

 

 

(14)

Balance, December 31, 2012

 

4,880 

 

 

3,490 

 

 

29,816 

 

 

11,741 

 

 

2,293 

 

 

52,220 

   Net income

 

 -

 

 

 -

 

 

 -

 

 

4,939 

 

 

 -

 

 

4,939 

   Total other comprehensive loss, net of taxes

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(3,165)

 

 

(3,165)

   Common stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(872)

 

 

 -

 

 

(872)

   Employee Stock Purchase Plan (4,713 shares)

 

 -

 

 

 

 

51 

 

 

 -

 

 

 -

 

 

55 

   Series B Preferred stock issuance

 

120 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

120 

   Series B Preferred stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(309)

 

 

 -

 

 

(309)

   Amortization of warrant cost

 

 -

 

 

 -

 

 

(14)

 

 

 -

 

 

 -

 

 

(14)

Warrant repurchase

 

 -

 

 

 -

 

 

 -

 

 

(58)

 

 

 -

 

 

(58)

Balance, December 31, 2013

 

5,000 

 

 

3,494 

 

 

29,853 

 

 

15,441 

 

 

(872)

 

 

52,916 

   Net income

 

 -

 

 

 -

 

 

 -

 

 

5,701 

 

 

 -

 

 

5,701 

   Total other comprehensive income, net of taxes

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,385 

 

 

2,385 

   Common stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(1,575)

 

 

 -

 

 

(1,575)

   Employee Stock Purchase Plan (3,432 shares)

 

 -

 

 

 

 

49 

 

 

 -

 

 

 -

 

 

53 

   Series B Preferred stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(350)

 

 

 -

 

 

(350)

Balance, December 31, 2014

$

5,000 

 

$

3,498 

 

$

29,902 

 

$

19,217 

 

$

1,513 

 

$

59,130 

 

 

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

 

 

 

48


 

MID PENN BANCORP, INC.                                           Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Years Ended December 31,

 

2014

 

2013

 

2012

Operating Activities:

 

 

 

 

 

 

 

 

   Net Income

$

5,701 

 

$

4,939 

 

$

4,951 

   Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

       provided by operating activities:

 

 

 

 

 

 

 

 

           Provision for loan and lease losses

 

1,617 

 

 

1,685 

 

 

1,036 

           Depreciation

 

1,235 

 

 

1,250 

 

 

1,153 

           Amortization (accretion) of intangibles

 

62 

 

 

39 

 

 

(14)

           Net amortization of security premiums

 

1,250 

 

 

2,557 

 

 

1,809 

  Gain on sales of investment securities

 

(168)

 

 

(220)

 

 

(267)

           Earnings on cash surrender value of life insurance

 

(201)

 

 

(231)

 

 

(247)

           SBA loans originated for sale

 

(1,168)

 

 

 -

 

 

 -

           Proceeds from sales of SBA loans originated for sale

 

1,287 

 

 

 -

 

 

 -

           Gain on sale of SBA loans

 

(119)

 

 

 -

 

 

 -

           Loss (gain) on disposal of property, plant, and equipment

 

18 

 

 

(8)

 

 

           Loss (gain) on sale / write-down of foreclosed assets

 

204 

 

 

(302)

 

 

96 

           Deferred income tax (benefit) expense

 

(112)

 

 

192 

 

 

450 

           (Increase) decrease in accrued interest receivable

 

(354)

 

 

189 

 

 

174 

           (Increase) decrease in other assets

 

(547)

 

 

500 

 

 

424 

           Decrease in accrued interest payable

 

(44)

 

 

(227)

 

 

(444)

           Increase in other liabilities

 

 

 

319 

 

 

278 

Net Cash Provided By Operating Activities 

 

8,670 

 

 

10,682 

 

 

9,400 

Investing Activities:

 

 

 

 

 

 

 

 

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

 

1,741 

 

 

16,050 

 

 

3,914 

    Proceeds from the maturity of investment securities

 

13,585 

 

 

37,101 

 

 

39,453 

    Proceeds from the sale of investment securities

 

13,729 

 

 

15,118 

 

 

17,895 

   Purchases of investment securities

 

(43,633)

 

 

(27,881)

 

 

(53,553)

   (Purchases) redemptions of restricted investment in bank stock

 

(212)

 

 

(466)

 

 

617 

   Net increase in loans and leases

 

(27,170)

 

 

(65,896)

 

 

(6,389)

   Purchases of bank premises and equipment

 

(1,009)

 

 

(588)

 

 

(995)

   Proceeds from sale of bank premises and equipment

 

 -

 

 

 -

 

 

42 

   Proceeds from sale of foreclosed assets

 

1,077 

 

 

2,957 

 

 

2,579 

Net Cash (Used In) Provided By Investing Activities 

 

(41,892)

 

 

(23,605)

 

 

3,563 

Financing Activities:

 

 

 

 

 

 

 

 

   Net increase in demand deposits and savings accounts

 

37,380 

 

 

13,949 

 

 

29,645 

   Net decrease in time deposits

 

(7,588)

 

 

(31,280)

 

 

(38,239)

    Net (decrease) increase in short-term borrowings

 

(23,255)

 

 

23,833 

 

 

 -

   Series A preferred stock dividends paid

 

 -

 

 

 -

 

 

(560)

Series A preferred stock redemption

 

 -

 

 

 -

 

 

(10,000)

Series B preferred stock issuance, net of costs

 

 -

 

 

120 

 

 

4,830 

Series B preferred stock dividends paid

 

(350)

 

 

(309)

 

 

 -

   Common stock dividends paid

 

(1,575)

 

 

(872)

 

 

(872)

Employee Stock Purchase Plan

 

53 

 

 

55 

 

 

56 

Warrant Repurchase

 

 -

 

 

(58)

 

 

 -

   Long-term debt repayment

 

(184)

 

 

(14,365)

 

 

(191)

   Proceeds from long-term debt borrowings

 

30,000 

 

 

15,000 

 

 

 -

Net Cash Provided By (Used In) Financing Activities 

 

34,481 

 

 

6,073 

 

 

(15,331)

Net increase (decrease) in cash and cash equivalents

 

1,259 

 

 

(6,850)

 

 

(2,368)

Cash and cash equivalents, beginning of year

 

8,623 

 

 

15,473 

 

 

17,841 

Cash and cash equivalents, end of year

$

9,882 

 

$

8,623 

 

$

15,473 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

   Interest paid

$

4,471 

 

$

5,284 

 

$

7,569 

   Income taxes paid

$

1,520 

 

$

775 

 

$

1,700 

Supplemental Noncash Disclosures:

 

 

 

 

 

 

 

 

   Loan transfers to foreclosed assets held for sale

$

881 

 

$

2,777 

 

$

2,587 

 

 

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

 

 

 

49


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

(1)          Basis of Presentation

 

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

 

Each of Mid Penn’s lines of business are part of the same reporting segment, community banking, whose operating results are regularly reviewed and managed by a centralized executive management group.  As a result, Mid Penn has only one reportable segment for financial reporting purposes.

 

For comparative purposes, the December 31, 2013 and December 31, 2012 balances have been reclassified to conform to the 2014 presentation.  Such reclassifications had no impact on net income.

 

 

(2)          Nature of Business

 

The Bank engages in a full-service commercial banking and trust business, making available to the community a wide range of financial services, including, but not limited to, installment loans, mortgage and home equity loans, secured and unsecured commercial and consumer loans, lines of credit, construction financing, farm loans, community development loans, loans to non-profit entities and local government loans and various types of time and demand deposits, including but not limited to, checking accounts, savings accounts, clubs, money market deposit accounts, certificates of deposit and IRAs.  In addition, the Bank provides a full range of trust services through its Trust Department.  Deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the extent provided by law. 

The financial services are provided to individuals, partnerships, non-profit organizations, and corporations through its 19 offices located in eastern Cumberland, Dauphin, northwestern Lancaster, western Luzerne, southern Northumberland, and Schuylkill Counties.

 

Mid Penn Insurance Services, LLC, a wholly-owned subsidiary of the Bank, provides a wide array of personal and commercial insurance products.  Income from Mid Penn Insurance Services, LLC is not material to Mid Penn.

 

 

(3)          Summary of Significant Accounting Policies

 

The accounting and reporting policies of Mid Penn conform with accounting principles generally accepted in the United States of America (“GAAP”) and to general practice within the financial industry.  The following is a description of the more significant accounting policies.

 

(a)Use of Estimates

 

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates. 

 

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan and lease losses, and the assessment of other-than-temporary impairment of investment securities.

 

(b)Cash and Cash Equivalents

 

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, balances due from banks, and federal funds sold, all of which mature within ninety days.

 

(c)Interest-bearing Time Deposits with Other Financial Institutions

 

Interest-bearing time deposits with other financial institutions consist of certificates of deposits in other financial institutions with maturities within one year.

 

(d) Investment Securities

 

Available for sale securities include debt and equity securities.  Debt and equity securities are reported at fair value, with unrealized holding gains and losses excluded from earnings and reported, net of deferred income taxes, as a component of accumulated other comprehensive income (loss) within shareholders’ equity.  Realized gains and losses on sales of

 

50


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

investment securities are computed on the basis of specific identification of the cost of each security.  Net gains on sales of investment securities were $168,000 in 2014, $220,000 in 2013, and $267,000 in 2012.  Mid Penn had no held to maturity securities in 2014 and 2013.

 

(e) Loans and Allowance for Loan and Lease Losses

 

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans.  These amounts are generally being amortized over the contractual life of the loan.  Premiums and discounts on purchased loans are amortized as adjustments to interest income using the effective yield method.

 

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

 

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

 

Commercial and industrial

 

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

 

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

 

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

 

Commercial real estate and commercial real estate - construction

 

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

 

 

51


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

Lease financing

 

Mid Penn originates leases for select commercial and state and municipal government lessees.  The nature of the leased asset is often subject to rapid depreciation in salvage value over a relatively short time frame or may be of an industry specific nature, making appraisal or liquidation of the asset difficult.  These factors have led the Bank to severely curtail the origination of new leases to state or municipal government agencies where default risk is extremely limited and to only the most credit-worthy commercial customers.  These commercial customers are primarily leasing fleet vehicles for use in their primary line of business, mitigating some of the asset value concerns within the portfolio.  Leasing has been a declining percentage of the Mid Penn’s portfolio since 2006, representing 0.20% of the portfolio at December 31, 2014.

 

Residential mortgage

 

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

 

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

 

The Bank underwrites residential mortgage loans to the standards established by the secondary mortgage market, i.e., Fannie Mae, Ginnie Mae, Freddie Mac, or Pennsylvania Housing Finance Agency standards, with the intention of selling the majority of residential mortgages originated into the secondary market.  In the event that the facts and circumstances surrounding a residential mortgage application do not meet all underwriting conditions of the secondary mortgage market, the Bank will evaluate the failed conditions and evaluate the potential risk of holding the residential mortgage in the Bank’s portfolio rather than rejecting the loan request.  In the event that the loan is held in the Bank’s portfolio, the interest rate on the residential mortgage would be increased to compensate for the added portfolio risk.

 

Consumer, including home equity

 

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

 

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

 

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

 

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

 

 

52


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

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

 

Allowance for Loan and Lease Losses

 

The allowance for credit losses consists of the allowance for loan and lease losses and the reserve for unfunded lending commitments. The allowance for loan and lease losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet and was $60,000 at December 31, 2014 and $90,000 at December 31, 2013.  The allowance for loan and lease losses is increased by the provision for loan and lease losses, and decreased by charge-offs, net of recoveries.  Loans deemed to be uncollectible are charged against the allowance for loan and lease losses, and subsequent recoveries, if any, are credited to the allowance.  All, or part, of the principal balance of loans are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.  Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectibleBecause all identified losses are immediately charged off, no portion of the allowance for loan and lease losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

 

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

 

The allowance consists of specific, general and unallocated components.  The specific component relates to loans that are classified as impaired.  For loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan.  The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans.  These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors.  These qualitative risk factors include changes in economic conditions, fluctuations in loan quality measures, changes in the experience of the lending staff and loan review systems, growth or changes in the mix of loans originated, and shifting industry or portfolio concentrations.

 

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

 

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

 

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

 

Mid Penn evaluates loans for charge-off on a monthly basis.  Policies that govern the recommendation for charge-off are unique to the type of loan being considered.  Commercial loans rated as nonaccrual or lower will first have a collateral evaluation completed in accordance with the guidance on impaired loans.  Once the collateral evaluation has been completed, a specific allocation of allowance is made based upon the results of the evaluation.  In the event the loan is unsecured, the loan would have been charged-off at the recognition of impairment.  If the loan is secured, it will undergo a 90 day waiting period to ensure the collateral shortfall identified in the evaluation is accurate and then charged down by the specific allocation.  Once the charge down is taken, the remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured).  Commercial loans secured by real estate rated as impaired will also have an initial collateral evaluation completed in accordance with the guidance on impaired loans.  An updated real estate valuation is ordered and the collateral evaluation is modified to reflect any variations in value.  A specific allocation of allowance is

 

53


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

made for any anticipated collateral shortfall and a 90 day waiting period begins to ensure the accuracy of the collateral shortfall.  The loan is then charged down by the specific allocation.  Once the charge down is taken, the remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured).  The process of charge-off for residential mortgage loans begins upon a loan becoming delinquent for 90 days and not in the process of collection.  The existing appraisal is reviewed and a lien search is obtained to determine lien position and any instances of intervening liens.  A new appraisal of the property will be ordered if deemed necessary by management and a collateral evaluation is completed. The loan will then be charged down to the value indicated in the evaluation.  Consumer loans (including home equity loans and other consumer loans) are recommended for charge-off after reaching delinquency of 90 days and the loan is not in the process of collection.  The entire balance of the consumer loan is recommended for charge-off at this point.

 

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

 

It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate within 30 days of the credit being classified as sub-standard non-accrual.  Prior to receipt of the updated real estate valuation Mid Penn will use any existing real estate valuation to determine any potential allowance issues; however no allowance recommendation will be made until which time Mid Penn is in receipt of the updated valuation.  The credit department employs an electronic tracking system to monitor the receipt of and need for updated appraisals.  To date, there have been no significant time lapses noted with the above processes. 

 

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

 

For impaired loans with no valuation allowance required, Mid Penn’s practice of obtaining independent third party market valuations on the subject property within 30 days of being placed on non-accrual status sometimes indicates that the loan to value ratio is sufficient to obviate the need for a specific allocation in spite of significant deterioration in real estate values in Mid Penn’s primary market area.  These circumstances are determined on a case by case analysis of the impaired loans.

 

Mid Penn actively monitors the values of collateral on impaired loans.  This monitoring may require the modification of collateral values over time or changing circumstances by some factor, either positive or negative, from the original values.  All collateral values will be assessed by management at least every 18 months for possible revaluation by an independent third party. 

 

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

 

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

 

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

 

The allowance calculation methodology includes further segregation of loan classes into risk rating categories.  The borrower’s overall financial condition, repayment sources, guarantors, and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments.  Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss.  Loans criticized as special mention have potential weaknesses that deserve management’s close attention.  If uncorrected, the potential weaknesses

 

54


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

may result in deterioration of the repayment prospects.  Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable.  Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses.  Any loans not classified as noted above are rated pass.

 

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

 

(f) Bank Premises and Equipment

 

Land is carried at cost.  Buildings, furniture, fixtures, equipment, land improvements, and leasehold improvements are stated at cost less accumulated depreciation.  Depreciation is computed by the straight-line method over the estimated useful lives of the assets.  Building assets are depreciated using an estimated useful life of five to fifty years.  Furniture, fixtures, and equipment are depreciated using an estimated useful life of three to ten years.  Land improvements are depreciated over an estimated useful life of ten to twenty years.  Leasehold improvements are depreciated using an estimated useful life that is the lesser of the remaining life of the lease or ten to thirty years.  Maintenance and normal repairs are charged to expense when incurred, while major additions and improvements are capitalized.  Gains and losses on disposals are reflected in current operations.

 

(g)Restricted Investment in Federal Home Loan Bank Stock

 

The Bank owns restricted stock investments in the FHLB.  Federal law requires a member institution of the FHLB to hold stock according to a predetermined formula.  The stock is carried at cost.  Total dividends received in 2014 and 2013 totaled $123,000 and $20,000, respectively.  During 2014 and 2013, the FHLB performed limited excess capital stock repurchases each calendar quarter.  Any future capital stock repurchases will be made on a quarterly basis if conditions warrant such repurchases. 

 

Management evaluates the restricted stock for impairment on an annual basis.  Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value.  The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

 

Management believes no impairment charge is necessary related to the FHLB restricted stock as of December 31, 2014 and 2013.

 

(h) Foreclosed Assets Held for Sale

 

Foreclosed assets held for sale consist primarily of real estate acquired through, or in lieu of, foreclosure in settlement of debt and are recorded at fair value less cost to sell at the date of transfer, establishing a new cost basis.  Any valuation adjustments required at the date of transfer are charged to the allowance for loan losses.  Subsequent to acquisition, foreclosed assets are carried at fair value less costs of disposal, based upon periodic evaluations that consider changes in market conditions and development and disposal costs.  Operating results from assets acquired in satisfaction of debt, including rental income less operating costs and gains or losses on the sale of, or the periodic evaluation of foreclosed assets, are recorded in noninterest expense.

(i)Mortgage Servicing Rights

Mortgage servicing rights are recognized as assets upon the sale of a mortgage loan.  A portion of the cost of the loan is allocated to the servicing right based upon relative fair value.  The fair value of servicing rights is based on the present value of estimated future cash flows of mortgages sold stratified by rate and maturity date.  Assumptions that are incorporated in the valuation of servicing rights include assumptions about prepayment speeds on mortgages and the cost to service loans.  Servicing rights are reported in other intangibles and are amortized over the estimated period of future servicing income to be received on the underlying mortgage loans.  The carrying amount of mortgage servicing rights was

 

55


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

$187,000 and $223,000 at December 31, 2014 and 2013, respectively.  Amortization expense is netted against loan servicing fee income and is reflected in the Consolidated Statements of Income in mortgage banking income.  Servicing rights are evaluated for impairment based upon estimated fair value as compared to unamortized book value.

(j)Investment in Limited Partnership

Mid Penn is a limited partner in a partnership that provides low-income housing in Enola, Pennsylvania.  The carrying value of Mid Penn’s investment in the limited partnership was $408,000 at December 31, 2014 and $452,000 at December 31, 2013, net of amortization, using the straight-line method.  Mid Penn’s maximum exposure to loss is limited to the carrying value of its investment.  The partnership received $46,000 in low-income housing tax credits during 2014, 2013 and 2012.

 

(k)Income Taxes

 

Mid Penn accounts for income taxes in accordance with income tax accounting guidance ASC Topic 740, Income Taxes.  

 

Current income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. Mid Penn determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.

 

Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized.

 

Mid Penn accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more-likely-than-not means a likelihood of more than 50%; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting date and is subject to management's judgment.

 

Mid Penn recognizes interest and penalties on income taxes, if any, as a component of income tax expense.

 

(l)Core Deposit Intangible

 

Core deposit intangible is a measure of the value of consumer demand and savings deposits acquired in business combinations accounted for as purchases.  The core deposit intangible is being amortized over an 8-year life on a straight-line basis.  The core deposit intangible is subject to impairment testing whenever events or changes in circumstances indicate its carrying amount may not reflect benefit.

 

(m)Goodwill

 

Goodwill is the excess of the purchase price over the fair value of assets acquired in connection with 2004 and 2006 business acquisitions accounted for as acquisitions.  If certain events occur, which indicate goodwill might be impaired between annual tests, goodwill must be tested when such events occur.  In making this assessment, Mid Penn considers a number of factors including operating results, business plans, economic projections, anticipated future cash flows, current market data, stock price, etc.  There are inherent uncertainties related to these factors and Mid Penn’s judgment in applying them to the analysis of goodwill impairment.  Changes in economic and operating conditions could result in goodwill impairment in future periods.  Mid Penn did not identify any impairment on its outstanding goodwill form its most recent testing, which was performed as of December 31, 2014 using a qualitative analysis.  In addition, Mid Penn did not identify any impairment in 2013 or 2012 using a quantitative analysis in accordance with ASC 350.

 

(n)Bank Owned Life Insurance

 

Mid Penn is the owner and beneficiary of bank owned life insurance (“BOLI”) policies on current and former directors.  The earnings from the BOLI policies are an asset that can be liquidated, if necessary, with associated tax costs.  However, Mid

 

56


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

Penn intends to hold these policies and, accordingly, Mid Penn has not provided deferred income taxes on the earnings from the increase in cash surrender value.

 

GAAP requires Split-Dollar Life Insurance Arrangements to have a liability recognized related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement, and a liability for the future death benefit.

(o)Marketing and Advertising Costs

 

Marketing and advertising costs are expensed as incurred.

 

(p)Postretirement Benefit Plans

 

Mid Penn follows the guidance in ASC Topic 715, Compensation-Retirement Benefits related to postretirement benefit plans.  This guidance requires additional disclosures about defined benefit pension plans and other postretirement defined benefit plans.

 

(q)Other Benefit Plan

 

A funded contributory defined-contribution plan is maintained for substantially all employees.   The cost of the Mid Penn defined contribution plan is charged to current operating expenses and is funded annually.

 

(r)Trust Assets and Income

 

Assets held by the Bank in a fiduciary or agency capacity for customers of the Trust Department are not included in the consolidated financial statements since such items are not assets of the Bank.  Trust income is recognized on the cash basis, which is not materially different than if it were reported on the accrual basis.

 

(s)Earnings Per Share

 

Earnings per share are computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each of the years presented.  The following data show the amounts used in computing basic and diluted earnings per share.  As shown in the table that follows, diluted earnings per 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:

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

Net Income

$

5,701 

 

$

4,939 

 

$

4,951 

Less:  Dividends on Series A preferred stock

 

 -

 

 

 -

 

 

500 

         Accretion of Series A preferred stock discount

 

 -

 

 

14 

 

 

14 

         Dividends on Series B preferred stock

 

350 

 

 

309 

 

 

 -

Net income available to common shareholders

$

5,351 

 

$

4,616 

 

$

4,437 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

3,495,705 

 

 

3,491,653 

 

 

3,486,543 

Basic earnings per common share

$

1.53 

 

$

1.32 

 

$

1.27 

 

 

57


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

The computations of diluted earnings per common share follow:

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

 

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

Net income available to common stockholders

$

5,351 

 

$

4,616 

 

$

4,437 

Weighted average number of common shares outstanding

 

3,495,705 

 

 

3,491,653 

 

 

3,486,543 

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

 

3,495,705 

 

 

3,491,653 

 

 

3,486,543 

Diluted earnings per common share

$

1.53 

 

$

1.32 

 

$

1.27 

 

Mid Penn repurchased all warrants in 2013; therefore, there were none remaining as of December 31, 2014 and December 31, 2013.  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 as of December 31, 2012.

 

 

(4)           Accumulated Other Comprehensive (Loss) Income

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Unrealized Gain (Loss) on Securities

 

Defined Benefit Plan Liability

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

Balance - December 31, 2013

$

(745)

 

$

(127)

 

$

(872)

 

 

 

 

 

 

 

 

 

Balance - December 31, 2014

$

1,626 

 

$

(113)

 

$

1,513 

 

 

 

 

(5)           Restrictions on Cash and Due from Bank Accounts

 

The Bank is required to maintain reserve balances with the Federal Reserve Bank of Philadelphia.  There was no required reserve balance at December 31, 2014 and December 31, 2013 because the Bank had sufficient vault cash available.

 

 

(6)           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 (loss), whereas realized gains and losses flow through Mid Penn’s consolidated statements of income.

 

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

 

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

 

58


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

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 (loss).

 

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

 

At December 31, 2014 and 2013, amortized cost, fair value, and unrealized gains and losses on investment securities are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

Value

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

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

$

26,343 

 

$

752 

 

$

29 

 

$

27,066 

Mortgage-backed U.S. government agencies

 

33,763 

 

 

190 

 

 

177 

 

 

33,776 

State and political subdivision obligations

 

77,482 

 

 

2,007 

 

 

318 

 

 

79,171 

Equity securities

 

1,584 

 

 

60 

 

 

23 

 

 

1,621 

 

$

139,172 

 

$

3,009 

 

$

547 

 

$

141,634 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

Value

December 31, 2013

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

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

$

12,134 

 

$

700 

 

$

 -

 

$

12,834 

Mortgage-backed U.S. government agencies

 

39,481 

 

 

349 

 

 

438 

 

 

39,392 

State and political subdivision obligations

 

70,770 

 

 

744 

 

 

2,476 

 

 

69,038 

Equity securities

 

1,550 

 

 

20 

 

 

31 

 

 

1,539 

 

$

123,935 

 

$

1,813 

 

$

2,945 

 

$

122,803 

 

Estimated fair values of debt securities are based on quoted market prices, where applicable.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments, adjusted for differences between the quoted instruments and the instruments being valued.

 

Investment securities having a fair value of $134,740,000 at December 31, 2014, and $114,600,000 at December 31, 2013, were pledged to secure public deposits and other borrowings.

 

59


 

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 December 31, 2014 and 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

Less Than 12 Months

 

12 Months or More

 

Total

December 31, 2014

Number of

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Securities

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

5

 

$

6,059 

 

$

29 

 

$

 -

 

$

 -

 

$

6,059 

 

$

29 

Mortgage-backed U.S. government agencies

20

 

 

9,511 

 

 

62 

 

 

4,416 

 

 

115 

 

 

13,927 

 

 

177 

State and political subdivision obligations

37

 

 

4,444 

 

 

33 

 

 

13,947 

 

 

285 

 

 

18,391 

 

 

318 

Equity securities

2

 

 

 -

 

 

 -

 

 

583 

 

 

23 

 

 

583 

 

 

23 

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    available for sale securities

64

 

$

20,014 

 

$

124 

 

$

18,946 

 

$

423 

 

$

38,960 

 

$

547 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

Less Than 12 Months

 

12 Months or More

 

Total

December 31, 2013

Number of

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Securities

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed U.S. government agencies

29

 

$

9,799 

 

$

182 

 

$

9,866 

 

$

256 

 

$

19,665 

 

$

438 

State and political subdivision obligations

90

 

 

39,611 

 

 

2,150 

 

 

4,288 

 

 

326 

 

 

43,899 

 

 

2,476 

Equity securities

1

 

 

 -

 

 

 -

 

 

550 

 

 

31 

 

 

550 

 

 

31 

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    available for sale securities

120

 

$

49,410 

 

$

2,332 

 

$

14,704 

 

$

613 

 

$

64,114 

 

$

2,945 

 

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.

 

The majority of the investment portfolio is comprised of mortgage-backed U.S. government agencies and state and political subdivision obligations.  For the investment securities with an unrealized loss, Mid Penn has concluded, based on its analysis, that the unrealized losses in the investments are primarily caused by the movement of interest rates, and the contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment.

 

At December 31, 2014, Mid Penn had 62 debt securities and 2 equity securities with unrealized losses totaling $547,000 that depreciated 1.40% from their amortized cost basis.  At December 31, 2014, the unrealized loss on securities in an unrealized loss position for twelve months or longer totaled $423,000 of which the majority was attributed to mortgage-backed U.S. government agencies and state and political subdivision obligations with $115,000 and $285,000 in unrealized losses, respectively.  At December 31, 2013, 119 debt securities and 1 equity security with unrealized losses totaling $2,945,000, depreciated 4.59% from the amortized cost basis.  At December 31, 2013, the unrealized loss on securities in an unrealized loss position for twelve months or longer totaled $613,000 of which the majority was attributed to mortgage-backed U.S. government agencies and state and political subdivision obligations with $256,000 and $326,000 in unrealized losses, respectively. 

 

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

 

60


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

 

The table below is the maturity distribution of investment securities at amortized cost and fair value at December 31, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

December 31, 2014

 

Amortized

 

Fair

 

Cost

 

Value

Due in 1 year or less

$

2,164 

 

$

2,201 

Due after 1 year but within 5 years

 

15,386 

 

 

15,891 

Due after 5 years but within 10 years

 

46,544 

 

 

47,496 

Due after 10 years

 

39,731 

 

 

40,649 

 

 

103,825 

 

 

106,237 

Mortgage-backed securities

 

33,763 

 

 

33,776 

Equity securities

 

1,584 

 

 

1,621 

 

$

139,172 

 

$

141,634 

 

 

 

(7)           Loans and Allowance for Loan and Lease Losses

 

The classes of the loan portfolio, summarized by the aggregate pass rating and the classified ratings of special mention, substandard, and doubtful within Mid Penn’s internal risk rating system as of December 31, 2014  and 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)                         December 31, 2014

Pass

 

Special Mention

 

Substandard

 

Doubtful

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

117,166 

 

$

654 

 

$

1,190 

 

$

 -

 

$

119,010 

Commercial real estate

 

280,817 

 

 

4,859 

 

 

11,681 

 

 

 -

 

 

297,357 

Commercial real estate - construction

 

55,834 

 

 

242 

 

 

 -

 

 

 -

 

 

56,076 

Lease financing

 

1,121 

 

 

 -

 

 

 -

 

 

 -

 

 

1,121 

Residential mortgage

 

64,900 

 

 

252 

 

 

1,290 

 

 

 -

 

 

66,442 

Home equity

 

28,167 

 

 

138 

 

 

201 

 

 

 -

 

 

28,506 

Consumer

 

3,021 

 

 

 -

 

 

 -

 

 

 -

 

 

3,021 

 

$

551,026 

 

$

6,145 

 

$

14,362 

 

$

 -

 

$

571,533 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)                                          December 31, 2013

Pass

 

Special Mention

 

Substandard

 

Doubtful

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

103,330 

 

$

938 

 

$

1,576 

 

$

 -

 

$

105,844 

Commercial real estate

 

277,232 

 

 

2,771 

 

 

12,771 

 

 

 -

 

 

292,774 

Commercial real estate - construction

 

45,265 

 

 

382 

 

 

 -

 

 

 -

 

 

45,647 

Lease financing

 

1,356 

 

 

 -

 

 

 -

 

 

 -

 

 

1,356 

Residential mortgage

 

69,447 

 

 

27 

 

 

356 

 

 

 -

 

 

69,830 

Home equity

 

26,056 

 

 

96 

 

 

169 

 

 

 -

 

 

26,321 

Consumer

 

4,690 

 

 

 -

 

 

 -

 

 

 -

 

 

4,690 

 

$

527,376 

 

$

4,214 

 

$

14,872 

 

$

 -

 

$

546,462 

 

 

61


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

Impaired loans by loan portfolio class as of December 31, 2014 and 2013 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

(Dollars in thousands)                      

Recorded Investment

 

Unpaid Principal Balance

 

Related Allowance

 

Recorded Investment

 

Unpaid Principal Balance

 

Related Allowance

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

395 

 

$

430 

 

$

 -

 

$

185 

 

$

671 

 

$

 -

Commercial real estate

 

1,971 

 

 

4,481 

 

 

 -

 

 

2,596 

 

 

5,898 

 

 

 -

Residential mortgage

 

1,146 

 

 

1,286 

 

 

 -

 

 

266 

 

 

282 

 

 

 -

Home equity

 

29 

 

 

88 

 

 

 -

 

 

27 

 

 

40 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

223 

 

$

231 

 

$

137 

 

$

115 

 

$

243 

 

$

42 

Commercial real estate

 

6,954 

 

 

7,255 

 

 

1,382 

 

 

7,649 

 

 

7,972 

 

 

1,860 

Residential mortgage

 

 -

 

 

 -

 

 

 -

 

 

25 

 

 

25 

 

 

25 

Home equity

 

211 

 

 

213 

 

 

115 

 

 

49 

 

 

49 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

618 

 

$

661 

 

$

137 

 

$

300 

 

$

914 

 

$

42 

Commercial real estate

 

8,925 

 

 

11,736 

 

 

1,382 

 

 

10,245 

 

 

13,870 

 

 

1,860 

Residential mortgage

 

1,146 

 

 

1,286 

 

 

 -

 

 

291 

 

 

307 

 

 

25 

Home equity

 

240 

 

 

301 

 

 

115 

 

 

76 

 

 

89 

 

 

 

Average recorded investment of impaired loans and related interest income recognized for the years ended December 31, 2014, 2013, and 2012 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

December 31, 2013

 

December 31, 2012

(Dollars in thousands)                    

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

 

Interest Income Recognized

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

72 

 

$

 -

 

$

188 

 

$

 -

 

$

313 

 

$

Commercial real estate

 

1,966 

 

 

346 

 

 

2,506 

 

 

187 

 

 

5,834 

 

 

21 

Residential mortgage

 

541 

 

 

 -

 

 

299 

 

 

 -

 

 

465 

 

 

 -

Home equity

 

29 

 

 

 -

 

 

31 

 

 

 -

 

 

44 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

93 

 

$

 -

 

$

51 

 

$

 -

 

$

239 

 

$

 -

Commercial real estate

 

6,823 

 

 

 -

 

 

4,349 

 

 

 -

 

 

2,175 

 

 

 -

Commercial real estate - construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

16 

 

 

 -

Residential mortgage

 

 -

 

 

 -

 

 

13 

 

 

 -

 

 

 -

 

 

 -

Home equity

 

76 

 

 

 -

 

 

54 

 

 

 -

 

 

66 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

165 

 

$

 -

 

$

239 

 

$

 -

 

$

552 

 

$

Commercial real estate

 

8,789 

 

 

346 

 

 

6,855 

 

 

187 

 

 

8,009 

 

 

21 

Commercial real estate - construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

16 

 

 

 -

Residential mortgage

 

541 

 

 

 -

 

 

312 

 

 

 -

 

 

465 

 

 

 -

Home equity

 

105 

 

 

 -

 

 

85 

 

 

 -

 

 

110 

 

 

 

 

62


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

Non-accrual loans by loan portfolio class as of December 31, 2014 and 2013 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

 

 

 

 

 

 

Commercial and industrial

$

267 

 

$

300 

Commercial real estate

 

7,249 

 

 

9,648 

Residential mortgage

 

1,152 

 

 

803 

Home equity

 

239 

 

 

126 

 

$

8,907 

 

$

10,877 

 

If nonaccrual loans and leases had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period, Mid Penn would have recorded interest income on these loans of $798,000, $861,000, and $774,000, in the years ended December 31, 2014, 2013, and 2012, respectively.  Mid Penn has no commitments to lend additional funds to borrowers with impaired or nonaccrual loans

 

The performance and credit quality of the loan portfolio is also monitored by the analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.  The classes of the loan portfolio summarized by the past due status as of December 31, 2014 and 2013 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands) December 31, 2014

30-59 Days Past Due

 

60-89 Days Past Due

 

Greater than 90 Days

 

Total Past Due

 

Current

 

Total Loans

 

Loans Receivable > 90 Days and Accruing

Commercial and industrial

$

172 

 

$

290 

 

$

87 

 

$

549 

 

$

118,461 

 

$

119,010 

 

$

 -

Commercial real estate

 

403 

 

 

197 

 

 

6,585 

 

 

7,185 

 

 

290,172 

 

 

297,357 

 

 

 -

Commercial real estate - construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

56,076 

 

 

56,076 

 

 

 -

Lease financing

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,121 

 

 

1,121 

 

 

 -

Residential mortgage

 

328 

 

 

82 

 

 

1,117 

 

 

1,527 

 

 

64,915 

 

 

66,442 

 

 

 -

Home equity

 

93 

 

 

63 

 

 

157 

 

 

313 

 

 

28,193 

 

 

28,506 

 

 

 -

Consumer

 

 

 

 -

 

 

 -

 

 

 

 

3,015 

 

 

3,021 

 

 

 -

            Total

$

1,002 

 

$

632 

 

$

7,946 

 

$

9,580 

 

$

561,953 

 

$

571,533 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands) December 31, 2013

30-59 Days Past Due

 

60-89 Days Past Due

 

Greater than 90 Days

 

Total Past Due

 

Current

 

Total Loans

 

Loans Receivable > 90 Days and Accruing

Commercial and industrial

$

291 

 

$

38 

 

$

300 

 

$

629 

 

$

105,215 

 

$

105,844 

 

$

 -

Commercial real estate

 

1,472 

 

 

570 

 

 

8,241 

 

 

10,283 

 

 

282,491 

 

 

292,774 

 

 

 -

Commercial real estate - construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

45,647 

 

 

45,647 

 

 

 -

Lease financing

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,356 

 

 

1,356 

 

 

 -

Residential mortgage

 

952 

 

 

 -

 

 

785 

 

 

1,737 

 

 

68,093 

 

 

69,830 

 

 

 -

Home equity

 

 

 

50 

 

 

99 

 

 

158 

 

 

26,163 

 

 

26,321 

 

 

 -

Consumer

 

24 

 

 

12 

 

 

 -

 

 

36 

 

 

4,654 

 

 

4,690 

 

 

 -

            Total

$

2,748 

 

$

670 

 

$

9,425 

 

$

12,843 

 

$

533,619 

 

$

546,462 

 

$

 -

 

 

63


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

The allowance for loan and lease losses and recorded investment in financing receivables for the years ended December 31, 2014, 2013, and 2012, and as of December 31, 2014, 2013, and 2012 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands) December 31, 2014

Commercial and industrial

 

Commercial real estate

 

Commercial real estate - construction

 

Lease financing

 

Residential mortgage

 

Home equity

 

Consumer

 

Unallocated

 

Total

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

1,187 

 

$

4,006 

 

$

 

$

 -

 

$

581 

 

$

441 

 

$

72 

 

$

21 

 

$

6,317 

  Charge-offs

 

(62)

 

 

(1,057)

 

 

 -

 

 

 -

 

 

(133)

 

 

(43)

 

 

(33)

 

 

 -

 

 

(1,328)

  Recoveries

 

13 

 

 

13 

 

 

 -

 

 

 -

 

 

20 

 

 

 

 

63 

 

 

 -

 

 

110 

  Provisions

 

255 

 

 

963 

 

 

24 

 

 

 

 

(18)

 

 

254 

 

 

(67)

 

 

204 

 

 

1,617 

Ending balance

$

1,393 

 

$

3,925 

 

$

33 

 

$

 

$

450 

 

$

653 

 

$

35 

 

$

225 

 

$

6,716 

Ending balance: individually evaluated for impairment

$

137 

 

$

1,382 

 

$

 -

 

$

 -

 

$

 -

 

$

115 

 

$

 -

 

$

 -

 

$

1,634 

Ending balance: collectively evaluated for impairment

$

1,256 

 

$

2,543 

 

$

33 

 

$

 

$

450 

 

$

538 

 

$

35 

 

$

225 

 

$

5,082 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

119,010 

 

$

297,357 

 

$

56,076 

 

$

1,121 

 

$

66,442 

 

$

28,506 

 

$

3,021 

 

$

 -

 

$

571,533 

Ending balance: individually evaluated  for impairment

$

618 

 

$

8,925 

 

$

 -

 

$

 -

 

$

1,146 

 

 

240 

 

$

 -

 

$

 -

 

$

10,929 

Ending balance: collectively evaluated for impairment

$

118,392 

 

$

288,432 

 

$

56,076 

 

$

1,121 

 

$

65,296 

 

$

28,266 

 

$

3,021 

 

$

 -

 

$

560,604 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands) December 31, 2013

Commercial and industrial

 

Commercial real estate

 

Commercial real estate - construction

 

Lease financing

 

Residential mortgage

 

Home equity

 

Consumer

 

Unallocated

 

Total

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

1,298 

 

$

3,112 

 

$

64 

 

$

 

$

581 

 

$

343 

 

$

101 

 

$

 

$

5,509 

  Charge-offs

 

(183)

 

 

(919)

 

 

(17)

 

 

 -

 

 

(167)

 

 

(91)

 

 

(96)

 

 

 -

 

 

(1,473)

  Recoveries

 

193 

 

 

279 

 

 

 

 

 

 

23 

 

 

 

 

84 

 

 

 -

 

 

596 

  Provisions

 

(121)

 

 

1,534 

 

 

(45)

 

 

(3)

 

 

144 

 

 

181 

 

 

(17)

 

 

12 

 

 

1,685 

Ending balance

$

1,187 

 

$

4,006 

 

$

 

$

 -

 

$

581 

 

$

441 

 

$

72 

 

$

21 

 

$

6,317 

Ending balance: individually evaluated for impairment

$

42 

 

$

1,860 

 

$

 -

 

$

 -

 

$

25 

 

$

 

$

 -

 

$

 -

 

$

1,933 

Ending balance: collectively evaluated for impairment

$

1,145 

 

$

2,146 

 

$

 

$

 -

 

$

556 

 

$

435 

 

$

72 

 

$

21 

 

$

4,384 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

105,844 

 

$

292,774 

 

$

45,647 

 

$

1,356 

 

$

69,830 

 

$

26,321 

 

$

4,690 

 

$

 -

 

$

546,462 

Ending balance: individually evaluated  for impairment

$

300 

 

$

10,245 

 

$

 -

 

$

 -

 

$

291 

 

 

76 

 

$

 -

 

$

 -

 

$

10,912 

Ending balance: collectively evaluated for impairment

$

105,544 

 

$

282,529 

 

$

45,647 

 

$

1,356 

 

$

69,539 

 

$

26,245 

 

$

4,690 

 

$

 -

 

$

535,550 

 

 

64


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands) December 31, 2012

Commercial and industrial

 

Commercial real estate

 

Commercial real estate - construction

 

Lease financing

 

Residential mortgage

 

Home equity

 

Consumer

 

Unallocated

 

Total

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

$

2,274 

 

$

3,544 

 

$

23 

 

$

 

$

362 

 

$

337 

 

$

87 

 

$

143 

 

$

6,772 

  Charge-offs

 

(834)

 

 

(493)

 

 

(6)

 

 

 -

 

 

(195)

 

 

(268)

 

 

(592)

 

 

 -

 

 

(2,388)

  Recoveries

 

31 

 

 

13 

 

 

 

 

 -

 

 

 -

 

 

10 

 

 

33 

 

 

 -

 

 

89 

  Provisions

 

(173)

 

 

48 

 

 

45 

 

 

(1)

 

 

414 

 

 

264 

 

 

573 

 

 

(134)

 

 

1,036 

Ending balance

$

1,298 

 

$

3,112 

 

$

64 

 

$

 

$

581 

 

$

343 

 

$

101 

 

$

 

$

5,509 

Ending balance: individually evaluated for impairment

$

111 

 

$

1,200 

 

$

54 

 

$

 -

 

$

 -

 

$

18 

 

$

 -

 

$

 -

 

$

1,383 

Ending balance: collectively evaluated for impairment

$

1,187 

 

$

1,912 

 

$

10 

 

$

 

$

581 

 

$

325 

 

$

101 

 

$

 

$

4,126 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

77,883 

 

$

284,867 

 

$

33,231 

 

$

1,305 

 

$

57,455 

 

$

22,920 

 

$

6,559 

 

$

 -

 

$

484,220 

Ending balance: individually evaluated  for impairment

$

415 

 

$

9,084 

 

$

54 

 

$

 -

 

$

448 

 

 

191 

 

$

 -

 

$

 -

 

$

10,192 

Ending balance: collectively evaluated for impairment

$

77,468 

 

$

275,783 

 

$

33,177 

 

$

1,305 

 

$

57,007 

 

$

22,729 

 

$

6,559 

 

$

 -

 

$

474,028 

 

The recorded investments in troubled debt restructured loans at December 31, 2014 and 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)                

Pre-Modification

 

Post-Modification

 

 

December 31, 2014

Outstanding Recorded Investment

 

Outstanding Recorded Investment

 

Recorded Investment

Commercial and industrial

$

40 

 

$

35 

 

$

23 

Commercial real estate

 

11,189 

 

 

9,443 

 

 

8,005 

Residential mortgage

 

903 

 

 

897 

 

 

713 

Home equity

 

50 

 

 

 

 

 

$

12,182 

 

$

10,382 

 

$

8,746 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)                

Pre-Modification

 

Post-Modification

 

 

December 31, 2013

Outstanding Recorded Investment

 

Outstanding Recorded Investment

 

Recorded Investment

Commercial and industrial

$

40 

 

$

417 

 

$

266 

Commercial real estate

 

10,581 

 

 

8,686 

 

 

7,470 

Residential mortgage

 

423 

 

 

35 

 

 

29 

 

$

11,044 

 

$

9,138 

 

$

7,765 

 

At December 31, 2014, Mid Penn’s troubled debt restructured loans totaled $8,746,000, of which six loans totaling $2,035,000, represented accruing impaired loans in compliance with the terms of the modification.  Of the $2,035,000, three are accruing impaired residential mortgages to unrelated borrowers totaling $71,000 and the other three are accruing impaired commercial real estate loans spread among two relationships totaling $1,964,000.  The remaining $6,711,000, representing 14 loans among nine relationships, are nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired loans.  Two large relationships account for $4,680,000 of the $6,711,000 nonaccrual impaired troubled debt restructured loan total.  As a result of the evaluation, a specific allocation and, subsequently, charge offs have been taken as appropriate.  As of December 31, 2014, charge offs associated with troubled debt restructured loans while under a forbearance agreement totaled $87,000.  As of December 31, 2014, there were no defaulted troubled debt restructured loans as all troubled debt restructured loans were current with respect to their associated forbearance agreements.  There were also no defaults on troubled debt restructured loans within twelve months of

 

65


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

restructure during 2014.  One forbearance agreement was negotiated during 2008, 10 forbearance agreements were negotiated during 2009, one was negotiated during 2010, four were negotiated during 2013, and four were negotiated during 2014.

 

At December 31, 2013, Mid Penn’s troubled debt restructured loans totaled $7,765,000,  of which, $833,000, representing five loans, are accruing impaired mortgages in compliance with the terms of the modification.  Of the $833,000, four are accruing impaired residential mortgages totaling $235,000 and one is an accruing impaired commercial real estate loan totaling $598,000.  The remaining $6,932,000, representing 12 loans, are nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired loans.  Two large relationships account for $4,819,000 of the $6,932,000 nonaccrual impaired troubled debt restructured loan total.  As a result of the evaluation, a specific allocation and, subsequently, charge offs have been taken as appropriate.  As of December 31, 2013, charge offs associated with troubled debt restructured loans while under a forbearance agreement totaled $0.  As of December 31, 2013, there were no defaulted troubled debt restructured loans as all troubled debt restructured loans were current with respect to their associated forbearance agreements.  There were also no defaults on troubled debt restructured loans within twelve months of restructure during 2013.  One forbearance agreement was negotiated during 2008, 10 forbearance agreements were negotiated during 2009, one was negotiated during 2010, and five were negotiated during 2013.

 

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

 

There were four loans modified in 2014 and five loans modified in 2013 that resulted in troubled debt restructurings.  The following table summarizes the loans whose terms have been modified resulting in troubled debt restructurings during the year ended December 31, 2014.

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)               

 

 

Pre-Modification

 

Post-Modification

 

 

December 31, 2014

Number of Contracts

 

Outstanding Recorded Investment

 

Outstanding Recorded Investment

 

Recorded Investment

Commercial real estate

2

 

$

1,057 

 

$

757 

 

$

734 

Residential mortgage

1

 

 

540 

 

 

540 

 

 

520 

Home equity

1

 

 

50 

 

 

 

 

 

4

 

$

1,647 

 

$

1,304 

 

$

1,259 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)               

 

 

Pre-Modification

 

Post-Modification

 

 

December 31, 2013

Number of Contracts

 

Outstanding Recorded Investment

 

Outstanding Recorded Investment

 

Recorded Investment

Commercial real estate

3

 

$

6,091 

 

$

5,588 

 

$

5,417 

Residential mortgage

2

 

 

74 

 

 

74 

 

 

28 

 

5

 

$

6,165 

 

$

5,662 

 

$

5,445 

 

The Bank has granted loans to certain of its executive officers, directors, and their related interests.  These loans were made on substantially the same basis, including interest rates and collateral as those prevailing for comparable transactions with other borrowers at the same time.  The aggregate amount of these loans was $6,559,000 and $8,402,000 at December 31, 2014 and 2013, respectively.  During 2014, $3,340,000 of new loans and advances were extended and repayments totaled $5,181,000$2,000 of these loans is no longer considered related parties as of December 31, 2014.  None of these loans were past due, in non-accrual status, or restructured at December 31, 2014. 

 

 

66


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

 

(8)           Bank Premises and Equipment

 

At December 31, 2014 and 2013, bank premises and equipment are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

Land

$

2,712 

 

$

2,712 

Buildings

 

10,116 

 

 

10,087 

Furniture, fixtures, and equipment

 

7,236 

 

 

9,483 

Leasehold improvements

 

826 

 

 

828 

Construction in progress

 

497 

 

 

13 

 

 

21,387 

 

 

23,123 

Less accumulated depreciation

 

(9,162)

 

 

(10,654)

 

$

12,225 

 

$

12,469 

 

Depreciation expense was $1,235,000 in 2014, $1,250,000 in 2013, and $1,153,000 in 2012.

 

 

(9)           Deposits

 

At December 31, 2014 and 2013, time deposits amounted to $124,785,000 and $132,373,000, respectively.  Interest expense on such certificates of deposit amounted to $1,971,000, $2,568,000, and $3,683,000 for the years ended December 31, 2014, 2013 and 2012, respectively. 

 

These time deposits at December 31, 2014, mature as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Time Deposits

 

 

Less than $100,000

 

 

$100,000 or more

Maturing in 2015

$

35,364 

 

$

25,814 

Maturing in 2016

 

22,943 

 

 

11,018 

Maturing in 2017

 

5,388 

 

 

2,210 

Maturing in 2018

 

4,528 

 

 

3,077 

Maturing in 2019

 

6,966 

 

 

6,299 

Maturing thereafter

 

1,178 

 

 

 -

 

$

76,367 

 

$

48,418 

 

Brokered deposits included in the deposit totals equaled $4,462,000, at December 31, 2014 and $2,750,000 at December 31, 2013.  Deposits and other funds from related parties held by Mid Penn at December 31, 2014 and 2013 amounted to $9,987,000 and $9,010,000, respectively.

 

 

(10)         Short-term Borrowings

 

Short-term borrowings totaled $578,000 at December 31, 2014 and $23,833,000 at December 31, 2013.  The Bank has a line of credit commitment from the FHLB for overnight borrowings up to $40,000,000.  This line is collateralized by certain qualifying loans and investment securities of the Bank.  The Bank also has unused lines of credit with correspondent banks amounting to $12,500,000 at December 31, 2014.

 

 

67


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

 

(11)         Long-term Debt

 

The Bank is a member of the FHLB and through its membership, the Bank can access a number of credit products, which are utilized to provide liquidity.  The maximum borrowing capacity available to the Bank at the FHLB at December 31, 2014 was $272,397,000, which includes the line of credit commitment for overnight borrowings.  As of December 31, 2014 and 2013, the Bank had long-term debt in the amount of $52,961,000 and $23,145,000, respectively, consisting of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

At December 31,

 

2014

 

2013

Loans maturing in 2015 with rates ranging from 0.58% to 4.18%

 

15,000 

 

 

15,000 

Loans maturing in 2016 with rates ranging from 0.54% to 0.89%

 

25,000 

 

 

5,000 

Loan maturing in 2019 at a rate of 1.87%

 

10,000 

 

 

 -

Loan maturing in 2026 at a rate of 4.80%

 

2,892 

 

 

3,073 

Loan maturing in 2027 at a rate of 6.71%

 

69 

 

 

72 

 

$

52,961 

 

$

23,145 

 

The aggregate amounts due on long-term debt subsequent to December 31, 2014 are $15,193,000 (2015), $25,203,000 (2016), $213,000 (2017), $223,000 (2018), $10,235,000 (2019), and $1,894,000 thereafter. 

 

 

(12)        Fair Value Measurement

 

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

 

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

 

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

 

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;

 

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).

 

 

68


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

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

 

There were no transfers of assets between fair value Level 1 and Level 2 for the year ended December 31, 2014. The following table illustrates the assets measured at fair value on a recurring basis segregated by hierarchy fair value levels:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements at December 31, 2014 using:

(Dollars in thousands)

 

Total carrying value at

 

Quoted prices in active markets

 

Significant other observable inputs

 

Significant unobservable inputs

Assets:

 

December 31, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

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

 

$

27,066 

 

$

 -

 

$

27,066 

 

$

 -

Mortgage-backed U.S. government agencies

 

 

33,776 

 

 

 -

 

 

33,776 

 

 

 -

State and political subdivision obligations

 

 

79,171 

 

 

 -

 

 

79,171 

 

 

 -

Equity securities

 

 

1,621 

 

 

561 

 

 

1,060 

 

 

 -

 

 

$

141,634 

 

$

561 

 

$

141,073 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements at December 31, 2013 using:

(Dollars in thousands)

 

Total carrying value at

 

Quoted prices in active markets

 

Significant other observable inputs

 

Significant unobservable inputs

Assets:

 

December 31, 2013

 

(Level 1)

 

(Level 2)

 

(Level 3)

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

 

$

12,834 

 

$

 -

 

$

12,834 

 

$

 -

Mortgage-backed U.S. government agencies

 

 

39,392 

 

 

 -

 

 

39,392 

 

 

 -

State and political subdivision obligations

 

 

69,038 

 

 

 -

 

 

69,038 

 

 

 -

Equity securities

 

 

1,539 

 

 

519 

 

 

1,020 

 

 

 -

 

 

$

122,803 

 

$

519 

 

$

122,284 

 

$

 -

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements at December 31, 2014 using:

(Dollars in thousands)

 

Total carrying value at

 

Quoted prices in active markets

 

Significant other observable inputs

 

Significant unobservable inputs

Assets:

 

December 31, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

Impaired Loans

 

$

6,664 

 

$

 -

 

$

 -

 

$

6,664 

Foreclosed Assets Held for Sale

 

 

142 

 

 

 -

 

 

 -

 

 

142 

Mortgage Servicing Rights

 

 

187 

 

 

 -

 

 

 -

 

 

187 

 

 

69


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value measurements at December 31, 2013 using:

(Dollars in thousands)

 

Total carrying value at

 

Quoted prices in active markets

 

Significant other observable inputs

 

Significant unobservable inputs

Assets:

 

December 31, 2013

 

(Level 1)

 

(Level 2)

 

(Level 3)

Impaired Loans

 

$

6,535 

 

$

 -

 

$

 -

 

$

6,535 

Foreclosed Assets Held for Sale

 

 

465 

 

 

 -

 

 

 -

 

 

465 

Mortgage Servicing Rights

 

 

223 

 

 

 -

 

 

 -

 

 

223 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2014

 

Fair Value Estimate

 

Valuation Technique

 

Unobservable Input

 

Range

 

Weighted Average

Impaired Loans

 

$

6,664 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

10% - 95% 

 

32%

Foreclosed Assets Held for Sale

 

 

142 

 

Appraisal of collateral (1), (3)

 

Appraisal adjustments (2)

 

15% - 40% 

 

27%

Mortgage Servicing Rights

 

 

187 

 

Multiple of annual service fee

 

Estimated prepayment speed based on rate and term

 

210% - 400% 

 

353%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2013

 

Fair Value Estimate

 

Valuation Technique

 

Unobservable Input

 

Range

 

Weighted Average

Impaired Loans

 

$

6,535 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

10% - 95% 

 

25%

Foreclosed Assets Held for Sale

 

 

465 

 

Appraisal of collateral (1), (3)

 

Appraisal adjustments (2)

 

15% - 40% 

 

24%

Mortgage Servicing Rights

 

 

223 

 

Multiple of annual service fee

 

Estimated prepayment speed based on rate and term

 

240% - 400% 

 

349%

 

(1)

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

(2)

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

(3)

Includes qualitative adjustments by management and estimated liquidation expenses.

 

The following methodologies and assumptions were used to estimate the fair value of certain assets and liabilities:

 

Cash and Cash Equivalents:

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

 

Interest-bearing Balances with other Financial Institutions: 

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

Securities Available for Sale:

The fair value of securities classified as available for sale is determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (level 2), which is a mathematical technique used widely in the industry to value debt

 

70


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

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

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

 

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

 

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

 

Mid Penn actively monitors the values of collateral on impaired loans.  This monitoring may require the modification of collateral values over time or changing circumstances by some factor, either positive or negative, from the original values.  All collateral values will be assessed by management at least every 18 months for possible revaluation by an independent third party. 

 

Loans:

For variable-rate loans that reprice frequently and which entail no significant changes in credit risk, carrying values approximated fair value.  The fair value of other loans are estimated by calculating the present value of the cash flow difference between the current rate and the market rate, for the average maturity, discounted quarterly at the market rate.

 

Foreclosed Assets Held for Sale:

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

 

Accrued Interest Receivable and Payable: 

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

 

Restricted Investment in Bank Stocks:

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

 

Mortgage Servicing Rights:

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

 

Deposits: 

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

 

Short-term Borrowings:

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

 

Long-term 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.

 

71


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

Commitments to Extend Credit and Letters of Credit:

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

 

The following table summarizes the carrying value and fair value of financial instruments at December 31, 2014 and 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

December 31, 2014

 

December 31, 2013

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Value

 

Value

 

Value

 

Value

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

9,882 

 

$

9,882 

 

$

8,623 

 

$

8,623 

Interest-bearing time balances with other financial institutions

 

5,772 

 

 

5,772 

 

 

7,513 

 

 

7,513 

Available for sale investment securities

 

141,634 

 

 

141,634 

 

 

122,803 

 

 

122,803 

Net loans and leases

 

564,817 

 

 

572,487 

 

 

540,145 

 

 

548,923 

Restricted investment in bank stocks

 

3,181 

 

 

3,181 

 

 

2,969 

 

 

2,969 

Accrued interest receivable

 

3,058 

 

 

3,058 

 

 

2,704 

 

 

2,704 

Mortgage servicing rights

 

187 

 

 

187 

 

 

223 

 

 

223 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

$

637,922 

 

$

639,226 

 

$

608,130 

 

$

610,419 

Short-term borrowings

 

578 

 

 

578 

 

 

23,833 

 

 

23,833 

Long-term debt

 

52,961 

 

 

52,514 

 

 

23,145 

 

 

22,988 

Accrued interest payable

 

349 

 

 

349 

 

 

393 

 

 

393 

 

 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet financial instruments:

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

$

 -

 

$

 -

 

$

 -

 

$

 -

Financial standby letters of credit

 

 -

 

 

 -

 

 

 -

 

 

 -

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of Mid Penn’s financial instruments as of December 31, 2014 and 2013.  Carrying values approximate fair values for cash and cash equivalents, interest-bearing time balances with other financial institutions, restricted investment in bank stocks, mortgage servicing rights, accrued interest receivable and payable, and short-term borrowings.  Other than cash and cash equivalents, which are considered Level 1 Inputs, these instruments are Level 2 Inputs.  The following tables exclude financial instruments for which the placement in the fair value hierarchy has been disclosed elsewhere or for which the carrying amount approximates fair value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

 

in Active Markets

 

 

 

Significant

(Dollars in thousands)

 

 

 

 

 

 

 

for Identical Assets

 

Significant Other

 

Unobservable

 

 

Carrying

 

 

 

 

or Liabilities

 

Observable Inputs

 

Inputs

December 31, 2014

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial instruments - assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans and leases

 

$

564,817 

 

$

572,487 

 

$

 -

 

$

 -

 

$

572,487 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments - liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

637,922 

 

$

639,226 

 

$

 -

 

$

639,226 

 

$

 -

Long-term debt

 

 

52,961 

 

 

52,514 

 

 

 -

 

 

52,514 

 

 

 -

 

 

72


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

 

in Active Markets

 

 

 

Significant

(Dollars in thousands)

 

 

 

 

 

 

 

for Identical Assets

 

Significant Other

 

Unobservable

 

 

Carrying

 

 

 

 

or Liabilities

 

Observable Inputs

 

Inputs

December 31, 2013

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial instruments - assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans and leases

 

$

540,145 

 

$

548,923 

 

$

 -

 

$

 -

 

$

548,923 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments - liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

608,130 

 

$

610,419 

 

$

 -

 

$

610,419 

 

$

 -

Long-term debt

 

 

23,145 

 

 

22,988 

 

 

 -

 

 

22,988 

 

 

 -

 

 

 

 

(13)        Postretirement Benefit Plans

 

Mid Penn has an unfunded noncontributory defined benefit Plan for directors.  The Plan provides defined benefits based on years of service.

Mid Penn also has other postretirement benefit Plans covering full-time employees.  These health care and life insurance Plans are noncontributory.

 

The significant aspects of each Plan are as follows:

 

(a)

Health Insurance

 

For full-time employees who retire after at least 20 years of service, Mid Penn will pay premiums for major medical insurance (as provided to active employees) for a period ending on the earlier of the date the participant obtains other employment where major medical coverage is available or the date of the participant's death; however, in all cases payment of medical premiums by Mid Penn will not exceed five years.  If the retiree becomes eligible for Medicare within the five-year period beginning on his/her retirement date, the Bank may pay, at its discretion, premiums for 65 Special coverage or a similar supplemental coverage.  After the five-year period has expired, all Mid Penn paid benefits cease; however, the retiree may continue coverage through the Bank at his/her own expense.  This Plan was amended in 2008 to encompass only those employees that had achieved ten years of full-time continuous service to Mid Penn as of January 1, 2008.  Employees hired after that date and those that had not achieved the service requirements are not eligible for the Plan. 

 

(b)

Life Insurance

 

For full-time employees who retire after at least 20 years of service, Mid Penn will provide term life insurance.  The amount of coverage prior to age 65 will be three times the participant's annual salary at retirement or $50,000, whichever is less.  After age 65, the life insurance coverage amount will decrease by 10% per year, subject to a minimum amount of $2,000.

 

(c)

Directors’ Retirement Plan

 

Mid Penn has an unfunded defined benefit retirement Plan for directors with benefits based on years of service.  The adoption of this Plan generated unrecognized prior service cost of $274,000, which is being amortized over the expected future years of service of active directors.  The unamortized balance at December 31, 2014, was $86,000.

 

73


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

Health and Life

 

The following tables provide a reconciliation of the changes in the Plan’s health and life insurance benefit obligations and fair value of Plan assets for the years ended December 31, 2014 and 2013, and a statement of the funded status at December 31, 2014 and 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

December 31,

Change in benefit obligations:

2014

 

2013

Benefit obligations, January 1

$

836 

 

$

894 

    Service cost

 

13 

 

 

17 

    Interest cost

 

38 

 

 

34 

    Actuarial gain

 

(26)

 

 

(15)

    Change in assumptions

 

40 

 

 

(55)

    Benefit payments

 

(40)

 

 

(39)

Benefit obligations, December 31

$

861 

 

$

836 

 

 

 

 

 

 

Change in fair value of plan assets:

 

 

 

 

 

Fair value of plan assets, January 1

$

 -

 

$

 -

    Employer contributions

 

40 

 

 

39 

    Benefit payments

 

(40)

 

 

(39)

Fair value of plan assets, December 31

$

 -

 

$

 -

 

 

 

 

 

 

Funded status at year end

$

(861)

 

$

(836)

 

The amount recognized in the consolidated balance sheet at December 31, 2014 and 2013, is as follows:

 

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

Accrued benefit liability

$

861 

 

$

836 

 

The amounts recognized in accumulated other comprehensive (loss) consist of:

 

 

 

 

 

 

 

(Dollars in thousands)

December 31,

 

2014

 

2013

Net gain, pretax

$

(19)

 

$

(33)

Net prior service cost, pretax

 

 -

 

 

(1)

 

The accumulated benefit obligation for health and life insurance plans was $861,000 and $836,000 at December 31, 2014 and 2013, respectively.

 

The estimated prior service costs that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 2015 is ($1,052).

 

 

74


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

The components of net periodic postretirement benefit cost for 2014, 2013 and 2012 are as follows:

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

 

2012

    Service cost

$

13 

 

$

17 

 

$

21 

    Interest cost

 

38 

 

 

34 

 

 

37 

    Amortization of prior service cost

 

(1)

 

 

(1)

 

 

(1)

    Net periodic postretirement benefit cost

$

50 

 

$

50 

 

$

57 

 

Assumptions used in the measurement of Mid Penn’s benefit obligations at December 31, 2014 and 2013 are as follows:

 

 

 

 

 

Weighted-average assumptions:

2014

 

2013

    Discount rate

4.00% 

 

4.75% 

    Rate of compensation increase

3.00% 

 

3.75% 

 

Assumptions used in the measurement of Mid Penn’s net periodic benefit cost for the years ended December 31, 2014, 2013 and 2012 are as follows:

 

 

 

 

 

 

 

Weighted-average assumptions:

2014

 

2013

 

2012

    Discount rate

4.75% 

 

4.00% 

 

4.50% 

    Rate of compensation increase

3.75% 

 

3.00% 

 

3.50% 

 

Assumed health care cost trend rates at December 31, 2014, 2013 and 2012 are as follows:

 

 

 

 

 

 

 

 

2014

 

2013

 

2012

Health care cost trend rate assumed for next year

6.50% 

 

7.00% 

 

7.50% 

Rate to which the cost trend rate is assumed to decline (the

 

 

 

 

 

     ultimate trend rate)

5.50% 

 

5.50% 

 

5.50% 

Year that the rate reaches the ultimate trend rate

2016 

 

2016 

 

2016 

 

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care Plans.  At December 31, 2014, a one-percentage-point change in assumed health care cost trend rates would have the following effects:

 

 

 

 

 

 

 

(Dollars in thousands)

One-Percentage Point

 

Increase

 

Decrease

Effect on total of service and interest cost

$

 

$

Effect on accumulated postretirement benefit obligation

 

61 

 

 

54 

 

Mid Penn expects to contribute $57,000 to its life and health benefit Plans in 2015.  The following table shows the estimated benefit payments for future periods.

 

 

 

 

(Dollars in thousands)

 

 

    1/1/2015 to 12/31/2015

$

57 

    1/1/2016 to 12/31/2016

 

67 

    1/1/2017 to 12/31/2017

 

62 

    1/1/2018 to 12/31/2018

 

67 

    1/1/2019 to 12/31/2019

 

69 

    1/1/2020 to 12/31/2024

 

328 

 

Benefit obligations were measured as of December 31, 2014, for the postretirement benefit Plan. 

 

75


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

Retirement Plan

 

The following tables provide a reconciliation of the changes in the directors’ defined benefit Plan’s benefit obligations and fair value of Plan assets for the years ended December 31, 2014 and 2013 and a statement of the status at December 31, 2014 and 2013.  This Plan is unfunded.

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

December 31,

Change in benefit obligations:

2014

 

2013

Benefit obligations, January 1

$

1,130 

 

$

1,139 

    Service cost

 

33 

 

 

32 

    Interest cost

 

51 

 

 

44 

    Actuarial (gain) loss

 

(8)

 

 

    Change in assumptions

 

69 

 

 

(5)

    Benefit payments

 

(89)

 

 

(84)

Benefit obligations, December 31

$

1,186 

 

$

1,130 

 

 

 

 

 

 

Change in fair value of plan assets:

 

 

 

 

 

Fair value of plan assets, January 1

$

 -

 

$

 -

    Employer contributions

 

89 

 

 

84 

    Benefit payments

 

(89)

 

 

(84)

Fair value of plan assets, December 31

$

 -

 

$

 -

 

 

 

 

 

 

Funded status at year end

$

(1,186)

 

$

(1,130)

 

Amounts recognized in the consolidated balance sheet at December 31, 2014 and 2013 are as follows:

 

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

Accrued benefit liability

$

1,186 

 

$

1,130 

 

Amounts recognized in accumulated other comprehensive income consist of:

 

 

 

 

 

 

 

(Dollars in thousands)

December 31,

 

2014

 

2013

Net prior service cost, pretax

$

86 

 

$

108 

Net loss, pretax

 

101 

 

 

40 

 

The accumulated benefit obligation for the retirement Plan was $1,186,000 at December 31, 2014 and $1,130,000 at December 31, 2013.

 

The estimated prior service costs that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 2015 is $21,525.

The components of net periodic retirement cost for 2014, 2013 and 2012 are as follows:

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

 

2012

    Service cost

$

33 

 

$

32 

 

$

22 

    Interest cost

 

51 

 

 

44 

 

 

49 

    Amortization of prior-service cost

 

22 

 

 

22 

 

 

22 

    Net periodic retirement cost

$

106 

 

$

98 

 

$

93 

 

 

76


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

Assumptions used in the measurement of Mid Penn’s benefit obligations at December 31, 2014 and 2013 are as follows:

 

 

 

 

Weighted-average assumptions:

2014

 

2013

    Discount rate

4.00% 

 

4.75% 

    Change in consumer price index

2.00% 

 

2.75% 

 

Assumptions used in the measurement of Mid Penn’s net periodic benefit cost for the years ended December 31, 2014, 2013 and 2012 are as follows:

 

 

 

 

 

 

 

Weighted-average assumptions:

2014

 

2013

 

2012

    Discount rate

4.75% 

 

4.00% 

 

4.50% 

    Change in consumer price index

2.75% 

 

2.00% 

 

2.50% 

 

Mid Penn expects to contribute $92,000 to its retirement Plan in 2015.  The following table shows the estimated benefit payments for future periods.

 

 

 

 

(Dollars in thousands)

 

 

    1/1/2015 to 12/31/2015

$

92 

    1/1/2016 to 12/31/2016

 

95 

    1/1/2017 to 12/31/2017

 

97 

    1/1/2018 to 12/31/2018

 

100 

    1/1/2019 to 12/31/2019

 

98 

    1/1/2020 to 12/31/2024

 

514 

 

Plan benefit obligations were measured as of December 31, 2014 for the directors’ defined benefit Plan.

 

The Bank is the owner and beneficiary of insurance policies on the lives of certain officers and directors, which informally fund the retirement plan obligation.  The aggregate cash surrender value of these policies was $3,689,000 and $3,609,000 at December 31, 2014 and 2013, respectively. 

 

(14)        Other Benefit Plans

 

(a)

Defined-Contribution Plan

 

The Bank has a funded contributory defined-contribution Plan covering substantially all employees.  The Bank did not contribute to the Plan in 2014,  2013, or 2012.

 

(b)

Deferred Compensation Plans

 

The Bank has an executive deferred compensation Plan, which allows an executive officer to defer compensation for a specified period in order to provide future retirement income.  The only participant in this Plan is a former executive officer.  The Bank accrued a liability for this Plan of approximately $177,000 at December 31, 2014 and $192,000 at December 31, 2013.  The expense related to the Plan was $6,000 in 2014, $0 in 2013, and $10,000 in 2012.

 

The Bank also has a directors’ deferred compensation Plan, which allows directors to defer receipt of fees for a specified period in order to provide future retirement income.  At December 31, 2014 and 2013, the Bank accrued a liability of approximately $453,000 and $405,000, respectively, for this Plan.  The expense related to the Plan in 2014 and 2013 was $16,000 and $11,000, respectively.  Income of $13,000 was recorded in 2012.

 

(c)

Salary Continuation Agreement

 

The Bank maintains a Salary Continuation Agreement (“Agreement”) for a former executive officer.  The Agreement provides the former executive officer with a fixed annual benefit.  The benefit is payable beginning at age 65 for a period of 15 years.  At December 31, 2014 and 2013, the Bank accrued a liability of approximately $221,000 and $206,000, respectively, for the Agreement.  The expense related to the Agreement was $15,000 for 2014, $14,000 for 2013, and $13,000 for 2012. 

 

 

77


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

The Bank is the owner and beneficiary of an insurance policy on the life of the participating former executive officer, which informally funds the benefit obligation.  The aggregate cash surrender value of this policy was approximately $1,215,000 and $1,178,000 at December 31, 2014 and 2013, respectively.

 

(d)

Employee Stock Ownership Plan

The Employee Stock Ownership Plan (“ESOP”) was terminated in 2013.  Total expense related to Mid Penn’s contribution to the ESOP for 2013 and 2012 was $0, respectively.  Contributions to the ESOP were made at the discretion of the Board of Directors.  The ESOP held no common shares as of December 31, 2013, and 38,799 common shares as of December 31, 2012, all of which were allocated to Plan participants.  The ESOP shares were valued using Level 1 inputs as there was an active market for identical assets at the measurement date.  At December 31, 2013, the total fair value of the ESOP was $0.

 

(e)

Split Dollar Life Insurance Arrangements

 

At December 31, 2014 and 2013, the Bank had Split Dollar Life Insurance arrangements with two former executives for which the aggregate collateral assignment and cash surrender values are approximately $1,776,000 and $1,739,000, respectively.

 

(f)

401(k) Plan

 

The Bank has a 401(k) Plan that covers substantially all full-time employees.  The Plan allows employees to contribute a portion of their salaries and wages to the Plan.  The Plan provides for the Bank to match a portion of employee-elected salary deferrals, subject to certain percentage maximums of their salaries and wages.  The Bank’s contribution to the Plan was $216,000, $129,000, and $111,000 for the years ending December 31, 2014, 2013, and 2012, respectively.

 

(g)

Employee Stock Purchase Plan

 

Mid Penn has an Employee Stock Purchase Plan (“ESPP”) in which all employees are eligible to participate.  The Plan allows employees to use a portion of their salaries and wages to purchase common shares of Mid Penn stock at the market value of shares at the end of each calendar quarter.

 

 

(15)         Federal Income Taxes

 

The following temporary differences gave rise to the net deferred tax asset at December 31, 2014 and 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

Deferred tax assets:

 

 

 

 

 

Allowance for loan and lease losses

$

2,283 

 

$

2,148 

Loan fees

 

68 

 

 

167 

Benefit plans

 

985 

 

 

976 

Nonaccrual interest

 

955 

 

 

895 

Unrealized loss on securities

 

 -

 

 

385 

Other

 

111 

 

 

127 

 

 

4,402 

 

 

4,698 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

Depreciation

 

(801)

 

 

(945)

Bond accretion

 

(106)

 

 

(92)

Goodwill and intangibles

 

(264)

 

 

(254)

Unrealized gain on securities

 

(837)

 

 

 -

Prepaid expenses

 

(266)

 

 

(170)

Other

 

(3)

 

 

(2)

 

 

(2,277)

 

 

(1,463)

Deferred tax asset, net

$

2,125 

 

$

3,235 

 

In assessing the realizability of federal or state deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible.  Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and prudent, feasible and permissible as well as

 

78


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

available tax planning strategies in making this assessment.  Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that Mid Penn will realize the benefits of these deferred tax assets.

 

The provision for (benefit from) income taxes consists of the following:

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

 

2012

Current

$

1,574 

 

$

1,009 

 

$

794 

Deferred

 

(112)

 

 

192 

 

 

450 

Total provision for income taxes

$

1,462 

 

$

1,201 

 

$

1,244 

 

A reconciliation of income tax at the statutory rate to Mid Penn's effective rate is as follows:

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

2014

 

2013

 

2012

Provision at the expected statutory rate

$

2,435 

 

$

2,088 

 

$

2,106 

Effect of tax-exempt income

 

(1,086)

 

 

(873)

 

 

(827)

Effect of investment in life insurance

 

(68)

 

 

(78)

 

 

(84)

Nondeductible interest

 

42 

 

 

40 

 

 

49 

Nondeductible merger and acquisition expense

 

163 

 

 

 -

 

 

 -

Other items

 

(24)

 

 

24 

 

 

 -

Provision for income taxes

$

1,462 

 

$

1,201 

 

$

1,244 

 

Mid Penn has no unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods.  Mid Penn does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months.

 

No amounts for interest and penalties were recorded in income tax expense in the consolidated statement of income for the years ended December 31, 2014, 2013, or 2012.  There were no amounts accrued for interest and penalties at December 31, 2014 or 2013.

 

Mid Penn and its subsidiaries are subject to U.S. federal income tax and income tax for the state of Pennsylvania.  Mid Penn is no longer subject to examination by taxing authorities for years before 2011.  Tax years 2011 through the present, with limited exception, remain open to examination.

 

 

(16)         Regulatory Matters

 

Mid Penn Bancorp, Inc., is a bank holding company and, as such, chooses to maintain a well-capitalized status in its bank subsidiary.  Quantitative measures established by regulation to ensure capital adequacy require Mid Penn to maintain minimum amounts and ratios (set forth below) of Tier 1 capital to average assets and of total capital (as defined in the regulations) to risk-weighted assets.  As of December 31, 2014 and December 31, 2013, Mid Penn met all capital adequacy requirements to which the Bank is subject, and the Bank is considered “well-capitalized”.  However, future changes in regulations could increase capital requirements and may have an adverse effect on capital resources.

 

Certain restrictions exist regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans or advances.  The amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with the retained net profits of the preceding two years.  At December 31, 2014, $6,298,000 of undistributed earnings of the Bank included in the consolidated shareholders’ equity was available for distribution to the Corporation as dividends without prior regulatory approval, subject to regulatory capital requirements below. 

 

 

79


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

Mid Penn maintained the following regulatory capital levels, leverage ratios, and risk-based capital ratios as of December 31, 2014, and December 31, 2013, as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Capital Adequacy

 

 

 

 

 

 

 

 

 

 

 

To Be Well-Capitalized

 

 

 

 

 

 

 

 

 

 

 

Under Prompt

 

 

 

 

 

 

Minimum Capital

 

Corrective

 

Actual

 

Required

 

Action Provisions

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

56,560 

 

7.4% 

 

$

30,429 

 

4.0% 

 

$

N/A

 

N/A

Tier 1 Capital (to Risk Weighted Assets)

 

56,560 

 

10.1% 

 

 

22,295 

 

4.0% 

 

 

N/A

 

N/A

Total Capital (to Risk Weighted Assets)

 

63,336 

 

11.4% 

 

 

44,590 

 

8.0% 

 

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

56,647 

 

7.5% 

 

$

30,360 

 

4.0% 

 

$

37,950 

 

5.0% 

Tier 1 Capital (to Risk Weighted Assets)

 

56,647 

 

10.2% 

 

 

22,295 

 

4.0% 

 

 

33,442 

 

6.0% 

Total Capital (to Risk Weighted Assets)

 

63,423 

 

11.4% 

 

 

44,590 

 

8.0% 

 

 

55,737 

 

10.0% 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

52,693 

 

7.5% 

 

$

28,031 

 

4.0% 

 

$

N/A

 

N/A

Tier 1 Capital (to Risk Weighted Assets)

 

52,693 

 

9.9% 

 

 

21,234 

 

4.0% 

 

 

N/A

 

N/A

Total Capital (to Risk Weighted Assets)

 

59,100 

 

11.1% 

 

 

42,467 

 

8.0% 

 

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

52,598 

 

7.5% 

 

$

28,041 

 

4.0% 

 

$

35,051 

 

5.0% 

Tier 1 Capital (to Risk Weighted Assets)

 

52,598 

 

9.9% 

 

 

21,234 

 

4.0% 

 

 

31,850 

 

6.0% 

Total Capital (to Risk Weighted Assets)

 

59,005 

 

11.1% 

 

 

42,467 

 

8.0% 

 

 

53,084 

 

10.0% 

 

 

 

(17)         Concentration of Risk and Off-Balance Sheet Risk

 

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit and standby letters of credit.  Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

 

The Bank evaluates each customer's creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower.  Collateral held varies but may include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties.  The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit written is represented by the contractual amount of those instruments.  The Bank uses the same credit policies in making commitments and conditional obligations as it does for direct, funded loans.

 

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.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

 

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  The term of these standby letters of credit is generally one year or less.  The amount of the liability as of December 31, 2014 and 2013 for guarantees under letters of credit issued is not material.

 

As of December 31, 2014, commitments to extend credit amounted to $125,279,000 and standby letters of credit amounted to $9,837,000.

 

80


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

 

Additionally, Mid Penn has committed to fund and sell qualifying residential mortgage loans to the FHLB in the total amount of $15,000,000.  As of December 31, 2014, $7,558,000 remains to be delivered on that commitment.

 

Significant concentration of credit risk may occur when obligations of parties engaged in similar activities occur and accumulate in significant amounts.

 

In analyzing the Bank's exposure to significant concentration of credit risk, management set a parameter of 10% or more of the Bank's total net loans outstanding as the threshold in determining whether the obligations of the same or affiliated parties would be classified as significant concentration of credit risk.  Concentrations by industry, product line, type of collateral, etc., are also considered.  U.S. Treasury securities, obligations of U.S. government agencies and corporations, and any assets collateralized by the same were excluded.

 

As of December 31, 2014, commercial real estate financing was the only similar activity that met the requirements to be classified as a significant concentration of credit risk.  However, there is a geographical concentration in that most of the Bank's business activity is with customers located in Central Pennsylvania, specifically within the Bank's trading area made up of Dauphin County, lower Northumberland County, western Schuylkill County and eastern Cumberland County.

 

The Bank's highest concentrations of credit within the loan portfolio are in the areas of Commercial Real Estate financing (50.6%) as of December 31, 2014.

 

 

(18)         Commitments and Contingencies

 

Operating Leases:

 

Mid Penn has entered into a non-cancelable operating lease agreement to lease approximately 2,500 square feet of office space in the downtown Harrisburg area through July 2020.  Mid Penn also has a non-cancelable lease on a drive-up ATM site in Halifax, PA that runs through October 2015.  Mid Penn has a non-cancelable operating lease agreement with a related party to lease approximately 5,900 square feet of office space on Derry Street in Harrisburg.  The initial term ended in November 2014.  Mid Penn has the option to renew this lease for two additional three-year periods and has exercised the first of these options, extending the term of the lease through November 2017. 

 

In August 2014, Mid Penn entered into a non-cancelable operating lease agreement to lease two office suites, one approximately 2,350 square feet and the second approximately 7,000 square feet, on North Front Street in Harrisburg.  The initial lease term extends through February 2020 and can be renewed for one additional three-year period.  In October 2014, Mid Penn entered into a non-cancelable operating lease agreement with a related party to lease a retail branch property located at 5288 Simpson Ferry Road in Mechanicsburg, with the initial term of 20 years.  Mid Penn has the option to renew this lease for two additional five-year periods.  In November 2014, Mid Penn entered into a non-cancelable operating lease agreement to lease a retail branch property located at 2305 South Market Street in Elizabethtown, with the initial term extending through December 2019.  Mid Penn has the option to renew this lease for two additional five-year terms. 

 

Minimum future rental payments under these operating leases as of December 31, 2014 are as follows:

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

Lease Obligation

 

Obligation to Related Parties

2015

$

411 

 

$

114 

2016

 

439 

 

 

128 

2017

 

441 

 

 

125 

2018

 

400 

 

 

79 

2019

 

393 

 

 

66 

thereafter

 

874 

 

 

 -

 

$

2,958 

 

$

512 

 

Rental expense in connection with leases in 2014, 2013, and 2012 were $151,000, $121,000, and $120,000, respectively.

 

 

81


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

Litigation:

 

Mid Penn is subject to lawsuits and claims arising out of its business.  In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial condition of Mid Penn.

 

 

(19)         Common Stock

 

Mid Penn has reserved 50,000 of authorized, but unissued shares of its common stock for issuance under a Stock Bonus Plan (the “Plan”).  Shares issued under the Plan are at the discretion of the Board of Directors. 

 

Under Mid Penn’s amended and restated dividend reinvestment plan, (“DRIP”), 200,000 of Mid Penn’s authorized but unissued common stock are reserved for issuance.  The DRIP also allows for voluntary cash payments within specified limits, for the purchase of additional shares.

 

On June 25, 2014, the 2014 Restricted Stock Plan was registered, which awards shall not exceed, in the aggregate 100,000 shares of common stock.  The Plan was established for employees and directors of Mid Penn and the Bank, selected by the Compensation Committee of the Board of Directors, to advance the best interest of Mid Penn and its shareholders.  The Plan provides those persons who have a responsibility for its growth with additional incentives by allowing them to acquire an ownership interest in Mid Penn and thereby encouraging them to contribute to the success of the company.  As of December 31, 2014, 3,500 shares have been granted under the plan.

 

 

(20)         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 the Mid Penn Bank under the Treasury’s TARP Capital Purchase Program (the “CPP”).  Under the letter agreement, the Treasury received (1) 10,000 shares of Series A Fixed Rate Cumulative Perpetual Preferred Stock, $1,000 liquidation preference (“Series A Preferred Stock”), and (2) a warrant to purchase up to 73,099 shares of Mid Penn common stock at an exercise price of $20.52 per share (the “Warrant”). 

 

On December 28, 2012, Mid Penn entered into a letter agreement with the Treasury pursuant to which Mid Penn repurchased from the Treasury all 10,000 shares of the Series A Preferred Stock issued to the Treasury which constitutes all of the issued and outstanding shares of Series A Preferred Stock.  Mid Penn repurchased the Series A Preferred Stock for a purchase price equal to the aggregate liquidation amount of the Preferred Stock of $10,000,000, plus accrued but unpaid dividends of $59,722. All 10,000 shares of Series A Preferred Stock have subsequently been cancelled.

 

On January 23, 2013, Mid Penn entered into a letter agreement with the Treasury pursuant to which Mid Penn repurchased from the Treasury on that date the Warrant for $58,479. The Warrant was subsequently cancelled.

 

As of December 31, 2014, Mid Penn has no further financial obligations under the Series A Preferred Stock, the Warrant or the CPP.

 

 

(21)         Stock Issued Under Private Placement Offering

 

On September 26, 2012, Mid Penn filed with the Pennsylvania Department of State a Statement with Respect to Shares which, effective upon filing, designated a series of preferred stock as “7% Non-Cumulative Non-Voting Non-Convertible Perpetual Preferred Stock, Series B” (“Series B Preferred Stock”), and set forth the voting and other powers, designations, preferences and relative, participating, optional or other rights, and the qualifications, limitations or restrictions of the Series B Preferred Stock.

 

Sales of Preferred Stock

 

Mid Penn sold shares of the Series B Preferred Stock in transactions exempt from registration under the Securities Act of 1933.

 

Between September 26, 2012 and December 31, 2012, Mid Penn sold 4,880 shares of its Series B Preferred Stock for total gross proceeds of $4,880,000, which have been offset by issuance costs of $50,000.  On January 3, 2013, 120 additional shares of the Series B Preferred Stock were sold resulting in total gross proceeds of $5,000,000 for the Series B Preferred Stock offering.

 

 

82


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

The following table summarizes the Series B Preferred Stock shares sold and the gross proceeds received through the private placement offering as of December 31, 2014:

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Shares

 

Gross Proceeds

September 26, 2012 - September 30, 2012

 

 

345 

 

$

345,000 

October 1, 2012 - December 31, 2012

 

 

4,535 

 

 

4,535,000 

January 1, 2013 - December 31, 2013

 

 

120 

 

 

120,000 

January 1, 2014 - December 31, 2014

 

 

 -

 

 

 -

Total

 

 

5,000 

 

$

5,000,000 

 

Terms of the Series B Preferred Stock

 

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

 

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

 

 

(22)          Parent Company Statements

 

 

 

 

 

 

 

 

CONDENSED BALANCE SHEETS

 

 

 

 

 

(Dollars in thousands)

December 31,

 

2014

 

2013

ASSETS

 

 

 

 

 

Cash and cash equivalents

$

554 

 

$

437 

Investment in subsidiaries

 

59,217 

 

 

52,821 

Other assets

 

 -

 

 

Total assets

$

59,771 

 

$

53,265 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

Other liabilities

$

641 

 

$

349 

Shareholders' equity

 

59,130 

 

 

52,916 

Total liabilities and shareholders' equity

$

59,771 

 

$

53,265 

 

 

83


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

 

 

 

 

 

 

 

 

 

 

CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

(Dollars in thousands)

For Years Ended December 31,

 

2014

 

2013

 

2012

Income

 

 

 

 

 

 

 

 

Dividends from subsidiaries

$

2,325 

 

$

1,237 

 

$

6,628 

Other income

 

 -

 

 

 -

 

 

Total Income

 

2,325 

 

 

1,237 

 

 

6,632 

 

 

 

 

 

 

 

 

 

Expense

 

 

 

 

 

 

 

 

Other expenses

 

(716)

 

 

(184)

 

 

(217)

Total Expense

 

(716)

 

 

(184)

 

 

(217)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income tax and equity in undistributed earnings (loss) of subsidiaries

 

1,609 

 

 

1,053 

 

 

6,415 

Equity in undistributed earnings (loss) of subsidiaries

 

4,012 

 

 

3,823 

 

 

(1,538)

 

 

 

 

 

 

 

 

 

Income before income tax

 

5,621 

 

 

4,876 

 

 

4,877 

Income tax benefit

 

80 

 

 

63 

 

 

74 

 

 

 

 

 

 

 

 

 

Net income

 

5,701 

 

 

4,939 

 

 

4,951 

Series A preferred stock dividends & discount accretion

 

 -

 

 

14 

 

 

514 

Series B preferred stock dividends

 

350 

 

 

309 

 

 

 -

Net income available to common shareholders

$

5,351 

 

$

4,616 

 

$

4,437 

Comprehensive income

$

8,086 

 

$

1,774 

 

$

5,328 

 

 

 

 

 

 

 

 

 

 

 

CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

(Dollars in thousands)

For Years Ended December 31,

 

2014

 

2013

 

2012

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

$

5,701 

 

$

4,939 

 

$

4,951 

Equity in undistributed (earnings) loss of subsidiaries

 

(4,012)

 

 

(3,823)

 

 

1,538 

Decrease in other assets

 

 

 

 

 

40 

Increase in other liabilities

 

292 

 

 

334 

 

 

15 

Net cash provided by operating activities

 

1,989 

 

 

1,453 

 

 

6,544 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Dividends paid

 

(1,925)

 

 

(1,181)

 

 

(1,432)

Series A preferred stock redemption

 

 -

 

 

 -

 

 

(10,000)

Series B preferred stock issuance, net of costs

 

 -

 

 

120 

 

 

4,830 

Employee Stock Purchase Plan

 

53 

 

 

55 

 

 

56 

Warrant repurchase

 

 -

 

 

(58)

 

 

 -

Net cash used in financing activities

 

(1,872)

 

 

(1,064)

 

 

(6,546)

Net increase (decrease) in cash and cash equivalents

 

117 

 

 

389 

 

 

(2)

Cash and cash equivalents, beginning of year

 

437 

 

 

48 

 

 

50 

Cash and cash equivalents, end of year

$

554 

 

$

437 

 

$

48 

 

 

84


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

 

 

(23)          Recent Accounting Pronouncements 

 

ASU 2014-01:  The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-01, Investments – Equity Method and Joint Ventures (Topic 323):  Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force)

 

The amendments in this Update permit a reporting entity that invests in qualified affordable housing projects to account for the investments using a proportional amortization method if certain conditions are met.  The Low Income Housing Tax Credit is a program designed to encourage investment of private capital for use in the construction and rehabilitation of low income housing, which provides certain tax benefits to investors in those projects.  If an entity elects the proportional amortization method, it will amortize the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognize the net investment performance in the income statement as a component of income tax expense.  Otherwise, the entity would apply either the equity method or the cost method, as appropriate.

 

Amendments in this Update are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014.  Early adoption is permitted.  If adopted, the amendments should be applied retrospectively to all periods presented.  A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments.

 

ASU 2014-04:  The FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40):  Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).

 

The Update clarifies that when an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. 

 

Amendments in this Update are effective for public business entities for annual periods and interim periods within those annual periods, beginning after December 15, 2014.  Early adoption is permitted.  If adopted, and entity can elect to adopt the amendments in this update using either a modified retrospective transition method or a prospective transition method. 

 

ASU 2014-09:  The FASB issued ASU Update 2014-09, Revenue from Contracts with Customers (Topic 606).

 

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

 

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

 

ASU 2014-14:  The FASB issued ASU Update 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40):  Classification of Certain Government Guaranteed Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).

 

The amendments in this Update address a practice issue related to the classification of certain foreclosed residential and nonresidential mortgage loans that are either fully or partially guaranteed under government programs.  Specifically, creditors should reclassify loans that meet certain conditions to "other receivables" upon foreclosure, rather than reclassifying them to other real estate owned (OREO). 

 

85


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor.

 

The ASU is effective for public business entities for annual periods and interim periods within those annual periods, beginning after December 15, 2014.  Early adoption is permitted, if the entity has already adopted ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.  Transition methods include a prospective method and a modified retrospective method; however, entities must apply the same transition method as elected under ASU 2014-04. 

 

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

 

 

(24)         Subsequent Event

 

Mid Penn has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2014, 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.   Other than the Merger information identified and disclosed below, there were no other subsequent events identified from the period subsequent to the balance sheet date of December 31, 2014 through the date these consolidated financial statements were issued.

 

On March 1, 2015, Mid Penn consummated the merger with Phoenix Bancorp, Inc., a Pennsylvania corporation (“Phoenix”).  Under the terms of a merger agreement between the parties, Phoenix merged with, and into Mid Penn, with Mid Penn continuing as the surviving entity.  Simultaneously with the consummation of the foregoing merger, Miners Bank, a Pennsylvania-state chartered bank and wholly-owned subsidiary of Phoenix, merged with and into Mid Penn Bank, a Pennsylvania-state chartered bank and wholly-owned subsidiary of Mid Penn.

 

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

 

As part of this transaction, Phoenix shareholders received either 3.167 shares of Mid Penn’s common stock or $51.60 in cash in exchange for each share of Phoenix common stock.  Holders of contingent rights issued by Phoenix received approximately 0.414 shares of Mid Penn’s common stock as settlement of such rights.  As a result, Mid Penn issued approximately 724,000 shares of common stock with an acquisition date fair value of approximately $11,294,000, based on Mid Penn’s closing stock price of $15.60 on February 27, 2015, and cash of approximately $2,949,000.  Based on the merger agreement, outstanding stock appreciation rights of Phoenix were settled in cash in accordance with their terms.  Including an insignificant amount of cash paid in lieu of fractional shares, the fair value of total consideration paid was approximately $14,243,000. 

 

As of the date that these consolidated financial statements were issued, the final determinations of the fair value of assets acquired and liabilities assumed have not been finalized, due to the timing of the transaction.

 

 

 

86


 

MID PENN BANCORP, INC.                                     Notes to Consolidated Financial Statements

 

(25)         Summary of Quarterly Consolidated Financial Data (Unaudited)

 

The following table presents summarized quarterly financial data for 2014 and 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

2014 Quarter Ended

 

March 31

 

June 30

 

September 30

 

December 31

Interest Income

$

7,380 

 

$

7,870 

 

$

7,633 

 

$

7,744 

Interest Expense

 

1,108 

 

 

1,119 

 

 

1,089 

 

 

1,111 

Net Interest Income

 

6,272 

 

 

6,751 

 

 

6,544 

 

 

6,633 

Provision for Loan and Lease Losses

 

547 

 

 

275 

 

 

395 

 

 

400 

Net Interest Income After Provision for Loan Losses

 

5,725 

 

 

6,476 

 

 

6,149 

 

 

6,233 

Noninterest Income

 

894 

 

 

774 

 

 

741 

 

 

839 

Noninterest Expense

 

4,738 

 

 

5,068 

 

 

4,929 

 

 

5,933 

Income Before Provision for Income Taxes

 

1,881 

 

 

2,182 

 

 

1,961 

 

 

1,139 

Provision for Income Taxes

 

370 

 

 

475 

 

 

366 

 

 

251 

Net Income

 

1,511 

 

 

1,707 

 

 

1,595 

 

 

888 

Preferred Stock Dividends and Discount Accretion

 

87 

 

 

88 

 

 

88 

 

 

87 

Net Income Available to Common Shareholders

$

1,424 

 

$

1,619 

 

$

1,507 

 

$

801 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

   Basic Earnings Per Share

$

0.41 

 

$

0.46 

 

$

0.43 

 

$

0.23 

   Diluted Earnings Per Share

 

0.41 

 

 

0.46 

 

 

0.43 

 

 

0.23 

   Cash Dividends

 

0.05 

 

 

0.10 

 

 

0.10 

 

 

0.20 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

2013 Quarter Ended

 

March 31

 

June 30

 

September 30

 

December 31

Interest Income

$

6,902 

 

$

7,153 

 

$

7,633 

 

$

7,295 

Interest Expense

 

1,443 

 

 

1,306 

 

 

1,192 

 

 

1,116 

Net Interest Income

 

5,459 

 

 

5,847 

 

 

6,441 

 

 

6,179 

Provision for Loan and Lease Losses

 

495 

 

 

415 

 

 

575 

 

 

200 

Net Interest Income After Provision for Loan Losses

 

4,964 

 

 

5,432 

 

 

5,866 

 

 

5,979 

Noninterest Income

 

850 

 

 

838 

 

 

808 

 

 

794 

Noninterest Expense

 

5,037 

 

 

4,612 

 

 

4,746 

 

 

4,996 

Income Before Provision for Income Taxes

 

777 

 

 

1,658 

 

 

1,928 

 

 

1,777 

Provision for Income Taxes

 

92 

 

 

292 

 

 

440 

 

 

377 

Net Income

 

685 

 

 

1,366 

 

 

1,488 

 

 

1,400 

Preferred Stock Dividends and Discount Accretion

 

61 

 

 

87 

 

 

88 

 

 

87 

Net Income Available to Common Shareholders

$

624 

 

$

1,279 

 

$

1,400 

 

$

1,313 

Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

   Basic Earnings Per Share

$

0.18 

 

$

0.37 

 

$

0.40 

 

$

0.37 

   Diluted Earnings Per Share

 

0.18 

 

 

0.37 

 

 

0.40 

 

 

0.37 

   Cash Dividends

 

 -

 

 

0.05 

 

 

0.05 

 

 

0.15 

 


 

 

 

 

 

87


 

MID PENN BANCORP, INC.

 

ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None

 

 

ITEM 9A.    CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Mid Penn carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and Interim Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of December 31, 2014.  Based upon that evaluation, the Chief Executive Officer and Interim Principal Financial Officer concluded, as of December 31, 2014,  that, Mid Penn’s disclosure controls and procedures were effective in recording, processing, summarizing, and reporting information required to be disclosed by Mid Penn, within the time periods specified in the SEC’s rules and forms, and such information is accumulated and communicated to management to allow timely decisions regarding required disclosures.

 

Changes in Internal Controls over Financial Reporting

 

There have been no changes in Mid Penn’s internal control over financial reporting during the fourth quarter of 2014 that have materially affected, or are reasonably likely to materially affect, Mid Penn’s internal control over financial reporting.

 

Mid Penn Bancorp, Inc. Management Report on Internal Controls over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a and 15(d) – 15(f) under the Exchange Act of 1934 (“1934 Act”).  The corporation’s internal control over financial reporting includes those policies and procedures that pertain to the corporation’s ability to record, process, summarize, and report reliable financial data.  All internal control systems have inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the circumvention or overriding of internal control.  Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation.  Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time.

 

In order to ensure that the corporation’s internal control over financial reporting is effective, management regularly assesses such controls and did so most recently for its financial reporting as of December 31, 2014.  This assessment was based on criteria for effective internal control over financial reporting described in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).   Management has concluded that Mid Penn’s internal control over financial reporting, as of December 31, 2014, is effective based on those criteria.

 

This annual report does not include an attestation report of Mid Penn’s independent registered public accounting firm regarding internal control over financial reporting.  Mid Penn’s internal control over financial reporting was not subject to attestation by Mid Penn’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit Mid Penn to provide only management’s report in this annual report.

 

 

 

/s/ Rory G. Ritrievi

 

/s/ Edward P. Williams

 

 

 

Rory G. Ritrievi

 

Edward P. Williams

President and

 

Interim Principal

Chief Executive Officer

 

Financial Officer

 

 

 

ITEM 9B.    OTHER INFORMATION 

 

None

 

 

 

 

88


 

MID PENN BANCORP, INC.

PART III

 

 

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

The information required by this Item, relating to directors, executive officers, and control persons is set forth under the captions “Executive Officers”, “Information Regarding Director Nominees and Continuing Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Audit Committee Report”, and “Governance of the Corporation” in Mid Penn’s definitive proxy statement to be used in connection with the 2015 Annual Meeting of Shareholders, which pages are incorporated herein by reference.

 

The Corporation has adopted a Code of Ethics that applies to directors, officers and employees of the Corporation and the Bank.  The Corporation amended the Code of Ethics on March 17, 2013.  A copy is posted under Governance Documents in the Corporate Information section under the Investors link on the Corporation’s website, midpennbank.com.    The Corporation’s Code of Ethics may be viewed on the Mid Penn website at midpennbank.com or requested from the Corporate Secretary by telephone at 1-866-642-7736.

 

 

ITEM 11.    EXECUTIVE COMPENSATION

 

The information required by this Item, relating to executive compensation, is set forth under the captions “Compensation Discussion and Analysis”, “Executive Compensation”, “Potential Payments Upon Termination or Change In Control”, “Information Regarding Director Nominees and Continuing Directors”, “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation” of Mid Penn’s definitive proxy statement to be used in connection with the 2015 Annual Meeting of Shareholders, which pages are incorporated herein by reference.

 

 

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS

 

The information required by this Item, relating to beneficial ownership of Mid Penn’s common stock, is set forth under the caption “Beneficial Ownership of Mid Penn Bancorp’s Stock Held By Principal Shareholders and Management” of Mid Penn’s definitive proxy statement to be used in connection with the 2015 Annual Meeting of Shareholders, which pages are incorporated herein by reference. Mid Penn does not maintain any equity compensation plans.

 

 

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

The information required by this Item, relating to transactions with management and others, certain business relationships and indebtedness of management, is set forth under the captions “Certain Relationships and Related Transactions” and “Governance of the Corporation” of Mid Penn’s definitive proxy statement to be used in connection with the 2015 Annual Meeting of Shareholders, which pages are incorporated herein by reference.

 

 

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

 

The information required by this Item, relating to the fees and services provided by Mid Penn’s principal accountant, is set forth under the caption “Audit Committee Report” and “Proposal No. 3:  Ratification of the Appointment of BDO USA, LLP as the Corporation’s Independent Registered Public Accounting firm for 2015 of Mid Penn’s definitive proxy statement to be used in connection with the 2015 Annual Meeting of Shareholders, which pages are incorporated herein by reference.

 

 

89


 

MID PENN BANCORP, INC.

 

PART IV

 

 

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

1.  Financial statements are incorporated by reference in Part II, Item 8 hereof.

Reports of Independent Registered Public Accounting Firms

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Comprehensive Income

Consolidated Statements of Changes in Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

 

2.  The financial statement schedules, required by Regulation S-X, are omitted because the information is either not applicable or is included

    elsewhere in the consolidated financial statements.

 

3.  The following Exhibits are filed as part of this filing on Form 10-K, or incorporated by reference hereto:

 

 

3(i)

The Registrant’s restated Articles of Incorporation.

3(ii)

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

10.1

Mid Penn Bank’s Retirement Plan. (Incorporated by reference to Exhibit 10.1 of Registrant’s Annual Report on form 10-K filed with the SEC on March 10, 2008.)*

10.2

Mid Penn Bank’s Employee Stock Ownership Plan. (Incorporated by reference to Exhibit 10.2 of Registrant’s Annual Report on form 10-K filed with the SEC on March 10, 2008.)*

10.3

The Registrant’s Dividend Reinvestment Plan, as amended and restated. (Incorporated by reference to Registrant’s

Registration Statement on Form S-3, filed with the SEC on October 12, 2005.)

 

10.4

Mid Penn Bancorp, Inc. 2014 Restricted Stock Plan. (Incorporated by reference to Appendix A of Registrant’s Definitive Proxy Statement on Schedule 14A as filed with the SEC on March 27, 2014.)*

10.5

Form of Mid Penn Bancorp, Inc. Restricted Stock Agreement.*

10.6

Assignment and Assumption Agreement, dated as of March 1, 2015, by and among Mid Penn Bancorp, Inc., Phoenix Bancorp, Inc., the Secretary of the Treasury, and the related Small Business Lending Fund-Securities Purchase Agreement, effective July 19, 2011, by and between the U.S. Department of the Treasury and Phoenix Bancorp, Inc. (Incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on March xx, 2015)

11

Statement re: Computation of Per Share Earnings. (Incorporated by reference to Part II, Item 8 of this Annual Report on Form 10-K.)

12

Statements re: Computation of Ratios. (Incorporated by reference to Part II, Item 8 of this Annual Report on Form 10-K.)

21

Subsidiaries of Registrant.

23

Consent of BDO USA, LLP.

23.1

Consent of Baker Tilly Virchow Krause, LLP.

31.1

Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer.

31.2

Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer.

32

Principal Executive and Financial Officer’s §1350 Certifications.

 

90


 

MID PENN BANCORP, INC.

99.1

Listing of Mid-Atlantic Custom Peer Group Banks.

101.LAB

XBRL Taxonomy Extension Label Linkbase.

101.PRE

XBRL Taxonomy Extension Presentation Linkbase.

101.INS

XBRL Instance Document.

101.SCH

XBRL Taxonomy Extension Schema.

101.CAL

XBRL Taxonomy Extension Calculation Linkbase.

101.DEF

XBRL Taxonomy Extension Definition Linkbase.

 

 

 

*

Denotes a management contract or compensatory plan or arrangement.

 

 

91


 

MID PENN BANCORP, INC.

SIGNATURES

 

Pursuant to the requirements of Section 12 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.

 

 

 

By:

/s/ Rory G. Ritrievi

 

Rory G. Ritrievi

 

President and

 

Chief Executive Officer

 

(Principal Executive Officer)

 

 

Date:

March 20, 2015

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Arch 25, 2012

 

 

 

 

By: /s/ Rory G. Ritrievi

Rory G. Ritrievi

President, Chief Executive Officer and

Director (Principal Executive Officer)

 

March 20, 2015

By: /s/ Edward P. Williams

Edward P. Williams

Interim Principal Financial Officer

 

March 20, 2015

By: /s/ Robert A. Abel

Robert A. Abel, Director

 

March 20, 2015

By: /s/ Steven T. Boyer

Steven T. Boyer, Director

 

March 20, 2015

By: /s/ Matthew G. DeSoto

Matthew G. DeSoto, Director

 

March 20, 2015

By: /s/ Robert C. Grubic

Robert C. Grubic, Director

 

March 20, 2015

By: /s/ Gregory M. Kerwin

Gregory M. Kerwin, Director

 

March 20, 2015

By: /s/ Robert E. Klinger

Robert E. Klinger, Director

 

March 20, 2015

By: /s/ Vincent J. Land               

Vincent J. Land, Director

 

March 20, 2015

By: /s/ Robert J. Moisey               

Robert J. Moisey, Director

 

March 20, 2015

By: /s/ Theodore W. Mowery

Theodore W. Mowery, Director

 

March 20, 2015

By: /s/ John E. Noone               

John E. Noone, Director

 

March 20, 2015

By:/s/ Noble C. Quandel, Jr.               

Noble C. Quandel, Jr., Director

 

March 20, 2015

By:/s/ William A. Specht, III               

William A. Specht, Director

 

March 20, 2015

 

 

92