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MID PENN BANCORP INC - Quarter Report: 2014 September (Form 10-Q)

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

  (Mark One)

 

 

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

 

For the quarterly period ended September 30, 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

 

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

 

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

 

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

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

 

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

 

As of November 14, 2014, the registrant had 3,496,916 shares of common stock outstanding.

 

 


 

MID PENN BANCORP, INC.

 

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

 

PART 1 – FINANCIAL INFORMATION

2

 

Item 1 – Financial Statements

2

 

 

Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013 (Unaudited)

2

 

 

Consolidated Statements of Income for the Three and Nine months Ended September 30, 2014 and September 30, 2013 (Unaudited)

3

 

 

Consolidated Statements of Comprehensive Income for the Three and Nine months Ended September 30, 2014 and September 30, 2013 (Unaudited)

4

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Nine months Ended September 30, 2014 and September 30, 2013 (Unaudited)

5

 

 

Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2014 and September 30, 2013 (Unaudited)

6

 

 

Notes to Consolidated Financial Statements (Unaudited)

7

 

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

30

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

43

 

Item 4 – Controls and Procedures

43

 

PART II – OTHER INFORMATION

44

 

Item 1 – Legal Proceedings

44

 

Item 1A – Risk Factors

44

 

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

44

 

Item 3 – Defaults upon Senior Securities

44

 

Item 4 – Mine Safety Disclosures

44

 

Item 5 – Other Information

44

 

Item 6 – Exhibits

44

 

Signatures

45

 

 

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

 

 

 

1


 

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

 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS

 

 

 

 

 

 

 

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

September 30, 2014

 

December 31, 2013

ASSETS

 

 

 

 

 

 Cash and due from banks

$

13,854 

 

$

7,407 

 Interest-bearing balances with other financial institutions

 

1,393 

 

 

1,216 

   Total cash and cash equivalents

 

15,247 

 

 

8,623 

 Interest-bearing time deposits with other financial institutions

 

5,772 

 

 

7,513 

 Available-for-sale investment securities

 

148,134 

 

 

122,803 

 Loans and leases, net of unearned interest

 

568,161 

 

 

546,462 

   Less:  Allowance for loan and lease losses

 

(6,411)

 

 

(6,317)

 Net loans and leases

 

561,750 

 

 

540,145 

 Bank premises and equipment, net

 

12,303 

 

 

12,469 

 Restricted investment in bank stocks

 

3,395 

 

 

2,969 

 Foreclosed assets held for sale

 

849 

 

 

965 

 Accrued interest receivable

 

3,000 

 

 

2,704 

 Deferred income taxes

 

2,055 

 

 

3,235 

 Goodwill

 

1,016 

 

 

1,016 

 Core deposit and other intangibles, net

 

203 

 

 

249 

 Cash surrender value of life insurance

 

8,526 

 

 

8,374 

 Other assets

 

2,153 

 

 

2,060 

      Total Assets

$

764,403 

 

$

713,125 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

 Deposits:

 

 

 

 

 

   Noninterest-bearing demand

$

52,715 

 

$

48,346 

   Interest-bearing demand

 

226,883 

 

 

201,090 

   Money Market

 

209,556 

 

 

196,736 

   Savings

 

30,672 

 

 

29,585 

   Time

 

126,171 

 

 

132,373 

       Total Deposits 

 

645,997 

 

 

608,130 

 Short-term borrowings

 

21,854 

 

 

23,833 

  Long-term debt

 

33,008 

 

 

23,145 

  Accrued interest payable

 

646 

 

 

393 

  Other liabilities

 

4,087 

 

 

4,708 

     Total Liabilities

 

705,592 

 

 

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 September 30, 2014 and December 31, 2013

 

5,000 

 

 

5,000 

   Common stock, par value $1.00; authorized 10,000,000 shares; 3,496,916 shares

 

 

 

 

 

       issued and outstanding at September 30, 2014 and 3,494,397 at December 31, 2013

 

3,497 

 

 

3,494 

   Additional paid-in capital

 

29,888 

 

 

29,853 

   Retained earnings

 

19,117 

 

 

15,441 

   Accumulated other comprehensive income (loss)

 

1,309 

 

 

(872)

 Total Shareholders’ Equity

 

58,811 

 

 

52,916 

       Total Liabilities and Shareholders' Equity

$

764,403 

 

$

713,125 

 

 

 

 

 

 

 

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

 

 

 

2


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2014

 

2013

 

2014

 

2013

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

  Interest & fees on loans and leases

$

6,657 

 

$

6,962 

 

$

20,122 

 

$

19,717 

 Interest on interest-bearing balances

 

11 

 

 

21 

 

 

31 

 

 

97 

 Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

 

 

   U.S. Treasury and government agencies

 

359 

 

 

170 

 

 

994 

 

 

393 

   State and political subdivision obligations, tax-exempt

 

563 

 

 

466 

 

 

1,618 

 

 

1,442 

   Other securities

 

43 

 

 

14 

 

 

118 

 

 

28 

 Interest on federal funds sold and securities purchased

 

 

 

 

 

 

 

 

 

 

 

   under agreements to resell

 

 -

 

 

 -

 

 

 -

 

 

11 

     Total Interest Income 

 

7,633 

 

 

7,633 

 

 

22,883 

 

 

21,688 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 Interest on deposits

 

953 

 

 

1,068 

 

 

2,921 

 

 

3,403 

 Interest on short-term borrowings

 

 

 

12 

 

 

26 

 

 

19 

 Interest on long-term debt

 

131 

 

 

112 

 

 

369 

 

 

519 

     Total Interest Expense 

 

1,089 

 

 

1,192 

 

 

3,316 

 

 

3,941 

     Net Interest Income 

 

6,544 

 

 

6,441 

 

 

19,567 

 

 

17,747 

PROVISION FOR LOAN AND LEASE LOSSES

 

395 

 

 

575 

 

 

1,217 

 

 

1,485 

Net Interest Income After Provision for Loan and Lease Losses

 

6,149 

 

 

5,866 

 

 

18,350 

 

 

16,262 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 Income from fiduciary activities

 

120 

 

 

111 

 

 

445 

 

 

360 

 Service charges on deposits

 

154 

 

 

150 

 

 

417 

 

 

430 

 Gain on sales of investment securities

 

 -

 

 

108 

 

 

150 

 

 

220 

 Earnings from cash surrender value of life insurance

 

50 

 

 

58 

 

 

152 

 

 

174 

 Mortgage banking income

 

95 

 

 

75 

 

 

208 

 

 

300 

 ATM debit card interchange income

 

138 

 

 

130 

 

 

403 

 

 

376 

 Merchant services income

 

65 

 

 

86 

 

 

198 

 

 

260 

 Gain on sales of SBA loans

 

19 

 

 

 -

 

 

97 

 

 

 -

 Other income

 

100 

 

 

90 

 

 

339 

 

 

376 

    Total Noninterest Income 

 

741 

 

 

808 

 

 

2,409 

 

 

2,496 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 Salaries and employee benefits

 

2,635 

 

 

2,657 

 

 

8,026 

 

 

8,199 

 Occupancy expense, net

 

282 

 

 

256 

 

 

986 

 

 

835 

 Equipment expense

 

297 

 

 

323 

 

 

908 

 

 

984 

 Pennsylvania Bank Shares tax expense

 

64 

 

 

104 

 

 

272 

 

 

365 

 FDIC Assessment

 

134 

 

 

 

 

405 

 

 

339 

 Legal and professional fees

 

101 

 

 

191 

 

 

366 

 

 

511 

 Director fees and benefits expense

 

83 

 

 

81 

 

 

238 

 

 

238 

 Marketing and advertising expense

 

95 

 

 

87 

 

 

227 

 

 

192 

 Software licensing

 

238 

 

 

239 

 

 

687 

 

 

666 

 Telephone expense

 

108 

 

 

116 

 

 

304 

 

 

318 

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

 

52 

 

 

(54)

 

 

109 

 

 

(376)

 Intangible amortization

 

 

 

 

 

22 

 

 

22 

 Loan collection costs

 

76 

 

 

32 

 

 

229 

 

 

178 

 Merger and acquisition expense

 

11 

 

 

 -

 

 

11 

 

 

 -

  Other expenses

 

745 

 

 

700 

 

 

1,945 

 

 

1,924 

    Total Noninterest Expense 

 

4,929 

 

 

4,746 

 

 

14,735 

 

 

14,395 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

1,961 

 

 

1,928 

 

 

6,024 

 

 

4,363 

 Provision for income taxes

 

366 

 

 

440 

 

 

1,211 

 

 

824 

NET INCOME

 

1,595 

 

 

1,488 

 

 

4,813 

 

 

3,539 

 Series A preferred stock dividends and discount accretion

 

 -

 

 

 -

 

 

 -

 

 

14 

 Series B preferred stock dividends

 

88 

 

 

88 

 

 

263 

 

 

222 

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

$

1,507 

 

$

1,400 

 

$

4,550 

 

$

3,303 

 

 

 

 

 

 

 

 

 

 

 

 

PER COMMON SHARE DATA:

 

 

 

 

 

 

 

 

 

 

 

 Basic Earnings Per Common Share

$

0.43 

 

$

0.40 

 

$

1.30 

 

$

0.95 

 Cash Dividends

 

0.10 

 

 

0.05 

 

 

0.25 

 

 

0.10 

 

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

 

 

3


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Three Months Ended September 30,

 

2014

 

2013

 

 

 

 

 

 

Net income

$

1,595 

 

$

1,488 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

securities, net of income taxes of $40 and $147, respectively

 

77 

 

 

286 

 

 

 

 

 

 

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

 

 

 

 

 

included in net income, net of income taxes of $0 and ($37), respectively   (1) (3)

 

 -

 

 

(71)

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Total other comprehensive income

 

81 

 

 

219 

 

 

 

 

 

 

Total comprehensive income

$

1,676 

 

$

1,707 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Nine Months Ended September 30,

 

2014

 

2013

 

 

 

 

 

 

Net income

$

4,813 

 

$

3,539 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

securities, net of income taxes of $1,171 and ($1,334), respectively

 

2,270 

 

 

(2,591)

 

 

 

 

 

 

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

 

 

 

 

 

included in net income, net of income taxes of ($51) and ($75), respectively   (1) (3)

 

(99)

 

 

(145)

 

 

 

 

 

 

Change in defined benefit plans, net of income taxes of $6 and $7, respectively   (2) (3)

 

10 

 

 

10 

 

 

 

 

 

 

Total other comprehensive income (loss)

 

2,181 

 

 

(2,726)

 

 

 

 

 

 

Total comprehensive income

$

6,994 

 

$

813 

 

(1)

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

 

(2)

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

 

(3)

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

 

 

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

 

 

4


 

MID PENN BANCORP, INC.Consolidated Statements of Changes in Shareholders Equity (Unaudited)

 

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

Preferred

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Shareholders'

 

Stock

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

Equity

Balance, January 1, 2014

$

5,000 

 

$

3,494 

 

$

29,853 

 

$

15,441 

 

$

(872)

 

$

52,916 

   Net income

 

 -

 

 

 -

 

 

 -

 

 

4,813 

 

 

 -

 

 

4,813 

   Total other comprehensive income, net of taxes

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,181 

 

 

2,181 

   Employee Stock Purchase Plan (2,519 shares)

 

 -

 

 

 

 

35 

 

 

 -

 

 

 -

 

 

38 

   Common stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(874)

 

 

 -

 

 

(874)

   Series B Preferred stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(263)

 

 

 -

 

 

(263)

Balance, September 30, 2014

$

5,000 

 

$

3,497 

 

$

29,888 

 

$

19,117 

 

$

1,309 

 

$

58,811 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2013

$

4,880 

 

$

3,490 

 

$

29,816 

 

$

11,741 

 

$

2,293 

 

$

52,220 

   Net income

 

 -

 

 

 -

 

 

 -

 

 

3,539 

 

 

 -

 

 

3,539 

   Total other comprehensive loss, net of taxes

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(2,726)

 

 

(2,726)

   Common stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(349)

 

 

 -

 

 

(349)

   Employee Stock Purchase Plan (3,845 shares)

 

 -

 

 

 

 

39 

 

 

 -

 

 

 -

 

 

43 

   Series B Preferred stock issuance

 

120 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

120 

   Series B Preferred stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(222)

 

 

 -

 

 

(222)

   Amortization of warrant cost

 

 -

 

 

 -

 

 

(14)

 

 

 -

 

 

 -

 

 

(14)

   Warrant repurchase

 

 -

 

 

 -

 

 

 -

 

 

(58)

 

 

 -

 

 

(58)

Balance, September 30, 2013

$

5,000 

 

$

3,494 

 

$

29,841 

 

$

14,651 

 

$

(433)

 

$

52,553 

 

 

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

 

 

5


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Nine Months Ended September 30,

 

2014

 

2013

Operating Activities:

 

 

 

 

 

   Net Income

$

4,813 

 

$

3,539 

   Adjustments to reconcile net income to net cash

 

 

 

 

 

       provided by operating activities:

 

 

 

 

 

           Provision for loan and lease losses

 

1,217 

 

 

1,485 

           Depreciation

 

934 

 

 

936 

           Amortization of intangibles

 

46 

 

 

97 

           Net amortization of security premiums

 

925 

 

 

2,082 

   Gain on sales of investment securities

 

(150)

 

 

(220)

           Earnings on cash surrender value of life insurance

 

(152)

 

 

(174)

           SBA loans originated for sale

 

(943)

 

 

 -

           Proceeds from sales of SBA loans originated for sale

 

1,040 

 

 

 -

           Gain on sale of SBA loans

 

(97)

 

 

 -

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

 

 

 

(8)

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

 

109 

 

 

(376)

           Deferred income tax expense (benefit)

 

71 

 

 

(1,223)

           (Increase) decrease in accrued interest receivable

 

(296)

 

 

209 

           (Increase) decrease in other assets

 

(94)

 

 

1,503 

           Increase in accrued interest payable

 

253 

 

 

183 

           (Decrease) increase in other liabilities

 

(621)

 

 

1,949 

Net Cash Provided By Operating Activities 

 

7,063 

 

 

9,982 

Investing Activities:

 

 

 

 

 

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

 

1,741 

 

 

15,702 

    Proceeds from the maturity of investment securities

 

10,497 

 

 

31,777 

    Proceeds from the sale of investment securities

 

7,199 

 

 

15,118 

   Purchases of investment securities

 

(40,511)

 

 

(18,376)

   (Purchases) redemptions of restricted investment in bank stocks

 

(426)

 

 

608 

   Net increase in loans and leases

 

(23,613)

 

 

(48,175)

   Purchases of bank premises and equipment

 

(776)

 

 

(564)

   Proceeds from sale of foreclosed assets

 

798 

 

 

1,820 

Net Cash Used In Investing Activities 

 

(45,091)

 

 

(2,090)

Financing Activities:

 

 

 

 

 

   Net increase in demand deposits and savings accounts

 

44,069 

 

 

16,475 

   Net decrease in time deposits

 

(6,202)

 

 

(21,082)

    Net (decrease) increase in short-term borrowings

 

(1,979)

 

 

9,245 

   Series B preferred stock dividend paid

 

(263)

 

 

(222)

   Common stock dividend paid

 

(874)

 

 

(349)

Series B preferred stock issuance

 

 -

 

 

120 

Employee Stock Purchase Plan

 

38 

 

 

43 

Warrant repurchase

 

 -

 

 

(58)

    Proceeds from long-term debt borrowings

 

10,000 

 

 

 -

   Repayment of long-term debt

 

(137)

 

 

(14,320)

Net Cash Provided By (Used In) Financing Activities 

 

44,652 

 

 

(10,148)

Net increase (decrease) in cash and cash equivalents

 

6,624 

 

 

(2,256)

Cash and cash equivalents, beginning of year

 

8,623 

 

 

15,473 

Cash and cash equivalents, end of period

$

15,247 

 

$

13,217 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

   Interest paid

$

3,063 

 

$

3,758 

   Income taxes paid

 

870 

 

 

550 

Supplemental Noncash Disclosures:

 

 

 

 

 

   Loan transfers to foreclosed assets held for sale

$

791 

 

$

2,648 

 

 

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

 

 

6


 

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

 

(1)          Basis of Presentation

 

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

 

Certain information and disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Mid Penn believes the information presented is not misleading and the disclosures are adequate.  For comparative purposes, the September 30, 2013 and December 31, 2013 balances have been reclassified, when necessary, to conform to the 2014 presentation.  Such reclassifications had no impact on net income. The results of operations for interim periods are not necessarily indicative of operating results expected for the full year.  These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Mid Penn’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

On August 27, 2014 Mid Penn, and Phoenix Bancorp, Inc., (“Phoenix”), entered into a merger agreement that provides for the combination of the two companies.  Under the merger agreement, Phoenix will merge with and into Mid Penn, with Mid Penn remaining as the surviving entity, and the separate corporate existence of Phoenix will cease.  Miners Bank, a wholly-owned subsidiary of Phoenix, will merge with and into Mid Penn Bank, with Mid Penn Bank continuing as the surviving entity.  Before the merger is completed, the shareholders of Mid Penn and Phoenix must approve and adopt the merger agreement and customary regulatory approvals received.  Refer to footnote 12, as well as Form 8-K filed on August 27, 2014, for more information. 

 

Mid Penn has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 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.

 

(2)           Investment Securities

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

 

Realized gains and losses on dispositions are based on the net proceeds and the amortized cost of the securities sold, using the specific identification method.  Unrealized gains and losses on investment securities available for sale are based on the difference between amortized cost and fair value of each security.  These gains and losses are credited or charged to other comprehensive income, whereas realized gains and losses flow through the Corporation’s consolidated statements of income.

 

Accounting Standards Codification (“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 related to all other factors.  The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings.  The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

 

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

 

7


 

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

 

At September 30, 2014 and December 31, 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

September 30, 2014

 

 

 

 

 

 

 

 

 

 

 

available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

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

$

26,350 

 

$

586 

 

$

71 

 

$

26,865 

Mortgage-backed U.S. government agencies

 

40,617 

 

 

314 

 

 

252 

 

 

40,679 

State and political subdivision obligations

 

77,425 

 

 

1,999 

 

 

434 

 

 

78,990 

Equity securities

 

1,583 

 

 

42 

 

 

25 

 

 

1,600 

 

$

145,975 

 

$

2,941 

 

$

782 

 

$

148,134 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 $144,323,000 at September 30, 2014 and $114,600,000 at December 31, 2013, were pledged to secure public deposits and other borrowings.

 

Mid Penn realized gross gains of $0 on sales of securities available for sale during the three months ended September 30, 2014 and $150,000 during the first nine months of 2014.  Mid Penn realized gross gains of $108,000 on sales of securities available for sale during the three months ended September 30, 2013 and $220,000 during the nine months ended September 30, 2013.  Mid Penn realized gross losses on the sale of securities available for sale of $0 during the three and nine months ended September 30, 2014 and September 30, 2013.

 

The following table presents gross unrealized losses and fair value of investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2014 and December 31, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

Number of

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

September 30, 2014

Securities

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

8

 

$

10,488 

 

$

71 

 

$

 -

 

$

 -

 

$

10,488 

 

$

71 

Mortgage-backed U.S. government agencies

22

 

 

11,367 

 

 

71 

 

 

5,395 

 

 

181 

 

 

16,762 

 

 

252 

State and political subdivision obligations

39

 

 

1,820 

 

 

19 

 

 

17,808 

 

 

415 

 

 

19,628 

 

 

434 

Equity securities

2

 

 

 -

 

 

 -

 

 

583 

 

 

25 

 

 

583 

 

 

25 

Total temporarily impaired

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    available-for-sale securities

71

 

$

23,675 

 

$

161 

 

$

23,786 

 

$

621 

 

$

47,461 

 

$

782 

 

 

 

8


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

Less Than 12 Months

 

12 Months or More

 

Total

 

Number of

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

December 31, 2013

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

 

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

 

At September 30, 2014, 69 debt securities and 2 equity security with unrealized losses depreciated 1.64% from their amortized cost basis.  Securities in an unrealized loss position for twelve months or longer at September 30, 2014 totaled $621,000, of which the majority was attributed to state and political subdivision obligations with $415,000 in unrealized losses.  At December 31, 2013, 119 debt securities and 1 equity security with unrealized losses depreciated 4.59% from their amortized cost basis.  At December 31, 2013, 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.

 

The table below is the maturity distribution of investment securities at amortized cost and fair value, by contractual maturity, where applicable.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay with or without penalties.

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

September 30, 2014

 

Amortized

 

Fair

 

Cost

 

Value

Due in 1 year or less

$

1,784 

 

$

1,813 

Due after 1 year but within 5 years

 

15,265 

 

 

15,846 

Due after 5 years but within 10 years

 

45,384 

 

 

46,136 

Due after 10 years

 

41,342 

 

 

42,060 

 

 

103,775 

 

 

105,855 

Mortgage-backed securities

 

40,617 

 

 

40,679 

Equity securities

 

1,583 

 

 

1,600 

 

$

145,975 

 

$

148,134 

 

 

 

9


 

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

 

(3)           Loans and Allowance for Loan and Lease Losses

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

 

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

 

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

 

Commercial and industrial

 

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

 

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

 

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

 

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.

 

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. 

 

10


 

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

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 0.21% of the portfolio at September 30, 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 the potential risk of holding the residential mortgage in the Bank’s portfolio rather than rejecting the loan request.  In the event that the loan is held in the Bank’s portfolio, the interest rate on the residential mortgage would be increased to compensate for the added portfolio risk.

 

Consumer, including home equity

 

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

 

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

 

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

 

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

 

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

 

 

11


 

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

Allowance for Loan and Lease Losses

 

The allowance for credit losses consists of the allowance for loan and lease losses and the reserve for unfunded lending commitments. The allowance for loan and lease losses (“allowance”) represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments, which is not material to the consolidated financial statements, represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet.  The allowance is increased by the provision for loan and lease losses, and decreased by charge-offs, net of recoveries.  Loans deemed to be uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance.  All, or part, of the principal balance of loans are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.  Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectible.  Because all identified losses are immediately charged off, no portion of the allowance is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

 

The allowance for credit losses is maintained at a level 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 repaying the loan; therefore, all impaired loans are deemed to be collateral dependent, except as noted below.

 

By definition, troubled debt restructurings are considered impaired.  Impairment for troubled debt restructured loans still accruing interest is tested each quarter for both the most effective impairment method to be utilized, and the level of impairment.  As of September 30, 2014, there were six accruing troubled debt restructured loans among five unrelated relationships.  Four loans to unrelated borrowers represented $600,000 in accruing troubled debt restructurings evaluated for impairment using the estimated fair value of the collateral securing the loan, while the remaining two accruing troubled debt restructurings representing $1,471,000, were evaluated for impairment using the discounted cash flow methodology.  As of December 31, 2013, there were five accruing troubled debt restructured loans to unrelated borrowers representing $833,000.  All five loans were evaluated for impairment using the estimated value of the collateral securing the loans.

 

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

 

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

 

12


 

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

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

 

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

 

It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate within 30 days of the credit being classified as impaired.  Prior to receipt of the updated real estate valuation Mid Penn will use the most current 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.

 

Mid Penn does not currently, or plan in the future to, use automated valuation methodologies as a method of valuing real estate collateral.

 

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, an interest rate below the going market rate for similarly structured credits, 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.

 

 

13


 

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

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

 

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

 

The classes of the loan portfolio, summarized by the aggregate pass rating and the classified ratings of special mention, substandard, and doubtful within Mid Penn’s internal risk rating system as of September 30, 2014 and December 31, 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

Special

 

 

 

 

 

 

September 30, 2014

Pass

 

Mention

 

Substandard

 

Doubtful

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

114,945 

 

$

853 

 

$

765 

 

$

 -

 

$

116,563 

Commercial real estate

 

277,363 

 

 

5,484 

 

 

11,956 

 

 

 -

 

 

294,803 

Commercial real estate - construction

 

54,942 

 

 

247 

 

 

 -

 

 

 -

 

 

55,189 

Lease financing

 

1,215 

 

 

 -

 

 

 -

 

 

 -

 

 

1,215 

Residential mortgage

 

67,317 

 

 

256 

 

 

877 

 

 

 -

 

 

68,450 

Home equity

 

27,527 

 

 

148 

 

 

220 

 

 

 -

 

 

27,895 

Consumer

 

4,046 

 

 

 -

 

 

 -

 

 

 -

 

 

4,046 

 

$

547,355 

 

$

6,988 

 

$

13,818 

 

$

 -

 

$

568,161 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

Special

 

 

 

 

 

 

December 31, 2013

Pass

 

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 

 

 

14


 

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

 

Impaired loans by loan portfolio class as of September 30, 2014 and December 31, 2013 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 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

$

40 

 

$

75 

 

$

 -

 

$

185 

 

$

671 

 

$

 -

Commercial real estate

 

2,006 

 

 

5,161 

 

 

 -

 

 

2,596 

 

 

5,898 

 

 

 -

Residential mortgage

 

877 

 

 

983 

 

 

 -

 

 

266 

 

 

282 

 

 

 -

Home equity

 

30 

 

 

820 

 

 

 -

 

 

27 

 

 

792 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

131 

 

$

136 

 

$

73 

 

$

115 

 

$

243 

 

$

42 

Commercial real estate

 

6,915 

 

 

7,209 

 

 

1,162 

 

 

7,649 

 

 

7,972 

 

 

1,860 

Residential mortgage

 

 -

 

 

 -

 

 

 -

 

 

25 

 

 

25 

 

 

25 

Home equity

 

111 

 

 

111 

 

 

 

 

49 

 

 

49 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

171 

 

$

211 

 

$

73 

 

$

300 

 

$

914 

 

$

42 

Commercial real estate

 

8,921 

 

 

12,370 

 

 

1,162 

 

 

10,245 

 

 

13,870 

 

 

1,860 

Residential mortgage

 

877 

 

 

983 

 

 

 -

 

 

291 

 

 

307 

 

 

25 

Home equity

 

141 

 

 

931 

 

 

 

 

76 

 

 

841 

 

 

 

Average recorded investment of impaired loans and related interest income recognized for the three months ended September 30, 2014 and September 30, 2013 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

September 30, 2014

 

September 30, 2013

(Dollars in thousands)                    

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

 

Interest Income Recognized

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

48 

 

$

 -

 

$

185 

 

$

 -

Commercial real estate

 

2,057 

 

 

 -

 

 

6,432 

 

 

123 

Residential mortgage

 

908 

 

 

 -

 

 

293 

 

 

 -

Home equity

 

31 

 

 

 -

 

 

29 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

133 

 

$

 -

 

$

42 

 

$

 -

Commercial real estate

 

6,930 

 

 

 -

 

 

4,026 

 

 

 -

Residential mortgage

 

 -

 

 

 -

 

 

25 

 

 

 -

Home equity

 

112 

 

 

 -

 

 

53 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

181 

 

$

 -

 

$

227 

 

$

 -

Commercial real estate

 

8,987 

 

 

 -

 

 

10,458 

 

 

123 

Residential mortgage

 

908 

 

 

 -

 

 

318 

 

 

 -

Home equity

 

143 

 

 

 -

 

 

82 

 

 

 -

 

 

15


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

September 30, 2014

 

September 30, 2013

(Dollars in thousands)                    

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

 

Interest Income Recognized

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

51 

 

$

 -

 

$

186 

 

$

 -

Commercial real estate

 

2,127 

 

 

346 

 

 

6,695 

 

 

187 

Residential mortgage

 

930 

 

 

 -

 

 

325 

 

 

 -

Home equity

 

54 

 

 

 -

 

 

30 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

135 

 

$

 -

 

$

43 

 

$

 -

Commercial real estate

 

7,008 

 

 

 -

 

 

4,042 

 

 

 -

Residential mortgage

 

 -

 

 

 -

 

 

25 

 

 

 -

Home equity

 

115 

 

 

 -

 

 

54 

 

 

 -

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

186 

 

$

 -

 

$

229 

 

$

 -

Commercial real estate

 

9,135 

 

 

346 

 

 

10,737 

 

 

187 

Residential mortgage

 

930 

 

 

 -

 

 

350 

 

 

 -

Home equity

 

169 

 

 

 -

 

 

84 

 

 

 -

 

 

Non-accrual loans by loan portfolio class as of September 30, 2014 and December 31, 2013 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

September 30, 2014

 

December 31, 2013

 

 

 

 

 

 

Commercial and industrial

$

106 

 

$

300 

Commercial real estate

 

6,923 

 

 

9,648 

Residential mortgage

 

1,331 

 

 

803 

Home equity

 

253 

 

 

126 

 

$

8,613 

 

$

10,877 

 

The performance and credit quality of the loan portfolio is also monitored by the analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.  The classes of the loan portfolio summarized by the past due status as of September 30, 2014 and December 31, 2013 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 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

$

 -

 

$

295 

 

$

97 

 

$

392 

 

$

116,171 

 

$

116,563 

 

$

 -

Commercial real estate

 

1,153 

 

 

908 

 

 

6,310 

 

 

8,371 

 

 

286,432 

 

 

294,803 

 

 

 -

Commercial real estate - construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

55,189 

 

 

55,189 

 

 

 -

Lease financing

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,215 

 

 

1,215 

 

 

 -

Residential mortgage

 

70 

 

 

1,281 

 

 

145 

 

 

1,496 

 

 

66,954 

 

 

68,450 

 

 

 -

Home equity

 

229 

 

 

 

 

 -

 

 

236 

 

 

27,659 

 

 

27,895 

 

 

 -

Consumer

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

4,046 

 

 

4,046 

 

 

 -

            Total

$

1,452 

 

$

2,491 

 

$

6,552 

 

$

10,495 

 

$

557,666 

 

$

568,161 

 

$

 -

 

 

16


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 

 

$

 -

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Commercial and industrial

 

Commercial real estate

 

Commercial real estate - construction

 

Lease financing

 

Residential mortgage

 

Home equity

 

Consumer

 

Unallocated

 

Total

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 1, 2014

$

1,341 

 

$

3,458 

 

$

19 

 

$

 

$

592 

 

$

483 

 

$

63 

 

$

173 

 

$

6,130 

  Charge-offs

 

(21)

 

 

(72)

 

 

 -

 

 

 -

 

 

(47)

 

 

 -

 

 

(5)

 

 

 -

 

 

(145)

  Recoveries

 

 

 

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

14 

 

 

 -

 

 

31 

  Provisions

 

(9)

 

 

209 

 

 

 -

 

 

 -

 

 

(39)

 

 

189 

 

 

(10)

 

 

55 

 

 

395 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

$

1,318 

 

$

3,604 

 

$

19 

 

$

 

$

506 

 

$

673 

 

$

62 

 

$

228 

 

$

6,411 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

Commercial real estate

 

Commercial real estate - construction

 

Lease financing

 

Residential mortgage

 

Home equity

 

Consumer

 

Unallocated

 

Total

Beginning balance,   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2014

$

1,187 

 

$

4,006 

 

$

 

$

 -

 

$

581 

 

$

441 

 

$

72 

 

$

21 

 

$

6,317 

  Charge-offs

 

(62)

 

 

(934)

 

 

 -

 

 

 -

 

 

(133)

 

 

(43)

 

 

(31)

 

 

 -

 

 

(1,203)

  Recoveries

 

13 

 

 

11 

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

55 

 

 

 -

 

 

80 

  Provisions

 

180 

 

 

521 

 

 

10 

 

 

 

 

58 

 

 

274 

 

 

(34)

 

 

207 

 

 

1,217 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2014

$

1,318 

 

$

3,604 

 

$

19 

 

$

 

$

506 

 

$

673 

 

$

62 

 

$

228 

 

$

6,411 

Ending balance: individually evaluated for impairment

$

73 

 

$

1,162 

 

$

 -

 

$

 -

 

$

 -

 

$

 

$

 -

 

$

 -

 

$

1,243 

Ending balance: collectively evaluated for impairment

$

1,245 

 

$

2,442 

 

$

19 

 

$

 

$

506 

 

$

665 

 

$

62 

 

$

228 

 

$

5,168 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

116,563 

 

$

294,803 

 

$

55,189 

 

$

1,215 

 

$

68,450 

 

$

27,895 

 

$

4,046 

 

$

 -

 

$

568,161 

Ending balance: individually evaluated  for impairment

$

171 

 

$

8,921 

 

$

 -

 

$

 -

 

$

877 

 

$

141 

 

$

 -

 

$

 -

 

$

10,110 

Ending balance: collectively evaluated for impairment

$

116,392 

 

$

285,882 

 

$

55,189 

 

$

1,215 

 

$

67,573 

 

$

27,754 

 

$

4,046 

 

$

 -

 

$

558,051 

 

 

17


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of, and for the period ended, September 30, 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,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 1, 2013

$

1,249 

 

$

3,819 

 

$

36 

 

$

 

$

660 

 

$

409 

 

$

91 

 

$

 

$

6,267 

  Charge-offs

 

(161)

 

 

(759)

 

 

(17)

 

 

 -

 

 

(41)

 

 

(91)

 

 

(8)

 

 

 -

 

 

(1,077)

  Recoveries

 

10 

 

 

 

 

 -

 

 

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

28 

  Provisions

 

56 

 

 

902 

 

 

(9)

 

 

(2)

 

 

(239)

 

 

(81)

 

 

(7)

 

 

(45)

 

 

575 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

$

1,154 

 

$

3,970 

 

$

10 

 

$

 

$

380 

 

$

237 

 

$

84 

 

$

(43)

 

$

5,793 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

Commercial real estate

 

Commercial real estate - construction

 

Lease financing

 

Residential mortgage

 

Home equity

 

Consumer

 

Unallocated

 

Total

Beginning balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2013

$

1,298 

 

$

3,112 

 

$

64 

 

$

 

$

581 

 

$

343 

 

$

101 

 

$

 

$

5,509 

  Charge-offs

 

(182)

 

 

(877)

 

 

(17)

 

 

 -

 

 

(167)

 

 

(91)

 

 

(23)

 

 

 -

 

 

(1,357)

  Recoveries

 

26 

 

 

13 

 

 

 

 

 

 

23 

 

 

 

 

79 

 

 

 -

 

 

156 

  Provisions

 

12 

 

 

1,722 

 

 

(45)

 

 

(2)

 

 

(57)

 

 

(20)

 

 

(73)

 

 

(52)

 

 

1,485 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2013

$

1,154 

 

$

3,970 

 

$

10 

 

$

 

$

380 

 

$

237 

 

$

84 

 

$

(43)

 

$

5,793 

Ending balance: individually evaluated for impairment

$

42 

 

$

1,423 

 

$

 -

 

$

 -

 

$

25 

 

$

 

$

 -

 

$

 -

 

$

1,498 

Ending balance: collectively evaluated for impairment

$

1,112 

 

$

2,547 

 

$

10 

 

$

 

$

355 

 

$

229 

 

$

84 

 

$

(43)

 

$

4,295 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

92,241 

 

$

293,897 

 

$

44,170 

 

$

1,475 

 

$

66,860 

 

$

24,449 

 

$

5,454 

 

$

 -

 

$

528,546 

Ending balance: individually evaluated  for impairment

$

227 

 

$

9,762 

 

$

 -

 

$

 -

 

$

41 

 

$

80 

 

$

 -

 

$

 -

 

$

10,110 

Ending balance: collectively evaluated for impairment

$

92,014 

 

$

284,135 

 

$

44,170 

 

$

1,475 

 

$

66,819 

 

$

24,369 

 

$

5,454 

 

$

 -

 

$

518,436 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 

 

 

18


 

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

The recorded investments in troubled debt restructured loans at September 30, 2014 and December 31, 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)                

Pre-Modification

 

Post-Modification

 

 

September 30, 2014

Outstanding Recorded Investment

 

Outstanding Recorded Investment

 

Recorded Investment

Commercial and industrial

$

40 

 

$

35 

 

$

25 

Commercial real estate

 

11,189 

 

 

9,443 

 

 

8,154 

Residential mortgage

 

1,141 

 

 

1,100 

 

 

877 

Home equity

 

50 

 

 

 

 

 

$

12,420 

 

$

10,585 

 

$

9,062 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)                

Pre-Modification

 

Post-Modification

 

 

December 31, 2013

Outstanding Recorded Investment

 

Outstanding Recorded Investment

 

Recorded Investment

Commercial and industrial

$

40 

 

$

35 

 

$

29 

Commercial real estate

 

10,581 

 

 

8,686 

 

 

7,470 

Residential mortgage

 

423 

 

 

417 

 

 

266 

 

$

11,044 

 

$

9,138 

 

$

7,765 

 

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

 

Mid Penn’s troubled debt restructured loans at September 30, 2014 totaled $9,062,000, of which, $2,071,000 represented six accruing loans among five unrelated relationships.  Two loans belong to a borrower who was upgraded and moved to accruing status during the year.  These two loans accounted for $1,471,000 of the total accruing troubled debt restructured loan balance.  One other large commercial real estate loan represented $527,000, while the remaining three loans are residential mortgages, all in compliance with the terms of the modification.  The remaining $6,991,000, representing 16 loans, are nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired loans.  Of these 16 loans, one business relationship accounted for five loans totaling $601,000, another commercial relationship accounted for two loans totaling $579,000, and a residential real estate relationship accounted for two loans totaling $535,000.  The remaining seven loans to unrelated borrowers totaled $5,276,000.  Included in the $5,276,000 are two large commercial real estate loans with balances of $3,123,000 and $1,557,000.

 

At December 31, 2013, troubled debt restructured loans totaled $7,765,000, of which, $833,000, representing five loans to unrelated borrowers, are accruing residential mortgages in compliance with the terms of the modification.  Of the $833,000, four are accruing residential mortgages totaling $235,000 and one is an accruing 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.  Of these 12 loans, two large unrelated commercial real estate relationships accounted for two loans totaling $4,819,000, one business relationship accounted for five loans totaling $609,000, a large commercial participation totaling $1,473,000 accounted for three loans, and the remaining two unrelated loans totaled $31,000.

 

As a result of the evaluations at September 30, 2014 and September 30, 2013, all necessary specific allocations and charge-offs have been appropriately taken in the opinion of management.  As of September 30, 2014 and September 30, 2013, charge-offs associated with troubled debt restructured loans while under forbearance agreement totaled $0 and there were no defaulted troubled debt restructured loans as all troubled debt restructured loans were current with respect to their associated forbearance agreements.  As of September 30, 2014, one forbearance agreement was negotiated during 2008, 10 forbearance agreements were negotiated during 2009, one forbearance agreement was negotiated in 2010, five forbearance agreements were negotiated in 2013, and five forbearance agreements were negotiated in 2014.

 

 

19


 

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

There were no loans modified resulting in troubled debt restructurings for the three months ended September 30, 2014 and September 30, 2013.  The following tables summarize loans whose terms have been modified resulting in troubled debt restructurings during the nine months ended September 30, 2014 and September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

(Dollars in thousands)               

 

 

Pre-Modification

 

Post-Modification

 

 

September 30, 2014

Number of Contracts

 

Outstanding Recorded Investment

 

Outstanding Recorded Investment

 

Recorded Investment

Commercial real estate

2

 

$

1,057 

 

$

757 

 

$

742 

Residential mortgage

2

 

 

718 

 

 

683 

 

 

669 

Home equity

1

 

 

50 

 

 

 

 

 

5

 

$

1,825 

 

$

1,447 

 

$

1,417 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

(Dollars in thousands)               

 

 

Pre-Modification

 

Post-Modification

 

 

September 30, 2013

Number of Contracts

 

Outstanding Recorded Investment

 

Outstanding Recorded Investment

 

Recorded Investment

Commercial real estate

3

 

$

6,091 

 

$

5,588 

 

$

5,502 

Residential mortgage

2

 

 

74 

 

 

74 

 

 

29 

 

5

 

$

6,165 

 

$

5,662 

 

$

5,531 

 

 

 

(4)        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.  An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement or disclosure. 

 

The fair value hierarchy is as follows:

 

Level 1 Inputs - Unadjusted quoted prices in active markets that are accessible at the measurement date for

 identical, unrestricted assets or liabilities;

 

Level 2 Inputs - Quoted prices in markets that are not active, or inputs that are observable either directly or

 indirectly, for substantially the full term of the asset or liability;

 

20


 

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

 

Level 3 Inputs - Prices or valuation techniques that require inputs that are both significant to the fair value

 measurement and unobservable (i.e., supported by little or no market activity).

 

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

 

There were no transfers of assets between fair value Level 1 and Level 2 for the three or nine months ended September 30, 2014.  The following tables illustrate the assets measured at fair value on a recurring basis segregated by hierarchy fair value levels.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Fair value measurements at September 30, 2014 using:

 

 

Total carrying value at

 

Quoted prices in active markets

 

Significant other observable inputs

 

Significant unobservable inputs

Assets:

 

September 30, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

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

 

$

26,865 

 

$

 -

 

$

26,865 

 

$

 -

Mortgage-backed U.S. government agencies

 

 

40,679 

 

 

 -

 

 

40,679 

 

 

 -

State and political subdivision obligations

 

 

78,990 

 

 

 -

 

 

78,990 

 

 

 -

Equity securities

 

 

1,600 

 

 

558 

 

 

1,042 

 

 

 -

 

 

$

148,134 

 

$

558 

 

$

147,576 

 

$

 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Fair value measurements at December 31, 2013 using:

 

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Fair value measurements at September 30, 2014 using:

 

 

Total carrying value at

 

Quoted prices in active markets

 

Significant other observable inputs

 

Significant unobservable inputs

Assets:

 

September 30, 2014

 

(Level 1)

 

(Level 2)

 

(Level 3)

Impaired Loans

 

$

7,002 

 

$

 -

 

$

 -

 

$

7,002 

Foreclosed Assets Held for Sale

 

 

503 

 

 

 -

 

 

 -

 

 

503 

Mortgage Servicing Rights

 

 

198 

 

 

 -

 

 

 -

 

 

198 

 

 

21


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

Fair value measurements at December 31, 2013 using:

 

 

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 as of September 30, 2014 and December 31, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Quantitative Information about Level 3 Fair Value Measurements

September 30, 2014

 

Fair Value Estimate

 

Valuation Technique

 

Unobservable Input

 

Range

 

Weighted Average

Impaired Loans

 

$

7,002 

 

Appraisal of collateral (1)

 

Appraisal adjustments (2)

 

10% - 95%

 

28%

Foreclosed Assets Held for Sale

 

 

503 

 

Appraisal of collateral (1), (3)

 

Appraisal adjustments (2)

 

15% - 40%

 

24%

Mortgage Servicing Rights

 

 

198 

 

Multiple of annual service fee

 

Estimated prepayment speed based on rate and term

 

280% - 400%

 

357%

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

22


 

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

securities without relying exclusively on quoted market prices for the specific securities but rather relying on the securities’ relationship to other benchmark quoted prices. 

 

Impaired Loans:

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

 

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

 

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

 

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

 

Mid Penn does not currently, or plan to in the future, use automated valuation methodologies as a method of valuing real estate collateral.

 

Loans:

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

 

Foreclosed Assets Held for Sale:

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

 

Accrued Interest Receivable and Payable:

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

 

Restricted Investment in Bank Stocks:

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

 

Mortgage Servicing Rights:

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

 

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.

 

 

23


 

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

 

Commitments to Extend Credit and Letters of Credit:

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

 

The following table summarizes the carrying value and fair value of financial instruments at September 30, 2014 and December 31, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

September 30, 2014

 

December 31, 2013

 

Carrying

 

Fair

 

Carrying

 

Fair

 

Value

 

Value

 

Value

 

Value

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

15,247 

 

$

15,247 

 

$

8,623 

 

$

8,623 

Interest-bearing time balances with other financial institutions

 

5,772 

 

 

5,772 

 

 

7,513 

 

 

7,513 

Investment securities

 

148,134 

 

 

148,134 

 

 

122,803 

 

 

122,803 

Net loans and leases

 

561,750 

 

 

564,735 

 

 

540,145 

 

 

548,923 

Restricted investment in bank stocks

 

3,395 

 

 

3,395 

 

 

2,969 

 

 

2,969 

Accrued interest receivable

 

3,000 

 

 

3,000 

 

 

2,704 

 

 

2,704 

Mortgage servicing rights

 

198 

 

 

198 

 

 

223 

 

 

223 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

$

645,997 

 

$

647,481 

 

$

608,130 

 

$

610,419 

Short-term borrowings

 

21,854 

 

 

21,854 

 

 

23,833 

 

 

23,833 

Long-term debt

 

33,008 

 

 

32,931 

 

 

23,145 

 

 

22,988 

Accrued interest payable

 

646 

 

 

646 

 

 

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 September 30, 2014 and December 31, 2013 not previously disclosed.  Carrying values approximate fair values for cash and cash equivalents, interest-bearing time balances with other financial institutions, restricted investment in bank stocks, mortgage servicing rights, accrued interest receivable and payable, and short-term borrowings.  Other than cash and cash equivalents, which are considered Level 1 Inputs and mortgage servicing rights, which are Level 3 inputs, these instruments are Level 2 Inputs.  These tables exclude financial instruments for which the carrying amount approximates fair value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

 

in Active Markets

 

 

 

Significant

(Dollars in thousands)

 

 

 

 

 

 

 

for Identical Assets

 

Significant Other

 

Unobservable

 

 

Carrying

 

 

 

 

or Liabilities

 

Observable Inputs

 

Inputs

September 30, 2014

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial instruments - assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans and leases

 

$

561,750 

 

$

564,735 

 

$

 -

 

$

 -

 

$

564,735 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments - liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

645,997 

 

$

647,481 

 

$

 -

 

$

647,481 

 

$

 -

Long-term debt

 

 

33,008 

 

 

32,931 

 

 

 -

 

 

32,931 

 

 

 -

 

 

24


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 

 

 

 -

 

 

(5)         Guarantees

 

In the normal course of business, Mid Penn makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying consolidated financial statements.  The commitments include various guarantees and commitments to extend credit.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Mid Penn evaluates each customer’s credit-worthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the customer.  Standby letters of credit and financial guarantees written are conditional commitments to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.  Mid Penn had $9,142,000 and $8,458,000 standby letters of credit outstanding as of September 30, 2014 and December 31, 2013, respectively.  Mid Penn does not anticipate any losses because of these transactions.  The current amount of the liability as of September 30, 2014 for payment under standby letters of credit issued was not material.

 

(6)        Defined Benefit Plans

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

(Dollars in thousands)

Pension Benefits

 

Other Benefits

 

2014

 

2013

 

2014

 

2013

Service cost

$

 

$

 

$

 

$

Interest cost

 

13 

 

 

11 

 

 

 

 

Amortization of prior service cost

 

 

 

 

 

 

 

 -

       Net periodic benefit cost

$

27 

 

$

24 

 

$

13 

 

$

13 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

(Dollars in thousands)

Pension Benefits

 

Other Benefits

 

2014

 

2013

 

2014

 

2013

Service cost

$

25 

 

$

24 

 

$

10 

 

$

13 

Interest cost

 

38 

 

 

33 

 

 

28 

 

 

26 

Amortization of prior service cost

 

15 

 

 

16 

 

 

 

 

       Net periodic benefit cost

$

78 

 

$

73 

 

$

39 

 

$

40 

 

 

 

25


 

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

 

 

(7)           Accumulated Other Comprehensive Income (Loss)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Unrealized Gain (Loss) on Securities

 

Defined Benefit Plans Liabilities

 

Accumulated Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

 

 

Balance - September 30, 2014

$

1,426 

 

$

(117)

 

$

1,309 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2013

$

(745)

 

$

(127)

 

$

(872)

 

 

(8)         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 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 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 the date hereof, Mid Penn has no further financial obligations under the Series A Preferred Stock, the Warrants or the Treasury’s CPP.

 

(9)         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 its Series B Preferred Stock, in transactions exempt from registration under the Securities Act of 1933, pursuant to Section 4(a)(2) thereof.

 

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 were sold resulting in total gross proceeds of $5,000,000 for the Series B Preferred Stock offering.

 

 

26


 

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

 

The following table summarizes the Series B Preferred Stock shares sold and the gross proceeds received through the private placement offering as of September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

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 - September 30, 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.  If and when dividends are declared, they will be paid on February 15, May 15, August 15, and November 15 of each year.  If a dividend payment date is not a business day, the dividend will be paid on the immediately preceding business day but no additional dividend payment will be prorated from the date of purchase to the first dividend payment date over a quarterly dividend period of 90 days.

 

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

 

(10)         Earnings per Common Share

 

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

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2014

 

2013

 

2014

 

2013

Net Income

$

1,595 

 

$

1,488 

 

$

4,813 

 

$

3,539 

Less:  Accretion of Series A preferred stock discount

 

 -

 

 

 -

 

 

 -

 

 

14 

         Dividends on Series B preferred stock

 

88 

 

 

88 

 

 

263 

 

 

222 

Net income available to common shareholders

$

1,507 

 

$

1,400 

 

$

4,550 

 

$

3,303 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

3,496,063 

 

 

3,492,228 

 

 

3,495,293 

 

 

3,491,651 

Basic earnings per common share

$

0.43 

 

$

0.40 

 

$

1.30 

 

$

0.95 

 

Mid Penn did not have dilutive securities outstanding during the periods ended September 30, 2014 and 2013.

 

(11)          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

 

27


 

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

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).  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.

 

 

28


 

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

 

(12)          Agreement and Plan of Merger 

 

On August 27, 2014, Mid Penn entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Phoenix Bancorp, Inc., a Pennsylvania corporation (“Phoenix”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Phoenix will merge with and into Mid Penn, with Mid Penn continuing as the surviving entity (the “Merger”). Immediately following the consummation of the Merger, Miners Bank, a Pennsylvania-state chartered bank and wholly-owned subsidiary of Phoenix, will merge with and into Mid Penn Bank, a Pennsylvania-state chartered bank and wholly-owned subsidiary of Mid Penn, with Mid Penn Bank continuing as the surviving entity. The Merger Agreement was approved by the Board of Directors of each of Mid Penn and Phoenix. Phoenix shareholders may seek appraisal rights as dissenting shareholders under Pennsylvania law.

 

Subject to the terms and conditions of the Merger Agreement, upon completion of the Merger, Phoenix shareholders will have the right to receive, at their election (but subject to customary procedures applicable to oversubscription and undersubscription for cash consideration), 3.167 shares (the “Exchange Ratio”) of common stock of Mid Penn (the “Mid Penn Common Stock”), $51.60 in cash or a combination of cash and Mid Penn’s Common Stock for their shares of common stock of Phoenix (the “Merger Consideration”). The amount of Merger Consideration issuable to Phoenix shareholders is subject to a pre-closing adjustment based on, with respect to one OREO property held by Miners Bank, the estimated costs, if any, for environmental remediation that may be required and any loss in connection with the maintenance and disposition costs of such property, net of any tax benefit and any recoveries from the sale of any parcels. Mid Penn may, at its election, reduce the amount of Merger Consideration if, and only to the extent that, these costs exceed $400,000. The Exchange Ratio is subject to customary anti-dilution adjustments in the event of stock splits, stock dividends and similar transactions involving Mid Penn Common Stock. At the closing of the Merger, 80% of the outstanding shares of Phoenix common stock will be converted into the right to receive shares of Mid Penn Common Stock and the remainder of the outstanding shares of Phoenix common stock will be converted into the right to receive cash.

 

Mid Penn has agreed to assume all of the issued and outstanding shares of Phoenix’s Senior Non-Cumulative Perpetual Preferred Stock, Series A (the “SBLF Preferred Stock”), which were issued to the U.S. Department of Treasury pursuant to the Small Business Lending Fund program, upon completion of the Merger. As of the date of this Agreement, the SBLF Preferred Stock had an aggregate liquidation preference of $2,625,000.

 

Completion of the Merger is subject to various conditions, including, among others, (a) approval by Phoenix shareholders of the Merger, (b) approval by Mid Penn shareholders of the Merger, (c)  assumption of the SBLF Preferred Stock by Mid Penn, and (d) receipt of required regulatory approvals.

 

The transaction is expected to be during either the first or second quarter of 2015.

 

 

 

29


 

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

 

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

 

The following is Management’s Discussion of Consolidated Financial Condition as of September 30, 2014, compared to year-end 2013, and the Results of Operations for the three and nine months ended September 30, 2014, compared to the same period in 2013.

 

This discussion should be read in conjunction with the financial tables, statistics, and the audited financial statements and notes thereto included in Mid Penn’s Annual Report on Form 10-K for the year ended December 31, 2013.  The results of operations for interim periods are not necessarily indicative of operating results expected for the full year.

 

Certain of the matters discussed in this document and in documents incorporated by reference herein, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Mid Penn to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.  The words “expect”, “anticipates”, “intend”, “plan”, “believe”, “estimate”, and similar expressions are intended to identify such forward-looking statements.

 

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

 

·

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

·

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

·

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, which may be more expensive to complete than anticipated, including as a result of unexpected factors or events;

·

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, Inc.;

·

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.

 

Mid Penn undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report.  Readers should carefully review the risk factors described in the documents that Mid Penn periodically files with the SEC, including Mid Penn’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

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 Mid Penn used are based on historical experiences and other factors, which are believed to be reasonable under the circumstances. 

 

30


 

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

Because of the nature of the judgments and estimates that Mid Penn has made, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of our operations.

 

Management of Mid Penn considers the accounting judgments relating to the allowance for loan and lease losses 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.

 

Results of Operations 

 

Overview

 

Net income available to common shareholders was $1,507,000, $0.43 basic earnings per common share, for the quarter ended September 30, 2014, as compared to net income available to common shareholders of $1,400,000, or $0.40 basic earnings per common share, for the quarter ended September 30, 2013, a 7.6% increase.  During the nine months ended September 30, 2014, net income available to common shareholders was $4,550,000 or $1.30 basic earnings per common share, versus $3,303,000, or $0.95 basic earnings per common share for the same period in 2013, a 37.8% increase.

Net interest income increased $103,000, or 1.6%, to $6,544,000 for the quarter ended September 30, 2014 from $6,441,000 during the quarter ended September 30, 2013.  Through the nine months of 2014, net interest income increased $1,820,000, or 10.3%, to $19,567,000 from $17,747,000 during the same period in 2013. 

The provision for loan and lease losses in the third quarter of 2014 was $395,000, compared to $575,000 in the third quarter of 2013.  During the nine months ended September 30, 2014, the provision for loan and lease losses was $1,217,000 compared to $1,485,000 for the nine months ended September 30, 2013.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

2014

 

2013

 

2014

 

2013

Return on average assets

0.84%

 

0.85%

 

0.89%

 

0.68%

Return on average equity

10.73%

 

11.37%

 

11.39%

 

9.00%

 

Total assets increased $51,278,000, or 7.1%, to $764,403,000 at September 30, 2014, from $713,125,000 at December 31, 2013.  Available-for-sale investment securities increased $25,331,000 from $122,803,000 at December 31, 2013 to $148,134,000 at September 30, 2014.  Due to the strategic increase in public funds deposits, Mid Penn increased the amount of pledgeable investments in its portfolio.  Gross loans increased $21,699,000 during the first nine months of 2014, while interest-bearing time deposits with other financial institutions decreased $1,741,000 from $7,513,000 at December 31, 2013 to $5,772,000 at September 30, 2014.  Mid Penn has been allowing a substantial portion of maturing interest-bearing time deposits with other financial institutions run off to fund loan growth and purchase higher yielding investment securities.  Total deposits increased $37,867,000 from $608,130,000 at December 31, 2013 to $645,997,000 at September 30, 2014.  Interest-bearing demand and money market deposit balances increased $38,613,000 to $436,439,000 at September 30, 2014 from $397,826,000 at December 31, 2013 due to the addition of large cash management, non-profit, and government accounts.  Time deposits declined $6,202,000 from $132,373,000 at December 31, 2013 to $126,171,000 at September 30, 2014 due to the strategy of allowing non-relationship time deposits run off to focus on lower-cost deposits, including public funds.  This strategy, coupled with strong earning assets, has improved margins and provided positive momentum to net interest income during the first nine months of 2014.  Long-term debt increased $9,863,000 from $23,145,000 at December 31, 2013 to $33,008,000 at September 30, 2014 because of the addition of a $10,000,000 FHLB Advance borrowing.  The long-term debt borrowing was taken as a prudent and planned asset liability management strategy to take advantage of low long-term borrowing rates and to help fund loan demand.

 

 

31


 

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

 

Net Interest Income/Funding Sources

 

Net interest income, Mid Penn’s primary source of revenue, is the amount by which interest income on loans and investments exceeds interest incurred on deposits and borrowings.  The amount of net interest income is affected by changes in interest rates and changes in the volume and mix of interest-sensitive assets and liabilities.  Net interest income and corresponding yields are presented in the analysis below on a taxable-equivalent basis.  Income from tax-exempt assets, primarily loans to or securities issued by state and local governments, is adjusted by an amount equivalent to the federal income taxes which would have been paid if the income received on these assets was taxable at the statutory rate of 34%.

 

For the three months ended September 30, 2014, Mid Penn’s taxable-equivalent net interest margin decreased to 3.93%, from 4.08% for the three months ended September 30, 2013.  Net interest income, on a taxable-equivalent basis, in the three months ended September 30, 2014, increased to $6,966,000 from $6,764,000 during the same three months of 2013,  primarily attributable to the rise in both investment security yields from 2.83% to 3.47%, as well as the size of the portfolio.  These increases resulted in an increase in tax-effected investment security income of $366,000, or 41.2%, during the three months ended September 30, 2014 compared to the same period in 2013.

 

For the nine months ended September 30, 2014, Mid Penn’s taxable-equivalent net interest margin increased to 4.03% from 3.79% for the nine months ended September 30, 2013.  Net interest income, on a taxable equivalent basis, in the first nine months of 2014, increased to $20,775,000 from $18,733,000 in the first nine months of 2013.  These increases are primarily attributable to the rise in investment security yields from 2.50% to 3.57%, increasing tax-effected investment security income by $958,000, or 36.7%, as well as the increase in loan volume, which equated to an increase in tax-effected loan income of $537,000, or 2.7%, during the nine months ended September 30, 2014 compared to the same period in 2013.

 

Included in the net interest income increase for the nine months ended September 30, 2014 is $335,000 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 interim consolidated financial statements. 

 

Although the effective interest rate impact on earning assets and funding sources can be reasonably estimated at current interest rate levels, the options selected by customers, and the future mix of the loan, investment, and deposit products in the Bank's portfolios, may significantly impact future operating results.  In addition, our net interest income may be impacted by further interest rate actions of the Federal Reserve Bank.

 

Provision for Loan Losses

 

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

 

Mid Penn has maintained the allowance for loan and lease losses in accordance with Mid Penn’s assessment process, which takes into consideration the risk characteristics of the loan and lease portfolio, the growth in the loan and lease portfolio during the first nine months of 2014, and shifting collateral values from December 31, 2013 to September 30, 2014

 

Following its model for loan and lease loss allowance adequacy, management recorded a $395,000 provision for the three months ended September 30, 2014, compared to a provision of $575,000 for the three months ended September 30, 2013.  During the nine months ended September 30, 2014, the provision for loan and lease losses was $1,217,000,  compared to $1,485,000 for the nine months ended September 30, 2013.  The allowance for loan and lease losses as a percentage of total loans was 1.13% at September 30, 2014, compared to 1.16% at December 31, 2013, and 60.01% of nonperforming loans at September 30, 2014, compared to 53.94% at December 31, 2013.  For further discussion of factors affecting the provision for loan and lease losses please see Credit Quality, Credit Risk, and Allowance for Loan and Lease Losses in the Financial Condition section of this Management’s Discussion and Analysis.

 

32


 

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

 

Noninterest Income

 

Noninterest income decreased $67,000, or 8.3%, during the third quarter of 2014 versus the same period in 2013.  During the nine months ended September 30, 2014, noninterest income decreased $87,000, or 3.5%, versus the same period in 2013.  The following components of noninterest income showed more significant changes:

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

Three Months Ended September 30,

 

2014

 

2013

 

$ Variance

 

% Variance

Net gain on sales of investment securities

$

 -

 

$

108 

 

$

(108)

 

-100.00%

 

Mid Penn did not sell any securities in the three months ended September 30, 2014, and therefore, had no gain on such activity, compared to gains of $108,000 recognized in the three months ended September 30, 2013. 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

Nine Months Ended September 30,

 

 

2014

 

 

2013

 

 

$ Variance

 

% Variance

Income from fiduciary activities

$

445 

 

$

360 

 

$

85 

 

23.61% 

Net gain on sales of investment securities

 

150 

 

 

220 

 

 

(70)

 

-31.82%

Mortgage banking income

 

208 

 

 

300 

 

 

(92)

 

-30.67%

Merchant services income

 

198 

 

 

260 

 

 

(62)

 

-23.85%

Net gain on sales of SBA loans

 

97 

 

 

 -

 

 

97 

 

NA

 

Income from fiduciary activities increased during the nine months ended September 30, 2014 versus the same period in 2013 as a result of increased sales of third party mutual funds and annuities during 2014 versus 2013.  Mid Penn recognized gains on the sale of investment securities in both 2014 and 2013 and the investment portfolio continues to be actively managed to react to changing market conditions and position the portfolio for future performance.  Mortgage banking income was down during the nine months ended September 30, 2014 over September 30, 2013.  Refinancing activity subsided in 2014 relative to 2013 due to mortgage rate increases.  While home purchase activity improved during the quarter, it did not rebound enough to compensate for the decline throughout the market area during the first quarter of 2014 due to harsh winter weather conditions.  This left Mid Penn behind for the nine months ended September 30, 2014 over the same period in 2013.  Merchant services income decreased for the nine months ended September 30, 2014 versus the same periods in 2013.  This variance is the result of increased competition in that business line along with harsh weather conditions during the first quarter as merchant sales were impacted by the lack of traffic.  Net gain on sales of SBA loans increased during the nine months ended September 30, 2014 versus the same period in 2013 as Mid Penn began selling the guaranteed portion of Small Business Association (SBA) loans in the secondary market in 2014.

 

Noninterest Expenses

 

Noninterest expenses increased $183,000, or 3.9%, during the third quarter of 2014, versus the same period in 2013.  During the nine months ended September 30, 2014, noninterest expenses increased $340,000, or 2.4%, versus the same period in 2013.  The changes were primarily a result of the following components of noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

Three Months Ended September 30,

 

2014

 

2013

 

$ Variance

 

% Variance

Pennsylvania Bank Shares tax expense

$

64 

 

$

104 

 

$

(40)

 

-38.46%

FDIC Assessment

 

134 

 

 

 

 

128 

 

2,133.33% 

Legal and professional fees

 

101 

 

 

191 

 

 

(90)

 

-47.12%

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

 

52 

 

 

(54)

 

 

106 

 

-196.30%

Loan collection costs

 

76 

 

 

32 

 

 

44 

 

137.50% 

Other expenses

 

745 

 

 

700 

 

 

45 

 

6.43% 

 

Pennsylvania Bank Shares tax expense decreased during the three months ended September 30, 2014 in accordance with a change in the statutory calculation methodology. FDIC assessments consist of premiums paid by FDIC-insured institutions.  The assessments are based on statutory and risk classification factors.  FDIC assessments increased during the three months ended September 30, 2014 over the same period in 2013 due to a $139,000 refund from the FDIC in September 2013 for overbillings that began in the second quarter of 2012.  Legal and professional fees decreased during the three months ended September 30, 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.  Loss (gain) on sale/write-down of foreclosed assets fluctuated during the three months ended September 30, 2014 versus the same period in 2013 due to the write-down of foreclosed assets as a result of updated appraisals on subject properties within the

 

33


 

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

portfolio in 2014 and the recognition of a substantial number of gains on the sale of a property during the third quarter of 2013.  Loan collection costs increased during the three months ended September 30, 2014 versus the same period in 2013 primarily due to real estate taxes Mid Penn was required to pay in 2014 in order to maintain its lien positions on foreclosed properties.  In addition, the three months ended September 30, 2013 loan collection cost figure was offset by $56,000 in previously paid costs reimbursed to Mid Penn in that quarter.  Other expenses increased during the three months ended September 30, 2014 primarily due to a migration to a per item cost structure associated with the transition to a hosted computer environment with our primary computer vendor during the fourth quarter of 2013.

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

Nine Months Ended September 30,

 

2014

 

2013

 

$ Variance

 

% Variance

Salaries and employee benefits

$

8,026 

 

$

8,199 

 

$

(173)

 

-2.11%

Occupancy expense, net

 

986 

 

 

835 

 

 

151 

 

18.08% 

Legal and professional fees

 

366 

 

 

511 

 

 

(145)

 

-28.38%

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

 

109 

 

 

(376)

 

 

485 

 

-128.99%

 

Salaries and employee benefits decreased during the nine months ended September 30, 2014 versus the same period in 2013, primarily due to improved actual medical claims from Mid Penn’s self-insured plan.  2014 also reflects the benefit of lower staffing levels in operational areas derived from the conversion to a hosted computer environment with our primary computer vendor during the fourth quarter of 2013.  Occupancy expense increased during the nine months ended September 30, 2014 due to increases in snow removal costs and heating as a result of the harsh weather conditions during the first and early second quarters of 2014.    Legal and professional fees decreased during the nine months ended September 30, 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.  Loss (gain) on sale/write-down of foreclosed assets fluctuated during the nine months ended September 30, 2014 versus the same period in 2013 due to the recognition of a substantial gain on the sale of a property during the second quarter of 2013.

 

Income Taxes

 

The provision for income taxes was $366,000 for the three months ended September 30, 2014, compared to the provision for income taxes of $440,000 in the same period last year.  The effective tax rate for the three months ended September 30, 2014, was 18.7% compared to 22.9% for the three months ended September 30, 2013.  This decrease is predominantly attributed to higher tax-exempt interest in the three months ended September 30, 2014 over the three months ended September 30, 2013 generated from municipal securitiesThe provision for income taxes for the nine months ended September 30, 2014 was $1,211,000,  compared to $824,000 during the same period in 2013.  The effective tax rate for the nine months ended September 30, 2014 was 20.1% compared to 18.9% for the nine months ended September 30, 2013.  This increase is mainly due to Mid Penn’s strong earnings in 2014 compared to the same period last year.  Generally, Mid Penn’s effective tax rate is below the statutory rate due to earnings on tax-exempt loans, investments, and bank-owned life insurance, as well as the impact of tax credits.  The realization of deferred tax assets is dependent on future earnings.  Mid Penn currently anticipates that future earnings will be adequate to fully utilize deferred tax assets.

 

Financial Condition

 

Loans

 

During the first nine months of 2014, Mid Penn experienced an increase in loans outstanding of $21,699,000, or 4.0%.  Commercial and industrial loans, as well as commercial real estate construction loans accounted for the majority of the growth as noted in the table below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

September 30, 2014

 

December 31, 2013

 

Amount

 

%

 

Amount

 

%

Commercial and industrial

$

116,563 

 

20.5% 

 

$

105,844 

 

19.4% 

Commercial real estate

 

294,803 

 

51.9% 

 

 

292,774 

 

53.6% 

Commercial real estate - construction

 

55,189 

 

9.7% 

 

 

45,647 

 

8.4% 

Lease financing

 

1,215 

 

0.2% 

 

 

1,356 

 

0.2% 

Residential mortgage

 

68,450 

 

12.0% 

 

 

69,830 

 

12.8% 

Home equity

 

27,895 

 

4.9% 

 

 

26,321 

 

4.8% 

Consumer

 

4,046 

 

0.8% 

 

 

4,690 

 

0.8% 

 

$

568,161 

 

100.0% 

 

$

546,462 

 

100.0% 

 

Most of Mid Penn’s lending activities are with customers located within the trading area of Dauphin County, lower Northumberland County, western Schuylkill County and eastern Cumberland County, Pennsylvania.  This region 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

 

34


 

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

help shield the local area from national trends.  At September 30, 2014, the unadjusted unemployment rate for the Harrisburg/Carlisle area was 5.3% versus the seasonally adjusted national unemployment rate of 5.9%.

 

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

 

During the first nine months of 2014, Mid Penn had net charge-offs of $1,123,000 compared to net charge-offs of $1,201,000 during the same period of 2013.  Loans charged off during the first nine months of 2014 were comprised of 14 commercial real estate loans spread among nine unrelated relationships totaling $934,000, five residential real estate loans to unrelated borrowers totaling $133,000, three commercial and industrial loans to unrelated borrowers totaling $62,000, one home equity loan for $43,000, and five consumer loans to unrelated borrowers totaling $23,000.  The remaining $8,000 was comprised of deposit account charge-offs.  Mid Penn may need to make future adjustments to the allowance and the provision for loan and lease losses if economic conditions or loan credit quality differs substantially from the assumptions used in making Mid Penn’s evaluation of the level of the allowance for loan losses as compared to the balance of outstanding loans.

 

Changes in the allowance for loan and lease losses for the nine months ended September 30, 2014 and 2013 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Nine Months Ended September 30,

 

2014

 

2013

Average total loans outstanding (net of unearned interest)

$

549,038 

 

$

499,726 

Period ending total loans outstanding (net of unearned interest)

 

568,161 

 

 

528,546 

 

 

 

 

 

 

Balance, beginning of period

 

6,317 

 

 

5,509 

 

 

 

 

 

 

    Loans charged off during period

 

(1,203)

 

 

(1,357)

    Recoveries of loans previously charged off

 

80 

 

 

156 

Net charge-offs

 

(1,123)

 

 

(1,201)

 

 

 

 

 

 

Provision for loan and lease losses

 

1,217 

 

 

1,485 

Balance, end of period

$

6,411 

 

$

5,793 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

0.27% 

 

 

0.32% 

 

 

 

 

 

 

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

 

1.13% 

 

 

1.10% 

 

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

 

 

35


 

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

 

At September 30, 2014, total nonperforming loans amounted to $10,684,000, or 1.88%, of loans and leases net of unearned income, as compared to levels of $11,710,000, or 2.14%, at December 31, 2013 and $11,742,000, or 2.22%, at September 30, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

September 30, 2014

 

December 31, 2013

 

September 30, 2013

Nonperforming Assets:

 

 

 

 

 

 

 

 

   Nonaccrual loans

$

8,613 

 

$

10,877 

 

$

10,885 

   Accruing troubled debt restructured loans

 

2,071 

 

 

833 

 

 

857 

        Total nonperforming loans

 

10,684 

 

 

11,710 

 

 

11,742 

 

 

 

 

 

 

 

 

 

   Foreclosed real estate

 

849 

 

 

965 

 

 

2,047 

       Total non-performing assets

 

11,533 

 

 

12,675 

 

 

13,789 

 

 

 

 

 

 

 

 

 

   Accruing loans 90 days or more past due

 

 -

 

 

 -

 

 

 -

       Total risk elements

$

11,533 

 

$

12,675 

 

$

13,789 

 

 

 

 

 

 

 

 

 

Nonperforming loans as a % of total

 

 

 

 

 

 

 

 

    loans outstanding

 

1.88% 

 

 

2.14% 

 

 

2.22% 

Nonperforming assets as a % of total

 

 

 

 

 

 

 

 

    loans outstanding and other real estate

 

2.03% 

 

 

2.32% 

 

 

2.60% 

Ratio of allowance for loan losses

 

 

 

 

 

 

 

 

    to nonperforming loans

 

60.01% 

 

 

53.94% 

 

 

49.34% 

 

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

 

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

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

September 30, 2014

 

December 31, 2013

Period ending total loans outstanding (net of unearned interest)

$

568,161 

 

$

546,462 

Allowance for loan and lease losses

 

6,411 

 

 

6,317 

Total Nonperforming loans

 

10,684 

 

 

11,710 

Nonperforming and impaired loans with partial charge-offs

 

2,717 

 

 

2,103 

 

 

 

 

 

 

Ratio of nonperforming loans with partial charge-offs

 

 

 

 

 

    to total loans

 

0.48% 

 

 

0.38% 

 

 

 

 

 

 

Ratio of nonperforming loans with partial charge-offs

 

 

 

 

 

    to total nonperforming loans

 

25.43% 

 

 

17.96% 

 

 

 

 

 

 

Coverage ratio net of nonperforming loans with

 

 

 

 

 

    partial charge-offs

 

80.47% 

 

 

65.75% 

 

 

 

 

 

 

Ratio of total allowance to total loans less

 

 

 

 

 

    nonperforming loans with partial charge-offs

 

1.13% 

 

 

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. 

 

36


 

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

 

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

 

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

 

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

 

By definition, troubled debt restructurings are considered impaired.  Impairment for troubled debt restructured loans still accruing interest is tested each quarter for both the most effective impairment method to be utilized, and the level of impairment.  As of September 30, 2014, there were six accruing troubled debt restructured loans among five unrelated relationships.  Four loans to unrelated borrowers represented $600,000 in accruing troubled debt restructurings evaluated for impairment using the estimated fair value of the collateral securing the loan, while the remaining two accruing troubled debt restructurings representing $1,471,000, were evaluated for impairment using the discounted cash flow methodology.  As of December 31, 2013, there were five accruing troubled debt restructured loans to unrelated borrowers representing $833,000.  All five loans were evaluated for impairment using the estimated value of the collateral securing the loans.

 

It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate within 30 days of the credit being classified as substandard non-accrual.  Prior to receipt of the updated real estate valuation Mid Penn will use the most current 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. 

 

Mid Penn does not currently, or plan in the future to, use automated valuation methodologies as a method of valuing real estate collateral.

 

37


 

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

 

As of September 30, 2014, Mid Penn had several loan relationships, with an aggregate carrying balance of $10,110,000, deemed impaired.  This group of loans is further broken down into a group of loans with an aggregate carrying balance of $7,156,000 for which specific allocations totaling $1,243,000 have been included within the allowance for loan and lease losses.  The remaining $2,954,000 of loans requires no specific allocation within the loan loss reserve.  The $10,110,000 of impaired loan relationships is comprised of $8,291,000 in real estate secured commercial relationships and $1,819,000 in business relationships.  There are specific allocations against the real estate secured group totaling $985,000,  representing 10 loans among eight relationships.  Two loans to unrelated commercial borrowers accounted for $465,000 and $217,000 of the specific allocation against real estate secured loans, while the additional eight loans, among the other six relationships, accounted for the remaining $303,000.  The group of impaired business relationships with specific allocations consists of four loans among three relationships with $257,000 in specific allocations set aside against these credits.  One large commercial participation relationship comprised of two loans is responsible for a specific allocation of $185,000 of the total pool attributable to this segment.  Management currently believes that the specific reserves are adequate to cover foreseeable probable losses related to these relationships.

 

The allowance for loan losses is a reserve established in the form of a provision expense for loan and lease losses and is reduced by loan charge-offs net of recoveries.  In conjunction with an internal loan review function that operates independently of the lending function, management monitors the loan portfolio to identify risk on a monthly basis so that an appropriate allowance is maintained.  Based on an evaluation of the loan portfolio, management presents a monthly review of the allowance for loan and lease losses to the Board of Directors, indicating any changes in the allowance since the last review.  In making the evaluation, management considers the results of recent regulatory examinations, which typically include a review of the allowance for loan and lease losses an integral part of the examination process.

 

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

 

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

 

·

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

·

Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans.

·

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

·

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

·

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

 

While the allowance for loan and lease losses is maintained at a level believed to be adequate by management for covering estimated losses in the loan and lease portfolio, determination of the allowance is inherently subjective, as it requires estimates, all of which may be susceptible to significant change.  Changes in these estimates may impact the provisions charged to expense in future periods. 

 

Management believes, based on information currently available, that the allowance for loan and lease losses of $6,411,000 is adequate as of September 30, 2014.  

 

Liquidity

 

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

 

·

A growing core deposit base;

·

Proceeds from the sale or maturity of investment securities;

·

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

·

Payments received on loans and mortgage-backed securities;

·

Overnight correspondent bank borrowings on various credit lines; and,

·

Borrowing capacity available from the FHLB.

 

38


 

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

 

Major sources of cash in the first nine months of 2014 came from the increase in demand deposits and savings accounts of $44,069,000, proceeds from the maturity of investment securities of $10,497,000, and proceeds from long-term debt borrowings of $10,000,000.

 

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

 

Major sources of cash in the first nine months of 2013 came from the proceeds from the maturities and sales of investment securities of $31,777,000 and $15,118,000, respectively, as well as the net increase in demand deposits and savings accounts of $16,475,000.

 

Major uses of cash in the first nine months of 2013 were the increase in net loans and leases of $48,175,000,  the decrease in time deposits of $21,082,000, and the purchases of investment securities of $18,376,000.

 

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

 

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

 

Capital Resources

 

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

 

At September 30, 2014, shareholders’ equity was $58,811,000, an increase of $5,895,000, or 11.1%, from $52,916,000 at December 31, 2013.  Capital has been positively impacted in 2014 by positive earnings available to common shareholders of $4,550,000 and other comprehensive income of $2,181,000.  All of Mid Penn’s investment securities are classified as available-for-sale, making this portion of the balance sheet more sensitive to the changing market value of investments.  Accumulated other comprehensive income associated with the change in investment securities increased $2,171,000 from December 31, 2013, and accounts for the majority of the change in accumulated other comprehensive income (loss).

 

Banks are evaluated for capital adequacy based on the ratio of capital to risk-weighted assets and total assets.  The risk-based capital standards require all banks to have Tier 1 capital of at least 4.0% and total capital (including Tier 1 capital) of at least 8.0% of risk-weighted assets.  The capital standard based on average assets, also known as the “leverage ratio”, requires all, but the most highly-rated banks, to have Tier 1 capital of at least 4.0% of total average assets.  At September 30, 2014, Mid Penn met the definition of a “well-capitalized” institution.

 

On August 27, 2014 Mid Penn, and Phoenix Bancorp, Inc., (“Phoenix”), entered into a merger agreement that provides for the combination of the two companies.  Under the merger agreement, Phoenix will merge with and into Mid Penn, with Mid Penn remaining as the surviving entity, and the separate corporate existence of Phoenix will cease.  Miners Bank, a wholly-owned subsidiary of Phoenix, will merge with and into Mid Penn Bank, with Mid Penn Bank continuing as the surviving entity.  The estimated cash expenditure of the merger is estimated to be $2,949,000 and will be funded by additional long-term borrowings.  For further discussion on the merger, please see the Phoenix Merger section of the Management’s Discussion and Analysis.

 

 

39


 

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 September 30, 2014 and December 31, 2013.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

56,435 

 

7.6% 

 

$

29,541 

 

4.0% 

 

$

N/A

 

N/A

Tier 1 Capital (to Risk Weighted Assets)

 

56,435 

 

10.3% 

 

 

21,891 

 

4.0% 

 

 

N/A

 

N/A

Total Capital (to Risk Weighted Assets)

 

62,906 

 

11.5% 

 

 

43,782 

 

8.0% 

 

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

56,338 

 

7.6% 

 

$

29,530 

 

4.0% 

 

$

36,912 

 

5.0% 

Tier 1 Capital (to Risk Weighted Assets)

 

56,338 

 

10.3% 

 

 

21,891 

 

4.0% 

 

 

32,837 

 

6.0% 

Total Capital (to Risk Weighted Assets)

 

62,809 

 

11.5% 

 

 

43,782 

 

8.0% 

 

 

54,728 

 

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% 

 

Regulatory Capital Changes

 

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations begins January 1, 2015, while larger institutions (generally those with assets of $250 billion or more) must begin compliance on January 1, 2014. 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.

 

 

40


 

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

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.

 

Preferred Stock 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.

 

Mid Penn sold shares of its Series B Preferred Stock, in transactions exempt from registration under the Securities Act of 1933, pursuant to Section 4(a)(2) thereof.

 

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 were sold resulting in total gross proceeds of $5,000,000 for the Series B Preferred Stock offering.

 

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

 

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

 

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 the date hereof, Mid Penn has no further financial obligations under the Series A Preferred Stock, the Warrants, or the Treasury’s CPP.

 

 

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

 

Phoenix Merger

 

On August 27, 2014, Mid Penn entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Phoenix Bancorp, Inc., a Pennsylvania corporation (“Phoenix”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, Phoenix will merge with and into Mid Penn, with Mid Penn continuing as the surviving entity (the “Merger”). Immediately following the consummation of the Merger, Miners Bank, a Pennsylvania-state chartered bank and wholly-owned subsidiary of Phoenix, will merge with and into Mid Penn Bank, a Pennsylvania-state chartered bank and wholly-owned subsidiary of Mid Penn, with Mid Penn Bank continuing as the surviving entity. The Merger Agreement was approved by the Board of Directors of each of Mid Penn and Phoenix. Phoenix shareholders may seek appraisal rights as dissenting shareholders under Pennsylvania law.

 

Subject to the terms and conditions of the Merger Agreement, upon completion of the Merger, Phoenix shareholders will have the right to receive, at their election (but subject to customary procedures applicable to oversubscription and undersubscription for cash consideration), 3.167 shares (the “Exchange Ratio”) of common stock of Mid Penn (the “Mid Penn Common Stock”), $51.60 in cash or a combination of cash and Mid Penn’s Common Stock for their shares of common stock of Phoenix (the “Merger Consideration”). The amount of Merger Consideration issuable to Phoenix shareholders is subject to a pre-closing adjustment based on, with respect to one OREO property held by Miners Bank, the estimated costs, if any, for environmental remediation that may be required and any loss in connection with the maintenance and disposition costs of such property, net of any tax benefit and any recoveries from the sale of any parcels. Mid Penn may, at its election, reduce the amount of Merger Consideration if, and only to the extent that, these costs exceed $400,000. The Exchange Ratio is subject to customary anti-dilution adjustments in the event of stock splits, stock dividends and similar transactions involving Mid Penn Common Stock. At the closing of the Merger, 80% of the outstanding shares of Phoenix common stock will be converted into the right to receive shares of Mid Penn Common Stock and the remainder of the outstanding shares of Phoenix common stock will be converted into the right to receive cash.

 

Mid Penn has agreed to assume all of the issued and outstanding shares of Phoenix’s Senior Non-Cumulative Perpetual Preferred Stock, Series A (the “SBLF Preferred Stock”), which were issued to the U.S. Department of Treasury pursuant to the Small Business Lending Fund program, upon completion of the Merger. As of the date of this Agreement, the SBLF Preferred Stock had an aggregate liquidation preference of $2,625,000.

 

Completion of the Merger is subject to various conditions, including, among others, (a) approval by Phoenix shareholders of the Merger, (b) approval by Mid Penn shareholders of the Merger, (c)  assumption of the SBLF Preferred Stock by Mid Penn, and (d) receipt of required regulatory approvals.

 

The transaction is expected to be during either the first or second quarter of 2015.

 

 

 

 

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MID PENN BANCORP, INC. 

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

There has been no material change in market risk since December 31, 2013, as reported in Mid Penn’s Form 10-K filed with the SEC on March 21, 2014.

 

 

ITEM 4 – CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Mid Penn maintains controls and procedures designed to ensure that information required to be disclosed in the reports that Mid Penn files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Based upon their evaluation of those controls and procedures as of September 30, 2014, Mid Penn’s management, with the participation of the Principal Executive Officer and Principal Financial and Accounting Officer, concluded that the disclosure controls and procedures were effective as of such date.

 

Changes in Internal Controls

 

During the three months ended September 30, 2014, there were no changes in Mid Penn’s internal control over financial reporting, that have materially affected, or are reasonable likely to materially affect, Mid Penn’s internal control over financial reporting.

 

 

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MID PENN BANCORP, INC. 

 

PART II – OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEDINGS

 

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

 

 

ITEM 1A  RISK FACTORS

 

Management has reviewed the risk factors that were previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2013.  There are no material changes from the risk factors as previously disclosed in the Form 10-K.

 

 

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

 

None

 

 

 

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

 

None

 

 

ITEM 4 - MINE SAFETY DISCLOSURES

 

Not Applicable

 

 

ITEM 5 – OTHER INFORMATION

 

None

 

 

ITEM 6 – EXHIBITS

 

·

Exhibit 2.1 – Agreement and Plan of Merger, dated as of August 27, 2014, by and between Mid Penn Bancorp, Inc.and Phoenix Bancorp, Inc. (Incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 29, 2014.)

·

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

·

Exhibit 3(ii) – Statement with Respect to Shares for Series B Preferred Stock.  (Incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on September 28, 2012.)

·

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

·

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

·

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

·

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

·

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

·

Exhibit 101.LAB – XBRL Taxonomy Extension Label Linkbase

·

Exhibit 101.PRE – XBRL Taxonomy Extension Presentation Linkbase

·

Exhibit 101.INS – XBRL Instance Document

·

Exhibit 101.SCH – XBRL Taxonomy Extension Schema

·

Exhibit 101.CAL – XBRL Taxonomy Extension Calculation Linkbase

·

Exhibit 101.DEF – XBRL Taxonomy Extension Definition Linkbase

 

 

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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.

 

 

 

 

 

Mid Penn Bancorp, Inc.

(Registrant)

By:

/s/ Rory G. Ritrievi

 

Rory G. Ritrievi

 

President and CEO

 

(Principal Executive Officer)

 

 

Date:

November 14, 2014

By:

/s/ Edward P. Williams

 

Edward P. Williams

 

Interim Principal Financial Officer

 

 

Date:

November 14, 2014

 

 

 

 

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MID PENN BANCORP, INC.

 

 

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