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MID PENN BANCORP INC - Quarter Report: 2016 March (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 March 31, 2016



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 May 12, 2016, the registrant had 4,227,981 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 March 31, 2016 and December 31, 2015 (Unaudited)

2



 

Consolidated Statements of Income for the Three Months Ended March 31, 2016 and March 31, 2015 (Unaudited)

3



 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and March 31, 2015 (Unaudited)

4



 

Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2016 and March 31, 2015 (Unaudited)

5



 

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and March 31, 2015 (Unaudited)

6



 

Notes to Consolidated Financial Statements (Unaudited)

8



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

35



Item 3 – Quantitative and Qualitative Disclosures about Market Risk

46



Item 4 – Controls and Procedures

46



PART II – OTHER INFORMATION

47



Item 1 – Legal Proceedings

47



Item 1A – Risk Factors

47



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

47



Item 3 – Defaults upon Senior Securities

47



Item 4 – Mine Safety Disclosures

46



Item 5 – Other Information

46



Item 6 – Exhibits

47



Signatures

48





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 data)

March 31, 2016

 

December 31, 2015

ASSETS

 

 

 

 

 

Cash and due from banks

$

9,707 

 

$

12,329 

Interest-bearing balances with other financial institutions

 

1,490 

 

 

955 

Federal funds sold

 

2,125 

 

 

 -

Total cash and cash equivalents

 

13,322 

 

 

13,284 

Interest-bearing time deposits with other financial institutions

 

2,332 

 

 

4,317 

Investment securities available for sale

 

161,910 

 

 

135,721 

Loans and leases, net of unearned interest

 

746,452 

 

 

739,191 

Less:  Allowance for loan and lease losses

 

(6,439)

 

 

(6,168)

Net loans and leases

 

740,013 

 

 

733,023 

Bank premises and equipment, net

 

13,728 

 

 

13,993 

Cash surrender value of life insurance

 

12,586 

 

 

12,516 

Restricted investment in bank stocks

 

2,871 

 

 

4,266 

Foreclosed assets held for sale

 

794 

 

 

1,185 

Accrued interest receivable

 

3,919 

 

 

3,813 

Deferred income taxes

 

1,466 

 

 

1,821 

Goodwill

 

3,918 

 

 

3,918 

Core deposit and other intangibles, net

 

627 

 

 

665 

Other assets

 

3,408 

 

 

3,116 

Total Assets

$

960,894 

 

$

931,638 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest bearing demand

$

107,369 

 

$

103,721 

Interest bearing demand

 

275,011 

 

 

247,356 

Money Market

 

224,656 

 

 

208,386 

Savings

 

59,147 

 

 

56,731 

Time

 

166,398 

 

 

160,849 

Total Deposits 

 

832,581 

 

 

777,043 

Short-term borrowings

 

 -

 

 

31,596 

Long-term debt

 

40,250 

 

 

40,305 

Subordinated debt

 

7,407 

 

 

7,414 

Accrued interest payable

 

586 

 

 

390 

Other liabilities

 

8,848 

 

 

4,822 

Total Liabilities

 

889,672 

 

 

861,570 

Shareholders' Equity:

 

 

 

 

 

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

 

 

 

 

 

4,227,981 and 4,226,717 shares issued and outstanding at

 

 

 

 

 

March 31, 2016 and at December 31, 2015, respectively

 

4,228 

 

 

4,227 

Additional paid-in capital

 

40,585 

 

 

40,559 

Retained earnings

 

24,345 

 

 

23,470 

Accumulated other comprehensive income

 

2,064 

 

 

1,812 

Total Shareholders’ Equity

 

71,222 

 

 

70,068 

Total Liabilities and Shareholders' Equity

$

960,894 

 

$

931,638 



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 March 31,



2016

 

2015

INTEREST INCOME

 

 

 

 

 

Interest & fees on loans and leases

$

8,807 

 

$

7,154 

Interest on interest-bearing balances

 

 

 

11 

Interest and dividends on investment securities:

 

 

 

 

 

U.S. Treasury and government agencies

 

322 

 

 

331 

State and political subdivision obligations, tax-exempt

 

464 

 

 

531 

Other securities

 

94 

 

 

131 

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

 

 

 

 -

Total Interest Income 

 

9,697 

 

 

8,158 

INTEREST EXPENSE

 

 

 

 

 

Interest on deposits

 

1,039 

 

 

914 

Interest on short-term borrowings

 

13 

 

 

11 

Interest on long-term debt

 

230 

 

 

195 

Total Interest Expense 

 

1,282 

 

 

1,120 

Net Interest Income 

 

8,415 

 

 

7,038 

PROVISION FOR LOAN AND LEASE LOSSES

 

340 

 

 

300 

Net Interest Income After Provision for Loan and Lease Losses

 

8,075 

 

 

6,738 

NONINTEREST INCOME

 

 

 

 

 

Income from fiduciary activities

 

106 

 

 

127 

Service charges on deposits

 

155 

 

 

150 

Net gain on sales of investment securities

 

 -

 

 

177 

Earnings from cash surrender value of life insurance

 

70 

 

 

56 

Mortgage banking income

 

186 

 

 

67 

ATM debit card interchange income

 

200 

 

 

155 

Merchant services income

 

67 

 

 

50 

Net gain on sales of SBA loans

 

190 

 

 

 -

Other income

 

258 

 

 

167 

Total Noninterest Income 

 

1,232 

 

 

949 

NONINTEREST EXPENSE

 

 

 

 

 

Salaries and employee benefits

 

3,723 

 

 

3,195 

Occupancy expense, net

 

547 

 

 

454 

Equipment expense

 

435 

 

 

313 

Pennsylvania Bank Shares tax expense

 

203 

 

 

115 

FDIC Assessment

 

153 

 

 

139 

Legal and professional fees

 

202 

 

 

143 

Director fees and benefits expense

 

89 

 

 

83 

Marketing and advertising expense

 

84 

 

 

88 

Software licensing

 

331 

 

 

319 

Telephone expense

 

142 

 

 

123 

Loss on sale/write-down of foreclosed assets

 

104 

 

 

32 

Intangible amortization

 

37 

 

 

Loan collection costs

 

39 

 

 

80 

Merger and acquisition expense

 

 -

 

 

762 

Other expenses

 

893 

 

 

785 

Total Noninterest Expense 

 

6,982 

 

 

6,640 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

2,325 

 

 

1,047 

Provision for income taxes

 

520 

 

 

84 

NET INCOME

 

1,805 

 

 

963 

Series B preferred stock dividends

 

 -

 

 

87 

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

$

1,805 

 

$

876 



 

 

 

 

 

PER COMMON SHARE DATA:

 

 

 

 

 

Basic Earnings Per Common Share

$

0.43 

 

$

0.23 

Cash Dividends

$

0.22 

 

$

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 March 31,



2016

 

2015



 

 

 

 

 

Net income

$

1,805 

 

$

963 



 

 

 

 

 

Other comprehensive income:

 

 

 

 

 



 

 

 

 

 

Unrealized gains arising during the period on available for sale

 

 

 

 

 

securities, net of income taxes of $189 and $244, respectively

 

366 

 

 

475 



 

 

 

 

 

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

 

 

 

 

 

included in net income, net of income taxes of $0 and ($60), respectively   (a)

 

 -

 

 

(117)



 

 

 

 

 

Change in defined benefit plans, net of income taxes of ($56) and $1, respectively   (b)

 

(114)

 

 



 

 

 

 

 

Total other comprehensive income

 

252 

 

 

361 



 

 

 

 

 

Total comprehensive income

$

2,057 

 

$

1,324 











(a)

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



(b)

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





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





 

 

4


 

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



FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 



 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total



Preferred

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Shareholders'



Stock

 

Stock

 

Capital

 

Earnings

 

Income

 

Equity

Balance, January 1, 2016

$

 -

 

$

4,227 

 

$

40,559 

 

$

23,470 

 

$

1,812 

 

$

70,068 

Net income

 

 -

 

 

 -

 

 

 -

 

 

1,805 

 

 

 -

 

 

1,805 

Total other comprehensive income, net of taxes

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

252 

 

 

252 

Employee Stock Purchase Plan (1,264 shares)

 

 -

 

 

 

 

18 

 

 

 -

 

 

 -

 

 

19 

Common stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(930)

 

 

 -

 

 

(930)

Restricted stock compensation expense

 

 -

 

 

 -

 

 

 

 

 -

 

 

 -

 

 

Balance, March 31, 2016

$

 -

 

$

4,228 

 

$

40,585 

 

$

24,345 

 

$

2,064 

 

$

71,222 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2015

$

5,000 

 

$

3,498 

 

$

29,902 

 

$

19,217 

 

$

1,513 

 

$

59,130 

Net income

 

 -

 

 

 -

 

 

 -

 

 

963 

 

 

 -

 

 

963 

Total other comprehensive income, net of taxes

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

361 

 

 

361 

Employee Stock Purchase Plan (1,013 shares)

 

 -

 

 

 

 

15 

 

 

 -

 

 

 -

 

 

16 

Common stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(350)

 

 

 -

 

 

(350)

Series B preferred stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(87)

 

 

 -

 

 

(87)

SBLF preferred stock in connection with Phoenix acquisition

 

1,750 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,750 

Common stock issued to Phoenix shareholders

 

 -

 

 

724 

 

 

10,568 

 

 

 -

 

 

 -

 

 

11,292 

Restricted stock compensation expense

 

 -

 

 

 -

 

 

 

 

 -

 

 

 -

 

 

Balance, March 31, 2015

$

6,750 

 

$

4,223 

 

$

40,493 

 

$

19,743 

 

$

1,874 

 

$

73,083 





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)

Three Months Ended March 31,



2016

 

2015

Operating Activities:

 

 

 

 

 

   Net Income

$

1,805 

 

$

963 

   Adjustments to reconcile net income to net cash

 

 

 

 

 

       provided by operating activities:

 

 

 

 

 

           Provision for loan and lease losses

 

340 

 

 

300 

           Depreciation

 

419 

 

 

314 

           Amortization of intangibles

 

37 

 

 

13 

           Net amortization of security premiums

 

665 

 

 

384 

   Gain on sales of investment securities

 

 -

 

 

(177)

           Earnings on cash surrender value of life insurance

 

(70)

 

 

(56)

           SBA loans originated for sale

 

(2,500)

 

 

 -

           Proceeds from sales of SBA loans originated for sale

 

2,690 

 

 

 -

           Gain on sale of loans

 

(190)

 

 

 -

           Loss on sale / write-down of foreclosed assets

 

104 

 

 

32 

           Restricted stock compensation expense

 

 

 

           Deferred income tax expense (benefit)

 

53 

 

 

(76)

           (Increase) decrease in accrued interest receivable

 

(106)

 

 

52 

           Increase in other assets

 

(290)

 

 

(47)

           Increase in accrued interest payable

 

196 

 

 

117 

           Increase (decrease) in other liabilities

 

4,026 

 

 

(40)

Net Cash Provided By Operating Activities 

 

7,187 

 

 

1,787 

Investing Activities:

 

 

 

 

 

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

 

1,985 

 

 

103 

    Proceeds from the maturity of investment securities

 

3,045 

 

 

2,594 

    Proceeds from the sale of investment securities

 

 -

 

 

16,091 

   Purchases of investment securities

 

(29,345)

 

 

(8,065)

   Net cash received from acquisition

 

 -

 

 

8,118 

   Redemptions of restricted investment in bank stock

 

1,395 

 

 

173 

   Net increase in loans and leases

 

(7,359)

 

 

(13,579)

   Purchases of bank premises and equipment

 

(154)

 

 

(393)

   Proceeds from sale of foreclosed assets

 

315 

 

 

27 

Net Cash (Used In) Provided By Investing Activities 

 

(30,118)

 

 

5,069 

Financing Activities:

 

 

 

 

 

   Net increase (decrease) in deposits

 

55,538 

 

 

(2,114)

    Net (decrease) increase in short-term borrowings

 

(31,596)

 

 

43 

   Series B preferred stock dividend paid

 

 -

 

 

(87)

   Common stock dividend paid

 

(930)

 

 

(350)

Employee Stock Purchase Plan

 

19 

 

 

16 

   Long-term debt repayment

 

(62)

 

 

(51)

Net Cash Provided By (Used In) Financing Activities 

 

22,969 

 

 

(2,543)

Net increase in cash and cash equivalents

 

38 

 

 

4,313 

Cash and cash equivalents, beginning of year

 

13,284 

 

 

9,882 

Cash and cash equivalents, end of year

$

13,322 

 

$

14,195 



 

6


 

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





 

 

 

 

 

(Dollars in thousands)

Three Months Ended March 31,



2016

 

2015

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

   Interest paid

$

1,086 

 

$

971 

   Income taxes paid

$

200 

 

$

100 



 

 

 

 

 

Supplemental Noncash Disclosures:

 

 

 

 

 

   Loan transfers to foreclosed assets held for sale

$

28 

 

$

216 









 

 

 

 

 

Assets, Liabilities, and Equity in Connection with Merger:

 

 

 

 

 



 

 

 

 

 

Assets Acquired:

 

 

 

 

 

Securities

$

 -

 

$

11,331 

Loans

 

 -

 

 

110,707 

Restricted stock

 

 -

 

 

509 

Property and equipment

 

 -

 

 

1,792 

Accrued interest receivable

 

 -

 

 

388 

Core deposit and other intangible assets

 

 -

 

 

578 

Bank-owned life insurance

 

 -

 

 

3,673 

Other assets

 

 -

 

 

933 



$

 -

 

$

129,911 



 

 

 

 

 

Liabilities Assumed:

 

 

 

 

 

Deposits

$

 -

 

$

123,238 

Accrued interest payable

 

 -

 

 

32 

Long-term debt

 

 -

 

 

3,570 

Other liabilities

 

 -

 

 

744 



$

 -

 

$

127,584 



 

 

 

 

 

Equity Acquired:

 

 

 

 

 

Preferred stock

$

 -

 

$

1,750 





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



 

 

7


 

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



(1)          Basis of Presentation



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



Effective March 1, 2016, Mid Penn Insurance Services, LLC, an immaterial subsidiary of Mid Penn, was liquidated due to the lack of consistent profitability and growth.



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 March 31, 2015 and December 31, 2015 balances have been reclassified, when, and if necessary, to conform to the 2016 presentation.  Such reclassifications had no impact on net income. The results of operations for interim periods are not necessarily indicative of operating results expected for the full year.  These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.



Mid Penn has evaluated events and transactions occurring subsequent to the balance sheet date of March 31, 2016, 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)           Mergers and Acquisitions



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



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



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



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



Included in the purchase price was goodwill and a core deposit intangible of $2,902,000 and $578,000, respectively.  The core deposit intangible will be amortized over a ten-year period using a sum of the year’s digits basis.  The goodwill will not be amortized, but will be measured annually for impairment or more frequently if circumstances require.  Core deposit intangible amortization expense projected for the succeeding five years beginning 2016 is estimated to be $96,000,  $86,000,  $75,000,  $65,000, and $54,000 per year, respectively, and $114,000 in total for years after 2020.



 

8


 

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



The allocation of the purchase price is as follows:





 

 

(Dollars in thousands)

 



 

 

Assets acquired:

 

 

Cash and cash equivalents

$

11,044 

Investment securities

 

11,331 

Loans

 

110,363 

Goodwill

 

2,902 

Core deposit and other intangibles

 

578 

Other assets

 

7,489 

Total assets acquired

 

143,707 

Liabilities assumed:

 

 

Deposits

 

123,238 

FHLB borrowings

 

3,570 

Other liabilities

 

908 

Total liabilities assumed

 

127,716 

Equity acquired:

 

 

Preferred stock

 

1,750 

Total equity acquired and liabilities assumed

 

129,466 

Consideration paid

$

14,241 



 

 

Cash paid

$

2,949 

Fair value of common stock issued, including replacement equity awards

 

11,292 



The following table summarizes the fair value of the assets acquired, and liabilities and equity assumed by Mid Penn through the Phoenix merger.







 

 

(Dollars in thousands)

 

Total purchase price

$

14,241 



 

 

Net assets acquired:

 

 

Cash and cash equivalents

 

11,044 

Investment securities

 

11,331 

Restricted stock

 

509 

Loans

 

110,363 

Bank owned life insurance

 

3,673 

Premises and equipment

 

1,792 

Deferred income taxes

 

503 

Accrued interest receivable

 

388 

Core deposit and other intangibles

 

578 

Other assets

 

624 

Deposits

 

(123,238)

FHLB borrowings

 

(3,570)

Accrued interest payable

 

(32)

Other liabilities

 

(876)

Preferred stock

 

(1,750)



 

11,339 

Goodwill

$

2,902 



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







 

 

 

9


 

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

(Dollars in thousands)

 

Gross amortized cost basis at March 1, 2015

$

112,816 

Market rate adjustment

 

270 

Credit fair value adjustment on pools of homogeneous loans

 

(1,461)

Credit fair value adjustment on impaired loans

 

(1,262)

Fair value of purchased loans at March 1, 2015

$

110,363 



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



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





 

 

(Dollars in thousands)

 

Contractually required principal and interest at acquisition

$

3,548 

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

 

(804)

Expected cash flows at acquisition

 

2,744 

Interest component of expected cash flows (accretable discount)

 

(458)

Fair value of acquired loans

$

2,286 



The following table presents pro forma information as if the merger between Mid Penn and Phoenix had been completed on January 1, 2014.  The pro forma information does not necessarily reflect the results of operations that would have occurred had Mid Penn merged with Phoenix at the beginning of 2014.  Supplemental pro forma earnings for 2015 were adjusted to exclude $762,000 of merger related costs incurred for the three months ended March 31, 2015.  The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies, or other factors.  The pro forma data is intended for informational purposes and is not indicative of the future results of operations.





 

 

(Dollars in thousands)

March 31, 2015

Net interest income after loan loss provision

$

7,374 

Noninterest income

 

1,014 

Noninterest expense

 

6,815 

Net income available to common shareholders

 

1,276 

Net income per common share

 

0.30 







(3)           Investment Securities



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



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



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



 

10


 

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



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



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



Mid Penn had no securities considered other than temporarily impaired as of March 31, 2016 or December 31, 2015, and did not record any securities impairment charges in the respective periods ended on these dates.



The amortized cost, fair value, and unrealized gains and losses on investment securities at March 31, 2016 and December 31, 2015 are as follows:





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 



Amortized

 

Unrealized

 

Unrealized

 

Fair

March 31, 2016

Cost

 

Gains

 

Losses

 

Value

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

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

$

26,309 

 

$

1,076 

 

$

38 

 

$

27,347 

Mortgage-backed U.S. government agencies

 

49,762 

 

 

134 

 

 

185 

 

 

49,711 

State and political subdivision obligations

 

79,647 

 

 

2,162 

 

 

156 

 

 

81,653 

Equity securities

 

3,266 

 

 

24 

 

 

91 

 

 

3,199 



$

158,984 

 

$

3,396 

 

$

470 

 

$

161,910 





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 



Amortized

 

Unrealized

 

Unrealized

 

Fair

December 31, 2015

Cost

 

Gains

 

Losses

 

Value

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

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

$

26,316 

 

$

729 

 

$

55 

 

$

26,990 

Mortgage-backed U.S. government agencies

 

38,983 

 

 

49 

 

 

228 

 

 

38,804 

State and political subdivision obligations

 

64,780 

 

 

1,914 

 

 

77 

 

 

66,617 

Equity securities

 

3,271 

 

 

82 

 

 

43 

 

 

3,310 



$

133,350 

 

$

2,774 

 

$

403 

 

$

135,721 



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 $155,153,000 at March 31, 2016 and $130,298,000 at December 31, 2015, were pledged to secure public deposits and other borrowings.



Mid Penn realized gross gains of $0 and $177,000 on sales of securities available for sale during the three months ended March 31, 2016 and March 31, 2015.  Mid Penn realized no gross losses on the sale of securities available for sale during the three months ended March 31, 2016 and March 31, 2015.



 

11


 

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

The following table presents gross unrealized losses and fair value of investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2016 and December 31, 2015.









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Less Than 12 Months

 

12 Months or More

 

Total



Number

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

Number

 

 

 

 

 

 



of

 

Fair

 

Unrealized

 

of

 

Fair

 

Unrealized

 

of

 

Fair

 

Unrealized

March 31, 2016

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

4

 

$

3,817 

 

$

28 

 

2

 

$

1,320 

 

$

10 

 

6

 

$

5,137 

 

$

38 

Mortgage-backed U.S. government agencies

16

 

 

22,011 

 

 

125 

 

10

 

 

6,248 

 

 

60 

 

26

 

 

28,259 

 

 

185 

State and political subdivision obligations

19

 

 

10,899 

 

 

110 

 

4

 

 

1,792 

 

 

46 

 

23

 

 

12,691 

 

 

156 

Equity securities

1

 

 

985 

 

 

15 

 

2

 

 

1,142 

 

 

76 

 

3

 

 

2,127 

 

 

91 

Total temporarily impaired available for sale securities

40

 

$

37,712 

 

$

278 

 

18

 

$

10,502 

 

$

192 

 

58

 

$

48,214 

 

$

470 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Less Than 12 Months

 

12 Months or More

 

Total



Number

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

Number

 

 

 

 

 

 



of

 

Fair

 

Unrealized

 

of

 

Fair

 

Unrealized

 

of

 

Fair

 

Unrealized

December 31, 2015

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

 

Securities

 

Value

 

Losses

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

6

 

$

6,259 

 

$

43 

 

2

 

$

1,383 

 

$

12 

 

8

 

$

7,642 

 

$

55 

Mortgage-backed U.S. government agencies

13

 

 

12,759 

 

 

124 

 

11

 

 

6,282 

 

 

104 

 

24

 

 

19,041 

 

 

228 

State and political subdivision obligations

9

 

 

4,041 

 

 

32 

 

3

 

 

1,631 

 

 

45 

 

12

 

 

5,672 

 

 

77 

Equity securities

1

 

 

990 

 

 

10 

 

2

 

 

615 

 

 

33 

 

3

 

 

1,605 

 

 

43 

Total temporarily impaired available for sale securities

29

 

$

24,049 

 

$

209 

 

18

 

$

9,911 

 

$

194 

 

47

 

$

33,960 

 

$

403 





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



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



At March 31, 2016,  55 debt securities and 3 equity securities with unrealized losses totaling $470,000 were temporarily depreciated 0.97% from their amortized cost basis.  At March 31, 2016,  the majority of securities in an unrealized loss position were attributed to state and political subdivision obligations and mortgage-backed U.S. government agencies.  At December 31, 2015,  44 debt securities and 3 equity securities with unrealized losses totaling $403,000 were temporarily depreciated 1.19% from their amortized cost basis. 

 

12


 

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



At December 31, 2015,  the majority of the unrealized losses on securities in an unrealized loss position were attributed to mortgage-backed U.S. government agencies



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





 

 

 

 

 



 

 

 

 

 

(Dollars in thousands)

March 31, 2016



Amortized

 

Fair



Cost

 

Value

Due in 1 year or less

$

4,153 

 

$

4,208 

Due after 1 year but within 5 years

 

39,196 

 

 

40,527 

Due after 5 years but within 10 years

 

54,222 

 

 

55,940 

Due after 10 years

 

8,385 

 

 

8,325 



 

105,956 

 

 

109,000 

Mortgage-backed securities

 

49,762 

 

 

49,711 

Equity securities

 

3,266 

 

 

3,199 



$

158,984 

 

$

161,910 











(4)           Loans and Allowance for Loan and Lease Losses



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



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



For all classes of loans, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days or more past due, or management has serious doubts about further collectability of principal or interest even though the loan is currently performing.  A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured.  When a loan is placed on nonaccrual status, unpaid interest is credited to income.  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, at least six consecutive months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt.  The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.



Commercial and industrial



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



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

 

13


 

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



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



Commercial real estate and commercial real estate - construction



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



Residential mortgage



Mid Penn offers a wide array of residential mortgage loans for both permanent structures and those under construction.  The Bank’s residential mortgage originations are secured primarily by properties located in its primary market and surrounding areas.  Residential mortgage loans have terms up to a maximum of 30 years and with loan-to-value ratios up to 100% 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 title insurance and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan.  Real estate loans originated by the Bank generally contain a “due on sale” clause allowing the Bank to declare the unpaid principal balance due and payable upon the sale of the security property.



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



Consumer, including home equity



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



The largest component of Mid Penn’s consumer loan portfolio consists of fixed rate home equity loans and variable rate home equity lines of credit.  Substantially all home equity loans and lines of credit are secured by second mortgages on principal residences.  The Bank will lend amounts, which, together with all prior 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.



 

14


 

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

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



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



Allowance for Loan and Lease Losses



The allowance for credit losses consists of (i) the allowance for loan and lease losses, and (ii) the reserve for unfunded lending commitments. The allowance for loan and lease losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet.  The reserve for unfunded lending commitments was $117,000 at March 31, 2016 and $94,500 at December 31, 2015.  The allowance for loan and lease losses is increased by the provision for loan and lease losses, and decreased by charge-offs, net of recoveries.  Loans deemed to be uncollectible are charged against the allowance for loan and lease losses, and subsequent recoveries, if any, are credited to the allowance.  All, or part, of the principal balance of loans are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.  Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed uncollectibleBecause all identified losses are immediately charged off, no portion of the allowance for loan and lease losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.



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



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



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



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



 

15


 

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

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



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



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



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



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



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



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



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



Loans whose terms are modified are classified as troubled debt restructurings if the borrowers have been granted concessions and it is deemed that those borrowers are experiencing financial difficulty.  Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date.  Nonaccrual 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.

 

16


 

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.



Acquired Loans



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



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



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



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



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



 

17


 

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



The classes of the loan portfolio, summarized by the aggregate pass rating, net of deferred fees and costs of ($209,000) as of March 31, 2016 and ($178,000) as of December 31, 2015, and the classified ratings of special mention, substandard, and doubtful within Mid Penn’s internal risk rating system as of March 31, 2016 and December 31, 2015, are as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

Special

 

 

 

 

 

 

March 31, 2016

Pass

 

Mention

 

Substandard

 

Doubtful

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

160,227 

 

$

789 

 

$

1,402 

 

$

 -

 

$

162,418 

Commercial real estate

 

382,438 

 

 

5,105 

 

 

7,090 

 

 

 -

 

 

394,633 

Commercial real estate - construction

 

45,523 

 

 

2,210 

 

 

 -

 

 

 -

 

 

47,733 

Lease financing

 

656 

 

 

 -

 

 

 -

 

 

 -

 

 

656 

Residential mortgage

 

102,077 

 

 

184 

 

 

1,753 

 

 

 -

 

 

104,014 

Home equity

 

33,431 

 

 

246 

 

 

187 

 

 

 -

 

 

33,864 

Consumer

 

3,134 

 

 

 -

 

 

 -

 

 

 -

 

 

3,134 



$

727,486 

 

$

8,534 

 

$

10,432 

 

$

 -

 

$

746,452 







 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

Special

 

 

 

 

 

 

 

 

 

December 31, 2015

Pass

 

Mention

 

Substandard

 

Doubtful

 

Total



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

158,302 

 

$

1,289 

 

$

670 

 

$

 -

 

$

160,261 

Commercial real estate

 

359,859 

 

 

2,088 

 

 

7,517 

 

 

 -

 

 

369,464 

Commercial real estate - construction

 

65,665 

 

 

2,403 

 

 

 -

 

 

 -

 

 

68,068 

Lease financing

 

727 

 

 

 -

 

 

 -

 

 

 -

 

 

727 

Residential mortgage

 

101,507 

 

 

475 

 

 

1,361 

 

 

 -

 

 

103,343 

Home equity

 

32,928 

 

 

261 

 

 

222 

 

 

 -

 

 

33,411 

Consumer

 

3,917 

 

 

 -

 

 

 -

 

 

 -

 

 

3,917 



$

722,905 

 

$

6,516 

 

$

9,770 

 

$

 -

 

$

739,191 





 

18


 

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



Impaired loans by loan portfolio class as of March 31, 2016 and December 31, 2015 are summarized as follows:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



March 31, 2016

 

December 31, 2015

(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

$

12 

 

$

49 

 

$

 -

 

$

14 

 

$

49 

 

$

 -

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

1,009 

 

 

2,020 

 

 

 -

 

 

1,023 

 

 

2,020 

 

 

 -

Acquired with credit deterioration

 

929 

 

 

 -

 

 

 -

 

 

931 

 

 

 -

 

 

 -

Residential mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

1,332 

 

 

1,421 

 

 

 -

 

 

1,329 

 

 

1,434 

 

 

 -

Acquired with credit deterioration

 

361 

 

 

 -

 

 

 -

 

 

400 

 

 

 -

 

 

 -

Home equity

 

68 

 

 

73 

 

 

 -

 

 

115 

 

 

137 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

104 

 

$

128 

 

$

40 

 

$

113 

 

$

128 

 

$

51 

Commercial real estate

 

1,835 

 

 

1,889 

 

 

428 

 

 

1,947 

 

 

1,981 

 

 

429 

Residential mortgage

 

 -

 

 

 -

 

 

 -

 

 

32 

 

 

32 

 

 

23 

Home equity

 

18 

 

 

37 

 

 

 

 

 -

 

 

 -

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

116 

 

$

177 

 

$

40 

 

$

127 

 

$

177 

 

$

51 

Commercial real estate

 

3,773 

 

 

3,909 

 

 

428 

 

 

3,901 

 

 

4,001 

 

 

429 

Residential mortgage

 

1,693 

 

 

1,421 

 

 

 -

 

 

1,761 

 

 

1,466 

 

 

23 

Home equity

 

86 

 

 

110 

 

 

 

 

115 

 

 

137 

 

 

 -



 

19


 

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



Average recorded investment of impaired loans and related interest income recognized for the three months ended March 31, 2016 and March 31, 2015 are summarized as follows:





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



March 31, 2016

 

March 31, 2015

(Dollars in thousands)                    

Average Recorded Investment

 

Interest Income Recognized

 

Average Recorded Investment

 

Interest Income Recognized

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

13 

 

$

 -

 

$

31 

 

$

 -

Acquired with credit deterioration

 

 -

 

 

 -

 

 

55 

 

 

 -

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

1,016 

 

 

 -

 

 

1,933 

 

 

 -

Acquired with credit deterioration

 

925 

 

 

 -

 

 

335 

 

 

 -

Residential mortgage:

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

1,325 

 

 

 

 

932 

 

 

 -

Acquired with credit deterioration

 

372 

 

 

 

 

85 

 

 

 -

Home equity:

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

71 

 

 

 -

 

 

32 

 

 

 -

Acquired with credit deterioration

 

 -

 

 

 -

 

 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

109 

 

$

 -

 

$

583 

 

$

 -

Commercial real estate

 

1,845 

 

 

 -

 

 

5,177 

 

 

 -

Residential mortgage

 

 -

 

 

 -

 

 

16 

 

 

 -

Home equity

 

18 

 

 

 -

 

 

208 

 

 

 -



 

 

 

 

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

122 

 

$

 -

 

$

669 

 

$

 -

Commercial real estate

 

3,786 

 

 

 -

 

 

7,445 

 

 

 -

Residential mortgage

 

1,697 

 

 

 

 

1,033 

 

 

 -

Home equity

 

89 

 

 

 -

 

 

244 

 

 

 -





Nonaccrual loans by loan portfolio class as of March 31, 2016 and December 31, 2015 are summarized as follows:







 

 

 

 

 



 

 

 

 

 

(Dollars in thousands)

March 31, 2016

 

December 31, 2015



 

 

 

 

 

Commercial and industrial

$

56 

 

$

66 

Commercial real estate

 

2,471 

 

 

2,607 

Residential mortgage

 

1,094 

 

 

1,630 

Home equity

 

86 

 

 

115 



$

3,707 

 

$

4,418 



 

20


 

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



The performance and credit quality of the loan portfolio is also monitored by the analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due.  The classes of the loan portfolio summarized by the past due status as of March 31, 2016 and December 31, 2015 are summarized as follows:



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2016

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

$

205 

 

$

 -

 

$

56 

 

$

261 

 

$

162,157 

 

$

162,418 

 

$

 -

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

170 

 

 

1,349 

 

 

1,528 

 

 

392,176 

 

 

393,704 

 

 

 -

Acquired with credit deterioration

 

 -

 

 

 -

 

 

56 

 

 

56 

 

 

873 

 

 

929 

 

 

56 

Commercial real estate - construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

47,733 

 

 

47,733 

 

 

 -

Lease financing

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

656 

 

 

656 

 

 

 -

Residential mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

350 

 

 

 -

 

 

186 

 

 

536 

 

 

103,117 

 

 

103,653 

 

 

 -

Acquired with credit deterioration

 

72 

 

 

 -

 

 

214 

 

 

286 

 

 

75 

 

 

361 

 

 

 -

Home equity

 

87 

 

 

 -

 

 

69 

 

 

156 

 

 

33,708 

 

 

33,864 

 

 

 -

Consumer

 

 

 

 -

 

 

 -

 

 

 

 

3,130 

 

 

3,134 

 

 

 -

            Total

$

727 

 

$

170 

 

$

1,930 

 

$

2,827 

 

$

743,625 

 

$

746,452 

 

$

56 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

30-59 Days Past Due

 

60-89 Days Past Due

 

Greater than 90 Days

 

Total Past Due

 

Current

 

Total Loans

 

Loans Receivable > 90 Days and Accruing

Commercial and industrial

$

55 

 

$

204 

 

$

66 

 

$

325 

 

$

159,936 

 

$

160,261 

 

$

 -

Commercial real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

211 

 

 

608 

 

 

1,456 

 

 

2,275 

 

 

366,258 

 

 

368,533 

 

 

 -

Acquired with credit deterioration

 

215 

 

 

518 

 

 

55 

 

 

788 

 

 

143 

 

 

931 

 

 

55 

Commercial real estate - construction

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

68,068 

 

 

68,068 

 

 

 -

Lease financing

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

727 

 

 

727 

 

 

 -

Residential mortgage:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

694 

 

 

550 

 

 

778 

 

 

2,022 

 

 

100,921 

 

 

102,943 

 

 

 -

Acquired with credit deterioration

 

12 

 

 

 -

 

 

222 

 

 

234 

 

 

166 

 

 

400 

 

 

 -

Home equity

 

 -

 

 

50 

 

 

23 

 

 

73 

 

 

33,338 

 

 

33,411 

 

 

 -

Consumer

 

10 

 

 

 

 

 -

 

 

15 

 

 

3,902 

 

 

3,917 

 

 

 -

            Total

$

1,197 

 

$

1,935 

 

$

2,600 

 

$

5,732 

 

$

733,459 

 

$

739,191 

 

$

55 



 

21


 

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



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









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of, and for the period ended, March 31, 2016

Commercial and industrial

 

Commercial real estate

 

Commercial real estate - construction

 

Lease financing

 

Residential mortgage

 

Home equity

 

Consumer

 

Unallocated

 

Total

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

1,393 

 

$

3,552 

 

$

153 

 

$

 

$

534 

 

$

317 

 

$

12 

 

$

206 

 

$

6,168 

  Charge-offs

 

 -

 

 

(96)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(3)

 

 

 -

 

 

(99)

  Recoveries

 

 

 

25 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

30 

  Provisions

 

33 

 

 

296 

 

 

(34)

 

 

 -

 

 

(18)

 

 

(14)

 

 

(4)

 

 

81 

 

 

340 

Ending balance

 

1,427 

 

 

3,777 

 

 

119 

 

 

 

 

516 

 

 

303 

 

 

 

 

287 

 

 

6,439 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:  individually evaluated for impairment

 

40 

 

 

428 

 

 

 -

 

 

 -

 

 

 -

 

 

 

 

 -

 

 

 -

 

 

471 

Ending balance:  acquired with credit deterioration

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Ending balance:  collectively evaluated for impairment

$

1,387 

 

$

3,349 

 

$

119 

 

$

 

$

516 

 

$

300 

 

$

 

$

287 

 

$

5,968 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

162,418 

 

$

394,633 

 

$

47,733 

 

$

656 

 

$

104,014 

 

$

33,864 

 

$

3,134 

 

$

 -

 

$

746,452 

Ending balance:  individually evaluated  for impairment

 

116 

 

 

2,844 

 

 

 -

 

 

 -

 

 

1,332 

 

 

86 

 

 

 -

 

 

 -

 

 

4,378 

Ending balance:  acquired with credit deterioration

 

 -

 

 

929 

 

 

 -

 

 

 -

 

 

361 

 

 

 -

 

 

 -

 

 

 -

 

 

1,290 

Ending balance:  collectively evaluated for impairment

$

162,302 

 

$

390,860 

 

$

47,733 

 

$

656 

 

$

102,321 

 

$

33,778 

 

$

3,134 

 

$

 -

 

$

740,784 



 

22


 

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









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of, and for the period ended, March 31, 2015

Commercial and industrial

 

Commercial real estate

 

Commercial real estate - construction

 

Lease financing

 

Residential mortgage

 

Home equity

 

Consumer

 

Unallocated

 

Total

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

$

1,393 

 

$

3,925 

 

$

33 

 

$

 

$

450 

 

$

653 

 

$

35 

 

$

225 

 

$

6,716 

  Charge-offs

 

 -

 

 

(450)

 

 

 -

 

 

 -

 

 

(1)

 

 

(29)

 

 

(5)

 

 

 -

 

 

(485)

  Recoveries

 

 -

 

 

 

 

 -

 

 

 -

 

 

 -

 

 

29 

 

 

 

 

 -

 

 

35 

  Provisions

 

246 

 

 

149 

 

 

 

 

(1)

 

 

95 

 

 

(134)

 

 

 

 

(60)

 

 

300 

Ending balance

 

1,639 

 

 

3,626 

 

 

35 

 

 

 

 

544 

 

 

519 

 

 

37 

 

 

165 

 

 

6,566 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance:  individually evaluated for impairment

 

223 

 

 

1,103 

 

 

 -

 

 

 -

 

 

23 

 

 

139 

 

 

 -

 

 

 -

 

 

1,488 

Ending balance:  acquired with credit deterioration

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

Ending balance:  collectively evaluated for impairment

$

1,416 

 

$

2,523 

 

$

35 

 

$

 

$

521 

 

$

380 

 

$

37 

 

$

165 

 

$

5,078 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

160,254 

 

$

340,647 

 

$

60,386 

 

$

1,016 

 

$

97,533 

 

$

32,110 

 

$

3,207 

 

$

 -

 

$

695,153 

Ending balance:  individually evaluated  for impairment

 

610 

 

 

7,058 

 

 

 -

 

 

 -

 

 

966 

 

 

246 

 

 

 -

 

 

 -

 

 

8,880 

Ending balance:  acquired with credit deterioration

 

272 

 

 

1,675 

 

 

 -

 

 

 -

 

 

425 

 

 

21 

 

 

 -

 

 

 -

 

 

2,393 

Ending balance:  collectively evaluated for impairment

$

159,372 

 

$

331,914 

 

$

60,386 

 

$

1,016 

 

$

96,142 

 

$

31,843 

 

$

3,207 

 

$

 -

 

$

683,880 





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

Commercial and industrial

 

Commercial real estate

 

Commercial real estate - construction

 

Lease financing

 

Residential mortgage

 

Home equity

 

Consumer

 

Unallocated

 

Total

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

1,393 

 

$

3,552 

 

$

153 

 

$

 

$

534 

 

$

317 

 

$

12 

 

$

206 

 

$

6,168 

Ending balance:  individually evaluated for impairment

 

51 

 

 

429 

 

 

 -

 

 

 -

 

 

23 

 

 

 -

 

 

 -

 

 

 -

 

 

503 

Ending balance:  collectively evaluated for impairment

$

1,342 

 

$

3,123 

 

$

153 

 

$

 

$

511 

 

$

317 

 

$

12 

 

$

206 

 

$

5,665 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

$

160,261 

 

$

369,464 

 

$

68,068 

 

$

727 

 

$

103,343 

 

$

33,411 

 

$

3,917 

 

$

 -

 

$

739,191 

Ending balance:  individually evaluated  for impairment

 

127 

 

 

2,970 

 

 

 -

 

 

 -

 

 

1,361 

 

 

115 

 

 

 -

 

 

 -

 

 

4,573 

Ending balance:  acquired with credit deterioration

 

 -

 

 

931 

 

 

 -

 

 

 -

 

 

400 

 

 

 -

 

 

 -

 

 

 -

 

 

1,331 

Ending balance:  collectively evaluated for impairment

$

160,134 

 

$

365,563 

 

$

68,068 

 

$

727 

 

$

101,582 

 

$

33,296 

 

$

3,917 

 

$

 -

 

$

733,287 

 

23


 

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



The recorded investments in troubled debt restructured loans at March 31, 2016 and December 31, 2015 are as follows:





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

(Dollars in thousands)                

Pre-Modification

 

Post-Modification

 

 

March 31, 2016

Outstanding Recorded Investment

 

Outstanding Recorded Investment

 

Recorded Investment

Commercial and industrial

$

40 

 

$

35 

 

$

11 

Commercial real estate

 

3,634 

 

 

3,117 

 

 

2,178 

Residential mortgage

 

733 

 

 

727 

 

 

592 



$

4,407 

 

$

3,879 

 

$

2,781 









 

 

 

 

 

 

 

 

(Dollars in thousands)                

Pre-Modification

 

Post-Modification

 

 

December 31, 2015

Outstanding Recorded Investment

 

Outstanding Recorded Investment

 

Recorded Investment

Commercial and industrial

$

40 

 

$

35 

 

$

15 

Commercial real estate

 

3,634 

 

 

3,117 

 

 

2,235 

Residential mortgage

 

733 

 

 

727 

 

 

555 



$

4,407 

 

$

3,879 

 

$

2,805 







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 March 31, 2016 totaled $2,781,000, of which five loans totaling $960,000 represented accruing impaired loans in compliance with the terms of the modification.  Four of these loans totaling $587,000 are accruing impaired residential mortgages to unrelated borrowers, with one loan comprising $525,000 of this total.  The other loan is an accruing impaired commercial real estate loan for $373,000.  The remaining $1,821,000, representing eight loans among three relationships, are nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired loans.  One large relationship accounted for $1,347,000 of the total $1,821,000 in nonaccrual impaired troubled debt restructured loans.



At December 31, 2015, Mid Penn’s troubled debt restructured loans totaled $2,805,000, of which four loans totaling $459,000, represented accruing impaired loans in compliance with the terms of the modification.  Of the $459,000, three are accruing impaired residential mortgages to unrelated borrowers totaling $64,000 and the other one is an accruing impaired commercial real estate loan for $395,000.  The remaining $2,346,000, representing nine loans among four relationships, are nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired loans.  One large relationship accounts for $1,370,000 of the $2,346,000 nonaccrual impaired troubled debt restructured loan total.



As a result of the evaluations at March 31, 2016 and March 31, 2015, any specific allocations and charge-offs have been taken as appropriate.  As of March 31, 2016 and March 31, 2015, there were no charge-offs associated with troubled debt restructured loans while under forbearance agreement and no troubled debt restructured loans that defaulted within twelve months of restructure.  As of March 31, 2016, one forbearance agreement was negotiated during 2008, nine forbearance agreements were negotiated during 2009, two forbearance agreements were negotiated in 2013, and one forbearance agreements were negotiated during 2014.



There were no new loans modified during the three months ended March 31, 2016 or 2015



As of March 31, 2016, Mid Penn had $203,000 of residential real estate held in other real estate owned and no loans for which formal foreclosure proceedings were in process.  As of December 31, 2015, Mid Penn had $358,000 of residential real estate held in other real estate owned and no loans for which formal foreclosure proceedings were in process.



 

24


 

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



The following table provides activity for the accretable yield of purchased impaired loans for the three months ended March 31, 2016.





 

 

(Dollars in thousands)

 

Accretable yield, January 1, 2016

$

178 

Accretable yield amortized to interest income

 

(34)

Reclassification from nonaccretable difference (a)

 

30 

Accretable yield, March 31, 2016

$

174 



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







(5)         Fair Value Measurement



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



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



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



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



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

 identical, unrestricted assets or liabilities;



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

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



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

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



 

25


 

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



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 months ended March 31, 2016. 



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





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Fair value measurements at March 31, 2016 using:

(Dollars in thousands)

 

Total carrying value at

 

Quoted prices in active markets

 

Significant other observable inputs

 

Significant unobservable inputs

Assets:

 

March 31, 2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

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

 

$

27,347 

 

$

 -

 

$

27,347 

 

$

 -

Mortgage-backed U.S. government agencies

 

 

49,711 

 

 

 -

 

 

49,711 

 

 

 -

State and political subdivision obligations

 

 

81,653 

 

 

 -

 

 

81,653 

 

 

 -

Equity securities

 

 

3,199 

 

 

1,142 

 

 

2,057 

 

 

 -



 

$

161,910 

 

$

1,142 

 

$

160,768 

 

$

 -







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Fair value measurements at December 31, 2015 using:

(Dollars in thousands)

 

Total carrying value at

 

Quoted prices in active markets

 

Significant other observable inputs

 

Significant unobservable inputs

Assets:

 

December 31, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

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

 

$

26,990 

 

$

 -

 

$

26,990 

 

$

 -

Mortgage-backed U.S. government agencies

 

 

38,804 

 

 

 -

 

 

38,804 

 

 

 -

State and political subdivision obligations

 

 

66,617 

 

 

 -

 

 

66,617 

 

 

 -

Equity securities

 

 

3,310 

 

 

1,240 

 

 

2,070 

 

 

 -



 

$

135,721 

 

$

1,240 

 

$

134,481 

 

$

 -





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.



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

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Fair value measurements at March 31, 2016 using:

(Dollars in thousands)

 

Total carrying value at

 

Quoted prices in active markets

 

Significant other observable inputs

 

Significant unobservable inputs

Assets:

 

March 31, 2016

 

(Level 1)

 

(Level 2)

 

(Level 3)

Impaired Loans

 

$

1,958 

 

$

 -

 

$

 -

 

$

1,958 

Foreclosed Assets Held for Sale

 

 

516 

 

 

 -

 

 

 -

 

 

516 

Mortgage Servicing Rights

 

 

162 

 

 

 -

 

 

 -

 

 

162 



 

26


 

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



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

Fair value measurements at December 31, 2015 using:

(Dollars in thousands)

 

Total carrying value at

 

Quoted prices in active markets

 

Significant other observable inputs

 

Significant unobservable inputs

Assets:

 

December 31, 2015

 

(Level 1)

 

(Level 2)

 

(Level 3)

Impaired Loans

 

$

2,088 

 

$

 -

 

$

 -

 

$

2,088 

Foreclosed Assets Held for Sale

 

 

453 

 

 

 -

 

 

 -

 

 

453 

Mortgage Servicing Rights

 

 

174 

 

 

 -

 

 

 -

 

 

174 







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 March 31, 2016 and December 31, 2015.





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Quantitative Information about Level 3 Fair Value Measurements

March 31, 2016

 

Fair Value Estimate

 

Valuation Technique

 

Unobservable Input

 

Range

 

Weighted Average

Impaired Loans

 

$

1,958 

 

Appraisal of collateral (a)

 

Appraisal adjustments (b)

 

10% - 60%

 

30%

Foreclosed Assets Held for Sale

 

 

516 

 

Appraisal of collateral (a), (c)

 

Appraisal adjustments (b)

 

17% - 31%  

 

27%

Mortgage Servicing Rights

 

 

162 

 

Multiple of annual service fee

 

Estimated prepayment speed based on rate and term

 

210% - 400%

 

360%





 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Quantitative Information about Level 3 Fair Value Measurements

December 31, 2015

 

Fair Value Estimate

 

Valuation Technique

 

Unobservable Input

 

Range

 

Weighted Average

Impaired Loans

 

$

2,088 

 

Appraisal of collateral (a)

 

Appraisal adjustments (b)

 

11% - 60%

 

30%

Foreclosed Assets Held for Sale

 

 

453 

 

Appraisal of collateral (a), (c)

 

Appraisal adjustments (b)

 

17% - 27%

 

26%

Mortgage Servicing Rights

 

 

174 

 

Multiple of annual service fee

 

Estimated prepayment speed based on rate and term

 

210% - 400%

 

360%





(a)

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



(b)

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



(c)

Includes qualitative adjustments by management and estimated liquidation expenses.



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



Cash and Cash Equivalents:

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



Interest-bearing Balances with other Financial Institutions:

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

 

27


 

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



Securities Available for Sale:

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



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

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



It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate within 30 days of the credit being classified as substandard nonaccrual.  Prior to receipt of the updated real estate valuation Mid Penn will use any existing real estate valuation to determine any potential allowance 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 12 months for possible revaluation by an independent third party.



Loans:

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



Foreclosed Assets Held for Sale:

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



Accrued Interest Receivable and Payable:

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



Restricted Investment in Bank Stocks:

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



Mortgage Servicing Rights:

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



Deposits: 

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



Short-term Borrowings:

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



Long-term and Subordinated Debt:

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

 

28


 

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 March 31, 2016 and December 31, 2015.







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

March 31, 2016

 

December 31, 2015



Carrying

 

Fair

 

Carrying

 

Fair



Value

 

Value

 

Value

 

Value

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

13,322 

 

$

13,322 

 

$

13,284 

 

$

13,284 

Interest-bearing time balances with other financial institutions

 

2,332 

 

 

2,332 

 

 

4,317 

 

 

4,317 

Investment securities

 

161,910 

 

 

161,910 

 

 

135,721 

 

 

135,721 

Net loans and leases

 

746,452 

 

 

750,824 

 

 

733,023 

 

 

738,773 

Restricted investment in bank stocks

 

2,871 

 

 

2,871 

 

 

4,266 

 

 

4,266 

Accrued interest receivable

 

3,919 

 

 

3,919 

 

 

3,813 

 

 

3,813 

Mortgage servicing rights

 

162 

 

 

162 

 

 

174 

 

 

174 



 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

$

832,581 

 

$

833,705 

 

$

777,043 

 

$

777,320 

Short-term borrowings

 

 -

 

 

 -

 

 

31,596 

 

 

31,596 

Long-term debt

 

40,250 

 

 

39,917 

 

 

40,305 

 

 

39,626 

Subordinated debt

 

7,407 

 

 

7,407 

 

 

7,414 

 

 

7,414 

Accrued interest payable

 

586 

 

 

586 

 

 

390 

 

 

390 



 

 

 

 

 

 

 

 

 

 

 

Off-balance sheet financial instruments:

 

 

 

 

 

 

 

 

 

 

 

Commitments to extend credit

$

 -

 

$

 -

 

$

 -

 

$

 -

Financial standby letters of credit

 

 -

 

 

 -

 

 

 -

 

 

 -





The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of Mid Penn’s financial instruments as of March 31, 2016 and December 31, 2015.  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, not previously disclosed.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

Fair Value Measurements



 

 

 

 

 

 

 

Quoted Prices

 

 

 

 



 

 

 

 

 

 

 

in Active Markets

 

 

 

Significant

(Dollars in thousands)

 

 

 

 

 

 

 

for Identical Assets

 

Significant Other

 

Unobservable



 

Carrying

 

 

 

 

or Liabilities

 

Observable Inputs

 

Inputs

March 31, 2016

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial instruments - assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans and leases

 

$

746,452 

 

$

750,824 

 

$

 -

 

$

 -

 

$

750,824 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments - liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

832,581 

 

$

833,705 

 

$

 -

 

$

833,705 

 

$

 -

Long-term debt

 

 

40,250 

 

 

39,917 

 

 

 -

 

 

39,917 

 

 

 -



 

29


 

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, 2015

 

Amount

 

Fair Value

 

(Level 1)

 

(Level 2)

 

(Level 3)

Financial instruments - assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loans and leases

 

$

733,023 

 

$

738,773 

 

$

 -

 

$

 -

 

$

738,773 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments - liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

777,043 

 

$

777,320 

 

$

 -

 

$

777,320 

 

$

 -

Long-term debt

 

 

40,305 

 

 

39,626 

 

 

 -

 

 

39,626 

 

 

 -









(6)          Guarantees



In the normal course of business, Mid Penn makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying consolidated financial statements.  The commitments include various guarantees and commitments to extend credit.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Mid Penn evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the customer.  Standby letters of credit and financial guarantees written are conditional commitments to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.  Mid Penn had $13,821,000 and $15,805,000 standby letters of credit outstanding as of March 31, 2016 and December 31, 2015, respectively.  Mid Penn does not anticipate any losses because of these transactions.  The current amount of the liability as of March 31, 2016 for payment under standby letters of credit issued was not material.





(7)           Subordinated Debt



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



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



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



ASC Subtopic 835-30, Simplifying the Presentation of Debt Issuance Costs, requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability.  The debt issuance costs associated with the Notes were $93,000 at March 31, 2016 and $86,000 at December 31, 2015.



 

30


 

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



(8)           Defined Benefit Plans



Mid Penn has an unfunded noncontributory defined benefit retirement plan for directors.  The plan provides defined benefits based on years of service.  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 March 31,

(Dollars in thousands)

Pension Benefits

 

Other Benefits



2016

 

2015

 

2016

 

2015

Service cost

$

 

$

 

$

 

$

Interest cost

 

12 

 

 

11 

 

 

 

 

Amortization of prior service cost

 

 

 

 

 

 

 

 -

       Net periodic benefit cost

$

26 

 

$

23 

 

$

13 

 

$

11 







(9)           Accumulated Other Comprehensive Income



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





 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

(Dollars in thousands)

Unrealized Gain on Securities

 

Defined Benefit Plans Liabilities

 

Accumulated Other Comprehensive Income



 

 

 

 

 

 

 

 

Balance - March 31, 2016

$

1,931 

 

$

133 

 

$

2,064 



 

 

 

 

 

 

 

 

Balance - December 31, 2015

$

1,565 

 

$

247 

 

$

1,812 







(10)         Common Stock



On May 6, 2014, the Mid Penn Bancorp, Inc. 2014 Restricted Stock Plan (the “Plan”) was approved by shareholders.  The Plan provides that awards shall not exceed, in the aggregate 100,000 shares of common stock.  Awards under the Plan are limited to employees and directors of the Company and the Bank selected by the Compensation Committee of the Board of Directors.  Current outstanding awards under the Plan require recipients to acquire specified ownership interest levels in Mid Penn in order for such award to vest, and thereby, encouraging them to contribute to the success of the company. 



Share-based compensation expense relating to restricted stock is recognized on a straight-line basis over the vesting periods of the awards and is a component of salaries and benefits expense.  As of March 31, 2016, 8,975 shares have been granted under the plan, which resulted in $8,000 in compensation expense for the three months ended March 31, 2016 and 2015On August 27, 2015, 875 of the granted shares vested, while the remaining granted shares remain unvested as of March 31, 2016.





(11)         Preferred Stock



Small Business Lending Fund Preferred Stock



On March 1, 2015, Mid Penn assumed all of the issued and outstanding shares of Phoenix with respect to 1,750 shares of Phoenix’s preferred stock issued to the Treasury in connection with the Small Business Lending Fund and issued 1,750 shares of SBLF Preferred Shares, having a $1,000 liquidation preference per share, to the Treasury.  The SBLF Preferred Shares qualified as Tier 1 capital and had terms and conditions identical to those shares of preferred stock issued by Phoenix to the Treasury.  Mid Penn paid noncumulative dividends payable quarterly on January 1, April 1, July 1, and October 1.  The dividend rate was 1.00% per annum for payment dates up to January 19, 2016.  



 

31


 

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



On December 15, 2015, Mid Penn, using a portion of the proceeds from the offering of its Notes, redeemed all of the outstanding shares of its SBLF Preferred Shares which were held by the Treasury for an aggregate redemption price of $1,754,000, including accrued but unpaid dividends. 



Series B Preferred Stock



Between September 26, 2012 and January 3, 2013,  Mid Penn issued, via private placement, 5,000 shares of its 7% Non-Cumulative Non-Voting Non-Convertible Perpetual Preferred Stock, Series B (“Series B Preferred Stock”) resulting in total gross proceeds of $5,000,000 for the offering.  On December 9, 2015, Mid Penn, using a portion of the proceeds from the offering of the Notes, redeemed all of its issued and outstanding shares of Series B Preferred Stock at a price equal to $1,024.67 per share, which is equal to $1,020 per share plus an amount equal to declared but unpaid dividends on December 9, 2015, for a total redemption price of $5,123,000.





(12)         Earnings per Common Share



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



The computations of basic earnings per common share follow:









 

 

 

 

 

(Dollars in thousands, except per share data)

Three Months Ended March 31,



2016

 

2015

Net Income

$

1,805 

 

$

963 

Less:  Dividends on Series B preferred stock

 

 -

 

 

87 

Net income available to common shareholders

$

1,805 

 

$

876 



 

 

 

 

 

Weighted average common shares outstanding

 

4,226,731 

 

 

3,747,167 

Basic earnings per common share

$

0.43 

 

$

0.23 



Mid Penn had no dilutive instruments outstanding as of March 31, 2016 and 2015.





(13)         Recent Accounting Pronouncements



ASU 2016-09:  The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation-Stock Compensation (Topic 718):  Improvements to Employee Share-Based Payment Accounting.



ASU 2016-09 introduces targeted amendments intended to simplify the accounting for stock compensation.  Specifically, the ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement.  The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur.  An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period.  That is, off balance sheet accounting for net operating losses stemming from excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise.  Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain and track an “APIC pool.”  The ASU also requires excess tax benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows.



In addition, the ASU elevates the statutory tax withholding threshold to qualify for equity classification up to the maximum statutory tax rates in the applicable jurisdiction(s).  The ASU also clarifies that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity.   The ASU provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis, to either estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures when they occur.



The amendments are effective for public business entities for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Early adoption is permitted.

 

32


 

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



Mid Penn is currently evaluating this ASU to determine the impact on its consolidated financial statements.



ASU 2016-08:  The FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606):  Principal versus Agent Considerations (Reporting Revenue Gross versus Net).



ASU 2016-08 updates the new revenue standard by clarifying the principal versus agent implementation guidance, but does not change the core principle of the new standard. The updates to the principal versus agent guidance:

"

require an entity to determine whether it is a principal or an agent for each distinct good or service (or a distinct bundle of goods or services) to be provided to the customer;

"

illustrate how an entity that is a principal might apply the control principle to goods, services, or rights to services, when another party is involved in providing goods or services to a customer;

"

clarify that the purpose of certain specific control indicators is to support or assist in the assessment of whether an entity controls a good or service before it is transferred to the customer, provide more specific guidance on how the indicators should be considered, and clarify that their relevance will vary depending on the facts and circumstances; and

"

revise existing examples and add two new ones to more clearly depict how the guidance should be applied.



The effective date and transition requirements for ASU 2016-08 are the same as the effective date and transition requirements of Topic 606, which is described below under ASU 2015-14.



Mid Penn is currently evaluating this ASU to determine the impact on its consolidated financial statements.



ASU 2016-07:  The FASB issued ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323):  Simplifying the Transition to the Equity Method of Accounting.



ASU 2016-07 requires an investor to initially apply the equity method of accounting from the date it qualifies for that method, i.e., the date the investor obtains significant influence over the operating and financial policies of an investee.  The ASU eliminates the previous requirement to retroactively adjust the investment and record a cumulative catch up for the periods that the investment had been held, but did not qualify for the equity method of accounting.



The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016.   The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the application of the equity method.  Early adoption is permitted.



Mid Penn is currently evaluating this ASU to determine the impact on its consolidated financial statements.



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



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



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



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



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



Mid Penn is currently evaluating the effects this ASU will have on its consolidated financial statements.

 

33


 

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



ASU 2016-01:  The FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10):  Recognition and Measurement of Financial Assets and Financial Liabilities.



This ASU requires equity investments to be measured at fair value with changes in fair value recognized in net income, excluding equity investments that are consolidated or accounted for under the equity method of accounting.  The ASU allows equity investments without readily determinable fair values to be measured at cost minus impairment, with a qualitative assessment required to identify impairment.  The ASU also requires public companies to use exit prices to measure the fair value of financial instruments, eliminates the disclosure requirements related to measurement assumptions for the fair value of instruments measured at amortized cost, and requires separate presentation of financials assets and liabilities based on form and measurement category.  In addition, for liabilities measured a fair value under the fair value option, the changes in fair value due to changes in instrument-specific credit risk should be recognized in OCI. 



This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. 



Mid Penn is currently evaluating this ASU to determine the impact on its consolidated financial statements.



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



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



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



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



Mid Penn early adopted this guidance in 2015.  The adoption of this guidance was not material to the consolidated financial statements.



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



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



Mid Penn is currently evaluating the effects this ASU will have on its consolidated financial statements.





 

 

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MID PENN BANCORP, INC. 





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



The following is Management’s Discussion of Consolidated Financial Condition as of March 31, 2016, compared to year-end 2015, and the Results of Operations for the three months ended March 31, 2016, compared to the same period in 2015For comparative purposes, the March 31, 2015 and December 31, 2015 balances have been reclassified, when, and if necessary, to conform to the 2016 presentation.  Such reclassifications had no impact on net income.



This discussion should be read in conjunction with the financial tables, statistics, and the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Annual Report”).  The results of operations for interim periods are not necessarily indicative of operating results expected for the full year.



Forward-looking statements involve risks, uncertainties and assumptions.  Although Mid Penn does not make forward-looking statements unless Mid Penn’s management believes its management has a reasonable basis for doing so, Mid Penn cannot guarantee their accuracy.  Actual results may differ materially from those expressed in these forward-looking statements due to a number of uncertainties and risks, including the risks described in the 2015 Annual Report and other unforeseen risks.  You should not put undue reliance on any forward-looking statements.  These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by us on Mid Penn’s website or otherwise, and Mid Penn undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.



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



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



·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

technological changes;

·

our ability to implement business strategies, including our acquisition strategy;

·

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

·

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

·

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

·

our ability to attract and retain qualified management and personnel;

·

results of the regulator examination and supervision process;

·

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

·

acts of war or terrorism;

 

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MID PENN BANCORP, INC. 

·

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

·

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

·

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

·

volatilities in the securities markets; and

·

slow economic conditions.



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



Critical Accounting Estimates



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



Management of the Corporation considers the accounting judgments relating to the allowance for loan and lease losses, the evaluation of the Corporation’s investment securities for other-than-temporary impairment, the valuation of the Corporation’s goodwill for impairment, and the valuation of assets acquired and liabilities assumed in business combinations, to be the accounting areas that require the most subjective and complex judgments.



The allowance 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.



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



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



Results of Operations 



The comparability of the financial condition and results of operations as of and for the three months ended March 31, 2016 and 2015, in general, have been impacted by the acquisition of Phoenix; however, the three months ended March 31, 2015 contained only one month of Phoenix’s results of operations since the acquisition date was March 1, 2015.



Overview



Net income available to common shareholders was $1,805,000 or $0.43 per basic earnings per common share, for the quarter ended March 31, 2016, as compared to net income available to common shareholders of $876,000 or $0.23 per basic earnings per common share, for the quarter ended March 31, 2015.  Earnings per common share for the first quarter of 2016 increased 87.0% over the same period in 2015.  The results for the three months ended March 31, 2015 were impacted by $762,000 in non-recurring merger-related expenses associated  with Mid Penn’s acquisition of Phoenix on March 1, 2015.  Mid Penn’s earnings for the three months ended March 31, 2016 were 27.7% higher than adjusted earnings for the first quarter of 2015 of $1,413,000, which excluded the after-tax impact of the Phoenix merger-related expenses.

 

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MID PENN BANCORP, INC. 



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







 

 

 



 

 

 



Three Months Ended March 31,



2016

 

2015

Return on average assets

0.77%

 

0.49%

Return on average equity

10.22%

 

6.17%



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%.



Net interest income increased $1,377,000 or 19.6% to $8,415,000 for the quarter ended March 31, 2016 from $7,038,000 during the quarter ended March 31, 2015.  Net interest income was positively impacted by the core loan growth in the year beyond the first quarter of 2015, as well as the full quarter earnings on loans from the Phoenix acquisition.



For the three months ended March 31, 2016, Mid Penn’s taxable-equivalent net interest margin decreased to 3.95% from 3.97% for the three months ended March 31, 2015.  The decrease was predominantly the result of a lower investment portfolio yield, which declined from 3.65% during the first quarter of 2015 to 3.13% during the same period in 2016.  The yields on investments that matured or were called in the past year were higher than yields on recent investment purchases, reflecting the continued low market rates for fixed income securities.



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



Provision for Loan Losses



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



Mid Penn has maintained the allowance for loan and lease losses in accordance with Mid Penn’s assessment process, which takes into consideration the risk characteristics of the loan portfolio, the growth in the loan portfolio during the first three months of 2016, and shifting collateral values from December 31, 2015 to March 31, 2016



Following its model for loan and lease loss allowance adequacy, management recorded a $340,000 provision for the three months ended March 31, 2016 compared to a provision of $300,000 for the three months ended March 31, 2015.  The allowance for loan and lease losses as a percentage of total loans was 0.86% at March 31, 2016, compared to 0.83% at December 31, 2015For 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.



 

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MID PENN BANCORP, INC. 

Noninterest Income



Noninterest income increased $283,000 or 29.8% during the first quarter of 2016 versus the same period in 2015.  The following components of noninterest income showed significant changes:







 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

Three Months Ended March 31,



2016

 

2015

 

$ Variance

 

% Variance

Net gain on sales of investment securities

$

 -

 

$

177 

 

$

(177)

 

-100.0%

Mortgage banking income

 

186 

 

 

67 

 

 

119 

 

177.6% 

ATM debit card interchange income

 

200 

 

 

155 

 

 

45 

 

29.0% 

Net gain on sales of loans

 

190 

 

 

 -

 

 

190 

 

NA

Other income

 

258 

 

 

167 

 

 

91 

 

54.5% 



Mid Penn has experienced significantly increased activity in Small Business Administration (“SBA”) loans during the first quarter of 2016 as more qualified borrowers have taken advantage of Mid Penn’s Preferred Lender status with the SBA.  Mid Penn recorded $190,000 in increased SBA gains during the quarter versus the same period in the prior year.  Mortgage banking income favorably increased $119,000 for the first quarter of 2016 over the first quarter of 2015.  Improved real estate activity throughout Mid Penn’s footprint, favorable interest rate conditions, and the addition of seasoned loan originators have contributed to increasing revenue from this business line.  ATM debit card interchange income increased $45,000 for the three months ended March 31, 2016 versus the same period in 2015 primarily due to increased transaction volume from demand deposit account growth, including the addition of the customer base from the Phoenix acquisition late in the first quarter of 2015.  Other income increased $91,000 for the three months ended March 31, 2016 over the three months ended March 31, 2015, primarily as a result of the $86,000 gain on the sale of insurance policies upon the dissolution of Mid Penn Insurance Services, LLC, the Bank’s wholly-owned subsidiary, effective March 1, 2016.  The decision was made to liquidate the subsidiary due to the lack of consistent profitability and growth.



During the first quarter of 2015, Mid Penn did some investment portfolio repositioning and took advantage of the increased fair values of certain holdings, thereby selling certain securities and realizing $177,000 of securities gains.  No investment sales or gains occurred during the first quarter of 2016.



Noninterest Expense 



Noninterest expense increased $342,000 or 5.2% during the first quarter of 2016, versus the same period in 2015.  The changes were primarily a result of the following components of noninterest expense:







 

 

 

 

 

 

 

 

 

 

(Dollars in Thousands)

Three Months Ended March 31,



2016

 

2015

 

$ Variance

 

% Variance

Salaries and employee benefits

$

3,723 

 

$

3,195 

 

$

528 

 

16.5% 

Occupancy expense, net

 

547 

 

 

454 

 

 

93 

 

20.5% 

Equipment expense

 

435 

 

 

313 

 

 

122 

 

39.0% 

Pennsylvania Bank Shares tax expense

 

203 

 

 

115 

 

 

88 

 

76.5% 

Legal and professional fees

 

202 

 

 

143 

 

 

59 

 

41.3% 

Loss on sale/write-down of foreclosed assets

 

104 

 

 

32 

 

 

72 

 

225.0% 

Merger and acquisition expense

 

 -

 

 

762 

 

 

(762)

 

-100.0%

Other expenses

 

905 

 

 

785 

 

 

120 

 

15.3% 



Salaries and employee benefit expenses increased during the quarter ended March 31, 2016 by $528,000 versus the same period in 2015.  The increase was driven by the addition of the Phoenix employees to Mid Penn’s employee pool, an increase in staffing levels due to Mid Penn’s entry into the Mechanicsburg market, and an increase in lending personnel and support staff in alignment with Mid Penn’s core banking growth.  Occupancy expenses for the three months ended March 31, 2016 increased by $93,000 compared to the same period in 2015.  This increase was impacted by the inclusion of rent and other occupancy costs from the new Corporate Administration offices on North Front Street in Harrisburg, and the new Elizabethtown and Simpson Ferry Road branch offices.  Legal and professional fees increased $59,000 during the three months ended March 31, 2016 compared to the same period in 2015 primarily due to $24,000 in recruitment services for the Bank’s two new agricultural lending officers, and $13,000 in realtor commissions to assist in the sublet of leased space acquired in the Phoenix transaction.  Loss on sale/write-down of foreclosed assets increased $72,000 during the first quarter of 2016 versus the same period in 2015 due to the sale and continued workout of certain holdings in the Bank’s portfolio of other real estate owned.  Merger-related expenses in connection with the acquisition of Phoenix were $762,000 in the first quarter of 2015, while no merger-related expenses were incurred in the first quarter of 2016.  Equipment expenses, Pennsylvania bank shares tax, and other expenses all saw increases for the first quarter of 2016 compared to the first quarter of 2015 related to the inclusion of certain Phoenix facilities, personnel, and other normal operating expenses to Mid Penn’s noninterest expense stream.

 

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MID PENN BANCORP, INC. 



Income Taxes



The provision for income taxes was $520,000 for the three months ended March 31, 2016, as compared to the provision for income taxes of $84,000 in the same period last year.  The effective tax rate for the three months ended March 31, 2016 was 22.4% compared to 8.1% for the three months ended March 31, 2015The low provision for the three months ended March 31, 2015 was caused by the $762,000 in merger-related expenses, of which $661,000 was deemed a deductible expense thereby substantially decreasing Mid Penn’s pre-tax income for the period.  Generally, Mid Penn’s effective tax rate is below the statutory rate due to earnings on tax-exempt loans, investments, and bank-owned life insurance, as well as the impact of tax credits.  The realization of deferred tax assets is dependent on future earnings.  Mid Penn currently anticipates that future earnings will be adequate to fully utilize deferred tax assets.



Financial Condition



Overview



Mid Penn’s total assets increased 29,256,000 or 3.1% to $960,894,000 at March 31, 2016 from $931,638,000 at December 31, 2015.  The increase in total assets was impacted by strong deposit growth, particularly in new retail customers, and increases in nonprofit and government deposits.  Increased public fund deposits required the Bank to purchase some additional investments for pledging purposes, contributing to the increase in the investment portfolio during the first quarter of 2016.  In addition, these increased deposits allowed the Bank to payoff short-term borrowings during the quarter.



Loans



During the first three months of 2016, Mid Penn experienced an increase in loans outstanding of $7,261,000 or 1.0%, mainly in the commercial real estate category.  Overall, commercial real estate, commercial and industrial, and residential mortgage loans accounted for the majority of Mid Penn’s loan growth as noted in the table below.





 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

(Dollars in thousands)

March 31, 2016

 

December 31, 2015



Amount

 

%

 

Amount

 

%

Commercial and industrial

$

162,418 

 

21.8% 

 

$

160,261 

 

21.7% 

Commercial real estate

 

394,633 

 

52.9% 

 

 

369,464 

 

50.0% 

Commercial real estate - construction

 

47,733 

 

6.4% 

 

 

68,068 

 

9.2% 

Lease financing

 

656 

 

0.1% 

 

 

727 

 

0.1% 

Residential mortgage

 

104,014 

 

13.9% 

 

 

103,343 

 

14.0% 

Home equity

 

33,864 

 

4.5% 

 

 

33,411 

 

4.5% 

Consumer

 

3,134 

 

0.4% 

 

 

3,917 

 

0.5% 



$

746,452 

 

100.0% 

 

$

739,191 

 

100.0% 



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



During the first three months of 2016, Mid Penn had net charge-offs of $69,000 compared to net charge-offs of $450,000 during the same period of 2015.  Loans charged off during the first three months of 2016 included six commercial real estate loans among five relationships totaling $96,000The remaining $3,000 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.

 

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MID PENN BANCORP, INC. 



Changes in the allowance for loan and lease losses for the three months ended March 31, 2016 and 2015 are summarized as follows:





 

 

 

 

 



 

 

 

 

 

(Dollars in thousands)

Three Months Ended March 31,



2016

 

2015

Average total loans outstanding (net of unearned interest)

$

746,130 

 

$

615,607 

Period ending total loans outstanding (net of unearned interest)

 

746,452 

 

 

695,153 

Alloance for loan and lease losses:

 

 

 

 

 

Balance, beginning of period

 

6,168 

 

 

6,716 



 

 

 

 

 

Loans charged off during period

 

(99)

 

 

(485)

Recoveries of loans previously charged off

 

30 

 

 

35 

Net charge-offs

 

(69)

 

 

(450)



 

 

 

 

 

Provision for loan and lease losses

 

340 

 

 

300 

Balance, end of period

$

6,439 

 

$

6,566 



 

 

 

 

 



 

 

 

 

 

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

 

0.04% 

 

 

0.30% 



 

 

 

 

 

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

 

0.86% 

 

 

0.94% 



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.



At March 31, 2016, total nonperforming loans amounted to $4,667,000 or 0.63% of loans and leases net of unearned income, compared to levels of $4,877,000 or 0.66% at December 31, 2015, and $9,411,000 or 1.35% at March 31, 2015.







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 



March 31, 2016

 

December 31, 2015

 

March 31, 2015

Nonperforming Assets:

 

 

 

 

 

 

 

 

   Nonaccrual loans

$

3,707 

 

$

4,418 

 

$

7,417 

   Accruing troubled debt restructured loans

 

960 

 

 

459 

 

 

1,994 

        Total nonperforming loans

 

4,667 

 

 

4,877 

 

 

9,411 



 

 

 

 

 

 

 

 

   Foreclosed real estate

 

794 

 

 

1,185 

 

 

722 

       Total nonperforming assets

 

5,461 

 

 

6,062 

 

 

10,133 



 

 

 

 

 

 

 

 

   Accruing loans 90 days or more past due

 

56 

 

 

55 

 

 

50 

       Total risk elements

$

5,517 

 

$

6,117 

 

$

10,183 



 

 

 

 

 

 

 

 

Nonperforming loans as a % of total

 

 

 

 

 

 

 

 

    loans outstanding

 

0.63% 

 

 

0.66% 

 

 

1.35% 

Nonperforming assets as a % of total

 

 

 

 

 

 

 

 

    loans outstanding and other real estate

 

0.73% 

 

 

0.82% 

 

 

1.46% 

Ratio of allowance for loan losses

 

 

 

 

 

 

 

 

    to nonperforming loans

 

137.97% 

 

 

126.46% 

 

 

69.77% 



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.

 

40


 

MID PENN BANCORP, INC. 

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







 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 



March 31, 2016

 

December 31, 2015

Period ending total loans outstanding (net of unearned interest)

$

746,452 

 

$

739,191 

Allowance for loan and lease losses

 

6,439 

 

 

6,168 

Total Nonperforming loans

 

4,667 

 

 

4,877 

Nonperforming and impaired loans with partial charge-offs

 

1,819 

 

 

1,869 



 

 

 

 

 

Ratio of nonperforming loans with partial charge-offs

 

 

 

 

 

    to total loans

 

0.24% 

 

 

0.25% 



 

 

 

 

 

Ratio of nonperforming loans with partial charge-offs

 

 

 

 

 

    to total nonperforming loans

 

38.98% 

 

 

38.32% 



 

 

 

 

 

Coverage ratio net of nonperforming loans with

 

 

 

 

 

    partial charge-offs

 

226.09% 

 

 

205.05% 



 

 

 

 

 

Ratio of total allowance to total loans less

 

 

 

 

 

    nonperforming loans with partial charge-offs

 

0.86% 

 

 

0.84% 



Mid Penn had no loans that received an addition al charge-offs for which a partial charge-off had originally been taken at March 31, 2016 or December 31, 2015.  



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 method indicates no operating income is available for evaluating the collateral position; therefore, most impaired loans are deemed to be collateral dependent. 



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



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



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



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



 

41


 

MID PENN BANCORP, INC. 

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



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



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



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



Excluding $1,290,000 in loans acquired with credit deterioration, of which none were subsequently impaired after being acquired as of March 31, 2016, Mid Penn had several loan relationships deemed impaired with an aggregate carrying balance of $4,378,000.  This pool of loans was further broken down into a group of loans with an aggregate carrying balance of $1,957,000 for which specific allocations totaling $471,000 were included within the loan loss reserve for these loans.  The remaining $2,421,000 of loans required no specific allocation within the loan loss reserve.  The $4,378,000 pool of impaired loan relationships was comprised of $2,844,000 in commercial real estate relationships, $1,332,000 in residential relationships, $116,000 in commercial and industrial relationships, and $86,000 in home equity relationships.  There were specific loan loss reserve allocations of $428,000 against the commercial real estate relationships,  $40,000 against the commercial and industrial relationships, and $3,000 against home equity relationships.  Management currently believes that the specific reserves are adequate to cover probable future losses related to these relationships.



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



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



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





·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

·

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

 

42


 

MID PENN BANCORP, INC. 

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



Management believes, based on information currently available, that the allowance for loan and lease losses of $6,439,000 is adequate as of March 31, 2016 is adequate to cover specifically identifiable loan losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.  



Liquidity



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



·

a growing core deposit base;

·

proceeds from the sale or maturity of investment securities;

·

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

·

payments received on loans and mortgage-backed securities;

·

overnight correspondent bank borrowings on various credit lines; and

·

borrowing capacity available from the FHLB.



The major source of cash received in the first three months of 2016 came from the $55,538,000 net increase in deposits.



Major uses of cash in the first three months of 2016 were the $31,596,000 net decrease in short-term borrowings and the $29,345,000 in investment purchases.



Major sources of cash received in the first quarter of 2015 came from the sale of investment securities of $16,091,000 and the net cash received from acquisitions of $8,118,000.



Major uses of cash in the first quarter of 2015 were the increase in net loans and leases of $13,579,000 and the purchases of investment securities of $8,065,000.



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.



Subordinated Debt



On November 9, 2015, Mid Penn entered into agreements with investors to purchase $7,500,000 aggregate principal amount of its Notes due 2025.  The Notes are treated as Tier 2 capital for regulatory capital purposes.  The offering closed in December 2015.



The Notes bear interest at a rate of 5.15% per year for the first five years and then float at the Wall Street Journal’s Prime Rate plus 0.50%, provided that the interest rate applicable to the outstanding principal balance will at no times be less than 4.0%.  Interest is paid quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, beginning on January 1, 2016.  The Notes will mature on December 9, 2025 and are redeemable in whole or in part, without premium or penalty, at any time on or after December 9, 2020, and prior to December 9, 2025.  Additionally, Mid Penn may redeem the Notes in whole at any time, or in part from time to time, upon at least 30 days’ notice if:  (i) a change or prospective change in law occurs that could prevent Mid Penn from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) an event occurs that precludes the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) Mid Penn becomes required to register as an investment company under the Investment Company Act of 1940, as amended, in each case at 100% of the principal amount of the subordinated notes, plus accrued and unpaid interest thereon to but excluding the date of redemption.  The debt issuance costs associated with the Notes were $93,000 at March 31, 2016 and $86,000 at December 31, 2015.



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

 

43


 

MID PENN BANCORP, INC. 

Regulatory Capital Changes



In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.  The phase-in period for community banking organizations began January 1, 2015.  The final rules implemented higher minimum capital requirements, added a new common equity Tier 1 capital requirement, and established criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital.  Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements, which amount must be greater than 2.5% of total risk-weighted assets at January 1, 2019.  The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations began on January 1, 2016 at the 0.625% level.  A summary of the payout restrictions based on the capital conservation buffer is as follows:





 

 

Capital Conservation Buffer
(as a % of risk-weighted assets)

 

Maximum Payout
(as a % of eligible retained income)

> 2.5%

 

No payout limitation applies

≤2.5% and >1.875%

 

60%

≤1.875% and >1.25%

 

40%

≤1.25% and >0.625%

 

20%

≤0.625%

 

0%



Implementation of the deductions and other adjustments to common equity tier 1 capital began on January 1, 2015 and will be phased-in over a three-year period.  The final rules called for the following minimum capital requirements to be considered “well-capitalized” (which include the impact of the capital conservation buffer effective January 1, 2016):





 

 

 

 

 

   

As of January 1,

   

2015

2016

2017

2018

2019

Minimum common equity Tier 1 capital ratio

4.5%  4.5%  4.5%  4.5%  4.5% 

Common equity Tier 1 capital conservation buffer

N/A

0.625%  1.25%  1.875%  2.5% 

Minimum common equity Tier 1 capital ratio plus capital conservation buffer

4.5%  5.125%  5.75%  6.375%  7.0% 

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

40%  60%  80%  100%  100% 

Minimum Tier 1 capital ratio

6.0%  6.0%  6.0%  6.0%  6.0% 

Minimum Tier 1 capital ratio plus capital conservation buffer

N/A

6.625%  7.25%  7.875%  8.5% 

Minimum total capital ratio

8.0%  8.0%  8.0%  8.0%  8.0% 

Minimum total capital ratio plus capital conservation buffer

N/A

8.625%  9.25%  9.875%  10.5% 



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



The final rules permanently 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.



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



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



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



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

 

44


 

MID PENN BANCORP, INC. 



Capital Resources



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



Shareholders’ equity increased during the three months ended March 31, 2016 by $1,154,000 or 1.7% from December 31, 2015.  Capital was positively impacted by positive earnings of $1,805,000 and an increase in accumulated other comprehensive income of $252,000.  Capital was reduced by the payment of $930,000 in common stock dividends during the first quarter of 2016.    All of Mid Penn’s investment securities are classified as available for sale, making accumulated other comprehensive income sensitive to the changing market value of investments.



Banks are evaluated for capital adequacy based on the ratio of capital to risk-weighted assets and total assets.  The new minimum capital to risk-adjusted assets requirements including the capital conservation buffers began on January 1, 2016 and are illustrated below.  At March 31, 2016, Mid Penn Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective action and the minimum capital requirements under Basel III



Mid Penn maintained the following regulatory capital levels, leverage ratios, and risk-based capital ratios as of March 31, 2016 and December 31, 2015:







 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

64,898 

 

6.9% 

 

$

37,639 

 

4.0% 

 

 

N/A

 

N/A

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

64,898 

 

9.2% 

 

 

36,111 

 

5.125% 

 

 

N/A

 

N/A

Tier 1 Capital (to Risk Weighted Assets)

 

64,898 

 

9.2% 

 

 

46,680 

 

6.625% 

 

 

N/A

 

N/A

Total Capital (to Risk Weighted Assets)

 

78,954 

 

11.2% 

 

 

60,773 

 

8.625% 

 

 

N/A

 

N/A



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

72,686 

 

7.8% 

 

$

37,513 

 

4.0% 

 

$

46,891 

 

5.0% 

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

72,686 

 

10.3% 

 

 

36,080 

 

5.125% 

 

 

45,761 

 

6.5% 

Tier 1 Capital (to Risk Weighted Assets)

 

72,686 

 

10.3% 

 

 

46,641 

 

6.625% 

 

 

56,321 

 

8.0% 

Total Capital (to Risk Weighted Assets)

 

79,242 

 

11.3% 

 

 

60,721 

 

8.625% 

 

 

70,401 

 

10.0% 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

64,089 

 

7.1% 

 

$

35,098 

 

4.0% 

 

 

N/A

 

N/A

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

64,089 

 

9.1% 

 

 

31,731 

 

4.5% 

 

 

N/A

 

N/A

Tier 1 Capital (to Risk Weighted Assets)

 

64,089 

 

9.1% 

 

 

42,308 

 

6.0% 

 

 

N/A

 

N/A

Total Capital (to Risk Weighted Assets)

 

77,852 

 

11.0% 

 

 

56,410 

 

8.0% 

 

 

N/A

 

N/A



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

70,351 

 

7.8% 

 

$

36,245 

 

4.0% 

 

$

45,306 

 

5.0% 

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

70,351 

 

10.0% 

 

 

31,698 

 

4.5% 

 

 

45,786 

 

6.5% 

Tier 1 Capital (to Risk Weighted Assets)

 

70,351 

 

10.0% 

 

 

42,264 

 

6.0% 

 

 

56,352 

 

8.0% 

Total Capital (to Risk Weighted Assets)

 

76,614 

 

10.9% 

 

 

56,352 

 

8.0% 

 

 

70,440 

 

10.0% 



 

45


 

MID PENN BANCORP, INC. 



Series B Preferred Stock Redemption



Between September 26, 2012 and January 3, 2013, Mid Penn issued, via a private placement, 5,000 shares of its Series B Preferred Stock, resulting in total gross proceeds of $5,000,000. 



On December 9, 2015, Mid Penn, using a portion of the proceeds from the offering of the Notes previously described on page 42, redeemed all of its issued and outstanding shares of Series B Preferred Stock at a price equal to $1,024.67 per share, which is equal to $1,020 per share plus an amount equal to declared but unpaid dividends on December 9, 2015, for a total redemption price of $5,123,000.



Small Business Lending Fund Program Redemption



On March 1, 2015, Mid Penn assumed all of the issued and outstanding shares of Phoenix with respect to 1,750 shares of Phoenix’s preferred stock issued to the Treasury in connection with the Small Business Lending Fund and issued 1,750 shares of Mid Penn’s SBLF Preferred Shares, having a $1,000 liquidation preference per share, to the Treasury.  The SBLF Preferred Shares qualify as Tier 1 Capital and have terms and conditions identical to those shares of preferred stock issued by Phoenix to Treasury. Mid Penn paid noncumulative dividends payable quarterly on January 1, April 1, July 1, and October 1.  The dividend rate was 1.00% per annum for payment dates up to its redemption.



On December 15, 2015, Mid Penn, using a portion of the proceeds from the offering of the Notes previously described on page 42, redeemed all of the outstanding shares of its SBLF Preferred Shares, which were held by the Treasury for an aggregate redemption price of $1,754,000, including accrued but unpaid dividends.





ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



There has been no material change in market risk since December 31, 2015, as reported in Mid Penn’s Form 10-K filed with the SEC on March 17, 2016.





ITEM 4 – CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



Mid Penn maintains controls and procedures designed to ensure that information required to be disclosed in the reports that Mid Penn files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Based upon their evaluation of those controls and procedures as of March 31, 2016, Mid Penn’s management, with the participation of the Principal Executive Officer and Principal Financial Officer, concluded that the disclosure controls and procedures were effective as of such date.



Changes in Internal Controls



During the three months ended March 31, 2016, 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.

 

 

46


 

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, 2015 to determine if there were material changes applicable to the three months ended March 31, 2016.  There are no material changes from the risk factors as previously disclosed in the Form 10-K.





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



None







ITEM 3 – DEFAULTS UPON SENIOR SECURITIES



None





ITEM 4 - MINE SAFETY DISCLOSURES



Not Applicable





ITEM 5 – OTHER INFORMATION



None





ITEM 6 – EXHIBITS



·

Exhibit 3(i) – The Registrant’s amended Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Registrant’s Registration Statement on Form S-4 (File No. 333-199740) filed with the Securities and Exchange Commission on October 31, 2014.)

·

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

·

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

·

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

·

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

·

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

·

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

·

Exhibit 101.LAB – XBRL Taxonomy Extension Label Linkbase

·

Exhibit 101.PRE – XBRL Taxonomy Extension Presentation Linkbase

·

Exhibit 101.INS – XBRL Instance Document

·

Exhibit 101.SCH – XBRL Taxonomy Extension Schema

·

Exhibit 101.CAL – XBRL Taxonomy Extension Calculation Linkbase

·

Exhibit 101.DEF – XBRL Taxonomy Extension Definition Linkbase

 

 

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MID PENN BANCORP, INC.



SIGNATURES



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







 



Mid Penn Bancorp, Inc.

(Registrant)

By:

/s/ Rory G. Ritrievi



Rory G. Ritrievi



President and CEO



(Principal Executive Officer)



 

Date:

May 12, 2016

By:

/s/ Michael D. Peduzzi, CPA



Michael D. Peduzzi, CPA



Chief Financial Officer



 

Date:

May 12, 2016





 

48