2014 Annual Report to Shareholders
From the President
On behalf of our Board of Directors, I am pleased to present a summary of 2014,
which in many ways was a milestone year for Mid Penn. In 2014, we made
headlines for record earnings, solid shareholder return, significant expansion with
the announcement of acquisition activity and de novo entrance into a dynamic new market,
and national and statewide recognition.
Net income available to common shareholders was $5,351,000 for the year, versus
$4,616,000 in 2013, an increase of 15.9%. Excluding one-time merger related
expenses of $573,000, net income available to common shareholders would have been
$5,760,000, a 24.8% improvement over 2013. Solid loan and core deposit growth, meticulous attention to expense control
and a respectable year in noninterest income were the primary reasons for our net income success in 2014. With that income
success came a 13.3% improvement in tangible book value of Mid Penn and an 80.0% improvement in dividends. Those two
improvements contributed to an 11.6% total shareholder return for the year.
In May, we were named to American Banker magazine’s “Top 200 Community Banks” list, a list that recognizes the
best banks in the nation based upon return on equity. We were a first-time recipient of the Pennsylvania Association of
Community Bankers’ “Grow Your Community Award.” Finally, and for the third year in a row, we were named one of the
“Top 100 Best Places to Work in PA.”
Early in the second half of the year, we announced our intention to acquire Phoenix Bancorp, Inc., a $135 million community
bank holding company based in Schuylkill County and the parent of Miners Bank. With one retail location already in the
Schuylkill County market and a desire to penetrate new markets with the Mid Penn brand and story, the Phoenix acquisition aligns
with our strategy. We spent the remainder of the year diligently working on obtaining all necessary approvals to complete the
acquisition. On March 1, 2015, we completed the merger, putting us well ahead of the original schedule. The resulting company
has assets approaching $900 million, putting us within striking distance of $1 billion.
Late in the year, we announced plans to open a retail location in Elizabethtown, Lancaster County. We have had an interest
in the Lancaster market in general, and specifically Elizabethtown, due to its proximity to our Middletown retail location.
On February 2, 2015, we opened our doors to the Elizabethtown community, and since that time, we have been focused
on introducing all of our great people, products, and services to the market. The team we have assembled in that market is
second to none, and we will succeed in making this a premium location for Mid Penn.
Throughout 2014, we worked on establishing an additional branch in Mechanicsburg, to further solidify our presence in
Cumberland County. On March 12, 2015, we announced our intent to open a retail branch, on Simpson Ferry Road, Lower
Allen Township, and filed the necessary applications with the Pennsylvania Department of Banking and Securities and the Federal
Deposit Insurance Corporation. We will spend the remainder of the first quarter and much of the second quarter gearing up for a
successful opening. We look forward to introducing ourselves to a new segment of the Mechanicsburg community.
Throughout the year, we continued to further enhance our model by following our plan of perpetual business process
improvement. A better online banking platform and the introduction of a mobile banking application are two examples
that evolved from that commitment.
We also continued to remain dedicated to one of our core commitments—to diligently serve and strengthen the communities we
serve. Employee volunteerism is a way of life at Mid Penn. In 2014, we committed over 1,500 hours of employee volunteer time in
the community. Hours of employee volunteerism increased in 2014 as they have every year since 2009. In addition to our time, we
also provided $140,000 in charitable support. Community support at Mid Penn includes contributing dollars AND time.
Looking back on 2014, it certainly was a milestone year! For the entire Mid Penn team, from the Board of Directors to the
executives and all of our associates, we are committed to ensuring that 2014 is just the first of many milestone years to come.
Thank you for your investment in Mid Penn which has helped us to achieve our many successes of 2014.
p
y
Rory G. Ritrievi
Rory G. Ritrievi
President and CEO
President and CEO
Strategic Growth
In 2014, Mid Penn announced plans to expand our branch network through our merger with Phoenix Bancorp, Inc.,
along with the opening of a new branch in Elizabethtown, Lancaster County.
NEW RETAIL LOCATIONS:
SCHUYLKILL COUNTY
Frackville
504 South Lehigh Avenue
Minersville
Route 901, Pottsville/Minersville Highway
Tremont
29 East Main Street
LUZERNE COUNTY
Hazleton
641 State Route 93 in Conyngham
LANCASTER COUNTY
Elizabethtown
2305 South Market Street
OTHER RETAIL LOCATIONS:
DAUPHIN COUNTY
Millersburg
349 Union Street
Lykens
550 Main Street
Elizabethville
4642 State Route 209
Dauphin
1001 Peters Mountain Road
Harrisburg – Allentown Boulevard
5500 Allentown Boulevard
Harrisburg – Derry Street
4509 Derry Street
Harrisburg – Front Street
2615 North Front Street
Harrisburg – Market Square Plaza
17 North Second Street
Middletown
1100 Spring Garden Drive
Steelton
51 South Front Street
CUMBERLAND COUNTY
Camp Hill
2101 Market Street
Mechanicsburg
4622 Carlisle Pike
SCHUYLKILL COUNTY
Tower City
545 East Grand Avenue
NORTHUMBERLAND COUNTY
Dalmatia
132 School Road
LUZERNE
NORTH-
UMBERLAND
SCHUYLKILL
DAUPHIN
CUMBERLAND
LANCASTER
Awards
Mid Penn was a first-time recipient of the Pennsylvania
Association of Community Bankers’ “Grow Your Community
Award,” recognizing the bank’s deep commitment to
serving our local communities.
Mid Penn was the recipient of both national and
statewide accolades in 2014, including the distinct
honor on the list of the “Top 200 Community
Banks” in the country.
Above: PACB President and CEO Nick DiFrancesco (left) presented
the 2014 “Grow Your Community Award” to Chief Retail Officer Kelly
Neiderer (center) and President and CEO Rory Ritrievi (right).
For the third consecutive year in a row, Mid Penn
was named one of the “Best Places to Work in
Pennsylvania.”
GIVING BACK
In 2014, Mid Penn remained dedicated to our core values as a community bank as evidenced through our
philanthropy for the year. This includes employee volunteerism, which experienced a 50% increase in 2014.
2014 Community
Giving Highlights
(cid:79) $140,000 in
charitable support
donated by Mid Penn
(cid:79) 1,500+ hours
volunteered by our
employees
(cid:79) 420+ instances of
volunteerism by our
employees
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2014
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-13677
MID PENN BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania
(State or Other Jurisdiction of
Incorporation or Organization)
349 Union Street
Millersburg, Pennsylvania
(Address of Principal Executive Offices)
25-1666413
(I.R.S. Employer
Identification Number)
17061
(Zip Code)
Registrant’s telephone number, including area code 1.866.642.7736
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $1.00 par value per share
Name of Each Exchange on Which Registered
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One).
Large accelerated filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates computed by reference to the closing price of the
common equity of $15.82 per share, as reported by NASDAQ, on June 30, 2014, the last business day of the registrant’s most recently completed second fiscal
quarter was approximately $55,307,574.
As of March 6, 2015, the registrant had 4,221,680 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be used in connection with the 2015 Annual Meeting of Shareholders is incorporated herein by reference in
partial response to Part III, hereof.
MID PENN BANCORP, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
Item 1 -
Business
Item 1A - Risk Factors
Item 1B - Unresolved Staff Comments
Item 2 -
Properties
Item 3 -
Legal Proceedings
Item 4 -
Mine Safety Disclosures
PART II
Item 5 -
Market for Registrant’s Common Equity, Related Shareholder Matters And Issuer Purchases of
Equity Securities
Item 6 -
Selected Financial Data
Item 7 -
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A - Quantitative and Qualitative Disclosure About Market Risk
Item 8 -
Financial Statements and Supplementary Data
Item 9 -
Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A - Controls and Procedures
Item 9B - Other Information
PART III
Item 10 -
Directors, Executive Officers and Corporate Governance
Item 11 -
Executive Compensation
Item 12 -
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder
Matters
Item 13 -
Certain Relationships and Related Transactions, and Director Independence
Item 14 -
Principal Accountant Fees and Services
PART IV
Item 15 -
Exhibits and Financial Statement Schedules
Signatures
EXHIBITS
PAGE
3
12
17
18
19
19
19
21
22
41
42
88
88
88
89
89
89
89
89
90
92
93
2
MID PENN BANCORP, INC.
PART I
ITEM 1. BUSINESS
The disclosures set forth in this Item are qualified by the section captioned “Special Cautionary Notice Regarding Forward-Looking Statements”
contained in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report and other
cautionary statements set forth elsewhere in this report.
Mid Penn Bancorp, Inc.
Mid Penn Bancorp, Inc. is a one-bank holding company, incorporated in the Commonwealth of Pennsylvania in August 1991. Mid Penn
Bancorp, Inc. and its wholly owned subsidiaries are collectively referred to herein as “Mid Penn” or the “Corporation.” On December 31, 1991,
Mid Penn acquired, as part of the holding company formation, all of the outstanding common stock of Mid Penn Bank (the “Bank”), and the
Bank became a wholly owned subsidiary of Mid Penn. Mid Penn’s primary business is to supervise and coordinate the business of its
subsidiaries and to provide them with capital and resources.
Mid Penn Insurance Services, LLC is a wholly-owned subsidiary of Mid Penn Bank that provides a wide range of personal and commercial
insurance products.
Mid Penn’s consolidated financial condition and results of operations consist almost entirely of that of Mid Penn Bank, which is managed as a
single business segment. At December 31, 2014, Mid Penn had total consolidated assets of $755,657,000, total deposits of $637,922,000, and
total shareholders’ equity of $59,130,000.
As of December 31, 2014, Mid Penn Bancorp, Inc. did not own or lease any properties. Mid Penn Bank owns or leases the banking offices as
identified in Part I, Item 2.
All Mid Penn employees are employed by the Bank. At December 31, 2014, the Bank had 187 full-time and 16 part-time employees. The Bank
and its employees are not subject to a collective bargaining agreement, and the Bank believes it enjoys good relations with its personnel.
Mid Penn Bank
Millersburg Bank, the predecessor to the Bank, was organized in 1868, and became a state chartered bank in 1931, obtaining trust powers in
1935, at which time its name was changed to Millersburg Trust Company. In 1971, Millersburg Trust Company adopted the name “Mid Penn
Bank.” On March 1, 2015, in connection with the acquisition of Phoenix Bancorp, Inc. (“Phoenix”) by Mid Penn, Miners Bank, Phoenix’s
wholly-owned banking subsidiary, merged with and into the Bank, with the Bank surviving and Miners Bank’s four branches operating as
“Miners Bank, a Division of Mid Penn Bank”. The Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance
Corporation (the “FDIC”) supervise the Bank. Mid Penn’s and the Bank’s legal headquarters are located at 349 Union Street, Millersburg,
Pennsylvania 17061. The Bank presently has 19 offices located in Cumberland, Dauphin, Lancaster, Luzerne, Northumberland, and Schuylkill
Counties, Pennsylvania.
Mid Penn’s primary business consists of attracting deposits and loans from its network of community banking offices operated by the Bank.
The Bank engages in full-service commercial banking and trust business, making available to the community a wide range of financial services,
including, but not limited to, installment loans, personal loans, mortgage and home equity loans, secured and unsecured commercial and
consumer loans, lines of credit, construction financing, farm loans, community development and local government loans and various types of
time and demand deposits. Deposits of the Bank are insured by the Deposit Insurance Fund (the “DIF”) of the FDIC to the maximum extent
provided by law. In addition, the Bank provides a full range of trust and retail investment services. The Bank also offers other services such as
Internet banking, telephone banking, cash management services, automated teller services and safe deposit boxes.
Acquisition of Phoenix Bancorp, Inc.
On March 1, 2015, Mid Penn acquired Phoenix, a bank holding company headquartered in Pottsville, Pennsylvania, by merger. Phoenix
shareholders received either 3.167 shares of Mid Penn’s common stock or $51.60 in cash in exchange for each share of Phoenix common stock.
Holders of contingent rights issued by Phoenix received approximately 0.414 shares of Mid Penn’s common stock as settlement of such rights.
As a result, Mid Penn issued approximately 724,000 shares of common stock with an acquisition date fair value of approximately $11,294,000,
based on Mid Penn’s closing stock price of $15.60 on February 27, 2015, and cash of approximately $2,949,000. Based on the merger
agreement, outstanding stock appreciation rights of Phoenix were settled in cash in accordance with their terms. Including an insignificant
amount of cash paid in lieu of fractional shares, the fair value of total consideration paid was approximately $14,243,000. The acquisition of
Phoenix significantly expanded Mid Penn’s presence in Schuylkill County, Pennsylvania and established a presence in Luzerne County,
Pennsylvania.
3
MID PENN BANCORP, INC.
Business Strategy
The Bank’s services are provided to small and middle-market businesses, consumers, nonprofit organizations, municipalities, and real estate
investors through 19 full service banking facilities. Mid Penn’s primary market currently, and historically, has lower unemployment than the
U.S. as a whole. This is due in part to a diversified manufacturing and services base and the presence of state government offices, which help
shield the primary market from national trends. At December 31, 2014, the seasonally adjusted unemployment rate for the Harrisburg/Carlisle
area, Mid Penn’s primary market area, was 4.2% versus the seasonally adjusted national unemployment rate of 5.6%
The Bank seeks to develop long-term customer relationships, maintain high quality service and provide quick responses to customer needs. Mid
Penn believes that an emphasis on local relationship building and its conservative approach to lending are important factors in the success and
growth of Mid Penn.
The Bank seeks credit opportunities of good quality within its target market that exhibit positive historical trends, stable cash flows and
secondary sources of repayment from tangible collateral. The Bank extends credit for the purpose of obtaining and continuing long-term
relationships. Lenders are provided with detailed underwriting policies for all types of credit risks accepted by the Bank and must obtain
appropriate approvals for credit extensions in excess of conservatively assigned lending limits. The Bank also maintains strict documentation
requirements and extensive credit quality assurance practices in order to identify credit portfolio weaknesses as early as possible so any
exposures that are discovered might be reduced.
Lending Activities
The Bank offers a variety of loan products to its customers, including loans secured by real estate and commercial and consumer loans. The
Bank’s lending objectives are as follows:
to establish a diversified commercial loan portfolio; and
to provide a satisfactory return to Mid Penn’s shareholders by properly pricing loans to include the cost of funds, administrative costs,
bad debts, local economic conditions, competition, customer relationships, the term of the loan, credit risk, collateral quality and a
reasonable profit margin.
Credit risk is managed through portfolio diversification, underwriting policies and procedures and loan monitoring practices. The Bank
generally secures its loans with real estate with such collateral values dependent and subject to change based on real estate market conditions
within its market area. As of December 31, 2014, the Bank’s highest concentration of credit is in commercial real estate. Most of the Bank’s
business activity with customers is located in Central Pennsylvania, specifically in Dauphin, southern Northumberland, western Schuylkill, and
eastern Cumberland Counties.
Investment Activities
Mid Penn’s investment portfolio is used to improve earnings through investments of funds in higher-yielding assets than overnight funding
alternatives, while maintaining asset quality, which provides the necessary balance sheet liquidity for Mid Penn. Mid Penn does not have any
significant concentrations within investment securities.
Mid Penn’s entire portfolio of investment securities is considered available for sale. As such, the investments are recorded on the balance sheet
at fair value. Mid Penn’s investments include US Treasury, agency and municipal securities that derive fair values relative to investments of the
same type with similar maturity dates. As the interest rate environment changes, Mid Penn’s fair value of existing securities will change. This
difference in value, or unrealized gain, amounted to $2,462,000 as of December 31, 2014. A majority of the investments are high quality United
States and municipal securities that, if held to maturity, are expected to result in no loss to the Bank.
For additional information with respect to Mid Penn’s business activities, see Part II, Item 7 of this report, which is incorporated herein by
reference.
Sources of Funds
The Bank primarily uses deposits and borrowings to finance lending and investment activities. Borrowing sources include advances from the
Federal Home Loan Bank of Pittsburgh (the “FHLB”) and overnight borrowings from the Bank’s customers and correspondent banks. All
borrowings, except for lines of credit with the Bank’s correspondent banks, require collateral in the form of loans or securities. Collateral levels,
therefore, limit borrowings and the available lines of credit extended by the Bank’s creditors. As a result, deposits remain critical to the future
funding and growth of the business. Deposit growth within the banking industry has been subject to strong competition from a variety of
financial services companies. This competition may require financial institutions to adjust their product offerings and pricing to adequately
grow deposits.
4
MID PENN BANCORP, INC.
Competition
The banking business is highly competitive, and the profitability of Mid Penn depends principally upon the Bank’s ability to compete in its
market area. The Bank actively competes with other financial services companies for deposit, loan, and trust business. Competitors include
other commercial banks, credit unions, savings banks, savings and loan associations, insurance companies, securities brokerage firms, finance
companies, mutual funds, and service alternatives via the Internet. Financial institutions compete primarily on the quality of services rendered,
interest rates on loans and deposits, service charges, the convenience of banking facilities, location and hours of operation and, in the case of
loans to larger commercial borrowers, relative lending limits.
Many competitors are significantly larger than the Bank and have significantly greater financial resources, personnel and locations from which
to conduct business. In addition, the Bank is subject to banking regulations while certain competitors may not be. There are relatively few
barriers for companies wanting to enter into the financial services industry. For more information, see the “Supervision and Regulation” section
below.
Mid Penn has been able to compete effectively with other financial institutions by emphasizing customer service. Mid Penn’s customer service
model is based on convenient hours, efficient and friendly employees, local decision making, and quality products. The Gramm-Leach-Bliley
Act (“GLB”), which broke down many barriers between the banking, securities and insurance industries, has significantly affected the
competitive environment in which Mid Penn operates.
The flow of cash into mutual funds, much of which is made through tax deferred investment vehicles such as 401(k) plans, have, until recently,
had been a popular savings vehicle for investors. The recent economic turmoil has negatively impacted the returns on many of these
investments and impacted the manner in which investors distribute their funds across investment alternatives. The safety of traditional bank
products has again become an attractive option during this period of market volatility. Mid Penn’s ability to attract funds in the future will be
impacted by the public’s appetite for the safety of insured or local investments versus the returns offered by alternative choices as part of their
personal investment mix.
Supervision and Regulation
General
Bank holding companies and banks are extensively regulated under both Federal and state laws. The regulation and supervision of Mid Penn
and the Bank are designed primarily for the protection of depositors, the DIF, and the monetary system, and not Mid Penn or its shareholders.
Enforcement actions may include the imposition of a conservator or receiver, cease-and-desist orders and written agreements, the termination of
insurance on deposits, the imposition of civil money penalties, and removal and prohibition orders. If a banking regulator takes any
enforcement action, the value of an equity investment in Mid Penn could be substantially reduced or eliminated.
Federal and state banking laws contain numerous provisions affecting various aspects of the business and operations of Mid Penn and the Bank.
Mid Penn is subject to, among others, the regulations of the Securities and Exchange Commission and the Board of Governors of the Federal
Reserve System (the “Federal Reserve”), and the Bank is subject to, among others, the regulations of the Pennsylvania Department of Banking
and Securities and the FDIC. The insurance activities of Mid Penn Insurance Services, LLC are subject to regulations by the insurance
departments of the various states in which it conducts business including principally the Pennsylvania Department of Insurance. The
descriptions below of, and references to, applicable statutes and regulations are not intended to be complete descriptions of these provisions or
their effects on Mid Penn or the Bank. They are summaries only and are qualified in their entirety by reference to such statutes and regulations.
Holding Company Regulation
Mid Penn is a registered bank holding company subject to supervision and regulation by the Federal Reserve. As such, it is subject to the Bank
Holding Company Act of 1956 (“BHCA”) and many of the Federal Reserve’s regulations promulgated thereunder. The Federal Reserve has
broad enforcement powers over bank holding companies, including the power to impose substantial fines and civil penalties.
The BHCA requires Mid Penn to file an annual report with the Federal Reserve regarding the holding company and its subsidiary bank. The
Federal Reserve Board also makes examinations of the holding company. The Bank is not a member of the Federal Reserve System; however,
the Federal Reserve possesses cease-and-desist powers over bank holding companies and their subsidiaries where their actions would constitute
an unsafe or unsound practice or violation of law. The Federal Reserve Board also makes policy that guides the declaration and distribution of
dividends by bank holding companies.
The BHCA restricts a bank holding company’s ability to acquire control of additional banks. In addition, the BHCA restricts the activities in
which bank holding companies may engage directly or through non-bank subsidiaries.
5
MID PENN BANCORP, INC.
Gramm-Leach-Bliley Financial Modernization Act
Under GLB, bank holding companies, such as Mid Penn, that meet certain management, capital, and Community Reinvestment Act standards,
are permitted to become financial holding companies and, by doing so, to affiliate with securities firms and insurance companies and to engage
in other activities that are financial in nature, incidental to such financial activities, or complementary to such activities. A bank holding
company may become a financial holding company if each of its subsidiary banks is well capitalized under the FDIC Improvement Act’s
prompt corrective action provisions, is well managed and has at least a satisfactory rating under the Community Reinvestment Act. The
required filing is a declaration that the bank holding company wishes to become a financial holding company and meets all applicable
requirements. Mid Penn has not elected to become a financial holding company at this time.
No prior regulatory approval will be required for a financial holding company to acquire a company, other than a bank or savings association,
engaged in activities permitted under GLB. Activities cited by GLB as being financial in nature include:
securities underwriting, dealing and market making;
sponsoring mutual funds and investment companies;
insurance underwriting and agency;
merchant banking activities; and
activities that the Federal Reserve has determined to be closely related to banking.
In addition to permitting financial services providers to enter into new lines of business, the law allows firms the freedom to streamline existing
operations and to potentially reduce costs. The Act may increase both opportunity as well as competition. Many community banks are less able
to devote the capital and management resources needed to facilitate broad expansion of financial services including insurance and brokerage
services.
Bank Regulation
The Bank, a Pennsylvania-chartered institution, is subject to supervision, regulation and examination by the Pennsylvania Department of
Banking and Securities and the FDIC. The deposits of the Bank are insured by the FDIC to the maximum extent provided by law. The FDIC
assesses deposit insurance premiums the amount of which depends in part on the condition of the Bank. Moreover, the FDIC may terminate
deposit insurance of the Bank under certain circumstances. The federal and state banking regulatory agencies have broad enforcement powers
over depository institutions under their jurisdiction, including the power to terminate deposit insurance, to impose fines and other civil and
criminal penalties, and to appoint a conservator or receiver if any of a number of conditions is met. In addition, the Bank is subject to a variety
of local, state and federal laws that affect its operations.
Banking regulations include, but are not limited to, permissible types and amounts of loans, investments and other activities, capital adequacy,
branching, interest rates on loans, compensation standards, payment of dividends, and the safety and soundness of banking practices.
Capital Requirements
Under risk-based capital requirements for bank holding companies, Mid Penn is required to maintain a minimum ratio of total capital to risk-
weighted assets (including certain off-balance-sheet activities, such as standby letters of credit) of eight percent. Through December 31, 2014,
at least half of the total capital is to be composed of common equity, retained earnings and qualifying perpetual preferred stock, less goodwill
(“Tier 1 Capital” and together with Tier 2 Capital, “Total Capital”). The remainder may consist of subordinated debt, non-qualifying preferred
stock and a limited amount of the loan loss allowance (“Tier 2 Capital”).
In addition, the Federal Reserve has established minimum leverage ratio requirements for bank holding companies. These requirements provide
for a minimum leverage ratio of Tier 1 Capital to adjusted average quarterly assets (“leverage ratio”) equal to 3% for bank holding companies
that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies will generally be required
to maintain a leverage ratio of at least 4-5%. The requirements also provide that bank holding companies experiencing internal growth or
making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant
reliance on intangible assets. Furthermore, the requirements indicate that the Federal Reserve will continue to consider a “Tangible Tier 1
Leverage Ratio” (deducting all intangibles) in evaluating proposals for expansion or new activity. The Federal Reserve has not advised Mid
Penn of any specific minimum Tier 1 leverage ratio.
In January 2015, the Federal Reserve proposed to raise the asset size threshold for determining the applicability of its Small Bank Holding
Company Policy Statement, as required by recent federal legislation adopted in December 2014, from $500 million to $1 billion and, so long as
certain qualitative factors are met, to be regulated under such policy, which allows simplified reporting requirements and less stringent capital
standards that reflect the traditional banking services provided by such smaller banks.
The Bank is subject to similar capital requirements adopted by the FDIC. The FDIC has not advised the Bank of any specific minimum leverage
ratios.
6
MID PENN BANCORP, INC.
The capital ratios of Mid Penn and the Bank are described in Note 16 to Mid Penn’s Consolidated Financial Statements, which are included
herein.
Banking regulators continue to indicate their desire to further develop capital requirements applicable to banking organizations. Changes to
capital requirements could materially affect the profitability of Mid Penn or the fair value of Mid Penn stock.
Regulatory Capital Changes
In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The phase-in period for community banking
organizations begins January 1, 2015. The final rules call for the following capital requirements:
A minimum ratio of common tier 1 capital to risk-weighted assets of 4.5%.
A minimum ratio of tier 1 capital to risk-weighted assets of 6%.
A minimum ratio of total capital to risk-weighted assets of 8% (no change from the current rule).
A minimum leverage ratio of 4%.
In addition, the final rules establishes a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets applicable to all
banking organizations. If a banking organization fails to hold capital above the minimum capital ratios and the capital conservation buffer, it
will be subject to certain restrictions on capital distributions and discretionary bonus payments. The phase-in period for the capital conservation
and countercyclical capital buffers for all banking organizations will begin on January 1, 2016.
Under the proposed rules, accumulated other comprehensive income (“AOCI”) would have been included in a banking organization’s common
equity tier 1 capital. The final rules allow community banks to make a one-time election not to include these additional components of AOCI in
regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from
regulatory capital. The opt-out election must be made in the first call report or FR Y-9 series report that is filed after the financial institution
becomes subject to the final rule.
The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred
stock) issued before May 19, 2010 for inclusion in the tier 1 capital of banking organizations with total consolidated assets less than $15 billion
as of December 31, 2009 and banking organizations that were mutual holding companies as of May 19, 2010.
The proposed rules would have modified the risk-weight framework applicable to residential mortgage exposures to require banking
organizations to divide residential mortgage exposures into two categories in order to determine the applicable risk weight. In response to
commenter concerns about the burden of calculating the risk weights and the potential negative effect on credit availability, the final rules do not
adopt the proposed risk weights but retain the current risk weights for mortgage exposures under the general risk-based capital rules.
Consistent with the Dodd-Frank Act, the new rules replace the ratings-based approach to securitization exposures, which is based on external
credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights for these exposures.
Alternatively, banking organizations may use the existing gross-ups approach to assign securitization exposures to a risk weight category or
choose to assign such exposures a 1,250% risk weight.
Under the new rules, mortgage servicing assets (“MSAs”) and certain deferred tax assets (“DTAs”) are subject to stricter limitations than those
applicable under the current general risk-based capital rule. The new rules also increase the risk weights for past-due loans, certain risk weights
and credit conversion factors.
Mid Penn has assessed the impact of these changes on the regulatory ratios of Mid Penn and the Bank on the capital, operations, liquidity and
earnings of Mid Penn and the Bank, and concluded that the new rules will not have a material negative effect.
Safety and Soundness Standards
The federal banking regulatory agencies have adopted a set of guidelines prescribing safety and soundness standards for depository institutions
such as the Bank. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general,
the guidelines require, among other things, appropriate systems and practices to identify and manage the risks and exposures specified in the
guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when
the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal
shareholder. In addition, the agencies adopted regulations that authorize an agency to order an institution that has been given notice by an
agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If the institution fails to submit an
acceptable compliance plan or fails to implement an accepted plan, the agency must issue an order directing action to correct the deficiency and
may issue an order directing other actions be taken, including restricting asset growth, restricting interest rates paid on deposits, and requiring an
increase in the institution’s ratio of tangible equity to assets.
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Payment of Dividends and Other Restrictions
Mid Penn is a legal entity separate and distinct from its subsidiary, the Bank. There are various legal and regulatory limitations on the extent to
which the Bank can, among other things, finance, or otherwise supply funds to, Mid Penn. Specifically, dividends from the Bank are the
principal source of Mid Penn’s cash funds and there are certain legal restrictions under Pennsylvania law and Pennsylvania banking regulations
on the payment of dividends by state-chartered banks. The relevant regulatory agencies also have authority to prohibit Mid Penn and the Bank
from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound banking practice. The payment of dividends
could, depending upon the financial condition of Mid Penn and the Bank, be deemed to constitute such an unsafe or unsound practice.
Prompt Corrective Action
In addition to the required minimum capital levels described above, federal law establishes a system of “prompt corrective actions” which
federal banking agencies are required to take, and certain actions which they have discretion to take, based upon the capital category into which
a federally regulated depository institution falls. Regulations set forth detailed procedures and criteria for implementing prompt corrective
action in the case of any institution, which is not adequately capitalized. Under the rules, an institution will be deemed to be “adequately
capitalized” if it exceeds the minimum federal regulatory capital requirements. However, it will be deemed “undercapitalized” if it fails to meet
the minimum capital requirements, “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-
based capital ratio that is less than 3.0%, or a leverage ratio that is less than 3.0%, and “critically undercapitalized” if the institution has a ratio
of tangible equity to total assets that is equal to or less than 2.0%.
The prompt corrective action rules require an undercapitalized institution to file a written capital restoration plan, along with a performance
guaranty by its holding company or a third party. In addition, an undercapitalized institution becomes subject to certain automatic restrictions
including a prohibition on payment of dividends, a limitation on asset growth and expansion, in certain cases, a limitation on the payment of
bonuses or raises to senior executive officers, and a prohibition on the payment of certain “management fees” to any “controlling person”.
Institutions that are classified as undercapitalized are also subject to certain additional supervisory actions, including increased reporting burdens
and regulatory monitoring, a limitation on the institution’s ability to make acquisitions, open new branch offices, or engage in new lines of
business, obligations to raise additional capital, restrictions on transactions with affiliates, and restrictions on interest rates paid by the institution
on deposits. In certain cases, bank regulatory agencies may require replacement of senior executive officers or directors, or sale of the
institution to a willing purchaser. If an institution is deemed “critically undercapitalized” and continues in that category for four quarters, the
statute requires, with certain narrowly limited exceptions, that the institution be placed in receivership.
Deposit Insurance
The FDIC insures deposits of the Bank through the DIF. The FDIC maintains the DIF by assessing depository institutions an insurance
premium. The amount each institution is assessed is based upon a variety of factors that include the balance of insured deposits as well as the
degree of risk the institution poses to the insurance fund. The FDIC insures deposits up to $250,000. The Bank pays an insurance premium into
the DIF based on the quarterly average daily deposit liabilities net of certain exclusions. The FDIC uses a risk-based premium system that
assesses higher rates on those institutions that pose greater risks to the DIF. The FDIC places each institution in one of four risk categories
using a two-step process based first on capital ratios (the capital group assignment) and then on other relevant information (the supervisory
group assignment). Subsequently, the rate for each institution within a risk category may be adjusted depending upon different factors that
either enhance or reduce the risk the institution poses to the DIF, including the unsecured debt, secured liabilities and brokered deposits related
to each institution. Finally, certain risk multipliers may be applied to the adjusted assessment.
Beginning with the second quarter of 2011, as mandated by the Dodd-Frank Act, the assessment base that the FDIC will use to calculate
assessment premiums will be a bank’s average assets minus average tangible equity. As the asset base of the banking industry is larger than the
deposit base, the range of assessment rates will change to a low of 2.5 basis points through a high of 45 basis points, per $100 of assets;
however, the dollar amount of total actual premiums is expected to be roughly the same.
The FDIC is required under the Dodd-Frank Act to establish assessment rates that will allow the DIF to achieve a reserve ratio of 1.35% of
Insurance Fund insured deposits by September 2020. In addition, the FDIC has established a “designated reserve ratio” of 2.0%, a target ratio
that, until it is achieved, will not likely result in the FDIC reducing assessment rates. In attempting to achieve the mandated 1.35% ratio, the
FDIC is required to implement assessment formulas that charge banks over $10 billion in asset size more than banks under that size. Those new
formulas began in the second quarter of 2011, but did not affect the Bank. Under the Dodd-Frank Act, the FDIC is authorized to make
reimbursements from the insurance fund to banks if the reserve ratio exceeds 1.50%, but the FDIC has adopted the “designated reserve ratio” of
2.0% and has announced that any reimbursements from the fund are indefinitely suspended.
Consumer Protection Laws
A number of laws govern the relationship between the Bank and its customers. For example, the Community Reinvestment Act is designed to
encourage lending by banks to persons in low and moderate income areas. The Home Mortgage Disclosure Act and the Equal Credit
Opportunity Act attempt to minimize lending decisions based on impermissible criteria, such as race or gender. The Truth-in-Lending Act and
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MID PENN BANCORP, INC.
the Truth-in-Savings Act require banks to provide certain disclosure of relevant terms related to loans and savings accounts, respectively. Anti-
tying restrictions (which prohibit conditioning the availability or terms of credit on the purchase of another banking product) further restrict the
Bank’s relationships with its customers.
Privacy Laws
The federal banking regulators have issued a number of regulations governing the privacy of consumer financial and customer information. The
regulations limit the disclosure by financial institutions, such as Mid Penn and the Bank, of nonpublic personal information about individuals
who obtain financial products or services for personal, family, or household purposes. Subject to certain exceptions allowed by law, the
regulations cover information sharing between financial institutions and nonaffiliated third parties. More specifically, the regulations require
financial institutions to:
provide initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic
personal financial information to nonaffiliated third parties and affiliates;
provide annual notices of their privacy policies to their current customers;
provide a reasonable method for consumers to “opt out” of disclosures to nonaffiliated third parties.
Affiliate Transactions
Transactions between Mid Penn and the Bank and its affiliates are governed by Sections 23A and 23B of the Federal Reserve Act. An “affiliate”
of a bank or savings institution is any company or entity that controls, is controlled by, or is under common control with the bank or savings
institution. Generally, a subsidiary of a depository institution that is not also a depository institution is not treated as an affiliate of the bank for
purposes of Sections 23A and 23B. Sections 23A and 23B are intended to protect insured depository institutions from suffering losses arising
from transactions with non-insured affiliates, by limiting the extent to which a bank or its subsidiaries may engage in covered transactions with
any one affiliate and with all affiliates of the bank in the aggregate, and requiring that such transactions be on terms that are consistent with safe
and sound banking practices.
The USA Patriot Act
In 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
(“USA Patriot Act”) was signed into law. The USA Patriot Act broadened the application of anti-money laundering regulations to apply to
additional types of financial institutions, such as broker-dealers, and strengthened the ability of the U.S. government to detect and prosecute
international money laundering and the financing of terrorism. The principal provisions of Title III of the USA Patriot Act require that regulated
financial institutions, including state-chartered banks:
establish an anti-money laundering program that includes training and audit components;
comply with regulations regarding the verification of the identity of any person seeking to open an account;
take additional required precautions with non-U.S. owned accounts; and
perform certain verification and certification of money laundering risk for their foreign correspondent banking relationships.
The USA Patriot Act also expanded the conditions under which funds in a U.S. interbank account may be subject to forfeiture and increased the
penalties for violation of anti-money laundering regulations. Failure of a financial institution to comply with the USA Patriot Act’s
requirements could have serious legal and reputational consequences for the institution. The Bank has adopted policies, procedures and controls
to address compliance with the requirements of the USA Patriot Act under the existing regulations and will continue to revise and update its
policies, procedures and controls to reflect changes required by the USA Patriot Act and implementing regulations.
Anti-Money Laundering and Anti-Terrorism Financing
Under Title III of the USA Patriot Act, also known as the International Money Laundering Abatement and Anti-Terrorism Financing Act of
2001, all financial institutions, including Mid Penn and the Bank, are required in general to identify their customers, adopt formal and
comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to
respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. Additional information-sharing
among financial institutions, regulators, and law enforcement authorities is encouraged for financial institutions that comply with this provision
and the authorization of the Secretary of the Treasury to adopt rules to further encourage cooperation and information-sharing. The
effectiveness of a financial institution in combating money-laundering activities is a factor to be considered in any application submitted by the
financial institution under the Bank Merger Act, which applies to the Bank.
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JOBS Act
In 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) became law. The JOBS Act is aimed at facilitating capital raising by
smaller companies and banks and bank holding companies by implementing the following changes:
raising the threshold requiring registration under the Securities Exchange Act of 1934 (the "Exchange Act") for banks and bank
holdings companies from 500 to 2,000 holders of record;
raising the threshold for triggering deregistration under the Exchange Act for banks and bank holding companies from 300 to 1,200
holders of record;
raising the limit for Regulation A offerings from $5 million to $50 million per year and exempting some Regulation A offerings from
state blue sky laws;
permitting advertising and general solicitation in Rule 506 and Rule 144A offerings;
allowing private companies to use "crowdfunding" to raise up to $1 million in any 12-month period, subject to certain conditions; and
creating a new category of issuer, called an "Emerging Growth Company," for companies with less than $1 billion in annual gross
revenue, which will benefit from certain changes that reduce the cost and burden of carrying out an equity IPO and complying with
public company reporting obligations for up to five years.
While the JOBS Act is not expected to have any immediate application to Mid Penn, management will continue to monitor the implementation
rules for potential effects which might benefit the Corporation.
Dodd-Frank Act
The Dodd-Frank Act, which became law in July 2010, significantly changes regulation of financial institutions and the financial services
industry, including: creating a Financial Services Oversight Council to identify emerging systemic risks and improve interagency cooperation;
centralizing responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau, which will be
responsible for implementing, examining and enforcing compliance with federal consumer financial laws; permanently raising the current
standard maximum deposit insurance amount to $250,000; establishing strengthened capital standards for banks, and disallowing certain trust
preferred securities from qualifying as Tier 1 capital (subject to certain grandfather provisions for existing trust preferred securities);
establishing new minimum mortgage underwriting standards; granting the Federal Reserve the power to regulate debit card interchange fees;
and implementing corporate governance changes. Many aspects of the Dodd-Frank Act are subject to rulemaking that will take effect over
several years, thus making it difficult to assess the impact of the statute on the financial industry, including Mid Penn, at this time.
It is difficult to predict at this time the specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will
have on community banks. Given the uncertainty associated with the manner in which the provisions of the Dodd-Frank Act will be
implemented by the various regulatory agencies and through regulations, the full extent of the impact such requirements will have on financial
institutions’ operations is presently unclear. The changes resulting from the Dodd-Frank Act may impact the profitability of our business
activities, require changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements
or otherwise adversely affect our business. These changes may also require us to invest significant management attention and resources to
evaluate and make necessary changes in order to comply with new statutory and regulatory requirements.
Small Business Lending Fund
In connection with its acquisition of Phoenix, Mid Penn issued 1,750 shares of its Senior Non-Cumulative Perpetual Preferred Stock, Series C,
having a $1,000 liquidation preference per share (the “SBLF Preferred Shares”), to the U.S. Department of the Treasury (“Treasury”). The
SBLF Preferred Shares qualify as Tier 1 Capital.
The terms of the SBLF Preferred Shares impose limits on the ability of Mid Penn to pay dividends and repurchase shares of common stock.
Under the terms of the SBLF Preferred Shares, no repurchases may be effected, and no dividends may be declared or paid on preferred shares
ranking pari passu with the SBLF Preferred Shares (such as Mid Penn’s 7% Non-Cumulative, Non-Voting, Non-Convertible Perpetual Preferred
Stock, Series B), junior preferred shares, or other junior securities (including the common stock) during the current quarter and for the next three
quarters following the failure to declare and pay dividends on the SBLF Preferred Shares, except that, in any such quarter in which the dividend
is paid, dividend payments on shares ranking pari passu may be paid to the extent necessary to avoid any resulting material covenant breach.
Under the terms of the SBLF Preferred Shares, Mid Penn may only declare and pay a dividend on the common stock or other stock junior to the
SBLF Preferred Shares, or repurchase shares of any such class or series of stock, if, after payment of such dividend, the dollar amount of Mid
Penn’s Tier 1 Capital would be at least $9.7 million, excluding any subsequent net charge-offs and any redemption of the SBLF Preferred
Shares (the “Tier 1 Dividend Threshold”).
Dividends are payable quarterly on January 1, April 1, July 1 and October 1 of each year. The dividend rate on the SBLF Preferred will remain
fixed at 1.00% until January 2016, when it will increase to 9.00%.
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MID PENN BANCORP, INC.
Effects of Government Policy and Potential Changes in Regulation
Changes in regulations applicable to Mid Penn or the Bank, or shifts in monetary or other government policies, could have a material effect on
our business. Mid Penn’s and the Bank’s business is also affected by the state of the financial services industry in general. As a result of legal
and industry changes, management believes that the industry will continue to experience an increased rate of change as the financial services
industry strives for greater product offerings, market share and economies of scale.
From time to time, legislation is enacted that has the effect of increasing the cost of doing business, limiting or expanding permissible activities
or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the
operations and taxation of banks, bank holding companies and other financial institutions are frequently made in Congress, and before various
bank regulatory agencies. Mid Penn cannot predict the likelihood of any major changes or the impact such changes might have on Mid Penn
and/or the Bank. Various congressional bills and other proposals have proposed a sweeping overhaul of the banking system, including
provisions for: limitations on deposit insurance coverage; changing the timing and method financial institutions use to pay for deposit insurance;
expanding the power of banks by removing the restrictions on bank underwriting activities; and tightening the regulation of bank derivatives
activities; and allowing commercial enterprises to own banks.
Mid Penn’s earnings are, and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States
government and its agencies. The monetary policies of the Federal Reserve have had, and will likely continue to have, an impact on the
operating results of commercial banks because of the Federal Reserve’s power to implement national monetary policy to, among other things,
curb inflation or combat recession. The Federal Reserve has a major impact on the levels of bank loans, investments and deposits through its
open market operations in United States government securities and through its regulation of, among other things, the discount rate on
borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature and impact of
future changes in monetary and fiscal policies.
From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions
on, the business of Mid Penn and the Bank. As a consequence of the extensive regulation of commercial banking activities in the United States,
the Bank’s business is particularly susceptible to being affected by federal legislation and regulations that may increase the costs of doing
business. Congress is currently debating major legislation that may fundamentally change the regulatory oversight of banking institutions in the
United States. Whether any legislation will be enacted or additional regulations will be adopted, and how they might impact Mid Penn cannot
be determined at this time.
Environmental Laws
Management does not anticipate that compliance with environmental laws and regulations will have any material effect on Mid Penn’s capital,
expenditures, earnings, or competitive position. However, environmentally related hazards have become a source of high risk and potentially
unlimited liability for financial institutions.
Additionally, the Pennsylvania Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act provides, among
other things, protection to lenders from environmental liability and remediation costs under the environmental laws for releases and
contamination caused by others. A lender who engages in activities involved in the routine practices of commercial lending, including, but not
limited to, the providing of financial services, holding of security interests, workout practices, foreclosure or the recovery of funds from the sale
of property shall not be liable under the environmental acts or common law equivalents to the Pennsylvania Department of Environmental
Resources or to any other person by virtue of the fact that the lender engages in such commercial lending practice. A lender, however, will be
liable if it, its employees or agents, directly cause an immediate release or directly exacerbate a release of regulated substance on or from the
property, or known and willfully compelled the borrower to commit an action which caused such release or violate an environmental act. The
Pennsylvania Economic Development Agency, Fiduciary and Lender Environmental Liability Protection Act does not limit federal liability
which still exists under certain circumstances.
Corporate Governance
The Sarbanes-Oxley Act of 2002 and related regulations adopted by the SEC and Nasdaq address the following other issues: corporate
governance, auditor independence and accounting standards, executive compensation, insider loans, whistleblower protection, and enhanced and
timely disclosure of corporate information. Mid Penn has prepared policies, procedures, and systems designed to ensure compliance with these
regulations.
Available Information
Mid Penn’s common stock is registered under Section 12(b) of the Securities Exchange Act of 1934 and is traded on the NASDAQ Stock
Market under the trading symbol MPB. Mid Penn is subject to the informational requirements of the Exchange Act, and, accordingly, files
reports, proxy statements and other information with the Securities and Exchange Commission. The reports, proxy statements and other
information filed with the SEC are available for inspection and copying at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580,
Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
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Mid Penn is an electronic filer with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC. The SEC’s Internet site address is www.sec.gov.
Mid Penn’s headquarters are located at 349 Union Street, Millersburg, Pennsylvania 17061, and its telephone number is 1-866-642-7736. Mid
Penn’s Internet address is midpennbank.com. Mid Penn makes available through its website, free of charge, its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after filing
with the Securities and Exchange Commission. Mid Penn has adopted a Code of Ethics that applies to all employees. This document is also
available on Mid Penn’s website. The information included on our website is not a part of this document.
ITEM 1A. RISK FACTORS
Mid Penn is subject to interest rate risk
Mid Penn’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest
income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and
borrowed funds. Interest rates are highly sensitive to many factors that are beyond Mid Penn’s control, including general economic conditions
and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System.
Changes in monetary policy, including changes in interest rates, could influence not only the interest Mid Penn receives on loans and securities
and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) Mid Penn’s ability to originate loans and
obtain deposits, (ii) the fair value of Mid Penn’s financial assets and liabilities, and (iii) the average duration of Mid Penn’s mortgage-backed
securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans
and other investments, Mid Penn’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely
affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other
borrowings.
Management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest
rates on Mid Penn’s results of operations. Any substantial, unexpected, prolonged change in market interest rates could have a material adverse
effect on Mid Penn’s financial condition and results of operations.
Mid Penn is subject to lending risk
As of December 31, 2014, approximately 72.0% of Mid Penn’s loan portfolio consisted of commercial and industrial, construction and
commercial real estate loans. These types of loans are generally viewed as having more risk of default than residential real estate loans or
consumer loans. These types of loans are also typically larger than residential real estate loans and consumer loans. Because Mid Penn’s loan
portfolio contains a significant number of commercial and industrial, construction and commercial real estate loans with relatively large
balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-
performing loans could result in a net loss of earnings from these loans, an increase in the provision for possible loan and lease losses and an
increase in loan charge-offs, all of which could have a material adverse effect on Mid Penn’s financial condition and results of operations.
Mid Penn’s allowance for possible loan and lease losses may be insufficient
Mid Penn maintains an allowance for possible loan and lease losses, which is a reserve established through provisions for possible losses
charged to expense, that represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans.
The allowance, in the judgment of management, is necessary to reserve for estimated loan and lease losses and risks inherent in the loan
portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss
experience; current loan portfolio quality; present economic, political and regulatory conditions and unidentified losses inherent in the current
loan portfolio. The determination of the appropriate level of the allowance for possible loan and lease losses inherently involves a high degree
of subjectivity and requires Mid Penn to make significant estimates of current credit risks and future trends, all of which may undergo material
changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem
credits and other factors, both within and outside of Mid Penn’s control, may require an increase in the allowance. In addition, bank regulatory
agencies periodically review Mid Penn’s allowance for possible loan and lease losses and may require an increase in the provision for possible
loan and lease losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if
charge-offs in future periods exceed the allowance, Mid Penn may need additional provisions to increase the allowance for possible loan and
lease losses. Any increases in the allowance will result in a decrease in net income and, possibly, capital, and may have a material adverse
effect on Mid Penn’s financial condition and results of operations.
Competition from other financial institutions may adversely affect Mid Penn’s profitability
Mid Penn’s banking subsidiary faces substantial competition in originating both commercial and consumer loans. This competition comes
principally from other banks, credit unions, savings institutions, mortgage banking companies and other lenders. Many of its competitors enjoy
advantages, including greater financial resources and higher lending limits, a wider geographic presence, more accessible branch office
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MID PENN BANCORP, INC.
locations, the ability to offer a wider array of services or more favorable pricing alternatives, as well as lower origination and operating costs.
This competition could reduce Mid Penn’s net income by decreasing the number and size of loans that its banking subsidiary originates and the
interest rates it may charge on these loans.
In attracting business and consumer deposits, its banking subsidiary faces substantial competition from other insured depository institutions such
as banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives, including money market funds.
Many of Mid Penn’s competitors enjoy advantages, including greater financial resources, more aggressive marketing campaigns, better brand
recognition, and more convenient branch locations. These competitors may offer higher interest rates than Mid Penn, which could decrease the
deposits that Mid Penn attracts or require Mid Penn to increase its rates to retain existing deposits or attract new deposits. Increased deposit
competition could adversely affect Mid Penn’s ability to generate the funds necessary for lending operations. As a result, Mid Penn may need to
seek other sources of funds that may be more expensive to obtain and could increase its cost of funds.
Mid Penn’s banking subsidiary also competes with non-bank providers of financial services, such as brokerage firms, consumer finance
companies, credit unions, insurance agencies and governmental organizations, which may offer more favorable terms. Some of its non-bank
competitors are not subject to the same extensive regulations that govern its banking operations. As a result, such non-bank competitors may
have advantages over Mid Penn’s banking subsidiary in providing certain products and services. This competition may reduce or limit Mid
Penn’s margins on banking services, reduce its market share and adversely affect its earnings and financial condition.
We have shares of preferred stock outstanding which have preference over the common stock as to dividends and liquidation distributions,
among other preferential rights
As of the date hereof, we have issued and outstanding 5,000 shares of 7% Non-Cumulative, Non-Voting, Non-Convertible Perpetual Preferred
Stock, Series B, par value $1.00 per share (the “Series B Preferred Stock”) and, in connection with the acquisition of Phoenix, the SBLF
Preferred Shares. The Series B Preferred Stock and the SBLF Preferred Shares afford holders thereof a preference to assets upon liquidation
and an annual dividend which rights impact the outstanding shares of common stock. The dividends declared on the Series B Preferred Stock
and the SBLF Preferred Shares reduce income available to common shareholders and Mid Penn’s earnings per common share. In the event of a
liquidation of Mid Penn's assets, holders of Series B Preferred Stock and the SBLF Preferred Shares will have a right to receive as a liquidation
payment any remaining assets of Mid Penn prior to any distributions to holders of the common stock, and the holders of the Series B Preferred
Stock and the SBLF Preferred Shares may be able to block actions otherwise approved by the holders of the common stock if such action is
adverse to their rights.
The Basel III capital requirements may require us to maintain higher levels of capital, which could reduce our profitability
Basel III targets higher levels of base capital, certain capital buffers and a migration toward common equity as the key source of regulatory
capital. Although the new capital requirements are phased in over the next decade and may change substantially before final implementation,
Basel III signals a growing effort by domestic and international bank regulatory agencies to require financial institutions, including depository
institutions, to maintain higher levels of capital. The direction of the Basel III implementation activities or other regulatory viewpoints could
require additional capital to support our business risk profile prior to final implementation of the Basel III standards. If Mid Penn is required to
maintain higher levels of capital, Mid Penn may have fewer opportunities to invest capital into interest-earning assets, which could limit the
profitable business operations available to Mid Penn and adversely impact our financial condition and results of operations.
If Mid Penn’s information systems are interrupted or sustain a breach in security, those events may negatively affect Mid Penn’s financial
performance and reputation
In conducting its business, Mid Penn relies heavily on its information systems. Maintaining and protecting those systems is difficult and
expensive, as is dealing with any failure, interruption, or breach in security of these systems, whether due to acts or omissions by Mid Penn or
by a third party, and whether intentional or not. Any such failure, interruption, or breach could result in failures or disruptions in Mid Penn’s
customer relationship management, general ledger, deposit, loan and other systems. A breach of Mid Penn’s information security may result
from fraudulent activity committed against Mid Penn or its clients, resulting in financial loss to Mid Penn or its clients, or privacy breaches
against Mid Penn’s clients. Such fraudulent activity may consist of check fraud, electronic fraud, wire fraud, “phishing”, social engineering or
other deceptive acts. The policies, procedures, and technical safeguards put in place by Mid Penn to prevent or limit the effect of any failure,
interruption, or security breach of its information systems may be insufficient to prevent or remedy the effects of any such occurrences. The
occurrence of any failures, interruptions, or security breaches of Mid Penn’s information systems could damage Mid Penn’s reputation, cause
Mid Penn to incur additional expenses, result in online services or other businesses, subject Mid Penn to regulatory sanctions or additional
regular scrutiny, or expose Mid Penn to civil litigation and possible financial liability, any of which could have a material adverse effect on Mid
Penn’s financial condition and results of operations.
Mid Penn’s controls and procedures may fail or be circumvented
Management periodically reviews and updates Mid Penn’s internal controls, disclosure controls and procedures, and corporate governance
policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide
only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of Mid Penn’s controls and
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MID PENN BANCORP, INC.
procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on Mid Penn’s business,
results of operations, and financial condition.
Mid Penn’s ability to pay dividends on its common stock, Series B Preferred Stock and SBLF Preferred Shares depends primarily on dividends
from its banking subsidiary, which is subject to regulatory limits
Mid Penn is a bank holding company and its operations are conducted by its subsidiaries. Its ability to pay dividends on its common stock,
Series B Preferred Stock and SBLF Preferred Shares depends on its receipt of dividends from the Bank. Dividend payments from its banking
subsidiary are subject to legal and regulatory limitations, generally based on net profits, and retained earnings, imposed by the various banking
regulatory agencies. The ability of the Bank to pay dividends is also subject to their profitability, financial condition, capital expenditures and
other cash flow requirements. There is no assurance that Mid Penn’s subsidiaries will be able to pay dividends in the future or that Mid Penn
will generate adequate cash flow to pay dividends in the future. Federal Reserve policy, which applies to Mid Penn as a registered bank holding
company, also provides that dividends by bank holding companies should generally be paid out of current earnings looking back over a one-year
period. Mid Penn’s failure to pay dividends on its common stock could have a material adverse effect on the market price of its common stock.
The terms of the SBLF Preferred Shares impose limits on the ability of Mid Penn to pay dividends and repurchase shares of common stock.
Under the terms of the SBLF Preferred Shares, no repurchases may be effected, and no dividends may be declared or paid on preferred shares
ranking pari passu with the SBLF Preferred Shares (such as the Series B Preferred Stock), junior preferred shares, or other junior securities
(including the common stock) during the current quarter and for the next three quarters following the failure to declare and pay dividends on the
SBLF Preferred Shares, except that, in any such quarter in which the dividend is paid, dividend payments on shares ranking pari passu may be
paid to the extent necessary to avoid any resulting material covenant breach.
Under the terms of the SBLF Preferred Shares, Mid Penn may only declare and pay a dividend on the common stock or other stock junior to the
SBLF Preferred Shares, or repurchase shares of any such class or series of stock, if, after payment of such dividend, the dollar amount of Mid
Penn’s Tier 1 Capital would be at least $9.7 million, excluding any subsequent net charge-offs and any redemption of the SBLF Preferred
Shares.
The 1.00% dividend rate on the SBLF Preferred Shares will remain fixed at this level until January 2016, when it will increase to 9.00%
The per annum dividend rate on the SBLF Preferred Shares is fixed at 1.00% until January 2016, when it will increase to 9.00%. Depending on
Mid Penn’s financial condition at the time, this increase in the dividend rate could have a material negative effect on its liquidity and results of
operations.
Mid Penn’s profitability depends significantly on economic conditions in central Pennsylvania
Unlike larger or regional lenders that are more geographically diversified, Mid Penn’s success is dependent to a significant degree on economic
conditions in central Pennsylvania, especially in eastern Cumberland, Dauphin, northwestern Lancaster, western Luzerne, southern
Northumberland, and Schuylkill Counties, which Mid Penn defines as our primary market. The banking industry is affected by general
economic conditions including the effects of inflation, recession, unemployment, real estate values, trends in the national and global economics,
and other factors beyond our control. An economic recession or a delayed recovery over a prolonged period of time in Central Pennsylvania
area could cause an increase in the level of the Bank’s non-performing assets and loan and lease losses, thereby causing operating losses,
impairing liquidity, and eroding capital. Mid Penn cannot assure you that adverse changes in the local economy would not have a material
adverse effect on Mid Penn’s consolidated financial condition, results of operations, and cash flows.
Mid Penn may not be able to attract and retain skilled people
Mid Penn’s success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities
engaged in by Mid Penn can be intense and Mid Penn may not be able to hire people or to retain them. The unexpected loss of services of one
or more of Mid Penn’s key personnel could have a material adverse impact on Mid Penn’s business because of their skills, knowledge of Mid
Penn’s market, years of industry experience, and the difficulty of promptly finding qualified replacement personnel.
Mid Penn is subject to claims and litigation pertaining to fiduciary responsibility
From time to time, customers make claims and take legal action pertaining to Mid Penn’s performance of its fiduciary responsibilities. Whether
customer claims and legal action related to Mid Penn’s performance of its fiduciary responsibilities are founded or unfounded, if such claims
and legal actions are not resolved in a manner favorable to Mid Penn they may result in significant financial liability and/or adversely affect the
market perception of Mid Penn and its products and services as well as impact customer demand for those products and services. Any financial
liability or reputation damage could have a material adverse effect on Mid Penn’s business, which, in turn, could have a material adverse effect
on Mid Penn’s financial condition and results of operations.
14
MID PENN BANCORP, INC.
The trading volume in Mid Penn’s common stock is less than that of other larger financial services companies
Mid Penn’s common stock is listed for trading on NASDAQ; the trading volume in its common stock, however, is less than that of other larger
financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the
presence in the marketplace of willing buyers and sellers of Mid Penn’s common stock at any given time. This presence depends on the
individual decisions of investors and general economic and market conditions over which Mid Penn has no control. Given the lower trading
volume of Mid Penn’s common stock, significant sales of Mid Penn’s common stock, or the expectation of these sales, could cause Mid Penn’s
stock price to fall.
Mid Penn operates in a highly regulated environment and may be adversely affected by changes in federal, state and local laws and regulations
Mid Penn is subject to extensive regulation, supervision and examination by federal and state banking authorities. Any change in applicable
regulations or federal, state or local legislation could have a substantial impact on Mid Penn and its operations. Additional legislation and
regulations that could significantly affect Mid Penn’s powers, authority and operations may be enacted or adopted in the future, which could
have a material adverse effect on its financial condition and results of operations. Further, regulators have significant discretion and authority to
prevent or remedy unsafe or unsound practices or violations of laws by banks and bank holding companies in the performance of their
supervisory and enforcement duties. The exercise of regulatory authority may have a negative impact on Mid Penn’s results of operations and
financial condition.
The potential exists for additional federal or state laws and regulations, or changes in policy, affecting many aspects of our operations, including
capital levels, lending and funding practices, and liquidity standards. New laws and regulations may increase our costs of regulatory compliance
and of doing business and otherwise affect our operations, and may significantly affect the markets in which we do business, the markets for and
value of our loans and investments, the fees we can charge and our ongoing operations, costs and profitability.
The soundness of other financial institutions may adversely affect Mid Penn
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. Mid Penn has exposure to
many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including
commercial banks, brokers and dealers, investment banks, and other institutional clients. Many of these transactions expose Mid Penn to credit
risk in the event of a default by a counterparty or client. In addition, Mid Penn’s credit risk may be exacerbated when the collateral held by Mid
Penn cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to Mid
Penn. Any such losses could have a material adverse effect on the Mid Penn’s financial condition and results of operations.
Prior levels of market volatility were unprecedented and future volatility may have materially adverse effects on our liquidity and financial
condition
In the recent past, the capital and credit markets experienced extreme volatility and disruption for more than two years. In some cases, the
markets exerted downward pressure on stock prices, security prices, and credit availability for certain issuers without regard to their underlying
financial strength. If such levels of market disruption and volatility return, there can be no assurance that we will not experience adverse effects,
which may be material, on our liquidity, financial condition, and profitability.
Mid Penn’s banking subsidiary may be required to pay higher FDIC insurance premiums or special assessments which may adversely affect its
earning
Poor economic conditions and the resulting bank failures have increased the costs of the FDIC and depleted the DIF. Additional bank failures
may prompt the FDIC to increase its premiums above the recently increased levels or to issue special assessments. Mid Penn generally is unable
to control the amount of premiums or special assessments that its subsidiary is required to pay for FDIC insurance. Any future changes in the
calculation or assessment of FDIC insurance premiums may have a material adverse effect on our results of operations, financial condition, and
our ability to continue to pay dividends on our common stock at the current rate or at all.
Pennsylvania Business Corporation Law and various anti-takeover provisions under our articles and bylaws could impede the takeover of Mid
Penn
Various Pennsylvania laws affecting business corporations may have the effect of discouraging offers to acquire Mid Penn, even if the
acquisition would be advantageous to shareholders. In addition, we have various anti-takeover measures in place under our articles of
incorporation and bylaws, including a supermajority vote requirement for mergers, a staggered board of directors, and the absence of cumulative
voting. Any one or more of these measures may impede the takeover of Mid Penn without the approval of our board of directors and may
prevent our shareholders from taking part in a transaction in which they could realize a premium over the current market price of our common
stock.
15
MID PENN BANCORP, INC.
Mid Penn may need to or be required to raise additional capital in the future, and capital may not be available when needed and on terms
favorable to current shareholders
Federal banking regulators require Mid Penn and its subsidiary bank to maintain adequate levels of capital to support their operations. These
capital levels are determined and dictated by law, regulation, and banking regulatory agencies. In addition, capital levels are also determined by
Mid Penn’s management and board of directors, based on capital levels that they believe are necessary to support Mid Penn’s business
operations.
If Mid Penn raises capital through the issuance of additional shares of its common stock or other securities, it would likely dilute the ownership
interests of current investors and could dilute the per share book value and earnings per share of its common stock. Furthermore, a capital raise
through issuance of additional shares may have an adverse impact on Mid Penn’s stock price. New investors also may have rights, preferences
and privileges senior to Mid Penn’s current shareholders, which may adversely impact its current shareholders.
Mid Penn’s ability to raise additional capital will depend on conditions in the capital markets at that time, which are outside of its control, and
on its financial performance. Accordingly, Mid Penn cannot be certain of its ability to raise additional capital on acceptable terms and
acceptable time frames or to raise additional capital at all. If Mid Penn cannot raise additional capital in sufficient amounts when needed, its
ability to comply with regulatory capital requirements could be materially impaired. Additionally, the inability to raise capital in sufficient
amounts may adversely affect Mid Penn’s financial condition and results of operations.
If we conclude that the decline in the value of any of our investment securities is other than temporary, we are required to write down the value
of that security through a charge to earnings
We review our investment securities portfolio at each quarter-end reporting period to determine whether the fair value is below the current
carrying value. When the fair value of any of our investment securities has declined below its carrying value, we are required to assess whether
the decline is other than temporary. If we conclude that the decline is other than temporary, we are required to write down the value of that
security through a charge to earnings. Changes in the expected cash flows of these securities and/or prolonged price declines have resulted and
may result in our concluding in future periods that there is additional impairment of these securities that is other than temporary, which would
require a charge to earnings to write down these securities to their fair value. Due to the complexity of the calculations and assumptions used in
determining whether an asset is impaired, the impairment disclosed may not accurately reflect the actual impairment in the future.
Mid Penn’s operations of its business, including its interaction with customers, are increasingly done via electronic means, and this has
increased its risks related to cyber security
Mid Penn is exposed to the risk of cyber-attacks in the normal course of business. In general, cyber incidents can result from deliberate attacks
or unintentional events. Mid Penn has observed an increased level of attention in the industry focused on cyber-attacks that include, but are not
limited to, gaining unauthorized access to digital systems for purposes of misappropriating assets or sensitive information, corrupting data, or
causing operational disruption. To combat against these attacks, policies and procedures are in place to prevent or limit the effect of the possible
security breach of its information systems and it has insurance against some cyber-risks and attacks. While Mid Penn has not incurred any
material losses related to cyber-attacks, nor is it aware of any specific or threatened cyber-incidents as of the date of this report, it may incur
substantial costs and suffer other negative consequences if it falls victim to successful cyber-attacks. Such negative consequences could include
remediation costs that may include liability for stolen assets or information and repairing system damage that may have been caused; deploying
additional personnel and protection technologies, training employees, and engaging third party experts and consultants; lost revenues resulting
from unauthorized use of proprietary information or the failure to retain or attract customers following an attack; litigation; and reputational
damage adversely affecting customer or investor confidence.
Mid Penn is subject to environmental liability risk associated with lending activities
A significant portion of Mid Penn’s loan portfolio is secured by real property. During the ordinary course of business, Mid Penn may foreclose
on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these
properties. If hazardous or toxic substances are found, Mid Penn may be liable for remediation costs, as well as for personal injury and property
damage. Environmental laws may require Mid Penn to incur substantial expenses and may materially reduce the affected property’s value or
limit Mid Penn’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies
with respect to existing laws, may increase Mid Penn’s exposure to environmental liability. Although Mid Penn has policies and procedures to
perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all
potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a
material adverse effect on Mid Penn’s financial condition and results of operations.
Mid Penn’s financial performance may suffer if its information technology is unable to keep pace with its growth or industry developments
Effective and competitive delivery of Mid Penn’s products and services is increasingly dependent upon information technology resources and
processes, both those provided internally as well as those provided through third party vendors. In addition to better serving customers, the
effective use of technology increases efficiency and enables Mid Penn to reduce costs. Mid Penn’s future success will depend, in part, upon its
16
MID PENN BANCORP, INC.
ability to address the needs of its customers by using technology to provide products and services to enhance customer convenience, as well as
to create additional efficiencies in its operations. Many of Mid Penn’s competitors have greater resources to invest in technological
improvements. Additionally, as technology in the financial services industry changes and evolves, keeping pace becomes increasingly complex
and expensive for Mid Penn. There can be no assurance that Mid Penn will be able to effectively implement new technology-driven products
and services, which could reduce its ability to compete effectively.
Future credit downgrades of the United States Government due to issues relating to debt and the deficit may adversely affect the Mid Penn
As a result of failure of the federal government to reach agreement over federal debt and the ongoing issues connected with the debt ceiling,
certain rating agencies placed the United States government’s long-term sovereign debt rating on their equivalent of negative watch and
announced the possibility of a rating downgrade. The rating agencies, due to constraints related to the rating of the United States, also placed
government-sponsored enterprises in which Mid Penn invests and receives lines of credit on negative watch and a downgrade of the United
States’ credit rating would trigger a similar downgrade in the credit rating of these government sponsored enterprises. Furthermore, the credit
rating of other entities, such as state and local governments, may also be downgraded should the United States credit rating be downgraded. The
impact that a credit rating downgrade may have on the national and local economy could have an adverse effect on Mid Penn’s financial
condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
17
MID PENN BANCORP, INC.
ITEM 2. PROPERTIES
With the exception of the Market Square Office, Derry Street Loan Administrative Office, River Chase Administrative Office, Simpson Ferry
Road Office, and the Elizabethtown Office, the Bank owns the properties listed below, as well as certain parking facilities related to its banking
offices, all of which are free and clear of any lien. The Bank’s main office and all branch offices are located in Pennsylvania. All of these
properties are in good condition and are deemed by management to be adequate for the Bank’s purposes. The table below sets forth the location
of each of the Bank’s properties at December 31, 2014.
Property Location
Description of Property
Property Location
Description of Property
Main Office &
Branch Office
Branch Office
Branch Office
Branch Office
Branch Office
Branch Office
Branch Office
Branch Office
Administrative Office
Millersburg Office
349 Union Street
Millersburg, PA 17061
Elizabethville Office
4642 State Route 209
Elizabethville, PA 17023
Dalmatia Office
132 School House Road
Dalmatia, PA 17017
Carlisle Pike Office
4622 Carlisle Pike
Mechanicsburg, PA 17050
Derry Street Office
4509 Derry Street
Harrisburg, PA 17111
Front Street Office
2615 North Front Street
Harrisburg, PA 17110
Tower City Office
545 East Grand Avenue
Tower City, PA 17980
Dauphin Office
1001 Peters Mountain Road
Dauphin, PA 17018
Derry Street Loan Administrative
Office
4099 Derry Street
Harrisburg, PA 17111
Simpson Ferry Road Office*
5288 Simpson Ferry Road
Mechanicsburg, PA 17055
* Mid Penn anticipates opening a branch at this location in May 2015.
Lykens Office
550 Main Street
Lykens, PA 17048
Allentown Boulevard Office
5500 Allentown Boulevard
Harrisburg, PA 17112
Market Square Office
17 N. Second Street
Harrisburg, PA 17101
Steelton Office
51 South Front Street
Steelton, PA 17113
Middletown Office
1100 Spring Garden Drive
Middletown, PA 17057
Camp Hill Office
2101 Market Street
Camp Hill, PA 17011
Operations Center
894 N. River Road
Halifax, PA 17032
River Chase Administrative Office
4311 North Front Street, Ste. 101
Harrisburg, PA 17110
Elizabethtown Office
2305 South Market Street
Elizabethtown, PA 17022
Branch Office
Branch Office
Branch Office
Branch Office
Branch Office
Branch Office
Operations Center
Administrative Office
Branch Office
18
MID PENN BANCORP, INC.
ITEM 3. LEGAL PROCEEDINGS
Management is not aware of any litigation that would have a material adverse effect on the consolidated financial position of the Corporation.
Mid Penn and the Bank have no proceedings pending other than ordinary routine litigation occurring in the normal course of business. In
addition, management does not know of any material proceedings contemplated by governmental authorities against Mid Penn or the Bank or
any of its properties.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
The Corporation’s common stock is traded on the NASDAQ Stock Market under the symbol MPB. The following table shows the range of high
and low sale prices for the Corporation’s stock and cash dividends paid for the quarters indicated.
Quarter Ended:
March 31, 2014
June 30, 2014
September 30, 2014
December 31, 2014
March 31, 2013
June 30, 2013
September 30, 2013
December 31, 2013
High
Low
Cash Dividends Paid
$
$
$
$
14.97
16.00
16.33
15.95
11.60
11.34
12.70
14.85
$
$
13.25
14.00
15.05
15.06
10.15
9.80
10.80
11.38
0.05
0.10
0.10
0.20
-
0.05
0.05
0.15
Transfer Agent: Computershare, Attn: Shareholder Services, P.O. Box 30170, College Station, TX 77842-3170. Phone: 1-800-368-5948.
Number of Shareholders: As of March 6, 2015, there were approximately 1,611 shareholders of record of Mid Penn’s common stock.
Dividends: Cash dividends of $0.45 were paid in 2014, while $0.25 was paid in both 2013 and 2012.
Dividend Reinvestment and Stock Purchases: Shareholders of Mid Penn may acquire additional shares of common stock by reinvesting their
cash dividends under the Dividend Reinvestment Plan without paying a brokerage fee. Voluntary cash contributions may also be made under
the Plan. For additional information about the Plan, contact the Transfer Agent.
Annual Meeting: The Annual Meeting of the Shareholders of Mid Penn is expected to be held at 10:00 a.m. on Tuesday, May 12, 2015, at 31
Bunker Hill Road, Halifax, PA 17032.
Accounting, Auditing and Internal Control Complaints: Information on how to report a complaint regarding accounting, internal accounting
controls or auditing matters is available at Mid Penn's website: midpennbank.com.
19
MID PENN BANCORP, INC.
Stock Performance Graph
Index
Mid Penn Bancorp, Inc.
Russell 3000
Mid-Atlantic Custom Peer Group*
12/31/09
100.00
100.00
100.00
12/31/10
72.89
116.93
109.30
Period Ending
12/31/11
75.04
118.13
109.36
12/31/12
114.24
137.52
127.36
12/31/13
149.43
183.66
150.73
12/31/14
166.80
206.72
164.07
*Mid-Atlantic Custom Peer Group consists of Mid-Atlantic commercial banks with assets less than $1B.
Source : SNL Financial LC, Charlottesville, VA
© 2015
www.snl.com
A detailed list of the Banks comprising the Mid-Atlantic Custom Peer Group is incorporated herein by reference to Exhibit 99.1, which is
attached to this Annual Report on Form 10-K.
20
MID PENN BANCORP, INC.
ITEM 6. SELECTED FINANCIAL DATA
Summary of Selected Financial Data
(Dollars in thousands, except per share data)
INCOME:
2014
2013
2012
2011
2010
$
Total Interest Income
Total Interest Expense
Net Interest Income
Provision for Loan and Lease Losses
Noninterest Income
Noninterest Expense
Income Before Provision for Income Taxes
Provision for Income Taxes
Net Income
Series A Preferred Stock Dividends and Discount Accretion
Series B Preferred Stock Dividends
Net Income Available to Common Shareholders
30,627 $
28,983 $
30,366 $
31,545 $
4,427
26,200
1,617
3,248
20,668
7,163
1,462
5,701
-
350
5,351
5,057
23,926
1,685
3,290
19,391
6,140
1,201
4,939
14
309
4,616
7,125
23,241
1,036
3,683
19,693
6,195
1,244
4,951
514
-
4,437
9,522
22,023
1,205
2,996
18,048
5,766
1,223
4,543
514
-
4,029
30,148
10,642
19,506
2,635
3,414
17,121
3,164
416
2,748
514
-
2,234
COMMON STOCK DATA PER SHARE:
Earnings Per Common Share (Basic)
Earnings Per Common Share (Fully Diluted)
Cash Dividends
Book Value Per Common Share
Tangible Book Value Per Common Share
$
1.53 $
1.53
0.45
15.48
15.13
1.32 $
1.32
0.25
13.71
13.35
1.27 $
1.27
0.25
13.57
13.19
1.16 $
1.16
0.20
12.47
12.10
0.64
0.64
-
10.98
10.58
AVERAGE SHARES OUTSTANDING (BASIC)
AVERAGE SHARES OUTSTANDING (FULLY DILUTED)
3,495,705
3,495,705
3,491,653
3,491,653
3,486,543
3,486,543
3,481,414
3,481,414
3,479,780
3,479,780
AT YEAR-END:
Available For Sale Investment Securities
Loans and Leases, Net of Unearned Interest
Allowance for Loan and Lease Losses
Total Assets
Total Deposits
Short-term Borrowings
Long-term Debt
Shareholders' Equity
RATIOS:
$
141,634 $
571,533
6,716
755,657
637,922
578
52,961
59,130
122,803 $
546,462
6,317
713,125
608,130
23,833
23,145
52,916
154,295 $
484,220
5,509
705,200
625,461
-
22,510
52,220
159,043 $
482,717
6,772
715,383
634,055
-
22,701
53,452
70,702
467,735
7,061
637,457
554,982
1,561
27,883
48,201
Return on Average Assets
Return on Average Shareholders' Equity
Cash Dividend Payout Ratio
Allowance for Loan and Lease Losses to Loans and Leases
Average Shareholders' Equity to Average Assets
0.78%
9.95%
29.41%
1.18%
7.80%
0.71%
9.37%
18.94%
1.16%
7.56%
0.69%
8.78%
19.69%
1.14%
7.98%
0.66%
8.96%
17.24%
1.40%
7.37%
0.44%
5.71%
0.00%
1.51%
7.73%
21
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document may constitute forward-looking statements for purposes of the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other
factors which may cause the actual results, performance or achievements of Mid Penn to be materially different from future results, performance
or achievements expressed or implied by such forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,” “believe,”
“estimate,” and similar expressions are intended to identify such forward-looking statements.
Mid Penn’s actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors,
including, without limitation:
the effects of future economic conditions on Mid Penn and its customers;
governmental monetary and fiscal policies, as well as legislative and regulatory changes;
future actions or inactions of the United States government, including a failure to increase the government debt limit or a prolonged
shutdown of the federal government;
possible impacts of the capital and liquidity requirements of Basel III standards and other regulatory pronouncements, regulations and
rules;
the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company
Accounting Oversight Board, Financial Accounting Standards Board, and other accounting standard setters;
the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities
and interest rate protection agreements, as well as interest rate risks;
the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions,
securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in Mid
Penn’s market area and elsewhere, including institutions operating locally, regionally, nationally and internationally, together with such
competitors offering banking products and services by mail, telephone, computer and the internet;
the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;
technological changes;
acquisitions and integration of acquired businesses, including Phoenix, which may take longer or be more costly to complete than
anticipated, including as a result of unexpected factors or events;
the anticipated cost savings and other synergies of acquisitions, including Phoenix, may take longer to be realized or may not be
achieved in their entirety, and attrition in key client, partner and other relationships relating to such acquisition may be greater than
expected;
results of the regulatory examination and supervision process;
loss of certain key officers;
the failure of assumptions underlying the establishment of reserves for loan and lease losses and estimations of values of collateral and
various financial assets and liabilities;
acts of war or terrorism;
our ability to maintain compliance with the exchange rules of the NASDAQ Stock Market LLC.;
our ability to maintain the value and image of our brand and protect our intellectual property rights;
volatilities in the securities markets;
disruptions due to flooding, severe weather, or other natural disasters or Acts of God; and
slow economic conditions.
All written or oral forward-looking statements attributable to Mid Penn are expressly qualified in their entirety by these cautionary statements.
Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of Mid Penn’s
consolidated financial statements and should be read in conjunction with the Consolidated Financial Statements of the Corporation and Notes
thereto and other detailed information appearing elsewhere in this Annual Report. Mid Penn is not aware of any known trends, events,
uncertainties or of any current recommendations by the regulatory authorities which, if they were to be implemented, would have a material
effect on Mid Penn’s liquidity, capital resources or operations.
Critical Accounting Estimates
Mid Penn’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of
America (“GAAP”) and conform to general practices within the banking industry. Application of these principles involves significant
judgments and estimates by management that have a material impact on the carrying value of certain assets and liabilities. The judgments and
estimates that we used are based on historical experiences and other factors, which are believed to be reasonable under the circumstances.
Because of the nature of the judgments and estimates that we have made, actual results could differ from these judgments and estimates, which
could have a material impact on the carrying values of assets and liabilities and the results of our operations.
22
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Management of the Corporation considers the accounting judgments relating to the allowance for loan and lease losses and the evaluation of the
Corporation’s investment securities for other-than-temporary impairment, to be the accounting areas that require the most subjective and
complex judgments.
The allowance for loan and lease losses represents management’s estimate of probable incurred credit losses inherent in the loan and lease
portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires
significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses
on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which
may be susceptible to significant change. The loan and lease portfolio also represents the largest asset type on the consolidated balance sheet.
Throughout the remainder of this report, the terms “loan” or “loans” refers to both loans and leases.
Valuations for the investment portfolio are determined using quoted market prices, where available. If quoted market prices are not available,
investment valuation is based on pricing models, quotes for similar investment securities, and observable yield curves and spreads. In addition
to valuation, management must assess whether there are any declines in value below the carrying value of the investments that should be
considered other than temporary or otherwise require an adjustment in carrying value and recognition of the loss in the consolidated statement of
income.
Financial Summary
The consolidated earnings of Mid Penn are derived primarily from the operations of its wholly owned subsidiary, Mid Penn Bank.
2014 versus 2013
Mid Penn’s net income available to common shareholders of $5,351,000 for the year 2014 reflects an increase of $735,000, or 15.9%, over the
$4,616,000 for the year 2013. This represents net income in 2014 of $1.53 per common share compared to $1.32 per common share in 2013.
Net income available to common shareholders for both the fourth quarter and year of 2014 was impacted by $573,000 in merger and acquisition
expenses incurred in conjunction with the acquisition of Phoenix Bancorp, Inc. Excluding these charges and the corresponding tax impact, net
income available to common shareholders for the twelve months ended December 31, 2014 would have been $5,760,000, an increase of
$1,144,000, or 24.8%, over the twelve months ended December 31, 2013.
Total assets of Mid Penn grew $42,532,000, or 6.0% in 2014 to close the year at $755,657,000, compared to $713,125,000 at the end of 2013.
The majority of the asset growth was centered in the loan portfolio, which increased $25,071,000, or 4.6%, to $571,533,000. Mid Penn’s
investment portfolio also increased $18,831,000, or 15.3%, to $141,634,000.
Total deposits increased $29,792,000, or 4.9%, from $608,130,000 at the end of 2013 to $637,922,000 at December 31, 2014. This was part of
a comprehensive effort to improve Mid Penn’s overall funding mix by reducing reliance on higher-priced money market and certificate of
deposit funds and placing greater emphasis on less expensive demand deposits and savings balances. As a result of these efforts, demand
deposits and savings comprise 49.5% of total deposits at the end of 2014 versus 45.9% of total deposits at the end of 2013. Mid Penn also had
increased its long-term debt by $29,816,000, or 128.8%, to $52,961,000 by the end of 2014 to take advantage of low long-term borrowing rates
and to provide funds to increase earning assets. This increase in long-term debt reduced Mid Penn’s short-term borrowing position $23,255,000,
or 97.6%, to $578,000 at the end of 2014.
Mid Penn’s return on average shareholders’ equity, (“ROE”), a widely recognized performance indicator in the financial industry, was 9.95% in
2014 and 9.37% in 2013. Return on average assets (“ROA”), another performance indicator, was 0.78% in 2014 and 0.71% in 2013.
Mid Penn’s performance during 2014 improved over the results reported in 2013. This improvement was the result of increasing earning assets,
improving cost of funds, improvement in nonperforming loans, and consistent management of controllable expenses throughout 2014.
Net interest margin improved to 3.99% in 2014 from 3.80% in 2013. This improvement was driven by a 15 basis point improvement in the rate
on supporting liabilities to 0.71% in 2014 from 0.86% in 2013. This improvement allowed average interest spread to increase to 3.91% from
3.70% in 2013 and net interest income on a tax equivalent basis to increase to $27,968,000 in 2014 from $25,250,000 in 2013. This increase was
achieved in spite of the substantial pool of nonperforming loans being carried on the balance sheet. The amount of interest income lost on this
pool of troubled loans in 2014 amounted to $798,000. Further discussion of net interest margin can be found in the Net Interest Income section
below.
Total nonperforming assets decreased $1,168,000 from $12,675,000 in 2013 to $11,507,000 at the end of 2014. Decreasing nonaccrual loans
were the leading source of improvement in nonperforming assets. Further discussion of these components can be found in the Credit Quality,
Credit Risk, and Allowance for Loan and Lease Losses section below.
23
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Net charge-offs increased to $1,218,000 in 2014 from $877,000 during 2013, mainly due to the impact of two large recoveries in 2013 totaling
$429,000. Gross charge-offs fell $145,000 from $1,473,000 in 2013 to $1,328,000 in 2014. Mid Penn decreased provision for loan and lease
losses from $1,685,000 in 2013 to $1,617,000 in 2014. This was largely driven by decreasing balances of nonperforming assets within the
portfolio. Further discussion of these issues can be found in the Provision for Loan and Lease Losses section below.
The Mid Penn’s tier one capital (to risk weighted assets) of $56,560,000, or 10.1%, and total capital (to risk weighted assets) of $63,336,000, or
11.4%, at December 31, 2014, are above the regulatory requirements. Tier one capital consists primarily of the Bank’s shareholders' equity and
any qualifying preferred stock. Total capital also includes qualifying subordinated debt, if any, and the allowance for loan and lease losses,
within permitted limits. Risk-weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance
sheet activities.
2013 versus 2012
Mid Penn’s net income available to common shareholders of $4,616,000 for the year 2013 reflected an increase of $179,000, or 4.0%, over the
$4,437,000 for the year 2012. This represented net income in 2013 of $1.32 per common share compared to $1.27 per common share in 2012.
Total assets of Mid Penn grew $7,925,000, or 1.1%, in 2013 to close the year at $713,125,000, compared to $705,200,000 at year-end 2012.
The majority of the asset growth was centered in the loan portfolio, which increased $62,242,000, or 12.9%, to $546,462,000. This loan growth
was supported by a decrease in investments, which fell to $122,803,000, or 20.4%, from $154,295,000 at the end of 2012.
Total deposits decreased $17,331,000, or 2.8%, from $625,461,000 at the end of 2012 to $608,130,000 at December 31, 2013. This was part of
a comprehensive effort to improve Mid Penn’s overall funding mix by reducing reliance on higher-priced money market and certificate of
deposit funds and placing greater emphasis on less expensive demand deposits and savings balances. As a result of these efforts, demand
deposits and savings comprised 45.9% of total deposits at the end of 2013 versus 40.2% of total deposits at the end of 2012. Mid Penn also had
shifted to a short-term borrowing position of $23,833,000 as part of its funding strategy by the end of 2013.
Mid Penn’s ROE, a widely recognized performance indicator in the financial industry, was 9.37% in 2013 and 8.78% in 2012. ROA, another
performance indicator, was 0.71% in 2013 and 0.69% in 2012.
Mid Penn’s performance during 2013 improved over the results reported in 2012. This improvement was the result of increased loan
production, improving cost of funds, improvement in nonperforming loans, and consistent management of controllable expenses throughout
2013.
Net interest margin improved to 3.80% in 2013 from 3.63% in 2012. This improvement was driven by a 34 basis point improvement in the rate
on supporting liabilities to 0.86% in 2013 from 1.20% in 2012. This improvement allowed average interest spread to increase to 3.70% from
3.49% in 2012 and net interest income on a tax equivalent basis to increase to $25,250,000 in 2013 from $24,494,000 in 2012. This increase was
achieved in spite of the substantial pool of nonperforming loans being carried on the balance sheet. The amount of interest income lost on this
pool of troubled loans in 2013 amounted to $861,000.
Total nonperforming assets decreased $425,000 from $13,100,000 in 2012 to $12,675,000 at the end of 2013. Decreasing nonaccrual loans
were the leading source of improvement in nonperforming assets.
Net charge-offs decreased to $877,000 in 2013 from $2,299,000 during 2012. Mid Penn increased provision for loan and lease losses from
$1,036,000 in 2012 to $1,685,000 in 2013. This was largely driven by the increase in loans in the overall portfolio.
Mid Penn’s tier one capital (to risk weighted assets) of $52,693,000, or 9.9%, and total capital (to risk weighted assets) of $59,100,000, or
11.1%, at December 31, 2013, are above the regulatory requirements.
24
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Net Interest Income
Net interest income, Mid Penn's primary source of revenue, represents the difference between interest income and interest expense. Net interest
income is affected by changes in interest rates and changes in average balances (volume) in the various interest-sensitive assets and liabilities.
TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS
(Dollars in thousands)
ASSETS:
Interest Earning Balances
Investment Securities:
Taxable
Tax-Exempt
Total Securities
Federal Funds Sold
Loans and Leases, Net
Restricted Investment
in Bank Stocks
Total Earning Assets
Cash and Due from Banks
Other Assets
Total Assets
LIABILITIES &
SHAREHOLDERS' EQUITY:
Interest Bearing Deposits:
NOW
Money Market
Savings
Time
Short-term Borrowings
Long-term Debt
Total Interest
Bearing Liabilities
Demand Deposits
Other Liabilities
Shareholders' Equity
Total Liabilities and
Shareholders' Equity
Net Interest Income
Net Yield on Interest Earning Assets:
Total Yield on Earning Assets
Rate on Supporting Liabilities
Average Interest Spread
Net Interest Margin
December 31, 2014
Income and Rates on a Taxable Equivalent Basis for Years Ended
December 31, 2013
December 31, 2012
Average
Balance
Interest
Average Average
Balance
Rates
Interest
Average Average
Balance
Rates
Interest
Average
Rates
$
6,839 $
41
0.60% $
14,818 $
109
0.74% $
26,092 $
236
0.90%
$
$
62,214
74,508
136,722
30
554,970
3,063
701,624
8,460
24,152
734,236
216,656
201,281
30,953
127,071
14,813
30,889
621,663
49,814
5,491
57,268
1,501
3,303
2.41%
4.43%
-
27,427
0.00%
4.94%
123
32,395
4.02%
4.62%
$
777
1,088
16
1,971
55
520
0.36% $
0.54%
0.05%
1.55%
0.37%
1.68%
4,427
0.71%
68,524
66,147
134,671
3,580
508,638
2,545
664,252
8,156
25,472
697,880
182,118
202,393
29,597
148,863
10,533
16,268
589,772
49,318
6,051
52,739
617
2,911
0.90%
4.40%
11
26,639
0.31%
5.24%
20
30,307
0.79%
4.56%
$
659
1,194
15
2,568
26
595
0.36% $
0.59%
0.05%
1.73%
0.25%
3.66%
5,057
0.86%
99,906
55,033
154,939
6,197
483,977
2,772
673,977
8,057
24,422
706,456
126,171
236,434
28,632
180,356
1,044
22,605
595,242
47,670
7,184
56,360
1,154
2,609
1.16%
4.74%
16
27,599
0.26%
5.70%
5
31,619
0.18%
4.69%
458
1,992
14
3,683
3
975
0.36%
0.84%
0.05%
2.04%
0.29%
4.31%
7,125
1.20%
$
734,236
$
27,968
$
697,880
$
25,250
$
706,456
$
24,494
4.62%
0.71%
3.91%
3.99%
4.56%
0.86%
3.70%
3.80%
4.69%
1.20%
3.49%
3.63%
Interest and average rates are presented on a fully taxable equivalent basis, using an effective tax rate of 34%. For purposes of calculating loan
yields, average loan balances include nonaccrual loans.
Loan fees of $749,000, $1,020,000, and $1,148,000 are included with interest income in Table 1 for the years 2014, 2013 and 2012,
respectively.
25
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
TABLE 2: VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in thousands)
2014 Compared to 2013
Increase (Decrease) Due to Change In:
2013 Compared to 2012
Increase (Decrease) Due to Change In:
Taxable Equivalent Basis
INTEREST INCOME:
Interest Bearing Balances
Investment Securities:
Taxable
Tax-Exempt
Total Investment Securities
Federal Funds Sold
Loans and Leases, Net
Restricted Investment Bank Stocks
Total Interest Income
INTEREST EXPENSE:
Interest Bearing Deposits:
NOW
Money Market
Savings
Time
Total Interest Bearing Deposits
Short-term Borrowings
Long-term Debt
Total Interest Expense
Volume
Rate
Net
Volume
Rate
Net
$
(59)
$
(9)
$
(68)
$
(102)
$
(25)
$
(127)
(57)
368
311
(11)
2,427
4
2,672
125
(6)
-
(376)
(257)
11
535
289
941
24
965
-
(1,639)
99
(584)
(7)
(100)
1
(221)
(327)
18
(610)
(919)
884
392
1,276
(11)
788
103
2,088
118
(106)
1
(597)
(584)
29
(75)
(630)
(363)
527
164
(7)
1,406
-
1,462
203
(286)
-
(643)
(726)
27
(273)
(972)
(174)
(225)
(399)
2
(2,366)
15
(2,774)
(2)
(512)
1
(472)
(985)
(4)
(107)
(1,096)
(537)
302
(235)
(5)
(960)
15
(1,312)
201
(798)
1
(1,115)
(1,711)
23
(380)
(2,068)
NET INTEREST INCOME
$
2,383
$
335
$
2,718
$
2,434
$
(1,678)
$
756
The effect of changing volume and rate has been allocated entirely to the rate column. Tax-exempt income is shown on a tax equivalent basis
assuming a federal income tax rate of 34%.
During 2014, taxable equivalent net interest income increased $2,718,000, or 10.8%, as compared to an increase of $756,000, or 3.1%, in 2013.
The average balances, effective interest differential, and interest yields for the years ended December 31, 2014, 2013, and 2012 and the
components of net interest income, are presented in Table 1. A comparative presentation of the changes in net interest income for 2014
compared to 2013, and 2013 compared to 2012, is provided in Table 2. This analysis indicates the changes in interest income and interest
expense caused by the volume and rate components of interest earning assets and interest bearing liabilities.
The yield on earning assets increased to 4.62% in 2014 from 4.56% in 2013. The yield on earning assets for 2012 was 4.69%. The change in
the yield on earning assets was due primarily to increases in market interest rates on investment securities and loan volume in 2014. The
increase in loan volume masked the decline in the average rate, which decreased from 5.24% in 2013 to 4.94% in 2014. The average “prime
rate” for 2014, 2013, and 2012 was 3.25%. The yield on earning assets in 2014 was also negatively impacted by the loss of interest on
nonperforming loans. During 2014, this loss of interest amounted to $798,000. Had this interest been included in Mid Penn’s earnings, the
yield on earning assets would have increased by 12 basis points.
Interest expense decreased by $630,000, or 12.5%, in 2014 as compared to a decrease of $2,068,000, or 29.0%, in 2013. The cost of interest
bearing liabilities decreased to 0.71% in 2014 from 0.86% in 2013. The cost of interest bearing liabilities for 2012 was 1.20%. The reduction in
the cost of interest bearing liabilities was due to changes in market interest rates and Mid Penn’s ability to replace higher-cost time deposits with
lower-cost demand deposits.
Included in the net interest income increase for the year ended December 31, 2014 is $324,000 in recaptured nonaccrual interest from two large
commercial real estate loans to a commercial borrower that were returned to accruing status in June 2014, and does not have a material impact
on Mid Penn’s consolidated financial statements.
Net interest margin, on a tax equivalent basis was 3.99% in 2014 compared to 3.80% in 2013 and 3.63% in 2012. The interest rate impact of
earning assets and funding sources due to changes in interest rates can be reasonably estimated at current interest rate levels, the options selected
26
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
by customers, and the future mix of the loan, investment, and deposit products in the Bank's portfolios, may significantly change the estimates
used in the simulation models. In addition, our net interest income may be impacted by further interest rate actions of the Federal Reserve.
Management continues to monitor the net interest margin closely.
Provision for Loan and Lease Losses
The provision for loan and lease losses is the expense necessary to maintain the allowance for loan and lease losses at a level adequate to absorb
management’s estimate of probable losses in the loan and lease portfolio. Mid Penn’s provision for loan and lease losses is based upon
management’s monthly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans and leases,
analyze delinquencies, ascertain loan and lease growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in
the markets we serve.
Mid Penn has maintained the allowance for loan and lease losses in accordance with Mid Penn’s assessment process, which took into
consideration the risk characteristics of the loan and lease portfolio and shifting collateral values from December 31, 2013 to December 31,
2014. For the year ended December 31, 2014, the provision for loan and lease losses was $1,617,000, as compared to $1,685,000 for the year
ended December 31, 2013. The allowance for loan and lease losses as a percentage of total loans was 1.18% at December 31, 2014, compared
to 1.16% at December 31, 2013 and 1.14% at December 31, 2012.
For the year ended December 31, 2014, Mid Penn had net charge-offs of $1,218,000 compared to net charge-offs of $877,000 during the year
ended December 31, 2013. Loans charged off during 2014 were comprised of 15 commercial real estate loans totaling $1,057,000. Eight of
these loans totaling $441,000 were to three borrowers with the remaining loans to unrelated borrowers. In addition, there were charge-offs for
five residential real estate loans to unrelated borrowers totaling $133,000, three commercial and industrial loans to unrelated borrowers totaling
$62,000, and one home equity loan representing $43,000 of the total charged off during 2014. The remaining $33,000 was comprised of various
consumer loans to unrelated borrowers.
Mid Penn may need to make future adjustments to the allowance and the provision for loan and lease losses if economic conditions or loan
credit quality differs substantially from the assumptions used in making Mid Penn’s evaluation of the level of the allowance for loan losses as
compared to the balance of outstanding loans.
Several factors contributed to the decrease in provision expense in 2014. The first element was the required quantitative allowance on loans
deemed impaired within the portfolio. While total impaired loans increased $17,000, from $10,912,000 at December 31, 2013 to $10,929,000 at
December 31, 2014, the specific reserves required on these impaired loans decreased $299,000, from $1,933,000 at December 31, 2013 to
$1,634,000 at December 31, 2014 due to improved collateral coverage within this group of loans. The second element was the required
quantitative allowance on classified loans within the portfolio that are not deemed to be impaired. Loans internally classified as special mention
increased from $4,214,000 at December 31, 2013 to $6,145,000 at December 31, 2014, or an increase of $1,931,000. Loans internally classified
as substandard but not impaired decreased $527,000 from $3,960,000 at December 31, 2013 to $3,433,000 at December 31, 2014. These
changes resulted in a net increase in special mention and classified loans of $1,404,000 during 2014. This increase was coupled with an increase
in the historical loss experience within these segments of the portfolio based upon current experience in the portfolio, which resulted in an
increase in the quantitative allowance for classified loans of $422,000. The final element was the qualitative segment of the allowance for loan
and lease losses increased $87,000 to $3,769,000 at December 31, 2014, from $3,682,000 at December 31, 2013. This increase was primarily
the result of the growth in the overall loan and lease portfolio. The combination of the shifting components and migrating loss experience
resulted in an overall increase of $210,000 in required balances in the allowance for loan and lease losses. The impact of the required reserves,
coupled with the specific mix of loan charge-off and recoveries during the year led to a slight decline in the provision for loan and lease losses
during 2014 versus 2013.
27
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
A summary of charge-offs and recoveries of loans and leases are presented in Table 3.
TABLE 3: ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in thousands)
Balance, beginning of year
Loans and leases charged off:
Commercial real estate, construction
and land development
Commercial, industrial and agricultural
Real estate - residential
Consumer
Leases
Total loans and leases charged off
Recoveries on loans and leases previously
charged off:
Commercial real estate, construction
and land development
Commercial, industrial and agricultural
Real estate - residential
Consumer
Leases
Total loans and leases recovered
2014
Years ended December 31,
2012
2013
2011
2010
$
6,317
$
5,509
$
6,772
$
7,061
$
7,686
1,057
62
133
76
-
1,328
13
14
20
63
-
110
936
183
167
187
-
1,473
286
193
23
92
2
596
499
834
195
860
-
2,388
15
31
-
43
-
89
545
546
310
142
44
1,587
26
10
19
32
6
93
1,413
787
858
146
230
3,434
21
3
70
80
-
174
Net charge-offs
Provision for loan and lease losses
Balance, end of year
1,218
1,617
6,716
$
877
1,685
6,317
$
2,299
1,036
5,509
$
1,494
1,205
6,772
$
3,260
2,635
7,061
$
Ratio of net charge-offs during the year
to average loans and leases outstanding during
the year, net of unearned discount
Allowance for loan and lease losses as a percentage
of total loans and leases at December 31
Allowance for loan and lease losses as a percentage
of non-performing assets at December 31
2014
Years ended December 31,
2012
2013
2011
2010
0.22%
0.17%
0.48%
0.31%
0.69%
1.18%
1.16%
1.14%
1.40%
1.51%
58.36%
49.84%
42.05%
50.91%
35.05%
28
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Noninterest Income
2014 versus 2013
Income from fiduciary activities for 2014 was $552,000, a $60,000, or 12.2% increase from $492,000 in 2013. This revenue source is
comprised of fees generated by Mid Penn’s Trust department and fees from the sale of third-party mutual funds and annuities to the Bank’s
retail and commercial customers. Assets under management in the areas of Trust and Wealth Management increased from $26,054,000 at the
end of 2013 to $46,859,000 at the end of 2014 due to more active marketing of these services to potential customers. This increase in assets
under management, which are not a component of Mid Penn’s consolidated balance sheets, accounted for the increased fee income during 2014.
Mid Penn recognized gains on sale of investment securities in 2014 of $168,000 as a result of efforts to position the portfolio to provide
improved earnings and cash flow in support of future loan growth, down $52,000 from the $220,000 recorded in 2013.
Mortgage refinancing activity decreased $35,000 or 10.1% to $313,000 during 2014 from $348,000 in 2013 due to mortgage rate increases.
While home purchase activity improved throughout the year, it did not rebound enough to compensate for the decline throughout our market
area during the first quarter of 2014 due to harsh winter weather conditions.
Merchant services revenue, which is derived from the interchange fee income received as a result of customers utilizing Mid Penn as their credit
card processor, decreased to $254,000 in 2014, a decline of $76,000, or 23.0%, compared to $330,000 in 2013. The decrease was mainly due to
increased competition in this business line as more financial institutions pursued additional revenue sources, which hindered Mid Penn’s ability
to price as it did in 2013.
During 2014, Mid Penn began selling the guaranteed portion of Small Business Association (“SBA”) loans in the secondary market. This new
business activity generated $119,000 in fee income during the year.
The decline in other income of $72,000, or 12.3% from 2013 can be traced to the recognition in 2013 of a refund of collection costs on a
previously troubled loan and a refund of previously paid sales taxes.
2013 versus 2012
Income from fiduciary activities for 2013 was $492,000, an $83,000, or 14.4%, decrease from $575,000 in 2012. Fees from third-party mutual
fund and annuity sales were $267,000 in 2013 and $389,000 in 2012. This decline in fee revenue was responsible for the variance from 2012.
Mid Penn recognized gains on sale of investment securities in 2013 of $220,000 and $267,000 in 2012 as a result of efforts to position the
portfolio to provide improved earnings and cash flow in support of future loan growth.
Mortgage banking income suffered from increasing mortgage rates earlier in the year, which effectively shut off the flow of customers seeking
to refinance their existing mortgages from higher rates. Mortgage banking income for 2013 was $348,000, a decrease of $327,000, or 48.4%,
from $675,000 in 2012.
Merchant services revenue increased to $330,000 in 2013, an increase of $74,000, or 28.9%, compared to $256,000 for 2012. Sales efforts in
this area were also very positive in 2013, adding to the enhanced revenue.
TABLE 4: NONINTEREST INCOME
(Dollars in thousands)
Income from fiduciary activities
Service charges on deposits
Net gain on sales of investment securities
Earnings from cash surrender value of life insurance
Mortgage banking income
ATM debit card interchange income
Merchant services income
Gain on sales of SBA loans
Other income
Total Noninterest Income
2014
Years ended December 31,
2013
2012
$
$
552
584
168
201
313
544
254
119
513
3,248
$
$
492
576
220
231
348
508
330
-
585
3,290
$
$
575
565
267
247
675
472
256
-
626
3,683
29
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Noninterest Expense
2014 versus 2013
Occupancy expense increased $185,000 to $1,313,000 in 2014. This expense area was negatively impacted by harsh weather conditions during
the first and early second quarters of 2014. Increased snow removal and heating costs were incurred during this period.
Pennsylvania Bank Shares tax expense decreased $99,000 to $365,000 in 2014 due to a statutory change in the calculation method.
Legal and professional fees decreased from $705,000 in 2013 to $516,000 in 2014, due to a decrease in consultant expenses over the same
period last year, which included one-time set-up fees associated with the migration of Mid Penn’s core banking data from an in-house
environment to a service bureau hosted platform in 2013.
Loss (gain) on sale/write-down of foreclosed assets went from $302,000 of income in 2013 to $204,000 of expense in 2014 due to the write-
down of foreclosed assets as a result of updated appraisals on subject properties within the portfolio during 2014 and the recognition of a
$340,000 gain on the sale of a property during the second quarter of 2013.
One-time merger and acquisition expenses of $573,000 in connection with the acquisition of Phoenix were incurred during 2014.
2013 versus 2012
Salaries and employee benefits represented the major component of noninterest expense. During 2013, increases in the workforce primarily
included adding experienced team members to add depth to the sales and support areas of Mid Penn. In 2013, Mid Penn also recognized a full
year of salary and employee benefits expense from the 2012 additions within the support functions throughout the Corporation to enhance
controls and support future growth. Commissions paid to employees in the retail investment and mortgage banking lines of business in 2013
were down $192,000 from 2012 due to reduced activity in both of these business lines.
FDIC assessment decreased $548,000 to $486,000 in 2013. Prior to 2011, assessments were calculated based on the total deposits of a financial
institution. Beginning in the second quarter of 2011, the assessment base was changed from deposits to average total assets less tangible equity.
This resulted in significant savings for Mid Penn. In addition, 2013 reflects the recognition of a refund of $139,000 in overbillings from the
FDIC due to an error by the FDIC in Mid Penn’s assessment calculation.
Legal and professional fees increased to $705,000 in 2013 from $604,000 in 2012. This increase was primarily related to consultants used in the
information technology area to improve the Bank’s network capabilities and successfully migrate to a service bureau processing environment.
Software licensing increased from $648,000 in 2012 to $947,000 in 2013. During 2013, Mid Penn incurred one-time charges of $26,000
associated with the migration its core banking data processing software from an in-house environment to a service bureau hosted platform. This
migration allowed for staffing reductions in the information technology and operations areas of $39,000 for part of the year in 2013. The
remaining increase was due to new service contracts on software to comply with various regulatory requirements and to expand the Bank’s
online loan and deposit application capabilities.
Mid Penn recognized a gain on sale or write-down on foreclosed assets of $302,000 in 2013. During 2013, Mid Penn recognized a gain of
$340,000 on the sale of a repossessed property. This gain was offset by Mid Penn’s ongoing analysis of the carrying values of repossessed
properties and the adjustment of their values to current market rates.
Loan collection costs decreased to $214,000 in 2013 from $369,000 in 2012. Other real estate owned (“OREO”) expense increased to $290,000
in 2013 from $253,000 in 2012. These items represented the costs associated with working through collection efforts on the pool of
nonperforming assets within the loan portfolio. While decreasing in total during 2013, they continued to be at historically elevated levels due to
the size and nature of the nonperforming assets pool.
ATM debit card processing and internet banking expenses both increased in recent years due to increasing customer demand for these banking
services.
30
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
TABLE 5: NONINTEREST EXPENSE
(Dollars in thousands)
Salaries and employee benefits
Occupancy expense, net
Equipment expense
Pennsylvania Bank Shares tax expense
FDIC Assessment
Legal and professional fees
Director fees and benefits expense
Marketing and advertising expense
Software licensing
Telephone expense
Loss (gain) on sale/write-down of foreclosed assets
Intangible amortization
Loan collection costs
Merger and acquisition expense
ATM debit card processing expense
Internet banking expense
Meals, travel, and lodging expense
Data processing
Insurance
OREO expense
Investor services
Other expenses
Total Noninterest Expense
Investments
2014
Years ended December 31,
2013
2012
$
$
10,879
1,313
1,205
365
542
516
377
308
965
467
204
27
288
573
310
319
273
251
141
172
72
1,101
20,668
$
$
10,788
1,128
1,299
464
486
705
319
253
947
436
(302)
29
214
-
202
252
271
130
129
290
68
1,283
19,391
$
$
10,518
1,077
1,234
462
1,034
604
335
378
648
411
96
45
369
-
171
240
266
102
126
253
76
1,248
19,693
Mid Penn’s investment portfolio is utilized to provide liquidity and managed to maximize return within reasonable risk parameters.
Mid Penn’s entire portfolio of investment securities is considered available for sale. As such, the investments are recorded at fair value. Our
investments are valued at a market price relative to investments of the same type with similar maturity dates. As the interest rate environment of
these securities changes, the value of securities changes accordingly.
As of December 31, 2014, the unrealized gain on investment securities resulted in an increase in shareholders’ equity of $1,625,000 (unrealized
gain on securities of $2,462,000 less deferred income taxes of $837,000). At December 31, 2013, the unrealized loss on investment securities
resulted in a decrease in shareholders’ equity of $747,000 (unrealized loss on securities of $1,132,000 less deferred income taxes of $385,000).
Mid Penn does not have any significant concentrations within its portfolio of investment securities. Table 6 provides a summary of our
available for sale investment securities.
TABLE 6: FAIR VALUE OF INVESTMENT SECURITIES
(Dollars in thousands)
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Equity securities
2014
27,066
33,776
79,171
1,621
141,634
$
$
December 31,
2013
$
$
12,834
39,392
69,038
1,539
122,803
$
$
2012
17,740
66,686
69,479
390
154,295
31
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Maturity and yield information relating to debt securities is shown in Table 7.
TABLE 7: INVESTMENT MATURITY AND YIELD
(Dollars in thousands)
As of December 31, 2014
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
One Year
and Less
After One
Year thru
Five Years
After Five
Years thru
Ten Years
After Ten
Years
$
$
-
-
2,201
2,201
$
$
8,841
1,802
7,050
17,693
$
$
18,225
3,821
29,271
51,317
$
$
-
28,153
40,649
68,802
Total
27,066
33,776
79,171
140,013
$
$
Weighted Average Yields
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Loans
One Year
and Less
-
-
7.29%
7.29%
After One
Year thru
Five Years
After Five
Years thru
Ten Years
3.60%
3.94%
4.88%
4.14%
2.48%
3.64%
4.76%
3.87%
After Ten
Years
-
3.63%
4.77%
4.30%
Total
2.85%
3.65%
4.85%
4.17%
At December 31, 2014, loans and leases totaled $571,533,000, a $25,071,000 or 4.6% increase from December 31, 2013. During 2014, Mid
Penn experienced a net increase in commercial real estate and commercial/industrial loans of approximately $28,178,000. This increase was
attributed to the increase in lending opportunities to credit-worthy borrowers within the markets Mid Penn serves as well as enhancements to the
lending sales team during 2014.
At December 31, 2014, loans, net of unearned income, represented 79.0% of earning assets as compared to 80.2% on December 31, 2013, and
72.4% on December 31, 2012.
The Bank's loan portfolio is diversified among individuals and small and medium-sized businesses generally located within the Bank's trading
area of eastern Cumberland, Dauphin, northwestern Lancaster, western Luzerne, southern Northumberland, and Schuylkill Counties.
Commercial real estate, construction and land development loans are collateralized mainly by mortgages on the income-producing real estate or
land involved. Commercial, industrial and agricultural loans are made to business entities and may be secured by business assets, including
commercial real estate, or may be unsecured. Residential real estate loans are secured by liens on the residential property. Consumer loans
include installment loans, lines of credit and home equity loans. The Bank has no concentration of credit to any one borrower. The Bank’s
highest concentration of credit is in Commercial Real Estate financings.
32
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
A distribution of the Bank's loan portfolio according to major loan classification is shown in Table 8.
TABLE 8: LOAN PORTFOLIO
(Dollars in thousands)
2014
2013
December 31,
2012
2011
2010
Amount
%
Amount
%
Amount
%
Amount
%
Amount
%
$
Commercial real estate,
construction and land
development
Commercial, industrial
and agricultural
Real estate - residential
Consumer
Total Loans
Unearned income
Loans net of unearned
discount
Allowance for loan and
lease losses
Net loans $
289,378
50.6
$
274,279
50.2
$
255,231
52.7
$
249,204
51.6
$
252,915
54.0
120,326
159,004
3,018
571,726
(193)
21.0
27.8
0.6
100.0
107,492
160,294
4,646
546,711
(249)
19.7
29.3
0.8
100.0
79,228
143,243
6,770
484,472
(252)
16.4
29.6
1.4
100.0
78,656
146,846
8,327
483,033
(316)
16.3
30.4
1.7
100.0
70,295
136,048
8,922
468,180
(445)
15.0
29.1
1.9
100.0
571,533
546,462
484,220
482,717
467,735
(6,716)
564,817
(6,317)
540,145
$
(5,509)
478,711
$
(6,772)
475,945
$
(7,061)
460,674
$
Mid Penn’s maturity and rate sensitivity information related to the loan portfolio is reflected in Table 9.
TABLE 9: LOAN MATURITY AND INTEREST SENSITIVITY
(Dollars in thousands)
As of December 31, 2014
Commercial real estate, construction
and land development
Commercial, industrial and
agricultural
Real estate - residential mortgages
Consumer
Rate Sensitivity
Predetermined rate
Floating or adjustable rate
One Year
and Less
After One
Year thru
Five Years
After Five
Years
Total
$
23,085
$
33,987
$
232,306
$
289,378
3,561
4,326
35
31,007
30,890
117
31,007
$
$
$
29,742
15,069
1,344
80,142
67,607
12,535
80,142
$
$
$
87,023
139,609
1,446
460,384
377,563
82,821
460,384
$
$
$
120,326
159,004
2,825
571,533
476,060
95,473
571,533
$
$
$
Credit Quality, Credit Risk, and Allowance for Loan and Lease Losses
Other than as described herein, we do not believe there are any trends, events or uncertainties that are reasonably expected to have a material
impact on future results of operations, liquidity, or capital resources. Further, based on known information, we believe that the effects of current
and past economic conditions and other unfavorable business conditions may influence certain borrowers’ abilities to comply with their
repayment terms. Mid Penn continues to monitor closely the financial strength of these borrowers. Mid Penn does not engage in practices
which may be used to artificially shield certain borrowers from the negative economic or business cycle effects that may compromise their
ability to repay. Mid Penn does not normally structure construction loans with interest reserve components. Mid Penn has not in the past
performed any commercial real estate or other type loan workouts whereby an existing loan was restructured into multiple new loans. Also, Mid
Penn does not extend loans at maturity solely due to the existence of guarantees, without recognizing the credit as impaired. While the existence
of a guarantee may be a mitigating factor in determining the proper level of allowance once impairment has been identified, the guarantee does
not affect the impairment analysis.
33
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
TABLE 10: NONPERFORMING ASSETS
(Dollars in thousands)
2014
2013
December 31,
2012
2011
2010
Nonperforming Assets:
Nonaccrual loans
Accruing troubled debt restructured loans
Total nonperforming loans
$
Foreclosed real estate
Total nonperforming assets
$
$
8,907
2,035
10,942
565
11,507
10,877
833
11,710
965
12,675
$
11,831
426
12,257
843
13,100
$
11,800
571
12,371
931
13,302
17,228
2,323
19,551
596
20,147
Accruing loans 90 days or more past due
Total risk elements
$
-
11,507
$
-
12,675
$
-
13,100
$
-
13,302
$
19
20,166
Nonperforming loans as a % of total
loans outstanding
Nonperforming assets as a % of total
loans outstanding and other real estate
Ratio of allowance for loan losses
to nonperforming loans
1.91%
2.01%
2.14%
2.32%
2.53%
2.71%
2.56%
2.76%
4.18%
4.31%
61.37%
53.94%
44.95%
54.74%
36.12%
Mid Penn assesses a specific allocation for both commercial loans and commercial real estate loans prior to charging down or charging off the
loan. Once the charge down is taken, the remaining balance remains a nonperforming loan with the original terms and interest rate intact and is
not treated as a restructured credit. During 2014, nonperforming loans declined $768,000 from $11,710,000 at December 31, 2013. This
improvement has been the result of slight improvement in some sectors of the general economy and maintaining a close relationship with
troubled borrowers as they navigate their plan toward a resolution of credit issues.
Mid Penn’s troubled debt restructured loans at December 31, 2014 totaled $8,746,000 of which, $2,035,000 are accruing loans in compliance
with the terms of the modification. $6,711,000 of the troubled debt restructured loans are included in nonaccrual loans. As a result of the
evaluation, a specific allocation and, subsequently, charge offs have been taken as appropriate. Further discussion of troubled debt restructured
loans can be found in Note 7 to Mid Penn’s Consolidated Financial Statements, which are included in Item 8. As of December 31, 2014, there
were no defaulted troubled debt restructured loans as all troubled debt restructured loans were current with respect to their associated
forbearance agreements.
Mid Penn entered into forbearance agreements on all loans currently classified as troubled debt restructures and all of these agreements have
resulted in additional principal repayment. The terms of these forbearance agreements vary whereby principal payments have been decreased,
interest rates have been reduced and/or the loan will be repaid as collateral is sold.
34
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
The following table provides additional analysis of partially charged-off loans:
TABLE 11: PARTIALLY CHARGED OFF LOANS
(Dollars in thousands)
December 31, 2014
December 31, 2013
Period ending total loans outstanding (net of unearned income)
Allowance for loan and lease losses
Total Nonperforming loans
Nonperforming and impaired loans with partial charge-offs
$
$
571,533
6,716
10,942
2,441
Ratio of nonperforming loans with partial charge-offs
to total loans
Ratio of nonperforming loans with partial charge-offs
to total nonperforming loans
Coverage ratio net of nonperforming loans with
partial charge-offs
Ratio of total allowance to total loans less
nonperforming loans with partial charge-offs
0.43%
22.31%
79.00%
1.18%
546,462
6,317
11,710
2,103
0.38%
17.96%
65.75%
1.16%
Mid Penn has not experienced any additional charge-offs on loans for which a partial charge-off had originally been taken.
Mid Penn considers a commercial loan or commercial real estate loan to be impaired when it becomes 90 days or more past due and not in the
process of collection. This methodology assumes the borrower cannot or will not continue to make additional payments. At that time the loan
would be considered collateral dependent as the discounted cash flow (“DCF”) method indicates no operating income is available for evaluating
the collateral position; therefore, all impaired loans are deemed to be collateral dependent.
Mid Penn evaluates loans for charge-off on a monthly basis. Policies that govern the recommendation for charge-off are unique to the type of
loan being considered. Commercial loans rated as nonaccrual or lower will first have a collateral evaluation completed in accordance with the
guidance on impaired loans. Once the collateral evaluation has been completed, a specific allocation of allowance is made based upon the
results of the evaluation. In the event the loan is unsecured, the loan would have been charged-off at the recognition of impairment. If the loan
is secured, it will undergo a 90 day waiting period to ensure the collateral shortfall identified in the evaluation is accurate and then charged
down by the specific allocation. Once the charge down is taken, the remaining balance remains a nonperforming loan with the original terms and
interest rate intact (not restructured). Commercial real estate loans rated as impaired will also have an initial collateral evaluation completed in
accordance with the guidance on impaired loans. An updated real estate valuation is ordered and the collateral evaluation is modified to reflect
any variations in value. A specific allocation of allowance is made for any anticipated collateral shortfall and a 90-day waiting period begins to
ensure the accuracy of the collateral shortfall. The loan is then charged down by the specific allocation. Once the charge down is taken, the
remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured). The process of charge-off for
residential mortgage loans begins upon a loan becoming delinquent for 90 days and not in the process of collection. The existing appraisal is
reviewed and a lien search is obtained to determine lien position and any instances of intervening liens. A new appraisal of the property will be
ordered if deemed necessary by management and a collateral evaluation is completed. The loan will then be charged down to the value indicated
in the evaluation. Consumer loans are recommended for charge-off after reaching delinquency of 90 days and the loan is not in the process of
collection. The entire balance of the consumer loan is recommended for charge-off at this point.
As noted above, Mid Penn assesses a specific allocation for both commercial loans and commercial real estate loans prior to charging down or
charging off the loan. Once the charge down is taken, the remaining balance remains a nonperforming loan with the original terms and interest
rate intact (not restructured). In addition, Mid Penn takes a preemptive step when any commercial loan or commercial real estate loan becomes
classified under its internal classification system. A preliminary collateral evaluation in accordance with the guidance on impaired loans is
prepared using the existing collateral information in the loan file. This process allows Mid Penn to review both the credit and documentation
files to determine the status of the information needed to make a collateral evaluation. This collateral evaluation is preliminary but allows Mid
Penn to determine if any potential collateral shortfalls exist.
Larger groups of small-balance loans, such as residential mortgages and consumer installment loans are collectively evaluated for impairment.
Accordingly, individual consumer and residential loans are not separately identified for impairment disclosures unless such loans are the subject
of a restructuring agreement.
35
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Mid Penn’s rating system assumes any loans classified as sub-standard non-accrual to be impaired, and all of these loans are considered
collateral dependent; therefore, all of Mid Penn’s impaired loans, whether reporting a specific allocation or not, are considered collateral
dependent.
It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate within 30 days of the credit
being classified as sub-standard non-accrual. Prior to receipt of the updated real estate valuation Mid Penn will use any existing real estate
valuation to determine any potential allowance issues; however no allowance recommendation will be made until which time Mid Penn is in
receipt of the updated valuation. The credit department employs an electronic tracking system to monitor the receipt of and need for updated
appraisals. To date, there have been no significant time lapses noted with the above processes.
In some instances Mid Penn is not holding real estate as collateral and is relying on business assets (personal property) for repayment. In these
circumstances a collateral inspection is performed by Mid Penn personnel to determine an estimated value. The value is based on net book
value, as provided by the financial statements, and discounted accordingly based on determinations made by management. Occasionally, Mid
Penn will employ an outside service to provide a fair estimate of value based on auction sales or private sales. Management reviews the
estimates of these third parties and discounts them accordingly based on management’s judgment, if deemed necessary.
For impaired loans with no valuation allowance required, Mid Penn’s practice of obtaining independent third party market valuations on the
subject property within 30 days of being placed on non-accrual status sometimes indicates that the loan to value ratio is sufficient to obviate the
need for a specific allocation in spite of significant deterioration in real estate values in Mid Penn’s primary market area. These circumstances
are determined on a case by case analysis of the impaired loans.
Mid Penn actively monitors the values of collateral on impaired loans. This monitoring may require the modification of collateral values over
time or changing circumstances by some factor, either positive or negative, from the original values. All collateral values will be assessed by
management at least every 12 months for possible revaluation by an independent third party.
As of December 31, 2014, Mid Penn had several unrelated loan relationships, with an aggregate carrying balance of $10,929,000, deemed
impaired. This pool of loans was further broken down into a group of loans with an aggregate carrying balance of $7,388,000 for which specific
allocations totaling $1,634,000 were included within the loan loss reserve for these loans. The remaining $3,541,000 of loans required no
specific allocation within the loan loss reserve. The $10,929,000 pool of impaired loan relationships was comprised of $8,925,000 in
commercial real estate relationships, $1,146,000 in residential relationships, $618,000 in commercial and industrial relationships, and $240,000
in home equity relationships. There were specific allocations of $1,382,000 against the commercial real estate relationships. $885,000 of this
total was between two unrelated relationships. There was also $137,000 against the commercial and industrial relationships and $115,000
against the home equity relationships. Management currently believes that the specific reserves are adequate to cover probable future losses
related to these relationships
The allowance for loan losses is a reserve established in the form of a provision expense for loan and lease losses and is reduced by loan charge-
offs net of recoveries. In conjunction with an internal loan review function that operates independently of the lending function, management
monitors the loan portfolio to identify risk on a monthly basis so that an appropriate allowance is maintained. Based on an evaluation of the
loan portfolio, management presents a monthly review of the allowance for loan and lease losses to the Board of Directors, indicating any
changes in the allowance since the last review. In making the evaluation, management considers the results of recent regulatory examinations,
which typically include a review of the allowance for loan and lease losses an integral part of the examination process. As part of the
examination process, federal or state regulatory agencies may require Mid Penn to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination, which may not be currently available to management.
In establishing the allowance, management evaluates on a quantitative basis individual classified loans and nonaccrual loans, and determines an
aggregate reserve for those loans based on that review. In addition, an allowance for the remainder of the loan and lease portfolio is determined
based on historical loss experience within certain components of the portfolio. These allocations may be modified if current conditions indicate
that loan and lease losses may differ from historical experience.
36
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
In addition, a portion of the allowance is established for losses inherent in the loan and lease portfolio which have not been identified by the
quantitative processes described above. This determination inherently involves a higher degree of subjectivity, and considers risk factors that
may not have yet manifested themselves in historical loss experience. These factors include:
changes in local, regional, and national economic and business conditions affecting the collectability of the portfolio, the values of
underlying collateral, and the condition of various market segments;
changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely
classified loans;
changes in the experience, ability, and depth of lending management and other relevant staff as well as the quality of the institution’s
loan review system;
changes in the nature and volume of the portfolio and the terms of loans generally offered; and
the existence and effect of any concentrations of credit and changes in the level of such concentrations.
While the allowance for loan and lease losses is maintained at a level believed to be adequate by management to provide for probable losses
inherent in the loan and lease portfolio, determination of the allowance is inherently subjective, as it requires estimates, all of which may be
susceptible to significant change. Changes in these estimates may impact the provisions charged to expense in future periods.
Management believes, based on information currently available, that the allowance for loan and lease losses of $6,716,000 as of December 31,
2014 is adequate to cover specifically identifiable loan losses, as well as estimated losses inherent in our portfolio for which certain losses are
probable but not specifically identifiable.
The allocation of the allowance for loan and lease losses among the major classifications is shown in Table 12 as of December 31 of each of the
past five years.
TABLE 12: ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in thousands)
Commercial real estate, construction
and land development
Commercial, industrial and agricultural
Real estate - residential
Consumer
Unallocated
2014
2013
December 31,
2012
2011
2010
$
$
3,958
1,395
450
688
225
6,716
$
$
4,015
1,187
581
513
21
6,317
$
$
3,122
1,299
635
444
9
5,509
$
$
3,567
2,276
362
424
143
6,772
$
$
3,775
2,448
219
424
195
7,061
The growth in the loan portfolio during 2014, as well as increases in historical loss factors in the special mention and substandard portions of the
portfolio, necessitated a larger allowance in 2014. See also the discussion in the Provision for Loan and Lease Losses section.
The allowance for loan and lease losses at December 31, 2014 was $6,716,000, or 1.18%, of total loans less unearned discount as compared to
$6,317,000, or 1.16%, at December 31, 2013, and $5,509,000, or 1.14%, at December 31, 2012.
Deposits and Other Funding Sources
Mid Penn's primary source of funds are deposits. Total deposits at December 31, 2014 increased by $29,792,000, or 4.9%, over December 31,
2013, which decreased by $17,331,000, or 2.8%, over December 31, 2012. Average balances and average interest rates applicable to the major
classifications of deposits for the years ended December 31, 2014, 2013, and 2012 are presented in Table 13.
Average short-term borrowings for 2014 were $14,813,000 as compared to $10,533,000 in 2013. These borrowings consisted of federal funds
purchased.
At December 31, 2014, the Bank had $4,462,000 in brokered deposits, an increase of $1,712,000, or 62.3%, over December 31, 2013, which
decreased by $1,378,000, or 33.4%, over the same period in 2012.
37
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
TABLE 13: DEPOSITS BY MAJOR CLASSIFICATION
(Dollars in thousands)
Noninterest-bearing demand deposits
Interest-bearing demand deposits
Money market
Savings
Time
2014
Average
Balance
49,814
216,656
201,281
30,953
127,071
625,775
$
$
Average
Rate
0.00%
0.36%
0.54%
0.05%
1.55%
0.62%
December 31,
2013
Average
Balance
$
$
49,318
182,118
202,393
29,597
148,863
612,289
Average
Rate
0.00%
0.36%
0.59%
0.05%
1.73%
0.72%
2012
Average
Balance
47,670
126,171
236,434
28,632
180,356
619,263
$
$
Average
Rate
0.00%
0.36%
0.84%
0.05%
2.04%
0.99%
The maturity distribution of time deposits of $100,000 or more is reflected in Table 14.
TABLE 14: MATURITY OF TIME DEPOSITS $100,000 OR MORE
(Dollars in thousands)
Three months or less
Over three months to twelve months
Over twelve months
Capital Resources
2014
December 31,
2013
$
$
4,506
21,308
22,604
48,418
$
$
4,745
16,953
24,230
45,928
$
$
2012
7,207
18,340
32,763
58,310
Shareholders' equity, or capital, is evaluated in relation to total assets and the risk associated with those assets. The detailed computation of the
Bank’s regulatory capital ratios can be found in Note 16 of Item 8, Notes to Consolidated Financial Statements. The greater a corporation’s
capital resources, the more likely it is to meet its cash obligations and absorb unforeseen losses. Too much capital, however, indicates that not
enough of the corporation’s earnings have been invested in the continued growth of the business or paid to shareholders. The buildup makes it
difficult for a corporation to offer a competitive return on the shareholders’ capital going forward. For these reasons capital adequacy has been,
and will continue to be, of paramount importance.
Shareholders’ equity increased in 2014 by $6,214,000, or 11.7%, following an increase in 2013 of $696,000, or 1.3%, and a decrease in 2012 of
$1,232,000, or 2.3%. Capital was positively impacted in 2014 by the net income available to common shareholders of $5,351,000 and the
increase in accumulated other comprehensive (loss) income of $2,385,000. Capital was positively impacted in 2013 by the net income available
to common shareholders of $4,616,000; however, the increase was muted by an increase in accumulated other comprehensive loss. Capital was
negatively impacted in 2012 by the repayment and redemption of the $10,000,000 in the Series A preferred stock, but the impact was softened
by the net income available to common shareholders of $4,437,000 and the issuance of the $4,880,000 in Series B preferred stock in 2012.
Subsequently, the Series B preferred stock offering of $5,000,000 was completed on January 3, 2013.
Mid Penn’s normal intent for dividend payout is to provide quarterly cash returns to shareholders and earnings retention at a level sufficient to
finance future growth. The dividends paid on common shares totaled $0.45 for the year ended December 31, 2014, and $0.25 for the years
ended December 31, 2013 and December 31, 2012.
The dividend payout ratio, which represents the percentage of annual net income returned to shareholders in the form of cash dividends, was
29.41% for 2014 and 18.94% for 2013.
38
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Mid Penn maintained the following regulatory capital levels, leverage ratios, and risk-based capital ratios as of December 31, 2014, and 2013, as
follows:
(Dollars in thousands)
Corporation
As of December 31, 2014:
Tier 1 Capital (to Average Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
Bank
As of December 31, 2014:
Tier 1 Capital (to Average Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
Corporation
As of December 31, 2013:
Tier 1 Capital (to Average Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
Bank
As of December 31, 2013:
Tier 1 Capital (to Average Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
Capital Purchase Program Participation
$
$
$
$
Capital Adequacy
Minimum Capital
Required
Actual
Amount
Ratio
Amount
Ratio
To Be Well-Capitalized
Under Prompt
Corrective
Action Provisions
Amount
Ratio
56,560
56,560
63,336
7.4%
10.1%
11.4%
56,647
56,647
63,423
7.5%
10.2%
11.4%
52,693
52,693
59,100
7.5%
9.9%
11.1%
52,598
52,598
59,005
7.5%
9.9%
11.1%
$
$
$
$
30,429
22,295
44,590
4.0%
4.0%
8.0%
30,360
22,295
44,590
4.0%
4.0%
8.0%
28,031
21,234
42,467
4.0%
4.0%
8.0%
28,041
21,234
42,467
4.0%
4.0%
8.0%
$
$
$
$
N/A
N/A
N/A
N/A
N/A
N/A
37,950
33,442
55,737
5.0%
6.0%
10.0%
N/A
N/A
N/A
N/A
N/A
N/A
35,051
31,850
53,084
5.0%
6.0%
10.0%
On December 19, 2008, Mid Penn entered into and closed a letter agreement with the United States Department of the Treasury (the “Treasury”)
pursuant to which the Treasury invested $10,000,000 in Mid Penn under the Treasury’s Capital Purchase Program (the “CPP”). Under the letter
agreement, the Treasury received (1) 10,000 shares of Series A Fixed Rate Cumulative Perpetual Preferred Stock, $1,000 liquidation preference
(“Series A Preferred Stock”), and (2) warrants to purchase up to 73,099 shares of the Mid Penn common stock at an exercise price of $20.52 per
share (the “Warrants”).
On December 28, 2012, Mid Penn entered into a letter agreement with the Treasury pursuant to which Mid Penn repurchased from the Treasury
all 10,000 shares of the Series A Preferred Stock issued to the Treasury, which constitutes all of the issued and outstanding shares of Series A
Preferred Stock. Mid Penn repurchased the Series A Preferred Stock for a purchase price equal to the aggregate liquidation amount of the
Preferred Stock of $10,000,000, plus accrued but unpaid dividends of $59,722. All 10,000 shares of Series A Preferred Stock have subsequently
been cancelled.
On January 23, 2013, Mid Penn entered into a letter agreement with the Treasury pursuant to which Mid Penn repurchased from the Treasury on
that date the Warrants for $58,479. The Warrants have subsequently been cancelled.
As of December 31, 2014, Mid Penn has no further financial obligations under the Series A Preferred Stock, the Warrants, or the Treasury’s
CPP.
Federal Income Taxes
Federal income tax expense for 2014 was $1,462,000 compared to $1,201,000 in 2013 and $1,244,000 in 2012. The effective tax rate was 20%
for 2014, 2013 and 2012.
39
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Liquidity
Mid Penn's asset-liability management policy addresses the management of Mid Penn's liquidity position and its ability to raise sufficient funds
to meet deposit withdrawals, fund loan growth and meet other operational needs. Mid Penn utilizes its investments as a source of liquidity,
along with deposit growth and increases in repurchase agreements and borrowings. (See Deposits and Other Funding Sources which appears
earlier in this discussion.) Liquidity from investments is provided primarily through investments and interest-bearing balances with maturities
of one year or less.
The Bank has a line of credit commitment from the FHLB for overnight borrowings up to $40,000,000. This line is collateralized by certain
qualifying loans and investment securities of the Bank. The Bank also has unused lines of credit with correspondent banks amounting to
$12,500,000 at December 31, 2014.
Major sources of cash in 2014 came from the increase in demand deposits and savings accounts of $37,380,000, the proceeds from long-term
debt borrowings of $30,000,000, and $27,314,000 from the maturities and sales of investment securities.
Major uses of cash in 2014 were the purchases of investment securities of $43,633,000, the increase in loans of $27,170,000, and the net
decrease in short-term borrowings of $23,255,000.
Major sources of cash in 2013 came from the maturity of investment securities and interest-bearing time deposits totaling $53,151,000, the
increase in short-term borrowings of $23,833,000, and the sale of investment securities of $15,118,000.
Major uses of cash in 2013 were the increase in net loans and leases of $65,896,000, the purchases of investment securities of $27,881,000 and
decrease in time deposits of $31,280,000.
Aggregate Contractual Obligations
Table 15 represents Mid Penn’s on-and-off balance sheet aggregate contractual obligations to make future payments as of December 31, 2014.
TABLE 15: AGGREGATE CONTRACTUAL OBLIGATIONS
(Dollars in thousands)
Payments Due by Period
Certificates of deposit
Long-term debt
Operating lease obligations
Payments under benefit plans
Financial
Statements Note
Reference
9
11
18
13
Total
124,785
52,961
2,958
1,646
182,350
$
$
One Year or
Less
One to Three
Years
Three to Five
Years
More than
Five Years
$
$
61,178
15,000
411
149
76,738
$
$
41,559
25,000
880
321
67,760
$
$
20,870
10,000
793
334
31,997
$
$
1,178
2,961
874
842
5,855
We are not aware of any other commitments or contingent liabilities which may have a material adverse impact on Mid Penn’s liquidity or
capital resources.
Effects of Inflation
A bank's asset and liability structure is substantially different from that of an industrial company in that virtually all assets and liabilities of a
bank are monetary in nature. Management believes the impact of inflation on its financial results depends principally upon Mid Penn's ability to
manage the balance sheet sensitivity to changes in interest rates and, by such reaction, mitigate the inflationary impact on performance. Interest
rates do not necessarily move in the same direction or at the same magnitude as the prices of other goods and services. As discussed previously,
Management seeks to manage the relationship between interest sensitive assets and liabilities in order to protect against wide interest rate
fluctuations, including those resulting from inflation.
Information shown elsewhere in this Annual Report will assist in the understanding of how Mid Penn is positioned to react to changing interest
rates and inflationary trends. In particular, the summary of net liabilities, as well as the composition of loans, investments and deposits should
be considered.
40
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Off-Balance Sheet Items
Mid Penn makes contractual commitments to extend credit and extends lines of credit, which are subject to Mid Penn's credit approval and
monitoring procedures.
As of December 31, 2014, commitments to extend credit amounted to $125,279,000 as compared to $141,616,000 as of December 31, 2013.
Mid Penn also issues standby letters of credit to its customers. The risk associated with standby letters of credit is essentially the same as the
credit risk involved in loan extensions to customers. Standby letters of credit increased to $9,837,000 at December 31, 2014, from $8,458,000 at
December 31, 2013.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a financial institution, Mid Penn’s primary source of market risk is interest rate risk. Interest rate risk is the exposure to fluctuations in Mid
Penn’s future earnings (earnings at risk) resulting from changes in interest rates. This exposure or sensitivity is a function of the repricing
characteristics of Mid Penn's portfolio of assets and liabilities. Each asset and liability reprices either at maturity or during the life of the
instrument. Interest rate sensitivity is measured as the difference between the volume of assets and liabilities that are subject to repricing in a
future period of time.
The principal purpose of asset-liability management is to maximize current and future net interest income within acceptable levels of interest
rate risk while satisfying liquidity and capital requirements. Net interest income is increased by increasing the net interest margin and by
volume growth. Thus the goal of interest rate risk management is to maintain a balance between risk and reward such that net interest income is
maximized while risk is maintained at an acceptable level.
Mid Penn utilizes an asset-liability management model to measure the impact of interest rate movements on its interest rate sensitivity position.
Mid Penn’s management also reviews the traditional maturity gap analysis regularly. Mid Penn does not always attempt to achieve an exact
match between interest sensitive assets and liabilities because it believes that an actively managed amount of interest rate risk is inherent and
appropriate in the management of the Corporation’s profitability.
Modeling techniques and simulation analysis involve assumptions and estimates that inherently cannot be measured with complete precision.
Key assumptions in the analyses include maturity and repricing characteristics of assets and liabilities, prepayments on amortizing assets, non-
maturing deposit sensitivity, and loan and deposit pricing. These assumptions are inherently uncertain due to the timing, magnitude and
frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful
in quantifying risk and provide a relative gauge of Mid Penn’s interest rate risk position over time.
Management reviews interest rate risk on a quarterly basis. This analysis includes earnings scenarios whereby interest rates are increased and
decreased by 100, 200, and 300 basis points. These scenarios, detailed in Table 16, indicate that Mid Penn would experience enhanced net
interest income over a one-year time frame due to upward interest rate changes, while a reduction in interest rates would result in a decline in net
interest income over a one-year time frame; however, actual results could vary significantly from the calculations prepared by Management. At
December 31, 2014, all interest rate risk levels according to the model were within the tolerance limits of the Board approved policy, except for
the (100) and (200) scenarios. Management will continue to monitor these scenarios.
TABLE 16: EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
December 31, 2014
% Change in
Net Interest
Income
18.89%
14.52%
10.10%
-10.66%
-16.09%
-21.32%
Change in
Basis Points
300
200
100
0
(100)
(200)
(300)
Risk Limit
≥ -25%
≥ -15%
≥ -10%
≥ -10%
≥ -15%
≥ -25%
December 31, 2013
% Change in
Net Interest
Income
22.98%
15.20%
7.21%
-5.32%
-10.37%
-15.43%
Change in
Basis Points
300
200
100
0
(100)
(200)
(300)
Risk Limit
≥ -25%
≥ -15%
≥ -10%
≥ -10%
≥ -15%
≥ -25%
41
MID PENN BANCORP, INC.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following audited financial statements are set forth in this Annual Report of Form 10-K on the following pages:
Index to Financial Statements and Supplementary Data
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
43
45
46
47
48
49
50
42
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Mid Penn Bancorp, Inc.
Millersburg, Pennsylvania
We have audited the accompanying consolidated balance sheets of Mid Penn Bancorp, Inc. and subsidiaries,
(the “Corporation”) as of December 31, 2014 and 2013 and the related consolidated statements of income,
comprehensive income, changes in shareholders’ equity and cash flows for each of the years in the two-year
period ended December 31, 2014. These consolidated financial statements are the responsibility of the
Corporation’s management. Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement. The
Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Corporation’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of Mid Penn Bancorp, Inc. and subsidiaries at December 31, 2014 and 2013, and the
results of their operations and their cash flows for each of the years in the two-year period ended December
31, 2014, in conformity with accounting principles generally accepted in the United States of America.
/s/ BDO USA, LLP
Harrisburg, Pennsylvania
March 20, 2015
43
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Mid Penn Bancorp, Inc.
We have audited the accompanying consolidated statements of income, comprehensive income, changes in
shareholders’ equity, and cash flows of Mid Penn Bancorp, Inc. and subsidiaries (the “Corporation”) for the
year ended December 31, 2012. The Corporation’s management is responsible for these consolidated
financial statements. Our responsibility is to express an opinion on these consolidated financial statements
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement. The
Corporation is not required to have, nor were we engaged to perform, an audit of their internal control over
financial reporting. Our audit included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but not for expressing an opinion
on the effectiveness of the Corporation’s internal control over financial reporting. Accordingly, we express
no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the Corporation’s results of operations and cash flows for the year ended December 31, 2012 in conformity
with accounting principles generally accepted in the United States of America.
/s/ Baker Tilly Virchow Krause, LLP
Pittsburgh, Pennsylvania
March 25, 2013
44
MID PENN BANCORP, INC.
Consolidated Balance Sheets
(Dollars in thousands, except share and per share data)
ASSETS
Cash and due from banks
Interest-bearing balances with other financial institutions
Total cash and cash equivalents
Interest-bearing time deposits with other financial institutions
Available for sale investment securities
Loans and leases, net of unearned interest
Less: Allowance for loan and lease losses
Net loans and leases
Bank premises and equipment, net
Restricted investment in bank stocks
Foreclosed assets held for sale
Accrued interest receivable
Deferred income taxes
Goodwill
Core deposit and other intangibles, net
Cash surrender value of life insurance
Other assets
Total Assets
LIABILITIES & SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing demand
Interest bearing demand
Money Market
Savings
Time
Total Deposits
Short-term borrowings
Long-term debt
Accrued interest payable
Other liabilities
Total Liabilities
Shareholders' Equity:
Series B Preferred stock, par value $1.00; liquidation value $1,000; authorized
5,000 shares; 7% non-cumulative dividend; 5,000 shares issued and outstanding at
December 31, 2014 and at December 31, 2013; total redemption value $5,100,000
Common stock, par value $1.00; authorized 10,000,000 shares; 3,497,829 shares
issued and outstanding at December 31, 2014 and 3,494,397 at December 31, 2013
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total Shareholders’ Equity
Total Liabilities and Shareholders' Equity
The accompanying notes are an integral part of these consolidated financial statements.
December 31, 2014
December 31, 2013
$
$
$
$
$
$
$
8,869
1,013
9,882
5,772
141,634
571,533
(6,716)
564,817
12,225
3,181
565
3,058
2,125
1,016
187
8,575
2,620
755,657
60,613
222,712
197,418
32,394
124,785
637,922
578
52,961
349
4,717
696,527
7,407
1,216
8,623
7,513
122,803
546,462
(6,317)
540,145
12,469
2,969
965
2,704
3,235
1,016
249
8,374
2,060
713,125
48,346
201,090
196,736
29,585
132,373
608,130
23,833
23,145
393
4,708
660,209
5,000
5,000
3,498
29,902
19,217
1,513
59,130
755,657
$
3,494
29,853
15,441
(872)
52,916
713,125
45
MID PENN BANCORP, INC.
Consolidated Statements of Comprehensive Income
(Dollars in thousands, except per share data)
INTEREST INCOME
Interest & fees on loans and leases
Interest on interest-bearing balances
Interest and dividends on investment securities:
U.S. Treasury and government agencies
State and political subdivision obligations, tax-exempt
Other securities
Interest on federal funds sold and securities purchased under agreements to resell
Total Interest Income
INTEREST EXPENSE
Interest on deposits
Interest on short-term borrowings
Interest on long-term debt
Total Interest Expense
Net Interest Income
PROVISION FOR LOAN AND LEASE LOSSES
Net Interest Income After Provision for Loan and Lease Losses
NONINTEREST INCOME
Income from fiduciary activities
Service charges on deposits
Net gain on sales of investment securities
Earnings from cash surrender value of life insurance
Mortgage banking income
ATM debit card interchange income
Merchant services income
Gain on sales of SBA loans
Other income
Total Noninterest Income
NONINTEREST EXPENSE
Salaries and employee benefits
Occupancy expense, net
Equipment expense
Pennsylvania Bank Shares tax expense
FDIC Assessment
Legal and professional fees
Director fees and benefits expense
Marketing and advertising expense
Software licensing
Telephone expense
Loss (gain) on sale/write-down of foreclosed assets
Intangible amortization
Loan collection costs
Merger and acquisition expense
Other expenses
Total Noninterest Expense
INCOME BEFORE PROVISION FOR INCOME TAXES
Provision for income taxes
NET INCOME
Series A preferred stock dividends and discount accretion
Series B preferred stock dividends
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
PER COMMON SHARE DATA:
Basic Earnings Per Common Share
Diluted Earnings Per Common Share
Cash Dividends Per Common Share
The accompanying notes are an integral part of these consolidated financial statements.
46
2014
Years Ended December 31,
2013
2012
$
26,905
41
$
26,305
109
$
1,346
2,180
155
-
30,627
3,852
55
520
4,427
26,200
1,617
24,583
552
584
168
201
313
544
254
119
513
3,248
10,879
1,313
1,205
365
542
516
377
308
965
467
204
27
288
573
2,639
20,668
7,163
1,462
5,701
-
350
5,351
1.53
1.53
0.45
$
$
591
1,921
46
11
28,983
4,436
26
595
5,057
23,926
1,685
22,241
492
576
220
231
348
508
330
-
585
3,290
10,788
1,128
1,299
464
486
705
319
253
947
436
(302)
29
214
-
2,625
19,391
6,140
1,201
4,939
14
309
4,616
1.32
1.32
0.25
$
$
$
$
27,233
236
1,137
1,722
22
16
30,366
6,147
3
975
7,125
23,241
1,036
22,205
575
565
267
247
675
472
256
-
626
3,683
10,518
1,077
1,234
462
1,034
604
335
378
648
411
96
45
369
-
2,482
19,693
6,195
1,244
4,951
514
-
4,437
1.27
1.27
0.25
MID PENN BANCORP, INC.
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
2014
December 31,
2013
2012
Net income
$
5,701
$
4,939
$
4,951
Other comprehensive income (loss):
Unrealized gains (losses) arising during the period on available for sale
securities, net of income taxes of $1,280, ($1,563), and $291, respectively
2,482
(3,033)
565
Reclassification adjustment for net gain on sales of available for sale
securities included in net income, net of income taxes of ($57), ($75),
and ($91), respectively (1) (3)
(111)
(145)
(176)
Change in defined benefit plans, net of income taxes of $7, $7, and ($6),
respectively (2) (3)
14
13
Total other comprehensive income (loss)
2,385
(3,165)
(12)
377
Total comprehensive income
$
8,086
$
1,774
$
5,328
(1) Amounts are included in net gain on sales of investment securities on the Consolidated Statements of Income as a separate component within total
noninterest income
(2) Amounts are included in the computation of net periodic benefit cost and are included in salaries and employee benefits on the Consolidated
Statements of Income as a separate element within total noninterest expense
(3)
Income tax amounts are included in the provision for income taxes in the Consolidated Statements of Income
The accompanying notes are an integral part of these consolidated financial statements.
47
MID PENN BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity
Accumulated
Other
Comprehensive
(Loss) Income
$
Total
Shareholders'
Equity
$
$
53,452
4,951
377
(872)
56
(10,000)
(560)
4,830
(14)
52,220
4,939
(3,165)
(872)
55
120
(309)
(14)
(58)
52,916
5,701
2,385
(1,575)
53
(350)
59,130
1,916
-
377
-
-
-
-
-
-
2,293
-
(3,165)
-
-
-
-
-
-
(872)
-
2,385
-
-
-
1,513
$
(Dollars in thousands)
$
Balance, January 1, 2012
Net income
Total other comprehensive income, net of taxes
Common stock dividends
Employee Stock Purchase Plan (5,175 shares)
Series A Preferred stock redemption
Series A Preferred stock dividends
Series B Preferred stock issuance, net of costs
Amortization of warrant cost
Balance, December 31, 2012
Net income
Total other comprehensive loss, net of taxes
Common stock dividends
Employee Stock Purchase Plan (4,713 shares)
Series B Preferred stock issuance
Series B Preferred stock dividends
Amortization of warrant cost
Warrant repurchase
Balance, December 31, 2013
Net income
Total other comprehensive income, net of taxes
Common stock dividends
Employee Stock Purchase Plan (3,432 shares)
Series B Preferred stock dividends
Balance, December 31, 2014
$
Additional
Preferred
Common
Stock
Stock
Paid-in
Capital
Retained
Earnings
10,000
-
-
-
-
(10,000)
-
4,880
-
4,880
-
-
-
-
120
-
-
-
5,000
-
-
-
-
-
5,000
$
$
3,484
-
-
-
6
-
-
-
-
3,490
-
-
-
4
-
-
-
-
3,494
-
-
-
4
-
3,498
$
$
29,830
-
-
-
50
-
-
(50)
(14)
29,816
-
-
-
51
-
-
(14)
-
29,853
-
-
-
49
-
29,902
$
$
8,222
4,951
-
(872)
-
-
(560)
-
-
11,741
4,939
-
(872)
-
-
(309)
-
(58)
15,441
5,701
-
(1,575)
-
(350)
19,217
The accompanying notes are an integral part of these consolidated financial statements.
48
MID PENN BANCORP, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Operating Activities:
Net Income
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses
Depreciation
Amortization (accretion) of intangibles
Net amortization of security premiums
Gain on sales of investment securities
Earnings on cash surrender value of life insurance
SBA loans originated for sale
Proceeds from sales of SBA loans originated for sale
Gain on sale of SBA loans
Loss (gain) on disposal of property, plant, and equipment
Loss (gain) on sale / write-down of foreclosed assets
Deferred income tax (benefit) expense
(Increase) decrease in accrued interest receivable
(Increase) decrease in other assets
Decrease in accrued interest payable
Increase in other liabilities
Net Cash Provided By Operating Activities
Investing Activities:
Net decrease in interest-bearing time deposits with other financial institutions
Proceeds from the maturity of investment securities
Proceeds from the sale of investment securities
Purchases of investment securities
(Purchases) redemptions of restricted investment in bank stock
Net increase in loans and leases
Purchases of bank premises and equipment
Proceeds from sale of bank premises and equipment
Proceeds from sale of foreclosed assets
Net Cash (Used In) Provided By Investing Activities
Financing Activities:
Net increase in demand deposits and savings accounts
Net decrease in time deposits
Net (decrease) increase in short-term borrowings
Series A preferred stock dividends paid
Series A preferred stock redemption
Series B preferred stock issuance, net of costs
Series B preferred stock dividends paid
Common stock dividends paid
Employee Stock Purchase Plan
Warrant Repurchase
Long-term debt repayment
Proceeds from long-term debt borrowings
Net Cash Provided By (Used In) Financing Activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental Disclosures of Cash Flow Information:
Interest paid
Income taxes paid
Supplemental Noncash Disclosures:
Loan transfers to foreclosed assets held for sale
2014
Years Ended December 31,
2013
2012
$
5,701
$
4,939
$
4,951
1,617
1,235
62
1,250
(168)
(201)
(1,168)
1,287
(119)
18
204
(112)
(354)
(547)
(44)
9
8,670
1,741
13,585
13,729
(43,633)
(212)
(27,170)
(1,009)
-
1,077
(41,892)
37,380
(7,588)
(23,255)
-
-
-
(350)
(1,575)
53
-
(184)
30,000
34,481
1,259
8,623
9,882
4,471
1,520
881
$
$
$
$
1,685
1,250
39
2,557
(220)
(231)
-
-
-
(8)
(302)
192
189
500
(227)
319
10,682
16,050
37,101
15,118
(27,881)
(466)
(65,896)
(588)
-
2,957
(23,605)
13,949
(31,280)
23,833
-
-
120
(309)
(872)
55
(58)
(14,365)
15,000
6,073
(6,850)
15,473
8,623
5,284
775
2,777
$
$
$
$
1,036
1,153
(14)
1,809
(267)
(247)
-
-
-
1
96
450
174
424
(444)
278
9,400
3,914
39,453
17,895
(53,553)
617
(6,389)
(995)
42
2,579
3,563
29,645
(38,239)
-
(560)
(10,000)
4,830
-
(872)
56
-
(191)
-
(15,331)
(2,368)
17,841
15,473
7,569
1,700
2,587
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
49
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The accompanying consolidated financial statements include the accounts of Mid Penn Bancorp, Inc. and its wholly-owned subsidiary
Mid Penn Bank (the “Bank”), and the Bank’s wholly-owned subsidiary Mid Penn Insurance Services, LLC (collectively, “Mid
Penn”). All material intercompany accounts and transactions have been eliminated in consolidation.
Each of Mid Penn’s lines of business are part of the same reporting segment, community banking, whose operating results are
regularly reviewed and managed by a centralized executive management group. As a result, Mid Penn has only one reportable
segment for financial reporting purposes.
For comparative purposes, the December 31, 2013 and December 31, 2012 balances have been reclassified to conform to the 2014
presentation. Such reclassifications had no impact on net income.
(2) Nature of Business
The Bank engages in a full-service commercial banking and trust business, making available to the community a wide range of
financial services, including, but not limited to, installment loans, mortgage and home equity loans, secured and unsecured
commercial and consumer loans, lines of credit, construction financing, farm loans, community development loans, loans to non-profit
entities and local government loans and various types of time and demand deposits, including but not limited to, checking accounts,
savings accounts, clubs, money market deposit accounts, certificates of deposit and IRAs. In addition, the Bank provides a full range
of trust services through its Trust Department. Deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the
extent provided by law.
The financial services are provided to individuals, partnerships, non-profit organizations, and corporations through its 19 offices
located in eastern Cumberland, Dauphin, northwestern Lancaster, western Luzerne, southern Northumberland, and Schuylkill
Counties.
Mid Penn Insurance Services, LLC, a wholly-owned subsidiary of the Bank, provides a wide array of personal and commercial
insurance products. Income from Mid Penn Insurance Services, LLC is not material to Mid Penn.
(3) Summary of Significant Accounting Policies
The accounting and reporting policies of Mid Penn conform with accounting principles generally accepted in the United States of
America (“GAAP”) and to general practice within the financial industry. The following is a description of the more significant
accounting policies.
(a)
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan
and lease losses, and the assessment of other-than-temporary impairment of investment securities.
(b)
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, balances due
from banks, and federal funds sold, all of which mature within ninety days.
(c)
Interest-bearing Time Deposits with Other Financial Institutions
Interest-bearing time deposits with other financial institutions consist of certificates of deposits in other financial
institutions with maturities within one year.
(d)
Investment Securities
Available for sale securities include debt and equity securities. Debt and equity securities are reported at fair value, with
unrealized holding gains and losses excluded from earnings and reported, net of deferred income taxes, as a component of
accumulated other comprehensive income (loss) within shareholders’ equity. Realized gains and losses on sales of
50
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
investment securities are computed on the basis of specific identification of the cost of each security. Net gains on sales of
investment securities were $168,000 in 2014, $220,000 in 2013, and $267,000 in 2012. Mid Penn had no held to maturity
securities in 2014 and 2013.
(e)
Loans and Allowance for Loan and Lease Losses
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are
stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs.
Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are
deferred and recognized as an adjustment of the yield (interest income) of the related loans. These amounts are generally
being amortized over the contractual life of the loan. Premiums and discounts on purchased loans are amortized as
adjustments to interest income using the effective yield method.
The loan portfolio is segmented into commercial and consumer loans. Commercial loans consist of the following classes:
commercial and industrial, commercial real estate, commercial real estate-construction and lease financing. Consumer
loans consist of the following classes: residential mortgage loans, home equity loans and other consumer loans.
For all classes of loans, the accrual of interest is discontinued when the contractual payment of principal or interest has
become 90 days or more past due or management has serious doubts about further collectability of principal or interest,
even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is
either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the
current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan and lease losses.
Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as
interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a
reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest
is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for
loan payments.
Commercial and industrial
Mid Penn originates commercial and industrial loans. Most of the Bank’s commercial and industrial loans have been
extended to finance local and regional businesses and include short-term loans to finance machinery and equipment
purchases, inventory, and accounts receivable. Commercial loans also involve the extension of revolving credit for a
combination of equipment acquisitions and working capital in expanding companies.
The maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery
and equipment. Generally, the maximum term on non-mortgage lines of credit is one year. The loan-to-value ratio on such
loans and lines of credit generally may not exceed 80% of the value of the collateral securing the loan. The Bank’s
commercial business lending policy includes credit file documentation and analysis of the borrower’s character, capacity to
repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of conditions affecting the
borrower. Analysis of the borrower’s past, present, and future cash flows is also an important aspect of the Bank’s current
credit analysis. Nonetheless, such loans are believed to carry higher credit risk than other extensions of credit.
Commercial and industrial loans typically are made on the basis of the borrower’s ability to make repayment from the cash
flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may
be substantially dependent on the success of the business itself, which, in turn, is likely to be dependent upon the general
economic environment. Mid Penn’s commercial and industrial loans are usually, but not always, secured by business assets
and personal guarantees. However, the collateral securing the loans may depreciate over time, may be difficult to appraise,
and may fluctuate in value based on the success of the business.
Commercial real estate and commercial real estate - construction
Commercial real estate and commercial real estate construction loans generally present a higher level of risk than loans
secured by one to four family residences. This greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties, and
the increased difficulty of evaluating and monitoring these types of loans. In addition, the repayment of loans secured by
commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash
flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.
51
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Lease financing
Mid Penn originates leases for select commercial and state and municipal government lessees. The nature of the leased
asset is often subject to rapid depreciation in salvage value over a relatively short time frame or may be of an industry
specific nature, making appraisal or liquidation of the asset difficult. These factors have led the Bank to severely curtail the
origination of new leases to state or municipal government agencies where default risk is extremely limited and to only the
most credit-worthy commercial customers. These commercial customers are primarily leasing fleet vehicles for use in their
primary line of business, mitigating some of the asset value concerns within the portfolio. Leasing has been a declining
percentage of the Mid Penn’s portfolio since 2006, representing 0.20% of the portfolio at December 31, 2014.
Residential mortgage
Mid Penn offers a wide array of residential mortgage loans for both permanent structures and those under construction. The
Bank’s residential mortgage originations are secured primarily by properties located in its primary market and surrounding
areas. Residential mortgage loans have terms up to a maximum of 30 years and with loan to value ratios up to 100% of the
lesser of the appraised value of the security property or the contract price. Private mortgage insurance is generally required
in an amount sufficient to reduce the Bank’s exposure to at or below the 85% loan to value level. Residential mortgage
loans generally do not include prepayment penalties.
In underwriting residential mortgage loans, the Bank evaluates both the borrower’s ability to make monthly payments and
the value of the property securing the loan. Most properties securing real estate loans made by Mid Penn are appraised by
independent fee appraisers. The Bank generally requires borrowers to obtain an attorney’s title opinion or title insurance
and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan.
Real estate loans originated by the Bank generally contain a “due on sale” clause allowing the Bank to declare the unpaid
principal balance due and payable upon the sale of the security property.
The Bank underwrites residential mortgage loans to the standards established by the secondary mortgage market, i.e.,
Fannie Mae, Ginnie Mae, Freddie Mac, or Pennsylvania Housing Finance Agency standards, with the intention of selling
the majority of residential mortgages originated into the secondary market. In the event that the facts and circumstances
surrounding a residential mortgage application do not meet all underwriting conditions of the secondary mortgage market,
the Bank will evaluate the failed conditions and evaluate the potential risk of holding the residential mortgage in the Bank’s
portfolio rather than rejecting the loan request. In the event that the loan is held in the Bank’s portfolio, the interest rate on
the residential mortgage would be increased to compensate for the added portfolio risk.
Consumer, including home equity
Mid Penn offers a variety of secured consumer loans, including home equity, automobile, and deposit secured loans. In
addition, the Bank offers other secured and unsecured consumer loans. Most consumer loans are originated in Mid Penn’s
primary market and surrounding areas.
The largest component of Mid Penn’s consumer loan portfolio consists of fixed rate home equity loans and variable rate
home equity lines of credit. Substantially all home equity loans and lines of credit are secured by second mortgages on
principal residences. The Bank will lend amounts, which, together with all prior leins, typically may be up to 85% of the
appraised value of the property securing the loan. Home equity term loans may have maximum terms up to 20 years while
home equity lines of credit generally have maximum terms of five years.
Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the
borrower. The underwriting standards employed by the Bank for consumer loans include an application, a determination of
the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on
the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also
includes a comparison of the value of the collateral, if any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans
which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such
cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance. In addition, consumer loan collections are dependent on the borrower’s continuing financial
stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various
federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on such
loans.
52
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a higher
security position in the case of foreclosure liquidation of collateral to extinguish the debt. Generally, foreclosure actions
could become more prevalent if the real estate market continues to be weak and property values deteriorate.
Allowance for Loan and Lease Losses
The allowance for credit losses consists of the allowance for loan and lease losses and the reserve for unfunded lending
commitments. The allowance for loan and lease losses represents management’s estimate of losses inherent in the loan
portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending
commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in
other liabilities on the consolidated balance sheet and was $60,000 at December 31, 2014 and $90,000 at December 31,
2013. The allowance for loan and lease losses is increased by the provision for loan and lease losses, and decreased by
charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan and lease
losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans are
charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly
unlikely. Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis,
earlier in the event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are
immediately charged off, no portion of the allowance for loan and lease losses is restricted to any individual loan or groups
of loans, and the entire allowance is available to absorb any and all loan losses.
The allowance for credit losses is maintained at a level considered adequate to provide for losses that can be reasonably
anticipated. Management performs a monthly evaluation of the adequacy of the allowance. The allowance is based on Mid
Penn’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the
borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current
economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates
that may be susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are
classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash
flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan. The
general component covers pools of loans by loan class including commercial loans not considered impaired, as well as
smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of
loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for
qualitative factors. These qualitative risk factors include changes in economic conditions, fluctuations in loan quality
measures, changes in the experience of the lending staff and loan review systems, growth or changes in the mix of loans
originated, and shifting industry or portfolio concentrations.
Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment
using relevant information available at the time of the evaluation. Adjustments to the factors are supported through
documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
Mid Penn considers a commercial loan (consisting of commercial and industrial, commercial real estate, commercial real
estate-construction, and lease financing loan classes) to be impaired when it becomes 90 days or more past due and not in
the process of collection. This methodology assumes the borrower cannot or will not continue to make additional
payments. At that time the loan would be considered collateral dependent as the discounted cash flow (“DCF”) method
indicates no operating income is available for evaluating the collateral position; therefore, all impaired loans are deemed to
be collateral dependent.
In addition, Mid Penn’s rating system assumes any loans classified as sub-standard non-accrual to be impaired, and all of
these loans are considered collateral dependent; therefore, all of Mid Penn’s impaired loans, whether reporting a specific
allocation or not, are considered collateral dependent.
Mid Penn evaluates loans for charge-off on a monthly basis. Policies that govern the recommendation for charge-off are
unique to the type of loan being considered. Commercial loans rated as nonaccrual or lower will first have a collateral
evaluation completed in accordance with the guidance on impaired loans. Once the collateral evaluation has been
completed, a specific allocation of allowance is made based upon the results of the evaluation. In the event the loan is
unsecured, the loan would have been charged-off at the recognition of impairment. If the loan is secured, it will undergo a
90 day waiting period to ensure the collateral shortfall identified in the evaluation is accurate and then charged down by the
specific allocation. Once the charge down is taken, the remaining balance remains a nonperforming loan with the original
terms and interest rate intact (not restructured). Commercial loans secured by real estate rated as impaired will also have an
initial collateral evaluation completed in accordance with the guidance on impaired loans. An updated real estate valuation
is ordered and the collateral evaluation is modified to reflect any variations in value. A specific allocation of allowance is
53
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
made for any anticipated collateral shortfall and a 90 day waiting period begins to ensure the accuracy of the collateral
shortfall. The loan is then charged down by the specific allocation. Once the charge down is taken, the remaining balance
remains a nonperforming loan with the original terms and interest rate intact (not restructured). The process of charge-off
for residential mortgage loans begins upon a loan becoming delinquent for 90 days and not in the process of collection. The
existing appraisal is reviewed and a lien search is obtained to determine lien position and any instances of intervening liens.
A new appraisal of the property will be ordered if deemed necessary by management and a collateral evaluation is
completed. The loan will then be charged down to the value indicated in the evaluation. Consumer loans (including home
equity loans and other consumer loans) are recommended for charge-off after reaching delinquency of 90 days and the loan
is not in the process of collection. The entire balance of the consumer loan is recommended for charge-off at this point.
As noted above, Mid Penn assesses a specific allocation for commercial loans prior to charging down or charging off the
loan. Once the charge down is taken, the remaining balance remains a nonperforming loan with the original terms and
interest rate intact (not restructured). In addition, Mid Penn takes a preemptive step when any commercial loan becomes
classified under its internal classification system. A preliminary collateral evaluation in accordance with the guidance on
impaired loans is prepared using the existing collateral information in the loan file. This process allows Mid Penn to review
both the credit and documentation files to determine the status of the information needed to make a collateral evaluation.
This collateral evaluation is preliminary but allows Mid Penn to determine if any potential collateral shortfalls exist.
It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate within 30
days of the credit being classified as sub-standard non-accrual. Prior to receipt of the updated real estate valuation Mid
Penn will use any existing real estate valuation to determine any potential allowance issues; however no allowance
recommendation will be made until which time Mid Penn is in receipt of the updated valuation. The credit department
employs an electronic tracking system to monitor the receipt of and need for updated appraisals. To date, there have been
no significant time lapses noted with the above processes.
In some instances Mid Penn is not holding real estate as collateral and is relying on business assets (personal property) for
repayment. In these circumstances a collateral inspection is performed by Mid Penn personnel to determine an estimated
value. The value is based on net book value, as provided by the financial statements, and discounted accordingly based on
determinations made by management. Occasionally, Mid Penn will employ an outside service to provide a fair estimate of
value based on auction sales or private sales. Management reviews the estimates of these third parties and discounts them
accordingly based on management’s judgment, if deemed necessary.
For impaired loans with no valuation allowance required, Mid Penn’s practice of obtaining independent third party market
valuations on the subject property within 30 days of being placed on non-accrual status sometimes indicates that the loan to
value ratio is sufficient to obviate the need for a specific allocation in spite of significant deterioration in real estate values
in Mid Penn’s primary market area. These circumstances are determined on a case by case analysis of the impaired loans.
Mid Penn actively monitors the values of collateral on impaired loans. This monitoring may require the modification of
collateral values over time or changing circumstances by some factor, either positive or negative, from the original values.
All collateral values will be assessed by management at least every 18 months for possible revaluation by an independent
third party.
An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.
The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used
in the methodologies for estimating specific and general losses in the portfolio.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, Mid Penn
does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for
impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.
Loans whose terms are modified are classified as troubled debt restructurings if the borrowers have been granted
concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a
troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated
maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments,
under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt
restructurings are designated as impaired.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The
borrower’s overall financial condition, repayment sources, guarantors, and value of collateral, if appropriate, are evaluated
annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments. Credit quality risk
ratings include regulatory classifications of special mention, substandard, doubtful, and loss. Loans criticized as special
mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses
54
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current
sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all
the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on
the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and
are charged to the allowance for loan losses. Any loans not classified as noted above are rated pass.
In addition, Federal and State regulatory agencies, as an integral part of their examination process, periodically review the
Bank’s allowance for loan and lease losses and may require the Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination, which may not be currently available to
management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level
of the allowance for loan losses is adequate.
(f)
Bank Premises and Equipment
Land is carried at cost. Buildings, furniture, fixtures, equipment, land improvements, and leasehold improvements are
stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated
useful lives of the assets. Building assets are depreciated using an estimated useful life of five to fifty years. Furniture,
fixtures, and equipment are depreciated using an estimated useful life of three to ten years. Land improvements are
depreciated over an estimated useful life of ten to twenty years. Leasehold improvements are depreciated using an
estimated useful life that is the lesser of the remaining life of the lease or ten to thirty years. Maintenance and normal
repairs are charged to expense when incurred, while major additions and improvements are capitalized. Gains and losses on
disposals are reflected in current operations.
(g)
Restricted Investment in Federal Home Loan Bank Stock
The Bank owns restricted stock investments in the FHLB. Federal law requires a member institution of the FHLB to hold
stock according to a predetermined formula. The stock is carried at cost. Total dividends received in 2014 and 2013 totaled
$123,000 and $20,000, respectively. During 2014 and 2013, the FHLB performed limited excess capital stock repurchases
each calendar quarter. Any future capital stock repurchases will be made on a quarterly basis if conditions warrant such
repurchases.
Management evaluates the restricted stock for impairment on an annual basis. Management’s determination of whether
these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by
recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their
cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital
stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make
payments required by law or regulation and the level of such payments in relation to the operating performance of the
FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the
FHLB.
Management believes no impairment charge is necessary related to the FHLB restricted stock as of December 31, 2014 and
2013.
(h)
Foreclosed Assets Held for Sale
Foreclosed assets held for sale consist primarily of real estate acquired through, or in lieu of, foreclosure in settlement of
debt and are recorded at fair value less cost to sell at the date of transfer, establishing a new cost basis. Any valuation
adjustments required at the date of transfer are charged to the allowance for loan losses. Subsequent to acquisition,
foreclosed assets are carried at fair value less costs of disposal, based upon periodic evaluations that consider changes in
market conditions and development and disposal costs. Operating results from assets acquired in satisfaction of debt,
including rental income less operating costs and gains or losses on the sale of, or the periodic evaluation of foreclosed
assets, are recorded in noninterest expense.
(i)
Mortgage Servicing Rights
Mortgage servicing rights are recognized as assets upon the sale of a mortgage loan. A portion of the cost of the loan is
allocated to the servicing right based upon relative fair value. The fair value of servicing rights is based on the present
value of estimated future cash flows of mortgages sold stratified by rate and maturity date. Assumptions that are
incorporated in the valuation of servicing rights include assumptions about prepayment speeds on mortgages and the cost to
service loans. Servicing rights are reported in other intangibles and are amortized over the estimated period of future
servicing income to be received on the underlying mortgage loans. The carrying amount of mortgage servicing rights was
55
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
$187,000 and $223,000 at December 31, 2014 and 2013, respectively. Amortization expense is netted against loan
servicing fee income and is reflected in the Consolidated Statements of Income in mortgage banking income. Servicing
rights are evaluated for impairment based upon estimated fair value as compared to unamortized book value.
(j)
Investment in Limited Partnership
Mid Penn is a limited partner in a partnership that provides low-income housing in Enola, Pennsylvania. The carrying
value of Mid Penn’s investment in the limited partnership was $408,000 at December 31, 2014 and $452,000 at December
31, 2013, net of amortization, using the straight-line method. Mid Penn’s maximum exposure to loss is limited to the
carrying value of its investment. The partnership received $46,000 in low-income housing tax credits during 2014, 2013
and 2012.
(k)
Income Taxes
Mid Penn accounts for income taxes in accordance with income tax accounting guidance ASC Topic 740, Income Taxes.
Current income tax accounting guidance results in two components of income tax expense: current and deferred. Current
income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax
law to the taxable income or excess of deductions over revenues. Mid Penn determines deferred income taxes using the
liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the
differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are
recognized in the period in which they occur.
Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets
are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some
portion or all of a deferred tax asset will not be realized.
Mid Penn accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax
position will be realized or sustained upon examination. The term more-likely-than-not means a likelihood of more than
50%; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any.
A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the
largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing
authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the
more-likely-than-not recognition threshold considers the facts, circumstances, and information available at the reporting
date and is subject to management's judgment.
Mid Penn recognizes interest and penalties on income taxes, if any, as a component of income tax expense.
(l)
Core Deposit Intangible
Core deposit intangible is a measure of the value of consumer demand and savings deposits acquired in business
combinations accounted for as purchases. The core deposit intangible is being amortized over an 8-year life on a straight-
line basis. The core deposit intangible is subject to impairment testing whenever events or changes in circumstances
indicate its carrying amount may not reflect benefit.
(m)
Goodwill
Goodwill is the excess of the purchase price over the fair value of assets acquired in connection with 2004 and 2006
business acquisitions accounted for as acquisitions. If certain events occur, which indicate goodwill might be impaired
between annual tests, goodwill must be tested when such events occur. In making this assessment, Mid Penn considers a
number of factors including operating results, business plans, economic projections, anticipated future cash flows, current
market data, stock price, etc. There are inherent uncertainties related to these factors and Mid Penn’s judgment in applying
them to the analysis of goodwill impairment. Changes in economic and operating conditions could result in goodwill
impairment in future periods. Mid Penn did not identify any impairment on its outstanding goodwill form its most recent
testing, which was performed as of December 31, 2014 using a qualitative analysis. In addition, Mid Penn did not identify
any impairment in 2013 or 2012 using a quantitative analysis in accordance with ASC 350.
(n)
Bank Owned Life Insurance
Mid Penn is the owner and beneficiary of bank owned life insurance (“BOLI”) policies on current and former directors. The
earnings from the BOLI policies are an asset that can be liquidated, if necessary, with associated tax costs. However, Mid
56
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Penn intends to hold these policies and, accordingly, Mid Penn has not provided deferred income taxes on the earnings from
the increase in cash surrender value.
GAAP requires Split-Dollar Life Insurance Arrangements to have a liability recognized related to the postretirement benefits
covered by an endorsement split-dollar life insurance arrangement, and a liability for the future death benefit.
(o)
Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred.
(p)
Postretirement Benefit Plans
Mid Penn follows the guidance in ASC Topic 715, Compensation-Retirement Benefits related to postretirement benefit
plans. This guidance requires additional disclosures about defined benefit pension plans and other postretirement defined
benefit plans.
(q)
Other Benefit Plan
A funded contributory defined-contribution plan is maintained for substantially all employees. The cost of the Mid Penn
defined contribution plan is charged to current operating expenses and is funded annually.
(r)
Trust Assets and Income
Assets held by the Bank in a fiduciary or agency capacity for customers of the Trust Department are not included in the
consolidated financial statements since such items are not assets of the Bank. Trust income is recognized on the cash basis,
which is not materially different than if it were reported on the accrual basis.
(s)
Earnings Per Share
Earnings per share are computed by dividing net income available to common shareholders by the weighted average number
of common shares outstanding during each of the years presented. The following data show the amounts used in computing
basic and diluted earnings per share. As shown in the table that follows, diluted earnings per share is computed using
weighted average common shares outstanding, plus weighted average common shares available from the exercise of all
dilutive stock warrants issued to the U.S. Treasury under the provisions of the Capital Purchase Program, based on the
average share price of Mid Penn’s common stock during the period.
The computations of basic earnings per common share follow:
(Dollars in thousands, except per share data)
Net Income
Less: Dividends on Series A preferred stock
Accretion of Series A preferred stock discount
Dividends on Series B preferred stock
Net income available to common shareholders
Weighted average common shares outstanding
Basic earnings per common share
2014
2013
2012
5,701
-
-
350
5,351
3,495,705
1.53
$
$
$
4,939
-
14
309
4,616
3,491,653
1.32
$
$
$
4,951
500
14
-
4,437
3,486,543
1.27
$
$
$
57
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
The computations of diluted earnings per common share follow:
(Dollars in thousands, except per share data)
Net income available to common stockholders
Weighted average number of common shares outstanding
Dilutive effect of potential common stock arising from stock warrants:
Exercise of outstanding stock warrants issued to U.S. Treasury
under the Capital Repurchase Program
Adjusted weighted-average common shares outstanding
Diluted earnings per common share
$
$
2014
2013
2012
5,351
3,495,705
$
4,616
3,491,653
$
4,437
3,486,543
-
3,495,705
1.53
$
-
3,491,653
1.32
$
-
3,486,543
1.27
Mid Penn repurchased all warrants in 2013; therefore, there were none remaining as of December 31, 2014 and December
31, 2013. Mid Penn had 73,099 warrants that were anti-dilutive because the fair value of the common stock was below the
$20.52 exercise price of these warrants as of December 31, 2012.
(4) Accumulated Other Comprehensive (Loss) Income
The components of accumulated other comprehensive (loss) income, net of taxes, are as follows:
(Dollars in thousands)
Unrealized Gain
(Loss) on Securities
Defined Benefit Plan
Liability
Accumulated Other
Comprehensive
Income (Loss)
Balance - December 31, 2013
Balance - December 31, 2014
$
$
(745)
1,626
$
$
(127)
(113)
$
$
(872)
1,513
(5) Restrictions on Cash and Due from Bank Accounts
The Bank is required to maintain reserve balances with the Federal Reserve Bank of Philadelphia. There was no required reserve
balance at December 31, 2014 and December 31, 2013 because the Bank had sufficient vault cash available.
(6) Investment Securities
Securities to be held for indefinite periods, but not intended to be held to maturity, are classified as available for sale and carried at fair
value. Securities held for indefinite periods include securities that management intends to use as part of its asset and liability
management strategy and that may be sold in response to liquidity needs, changes in interest rates, resultant prepayment risk, and
other factors related to interest rate and resultant prepayment risk changes.
Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the
specific identification method. Unrealized gains and losses on investment securities available for sale are based on the difference
between book value and fair value of each security. These gains and losses are credited or charged to other comprehensive income
(loss), whereas realized gains and losses flow through Mid Penn’s consolidated statements of income.
ASC Topic 320, Investments – Debt and Equity Securities, clarifies the interaction of the factors that should be considered when
determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it
has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated
recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment.
In instances when a determination is made that other-than-temporary impairment exists but the investor does not intend to sell the debt
security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, this guidance
changes the presentation and amount of the other-than-temporary impairment recognized in the income statement. The other-than-
temporary impairment is separated into (a) the amount of the total other-than-temporary impairment related to a decrease in cash flows
expected to be collected from the debt security (the credit loss) and (b) the amount of the total other-than-temporary impairment
58
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in
earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive
income (loss).
In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intent and ability
to hold the securities until recovery of unrealized losses.
At December 31, 2014 and 2013, amortized cost, fair value, and unrealized gains and losses on investment securities are as follows:
(Dollars in thousands)
December 31, 2014
Available for sale securities:
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Equity securities
(Dollars in thousands)
December 31, 2013
Available for sale securities:
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Equity securities
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair
Value
$
$
$
$
26,343
33,763
77,482
1,584
139,172
Amortized
Cost
12,134
39,481
70,770
1,550
123,935
$
$
$
$
752
190
2,007
60
3,009
Unrealized
Gains
700
349
744
20
1,813
$
$
$
$
29
177
318
23
547
Unrealized
Losses
-
438
2,476
31
2,945
$
$
$
$
27,066
33,776
79,171
1,621
141,634
Fair
Value
12,834
39,392
69,038
1,539
122,803
Estimated fair values of debt securities are based on quoted market prices, where applicable. If quoted market prices are not available,
fair values are based on quoted market prices of comparable instruments, adjusted for differences between the quoted instruments and
the instruments being valued.
Investment securities having a fair value of $134,740,000 at December 31, 2014, and $114,600,000 at December 31, 2013, were
pledged to secure public deposits and other borrowings.
59
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
The following table presents gross unrealized losses and fair value of investments aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss position at December 31, 2014 and 2013.
(Dollars in thousands)
December 31, 2014
Available for sale securities:
U.S. Treasury and U.S. government
agencies
Mortgage-backed U.S. government
agencies
State and political subdivision obligations
Equity securities
Total temporarily impaired
available for sale securities
(Dollars in thousands)
December 31, 2013
Available for sale securities:
Mortgage-backed U.S. government
agencies
State and political subdivision obligations
Equity securities
Total temporarily impaired
available for sale securities
Less Than 12 Months
Number of
Securities
Fair
Value
Unrealized
Losses
12 Months or More
Fair
Value
Unrealized
Losses
Fair
Value
Total
Unrealized
Losses
5
20
37
2
$
6,059 $
9,511
4,444
-
29 $
62
33
-
- $
- $
6,059 $
4,416
13,947
583
115
285
23
13,927
18,391
583
29
177
318
23
64
$
20,014 $
124 $
18,946 $
423 $
38,960 $
547
Less Than 12 Months
Number of
Securities
Fair
Value
Unrealized
Losses
12 Months or More
Fair
Value
Unrealized
Losses
Fair
Value
Total
Unrealized
Losses
29
90
1
$
9,799 $
182 $
39,611
-
2,150
-
9,866 $
4,288
550
256 $
326
31
19,665 $
43,899
550
438
2,476
31
120
$
49,410 $
2,332 $
14,704 $
613 $
64,114 $
2,945
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis; and more frequently when
economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair
value has been less than cost, and the financial condition and near term prospects of the issuer. In addition, for debt securities, Mid
Penn considers (a) whether management has the intent to sell the security, (b) it is more likely than not that management will be
required to sell the security prior to its anticipated recovery, and (c) whether management expects to recover the entire amortized cost
basis. For equity securities, management considers the intent and ability to hold securities until recovery of unrealized losses.
The majority of the investment portfolio is comprised of mortgage-backed U.S. government agencies and state and political
subdivision obligations. For the investment securities with an unrealized loss, Mid Penn has concluded, based on its analysis, that the
unrealized losses in the investments are primarily caused by the movement of interest rates, and the contractual terms of these
investments do not permit the issuer to settle the securities at a price less than the par value of the investment.
At December 31, 2014, Mid Penn had 62 debt securities and 2 equity securities with unrealized losses totaling $547,000 that
depreciated 1.40% from their amortized cost basis. At December 31, 2014, the unrealized loss on securities in an unrealized loss
position for twelve months or longer totaled $423,000 of which the majority was attributed to mortgage-backed U.S. government
agencies and state and political subdivision obligations with $115,000 and $285,000 in unrealized losses, respectively. At December
31, 2013, 119 debt securities and 1 equity security with unrealized losses totaling $2,945,000, depreciated 4.59% from the amortized
cost basis. At December 31, 2013, the unrealized loss on securities in an unrealized loss position for twelve months or longer totaled
$613,000 of which the majority was attributed to mortgage-backed U.S. government agencies and state and political subdivision
obligations with $256,000 and $326,000 in unrealized losses, respectively.
Because Mid Penn does not intend to sell these investments and it is not likely it will be required to sell these investments before a
recovery of fair value, which may be maturity, Mid Penn does not consider the securities with unrealized losses to be other-than-
temporarily impaired as losses relate to changes in interest rates and not erosion of credit quality.
60
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
The table below is the maturity distribution of investment securities at amortized cost and fair value at December 31, 2014.
(Dollars in thousands)
Due in 1 year or less
Due after 1 year but within 5 years
Due after 5 years but within 10 years
Due after 10 years
Mortgage-backed securities
Equity securities
December 31, 2014
Amortized
Cost
Fair
Value
$
$
2,164
15,386
46,544
39,731
103,825
33,763
1,584
139,172
$
$
2,201
15,891
47,496
40,649
106,237
33,776
1,621
141,634
(7) Loans and Allowance for Loan and Lease Losses
The classes of the loan portfolio, summarized by the aggregate pass rating and the classified ratings of special mention, substandard,
and doubtful within Mid Penn’s internal risk rating system as of December 31, 2014 and 2013 are as follows:
Pass
Special Mention
Substandard
Doubtful
Total
(Dollars in thousands)
December 31, 2014
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Lease financing
Residential mortgage
Home equity
Consumer
$
$
117,166
280,817
55,834
1,121
64,900
28,167
3,021
551,026
$
$
654
4,859
242
-
252
138
-
6,145
$
$
1,190
11,681
-
-
1,290
201
-
14,362
$
$
(Dollars in thousands)
December 31, 2013
Pass
Special Mention
Substandard
Doubtful
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Lease financing
Residential mortgage
Home equity
Consumer
$
$
103,330
277,232
45,265
1,356
69,447
26,056
4,690
527,376
$
$
938
2,771
382
-
27
96
-
4,214
$
$
1,576
12,771
-
-
356
169
-
14,872
$
$
61
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
$
119,010
297,357
56,076
1,121
66,442
28,506
3,021
571,533
Total
105,844
292,774
45,647
1,356
69,830
26,321
4,690
546,462
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Impaired loans by loan portfolio class as of December 31, 2014 and 2013 are summarized as follows:
(Dollars in thousands)
December 31, 2014
December 31, 2013
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
With no related allowance recorded:
Commercial and industrial
Commercial real estate
Residential mortgage
Home equity
$
395 $
430 $
1,971
1,146
29
4,481
1,286
88
With an allowance recorded:
Commercial and industrial
Commercial real estate
Residential mortgage
Home equity
Total:
Commercial and industrial
Commercial real estate
Residential mortgage
Home equity
$
223 $
231 $
6,954
-
211
7,255
-
213
$
618 $
661 $
8,925
1,146
240
11,736
1,286
301
-
-
-
-
137
1,382
-
115
137
1,382
-
115
$
185 $
671 $
2,596
266
27
5,898
282
40
$
115 $
243 $
7,649
25
49
7,972
25
49
$
300 $
914 $
10,245
291
76
13,870
307
89
-
-
-
-
42
1,860
25
6
42
1,860
25
6
Average recorded investment of impaired loans and related interest income recognized for the years ended December 31, 2014, 2013,
and 2012 are summarized as follows:
(Dollars in thousands)
December 31, 2014
December 31, 2013
December 31, 2012
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
Average
Recorded
Investment
Interest
Income
Recognized
With no related allowance recorded:
Commercial and industrial
Commercial real estate
Residential mortgage
Home equity
$
72 $
1,966
541
29
With an allowance recorded:
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Residential mortgage
Home equity
Total:
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Residential mortgage
Home equity
$
93 $
6,823
-
-
76
$
165 $
8,789
-
541
105
$
188 $
2,506
299
31
$
51 $
4,349
-
13
54
$
239 $
6,855
-
312
85
-
187
-
-
-
-
-
-
-
-
187
-
-
-
$
313 $
5,834
465
44
$
239 $
2,175
16
-
66
$
552 $
8,009
16
465
110
1
21
-
4
-
-
-
-
-
1
21
-
-
4
-
346
-
-
-
-
-
-
-
-
346
-
-
-
62
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Non-accrual loans by loan portfolio class as of December 31, 2014 and 2013 are summarized as follows:
(Dollars in thousands)
Commercial and industrial
Commercial real estate
Residential mortgage
Home equity
2014
2013
$
$
267
7,249
1,152
239
8,907
$
$
300
9,648
803
126
10,877
If nonaccrual loans and leases had been current in accordance with their original terms and had been outstanding throughout the period
or since origination, if held for part of the period, Mid Penn would have recorded interest income on these loans of $798,000,
$861,000, and $774,000, in the years ended December 31, 2014, 2013, and 2012, respectively. Mid Penn has no commitments to lend
additional funds to borrowers with impaired or nonaccrual loans
The performance and credit quality of the loan portfolio is also monitored by the analyzing the age of the loans receivable as
determined by the length of time a recorded payment is past due. The classes of the loan portfolio summarized by the past due status
as of December 31, 2014 and 2013 are summarized as follows:
(Dollars in thousands)
December 31, 2014
30-59 Days
Past Due
60-89 Days
Past Due
Greater
than 90
Days
Total Past
Due
Current
Total Loans
Loans
Receivable >
90 Days and
Accruing
Commercial and industrial
Commercial real estate
$
$
172
403
290
197
$
87
6,585
$
549
7,185
$
118,461
290,172
$
119,010
297,357
$
-
-
328
93
6
1,002
$
$
-
-
82
63
-
632
-
-
1,117
157
-
7,946
$
$
-
-
1,527
313
6
9,580
56,076
1,121
64,915
28,193
3,015
561,953
$
$
56,076
1,121
66,442
28,506
3,021
571,533
$
-
-
-
-
-
-
-
-
Commercial real estate -
construction
Lease financing
Residential mortgage
Home equity
Consumer
Total
(Dollars in thousands)
December 31, 2013
30-59 Days
Past Due
60-89 Days
Past Due
Greater
than 90
Days
Total Past
Due
Current
Total Loans
Loans
Receivable >
90 Days and
Accruing
Commercial and industrial
Commercial real estate
$
291
1,472
$
38
570
$
300
8,241
$
629
10,283
$
105,215
282,491
$
105,844
292,774
$
Commercial real estate -
construction
Lease financing
Residential mortgage
Home equity
Consumer
Total
-
-
952
9
24
2,748
$
$
-
-
-
50
12
670
-
-
785
99
-
9,425
$
$
-
-
1,737
158
36
12,843
45,647
1,356
68,093
26,163
4,654
533,619
$
$
45,647
1,356
69,830
26,321
4,690
546,462
$
-
-
-
-
-
-
-
-
63
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
The allowance for loan and lease losses and recorded investment in financing receivables for the years ended December 31, 2014,
2013, and 2012, and as of December 31, 2014, 2013, and 2012 are as follows:
(Dollars in thousands)
December 31, 2014
Commercial
and industrial
Commercial
real estate
Commercial
real estate -
construction
Lease
financing
Residential
mortgage
Home equity Consumer Unallocated
Total
Allowance for loan and
lease losses:
Beginning balance
Charge-offs
Recoveries
Provisions
Ending balance
$
$
Ending balance:
individually evaluated for
impairment
$
1,187 $
(62)
13
255
1,393 $
4,006 $
(1,057)
13
963
3,925 $
9 $
-
-
24
33 $
- $
-
-
2
2 $
581 $
(133)
20
(18)
450 $
441 $
(43)
1
254
653 $
72 $
(33)
63
(67)
35 $
21 $
-
-
204
225 $
6,317
(1,328)
110
1,617
6,716
137 $
1,382 $
- $
- $
- $
115 $
- $
- $
1,634
Ending balance:
collectively evaluated for
impairment
Loans receivables:
Ending balance
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated for
impairment
(Dollars in thousands)
December 31, 2013
$
1,256 $
2,543 $
33 $
2 $
450 $
538 $
35 $
225 $
5,082
$
119,010 $
297,357 $
56,076 $
1,121 $
66,442 $
28,506 $
3,021 $
- $
571,533
$
618 $
8,925 $
- $
- $
1,146
240 $
- $
- $
10,929
$
118,392 $
288,432 $
56,076 $
1,121 $
65,296 $
28,266 $
3,021 $
- $
560,604
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
Charge-offs
Recoveries
Provisions
Ending balance
$
$
Ending balance:
individually evaluated for
impairment
$
1,298 $
(183)
193
(121)
1,187 $
3,112 $
(919)
279
1,534
4,006 $
64 $
(17)
7
(45)
9 $
1 $
-
2
(3)
- $
581 $
(167)
23
144
581 $
343 $
(91)
8
181
441 $
101 $
(96)
84
(17)
72 $
9 $
-
-
12
21 $
5,509
(1,473)
596
1,685
6,317
42 $
1,860 $
- $
- $
25 $
6 $
- $
- $
1,933
Ending balance:
collectively evaluated for
impairment
Loans receivables:
Ending balance
Ending balance:
individually evaluated
for impairment
Ending balance:
collectively evaluated for
impairment
$
1,145 $
2,146 $
9 $
- $
556 $
435 $
72 $
21 $
4,384
$
105,844 $
292,774 $
45,647 $
1,356 $
69,830 $
26,321 $
4,690 $
- $
546,462
$
300 $
10,245 $
- $
- $
291
76 $
- $
- $
10,912
$
105,544 $
282,529 $
45,647 $
1,356 $
69,539 $
26,245 $
4,690 $
- $
535,550
64
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
December 31, 2012
Commercial
and industrial
Commercial
real estate
Commercial
real estate -
construction
Lease
financing
Residential
mortgage
Home equity Consumer Unallocated
Total
Allowance for loan and
lease losses:
Beginning Balance
Charge-offs
Recoveries
Provisions
Ending balance
$
$
Ending balance:
individually evaluated for
impairment
$
Ending balance:
collectively evaluated for
impairment
$
2,274 $
(834)
31
(173)
1,298 $
3,544 $
(493)
13
48
3,112 $
23 $
(6)
2
45
64 $
2 $
-
-
(1)
1 $
362 $
(195)
-
414
581 $
337 $
(268)
10
264
343 $
87 $
(592)
33
573
101 $
143 $
-
-
(134)
9 $
6,772
(2,388)
89
1,036
5,509
111 $
1,200 $
54 $
- $
- $
18 $
- $
- $
1,383
1,187 $
1,912 $
10 $
1 $
581 $
325 $
101 $
9 $
4,126
Loans receivables:
Ending balance
Ending balance:
individually evaluated
for impairment
$
77,883 $
284,867 $
33,231 $
1,305 $
57,455 $
22,920 $
6,559 $
- $
484,220
$
415 $
9,084 $
54 $
- $
448
191 $
- $
- $
10,192
Ending balance:
collectively evaluated for
impairment
$
77,468 $
275,783 $
33,177 $
1,305 $
57,007 $
22,729 $
6,559 $
- $
474,028
The recorded investments in troubled debt restructured loans at December 31, 2014 and 2013 are as follows:
(Dollars in thousands)
December 31, 2014
Commercial and industrial
Commercial real estate
Residential mortgage
Home equity
(Dollars in thousands)
December 31, 2013
Commercial and industrial
Commercial real estate
Residential mortgage
Pre-Modification
Post-Modification
Outstanding Recorded
Investment
Outstanding Recorded
Investment
Recorded Investment
$
$
$
$
40
11,189
903
50
12,182
Pre-Modification
Outstanding Recorded
Investment
40
10,581
423
11,044
$
$
$
$
35
9,443
897
7
10,382
Post-Modification
Outstanding Recorded
Investment
417
8,686
35
9,138
$
$
$
$
23
8,005
713
5
8,746
Recorded Investment
266
7,470
29
7,765
At December 31, 2014, Mid Penn’s troubled debt restructured loans totaled $8,746,000, of which six loans totaling $2,035,000,
represented accruing impaired loans in compliance with the terms of the modification. Of the $2,035,000, three are accruing impaired
residential mortgages to unrelated borrowers totaling $71,000 and the other three are accruing impaired commercial real estate loans
spread among two relationships totaling $1,964,000. The remaining $6,711,000, representing 14 loans among nine relationships, are
nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired loans. Two large
relationships account for $4,680,000 of the $6,711,000 nonaccrual impaired troubled debt restructured loan total. As a result of the
evaluation, a specific allocation and, subsequently, charge offs have been taken as appropriate. As of December 31, 2014, charge offs
associated with troubled debt restructured loans while under a forbearance agreement totaled $87,000. As of December 31, 2014,
there were no defaulted troubled debt restructured loans as all troubled debt restructured loans were current with respect to their
associated forbearance agreements. There were also no defaults on troubled debt restructured loans within twelve months of
65
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
restructure during 2014. One forbearance agreement was negotiated during 2008, 10 forbearance agreements were negotiated during
2009, one was negotiated during 2010, four were negotiated during 2013, and four were negotiated during 2014.
At December 31, 2013, Mid Penn’s troubled debt restructured loans totaled $7,765,000, of which, $833,000, representing five loans,
are accruing impaired mortgages in compliance with the terms of the modification. Of the $833,000, four are accruing impaired
residential mortgages totaling $235,000 and one is an accruing impaired commercial real estate loan totaling $598,000. The
remaining $6,932,000, representing 12 loans, are nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with
the guidance on impaired loans. Two large relationships account for $4,819,000 of the $6,932,000 nonaccrual impaired troubled debt
restructured loan total. As a result of the evaluation, a specific allocation and, subsequently, charge offs have been taken as
appropriate. As of December 31, 2013, charge offs associated with troubled debt restructured loans while under a forbearance
agreement totaled $0. As of December 31, 2013, there were no defaulted troubled debt restructured loans as all troubled debt
restructured loans were current with respect to their associated forbearance agreements. There were also no defaults on troubled debt
restructured loans within twelve months of restructure during 2013. One forbearance agreement was negotiated during 2008, 10
forbearance agreements were negotiated during 2009, one was negotiated during 2010, and five were negotiated during 2013.
Mid Penn entered into forbearance agreements on all loans currently classified as troubled debt restructures and all of these
agreements have resulted in additional principal repayment. The terms of these forbearance agreements vary whereby principal
payments have been decreased, interest rates have been reduced and/or the loan will be repaid as collateral is sold.
There were four loans modified in 2014 and five loans modified in 2013 that resulted in troubled debt restructurings. The following
table summarizes the loans whose terms have been modified resulting in troubled debt restructurings during the year ended December
31, 2014.
(Dollars in thousands)
December 31, 2014
Commercial real estate
Residential mortgage
Home equity
(Dollars in thousands)
December 31, 2013
Commercial real estate
Residential mortgage
Number of
Contracts
2
1
1
4
Number of
Contracts
3
2
5
$
$
$
$
Pre-Modification
Post-Modification
Outstanding Recorded
Investment
Outstanding Recorded
Investment
Recorded Investment
1,057
540
50
1,647
Pre-Modification
Outstanding Recorded
Investment
6,091
74
6,165
$
$
$
$
757
540
7
1,304
Post-Modification
Outstanding Recorded
Investment
5,588
74
5,662
$
$
$
$
734
520
5
1,259
Recorded Investment
5,417
28
5,445
The Bank has granted loans to certain of its executive officers, directors, and their related interests. These loans were made on
substantially the same basis, including interest rates and collateral as those prevailing for comparable transactions with other
borrowers at the same time. The aggregate amount of these loans was $6,559,000 and $8,402,000 at December 31, 2014 and 2013,
respectively. During 2014, $3,340,000 of new loans and advances were extended and repayments totaled $5,181,000. $2,000 of these
loans is no longer considered related parties as of December 31, 2014. None of these loans were past due, in non-accrual status, or
restructured at December 31, 2014.
66
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
(8) Bank Premises and Equipment
At December 31, 2014 and 2013, bank premises and equipment are as follows:
(Dollars in thousands)
Land
Buildings
Furniture, fixtures, and equipment
Leasehold improvements
Construction in progress
Less accumulated depreciation
2014
2013
2,712
10,116
7,236
826
497
21,387
(9,162)
12,225
$
$
2,712
10,087
9,483
828
13
23,123
(10,654)
12,469
$
$
Depreciation expense was $1,235,000 in 2014, $1,250,000 in 2013, and $1,153,000 in 2012.
(9) Deposits
At December 31, 2014 and 2013, time deposits amounted to $124,785,000 and $132,373,000, respectively. Interest expense on such
certificates of deposit amounted to $1,971,000, $2,568,000, and $3,683,000 for the years ended December 31, 2014, 2013 and 2012,
respectively.
These time deposits at December 31, 2014, mature as follows:
(Dollars in thousands)
Maturing in 2015
Maturing in 2016
Maturing in 2017
Maturing in 2018
Maturing in 2019
Maturing thereafter
Time Deposits
Less than $100,000
$100,000 or more
$
$
35,364
22,943
5,388
4,528
6,966
1,178
76,367
$
$
25,814
11,018
2,210
3,077
6,299
-
48,418
Brokered deposits included in the deposit totals equaled $4,462,000, at December 31, 2014 and $2,750,000 at December 31, 2013.
Deposits and other funds from related parties held by Mid Penn at December 31, 2014 and 2013 amounted to $9,987,000 and
$9,010,000, respectively.
(10) Short-term Borrowings
Short-term borrowings totaled $578,000 at December 31, 2014 and $23,833,000 at December 31, 2013. The Bank has a line of credit
commitment from the FHLB for overnight borrowings up to $40,000,000. This line is collateralized by certain qualifying loans and
investment securities of the Bank. The Bank also has unused lines of credit with correspondent banks amounting to $12,500,000 at
December 31, 2014.
67
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
(11) Long-term Debt
The Bank is a member of the FHLB and through its membership, the Bank can access a number of credit products, which are utilized
to provide liquidity. The maximum borrowing capacity available to the Bank at the FHLB at December 31, 2014 was $272,397,000,
which includes the line of credit commitment for overnight borrowings. As of December 31, 2014 and 2013, the Bank had long-term
debt in the amount of $52,961,000 and $23,145,000, respectively, consisting of:
(Dollars in thousands)
Loans maturing in 2015 with rates ranging from 0.58% to 4.18%
Loans maturing in 2016 with rates ranging from 0.54% to 0.89%
Loan maturing in 2019 at a rate of 1.87%
Loan maturing in 2026 at a rate of 4.80%
Loan maturing in 2027 at a rate of 6.71%
At December 31,
2014
2013
15,000
25,000
10,000
2,892
69
52,961
$
15,000
5,000
-
3,073
72
23,145
$
The aggregate amounts due on long-term debt subsequent to December 31, 2014 are $15,193,000 (2015), $25,203,000 (2016),
$213,000 (2017), $223,000 (2018), $10,235,000 (2019), and $1,894,000 thereafter.
(12) Fair Value Measurement
Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the
liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement
date under current market conditions. This guidance provides additional information on determining when the volume and level of
activity for the asset or liability has significantly decreased. The guidance also includes information on identifying circumstances
when a transaction may not be considered orderly.
Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether
there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity
for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity
for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices
may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.
This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability,
some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether
the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A
transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. Inputs to valuation techniques refer to the assumptions that market participants would use in
pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in
pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that
reflect the reporting entity’s own belief about the assumptions market participants would use in pricing the asset or liability based
upon the best information available in the circumstances. Fair value measurement and disclosure guidance establishes a fair value
hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs - Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities;
Level 2 Inputs - Quoted prices in markets that are not active, or inputs that are observable either directly or
indirectly, for substantially the full term of the asset or liability;
Level 3 Inputs - Prices or valuation techniques that require inputs that are both significant to the fair value
measurement and unobservable (i.e., supported by little or no market activity).
68
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such
instruments pursuant to the valuation hierarchy, is set forth below.
There were no transfers of assets between fair value Level 1 and Level 2 for the year ended December 31, 2014. The following table
illustrates the assets measured at fair value on a recurring basis segregated by hierarchy fair value levels:
(Dollars in thousands)
Assets:
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Equity securities
(Dollars in thousands)
Assets:
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Equity securities
Fair value measurements at December 31, 2014 using:
Quoted prices in
active markets
(Level 1)
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
$
$
-
-
-
561
561
$
$
27,066
33,776
79,171
1,060
141,073
$
$
-
-
-
-
-
Fair value measurements at December 31, 2013 using:
Quoted prices in
active markets
(Level 1)
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
$
$
-
-
-
519
519
$
$
12,834
39,392
69,038
1,020
122,284
$
$
-
-
-
-
-
Total carrying value at
December 31, 2014
$
27,066
33,776
79,171
1,621
141,634
$
$
Total carrying value at
December 31, 2013
$
12,834
39,392
69,038
1,539
122,803
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not
measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there
is evidence of impairment).
The following tables illustrate the assets measured at fair value on a nonrecurring basis segregated by hierarchy fair value levels.
(Dollars in thousands)
Assets:
Impaired Loans
Foreclosed Assets Held for Sale
Mortgage Servicing Rights
Fair value measurements at December 31, 2014 using:
Total carrying value at
December 31, 2014
$
6,664
142
187
Quoted prices in
active markets
(Level 1)
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
$
$
-
-
-
$
-
-
-
6,664
142
187
69
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
Assets:
Impaired Loans
Foreclosed Assets Held for Sale
Mortgage Servicing Rights
Fair value measurements at December 31, 2013 using:
Total carrying value at
December 31, 2013
$
6,535
465
223
Quoted prices in
active markets
(Level 1)
Significant other
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
$
$
-
-
-
$
-
-
-
6,535
465
223
The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for
which Mid Penn has utilized Level 3 inputs to determine the fair value.
(Dollars in thousands)
Quantitative Information about Level 3 Fair Value Measurements
December 31, 2014
Fair Value
Estimate
Valuation Technique
Unobservable Input
Range
Weighted
Average
Impaired Loans
$
6,664 Appraisal of collateral (1)
Appraisal adjustments (2)
10% - 95%
32%
Foreclosed Assets Held for
Sale
142
Appraisal of collateral (1),
(3)
Appraisal adjustments (2)
15% - 40%
27%
Mortgage Servicing Rights
187
Multiple of annual service
fee
Estimated prepayment speed
based on rate and term
210% - 400%
353%
(Dollars in thousands)
Quantitative Information about Level 3 Fair Value Measurements
December 31, 2013
Fair Value
Estimate
Valuation Technique
Unobservable Input
Range
Weighted
Average
Impaired Loans
$
6,535 Appraisal of collateral (1)
Appraisal adjustments (2)
10% - 95%
25%
Foreclosed Assets Held for
Sale
Mortgage Servicing Rights
465
223
Appraisal of collateral (1),
(3)
Appraisal adjustments (2)
15% - 40%
24%
Multiple of annual service
fee
Estimated prepayment speed
based on rate and term
240% - 400%
349%
(1) Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes various level 3
inputs which are not observable.
(2) Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation
expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. Higher downward
adjustments are caused by negative changes to the collateral or conditions in the real estate market, actual offers or sales contracts received,
or age of the appraisal.
Includes qualitative adjustments by management and estimated liquidation expenses.
(3)
The following methodologies and assumptions were used to estimate the fair value of certain assets and liabilities:
Cash and Cash Equivalents:
The carrying value of cash and cash equivalents is considered to be a reasonable estimate of fair value.
Interest-bearing Balances with other Financial Institutions:
The estimate of fair value was determined by comparing the present value of quoted interest rates on like deposits with the weighted
average yield and weighted average maturity of the balances.
Securities Available for Sale:
The fair value of securities classified as available for sale is determined by obtaining quoted market prices on nationally recognized
securities exchanges (Level 1), or matrix pricing (level 2), which is a mathematical technique used widely in the industry to value debt
70
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
securities without relying exclusively on quoted market prices for the specific securities but rather relying on the securities’
relationship to other benchmark quoted prices.
Impaired Loans (included in “Net Loans and Leases” in the following tables):
Mid Penn’s rating system assumes any loans classified as sub-standard non-accrual to be impaired, and all of these loans are
considered collateral dependent; therefore, all of Mid Penn’s impaired loans, whether reporting a specific allocation or not, are
considered collateral dependent.
It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate within 30 days of the
credit being classified as sub-standard non-accrual. Prior to receipt of the updated real estate valuation Mid Penn will use any existing
real estate valuation to determine any potential allowance issues; however no allowance recommendation will be made until which
time Mid Penn is in receipt of the updated valuation.
In some instances Mid Penn is not holding real estate as collateral and is relying on business assets (personal property) for repayment.
In these circumstances a collateral inspection is performed by Mid Penn personnel to determine an estimated value. The value is
based on net book value, as provided by the financial statements, and discounted accordingly based on determinations made by
management. Occasionally, Mid Penn will employ an outside service to provide a fair estimate of value based on auction sales or
private sales. Management reviews the estimates of these third parties and discounts them accordingly based on management’s
judgment, if deemed necessary. Mid Penn considers the estimates used in its impairment analysis to be Level 3 inputs.
Mid Penn actively monitors the values of collateral on impaired loans. This monitoring may require the modification of collateral
values over time or changing circumstances by some factor, either positive or negative, from the original values. All collateral values
will be assessed by management at least every 18 months for possible revaluation by an independent third party.
Loans:
For variable-rate loans that reprice frequently and which entail no significant changes in credit risk, carrying values approximated fair
value. The fair value of other loans are estimated by calculating the present value of the cash flow difference between the current rate
and the market rate, for the average maturity, discounted quarterly at the market rate.
Foreclosed Assets Held for Sale:
Assets included in foreclosed assets held for sale are carried at fair value, less costs to sell, and accordingly is presented as measured
on a non-recurring basis. Values are estimated using Level 3 inputs, based on appraisals that consider the sales prices of property in
the proximate vicinity.
Accrued Interest Receivable and Payable:
The carrying amount of accrued interest receivable and payable approximates their fair values.
Restricted Investment in Bank Stocks:
The carrying amount of required and restricted investment in correspondent bank stock approximates fair value, and considers the
limited marketability of such securities.
Mortgage Servicing Rights:
The fair value of servicing rights is based on the present value of estimated future cash flows on pools of mortgages stratified by rate
and maturity date.
Deposits:
The fair value for demand deposits (e.g., interest and noninterest checking, savings, and money market deposit accounts) is by
definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). Fair value for fixed-rate
certificates of deposit was estimated using a discounted cash flow calculation by combining all fixed-rate certificates into a pool with a
weighted average yield and a weighted average maturity for the pool and comparing the pool with interest rates currently being
offered on a similar maturity.
Short-term Borrowings:
Because of time to maturity, the estimated fair value of short-term borrowings approximates the book value.
Long-term Debt:
The estimated fair values of long-term debt were determined using discounted cash flow analysis, based on currently available
borrowing rates for similar types of borrowing arrangements.
71
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Commitments to Extend Credit and Letters of Credit:
The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking
into account market interest rates, the remaining terms and present credit worthiness of the counterparties. The fair value of
guarantees and letters of credit is based on fees currently charged for similar agreements.
The following table summarizes the carrying value and fair value of financial instruments at December 31, 2014 and 2013.
(Dollars in thousands)
December 31, 2014
December 31, 2013
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Financial assets:
Cash and cash equivalents
Interest-bearing time balances with other
financial institutions
Available for sale investment securities
Net loans and leases
Restricted investment in bank stocks
Accrued interest receivable
Mortgage servicing rights
Financial liabilities:
Deposits
Short-term borrowings
Long-term debt
Accrued interest payable
Off-balance sheet financial instruments:
Commitments to extend credit
Financial standby letters of credit
$
9,882
$
9,882
$
8,623
$
8,623
5,772
141,634
564,817
3,181
3,058
187
637,922
578
52,961
349
-
-
$
$
5,772
141,634
572,487
3,181
3,058
187
639,226
578
52,514
349
-
-
$
$
7,513
122,803
540,145
2,969
2,704
223
608,130
23,833
23,145
393
-
-
$
$
7,513
122,803
548,923
2,969
2,704
223
610,419
23,833
22,988
393
-
-
$
$
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of Mid Penn’s financial instruments
as of December 31, 2014 and 2013. Carrying values approximate fair values for cash and cash equivalents, interest-bearing time
balances with other financial institutions, restricted investment in bank stocks, mortgage servicing rights, accrued interest receivable
and payable, and short-term borrowings. Other than cash and cash equivalents, which are considered Level 1 Inputs, these
instruments are Level 2 Inputs. The following tables exclude financial instruments for which the placement in the fair value hierarchy
has been disclosed elsewhere or for which the carrying amount approximates fair value.
(Dollars in thousands)
December 31, 2014
Financial instruments - assets
Carrying
Amount
Fair Value
Fair Value Measurements
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Net loans and leases
$
564,817
$
572,487
$
-
$
-
$
572,487
Financial instruments - liabilities
Deposits
Long-term debt
$
637,922
52,961
$
639,226
52,514
$
$
-
-
639,226
52,514
$
-
-
72
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
December 31, 2013
Financial instruments - assets
Carrying
Amount
Fair Value
Fair Value Measurements
Quoted Prices
in Active Markets
for Identical Assets
or Liabilities
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Net loans and leases
$
540,145
$
548,923
$
-
$
-
$
548,923
Financial instruments - liabilities
Deposits
Long-term debt
$
608,130
23,145
$
610,419
22,988
$
$
-
-
610,419
22,988
$
-
-
(13) Postretirement Benefit Plans
Mid Penn has an unfunded noncontributory defined benefit Plan for directors. The Plan provides defined benefits based on years of
service.
Mid Penn also has other postretirement benefit Plans covering full-time employees. These health care and life insurance Plans are
noncontributory.
The significant aspects of each Plan are as follows:
(a)
Health Insurance
For full-time employees who retire after at least 20 years of service, Mid Penn will pay premiums for major medical
insurance (as provided to active employees) for a period ending on the earlier of the date the participant obtains other
employment where major medical coverage is available or the date of the participant's death; however, in all cases payment
of medical premiums by Mid Penn will not exceed five years. If the retiree becomes eligible for Medicare within the five-
year period beginning on his/her retirement date, the Bank may pay, at its discretion, premiums for 65 Special coverage or a
similar supplemental coverage. After the five-year period has expired, all Mid Penn paid benefits cease; however, the
retiree may continue coverage through the Bank at his/her own expense. This Plan was amended in 2008 to encompass only
those employees that had achieved ten years of full-time continuous service to Mid Penn as of January 1, 2008. Employees
hired after that date and those that had not achieved the service requirements are not eligible for the Plan.
(b)
Life Insurance
For full-time employees who retire after at least 20 years of service, Mid Penn will provide term life insurance. The amount
of coverage prior to age 65 will be three times the participant's annual salary at retirement or $50,000, whichever is less.
After age 65, the life insurance coverage amount will decrease by 10% per year, subject to a minimum amount of $2,000.
(c)
Directors’ Retirement Plan
Mid Penn has an unfunded defined benefit retirement Plan for directors with benefits based on years of service. The
adoption of this Plan generated unrecognized prior service cost of $274,000, which is being amortized over the expected
future years of service of active directors. The unamortized balance at December 31, 2014, was $86,000.
73
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Health and Life
The following tables provide a reconciliation of the changes in the Plan’s health and life insurance benefit obligations and
fair value of Plan assets for the years ended December 31, 2014 and 2013, and a statement of the funded status at December
31, 2014 and 2013.
(Dollars in thousands)
Change in benefit obligations:
Benefit obligations, January 1
Service cost
Interest cost
Actuarial gain
Change in assumptions
Benefit payments
Benefit obligations, December 31
Change in fair value of plan assets:
Fair value of plan assets, January 1
Employer contributions
Benefit payments
Fair value of plan assets, December 31
Funded status at year end
December 31,
2014
2013
836
13
38
(26)
40
(40)
861
-
40
(40)
-
(861)
$
$
$
$
$
894
17
34
(15)
(55)
(39)
836
-
39
(39)
-
(836)
$
$
$
$
$
The amount recognized in the consolidated balance sheet at December 31, 2014 and 2013, is as follows:
(Dollars in thousands)
Accrued benefit liability
2014
2013
$
861
$
836
The amounts recognized in accumulated other comprehensive (loss) consist of:
(Dollars in thousands)
Net gain, pretax
Net prior service cost, pretax
2014
$
December 31,
(19)
-
$
2013
(33)
(1)
The accumulated benefit obligation for health and life insurance plans was $861,000 and $836,000 at December 31, 2014
and 2013, respectively.
The estimated prior service costs that will be amortized from accumulated other comprehensive income into net periodic
benefit cost during 2015 is ($1,052).
74
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
The components of net periodic postretirement benefit cost for 2014, 2013 and 2012 are as follows:
(Dollars in thousands)
Service cost
Interest cost
Amortization of prior service cost
Net periodic postretirement benefit cost
2014
2013
2012
$
$
13
38
(1)
50
$
$
17
34
(1)
50
$
$
21
37
(1)
57
Assumptions used in the measurement of Mid Penn’s benefit obligations at December 31, 2014 and 2013 are as follows:
Weighted-average assumptions:
Discount rate
Rate of compensation increase
2014
2013
4.00%
3.00%
4.75%
3.75%
Assumptions used in the measurement of Mid Penn’s net periodic benefit cost for the years ended December 31, 2014, 2013
and 2012 are as follows:
Weighted-average assumptions:
Discount rate
Rate of compensation increase
2014
2013
2012
4.75%
3.75%
4.00%
3.00%
4.50%
3.50%
Assumed health care cost trend rates at December 31, 2014, 2013 and 2012 are as follows:
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
Year that the rate reaches the ultimate trend rate
2014
2013
2012
6.50%
5.50%
2016
7.00%
5.50%
2016
7.50%
5.50%
2016
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care Plans. At
December 31, 2014, a one-percentage-point change in assumed health care cost trend rates would have the following effects:
(Dollars in thousands)
Effect on total of service and interest cost
Effect on accumulated postretirement benefit obligation
One-Percentage Point
Increase
Decrease
$
4
61
$
3
54
Mid Penn expects to contribute $57,000 to its life and health benefit Plans in 2015. The following table shows the estimated
benefit payments for future periods.
(Dollars in thousands)
1/1/2015 to 12/31/2015
1/1/2016 to 12/31/2016
1/1/2017 to 12/31/2017
1/1/2018 to 12/31/2018
1/1/2019 to 12/31/2019
1/1/2020 to 12/31/2024
$
57
67
62
67
69
328
Benefit obligations were measured as of December 31, 2014, for the postretirement benefit Plan.
75
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Retirement Plan
The following tables provide a reconciliation of the changes in the directors’ defined benefit Plan’s benefit obligations and
fair value of Plan assets for the years ended December 31, 2014 and 2013 and a statement of the status at December 31,
2014 and 2013. This Plan is unfunded.
(Dollars in thousands)
Change in benefit obligations:
Benefit obligations, January 1
Service cost
Interest cost
Actuarial (gain) loss
Change in assumptions
Benefit payments
Benefit obligations, December 31
Change in fair value of plan assets:
Fair value of plan assets, January 1
Employer contributions
Benefit payments
Fair value of plan assets, December 31
Funded status at year end
December 31,
2014
2013
1,130
33
51
(8)
69
(89)
1,186
-
89
(89)
-
(1,186)
$
$
$
$
$
1,139
32
44
4
(5)
(84)
1,130
-
84
(84)
-
(1,130)
$
$
$
$
$
Amounts recognized in the consolidated balance sheet at December 31, 2014 and 2013 are as follows:
(Dollars in thousands)
Accrued benefit liability
2014
2013
$
1,186
$
1,130
Amounts recognized in accumulated other comprehensive income consist of:
(Dollars in thousands)
Net prior service cost, pretax
Net loss, pretax
December 31,
2014
2013
$
86
101
$
108
40
The accumulated benefit obligation for the retirement Plan was $1,186,000 at December 31, 2014 and $1,130,000 at
December 31, 2013.
The estimated prior service costs that will be amortized from accumulated other comprehensive income into net periodic
benefit cost during 2015 is $21,525.
The components of net periodic retirement cost for 2014, 2013 and 2012 are as follows:
(Dollars in thousands)
Service cost
Interest cost
Amortization of prior-service cost
Net periodic retirement cost
2014
2013
2012
$
$
33
51
22
106
$
$
32
44
22
98
$
$
22
49
22
93
76
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Assumptions used in the measurement of Mid Penn’s benefit obligations at December 31, 2014 and 2013 are as follows:
Weighted-average assumptions:
Discount rate
Change in consumer price index
2014
2013
4.00%
2.00%
4.75%
2.75%
Assumptions used in the measurement of Mid Penn’s net periodic benefit cost for the years ended December 31, 2014, 2013
and 2012 are as follows:
Weighted-average assumptions:
Discount rate
Change in consumer price index
2014
2013
2012
4.75%
2.75%
4.00%
2.00%
4.50%
2.50%
Mid Penn expects to contribute $92,000 to its retirement Plan in 2015. The following table shows the estimated benefit
payments for future periods.
(Dollars in thousands)
1/1/2015 to 12/31/2015
1/1/2016 to 12/31/2016
1/1/2017 to 12/31/2017
1/1/2018 to 12/31/2018
1/1/2019 to 12/31/2019
1/1/2020 to 12/31/2024
$
92
95
97
100
98
514
Plan benefit obligations were measured as of December 31, 2014 for the directors’ defined benefit Plan.
The Bank is the owner and beneficiary of insurance policies on the lives of certain officers and directors, which informally
fund the retirement plan obligation. The aggregate cash surrender value of these policies was $3,689,000 and $3,609,000 at
December 31, 2014 and 2013, respectively.
(14) Other Benefit Plans
(a)
Defined-Contribution Plan
The Bank has a funded contributory defined-contribution Plan covering substantially all employees. The Bank did not
contribute to the Plan in 2014, 2013, or 2012.
(b)
Deferred Compensation Plans
The Bank has an executive deferred compensation Plan, which allows an executive officer to defer compensation for a
specified period in order to provide future retirement income. The only participant in this Plan is a former executive officer.
The Bank accrued a liability for this Plan of approximately $177,000 at December 31, 2014 and $192,000 at December 31,
2013. The expense related to the Plan was $6,000 in 2014, $0 in 2013, and $10,000 in 2012.
The Bank also has a directors’ deferred compensation Plan, which allows directors to defer receipt of fees for a specified
period in order to provide future retirement income. At December 31, 2014 and 2013, the Bank accrued a liability of
approximately $453,000 and $405,000, respectively, for this Plan. The expense related to the Plan in 2014 and 2013 was
$16,000 and $11,000, respectively. Income of $13,000 was recorded in 2012.
(c)
Salary Continuation Agreement
The Bank maintains a Salary Continuation Agreement (“Agreement”) for a former executive officer. The Agreement
provides the former executive officer with a fixed annual benefit. The benefit is payable beginning at age 65 for a period of
15 years. At December 31, 2014 and 2013, the Bank accrued a liability of approximately $221,000 and $206,000,
respectively, for the Agreement. The expense related to the Agreement was $15,000 for 2014, $14,000 for 2013, and
$13,000 for 2012.
77
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
The Bank is the owner and beneficiary of an insurance policy on the life of the participating former executive officer, which
informally funds the benefit obligation. The aggregate cash surrender value of this policy was approximately $1,215,000
and $1,178,000 at December 31, 2014 and 2013, respectively.
(d)
Employee Stock Ownership Plan
The Employee Stock Ownership Plan (“ESOP”) was terminated in 2013. Total expense related to Mid Penn’s contribution
to the ESOP for 2013 and 2012 was $0, respectively. Contributions to the ESOP were made at the discretion of the Board of
Directors. The ESOP held no common shares as of December 31, 2013, and 38,799 common shares as of December 31,
2012, all of which were allocated to Plan participants. The ESOP shares were valued using Level 1 inputs as there was an
active market for identical assets at the measurement date. At December 31, 2013, the total fair value of the ESOP was $0.
(e)
Split Dollar Life Insurance Arrangements
At December 31, 2014 and 2013, the Bank had Split Dollar Life Insurance arrangements with two former executives for
which the aggregate collateral assignment and cash surrender values are approximately $1,776,000 and $1,739,000,
respectively.
(f)
401(k) Plan
The Bank has a 401(k) Plan that covers substantially all full-time employees. The Plan allows employees to contribute a
portion of their salaries and wages to the Plan. The Plan provides for the Bank to match a portion of employee-elected
salary deferrals, subject to certain percentage maximums of their salaries and wages. The Bank’s contribution to the Plan
was $216,000, $129,000, and $111,000 for the years ending December 31, 2014, 2013, and 2012, respectively.
(g)
Employee Stock Purchase Plan
Mid Penn has an Employee Stock Purchase Plan (“ESPP”) in which all employees are eligible to participate. The Plan
allows employees to use a portion of their salaries and wages to purchase common shares of Mid Penn stock at the market
value of shares at the end of each calendar quarter.
(15) Federal Income Taxes
The following temporary differences gave rise to the net deferred tax asset at December 31, 2014 and 2013.
(Dollars in thousands)
Deferred tax assets:
Allowance for loan and lease losses
Loan fees
Benefit plans
Nonaccrual interest
Unrealized loss on securities
Other
Deferred tax liabilities:
Depreciation
Bond accretion
Goodwill and intangibles
Unrealized gain on securities
Prepaid expenses
Other
Deferred tax asset, net
2014
2013
2,283
68
985
955
-
111
4,402
(801)
(106)
(264)
(837)
(266)
(3)
(2,277)
2,125
$
$
2,148
167
976
895
385
127
4,698
(945)
(92)
(254)
-
(170)
(2)
(1,463)
3,235
$
$
In assessing the realizability of federal or state deferred tax assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during periods in which those temporary differences become deductible. Management considers
the scheduled reversal of deferred tax liabilities, projected future taxable income, and prudent, feasible and permissible as well as
78
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
available tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that
Mid Penn will realize the benefits of these deferred tax assets.
The provision for (benefit from) income taxes consists of the following:
(Dollars in thousands)
Current
Deferred
Total provision for income taxes
A reconciliation of income tax at the statutory rate to Mid Penn's effective rate is as follows:
(Dollars in thousands)
Provision at the expected statutory rate
Effect of tax-exempt income
Effect of investment in life insurance
Nondeductible interest
Nondeductible merger and acquisition expense
Other items
Provision for income taxes
2014
2,435
(1,086)
(68)
42
163
(24)
1,462
$
$
2014
2013
2012
$
$
1,574
(112)
1,462
$
$
$
$
1,009
192
1,201
2013
2,088
(873)
(78)
40
-
24
1,201
$
$
$
$
794
450
1,244
2012
2,106
(827)
(84)
49
-
-
1,244
Mid Penn has no unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods.
Mid Penn does not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve
months.
No amounts for interest and penalties were recorded in income tax expense in the consolidated statement of income for the years
ended December 31, 2014, 2013, or 2012. There were no amounts accrued for interest and penalties at December 31, 2014 or 2013.
Mid Penn and its subsidiaries are subject to U.S. federal income tax and income tax for the state of Pennsylvania. Mid Penn is no
longer subject to examination by taxing authorities for years before 2011. Tax years 2011 through the present, with limited exception,
remain open to examination.
(16) Regulatory Matters
Mid Penn Bancorp, Inc., is a bank holding company and, as such, chooses to maintain a well-capitalized status in its bank subsidiary.
Quantitative measures established by regulation to ensure capital adequacy require Mid Penn to maintain minimum amounts and ratios
(set forth below) of Tier 1 capital to average assets and of total capital (as defined in the regulations) to risk-weighted assets. As of
December 31, 2014 and December 31, 2013, Mid Penn met all capital adequacy requirements to which the Bank is subject, and the
Bank is considered “well-capitalized”. However, future changes in regulations could increase capital requirements and may have an
adverse effect on capital resources.
Certain restrictions exist regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans or
advances. The amount of dividends that may be paid in any calendar year is limited to the current year’s net profits, combined with
the retained net profits of the preceding two years. At December 31, 2014, $6,298,000 of undistributed earnings of the Bank included
in the consolidated shareholders’ equity was available for distribution to the Corporation as dividends without prior regulatory
approval, subject to regulatory capital requirements below.
79
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Mid Penn maintained the following regulatory capital levels, leverage ratios, and risk-based capital ratios as of December 31, 2014,
and December 31, 2013, as follows:
(Dollars in thousands)
Corporation
As of December 31, 2014:
Tier 1 Capital (to Average Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
Bank
As of December 31, 2014:
Tier 1 Capital (to Average Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
Corporation
As of December 31, 2013:
Tier 1 Capital (to Average Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
Bank
As of December 31, 2013:
Tier 1 Capital (to Average Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
$
$
$
$
Capital Adequacy
Minimum Capital
Required
Actual
Amount
Ratio
Amount
Ratio
To Be Well-Capitalized
Under Prompt
Corrective
Action Provisions
Amount
Ratio
56,560
56,560
63,336
7.4%
10.1%
11.4%
56,647
56,647
63,423
7.5%
10.2%
11.4%
52,693
52,693
59,100
7.5%
9.9%
11.1%
52,598
52,598
59,005
7.5%
9.9%
11.1%
$
$
$
$
30,429
22,295
44,590
4.0%
4.0%
8.0%
30,360
22,295
44,590
4.0%
4.0%
8.0%
28,031
21,234
42,467
4.0%
4.0%
8.0%
28,041
21,234
42,467
4.0%
4.0%
8.0%
$
$
$
$
N/A
N/A
N/A
N/A
N/A
N/A
37,950
33,442
55,737
5.0%
6.0%
10.0%
N/A
N/A
N/A
N/A
N/A
N/A
35,051
31,850
53,084
5.0%
6.0%
10.0%
(17) Concentration of Risk and Off-Balance Sheet Risk
The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance
sheets.
The Bank evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies but may
include accounts receivable, inventory, property, plant, and equipment, and income-producing commercial properties. The Bank's
exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit
and standby letters of credit written is represented by the contractual amount of those instruments. The Bank uses the same credit
policies in making commitments and conditional obligations as it does for direct, funded loans.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The term of these standby letters of credit is generally one year or less. The amount of the liability as of December 31, 2014 and 2013
for guarantees under letters of credit issued is not material.
As of December 31, 2014, commitments to extend credit amounted to $125,279,000 and standby letters of credit amounted to
$9,837,000.
80
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Additionally, Mid Penn has committed to fund and sell qualifying residential mortgage loans to the FHLB in the total amount of
$15,000,000. As of December 31, 2014, $7,558,000 remains to be delivered on that commitment.
Significant concentration of credit risk may occur when obligations of parties engaged in similar activities occur and accumulate in
significant amounts.
In analyzing the Bank's exposure to significant concentration of credit risk, management set a parameter of 10% or more of the Bank's
total net loans outstanding as the threshold in determining whether the obligations of the same or affiliated parties would be classified
as significant concentration of credit risk. Concentrations by industry, product line, type of collateral, etc., are also considered. U.S.
Treasury securities, obligations of U.S. government agencies and corporations, and any assets collateralized by the same were
excluded.
As of December 31, 2014, commercial real estate financing was the only similar activity that met the requirements to be classified as a
significant concentration of credit risk. However, there is a geographical concentration in that most of the Bank's business activity is
with customers located in Central Pennsylvania, specifically within the Bank's trading area made up of Dauphin County, lower
Northumberland County, western Schuylkill County and eastern Cumberland County.
The Bank's highest concentrations of credit within the loan portfolio are in the areas of Commercial Real Estate financing (50.6%) as
of December 31, 2014.
(18) Commitments and Contingencies
Operating Leases:
Mid Penn has entered into a non-cancelable operating lease agreement to lease approximately 2,500 square feet of office space in the
downtown Harrisburg area through July 2020. Mid Penn also has a non-cancelable lease on a drive-up ATM site in Halifax, PA that
runs through October 2015. Mid Penn has a non-cancelable operating lease agreement with a related party to lease approximately
5,900 square feet of office space on Derry Street in Harrisburg. The initial term ended in November 2014. Mid Penn has the option to
renew this lease for two additional three-year periods and has exercised the first of these options, extending the term of the lease
through November 2017.
In August 2014, Mid Penn entered into a non-cancelable operating lease agreement to lease two office suites, one approximately 2,350
square feet and the second approximately 7,000 square feet, on North Front Street in Harrisburg. The initial lease term extends
through February 2020 and can be renewed for one additional three-year period. In October 2014, Mid Penn entered into a non-
cancelable operating lease agreement with a related party to lease a retail branch property located at 5288 Simpson Ferry Road in
Mechanicsburg, with the initial term of 20 years. Mid Penn has the option to renew this lease for two additional five-year periods. In
November 2014, Mid Penn entered into a non-cancelable operating lease agreement to lease a retail branch property located at 2305
South Market Street in Elizabethtown, with the initial term extending through December 2019. Mid Penn has the option to renew this
lease for two additional five-year terms.
Minimum future rental payments under these operating leases as of December 31, 2014 are as follows:
(Dollars in thousands)
2015
2016
2017
2018
2019
thereafter
Lease Obligation
Obligation to Related
Parties
$
$
411 $
439
441
400
393
874
2,958 $
114
128
125
79
66
-
512
Rental expense in connection with leases in 2014, 2013, and 2012 were $151,000, $121,000, and $120,000, respectively.
81
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Litigation:
Mid Penn is subject to lawsuits and claims arising out of its business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial
condition of Mid Penn.
(19) Common Stock
Mid Penn has reserved 50,000 of authorized, but unissued shares of its common stock for issuance under a Stock Bonus Plan (the
“Plan”). Shares issued under the Plan are at the discretion of the Board of Directors.
Under Mid Penn’s amended and restated dividend reinvestment plan, (“DRIP”), 200,000 of Mid Penn’s authorized but unissued
common stock are reserved for issuance. The DRIP also allows for voluntary cash payments within specified limits, for the purchase
of additional shares.
On June 25, 2014, the 2014 Restricted Stock Plan was registered, which awards shall not exceed, in the aggregate 100,000 shares of
common stock. The Plan was established for employees and directors of Mid Penn and the Bank, selected by the Compensation
Committee of the Board of Directors, to advance the best interest of Mid Penn and its shareholders. The Plan provides those persons
who have a responsibility for its growth with additional incentives by allowing them to acquire an ownership interest in Mid Penn and
thereby encouraging them to contribute to the success of the company. As of December 31, 2014, 3,500 shares have been granted
under the plan.
(20) Preferred Stock
On December 19, 2008, Mid Penn entered into and closed a Letter Agreement with the United States Department of the Treasury (the
“Treasury”) pursuant to which the Treasury invested $10,000,000 in the Mid Penn Bank under the Treasury’s TARP Capital Purchase
Program (the “CPP”). Under the letter agreement, the Treasury received (1) 10,000 shares of Series A Fixed Rate Cumulative
Perpetual Preferred Stock, $1,000 liquidation preference (“Series A Preferred Stock”), and (2) a warrant to purchase up to 73,099
shares of Mid Penn common stock at an exercise price of $20.52 per share (the “Warrant”).
On December 28, 2012, Mid Penn entered into a letter agreement with the Treasury pursuant to which Mid Penn repurchased from the
Treasury all 10,000 shares of the Series A Preferred Stock issued to the Treasury which constitutes all of the issued and outstanding
shares of Series A Preferred Stock. Mid Penn repurchased the Series A Preferred Stock for a purchase price equal to the aggregate
liquidation amount of the Preferred Stock of $10,000,000, plus accrued but unpaid dividends of $59,722. All 10,000 shares of Series A
Preferred Stock have subsequently been cancelled.
On January 23, 2013, Mid Penn entered into a letter agreement with the Treasury pursuant to which Mid Penn repurchased from the
Treasury on that date the Warrant for $58,479. The Warrant was subsequently cancelled.
As of December 31, 2014, Mid Penn has no further financial obligations under the Series A Preferred Stock, the Warrant or the CPP.
(21) Stock Issued Under Private Placement Offering
On September 26, 2012, Mid Penn filed with the Pennsylvania Department of State a Statement with Respect to Shares which,
effective upon filing, designated a series of preferred stock as “7% Non-Cumulative Non-Voting Non-Convertible Perpetual Preferred
Stock, Series B” (“Series B Preferred Stock”), and set forth the voting and other powers, designations, preferences and relative,
participating, optional or other rights, and the qualifications, limitations or restrictions of the Series B Preferred Stock.
Sales of Preferred Stock
Mid Penn sold shares of the Series B Preferred Stock in transactions exempt from registration under the Securities Act of 1933.
Between September 26, 2012 and December 31, 2012, Mid Penn sold 4,880 shares of its Series B Preferred Stock for total gross
proceeds of $4,880,000, which have been offset by issuance costs of $50,000. On January 3, 2013, 120 additional shares of the Series
B Preferred Stock were sold resulting in total gross proceeds of $5,000,000 for the Series B Preferred Stock offering.
82
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
The following table summarizes the Series B Preferred Stock shares sold and the gross proceeds received through the private
placement offering as of December 31, 2014:
(Dollars in thousands)
Period
September 26, 2012 - September 30, 2012
October 1, 2012 - December 31, 2012
January 1, 2013 - December 31, 2013
January 1, 2014 - December 31, 2014
Terms of the Series B Preferred Stock
Shares
Gross Proceeds
345
4,535
120
-
5,000
$
$
345,000
4,535,000
120,000
-
5,000,000
Total
The annual dividend rate for the Series B Preferred Stock is 7% per annum of the liquidation preference of the Series B Preferred
Stock or $70.00 per annum for each share of Series B Preferred Stock. The Board of Directors must approve each dividend payment
from legally available funds. Dividends are payable to holders of record of the Series B Preferred Stock as they appear on our books
on the record dates fixed by our Board of Directors. Dividends on any of Series B Preferred Stock are non-cumulative and we
currently expect them to be declared quarterly for payment on February 15, May 15, August 15, and November 15 of each year. If a
dividend payment date is not a business day, the dividend will be paid on the immediately preceding business day but no additional
dividend payment will be prorated from the date of purchase to the first dividend payment date over a quarterly dividend period of 90
days.
Mid Penn may redeem shares of its Series B Preferred Stock at its option, in whole or in part, at any time subject to prior approval of
the Federal Reserve, if then required, at a redemption price of $1,020 per share of Series B Preferred Stock plus an amount equal to
any declared but unpaid dividends and in accordance with the terms and conditions set forth in a Certificate of Designations for the
Series B Preferred Stock as filed with the Pennsylvania Department of State.
(22) Parent Company Statements
CONDENSED BALANCE SHEETS
(Dollars in thousands)
ASSETS
Cash and cash equivalents
Investment in subsidiaries
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities
Shareholders' equity
Total liabilities and shareholders' equity
December 31,
2014
2013
$
$
$
$
554
59,217
-
59,771
641
59,130
59,771
$
$
$
$
437
52,821
7
53,265
349
52,916
53,265
83
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Dollars in thousands)
Income
Dividends from subsidiaries
Other income
Total Income
Expense
Other expenses
Total Expense
Income before income tax and equity in undistributed earnings (loss) of subsidiaries
Equity in undistributed earnings (loss) of subsidiaries
Income before income tax
Income tax benefit
Net income
Series A preferred stock dividends & discount accretion
Series B preferred stock dividends
Net income available to common shareholders
Comprehensive income
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Equity in undistributed (earnings) loss of subsidiaries
Decrease in other assets
Increase in other liabilities
Net cash provided by operating activities
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid
Series A preferred stock redemption
Series B preferred stock issuance, net of costs
Employee Stock Purchase Plan
Warrant repurchase
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
For Years Ended December 31,
2013
2014
2012
2,325
-
2,325
(716)
(716)
1,609
4,012
5,621
80
5,701
-
350
5,351
8,086
$
$
$
1,237
-
1,237
(184)
(184)
1,053
3,823
4,876
63
4,939
14
309
4,616
1,774
$
$
$
6,628
4
6,632
(217)
(217)
6,415
(1,538)
4,877
74
4,951
514
-
4,437
5,328
For Years Ended December 31,
2013
2014
2012
5,701
(4,012)
8
292
1,989
(1,925)
-
-
53
-
(1,872)
117
437
554
$
$
4,939
(3,823)
3
334
1,453
(1,181)
-
120
55
(58)
(1,064)
389
48
437
$
$
4,951
1,538
40
15
6,544
(1,432)
(10,000)
4,830
56
-
(6,546)
(2)
50
48
$
$
$
$
$
84
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
(23) Recent Accounting Pronouncements
ASU 2014-01: The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-01,
Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects
(a consensus of the FASB Emerging Issues Task Force).
The amendments in this Update permit a reporting entity that invests in qualified affordable housing projects to account for the
investments using a proportional amortization method if certain conditions are met. The Low Income Housing Tax Credit is a
program designed to encourage investment of private capital for use in the construction and rehabilitation of low income housing,
which provides certain tax benefits to investors in those projects. If an entity elects the proportional amortization method, it will
amortize the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognize the net
investment performance in the income statement as a component of income tax expense. Otherwise, the entity would apply either the
equity method or the cost method, as appropriate.
Amendments in this Update are effective for public business entities for annual periods and interim reporting periods within those
annual periods, beginning after December 15, 2014. Early adoption is permitted. If adopted, the amendments should be applied
retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in
qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those
preexisting investments.
ASU 2014-04: The FASB issued ASU 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40):
Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB
Emerging Issues Task Force).
The Update clarifies that when an in substance repossession or foreclosure occurs, and a creditor is considered to have received
physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining
legal title to the residential real estate property upon completion of a foreclosure, or (2) the borrower conveying all interest in the
residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a
similar legal agreement.
Amendments in this Update are effective for public business entities for annual periods and interim periods within those annual
periods, beginning after December 15, 2014. Early adoption is permitted. If adopted, and entity can elect to adopt the amendments in
this update using either a modified retrospective transition method or a prospective transition method.
ASU 2014-09: The FASB issued ASU Update 2014-09, Revenue from Contracts with Customers (Topic 606).
The amendments in this Update establish a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP,
including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The
revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It
attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the
consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: i) identify the
contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate
the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a
performance obligation.
The ASU is effective for annual periods beginning after December 15, 2016, including interim periods therein. Three basic transition
methods are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. Under the
this alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the
date of initial application (e.g. January 1, 2017) and recognize the cumulative effect of the new standard as an adjustment to the
opening balance of retained earnings. That is, prior years would not be restated and additional disclosures would be required to enable
users of the financial statements to understand the impact of adopting the new standard in the current year compared to prior years that
are presented under legacy U.S. GAAP. Early adoption is prohibited.
ASU 2014-14: The FASB issued ASU Update 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40):
Classification of Certain Government Guaranteed Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task
Force).
The amendments in this Update address a practice issue related to the classification of certain foreclosed residential and nonresidential
mortgage loans that are either fully or partially guaranteed under government programs. Specifically, creditors should reclassify loans
that meet certain conditions to "other receivables" upon foreclosure, rather than reclassifying them to other real estate owned (OREO).
85
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and
interest) the creditor expects to recover from the guarantor.
The ASU is effective for public business entities for annual periods and interim periods within those annual periods, beginning after
December 15, 2014. Early adoption is permitted, if the entity has already adopted ASU 2014-04, Reclassification of Residential Real
Estate Collateralized Consumer Mortgage Loans upon Foreclosure. Transition methods include a prospective method and a modified
retrospective method; however, entities must apply the same transition method as elected under ASU 2014-04.
Mid Penn is evaluating the effects these Updates will have on its consolidated financial statements.
(24) Subsequent Event
Mid Penn has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2014, for items that
should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the
date these consolidated financial statements were issued. Other than the Merger information identified and disclosed below, there
were no other subsequent events identified from the period subsequent to the balance sheet date of December 31, 2014 through the
date these consolidated financial statements were issued.
On March 1, 2015, Mid Penn consummated the merger with Phoenix Bancorp, Inc., a Pennsylvania corporation (“Phoenix”). Under
the terms of a merger agreement between the parties, Phoenix merged with, and into Mid Penn, with Mid Penn continuing as the
surviving entity. Simultaneously with the consummation of the foregoing merger, Miners Bank, a Pennsylvania-state chartered bank
and wholly-owned subsidiary of Phoenix, merged with and into Mid Penn Bank, a Pennsylvania-state chartered bank and wholly-
owned subsidiary of Mid Penn.
Additionally, as part of this transaction, on March 1, 2015, Mid Penn assumed all of the liabilities and obligations of Phoenix with
respect to 1,750 shares of Phoenix’s preferred stock issued to the Treasury in connection with the Small Business Lending Fund and
issued 1,750 shares of Mid Penn’s Senior Non-Cumulative Perpetual Preferred Stock, Series C, having a $1,000 liquidation preference
per share (the “SBLF Preferred Shares”), to the Treasury. The SBLF Preferred Shares qualify as Tier 1 Capital and have terms and
conditions identical to those shares of preferred stock issued by Phoenix to Treasury.
As part of this transaction, Phoenix shareholders received either 3.167 shares of Mid Penn’s common stock or $51.60 in cash in
exchange for each share of Phoenix common stock. Holders of contingent rights issued by Phoenix received approximately
0.414 shares of Mid Penn’s common stock as settlement of such rights. As a result, Mid Penn issued approximately 724,000 shares of
common stock with an acquisition date fair value of approximately $11,294,000, based on Mid Penn’s closing stock price of $15.60
on February 27, 2015, and cash of approximately $2,949,000. Based on the merger agreement, outstanding stock appreciation rights
of Phoenix were settled in cash in accordance with their terms. Including an insignificant amount of cash paid in lieu of fractional
shares, the fair value of total consideration paid was approximately $14,243,000.
As of the date that these consolidated financial statements were issued, the final determinations of the fair value of assets acquired and
liabilities assumed have not been finalized, due to the timing of the transaction.
86
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
(25) Summary of Quarterly Consolidated Financial Data (Unaudited)
The following table presents summarized quarterly financial data for 2014 and 2013.
(Dollars in thousands, except per share data)
2014 Quarter Ended
March 31
June 30
September 30
December 31
Interest Income
Interest Expense
Net Interest Income
Provision for Loan and Lease Losses
Net Interest Income After Provision for Loan Losses
Noninterest Income
Noninterest Expense
Income Before Provision for Income Taxes
Provision for Income Taxes
Net Income
Preferred Stock Dividends and Discount Accretion
Net Income Available to Common Shareholders
Per Share Data:
Basic Earnings Per Share
Diluted Earnings Per Share
Cash Dividends
(Dollars in thousands, except per share data)
Interest Income
Interest Expense
Net Interest Income
Provision for Loan and Lease Losses
Net Interest Income After Provision for Loan Losses
Noninterest Income
Noninterest Expense
Income Before Provision for Income Taxes
Provision for Income Taxes
Net Income
Preferred Stock Dividends and Discount Accretion
Net Income Available to Common Shareholders
Per Share Data:
Basic Earnings Per Share
Diluted Earnings Per Share
Cash Dividends
$
$
$
$
$
$
$
$
$
7,380
1,108
6,272
547
5,725
894
4,738
1,881
370
1,511
87
1,424
0.41
0.41
0.05
$
$
$
7,870
1,119
6,751
275
6,476
774
5,068
2,182
475
1,707
88
1,619
0.46
0.46
0.10
$
$
$
7,633
1,089
6,544
395
6,149
741
4,929
1,961
366
1,595
88
1,507
0.43
0.43
0.10
7,744
1,111
6,633
400
6,233
839
5,933
1,139
251
888
87
801
0.23
0.23
0.20
March 31
June 30
September 30
December 31
2013 Quarter Ended
$
$
$
6,902
1,443
5,459
495
4,964
850
5,037
777
92
685
61
624
0.18
0.18
-
$
$
$
7,153
1,306
5,847
415
5,432
838
4,612
1,658
292
1,366
87
1,279
0.37
0.37
0.05
$
$
$
7,633
1,192
6,441
575
5,866
808
4,746
1,928
440
1,488
88
1,400
0.40
0.40
0.05
7,295
1,116
6,179
200
5,979
794
4,996
1,777
377
1,400
87
1,313
0.37
0.37
0.15
87
MID PENN BANCORP, INC.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Mid Penn carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer
and Interim Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15 as of December 31, 2014. Based upon that evaluation, the Chief Executive Officer and Interim Principal Financial
Officer concluded, as of December 31, 2014, that, Mid Penn’s disclosure controls and procedures were effective in recording, processing,
summarizing, and reporting information required to be disclosed by Mid Penn, within the time periods specified in the SEC’s rules and forms,
and such information is accumulated and communicated to management to allow timely decisions regarding required disclosures.
Changes in Internal Controls over Financial Reporting
There have been no changes in Mid Penn’s internal control over financial reporting during the fourth quarter of 2014 that have materially
affected, or are reasonably likely to materially affect, Mid Penn’s internal control over financial reporting.
Mid Penn Bancorp, Inc. Management Report on Internal Controls over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a and 15(d)
– 15(f) under the Exchange Act of 1934 (“1934 Act”). The corporation’s internal control over financial reporting includes those policies and
procedures that pertain to the corporation’s ability to record, process, summarize, and report reliable financial data. All internal control systems
have inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of human error and the
circumvention or overriding of internal control. Accordingly, even effective internal control over financial reporting can provide only
reasonable assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the
effectiveness of internal control over financial reporting may vary over time.
In order to ensure that the corporation’s internal control over financial reporting is effective, management regularly assesses such controls and
did so most recently for its financial reporting as of December 31, 2014. This assessment was based on criteria for effective internal control
over financial reporting described in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (“COSO”). Management has concluded that Mid Penn’s internal control over financial reporting, as of December
31, 2014, is effective based on those criteria.
This annual report does not include an attestation report of Mid Penn’s independent registered public accounting firm regarding internal control
over financial reporting. Mid Penn’s internal control over financial reporting was not subject to attestation by Mid Penn’s independent
registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit Mid Penn to provide only
management’s report in this annual report.
/s/ Rory G. Ritrievi
Rory G. Ritrievi
President and
Chief Executive Officer
/s/ Edward P. Williams
Edward P. Williams
Interim Principal
Financial Officer
ITEM 9B. OTHER INFORMATION
None
88
MID PENN BANCORP, INC.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item, relating to directors, executive officers, and control persons is set forth under the captions “Executive
Officers”, “Information Regarding Director Nominees and Continuing Directors”, “Section 16(a) Beneficial Ownership Reporting Compliance”,
“Audit Committee Report”, and “Governance of the Corporation” in Mid Penn’s definitive proxy statement to be used in connection with the
2015 Annual Meeting of Shareholders, which pages are incorporated herein by reference.
The Corporation has adopted a Code of Ethics that applies to directors, officers and employees of the Corporation and the Bank. The
Corporation amended the Code of Ethics on March 17, 2013. A copy is posted under Governance Documents in the Corporate Information
section under the Investors link on the Corporation’s website, midpennbank.com. The Corporation’s Code of Ethics may be viewed on the Mid
Penn website at midpennbank.com or requested from the Corporate Secretary by telephone at 1-866-642-7736.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item, relating to executive compensation, is set forth under the captions “Compensation Discussion and
Analysis”, “Executive Compensation”, “Potential Payments Upon Termination or Change In Control”, “Information Regarding Director
Nominees and Continuing Directors”, “Compensation Committee Report” and “Compensation Committee Interlocks and Insider Participation”
of Mid Penn’s definitive proxy statement to be used in connection with the 2015 Annual Meeting of Shareholders, which pages are incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
SHAREHOLDER MATTERS
The information required by this Item, relating to beneficial ownership of Mid Penn’s common stock, is set forth under the caption “Beneficial
Ownership of Mid Penn Bancorp’s Stock Held By Principal Shareholders and Management” of Mid Penn’s definitive proxy statement to be
used in connection with the 2015 Annual Meeting of Shareholders, which pages are incorporated herein by reference. Mid Penn does not
maintain any equity compensation plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item, relating to transactions with management and others, certain business relationships and indebtedness of
management, is set forth under the captions “Certain Relationships and Related Transactions” and “Governance of the Corporation” of Mid
Penn’s definitive proxy statement to be used in connection with the 2015 Annual Meeting of Shareholders, which pages are incorporated herein
by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item, relating to the fees and services provided by Mid Penn’s principal accountant, is set forth under the
caption “Audit Committee Report” and “Proposal No. 3: Ratification of the Appointment of BDO USA, LLP as the Corporation’s Independent
Registered Public Accounting firm for 2015” of Mid Penn’s definitive proxy statement to be used in connection with the 2015 Annual Meeting
of Shareholders, which pages are incorporated herein by reference.
89
MID PENN BANCORP, INC.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial statements are incorporated by reference in Part II, Item 8 hereof.
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. The financial statement schedules, required by Regulation S-X, are omitted because the information is either not applicable or is included
elsewhere in the consolidated financial statements.
3. The following Exhibits are filed as part of this filing on Form 10-K, or incorporated by reference hereto:
3(i)
3(ii)
10.1
10.2
10.3
10.4
10.5
10.6
11
12
21
23
23.1
31.1
31.2
32
The Registrant’s restated Articles of Incorporation.
The Registrant’s By-laws. (Incorporated by reference to Exhibit 3(ii) of Registrant’s Current Report on Form 8-K filed
with the SEC on August 30, 2010.)
Mid Penn Bank’s Retirement Plan. (Incorporated by reference to Exhibit 10.1 of Registrant’s Annual Report on form 10-K
filed with the SEC on March 10, 2008.)*
Mid Penn Bank’s Employee Stock Ownership Plan. (Incorporated by reference to Exhibit 10.2 of Registrant’s Annual
Report on form 10-K filed with the SEC on March 10, 2008.)*
The Registrant’s Dividend Reinvestment Plan, as amended and restated. (Incorporated by reference to Registrant’s
Registration Statement on Form S-3, filed with the SEC on October 12, 2005.)
Mid Penn Bancorp, Inc. 2014 Restricted Stock Plan. (Incorporated by reference to Appendix A of Registrant’s Definitive
Proxy Statement on Schedule 14A as filed with the SEC on March 27, 2014.)*
Form of Mid Penn Bancorp, Inc. Restricted Stock Agreement.*
Assignment and Assumption Agreement, dated as of March 1, 2015, by and among Mid Penn Bancorp, Inc., Phoenix
Bancorp, Inc., the Secretary of the Treasury, and the related Small Business Lending Fund-Securities Purchase Agreement,
effective July 19, 2011, by and between the U.S. Department of the Treasury and Phoenix Bancorp, Inc. (Incorporated by
reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on March xx, 2015)
Statement re: Computation of Per Share Earnings. (Incorporated by reference to Part II, Item 8 of this Annual Report on
Form 10-K.)
Statements re: Computation of Ratios. (Incorporated by reference to Part II, Item 8 of this Annual Report on Form 10-K.)
Subsidiaries of Registrant.
Consent of BDO USA, LLP.
Consent of Baker Tilly Virchow Krause, LLP.
Rule 13a-14(a)/15d-14(a) Certification of the Principal Executive Officer.
Rule 13a-14(a)/15d-14(a) Certification of the Principal Financial Officer.
Principal Executive and Financial Officer’s §1350 Certifications.
90
MID PENN BANCORP, INC.
99.1
Listing of Mid-Atlantic Custom Peer Group Banks.
101.LAB XBRL Taxonomy Extension Label Linkbase.
101.PRE XBRL Taxonomy Extension Presentation Linkbase.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension Schema.
101.CAL XBRL Taxonomy Extension Calculation Linkbase.
101.DEF XBRL Taxonomy Extension Definition Linkbase.
*
Denotes a management contract or compensatory plan or arrangement.
91
MID PENN BANCORP, INC.
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURES
By:
/s/ Rory G. Ritrievi
Rory G. Ritrievi
President and
Chief Executive Officer
(Principal Executive Officer)
Date: March 20, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Arch 25, 2012
By:
March 20, 2015
/s/ Rory G. Ritrievi
Rory G. Ritrievi
President, Chief Executive Officer and
Director (Principal Executive Officer)
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
By:
/s/ Edward P. Williams
Edward P. Williams
Interim Principal Financial Officer
/s/ Robert A. Abel
Robert A. Abel, Director
/s/ Steven T. Boyer
Steven T. Boyer, Director
/s/ Matthew G. DeSoto
Matthew G. DeSoto, Director
/s/ Robert C. Grubic
Robert C. Grubic, Director
/s/ Gregory M. Kerwin
Gregory M. Kerwin, Director
/s/ Robert E. Klinger
Robert E. Klinger, Director
/s/ Vincent J. Land
Vincent J. Land, Director
/s/ Robert J. Moisey
Robert J. Moisey, Director
/s/ Theodore W. Mowery
Theodore W. Mowery, Director
/s/ John E. Noone
John E. Noone, Director
/s/ Noble C. Quandel, Jr.
Noble C. Quandel, Jr., Director
/s/ William A. Specht, III
William A. Specht, Director
March 20, 2015
March 20, 2015
March 20, 2015
March 20, 2015
March 20, 2015
March 20, 2015
March 20, 2015
March 20, 2015
March 20, 2015
March 20, 2015
March 20, 2015
March 20, 2015
March 20, 2015
92
MID PENN BANCORP, INC.
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Name
Mid Penn Bank
State of Incorporation
Pennsylvania
Mid Penn Insurance Services, LLC*
Pennsylvania
* Subsidiary of Mid Penn Bank
93
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-4 (Registration No.
333-199740) (including any amendments or supplements thereto, related appendices, and financial statements), Form
S-8 (Registration No. 333-197024) filed with the SEC on June 25, 2014, Form S-8 (Registration No. 333-170833)
filed with the SEC on November 24, 2010, Form S-3/A (Registration No. 333-39341) filed with the SEC on October
7, 2005, Form S-3D (Registration No. 333-128958) filed with the SEC on October, 12, 2005, and Form S-3
(Registration No. 333-156759) filed with the SEC on January 16, 2009 of Mid Penn Bancorp, Inc. of our report dated
March 20, 2015, relating to the consolidated financial statements which appears in the Annual Report on Form 10-K.
/s/ BDO USA, LLP
Harrisburg, Pennsylvania
March 20, 2015
94
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-4 (Registration No.
333-199740) (including any amendments or supplements thereto, related appendices, and financial statements), Form
S-8 (Registration No. 333-197024), Form S-8 (Registration No. 333-170833), Form S-3/A (Registration No. 333-
39341), Form S-3D (Registration No. 333-128958), and Form S-3 (Registration No. 333-156759) of Mid Penn
Bancorp, Inc. of our report dated March 25, 2013, relating to the consolidated financial statements which appears in
the Annual Report on Form 10-K for the year ended December 31, 2014.
/s/ Baker Tilly Virchow Krause, LLP
Pittsburgh, Pennsylvania
March 20, 2015
95
MID PENN BANCORP, INC.
EXHIBIT 31.1
I, Rory G. Ritrievi, certify that:
1.
I have reviewed this annual report on Form 10-K of Mid Penn Bancorp, Inc.;
CERTIFICATION
2.
3.
4.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
By: __/s/ Rory G. Ritrievi__ ___
President and CEO
Date: March 20, 2015
96
MID PENN BANCORP, INC.
EXHIBIT 31.2
I, Edward P. Williams, certify that:
1.
I have reviewed this annual report on Form 10-K of Mid Penn Bancorp, Inc.;
CERTIFICATION
2.
3.
4.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
By: __/s/ Edward P. Williams__ ___
Interim Principal Financial Officer
Date: March 20, 2015
97
MID PENN BANCORP, INC.
EXHIBIT 32
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADDED BY SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the annual report of Mid Penn Bancorp, Inc. (the “Corporation”) on Form 10-K for the period ending December 31, 2014, as
filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rory G. Ritrievi, President and CEO, and I, Edward P.
Williams, Interim Principal Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as added pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
2. To my knowledge, the information contained in the Report fairly presents, in all material respects the financial condition and
results of operations of Mid Penn Bancorp, Inc. as of the dates and for the periods expressed in the Report.
By: __/s/ Rory G. Ritrievi_______
President and CEO
Date: March 20, 2015
By: __/s/ Edward P. Williams ____
Interim Principal Financial Officer
Date: March 20, 2015
98
MID PENN BANCORP, INC.
Mid-Atlantic Custom Peer Group
Company
1st Colonial Bancorp, Inc.
1st Constitution Bancorp
Absecon Bancorp
Adirondack Trust Company
Allegheny Valley Bancorp, Inc.
American Bank Incorporated
Annapolis Bancorp, Inc.
Apollo Bancorp, Inc.
Ballston Spa Bancorp, Inc.
Bancorp of New Jersey, Inc.
Bank of Akron
Bank of Utica
BCSB Bancorp, Inc.
Berkshire Bancorp Inc.
Brunswick Bancorp
Calvin B. Taylor Bankshares, Inc.
Capital Bank of New Jersey
Carroll Bancorp, Inc.
Carrollton Bancorp
CB Financial Services, Inc.
CBT Financial Corporation
CCFNB Bancorp, Inc.
Cecil Bancorp, Inc.
Citizens Financial Services, Inc.
Citizens National Bank of Meyersdale
Clarion County Community Bank
Commercial National Financial Corporation
Community Bank of Bergen County
Community First Bank
Community National Bank
Community National Bank of Northwestern PA
Community Partners Bancorp
Cornerstone Financial Corp.
County First Bank
Damascus Community Bank
Delhi Bank Corp.
Delmar Bancorp
Dimeco, Inc.
DNB Financial Corporation
Elmer Bancorp, Inc.
Elmira Savings Bank
Embassy Bancorp, Inc.
City
State
NJ
Collingswood
NJ
Cranbury
Absecon
NJ
Saratoga Springs NY
PA
Pittsburgh
PA
Allentown
MD
Annapolis
PA
Apollo
NY
Ballston Spa
NJ
Fort Lee
NY
Akron
NY
Utica
MD
Baltimore
New York
NY
New Brunswick NJ
MD
Berlin
NJ
Vineland
MD
Sykesville
MD
Columbia
PA
Carmichaels
PA
Clearfield
PA
Bloomsburg
MD
Elkton
PA
Mansfield
PA
Meyersdale
PA
Clarion
PA
Latrobe
NJ
Maywood
NJ
Somerset
NY
Great Neck
PA
Albion
NJ
Tinton Falls
NJ
Mount Laurel
MD
La Plata
MD
Damascus
NY
Delhi
MD
Salisbury
PA
Honesdale
PA
Downingtown
NJ
Elmer
NY
Elmira
PA
Bethlehem
Company
Emclaire Financial Corp.
Empire National Bank
ENB Financial Corp
Enterprise National Bank N.J.
ES Bancshares, Inc.
Evans Bancorp, Inc.
Farmers and Merchants Bank
Fidelity D & D Bancorp, Inc.
First Bank
First Community Financial Corporation
First Keystone Corporation
First National Bank of Groton
First Resource Bank
Fleetwood Bank Corporation
FNB Bancorp, Inc.
FNBM Financial Corporation
FNBPA Bancorp, Inc.
Frederick County Bancorp, Inc.
Glen Burnie Bancorp
GNB Financial Services, Inc.
Greater Hudson Bank, National Assoc.
Hamlin Bank and Trust Company
Harford Bank
Harvest Community Bank
Highlands Bancorp, Inc.
Hilltop Community Bancorp, Inc.
Honat Bancorp, Inc.
Hopewell Valley Community Bank
Howard Bancorp, Inc.
IBW Financial Corporation
Jeffersonville Bancorp
Jonestown Bank and Trust Co.
JTNB Bancorp, Inc.
Juniata Valley Financial Corp.
Kinderhook Bank Corporation
Kish Bancorp, Inc.
Landmark Bancorp, Inc.
Liberty Bell Bank
Luzerne National Bank Corporation
Lyons Bancorp, Inc.
Manor Bank
Mars National Bank
Exhibit 99.1
State
City
PA
Emlenton
NY
Islandia
PA
Ephrata
NJ
Kenilworth
NY
Newburgh
NY
Hamburg
MD
Upperco
PA
Dunmore
NJ
Hamilton
PA
Mifflintown
PA
Berwick
NY
Groton
PA
Exton
PA
Fleetwood
PA
Newtown
PA
Minersville
PA
Port Allegany
MD
Frederick
MD
Glen Burnie
PA
Gratz
NY
Middletown
PA
Smethport
MD
Aberdeen
NJ
Pennsville
NJ
Vernon
NJ
Summit
PA
Honesdale
NJ
Pennington
MD
Ellicott City
Washington
DC
Jeffersonville NY
PA
Jonestown
PA
Jim Thorpe
PA
Mifflintown
NY
Kinderhook
PA
Reedsville
PA
Pittston
NJ
Marlton
PA
Luzerne
NY
Lyons
PA
Manor
PA
Mars
99
MID PENN BANCORP, INC.
Company
Mauch Chunk Trust Financial Corp.
Mid Penn Bancorp, Inc.
Mifflinburg Bank & Trust Company
MNB Corporation
Muncy Bank Financial, Inc.
National Bank of Coxsackie
National Capital Bank of Washington
Neffs Bancorp, Inc.
New Jersey Community Bank
New Millennium Bank
New Tripoli Bancorp, Inc.
Northumberland Bancorp
Norwood Financial Corp.
Old Line Bancshares, Inc.
Orange County Bancorp, Inc.
Parke Bancorp, Inc.
Pascack Bancorp, Inc.
Patapsco Bancorp, Inc.
Penns Woods Bancorp, Inc.
Penseco Financial Services Corporation
Peoples Financial Services Corp.
Peoples Limited
Putnam County National Bank of Carmel
QNB Corp.
Republic First Bancorp, Inc.
Royal Bancshares of Pennsylvania, Inc.
Rumson-Fair Haven Bank & Trust Co.
Scottdale Bank & Trust Company
Shore Community Bank
Solvay Bank Corporation
Somerset Hills Bancorp
Somerset Trust Holding Company
Stewardship Financial Corporation
Sussex Bancorp
Tri-County Financial Corporation
Turbotville National Bancorp, Inc.
UNB Corporation
Unity Bancorp, Inc.
VSB Bancorp, Inc.
West Milton Bancorp, Inc.
Woodlands Financial Services Company
Mid-Atlantic Custom Peer Group (continued)
Exhibit 99.1 (continued)
State
City
PA
Jim Thorpe
PA
Millersburg
PA
Mifflinburg
PA
Bangor
PA
Muncy
NY
Coxsackie
DC
Washington
PA
Neffs
NJ
Freehold
New Brunswick NJ
PA
New Tripoli
PA
Northumberland
PA
Honesdale
MD
Bowie
NY
Middletown
NJ
Sewell
NJ
Waldwick
MD
Dundalk
PA
Williamsport
PA
Scranton
PA
Hallstead
PA
Wyalusing
NY
Carmel
PA
Quakertown
PA
Philadelphia
PA
Narberth
NJ
Rumson
PA
Scottdale
NJ
Toms River
NY
Solvay
NJ
Bernardsville
PA
Somerset
NJ
Midland Park
NJ
Franklin
MD
Waldorf
PA
Turbotville
PA
Mount Carmel
NJ
Clinton
NY
Staten Island
PA
West Milton
PA
Williamsport
100
Financial Highlights as of and for the year ended December 31,
(Dollars in thousands, except per share data)
2014
2013
2013
CHANGE
CHANGE
Total Assets
Total Deposits
Net Loans and Leases
Total Investments and Interest Bearing
Time Deposits with Other Financial Institutions
Shareholders' Equity
$755,657 $ 713,125
13,125
637,922
08,130
608,130
564,817
540,145
40,145
147,406
30,316
130,316
59,130
52,916
52,916
Net Income Available to Common Shareholders
5,351
4,616
4,616
Earnings Per Share (Basic)
Earnings Per Share (Fully Diluted)
Cash Dividends
Book Value Per Common Share
Tangible Book Value Per Common Share
Return on Average Shareholders' Equity
Return on Average Assets
Net Interest Margin
Nonperforming Assets to Total Assets
1.53
1.53
0.45
15.48
15.13
9.95%
0.78%
3.99%
1.52%
1.32
1.32
1.32
1.32
0.25
0.25
13.71
13.71
13.35
13.35
9.37%
9.37%
0.71%
0.71%
3.80%
3.80%
1.78%
1.78%
6.0%
6.0%
4.9%
4.9%
4.6%
4.6%
13.1%
13.1%
11.7%
11.7%
15.9%
15.9%
16.0%
16.0%
16.0%
16.0%
80.0%
80.0%
12.9%
12.9%
13.3%
13.3%
6.2%
6.2%
9.9%
9.9%
4.9%
4.9%
-14.6%
-14.6%
TOTAL ASSETS
AVERAGE ANNUAL INCREASE: 5%
TOTAL DEPOSITS
AVERAGE ANNUAL INCREASE: 6%
NET LOANS
& LEASES
AVERAGE ANNUAL INCREASE: 4%
4
.
5
1
7
$
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’09
’10
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’12
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’14
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’10
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’12
’13
’14
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’10
’11
’12
’13
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Dollar amounts in millions.
$800
700
600
500
400
300
200
100
0
349 Union Street, Millersburg, PA 17061
1-866-642-7736 | midpennbank.com
OUR MISSION
To uphold the values of community banking, in order to be the best bank for our shareholders,
customers, employees and the communities we serve.
BOARD OF DIRECTORS
Robert C. Grubic
Chairman
William A. Specht, III
Vice-Chairman
Robert A. Abel
Steven T. Boyer
Matthew G. DeSoto
Theodore W. Mowery
Gregory M. Kerwin
John E. Noone
Robert E. Klinger
Vincent J. Land
Robert J. Moisey
Noble C. Quandel, Jr.
Rory G. Ritrievi
SENIOR MANAGEMENT
Rory G. Ritrievi
President and CEO
Scott W. Micklewright
Chief Lending Officer
Kelly K. Neiderer
Chief Retail Officer
Justin T. Webb
Chief Risk Officer
Roberta A. Hoffman
Director of Human Resources
Margaret E. Steinour
Loan Operations Manager
Becky M. Bacher
BSA/Security Officer
Amy M. Barnett
Compliance Officer
John Paul Livingston
Chief Technology Officer
Kimberly Arthur-Tressler
Director of Trust Services
Cindy L. Wetzel
Corporate Secretary
Edward P. Williams
Chief Financial Officer
Paul F. Spiegel
Senior Operations Manager