5-YEAR SHAREHOLDER RETURN
264%
300
200
100
2016 TOTAL
SHAREHOLDER
RETURN
52%
2016 RETURN
ON EQUITY
10.71%
$1 BILLION
$1 BILLION IN ASSETS CROSSED IN 2016
“We achieved our highest year of
net earnings available to common
shareholders in our 148-year history.
We ended the year with $7,804,000
in earnings, an increase of more than
29% over 2015 earnings.”
–PRESIDENT AND CEO RORY G. RITRIEVI
DOUBLE-DIGIT GROWTH IN CORE BANKING
>20%
>10%
>44%
2016 ANNUAL REPORT TO SHAREHOLDERS
TOTAL DEPOSITS
increased
more than 20%
TOTAL LOANS
increased
more than 10%
TOTAL NON-INTEREST
INCOME increased
more than 44%
349 Union Street, Millersburg, PA 17061 | 1-866-642-7736 | midpennbank.com
Member FDIC
A LETTER FROMPresident and CEO Rory G. Ritrievi & Chairman of the Board Robert C. GrubicWith a total shareholder return of over 50%, record net income and earnings per share and surpassing $1 billion in assets, 2016 was a great year for Mid Penn Bancorp, Inc. and its subsidiary Mid Penn Bank! These record-setting financial achievements were, however, only part of the story.With a $7.73 or 48% increase in stock price and $0.58 in cash dividends paid during the year, total shareholder return for 2016 was 52%. It is the best performance in that metric as far back as our records show, and one in which we take considerable pride. We operate this company for the benefit of our shareholders, and delivering a shareholder return of this magnitude was the best part of the year.The dividends paid were made possible by achieving our highest year of net earnings available to common shareholders in our 148-year history. We ended the year with $7,804,000 in earnings, an increase of more than 29% over 2015 earnings. That equated to earnings per common share of $1.85, a 26% increase, and also a record high for Mid Penn. In recognition of this outstanding shareholder return, we made American Banker’s “Top 200 Community Banks” list for the third consecutive year. The list is based upon a three-year average of return on shareholders’ equity, and this year, we moved up the list to 145th. Our return on equity in 2016 was 10.71%, a big improvement over the 9.16% that got us on the list in 2015. We are pleased that we continue to be featured on the list while also moving up in the rankings each year. The earnings success was achieved with a simple formula - grow high quality loans and low cost deposits; grow fee-based revenues; improve asset quality; and control operating expenses. In 2016, we grew loans by over 10% and low-cost deposits by over 20%. This led to a 9% increase in net interest income. As net interest income comprises the bulk of our revenues, strong performance in loan and deposit growth is of the utmost importance to a successful year in earnings. Our other source of income, fee-based noninterest income, grew significantly, increasing by 44% in 2016. This was the result of strong performances in just about every line item, including residential mortgage production; significant growth in trust and wealth assets under management; growth in merchant services income; growth in interchange income. With the improvements in net interest income and noninterest income, our total revenues grew by an impressive 11.4%. We attribute our revenue expansion success to our high-performing team of relationship-building bankers who cover every area of our expanding footprint, providing the products and services that all of our customers need. We have made considerable improvements to the size and quality of our relationship-building team since we began restructuring Mid Penn eight years ago. We now have more qualified commercial lenders, retail managers, trust and wealth management calling officers, cash management calling officers, investment advisors, SBA lenders, and residential mortgage lenders. In 2016, we further expanded our product and service offerings with the addition of an agricultural lending group. The investment we made in methodically building our team is yielding solid results. In 2016, we originated over $300 million in loans, grew relationship deposits by $158 million and grew trust assets under management by 98%.While loan growth is paramount to Mid Penn’s success, preserving the quality of that loan portfolio is equally important. Those shareholders who have been associated with Mid Penn Bancorp since 2009 or longer can attest to the frustration of earnings lost to loan charge-offs. In 2016, we continued to make significant strides in asset quality improvement. Those improvements have allowed us to recognize asset quality metrics that are our best in almost a decade. As an example, our “Texas Ratio,” which is a calculation of the likelihood of bank stress due to asset quality, fell to 7.9% at December 31, 2016, which is considered a favorable level among our peers and for the banking industry. We decreased our nonperforming assets by over 13% and increased our provision for loan losses by over 75%. The commitment to pristine asset quality continues.Mid Penn reached another milestone in 2016 when it grew to over $1 billion in assets. Crossing that threshold raises the level of awareness of Mid Penn in the investment community, but also raises the level of oversight from our regulators. We exceeded $1 billion in assets with great confidence as we made significant infrastructure and delivery improvements in anticipation of reaching that milestone. Those infrastructure improvements will continue as we grow and advance towards our next milestone.In 2016, we also expanded our footprint and announced plans to expand it even further in 2017. We added our 21st bank wide retail location on the Oregon Pike, our second in Lancaster County. We announced plans for our 22nd overall and third Lancaster County retail location coming to New Holland in May of this year. We also announced plans to dramatically improve our retail delivery in Camp Hill by relocating to another facility. Our new location, which opened in February 2017, will provide improved functionality and will be much more accessible and welcoming to customers. We also made efficiency improvements to our retail locations in Millersburg, Tower City and Lykens. Finally, we developed a plan to expand our retail network in Schuylkill County, home of our Miners Bank division, with plans to add a branch in Orwigsburg. While other banks are closing branches and forcing customers to use alternative delivery channels, we continue to find ways to develop an efficient retail network while enhancing all delivery channels, giving every and any customer a choice of banking options. The results so far? Mid Penn is the 9th largest bank in total deposits throughout all of the counties it serves. Every bank ranked ahead of us on that list, save for one, is headquartered in another region, state or country. And although those institutions are at least five times and up to 300+ times our size, we have continued to demonstrate the viability of our community banking brand by improving our deposit position and gaining market share in all six of the counties in which we operate. We took time in 2016 to also improve the look and feel of our website and online banking, another important delivery channel. Customers from every age group and every demographic need and appreciate technology driven banking. While as a community bank we don’t have the resources to be leaders in technology delivery, we do want to keep pace with customer preferences. If you have not already done so, please visit our website at www.midpennbank.com and provide your feedback. There is actually a suggestion box in which you can send a message directly to our President and Chief Executive A LETTER FROMPresident and CEO Rory G. Ritrievi & Chairman of the Board Robert C. GrubicWith a total shareholder return of over 50%, record net income and earnings per share and surpassing $1 billion in assets, 2016 was a great year for Mid Penn Bancorp, Inc. and its subsidiary Mid Penn Bank! These record-setting financial achievements were, however, only part of the story.With a $7.73 or 48% increase in stock price and $0.58 in cash dividends paid during the year, total shareholder return for 2016 was 52%. It is the best performance in that metric as far back as our records show, and one in which we take considerable pride. We operate this company for the benefit of our shareholders, and delivering a shareholder return of this magnitude was the best part of the year.The dividends paid were made possible by achieving our highest year of net earnings available to common shareholders in our 148-year history. We ended the year with $7,804,000 in earnings, an increase of more than 29% over 2015 earnings. That equated to earnings per common share of $1.85, a 26% increase, and also a record high for Mid Penn. In recognition of this outstanding shareholder return, we made American Banker’s “Top 200 Community Banks” list for the third consecutive year. The list is based upon a three-year average of return on shareholders’ equity, and this year, we moved up the list to 145th. Our return on equity in 2016 was 10.71%, a big improvement over the 9.16% that got us on the list in 2015. We are pleased that we continue to be featured on the list while also moving up in the rankings each year. The earnings success was achieved with a simple formula - grow high quality loans and low cost deposits; grow fee-based revenues; improve asset quality; and control operating expenses. In 2016, we grew loans by over 10% and low-cost deposits by over 20%. This led to a 9% increase in net interest income. As net interest income comprises the bulk of our revenues, strong performance in loan and deposit growth is of the utmost importance to a successful year in earnings. Our other source of income, fee-based noninterest income, grew significantly, increasing by 44% in 2016. This was the result of strong performances in just about every line item, including residential mortgage production; significant growth in trust and wealth assets under management; growth in merchant services income; growth in interchange income. With the improvements in net interest income and noninterest income, our total revenues grew by an impressive 11.4%. We attribute our revenue expansion success to our high-performing team of relationship-building bankers who cover every area of our expanding footprint, providing the products and services that all of our customers need. We have made considerable improvements to the size and quality of our relationship-building team since we began restructuring Mid Penn eight years ago. We now have more qualified commercial lenders, retail managers, trust and wealth management calling officers, cash management calling officers, investment advisors, SBA lenders, and residential mortgage lenders. In 2016, we further expanded our product and service offerings with the addition of an agricultural lending group. The investment we made in methodically building our team is yielding solid results. In 2016, we originated over $300 million in loans, grew relationship deposits by $158 million and grew trust assets under management by 98%.While loan growth is paramount to Mid Penn’s success, preserving the quality of that loan portfolio is equally important. Those shareholders who have been associated with Mid Penn Bancorp since 2009 or longer can attest to the frustration of earnings lost to loan charge-offs. In 2016, we continued to make significant strides in asset quality improvement. Those improvements have allowed us to recognize asset quality metrics that are our best in almost a decade. As an example, our “Texas Ratio,” which is a calculation of the likelihood of bank stress due to asset quality, fell to 7.9% at December 31, 2016, which is considered a favorable level among our peers and for the banking industry. We decreased our nonperforming assets by over 13% and increased our provision for loan losses by over 75%. The commitment to pristine asset quality continues.Mid Penn reached another milestone in 2016 when it grew to over $1 billion in assets. Crossing that threshold raises the level of awareness of Mid Penn in the investment community, but also raises the level of oversight from our regulators. We exceeded $1 billion in assets with great confidence as we made significant infrastructure and delivery improvements in anticipation of reaching that milestone. Those infrastructure improvements will continue as we grow and advance towards our next milestone.In 2016, we also expanded our footprint and announced plans to expand it even further in 2017. We added our 21st bank wide retail location on the Oregon Pike, our second in Lancaster County. We announced plans for our 22nd overall and third Lancaster County retail location coming to New Holland in May of this year. We also announced plans to dramatically improve our retail delivery in Camp Hill by relocating to another facility. Our new location, which opened in February 2017, will provide improved functionality and will be much more accessible and welcoming to customers. We also made efficiency improvements to our retail locations in Millersburg, Tower City and Lykens. Finally, we developed a plan to expand our retail network in Schuylkill County, home of our Miners Bank division, with plans to add a branch in Orwigsburg. While other banks are closing branches and forcing customers to use alternative delivery channels, we continue to find ways to develop an efficient retail network while enhancing all delivery channels, giving every and any customer a choice of banking options. The results so far? Mid Penn is the 9th largest bank in total deposits throughout all of the counties it serves. Every bank ranked ahead of us on that list, save for one, is headquartered in another region, state or country. And although those institutions are at least five times and up to 300+ times our size, we have continued to demonstrate the viability of our community banking brand by improving our deposit position and gaining market share in all six of the counties in which we operate. We took time in 2016 to also improve the look and feel of our website and online banking, another important delivery channel. Customers from every age group and every demographic need and appreciate technology driven banking. While as a community bank we don’t have the resources to be leaders in technology delivery, we do want to keep pace with customer preferences. If you have not already done so, please visit our website at www.midpennbank.com and provide your feedback. There is actually a suggestion box in which you can send a message directly to our President and Chief Executive Officer. Your suggestions are routed directly to him, and he responds to each and every one of them personally!While we are proud of the record-setting shareholder return mentioned above, we are equally proud of the culture we have developed, which centers around strengthening the communities in which we operate. In 2016, we made over $200,000 in corporate donations, contributed 1,300 hours of employee volunteer time and raised $50,000 among our employees for charitable causes, all of which were record amounts! We also won the Pennsylvania Association of Community Bankers’ “Grow Your Community” award for the third consecutive year. Our signature community event for 2016 was again the Mid Penn Bank Celebrity Golf Tournament for Charity. Supported by former NFL players Ron Jaworski, Bill Bergey, Mike Quick and Joe Pisarcik, we were able to raise $25,000 for the benefit of the Pennsylvania Breast Cancer Coalition (PBCC). The 2017 event which will be held in May will again benefit PBCC, and for the first time, will be co-branded with the NFL Alumni Association. It will feature more celebrities in support of a larger fundraising goal. We are excited by the progress of that event in its three years in existence. While it is our signature event, it is by no means our only one. We are also proud of our ongoing commitment to the annual Millersburg Fireworks event, which we host and sponsor as a way to say “thank you” to the communities we serve. We continue to extend this community outreach by participating in area parades throughout our footprint, and in 2016, more than 270 volunteer hours were given alone at local Halloween parades. Additionally, our charitable team volunteered their time to local organizations including Big Brothers Big Sisters, Junior Achievement, Special Olympics and several other deserving nonprofits. Along with donating time, our employees continue to generously support a range of community causes and events through fundraisers and giving campaigns. The largest fundraising event held by our employees in 2016 was our “No Shave November” campaign, which raised $11,000 for Penn State Cancer Institute to support prostate cancer research. Supporting area students and schools is also an important commitment that we have continued to uphold and enhance over the years. In 2016, we funded $7,000 in academic scholarships to high school seniors throughout Central Pennsylvania. This includes our annual “Anna Woodside Scholarship” which honors a woman who was influential to Mid Penn during her lifetime from 1912 to 2013. We also offered a special program called “Millionaire for a Day” to encourage creativity and the development of writing skills among elementary school students. More than 2,180 local children submitted essays, and three contest winners were selected to receive a limo ride to school and 90 days’ worth of interest on a $1 million bank account balance. By regularly implementing innovative programs such as these, we continue to impact the regions we serve and differentiate our delivery as a community bank.With a strong 2016 behind us, we now focus our energy on continuing that momentum in 2017. While recent years have had considerable headwinds in the form of low interest rates, a weak economy and growing regulation, there is hope that those headwinds might become significantly milder, and therefore, more favorable in 2017. Regardless, we will work hard to make this another special year. Look for us to continue our progress in market share growth through the delivery of products and services that our market community members want and need.For several years, we have insisted that we are building THE best bank in Central Pennsylvania - the best bank for shareholders, customers, employees and the community at large. There have been other banks that could have staked that claim at one point or another in the Central Pennsylvania region’s history. They are all gone now, having sold out to larger banks outside the Central Pennsylvania area. Our intention is to continue to grow in size, profitability and efficiency to benefit our shareholders while also serving our communities years into the future.To achieve all of this, we acknowledge our debt of gratitude to each of our stakeholders. Together, we are building THE best bank in Central Pennsylvania. We thank you for your continued support.Rory G. Ritrievi Robert C. Grubic President and CEO Chairman of the BoardForward-Looking Statement under the Private Securities Litigation Reform Act of 1995: Statements in this letter regarding Mid Penn’s business, which are not historical facts, are “forward-looking statements” that involves risks and uncertainties. For a discussion of such risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see Mid Penn’s filings with the Securities Exchange Commission, including “Item 1A. Risk Factors” in Mid Penn’s Annual Report on Form 10-K attached to this letter. These statements speak only as of the date of this letter, even if subsequently made available by Mid Penn on its website or otherwise. Mid Penn undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this letter.Community Strong Since 1868 Mid Penn is committed to our core values as a community bank. Through major giving campaigns, community events, employee volunteerism and giving, educational outreach and corporate donations, the bank and our team of employees are highly engaged in giving back to our local communities.Given in Corporate Donations$216,133Hours of Volunteer Time Given by Our Employees1,300Raised by Our Employees for Charitable Causes$49,5002016 GIVING HIGHLIGHTSOur employees held a “No Shave November” campaign in 2016 and raised $11,000 for Penn State Cancer Institute. The donation supported prostate cancer research performed at Penn State Health Milton S. Hershey Medical Center.In 2016, Mid Penn raised $25,000 for the PA Breast Cancer Coalition through the Mid Penn Bank Celebrity Golf Tournament for Charity. The event was supported by NFL celebrities Ron Jaworski, Bill Bergey and Joe Pisarcik.Annually, Mid Penn Bank provides deserving high school seniors throughout the Central Pennsylvania region with academic scholarships. We funded $7,000 in scholarships in 2016. 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, 2016
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-13677
MID PENN BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania
(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
Non-accelerated Filer
☐
☐
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 $15.91 per share, as reported by The NASDAQ Stock Market LLC (“NASDAQ”), on June 30, 2016, the last business
day of the registrant’s most recently completed second fiscal quarter was approximately $67,283,485.
As of March 1, 2017, the registrant had 4,233,297 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be used in connection with the 2017 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 Accounting Fees and Services
PART IV
Item 15 -
Exhibits and Financial Statement Schedules
Signatures
EXHIBITS
PAGE
3
12
17
17
17
17
18
20
21
42
43
97
97
97
98
98
98
98
98
99
100
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’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, 2016, Mid Penn had total consolidated assets of $1,032,599,000 with total
deposits of $935,373,000 and total shareholders’ equity of $70,467,000.
As of December 31, 2016, 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, 2016, the Bank had 234 full-time and 23 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 Insurance Services, LLC was a wholly-owned subsidiary of Mid Penn Bank that provided a wide range of personal and
commercial insurance products. Due to the lack of activity within this subsidiary, the decision was made to exit this line of business,
effective March 1, 2016.
Mid Penn Bank
Mid Penn Bank was organized in 1868 under a predecessor name, Millersburg Bank, 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, Phoenix’s wholly-owned banking subsidiary, Miners Bank, was merged with and into the Bank. The Bank
was the surviving charter, and Miners Bank’s four branches in Schuylkill and Luzerne Counties, Pennsylvania operate 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 21 full service retail banking properties 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, 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 online banking, telephone banking, cash management services, automated teller services and safe deposit boxes.
Business Strategy
The Bank’s services are provided to small and middle-market businesses, consumers, nonprofit organizations, municipalities, and real
estate investors through 21 full service retail banking properties, one loan production office, and a corporate administration office.
Mid Penn’s primary markets currently, and historically, have lower unemployment than the U.S. as a whole, due in part to a
diversified manufacturing and services base and the presence of state government offices, which help shield the markets from national
trends. At December 31, 2016, the unadjusted unemployment rate for the Harrisburg/Carlisle and Lancaster areas, two of Mid Penn’s
primary markets, were 3.9% and 3.7%, respectively, versus the seasonally adjusted national unemployment rate of 4.7%. The
unadjusted unemployment rate for Mid Penn’s other market, in the Scranton/Wilkes-Barre/Hazleton area, was 5.5% at December 31,
2016.
3
MID PENN BANCORP, INC.
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 sound quality within its target market. Creditworthy customers exhibit positive historical
repayment 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. 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 mitigated or potential losses 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 primary lending objectives are as follows:
to establish a diversified 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, 2016, 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 Cumberland, Dauphin,
Lancaster, Luzerne, Northumberland, and Schuylkill Counties.
Investment Activities
Mid Penn’s securities portfolio is used to provide both liquidity and a secondary source of interest earning through investments in
higher-yielding assets than overnight funding alternatives, while maintaining asset quality. Mid Penn does not have any significant
non-governmental concentrations within its investment securities portfolio.
Mid Penn’s entire portfolio of investment securities as of December 31, 2016, was 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 between the amortized cost and fair value, or
unrealized loss, amounted to $4,423,000 as of December 31, 2016. 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 retail deposits and, to a lesser extent, wholesale 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 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, generating and retaining retail 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 maintain and 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 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. 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
historically been a popular savings vehicle for investors. The recent economic conditions and persistent lower interest rates have
impacted the returns on many investments and impacted the manner in which investors distribute their funds across investment
alternatives. The safety of traditional bank products has remained an attractive option during periods 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 focused on 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. As of December 31, 2016, the Bank was not subject to any supervisory enforcement actions.
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 (“SEC”) 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 descriptions below of, and references to, applicable statutes
and regulations are not intended to be complete lists or reflective of all applicable 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.
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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. 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.
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. 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. Mid Penn has not elected to become a
financial holding company at this time.
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 both the asset size and 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, various bank account and bank service
disclosures, 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, 2016, 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”). The remainder may consist of subordinated debt, non-qualifying preferred stock and
a limited amount of the loan loss allowance (“Tier 2 Capital”). Combined, the Tier 1 Capital and Tier 2 Capital comprise regulatory
“Total 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 requirement.
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MID PENN BANCORP, INC.
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.
The capital ratios of Mid Penn and the Bank are described in Note 18 to Mid Penn’s Consolidated Financial Statements, which are
included herein.
Banking regulators continue to indicate their desire to further refine capital requirements applicable to banking organizations,
including those discussed in the “Regulatory Capital Changes” section below. Changes to capital requirements could materially affect
the profitability of Mid Penn or the fair value of Mid Penn stock.
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.
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 began January 1, 2015. The final rules called for the following minimum capital requirements
(which include the impact of the capital conservation buffer effective January 1, 2016):
Common equity tier 1 capital to risk-weighted assets
Tier 1 capital to risk-weighted assets
Total capital to risk-weighted assets
Leverage ratio
Effective January 1,
2016
2017
5.125%
6.625%
8.625%
4.0%
5.75%
7.25%
9.25%
4.0%
The final rules established 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
could 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 began on January 1, 2016 at the 0.625% level.
Implementation of the deductions and other adjustments to common equity tier 1 capital began on January 1, 2015 and will be phased-
in over a three-year period (beginning at 40% on January 1, 2015, 60% on January 1, 2016 and an additional 20% per year thereafter).
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MID PENN BANCORP, INC.
The final rules allow community banks to make a one-time election not to include the additional components of accumulated other
comprehensive income (“AOCI”) in regulatory capital and instead use the existing treatment under the general risk-based capital rules
that excludes most AOCI components from regulatory capital. Mid Penn made the election not to include the additional components
of AOCI in regulatory capital.
The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual
preferred stock) issued before May 19, 2010 for inclusion in the Tier 1 Capital of banking organizations with total consolidated assets
less than $15 billion as of December 31, 2009 and banking organizations that were mutual holding companies as of May 19, 2010.
Consistent with the Dodd-Frank Act, the new rules replace the ratings-based approach to securitization exposures, which is based on
external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights for these
exposures. Alternatively, banking organizations may use the existing gross-ups approach to assign securitization exposures to a risk
weight category or choose to assign such exposures a 1,250% risk weight.
Under the new rules, mortgage servicing assets (“MSAs”) and certain deferred tax assets (“DTAs”) are subject to stricter limitations
than those applicable under the current general risk-based capital rule. The new rules also increase the risk weights for past-due loans,
certain risk weights and credit conversion factors.
Mid Penn has implemented these changes in determining and reporting the regulatory ratios of Mid Penn and the Bank, and has
concluded that the new rules did not have a material negative effect on Mid Penn’s financial condition.
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 management practices, internal controls and
information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset
quality, liquidity, capital, earnings, 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.
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. Mid Penn and the Bank were not subject to any such dividend prohibitions
as of December 31, 2016.
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 level of assets and
tangible equity, 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 a regulatory defined assessment calculation. 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.
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MID PENN BANCORP, INC.
Beginning with the second quarter of 2011, as mandated by the Dodd-Frank Act, the assessment base that the FDIC uses to calculate
assessment premiums is 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 is a low of 2.5 basis points and a high of 45 basis points, per $100 of assets.
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. These new formulas did not affect the Bank as it was less than $10 billion in total assets size.. 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 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. The Bank maintains a comprehensive
compliance management program to promote its compliance with these and other applicable consumer protection laws and
regulations.
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
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
(“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;
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MID PENN BANCORP, INC.
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.
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, 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.
Dodd-Frank Act
The Dodd-Frank Act, which became law in July 2010, significantly changed regulation of financial institutions and the financial
services industry. Dodd-Frank created a Financial Services Oversight Council to identify emerging systemic risks and improve
interagency cooperation, and centralized responsibility for consumer financial protection by creating a new agency, the Consumer
Financial Protection Bureau, which is responsible for implementing, examining and enforcing compliance with federal consumer
financial laws. Dodd-Frank also permanently raised the current standard maximum deposit insurance amount to $250,000, established
strengthened capital standards for banks, disallowed certain trust preferred securities from qualifying as Tier 1 Capital (subject to
certain grandfather provisions for existing trust preferred securities), established new minimum mortgage underwriting standards,
granted the Federal Reserve the power to regulate debit card interchange fees, and implemented corporate governance changes.
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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 changing the regulation of bank derivatives activities; and allowing commercial enterprises to own banks.
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. 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.
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, promote employment, control 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.
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 liability for some 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 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 established policies, procedures, and systems designed to
promote 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 NASDAQ 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 SEC. 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.
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MID PENN BANCORP, INC.
You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. 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 website 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
possible after filing with the SEC. 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 considered 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
income Mid Penn receives on loans and securities and the amount of interest expense 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 investments fall more quickly than the interest rates paid on deposits and 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, or rapid 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 credit risk
As of December 31, 2016, approximately 70% of Mid Penn’s loan portfolio in Table 8 consisted of commercial, industrial and
agricultural, 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 secured 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 loan and lease losses may be insufficient
Mid Penn maintains an allowance for loan and lease losses, which is a reserve established 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 resulting from loan loss
provisions 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.
12
MID PENN BANCORP, INC.
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
loan competitors enjoy advantages, including greater financial resources and higher lending limits, a wider geographic presence, more
accessible branch office 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 deposit 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 and costly 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.
The Basel III capital requirements 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 through January 1, 2019, 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 Basel III implementation activities and related regulatory capital targets require additional capital to
support our business risk profile prior to final implementation of the Basel III standards. Mid Penn may be required to maintain
higher levels of capital, thus potentially reducing 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 and data 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, identity theft, 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 and data 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 and data could damage Mid Penn’s reputation, cause
Mid Penn to incur additional expenses, result in online services or other businesses becoming inoperable, subject Mid Penn to
regulatory sanctions or additional regulatory 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 business operations and interaction with customers are increasingly done via electronic means, and this has increased
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. An increased level of attention in the industry is 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,
13
MID PENN BANCORP, INC.
corrupting data, or causing operational disruption. To combat against these attacks, Mid Penn has policies and procedures 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 cyber-attacks may have 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’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 performance by
personnel or 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 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, and principal and interest on its subordinated notes, 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, primarily the Bank. Its ability to pay
dividends on its common stock and subordinated notes, 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 profitability, financial condition,
liquidity, and capital management limits. 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
earnings from both the current period and a designated look-back 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 5.15% interest rate on our subordinated notes will remain fixed at this level until December 2020, when it will float to Prime plus
0.50%
The per annum interest rate our subordinated notes is fixed at 5.15% until December 2020, when it will float at the Wall Street
Journal’s Prime rate plus 0.50%, provided that the interest rate applicable will at no times be less than 4.0%. Depending on Mid
Penn’s financial condition at the time, an increase in the interest 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 financial institutions that are more geographically diversified, Mid Penn’s success is dependent to a
significant degree on economic conditions in Central Pennsylvania, especially in Cumberland, Dauphin, Lancaster, Luzerne,
Northumberland, and Schuylkill Counties, which are the counties and markets primarily served by Mid Penn. The banking industry is
affected by general economic conditions including the effects of inflation, recession, unemployment, real estate values, trends in
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 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 personnel
Mid Penn’s success depends, in large part, on its ability to attract and retain qualified, key personnel. Competition for the best
personnel in most activities engaged in by Mid Penn can be intense, and Mid Penn may not be able to hire or 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.
14
MID PENN BANCORP, INC.
Mid Penn is subject to claims and litigation pertaining to fiduciary responsibility
From time to time, customers may 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, the claims or related
litigation processes may result in significant financial expense and 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.
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; however, the trading volume in its common stock 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 generally 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, or changes in supervisory activities, to
affect many aspects of Mid Penn’s operations, including capital levels, lending and funding practices, and liquidity standards. New
laws and regulations may increase costs of regulatory compliance and of doing business and otherwise affect operations, and may
significantly affect the markets in which Mid Penn does business, the markets for and value of Mid Penn’s loans and investments, the
ability to attract deposits at a reasonable cost, the fees charged, and 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 readily realized or liquidated at prices 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 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. 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 Mid Penn will not
experience adverse effects, which may materially affect its liquidity, financial condition, and profitability.
15
MID PENN BANCORP, INC.
Mid Penn’s banking subsidiary may be required to pay higher FDIC insurance premiums or special assessments which may adversely
affect its earnings
Poor economic conditions and the resulting bank failures from the most recent recession have stressed the DIF and increased the costs
of Mid Penn’s FDIC insurance assessments. 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 banking 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 of incorporation 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, the staggered election of Mid Penn’s board of
directors, and the absence of cumulative voting. Any one or more of these laws or 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.
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 merger and acquisition activities, or 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
Mid Penn reviews its investment securities portfolio at each quarter-end reporting period to determine whether the fair value of
individual securities or the portfolio as a whole is below the current carrying value. When the fair value of any of its investment
securities has declined below its carrying value, Mid Penn is required to assess whether the decline is other than temporary. If Mid
Penn concludes that the decline is other than temporary, it is 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 may result in Mid Penn concluding
that impairment of these securities 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, or lack thereof, may not accurately reflect the actual impairment in the future.
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
16
MID PENN BANCORP, INC.
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 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, and could adversely affect its financial condition and results of operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
The Bank owns a building in Millersburg, Pennsylvania, located at 349 Union Street, which serves as its headquarters and the
executive and administrative offices of Mid Penn and the Bank. The Bank also owns one building in Halifax, Pennsylvania that
serves as an operational support facility. In addition, the Bank leases two buildings in Harrisburg, Pennsylvania that serve as
additional administrative and operational support offices. Administrative space is also leased in Pottsville, Lancaster, and
Chambersburg, Pennsylvania. The Bank’s retail office network is comprised of 21 full service locations and two ATM only sites at
December 31, 2016. Eleven retail banking locations are located in Dauphin County, five in Schuylkill County, three in Cumberland
County, two in Lancaster County, one in Northumberland County, and one in Luzerne County. As of December 31, 2016, retail
banking facilities at sixteen locations were owned, while seven were leased. On January 20, 2017, the Bank consummated the sale of
three retail banking properties held for sale. Two of the properties are being leased back from the buyer, while the operations of the
third location will be moved to a nearby leased facility. All real estate owned is free and clear of encumbrances. Mid Penn’s
operating leases expire at various dates through the year 2035 and generally include options to renew. For additional information
regarding the lease commitments, refer to Part II, Item 8, Note 9 “Bank Premises and Equipment” in the Notes to Consolidated
Financial Statements.
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, the Bank, or any of its properties.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
17
MID PENN BANCORP, INC.
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 NASDAQ under the symbol MPB. The following table shows the range of high and
low closing prices for one share of the Corporation’s common stock and cash dividends paid per share for the quarters indicated.
Quarter Ended:
March 31, 2016
June 30, 2016
September 30, 2016
December 31, 2016
March 31, 2015
June 30, 2015
September 30, 2015
December 31, 2015
High
Low
Cash
Dividends
Paid
$
$
16.99 $
16.23
19.49
24.00
16.09 $
16.50
16.94
17.00
14.70 $
14.88
15.72
18.50
15.35 $
15.24
15.32
15.60
0.22
0.12
0.12
0.12
0.10
0.10
0.12
0.12
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 1, 2017, there were approximately 1,714 shareholders of record of Mid Penn’s common stock.
Dividends: In 2016, cash dividends of $0.58 were paid, while cash dividends of $0.68 were declared. A special cash dividend of
$0.10 was declared on December 21, 2016 and paid on January 17, 2017. Cash dividends paid and declared were $0.44 in 2015 and
$0.45 in 2014. The declaration of cash dividends on Mid Penn’s common stock is at the discretion of its Board of Directors, and any
decision to declare a dividend is based on a number of factors, including, but not limited to, earnings, prospects, financial condition,
regulatory capital levels, applicable covenants under any credit agreements and other contractual restrictions, Pennsylvania law,
federal and Pennsylvania bank regulatory law, and other factors deemed relevant.
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 16,
2017, at the Halifax Area Ambulance and Rescue Association Building located 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.
18
MID PENN BANCORP, INC.
Stock Performance Graph
Index
Mid Penn Bancorp, Inc.
Russell 3000
Mid-Atlantic Custom Peer Group*
Period Ending
12/31/11
12/31/12
12/31/16
100.00 152.24 199.14 222.29 236.54 364.17
100.00 116.42 155.47 175.00 175.84 198.23
100.00 117.25 137.31 148.21 162.20 154.25
12/31/14
12/31/13
12/31/15
* Mid-Atlantic Custom Peer Group consists of Mid-Atlantic commercial banks with assets less than $1B.
Source: SNL Financial, an offering of S&P Global Market Intelligence
© 2017
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 filed with this Annual Report on Form 10-K.
19
MID PENN BANCORP, INC.
ITEM 6. SELECTED FINANCIAL DATA
Summary of Selected Financial Data
(Dollars in thousands, except per share data)
INCOME:
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 and
Redemption Premium
Series C Preferred Stock Dividends
Net Income Available to Common
Shareholders
COMMON STOCK DATA PER SHARE:
Earnings Per Common Share (Basic)
Earnings Per Common Share (Fully
Diluted)
Cash Dividends Declared
Cash Dividends Paid
Book Value Per Common Share
Tangible Book Value Per Common
Share (a)
AVERAGE SHARES OUTSTANDING
(BASIC):
AVERAGE SHARES OUTSTANDING
(FULLY DILUTED):
AT YEAR-END:
$
2016
2015
2014
2013
2012
40,212 $
5,367
34,845
1,870
5,924
28,818
10,081
2,277
7,804
—
—
—
36,490 $
4,607
31,883
1,065
4,113
26,759
8,172
1,644
6,528
30,627 $
4,427
26,200
1,617
3,284
20,704
7,163
1,462
5,701
28,983 $
5,057
23,926
1,685
3,290
19,391
6,140
1,201
4,939
—
—
14
473
17
350
—
309
—
30,366
7,125
23,241
1,036
3,683
19,693
6,195
1,244
4,951
514
—
—
7,804
6,038
5,351
4,616
4,437
$
1.85 $
1.47 $
1.53 $
1.32 $
1.27
1.85
0.68
0.58
16.65
1.47
0.44
0.44
16.58
1.53
0.45
0.45
15.48
1.32
0.25
0.25
13.71
1.27
0.25
0.25
13.57
15.59
15.49
15.13
13.35
13.19
4,229,284
4,106,548
3,495,705
3,491,653
3,486,543
4,229,284
4,106,548
3,495,705
3,491,653
3,486,543
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
Subordinated Debt
Shareholders' Equity
RATIOS:
Return on Average Assets
Return on Average Shareholders' Equity
Cash Dividend Payout Ratio
Allowance for Loan and Lease Losses to
Loans and Leases at Year End
Average Shareholders' Equity to Average
Assets for the Year
133,625 $
135,721 $
141,634 $
122,803 $
154,295
813,924
7,183
1,032,599
935,373
—
13,581
7,414
70,467
736,513
6,168
931,638
777,043
31,596
40,305
7,414
70,068
571,533
6,716
755,657
637,922
578
52,961
—
59,130
546,462
6,317
713,125
608,130
23,833
23,145
—
52,916
0.78 %
10.71 %
31.43 %
0.74 %
9.16 %
29.93 %
0.78 %
9.95 %
29.41 %
0.71 %
9.37 %
18.94 %
0.88 %
0.83 %
1.18 %
1.16 %
7.28 %
8.06 %
7.80 %
7.56 %
484,220
5,509
705,200
625,461
—
22,510
—
52,220
0.69 %
8.78 %
19.69 %
1.14 %
7.98 %
(a) Tangible Book Value Per Common Share excludes goodwill and core deposits and other intangibles, net
.
20
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;
an increase in the Pennsylvania Bank Shares Tax to which Mid Penn Bank’s capital stock is currently subject, or
imposition of any additional taxes on the capital stock of Mid Penn or Mid Penn Bank;
impacts of the capital and liquidity requirements imposed by Basel III standards and other regulatory pronouncements,
regulations and rules;
the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the
Public Company Accounting Oversight Board, Financial Accounting Standards Board, the SEC, and other accounting and
reporting standard setters;
the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan
collateral, the value of investment securities, and interest rate protection agreements;
the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies,
credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial
institutions operating in Mid Penn’s market area and elsewhere, including institutions operating locally, regionally,
nationally and internationally, together with such competitors offering banking products and services by mail, telephone,
computer and the internet;
the costs and effects of litigation and of unexpected or adverse outcomes in such litigation;
technological changes;
our ability to implement business strategies, including our acquisition strategy;
our ability to successfully locate advantageous acquisition or expansion targets (institutions or offices) at advantageous
prices;
our ability to successfully integrate any banks, companies, offices, assets, liabilities, customers, systems and management
personnel we acquire into our operations and our ability to realize related revenue synergies and cost savings within
expected time frames;
potential goodwill impairment charges, future impairment charges and fluctuations in the fair values of reporting units or
of assets in the event projected financial results are not achieved within expected time frames;
our ability to attract and retain qualified management and personnel;
results of the regulatory examination and supervision process;
the failure of assumptions underlying the establishment of reserves for loan and lease losses and estimations of values of
collateral and various financial assets and liabilities;
our ability to maintain compliance with the exchange rules of NASDAQ;
our ability to maintain the value and image of our brand and protect our intellectual property rights;
volatility in the securities markets;
21
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
disruptions due to flooding, severe weather, or other natural disasters or Acts of God;
acts of war or terrorism; and
slow economic conditions.
All written or oral forward-looking statements attributable to Mid Penn are expressly qualified in their entirety by these cautionary
factors.
This 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 on Form 10-K. The
comparability of the results of operations for the year ended 2016 compared to 2015 and 2014, in general, have been impacted by the
acquisition of Phoenix, which closed on March 1, 2015. For comparative purposes, some 2015 and 2014 balances have been
reclassified to conform to the 2016 presentation. Such reclassifications had no impact on net income available to common
shareholders.
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 for smaller reporting public companies.
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 reported results of our operations.
Management of the Corporation considers the accounting judgments relating to the allowance for loan and lease losses, the evaluation
of the Corporation’s investment securities for other-than-temporary impairment, the valuation of the Corporation’s goodwill for
impairment, and the valuation of assets acquired and liabilities assumed in business combinations, to be the accounting areas that
require the most subjective and complex judgments.
The allowance for loan and lease losses represents management’s estimate of probable incurred credit losses inherent in the loan and
lease portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because
it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired
loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant change. The loan and lease portfolio also represents the largest
asset type on the consolidated balance sheet. Throughout the remainder of this report, the terms “loan” or “loans” refers to both loans
and leases.
Valuations for the investment portfolio are determined using quoted market prices, where available. If quoted market prices are not
available, investment valuation is based on pricing models, quotes for similar investment securities, and observable values based upon
yield curves and spreads. In addition to valuation, management must assess whether there are any declines in value below the
carrying value of the investments that should be considered other than temporary or otherwise require an adjustment in carrying value
and recognition of the loss in the consolidated statement of income.
Goodwill recorded in connection with acquisitions is tested annually for impairment. If certain events occur which indicate goodwill
might be impaired between annual tests, goodwill must be tested when such events occur. In making this assessment, Mid Penn
considers a number of factors including operating results, business plans, economic projections, anticipated future cash flows, current
market data, stock price, etc. There are inherent uncertainties related to these factors and Mid Penn’s judgment in applying them to
the analysis of goodwill impairment. Changes in economic and operating conditions could result in goodwill impairment in future
periods.
22
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Valuations of assets acquired and liabilities assumed in business combinations are measured at fair value as of the acquisition date. In
many cases, determining the fair value of the assets acquired and liabilities assumed requires Mid Penn to estimate the timing and
amount of cash flows expected to result from these assets and liabilities and to discount these cash flows at appropriate rates of
interest, which require the utilization of significant estimates and judgment in accounting for the acquisition.
Financial Summary
The comparability of the results of operations for the years ended 2016 and 2015, in general, have been impacted by the acquisition of
Phoenix. The reported results for the year ended December 31, 2015 included only ten months of operating results related to the
Phoenix acquisition, which closed on March 1, 2015, versus 2016 including twelve months of Phoenix-related results. The
consolidated earnings of Mid Penn are derived primarily from the operations of its wholly owned subsidiary, Mid Penn Bank.
2016 versus 2015
Mid Penn’s net income available to common shareholders (“earnings”) of $7,804,000 for the year 2016 reflects an increase of
$1,766,000 or 29 percent, over earnings of $6,038,000 for the year 2015. This represents earnings in 2016 of $1.85 per common
share, basic and diluted, compared to $1.47 per common share basic and diluted in 2015.
Total assets of Mid Penn grew $100,961,000 or 11 percent, in 2016 to close the year at $1,032,599,000 compared to total assets of
$931,638,000 at the end of 2015. This increase was impacted by strong growth in the loan portfolio, as well as in deposits, which led
to an increase in Federal Funds Sold. For the year ended December 31, 2016, total deposits increased $158,330,000 or 20 percent to
$935,373,000 while the loan portfolio increased $77,411,000 or 11 percent, to $813,924,000 at December 31, 2016. Over the last
twelve months, all deposit categories increased, mainly due to both strong retail branch deposit growth and cash management sales
efforts. Mid Penn was in a Federal Funds Sold position of $30,477,000 at December 31, 2016, while it was in a short-term borrowing
position of $31,596,000 at December 31, 2015.
During the year ended December 31, 2016, long-term debt decreased by $26,724,000 or 66 percent, to $13,581,000 by the end of the
year. Mid Penn was able to take advantage of the growth in deposits as a lower cost funding source. The growth in deposits also
allowed Mid Penn the opportunity to prepay $16,500,000 in long-term FHLB Advances in 2016.
Mid Penn’s return on average shareholders’ equity, (“ROE”), a widely recognized performance indicator in the financial industry, was
10.71% in 2016 and 9.16% in 2015. Return on average assets (“ROA”), another performance indicator, was 0.78% in 2016 and
0.74% in 2015.
Net interest margin was 3.82% in 2016 versus 4.03% in 2015. Net interest income on a tax equivalent basis increased to $36,470,000
in 2016 from $33,806,000 in 2015. Included in net interest income for the year ended December 31, 2016 was $167,000 in income
from the successful resolution of two legacy Phoenix loans acquired with credit deterioration and $558,000 in income for the year
ended December 31, 2015 from the successful resolution of six legacy Phoenix loans acquired with credit deterioration. The income
was the result of recognizing the remaining accretable and nonaccretable discounts on these loans. Further discussion of net interest
margin can be found in the Net Interest Income section below.
Total nonperforming assets decreased $303,000 from $6,062,000 at the end of 2015 to $5,759,000 at the end of 2016. The decline of
$961,000 in foreclosed real estate held for sale from $1,185,000 at December 31, 2015 to $224,000 at December 31, 2016 was 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.
Net charge-offs decreased to $855,000 in 2016 from $1,613,000 during 2015. Gross charge-offs decreased $677,000 from $1,784,000
in 2015 to $1,107,000 in 2016. Mid Penn increased the provision for loan and lease losses from $1,065,000 in 2015 to $1,870,000 in
2016. The increase in the loan loss provision for 2016 compared to 2015 was largely driven by the growth in the loan portfolio, as
well as an increase in specific allocations on impaired loans. Further discussion of these issues can be found in the Provision for Loan
and Lease Losses section below.
Mid Penn’s Tier 1 Capital (to risk weighted assets) of $70,431,000 or 9.1%, and Total Capital (to risk weighted assets) of $85,148,000
or 11.0%, at December 31, 2016, are above the regulatory requirements. Tier 1 Capital consists primarily of Mid Penn’s shareholders'
equity. Total Capital also includes Mid Penn’s qualifying subordinated debt 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.
23
MID PENN BANCORP, INC.
2015 versus 2014
Management’s Discussion and Analysis
Mid Penn’s earnings of $6,038,000 for the year 2015 reflects an increase of $687,000 or 13 percent, over earnings of $5,351,000 for
the year 2014. This represents earnings in 2015 of $1.47 per common share compared to $1.53 per common share in 2014.
Total assets of Mid Penn grew $176,067,000 or 23 percent, in 2015 to close the year at $931,724,000 compared to $755,657,000 at the
end of 2014. This increase was impacted by the inclusion of Phoenix’s assets on Mid Penn’s balance sheet, as well as growth in the
loan portfolio, which increased $164,980,000 or 29 percent, to $736,513,000. Loans attributable to Phoenix included in the growth of
the loan portfolio were $91,655,000.
Total deposits increased $139,121,000 or 22 percent, from $637,922,000 at the end of 2014 to $777,043,000 at December 31, 201 5.
Over the last twelve months, all deposit categories increased, mainly due to the inclusion of Phoenix’s deposits, but also due to strong
cash management and retail efforts. Long-term debt decreased by $12,656,000 or 24 percent, to $40,305,000 by the end of 2015. Mid
Penn increased its short-term borrowing position by $31,018,000 to $31,596,000 at the end of 2015 as a low-cost funding source to
fund the increased loan demand and to replace the long-term debt that matured in 2015.
Mid Penn’s ROE, a widely recognized performance indicator in the financial industry, was 9.16% in 2015 and 9.95% in 2014. ROA,
another performance indicator, was 0.74% in 2015 and 0.78% in 2014.
Performance in 2015 was influenced by the March 1, 2015 acquisition of Phoenix, which resulted in increased earning assets and
shareholders’ equity, as well as an improved cost of funds. Mid Penn also had improvement in nonperforming loans and consistent
management of controllable expenses throughout 2015.
Net interest margin improved to 4.03% in 2015 from 3.99% in 2014. This improvement was driven by a decrease in the rate on
supporting liabilities to 0.64% in 2015 from 0.71% in 2014, which allowed the average interest spread to increase to 3.94% from
3.91% in 2014. Net interest income on a tax equivalent basis increased to $33,806,000 in 2015 from $27,968,000 in 2014. Included
in the net interest income increase for the year ended December 31, 2015 is $558,000 in income from the successful resolution of six
legacy Phoenix loans acquired with credit deterioration. The income was the result of recognizing the remaining accretable and
nonaccretable discounts on these loans. Further discussion of net interest margin can be found in the Net Interest Income section
below.
Total nonperforming assets decreased $5,445,000 from $11,507,000 in 2014 to $6,062,000 at the end of 2015. Decreasing nonaccrual
loans were the leading source of improvement in nonperforming assets. Two nonaccrual troubled debt restructured loans to unrelated
borrowers that totaled $4,680,000 at December 31, 2014, were resolved in 2015, further aiding in the reduction in nonper forming
assets. Further discussion of these components can be found in the Credit Quality, Credit Risk, and Allowance for Loan and Lease
Losses section.
Net charge-offs increased to $1,613,000 in 2015 from $1,218,000 during 2014. Gross charge-offs increased $456,000 from
$1,328,000 in 2014 to $1,784,000 in 2015 mainly due to the impact of two large charge-offs to unrelated borrowers in 2015 totaling
$1,461,000. Mid Penn decreased the provision for loan and lease losses from $1,617,000 in 2014 to $1,065,000 in 2015. 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.
Mid Penn’s Tier 1 Capital (to risk weighted assets) of $64,089,000 or 9.1%, and Total Capital (to risk weighted assets) of
$77,852,000, or 11.0%, at December 31, 2015, are above the regulatory requirements. Tier 1 Capital consists primarily of Mid Penn’s
shareholders' equity. Total Capital also includes Mid Penn’s qualifying subordinated debt 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.
Net Interest Income
Net interest income, Mid Penn's primary source of earnings, represents the difference between interest income received on loans,
investments, and overnight funds, and interest expense paid on deposits and short- and long-term borrowings. Net interest income is
affected by changes in interest rates and changes in average balances (volume) in the various interest-sensitive assets and liabilities.
24
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS
(Dollars in thousands)
ASSETS:
Interest Bearing Balances
Investment Securities:
Taxable
Tax-Exempt
December 31, 2016
Income and Rates on a Taxable Equivalent Basis for Years Ended
December 31, 2015
December 31, 2014
Average
Average
Balance Interest Rates
Average
Average
Balance Interest Rates
Average
Average
Balance Interest Rates
$
2,559 $
12
0.47 % $ 6,377 $
44
0.69 % $ 6,839 $
41
0.60 %
79,277 1,515
1.91 % 67,382 1,604
2.38 % 62,214 1,501
2.41 %
80,451 3,130
(a)
3.89 % 69,996 3,031
(a)
4.33 % 74,508 3,303
(a)
4.43 %
Total Securities
159,728
137,378
136,722
Federal Funds Sold
16,848
82
0.49 %
535
2
0.37 %
30 —
0.00 %
Loans and Leases, Net
Restricted Investment in
Bank Stocks
Total Earning Assets
772,877 36,963
(b)
4.78 % 689,870 33,483
(b)
4.85 % 554,970 27,427
(b)
4.94 %
2,751
135
954,763 41,837
4.91 %
249
4.38 % 837,911 38,413
3,751
6.64 %
123
4.58 % 701,624 32,395
3,063
4.02 %
4.62 %
Cash and Due from Banks
Other Assets
Total Assets
12,791
33,898
$ 1,001,452
13,263
32,754
$ 883,928
8,460
24,152
$ 734,236
LIABILITIES &
SHAREHOLDERS' EQUITY:
Interest-bearing Demand
Money Market
Savings
Time
Total Interest-bearing
Deposits
Short-term Borrowings
Long-term Debt
Subordinated Debt
Total Interest-bearing
Liabilities
$ 293,745 1,009
235,561 1,315
34
172,657 2,156
59,615
804
0.34 % $ 238,141
0.56 % 208,693 1,122
0.06 % 52,895
31
1.25 % 154,335 1,932
777
0.34 % $ 216,656
0.54 % 201,281 1,088
0.06 % 30,953
16
1.25 % 127,071 1,971
0.36 %
0.54 %
0.05 %
1.55 %
761,578 4,514
654,064 3,889
575,961 3,852
2,370
28,474
7,431
15
442
396
0.63 % 13,184
1.55 % 50,642
625
5.33 %
47
648
23
0.36 % 14,813
1.28 % 30,889
3.68 %
55
520
— —
0.37 %
1.68 %
NA
799,853 5,367
0.67 % 718,515 4,607
0.64 % 621,663 4,427
0.71 %
Noninterest-bearing Demand
Other Liabilities
Shareholders' Equity
120,244
8,462
72,893
Total Liabilities &
Shareholders' Equity
$ 1,001,452
87,474
6,691
71,248
49,814
5,491
57,268
$ 883,928
$ 734,236
Net Interest Income
$ 36,470
$ 33,806
$ 27,968
Total Yield on Earning Assets
Rate on Supporting Liabilities
Average Interest Spread
Net Interest Margin
4.38 %
0.67 %
3.71 %
3.82 %
4.58 %
0.64 %
3.94 %
4.03 %
4.62 %
0.71 %
3.91 %
3.99 %
(a)
(b)
includes tax equivalent adjustments on tax-free municipal securities of $1,064,000, $1,031,000, and $1,123,000 for the years 2016, 2015, and 2014,
respectively
includes tax equivalent adjustments on tax-free municipal loans of $561,000, $643,000, and $522,000 for the years 2016, 2015, and 2014, respectively
25
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Interest and average rates in Table 1 above 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 $1,097,000, $666,000, and $749,000 are included with loan interest income in Table 1 above for the years 2016, 2015,
and 2014, respectively.
TABLE 2: VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
(Dollars in thousands on a 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
Subordinated Debt
Total Interest Expense
2016 Compared to 2015
Increase (Decrease)
Due to Change In:
2015 Compared to 2014
Increase (Decrease)
Due to Change In:
Volume Rate
Net
Volume Rate
Net
$
(26 ) $
(6 ) $
(32 ) $
(3 ) $
6 $
3
283
453
736
(372 )
(354 )
(726 )
(89 )
99
10
61
4,029
(66 )
4,734
19
(549 )
(48 )
(1,310 )
80
3,480
(114 )
3,424
125
(200 )
(75 )
—
6,667
28
6,617
(22 )
(72 )
(94 )
2
(611 )
98
(599 )
103
(272 )
(169 )
2
6,056
126
6,018
188
145
—
229
562
(39 )
(284 )
250
489
17
48
3
(5 )
63
7
78
123
271
205
193
3
224
625
(32 )
(206 )
373
760
77
41
—
422
540
(6 )
333
—
867
(50 )
(7 )
15
(461 )
(503 )
(2 )
(205 )
23
(687 )
27
34
15
(39 )
37
(8 )
128
23
180
NET INTEREST INCOME
$
4,245 $
(1,581 ) $
2,664 $
5,750 $
88 $
5,838
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 2016, taxable equivalent net interest income increased $2,664,000 or 8 percent compared to 2015. During 2015, taxable
equivalent net interest income increased $5,838,000 or 21 percent compared to 2014, with much of this increase attributable to the
impact of the Phoenix acquisition. The average balances, effective interest differential, and interest yields for the years ended
December 31, 2016, 2015, and 2014 and the components of net interest income, are presented in Table 1. A comparative presentation
of the changes in net interest income for 2016 compared to 2015, and 2015 compared to 2014, 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 decreased to 4.38% in 2016 from 4.58% in 2015. The yield on earning assets for 2014 was 4.62%. The
decline in the yield on earning assets in 2016 was softened by the increase in both investment and loan volume. The increased volume
helped offset the impact of the decline in the average rate. The average rate on loans decreased from 4.85% in 2015 to 4.78% in 2016.
The average rates on investment securities also declined from 2015 to 2016. Taxable investments decreased from 2.38% to 1.91% and
tax-exempt investments decreased from 4.33% to 3.89%. This decline in investment yields was generally the result of matured,
called, and sold bond proceeds being reinvested at lower market rates. The average “prime rate” for 2016 was 3.50%, while it was
3.25% in both 2015 and 2014.
26
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Interest expense increased by $760,000 or 16 percent, in 2016 as compared to 2015. For the year ending December 31, 2015, interest
expense increased $180,000 or 4 percent, compared to 2014. The cost of interest bearing liabilities increased to 0.67% in 2016 from
0.64% in 2015. The cost of interest bearing liabilities for 2014 was 0.71%. While the continued low interest rate environment, along
with Mid Penn’s ability to replace higher-cost time deposits with lower-cost demand deposits, aided in maintaining a low cost of
interest bearing liabilities in 2016, the increase in the volume of interest bearing liabilities of $81,338,000 for the year ended
December 31, 2016, including a full year of the subordinated debt interest expense, led to the overall increase in interest expense.
Included in the net interest income for the year ended December 31, 2016 was $167,000 in income from the successful resolution of
two legacy Phoenix loans acquired with credit deterioration. Similarly, $558,000 in interest income for the year ended December 31,
2015 was realized from the successful resolution of six legacy Phoenix loans acquired with credit deterioration. The income was the
result of recognizing the remaining accretable and nonaccretable discounts on these loans.
Net interest margin, on a tax equivalent basis, was 3.82% in 2016 compared to 4.03% in 2015 and 3.99% in 2014. 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,
however, the options selected by customers. 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 actual and 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, 2015 to
December 31, 2016. For the year ended December 31, 2016, the provision for loan and lease losses was $1,870,000 compared to
$1,065,000 for the year ended December 31, 2015. The allowance for loan and lease losses as a percentage of total loans was 0.88%
at December 31, 2016, compared to 0.83% at December 31, 2015 and 1.18% at December 31, 2014. This ratio for December 31, 2015
and 2016 was impacted by the inclusion of the Phoenix loan portfolio in the calculation, coupled with the elimination of Phoenix’s
allowance for loan and lease losses in conformity with GAAP purchase accounting treatment.
For the year ended December 31, 2016, Mid Penn had net charge-offs of $855,000 compared to net charge-offs of $1,613,000 during
the year ended December 31, 2015. Loans charged off during 2016 were comprised of one commercial and industrial loan for
$820,000 and ten commercial real estate loans among eight relationships totaling $216,000. In addition, there were charge-offs for
three consumer loans to unrelated borrowers totaling $25,000, one home equity loan for $25,000, and three residential real estate loans
among two relationships totaling $4,000. The remaining $17,000 was comprised of deposit account charge-offs. These charge-offs
were offset by total recoveries of $252,000 realized during 2016.
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 increase in the loan loss provision expense in 2016 compared to 2015. The first element was the
increase in specific allocations on criticized and classified assets during 2016. While these categories of loans declined $2,299,000 or
14 percent from $16,286,000 at the end 2015 to $13,987,000 at December 31, 2016, the specific allocations required on this pool
increased $355,000 from $503,000 at December 31, 2015 to $858,000 at the end of 2016. The second element was an increase in both
the special mention and substandard historical loss factors. These elements of the allowance calculation increased to 4.5% and 4.8%
at December 31, 2016 from 2.2% and 4.2% at the end of 2015. The increased loss factors were the result of less favorable loss history
during the look-back period. Finally, the overall growth in the loan portfolio of $76,692,000 or 10 percent, drove increased levels of
both quantitative and qualitative allocations of $47,000 and $578,000, respectively during 2016.
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
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
Total loans and leases recovered
2016
Years ended December 31,
2014
2013
2015
2012
$
6,168 $
6,716 $
6,317 $
5,509 $
6,772
216
820
4
67
1,107
1,569
130
35
50
1,784
1,057
62
133
76
1,328
936
183
167
187
1,473
499
834
195
860
2,388
211
4
26
11
252
75
12
44
40
13
13
20
64
171
110
286
193
23
92
596
15
31
—
43
89
Net charge-offs
Provision for loan and lease losses
Balance, end of year
855
1,870
7,183 $
1,613
1,065
6,168 $
1,218
1,617
6,716 $
877
1,685
6,317 $
2,299
1,036
5,509
$
2016
Years ended December 31,
2014
2013
2015
2012
Ratio of net charge-offs during the year to average loans
and leases outstanding during the year, net of unearned
discount
0.11 %
0.23 %
0.22 %
0.17 %
0.48 %
Allowance for loan and lease losses as a percentage of total
loans and leases at December 31
0.88 %
0.83 %
1.18 %
1.16 %
1.14 %
Allowance for loan and lease losses as a percentage of
non-performing assets at December 31
124.73 %
101.75 %
58.36 %
49.84 %
42.05 %
Noninterest Income
2016 versus 2015
During the twelve months ended December 31, 2016, noninterest income (excluding net securities gains of $1,046,000) increased
$1,090,000 or 29 percent, versus the twelve months ended December 31, 2015 (excluding net security gains of $325,000). Items of
particular note are detailed below.
During 2016, Mid Penn took advantage of increased market values on securities to reposition some of its investment portfolio,
including selling a large volume of longer-term and rate-sensitive CMOs, as well as certain municipal bonds and agency notes. Mid
Penn realized $1,046,000 in net securities gains during 2016 as a result of these investment management activities. In comparison,
during 2015, Mid Penn realized $325,000 from net gains on sales of securities.
28
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Mortgage banking income more than doubled to $922,000 during the twelve months ended December 31, 2016, as compared to
$456,000 for the same period in 2015. Increased residential real estate financing activity throughout Mid Penn’s footprint, favorably
low mortgage market interest rates, and the addition of seasoned loan originators collectively contributed to the increased revenue
from this business line.
Mid Penn also experienced increased origination and sales activity in Small Business Administration (“SBA”) loans, resulting in gains
of $470,000 from related loan sale gains during the twelve months of 2016, an increase of $218,000 or 87 percent compared to SBA
loan sales gains of $252,000 for the same period in 2015. More qualified borrowers continue to take advantage of Mid Penn’s
Preferred Lender status with the SBA.
Mid Penn also recognized $317,000 in merchant services income during the twelve months ended December 31, 2016, an increase of
$82,000 or 35 percent compared to $235,000 of merchant services income for the same period in 2015. This increase reflects the
efforts of the commercial and retail sales team to continue enrolling new participating merchants throughout Mid Penn’s markets.
Other noninterest income increased $217,000 for the twelve months ended December 31, 2016 compared to the twelve months ended
December 31, 2015. Included in 2016 other income was $86,000 from the gain on the sale of insurance policies upon the dissolution
of Mid Penn Insurance Services, LLC, a then wholly-owned subsidiary of Mid Penn Bank, effective March 1, 2016. The decision was
made to liquidate the subsidiary due to the lack of consistent profitability and growth.
2015 versus 2014
During the twelve months ended December 31, 2015, noninterest income, excluding securities gains of $325,000 increased $682,000
or 22 percent, versus the twelve months ended December 31, 2014, excluding security gains of $168,000. The twelve months ended
December 31, 2015 was positively impacted by the addition of Phoenix to the income stream. Items of particular note are detailed
below.
Income from fiduciary activities for 2015 was $466,000, an $86,000 or 16 percent decrease from $552,000 in 2014. This is primarily
attributable to a change in the commission structure on 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 decreased from $46,859,000 at the
end of 2014 to $42,891,000 at the end of 2015 and are not a component of Mid Penn’s consolidated balance sheets.
Mid Penn recognized gains on sale of investment securities in 2015 of $325,000 as a result of efforts to better align the portfolio for a
rising interest rate environment, up $157,000 from the $168,000 recorded in 2014.
Earnings on bank-owned life insurance increased $68,000 or 34 percent, to $269,000 during 2015 over earnings of $201,000 in 2014.
This increase was from the addition of a pool of employee split-dollar policies acquired in the Phoenix acquisition.
Mortgage banking activity increased $143,000 or 46 percent to $456,000 during 2014 from $313,000 in 2014. Improved real estate
activity throughout Mid Penn’s footprint and favorable interest rate conditions have contributed to increasing revenue from this
business line.
Mid Penn has experienced significant activity in SBA loans during 2015 as more qualified borrowers have taken advantage of Mid
Penn’s Preferred Lender status with the SBA. During 2015, this business activity generated $252,000 in fee income, an increase of
$133,000 or 112 percent versus the twelve months ended December 31, 2014.
An increase in Letter of Credit fees of $40,000 in 2015 aided in the increase in other income of $140,000 or 27 percent from 2014.
29
MID PENN BANCORP, INC.
TABLE 4: NONINTEREST INCOME
(Dollars in thousands)
Management’s Discussion and Analysis
Years ended December 31,
2015
2014
2016
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
$
$
481 $
684
1,046
264
922
844
317
470
896
5,924 $
466 $
690
325
269
456
741
235
252
679
4,113 $
552
584
168
201
313
544
254
119
549
3,284
Noninterest Expense
2016 versus 2015
During the year ended December 31, 2016, noninterest expenses totaled $28,818,000, an increase of $2,059,000 or 8 percent
compared to $26,759,000 for the year ended December 31, 2015.
Salaries and employee benefit expenses increased $1,521,000 during the twelve months ended December 31, 2016 versus the same
period in 2015. The increase primarily was attributable to franchise expansion, including (i) the addition of employees from the
March 1, 2015 Phoenix acquisition, (ii) staff added to serve in Mid Penn’s branch in the Mechanicsburg, PA market, which opened in
June 2015, and (iii) an increase in lending personnel, credit support staff, and executive management in alignment with Mid Penn’s
core banking growth.
In connection with the acquisition of Phoenix, Mid Penn incurred $762,000 of nonrecurring merger-related expenses during 2015,
while no merger-related expenses were incurred in 2016.
Pennsylvania bank shares tax expense increased $240,000 during the twelve months ended December 31, 2016 versus the same period
in 2015 due to the Phoenix acquisition and the resultant increase in the capital base used to determine the annual shares tax.
Occupancy and Equipment expenses increased $329,000 during 2016 versus 2015. The increase is primarily attributable to both
added facilities from the Phoenix acquisition, newer offices in Mechanicsburg, PA and Lancaster County, PA, and increased
depreciation expense on information technology related enhancements.
Mid Penn benefited from lower loan collection costs in 2016, which are reported in other expenses. These loan collection costs were
$306,000 during 2015, but decreased $128,000 or 42 percent to $178,000 during 2016 as the pool of nonperforming credits continued
to decrease.
Included in other expenses in 2016 was a $142,000 impairment charge recorded on an asset held for sale and $17,000 in prepayment
penalties on long-term FHLB Advances, while there were no impairment charges or prepayment penalties recorded in 2015.
2015 versus 2014
Noninterest expenses increased $6,065,000 or 29 percent, during the twelve months ended December 31, 2015, versus the same period
in 2014. Both periods were impacted by the addition of Phoenix to the expense stream or related merger expenses. Items of particular
note are detailed below.
Salaries and employee benefits increased during the year ended December 31, 2015 by $3,164,000 or 29 percent, versus 2014. The
increase was driven by the addition of the Phoenix employees to Mid Penn’s employee pool, an increase in staffing levels due to Mid
Penn’s entry into the Lancaster County and Mechanicsburg markets, and an increase in lending personnel and support staff to augment
the expanding reach of Mid Penn.
30
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Occupancy expense increased $634,000 to $1,947,000 in 2015. In addition to the occupancy expenses from the three leased and three
owned properties acquired in the Phoenix transaction, this increase was impacted by the inclusion of rent for the new Corporate
Administration offices on North Front Street in Harrisburg, and the new Elizabethtown and Simpson Ferry Road branch offices.
Legal and professional fees increased $72,000 or 14 percent, during the twelve months ended December 31, 2015 compared to the
same period in 2014. This was due to the increase in consultant fees incurred for cyber penetration testing of Mid Penn’s computer
network, implementation of Mid Penn’s mobile banking app, routine legal fees generated through the normal conduct of business, and
the periodic examination of potential merger and acquisition opportunities as they became available.
Marketing and advertising expense increased $225,000 in 2015 to $533,000 from $308,000 in 2014. This increase is primarily the
result of rebranding efforts in the Phoenix footprint to bring Mid Penn’s style of community banking to the new region.
Equipment, Pennsylvania Bank Shares tax, software licensing, telephone, and other expenses all saw increases related to the inclusion
of Phoenix’s normal operating expenses to Mid Penn’s expense stream year-to-date.
Merger and acquisition expenses in connection with the acquisition of Phoenix increased $189,000 to $762,000 in 2015 versus
$573,000 in 2014. All expenses in connection with the merger have been recognized.
TABLE 5: NONINTEREST EXPENSE
(Dollars in thousands)
Years ended December 31,
2015
2014
2016
Salaries and employee benefits
Occupancy expense, net
Equipment expense
Pennsylvania Bank Shares tax expense
FDIC Assessment
Legal and professional fees
Marketing and advertising expense
Software licensing
Telephone expense
Loss on sale/write-down of foreclosed assets
Intangible amortization
Merger and acquisition expense
ATM debit card processing expense
Internet banking expense
Director fees and benefits expense
Loan collection costs
Meals, travel, and lodging expense
Data processing
Insurance
OREO expense
Investor services
Other expenses
Total Noninterest Expense
$
$
15,564 $
2,064
1,689
648
688
711
500
1,380
548
217
126
—
440
528
340
178
428
341
178
248
85
1,917
28,818 $
14,043 $
1,947
1,477
408
613
588
533
1,472
569
111
114
762
334
429
363
306
399
346
186
255
96
1,408
26,759 $
10,879
1,313
1,205
365
542
516
308
965
467
204
63
573
310
319
377
288
273
251
141
172
72
1,101
20,704
Investments
Mid Penn’s investment portfolio is utilized primarily to provide liquidity and collateral, while also being managed to provide
additional interest income within reasonable risk parameters.
Mid Penn’s entire portfolio of investment securities at December 31, 2016 and December 31, 2015 were considered available for sale.
As such, the investments are recorded at fair value. The 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.
31
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
At December 31, 2016, the unrealized loss on investment securities resulted in a decrease in shareholders’ equity of $2,919,000
(unrealized loss on securities of $4,423,000 less deferred income tax benefit of $1,504,000). At December 31, 2015, the unrealized
gain on investment securities resulted in an increase in shareholders’ equity of $1,565,000 (unrealized gain on securities of $2,371,000
less deferred income taxes of $806,000). Mid Penn does not have any significant concentrations of non-governmental securities
within its investment portfolio. 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
Corporate debt securities
Equity securities
2016
December 31,
2015
$
$
47,012 $
25,619
58,838
1,000
1,156
133,625 $
26,990 $
38,804
66,617
2,070
1,240
135,721 $
2014
27,066
33,776
79,171
1,060
561
141,634
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, 2016
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Corporate debt securities
Equity securities
Weighted Average Yields
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Corporate debt securities
Equity securities
Loans
After One After Five
One Year Year thru Years thru After Ten
and Less Five Years Ten Years Years
13,742 $
$
5,165
4,729
1,000
100
24,736 $
30,834 $
17,596
33,061
—
—
81,491 $
— $
741
1,305
—
—
2,046 $
47,012
2,436 $
25,619
2,117
58,838
19,743
1,000
—
1,056
1,156
25,352 $ 133,625
Total
$
After One
Year thru
Five
Years
After Five
Years
thru
Ten Years
One Year
and Less
After Ten
Years
Total
—
4.22 %
5.22 %
—
—
4.86 %
1.83 %
2.79 %
3.40 %
4.75 %
2.03 %
2.25 %
2.00 %
2.14 %
4.35 %
—
—
2.98 %
2.64 %
3.30 %
3.21 %
—
4.14 %
3.03 %
1.98 %
2.43 %
3.91 %
4.75 %
3.96 %
2.88 %
At December 31, 2016, loans and leases increased $77,411,000 to $813,924,000 or 11 percent, from December 31, 2015. The main
driver of Mid Penn’s loan growth was in the commercial loan area, specifically in commercial and industrial and commercial real
estate loans. Mid Penn has expanded its commercial lending scope over the past few years, including adding two agricultural lenders
in 2016, and has a complete team of professional lenders who focus their efforts on developing and maintaining complete business
relationships.
At December 31, 2016, loans, net of unearned income, represented 83 percent of earning assets, compared to 84 percent on Dece mber
31, 2015, and 79 percent on December 31, 2014.
32
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
The Bank's loan portfolio is diversified among individuals and small and medium-sized businesses generally located within the Bank's
primary market area of Cumberland, Dauphin, Lancaster, Luzerne, 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 primarily 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 significant concentration
of credit to any one borrower. The Bank’s highest concentration of credit by loan type is in commercial real estate financings.
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)
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
2016
Amount %
2015
December 31,
2014
2013
2012
Amount %
Amount %
Amount %
Amount %
$ 397,547 48.8 $ 355,339 48.1 $ 289,378 50.6 $ 274,279 50.2 $ 255,231 52.7
4,132 0.6
4,204 0.5
171,985 21.1 160,988 21.8 120,326 21.0 107,492 19.7 79,228 16.4
240,418 29.5 216,269 29.6 159,004 27.8 160,294 29.3 143,243 29.6
6,770 1.4
814,082 100.0 736,800 100.0 571,726 100.0 546,711 100.0 484,472 100.0
(193 )
571,533
(6,716 )
$ 564,817
(249 )
546,462
(6,317 )
$ 540,145
(287 )
736,513
(6,168 )
$ 730,345
(252 )
484,220
(5,509 )
$ 478,711
(158 )
813,924
(7,183 )
$ 806,741
4,646 0.8
3,018 0.6
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, 2016
Commercial real estate, construction and land development
Commercial, industrial and agricultural
Real estate - residential mortgages
Consumer
Rate Sensitivity
Predetermined rate
Floating or adjustable rate
$
$
$
After One
One Year Year thru After Five
and Less Five Years Years
$
Total
34,478 $
5,096
4,976
105
30,512 $ 332,557 $ 397,547
171,985
116,233
50,656
240,418
211,227
24,215
3,974
2,805
1,064
44,655 $ 106,447 $ 662,822 $ 813,924
49,692 $ 123,959 $ 195,288
21,637 $
23,019
618,636
538,861
56,756
44,656 $ 106,448 $ 662,820 $ 813,924
Credit Quality, Credit Risk, and Allowance for Loan and Lease Losses
Other than as described herein, Mid Penn does not believe there are any significant credit-related trends, events or uncertainties
relating to its loan portfolio that are reasonably expected to have a material impact on future results of operations, liquidity, or capital
resources. Further, based on known information, Mid Penn believes that the effects of current and past economic conditions and other
unfavorable business conditions may influence certain borrowers’ abilities to comply with their repayment terms. Mid Penn continues
to monitor the financial strength of these borrowers constantly and 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, or perform commercial real estate or other type of
33
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
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.
TABLE 10: NONPERFORMING ASSETS
(Dollars in thousands)
Nonperforming Assets:
Nonaccrual loans
Accruing troubled debt restructured loans
Total nonperforming loans
2016
2015
December 31,
2014
2013
2012
$
4,658 $
877
5,535
4,418 $
459
4,877
8,907 $
2,035
10,942
10,877 $
833
11,710
11,831
426
12,257
Foreclosed real estate
Total nonperforming assets
224
5,759
1,185
6,062
565
11,507
965
12,675
843
13,100
Accruing loans 90 days or more past due
Total risk elements
59
5,818 $
55
6,117 $
—
11,507 $
—
12,675 $
—
13,100
$
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
0.68 %
0.66 %
1.91 %
2.14 %
2.53 %
0.71 %
129.78 %
0.82 %
126.46 %
2.01 %
61.37 %
2.32 %
53.94 %
2.71 %
44.95 %
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 2016, nonperforming loans increased $658,000 from
$4,877,000 at December 31, 2015, to $5,535,000 at December 31, 2016 while foreclosed real estate declined $961,000 to $224,000 at
December 31, 2016. The increase in nonperforming loans was offset by the decline in foreclosed real estate, causing total
nonperforming assets to decrease by $303,000 to $5,759,000 at December 31, 2016 from $6,062,000 at December 31, 2015.
Increased accruing troubled debt restructured loans were the leading source of the increase in nonperforming assets. The remaining
improvement has primarily been the result of well-structured workout plans.
Mid Penn’s troubled debt restructured loans at December 31, 2016 totaled $3,515,000 of which $877,000 were accruing loans in
compliance with the terms of the modification. $2,638,000 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 8 to Mid Penn’s Consolidated Financial Statements, which are included in Item
8. As of December 31, 2016, 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 these agreements
have resulted in additional principal repayment. The terms of these forbearance agreements vary and may include reductions in
principal payments, reductions in interest rates, and/or repayment of the loan 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)
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
December 31,
2016
December 31,
2015
$
813,924 $
7,183
5,535
736,513
6,168
4,877
1,604
1,869
Ratio of nonperforming loans with partial charge-offs
to total loans
0.20 %
0.25 %
Ratio of nonperforming loans with partial charge-offs to
total nonperforming loans
28.97 %
38.32 %
Coverage ratio net of nonperforming loans with partial
charge-offs
182.71 %
205.05 %
Ratio of total allowance to total loans less nonperforming
loans with partial charge-offs
0.88 %
0.84 %
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 likely be considered collateral dependent as the discounted cash flow (“DCF”) method would indicates no
operating income is available for evaluating the collateral position; therefore, most impaired loans are deemed to be collateral
dependent.
Mid Penn evaluates loans for charge-off on a monthly basis. Policies that govern the recommendation for charge-off are unique to the
type of loan being considered. Commercial loans rated as nonaccrual or lower will first have a collateral evaluation completed in
accordance with the guidance on impaired loans. Once the collateral evaluation has been completed, a specific allocation of
allowance is made based upon the results of the evaluation. The balance remains a nonperforming loan with the original terms and
interest rate intact (not restructured). In the event the loan is unsecured, the loan would have been charged-off at the recognition of
impairment. Commercial real estate loans rated as impaired will also have an initial collateral evaluation completed in accordance
with the guidance on impaired loans. An updated real estate valuation is ordered and the collateral evaluation is modified to reflect
any variation in value. A specific allocation of allowance is made for any anticipated collateral shortfall. The balance remains a
nonperforming loan with the original terms and interest rate intact (not restructured). The process of charge-off for residential
mortgage loans begins upon a loan becoming delinquent for 90 days and not in the process of collection. The existing appraisal is
reviewed and a lien search is obtained to determine lien position and any instances of intervening liens. A new appraisal of the
property will be ordered if deemed necessary by management and a collateral evaluation is completed. The loan will then be charged
down to the value indicated in the evaluation. Consumer loans are recommended for charge-off after reaching delinquency of 90 days
and the loan is not in the process of collection. The collateral shortfall of the consumer loan is recommended for charge-off at this
point.
As noted above, Mid Penn assesses a specific allocation for both commercial loans and commercial real estate loans. The balance
remains a nonperforming loan with the original terms and interest rate intact (not restructured). In addition, Mid Penn takes a
preemptive step when any commercial loan or commercial real estate loan becomes classified under its internal classification system.
A preliminary collateral evaluation in accordance with the guidance on impaired loans is prepared using the existing collateral
information in the loan file. This process allows Mid Penn to review both the credit and documentation files to determine the status of
the information needed to make a collateral evaluation. This collateral evaluation is preliminary but allows Mid Penn to determine if
any potential collateral shortfalls exist.
35
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Larger groups of small-balance loans, such as residential mortgages and consumer installment loans are collectively evaluated for
impairment. Accordingly, individual consumer and residential loans are not separately identified for impairment disclosures unless
such loans are the subject of a restructuring agreement.
Mid Penn’s rating system assumes any loans classified as substandard nonaccrual to be impaired, and most of these loans are
considered collateral dependent; therefore, most of Mid Penn’s impaired loans, whether reporting a specific allocation or not, are
considered collateral dependent.
It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate as soon as practically
possible of the credit being classified as substandard 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 such time as Mid Penn is in receipt of the updated valuation. The Asset Recovery department employs an electronic
tracking system to monitor the receipt of and need for updated appraisals. To date, there have been no material time lapses noted with
the above processes.
In some instances Mid Penn is not holding real estate as collateral and is relying on business assets (personal property) for repayment.
In these circumstances a collateral inspection is performed by Mid Penn personnel to determine an estimated value. The value is
based on net book value, as provided by the financial statements, and discounted accordingly based on determinations made by
management. Occasionally, Mid Penn will employ an outside service to provide a fair estimate of value based on auction or private
sales. Management reviews the estimates of these third parties and discounts them accordingly based on management’s judgment, if
deemed necessary.
For impaired loans with no valuation allowance required, Mid Penn’s practice of obtaining independent third party market valuations
on the subject property as soon as practically possible of being placed on nonaccrual status sometimes indicates that the loan to value
ratio is sufficient to obviate the need for a specific allocation in spite of significant deterioration in real estate values in Mid Penn’s
primary market area. These circumstances are determined on a case by case analysis of the impaired loans.
Mid Penn actively monitors the values of collateral on impaired loans. This monitoring may require the modification of collateral
values over time or changing circumstances by some factor, either positive or negative, from the original values. All collateral values
will be assessed by management at least every 12 months for possible revaluation by an independent third party.
Mid Penn had $6,453,000 in loans deemed impaired at December 31, 2016. Excluding $1,231,000 in loans acquired with credit
deterioration from the Phoenix acquisition, Mid Penn had several loan relationships deemed impaired with an aggregate carrying
balance of $5,222,000. This pool of loans was further broken down into a group of loans with an aggregate carrying balance of
$2,915,000 for which specific allocations totaling $858,000 were included within the loan loss reserve for these loans. The remaining
$2,307,000 of loans required no specific allocation within the loan loss reserve. Of the $5,222,000 of impaired loan relationships,
excluding the loans acquired with credit deterioration from the Phoenix acquisition, $3,246,000 were commercial real estate
relationships, $916,000 were residential relationships, $860,000 were commercial real estate–construction relationships, $140,000
were home equity relationships, and $60,000 were commercial and industrial relationships. There were specific loan loss reserve
allocations of $711,000 against the commercial real estate relationships, $72,000 against commercial real estate-construction, $68,000
against residential mortgage, $6,000 against the commercial and industrial relationships, and $1,000 against home equity relationships.
Management currently believes that the specific reserves are adequate to cover probable future losses related to these relationships.
The allowance for loan 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 international, national, regional, and local economic and business conditions and developments that affect the
collectability of the portfolio, including the condition of various market segments;
changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity
of adversely classified or graded loans;
changes in the value of underlying collateral for collateral-dependent loans;
changes in the experience, ability, and depth of lending management and other relevant staff;
changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and
recovery practices not considered elsewhere in estimating credit losses;
changes in the quality of the institution's loan review system;
changes in the nature and volume of the portfolio and in the terms of loans;
the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated
credit losses in the institution's existing portfolio; and
the existence and effect of any concentrations of credit and changes in the level of such concentrations.
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 $7,183,000 as of
December 31, 2016 is adequate to cover specifically identifiable loan losses, as well as estimated losses inherent in our portfolio for
which certain losses are probable but not specifically identifiable.
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
$
2016
2015
December 31,
2014
2013
2012
4,467 $
1,581
541
382
212
7,183 $
3,705 $
1,394
534
329
206
6,168 $
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
The growth in the loan portfolio during 2016, as well as an increase in specific allocations on impaired loans, resulted in a larger
allowance in 2016. See also the discussion in the Provision for Loan and Lease Losses section.
The allowance for loan and lease losses at December 31, 2016 was $7,183,000 or 0.88%, of total loans (less unearned discount) as
compared to $6,168,000 or 0.83%, at December 31, 2014, and $6,716,000 or 1.18%, at December 31, 2014. This ratio at December
31, 2015 and 2016 was impacted in 2015 by the inclusion of the Phoenix loan portfolio in the calculation, coupled with the elimination
of Phoenix’s allowance for loan and lease losses in conformity with GAAP purchase accounting treatment.
37
MID PENN BANCORP, INC.
Deposits and Other Funding Sources
Management’s Discussion and Analysis
Mid Penn's primary source of funds are deposits. Total deposits at December 31, 2016 increased by $158,330,000 or 20 percent, over
December 31, 2015, which increased by $139,121,000 or 22 percent, over December 31, 2014. During 2016, all deposit categories
increased, mainly due to both strong cash management and retail growth. Average balances and average interest rates applicable to
the major classifications of deposits for the years ended December 31, 2016, 2015, and 2014 are presented in Table 13.
Average short-term borrowings for 2016 were $2,370,000 compared to $13,184,000 in 2015. These short-term borrowings consisted
of federal funds purchased. As of December 31, 2016, Mid Penn had no short-term borrowings outstanding.
At December 31, 2016, the Bank had $13,567,000 in brokered time deposits, an increase of $2,399,000 or 21 percent, over December
31, 2015, which increased by $6,706,000 or 150.3%, over the same period in 2014. The increase in brokered deposits in 2015 was
mainly due to the brokered certificates of deposits Mid Penn acquired from Phoenix, which totaled $6,221,000 at December 31, 2015.
TABLE 13: DEPOSITS BY MAJOR CLASSIFICATION
(Dollars in thousands)
Noninterest-bearing demand deposits
Interest-bearing demand deposits
Money market
Savings
Time
2016
Average Average
Balance Rate
$ 120,244
293,745
235,561
59,615
172,657
$ 881,822
0.00 % $ 87,474
0.34 % 238,141
0.56 % 208,693
0.06 % 52,895
1.25 % 154,335
0.51 % $ 741,538
Years Ended December 31,
2015
Average Average
Balance Rate
2014
Average Average
Balance Rate
0.00 % $ 49,814
0.34 % 216,656
0.54 % 201,281
0.06 % 30,953
1.25 % 127,071
0.53 % $ 625,775
0.00 %
0.36 %
0.54 %
0.05 %
1.55 %
0.62 %
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
2016
December 31,
2015
$
$
16,083 $
28,254
41,822
86,159 $
8,986 $
17,807
37,233
64,026 $
2014
4,506
21,308
22,604
48,418
Capital Resources
Shareholders' equity, or capital, is evaluated in relation to total assets and the risk associated with those assets. The detailed
computation of Mid Penn’s regulatory capital ratios can be found in Note 18 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 2016 by $399,000 or 1 percent, following an increase in 2015 of $10,938,000 or 18 percent, and an
increase in 2014 of $6,214,000 or 12 percent. Capital was positively impacted in 2016 by the net income available to common
shareholders of $7,804,000 but this increase was offset by the other comprehensive loss of $4,665,000 and dividend payments of
$2,875,000. The primary source of Mid Penn’s other comprehensive loss in 2016 was the change in unrealized losses on available-for-
sale investments held primarily to support public deposit pledging requirements. These unrealized losses are not other-than-
temporary-impairments, but relate to the price changes of securities from significant yield curve increases which occurred during the
fourth quarter of 2016. In 2015 capital was positively impacted by the issuance of 723,851 shares of common stock valued at
$11,292,000 as merger consideration in the Phoenix acquisition, as well as an increase in retained earnings from the normal operations
of Mid Penn. Mid Penn also used the $7,500,000 in net proceeds from the issuance and sale of its subordinated notes to redeem all of
its Series B Preferred Stock for an aggregate redemption price of $5,123,000 and Series C Preferred Stock for an aggregate
redemption price of $1,754,000. These redemptions negatively impacted shareholders’ equity in 2015. Capital was positively
impacted in 2014 by the net income available to common shareholders of $5,701,000 and other comprehensive income of $2,385,000.
38
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Mid Penn’s current intent for dividend payout is to provide quarterly cash returns to shareholders and earnings retention at a level
sufficient to finance future growth. For additional information, see “Part II – Item 5 - Market for Registrant’s Common Equity,
Related Shareholder Matters and Issuer Repurchases of Equity Securities – Dividends”. The dividends paid and declared on common
shares totaled $0.58 and $0.68, respectively, for the year ended December 31, 2016. Dividends paid and declared totaled $0.44 for the
year ended December 31, 2015 and $0.45 for the year ended December 31, 2014. The dividend payout ratio, which represents the
percentage of annual net income returned to shareholders in the form of cash dividends, was 31.43% for 2016 and 29.93% for 2015.
Mid Penn maintained regulatory capital levels, leverage ratios, and risk-based capital ratios as of December 31, 2016, and 2015, as
follows:
(Dollars in thousands)
Capital Adequacy
To Be
Well-Capitalized
Under Prompt
Minimum Capital
Corrective
Actual
Required
Amount Ratio
Amount Ratio
Action Provisions
Amount Ratio
$ 70,431
6.8 % $ 41,595
4.0 % $
N/A
N/A
70,431
70,431
85,148
9.1 % 34,807
9.1 % 46,409
11.0 % 61,879
4.5 %
6.0 %
8.0 %
N/A
N/A
N/A
N/A
N/A
N/A
$ 77,026
7.4 % $ 41,568
4.0 % $ 51,960
5.0 %
77,026
77,026
84,329
10.0 % 34,781
10.0 % 46,374
10.9 % 61,832
4.5 % 50,239
6.0 % 61,832
8.0 % 77,291
6.5 %
8.0 %
10.0 %
$ 64,089
7.3 % $ 35,098
4.0 % $
N/A
N/A
64,089
64,089
77,852
9.1 % 31,731
9.1 % 42,308
11.0 % 56,410
4.5 %
6.0 %
8.0 %
N/A
N/A
N/A
N/A
N/A
N/A
$ 70,351
7.8 % $ 36,245
4.0 % $ 45,306
5.0 %
70,351
70,351
76,614
10.0 % 31,698
10.0 % 42,264
10.9 % 56,352
4.5 % 45,786
6.0 % 56,352
8.0 % 70,440
6.5 %
8.0 %
10.0 %
Corporation
As of December 31, 2016
Tier 1 Capital (to Average Assets)
Common Equity Tier 1 Capital (to Risk Weighted
Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
Bank
As of December 31, 2016
Tier 1 Capital (to Average Assets)
Common Equity Tier 1 Capital (to Risk Weighted
Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
Corporation
As of December 31, 2015
Tier 1 Capital (to Average Assets)
Common Equity Tier 1 Capital (to Risk Weighted
Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
Bank
As of December 31, 2015
Tier 1 Capital (to Average Assets)
Common Equity Tier 1 Capital (to Risk Weighted
Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
Series B Preferred Stock
Between September 26, 2012 and January 3, 2013, Mid Penn issued, via a private placement, 5,000 shares of its 7% Non-Cumulative
Non-Voting Non-Convertible Perpetual Preferred Stock, Series B (“Series B Preferred Stock”), resulting in total gross proceeds of
$5,000,000. On December 9, 2015, Mid Penn, using a portion of the proceeds from the offering of the subordinated notes described
below, redeemed all of its issued and outstanding shares of Series B Preferred Stock at a price equal to $1,024.67 per share, which is
equal to $1,020 per share plus an amount equal to declared but unpaid dividends on December 9, 2015, for a total redemption price of
$5,123,000.
39
MID PENN BANCORP, INC.
Small Business Lending Fund Preferred Shares
Management’s Discussion and Analysis
On March 1, 2015, Mid Penn assumed all of the issued and outstanding shares of Phoenix with respect to 1,750 shares of Phoenix’s
preferred stock issued to the Treasury in connection with the Small Business Lending Fund (“SBLF”) and issued 1,750 shares of
SBLF Preferred Shares, having a $1,000 liquidation preference per share, to the Treasury. The SBLF Preferred Shares qualified as
Tier 1 Capital and had terms and conditions identical to those shares of preferred stock issued by Phoenix to the Treasury. Mid Penn
paid noncumulative dividends quarterly on January 1, April 1, July 1, and October 1. The dividend rate was 1.00% per annum for
payment dates up to its redemption. On December 15, 2015, Mid Penn, using a portion of the proceeds from the offering of
subordinated notes described below, redeemed all of the outstanding shares of its SBLF Preferred Shares held by the Treasury for an
aggregate redemption price of $1,754,000 including accrued but unpaid dividends.
Subordinated Debt
On November 9, 2015, Mid Penn entered into agreements with investors to purchase $7,500,000 aggregate principal amount of its
Subordinated Notes (the “Notes”) due 2025. The Notes are treated as Tier 2 capital for regulatory capital purposes. The offering
closed in December 2015.
The Notes bear interest at a rate of 5.15% per year for the first five years and then float at the Wall Street Journal’s Prime Rate plus
0.50%, provided that the interest rate applicable to the outstanding principal balance will at no times be less than 4.0%. Interest is
paid quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, beginning on January 1, 2016. The Notes will
mature on December 9, 2025 and are redeemable in whole or in part, without premium or penalty, at any time on or after December 9,
2020, and prior to December 9, 2025. Additionally, Mid Penn may redeem the Notes in whole at any time, or in part from time to
time, upon at least 30 days’ notice if: (i) a change or prospective change in law occurs that could prevent Mid Penn from deducting
interest payable on the Notes for U.S. federal income tax purposes; (ii) an event occurs that precludes the Notes from being recognized
as Tier 2 capital for regulatory capital purposes; or (iii) Mid Penn becomes required to register as an investment company under the
Investment Company Act of 1940, as amended, in each case at 100% of the principal amount of the subordinated notes, plus accrued
and unpaid interest thereon to but excluding the date of redemption.
Holders of the Notes may not accelerate the maturity of the Notes, except upon Mid Penn’s or Mid Penn Bank’s, its principal banking
subsidiary’s, bankruptcy, insolvency, liquidation, receivership, or similar event.
Federal Income Taxes
Federal income tax expense for 2016 was $2,277,000 compared to $1,644,000 in 2015 and $1,462,000 in 2014. The effective tax rate
was 23% in 2016 and 20% in both 2015 and 2014. The increased effective tax rate was the result of higher pre-tax earnings and a
larger amount in the higher incremental tax bracket.
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 borrowings. (See Deposits and Other Funding Sources which appears
earlier in this discussion.) Liquidity from investments is provided primarily through investment calls and sales, and from investments
and interest-bearing balances with maturities of one year or less.
The Bank has short-term borrowing capacity from the FHLB for overnight borrowings up to the Bank’s unused borrowing capacity of
$404,244,000 at December 31, 2016, upon satisfaction of any stock purchase requirements of the FHLB. 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 $15,000,000 at December 31, 2016.
Major sources of cash in 2016 came from the $111,390,000 proceeds from the sales of investments securities and the increase in
deposits of $158,330,000.
Major uses of cash in 2016 were the purchases of investment securities of $142,861,000 and the increase in loans of $77,795,000.
Major sources of cash in 2015 came from the $37,142,000 proceeds from the sales of investments securities, the increase in short-term
borrowings of $31,018,000 and the increase in deposits of $15,883,000, which excludes the deposits assumed in the Phoenix
acquisition.
40
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Major uses of cash in 2015 were the increase in loans of $60,043,000, excluding the loans acquired in the Phoenix acquisition, the
purchases of investment securities of $35,858,000 and long-term debt repayments of $16,226,000.
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, 2016.
TABLE 15: AGGREGATE CONTRACTUAL OBLIGATIONS
(Dollars in thousands)
Operating lease obligations
Certificates of deposit
Long-term debt
Subordinated debt
Payments under benefit plans
Executive compensation
payments
Payments Due by Period
Three to
Five
Years
One to
Three
Years
More than
Five
Years
One Year or
Less
Total
$
Financial Statements
Note Reference
9
10
12
13
15
10,393 $
182,595
13,581
7,500
1,396
1,121 $
81,753
1,016
386
167
2,231 $
63,901
10,000
773
317
1,375 $
36,203
—
773
292
16
397
205,469 $
48
83,370 $
101
75,092 $
101
37,369 $
$
5,666
738
2,565
5,568
620
147
9,638
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 on Form 10-K 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.
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, 2016, commitments to extend credit amounted to $201,749,000 compared to $157,338,000 as of December 31,
2015.
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 decreased to $14,000,000 at December 31, 2016,
from $15,805,000 at December 31, 2015.
41
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
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 Mid Penn’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, 2016, all interest rate risk levels according to the model were within the
tolerance limits of the Board-approved policy.
TABLE 16: EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES
December 31, 2016
% Change in
Net Interest
Income
11.19%
7.35%
3.50%
-4.75%
-10.79%
-16.63%
Change in
Basis Points
300
200
100
0
(100)
(200)
(300)
Policy
Risk Limit
≥ -20%
≥ -15%
≥ -10%
≥ -10%
≥ -15%
≥ -20%
Change in
Basis Points
300
200
100
0
(100)
(200)
(300)
December 31, 2015
% Change in
Net Interest
Income
5.77%
3.64%
1.55%
-2.19%
-7.09%
-12.21%
Policy
Risk Limit
≥ -20%
≥ -15%
≥ -10%
≥ -10%
≥ -15%
≥ -20%
42
MID PENN BANCORP, INC.
ITEM 8. FINANCIAL STATEMENTS
The following audited financial statements are set forth in this Annual Report on Form 10-K on the following pages:
Index to Financial Statements
Report of Independent Registered Public Accounting Firm
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
44
45
46
47
48
49
51
43
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, 2016 and 2015 and the related consolidated statements of income, comprehensive income, changes in shareholders’
equity and cash flows for each of the years in the three-year period ended December 31, 2016. 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 consolidated financial
position of Mid Penn Bancorp, Inc. and subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 2016, in conformity with accounting principles generally
accepted in the United States of America.
/s/ BDO USA, LLP
Harrisburg, Pennsylvania
March 23, 2017
44
MID PENN BANCORP, INC.
Consolidated Balance Sheets
December 31, 2016
December 31, 2015
(Dollars in thousands)
ASSETS
Cash and due from banks
Interest-bearing balances with other financial institutions
Federal funds sold
Total cash and cash equivalents
Interest-bearing time deposits with other financial institutions
Investment securities available for sale
Loans held for sale
Loans and leases, net of unearned interest
Less: Allowance for loan and lease losses
Net loans and leases
Bank premises and equipment, net
Bank premises and equipment held for sale
Cash surrender value of life insurance
Restricted investment in bank stocks
Foreclosed assets held for sale
Accrued interest receivable
Deferred income taxes
Goodwill
Core deposit and other intangibles, net
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
Subordinated debt
Accrued interest payable
Other liabilities
Total Liabilities
$
$
$
13,493 $
2,003
30,477
45,973
—
133,625
1,959
813,924
(7,183 )
806,741
11,074
1,894
12,780
2,443
224
3,928
4,286
3,918
539
3,215
1,032,599 $
122,811 $
317,533
252,271
60,163
182,595
935,373
—
13,581
7,414
515
5,249
962,132
12,329
955
—
13,284
4,317
135,721
2,678
736,513
(6,168 )
730,345
13,993
—
12,516
4,266
1,185
3,813
1,821
3,918
665
3,116
931,638
103,721
247,356
208,386
56,731
160,849
777,043
31,596
40,305
7,414
390
4,822
861,570
4,227
40,559
23,470
1,812
70,068
931,638
Shareholders' Equity:
Common stock, par value $1.00; authorized 10,000,000 shares; 4,233,297 shares and
4,226,717 shares issued at December 31, 2016 and December 31, 2015, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Total Shareholders’ Equity
Total Liabilities and Shareholders' Equity
4,233
40,688
28,399
(2,853 )
70,467
1,032,599 $
$
The accompanying notes are an integral part of these consolidated financial statements.
45
MID PENN BANCORP, INC.
(Dollars in thousands, except per share data)
INTEREST INCOME
Interest and 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
Total Interest Income
INTEREST EXPENSE
Interest on deposits
Interest on short-term borrowings
Interest on long-term and subordinated 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
Net 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
Marketing and advertising expense
Software licensing
Telephone expense
Loss on sale or write-down of foreclosed assets
Intangible amortization
Merger and acquisition expense
Other expenses
Total Noninterest Expense
INCOME BEFORE PROVISION FOR INCOME TAXES
Provision for income taxes
NET INCOME
Series B preferred stock dividends and redemption premium
Series C preferred stock dividends
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
PER COMMON SHARE DATA:
Basic and Diluted Earnings Per Common Share
Cash Dividends Declared
$
$
The accompanying notes are an integral part of these consolidated financial statements
46
Consolidated Statements of Income
2016
Years Ended December 31,
2015
2014
$
36,402 $
12
32,840 $
44
1,346
2,066
304
82
40,212
4,514
15
838
5,367
34,845
1,870
32,975
481
684
1,046
264
922
844
317
470
896
5,924
15,564
2,064
1,689
648
688
711
500
1,380
548
217
126
—
4,683
28,818
10,081
2,277
7,804
—
—
7,804
$
1,222
2,000
382
2
36,490
3,889
47
671
4,607
31,883
1,065
30,818
466
690
325
269
456
741
235
252
679
4,113
14,043
1,947
1,477
408
613
588
533
1,472
569
111
114
762
4,122
26,759
8,172
1,644
6,528
473
17
6,038
$
26,905
41
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
549
3,284
10,879
1,313
1,205
365
542
516
308
965
467
204
63
573
3,304
20,704
7,163
1,462
5,701
350
—
5,351
1.85 $
0.68
1.47 $
0.44
1.53
0.45
MID PENN BANCORP, INC.
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net income
Other comprehensive (loss) income:
Unrealized (losses) gains arising during the period on available-for-sale
securities, net of income taxes of ($1,954), $80, and $1,280, respectively
$
Reclassification adjustment for net gain on sales of available-for-sale
securities included in net income, net of income taxes of ($356), ($110),
and ($57), respectively (a)
Years Ended December 31,
2015
2016
2014
7,804 $
6,528 $
5,701
(3,794 )
154
2,482
(690 )
(215 )
(111 )
Change in defined benefit plans, net of income taxes of ($93), $185, and $7,
respectively (b)
Total other comprehensive (loss) income
Total comprehensive income
$
(181 )
(4,665 )
3,139 $
360
299
6,827 $
14
2,385
8,086
(a) 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
(b) Amounts are included in the computation of net periodic benefit cost and are included in salaries and employee benefits on the Consolidated Statements of
Income as a separate element within total noninterest expense
The accompanying notes are an integral part of these consolidated financial statements.
47
MID PENN BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share data)
Additional
Accumulated
Other
Total
Preferred Common Paid-in
Stock
Capital
Stock
$
Retained Comprehensive Shareholders'
Earnings (Loss) Income Equity
Balance, January 1, 2014
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
Net income
Total other comprehensive income, net of taxes
Common stock dividends
Employee Stock Purchase Plan (4,162 shares)
Series B preferred stock dividends
Series B preferred stock redemption
Series B preferred stock redemption premium
Series C preferred stock in connection with
Phoenix acquisition
Series C preferred stock dividends
Series C preferred stock redemption
Common stock issued to Phoenix shareholders
(723,851 shares)
Restricted stock activity (875 shares)
Balance, December 31, 2015
Net income
Total other comprehensive loss, net of taxes
Common stock dividends
Employee Stock Purchase Plan (4,465 shares)
Restricted stock activity (2,115 shares)
Balance, December 31, 2016
$
5,000 $
—
—
—
—
—
5,000
—
—
—
—
—
(5,000 )
—
3,494 $
—
—
—
4
—
3,498
—
—
—
4
—
—
—
—
—
—
49
—
29,853 $ 15,441 $
5,701
—
(1,575 )
—
(350 )
29,902 19,217
6,528
—
(1,785 )
—
(373 )
—
—
—
62
—
—
—
1,750
—
(1,750 )
—
—
—
—
—
—
(100 )
—
(17 )
—
—
—
—
—
—
—
—
—
0 $
724
1
4,227
—
—
—
4
2
4,233 $
10,568
27
—
—
40,559 23,470
7,804
—
(2,875 )
—
—
40,688 $ 28,399 $
—
—
—
78
51
(872 ) $
—
2,385
—
—
—
1,513
—
299
—
—
—
—
—
—
—
—
—
—
1,812
—
(4,665 )
—
—
—
(2,853 ) $
52,916
5,701
2,385
(1,575 )
53
(350 )
59,130
6,528
299
(1,785 )
66
(373 )
(5,000 )
(100 )
1,750
(17 )
(1,750 )
11,292
28
70,068
7,804
(4,665 )
(2,875 )
82
53
70,467
The accompanying notes are an integral part of these consolidated financial statements.
48
MID PENN BANCORP, INC.
(Dollars in thousands)
Operating Activities:
Net Income
$
Adjustments to reconcile net income to net cash provided by operating activities:
Consolidated Statements of Cash Flows
Years Ended December 31,
2015
2014
2016
7,804 $
6,528 $
5,701
Provision for loan and lease losses
Depreciation
Amortization of intangibles
Net amortization of security premiums
Gain on sales of investment securities
Earnings on cash surrender value of life insurance
Mortgage loans originated for sale
Proceeds from sales of mortgage loans originated for sale
Gain on sale of mortgage loans
SBA loans originated for sale
Proceeds from sales of SBA loans originated for sale
Gain on sale of SBA loans
Loss on write-down/disposal of property, plant, and equipment
Loss on sale / write-down of foreclosed assets
Restricted stock compensation expense
Deferred income tax (benefit) expense
Increase in accrued interest receivable
(Increase) decrease in other assets
Increase (decrease) in accrued interest payable
Increase (decrease) 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
Net cash received from acquisition
Redemptions (purchases) of restricted investment in bank stocks
Net increase in loans and leases
Purchases of bank premises and equipment
Proceeds from sale of foreclosed assets
Net Cash Used In Investing Activities
Financing Activities:
Net increase in deposits
Net (decrease) increase in short-term borrowings
Series B preferred stock dividends and redemption premium paid
Series B preferred stock redemption
Series C preferred stock dividends paid
Series C preferred stock redemption
Common stock dividends paid
Employee Stock Purchase Plan
Long-term debt repayment
Proceeds from long-term debt borrowings
Deferred financing fees paid for subordinated debt issuance
Subordinated debt issuance
Net Cash Provided By Financing Activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
49
1,870
1,658
126
11,709
(1,046 )
(264 )
(42,888 )
43,810
(922 )
(5,872 )
6,342
(470 )
142
217
53
(336 )
(115 )
(99 )
125
427
22,271
4,317
16,110
111,390
(142,861 )
—
1,823
(77,795 )
(775 )
992
(86,799 )
158,330
(31,596 )
—
—
—
—
(2,875 )
82
(26,724 )
—
—
—
97,217
1,065
1,485
100
4,251
(325 )
(269 )
(26,083 )
26,539
(456 )
(3,484 )
3,736
(252 )
—
111
27
997
(367 )
333
9
(771 )
13,174
1,455
11,940
37,142
(35,858 )
8,095
(576 )
(60,043 )
(1,461 )
403
(38,903 )
15,883
31,018
(473 )
(5,000 )
(17 )
(1,750 )
(1,785 )
66
(16,226 )
—
(85 )
7,500
29,131
32,689
13,284
45,973 $
3,402
9,882
13,284 $
$
1,617
1,235
62
1,250
(168 )
(201 )
(16,775 )
17,088
(313 )
(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 )
29,792
(23,255 )
(350 )
—
—
—
(1,575 )
53
(184 )
30,000
—
—
34,481
1,259
8,623
9,882
MID PENN BANCORP, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Years Ended December 31,
2015
2014
2016
Supplemental Disclosures of Cash Flow Information:
Interest paid
Income taxes paid
$
$
5,242 $
1,700 $
4,566 $
1,130 $
4,471
1,520
Supplemental Noncash Disclosures:
248 $
1,135 $
881
1,894 $
— $
— $
11,292 $
—
—
Year Ended
December 31,
2015
$
$
$
$
11,331
110,363
509
1,792
503
388
578
3,673
624
129,761
123,238
32
3,570
876
127,716
$
1,750
Loan transfers to foreclosed assets held for sale
Asset transfers to bank premises and equipment held for
sale
Common stock issued to Phoenix shareholders
$
$
$
Assets, Liabilities, and Equity in Connection with Merger:
(Dollars in thousands)
Assets Acquired:
Securities
Loans
Restricted stock
Property and equipment
Deferred income taxes
Accrued interest receivable
Core deposit and other intangible assets
Bank-owned life insurance
Other assets
Liabilities Assumed:
Deposits
Accrued interest payable
Long-term debt
Other liabilities
Equity Acquired:
Preferred stock
The accompanying notes are an integral part of these consolidated financial statements.
50
MID PENN BANCORP, INC.
(1) Basis of Presentation
Notes to Consolidated Financial Statements
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 former wholly-owned subsidiary Mid Penn Insurance Services, LLC,
which was closed, effective March 1, 2016 (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.
The comparability of the results of operations for the year ended 2016 compared to 2015 and 2014, in general, have been
impacted by the acquisition of Phoenix as further described in Note 4. For comparative purposes, the 2015 and 2014 balances
have been reclassified to conform to the 2016 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, 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 21 retail
banking offices located in Cumberland, Dauphin, Lancaster, Luzerne, Northumberland, and Schuylkill Counties.
A decision was made to close Mid Penn Insurance Services, LLC, effective March 1, 2016 due to a lack of activity within the
subsidiary. Mid Penn Insurance Services, LLC was an immaterial subsidiary of the Bank, and was immaterial to Mid Penn’s
consolidated results.
(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, the assessment of other-than-temporary impairment of investment securities, the valuation of the
goodwill for impairment, and the valuation of assets acquired and liabilities assumed in business combinations.
(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.
51
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
(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. Premiums and discounts on debt securities
are amortized as an adjustment to interest income using the interest method. Realized gains and losses on sales of
investment securities are computed on the basis of specific identification of the cost of each security. Net gains on sales
of investment securities were $1,046,000 in 2016, $325,000 in 2015, and $168,000 in 2014. Mid Penn had no held-to-
maturity securities in 2016 and 2015.
(e) Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are included in loans held for sale and are carried
at fair value, as determined by outstanding commitments from investors. Gains and losses on sales of mortgage loans are
included in the Consolidated Statements of Income in mortgage banking income. Mortgage banking income was
$922,000 in 2016, $456,000 in 2015, and $313,000 in 2014.
(f) 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. Residential loans held for sale are carried at fair value and are
included in loans held for sale on the balance sheet. Loan origination fees, net of certain direct origination costs, are
deferred and recognized as an adjustment of the yield (interest income) of the related loans. These amounts are generally
being amortized over the contractual life of the loan. Premiums and discounts on purchased loans are amortized as
adjustments to interest income using the effective yield method.
The loan portfolio is segmented into commercial and consumer loans. Commercial loans consist of the following classes:
commercial and industrial, commercial real estate, commercial real estate-construction and lease financing. Consumer
loans consist of the following classes: residential mortgage loans, home equity loans and other consumer loans.
For all classes of loans, the accrual of interest is discontinued when the contractual payment of principal or interest has
become 90 days or more past due or management has serious doubts about further collectability of principal or interest,
even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and
is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest is credited to income.
Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as
interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to
accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a
reasonable period of time (generally 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.
52
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Commercial and industrial loans typically are made on the basis of the borrower’s ability to make repayment from the
cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business
loans may be substantially dependent on the success of the business itself, which, in turn, is likely to be dependent upon
the general economic environment. Mid Penn’s commercial and industrial loans are usually, but not always, secured by
business assets and personal guarantees. However, the collateral securing the loans may depreciate over time, may be
difficult to appraise, and may fluctuate in value based on the success of the business.
Commercial real estate and commercial real estate - construction
Commercial real estate and commercial real estate construction loans generally present a higher level of risk than loans
secured by one to four family residences. This greater risk is due to several factors, including the concentration of
principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these types of loans. In addition, the repayment of
loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.
Residential mortgage
Mid Penn offers a wide array of residential mortgage loans for both permanent structures and those under construction.
The Bank’s residential mortgage originations are secured primarily by properties located in its primary market and
surrounding areas. Residential mortgage loans have terms up to a maximum of 30 years and with loan to value ratios up
to 100% of the lesser of the appraised value of the security property or the contract price. Private mortgage insurance is
generally required in an amount sufficient to reduce the Bank’s exposure to at or below the 85% loan to value level.
Residential mortgage loans generally do not include prepayment penalties.
In underwriting residential mortgage loans, the Bank evaluates both the borrower’s ability to make monthly payments and
the value of the property securing the loan. Most properties securing real estate loans made by Mid Penn are appraised by
independent fee appraisers. The Bank generally requires borrowers to obtain title insurance and fire and property
insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. Real estate loans
originated by the Bank generally contain a “due on sale” clause allowing the Bank to declare the unpaid principal balance
due and payable upon the sale of the security property.
The Bank underwrites residential mortgage loans to the standards established by the secondary mortgage market, i.e.,
Fannie Mae, Ginnie Mae, Freddie Mac, or Pennsylvania Housing Finance Agency standards, with the intention of selling
the majority of residential mortgages originated into the secondary market. In the event that the facts and circumstances
surrounding a residential mortgage application do not meet all underwriting conditions of the secondary mortgage market,
the Bank will evaluate the failed conditions and evaluate the potential risk of holding the residential mortgage in the
Bank’s portfolio rather than rejecting the loan request. In the event that the loan is held in the Bank’s portfolio, the
interest rate on the residential mortgage typically would be increased to compensate for the added portfolio risk.
Consumer, including home equity
Mid Penn offers a variety of secured consumer loans, including home equity, automobile, and deposit secured loans. In
addition, the Bank offers other secured and unsecured consumer loans. Most consumer loans are originated in Mid Penn’s
primary market and surrounding areas.
The largest component of Mid Penn’s consumer loan portfolio consists of fixed rate home equity loans and variable rate
home equity lines of credit. Substantially all home equity loans and lines of credit are secured by second mortgages on
principal residences. The Bank will lend amounts, which, together with all prior liens, typically may be up to 85% of the
appraised value of the property securing the loan. Home equity term loans may have maximum terms up to 20 years
while home equity lines of credit generally have maximum terms of five years.
Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the
borrower. The underwriting standards employed by the Bank for consumer loans include an application, a determination
of the applicant’s payment history on other debts, and an assessment of ability to meet existing obligations and payments
on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process
also includes a comparison of the value of the collateral, if any, in relation to the proposed loan amount.
53
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer
loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In
such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of
the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower’s continuing financial
stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on
such loans.
Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a higher
security position in the case of foreclosure liquidation of collateral to extinguish the debt. Generally, foreclosure actions
could become more prevalent if the real estate market weakens and property values deteriorate.
Allowance for Loan and Lease Losses
The allowance for credit losses consists of 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 $120,000 at December 31, 2016 and $94,500 at December 31,
2015. The allowance for loan and lease losses is increased by the provision for loan and lease losses, and decreased by
charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan and lease
losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans are
charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly
unlikely. Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis,
earlier in the event of bankruptcy, or if there is an amount deemed 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 DCF, collateral
value, or observable market price of the impaired loan is lower than the carrying value of that loan. The general
component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller
balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans
are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for
qualitative factors. These qualitative risk factors include changes in economic conditions, fluctuations in loan quality
measures, changes in collateral values, changes in the experience of the lending staff and loan review systems, changes in
lending policies and procedures, including underwriting standards, changes in the mix and volume of loans originated, the
effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit
losses in the existing loan portfolio, 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 generally considers a commercial loan (consisting of commercial and industrial, commercial real estate,
commercial real estate-construction, and lease financing loan classes) to be impaired when it becomes 90 days or more
past due and not in the process of collection or sooner when it is probable that Mid Penn will be unable to collect all
contractual principal and interest due. This methodology assumes the borrower cannot or will not continue to make
additional payments. At that time the loan would generally be considered collateral dependent as the DCF method would
generally indicate no operating income available for evaluating the collateral position; therefore, most impaired loans are
deemed to be collateral dependent.
54
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
In addition, Mid Penn’s rating system assumes any loans classified as nonaccrual, included in the substandard rating, to be
impaired, and most of these loans are considered collateral dependent; therefore, most of Mid Penn’s impaired loans,
whether reporting a specific allocation or not, are considered collateral dependent.
Mid Penn evaluates loans for charge-off on a monthly basis. Policies that govern the recommendation for charge-off are
unique to the type of loan being considered. Commercial loans rated as substandard nonaccrual or lower will first have a
collateral evaluation completed in accordance with the guidance on impaired loans. Once the collateral evaluation has
been completed, a specific allocation of allowance is made based upon the results of the evaluation. The remaining
balance remains a nonperforming loan with the original terms and interest rate intact (not restructured). In the event the
loan is unsecured, the loan would have been charged-off at the recognition of impairment. Commercial real estate loans
rated as impaired will also have an initial collateral evaluation completed in accordance with the guidance on impaired
loans. An updated real estate valuation is ordered and the collateral evaluation is modified to reflect any variations in
value. A specific allocation of allowance is made for any anticipated collateral shortfall. The remaining balance remains a
nonperforming loan with the original terms and interest rate intact (not restructured). The process of charge-off for
residential mortgage loans begins upon a loan becoming delinquent for 90 days and not in the process of collection. The
existing appraisal is reviewed and a lien search is obtained to determine lien position and any instances of intervening
liens. A new appraisal of the property will be ordered if deemed necessary by management and a collateral evaluation is
completed. The loan will then be charged down to the value indicated in the evaluation. Consumer loans (including home
equity loans and other consumer loans) are recommended for charge-off after reaching delinquency of 90 days and the
loan is not in the process of collection. The collateral shortfall of the consumer loan is recommended for charge-off at this
point.
As noted above, Mid Penn assesses a specific allocation for commercial loans and commercial real estate loans. The
remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured). In
addition, Mid Penn takes a preemptive step when any commercial loan becomes classified under its internal classification
system. A preliminary collateral evaluation, in accordance with the guidance on impaired loans, is prepared using the
existing collateral information in the loan file. This process allows Mid Penn to review both the credit and documentation
files to determine the status of the information needed to make a collateral evaluation. This collateral evaluation is
preliminary but allows Mid Penn to determine if any potential collateral shortfalls exist.
It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate as soon
as practically possible of the credit being classified as substandard nonaccrual. Prior to receipt of the updated real estate
valuation Mid Penn will use any existing real estate valuation to determine any potential allowance issues; however, no
allowance recommendation will be made until such time Mid Penn is in receipt of the updated valuation. The Asset
Recovery department employs an electronic tracking system to monitor the receipt of and need for updated appraisals. To
date, there have been no material time lapses noted with the above processes.
In some instances Mid Penn is not holding real estate as collateral and is relying on business assets (personal property) for
repayment. In these circumstances a collateral inspection is performed by Mid Penn personnel to determine an estimated
value. The value is based on net book value, as provided by the financial statements, and discounted accordingly based on
determinations made by management. Occasionally, Mid Penn will employ an outside service to provide a fair estimate
of value based on auction sales or private sales. Management reviews the estimates of these third parties and discounts
them accordingly based on management’s judgment, if deemed necessary.
For impaired loans with no valuation allowance required, Mid Penn’s practice of obtaining independent third party market
valuations on the subject property as soon as practically possible of the credit being placed on nonaccrual status
sometimes indicates that the loan to value ratio is sufficient to obviate the need for a specific allocation in spite of
significant deterioration in real estate values in Mid Penn’s primary market area. These circumstances are determined on
a case by case analysis of the impaired loans.
Mid Penn actively monitors the values of collateral on impaired loans. This monitoring may require the modification of
collateral values over time or changing circumstances by some factor, either positive or negative, from the original values.
All collateral values will be assessed by management at least every 12 months for possible revaluation by an independent
third party.
An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable
losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses in the portfolio.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, Mid Penn
does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for
impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.
55
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Loans whose terms are modified are classified as troubled debt restructurings if the borrowers have been granted
concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a
troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated
maturity date. Nonaccrual troubled debt restructurings are restored to accrual status if principal and interest payments,
under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt
restructurings are designated as impaired.
The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The
borrower’s overall financial condition, repayment sources, guarantors, and value of collateral, if appropriate, are evaluated
annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments. Credit quality risk
ratings include regulatory classifications of special mention, substandard, doubtful, and loss. Loans criticized as special
mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses
may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current
sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all
the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full,
on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible
and are charged to the allowance for loan losses. Any loans not classified as noted above are rated pass.
In addition, Federal and State regulatory agencies, as an integral part of their examination process, periodically review the
Bank’s allowance for loan and lease losses and may require the Bank to recognize additions to the allowance based on
their judgments about information available to them at the time of their examination, which may not be currently available
to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current
level of the allowance for loan losses is adequate.
Acquired Loans
Loans that Mid Penn acquires in connection with business combinations are recorded at fair value with no carryover of the
existing related allowance for loan losses. Fair value of the loans involves estimating the amount and timing of principal
and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.
The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and
is recognized into interest income over the remaining life of the loan. The difference between contractually required
payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable
discount. These loans are accounted for under the Accounting Standard Codification (“ASC”) 310-30, Loans and Debt
Securities Acquired with Deteriorated Credit Quality. The nonaccretable discount includes estimated future credit losses
expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows will require Mid Penn
to evaluate the need for an additional allowance for credit losses. Subsequent improvement in expected cash flows will
result in the reversal of a corresponding amount of the nonaccretable discount which Mid Penn will then reclassify as
accretable discount that will be recognized into interest income over the remaining life of the loan.
Loans acquired through business combinations that do meet the specific criteria of ASC 310-30 are individually evaluated
each period to analyze expected cash flows. To the extent that the expected cash flows of a loan have decreased due to
credit deterioration, Mid Penn establishes an allowance.
Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30 are accounted for
under ASC 310-20. These loans are initially recorded at fair value, and include credit and interest rate marks associated
with acquisition accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to
yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition
date for acquired performing loans. An allowance for loan losses is recorded for any credit deterioration in these loans
subsequent to acquisition.
Acquired loans that met the criteria for impaired or nonaccrual of interest prior to the acquisition may be considered
performing upon acquisition, regardless of whether the customer is contractually delinquent if Mid Penn expects to fully
collect the new carrying value (i.e. fair value) of the loans. As such, Mid Penn may no longer consider the loan to be
nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. In
addition, charge-offs on such loans would be first applied to the nonaccretable difference portion of the fair value
adjustment.
56
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
(g) 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. Bank premises and equipment designated as held for sale are carried at
the lower of cost or market value.
(h) Restricted Investments in Bank Stocks
Restricted investments in bank stocks represent required investments in the common stock of correspondent banks. As a
member of the FHLB and Atlantic Community Bankers Bank (“ACBB”), the Bank is required to own restricted stock
investments in these correspondent banks, which is carried at cost. The total amount of these restricted stock investments
was $2,443,000 December 31, 2016 and $4,266,000 at December 31, 2015. This reduction was attributed to the decline in
Mid Penn’s FHLB long term advances and its shift from a short-term borrowing to a short-term selling position in 2016.
Total dividends received in 2016 and 2015 totaled $135,000 and $250,000, respectively.
(i)
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. As of December 31, 2016, Mid Penn had $57,000 of residential real estate
held in other real estate owned. There was $426,000 in loans for which formal foreclosure proceedings were in process at
December 31, 2016. As of December 31, 2015, Mid Penn had $358,000 of residential real estate held in other real estate
owned. There were no loans for which formal foreclosure proceedings were in process at December 31, 2015.
(j) 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 core deposit and other intangibles in the Consolidated Balance Sheets
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 $144,000 and $174,000 at December 31, 2016 and 2015,
respectively. Amortization expense is reflected in the Consolidated Statements of Income in other income and was
$30,000, $24,000, and $36,000 for the years 2016, 2015, and 2014, respectively. Servicing rights are evaluated for
impairment based upon estimated fair value as compared to unamortized book value.
(k)
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 $321,000 at December 31, 2016 and $365,000 at December
31, 2015, net of amortization, using the straight-line method and is reported in other assets on the Consolidated Balance
Sheets. 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 2016, 2015 and 2014.
57
MID PENN BANCORP, INC.
(l)
Income Taxes
Notes to Consolidated Financial Statements
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 basis 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.
(m) 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 a ten-year period using a
sum of the year’s digits basis. The core deposit intangible is subject to impairment testing whenever events or changes in
circumstances indicate such testing.
(n) Goodwill
Goodwill is the excess of the purchase price over the fair value of assets acquired in connection with past business
acquisitions, including the 2015 Phoenix acquisition. 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 from its
most recent testing, which was performed as of December 31, 2016 using a qualitative analysis. In addition, Mid Penn
did not identify any impairment in 2015 or 2014 using a qualitative and quantitative analysis, respectively, in accordance
with ASC 350.
(o) Bank Owned Life Insurance
Mid Penn is the owner and beneficiary of bank-owned life insurance (“BOLI”) policies on current and former directors, as
well as select Miners Bank employees, which were acquired through the Phoenix acquisition. The earnings from the
BOLI policies are an asset that can be liquidated, if necessary, with associated tax costs. However, Mid 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.
Mid Penn is also party to certain Split-Dollar Life Insurance Arrangements, and in accordance with GAAP, has accrued a
liability related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement, and a
liability for the future death benefit.
(p) Marketing and Advertising Costs
Marketing and advertising costs are expensed as incurred.
58
MID PENN BANCORP, INC.
(q) Postretirement Benefit Plans
Notes to Consolidated Financial Statements
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.
(r) 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.
(s) 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.
(t) Comprehensive Income
Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income
(loss) includes changes in unrealized gains and losses on securities available for sale arising during the period and
reclassification adjustments for realized gains and losses on securities available for sale included in net income. Mid Penn
has an unfunded noncontributory defined benefit Plan for directors and other postretirement benefit Plans covering full-
time employees. These Plans utilize assumptions and methods to calculate the fair value of Plan assets and recognizing
the overfunded and underfunded status of the Plans on its consolidated balance sheet. Gains and losses, prior service costs
and credits are recognized in other comprehensive income (loss), net of tax, until they are amortized, or immediately upon
curtailment.
(u) Restricted Stock
Mid Penn provides members of Senior Management who have a responsibility for its growth with additional incentives by
allowing them to acquire an ownership interest in Mid Penn through the Restricted Stock Plan. The restricted stock is
non-voting and non-participating until the granted shares vest. Once the shares vest, the recipient would have full voting
rights and be entitled to any commons stock dividends.
(v) 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 earnings per share.
(Dollars in thousands, except per share data)
Net Income
Less:
2016
2015
2014
$
7,804 $
6,528 $
5,701
Dividends on Series B preferred stock
Redemption premium on Series B preferred stock
Dividends on Series C preferred stock
Net income available to common shareholders
$
—
—
—
7,804 $
373
100
17
6,038 $
350
—
—
5,351
Weighted average common shares outstanding
Basic earnings per common share
4,229,284 4,106,548 3,495,705
1.53
$
1.47 $
1.85 $
Mid Penn had no dilutive instruments outstanding during the periods ended December 31, 2016, 2015, and 2014.
59
MID PENN BANCORP, INC.
(4) Mergers and Acquisitions
Notes to Consolidated Financial Statements
On March 1, 2015, Phoenix Bancorp, Inc. (“Phoenix”) merged with, and into, Mid Penn, with Mid Penn continuing as the
surviving entity. Simultaneously with the consummation of the foregoing merger, Miners Bank (“Miners”), a Pennsylvania-
state chartered bank and wholly-owned subsidiary of Phoenix, merged with and into the Bank.
As part of this transaction, Phoenix shareholders received either 3.167 shares of the Company’s common stock or $51.60 in cash
in exchange for each share of Phoenix common stock. Holders of contingent rights issued by Phoenix received approximately
0.414 shares of the Company’s common stock as settlement of such rights. As a result, the Company issued 723,851 shares of
common stock with an acquisition date fair value of approximately $11,292,000, based on the closing stock price of the
Company’s common stock on February 27, 2015 of $15.60, and cash of $2,949,000. Including an insignificant amount of cash
paid in lieu of fractional shares, the fair value of total consideration paid was $14,241,000.
Additionally, as part of this transaction, on March 1, 2015, Mid Penn assumed all of the liabilities and obligations of Phoenix
with respect to 1,750 shares of Phoenix’s preferred stock issued to the United States Treasury (“Treasury”) in connection with
the Small Business Lending Fund and issued 1,750 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock,
Series C that had a $1,000 liquidation preference per share (the “SBLF Preferred Shares”), to the Treasury. The SBLF Preferred
Shares qualified as Tier 1 Capital and had terms and conditions identical to those shares of preferred stock issued by Phoenix to
the Treasury.
The assets and liabilities of Miners and Phoenix were recorded on the consolidated balance sheet at their estimated fair value as
of March 1, 2015, and their results of operations have been included in the consolidated income statement since that date.
Included in the purchase price was goodwill and a core deposit intangible of $2,902,000 and $578,000, respectively. The core
deposit intangible will be amortized over a ten-year period using a sum of the year’s digits basis. The goodwill is not taxable
and will not be amortized, but will be measured annually for impairment or more frequently if circumstances require. Core
deposit intangible amortization expense projected for the next five years beginning in 2017 is estimated to be $86,000, $75,000,
$65,000, $54,000, and $44,000 per year, respectively, and $70,000 in total for years after 2021.
The allocation of the purchase price is as follows:
(Dollars in thousands)
Assets acquired:
Cash and cash equivalents
Investment securities
Loans
Goodwill
Core deposit and other intangibles
Other assets
Total assets acquired
Liabilities assumed:
Deposits
FHLB borrowings
Other liabilities
Total liabilities assumed
Equity acquired:
Preferred stock
Total equity acquired and liabilities assumed
Consideration paid
Cash paid
Fair value of common stock issued, including replacement
equity awards
$
$
$
11,044
11,331
110,363
2,902
578
7,489
143,707
123,238
3,570
908
127,716
1,750
129,466
14,241
2,949
11,292
60
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
The following table summarizes the estimated fair value of the assets acquired and liabilities and equity assumed.
(Dollars in thousands)
Total purchase price
Net assets acquired:
Cash and cash equivalents
Investment securities
Restricted stock
Loans
Bank owned life insurance
Premises and equipment
Deferred income taxes
Accrued interest receivable
Core deposit and other intangibles
Other assets
Deposits
FHLB borrowings
Accrued interest payable
Other liabilities
Preferred stock
$
14,241
11,044
11,331
509
110,363
3,673
1,792
503
388
578
624
(123,238 )
(3,570 )
(32 )
(876 )
(1,750 )
11,339
2,902
Goodwill
$
The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $112,816,000. The
table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans
acquired.
(Dollars in thousands)
Gross amortized cost basis at March 1, 2015
Market rate adjustment
Credit fair value adjustment on pools of homogeneous loans
Credit fair value adjustment on impaired loans
Fair value of purchased loans at March 1, 2015
$
$
112,816
270
(1,461 )
(1,262 )
110,363
The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the
stated rates of the acquired loans. The credit adjustment made on pools of homogeneous loans represents the changes in credit
quality of the underlying borrowers from the loan inception to the acquisition date. The credit adjustment on impaired loans is
derived in accordance with ASC 310-30 and represents the portion of the loan balance that has been deemed uncollectible based
on our expectations of future cash flows for each respective loan.
The information about the acquired Phoenix loans accounted for under ASC 310-30 as of March 1, 2015 is as follows:
(Dollars in thousands)
Contractually required principal and interest at acquisition
Contractual cash flows not expected to be collected
(nonaccretable discount)
Expected cash flows at acquisition
Interest component of expected cash flows (accretable discount)
$
Fair value of acquired loans
61
$
3,548
(804 )
2,744
(458 )
2,286
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
The following table presents unaudited pro forma information as if the merger between Mid Penn and Phoenix had been
completed on January 1, 2014. The pro forma information does not necessarily reflect the results of operations that would have
occurred had Mid Penn merged with Phoenix at the beginning of 2014. Supplemental pro forma earnings for 2015 were
adjusted to exclude $762,000 of merger related costs incurred for the year ended December 31, 2015; the results for the year
ended December 31, 2014 were adjusted to include these charges. The pro forma financial information does not include the
impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues,
expense efficiencies, or other factors. The pro forma data is intended for informational purposes and is not indicative of the
future results of operations.
(Dollars in thousands, except per share data)
Net interest income after loan loss provision
Noninterest income
Noninterest expense
Net income available to common shareholders
Net income per common share
(Unaudited)
Years Ended December
31,
2015
2014
$
31,454 $
4,152
27,817
5,811
1.38
29,745
4,131
26,846
5,259
1.25
The amount of total revenue, consisting of interest income plus noninterest income specifically related to Phoenix for the period
beginning March 1, 2015, included in the consolidated statements of income of Mid Penn for the year ended December 31,
2015, was $4,244,000. The net income specifically related to Phoenix for the period beginning March 1, 2015, included in the
consolidated statements of income of Mid Penn for the year ended December 31, 2015, was $747,000.
(5) Accumulated Other Comprehensive (Loss) Income
The components of accumulated other comprehensive (loss) income, net of taxes, are as follows:
(Dollars in thousands)
Unrealized (Loss)
Gain on
Securities
Defined Benefit
Plan Liability
66 $
247 $
(2,919 ) $
1,565 $
Accumulated Other
Comprehensive
(Loss) Income
(2,853 )
1,812
Balance - December 31, 2016
Balance - December 31, 2015
$
$
(6) 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, 2016 and December 31, 2015 because the Bank had sufficient vault cash available.
(7)
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.
62
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
In instances when a determination is made that other-than-temporary impairment exists but the investor does not intend to sell
the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated
recovery, this guidance changes the presentation and amount of the other-than-temporary impairment recognized in the income
statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment
related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total
other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related
to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors
is recognized in other comprehensive income (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. Mid Penn had no other-than-temporary impaired debt or equity
securities in 2016, 2015, and 2014.
At December 31, 2016 and 2015, amortized cost, fair value, and unrealized gains and losses on investment securities are as
follows:
(Dollars in thousands)
December 31, 2016
Available for sale securities:
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Corporate debt securities
Equity securities
(Dollars in thousands)
December 31, 2015
Available for sale securities:
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Corporate debt securities
Equity securities
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
$
48,520 $
26,181
61,079
1,000
1,268
$ 138,048 $
34 $
17
91
—
—
142 $
1,542 $
579
2,332
—
112
47,012
25,619
58,838
1,000
1,156
4,565 $ 133,625
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
$
$
26,316 $
38,983
64,780
2,000
1,271
133,350 $
729 $
49
1,914
80
2
2,774 $
55 $
228
77
10
33
403 $
26,990
38,804
66,617
2,070
1,240
135,721
Estimated fair values of debt securities are based on quoted market prices, where applicable. If quoted market prices are not
available, fair values are based on quoted market prices of comparable instruments, adjusted for differences between the quoted
instruments and the instruments being valued.
Investment securities having a fair value of $131,469,000 at December 31, 2016, and $130,298,000 at December 31, 2015, were
pledged primarily to secure public deposits.
63
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, 2016 and 2015.
(Dollars in thousands)
Less Than 12 Months
12 Months or More
Total
December 31, 2016
Available for sale securities:
Number
of
Securities
Fair
Value
Unrealized
Losses
Number
of
Securities
Fair
Value
Unrealized
Losses
Number
of
Securities
Fair
Value
Unrealized
Losses
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
23
$ 43,698 $
1,542
18
24,321
579
108
0
50,582
—
2,332
—
149
$ 118,601 $
4,453
0
0
0
2
2
$ — $
—
23
$ 43,698 $
1,542
—
—
18
24,321
579
—
1,056
—
112
108
2
50,582
1,056
2,332
112
$ 1,056 $
112
151
$ 119,657 $
4,565
(Dollars in thousands)
Less Than 12 Months
12 Months or More
Total
December 31, 2015
Available for sale securities:
U.S. Treasury and
U.S. government agencies
Mortgage-backed
U.S. government agencies
State and political
subdivision obligations
Corporate debt securities
Equity securities
Total temporarily impaired
available for sale securities
Number
of
Securitie
s
6
13
9
1
0
Fair
Value
Unreali
zed
Losses
Number
of
Securitie
s
Fair
Value
Unreali
zed
Losses
Number
of
Securitie
s
Fair
Value
Unreali
zed
Losses
$ 6,259 $
12,75
43
2
$ 1,383 $
12
8
$ 7,642 $
19,04
55
9
124
11
6,282
104
24
1
228
4,041
990
32
10
— —
3
0
2
1,631
45
— —
33
615
12
1
2
5,672
990
615
77
10
33
24,04
33,96
29
$
9 $
209
18
$ 9,911 $
194
47
$
0 $
403
Management evaluates securities for other-than-temporary impairment on a quarterly basis; and more frequently when economic
or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value
has been less than cost, and the financial condition and near term prospects of the issuer. In addition, for debt securities, Mid
Penn considers (a) whether management has the intent to sell the security, (b) it is more likely than not that management will be
required to sell the security prior to its anticipated recovery, and (c) whether management expects to recover the entire
amortized cost basis. For equity securities, management considers the intent and ability to hold securities until recovery of
unrealized losses.
The majority of the investment portfolio is comprised of mortgage-backed U.S. government agencies and state and political
subdivision obligations. For the investment securities with an unrealized loss, Mid Penn has concluded, based on its analysis,
that the unrealized losses in the investments are primarily caused by the movement of interest rates, and the contractual terms of
these investments do not permit the issuer to settle the securities at a price less than the par value of the investment.
At December 31, 2016, Mid Penn had 149 debt securities and 2 equity securities with unrealized losses totaling $4,565,000 that
depreciated 3.82% from their collective amortized cost basis. At December 31, 2016, the majority of the unrealized losses on
securities in an unrealized loss position were attributed to state and political subdivision obligations and U.S. Treasury and
government agencies. At December 31, 2015, Mid Penn had 45 debt securities and 2 equity securities with unrealized losses
totaling $403,000 that depreciated 1.19% from their amortized cost basis. At December 31, 2015, the majority of the unrealized
losses on securities in an unrealized loss position were attributed to mortgage-backed U.S. government agencies. 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.
64
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
During 2016, Mid Penn realized gross gains on the sales of securities available for sale of $1,927,000 on 102 debt securities.
Mid Penn also realized $881,000 in gross losses on the sales of 56 debt securities available for sale during 2016. Mid Penn
realized gross gains of $325,000 and $168,000 on sales of securities available for sale during 2015 and 2014, respectively, while
no gross losses were realized in 2015 and 2014.
The table below is the maturity distribution of investment securities at amortized cost and fair value at December 31, 2016.
(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, 2016
Fair
Value
Amortized
Cost
$
$
1,293 $
19,656
66,084
23,566
110,599
26,181
1,268
138,048 $
1,305
19,471
63,895
22,179
106,850
25,619
1,156
133,625
(8) Loans and Allowance for Loan and Lease Losses
The classes of the loan portfolio, summarized by the aggregate pass rating, net of deferred fees and costs of $196,000 and
$178,000 as of December 31, 2016 and 2015, respectively, and the classified ratings of special mention, substandard, and
doubtful within Mid Penn’s internal risk rating system as of December 31, 2016 and 2015, are noted below:
(Dollars in thousands)
December 31, 2016
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Lease financing
Residential mortgage
Home equity
Consumer
(Dollars in thousands)
December 31, 2015
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Lease financing
Residential mortgage
Home equity
Consumer
Special Mention Substandard Doubtful Total
937 $
1,683
202
—
107
142
—
3,071 $
801 $
7,249
1,286
—
1,356
224
10,916 $
— $ 172,518
— 446,524
54,376
—
425
—
99,457
—
37,608
—
—
3,016
— $ 813,924
Special Mention Substandard Doubtful Total
1,289 $
2,088
2,403
—
475
261
—
6,516 $
670 $
7,517
—
—
1,361
222
—
9,770 $
— $ 160,261
— 369,464
68,068
—
—
727
— 100,665
33,411
—
—
3,917
— $ 736,513
Pass
$ 170,780 $
437,592
52,888
425
97,994
37,242
3,016
$ 799,937 $
Pass
$ 158,302 $
359,859
65,665
727
101,507
32,928
3,917
$ 722,905 $
65
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Impaired loans by loan portfolio class as of December 31, 2016 and 2015 are summarized as follows:
(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial:
Commercial and industrial
Commercial real estate:
Commercial real estate
Acquired with credit deterioration*
Commercial real estate - construction:
Commercial real estate - construction
Residential mortgage:
Residential mortgage
Acquired with credit deterioration*
Home equity:
Home equity
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
December 31, 2016
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Recorded
Investment
December 31, 2015
Unpaid
Principal
Balance
Related
Allowance
$
4 $
9 $
— $
14 $
49 $
726
842
1,792
842
—
—
1,023
931
2,020
931
618
618
—
—
—
848
389
882
389
—
—
1,329
400
1,434
400
111
129
—
115
137
$
$
56 $
2,520
242
68
29
62 $
2,646
242
68
49
60 $
4,088
860
1,305
140
71 $
5,280
860
1,339
178
6 $
711
72
68
1
6 $
711
72
68
1
113 $
1,947
—
32
—
128 $
1,981
—
32
—
127 $
3,901
—
1,761
115
177 $
4,001
—
1,466
137
—
—
—
—
—
—
—
51
429
—
23
—
51
429
—
23
—
*
Loans acquired with credit deterioration are presented net of credit fair value adjustment.
66
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Average recorded investment of impaired loans and related interest income recognized for the years ended December 31, 2016,
2015, and 2014 are summarized as follows:
(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial:
Commercial and industrial
Acquired with credit deterioration
Commercial real estate:
Commercial real estate
Acquired with credit deterioration
Commercial real estate - construction:
Commercial real estate - construction
Residential mortgage:
Residential mortgage
Acquired with credit deterioration
Home equity:
Home equity
Acquired with credit deterioration
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
December 31, 2016
Interest
Income
Recognized
Average
Recorded
Investment
December 31, 2015
Interest
Income
Recognized
Average
Recorded
Investment
December 31, 2014
Interest
Income
Recognized
Average
Recorded
Investment
$
9 $
—
— $
—
19 $
—
— $
205
72 $
—
820
810
124
821
378
75
—
59 $
2,177
48
14
32
68 $
3,807
172
1,213
107
$
$
—
164
1,051
926
14
350
1,966
—
—
21
4
—
—
— $
—
—
—
—
— $
164
—
25
—
—
816
400
107
—
123 $
1,721
—
25
—
142 $
3,698
—
1,241
107
—
8
—
—
3
— $
—
—
—
—
205 $
364
—
8
3
—
541
—
29
—
93 $
6,823
—
—
76
165 $
8,789
—
541
105
—
—
346
—
—
—
—
—
—
—
—
—
—
—
—
346
—
—
—
Nonaccrual loans by loan portfolio class as of December 31, 2016 and 2015 are summarized as follows:
(Dollars in thousands)
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Residential mortgage
Home equity
2016
2015
$
$
4 $
2,939
860
715
140
4,658 $
66
2,607
—
1,630
115
4,418
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
$666,000, $778,000, and $798,000, in the years ended December 31, 2016, 2015, and 2014, respectively. Mid Penn has no
commitments to lend additional funds to borrowers with impaired or nonaccrual loans.
67
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
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, 2016 and 2015 are summarized as follows:
(Dollars in thousands)
December 31, 2016
Commercial and industrial:
Commercial and industrial
Commercial real estate:
Commercial real estate
Acquired with credit deterioration
Commercial real
estate - construction:
Commercial real estate -
construction
Lease financing:
Lease financing
Residential mortgage:
Residential mortgage
Acquired with credit deterioration
Home equity:
Home equity
Consumer:
Consumer
Total
(Dollars in thousands)
December 31, 2015
Commercial and industrial:
Commercial and industrial
Commercial real estate:
Commercial real estate
Acquired with credit deterioration
Commercial real
estate - construction:
Commercial real estate -
construction
Lease financing:
Lease financing
Residential mortgage:
Residential mortgage
Acquired with credit deterioration
Home equity:
Home equity
Consumer:
Consumer
Total
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
$
164 $
12 $
4 $
180 $ 172,338 $ 172,518 $
475
—
—
—
1,004
59
1,479 444,203 445,682
842
783
59
—
404
84
488
53,888
54,376
—
—
—
—
425
425
548
—
124
—
237
238
909
238
98,159
151
99,068
389
33
13
125
171
37,437
37,608
—
1,220 $
$
—
553 $
—
1,751 $
—
3,016
3,016
3,524 $ 810,400 $ 813,924 $
—
—
59
—
—
—
—
—
—
59
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
$
55 $
204 $
66 $
325 $ 159,936 $ 160,261 $
211
215
608
518
1,456
55
2,275 366,258 368,533
931
143
788
—
—
—
—
68,068
68,068
—
—
—
—
727
727
694
12
550
—
778
222
2,022
234
98,243 100,265
400
166
—
50
23
73
33,338
33,411
10
1,197 $
5
1,935 $
—
2,600 $
15
3,917
3,902
5,732 $ 730,781 $ 736,513 $
$
—
—
55
—
—
—
—
—
—
55
68
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Activity in the allowance for loan and lease losses for the years ended December 31, 2016, 2015, and 2014, and the recorded
investment in loans receivable as of December 31, 2016, 2015, and 2014 are as follows:
(Dollars in thousands)
Commercial
and
industrial
Commercial
real
estate
Commercial
real estate -
construction
Lease
financing
Residential
mortgage
Home
equity Consumer Unallocated Total
1,393 $
(820 )
4
1,003
1,580
3,552 $
(216 )
211
776
4,323
153 $
—
—
(9 )
144
1 $
—
—
—
1
317 $
534 $
(4 )
(25 )
26 —
87
(15 )
379
541
12 $
(42 )
11
22
3
206 $ 6,168
(1,107 )
252
1,870
7,183
—
—
6
212
6
711
72
—
68
1
—
—
858
December 31,
2016
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
$
1,574 $
3,612 $
72 $
1 $
473 $
378 $
3 $
212 $ 6,325
Loans receivable:
Ending balance
$
Ending balance:
individually
evaluated for
impairment
Ending balance:
acquired with
credit
deterioration
Ending balance:
collectively
evaluated for
impairment
$
172,518 $
446,524 $
54,376 $
425 $
99,457 $ 37,608 $
3,016 $ —
$ 813,924
60
3,246
860
—
916
140
—
—
5,222
—
842
—
—
389 —
—
—
1,231
172,458 $
442,436 $
53,516 $
425 $
98,152 $ 37,468 $
3,016 $ —
$ 807,471
69
MID PENN BANCORP, INC.
(Dollars in thousands)
Notes to Consolidated Financial Statements
Commercial
and
industrial
Commercial
real estate
Commercial
real estate -
construction
Lease
financing
Residential
mortgage
Home
equity Consumer Unallocated Total
December 31,
2015
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
$
Loans receivable:
Ending balance
$
Ending balance:
individually
evaluated for
impairment
Ending balance:
acquired with
credit
deterioration
Ending balance:
collectively
evaluated for
impairment
$
1,393 $
(130 )
12
118
1,393
3,925 $
(1,569 )
75
1,121
3,552
33 $
—
—
120
153
2 $
—
—
(1 )
1
450 $
(35 )
44
75
534
653 $
(36 )
29
(329 )
317
35 $
(14 )
11
(20 )
12
225 $ 6,716
(1,784 )
171
1,065
6,168
—
—
(19 )
206
51
429
—
—
23 —
—
—
503
1,342 $
3,123 $
153 $
1 $
511 $
317 $
12 $
206 $ 5,665
160,261 $
369,464 $
68,068 $
727 $ 100,665 $ 33,411 $
3,917 $
— $ 736,513
127
2,970
—
—
1,361
115
—
—
4,573
—
931
—
—
400 —
—
—
1,331
160,134 $
365,563 $
68,068 $
727 $
98,904 33,296 $
3,917 $
— $ 730,609
70
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Commercial
real
estate
Commercial
real estate -
construction
Lease
financing
Residential
mortgage
Home
equity Consumer Unallocated Total
industrial
(Dollars in thousands)
Commercial
and
December 31, 2014
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
Loans receivable:
Ending balance
Ending balance:
individually
evaluated for
impairment
Ending balance:
collectively
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 $ 6,317
(1,328 )
—
110
—
1,617
204
6,716
225
137
1,382
—
—
—
115
—
—
1,634
$
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
The recorded investments in troubled debt restructured loans at December 31, 2016 and 2015 are as follows:
(Dollars in thousands)
December 31, 2016
Commercial and industrial
Commercial real estate
Residential mortgage
(Dollars in thousands)
December 31, 2015
Commercial and industrial
Commercial real estate
Residential mortgage
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding Recorded
Investment
$
$
40 $
4,569
759
5,368 $
Recorded Investment
5
2,871
639
3,515
35 $
4,031
757
4,823 $
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding Recorded
Investment
$
$
40 $
3,634
733
4,407 $
Recorded Investment
15
2,235
555
2,805
35 $
3,117
727
3,879 $
At December 31, 2016, Mid Penn’s troubled debt restructured loans totaled $3,515,000, including five loans totaling $877,000
represented accruing impaired loans in compliance with the terms of the modification. Of the $877,000, four are accruing
impaired residential mortgages to unrelated borrowers totaling $571,000 and the other one is an accruing impaired commercial
real estate loan for $306,000. The remaining $2,638,000 of troubled debt restructured loans represent ten loans among four
relationships, are nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired
71
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
loans. Two large relationships account for $2,170,000 of the $2,638,000 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, 2016, there were no charge-offs associated with troubled debt restructured loans while under a forbearance
agreement. As of December 31, 2016, 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 2016. One forbearance agreement was negotiated during 2008,
eight forbearance agreements were negotiated during 2009, two were negotiated during 2013, one was negotiated during 2014,
and three were negotiated during 2016.
At December 31, 2015, Mid Penn’s troubled debt restructured loans totaled $2,805,000 of which four loans totaling $459,000
represented accruing impaired loans in compliance with the terms of the modification. Of the $459,000, three are accruing
impaired residential mortgages to unrelated borrowers totaling $64,000 and the other one is an accruing impaired commercial
real estate loan for $395,000. The remaining $2,346,000, representing nine loans among four relationships, are nonaccrual
impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired loans. One large
relationship accounted for $1,370,000 of the $2,346,000 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,
2015, there were no charge-offs associated with troubled debt restructured loans while under a forbearance agreement. As of
December 31, 2015, 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 2015. One forbearance agreement was negotiated during 2008, nine forbearance
agreements were negotiated during 2009, two were negotiated during 2013, and one was negotiated during 2014.
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 three loans modified in 2016 and no loans modified in 2015 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, 2016.
(Dollars in thousands)
December 31, 2016
Commercial real estate
Residential mortgage
Pre-
Modification
Outstanding
Recorded
Investment
934 $
68
1,002 $
Post-
Modification
Outstanding
Recorded
Investment
914 $
68
982 $
$
$
Number
of
Contracts
2
1
3
Recorded
Investment
914
68
982
The following table provides activity for the accretable yield of purchased impaired loans for the year ended December 31,
2016.
(Dollars in thousands)
Accretable yield, January 1, 2016
Accretable yield amortized to interest income
Reclassification from nonaccretable difference (a)
Accretable yield, December 31, 2016
$
$
178
(141 )
30
67
(a) Reclassification from non-accretable difference represents an increase to the estimated cash flows to be collected on the
underlying portfolio.
The Bank has granted loans to certain of its executive officers, directors, and their related interests. The aggregate amount of
these loans was $17,594,000 and $10,657,000 at December 31, 2016 and 2015, respectively. During 2016, $14,479,000 of new
loans and advances were extended and repayments totaled $7,542,000. None of these loans were past due, in nonaccrual status,
or restructured at December 31, 2016.
72
MID PENN BANCORP, INC.
(9) Bank Premises and Equipment
At December 31, 2016 and 2015, bank premises and equipment are as follows:
Notes to Consolidated Financial Statements
(Dollars in thousands)
Land
Buildings
Furniture, fixtures, and equipment
Leasehold improvements
Construction in progress
Total cost
Less accumulated depreciation
$
Net book value of bank premises and equipment
Assets held for sale
Total bank premises and equipment
$
2016
2015
2,315 $
9,517
8,184
1,432
89
21,537
(10,463 )
11,074
1,894
12,968 $
2,906
10,789
8,742
1,212
18
23,667
(9,674 )
13,993
—
13,993
Depreciation expense was $1,658,000 in 2016, $1,485,000 in 2015, and $1,235,000 in 2014.
As of December 31, 2016, assets held-for-sale consisted of three full service retail banking properties. These properties were
transferred from land and buildings to assets held for sale due to Mid Penn’s intent to sell them during January 2017. An
impairment charge of $142,000 was recorded on one of the properties at December 31, 2016 and included in other expenses on
the Consolidated Statements of Income.
On January 20, 2017, Mid Penn consummated the sale of the three properties for an aggregate sale price of $2,240,000, which
exceeded Mid Penn’s combined carrying value by approximately $346,000. Two of the properties are being leased back by Mid
Penn for a period of at least 15 years, and the respective gains on the sales of those properties will be recognized over the life of
the leases.
Operating Leases:
As of December 31, 2016, Mid Penn was obligated to utilize certain premises under certain non-cancelable operating leases,
which expire at various dates through the year ending December 31, 2035. Many of these leases contain renewal options and
certain leases contain escalation clauses calling for rentals to be adjusted for increased real estate taxes and other operating
expenses or proportionately adjusted for increases in consumer or other price indices. Four of Mid Penn’s operating leases are
with related parties. The rental expense paid to related parties was $348,000 in 2016, $279,000 in 2015, and $54,000 in 2014.
The future minimum payments to related parties are $346,000 (2017), $302,000 (2018), $304,000 (2019), $305,000 (2020),
$213,000 (2021), and $2,118,000 thereafter.
In 2016, Mid Penn entered into two subleasing agreements with escalation clauses to two unrelated parties. The first sublease
agreement began on April 1, 2016, while the second sublease began on July 1, 2016. Both subleases end on March 31, 2021.
The following summary reflects the future minimum rental payments by year under Mid Penn’s operating leases as of December
31, 2016, including a breakdown of the sublease rental income and future minimum payments owed to related parties.
(Dollars in thousands)
2017
2018
2019
2020
2021
thereafter
Lease
Obligation
$
Sublease
Rental
Income
Net
Rental
Expense
1,047
1,036
1,035
712
562
5,666
335 $ 10,058
74 $
79
81
81
20
—
1,121 $
1,115
1,116
793
582
5,666
10,393 $
$
Rental expense in connection with leases was $716,000 in 2016, $627,000 in 2015, and $151,000 in 2014.
73
MID PENN BANCORP, INC.
(10) Deposits
Notes to Consolidated Financial Statements
At December 31, 2016 and 2015, time deposits amounted to $182,595,000 and $160,849,000, respectively. Interest expense on
certificates of deposit amounted to $2,156,000, $1,920,000, and $1,971,000 for the years ended December 31, 2016, 2015 and
2014, respectively. The aggregate amount of demand deposit overdrafts that were reclassified as loans were $285,000 at
December 31, 2016, compared to $567,000 as of December 31, 2015.
Time deposits at December 31, 2016, mature as follows:
(Dollars in thousands)
Maturing in 2017
Maturing in 2018
Maturing in 2019
Maturing in 2020
Maturing in 2021
Maturing thereafter
Time Deposits
Less than $250,000 $250,000 or more
16,760
$
5,360
3,209
950
303
—
26,582
64,993 $
35,238
20,094
20,997
13,953
738
156,013 $
$
Brokered deposits included in the time deposit totals equaled $13,567,000, at December 31, 2016 and $11,168,000 at December
31, 2015. Deposits and other funds from related parties held by Mid Penn at December 31, 2016 and 2015 amounted to
$19,279,000 and $17,163,000, respectively.
(11) Short-term Borrowings
Short-term borrowings generally have original terms of less than a week. Mid Penn’s short-term borrowings consist of federal
funds purchased. There were no short-term borrowings at December 31, 2016, and $31,596,000 with a rate of 0.40% at
December 31, 2015. The Bank also has short-term borrowing capacity from the FHLB up to the Bank’s unused borrowing
capacity of $404,204,000 at December 31, 2016, upon satisfaction of any stock purchase requirements of the FHLB. The Bank
also has unused overnight lines of credit with correspondent banks amounting to $15,000,000 at December 31, 2016.
(12) 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. As of December 31, 2016 and 2015, the Bank had long-term debt outstanding in the amount of
$13,581,000 and $40,305,000, respectively, consisting of:
(Dollars in thousands)
Loans maturing in 2016 with rates ranging
from 0.54% to 1.08%
Loans maturing in 2017 at a rate of 3.03%
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,
2016
2015
$
$
— $
1,016
10,000
2,504
61
13,581 $
26,521
1,016
10,000
2,703
65
40,305
The aggregate principal amounts due on long-term debt subsequent to December 31, 2016 are $1,229,000 (2017), $223,000
(2018), $10,235,000 (2019), $246,000 (2020), $258,000 (2021), and $1,390,000 thereafter.
(13) Subordinated Debt
On December 9, 2015, Mid Penn sold $7,500,000 aggregate principal amount of its Notes due 2025. The Notes are treated as
Tier 2 capital for regulatory capital purposes.
The Notes bear interest at a rate of 5.15% per year for the first five years and then float at the Wall Street Journal’s Prime Rate
plus 0.50%, provided that the interest rate applicable to the outstanding principal balance will at no times be less than 4.0%.
Interest will be payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, and began on January 1,
74
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
2016. The Notes will mature on December 9, 2025 and are redeemable in whole or in part, without premium or penalty, at any
time on or after December 9, 2020, and prior to December 9, 2025. Additionally, Mid Penn may redeem the Notes in whole at
any time, or in part from time to time, upon at least 30 days’ notice if: (i) a change or prospective change in law occurs that
could prevent Mid Penn from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) an event occurs
that precludes the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) Mid Penn becomes
required to register as an investment company under the Investment Company Act of 1940, as amended, in each case at 100% of
the principal amount of the subordinated notes, plus accrued and unpaid interest thereon to but excluding the date of redemption.
Holders of the Notes may not accelerate the maturity of the Notes, except upon Mid Penn’s or Mid Penn Bank, its principal
banking subsidiary’s, bankruptcy, insolvency, liquidation, receivership or similar event. As of December 31, 2016, related
parties held $1,930,000 of the Notes.
(14) 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).
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.
75
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
There were no transfers of assets between fair value Level 1 and Level 2 for the years ended December 31, 2016 or 2015. The
following tables illustrate 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
Corporate debt securities
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
Corporate debt securities
Equity securities
Fair value measurements at December 31, 2016
using:
Significant
other
observable
inputs
(Level 2)
Quoted prices
in active
markets
(Level 1)
Significant
unobservable
inputs
(Level 3)
Total
carrying
value at
December 31, 2016
$
47,012 $
1,864 $
45,148 $
25,619
—
25,619
58,838
1,000
1,156
133,625 $
—
—
1,056
2,920 $
58,838
1,000
100
130,705 $
$
—
—
—
—
—
—
Fair value measurements at December 31, 2015
using:
Significant
other
observable
inputs
(Level 2)
Quoted prices
in active
markets
(Level 1)
Significant
unobservable
inputs
(Level 3)
Total
carrying
value at
December 31, 2015
$
26,990 $
1,861 $
25,129 $
38,804
—
38,804
66,617
2,070
1,240
135,721 $
—
—
1,240
3,101 $
66,617
2,070
—
132,620 $
$
—
—
—
—
—
—
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
Total
carrying
value at
December 31, 2016
$
2,404 $
135
144
76
Fair value measurements at December 31,
2016 using:
Significant
other
observable
inputs
(Level 2)
Quoted
prices
in active
markets
(Level 1)
Significant
unobservable
inputs
(Level 3)
— $
—
—
— $
—
—
2,404
135
144
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
Assets:
Impaired Loans
Foreclosed Assets Held for Sale
Mortgage Servicing Rights
Total
carrying
value at
December 31, 2015
$
2,088 $
453
174
Fair value measurements at December 31,
2015 using:
Significant
other
observable
inputs
(Level 2)
Quoted
prices
in active
markets
(Level 1)
Significant
unobservable
inputs
(Level 3)
— $
—
—
— $
—
—
2,088
453
174
The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and
for which Mid Penn has utilized Level 3 inputs to determine the fair value.
(Dollars in thousands)
December 31, 2016
Impaired Loans
Foreclosed Assets Held for Sale
Mortgage Servicing Rights
(Dollars in thousands)
December 31, 2015
Impaired Loans
Foreclosed Assets Held for Sale
Mortgage Servicing Rights
Quantitative Information about Level 3 Fair Value Measurements
Fair Value
Estimate
$
2,404
135
144
Valuation
Technique
Appraisal of
collateral (a)
Appraisal of
collateral (a), (c)
Multiple of annual
service fee
Unobservable
Input
Appraisal
adjustments (b)
Appraisal
adjustments (b)
Estimated
prepayment speed
based on rate and
term
Range
11% - 70%
Weighted
Average
30%
26% - 31%
27%
210% - 400%
365%
Quantitative Information about Level 3 Fair Value Measurements
Fair Value
Estimate
$
2,088
453
174
Valuation
Technique
Appraisal of
collateral (a)
Appraisal of
collateral (a), (c)
Multiple of annual
service fee
Unobservable
Input
Appraisal
adjustments (b)
Appraisal
adjustments (b)
Estimated
prepayment speed
based on rate and
term
Range
11% - 60%
Weighted
Average
30%
17% - 27%
26%
210% - 400%
360%
(a)
(b)
Fair value is generally determined through independent appraisals of the underlying collateral, which generally includes various level 3 inputs which are
not observable.
Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The
range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. Higher downward adjustments are caused by
negative changes to the collateral or conditions in the real estate market, actual offers or sales contracts received, or age of the appraisal.
(c)
Includes qualitative adjustments by management and estimated liquidation expenses.
The following methodologies and assumptions were used to estimate the fair value of 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.
77
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Securities Available for sale:
The fair value of securities classified as available for sale is determined by obtaining quoted market prices on nationally
recognized securities exchanges (Level 1), or matrix pricing (level 2), which is a mathematical technique used widely in the
industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather relying
on the securities’ relationship to other benchmark quoted prices.
Impaired Loans (included in “Net Loans and Leases” in the following tables):
Mid Penn’s rating system assumes any loans classified as substandard nonaccrual to be impaired, and most of these loans are
considered collateral dependent; therefore, most of Mid Penn’s impaired loans, whether reporting a specific allocation or not,
are considered collateral dependent.
It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate as soon as
practically possible of the credit being classified as substandard nonaccrual. Prior to receipt of the updated real estate valuation
Mid Penn will use any existing real estate valuation to determine any potential allowance issues; however, no allowance
recommendation will be made until Mid Penn is in receipt of the updated valuation.
In some instances Mid Penn is not holding real estate as collateral and is relying on business assets (personal property) for
repayment. In these circumstances a collateral inspection is performed by Mid Penn personnel to determine an estimated value.
The value is based on net book value, as provided by the financial statements, and discounted accordingly based on
determinations made by management. Occasionally, Mid Penn will employ an outside service to provide a fair estimate of
value based on auction sales or private sales. Management reviews the estimates of these third parties and discounts them
accordingly based on management’s judgment, if deemed necessary. Mid Penn considers the estimates used in its impairment
analysis to be Level 3 inputs.
Mid Penn actively monitors the values of collateral on impaired loans. This monitoring may require the modification of
collateral values over time or changing circumstances by some factor, either positive or negative, from the original values. All
collateral values will be assessed by management at least every 12 months for possible revaluation by an independent third
party.
Loans:
For variable-rate loans that reprice frequently and which entail no significant changes in credit risk, carrying values
approximated fair value. The fair value of other loans are estimated by calculating the present value of the cash flow difference
between the current rate and the market rate, for the average maturity, discounted quarterly at the market rate.
Foreclosed Assets Held for Sale:
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 Borrowings and Subordinated Debt:
The estimated fair values of long-term borrowings and subordinated debt were determined using discounted cash flow analysis,
based on currently available borrowing rates for similar types of borrowing arrangements.
78
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, 2016 and 2015.
(Dollars in thousands)
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
December 31, 2016
Fair
Carrying
Value
Value
December 31, 2015
Carrying
Fair
Value
Value
$
45,973 $
45,973 $
13,284 $
13,284
—
133,625
806,741
2,443
3,928
144
—
133,625
824,293
2,443
3,928
144
4,317
135,721
730,345
4,266
3,813
174
4,317
135,721
738,773
4,266
3,813
174
Financial liabilities:
Deposits
Short-term borrowings
Long-term debt
Subordinated debt
Accrued interest payable
$ 935,373 $ 935,075 $ 777,043 $ 777,320
31,596
—
39,626
13,614
7,500
7,534
390
515
—
13,581
7,414
515
31,596
40,305
7,500
390
Off-balance sheet financial instruments:
Commitments to extend credit
Financial standby letters of credit
$
— $
—
— $
—
— $
—
—
—
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of Mid Penn’s financial
instruments as of December 31, 2016 and 2015. Carrying values approximate fair values for cash and cash equivalents, interest-
bearing time balances with other financial institutions, restricted investment in bank stocks, mortgage servicing rights, accrued
interest receivable and payable, short-term borrowings, and subordinated debt. 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, 2016
Financial instruments - assets
Net loans and leases
Financial instruments - liabilities
Deposits
Long-term debt
Fair Value Measurements
Significant
Quoted Prices
in Active Markets
for Identical Assets Observable
Other
Significant
Unobservable
Inputs
(Level 3)
Carrying Fair
Amount Value
or Liabilities
(Level 1)
Inputs
(Level 2)
$ 806,741 $ 824,293 $
— $
— $
824,293
$ 935,373 $ 935,075 $
13,614
13,581
— $
—
935,075 $
13,614
—
—
79
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
(Dollars in thousands)
December 31, 2015
Financial instruments - assets
Net loans and leases
Financial instruments - liabilities
Deposits
Long-term debt
(15) Postretirement Benefit Plans
Fair Value Measurements
Significant
Quoted Prices
in Active Markets
for Identical Assets Observable
Other
Significant
Unobservable
Inputs
(Level 3)
Carrying Fair
Amount Value
or Liabilities
(Level 1)
Inputs
(Level 2)
$ 730,345 $ 738,773 $
— $
— $
738,773
$ 777,043 $ 777,320 $
39,626
40,305
— $
—
777,320 $
39,626
—
—
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 certain 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 at age 55 or later, after completion of at least 20 years of service, Mid Penn will
reimburse up to $5,000 in premiums for major medical insurance 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 will reimburse up to
$5,000 in premiums for Medicare Advantage 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 at age 55 or later, after completion of 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 $5,000.
(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, 2016, was $43,000.
80
MID PENN BANCORP, INC.
Health and Life
Notes to Consolidated Financial Statements
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, 2016 and 2015, and a statement of the funded status at
December 31, 2016 and 2015.
(Dollars in thousands)
Change in benefit obligations:
Benefit obligations, January 1
Service cost
Interest cost
Change in experience
Change in assumptions
Change due to plan amendment
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,
2016
2015
572 $
4
23
2
13
—
(74 )
540 $
— $
74
(74 )
— $
861
13
32
(24 )
(4 )
(244 )
(62 )
572
—
62
(62 )
—
(540 ) $
(572 )
$
$
$
$
$
Mid Penn has capped the benefit to future retirees under its post-retirement health benefit plan. Employees who had
achieved ten years of service as of January 1, 2008 and subsequently retire after at least 20 years of service are eligible for
reimbursement of major medical insurance premiums up to $5,000, if the employee has not yet reached age 65. Upon
becoming eligible for Medicare, Mid Penn will reimburse up to $5,000 in premiums for Medicare Advantage or a similar
supplemental coverage. The maximum reimbursement period will not exceed five years regardless of retirement age and
will end upon the participant obtaining other employment where major medical coverage is available or the participant’s
death.
The amount recognized in the consolidated balance sheet at December 31, 2016 and 2015, is as follows:
(Dollars in thousands)
Accrued benefit liability
2016
2015
$
540 $
572
The amounts recognized in accumulated other comprehensive (loss) income consist of:
(Dollars in thousands)
Net gain, pretax
Net prior service cost, pretax
December 31,
2016
2015
$
(31 ) $
(209 )
(47 )
(244 )
The accumulated benefit obligation for health and life insurance plans was $540,000 and $572,000 at December 31, 2016
and 2015, respectively.
There will be $34,898 in estimated prior service costs amortized from accumulated other comprehensive income into net
periodic benefit cost during 2017.
81
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
The components of net periodic postretirement (income) benefit cost for 2016, 2015 and 2014 are as follows:
(Dollars in thousands)
Service cost
Interest cost
Amortization of prior service cost
Net periodic postretirement (income) benefit cost
2016
2015
2014
$
$
4 $
23
(35 )
(8 ) $
13 $
32
—
45 $
13
38
(1 )
50
Assumptions used in the measurement of Mid Penn’s benefit obligations at December 31, 2016 and 2015 are as follows:
Weighted-average assumptions:
Discount rate
Rate of compensation increase
2016
2015
4.00 %
3.00 %
4.25 %
3.25 %
Assumptions used in the measurement of Mid Penn’s net periodic benefit cost for the years ended December 31, 2016,
2015 and 2014 are as follows:
Weighted-average assumptions:
Discount rate
Rate of compensation increase
2016
2015
2014
4.25 %
3.25 %
4.00 %
3.00 %
4.75 %
3.75 %
Assumed health care cost trend rates at December 31, 2016, 2015 and 2014 are as follows:
Health care cost trend rate assumed for next year
2016
2015
2014
6.00 %
5.50 %
6.50 %
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
Year that the rate reaches the ultimate trend rate
5.50 %
2018
5.50 %
2016
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, 2016, 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
$
— $
3
—
3
Mid Penn expects to contribute $73,000 to its life and health benefit Plans in 2017. The following table shows the
estimated benefit payments for future periods.
(Dollars in thousands)
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 12/31/2020
1/1/2021 to 12/31/2021
1/1/2022 to 12/31/2026
$
73
64
61
56
30
156
82
MID PENN BANCORP, INC.
Retirement Plan
Notes to Consolidated Financial Statements
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, 2016 and 2015 and a statement of the status at December 31,
2016 and 2015. This Plan is unfunded.
(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,
2016
2015
1,150 $
34
46
(13 )
(4 )
(91 )
1,122 $
— $
91
(91 )
— $
1,186
33
45
(8 )
(16 )
(90 )
1,150
—
90
(90 )
—
(1,122 ) $
(1,150 )
$
$
$
$
$
Amounts recognized in the consolidated balance sheet at December 31, 2016 and 2015 are as follows:
(Dollars in thousands)
Accrued benefit liability
2016
2015
$
1,122 $
1,150
Amounts recognized in accumulated other comprehensive income (loss) consist of:
(Dollars in thousands)
Net prior service cost, pretax
Net loss, pretax
December 31,
2016
2015
$
43 $
60
64
77
The accumulated benefit obligation for the retirement Plan was $1,122,000 at December 31, 2016 and $1,150,000 at
December 31, 2015.
The estimated prior service costs that will be amortized from accumulated other comprehensive loss into net periodic
benefit cost during 2017 is $21,525.
The components of net periodic retirement cost for 2016, 2015 and 2014 are as follows:
(Dollars in thousands)
Service cost
Interest cost
Amortization of prior-service cost
Net periodic retirement cost
2016
2015
2014
$
$
34 $
46
22
102 $
33 $
45
22
100 $
33
51
22
106
83
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Assumptions used in the measurement of Mid Penn’s benefit obligations at December 31, 2016 and 2015 are as follows:
Weighted-average assumptions:
Discount rate
Change in consumer price index
2016
2015
4.00 %
2.00 %
4.25 %
2.25 %
Assumptions used in the measurement of Mid Penn’s net periodic benefit cost for the years ended December 31, 2016,
2015 and 2014 are as follows:
Weighted-average assumptions:
Discount rate
Change in consumer price index
2016
2015
2014
4.25 %
2.25 %
4.00 %
2.25 %
4.75 %
2.75 %
Mid Penn expects to contribute $94,000 to its retirement Plan in 2017. The following table shows the estimated benefit
payments for future periods.
(Dollars in thousands)
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 12/31/2020
1/1/2021 to 12/31/2021
1/1/2022 to 12/31/2026
$
94
96
96
98
108
464
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 $3,834,000 and $3,764,000
at December 31, 2016 and 2015, respectively.
(16) Other Benefit Plans
(a)
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 $362,000, $321,000, and $216,000 for the years ending December 31, 2016, 2015, and 2014, respectively.
(b) 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 2016, 2015, or 2014.
(c) Deferred Compensation Plans
The Bank has an executive deferred compensation plan, which allows executive officers to defer compensation for a
specified period in order to provide future retirement income. The only participant in the Plan is a former executive
officer. The Bank accrued a liability for the Plan of approximately $143,000 at December 31, 2016 and $160,000 at
December 31, 2015. The expense related to the Plan was $6,000 in 2016, $9,000 in 2015, and $6,000 in 2014.
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, 2016 and 2015, the Bank accrued a liability of
approximately $606,000 and $523,000, respectively, for this Plan. The expense related to the Plan was $21,000 in 2016,
$17,000 in 2015, and $16,000 in 2014.
84
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
(d) 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, 2016 and 2015, the Bank accrued a liability of approximately $254,000 and $237,000,
respectively, for the Agreement. The expense related to the Agreement was $17,000 for 2016, $16,000 for 2015, and
$15,000 for 2014.
The Bank is the owner and beneficiary of an insurance policy on the life of the participating former executive officer,
which supports the funding of the benefit obligation. The aggregate cash surrender value of this policy was approximately
$1,284,000 and $1,253,000 at December 31, 2016 and 2015, respectively.
(e) Split Dollar Life Insurance Arrangements
At December 31, 2016 and 2015, the Bank had Split Dollar Life Insurance arrangements with two former executives for
which the aggregate collateral assignment and cash surrender values are approximately $1,801,000 and $1,806,000,
respectively. Mid Penn also acquired Phoenix’s Split Dollar Life Insurance arrangements in 2015 on select employees,
which had aggregate cash surrender value of $3,838,000 at December 31, 2016 and $3,749,000 at December 31, 2015.
(f) 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.
ESPP shares purchased
Average purchase price per share
2016 2015 2014
4,465 4,162 3,432
$ 18.520 $ 15.865 $ 15.318
(17) Federal Income Taxes
The following temporary differences gave rise to the net deferred tax asset at December 31, 2016 and 2015.
$
(Dollars in thousands)
Deferred tax assets:
Allowance for loan and lease losses
Loan fees
Deferred compensation
Benefit plans
Unrealized loss on securities
Nonaccrual interest
Business combination adjustments
Other
Deferred tax liabilities:
Depreciation
Bond accretion
Goodwill and intangibles
Unrealized gain on securities
Prepaid expenses
Business combination adjustments
Other
Deferred tax asset, net
$
85
2016
2015
2,442 $
82
906
955
1,504
—
720
177
6,786
(1,175 )
(117 )
(500 )
—
(312 )
(367 )
(29 )
(2,500 )
4,286 $
2,097
79
313
586
—
554
1,166
170
4,965
(1,074 )
(111 )
(472 )
(806 )
(240 )
(428 )
(13 )
(3,144 )
1,821
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
In assessing the realizability of federal or state deferred tax assets, management considers whether it is more likely than not
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 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 income taxes consists of the following:
(Dollars in thousands)
Current expense
Deferred (benefit) expense
Total provision for income taxes
2016
2015
2014
$
$
2,613 $
(336 )
2,277 $
647 $
997
1,644 $
1,574
(112 )
1,462
A reconciliation of income tax at the statutory rate of 34% 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
2016
2015
2014
$
$
3,428 $
(1,089 )
(90 )
41
—
(13 )
2,277 $
2,779 $
(1,105 )
(91 )
37
34
(10 )
1,644 $
2,435
(1,086 )
(68 )
42
163
(24 )
1,462
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, 2016, 2015, or 2014. There were no amounts accrued for interest and penalties at December 31, 2016 or
2015.
Mid Penn and its subsidiaries are subject to U.S. federal income tax and income tax for the state of Pennsylvania. With limited
exceptions, Mid Penn is no longer subject to examination by taxing authorities for years before 2013.
(18) 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, 2016 and December 31, 2015, 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.
The federal banking agencies have substantially amended the regulatory risk-based capital rules applicable to Mid Penn. The
amendments implemented the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The amended
rules included new minimum risk-based capital and leverage ratios, which became effective in January 2015, with certain
requirements to be phased in beginning in 2016, and refined the definition of what constitutes "capital" for purposes of
calculating those ratios.
86
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
The new minimum capital level requirements applicable to Mid Penn include: (i) a new common equity Tier I capital ratio of
4.5%; (ii) a Tier I capital ratio of 6.0% (increased from 4.0 %); (iii) a Total Capital ratio of 8.0% (unchanged from current
rules); and (iv) a Tier I leverage ratio of 4.0% for all institutions. The amended rules also establish a "capital conservation
buffer" of 2.5% above the new regulatory minimum capital ratios, and would result in the following minimum ratios: (i) a
common equity Tier I capital ratio of 7.0%; (ii) a Tier I capital ratio of 8.5%; and (iii) a Total Capital ratio of 10.5%. The new
capital conservation buffer requirement was phased in beginning in January 2016 at 0.625% of risk-weighted assets and will
increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends,
engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These
limitations will establish a maximum percentage of eligible retained income that could be utilized for such actions.
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, 2016, $5,311,000 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.
Mid Penn maintained the following regulatory capital levels, leverage ratios, and risk-based capital ratios as of December 31,
2016, and December 31, 2015, as follows:
(Dollars in thousands)
Capital Adequacy
Corporation
As of December 31, 2016
Tier 1 Capital (to Average Assets)
Common Equity Tier 1 Capital (to Risk Weighted
Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
Bank
As of December 31, 2016
Tier 1 Capital (to Average Assets)
Common Equity Tier 1 Capital (to Risk Weighted
Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
Corporation
As of December 31, 2015
Tier 1 Capital (to Average Assets)
Common Equity Tier 1 Capital (to Risk Weighted
Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
Bank
As of December 31, 2015
Tier 1 Capital (to Average Assets)
Common Equity Tier 1 Capital (to Risk Weighted
Assets)
Tier 1 Capital (to Risk Weighted Assets)
Total Capital (to Risk Weighted Assets)
To Be
Well-Capitalized
Under Prompt
Minimum Capital
Corrective
Actual
Required
Amount Ratio
Amount Ratio
Action Provisions
Amount Ratio
$ 70,431
6.8 % $ 41,595
4.0 % $
N/A
N/A
70,431
70,431
85,148
9.1 % 34,807
9.1 % 46,409
11.0 % 61,879
4.5 %
6.0 %
8.0 %
N/A
N/A
N/A
N/A
N/A
N/A
$ 77,026
7.4 % $ 41,568
4.0 % $ 51,960
5.0 %
77,026
77,026
84,329
10.0 % 34,781
10.0 % 46,374
10.9 % 61,832
4.5 % 50,239
6.0 % 61,832
8.0 % 77,291
6.5 %
8.0 %
10.0 %
$ 64,089
7.3 % $ 35,098
4.0 % $
N/A
N/A
64,089
64,089
77,852
9.1 % 31,731
9.1 % 42,308
11.0 % 56,410
4.5 %
6.0 %
8.0 %
N/A
N/A
N/A
N/A
N/A
N/A
$ 70,351
7.8 % $ 36,245
4.0 % $ 45,306
5.0 %
70,351
70,351
76,614
10.0 % 31,698
10.0 % 42,264
10.9 % 56,352
4.5 % 45,786
6.0 % 56,352
8.0 % 70,440
6.5 %
8.0 %
10.0 %
87
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
(19) 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, 2016 and 2015 for guarantees under letters of credit issued is not material.
As of December 31, 2016, commitments to extend credit amounted to $201,749,000 and standby letters of credit amounted to
$14,000,000. As of December 31, 2015, commitments to extend credit amounted to $157,338,000 and standby letters of credit
amounted to $15,805,000.
Additionally, Mid Penn has sold loans to the FHLB as part of its Mortgage Partnership Finance Program (“Program). Under the
terms of the Program, there is limited recourse back to Mid Penn for loans that do not perform in accordance with the terms of
the loan agreement. Each loan that is sold under the Program is “credit enhanced” such that the individual loan’s rating is raised
to “BBB”, as determined by the FHLB. The Program can be terminated by either the FHLB or Mid Penn, without cause, by
giving notice to the other party. The FHLB has no obligation to commit to purchase any mortgage through, or from, Mid Penn.
The total balance of loans sold under the Program was $9,206,000 and $5,958,000 for the years ended December 31, 2016 and
2015.
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, 2016, 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
Cumberland, Dauphin, Lancaster, Luzerne, Northumberland, and Schuylkill Counties.
The Bank's highest concentrations of credit within the loan portfolio is in commercial real estate financing (48.8 %) as of
December 31, 2016.
(20) Contingencies
Litigation:
Mid Penn is subject to lawsuits and claims arising out of its normal conduct of 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.
88
MID PENN BANCORP, INC.
(21) Common Stock
Dividend Reinvestment Plan
Notes to Consolidated Financial Statements
Under Mid Penn’s amended and restated dividend reinvestment plan (“DRIP”), 330,750 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.
Restricted Stock Plan
On June 25, 2014, the 2014 Restricted Stock Plan was registered under 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. Share-based
compensation expense relating to restricted stock is recognized on a straight-line basis over the vesting periods of the awards
and is a component of salaries and benefits expense. As of December 31, 2016, 16,045 shares have been granted under the Plan.
Mid Penn granted 7,540 shares in 2016, 5,475 shares in 2015, and 3,500 shares in 2014. In 2016, 470 of the granted shares were
cancelled due to the exit of a plan participant.
The following table presents compensation expense and related tax benefits for restricted stock awards recognized on the
consolidated statement of income.
(Dollars in thousands)
Compensation expense
Tax benefit
Net income effect
2016 2015 2014
28 $ —
$
(10 ) —
18 $ —
53 $
(18 )
35 $
$
At December 31, 2016, there was $215,000 of unrecognized compensation cost related to all non-vested share-based
compensation awards. This cost is expected to be recognized through July 2020.
The following table presents information regarding the non-vested restricted stock for the year ended December 31, 2016.
Weighted-
Average
Grant
Date Fair
Value
Shares
8,100 $
(2,115 )
(470 )
7,540
13,055
16.13
16.10
16.09
18.77
17.66
Non-vested at January 1, 2016
Vested
Cancelled
Granted
Non-vested at December 31, 2016
(22) Preferred Stock
Series B Preferred Stock
Between September 26, 2012 and January 3, 2013, Mid Penn issued, via a private placement, 5,000 shares of its 7% Non-
Cumulative Non-Voting Non-Convertible Perpetual Preferred Stock, Series B Preferred Stock, resulting in total gross proceeds
of $5,000,000. On December 9, 2015, Mid Penn, using a portion of the proceeds from the offering of the Notes, redeemed all of
its issued and outstanding shares of Series B Preferred Stock at a price equal to $1,024.67 per share, which is equal to
$1,020 per share plus an amount equal to declared but unpaid dividends on December 9, 2015, for a total redemption price of
$5,123,000.
89
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
Small Business Lending Fund Preferred Shares
On March 1, 2015, Mid Penn assumed all of the issued and outstanding shares of Phoenix with respect to 1,750 shares of
Phoenix’s preferred stock issued to the Treasury in connection with the Small Business Lending Fund and issued 1,750 shares of
SBLF Preferred Shares that had a $1,000 liquidation preference per share, to the Treasury. The SBLF Preferred Shares qualified
as Tier 1 Capital and had terms and conditions identical to those shares of preferred stock issued by Phoenix to the Treasury.
Mid Penn paid noncumulative dividends payable quarterly on January 1, April 1, July 1, and October 1. The dividend rate was
1.00% per annum for payment dates up to January 19, 2016.
On December 15, 2015, Mid Penn, using a portion of the proceeds from the offering of the Notes, redeemed all of the
outstanding shares of its SBLF Preferred Shares, which were held by the Treasury for an aggregate redemption price of
$1,754,000, including accrued but unpaid dividends.
(23) Parent Company Statements
CONDENSED BALANCE SHEETS
(Dollars in thousands)
ASSETS
Cash and cash equivalents
Equity investments
Investment in subsidiaries
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Subordinated debt
Other liabilities
Shareholders' equity
Total liabilities and shareholders' equity
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 of subsidiaries
Income before income tax
Income tax benefit
Net income
Series B preferred stock dividends and redemption premium
Series C preferred stock dividends
Net income available to common shareholders
Comprehensive income
90
December 31,
2016
2015
$
$
$
$
780 $
545
77,029
40
78,394 $
7,414 $
513
70,467
78,394 $
564
626
76,334
14
77,538
7,414
56
70,068
77,538
For Years Ended December 31,
2015
2014
2016
$
$
$
2,871 $
33
2,904
(606 )
(606 )
2,298
5,311
7,609
195
7,804
—
—
7,804 $
3,139 $
5,662 $
19
5,681
(695 )
(695 )
4,986
1,346
6,332
196
6,528
473
17
6,038 $
6,827 $
2,325
—
2,325
(716 )
(716 )
1,609
4,012
5,621
80
5,701
350
—
5,351
8,086
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Equity in undistributed earnings of subsidiaries
Decrease (increase) in other assets
Increase (decrease) in other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Net cash paid for acquisition
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid
Series B preferred stock redemption premium
Series B preferred stock redemption
Series C preferred stock redemption
Employee Stock Purchase Plan
Deferred financing fees paid for subordinated debt issuance
Subordinated debt issuance
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
(24) Recent Accounting Pronouncements
For Years Ended December 31,
2015
2014
2016
$
7,804 $
(5,311 )
59
457
3,009
6,528 $
(1,346 )
(14 )
(665 )
4,503
5,701
(4,012 )
8
292
1,989
—
—
(2,949 )
(2,949 )
—
—
(2,875 )
—
—
—
82
—
—
(2,793 )
216
564
780 $
(2,175 )
(100 )
(5,000 )
(1,750 )
66
(85 )
7,500
(1,544 )
10
554
564 $
(1,925 )
—
—
—
53
—
—
(1,872 )
117
437
554
$
ASU 2017-04: The Financial Accounting Standards Board (“FASB”) issued ASU 2017-04; Intangibles – Goodwill and Other
(Topic 350): Simplifying the Test for Goodwill Impairment
The amendments in this ASU are required for public business entities and other entities that have goodwill reported in their
financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. To
simplify the subsequent measurement of goodwill, the Update eliminates Step 2 from the goodwill impairment test. An entity
should now perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with it
carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the
reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that
reporting unity. Additionally, an entity should consider income tax effects from any tax deductible goodwill on the carrying
amount of the reporting unit when measuring the goodwill impairment loss, if applicable.
The ASU eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative
assessment, and if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same
impairment assessment applies to all reporting units. An entity still has the option to perform the qualitative assessment for a
reporting unit to determine if the quantitative impairment test is necessary.
An entity should apply the amendments in this Update on a prospective basis. A public business entity should adopt the
amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15,
2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1,
2017.
Mid Penn elected to early adopt this ASU as it currently complies by comparing its fair value to its carrying value. The
adoption of this ASU did not have a material impact on Mid Penn’s consolidated financial statements.
ASU 2016-15: The FASB issued ASU 2016-15; Classification of Certain Cash Receipts and Cash Payments
91
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
The ASU clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The
amendments are intended to reduce diversity in practice.
Cash payments for debt prepayment or extinguishment costs will be classified in financing activities.
Upon settlement of zero-coupon bonds and bonds with insignificant cash coupons, the portion of the payment attributable
to imputed interest will be classified as an operating activity, while the portion of the payment attributable to principal will
be classified as a financing activity.
Cash paid by an acquirer that isn’t soon after a business combination for the settlement of a contingent consideration
liability will be separated between financing activities and operating activities. Cash payments up to the amount of the
contingent consideration liability recognized at the acquisition date will be classified in financing activities; any excess
will be classified in operating activities. Cash paid soon after the business combination will be classified in investing
activities.
Cash proceeds received from the settlement of insurance claims will be classified on the basis of the related insurance
coverage (that is, the nature of the loss). Cash proceeds from lump-sum settlements will be classified based on the nature
of each loss included in the settlement.
Cash proceeds received from the settlement of corporate-owned life insurance (“COLI”) and BOLI policies will be
classified as cash inflows from investing activities. Cash payments for premiums on COLI and BOLI may be classified as
cash outflows for investing, operating, or a combination of both.
A transferor’s beneficial interest obtained in a securitization of financial assets will be disclosed as a noncash activity,
and cash received from beneficial interests will be classified in investing activities.
Distributions received from equity method investees will be classified using either a cumulative earnings approach or a
look- through approach as an accounting policy election.
The ASU contains additional guidance clarifying when an entity should separate cash receipts and cash payments and classify
them into more than one class of cash flows (including when reasonable judgment is required to estimate and allocate cash
flows) versus when an entity should classify the aggregate amount into one class of cash flows on the basis of predominance.
The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2017. For all other entities, the amendments in this Update are effective for fiscal years
beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption
is permitted. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the
beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the
amendments in the same period.
Mid Penn is currently evaluating this ASU, particularly related to cash payments for debt prepayment costs and cash proceeds
received from the settlement of BOLI policies as these areas might affect Mid Penn in the future. This ASU, however, is not
expected to have a material impact on Mid Penn’s consolidated financial statements because the guidance only affects the
classification within the statement of cash flows,
ASU 2016-13: The FASB issued ASU 2016-13; Financial Instruments – Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments
The ASU requires credit losses on most financial assets measured at amortized cost and certain other instruments to be
measured using an expected credit loss model (referred to as the current expected credit loss (“CECL”) model). Under this
model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments,
but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date
of initial recognition of that instrument.
The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for
purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should
be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial
recognition, the allowance is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis.
The subsequent accounting for PCD financial assets is the same expected loss model described above.
Further, the ASU made certain targeted amendments to the existing impairment model for available-for-sale debt securities. For
an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record
credit losses as an allowance rather than a write-down of the amortized cost basis. Certain incremental disclosures are required.
92
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
The Update has tiered effective dates, with early adoption permitted for all entities as of the fiscal year beginning after
December 15, 2018. For public business entities that are SEC filers, the amendments are effective for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years. For all other public business entities, the
amendments are effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal
years. For all other entities, including not-for-profit entities and employee benefit plans within the scope of Topics 960 through
965 on plan accounting, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods
within fiscal years beginning after December 15, 2021.
Mid Penn is currently evaluating the details of this ASU and the impact the guidance will have on Mid Penn’s consolidated
financial statements. Mid Penn expects that it is possible that the ASU will result in an increase in the allowance for credit
losses resulting from the change to expected losses for the estimated life of the financial asset, including an allowance for debt
securities. The amount of the increase in the allowance for credit losses resulting from the new guidance will be impacted by
the portfolio composition and asset quality at the adoption date, as well as economic conditions and forecasts at the time of
adoption.
ASU 2016-09: The FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting.
The ASU introduces targeted amendments intended to simplify the accounting for stock compensation. Specifically, the ASU
requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be
recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be
treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits, and
assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. That is,
off balance sheet accounting for net operating losses stemming from excess tax benefits would no longer be required and instead
such net operating losses would be recognized when they arise. Existing net operating losses that are currently tracked off
balance sheet would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings
in the period of adoption. Entities will no longer need to maintain and track an “APIC pool.” The ASU also requires excess tax
benefits to be classified along with other income tax cash flows as an operating activity in the statement of cash flows.
In addition, the ASU elevates the statutory tax withholding threshold to qualify for equity classification up to the maximum
statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies that cash paid by an employer when directly
withholding shares for tax withholding purposes should be classified as a financing activity. The ASU provides an optional
accounting policy election (with limited exceptions), to be applied on an entity-wide basis, to either estimate the number of
awards that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures when they occur.
The amendments are effective for public business entities for annual periods beginning after December 15, 2016, and interim
periods within those annual periods. Early adoption is permitted.
Mid Penn currently provides share-based stock compensation to members of its Senior Management team who have a
responsibility for its growth as disclosed in Note 21. Mid Penn expects the adoption of this ASU to have no material impact on
its consolidated financial statements as the current.
ASU 2016-07: The FASB issued ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323): Simplifying the
Transition to the Equity Method of Accounting.
The ASU requires an investor to initially apply the equity method of accounting from the date it qualifies for that method, i.e.,
the date the investor obtains significant influence over the operating and financial policies of an investee. It also eliminates the
previous requirement to retroactively adjust the investment and record a cumulative catch up for the periods that the investment
had been held, but did not qualify for the equity method of accounting.
The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of
ownership interest or degree of influence that result in the application of the equity method. Early adoption is permitted.
Mid Penn currently does not have a material volume of equity method or joint venture investments; therefore, this ASU is not
expected to have a material impact on its consolidated financial statements.
ASU 2016-02: The FASB issued ASU 2016-02, Leases.
93
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
The new leases standard applies a right-of-use (“ROU”) model that requires a lessee to record, for all leases with a lease term of
more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For
leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying
asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or
operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense
recognition in the income statement, as well as the effect on the statement of cash flows, differs depending on the lease
classification.
The new leases standard requires a lessor to classify leases as either sales-type, direct financing or operating, similar to existing
U.S. GAAP. Classification depends on the same five criteria used by lessees plus certain additional factors. The subsequent
accounting treatment for all three lease types is substantially equivalent to existing U.S. GAAP for sales-type leases, direct
financing leases, and operating leases. However, the new standard updates certain aspects of the lessor accounting model to
align it with the new lessee accounting model, as well as with the new revenue standard under Topic 606.
Lessees and lessors are required to provide certain qualitative and quantitative disclosures to enable users of financial statements
to assess the amount, timing, and uncertainty of cash flows arising from leases. The new leases standard addresses other
considerations including identification of a lease, separating lease and non-lease components of a contract, sale and leaseback
transactions, modifications, combining contracts, reassessment of the lease term, and remeasurement of lease payments. It also
contains comprehensive implementation guidance with practical examples.
The amendments are effective for public business entities for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early adoption is permitted. Specific transition requirements apply.
Mid Penn occupies certain offices under non-cancelable operating lease agreements, which currently are not reflected in its
consolidated statement of condition. Mid Penn expects to recognize lease liabilities and ROU assets associated with these lease
agreements; however, the extent of the impact on Mid Penn’s consolidated financial statements is currently under evaluation.
ASU 2016-01: The FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities.
This ASU requires equity investments to be measured at fair value with changes in fair value recognized in net income,
excluding equity investments that are consolidated or accounted for under the equity method of accounting. The ASU allows
equity investments without readily determinable fair values to be measured at cost minus impairment, with a qualitative
assessment required to identify impairment. The ASU also requires public companies to use exit prices to measure the fair
value of financial instruments, eliminates the disclosure requirements related to measurement assumptions for the fair value of
instruments measured at amortized cost, and requires separate presentation of financials assets and liabilities based on form and
measurement category. In addition, for liabilities measured a fair value under the fair value option, the changes in fair value due
to changes in instrument-specific credit risk should be recognized in OCI.
This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years.
As of December 31, 2016, Mid Penn held $2,156,000 of equity investments (excluding restricted investments in bank stocks).
Mid Penn does not expect to make significant increases in the volume of its equity investments; therefore, the adoption of this
ASU is not expected to be material to Mid Penn’s consolidated financial statements.
ASU 2015-16: The FASB issued ASU 2015-16, Business Combination (Topic 805): Simplifying the Accounting for
Measurement-Period Adjustments).
The ASU requires adjustments to provisional amounts that are identified during the measurement period to be recognized in the
reporting period in which the adjustment amounts are determined. This includes any effect on earnings of changes in
depreciation, amortization, or other income effects as a result of the change to the provisional amounts, calculated as if the
accounting had been completed at the acquisition date.
In addition, the amendments in the proposed ASU would require an entity to disclose (either on the face of the income statement
or in the notes) the nature and amount of measurement-period adjustments recognized in the current period, including separately
the amounts in current-period income statement line items that would have been recorded in previous reporting periods if the
adjustment to the provisional amounts had been recognized as of the acquisition date.
The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2015. Early adoption is permitted. The amendments in this ASU should be applied prospectively
to measurement-period adjustments that occur after the effective date of this ASU.
Mid Penn early adopted this guidance in 2015. The adoption of this guidance was not material to the consolidated financial
statements. See Note 4 “Mergers and Acquisitions” regarding business combinations.
94
MID PENN BANCORP, INC.
Notes to Consolidated Financial Statements
ASU 2014-09: The FASB issued ASU 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.
In August 2015, the FASB issued ASU 2015-14, Revenue from contracts with Customers (Topic 606): Deferral of the Effective
Date. This ASU defers the effective date of ASU 2014-09 for all entities by one year.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross versus Net), as an amendment to ASU 2014-09 to improve Topic 606, by reducing:
(i) the potential for diversity in practice arising from inconsistent and application of the principal versus agent guidance, and (ii)
the cost and complexity of applying Topic 606 both at transition and on an ongoing basis.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing, as an amendment to ASU 2014-09 to improve Topic 606, by reducing: (i) the potential for diversity
in practice at initial applications, and (ii) the cost and complexity of applying Topic 606 both at transition and on an ongoing
basis.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope
Improvements and Practical Expedients. The amendments in this ASU do not change the core principles of Topic 606. These
amendments affect only the narrow aspects of Topic 606: (i) Collectability Criterion, (ii) Presentation of Sales Taxes and Other
Similar Taxes Collected from Customers, (iii) Noncash Consideration, (iv) Contract Modifications at Transition, and (v)
Completed Contracts at Transition.
ASU 2014-09, including transition requirements for all amendments, is effective for interim and annual reporting periods in
fiscal years beginning after December 15, 2017. Early adoption is permitted as of the original effective date for interim and
annual reporting periods in fiscal years beginning after December 15, 2016.
Mid Penn’s implementation efforts include the identification of revenue within the scope of the guidance, particularly in regards
to assessing collectability. Mid Penn’s review is ongoing, and it will continue to evaluate any impact as additional guidance is
issued and as its internal assessment progresses.
ASU 2015-03: The FASB issued ASU 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the
Presentation of Debt Issuance Costs.
The ASU requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the
related liability, consistent with the presentation of debt discounts. Prior to the amendments, debt issuance costs were presented
as a deferred charge (i.e., an asset) on the balance sheet. The ASU provides examples illustrating the balance sheet presentation
of notes net of their related discounts and debt issuance costs. Further, the amendments require the amortization of debt
issuance costs to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in
the aggregate when determining the effective interest rate on the debt.
The amendments are effective for public business entities for fiscal years beginning after December 15, 2015, and interim
periods within those fiscal years. The amendments are effective for all other entities for fiscal years beginning after December
15, 2015, and interim periods within fiscal years beginning after December 15, 2016. The amendments must be applied
retrospectively. All entities have the option of adopting the new requirements as of an earlier date for financial statements that
have not been previously issued.
Mid Penn adopted this ASU in March of 2016. The adoption of this guidance had no material impact on Mid Penn’s
consolidated financial statements.
95
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 2016 and 2015.
(Dollars in thousands, except per share data)
2016 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 Available to Common
Shareholders
Per Share Data:
$
9,697 $
1,282
8,415
340
8,075
1,232
6,982
2,325
520
9,859 $
1,316
8,543
395
8,148
1,398
6,931
2,615
593
10,125 $
1,367
8,758
585
8,173
1,419
7,165
2,427
526
1,805 $
2,022 $
1,901 $
Basic Earnings Per Common
Share
Cash Dividends Declared
$
0.43 $
0.22
0.48 $
0.12
0.45 $
0.12
10,531
1,402
9,129
550
8,579
1,875
7,740
2,714
638
2,076
0.49
0.22
(Dollars in thousands, except per share data)
2015 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
Series B Preferred Stock Dividends
and Redemption Premium
Series C Preferred Stock Dividends
Net Income Available to Common
Shareholders
Per Share Data:
$
8,158 $
1,120
7,038
300
6,738
949
6,640
1,047
84
963
87
—
9,644 $
1,158
8,486
300
8,186
1,093
6,642
2,637
593
2,044
88
4
9,339 $
1,150
8,189
265
7,924
1,085
6,569
2,440
546
1,894
88
4
9,349
1,179
8,170
200
7,970
960
6,882
2,048
421
1,627
210
9
876 $
1,952 $
1,802 $
1,408
Basic Earnings Per Common
Share
Cash Dividends Declared
$
0.23 $
0.10
0.46 $
0.10
0.43 $
0.12
0.35
0.12
96
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 Chief 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, 2016. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded, as of December 31, 2016, 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 2016 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, 2016. This assessment was based on criteria for
effective internal control over financial reporting described in Internal Control-Integrated Framework (2013) 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, 2016, 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 SEC 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/ Michael D. Peduzzi, CPA
Michael D. Peduzzi, CPA
Chief Financial Officer
ITEM 9B. OTHER INFORMATION
None
97
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 2017 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 2017 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 2017 Annual Meeting of Shareholders, which pages are incorporated herein by
reference.
The following table provides information related to equity compensation plans as of December 31, 2016:
Plan Category
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants, and Rights
(a)
Weighted-
average Exercise
Price of Outstanding
Options, Warrants, and
Rights
(b)
Number of Securities
Remaining for Future
Issuance Under Equity
Compensation Plans
(excluding securities
reflected in column (a))
(c)
Equity compensation plans
approved by security holders
Equity compensation plans
not approved by security holders
Total
16,045
—
16,045
— (1)
—
—
83,955
—
83,955
(1)
All awards under the Mid Penn Bancorp, Inc. 2014 Restricted Stock Plan are in the form of restricted stock. Accordingly, they were not included in calculating
the weighted-average exercise price because the shares of common stock will be issued for no consideration.
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 2017 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 2017” of Mid Penn’s definitive proxy statement to be used in connection with the
2017 Annual Meeting of Shareholders, which pages are incorporated herein by reference.
98
MID PENN BANCORP, INC.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Financial statements are incorporated by reference in Part II, Item 8 hereof.
Reports of Independent Registered Public Accounting Firm
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
(b) 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.
(c) The following Exhibits are filed as part of this filing on Form 10-K, or incorporated by reference hereto:
3(i)
The Registrant’s amended Articles of Incorporation. (Incorporated by reference to Exhibit 3(i) of Registrant’s Annual
Report on Form 10-K filed with the SEC on March 23, 2017.)
3(ii)
The Registrant’s By-laws. (Incorporated by reference to Exhibit 3(ii) of Registrant’s Current Report on Form 8-K filed with
the SEC on August 30, 2010.)
10.1
Mid Penn Bank’s Retirement Plan. (Incorporated by reference to Exhibit 10.1 of Registrant’s Annual Report on form 10-K
filed with the SEC on March 10, 2008.)*
10.2
The Registrant’s Dividend Reinvestment Plan, as amended and restated. (Incorporated by reference to Registrant’s
Registration Statement on Form S-3, filed with the SEC on October 12, 2005.)
10.3
Mid Penn Bancorp, Inc. 2014 Restricted Stock Plan. (Incorporated by reference to Appendix A of Registrant’s Definitive
Proxy Statement on Schedule 14A as filed with the SEC on March 27, 2014.)*
10.4
Form of Mid Penn Bancorp, Inc. Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.4 of Registrant’s
Annual Report on Form 10-K filed with the SEC on March 23, 2017.)*
10.5
Form of Change in Control Agreement (Incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form
8-K filed on November 4, 2016.)*
10.6
Employment Agreement, dated November 3, 2016, among Mid Penn Bancorp, Inc., Mid Penn Bank and Rory G. Ritrievi.
(Incorporated by reference to Exhibit 10.2 of Registrant’s Current Report on Form 8-K filed on November 4, 2016.)*
10.7
11
Offer letter, dated March 4, 2016, between Michael D. Peduzzi and Mid Penn Bank.
Statement re: Computation of Per Share Earnings. (Incorporated by reference to Part II, Item 8 of this Annual Report on
Form 10-K.)
Subsidiaries of Registrant.
Consent of BDO USA, 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.
Listing of Mid-Atlantic Custom Peer Group Banks.
21
23
31.1
31.2
32
99.1
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.
101.LAB XBRL Taxonomy Extension Label Linkbase.
101.PRE XBRL Taxonomy Extension Presentation Linkbase.
*
Denotes a management contract or compensatory plan or arrangement.
99
MID PENN BANCORP, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
MID PENN BANCORP, INC.
(Registrant)
By: /s/ Rory G. Ritrievi
Rory G. Ritrievi
President and
Chief Executive Officer
(Principal Executive Officer)
Date: March 23, 2017
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.
By: /s/ Rory G. Ritrievi
Rory G. Ritrievi
President, Chief Executive Officer and
Director (Principal Executive Officer)
By: /s/ Michael D. Peduzzi, CPA
Michael D. Peduzzi, CPA
Chief Financial Officer
By: /s/ Robert A. Abel
Robert A. Abel, Director
By: /s/ Steven T. Boyer
Steven T. Boyer, Director
By: /s/ Matthew G. DeSoto
Matthew G. DeSoto, Director
By: /s/ Robert C. Grubic
Robert C. Grubic, Director
By: /s/ Gregory M. Kerwin
Gregory M. Kerwin, Director
By: /s/ Robert E. Klinger
Robert E. Klinger, Director
By: /s/ Robert J. Moisey
Robert J. Moisey, Director
By: /s/ Theodore W. Mowery
Theodore W. Mowery, Director
By: /s/ John E. Noone
John E. Noone, Director
By: /s/ Noble C. Quandel, Jr.
Noble C. Quandel, Jr., Director
By: /s/ William A. Specht, III
William A. Specht, Director
March 23, 2017
March 23, 2017
March 23, 2017
March 23, 2017
March 23, 2017
March 23, 2017
March 23, 2017
March 23, 2017
March 23, 2017
March 23, 2017
March 23, 2017
March 23, 2017
March 23, 2017
100
EXHIBIT 10.7
MID PENN BANK
March 4, 2016
Michael D. Peduzzi
Dear Mike:
The following is a summary of the compensation package for the position we are offering you today. We look
forward to finalizing the offer and having you join the Mid Penn Bank Team. My summary of the offer is as
follows:
Title
Salary
Executive Vice President, Chief Financial Officer of the Bank and Holding
Company
$205,000 annually
Restricted Stock
1000 Shares will be granted to you on your date of hire
Signing Incentive
$40,000 note to be forgiven over a 4 year period
Paid Time Off
4 weeks per year (first year to be prorated from date of hire)
Holidays
10 paid days per calendar year
Personal Day
1 day per calendar year
Medical Coverage
For employees who elect to participate, coverage will begin on the 1st day of
the month following date of hire. If medical coverage is waived, you will
receive $40.00 per bi weekly payroll, beginning on the first of the month
following the date of hire.
Vision & Dental Insurance
Employees can elect additional vision and dental coverage paid in part by Mid
Penn Bank, which may begin on the 1st day of the month following date of
hire.
349 Union Street, Millersburg, PA 17061 • 1-866-642-7736 • midpennbank.com
Member FDIC
Flexible Spending Account
You have the option to add to this election up to $2,550 for the year.
Disability Insurance
Group Life Insurance
Retirement Plan
Coverage will begin on the 1st day of the month following the 90-day
introductory period. After 30 days of continuous disability, the disability
insurance will pay 60% of normal base wages.
Equal to 500,000 beginning the 1st day of the month following the 90-day
introductory period.
Employees are eligible to participate in the Mid Penn Bank 401(k) retirement
plan beginning on the first of the month after completion of 90 days of
service. Matching contributions will also begin on the first day of the month
following 90 days of service.
Country Club Membership
Will be provided
Company Car
Will be provided
When and if the Bank institutes Change in Control agreements you will be included in this offering. You
are also eligible for the Bank Performance Bonus.
If you are in agreement with the salary and benefit plans and general terms of employment, please
acknowledge receipt and acceptance of employment by signing below and returning this letter to me.
Accepted the 12TH day of March, 2016 by Michael D. Peduzzi, with employment to begin effective April 11, 2016
or sooner if possible. I understand that my employment is contingent upon acceptable background, credit and
reference checks.
MID PENN BANCORP, INC.
EXHIBIT 21
Name
Mid Penn Bank
SUBSIDIARIES OF REGISTRANT
State of Incorporation
Pennsylvania
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23
Mid Penn Bancorp, Inc.
Millersburg, Pennsylvania
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-197024 and 333-170833),
Form S-3 (No. 333-156759), Form S-3D (No. 333-128958), and Form S-3/A (No. 333-39341) of Mid Penn Bancorp, Inc. of our report
dated March 23, 2017, relating to the consolidated financial statements, which appears in this Form 10-K.
/s/ BDO USA, LLP
Harrisburg, Pennsylvania
March 23, 2017
MID PENN BANCORP, INC.
I, Rory G. Ritrievi, certify that:
CERTIFICATION
EXHIBIT 31.1
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Mid Penn Bancorp, Inc.;
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) 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;
(b) 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;
(c) 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
(d) 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) 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
(b) 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 23, 2017
MID PENN BANCORP, INC.
CERTIFICATION
EXHIBIT 31.2
I, Michael D. Peduzzi, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Mid Penn Bancorp, Inc.;
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) 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;
(b) 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;
(c) 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
(d) 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) 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
(b) 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/ Michael D. Peduzzi, CPA
Chief Financial Officer
Date: March 23, 2017
MID PENN BANCORP, INC.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADDED BY SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
EXHIBIT 32
In connection with the annual report of Mid Penn Bancorp, Inc. (the “Corporation”) on Form 10-K for the period ending December
31, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rory G. Ritrievi, President and
CEO, and I, Michael D. Peduzzi, Chief 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.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
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 23, 2017
By: /s/ Michael D. Peduzzi, CPA
Chief Financial Officer
Date: March 23, 2017
MID PENN BANCORP, INC.
Mid-Atlantic Custom Peer Group
Company
1st Colonial Bancorp, Inc.
1st Constitution Bancorp
1st Summit Bancorp of Johnstown, Inc.
Absecon Bancorp
Allegheny Valley Bancorp, Inc.
American Bank Incorporated
Apollo Bancorp, Inc.
Ballston Spa Bancorp, Inc.
Bancorp of New Jersey, Inc.
Bank of Akron
Brunswick Bancorp
Bucks County Bank
Calvin B. Taylor Bankshares, Inc.
Carroll Bancorp, Inc.
CB Financial Services, Inc.
CBT Financial Corporation
CCFNB Bancorp, Inc.
Centric Financial Corporation
Citizens Financial Services, Inc.
Clarion County Community Bank
Commercial National Financial Corporation
Community Bank of Bergen County, NJ
Community First Bank
Cornerstone Financial Corp.
County First Bank
Damascus Community Bank
Delaware Bancshares, Inc.
Delhi Bank Corp.
Delmar Bancorp
Dimeco, Inc.
DNB Financial Corporation
Elmer Bancorp, Inc.
Embassy Bancorp, Inc.
Emclaire Financial Corp.
Empire Bancorp Inc.
ENB Financial Corp
Enterprise Bank N.J.
ES Bancshares, Inc.
Evans Bancorp, Inc.
Farmers and Merchants Bank
State
City
NJ
Cherry Hill
NJ
Cranbury
PA
Johnstown
NJ
Absecon
PA
Pittsburgh
PA
Allentown
PA
Apollo
NY
Ballston Spa
NJ
Fort Lee
Akron
NY
New Brunswick NJ
PA
Doylestown
MD
Berlin
MD
Sykesville
PA
Carmichaels
PA
Clearfield
PA
Bloomsburg
PA
Harrisburg
PA
Mansfield
PA
Clarion
PA
Latrobe
NJ
Maywood
NJ
Somerset
NJ
Mount Laurel
MD
La Plata
MD
Damascus
NY
Walton
NY
Delhi
MD
Salisbury
PA
Honesdale
PA
Downingtown
NJ
Elmer
PA
Bethlehem
PA
Emlenton
NY
Islandia
PA
Ephrata
NJ
Kenilworth
NY
Newburgh
NY
Hamburg
MD
Upperco
Company
Fidelity D & D Bancorp, Inc.
First American International Corp.
First Bank
First Keystone Corporation
First National Bank of Groton
First Priority Financial Corp.
First Resource Bank
Fleetwood Bank Corporation
FNB Bancorp, Inc.
Frederick County Bancorp, Inc.
Glen Burnie Bancorp
Glenville Bank Holding Company, Inc.
GNB Financial Services, Inc.
Greater Hudson Bank
Hamlin Bank and Trust Company
Harford Bank
Harmony Bank
Harvest Community Bank
Highlands Bancorp, Inc.
Honat Bancorp, Inc.
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
Lyons Bancorp, Inc.
Manor Bank
Marlin Business Services Corp.
Mars National Bancorp, Inc.
Mauch Chunk Trust Financial Corp.
Mercersburg Financial Corporation
Mid Penn Bancorp, Inc.
Mifflinburg Bancorp, Inc.
MNB Corporation
Muncy Bank Financial, Inc.
Exhibit 99.1
City
Dunmore
Brooklyn
Hamilton
Berwick
Groton
Malvern
Exton
Fleetwood
Newtown
Frederick
Glen Burnie
Scotia
Gratz
Bardonia
Smethport
Aberdeen
Jackson
Pennsville
Vernon
Honesdale
Ellicott City
Washington
Jeffersonville
Jonestown
Jim Thorpe
Mifflintown
Kinderhook
Belleville
Pittston
Marlton
Lyons
Manor
Mount Laurel
Mars
Jim Thorpe
Mercersburg
Millersburg
Mifflinburg
Bangor
Muncy
State
PA
NY
NJ
PA
NY
PA
PA
PA
PA
MD
MD
NY
PA
NY
PA
MD
NJ
NJ
NJ
PA
MD
DC
NY
PA
PA
PA
NY
PA
PA
NJ
NY
PA
NJ
PA
PA
PA
PA
PA
PA
PA
MID PENN BANCORP, INC.
Mid-Atlantic Custom Peer Group (continued)
Company
National Bank of Coxsackie
National Capital Bank of Washington
Neffs Bancorp, Inc.
New Jersey Community Bank
New Millennium Bank
New Tripoli Bancorp, Inc.
New Windsor Bancorp, Inc.
Northumberland Bancorp
Norwood Financial Corp.
Orange County Bancorp, Inc.
Parke Bancorp, Inc.
Peoples Bancorp, Inc.
Peoples Limited
PSB Holding Corporation
Putnam County National Bank of Carmel
Riverview Financial Corporation
Royal Bancshares of Pennsylvania, Inc.
Scottdale Bank & Trust Company
Shore Community Bank
Solvay Bank Corporation
Somerset Trust Holding Company
Steuben Trust Corporation
Stewardship Financial Corporation
Sussex Bancorp
Turbotville National Bancorp, Inc.
Two River Bancorp
UNB Corporation
VSB Bancorp, Inc.
West Milton Bancorp, Inc.
Woodlands Financial Services Company
York Traditions Bank
State
City
NY
Coxsackie
DC
Washington
PA
Neffs
Freehold
NJ
New Brunswick NJ
PA
New Tripoli
New Windsor
MD
Northumberland PA
PA
Honesdale
NY
Middletown
NJ
Sewell
MD
Chestertown
PA
Wyalusing
MD
Preston
NY
Carmel
PA
Harrisburg
PA
Bala Cynwyd
PA
Scottdale
NJ
Toms River
NY
Solvay
PA
Somerset
NY
Hornell
NJ
Midland Park
NJ
Rockaway
PA
Turbotville
NJ
Tinton Falls
PA
Mount Carmel
NY
Staten Island
PA
West Milton
PA
Williamsport
PA
York
Officer. Your suggestions are routed directly to him, and he responds to each and every one of them personally!While we are proud of the record-setting shareholder return mentioned above, we are equally proud of the culture we have developed, which centers around strengthening the communities in which we operate. In 2016, we made over $200,000 in corporate donations, contributed 1,300 hours of employee volunteer time and raised $50,000 among our employees for charitable causes, all of which were record amounts! We also won the Pennsylvania Association of Community Bankers’ “Grow Your Community” award for the third consecutive year. Our signature community event for 2016 was again the Mid Penn Bank Celebrity Golf Tournament for Charity. Supported by former NFL players Ron Jaworski, Bill Bergey, Mike Quick and Joe Pisarcik, we were able to raise $25,000 for the benefit of the Pennsylvania Breast Cancer Coalition (PBCC). The 2017 event which will be held in May will again benefit PBCC, and for the first time, will be co-branded with the NFL Alumni Association. It will feature more celebrities in support of a larger fundraising goal. We are excited by the progress of that event in its three years in existence. While it is our signature event, it is by no means our only one. We are also proud of our ongoing commitment to the annual Millersburg Fireworks event, which we host and sponsor as a way to say “thank you” to the communities we serve. We continue to extend this community outreach by participating in area parades throughout our footprint, and in 2016, more than 270 volunteer hours were given alone at local Halloween parades. Additionally, our charitable team volunteered their time to local organizations including Big Brothers Big Sisters, Junior Achievement, Special Olympics and several other deserving nonprofits. Along with donating time, our employees continue to generously support a range of community causes and events through fundraisers and giving campaigns. The largest fundraising event held by our employees in 2016 was our “No Shave November” campaign, which raised $11,000 for Penn State Cancer Institute to support prostate cancer research. Supporting area students and schools is also an important commitment that we have continued to uphold and enhance over the years. In 2016, we funded $7,000 in academic scholarships to high school seniors throughout Central Pennsylvania. This includes our annual “Anna Woodside Scholarship” which honors a woman who was influential to Mid Penn during her lifetime from 1912 to 2013. We also offered a special program called “Millionaire for a Day” to encourage creativity and the development of writing skills among elementary school students. More than 2,180 local children submitted essays, and three contest winners were selected to receive a limo ride to school and 90 days’ worth of interest on a $1 million bank account balance. By regularly implementing innovative programs such as these, we continue to impact the regions we serve and differentiate our delivery as a community bank.With a strong 2016 behind us, we now focus our energy on continuing that momentum in 2017. While recent years have had considerable headwinds in the form of low interest rates, a weak economy and growing regulation, there is hope that those headwinds might become significantly milder, and therefore, more favorable in 2017. Regardless, we will work hard to make this another special year. Look for us to continue our progress in market share growth through the delivery of products and services that our market community members want and need.For several years, we have insisted that we are building THE best bank in Central Pennsylvania - the best bank for shareholders, customers, employees and the community at large. There have been other banks that could have staked that claim at one point or another in the Central Pennsylvania region’s history. They are all gone now, having sold out to larger banks outside the Central Pennsylvania area. Our intention is to continue to grow in size, profitability and efficiency to benefit our shareholders while also serving our communities years into the future.To achieve all of this, we acknowledge our debt of gratitude to each of our stakeholders. Together, we are building THE best bank in Central Pennsylvania. We thank you for your continued support.Rory G. Ritrievi Robert C. Grubic President and CEO Chairman of the BoardForward-Looking Statement under the Private Securities Litigation Reform Act of 1995: Statements in this letter regarding Mid Penn’s business, which are not historical facts, are “forward-looking statements” that involves risks and uncertainties. For a discussion of such risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see Mid Penn’s filings with the Securities Exchange Commission, including “Item 1A. Risk Factors” in Mid Penn’s Annual Report on Form 10-K attached to this letter. These statements speak only as of the date of this letter, even if subsequently made available by Mid Penn on its website or otherwise. Mid Penn undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this letter.Community Strong Since 1868 Mid Penn is committed to our core values as a community bank. Through major giving campaigns, community events, employee volunteerism and giving, educational outreach and corporate donations, the bank and our team of employees are highly engaged in giving back to our local communities.Given in Corporate Donations$216,133Hours of Volunteer Time Given by Our Employees1,300Raised by Our Employees for Charitable Causes$49,5002016 GIVING HIGHLIGHTSOur employees held a “No Shave November” campaign in 2016 and raised $11,000 for Penn State Cancer Institute. The donation supported prostate cancer research performed at Penn State Health Milton S. Hershey Medical Center.In 2016, Mid Penn raised $25,000 for the PA Breast Cancer Coalition through the Mid Penn Bank Celebrity Golf Tournament for Charity. The event was supported by NFL celebrities Ron Jaworski, Bill Bergey and Joe Pisarcik.Annually, Mid Penn Bank provides deserving high school seniors throughout the Central Pennsylvania region with academic scholarships. We funded $7,000 in scholarships in 2016. DAUPHINWe were once again named one of the “Top 200 Community Banks” in the U.S. by American Banker magazine, based upon our return on average shareholder equity. Additionally, we were again named a recipient of the Pennsylvania Association of Community Bankers’ “Grow Your Community Award.”New Holland branch coming May 2017. Continued Growth In 2016, we expanded our Lancaster County presence by opening an administrative office in July on the Oregon Pike. Adjacent to this office, we opened our Oregon Pike branch in December.We also laid the groundwork to relocate our Camp Hill branch to a more accessible and welcoming location. The new branch at 2148 Market Street opened in February 2017.In 2017, we will continue to grow in Lancaster County with a branch in New Holland. We will also extend the Miners Bank brand in Schuylkill County with a new branch in Orwigsburg (pending regulatory approval).NORTH- UMBERLANDSCHUYLKILLLEBANONPERRYCUMBERLANDSNYDERLANCASTERTo uphold the values of community banking, in order to be the best bank for our shareholders, customers, employees and the communities we serve.OUR MISSIONRobert C. Grubic, ChairmanWilliam A. Specht, III, Vice-ChairmanRobert A. AbelSteven T. BoyerMatthew G. DeSotoGregory M. KerwinRobert E. KlingerRobert J. Moisey Theodore W. MoweryJohn E. NooneNoble C. Quandel, Jr. Rory G. RitrieviRory G. Ritrievi President and CEOScott W. Micklewright Chief Lending OfficerKelly K. Neiderer Chief Retail OfficerJoseph L. Paese Director of Trust & Wealth ManagementMichael D. Peduzzi Chief Financial OfficerJustin T. Webb Chief Risk OfficerAmy M. Barnett Senior Compliance OfficerRoberta A. Hoffman Director of Human ResourcesJohn Paul Livingston Chief Technology OfficerPaul F. Spiegel Senior Operations ManagerMargaret E. Steinour Senior Loan Operations ManagerCindy L. Wetzel Corporate Secretary BOARD OF DIRECTORSMID PENN BANCORP, INC. AND MID PENN BANKSENIOR MANAGEMENT OF MID PENN BANKOrwigsburg branch coming June 2017 (pending regulatory approval). DAUPHINWe were once again named one of the “Top 200 Community Banks” in the U.S. by American Banker magazine, based upon our return on average shareholder equity. Additionally, we were again named a recipient of the Pennsylvania Association of Community Bankers’ “Grow Your Community Award.”New Holland branch coming May 2017. Continued Growth In 2016, we expanded our Lancaster County presence by opening an administrative office in July on the Oregon Pike. Adjacent to this office, we opened our Oregon Pike branch in December.We also laid the groundwork to relocate our Camp Hill branch to a more accessible and welcoming location. The new branch at 2148 Market Street opened in February 2017.In 2017, we will continue to grow in Lancaster County with a branch in New Holland. We will also extend the Miners Bank brand in Schuylkill County with a new branch in Orwigsburg (pending regulatory approval).NORTH- UMBERLANDSCHUYLKILLLEBANONPERRYCUMBERLANDSNYDERLANCASTERTo uphold the values of community banking, in order to be the best bank for our shareholders, customers, employees and the communities we serve.OUR MISSIONRobert C. Grubic, ChairmanWilliam A. Specht, III, Vice-ChairmanRobert A. AbelSteven T. BoyerMatthew G. DeSotoGregory M. KerwinRobert E. KlingerRobert J. Moisey Theodore W. MoweryJohn E. NooneNoble C. Quandel, Jr. Rory G. RitrieviRory G. Ritrievi President and CEOScott W. Micklewright Chief Lending OfficerKelly K. Neiderer Chief Retail OfficerJoseph L. Paese Director of Trust & Wealth ManagementMichael D. Peduzzi Chief Financial OfficerJustin T. Webb Chief Risk OfficerAmy M. Barnett Senior Compliance OfficerRoberta A. Hoffman Director of Human ResourcesJohn Paul Livingston Chief Technology OfficerPaul F. Spiegel Senior Operations ManagerMargaret E. Steinour Senior Loan Operations ManagerCindy L. Wetzel Corporate Secretary BOARD OF DIRECTORSMID PENN BANCORP, INC. AND MID PENN BANKSENIOR MANAGEMENT OF MID PENN BANKOrwigsburg branch coming June 2017 (pending regulatory approval). 5-YEAR SHAREHOLDER RETURN
264%
300
200
100
2016 TOTAL
SHAREHOLDER
RETURN
52%
2016 RETURN
ON EQUITY
10.71%
$1 BILLION
$1 BILLION IN ASSETS CROSSED IN 2016
“We achieved our highest year of
net earnings available to common
shareholders in our 148-year history.
We ended the year with $7,804,000
in earnings, an increase of more than
29% over 2015 earnings.”
–PRESIDENT AND CEO RORY G. RITRIEVI
DOUBLE-DIGIT GROWTH IN CORE BANKING
>20%
>10%
>44%
2016 ANNUAL REPORT TO SHAREHOLDERS
TOTAL DEPOSITS
increased
more than 20%
TOTAL LOANS
increased
more than 10%
TOTAL NON-INTEREST
INCOME increased
more than 44%
349 Union Street, Millersburg, PA 17061 | 1-866-642-7736 | midpennbank.com
Member FDIC