2018 ANNUAL REPORT TO SHAREHOLDERS
FOUR COMMUNITIES. ONE POWERFUL BANK.
LUZERNE
NORTH
UMBERLAND
SCHUYLKILL
DAUPHIN
BERKS
M
O
BUCKS
N
T
G
O
M
CUMBERLAND
LANCASTER
CHESTER
E
R
Y
WESTMORELAND
FAYETTE
Member FDIC
A LE TTER FROM
President and CEO Rory G. Ritrievi &
Chairman of the Board Robert C. Grubic
Sitting down to write this shareholder letter on
value of the stock. With strong earnings per share, we
are able to pay a healthy dividend while still retaining
enough to drive up book value per share, a key metric
in stock valuation. Throughout 2018, book value per
share increased from $17.85 at December 31, 2017
to $26.38 at December 31, 2018, a 47% increase.
the 210th anniversary of the birth of Abraham
Lincoln brought to mind his quote, “The best
way to predict the future is to create it.” While we
started 2018 with $1.1 billion in assets and 23 retail
locations, we ended the year with $2.1 billion in
assets and 38 retail locations. In 2018, Mid Penn
Bancorp, Inc. and its subsidiary Mid Penn Bank had
an action-packed year that we predict has laid the
groundwork for a future of financial success and
shareholder return.
SHAREHOLDER RETURN
In the first quarter of 2018, we paid cash dividends
that totaled $0.25 a share, making that our largest
quarterly dividend payout in 14 years. Subsequent
quarterly dividends pushed our total payout in 2018
to $0.70 a share. That is the largest annual dividend
we have had since 2008. Our primary objective each
year is to provide you, our shareholders, with a great
return on your investment. That return comes from
those cash dividends and growth in the per share
EARNINGS
For the 2018 year, we hit a record-high $10,494,000
in net earnings. While new capital was added through
the two acquisitions we completed in 2018 (described
in more detail below), the full benefit of the increased
capital was not realized until later in the year. As a
“IN THE FIRST QUARTER OF 2018,
WE PAID CASH DIVIDENDS THAT
TOTALED $0.25 A SHARE, MAKING
THAT OUR LARGEST QUARTERLY
DIVIDEND PAYOUT IN 14 YEARS.”
result, earnings per share slipped to $1.48 in 2018
from $1.67 in 2017. The momentum in earnings,
however, grew throughout the year. In fact, the fourth
quarter of 2018 was accretive by $0.42 a share over
the fourth quarter of 2017. We are pleased with that
trend and encouraged as we enter 2019.
ORGANIC GROWTH
Our 2018 financial success was attained through
strong organic growth in consumer, business and
municipal relationships throughout our legacy markets
in Central Pennsylvania. In those markets, we grew
total loans by 17% while improving both net interest
margin and asset quality. Throughout the year, we
originated $447 million in new loans, a record
level for the bank. Deposit growth was much more
challenging due to competitive pricing pressures, but
we still managed 3% organic growth. The net interest
earned from our organic loan and deposit growth
accounted for almost one-third of the 49% increase
in net interest income. We also managed to have a
great year in noninterest income. Most sources of
noninterest income increased year-over-year, including
our trust and wealth management revenues, mortgage
banking revenues and interchange (or debit and credit
card) revenues. The focus we developed on all of
those areas a few years ago is beginning to bear fruit
in very meaningful ways.
Beyond our organic balance sheet growth, we also
expanded our branch presence in existing markets in
2018. In the first quarter of 2018, we opened a new
retail location in Halifax, PA and followed that up with
a new location in Pillow, PA later in the third quarter.
Both of these Upper Dauphin County locations did
well in their first year and reinforce our dominance in
that region.
ASSET QUALITY
The year we had in asset quality in 2018 was a solid
continuation of the good trends experienced over the
last few years. For the second consecutive year, we
ended with a net recovery instead of a net charge-
off. Additionally, our delinquency rate was 0.09%
at year end! The high quality of our loan portfolio
is something in which we take great pride. In the
last 10 years, we have originated over $2 billion
of commercial, residential and consumer loans
throughout Central Pennsylvania. In the process of
doing so, we completely revamped the loan portfolio
and the quality of the loans therein. The company’s
financial success, to a great extent, goes as the asset
quality of the loan portfolio goes. We head into 2019
confident in that asset quality.
MERGERS AND ACQUISITIONS
The organic growth success we had in 2018 is only
part of the story. In the first quarter, we finalized the
purchase of The Scottdale Bank & Trust Company of
Westmoreland and Fayette Counties and successfully
converted their customers onto our systems. That
acquisition added approximately $281 million of
assets, including $71 million in loans. It also added
$210 million of core deposits, which was an important
source of funding for the organic loan growth
mentioned above. The addition of Scottdale gave us
both the asset size and additional capital to better
serve customers throughout our markets.
“THE ADDITION OF SCOTTDALE
GAVE US BOTH THE ASSET SIZE AND
ADDITIONAL CAPITAL TO BETTER
SERVE CUSTOMERS THROUGHOUT
OUR MARKETS.”
Shortly after we completed the acquisition of
Scottdale, we announced the acquisition of First
Priority Financial Corporation of Malvern, PA. First
Priority was a $642 million community bank serving
Chester, Bucks, Montgomery and Berks Counties.
Legal merger close occurred in the third quarter and
we successfully converted their customers onto our
systems in October. With First Priority, we added $512
million in loans and $399 million in core deposits.
That acquisition not only gives us access to new and
dynamic markets, but also the size to fully serve the
needs of customers in those markets. Through this
merger we picked up four additional Board members
with Joel Frank, Alan Novak, Patrick Smith and David
Sparks, all former First Priority Board members.
“WITH FIRST PRIORITY WE ADDED
$512 MILLION IN LOANS AND $399
MILLION IN CORE DEPOSITS. THAT
ACQUISITION NOT ONLY GIVES US
ACCESS TO NEW AND DYNAMIC
MARKETS, BUT ALSO THE SIZE TO
FULLY SERVE THE NEEDS OF THE
CUSTOMERS IN THOSE MARKETS.”
We believe both acquisitions were strategically important
for Mid Penn. To establish a presence organically in
those markets would have taken years of investment
without much return. We did, however, pay a premium
for each company. That premium has created a
significant level of goodwill on our balance sheet and
the tangible book value of our stock was consequently
diluted. Warren Buffet once said, “It’s far better to buy a
wonderful company at a fair price than a fair company
at a wonderful price.” We feel Scottdale and First
Priority were wonderful companies that we purchased
for a fair price. The dilution to tangible book from those
combined transactions, we feel, will be earned back
within a reasonable period of time.
COMMUNITY SERVICE
While we almost doubled our size in 2018 and
began serving six new counties, we stayed true to our
community bank roots. In 2018, Mid Penn contributed
$251,000 to various charitable organizations. We
also orchestrated $460,000 of Earned Income Tax
Credit giving, bringing total corporate contributions
to $711,000. Additionally, our employees contributed
$57,000 out of their own pockets and over 3,000
hours of their own time to various charities. Including
these contributions from the company and its
employees, as well as additional fundraising from
outside sources that we coordinated for several of our
events, Mid Penn was responsible for over $865,000
being contributed to the communities, schools, and
deserving nonprofit organizations throughout our
footprint in 2018. Major company projects for the year
included the Fourth of July Fireworks in Millersburg for
the tenth straight year, the Mid Penn Bank Celebrity
Golf Tournament for Breast Cancer - which raised
$100,000 - and our No Shave November partnership
with Penn State Cancer Institute’s Urology Division
which raised $40,000 for prostate cancer research. It
was our most charitable year yet as an organization!
Strong financial performance while supporting the
community is the Mid Penn Bank way.
“IT WAS OUR MOST CHARITABLE YEAR
YET AS AN ORGANIZATION! STRONG
FINANCIAL PERFORMANCE WHILE
SUPPORTING THE COMMUNITY IS THE
MID PENN BANK WAY.”
RECOGNITION
As 2018 progressed, we once again received some
important industry recognition. For the fifth year in
a row, we were recognized as being one of the Top
200 Community Banks in the country by American
Banker for our performance in return on equity.
Also, for the fifth year in a row, we won the “Grow
Your Community” Award from the Pennsylvania
we have had over the last few years since entering
Lancaster County. Complete the cultural integration of
our new markets in Westmoreland, Fayette, Chester,
Bucks, Montgomery and Berks Counties and actually
grow our presence in each of those areas. Make
significant progress in earning back the tangible book
value dilution of the two mergers completed in 2018
that afforded us these new markets. Continue the
development and expansion of noninterest income
sources. And, of course, provide that wonderful
community support that has become part of our
calling card. While 2018 was a milestone year in
many ways, the Mid Penn team has already hit the
ground running to make 2019 even better.
If the best way to predict our future is to create it,
then we are confident that we are creating THE best
bank in the state of Pennsylvania. Most importantly,
we are building a future of financial success for the
benefit of our shareholders, employees, customers and
communities.
Thank you for your investment in and support of Mid
Penn Bancorp, Inc. and Mid Penn Bank where we
predict that the best is yet to come!
Rory G. Ritrievi
President and CEO
Robert C. Grubic
Chairman of the Board
Association of Community Bankers for our fundraising
efforts with the aforementioned No Shave November
campaign. The work we did with our charity golf
tournament garnered a “Pink Ribbon Award” from the
Pennsylvania Breast Cancer Coalition.
BOARD DIVERSITY AND SUCCESSION
In last year’s shareholder letter, we identified the
importance of diversifying our Board of Directors and
building a strong succession plan. As you will see in
the proxy materials that accompany this annual report,
we have added Kimberly J. Brumbaugh of Lancaster
County to our Board. After a fairly exhaustive search, in
which we identified many qualified candidates, we were
fortunate to have Ms. Brumbaugh accept our invitation.
Ms. Brumbaugh is a wealth management professional
and business owner who works in Chester County
and provides great community support throughout
Southeastern Pennsylvania. In the proxy materials that
accompany this report, you will see a discussion on our
Board diversity goals and the direction we are taking to
assure an effective director succession plan. Our Board
of Directors is and always has been a valuable asset,
and our plan is to make sure that it constantly evolves
to meet all of our objectives.
“OUR BOARD OF DIRECTORS IS AND
ALWAYS HAS BEEN A VALUABLE
ASSET, AND OUR PLAN IS TO MAKE
SURE THAT IT CONSTANTLY EVOLVES
TO MEET ALL OF OUR OBJECTIVES.”
OUR 2019 PLAN
By the time you read this letter, we will already be one
quarter of the way through 2019. That first quarter
will be a significant first step in recognizing the benefit
of the work we did in 2018. Our plan this year is
straightforward. Continue the strong organic growth in
loans and deposits we have had in our legacy markets
of Dauphin, Cumberland, Schuylkill, Northumberland
and Luzerne Counties. Keep building on the success
CONTINUED
GROWTH
Mid Penn experienced
tremendous growth in 2018.
We bookended the year with
the acquisition of two separate
banks: Scottdale Bank & Trust in
western Pennsylvania and First
Priority Bank in southeastern
Pennsylvania. These acquisitions
increased shareholder value
and expanded Mid Penn’s
growing footprint to include 12
counties and 38 retail locations
across the state of Pennsylvania,
creating a powerful bank
holding company to serve four
distinct communities.
Scottdale Bank & Trust
We completed our merger with the
Scottdale Bank & Trust Company, based
in Westmoreland & Fayette counties,
on January 8, 2018 with a full systems
conversion occurring in late February.
There are five branches spread across the
two counties operating as “Scottdale Bank
& Trust, a division of Mid Penn Bank.”
First Priority Bank
We completed our merger with First
Priority Bank, with eight retail locations
across Berks, Bucks, Chester &
Montgomery counties, in August 2018
and a full systems conversion in October.
First Priority Bank operates as “First
Priority Bank, a division of Mid Penn
Bank” and, like Scottdale, provides us
with the opportunity to serve a brand-
new community with our full range of
community banking products and services.
HALIFAX OPENING, JANUARY 12, 2018
PILLOW OPENING, SEPTEMBER 10, 2018
Branch Openings
On January 12, 2018 we opened our
newly-constructed retail location in
Halifax, PA. The new office has been
well-received by the community and
has provided an additional level of
convenience to Upper Dauphin County
residents and organizations.
In the midst of finalizing the acquisition of
First Priority Bank, we opened a new retail
location in Pillow, PA on September 10,
2018. As Mid Penn continues to expand
throughout the state of Pennsylvania,
we also remain focused on fulfilling the
banking needs of the Upper Dauphin
County community, who we have proudly
served for more than 150 years.
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, 2018
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 whether the registrant has submitted electronically every Interactive Data File required to be submitted 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
such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated Filer
☐
☐
Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
☒
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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 $34.90 per share, as reported by The NASDAQ Stock Market LLC (“NASDAQ”), on June 30, 2018, the last business
day of the registrant’s most recently completed second fiscal quarter was approximately $213,745,643.
As of March 1, 2019, the registrant had 8,459,918 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be used in connection with the 2019 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
Item 16 -
Form 10-K Summary
Signatures
EXHIBITS
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3
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,
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 Bank subsidiary and its divisions, and to provide them with capital and resources.
Mid Penn’s consolidated financial condition and results of operations consist almost entirely of that of the Bank, which is managed as
a single business segment. At December 31, 2018, Mid Penn had total consolidated assets of $2,077,981,000 with total deposits of
$1,726,026,000 and total shareholders’ equity of $223,209,000. Mid Penn currently does not own or lease any real property. 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, with a shared services agreement to support the operation of the holding
company. At December 31, 2018, the Bank had 372 full-time and 34 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, a wholly-owned subsidiary of Mid Penn Bank that provided a wide range of personal and
commercial insurance products, ceased operations effective March 1, 2016 due to a lack of activity within this subsidiary.
Mid Penn Bank
Mid Penn Bank was organized in 1868 under a predecessor name, Millersburg Bank, and became a state chartered bank in 1931 and
obtained 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”. Mid Penn’s and the Bank’s legal headquarters are located at 349 Union Street,
Millersburg, Pennsylvania 17061.
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 five
branches in Schuylkill and Luzerne Counties, Pennsylvania operate as “Miners Bank, a Division of Mid Penn Bank”.
On January 8, 2018, Mid Penn completed its acquisition of The Scottdale Bank and Trust Company (“Scottdale”) through the merger
of Scottdale with and into Mid Penn Bank (the “Scottdale Merger”). The Scottdale Merger resulted in the addition of five branches in
Western Pennsylvania operating as “Scottdale Bank & Trust, a Division of Mid Penn Bank”.
On July 31, 2018, Mid Penn completed its acquisition of First Priority Financial Corp. (“First Priority”) pursuant to which First
Priority was merged with and into Mid Penn (the “First Priority Merger”), with Mid Penn being the surviving corporation in the First
Priority Merger. As part of this acquisition, First Priority’s banking subsidiary, First Priority Bank, was merged with and into Mid
Penn Bank. The First Priority Merger resulted in the addition of eight offices in Southeastern Pennsylvania operating as “First Priority
Bank, a Division of Mid Penn Bank”.
Additional information related to the Scottdale and First Priority Mergers can be found in Notes 4 and 5 to the Consolidated Financial
Statements contained in Item 8 of this report.
Also, in January 2018, Mid Penn opened a new full-service office in Halifax, PA, and in September 2018, opened a new full-service
office in Pillow, PA. After the opening of these two branches and adding thirteen from the two acquisitions that occurred during
2018, the Bank now has thirty-eight full service retail banking properties located in Berks, Bucks, Chester, Cumberland, Dauphin,
Fayette, Lancaster, Luzerne, Montgomery, Northumberland, Schuylkill and Westmoreland Counties within Pennsylvania.
4
MID PENN BANCORP, INC.
Mid Penn’s primary business consists of attracting deposits and loans from the Bank’s network of community banking offices. 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. The Pennsylvania Department of Banking and Securities and the Federal Deposit Insurance Corporation (the
“FDIC”) supervise the Bank. Deposits of the Bank are insured by the FDIC’s Deposit Insurance Fund (the “DIF”) 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 provides services to commercial businesses and real estate investors, consumers, nonprofit organizations, and municipalities
through thirty-eight full service retail banking properties, one loan production office, a corporate administration office, and one
operations facility which are all based in Pennsylvania. Mid Penn’s primary markets reflect a diversified manufacturing and services
base across twelve Pennsylvania counties, including having several offices in and around the state capital region of Harrisburg. The
Bank emphasizes developing long-term customer relationships, maintaining high quality service, and providing quick responses to
customer needs. Mid Penn believes that local relationship building and its conservative approach to lending are important factors in
the success and growth of Mid Penn.
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 relationships with creditworthy customers who exhibit positive historical repayment trends, stable cash flows
and secondary sources of repayment from tangible collateral;
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. 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. 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, 2018, the Bank’s highest concentration of
credit is in commercial real estate.
Investment Activities
Mid Penn’s securities portfolio is a source for both liquidity and interest earnings, and serves to support pledging requirements on
public funds deposits through investments in primarily higher-quality fixed-income debt securities. Mid Penn does not have any
significant non-governmental concentrations within its investment securities portfolio.
In addition to an available-for-sale portfolio, during the first quarter of 2017, Mid Penn established a held-to-maturity investment
portfolio comprised primarily of lower-risk and lower-yielding U.S. Treasury notes, U.S. agency mortgage-backed securities, and
investment-grade municipal securities. The held-to-maturity portfolio was established to support the Bank’s growth in public fund
deposits which require pledging. The investments in the held-to-maturity portfolio are recorded on the balance sheet at book value
(amortized cost), while the available-for-sale securities are recorded on the balance sheet at fair value. Mid Penn’s available-for-sale
investments include agency notes, agency mortgage-backed securities, and municipal securities. These debt securities derive fair
values relative to investments of the same type and credit profile with similar maturity dates. As the interest rate environment
changes, Mid Penn’s fair value of securities will change. This difference between the amortized cost and fair value of available-for-
sale investment securities, or unrealized loss, amounted to $4,103,000 as of December 31, 2018. On an after-tax basis, this unrealized
loss on available-for-sale securities resulted in a reduction to shareholders’ equity, through the accumulated other comprehensive loss
component, of $3,242,000. A majority of the investments are high quality United States and municipal securities that, if held to
maturity, are expected to result in no realized loss to the Bank.
5
MID PENN BANCORP, INC.
Deposits and Other Sources of Funds
The Bank primarily uses retail deposits and, to a lesser extent, wholesale borrowings to finance lending and investment activities.
Wholesale borrowing sources include advances from the Federal Home Loan Bank of Pittsburgh (the “FHLB”) and overnight
borrowings from the Bank’s other correspondent banking relationships. 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 the extent of borrowings
and the available lines of credit extended by the Bank’s creditors. As a result, generating and retaining retail deposits remains 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.
Additionally, the safety of traditional bank deposit products has remained an attractive option during periods of market volatility. Mid
Penn’s ability to attract retail funds in the future will continue to 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.
Competition
The banking business is highly competitive, and the profitability of Mid Penn depends principally upon the Bank’s ability to
successfully 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 and Item 1A., “Risk Factors”.
Mid Penn has been able to compete effectively with other financial institutions by emphasizing customer service, convenient hours,
efficient and friendly employees, local decision making, and quality products.
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 primarily focused on the protection of depositors, the DIF, and the monetary system, and do not prioritize
shareholder interests. Enforcement actions that may be imposed by federal and state banking regulators 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, 2018, 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”). 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 of the more significant laws and regulations and are qualified in their entirety by reference to the complete
provisions of 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.
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MID PENN BANCORP, INC.
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 actions would constitute an unsafe or unsound practice or violation of law. The Federal Reserve Board also makes policy that
applies to 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.
Gramm-Leach-Bliley Financial Modernization Act
Under the Gramm-Leach-Bliley Financial Modernization Act (“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 certain financial 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 by regulation to be closely related to banking.
In addition to permitting financial holding companies entry into new lines of business, the law allows companies the freedom to
streamline existing operations and to potentially reduce costs. The GLB may increase both opportunity and 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, such as 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 both 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 affect a wide range of the Bank’s activities and operations, including, but snot 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. 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”. As of December
31, 2018, Mid Penn complied with these risk-based capital requirements.
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MID PENN BANCORP, INC.
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. As of December 31, 2018, Mid Penn has met these leverage requirements, and the Federal
Reserve has not advised Mid Penn of any specific minimum Tier 1 leverage ratio requirement.
The Bank is subject to similar capital requirements adopted by the FDIC, and as of December 31, 2018, the Bank’s capital levels were
sufficient to be considered “well-capitalized”. 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 19 to Mid Penn’s Consolidated Financial Statements, which are
included herein.
Banking regulators may 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 limited exceptions, that
the institution be placed in receivership.
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MID PENN BANCORP, INC.
Regulatory Capital Changes
In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes
required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The final rules established a
common equity tier 1 capital conservation buffer with a multi-year phase in to an eventual 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
applicable capital conservation buffer for a given year, the bank 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 and were phased-in over a three-year period. The final rules called for the following
minimum capital requirements, including the capital conservation buffer, effective at both January 1, 2018 and 2019).
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,
2018
6.375%
7.875%
9.875%
4.0%
2019
7.0%
8.5%
10.5%
4.0%
The final rules also allowed 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 former 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 and the Bank have complied throughout the phase-in period, and currently remain in compliance, with all the regulatory
capital requirements. Accordingly, the new rules did not have a material negative effect on Mid Penn’s financial condition or capital
management activities for any period since the changes were implemented.
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 an institution is not satisfying certain
safety and soundness standards and fails to submit to the banking regulatory agency an acceptable compliance plan or fails to
implement an accepted plan, the agency may 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, restricting dividend payments to
shareholders, and requiring an increase in the institution’s ratio of tangible equity to assets. For the periods reported in this Form 10-K
and in the period subsequent to December 31, 2018, up to the date of the filing of this Form 10-K, Mid Penn was not subject to any
such bank regulatory orders.
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MID PENN BANCORP, INC.
Payment of Dividends and Other Restrictions
Mid Penn is a legal entity separate and distinct from its subsidiary, the Bank. There are various legal and regulatory limitations on the
extent to which the Bank can, among other things, finance, or otherwise supply funds to, Mid Penn. Specifically, dividends from the
Bank are the principal source of Mid Penn’s cash funds, and there are certain legal restrictions under Pennsylvania law and
Pennsylvania banking regulations on the payment of dividends by state-chartered banks. The relevant regulatory agencies also have
authority to prohibit Mid Penn and the Bank from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or
unsound banking practice. Depending upon the financial condition of Mid Penn and the Bank, the payment of dividends could be
deemed by a regulatory agency to constitute such an unsafe or unsound practice. Mid Penn and the Bank were not subject to any such
dividend prohibitions during the years ended December 31, 2018, 2017, and 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, and the condition of the Bank (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.
Beginning with the second quarter of 2011 and as applicable continuously through to the current period, 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.
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 services, investments, and lending activities 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;
annual notices of their privacy policies to their current customers; and
a reasonable method for consumers to “opt out” of disclosures to nonaffiliated third parties.
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MID PENN BANCORP, INC.
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, Anti-Money Laundering and Anti-Terrorism Financing
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. 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. The principal provisions of Title III of the USA Patriot Act require that regulated financial
institutions, including state-chartered banks:
establish an anti-money laundering program that includes training and audit components;
comply with regulations regarding the verification of the identity of any person seeking to open an account;
take additional required precautions with non-U.S. owned accounts; and
perform certain verification and certification of money laundering risk for their foreign correspondent banking
relationships.
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 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 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.
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.
Tax Cuts and Jobs Act
On December 22, 2017, President Donald J. Trump signed into law the Tax Cuts and Jobs Act (the “TCJA”), a tax reform law that
included a significant provision reducing the corporate tax rate applicable to Mid Penn, for tax years beginning after 2017, to a flat 21
percent rate. The reduction resulted in a one-time $1,169,000 write-down of Mid Penn’s deferred tax asset in December 2017,
because the deferred tax asset was previously valued based upon the projection of Mid Penn realizing a 34 percent future corporate tax
rate benefit. This write-down was included in Mid Penn’s income tax provision for the year ended December 31, 2017, as further
discussed in Note 18 (Federal Income Taxes) to the consolidated financial statements.
Other significant provisions of the TCJA include (i) for tax years beginning after Dec. 31, 2017, the corporate AMT is repealed, and
(ii) for property placed in service in tax years beginning after Dec. 31, 2017, the maximum amount Mid Penn may expense
under Internal Revenue Code Sec. 179 is increased to $1 million, and the deduction phase-out threshold amount for all qualifying
purchases in a year is increased to $2.5 million (with these amounts being indexed for inflation beginning for tax years after 2018).
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MID PENN BANCORP, INC.
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. Certain changes implemented by the JOBS Act that impacted Mid Penn
included (i) 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, and (ii) raising the threshold for triggering deregistration under the
Exchange Act for banks and bank holding companies from 300 to 1,200 holders of record.
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.
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, economic, and competitive changes, management believes that the Bank and the financial services industry will
continue to experience an increased rate of change from both the opportunities and competitive challenges resulting from greater
product and service offerings, technological advancements, and business combinations.
From time to time, legislation is enacted that has the effect of increasing the compliance and operations requirements and the cost of
doing business, changing the tax structure applicable to Mid Penn, 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. Congressional bills and other proposals could result in additional significant changes to the
banking system, including but not limited to 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, 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 or change Mid Penn’s
and the Bank’s competitive landscape. Whether any future 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
loan and deposit rates offered by the Bank and its competitors, and 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 reasonably predict the
nature, amount, frequency, 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.
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MID PENN BANCORP, INC.
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 knew and willfully compelled the borrower to commit
an action which caused such release or to 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 (“SOX”) and related regulations adopted by the SEC and NASDAQ addressed 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. Section 404 of SOX requires publicly held companies to document, test and
certify that their internal control systems over financial reporting are effective. Effective for year-end financial reports beginning with
December 31, 2017, Mid Penn is subject to the independent attestation requirement under Section 404 of the SOX. The Bank remains
subject to independent auditor attestation under FDIC regulation 363.3(b), which is a similar independent attestation requirement at
the Bank level.
Available Information
Mid Penn’s common stock is registered under Section 12(b) of the Exchange Act 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. 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 and 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
Before investing in Mid Penn common stock, an investor should carefully read and consider the risk factors described below, which
are not intended to be all inclusive, and to review other information contained in this report and in our other filings with the SEC. The
risks and uncertainties described below are not the only ones facing Mid Penn and the Bank. Additional risks and uncertainties that we
are not aware of, or that we currently deem less significant, or that we are otherwise not specifically focused on, may also impact our
business, results of operations, and our common stock. If any of these known or unknown risks or uncertainties actually occurs, our
business, financial condition and results of operations could be materially and adversely affected. If this were to happen, the market
price of our common stock could decline significantly, and an investor could lose all or part of his or her investment in Mid Penn.
Unless the context otherwise requires, references to “we,” “us,” “our,” “Mid Penn,” or “Mid Penn Bancorp, Inc.,” collectively refer to
Mid Penn Bancorp, Inc. and its banking subsidiary, and specific references to the “Bank” refer to Mid Penn Bank, the wholly-owned
banking subsidiary of Mid Penn Bancorp, Inc.
Risks Related to Our Primary Business and Industry
Mid Penn is subject to interest rate risk
Mid Penn’s earnings and cash flows are largely dependent upon the Bank’s 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
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MID PENN BANCORP, INC.
the interest income the Bank receives on loans and securities and the amount of interest expense it pays on deposits and borrowings,
but such changes could also affect (i) the Bank’s ability to originate loans and obtain deposits, (ii) the fair value of financial assets and
liabilities, and (iii) the average duration of mortgage-backed securities in the Bank’s investment 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 the Bank’s net interest income and Mid Penn’s financial condition and results of operations.
Mid Penn is subject to credit risk
As of December 31, 2018, approximately 79 percent of the Bank’s loan portfolio in Table 8 of Management’s Discussion and
Analysis consisted of commercial, industrial, and agricultural 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 the 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. 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. An increase in non-performing loans or collateral value deficiencies 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.
The 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.
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
larger competitors who offer loans enjoy advantages over the Bank, 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, the Bank faces substantial competition from other insured depository institutions such as
other commercial banks, savings institutions and credit unions, as well as institutions offering uninsured investment alternatives,
including money market funds. Many of Mid Penn’s larger competitors who accept deposits also enjoy advantages over the Bank,
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 the Bank attracts
or require an increase in rates and interest expense 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.
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MID PENN BANCORP, INC.
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 expected discontinuance of LIBOR presents risks to the financial instruments originated, issued or held by Mid Penn that use
LIBOR as a reference rate
LIBOR is used as a reference rate for many of Mid Penn’s transactions, which means it is the base on which relevant interest rates are
determined. Transactions include those in which Mid Penn lends and borrows money; issues, purchases and sells securities; and enters
into derivatives to manage Mid Penn’s and its customers’ risk. LIBOR is the subject of recent national and international regulatory
guidance and proposals for reform. The United Kingdom Financial Conduct Authority, which regulates the process for setting LIBOR,
announced in July 2017 that it intends to stop persuading or compelling banks to submit rates for the calculation of LIBOR to the
administrator of LIBOR after 2021. While there are ongoing efforts to establish an alternative reference rate to LIBOR, as of the date
of this report, no such rate has been accepted or is considered ready to be implemented.
If another rate does not achieve wide acceptance as the alternative to LIBOR, there likely will be disruption to all of the markets
relying on the availability of a broadly accepted reference rate. Even if another reference rate ultimately replaces LIBOR, risks will
remain for Mid Penn with respect to outstanding loans, derivatives or other instruments using LIBOR. Those risks arise in connection
with transitioning those instruments to a new reference rate and the corresponding value transfer that may occur in connection with
that transition. Risks related to transitioning instruments to a new reference rate or to how LIBOR is calculated and its availability
include impacts on the yield on loans or securities held by Mid Penn, amounts paid on securities Mid Penn has issued, or amounts
received and paid on derivative instruments Mid Penn has entered into. The value of loans, securities, or derivative instruments tied to
LIBOR and the trading market for LIBOR-based securities could also be impacted upon its discontinuance or if it is limited. Further,
it is possible that LIBOR quotes will become unavailable prior to 2021 if sufficient banks decline to make submissions to the LIBOR
administrator. In that case, the risks associated with the transition to an alternative reference rate will be accelerated and magnified.
These risks may also be increased due to the shorter timeframe for preparing for the transition.
The Basel III capital requirements require us to maintain higher levels of capital, which could reduce our profitability
Basel III established higher levels of base capital, certain capital buffers, and a migration toward common equity as the key source of
regulatory capital. Although these capital requirements have been phased in and met by Mid Penn, the Basel III requirements signal 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 required
additional capital to support our business risk profile. Maintaining higher levels of capital potentially reduces opportunities to
leverage interest-earning assets, which could limit the net interest income and profitability of 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.
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MID PENN BANCORP, INC.
Mid Penn’s business operations and interaction with customers are increasingly done via technology and electronic delivery
channels, 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,
corrupting data, or causing operational disruption. To combat against these attacks, Mid Penn has certain security systems and
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.
We are required to make a number of judgments in applying generally accepted accounting standards, and different estimates and
assumptions in the application of these accounting standards could result in a decrease in capital and/or other material changes to
our reports of financial condition and results of operations
Generally accepted accounting principles involve certain estimates and processes that are particularly susceptible to significant
change, including those related to the determination of the allowance for loan losses and reserve for unfunded lending commitments,
the fair value of certain financial instruments including investment securities, income tax assets or liabilities (including deferred tax
assets and any related valuation allowance), and share-based compensation. While we have identified critical accounting policies and
have procedures and processes in place to support making the related judgments and estimates, changes to the processes, assumptions,
or models in the application of these generally accepted accounting principles, and the impact to the related judgments and estimates
could result in a decrease to net income and, possibly, capital and may have a material adverse effect on our financial condition and
results of operations. From time to time, the Financial Accounting Standards Board and the SEC issues changes to or updated
interpretations of the financial accounting and reporting guidance that governs the preparation of Mid Penn’s financial statements.
These changes are beyond our control, can be difficult to predict, and could materially impact how we report our financial condition
and results of operations. We could be required to apply new or revised guidance retrospectively, which may result in the revision of
prior financial statements by material amounts. The implementation of new or revised guidance could also result in material adverse
effects to our reported capital.
Mid Penn’s profitability depends significantly on economic conditions in 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 Pennsylvania, especially in the twelve 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 Pennsylvania, or more specific to the communities in the Pennsylvania served by Mid
Penn, 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 and state economy
supporting its market area would not have a material adverse effect on Mid Penn’s consolidated financial condition, results of
operations, and cash flows.
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MID PENN BANCORP, INC.
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.
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.
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 and the Bank are subject to extensive regulation, supervision and examination by federal and state banking authorities. The
potential exists for additional or amended federal or state laws and regulations, or changes in supervisory policies or activities, to
materially 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.
Further, 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. Also,
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. Any changes in applicable regulations
or federal, state or local legislation, or the exercise of bank regulatory authority, may have a negative impact on Mid Penn’s results of
operations, financial condition, and its ability to pay dividends on common stock.
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 and losses in the event of a default by a counterparty or client. Any such losses could have
a material adverse effect on Mid Penn’s financial condition and results of operations.
Volatility in financial markets and the economy may have materially adverse effects on our liquidity and financial condition
In the recent past, the capital and credit markets experienced extreme volatility and economic disruption. Adverse financial market
and economic conditions can exert downward pressure on stock prices, security prices, and credit availability for certain issuers
without regard to their underlying financial strength. If such levels of financial market and economic 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.
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 stressed the DIF and increased the costs of
the Bank’s FDIC insurance assessments. Future 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 the results of Mid Penn’s operations and financial condition.
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MID PENN BANCORP, INC.
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 process, inputs, calculations and assumptions used in determining whether an investment
is impaired, Mid Penn’s assessment of or disclosure of the impairment status of investments 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
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 provided both internally and 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, attract customers who prefer technological delivery channels, and 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 keep pace with these technological advancements or the related substantial
costs and investments required, which could adversely affect its financial condition and results of operations.
Growing by acquisition entails certain risks, and difficulties in integrating past or future acquisitions could adversely affect our
business
During 2018, Mid Penn completed acquisitions of both The Scottdale Bank & Trust Company and First Priority Financial Corp.
Growth by acquisition involves substantial risks, as the ultimate success of such acquisitions may depend on, among other things, the
ability to realize anticipated cost savings and to integrate the acquired companies and operation in a manner that does not result in
decreased revenues resulting from excessive acquisition costs, conversion costs, or disruption of existing customer relationships in
both the acquired companies and legacy markets. If we are not able to successfully achieve the financial efficiencies or integration and
growth objectives of acquisitions, the anticipated benefits of an acquisition may not be realized fully, or at all, or may take longer to
realize than planned.
Further, the asset quality or other financial characteristics of an acquired company may deteriorate from the date a merger or other
acquisition agreement is entered into and when the transaction is completed or the post-merger period.
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MID PENN BANCORP, INC.
Mid Penn has spent and may continue to spend significant resources identifying companies and businesses to acquire. The efficient
and effective integration of any companies and businesses we acquire and integrate into our organization is critical to our growth. The
Scottdale Merger, the First Priority Merger, and any future mergers or acquisitions, involve numerous risks including difficulties in
integrating the culture, operations, technologies and personnel of the acquired companies, the diversion of management’s attention
from other business concerns and the potential loss of customers. Failure to successfully integrate the operations of Scottdale and First
Priority, or those of future acquisition targets, could harm Mid Penn’s business, financial condition, results of operations and cash
flows.
We plan to pursue a growth strategy and there are risks associated with rapid growth
We intend to pursue a growth plan consistent with our prior business strategy, including growth by acquisition, as well as leveraging
our existing branch network or adding new branch locations in current and adjacent markets we choose to serve. The Scottdale Merger
and First Priority Merger were part of our growth strategy.
Our ability to manage growth successfully will depend on our ability to attract or retain qualified personnel, maintain cost controls and
efficiencies, and ensure our areas of growth continue to meet our high asset quality standards, while attracting additional loans and
deposits on favorable terms, as well as on factors beyond our control, such as economic conditions and competition in existing and
new markets. If we grow too quickly and are not able to attract qualified personnel, control costs and maintain asset quality, this
continued rapid growth could materially adversely affect our financial performance.
The interest rate on our subordinated notes will remain fixed until December 2020, when some will begin to float to Prime plus 0.50%
The per annum interest rate on the $7.5 million of our subordinated notes issued by Mid Penn in December 2015 is fixed at 5.15%,
until December 2020 when the interest rate will float at the Wall Street Journal’s Prime rate plus 0.50%, provided that the interest rate
applicable will at no time be less than 4.0%.
The per annum interest rate on the $10 million of our subordinated notes issued in December 2017 is fixed at 5.25% until December
2022, when it will float at the Wall Street Journal’s Prime rate plus 0.50%, provided that the interest rate applicable will at no time be
less than 5.0%.
The per annum interest rate on the $9.5 million of subordinated notes assumed in the First Priority acquisition is fixed at 7.00% and
the notes are non-callable through November 2020. These notes include provisions for redemption pricing between 101.5% and
100.5% of the total of $9.5 million, plus accrued but unpaid interest thereon up to but excluding the redemption date, if called after
five years but prior to the maturity date of November 2025.
Depending on Mid Penn’s financial condition at the time of these rates changing from fixed to variable, an increase in the interest rate
on our subordinated debt could have a material adverse effect on Mid Penn’s liquidity and results of operations.
Risks Related to Mid Penn Common Stock
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.
The market price of Mid Penn common stock may fluctuate significantly, and this may make it difficult for investors to resell shares of
common stock owned by them at times or at prices they find attractive
The market price of our common stock as reported on NASDAQ is subject to constant change during business trading hours. We
expect that the market price of Mid Penn common stock will continue to fluctuate and there can be no assurance about the stability or
trend of market prices for Mid Penn common stock. Stock price volatility may make it difficult for investors to resell their Mid Penn
common stock when they want and at times or prices that they find attractive. Mid Penn’s stock price may fluctuate significantly as a
result of a variety of factors, many of which are beyond our control. These factors include those described elsewhere in this entire
“Risk Factors” section, in this document, and our other filings with the SEC.
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MID PENN BANCORP, INC.
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 primarily by its banking subsidiary. Mid Penn’s ability to pay
dividends on its common stock, and principal and interest on its 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 respective regulatory agencies that supervise the Bank. 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
banking subsidiary or other subsidiaries established in the future will be able to pay dividends, or that Mid Penn itself 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 ability to pay dividends on its common stock, or the amount of any dividends
paid, could have a material adverse effect on the market price of its 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 stockholders
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
common stockholders, which may adversely impact its current common stockholders.
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.
Offerings of debt, which would be senior to Mid Penn’s common stock upon liquidation, and/or preferred equity securities which may
be senior to our common stock for purposes of dividend distributions or upon liquidation, may adversely affect the market price of our
common stock
Mid Penn may attempt to increase its capital resources or, if its or the Bank’s capital ratios fall below the required minimums, Mid
Penn or the Bank could be required to raise additional capital by making additional offerings of debt or preferred equity securities,
including medium-term notes, senior or subordinated notes and preferred stock. If a future liquidation of Mid Penn occurs, holders of
debt securities and shares of preferred stock and lenders with respect to other borrowings are likely to receive distributions of available
assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of existing shareholders or reduce
the market price of our common stock, or both. Holders of Mid Penn common stock are not entitled to preemptive rights or other
protections against dilution.
Also, Mid Penn’s board of directors is authorized to issue one or more classes or series of preferred stock from time to time without
any action on the part of the shareholders. The board of directors also has the power, without shareholder approval, to set the terms of
any such classes or series of preferred stock that may be issued, including voting rights, dividend rights, and preferences over common
stock with respect to dividends or upon our dissolution, winding up and liquidation and other terms. If Mid Penn issues preferred stock
in the future that has a preference over its common stock with respect to the payment of dividends or upon our liquidation, dissolution
or winding up, or if preferred stock is issued with voting rights that dilute the voting power of common stock, the rights of holders of
Mid Penn’s common stock or the market price of the common stock could be adversely affected.
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MID PENN BANCORP, INC.
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, Mid Penn has various anti-takeover measures in place under its
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 and may prevent its shareholders from taking part in a transaction in which they could realize a premium over the current market
price of its common stock.
Mid Penn’s common stock is not insured by any governmental entity
Although Mid Penn and the Bank are regulated by governmental agencies, Mid Penn common stock is not a deposit account or other
obligation of the Bank or any other bank and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, any
other governmental entity or by any other public or private entity. Investment in Mid Penn common stock is inherently risky for the
reasons described elsewhere in this “Risk Factors” section, in this document, and our other filings with the SEC. Mid Penn common
stock is also subject to the same market forces that affect the price of common stock in any other publicly traded company. As a result,
investors who acquire Mid Penn common stock may lose some or all of their investment.
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 primary
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 and 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 thirty-eight full service locations and one loan production office at December 31, 2018.
Twelve retail banking locations are located in Dauphin County, five in Schuylkill County, four in Berks County, three in
Westmoreland County, three in Cumberland County, three in Lancaster County, two in Fayette County, two in Chester County, and
one location in each of Northumberland, Luzerne, Montgomery, and Bucks Counties. As of December 31, 2018, retail banking
facilities at twenty-four locations were owned, while fourteen branch facilities and the loan production office were leased. 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 10
“Bank Premises and Equipment” in the Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
There has been no change to the information disclosed in Item 1, Part II of Mid Penn’s Quarterly Report or Form 10-Q for the period
ended June 30, 2018, which is incorporated by reference. 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
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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.
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 8, 2019, there were approximately 2,334 shareholders of record of Mid Penn’s common stock.
Dividends: Cash dividends of $0.70 and $0.45 were paid and declared, respectively, in 2018. In 2017, cash dividends of $0.62 were
paid, while cash dividends of $0.77 were declared. A special cash dividend of $0.10 was declared on November 21, 2017 and paid on
January 5, 2018. Cash dividends of $0.58 and $0.68 were paid and declared, respectively, in 2016. 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 14,
2019, at the West Shore Country Club, 100 Brentwater Road, Camp Hill, PA 17011.
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: www.midpennbank.com.
22
MID PENN BANCORP, INC.
Stock Performance Graph
The following five-year performance graph compares the cumulative total shareholder return (including reinvestment of dividends) on
Mid Penn Bank’s common stock to the Russell 3000 Index and Mid Penn’s Peer Group, which includes Mid-Atlantic commercial
banks with assets between $1 billion and $2 billion as of September 30, 2018. The stock performance graph assumes that $100 was
invested on December 31, 2013, and the cumulative return is measured as of each subsequent fiscal year end.
Total Return Performance
Mid Penn Bancorp, Inc.
Russell 3000 Index
Peer Group
300
250
200
150
100
l
e
u
a
V
x
e
d
n
I
50
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
12/31/18
Index
Mid Penn Bancorp, Inc.
Russell 3000
Mid-Atlantic Custom Peer Group*
Period Ending
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
100.00 111.63 118.78 182.87 260.95
100.00 112.56 113.10 127.50 154.44
100.00 106.27 114.85 145.90 174.30
12/31/18
184.14
146.34
162.33
* Peer Group consists of Mid-Atlantic commercial banks with assets between $1 billion and $2 billion as of September 30,
2018.
Source: S&P Global Market Intelligence
© 2019
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.
23
MID PENN BANCORP, INC.
ITEM 6. SELECTED FINANCIAL DATA
(Dollars in thousands, except per share data)
INCOME:
2018
2017
2016
2015
2014
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 B Preferred Stock Dividends and Redemption Premium
Series C Preferred Stock Dividends
Series D Preferred Stock Dividends
Net Income Available to Common Shareholders
$
68,654 $
12,720
55,934
500
7,462
50,171
12,725
2,129
10,596
—
—
102
10,494
43,892 $
6,304
37,588
325
5,693
31,367
11,589
4,500
7,089
—
—
—
7,089
40,212 $
5,367
34,845
1,870
5,924
28,818
10,081
2,277
7,804
—
—
—
7,804
36,490 $
4,607
31,883
1,065
4,113
26,759
8,172
1,644
6,528
473
17
—
6,038
30,627
4,427
26,200
1,617
3,284
20,704
7,163
1,462
5,701
350
—
—
5,351
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
FOR THE YEAR (BASIC):
AVERAGE SHARES OUTSTANDING
FOR THE YEAR (FULLY DILUTED):
AT YEAR-END:
Available-For-Sale Investment Securities
Held-to-Maturity 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
$
1.48 $
1.48
0.45
0.70
26.38
18.10
1.67 $
1.67
0.77
0.62
17.85
16.82
1.85 $
1.85
0.68
0.58
16.65
15.59
1.47 $
1.47
0.44
0.44
16.58
15.49
1.53
1.53
0.45
0.45
15.48
15.13
7,071,091 4,236,616 4,229,284 4,106,548 3,495,705
7,071,091 4,236,616 4,229,284 4,106,548 3,495,705
—
—
8,397
7,606
93,465 $ 133,625 $ 135,721 $ 141,634
$ 111,923 $
168,370 101,356
—
1,624,067 910,404 813,924 736,513 571,533
6,716
2,077,981 1,170,354 1,032,599 931,638 755,657
1,726,026 1,023,568 935,373 777,043 637,922
578
52,961
—
59,130
43,100
48,024
27,082
223,209
34,611
12,352
17,338
75,703
31,596
40,305
7,414
70,068
-
13,581
7,414
70,467
6,168
7,183
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
0.63 %
5.98 %
47.30 %
0.64 %
9.48 %
37.18 %
0.78 %
10.71 %
31.35 %
0.74 %
9.16 %
29.93 %
0.78 %
9.95 %
29.41 %
0.52 %
10.54 %
0.84 %
6.78 %
0.88 %
7.28 %
0.83 %
8.06 %
1.18 %
7.80 %
(a) Tangible Book Value Per Common Share is a non-GAAP measure as it excludes goodwill and core deposits and other intangibles, net; see Reconciliation of
Non-GAAP Measure below
24
MID PENN BANCORP, INC.
RECONCILIATION OF NON-GAAP MEASURE:
This Annual Report contains financial information determined by methods other than in accordance with U.S. Generally Accepted
Accounting Principles ("GAAP"). For tangible book value, the most directly comparable financial measure calculated in accordance
with GAAP is our book value. Management of Mid Penn believes that this measure is important to many investors in the marketplace
who are interested in changes from period to period in book value per common share exclusive of changes in intangible
assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing our tangible book
value. Income tax effects of non-GAAP adjustments are calculated using the applicable statutory tax rate for the jurisdictions in
which the charges (benefits) are incurred, while taking into consideration any valuation allowances or non-deductible portions of the
non-GAAP adjustments. This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for
financial measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of
Mid Penn’s results and financial condition as reported under GAAP, nor is it necessarily comparable to non-GAAP performance
measures that may be presented by other companies. Management believes that this non-GAAP supplemental information will be
helpful in understanding Mid Penn’s ongoing operating results. This supplemental presentation should not be construed as an
inference that Mid Penn’s future results will be unaffected by similar adjustments to be determined in accordance with GAAP.
(Dollars in thousands, except per share data)
2018
2017
December 31,
2016
2015
2014
Shareholder's Equity
Less: Preferred Stock
Less: Goodwill
Less: Core Deposit and Other Intangibles
Tangible Equity
$
$
223,209 $
—
62,840
7,221
153,148 $
75,703 $
—
3,918
434
71,351 $
70,467
—
3,918
539
66,010
$
$
70,068
—
3,918
665
65,485
$
$
59,130
5,000
1,016
187
52,927
Common Shares Issued and Outstanding
8,459,918 4,242,216 4,233,297 4,226,717 3,497,829
Tangible Book Value per Common Share
$
18.10 $
16.82 $
15.59 $
15.49 $
15.13
.
25
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 or the Bank 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, the Bank, and their markets and 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;
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;
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 bank regulatory agencies;
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 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 expand our franchise, including acquiring institutions or establishing new offices at
advantageous prices;
our ability to successfully integrate any banks, companies, offices, assets, labilities, 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, or 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 regulatory examination and supervision processes;
the failure of assumptions underlying the establishment of reserves for loan and lease losses, the assessment of potential
impairment of investment securities, and estimations of values of collateral and various financial assets and liabilities;
our ability to maintain compliance with the listing 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;
disruptions due to flooding, severe weather, or other natural disasters or Acts of God; and
acts of war or terrorism.
26
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
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 2018, compared to 2017 and 2016, in general, have been materially
impacted by the acquisition of The Scottdale Bank and Trust Company, which closed on January 8, 2018, and the acquisition of First
Priority Financial Corp., which closed on July 31, 2018. For comparative purposes, some 2017 and 2016 balances have been
reclassified to conform to the 2018 presentation. Such reclassifications had no impact on net income available to common
shareholders or shareholders’ equity.
Mid Penn is not aware of any current trends, events, uncertainties or any current recommendations by the regulatory authorities which,
if they were to be implemented, would have a material effect on Mid Penn’s or the Bank’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 used in applying these principles 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 have been 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 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 adjusted for qualitative factors, 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 of securities, management must assess whether there are any declines where the fair
value is below the carrying value of any investments such that the decline should be considered other than temporary or otherwise
require an adjustment in carrying value and recognition of a loss in the consolidated statement of income.
Certain intangible assets generated in connection with acquisitions are periodically assessed for impairment. Goodwill is tested
annually for impairment, and 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. Similarly, the amortized
basis of the core deposit intangible asset and trade name intangible are periodically assessed for impairment. There are inherent
uncertainties related to these factors and Mid Penn’s judgment in applying them to the analysis of core deposit intangible, trade name
intangible, and goodwill impairment. Future changes in economic and operating conditions could result in goodwill or core deposit
intangible or trade name intangible impairment in subsequent periods.
Valuations of assets acquired and liabilities assumed in business combinations are measured at fair value as of the acquisition date. In
many cases, determining the fair value of the assets acquired and liabilities assumed requires Mid Penn to estimate 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.
27
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Financial Summary
2018 versus 2017
As noted above, the comparability of the results of operations for the years ended 2018 and 2017, in general, have been materially
impacted by the acquisitions of Scottdale, which closed on January 8, 2018, and First Priority, which closed on July 31, 2018.
Mid Penn’s net income available to common shareholders (“earnings”) was $10,494,000 or $1.48 per common share basic and diluted
for the year ended December 31,2018, compared to earnings of $7,089,000 or $1.67 per common share basic and diluted for the year
ended December 31, 2017. The results for the year ended December 31, 2018 included merger and acquisition expenses resulting
from Mid Penn’s acquisitions of First Priority and Scottdale. Earnings for the year ended December 31, 2017 included certain merger-
related costs for the Scottdale acquisition, and were also impacted by a one-time non-cash reduction in the value of Mid Penn’s
deferred tax asset, which resulted in a charge of $1,169,000 included in the provision for income taxes. This income tax adjustment
was a result of the TCJA, which lowered Mid Penn’s maximum corporate tax rate from 34 percent in 2017 and prior periods to 21
percent in 2018 and future periods.
Total assets of Mid Penn grew $907,627,000 or 78 percent, in 2018 to close the year at $2,077,981,000, compared to total assets of
$1,170,354,000 at the end of 2017. Asset growth during the year ended December 31, 2018 includes the acquired loans, investments,
cash, facilities, goodwill and core deposit intangibles recorded from the legal closing of the Scottdale and First Priority transactions, as
well as organic growth from our legacy markets.
Increases in short-term debt, long-term debt and subordinated debt during the year ended December 31, 2018 were a result of both (i)
$50 million of shorter-term FHLB fixed-rate borrowings obtained in late November 2018, and (ii) $15.5 million of combined long-
term FHLB borrowings and subordinated debt assumed in the First Priority acquisition. Scottdale had no borrowings that were
assumed by Mid Penn in that acquisition.
Mid Penn’s return on average shareholders’ equity (“ROE”), a widely recognized performance indicator in the financial industry, was
5.98% in 2018 and 9.48% in 2017. The reduction in this indicator was significantly impacted by the material costs incurred in 2018
with the two acquisitions, and from the impact of additional common equity issued in conjunction with both transactions. Return on
average assets (“ROA”), another performance indicator, was 0.63% in 2018 and 0.64% in 2017.
Net interest margin was 3.67% in 2018 versus 3.68% in 2017. Net interest income on a tax equivalent basis increased to $56,824,000
in 2018 from $38,597,000 in 2017. Increases in yields on earning assets and increases in noninterest-bearing deposits during 2018
were offset by the impact of both (i) the rising cost of both deposit and borrowed funds as a result of market pricing in response to
recent Federal Open Market Committee (“FOMC”) rate increases, and (ii) the increase in wholesale funding and related interest costs,
including the assumption of some higher-cost brokered time deposits, FHLB borrowings, and subordinated debt in the First Priority
transaction. Further discussion of net interest margin can be found in the Net Interest Income section below.
Mid Penn’s allowance for loan and lease losses at December 31, 2018 was $8,397,000 or 0.52% of total loans (less unearned
discount), as compared to $7,606,000 or 0.84% at December 31, 2017. During 2018, Mid Penn had net loan recoveries of $291,000
compared to net recoveries of $98,000 during the same period of 2017. The primary reason for the favorable net recovery amount
during 2018 was Mid Penn’s workout and recovery of $777,000 of principal from a commercial real estate relationship that was
subject to a restructuring and partial charge-off in 2009. Mid Penn’s net recovery position for the year ended December 31, 2017 was
primarily attributed to the recovery of $318,000 of principal from the successful workout of a different commercial real estate
relationship that was partially charged-off in 2010. Further discussion of these items can be found in the Provision for Loan and Lease
Losses section below.
Total nonperforming assets increased $975,000 from $11,308,000 at the end of 2017 to $12,283,000 at the end of 2018. Further
discussion of the components of nonperforming assets can be found in the Credit Quality, Credit Risk, and Allowance for Loan and
Lease Losses section below.
Mid Penn’s regulatory capital measures of Tier 1 Capital (to risk weighted assets) of $155,662,000 or 10.0%, and Total Capital (to
risk weighted assets) of $191,300,000 or 12.3%, at December 31, 2018, are above the regulatory “well capitalized” requirements. Tier
1 Capital consists primarily of Mid Penn’s shareholders' equity less the value of goodwill and other intangible assets, and excluding
the impact of the accumulated other comprehensive income/loss component. Total Capital includes the Tier 1 Capital, as well as Mid
Penn’s qualifying subordinated debt and the allowance for loan and lease losses, within permitted regulatory limits. Risk-weighted
assets are determined by assigning various levels of risk, in accordance with regulatory risk-weighting definitions, to different
categories of assets and off-balance sheet activities.
28
MID PENN BANCORP, INC.
2017 versus 2016
Management’s Discussion and Analysis
Mid Penn’s net income available to common shareholders (“earnings”) of $7,089,000 for the year 2017 reflects a decrease of
$715,000 or 9 percent, as compared to earnings of $7,804,000 for the year 2016. This represents earnings in 2017 of $1.67 per
common share, basic and diluted, compared to $1.85 per common share basic and diluted in 2016. Earnings for the year 2017 were
negatively impacted by a non-cash reduction in the value of Mid Penn’s deferred tax asset under the TCJA, which resulted in a charge
of $1,169,000 included in the provision for income taxes.
Total assets of Mid Penn grew $137,755,000 or 13 percent, in 2017 to close the year at $1,170,354,000 compared to total assets of
$1,032,599,000 at the end of 2016. Mid Penn realized favorable loan growth, primarily in commercial relationships, of $96,480,000
or over 11 percent since December 31, 2016. This asset and loan growth was principally funded by an increase in deposits of
$88,195,000 or over 9 percent since year-end 2016, with $40,903,000 of the deposit growth being in noninterest-bearing accounts.
Mid Penn was in a short-term borrowing position of $34,611,000 at December 31, 2017, while it was in a Federal Funds Sold position
of $30,477,000 at December 31, 2016.
During the year ended December 31, 2017, long-term debt decreased by $1,229,000 or 9 percent, to $12,352,000 by the end of the
year as previous higher-cost borrowings matured and Mid Penn was able to replace them with lower-cost funding sources.
Mid Penn’s ROE was 9.48% in 2017 and 10.71% in 2016. ROA was 0.64% in 2017 and 0.78% in 2016.
Net interest margin was 3.68% in 2017 versus 3.82% in 2016. Net interest income on a tax equivalent basis increased to $38,597,000
in 2017 from $36,470,000 in 2016. The decrease in the net interest margin for 2017 compared to 2016 was primarily the result of a
lower realized yield on the relatively shorter-term and lower-risk securities in the held-to-maturity investment portfolio established in
2017. 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. 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 increased $5,549,000 from $5,759,000 at the end of 2016 to $11,308,000 at the end of 2017. The increase
in nonperforming assets is primarily due to two loan relationships totaling $7.3 million, with a combined $136,000 specific allowance
allocation, being placed on nonaccrual status during the latter six months of 2017. Further discussion of these components can be
found in the Credit Quality, Credit Risk, and Allowance for Loan and Lease Losses section below.
Mid Penn had net loan recoveries of $98,000 for the twelve months ended December 31, 2017, compared to net loan charge-offs of
$855,000 during the same period of 2016. The net recoveries were a result of Mid Penn’s successful collection and workout efforts on
previously impaired loan relationships. Gross charge-offs decreased $610,000 from $1,107,000 in 2016 to $497,000 in 2017. Mid
Penn decreased the provision for loan and lease losses from $1,870,000 in 2016 to $325,000 in 2017. The significant net principal
recoveries during the twelve months ended December 31, 2017 added $98,000 to the allowance for loan loss balance. Also, as a result
of favorable workout activities of certain impaired credits, the amount of required specific allocations in the allowance was reduced as
of December 31, 2017 as compared to the prior year end. Further discussion of these issues can be found in the Provision for Loan
and Lease Losses section below.
Mid Penn’s regulatory capital measures of Tier 1 Capital (to risk weighted assets) of $74,417,000 or 8.4%, and Total Capital (to risk
weighted assets) of $99,466,000 or 11.3%, at December 31, 2017, are above the regulatory “well capitalized” requirements. Tier 1
Capital consists primarily of Mid Penn’s shareholders' equity net of the accumulated other comprehensive income/loss component.
Total Capital includes the Tier 1 Capital, as well as Mid Penn’s qualifying subordinated debt and the allowance for loan and lease
losses, within permitted regulatory limits. Risk-weighted assets are determined by assigning various levels of risk to different
categories of assets and off-balance sheet activities.
29
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:
December 31, 2018
Income and Rates on a Taxable Equivalent Basis for Years Ended
December 31, 2017
December 31, 2016
Average
Average
Balance Interest Rates
Average
Average
Balance Interest Rates
Average
Average
Balance Interest Rates
$
4,983 $
75
1.51 % $
2,621 $
18
0.69 % $
2,559 $
12
0.47 %
Taxable
Tax-Exempt
Total Securities
165,422 3,838
102,656 2,940 (a)
268,078 6,778
2.32 % 121,050 2,376
2.86 %
2.53 % 173,969 4,063
52,919 1,687 (a)
1.96 %
3.19 %
2.34 % 159,728 4,645
79,277 1,515
80,451 3,130 (a)
1.91 %
3.89 %
2.91 %
Federal Funds Sold
Loans and Leases, Net
Restricted Investment in
Bank Stocks
Total Earning Assets
25,745
451
1,243,987 61,965 (b)
1.75 %
11,220
4.98 % 857,259 40,591 (b)
115
1.02 %
16,848
4.73 % 772,877 36,963 (b)
82
0.49 %
4.78 %
3,567
275
1,546,360 69,544
7.71 %
114
4.50 % 1,048,024 44,901
2,955
3.86 %
135
4.28 % 954,763 41,837
2,751
4.91 %
4.38 %
Cash and Due from Banks
Other Assets
Total Assets
29,408
89,953
$ 1,665,721
20,323
35,092
$ 1,103,439
12,791
33,898
$ 1,001,452
LIABILITIES &
SHAREHOLDERS' EQUITY:
Interest-bearing Demand $ 371,873 2,447
309,705 2,990
Money Market
191,686
Savings
540
324,853 4,907
Time
Total Interest-bearing
Deposits
1,198,117 10,884
0.66 % $ 335,859 1,410
0.97 % 247,337 1,448
0.28 %
35
1.51 % 197,154 2,570
62,500
0.42 % $ 293,745 1,009
0.59 % 235,561 1,315
0.06 %
34
1.30 % 172,657 2,156
59,615
0.34 %
0.56 %
0.06 %
1.25 %
0.91 % 842,850 5,463
0.65 % 761,578 4,514
0.59 %
Short-term Borrowings
Long-term Debt
Subordinated Debt
Total Interest-bearing
Liabilities
207
8,833
17,292
462
21,324 1,167
2.34 %
2.67 %
5.47 %
7,961
13,321
7,746
111
318
412
1.39 %
2.39 %
5.32 %
2,370
28,474
7,431
15
442
396
0.63 %
1.55 %
5.33 %
1,245,566 12,720
1.02 % 871,878 6,304
0.72 % 799,853 5,367
0.67 %
Noninterest-bearing Demand 232,562
12,030
Other Liabilities
175,563
Shareholders' Equity
Total Liabilities &
Shareholders' Equity
$ 1,665,721
146,683
10,094
74,784
120,244
8,462
72,893
$ 1,103,439
$ 1,001,452
Net Interest Income (taxable
equivalent basis)
Taxable Equivalent Adjustment
Net Interest Income
Total Yield on Earning Assets
Rate on Supporting Liabilities
Average Interest Spread
Net Interest Margin
$ 56,824
(890 )
$ 55,934
$ 38,597
(1,009 )
$ 37,588
$ 36,470
(1,625 )
$ 34,845
4.50 %
1.02 %
3.48 %
3.67 %
4.28 %
0.72 %
3.56 %
3.68 %
4.38 %
0.67 %
3.71 %
3.82 %
(a)
(b)
Includes tax equivalent adjustments (calculated using statutory rates of 21% for 2018 and 34% for 2017 and 2016) of $617,000, $574,000, and $1,064,000
for the years 2018, 2017, and 2016, respectively, resulting from tax-free municipal securities in the investment portfolio.
Includes tax equivalent adjustments (calculated using statutory rates of 21% for 2018 and 34% for 2017 and 2016) of $273,000, $435,000, and $561,000 for
the years 2018, 2017, and 2016, respectively, resulting from tax-free municipal loans in the commercial loan portfolio.
30
MID PENN BANCORP, INC.
Net Interest Income
Management’s Discussion and Analysis
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.
Interest and average rates in Table 1 above are presented on a fully taxable-equivalent basis. Tax-equivalent adjustments were
calculated using statutory corporate tax rates of 21 percent for the year ended December 31, 2018, and 34 percent for the years ended
December 31, 2017 and 2016. For purposes of calculating loan yields, average loan balances include nonaccrual loans. Loan fees of
$1,038,000, $921,000 and $1,097,000 are included with loan interest income in Table 1 above for the years ended December 31, 2018,
2017, and 2016, 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 Securities
2018 Compared to 2017
Increase (Decrease)
Due to Change In:
2017 Compared to 2016
Increase (Decrease)
Due to Change In:
Volume Rate
Net
Volume Rate
Net
$
16 $
41 $
57 $
1 $
5 $
6
871
1,586
2,457
591
(333 )
258
1,462
1,253
2,715
798
(1,071 )
(273 )
63
(372 )
(309 )
861
(1,443 )
(582 )
Federal Funds Sold
Loans and Leases, Net
Restricted Investment Bank Stocks
Total Interest Income
149
18,311
24
20,957
187
336
3,063 21,374
161
3,686 24,643
137
(27 )
4,036
10
3,747
60
(408 )
(31 )
(683 )
33
3,628
(21 )
3,064
INTEREST EXPENSE:
Interest Bearing Deposits:
Interest Bearing Demand
Money Market
Savings
Time
Total Interest Bearing Deposits
Short-term Borrowings
Long-term Debt
Subordinated Debt
Total Interest Expense
151
365
72
1,665
2,253
12
95
722
3,082
886
1,177
433
672
3,168
84
49
33
3,334
1,037
1,542
505
2,337
5,421
96
144
755
6,416
145
66
—
306
517
35
(235 )
17
334
256
67
1
108
432
61
111
(1 )
603
401
133
1
414
949
96
(124 )
16
937
NET INTEREST INCOME
$ 17,875 $
352 $ 18,227 $
3,413 $
(1,286 ) $
2,127
The effect of changing volume and rate, which cannot be segregated, has been allocated entirely to the rate column. Tax-exempt
income is shown on a tax equivalent basis using statutory corporate tax rates of 21 percent for the year ended December 31, 2018, and
34 percent for the years ended December 31, 2017 and 2016.
During 2018, taxable equivalent net interest income increased $18,227,000 or 47 percent compared to 2017. During 2017, taxable
equivalent net interest income increased $2,127,000 or 6 percent compared to 2016. The average balances, effective interest
differential, and interest yields for the years ended December 31, 2018, 2017, and 2016 and the components of net interest income are
presented in Table 1. Table 2 provides a comparative presentation of the changes in net interest income for 2018 compared to 2017,
and 2017 compared to 2016, by reflecting changes in interest income and interest expense caused by the volume and rate components
of interest earning assets and interest bearing liabilities.
31
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
The yield on earning assets increased to 4.50% in 2018 from 4.28% in 2017. The yield on earning assets for 2016 was 4.38%. The
increase in the yield on earning assets in 2018 was largely due to increases in both rate and volume of loan and investments. The
average rate on loans increased to 4.98% in 2018 from 4.73% in 2017. The average rates on investment securities also increased from
2017 to 2018 as a decrease in the yield on tax-exempt investments from 3.19% to 2.86% was more than offset by the impact of an
increase in the yield on taxable investments from 1.96% to 2.32%. The increase in investment yields in 2018 was affected by both
yields on purchases, and from yields on securities added to the investment portfolio as a result of the two 2018 acquisitions.
Interest expense increased by $6,416,000 or 102 percent in 2018, as compared to 2017. For the year ending December 31, 2017,
interest expense increased $937,000 or 17 percent, compared to 2016. The cost of interest bearing liabilities increased to 1.02% in
2018 from 0.72% in 2017. The cost of interest bearing liabilities for 2016 was 0.67%. The increase in the cost of interest bearing
liabilities was due to both (i) the rising cost of both deposit and borrowed funds as a result of market pricing in response to recent
FOMC rate increases, and (ii) the increase in wholesale funding, including the assumption of some higher-cost brokered time deposits,
FHLB borrowings, and subordinated debt in the First Priority transaction.
Net interest margin, on a tax equivalent basis, was 3.67% in 2018 compared to 3.68% in 2017 and 3.82% in 2016. Increases in yields
on earning assets and increases in noninterest-bearing deposits were offset by the higher cost of interest bearing liabilities when
comparing 2018 to 2017. The decrease in the net interest margin for 2017 compared to 2016 was primarily the result of a lower
realized yield on the investment portfolio, including the impact of purchases of lower-risk and lower-yielding held-to-maturity
portfolio securities in 2017.
Further changes to the future mix of the loan, investment, and deposit products in the Bank's portfolios, and the volume of variable
rate and fixed rate instruments based upon new loan originations and investment purchases, may significantly change the net interest
margin and the yields on earning-assets and the costs of interest-bearing liabilities. In addition, 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 portfolio credit risk and potential loss
assessment process, which took into consideration the risk characteristics of the loan and lease portfolio, shifting collateral values, and
the assessment of other relevant qualitative factors from December 31, 2017 to December 31, 2018. For the year ended December 31,
2018, the provision for loan and lease losses was $500,000 compared to $325,000 for the year ended December 31, 2017. The
increase in loan loss provision expense year-over-year was necessary to support the allowance for loan loss given the organic loan
growth within Mid Penn’s loan portfolio since December 31, 2017, though the required provision for both years was favorably
impacted by the net recoveries for the respective year. The allowance for loan and lease losses as a percentage of total loans was
0.52% at December 31, 2018, compared to 0.84% at December 31, 2017 and 0.88% at December 31, 2016.
For the year ended December 31, 2018, Mid Penn favorably had net recoveries of $291,000 compared to net recoveries of $98,000
during the same period of 2017. Loans charged off during 2018 were comprised of two commercial and industrial loans for $142,000,
four commercial real estate loans among two relationships totaling $64,000 and one commercial real estate – construction loan of
$40,000. In addition, there were charge-offs for three home equity loans for $185,000, three residential real estate loans totaling
$60,000, and four consumer loans to unrelated borrowers totaling $14,000. The remaining $23,000 was comprised of deposit account
charge-offs. These charge-offs were more than offset by total recoveries of $819,000 realized during 2017, primarily comprised of
one commercial real estate loan totaling $777,000.
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 or other relevant qualitative factors differ 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.
32
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)
2018
Years ended December 31,
2016
2015
2017
2014
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
$
7,606 $
7,183 $
6,168 $
6,716 $
6,317
104
142
60
222
528
808
1
-
10
819
322
25
102
48
497
216
820
4
67
1,107
1,569
130
35
50
1,784
1,057
62
133
76
1,328
553
26
4
12
595
211
4
26
11
252
75
12
44
40
171
13
13
20
64
110
Net (recoveries) charge-offs
Provision for loan and lease losses
Balance, end of year
(291 )
500
8,397 $
(98 )
325
7,606 $
855
1,870
7,183 $
1,613
1,065
6,168 $
1,218
1,617
6,716
$
2018
Years ended December 31,
2016
2015
2017
2014
Ratio of net (recoveries) charge-offs during the year to
average loans and leases outstanding during the year, net of
unearned discount
-0.02 %
-0.01 %
0.11 %
0.23 %
0.22 %
Allowance for loan and lease losses as a percentage of total
loans and leases at December 31
0.52 %
0.84 %
0.88 %
0.83 %
1.18 %
Allowance for loan and lease losses as a percentage of
non-performing assets at December 31
68.37 %
67.26 %
124.73 %
101.75 %
58.36 %
33
MID PENN BANCORP, INC.
TABLE 4: NONINTEREST INCOME
(Dollars in thousands)
Management’s Discussion and Analysis
Years ended December 31,
2017
2016
2018
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
$
$
1,155 $
933
137
286
751
1,253
347
561
2,039
7,462 $
845 $
721
42
262
872
937
335
800
893
5,707 $
481
684
1,046
264
922
844
317
470
918
5,946
Noninterest Income
2018 versus 2017
For the year ended December 31, 2018, noninterest income totaled $7,462,000, an increase of $1,755,000 or 31 percent, compared to
noninterest income of $5,707,000 for the year ended December 31, 2017. Several components of noninterest income were affected by
higher account and transaction volume, when comparing 2018 to the prior year, due to both the First Priority and Scottdale
acquisitions that closed during 2018.
Income from fiduciary activities was $1,155,000 for the year ended December 31, 2018, an increase of $310,000 or 37 percent
compared to fiduciary income of $845,000 for the year ended December 31, 2017. These additional revenues were attributed to
continued growth in trust assets under management, and increased sales of retail investment products, as a result of successful
business development efforts by Mid Penn’s trust and wealth management team.
Service charges on deposits were $933,000 for the year ended December 31, 2018, an increase of $212,000 or 29 percent, compared to
service charges of $721,000 for the year ended December 31, 2017. This increase was driven by an increase in collected charges on a
higher volume of transactional deposit accounts, including deposit accounts assumed in both the Scottdale and First Priority
acquisitions.
Net gains on sales of securities were $137,000 for the year ended December 31, 2018, an increase of $95,000 compared to net gains
on sales of securities of $42,000 for the year ended December 31, 2017. Some investment securities acquired from Scottdale and First
Priority were sold to ensure that the overall portfolio, after the acquisitions, was in alignment with Mid Penn’s investment
management objectives.
ATM debit card interchange income was $1,253,000 for the year ended December 31, 2018, an increase of $316,000 or over 33
percent compared to interchange income of $937,000 for the year ended December 31, 2017. The increase in Mid Penn Bank ATM
and debit card activity resulted from both increasing card-based transaction volume, as well as new demand deposit accounts,
including those acquired in the Scottdale and First Priority transactions.
Other income was $2,039,000 for the year ended December 31, 2018, an increase of $1,146,000 compared to other income of
$893,000 for the year ended December 31, 2017. The increase in other income was primarily driven by $737,000 of settlement gains
recognized during 2018 as a result of certain lump sum payouts reducing pension liabilities to participants of the Scottdale defined
benefit retirement, with such pension liabilities being assumed as a result of the Scottdale acquisition in 2018. Also, increases in letter
of credit renewal fees and other service fees and commissions also contributed to the year-over-year growth in other income.
Mortgage banking income was $751,000 for the year ended December 31, 2018, a decrease of $121,000 or 14 percent compared to the
year ended December 31, 2017. Higher longer-term mortgage interest rates for much of 2018 resulted in a lower volume of mortgage
refinance activity during 2018 when compared to 2017.
Net gains on sales of SBA loans was $561,000 for the year ended December 31, 2018, a decrease of $239,000 when compared to the
same period in 2017. Increased interest rates on SBA loans, and tighter market pricing on secondary market sales yields, resulted in
lower levels of loan sales and related gains in 2018 versus the prior year.
34
MID PENN BANCORP, INC.
2017 versus 2016
Management’s Discussion and Analysis
During the twelve months ended December 31, 2017, noninterest income (excluding net securities gains of $42,000) increased
$765,000 or 16 percent, versus the twelve months ended December 31, 2016 (excluding net security gains of $1,046,000). Items of
particular note are detailed below.
Mid Penn increased its origination and sales activities related to SBA loans, resulting in gains of $800,000 from related loan sales
during the year ended December 31, 2017, an increase of $330,000 or 70 percent compared to SBA loan sales gains of $470,000 for
the twelve months ended December 31, 2016. More qualified small business borrowers continue to take advantage of Mid Penn’s
Preferred Lender status with the SBA.
Income from fiduciary activities was $845,000 for the twelve months ended December 31, 2017, an increase of $364,000 or 76
percent compared to fiduciary income of $481,000 for the year ended December 31, 2016. These additional revenues were attributed
to trust assets under management significantly increasing over the past twelve months as a result of successful business development
efforts by Mid Penn’s expanded team of trust and retail investment officers.
ATM debit card interchange income was $937,000 for the twelve months ended December 31, 2017, an increase of $93,000 or 11
percent compared to interchange income of $844,000 for the same period in 2016. The additional income is a result of an increased
volume of transactional checking accounts and an increase in Mid Penn Bank ATM debit card transactions across our market area.
Net gains on sales of securities were $42,000 for the twelve months ended December 31, 2017, a decrease of $1,004,000 or 96 percent
compared to net gains on sales of securities of $1,046,000 during the year ended December 31, 2016. During 2016, Mid Penn took
advantage of favorable fixed income investment market conditions and increased fair values on several 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.
Other noninterest income decreased $25,000 for the twelve months ended December 31, 2017 compared to the twelve months ended
December 31, 2016. 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.
TABLE 5: NONINTEREST EXPENSE
(Dollars in thousands)
Years ended December 31,
2017
2016
2018
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 and utilization
Telephone expense
Loss on sale/write-down of foreclosed assets
Intangible amortization
Merger and acquisition expense
ATM debit card processing 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
23,862 $
4,019
2,186
225
772
1,117
1,025
3,036
621
4
1,224
4,790
631
792
271
945
573
278
275
159
3,366
50,171 $
16,929 $
2,512
1,536
451
792
802
516
2,051
497
88
104
619
448
465
148
544
420
216
79
115
2,049
31,381 $
15,564
2,064
1,689
648
688
711
500
1,908
548
217
126
—
440
340
178
428
341
178
248
85
1,939
28,840
$
$
35
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Noninterest Expense
2018 versus 2017
Noninterest expense for the year ended December 31, 2018 totaled $50,171,000, an increase of $18,790,000 or 60 percent compared
to noninterest expenses of $31,381,000 for the twelve months ended December 31, 2017. The primary source of the increase in
noninterest expense were the merger expenses and other costs supporting Mid Penn’s acquisition of both First Priority and Scottdale,
and from the opening of new retail branches and new corporate administrative offices in 2018.
For the year ended December 31, 2018, Mid Penn incurred merger and acquisition expenses totaling $4,790,000 in connection with
the First Priority and Scottdale acquisitions, with such expenses including investment banking fees, merger-related legal expenses,
professional fees related to the preparation and filing of merger documents, severance costs, and information technology
conversion/termination costs. Merger and acquisition expenses of $619,000 were recorded for the year ended December 31, 2017, and
consisted primarily of investment banking fees, legal fees, and professional fees related to the preparation and filing of merger
documents, related to the Scottdale acquisition.
Salaries and employee benefits expense increased $6,933,000 or 41 percent during the twelve months ended December 31, 2018
versus the same period in 2017, with the increase attributable to (i) the retail staff additions at the five retail locations added through
the Scottdale acquisition and the opening of the Halifax, PA branch, all effective January 8, 2018, (ii) the retail staff additions at the
eight retail locations and loan production office added through the First Priority acquisition, effective July 31, 2018, (iii) the retail staff
additions as a result of the opening of two additional retail offices in upper Dauphin County, Pennsylvania (Halifax and Pillow), and
(iv) the addition of commercial lenders, credit administration personnel, and other staff additions in Mid Penn’s legacy markets, in
alignment with Mid Penn’s core banking growth objectives.
Occupancy expenses increased $1,507,000 or 60 percent during the year ended December 31, 2018 compared to the same period in
2017. Similarly, equipment expense increased $650,000 or 42 percent during the year ended December 31, 2018 compared to the year
ended December 31, 2017. These increases were driven by (i) the facility operating costs and increased depreciation expense for
building, furniture, and equipment associated with the addition of the above-noted acquired and new branch offices, and (ii)
depreciation and occupancy costs related to Mid Penn’s addition of larger corporate administrative office facilities to increase the
effectiveness and efficiency of administrative and operations support services for the growing franchise.
FDIC assessment expense was $772,000 for the year ended December 31, 2018, a decrease of $20,000 or 3 percent compared to
$792,000 for the year ended December 31, 2017. As a result of several factors, including the 2018 acquisitions, the favorable asset
quality of both legacy portfolio loan assets and acquired portfolios, and successful workouts of non-performing assets, Mid Penn had
more favorable capital and asset quality ratios, resulting in a lower overall FDIC assessment rate for 2018.
Legal and professional fees for the year ended December 31, 2018 increased by $315,000 or 39 percent compared to the year ended
December 31, 2017, due to increased third-party services for wealth management, audit, information technology consulting, and
public relations activities given the expanded franchise operating profile.
Marketing and advertising expense increased 99 percent, from $516,000 for the year ended December 31, 2017 to $1,025,000 for the
year ended December 31, 2018. The increased costs were a result of marketing and branding initiatives implemented at the recently
acquired Scottdale and First Priority locations, and market-specific business development promotions across Mid Penn’s footprint.
Software licensing and utilization costs were $3,036,000 during the year ended December 31, 2018, an increase of $985,000 or 48
percent compared to $2,051,000 for the year ended December 31, 2017. The increase is a result of additional costs to license (i) all of
the Scottdale and First Priority locations and the new retail branches, (ii) upgrades to internal systems to enhance data management
and storage capabilities given the larger company profile, and (iii) increases in certain core processing fees as our customer base and
account/transaction volumes continue to grow.
Intangible amortization increased from $104,000 during the year ended December 31, 2017 to $1,224,000 during the same period in
2018. In the first quarter of 2018, Mid Penn recorded a core deposit intangible (CDI) asset related to the Scottdale acquisition of
$4,940,000. On July 31, 2018, Mid Penn recorded an additional CDI asset of $2,832,000 as a result of the First Priority acquisition.
These CDI assets will be amortized using the sum of the years’ digit method over a ten-year period from the respective acquisition
date. During the year ended December 31, 2018, the CDI amortization recorded related to the Scottdale and First Priority acquisitions
totaled $1,113,000, of which $898,000 was related to the amortization of the Scottdale CDI and $215,000 was related to the
amortization of the First Priority CDI. The remaining intangible amortization expense in 2018, and the prior year’s amortization
expense, was attributable to CDI recorded as a result of Mid Penn’s acquisition of Phoenix Bancorp in 2015.
36
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Other expense was $7,290,000 during the year ended December 31, 2018, an increase of $2,806,000 or 63 percent compared to other
expense of $4,484,000 for the year ended December 31, 2017. As both organic growth and the Scottdale and First Priority
acquisitions have increased Mid Penn’s geographic profile and employee base, several categories within other expenses experienced
year-over-year increases, including insurance costs, stationary and supplies, printing, postage, employee travel costs, and directors
fees.
2017 versus 2016
During the year ended December 31, 2017, noninterest expenses totaled $31,381,000, an increase of $2,541,000 or 9 percent
compared to $28,840,000 for the year ended December 31, 2016.
Salaries and employee benefits expense increased $1,365,000 or 9 percent during the twelve months ended December 31, 2017, versus
the same period in 2016, with the increase attributable to (i) the addition of commercial lending personnel and credit support staff in
alignment with Mid Penn’s core banking growth and expanding markets, (ii) retail staff additions at the New Holland and Orwigsburg
locations, which opened in 2017, and the Oregon Pike location, which opened in late 2016, and (iii) an increased volume of covered
employees and healthcare claims as Mid Penn maintains a self-funded medical plan as part of a consortium.
In connection with the acquisition of Scottdale, Mid Penn incurred $619,000 of merger related expenses during 2017, while no merger
related expenses were incurred in 2016.
Occupancy expenses increased $448,000 or 22 percent during the year ended December 31, 2017 compared to the same period in
2016. In the twelve months since December 31, 2016, Mid Penn added facility operating costs associated with opening the above-
noted three new branch offices, as well as incurring full-year costs for loan production offices opened during 2016 in Lancaster and
Franklin Counties in Pennsylvania.
Mid Penn’s FDIC assessment costs were $792,000 during the twelve months ended December 31, 2017, an increase of $104,000 or 15
percent compared to the FDIC assessment of $688,000 for the twelve months ended December 31, 2016. The increase is due to Mid
Penn’s growth in deposits and assets, which increased the base amount used to determine the FDIC insurance assessment.
Legal and professional fees for the twelve months ended December 31, 2017 increased by $91,000 or 13 percent compared to the
same period in 2016 due to increased third-party services for wealth management, audit, and public relations activities.
Pennsylvania bank shares tax expense decreased $197,000 or 30 percent during the twelve months ended December 31, 2017 versus
the same period in 2016, due to the additional Pennsylvania-eligible tax credits generated from Mid Penn’s increased level of
charitable donations to support education and community development organizations throughout the markets it serves. The increased
amount of charitable contributions supported part of the increase in Other Expenses.
Investments
Mid Penn’s investment portfolio is utilized primarily to support overall liquidity management, to provide collateral supporting
pledging requirements over public funds deposit), and to generate additional interest income within reasonable risk parameters. Mid
Penn’s investment portfolio includes both held-to-maturity securities and available-for-sale securities.
During the year ended December 31, 2018, the portfolio of held-to-maturity securities increased over 66 percent to $168,370,000 as of
December 31, 2018, as compared to $101,356,000 as of December 31, 2017 (held-to-maturity investments are recorded at amortized
cost). Mid Penn’s total available-for-sale securities portfolio increased $18,458,000 or 20 percent, from $93,465,000 at December 31,
2017 to $111,923,000 at December 31, 2018. The increase to the investment securities during 2018 was primarily due to investments
acquired from Scottdale and First Priority. Some acquired available-for-sale securities were sold after the mergers and the proceeds
reinvested in held-to-maturity securities, both to support pledging requirements, and to ensure greater portfolio alignment with Mid
Penn’s investment management objectives.
Mid Penn’s available-for-sale portfolio is recorded at fair value, meaning the investments are valued at a market price relative to
investments of the same type with similar maturity dates. As the interest rate environment and overall market yield curve changes, the
fair value of securities changes accordingly. The fair values of securities can also be impacted by changing market supply and
demand for certain types of securities.
37
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
At December 31, 2018, the unrealized loss on available-for-sale investment securities resulted in a decrease in shareholders’ equity of
$3,242,000 (comprised of a gross unrealized loss on securities of $4,103,000 net of a deferred income tax benefit of $861,000). At
December 31, 2017, the unrealized loss on available-for-sale investment securities resulted in a decrease in shareholders’ equity of
$2,159,000 (gross unrealized loss on securities of $2,733,000 net of a deferred income tax benefit of $574,000). Mid Penn does not
have any significant concentrations of non-governmental securities within its investment portfolio. Table 6 provides a summary of
our investment securities, and maturity and yield information relating to debt securities is shown in Table 7.
TABLE 6: FAIR VALUE OF INVESTMENT SECURITIES
(Dollars in thousands)
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
$
Available-for-sale equity securities:
Total available-for-sale debt securities
2018
December 31,
2017
2016
41,572 $
38,849
29,256
2,246
111,923
38,730 $
25,831
27,043
1,355
92,959
47,012
25,619
58,838
1,099
132,568
Equity securities
$
Total available-for-sale equity securities
492 $
492
506 $
506
1,057
1,057
Held-to-maturity securities:
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Corporate debt securities
$
Total held-to-maturity securities
Total $
16,856 $
64,548
83,649
1,539
166,592
279,007 $
10,894 $
52,949
36,640
—
100,483
193,948 $
—
—
—
—
—
133,625
TABLE 7: INVESTMENT MATURITY AND YIELD
(Dollars in thousands)
As of December 31, 2018
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
Held to maturity securities:
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Corporate debt securities
After One After Five
One Year Year thru Years thru After Ten
and Less
Five Years Ten Years Years
Total
$
$
$
$
— $
14
—
—
14 $
20,934 $
7,858
3,548
250
32,590 $
20,638 $
23,256
19,389
1,000
64,283 $
991 $
—
95
—
1,086 $
12,463 $
—
6,282
—
18,745 $
3,531 $
23,670
77,657
1,539
106,397 $
— $
7,721
6,319
996
15,036 $
— $
42,142
—
—
42,142 $
41,572
38,849
29,256
2,246
111,923
16,985
65,812
84,034
1,539
168,370
38
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Weighted Average Yields
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
Held to maturity securities:
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Corporate debt securities
Loans
After One
Year thru
Five
Years
After Five
Years
thru
Ten Years
One Year
and Less
After Ten
Years
Total
—
4.08 %
—
—
4.08 %
1.41 %
—
6.93 %
—
1.89 %
2.05 %
3.15 %
2.77 %
1.50 %
2.38 %
1.93 %
—
3.15 %
—
2.34 %
2.18 %
2.71 %
3.28 %
4.75 %
2.74 %
3.42 %
2.91 %
3.47 %
5.36 %
3.37 %
—
2.72 %
3.22 %
6.50 %
2.75 %
—
2.72 %
—
—
2.72 %
2.11 %
2.80 %
3.21 %
5.16 %
2.64 %
2.21 %
2.79 %
3.45 %
5.36 %
3.08 %
Total loans at December 31, 2018 were $1,624,067,000 compared to $910,404,000 at December 31, 2017, an increase of
$713,663,000 or over 78 percent since year-end 2017. A large portion of the year-over-year increase was a result of the loans
acquired from First Priority and Scottdale totaling $543,272,000 as of December 31, 2018. The majority of Mid Penn’s $170,391,000
of organic loan growth during 2018 was attributable to commercial loans, including both commercial and industrial financing, and
commercial real estate credits.
At December 31, 2018, loans (net of unearned income) represented 85 percent of earning assets, compared to 83 percent at both
December 31, 2017 and 2016.
The Bank's loan portfolio is diversified among individuals and businesses generally located within the Bank's primary market area of
Berks, Bucks, Chester, Cumberland, Dauphin, Fayette, Lancaster, Luzerne, Montgomery, Northumberland, Schuylkill and
Westmoreland counties in Pennsylvania. 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, and the maturity and rate
sensitivity information related to the loan portfolio is reflected in Table 9.
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
2018
Amount %
2017
December 31,
2016
2015
2014
Amount %
Amount %
Amount %
Amount %
$ 1,003,542 61.8 $ 465,122 51.1 $ 397,547 48.8 $ 355,339 48.1 $ 289,378 50.6
3,954 0.4
10,351 0.6
286,583 17.6 188,262 20.7 171,985 21.1 160,988 21.8 120,326 21.0
323,639 19.9 253,152 27.8 240,418 29.5 216,269 29.6 159,004 27.8
3,018 0.6
1,624,115 100.0 910,490 100.0 814,082 100.0 736,800 100.0 571,726 100.0
(158 )
813,924
(7,183 )
$ 806,741
(48 )
1,624,067
(8,397 )
$ 1,615,670
(193 )
571,533
(6,716 )
$ 564,817
(86 )
910,404
(7,606 )
$ 902,798
(287 )
736,513
(6,168 )
$ 730,345
4,132 0.6
4,204 0.5
39
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
TABLE 9: LOAN MATURITY AND INTEREST SENSITIVITY
(Dollars in thousands)
As of December 31, 2018
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
$
79,430 $ 233,925 $ 690,187 $ 1,003,542
286,583
17,866
323,639
13,570
10,303
279
$ 111,145 $ 346,231 $ 1,166,691 $ 1,624,067
192,464
276,445
7,595
76,253
33,624
2,429
Total
$
53,061 $ 249,407 $ 287,796 $ 590,264
878,895 1,033,803
58,084
$ 111,145 $ 346,231 $ 1,166,691 $ 1,624,067
96,824
Credit Quality, Credit Risk, and Allowance for Loan and Lease Losses
Other than as described herein, Mid Penn does not believe there are current 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. Mid Penn recognizes 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 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 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
2018
2017
December 31,
2016
2015
2014
$
10,749 $
517
11,266
10,575 $
544
11,119
4,658 $
877
5,535
4,418 $
459
4,877
8,907
2,035
10,942
Foreclosed real estate
Total nonperforming assets
1,017
12,283
189
11,308
224
5,759
1,185
6,062
565
11,507
Accruing loans 90 days or more past due
Total risk elements
—
12,283 $
—
11,308 $
59
5,818 $
55
6,117 $
—
11,507
$
Nonperforming loans as a % of total loans outstanding
0.69 %
1.22 %
0.68 %
0.66 %
1.91 %
Nonperforming assets as a % of total loans outstanding and
other real estate
0.76 %
1.24 %
0.71 %
0.82 %
2.01 %
Ratio of allowance for loan losses to nonperforming loans
74.53 %
68.41 %
129.78 %
126.46 %
61.37 %
Mid Penn assesses a specific allocation for both commercial loans and commercial real estate loans prior to partially or fully charging
off the loan. If a partial charge off 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 2018, nonperforming loans increased $147,000 from $11,119,000 at
December 31, 2017, to $11,266,000 at December 31, 2018, and foreclosed real estate increased $828,000 to $1,017,000 at December
31, 2018. The increase in nonperforming loans is primarily due to the addition of approximately $3,866,000 of nonaccrual loans
40
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
added during the twelve months ended December 31, 2018. This increase was partially offset by favorable reductions to the
nonperforming loan portfolio due to (i) the successful workout of one nonaccrual loan relationship during the second quarter of 2018,
which decreased the total nonaccrual loan pool by $1,094,000 and (ii) the sale of some collateral in an existing nonaccrual loan
relationship resulting in total principal pay-down of $1,393,000. Additionally, certain loans totaling $668,000 were transferred from
nonaccrual loans to foreclosed real estate during 2018. Two loan relationships, which account for $5,725,000 or the majority of the
nonperforming loan balance, are discussed in more detail below.
Loan no. 1 – At December 31, 2018, the outstanding principal balance of this loan relationship was $4,302,000. A $275,000 specific
allowance allocation was assigned to this relationship. As part of the workout process, this loan had been modified as a troubled debt
restructured loan during 2017. Management is pursuing diligent workout efforts, including proceeds from the sale of pledged
collateral not associated with the primary operation of the business, to collect the remaining outstanding balance.
Loan no. 2 – At December 31, 2018, the contractual outstanding principal balance of this loan relationship was $1,423,000 and was
comprised of four loans collateralized primarily by commercial real estate, as well as certain machinery and equipment. As part of the
workout process, the loans in this relationship were modified as a troubled debt restructured loans during 2017. During the second
quarter of 2018, certain commercial real estate collateral was sold, resulting in the principal payoff of three previous loans associated
with this loan relationship totaling $1,393,000. Given that the fair value of the remaining collateral exceeds the outstanding principal
balance, no specific allowance allocation has been assigned to this relationship. Management expects to recover the remaining
outstanding balance through the sale of real estate and equipment collateral pledged in support of the loans.
Mid Penn’s troubled debt restructured loans at December 31, 2017 totaled $7,020,000, of which $517,000 were accruing loans in
compliance with the terms of the modification and $6,503,000 are included in nonaccrual loans. As a result of the evaluation, a
specific allocation, and subsequently, charge-offs have been taken as deemed appropriate.
Mid Penn entered into forbearance agreements on all loans currently classified as troubled debt restructured loans, 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.
Further discussion of troubled debt restructured loans can be found in Note 9 to Mid Penn’s Consolidated Financial Statements, which
are included in Item 8. As of December 31, 2018, there were no defaulted troubled debt restructured loans, as all troubled debt
restructured loans were current with respect to their associated forbearance agreements.
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,
2018
December 31,
2017
$
1,624,067 $
8,397
11,266
910,404
7,606
11,119
333
1,701
Ratio of nonperforming loans with partial charge-offs to
total loans
0.02 %
0.19 %
Ratio of nonperforming loans with partial charge-offs to
total nonperforming loans
2.96 %
15.30 %
Coverage ratio net of nonperforming loans with partial
charge-offs
76.80 %
80.76 %
Ratio of total allowance to total loans less nonperforming
loans with partial charge-offs
0.52 %
0.84 %
41
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Mid Penn has not experienced any additional charge-offs on loans for which a partial charge-off had originally been taken during the
periods presented.
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, 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 likely be considered collateral dependent as the discounted cash flow (“DCF”) method would indicate no operating income is
available for evaluating the collateral position; therefore, most impaired loans are deemed to be collateral dependent.
Mid Penn evaluates loans for charge-off on a monthly basis. Policies that govern the recommendation for charge-off are unique to the
type of loan being considered. Commercial loans rated as nonaccrual or lower will first have a collateral evaluation completed in
accordance with the guidance on impaired loans. Once the collateral evaluation has been completed, a specific allocation of
allowance is made based upon the results of the evaluation. The balance remains a nonperforming loan with the original terms and
interest rate intact (not restructured). In the event the loan is unsecured, the loan would have been charged-off at the recognition of
impairment. Commercial real estate loans rated as impaired will also have an initial collateral evaluation completed in accordance
with the guidance on impaired loans. An updated real estate valuation is ordered and the collateral evaluation is modified to reflect
any variation in value. A specific allocation of allowance is made for any anticipated collateral shortfall. The balance remains a
nonperforming loan with the original terms and interest rate intact (not restructured). The process of charge-off for residential
mortgage loans begins upon a loan becoming delinquent for 90 days and not in the process of collection. The existing appraisal is
reviewed and a lien search is obtained to determine lien position and any instances of intervening liens. A new appraisal of the
property will be ordered if deemed necessary by management and a collateral evaluation is completed. The loan will then be charged
down to the value indicated in the evaluation. Consumer loans are recommended for charge-off after reaching delinquency of 90 days
and the loan is not in the process of collection. The collateral shortfall of the consumer loan is recommended for charge-off at this
point.
As noted above, Mid Penn assesses a specific allocation for both commercial loans and commercial real estate loans. The balance
remains a nonperforming loan with the original terms and interest rate intact (not restructured). In addition, Mid Penn takes a
preemptive step when any commercial loan or commercial real estate loan becomes classified under its internal classification system.
A preliminary collateral evaluation in accordance with the guidance on impaired loans is prepared using the existing collateral
information in the loan file. This process allows Mid Penn to review both the credit and documentation files to determine the status of
the information needed to make a collateral evaluation. This collateral evaluation is preliminary, but allows Mid Penn to determine if
any potential collateral shortfalls exist.
Larger groups of small-balance loans, such as residential mortgages and consumer installment loans are collectively evaluated for
impairment. Accordingly, individual consumer and residential loans are not separately identified for impairment disclosures unless
such loans are the subject of a restructuring agreement.
Mid Penn’s rating system assumes any loans classified as substandard nonaccrual to be impaired, and most of these loans are
considered collateral dependent; therefore, most of Mid Penn’s impaired loans, whether reporting a specific allocation or not, are
considered collateral dependent.
It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate as soon as practicable
following 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.
42
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
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 practicable following being placed on nonaccrual status sometimes indicates that the loan to value
ratio is sufficient to obviate the need for a specific allocation, despite 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 loans with an aggregate balance of $11,266,000 deemed impaired at December 31, 2018. Excluding $2,803,000 in
loans acquired with credit deterioration in connection with the closing of the Phoenix acquisition in 2015, and the Scottdale and First
Priority acquisitions in 2018, Mid Penn had several loan relationships deemed impaired with an aggregate carrying balance of
$8,463,000. This pool of impaired loans was further broken down into a group of loans with an aggregate carrying balance of
$5,615,000, for which specific allocations totaling $742,000 were included within the loan loss reserve for these loans. The remaining
$2,848,000 of loans required no specific allocation within the loan loss reserve. Of the $8,463,000 of impaired loan relationships,
excluding the loans acquired with credit deterioration from the Phoenix, Scottdale, and First Priority acquisitions, $4,527,000 were
commercial and industrial relationships, $2,728,000 were commercial real estate relationships, $811,000 were residential
relationships, $367,000 were commercial real estate – construction relationships, and $30,000 were home equity relationships. There
were specific loan loss reserve allocations of $500,000 against the commercial and industrial relationships, $204,000 against the
commercial real estate relationships, and $38,000 against the commercial real estate – construction 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 as an integral
part of the examination process. As part of the examination process, federal or state regulatory agencies may require Mid Penn to
recognize additions to the allowance based on their judgments about information available to them at the time of their examination,
which may not be currently available to management.
In establishing the allowance, management evaluates on a quantitative basis individual classified loans and nonaccrual loans, and
determines an aggregate reserve for those loans based on that review. In addition, an allowance for the remainder of the loan and
lease portfolio is determined based on historical loss experience within certain components of the portfolio. These allocations may be
modified if current conditions indicate that loan and lease losses may differ from historical experience.
In addition, a portion of the allowance is established for losses inherent in the loan and lease portfolio which have not been identified
by the quantitative processes described above. This determination inherently involves a higher degree of subjectivity, and considers
risk factors that may not have yet manifested themselves in historical loss experience. These factors include:
changes in international, national, regional, and local economic and business conditions and developments that affect the
collectability of the portfolio, including the condition of various market segments;
changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity
of adversely classified or graded loans;
changes in the value of underlying collateral for collateral-dependent loans;
changes in the experience, ability, and depth of lending management and other relevant staff;
changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and
recovery practices not considered elsewhere in estimating credit losses;
changes in the quality of the institution's loan review system;
changes in the nature and volume of the portfolio and in the terms of loans;
the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated
credit losses in the institution's existing portfolio; and
the existence and effect of any concentrations of credit and changes in the level of such concentrations.
43
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
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 and
consideration of the above-noted qualitative factors 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 $8,397,000 as of December 31, 2018 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)
2018
2017
2015
2014
December 31,
2016
Commercial real estate, construction and land development $
Commercial, industrial and agricultural
Real estate - residential
Consumer
Unallocated
$
4,778 $
2,391
453
535
240
8,397 $
4,613 $
1,795
428
426
344
7,606 $
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
The organic growth in the loan portfolio during 2018, as well as an increase in specific allocations on impaired loans, resulted in a
larger allowance in 2018. See also the discussion in the Provision for Loan and Lease Losses section.
The allowance for loan and lease losses at December 31, 2018 was $8,397,000 or 0.52% of total loans (less unearned discount), as
compared to $7,606,000 or 0.84% at December 31, 2017, and $7,183,000 or 0.88% at December 31, 2016.
Deposits and Other Funding Sources
Mid Penn's primary source of funds are retail deposits from business and consumers in its market area. Total deposits at December
31, 2018 increased by $702,458,000 or 69 percent over December 31, 2017, which increased by $88,195,000 or 9 percent over
December 31, 2016. Deposits assumed from the First Priority and Scottdale acquisitions accounted for $596,780,000 of the increase
in total deposits since year end 2017, while organic deposit growth totaled $105,678,000. Many new customers have opened money
market and time deposits to take advantage of higher deposit account yields in response to FOMC rate increases. Average balances
and average interest rates applicable to the major classifications of deposits for the years ended December 31, 2018, 2017, and 2016
are presented in Table 13.
Short-term borrowings, consisting of FHLB borrowings having an initial term of less than one year, totaled $43,100,000 as of
December 31, 2018. Short-term borrowings totaled $34,611,000 as of December 31, 2017 and consisted entirely of federal funds
purchased.
At December 31, 2018, the Bank also had $56,188,000 in brokered time deposits, an increase of $53,096,000 or over 170 percent
since December 31, 2017. The increase was primarily due to a portfolio of brokered certificates of deposit assumed in the First
Priority acquisition. At December 31, 2017, the Bank had $3,092,000 in brokered time deposits, a decrease of $1,151,000 or 27
percent over December 31, 2016.
TABLE 13: DEPOSITS BY MAJOR CLASSIFICATION
(Dollars in thousands)
Noninterest-bearing demand deposits
Interest-bearing demand deposits
Money market
Savings
Time
Years Ended December 31,
2017
Average Average
Balance Rate
2016
Average Average
Balance Rate
2018
Average Average
Balance Rate
$ 232,562
371,873
309,705
191,686
324,853
$ 1,430,679
0.00 % $ 146,683
0.66 335,859
0.97 247,337
0.28 62,500
1.51 197,154
0.76 % $ 989,533
0.00 % $ 120,244
0.42 293,745
0.59 235,561
0.06 59,615
1.30 172,657
0.55 % $ 881,822
0.00 %
0.34
0.56
0.06
1.25
0.51 %
44
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
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
2018
December 31,
2017
$
$
29,957 $
201,827
12,952
244,736 $
38,563 $
27,295
39,883
105,741 $
2016
16,083
28,254
41,822
86,159
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 19 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 a corporation’s earnings have been invested in the continued growth of the business or
paid to shareholders. Excess capital makes it difficult for a corporation to offer a competitive return on the shareholders’ capital going
forward. For these reasons capital management practices have been, and will continue to be, of paramount importance.
Shareholders’ equity more than doubled, from $75,703,000 at December 31, 2017 to $223,209,000 at December 31, 2018, primarily
due to (i) the issuance of 1,878,827 shares of Mid Penn common stock on January 8, 2018 in connection with the acquisition of
Scottdale; and (ii) the issuance of 2,320,800 shares of Mid Penn common stock on July 31, 2018, in connection with the acquisition of
First Priority. Additionally, shareholders’ equity reflects the growth in retained earnings through $10,494,000 of net income available
to common shareholders for 2018, less dividends declared during the year of $3,453,000. These increases were partially offset by
other comprehensive losses, primarily due to the after-tax impact of the unrealized reduction in market value within the available-for-
sale investment portfolio since December 31, 2017.
Shareholders’ equity increased in 2017 by $5,236,000 or 7 percent, following an increase in 2016 of $399,000 or 1 percent, and an
increase in 2015 of $1,938,000 or 18 percent. In 2017, capital was positively impacted by the net income available to common
shareholders of $7,089,000 and other comprehensive income of $1,120,000. These increases were partially offset by dividends
declared during 2017 of $3,264,000.
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 declarations 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.
Mid Penn’s current intent for dividend payout is to provide reasonable quarterly cash returns to shareholders while still retaining
sufficient earnings to finance future growth and maintain sound capital levels. For additional information, see “Part II, Item 5,
“Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Repurchases of Equity Securities – Dividends”.
Dividends paid and declared on common shares totaled $0.70 and $0.45, respectively, for the year ended December 31, 2018.
Dividends paid and declared totaled $0.62 and $0.77, respectively, for the year ended December 31, 2017, and $0.58 and $0.68,
respectively, for the year ended December 31, 2016. The dividend payout ratio, which represents the percentage of annual net income
returned to shareholders in the form of cash dividends, was 47.30% for 2018 and 37.18% for 2017.
45
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
Mid Penn maintained regulatory capital levels, leverage ratios, and risk-based capital ratios as of December 31, 2018 and 2017, as
follows:
(Dollars in thousands)
Capital Adequacy
To Be
Well-Capitalized
Under Prompt
Minimum Capital
Corrective
Actual
Required (1)
Amount Ratio
Amount Ratio
Action Provisions
Amount Ratio
$ 155,662
8.0 % $ 77,499
4.000 % $
N/A
N/A
155,662
155,662
191,300
10.0 % 98,977
10.0 % 122,265
12.3 % 153,317
6.375 %
7.875 %
9.875 %
N/A
N/A
N/A
N/A
N/A
N/A
$ 171,776
8.9 % $ 77,230
4.000 % $ 96,537
5.0 %
171,776
171,776
180,332
11.1 % 98,963
11.1 % 122,248
11.6 % 153,295
6.375 % 100,903
7.875 % 124,189
9.875 % 155,236
6.5 %
8.0 %
10.0 %
$ 74,417
6.5 % $ 45,857
4.000 % $
N/A
N/A
74,417
74,417
99,466
8.4 % 50,661
8.4 % 63,877
11.3 % 81,498
5.750 %
7.250 %
9.250 %
N/A
N/A
N/A
N/A
N/A
N/A
$ 88,294
7.7 % $ 45,846
4.000 % $ 57,308
5.0 %
88,294
88,294
96,005
10.0 % 50,661
10.0 % 63,877
10.9 % 81,498
5.750 % 57,269
7.250 % 70,485
9.250 % 88,106
6.5 %
8.0 %
10.0 %
Corporation
As of December 31, 2018
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, 2018
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, 2017
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, 2017
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)
(1) The minimum amounts and ratios as of December 31, 2018 include the third year phase in of the capital conservation buffer
of 1.875% required by the Basel III framework. At December 31, 2017, the minimum amounts and ratios included the
second year phase in of the capital conservation buffer of 1.25 percent required by the Basel III framework.
Effective in the third quarter of 2018, the Federal Reserve raised the consolidated asset limit to be considered a small bank holding
company from $1 billion to $3 billion. A company that qualifies as a small bank holding company is not subject to the Federal
Reserve’s consolidated capital rules, although a company that so qualifies may continue to file reports that include such capital
amounts and ratios. The Company has elected to continue to report those amounts and ratios.
46
MID PENN BANCORP, INC.
Series D Preferred Stock
Management’s Discussion and Analysis
In accordance with the terms and conditions of the Agreement and Plan of Merger dated January 16, 2018 between Mid Penn and First
Priority (the “Merger Agreement”), each share of First Priority Fixed Rate Cumulative Perpetual Preferred Stock, Series C (the “First
Priority Preferred Stock”) outstanding as of July 31, 2018 was converted into the right to receive one share of Mid Penn Fixed Rate
Cumulative Perpetual Preferred Stock, Series D, having a $1,000 liquidation preference per share (the “Mid Penn Preferred Stock”). In
connection with the First Priority Merger, Mid Penn issued 3,404 shares of Mid Penn Preferred Stock. The terms of the Mid Penn
Preferred Stock were no less favorable than those of the First Priority Preferred Stock as in effect immediately prior to the Merger.
Dividends were payable quarterly on February 15, May 15, August 15 and November 15 of each year. The dividend rate on the Mid
Penn Preferred Stock was fixed at 9%.
During the fourth quarter of 2018, the Federal Reserve Bank approved Mid Penn’s request to redeem all 3,404 shares of Mid Penn
Preferred Stock issued in connection with the First Priority Merger, and the redemption was completed and final dividend payment
made on December 14, 2018.
Subordinated Debt
Subordinated Debt Assumed July 2018 with the First Priority Acquisition
On July 31, 2018, Mid Penn completed its acquisition of First Priority and assumed $9,500,000 of Subordinated Notes (the “First
Priority Notes”). In accordance with purchase accounting principles, the First Priority Notes were assigned a fair value premium of
$247,000. The notes are intended to be treated as Tier 2 capital for regulatory reporting purposes.
The First Priority Notes agreements were entered into by First Priority on November 13, 2015 with five accredited investors, pursuant
to which First Priority issued subordinated notes totaling $9,500,000. The First Priority Notes have a maturity date of November 30,
2025, and bear interest at a fixed rate of 7.00% per annum. The Notes are non-callable for an initial period of five years and include
provisions for redemption pricing between 101.5% and 100.5% of the liquidation value, if called after five years but prior to the stated
maturity date.
Subordinated Debt Issued December 2017
On December 19, 2017, Mid Penn entered into agreements with investors to purchase $10,000,000 aggregate principal amount of its
Subordinated Notes due 2028 (the “2017 Notes”). The 2017 Notes are intended to be treated as Tier 2 capital for regulatory capital
purposes. The offering closed in December 2017.
The 2017 Notes will bear interest at a rate of 5.25% 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 time be less than 5.0%.
Interest will be payable semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2018, for the first five
years after issuance and will be payable quarterly in arrears thereafter on January 15, April 15, July 15, and October 15. The 2017
Notes will mature on January 1, 2028 and are redeemable in whole or in part, without premium or penalty, at any time on or after
December 21, 2022, and prior to January 1, 2028. Additionally, Mid Penn may redeem the 2017 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 2017 Notes for U.S. federal income tax purposes; (ii) an event occurs that precludes the 2017 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 the event of a redemption described in the previous
sentence, Mid Penn will redeem the 2017 Notes at 100% of the principal amount of the 2017 Notes, plus accrued and unpaid interest
thereon to but excluding the date of redemption.
Holders of the 2017 Notes may not accelerate the maturity of the 2017 Notes, except upon the bankruptcy, insolvency, liquidation,
receivership or similar event of Mid Penn or Mid Penn Bank.
Subordinated Debt Issued December 2015
On December 9, 2015, Mid Penn entered into agreements with investors to purchase $7,500,000 aggregate principal amount of its
Subordinated Notes (the “2015 Notes”) due 2025. The 2015 Notes are treated as Tier 2 capital for regulatory capital purposes. The
offering closed in December 2015.
47
MID PENN BANCORP, INC.
Management’s Discussion and Analysis
The 2015 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 time 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 2015 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 2015 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 2015 Notes for U.S. federal income tax purposes; (ii) an event occurs that precludes the 2015 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 2015 Notes, plus
accrued and unpaid interest thereon to but excluding the date of redemption.
Holders of the 2015 Notes may not accelerate the maturity of the 2015 Notes, except upon Mid Penn’s or Mid Penn Bank’s
bankruptcy, insolvency, liquidation, receivership, or similar event.
Federal Income Taxes
Federal income tax expense for 2018 was $2,129,000, compared to $4,500,000 for 2017 and $2,277,000 in 2016. Federal income tax
expense in 2018 reflects the reduction in the maximum corporate income tax rate from 34 percent to 21 percent, legislated by the
TCJA in December, 2017, with the rate change effective January 1, 2018. Also, as a result of the TCJA, federal income tax expense
was negatively impacted by a one-time non-cash reduction in the value of Mid Penn’s deferred tax asset, which resulted in a charge of
$1,169,000 during the year ended December 31, 2017. Mid Penn’s deferred tax asset, which was previously valued based upon the
projection of a 34 percent future tax benefit, was adjusted to reflect future deferred tax benefits at the new 21 percent corporate tax
rate. The effective tax rate (excluding the one-time deferred tax adjustment) was 17% in 2018, 29% in 2017, and 23% in 2016.
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. In addition to its cash and
equivalents, Mid Penn utilizes its investments as a source of liquidity, along with deposit growth and increases in borrowings. For
additional information, see Deposits and Other Funding Sources, which appears earlier in this discussion. Liquidity from investments
is provided primarily through investment calls and sales, prepayments on mortgage-backed securities, and from investments and
interest-bearing balances with maturities of one year or less.
The Bank can obtain funds from overnight borrowings, short-term borrowings, and long-term borrowings from the FHLB, up to the
Bank’s maximum borrowing capacity with the FHLB, which was $507,462,000 at December 31, 2018. FHLB borrowings require the
Bank to make certain restricted stock purchases in accordance with FHLB requirements. Borrowings with the FHLB are
collateralized by certain qualifying loans and investment securities of the Bank. The Bank also has unused lines of credit with other
correspondent banks amounting to $15,000,000 at December 31, 2018.
Major sources of cash in 2018 came from the $158,271,000 in proceeds from the sales of available-for-sale investments securities and
the $72,616,000 in net cash received from the acquisitions of Scottdale and First Priority.
Major uses of cash in 2018 were $132,097,000 to fund loan growth and $100,205,000 for investment purchases.
Major sources of cash in 2017 came from the increase in deposits of $88,195,000, as well as $52,932,000 of proceeds from the sales of
investments securities and $34,611,000 from the increase in short-term borrowings.
Major uses of cash in 2017 were the purchases of investment securities of $124,738,000 and the increase in loans of $96,570,000.
48
MID PENN BANCORP, INC.
Aggregate Contractual Obligations
Management’s Discussion and Analysis
Table 15 represents Mid Penn’s on-and-off balance sheet aggregate contractual obligations to make future payments as of December
31, 2018.
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
Financial Statements
Note Reference
10
11
13
14
16
$
Total
One Year or
Less
Payments Due by Period
Three to
Five
Years
One to
Three
Years
More than
Five
Years
15,144 $
497,225
50,363
39,005
3,649
2,171 $
276,169
13,221
1,576
247
3,573 $
186,364
34,536
3,152
548
2,709 $
33,848
206
3,152
604
6,691
844
2,400
31,125
2,250
17
6,114
596,356 $
50
291,263 $
96
224,696 $
96
37,906 $
5,872
42,491
$
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 measure its sensitivity to changes in interest rates and to take appropriate actions, as needed or controllable
by the Bank, to mitigate the impacts of inflation 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 included elsewhere in this report will assist in the understanding of how Mid Penn is positioned to react to changing
interest rates and inflationary trends. In particular, the previously discussed risk factors, the composition of and yields on loans and
investments, and the composition and costs of deposits and other interest-bearing liabilities, 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, 2018, commitments to extend credit amounted to $346,238,000 compared to $199,240,000 as of December 31,
2017.
Mid Penn also issues standby letters of credit to its customers. The risk associated with standby letters of credit is essentially the same
as the credit risk involved in loan extensions to customers. Standby letters of credit increased to $20,839,000 at December 31, 2018,
from $20,496,000 at December 31, 2017.
49
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, 2018, 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, 2018
% Change in
Net Interest
Income
8.09%
5.38%
2.66%
-2.01%
-3.49%
-6.43%
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, 2017
% Change in
Net Interest
Income
7.83%
5.12%
2.41%
-1.49%
-6.19%
-11.37%
Policy
Risk Limit
≥ -20%
≥ -15%
≥ -10%
≥ -10%
≥ -15%
≥ -20%
50
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
Management Report on Internal Control Over Financial Reporting
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
52
53
55
56
57
58
59
61
51
MID PENN BANCORP, INC.
Management Report on Internal Controls Over Financial Reporting
The Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management,
including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and
procedures, as defined in SEC Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Corporation’s Chief Executive Officer
and Chief Financial Officer concluded that, as of December 31, 2018, the Corporation’s disclosure controls and procedures are
effective. Disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Corporation’s
reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms.
The management of the Corporation is responsible for establishing and maintaining adequate internal control over financial reporting.
The Corporation’s internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness of future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2018, using
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-
Integrated Framework (2013). Based on this assessment, management concluded that, as of December 31, 2018, the Corporation’s
internal control over financial reporting is effective based on those criteria.
The effectiveness of the Corporation’s internal control over financial reporting has been audited by BDO USA, LLP, an independent
registered public accounting firm, as stated in their report which is included herein.
/s/ Rory G. Ritrievi
Rory G. Ritrievi
President and
Chief Executive Officer
March 18, 2019
/s/ Michael D. Peduzzi, CPA
Michael D. Peduzzi, CPA
Sr. Executive Vice President and
Chief Financial Officer
March 18, 2019
52
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Mid Penn Bancorp, Inc.
Millersburg, Pennsylvania
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Mid Penn Bancorp, Inc. and subsidiaries (the “Corporation”) as of
December 31, 2018 and 2017, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity,
and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the
“consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Corporation and subsidiaries at December 31, 2018 and 2017, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted
in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the Corporation's internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”) and our report dated March 18, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an
opinion on the Corporation’s consolidated financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. 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, whether due to
error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ BDO USA, LLP
We have served as the Corporation's auditor since 2013.
Harrisburg, Pennsylvania
March 18, 2019
53
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Mid Penn Bancorp, Inc.
Millersburg, Pennsylvania
Opinion on Internal Control over Financial Reporting
We have audited Mid Penn Bancorp, Inc. and subsidiaries’ (the “Corporation’s”) internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). In our opinion, the Corporation maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(“PCAOB”), the consolidated balance sheets of the Corporation and subsidiaries as of December 31, 2018 and 2017, the related
consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years
in the period ended December 31, 2018 and the related notes and our report dated March 18, 2019 expressed an unqualified opinion
thereon.
Basis for Opinion
The Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management Report on
Internal Controls over Financial Reporting”. Our responsibility is to express an opinion on the Corporation’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Corporation in accordance with U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA, LLP
Harrisburg, Pennsylvania
March 18, 2019
54
MID PENN BANCORP, INC.
(Dollars in thousands)
ASSETS
Cash and due from banks
Interest-bearing balances with other financial institutions
Federal funds sold
Total cash and cash equivalents
Investment securities available for sale
Investment securities held to maturity, at amortized cost (fair value $166,582 and $100,483)
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
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
Shareholders' Equity:
Common stock, par value $1.00; authorized 10,000,000 shares; 8,459,918 and 4,242,216 shares
issued and outstanding at December 31, 2018 and December 31, 2017, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total Shareholders’ Equity
Total Liabilities and Shareholders' Equity
The accompanying notes are an integral part of these consolidated financial statements.
55
Consolidated Balance Sheets
December 31, 2018
December 31, 2017
$
$
$
$
24,600 $
4,572
10,893
40,065
111,923
168,370
1,702
1,624,067
(8,397 )
1,615,670
25,303
16,691
6,646
1,017
8,244
4,696
62,840
7,221
7,593
2,077,981 $
269,870 $
384,834
375,648
209,345
486,329
1,726,026
43,100
48,024
27,082
2,262
8,278
1,854,772
8,460
177,565
39,562
(2,378 )
223,209
2,077,981 $
19,795
3,028
691
23,514
93,465
101,356
1,040
910,404
(7,606 )
902,798
16,168
13,042
4,384
189
4,564
1,888
3,918
434
3,594
1,170,354
163,714
349,241
246,220
62,770
201,623
1,023,568
34,611
12,352
17,338
645
6,137
1,094,651
4,242
40,970
32,565
(2,074 )
75,703
1,170,354
Consolidated Statements of Income
2018
Years Ended December 31,
2017
2016
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 on federal funds sold
Interest and dividends on investment securities:
U.S. Treasury and government agencies
State and political subdivision obligations, tax-exempt
Other securities
$
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 and utilization
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 D 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
56
$
61,692
75
451
3,518
2,323
595
68,654
10,884
207
1,629
12,720
55,934
500
55,434
1,155
933
137
286
751
1,253
347
561
2,039
7,462
23,862
4,019
2,186
225
772
1,117
1,025
3,036
621
4
1,224
4,790
7,290
50,171
12,725
2,129
10,596
102
$
40,156
18
115
2,273
1,113
217
43,892
5,463
111
730
6,304
37,588
325
37,263
845
721
42
262
872
937
335
800
893
5,707
16,929
2,512
1,536
451
792
802
516
2,051
497
88
104
619
4,484
31,381
11,589
4,500
7,089
—
$
$
$
10,494
$
7,089
$
1.48
0.45
$
$
1.67
0.77
$
$
36,402
12
82
1,346
2,066
304
40,212
4,514
15
838
5,367
34,845
1,870
32,975
481
684
1,046
264
922
844
317
470
918
5,946
15,564
2,064
1,689
648
688
711
500
1,908
548
217
126
—
4,177
28,840
10,081
2,277
7,804
—
7,804
1.85
0.68
MID PENN BANCORP, INC.
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
Net income
Other comprehensive income (loss) (a):
Years Ended December 31,
2017
2018
2016
$
10,596 $
7,089 $
7,804
Unrealized gains (losses) arising during the period on available for sale
securities, net of income taxes of ($259), $589, and ($1,954), respectively
(1,010 )
1,143
(3,794 )
Reclassification adjustment for net gain on sales of available for sale
securities included in net income, net of income taxes of ($29), ($14),
and ($356), respectively (b)
(108 )
(28 )
(690 )
Change in defined benefit plans, net of income taxes of $361, $3, and ($93),
respectively (c)
1,361
5
(181 )
Reclassification adjustment for settlement gains on benefit plans, net of
income taxes of ($155) and $0, respectively (d)
Total other comprehensive income (loss)
Total comprehensive income
(582 )
(339 )
10,257 $
—
1,120
8,209 $
—
(4,665 )
3,139
$
(a) The income tax impacts of the components of other comprehensive income are calculated using a 21 percent tax rate for 2018 and a 34 percent tax rate for
2017 and 2016.
(b) 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
(c) The change in defined benefit plans includes several components of net periodic benefit costs, including service costs, interest costs, expected return on plan
assets, and amortization of prior service costs. Please reference Note 16 – Defined Benefit Plans, for the classification of these components on Consolidated
Statements of Income.
(d) Amounts are included in other income on the Consolidated Statements of Income within total noninterest income.
The accompanying notes are an integral part of these consolidated financial statements.
57
1,812 $
—
(4,665 )
—
—
—
(2,853 ) $
—
1,120
—
—
—
—
(341 )
(2,074 ) $
35
(2,039 )
—
(339 )
—
—
—
—
70,068
7,804
(4,665 )
(2,875 )
82
53
70,467
7,089
1,120
(3,264 )
104
42
145
—
75,703
(9 )
75,694
10,596
(339 )
3,404
(102 )
(3,404 )
(3,453 )
MID PENN BANCORP, INC.
Consolidated Statements of Changes in Shareholders’ Equity
(Dollars in thousands, except share data)
Accumulated
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Other
Total
Retained
Earnings
Comprehensive
Income (Loss)
Shareholders'
Equity
Balance, January 1, 2016
$
Net income
Total other comprehensive loss, net of taxes
Common stock dividends declared
Employee Stock Purchase Plan (4,465 shares)
Restricted stock activity (2,115 shares)
Balance, December 31, 2016
$
Net income
Total other comprehensive income, net of taxes
Common stock dividends declared
Employee Stock Purchase Plan (3,578 shares)
Director Stock Purchase Plan (1,345 shares)
Restricted stock activity (3,996 shares)
Tax rate adjustment impact
Balance, December 31, 2017
$
— $
—
—
—
—
—
0 $
—
—
—
—
—
—
—
0 $
4,227 $
—
—
—
4
2
4,233 $
—
—
—
4
1
4
—
4,242 $
40,559 $
—
—
—
78
51
40,688 $
—
—
—
100
41
141
—
40,970 $
23,470 $
7,804
—
(2,875 )
—
—
28,399 $
7,089
—
(3,264 )
—
—
—
341
32,565 $
Impact of adoption of new accounting standard
(a)
Balance at January 1, 2018, adjusted
Net income
Total other comprehensive loss, net of taxes
Series D preferred stock issued in connection
with the First Priority acquisition
Series D preferred stock dividends
Series D preferred stock redemption
Common stock dividends declared
Common stock issued to Scottdale shareholders
(1,878,827 shares) (b)
Common stock issued to First Priority
shareholders (2,320,800 shares) (c)
Employee Stock Purchase Plan (4,132 shares)
Director Stock Purchase Plan (4,296 shares)
Restricted stock activity (9,647 shares)
Balance, December 31, 2018
$
—
—
—
—
—
4,242
—
—
—
40,970
—
—
(44 )
32,521
10,596
—
3,404
—
(3,404 )
—
—
—
—
—
—
—
—
—
—
(102 )
—
(3,453 )
—
1,879
62,302
—
—
64,181
—
—
—
—
0 $
2,321
4
4
10
8,460 $
73,801
115
120
257
177,565 $
—
—
—
—
39,562 $
—
—
—
—
(2,378 ) $
76,122
119
124
267
223,209
(a) Represents the impact of adopting Accounting Standard Update ASU 2016-01. See Note 26 to the consolidated financial statements for more information.
(b) Shares issued on January 8, 2018 as a result of the acquisition of The Scottdale Bank & Trust Company (“Scottdale”). See Note 4 to the consolidated
financial statements for more information.
(c) Shares issued on July 31, 2018 as a result of the acquisition of First Priority Financial Corp. (“First Priority”). See Note 5 to the consolidated financial
statements for more information.
The accompanying notes are an integral part of these consolidated financial statements.
58
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,
2017
2016
2018
10,596 $
7,089 $
7,804
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 expense (benefit)
Increase in accrued interest receivable
Increase in other assets
Increase in accrued interest payable
(Decrease) increase in other liabilities
Net Cash Provided By Operating Activities
Investing Activities:
Net decrease in interest-bearing time deposits with other financial institutions
Proceeds from the maturity of investment securities
Proceeds from the sale of investment securities
Purchases of investment securities
Net cash received from acquisitions
Redemptions (purchases) of restricted investment in bank stocks
Net increase in loans and leases
Purchases of bank premises and equipment
Proceeds from sale of bank premises and equipment
Proceeds from sale of foreclosed assets
Net Cash Provided By (Used In) Investing Activities
Financing Activities:
Net (decrease) increase in deposits
Net (decrease) increase in short-term borrowings
Proceeds from long-term debt issuance
Series D preferred stock dividends paid
Series D preferred stock redemption
Common stock dividends paid
Employee Stock Purchase Plan share issuance
Director Stock Purchase Plan share issuance
Long-term debt repayment
Deferred financing fees paid for subordinated debt issuance
Subordinated debt issuance
Net Cash (Used In) Provided By Financing Activities
500
2,395
1,224
517
(137 )
(286 )
(46,264 )
46,353
(751 )
(7,734 )
8,296
(561 )
71
4
267
1,317
(398 )
(1,779 )
528
(3,175 )
10,983
—
31,728
158,271
(100,205 )
72,616
72
(132,097 )
(8,958 )
—
420
21,847
(12,469 )
(25,836 )
30,000
(102 )
(3,404 )
(4,513 )
119
124
(198 )
—
—
(16,279 )
325
1,464
105
1,280
(42 )
(262 )
(44,010 )
45,801
(872 )
(10,282 )
11,082
(800 )
14
88
145
1,828
(636 )
(380 )
130
(172 )
11,895
—
11,062
52,932
(124,738 )
—
(1,941 )
(96,570 )
(6,879 )
2,201
136
(163,797 )
88,195
34,611
—
—
—
(2,204 )
104
42
(1,220 )
(85 )
10,000
129,443
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
16,551
23,514
40,065 $
(22,459 )
45,973
23,514 $
$
59
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
4
21,848
4,317
16,110
111,390
(142,861 )
—
1,823
(77,795 )
(775 )
—
992
(86,799 )
158,330
(31,596 )
—
—
—
(2,452 )
82
—
(26,724 )
—
—
97,640
32,689
13,284
45,973
MID PENN BANCORP, INC.
(Dollars in thousands)
Supplemental Disclosures of Cash Flow Information:
Interest paid
Income taxes paid
Supplemental Noncash Disclosures:
Loan transfers to foreclosed assets held for sale
Dividends declared and not paid
Asset transfers to bank premises and equipment held for sale
Common stock issued to First Priority and Scottdale shareholders
Assets, Liabilities, and Equity in Connection with Mergers (a):
(Dollars in thousands)
Assets Acquired:
Securities
Loans
Restricted stock
Property and equipment
Foreclosed assets
Deferred income taxes
Accrued interest receivable
Core deposit and other intangible assets
Cash surrender value of life insurance
Other assets
Liabilities Assumed:
Deposits
Borrowings
Accrued interest payable
Other liabilities
Equity Acquired:
Preferred stock
Consolidated Statements of Cash Flows
Years Ended December 31,
2017
2016
2018
11,103 $
1,425 $
6,174 $
3,890 $
1,116 $
— $
— $
4,200 $
189 $
1,060 $
— $
— $
5,242
1,700
248
423
1,894
—
177,016 $
582,392
2,334
2,643
136
4,190
3,282
7,976
3,363
1,100
784,432 $
714,927 $
49,939
1,089
6,309
772,264 $
— $
—
—
—
—
—
—
—
—
—
— $
— $
—
—
—
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
$
$
$
$
$
$
$
$
$
$
$
3,404 $
— $
(a) This disclosure includes the impact of both the acquisition of The Scottdale Bank and Trust Company, effective January 8, 2018, and the
acquisition of First Priority Financial Corp., effective July 31, 2018. Please reference Notes 4 and 5 for more information.
The accompanying notes are an integral part of these consolidated financial statements.
60
MID PENN BANCORP, INC.
MID PENN BANCORP, INC.
(1) Basis of Presentation
Notes to Consolidated Financial Statements
For all periods presented, the accompanying consolidated financial statements include the accounts of Mid Penn Bancorp, Inc.
and its wholly-owned subsidiary Mid Penn Bank (the “Bank”), and for the year ended December 31, 2016, include the accounts
of the Bank’s former wholly-owned subsidiary, Mid Penn Insurance Services, LLC, were included in the accompanying
consolidated financial statements which was closed effective March 1, 2016. Mid Penn Bancorp, Inc. and its wholly owned
subsidiaries are collectively referred to herein as “Mid Penn” or the “Corporation.” 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.
On January 8, 2018, Mid Penn completed its acquisition of The Scottdale Bank & Trust Company (“Scottdale”), a Pennsylvania
bank and trust company, through the merger of Scottdale with and into Mid Penn Bank pursuant to the previously announced
Agreement and Plan of Merger, dated as of March 29, 2017, among Mid Penn, Mid Penn Bank and Scottdale. Refer to Note 4,
Acquisition of The Scottdale Bank & Trust Company, as well as the Company’s Current Report on Form 8-K filed on January 8,
2018, for more information.
On July 31, 2018, Mid Penn completed its acquisition of First Priority Financial Corp. (“First Priority”), pursuant to the
previously announced Agreement and Plan of Merger dated as of January 16, 2018. On July 31, 2018, First Priority was merged
with and into Mid Penn, with Mid Penn being the surviving corporation. Refer to Note 5, Acquisition of First Priority Financial
Corp., as well as the Company’s Current Report on Form 8-K filed on August 1, 2018, for more information.
The comparability of Mid Penn’s results of operations for the year ended December 31, 2018, compared to the years ended
December 31, 2017 and 2016, in general, have been materially impacted by these two acquisitions, as further described in Note
4 and Note 5. For comparative purposes, the 2017 and 2016 balances have been reclassified to conform to the 2018
presentation. Such reclassifications had no impact on net income.
(2) Nature of Business
Mid Penn, through operations conducted by 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 and wealth management 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 38 retail
banking offices located in Berks, Bucks, Chester, Cumberland, Dauphin, Fayette, Lancaster, Luzerne, Montgomery,
Northumberland, Schuylkill and Westmoreland counties in Pennsylvania.
A former subsidiary of the Bank, Mid Penn Insurance Services, LLC, was closed 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.
61
MID PENN BANCORP, INC.
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.
(d)
Investment Securities
Available-for-sale securities include debt securities which are reported at fair value, with unrealized holding gains and
losses excluded from earnings being reported, net of deferred income taxes, as a component of accumulated other
comprehensive income (loss) within shareholders’ equity. Beginning January 1, 2018, upon adoption of ASU 2016-01,
equity securities with readily determinable fair values are stated at fair value within other assets on the balance sheet, with
realized and unrealized gains and losses reported in other expense on the income statement. For periods prior to January 1,
2018, equity securities were classified as available-for-sale and stated at fair value within investment securities available-
for-sale on the balance sheet, with unrealized gains and losses reported as a separate component of accumulated other
comprehensive loss, net of tax.
During 2017, Mid Penn added a held-to-maturity pool to its overall investment portfolio of debt securities, which are
reported at amortized cost. Unrealized holding gains and losses on held-to-maturity securities are excluded from earnings,
and are not 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.
(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.
(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 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.
62
MID PENN BANCORP, INC.
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.
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.
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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 non-qualifying condition(s) 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.
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 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. Mid Penn also estimates a reserve for unfunded lending commitments, which represents
management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the
consolidated balance sheet. The reserve for unfunded loan commitments was $159,000 at December 31, 2018 and
$105,000 at December 31, 2017.
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.
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The allowance consists of specific, general and unallocated components. The specific component relates to loans that are
classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash
flows (“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. 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.
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. 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. 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. 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, and will
update the allowance impact calculation upon receipt of the updated real estate 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.
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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 an estimate of fair 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’s practice of obtaining independent third party market valuations on the subject property as soon as practically
possible of the credit being identified as impaired sometimes indicates that the loan to value ratio is sufficient to obviate
the need for a specific allocation. 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 twelve months for revaluation by an independent third
party.
The unallocated component of the allowance for loan and lease losses allocation recognizes the inherent imprecision in
our allowance for loan and lease loss methodology, or any alternative methodology, for estimating specific and general
loan losses, including the unpredictable timing and amounts of charge-offs, the fact that historical loss averages do not
necessarily correlate to unexpected changes to specific-credit or general portfolio cash flows and collateral values which
could negatively impact unimpaired portfolio loss factors. Also, the unallocated component covers several considerations
that are not specifically measureable through either the specific and general components. For example, we believe that we
could face credit risks and uncertainties, not reflected in recent historical losses or qualitative factor assessments,
associated with unpredictable changes in economic growth or business conditions in our markets or for certain industries
in which we have commercial loan borrowers, or unanticipated stresses to the values of real estate held as collateral. Any
or all of these additional issues can adversely affect our borrowers’ ability to timely repay their loans. Additionally, we
have experienced continued strong commercial loan growth, including growth in newer markets where we have less of a
loss history.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, Mid Penn
does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for
impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.
Loans whose terms are modified are classified as troubled debt restructurings if the borrowers have been granted
concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a
troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated
maturity date. Nonaccrual troubled debt restructurings are restored to accrual status if principal and interest payments,
under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt
restructurings are designated as impaired.
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.
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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.
On loans determined to purchase credit impaired, 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.
(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 fifteen 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 level of stock ownership in the FHLB is adjusted
by the FHLB throughout the year based upon the level of outstanding borrowings of the Bank (in general, the higher the
amount of borrowings, the higher the amount of FHLB stock ownership requirement). Total dividends received from the
FHLB in 2018 and 2017 totaled $275,000 and $114,000, respectively.
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(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, 2018, Mid Penn had $844,000 of residential real estate
held in other real estate owned. There was also $211,000 in loans for which formal foreclosure proceedings were in
process at December 31, 2018. As of December 31, 2017, Mid Penn had $42,000 of residential real estate held in other
real estate owned and $308,000 in loans for which formal foreclosure proceedings were in process.
(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 $106,000 and $126,000 at December 31, 2018 and 2017,
respectively. Amortization expense is reflected in the Consolidated Statements of Income in intangible amortization and
was $20,000, $18,000, and $30,000 for the years 2018, 2017, and 2016, respectively. Servicing rights are evaluated for
impairment based upon estimated fair value as compared to unamortized carrying value. No servicing right impairments
were identified or recorded for the three year period ended December 31, 2018. The principal balance of loans serviced
for others was $15,601,000 and $17,963,000 for December 31 2018 and 2017, respectively.
(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 $233,000 at December 31, 2018 and $277,000 at December
31, 2017, 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. Mid Penn received
$76,000 in low-income housing tax credits for each of the tax years ended December 31, 2017 and 2016.
During the second quarter of 2018, Mid Penn entered into a commitment to purchase a limited partnership interest in a
low-income housing project to construct thirty-seven apartments and common amenities in Dauphin County,
Pennsylvania. All of the units are intended to qualify for Federal Low-Income Housing Tax Credits (“LIHTCs”) as
provided for in Section 42 of the Internal Revenue Code of 1986, as amended. Mid Penn’s limited partner capital
contribution commitment is $7,579,000, which will be paid in installments over the course of construction of the low-
income housing facilities. Each installment payment is conditional upon both Mid Penn’s review and approval of the
installment payment certificate and continued compliance with the terms of the original partnership agreement. The
investment in the limited partnership will be reported in other assets on the Consolidated Balance Sheet and amortized
over a ten year period. The project has been conditionally awarded $861,000 in annual LIHTCs by the Pennsylvania
Housing Finance Agency, with a total anticipated LIHTC amount of $8,613,000 to be awarded to Mid Penn over the ten
year amortization period. Mid Penn’s commitment to initiate investments in the limited partnership interest was
conditional upon (i) the review and approval of all closing documents, (ii) an opinion letter for tax counsel to the
Partnership that the project qualifies for the LIHTCs, and (iii) review and approval by Mid Penn of other documents it
deemed necessary. All such initial conditions were satisfied and Mid Penn began funding the investment during 2018. As
of December 31, 2018, the total investment in the limited partnership was $1,710,000 and was reported in other assets on
the Consolidated Balance Sheet.
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MID PENN BANCORP, INC.
(l)
Income Taxes
Mid Penn accounts for income taxes in accordance with income tax accounting guidance ASC Topic 740, Income Taxes.
Current income tax accounting guidance results in two components of income tax expense: current and deferred. Current
income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted
tax law to the taxable income or excess of deductions over revenues. Mid Penn determines deferred income taxes using
the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects
of the differences between the book and tax 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.
In December, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted reducing the corporate tax rate applicable to
Mid Penn, for tax years beginning after 2017, to a flat 21 percent rate. Though the reduced rate will provide tax savings to
Mid Penn in future periods after 2017, the reduction resulted in a one-time $1,169,000 write-down of Mid Penn’s deferred
tax asset in December 2017, because the deferred tax asset was previously valued based upon the projection of Mid Penn
realizing a 34 percent future corporate tax rate benefit. This write-down was included in Mid Penn’s income tax provision
for the year ended December 31, 2017, as further discussed in Note 18 (Federal Income Taxes) to the consolidated
financial statements.
(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 carrying amount of core deposit intangibles was $6,893,000 and $308,000
at December 31, 2018 and 2017, respectively. Amortization expense is reflected in the Consolidated Statements of
Income in intangible amortization and was $1,188,000, $86,000, and $96,000 for the years 2018, 2017, and 2016,
respectively. The core deposit intangible for each respective acquisition (Phoenix in 2015, and Scottdale and First Priority
in 2018) is being amortized over a ten-year period staring at the respective acquisition date and using a sum-of-the-year’s
digits basis. Core deposit intangibles are subject to impairment testing whenever events or changes in circumstances
indicate the need for such evaluation.
(n) Goodwill
Goodwill is the excess of the purchase price over the fair value of assets acquired in connection with past business
acquisitions. The goodwill balance at December 31, 2018 was comprised of, (i) $39,744,000 related to the July 31, 2018
First Priority acquisition, (ii) $19,178,000 related to the January 8, 2018 Scottdale acquisition and (iii) $3,918,000
recorded as a result of the Phoenix acquisition in 2015. Goodwill is evaluated annually for impairment; however, if
certain events occur which indicate goodwill might be impaired between annual tests, goodwill must be tested when such
events occur. In making this goodwill potential impairment 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 evaluation,
which was performed as of October 31, 2018 using a qualitative analysis. In addition, Mid Penn did not identify any
impairment in 2017 or 2016 using a similar qualitative analyses.
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MID PENN BANCORP, INC.
(o) Bank Owned Life Insurance
Mid Penn is the owner and beneficiary of bank-owned life insurance (“BOLI”) policies on current and former Mid Penn
directors, as well as BOLI policies acquired through the Phoenix and First Priority acquisitions covering select Miners
Bank and First Priority employees. 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.
(q) Postretirement Benefit Plans
Mid Penn follows the guidance in ASC Topic 715, Compensation-Retirement Benefits, related to postretirement benefit
plans. This guidance requires additional disclosures about defined benefit pension plans and other postretirement defined
benefit plans.
As a result of the acquisition of Scottdale on January 8, 2018, Mid Penn assumed a noncontributory defined benefit
pension plan covering certain former employees of Scottdale. A liability of $345,000 representing the funded status of the
plan was included in other liabilities as of December 31, 2018. Additionally, for the year ended December 31, 2018, Mid
Penn recognized $737,000 of settlement gains as a result of certain lump sum payouts to participants of the defined benefit
pension plan. The settlement gains were recorded in noninterest income as a component of other income for the year
ended December 31, 2018.
(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.
During 2018, Mid Penn assumed the 401(k) plans of Scottdale and First Priority and, as of December 31, 2018, these
401(k) plans were managed by Mid Penn’s Human Resources and Trust areas. These 401(k) plans were frozen and no
contributions were made to the plans in 2018. The plans are being evaluated for either termination or merger into Mid
Penn’s primary 401(k) plan.
(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 assets under management totaled
$125,567,000 and $124,354,000 at December 31, 2018 and 2017, respectively. Most 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.
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MID PENN BANCORP, INC.
(u) Restricted Stock
On May 6, 2014, Mid Penn shareholders approved the 2014 Restricted Stock Plan (the “Plan”), which authorizes the
issuance of awards that shall not exceed, in the aggregate, 100,000 shares of common stock. Awards under the Plan are
limited to employees and directors of the Company and the Bank selected by the Compensation Committee of the Board
of Directors, to advance the best interest of Mid Penn and its shareholders.
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. The restricted stock is non-voting and non-
participating until the granted shares vest. Once the shares vest, the recipient has full voting rights and is entitled to
common 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:
2018
2017
2016
$
10,596 $
7,089 $
7,804
Dividends on Series D preferred stock
Net income available to common shareholders
102
10,494 $
—
7,089 $
—
7,804
$
Weighted average common shares outstanding
Basic earnings per common share
7,071,091 4,236,616 4,229,284
1.85
$
1.48 $
1.67 $
There were no antidilutive shares used in the calculation at December 31, 2018, 2017, and 2016.
71
MID PENN BANCORP, INC.
(4) Acquisition of The Scottdale Bank and Trust Company
On January 8, 2018, Scottdale merged with and into Mid Penn Bank, with Mid Penn Bank continuing as the surviving entity.
Pursuant to the merger agreement, each share of Scottdale common stock issued and outstanding immediately prior to January 8,
2018 converted into the right to receive (i) $1,166 in cash without interest or (ii) 38.88 shares of Mid Penn common stock. As a
result, Mid Penn issued 1,878,827 shares of Mid Penn common stock with an acquisition date fair value of approximately
$64,181,000, based on the closing stock price of Mid Penn’s common stock on January 8, 2018 of $34.16, and cash of
$2,792,000. Including an insignificant amount of cash paid in lieu of fractional shares, the fair value of total consideration paid
was $66,973,000.
The assets and liabilities of Scottdale were recorded on the consolidated balance sheet of the Company at their estimated fair
value as of January 8, 2018, and their results of operations have been included in the consolidated income statement of the
Company since such date. Scottdale has been fully integrated into Mid Penn; therefore, the amount of revenue and earnings of
Scottdale included in the consolidated income statement since the acquisition date is impracticable to provide.
Included in the purchase price was goodwill of $19,178,000 and a core deposit intangible of $4,940,000. The core deposit
intangible will be amortized over a ten-year period using a sum of the years’ digits basis. The goodwill will not be amortized,
but will be measured annually for impairment or more frequently if circumstances require. Core deposit intangible amortization
expense related to the Scottdale acquisition in 2018 totaled $898,000. Core deposit intangible amortization related to the
Scottdale acquisition for the five years beginning 2019 through 2023 is estimated to be $808,000, $719,000, $629,000,
$539,000, and $449,000 per year, respectively, and $898,000 in total for the four years after 2023.
The allocation of the purchase price is as follows:
(Dollars in thousands)
Assets acquired:
Cash and cash equivalents
Investment securities
Restricted stock
Loans
Goodwill
Core deposit intangible
Premises and equipment
Foreclosed assets
Deferred income taxes
Accrued interest receivable
Other assets
Total assets acquired
Liabilities assumed:
Deposits
Accrued interest payable
Other liabilities
Total liabilities assumed
Consideration paid
Cash paid
Fair value of common stock issued
72
$
67,817
114,039
97
70,769
19,178
4,940
1,496
11
1,050
989
266
280,652
209,981
16
3,682
213,679
$
66,973
$
2,792
64,181
MID PENN BANCORP, INC.
The following table summarizes the final estimated fair value of the assets acquired and liabilities and equity assumed in the
Scottdale transaction.
(Dollars in thousands)
Total purchase price (consideration paid)
$
66,973
Net assets acquired:
Cash and cash equivalents
Investment securities
Restricted stock
Loans
Core deposit intangible
Premises and equipment
Foreclosed assets
Deferred income taxes
Accrued interest receivable
Other assets
Deposits
Accrued interest payable
Other liabilities
Goodwill
67,817
114,039
97
70,769
4,940
1,496
11
1,050
989
266
(209,981 )
(16 )
(3,682 )
47,795
19,178
$
In general, factors contributing to goodwill recognized as a result of the Scottdale acquisition include expected cost savings
from combined operations, opportunities to expand into several new markets, and growth and profitability potential from the
repositioning of short-term investments into higher-yielding loans. The goodwill acquired as a result of the Scottdale
acquisition is not tax deductible.
The fair value of the financial assets acquired included loans receivable with a net amortized cost basis of $70,769,000. 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 January 8, 2018
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 January 8, 2018
$
$
71,809
601
(995 )
(646 )
70,769
The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the
contractual 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 loan inception to the acquisition date. The credit adjustment on impaired loans
is derived in accordance with ASC 310-30-30 and represents the portion of the loan balance that has been deemed uncollectible
based on our expectations of future cash flows for each respective loan.
The information about the acquired Scottdale impaired loan portfolio as of January 8, 2018 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
$
$
2,586
(1,010 )
1,576
(305 )
1,271
73
MID PENN BANCORP, INC.
The following table presents pro forma information as if the merger between Mid Penn Bank and Scottdale had been completed
on January 1, 2017. The pro forma information does not necessarily reflect the results of operations that would have occurred
had Mid Penn Bank merged with Scottdale at the beginning of 2017. The supplemental pro forma earnings for the year ended
December 31, 2018 exclude both (i) adjustments to estimate the eight day impact of Scottdale due to immateriality and
impracticality and (ii) $1,304,000 of merger related costs incurred in 2018 related to the Scottdale acquisition, of which
$205,000 was not deductible for federal income tax purposes. Scottdale merger related costs also included approximately
$518,000 of severance and retention bonus expenses. 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.
(Dollars in thousands, except per share data)
Net interest income after loan loss provision
Noninterest income
Noninterest expense
Net income
Net income per common share
$
For the Year Ended
December 31, 2018
2018
2017
55,434 $
7,462
48,867
11,736
1.64
43,371
6,094
38,403
8,075
1.32
(5)
Acquisition of First Priority Financial Corp.
On July 31, 2018, Mid Penn completed its acquisition of First Priority, through the merger of First Priority with and into Mid
Penn. In connection with this acquisition, First Priority Bank, First Priority’s wholly-owned bank subsidiary, was merged
with and into Mid Penn Bank.
Pursuant to the merger agreement between Mid Penn and First Priority, the common shareholders of First Priority received
0.3481 shares of Mid Penn common stock for each share of First Priority common stock owned. Additionally, outstanding
options to purchase First Priority common stock at the time of the merger were converted into the right to receive cash at a
per-option value of $11.07 less the applicable exercise price, without interest. As a result of the acquisition, Mid Penn’s
fulfillment of the merger consideration requirements resulted in (i) the issuance of 2,320,800 shares of Mid Penn common
stock with an acquisition date fair value of approximately $76,122,000 based on the closing stock price of Mid Penn’s
common stock of $32.80 on July 31, 2018, (ii) the payment $3,801,000 related to cashing out the stock options, (iii) cash paid
of $6,000 in lieu of fractional shares, and (iv) the issuance of 3,404 shares of Fixed Rate Cumulative Perpetual Preferred
Stock, Series D totaling $3,404,000 in replacement of similarly valued preferred shares previously issued by First Priority.
Aggregately, this resulted in a combined fair value of total consideration paid of $79,929,000.
The assets and liabilities of First Priority were recorded on the consolidated balance sheet of the Company at their estimated
fair value as of July 31, 2018, and their results of operations have been included in the consolidated income statement of the
Company since such date. First Priority has been fully integrated into Mid Penn; therefore, the amount of revenue and
earnings of First Priority included in the consolidated income statement since the acquisition date is impracticable to provide.
Included in the purchase price was $39,744,000 of goodwill, a core deposit intangible of $2,832,000, and a trade name
intangible of $205,000. The core deposit intangible will be amortized over a ten-year period using a sum of the years’ digits
basis. The goodwill will not be amortized, but will be measured annually for impairment or more frequently if circumstances
require. Core deposit intangible amortization expense recognized in 2018 related to the First Priority acquisition totaled
$215,000. Core deposit intangible amortization expense related to the First Priority acquisition for the five years beginning
2019 through 2023 is estimated to be $493,000, $442,000, $390,000, $339,000 and $288,000 per year, respectively, and
$665,000 in total for the four years after 2023.
74
MID PENN BANCORP, INC.
The allocation of the purchase price is as follows:
(Dollars in thousands)
Assets acquired:
Cash and cash equivalents
Investment securities
Restricted stock
Loans
Goodwill
Core deposit intangible
Trade name intangible
Premises and equipment
Foreclosed assets
Deferred income taxes
Accrued interest receivable
Other assets
Total assets acquired
Liabilities assumed:
Deposits
Borrowings
Accrued interest payable
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
$
11,398
62,977
2,237
511,623
39,744
2,832
205
1,147
125
3,140
2,293
4,197
641,918
504,946
49,939
1,073
2,627
558,585
3,404
561,989
$
79,929
$
3,807
76,122
75
MID PENN BANCORP, INC.
Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, allows for adjustments to goodwill for a
period of up to one year after the merger date for information that becomes available that reflects circumstances at the merger
date. The following table summarizes the estimated fair value of the assets acquired and liabilities and equity assumed in the
First Priority transaction that management believes are final, however, ASC 805 does allow for adjustments for a period up to
one year from the merger date.
(Dollars in thousands)
Total purchase price (consideration paid)
$
79,929
Net assets acquired:
Cash and cash equivalents
Investment securities
Restricted stock
Loans
Core deposit intangible
Trade name intangible
Premises and equipment
Foreclosed assets
Deferred income taxes
Accrued interest receivable
Other assets
Deposits
Borrowings
Accrued interest payable
Other liabilities
Preferred stock
Goodwill
11,398
62,977
2,237
511,623
2,832
205
1,147
125
3,140
2,293
4,197
(504,946 )
(49,939 )
(1,073 )
(2,627 )
(3,404 )
40,185
39,744
$
In general, factors contributing to goodwill recognized as a result of the First Priority acquisition include expected cost
savings from combined operations, opportunities to expand into several new markets, and growth and profitability potential
from the repositioning of short-term investments into higher-yielding loans. The goodwill acquired as a result of the First
Priority acquisition is not tax deductible.
The fair value of the financial assets acquired included loans receivable with a net amortized cost basis of $511,623,000. 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 January 8, 2018
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 January 8, 2018
$
$
521,644
(3,023 )
(6,742 )
(256 )
511,623
The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to
the contractual 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 loan inception to the acquisition date. The credit adjustment on
impaired loans is derived in accordance with ASC 310-30-30 and represents the portion of the loan balance that has been
deemed uncollectible based on our expectations of future cash flows for each respective loan.
76
MID PENN BANCORP, INC.
The information about the acquired First Priority impaired loan portfolio as of July 31, 2018 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
$
1,855
(858 )
997
(125 )
872
The following table presents pro forma information as if the merger between Mid Penn and First Priority had been completed
on January 1, 2017. The pro forma information does not necessarily reflect the results of operations that would have
occurred had Mid Penn merged with First Priority at the beginning of 2017. The supplemental pro forma earnings for the
year ended December 31, 2018 excludes $3,486,000 of merger related costs related to the First Priority acquisition, of which
$714,000 was not deductible for federal income tax purposes. First Priority merger related costs also included approximately
$1,475,000 of severance and retention bonus expenses. 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.
(Dollars in thousands, except per share data)
Net interest income after loan loss provision
Noninterest income
Noninterest expense
Net income
Net income per common share
$
For the Year Ended
December 31,
2018
2017
66,370 $
7,845
55,689
15,469
1.84
55,082
6,748
49,268
9,170
1.40
(6) Accumulated Other Comprehensive (Loss) Income
The components of accumulated other comprehensive (loss) income, net of taxes, are as follows:
(Dollars in thousands)
Balance - December 31, 2018
Balance - December 31, 2017
Unrealized (Loss)
Gain on
Securities
Defined Benefit
Plan Liability
Accumulated Other
Comprehensive
(Loss) Income
$
$
(3,242 ) $
(2,159 ) $
864 $
85 $
(2,378 )
(2,074 )
(7) 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, 2018 and December 31, 2017 because the Bank had sufficient vault cash available.
(8)
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. Securities to be held to maturity are carried
at amortized cost.
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.
77
MID PENN BANCORP, INC.
ASC Topic 320, Investments – Debt Securities, clarifies the interaction of the factors that should be considered when
determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether
(a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its
anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment.
In instances when a determination is made that other-than-temporary impairment exists but the investor does not intend to sell
the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated
recovery, this guidance changes the presentation and amount of the other-than-temporary impairment recognized in the income
statement. The other-than-temporary impairment is separated into (a) the amount of the total other-than-temporary impairment
related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and (b) the amount of the total
other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related
to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors
is recognized in other comprehensive income (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 2018, 2017, and 2016.
Beginning January 1, 2018, upon adoption of ASU 2016-01, equity securities with readily determinable fair values are stated at
fair value within other assets on the balance sheet, with realized and unrealized gains and losses reported in other expense on the
income statement. For periods prior to January 1, 2018, equity securities were classified as available-for-sale and stated at fair
value within investment securities available-for-sale on the balance sheet, with unrealized gains and losses reported as a separate
component of accumulated other comprehensive loss, net of tax. Equity securities without readily determinable fair values are
recorded at cost less any impairment.
At December 31, 2018 and 2017, amortized cost, fair value, and unrealized gains and losses on investment securities are as
follows:
(Dollars in thousands)
December 31, 2018
Available for sale securities:
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Corporate debt securities
$
Total available for sale securities
43,270 $
39,865
30,642
2,250
116,027
Held to maturity securities:
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Corporate debt securities
Total held to maturity securities
$
16,985 $
65,812
84,034
1,539
168,370
Total $ 284,397 $
10 $
—
11
—
21
14 $
46
457
—
517
538 $
1,708 $
1,016
1,397
4
4,125
41,572
38,849
29,256
2,246
111,923
16,856
143 $
64,548
1,310
83,649
842
1,529
10
2,305
166,582
6,430 $ 278,505
78
MID PENN BANCORP, INC.
(Dollars in thousands)
December 31, 2017
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
Total available-for-sale debt securities
Available-for-sale equity securities:
Equity securities
Total available-for-sale equity securities
Held-to-maturity debt securities:
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Total held-to-maturity debt securities
Total
Amortized Unrealized Unrealized
Cost
Gains
Losses
Fair
Value
$
$
$
$
$
40,125 $
26,398
27,775
1,350
95,648 $
550
550 $
10,984 $
53,472
36,900
101,356
197,554 $
— $
2
7
5
14 $
—
— $
— $
—
41
41
55 $
1,395 $
569
739
—
2,703 $
38,730
25,831
27,043
1,355
92,959
44
44 $
506
506
90 $
523
301
914
3,661 $
10,894
52,949
36,640
100,483
193,948
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.
Equity securities consist of Community Reinvestment Act funds and, as of December 31, 2018 and December 31, 2017, Mid
Penn had $492,000 and $506,000, respectively, in equity securities recorded at fair value. Prior to January 1, 2018, equity
securities were stated at fair value with unrealized gains and losses reported as a separate component of accumulated other
comprehensive loss, net of tax. At December 31, 2017, net unrealized gains of $44,000 had been recognized in accumulated
other comprehensive loss. On January 1, 2018, with the adoption of ASU 2016-01, these unrealized gains and losses were
reclassified out of accumulated other comprehensive loss and into retained earnings and subsequent changes in fair value are
now recognized in net income and the fair value of securities is presented in other assets. During the year ended December 31,
2018, no equity securities were sold and $15,000 of loss related to the change in fair value of the equity securities was recorded
in other expense.
Investment securities having a fair value of $214,239,000 at December 31, 2018, and $141,465,000 at December 31, 2017, were
pledged primarily to secure public deposits.
79
MID PENN BANCORP, INC.
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, 2018 and 2017.
(Dollars in thousands)
Less Than 12 Months
12 Months or More
Total
December 31, 2018
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
Corporate debt securities
Total temporarily impaired
available for sale securities
Held to maturity securities:
U.S. Treasury and
U.S. government agencies
Mortgage-backed
U.S. government agencies
State and political
subdivision obligations
Corporate debt securities
Total temporarily impaired
held to maturity securities
Total
0
$ — $
—
21
$ 38,386 $
1,708
21
$ 38,386 $
1,708
11
16,740
163
19
22,093
853
30
38,833
1,016
3
2
1,751
1,996
23
4
51
0
24,520
—
1,374
—
54
2
26,271
1,996
1,397
4
16
20,487
190
91
84,999
3,935
107
105,486
4,125
1
$ 1,985 $
10
3
$ 8,852 $
133
4
$ 10,837 $
143
10
16,165
79
35
42,431
1,231
45
58,596
1,310
26
1
38
54
11,321
1,529
111
10
77
0
29,460
—
731
—
103
1
40,781
1,529
842
10
31,000
$ 51,487 $
210
400
115
206
80,743
$ 165,742 $
2,095
6,030
153
260
111,743
$ 217,229 $
2,305
6,430
(Dollars in thousands)
Less Than 12 Months
12 Months or More
Total
December 31, 2017
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
Corporate debt securities
Equity securities
Total temporarily impaired
available for sale securities
Held to maturity securities:
U.S. Treasury and
U.S. government agencies
Mortgage-backed
U.S. government agencies
State and political
subdivision obligations
Total temporarily impaired
held to maturity securities
Total
3
4
11
0
0
$ 5,008 $
184
18
$ 33,722 $
1,211
21
$ 38,730 $
1,395
5,267
75
15
20,497
494
19
25,764
6,144
—
—
102
—
—
40
0
1
19,091
—
506
637
—
44
51
0
1
25,235
—
506
569
739
—
44
18
16,419
361
74
73,816
2,386
92
90,235
2,747
0
0
0
$ — $
—
4
$ 10,894 $
90
4
$ 10,894 $
90
—
—
35
52,949
523
35
52,949
—
—
77
29,976
301
77
29,976
523
301
0
18
—
$ 16,419 $
—
361
116
190
93,819
$ 167,635 $
914
3,300
116
208
93,819
$ 184,054 $
914
3,661
80
MID PENN BANCORP, INC.
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, 2018, the majority of the unrealized losses on securities in an unrealized loss position were attributed to state and
political subdivision obligations, mortgage-back U.S. government agencies and U.S. Treasury and government agencies. At
December 31, 2017, the majority of the unrealized losses on securities in an unrealized loss position were attributed to state and
political subdivision obligations and mortgage-back 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 primarily to changes
in interest rates (based upon the respective securities maturity date relative to the yield curve) and not due to any notable erosion of
credit quality.
Gross realized gains and losses on sales of available-for-sale securities for the years ended December 31, 2018, 2017, and 2016 are
shown in the table below.
(Dollars in thousands)
Realized gains
Realized losses
Net gains
For the year ended December 31,
2017
2018
2016
$
$
150 $
(13 )
137 $
246 $
(204 )
42 $
1,927
(881 )
1,046
The table below is the maturity distribution of investment securities at amortized cost and fair value at December 31, 2018.
(Dollars in thousands)
December 31, 2018
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
Held to Maturity
Amortized Fair
Available for Sale
Amortized Fair
Cost
$
— $
Value
Value Cost
1,086 $ 1,087
— $
18,745 18,597
25,285 24,732
82,727 82,350
43,070 41,027
7,807
—
7,315
76,162 73,074 102,558 102,034
65,812 64,548
39,865 38,849
$ 116,027 $ 111,923 $ 168,370 $ 166,582
—
81
MID PENN BANCORP, INC.
(9) 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 $475,000 and
$464,000 as of December 31, 2018 and 2017, respectively, and the classified ratings of special mention, substandard, and
doubtful within Mid Penn’s internal risk rating system as of December 31, 2018 and 2017, are noted below:
(Dollars in thousands)
December 31, 2018
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Lease financing
Residential mortgage
Home equity
Consumer
(Dollars in thousands)
December 31, 2017
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Lease financing
Residential mortgage
Home equity
Consumer
Pass
$ 276,690 $
850,150
141,806
53
251,151
70,004
10,315
$ 1,600,169 $
Pass
$ 182,168 $
505,397
61,667
229
97,814
41,479
3,868
$ 892,622 $
Special Mention Substandard Doubtful Total
2,769 $
2,432
—
—
147
—
—
5,348 $
7,059 $
8,787
367
—
2,245
92
—
18,550 $
— $ 286,518
— 861,369
— 142,173
—
53
— 253,543
70,096
—
10,315
—
— $ 1,624,067
Special Mention Substandard Doubtful Total
453 $
1,435
182
—
157
105
—
2,332 $
5,412 $
8,180
487
—
1,062
309
—
15,450 $
— $ 188,033
— 515,012
62,336
—
—
229
99,033
—
41,893
—
3,868
—
— $ 910,404
82
MID PENN BANCORP, INC.
Impaired loans by loan portfolio class as of December 31, 2018 and 2017 are summarized as follows:
(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Lease financing
Residential mortgage
Home equity
Consumer
With no related allowance recorded and acquired
with credit deterioration: *
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Lease financing
Residential mortgage
Home equity
Consumer
With an allowance recorded:
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Lease financing
Residential mortgage
Home equity
Consumer
Total:
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Lease financing
Residential mortgage
Home equity
December 31, 2018
Unpaid
Principal
Balance
Recorded
Investment
Related
Allowance
Recorded
Investment
December 31, 2017
Unpaid
Principal
Balance
Related
Allowance
$
$
$
$
— $
2,007
—
—
657
30
—
— $
2,276
—
—
811
106
—
28 $
1,563
—
—
1,208
4
—
28 $
1,563
—
—
1,208
4
—
4,527 $
721
367
—
—
—
—
4,635 $
721
370
—
—
—
—
4,555 $
4,291
367
—
2,019
34
4,663 $
4,560
370
—
1,865
110
— $
—
—
—
—
—
—
— $
—
—
—
—
—
—
500 $
204
38
—
—
—
—
500 $
204
38
—
—
—
— $
3,424
—
—
760
260
—
13 $
4,056
—
—
877
295
—
— $
555
—
—
306
—
—
— $
555
—
—
306
—
—
4,434 $
1,423
487
—
—
—
—
4,460 $
1,589
492
—
—
—
—
4,434 $
5,402
487
—
1,066
260
4,473 $
6,200
492
—
1,183
295
—
—
—
—
—
—
—
—
—
—
—
—
—
—
136
293
100
—
—
—
—
136
293
100
—
—
—
*
Loans acquired with credit deterioration are presented net of credit fair value adjustment.
83
MID PENN BANCORP, INC.
The average recorded investment of impaired loans and related interest income recognized for the years ended December 31,
2018, 2017, and 2016 are summarized as follows:
(Dollars in thousands)
With no related allowance recorded:
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Lease financing
Residential mortgage
Home equity
Consumer
With no related allowance recorded and acquired
with credit deterioration:
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Lease financing
Residential mortgage
Home equity
Consumer
With an allowance recorded:
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Lease financing
Residential mortgage
Home equity
Consumer
Total:
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Lease financing
Residential mortgage
Home equity
December 31, 2018
Interest
Income
Recognized
Average
Recorded
Investment
December 31, 2017
Interest
Income
Recognized
Average
Recorded
Investment
December 31, 2016
Interest
Income
Recognized
Average
Recorded
Investment
$
$
$
$
— $
3,048
—
—
754
101
—
23 $
1,414
—
—
832
1
—
4,437 $
541
367
—
—
—
—
4,460 $
5,003
367
—
1,586
102
— $
3
—
—
29
—
—
— $
23
—
—
—
—
—
— $
—
—
—
—
—
—
— $
26
—
—
29
—
15 $
1,915
164
—
890
218
—
— $
651
—
—
332
—
—
1,779 $
1,446
488
—
—
—
—
1,794 $
4,012
652
—
1,222
218
— $
279
—
—
18
6
—
— $
110
—
—
—
—
—
— $
—
—
—
—
—
—
— $
389
—
—
18
6
9 $
820
124
—
821
75
—
— $
810
—
—
378
—
—
59 $
2,177
48
—
14
32
—
68 $
3,807
172
—
1,213
107
—
—
—
—
21
—
—
—
164
—
—
4
—
—
—
—
—
—
—
—
—
—
164
—
—
25
—
Nonaccrual loans by loan portfolio class, including loans acquired with credit deterioration, as of December 31, 2018 and 2017
are summarized as follows:
(Dollars in thousands)
Commercial and industrial
Commercial real estate
Commercial real estate - construction
Residential mortgage
Home equity
2018
2017
$
$
4,555 $
4,291
367
1,502
34
10,749 $
4,434
4,902
487
492
260
10,575
84
MID PENN BANCORP, INC.
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
$536,000, $780,000, and $778,000, in the years ended December 31, 2018, 2017, and 2016, respectively. Mid Penn has no
commitments to lend additional funds to borrowers with impaired or nonaccrual loans.
The performance and credit quality of the loan portfolio is also monitored by the analyzing the age of the loans receivable as
determined by the length of time a recorded payment is past due. The classes of the loan portfolio summarized by the past due
status as of December 31, 2018 and 2017 are summarized as follows:
(Dollars in thousands)
December 31, 2018
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
Lease financing:
Lease financing
Residential mortgage:
Residential mortgage
Acquired with credit deterioration
Home equity:
Home equity
Acquired with credit deterioration
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
—
—
—
—
—
—
—
—
—
—
—
$
17 $
23
— $
5
4,527 $
—
4,544 $ 281,946 $ 286,490 $
28
—
28
685
29
—
—
458
1,534
1,143 858,663 859,806
1,563
1,563
—
—
—
367
367 141,806 142,173
—
—
—
—
53
53
461
19
166
—
—
57
22
—
277
913
738 251,597 252,335
1,208
219
989
25
4
213
4
69,879
—
70,092
4
57
1,457 $
$
5
89 $
—
8,105 $
62
10,315
10,253
9,651 $ 1,614,416 $ 1,624,067 $
85
MID PENN BANCORP, INC.
(Dollars in thousands)
December 31, 2017
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
—
—
—
—
—
—
—
—
—
-
$
4,439 $
16 $
— $
4,455 $ 183,578 $ 188,033 $
—
500
—
—
3,669
55
3,669 510,788 514,457
555
555
—
—
—
487
487
61,849
62,336
—
—
—
—
229
229
310
—
467
31
177
193
954
224
97,773
82
98,727
306
54
98
250
402
41,491
41,893
—
3,868
4,831 $ 10,749 $ 899,655 $ 910,404 $
3,865
3
3
5,306 $
$
—
612 $
86
MID PENN BANCORP, INC.
Activity in the allowance for loan and lease losses for the years ended December 31, 2018, 2017, and 2016, and the recorded
investment in loans receivable as of December 31, 2018, 2017, and 2016 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
December 31,
2018
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
$
1,795 $
(142 )
1
737
2,391
4,435 $
(64 )
808
(476 )
4,703
178 $
(40 )
—
(63 )
75
— $
—
—
—
—
428 $
(60 )
—
85
453
423 $
(185 )
1
289
528
3 $
(37 )
9
32
7
344 $
—
—
(104 )
240
7,606
(528 )
819
500
8,397
500
204
38
—
— —
—
—
742
1,891 $
4,499 $
37 $
— $
453 $
528 $
7 $
240 $
7,655
286,518 $
861,369 $
142,173 $
53 $ 253,543 $ 70,096 $ 10,315 $ —
$ 1,624,067
4,527
2,728
367
—
811
30
—
—
8,463
28
1,563
—
—
1,208
4
—
—
2,803
281,963 $
857,078 $
141,806 $
53 $ 251,524 $ 70,062 $ 10,315 $ —
$ 1,612,801
87
MID PENN BANCORP, INC.
(Dollars in thousands)
December 31,
2017
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
Commercial
and
industrial
Commercial
real estate
Commercial
real estate -
construction
Lease
financing
Residential
mortgage
Home
equity Consumer Unallocated Total
1,580 $
(25 )
26
214
1,795
4,323 $
(322 )
553
(119 )
4,435
144 $
—
—
34
178
1 $
—
—
(1 )
—
541 $
(102 )
4
(15 )
428
379 $
(20 )
5
59
423
3 $
(28 )
7
21
3
212 $ 7,183
(497 )
595
325
7,606
—
—
132
344
136
293
100
—
— —
—
—
529
$
1,659 $
4,142 $
78 $
— $
428 $
423 $
3 $
344 $ 7,077
Loans receivable:
Ending balance
$
Ending balance:
individually
evaluated for
impairment
Ending balance:
acquired with
credit
deterioration
Ending balance:
collectively
evaluated for
impairment
$
188,033 $
515,012 $
62,336 $
229 $
99,033 $ 41,893 $
3,868 $
— $ 910,404
4,434
4,847
487
—
760
260
—
— 10,788
—
555
—
—
306 —
—
—
861
183,599 $
509,610 $
61,849 $
229 $
97,967 $ 41,633 $
3,868 $
— $ 898,755
88
MID PENN BANCORP, INC.
(Dollars in thousands)
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
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
$
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
89
MID PENN BANCORP, INC.
The recorded investments in troubled debt restructured loans at December 31, 2018 and 2017 are as follows:
(Dollars in thousands)
December 31, 2018
Commercial and industrial
Commercial real estate
Residential mortgage
Home equity
(Dollars in thousands)
December 31, 2017
Commercial and industrial
Commercial real estate
Residential mortgage
Home equity
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding Recorded
Investment
$
$
4,110 $
2,940
677
14
7,741 $
$
$
4,110 $
5,735
677
14
10,536 $
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding Recorded
Investment
Recorded Investment
4,302
2,201
516
1
7,020
4,460 $
2,841
675
14
7,990 $
Recorded Investment
4,434
4,593
540
4
9,571
4,460 $
5,581
675
14
10,730 $
Mid Penn’s troubled debt restructured loans at December 31, 2018 totaled $7,020,000, and included four loans totaling
$517,000 representing accruing impaired loans to unrelated borrowers in compliance with the terms of the modification, with
three loans being accruing impaired residential mortgages to unrelated borrowers totaling $516,000 and one loan being an
accruing impaired home equity loan of $1,000. The remaining $6,503,000 of troubled debt restructurings was attributable to ten
loans among five relationships which were classified as nonaccrual impaired based upon a collateral evaluation in accordance
with the guidance on impaired loans. Two large relationships accounted for $5,463,000 of the total $6,503,000 in nonaccrual
impaired troubled debt restructured loans. As of December 31, 2018, 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 2018.
At December 31, 2017, Mid Penn’s troubled debt restructured loans totaled $9,571,000, and included four loans totaling
$544,000 representing accruing impaired loans in compliance with the terms of the modification, with three loans being
accruing impaired residential mortgages to unrelated borrowers totaling $540,000, and one loan being an accruing impaired
home equity loan of $4,000. The remaining $9,027,000 of troubled debt restructured loans is attributable to fifteen loans among
seven relationships, which were classified as nonaccrual impaired based upon a collateral evaluation in accordance with the
guidance on impaired loans. Two large relationships accounted for $7,284,000 of the $9,027,000 in nonaccrual impaired
troubled debt restructured loans. As of December 31, 2017, there was $66,000 of charge-offs associated with troubled debt
restructured loans while under a forbearance agreement. As of December 31, 2017, 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 2017.
Mid Penn entered into forbearance agreements on all loans currently classified as troubled debt restructurings 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 was one loan modified in 2018, ten loans modified in 2017, and three loans modified in 2016 that resulted in troubled
debt restructurings. The following table summarizes the loans whose terms have been modified resulting in troubled debt
restructurings during the years ended December 31, 2018, 2017, and 2016.
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
(Dollars in thousands)
December 31, 2018
Commercial real estate
Recorded
Investment
266
266
270 $
270 $
270 $
270 $
Number
of
Contracts
1
1
$
$
90
MID PENN BANCORP, INC.
(Dollars in thousands)
December 31, 2017
Commercial and industrial
Commercial real estate
(Dollars in thousands)
December 31, 2016
Commercial and industrial
Residential mortgage
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Recorded
Investment
4,434
3,140
7,574
4,460 $
3,150
7,610 $
4,110 $
3,212
7,322 $
Number
of
Contracts
1
9
10
$
$
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Recorded
Investment
914
68
982
914 $
68
982 $
934 $
68
1,002 $
Number
of
Contracts
2
1
3
$
$
The following table provides activity for the accretable yield of purchased impaired loans for the year ended December 31,
2018.
(Dollars in thousands)
Accretable yield, January 1, 2018
Acquisition of impaired loans
Accretable yield amortized to interest income
Accretable yield, December 31, 2018
$
$
$
67
430
(188 )
309
The Bank has granted loans to certain of its executive officers, directors, and their related interests. The aggregate amount of
these loans was $17,843,000 and $15,163,000 at December 31, 2018 and 2017, respectively. During 2018, $6,458,000 of new
loans and advances were extended, $582,000 of loans were assumed from First Priority as a result of the addition of new
directors, and repayments totaled $4,360,000. None of these loans were past due, in nonaccrual status, or restructured at
December 31, 2018.
91
MID PENN BANCORP, INC.
(10) Bank Premises and Equipment
At December 31, 2018 and 2017, bank premises and equipment are as follows:
(Dollars in thousands)
Land
Buildings
Furniture, fixtures, and equipment
Leasehold improvements
Construction in progress
Total cost
Less accumulated depreciation
Total bank premises and equipment
2018
2017
$
$
4,305 $
19,490
11,837
1,363
83
37,078
(11,775 )
25,303 $
3,564
8,632
8,262
1,126
4,467
26,051
(9,883 )
16,168
There were no premises and equipment classified as held for sale as of December 31, 2018 or 2017. 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 during 2016 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 as a separate component in noninterest
expense on the Consolidated Statements of Income. On January 20, 2017, Mid Penn consummated the sale of the three
properties for an aggregate purchase price of $2,240,000, which exceeds 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.
As of December 31, 2017, construction in process included (i) a commercial building and related improvements in Harrisburg,
(ii) two vacant and undeveloped lots adjacent to the commercial building; and (iii) land, building, and improvements related to a
newly constructed branch in Halifax, PA. The commercial building and adjacent lots in Harrisburg, PA were being renovated as
of December 31, 2017 to serve as an administrative center for the Mid Penn, replacing two administrative offices which were
previously leased. The renovations were substantially completed in February 2018, and Mid Penn employees took occupancy at
that time. The new full-service office in Halifax, PA opened on January 8, 2018.
Depreciation expense was $2,395,000 in 2018, $1,464,000 in 2017, and $1,658,000 in 2016.
On January 1, 2019, as a result of the adoption of ASU 2016-02, Leases, the remaining balance of the deferred sale/leaseback
gain was eliminated through an opening adjustment to retained earnings. The adoption of this standard also resulted in an
increase to both other assets and other liabilities to record right-of-use lease assets and corresponding lease liabilities for all of
Mid Penn’s leased facilities. Please reference Note 26, Recent Accounting Pronouncements, for more information.
Operating Leases:
As of December 31, 2018, 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. Three of Mid Penn’s operating leases are
with related parties. The rental expense paid to related parties was $320,000 in 2018, $352,000 in 2017, and $348,000 in 2016.
The future minimum payments to related parties are $208,000 (2019), $214,000 (2020), $186,000 (2021), $175,000 (2022),
$175,000 in 2023, and $1,700,000 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.
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MID PENN BANCORP, INC.
The following summary reflects the future minimum rental payments by year under Mid Penn’s operating leases as of December
31, 2018, including a breakdown of the sublease rental income and future minimum payments owed to related parties.
(Dollars in thousands)
2019
2020
2021
2022
2023
thereafter
Lease
Obligation
2,171
1,970
1,603
1,464
1,245
6,691
15,144 $
$
Sublease
Rental
Income
81
81
20
—
—
—
Net
Rental
Expense
2,090
1,889
1,583
1,464
1,245
6,691
182 $ 14,962
Rental expense in connection with leases was $1,433,000 in 2018, $1,087,000 in 2017, $716,000 in 2016.
(11) Deposits
At December 31, 2018 and 2017, time deposits amounted to $486,329,000 and $201,623,000, respectively. Interest expense on
certificates of deposit amounted to $4,906,000, $2,570,000, and $2,156,000 for the years ended December 31, 2018, 2017, and
2016, respectively. The aggregate amount of demand deposit overdrafts that were reclassified as loans were $356,000 at
December 31, 2018, compared to $136,000 as of December 31, 2017.
Time deposits at December 31, 2018, mature as follows:
(Dollars in thousands)
Maturing in 2019
Maturing in 2020
Maturing in 2021
Maturing in 2022
Maturing in 2023
Maturing thereafter
Time Deposits
Less than $250,000 $250,000 or more
70,445
$
8,618
1,796
2,499
770
—
84,128
199,257 $
129,223
42,965
19,370
10,566
820
402,201 $
$
Brokered deposits included in the time deposit totals equaled $110,218,000 at December 31, 2018 and $19,447,000 at December
31, 2017. Deposits and other funds from related parties held by Mid Penn at December 31, 2018 and 2017 amounted to
$27,399,000 and $20,262,000, respectively.
(12) Short-term Borrowings
At December 31, 2018 and 2017, Mid Penn had short-term borrowings totaling $43,100,000 and $34,611,000, respectively,
consisting of federal funds purchased and advances from the FHLB with an original maturity of less than a year. Federal funds
purchased from correspondent banks mature in one business day and reprice daily based on the Federal Funds rate. Advances
from the FHLB are collateralized by our investment in the common stock of the FHLB and by a blanket lien on selected loan
receivables comprised principally real estate secured loans totaling $507,462,000 within the Bank’s portfolio. As of December
31, 2018, the Bank had short-term borrowing capacity from the FHLB up to the Bank’s unused borrowing capacity of
$464,362,000 upon satisfaction of any stock purchase requirements of the FHLB. The Bank also has unused overnight lines of
credit with other correspondent banks amounting to $15,000,000 at December 31, 2018. No draws have been made on these
lines of credit and on December 31, 2018 and 2017, the balance was zero.
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MID PENN BANCORP, INC.
The following table outlines Mid Penn’s various sources of short-term borrowed funds at or for the years ended December 31,
2018 and 2017. The maximum balance represents the highest indebtedness for each category of short-term borrowed funds at
any month-end during each of the years shown.
(Dollars in thousands)
Federal funds purchased:
Balance at year end
Weighted average rate at year end
Maximum month-end balance
Average daily balance during the year
Weighted average rate during the year
FHLB short-term borrowings:
Balance at year end
Weighted average rate at year end
Maximum month-end balance
Average daily balance during the year
Weighted average rate during the year
December 31,
2018
2017
$
— $ 34,511
0 %
$ 35,050 $ 41,610
7,961
$
1.54 %
7,049 $
2.24 %
$ 43,100 $
2.74 %
$ 43,100 $
1,784 $
$
2.74 %
1.39 %
—
0.00 %
—
—
0.00 %
(13) 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, 2018 and 2017, the Bank had long-term debt outstanding in the amount of
$48,024,000 and $12,352,000, respectively, consisting of FHLB fixed rate instruments. The obligations are secured under the
terms of a blanket collateral agreement with the FHLB consisting of FHLB stock and qualifying Mid Penn loan receivables,
principally real estate secured loans totaling $507,462,000. The following table presents a summary of long-term debt as of
December 31, 2018 and December 31, 2017.
(Dollars in thousands)
At December 31,
2018
2017
Due July 2019, 1.64%
Due December 2019, 1.87%
Due January 2020, 3.00%
Due February 2020, 3.01%
Due March 2020, 3.02%
Due April 2020, 3.03%
Due June 2020, 1.72%
Due August 2020, 3.05%
Due October 2020, 3.06%
Due December 2020, 1.78%
Due August 2026, 4.80%
Due February 2027, 6.71%
Less: fair value adjustment on debt assumed from
acquisitions
$
$
2,000 $
10,000
5,000
5,000
5,000
5,000
2,000
5,000
5,000
2,000
2,076
52
48,128
104
48,024 $
—
10,000
—
—
—
—
—
—
—
—
2,295
57
12,352
—
12,352
The aggregate principal amounts due on long-term debt subsequent to December 31, 2018 are $12,234,000 (2019), $34,246,000
(2020), $258,000 (2021), $271,000 (2022), $284,000 (2023) and $835,000 thereafter.
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MID PENN BANCORP, INC.
(14) Subordinated Debt
Subordinated Debt Assumed July 2018 with the First Priority Acquisition
On July 31, 2018, Mid Penn completed its acquisition of First Priority and assumed $9,500,000 of Subordinated Notes (the
“First Priority Notes”). In accordance with purchase accounting principles, the First Priority Notes were assigned a fair value
premium of $247,000. The notes are intended to be treated as Tier 2 capital for regulatory reporting purposes.
The First Priority Notes agreements were entered into by First Priority on November 13, 2015 with five accredited investors
pursuant to which First Priority issued subordinated notes totaling $9,500,000. The First Priority Notes have a maturity date of
November 30, 2025, and bear interest at a fixed rate of 7.00% per annum. The Notes are non-callable for an initial period of
five years and include provisions for redemption pricing between 101.5% and 100.5% of the liquidation value if called after
five years but prior to the stated maturity date.
Subordinated Debt Issued December 2017
On December 19, 2017, Mid Penn entered into agreements with investors to purchase $10,000,000 aggregate principal amount
of its Subordinated Notes due 2028 (the “2017 Notes”). The 2017 Notes are intended to be treated as Tier 2 capital for
regulatory capital purposes. The offering closed in December 2017.
The 2017 Notes will bear interest at a rate of 5.25% 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 5.0%. Interest will be payable semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15,
2018, for the first five years after issuance and will be payable quarterly in arrears thereafter on January 15, April 15, July 15,
and October 15. The 2017 Notes will mature on January 1, 2028 and are redeemable in whole or in part, without premium or
penalty, at any time on or after December 21, 2022, and prior to January 1, 2028. Additionally, Mid Penn may redeem the 2017
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 2017 Notes for U.S. federal income tax
purposes; (ii) an event occurs that precludes the 2017 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 the event of a redemption described in the previous sentence, Mid Penn will redeem the 2017 Notes at
100% of the principal amount of the 2017 Notes, plus accrued and unpaid interest thereon to but excluding the date of
redemption.
Holders of the 2017 Notes may not accelerate the maturity of the 2017 Notes, except upon the bankruptcy, insolvency,
liquidation, receivership or similar event of Mid Penn or Mid Penn Bank, its principal banking subsidiary. As of December 31,
2018, related parties held $1,450,000 of the 2017 Notes.
Subordinated Debt Issued December 2015
On December 9, 2015, Mid Penn sold $7,500,000 aggregate principal amount of its Subordinated Notes due 2025 (the “2015
Notes”). The 2015 Notes are treated as Tier 2 capital for regulatory capital purposes.
The 2015 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, 2016. The 2015 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
2015 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 2015 Notes for U.S. federal income
tax purposes; (ii) an event occurs that precludes the 2015 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 2015 Notes, plus accrued and unpaid interest thereon to but
excluding the date of redemption.
Holders of the 2015 Notes may not accelerate the maturity of the 2015 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, 2018,
related parties held $1,930,000 of the 2015 Notes.
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MID PENN BANCORP, INC.
(15) 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.
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MID PENN BANCORP, INC.
There were no transfers of assets between fair value Level 1 and Level 2 for the years ended December 31, 2018 or 2017. The
following tables illustrate the assets measured at fair value on a recurring basis segregated by hierarchy fair value levels:
(Dollars in thousands)
Assets:
Available-for-sale debt securities:
Total
carrying
value at
December 31,
2018
Fair value measurements at December 31, 2018
using:
Significant
other
observable
inputs
Significant
unobservable
inputs
Quoted prices
in active
markets
(Level 1)
(Level 2)
(Level 3)
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Corporate debt securities
$
41,572 $
38,849
29,256
2,246
— $
—
—
—
41,572 $
38,849
29,256
2,246
Other assets:
Equity securities
(Dollars in thousands)
Assets:
Available-for-sale debt securities:
U.S. Treasury and U.S. government agencies
Mortgage-backed U.S. government agencies
State and political subdivision obligations
Corporate debt securities
Other assets:
Equity securities
492
112,415 $
$
492
492 $
—
111,923 $
Fair value measurements at December 31, 2017
using:
Significant
other
observable
inputs
Quoted prices
in active
markets
Significant
unobservable
inputs
(Level 1)
(Level 2)
(Level 3)
Total
carrying
value at
December 31,
2017
$
$
38,730 $
25,831
27,043
1,355
506
93,465 $
— $
—
—
—
38,730 $
25,831
27,043
1,355
506
506 $
—
92,959 $
—
—
—
—
—
—
—
—
—
—
—
—
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
Fair value measurements at December 31, 2018
using:
Significant
other
observable
inputs
Significant
unobservable
inputs
Quoted
prices
in active
markets
(Level 1)
(Level 2)
(Level 3)
Total
carrying
value at
December 31,
2018
$
4,935 $
581
— $
—
— $
—
4,935
581
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MID PENN BANCORP, INC.
(Dollars in thousands)
Assets:
Impaired Loans
Foreclosed Assets Held for Sale
Fair value measurements at December 31, 2017
using:
Significant
other
observable
inputs
Significant
unobservable
inputs
Quoted
prices
in active
markets
(Level 1)
(Level 2)
(Level 3)
Total
carrying
value at
December 31,
2017
$
6,090 $
—
— $
—
— $
—
6,090
—
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.
Foreclosed Assets Held for Sale
581
(Dollars in thousands)
December 31, 2018
Impaired Loans
(Dollars in thousands)
December 31, 2017
Impaired Loans
Quantitative Information about Level 3 Fair Value Measurements
Fair Value
Estimate
$
4,935
Valuation
Technique
Appraisal of
collateral (a), (c)
Appraisal of
collateral (a), (c)
Unobservable
Input
Appraisal
adjustments (b)
Appraisal
adjustments (b)
Range
26% -100%
Weighted
Average
40%
17% - 17%
17%
Quantitative Information about Level 3 Fair Value Measurements
Fair Value
Estimate
$
6,090
Valuation
Technique
Appraisal of
collateral (a), (c)
Appraisal of
collateral (a), (c)
Unobservable
Input
Appraisal
adjustments (b)
Appraisal
adjustments (b)
Range
6% - 51%
Weighted
Average
28%
0% - 0%
0%
Foreclosed Assets Held for Sale
—
(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:
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:
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.
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MID PENN BANCORP, INC.
It is Mid Penn’s policy to obtain updated third party valuations on all substandard nonaccrual loans collateralized by real estate
within 30 days of the credit being classified as impaired. Prior to receipt of the updated real estate valuation Mid Penn will use
any existing real estate valuation to determine any potential allowance for loan loss issues and will update the allowance impact
calculation upon receipt of the updated real estate 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.
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.
The following table summarizes the carrying value and fair value of financial instruments at December 31, 2018 and 2017.
(Dollars in thousands)
Financial assets:
Cash and cash equivalents
Available for sale investment securities
Held to maturity investment securities
Loans held for sale
Equity securities
Net loans and leases
Restricted investment in bank stocks
Accrued interest receivable
Mortgage servicing rights
Financial liabilities:
Deposits
Short-term borrowings
Long-term debt
Subordinated debt
Accrued interest payable
December 31, 2018
Fair
Carrying
Value
Value
December 31, 2017
Carrying
Fair
Value
Value
$
40,065 $
111,923
168,370
1,702
492
40,065 $
111,923
166,582
1,702
492
1,615,670 1,622,287
6,646
8,244
101
6,646
8,244
101
23,514 $
93,465
101,356
1,040
506
902,798
4,384
4,564
126
23,514
93,465
100,483
1,040
506
917,081
4,384
4,564
126
$ 1,726,026 $ 1,725,674 $ 1,023,568 $ 1,026,830
34,611
11,692
17,358
645
43,100
48,024
27,082
2,262
43,100
44,585
24,881
2,262
34,611
12,352
17,338
645
The Bank’s outstanding and unfunded credit commitments and financial standby letters of credit were deemed to have no
significant fair value as of December 31, 2018 and 2017.
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MID PENN BANCORP, INC.
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, 2018 and 2017. Carrying values approximate fair values for cash and cash equivalents, interest-
bearing time balances with other financial institutions, restricted investment in bank stocks, accrued interest receivable and
payable, and short-term borrowings. Other than cash and cash equivalents, which are considered Level 1 Inputs, these
instruments are Level 2 Inputs. The following tables exclude financial instruments for which the placement in the fair value
hierarchy has been disclosed elsewhere or for which the carrying amount approximates fair value.
(Dollars in thousands)
December 31, 2018
Financial instruments - assets
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)
Held-to-maturity investment securities
Net loans and leases
$ 168,370 $ 166,582 $
1,615,670 1,622,287
Financial instruments - liabilities
Deposits
Long-term debt
Subordinated debt
$ 1,726,026 $ 1,725,674 $
44,585
24,881
48,024
27,082
— $
—
— $
—
—
166,582 $
—
—
1,622,287
1,725,674 $
44,585
24,881
—
—
—
(Dollars in thousands)
December 31, 2017
Financial instruments - assets
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)
Held-to-maturity investment securities
Net loans and leases
$ 101,356 $ 100,483 $
902,798 917,081
Financial instruments - liabilities
Deposits
Long-term debt
Subordinated debt
(16) Postretirement Benefit Plans
$ 1,023,568 $ 1,026,830 $
11,692
17,358
12,352
17,338
— $
—
— $
—
—
100,483 $
—
—
917,081
1,026,830 $
11,692
17,358
—
—
—
Mid Penn has an unfunded noncontributory defined benefit plan for directors, which provides defined benefits based on the
respective director’s years of service, as well as a postretirement healthcare and life insurance benefit plan, which is
noncontributory, covering certain full-time employees. Mid Penn also assumed a noncontributory defined benefit pension plan
as a result of the acquisition of Scottdale on January 8, 2018.
Service costs related to plans benefiting Mid Penn employees are reported as a component of salaries and employee benefits on
the Consolidated Statements of Income, while interest costs, expected return on plan assets, amortization (accretion) of prior
service cost, and settlement gain are reported as a component of other income. Service costs, interest costs, and amortization of
prior service costs related to plans benefiting Mid Penn’s nonemployee directors are reported as a component of director fees
and benefits expense within the other expense line item on the Consolidated Statement of Income.
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MID PENN BANCORP, INC.
The accrued benefit liability, related income statement impacts, and other significant aspects of the plans are detailed below.
(a) Life Insurance
Full-time employees who had at least ten years of service as of January 1, 2008 and retire with the Bank after age 55 and
at least 20 years of service are eligible for term life insurance coverage. The insurance amount will be $50,000 until age
65. After age 65, the insurance amount will decrease by $5,000 per year until age 74. Thereafter, the insurance amount
will be $5,000.
(b) Health and Life Benefit Plan
Full-time employees who had at least 10 years of service as of January 1, 2008 and who retire at age 55 or later, after
completion of at least 20 years of service, are eligible for medical benefits. Medical benefits are provided for up to five
years after retirement. Employees who retired prior to December 31, 2015 may elect the least expensive single coverage
in the employer’s group medical plan. If the retiree becomes eligible for Medicare during the five year duration of
coverage, the Bank will pay, at its discretion, premiums for single 65-special coverage or similar supplemental coverage.
For those employees who retired between September 18, 2015 and December 31, 2015, the Bank will only pay up to
$5,000 (grossed up by 36.79 percent as of December 31, 2018) towards such medical coverage. Employees who retired
after December 31, 2015 may not participate in the employer’s group medical plan. Instead, the Bank will reimburse the
retiree for up to $5,000 in medical costs.
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, 2018 and 2017, and a statement of the funded status at
December 31, 2018 and 2017.
(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,
2018
2017
508 $
4
17
(38 )
(17 )
60
(59 )
475 $
— $
59
(59 )
— $
540
4
20
(11 )
20
—
(65 )
508
—
65
(65 )
—
(475 ) $
(508 )
$
$
$
$
$
$
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.
101
MID PENN BANCORP, INC.
The amount recognized in other liabilities on the consolidated balance sheets at December 31, 2018 and 2017, is as
follows:
(Dollars in thousands)
Accrued benefit liability
2018
2017
$
475 $
508
The amounts recognized in accumulated other comprehensive loss consist of:
(Dollars in thousands)
Net gain, pretax
Net prior service cost, pretax
December 31,
2018
2017
$
(76 ) $
(89 )
(22 )
(174 )
The accumulated benefit obligation for health and life insurance plans was $475,000 and $508,000 at December 31, 2018
and 2017, respectively.
There will be $25,000 in estimated prior service costs amortized from accumulated other comprehensive income into net
periodic benefit cost during 2019.
The components of net periodic postretirement benefit (income) cost for 2018, 2017 and 2016 are as follows:
(Dollars in thousands)
Service cost
Interest cost
Amortization of prior service cost
Amortization of net (gain) or loss
Net periodic postretirement benefit (income) cost
2018
2017
2016
$
$
4 $
17
(25 )
(1 )
(5 ) $
4 $
20
(35 )
—
(11 ) $
4
23
(35 )
—
(8 )
Assumptions used in the measurement of Mid Penn’s benefit obligations at December 31, 2018 and 2017 are as follows:
Weighted-average assumptions:
Discount rate
Rate of compensation increase
2018
2017
4.00 %
3.00 %
3.50 %
2.50 %
Assumptions used in the measurement of Mid Penn’s net periodic benefit cost for the years ended December 31, 2018,
2017 and 2016 are as follows:
Weighted-average assumptions:
Discount rate
Rate of compensation increase
2018
2017
2016
3.50 %
2.50 %
4.00 %
3.00 %
4.25 %
3.25 %
Assumed health care cost trend rates at December 31, 2018, 2017 and 2016 are as follows:
Health care cost trend rate assumed for next year
2018
2017
2016
5.50 %
6.00 %
6.00 %
Rate to which the cost trend rate is assumed to decline (the
ultimate trend rate)
Year that the rate reaches the ultimate trend rate
5.40 %
2022
5.40 %
2024
5.50 %
2018
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. At
December 31, 2018, 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
102
One-Percentage Point
Increase
Decrease
$
— $
6
—
(9 )
MID PENN BANCORP, INC.
Mid Penn expects to contribute $60,000 to its life and health benefit plans in 2019. The following table shows the
estimated benefit payments for future periods.
(Dollars in thousands)
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 12/31/2022
1/1/2023 to 12/31/2023
1/1/2024 to 12/31/2028
$
60
50
34
38
31
160
(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 had been amortized over the expected
future years of service of active directors, of which $22,000 was recognized in 2018 and was fully amortized as of
December 31, 2018.
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, 2018 and 2017, and a statement of the status at December 31,
2018 and 2017. This Plan is unfunded.
(Dollars in thousands)
Change in benefit obligations:
Benefit obligations, January 1
Service cost
Interest cost
Actuarial gain (loss)
Change in assumptions
Benefit payments
Benefit obligations, December 31
Change in fair value of plan assets:
Fair value of plan assets, January 1
Employer contributions
Benefit payments
Fair value of plan assets, December 31
Funded status at year end
December 31,
2018
2017
1,116 $
36
38
5
(5 )
(90 )
1,100 $
— $
90
(90 )
— $
1,122
35
43
6
2
(92 )
1,116
—
92
(92 )
—
(1,100 ) $
(1,116 )
$
$
$
$
$
Amounts recognized in other liabilities on the consolidated balance sheet at December 31, 2018 and 2017 are as follows:
(Dollars in thousands)
Accrued benefit liability
2018
2017
$
1,100 $
1,116
Amounts recognized in accumulated other comprehensive loss consist of:
(Dollars in thousands)
Net prior service cost, pretax
Net loss, pretax
December 31,
2018
2017
$
— $
67
22
67
103
MID PENN BANCORP, INC.
The accumulated benefit obligation for the retirement plan was $1,100,000 at December 31, 2018 and $1,116,000 at
December 31, 2017.
No estimated prior service costs will be amortized from accumulated other comprehensive loss into net periodic benefit
cost during 2019 as the amount is fully amortized.
The components of net periodic retirement cost for 2018, 2017 and 2016 are as follows:
(Dollars in thousands)
Service cost
Interest cost
Amortization of prior-service cost
Net periodic retirement cost
2018
2017
2016
$
$
36 $
38
22
96 $
35 $
43
22
100 $
34
46
22
102
Assumptions used in the measurement of Mid Penn’s benefit obligations at December 31, 2018 and 2017 are as follows:
Weighted-average assumptions:
Discount rate
Change in consumer price index
2018
2017
4.00 %
2.00 %
3.50 %
1.50 %
Assumptions used in the measurement of Mid Penn’s net periodic benefit cost for the years ended December 31, 2018,
2017 and 2016 are as follows:
Weighted-average assumptions:
Discount rate
Change in consumer price index
2018
2017
2016
4.00 %
2.00 %
4.00 %
1.50 %
4.25 %
2.25 %
Mid Penn expects to contribute $95,000 to its retirement plan in 2019. The following table shows the estimated benefit
payments for future periods.
(Dollars in thousands)
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 12/31/2022
1/1/2023 to 12/31/2024
1/1/2024 to 12/31/2028
$
95
97
108
107
106
376
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 $3,976,000 and $3,905,000
at December 31, 2018 and 2017, respectively.
(d)
Defined Benefit Pension Plan
As a result of the acquisition of Scottdale on January 8, 2018, Mid Penn has assumed a noncontributory defined benefit
pension plan covering certain former employees of Scottdale. Mid Penn’s policy is to fund pension benefits as accrued.
The Plan’s assets are managed by the Trust Department of the Bank and were primarily invested in corporate equity
securities at the time of acquisition, but have since been diversified into a more conservative investment profile, including
fixed income debt securities. The investment objective of the plan is “Balanced” to provide relatively stable growth from
assets offset by a moderate level of income with target portfolio allocations of up to 20% cash, 30-50% fixed income
securities, and 40-60% equity securities. The valuation of the plan’s assets are subject to market fluctuations.
For the year ended December 31, 2018, Mid Penn recognized $737,000 of settlement gains as a result of certain lump sum
payouts to participants of the defined benefit pension plan. The settlement gains were recorded in noninterest income as a
component of other income for the year ended December 31, 2018.
104
MID PENN BANCORP, INC.
The following tables provide a reconciliation of the changes in the defined benefit pension plan’s benefit obligations and
fair value of plan assets for the year ended December 31, 2018, and a statement of the status at December 31, 2018.
(Dollars in thousands)
Change in benefit obligations:
Benefit obligations, January 1
Service cost
Interest cost
Settlement loss
Actuarial gain
Settlement payments
Benefit payments
Benefit obligations, December 31
Change in fair value of plan assets:
Fair value of plan assets, January 1
Return on plan assets
Employer contributions
Benefit payments
Administrative expenses
Settlement payments
Fair value of plan assets, December 31
Funded status at year end
December 31,
2018
$
$
$
$
$
$
10,542
287
392
118
(2,271 )
(3,828 )
(77 )
5,163
8,121
57
600
(77 )
(55 )
(3,828 )
4,818
(345 )
Amounts recognized in other liabilities on the consolidated balance sheet at December 31, 2018 and 2017 are as follows:
(Dollars in thousands)
Accrued benefit liability
Amounts recognized in accumulated other comprehensive loss consist of:
(Dollars in thousands)
Unrecognized actuarial gain
2018
$
345
December 31,
2018
$
994
The accumulated benefit obligation for the retirement plan was $5,163,000 at December 31, 2018.
The components of net periodic retirement cost for 2018 are as follows:
(Dollars in thousands)
Service cost
Interest cost
Expected return on plan assets
Net periodic retirement cost
2018
287
392
(423 )
256
$
$
Assumptions used in the measurement of Mid Penn’s benefit obligations at December 31, 2018 are as follows:
Weighted-average assumptions:
Discount rate
Expected long-term return on plan assets
Rate of compensation increases
2018
4.25 %
5.00 %
3.00 %
105
MID PENN BANCORP, INC.
Assumptions used in the measurement of Mid Penn’s net periodic benefit cost for the years ended December 31, 2018 are
as follows:
Weighted-average assumptions:
Discount rate
Expected long-term return on plan assets
Rate of compensation increases
2018
4.25 %
5.00 %
3.00 %
The plan’s weighted-average asset allocations by investment category as of December 31, 2018 are as follows:
Weighted-average asset allocations:
Cash and cash equivalents
Common stock
Corporate bonds
2018
50.44 %
38.14 %
11.42 %
100.00 %
The following table sets forth by level, within the fair value hierarchy, the plan’s assets at fair value as of December 31,
2018.
Fair Value Measurements
Significant
other
observable
inputs
(Level 2)
Quoted prices
in active
markets
(Level 1)
Significant
unobservable
inputs
(Level 3)
$
2,430 $
(Dollars in thousands)
December 31, 2018
Cash and cash equivalents
Common stock:
Mining
Manufacturing
Transportation, Communications, Electric, Gas,
and Sanitary Services
Finance, Insurance, and Real Estate
Services
Other
Corporate bonds
$
36
888
468
248
189
9
—
4,268 $
— $
—
—
—
—
—
—
550
550 $
—
—
—
—
—
—
—
—
—
A description of the valuation methodologies used for assets measured at fair value is disclosed below.
Common Stocks
Valued at the closing price reported on the active market on which the individual securities are traded.
Corporate Bonds
Valued using matrix pricing, 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.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or
reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent
with other market participants, the use of different methodologies or assumptions to determine the fair value of certain
financial instruments could result in a different fair value measurement at the reporting date.
106
MID PENN BANCORP, INC.
Mid Penn expects to contribute $600,000 to the defined benefit pension plan in 2019. The following table shows the
estimated benefit payments for future periods.
(Dollars in thousands)
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 12/31/2022
1/1/2023 to 12/31/2024
1/1/2024 to 12/31/2028
(17) Other Benefit Plans
$
92
115
144
160
162
1,714
Mid Penn maintains several benefit plans for both current and former employees of the Bank. Liabilities related to the
plans are recorded in other liabilities on the balance sheet, and aggregate cash surrender values assets related to the life
insurance plans are recorded in the cash surrender value of life insurance line item on the balance sheet. Significant
aspects of the plans are detailed below.
(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 and 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 401(k) Plan
was $514,000, $383,000, and $362,000 for the years ending December 31, 2018, 2017, and 2016, respectively.
During 2018, Mid Penn assumed the 401(k) plans of Scottdale and First Priority and, as of December 31, 2018, these
401(k) plans were managed by Mid Penn’s Human Resources and Trust areas. These 401(k) plans were frozen and no
contributions were made to the plans in 2018. The plans are being evaluated for either termination or merger into Mid
Penn’s primary 401(k) plan.
(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 2018, 2017, or 2016.
(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 $106,000 at December 31, 2018 and $125,000 at
December 31, 2017. The expense related to the plan was $78,000 in 2018, $5,000 in 2017, and $6,000 in 2016.
The Bank also has a directors’ deferred compensation plan, which allows directors to defer receipt of director fees for a
specified period in order to provide future retirement income. At December 31, 2018 and 2017, the Bank accrued a
liability of $838,000 and $683,000, respectively, for this plan. The expense related to the plan was $31,000 in 2018,
$25,000 in 2017, and $21,000 in 2016.
(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, 2018 and 2017, the Bank accrued a liability of approximately $236,000 and $246,000,
respectively, for the Agreement. The expense related to the Agreement was $17,000 for 2018, $17,000 for 2017, and
$17,000 for 2016.
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
$1,352,000 and $1,317,000 at December 31, 2018 and 2017, respectively.
107
MID PENN BANCORP, INC.
(e) Split Dollar Life Insurance Arrangements
At December 31, 2018 and 2017, the Bank had Split Dollar Life Insurance arrangements with two former executives for
which the aggregate collateral assignment and cash surrender values are approximately $1,387,000 and $1,375,000,
respectively. Mid Penn acquired Phoenix’s Split Dollar Life Insurance arrangements in 2015 on select employees, which
had aggregate cash surrender values of $4,010,000 at December 31, 2018 and $3,924,000 at December 31, 2017.
(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 shares of Mid Penn common stock at the market
value of shares at the end of each calendar quarter.
ESPP shares purchased
Average purchase price per share
(g) Director Stock Purchase Plan
2018
2017 2016
4,132 3,578 4,465
$ 28.716 $ 29.027 $ 18.520
On May 24, 2017, the Board of Directors of Mid Penn approved the Director Stock Purchase Plan (“DSPP”). The
purpose of the DSPP is to provide non-employee directors of Mid Penn with a convenient means to purchase Corporation
common stock at fair market value on the last day of each calendar quarter. The plan was effective beginning July 1,
2017. Participants purchased 4,296 shares at an average purchase price per share of $28.94 during the year ended
December 31, 2018. Participants purchased 1,345 shares at an average purchase price per share of $31.136 during the
year ended December 31, 2017.
(h) Supplemental Executive Retirement Plan
On August 31, 2018, Mid Penn entered into supplemental executive retirement plan agreements (“SERPs”) with four
named executive officers. Each SERP provides for the monthly payment of a fixed cash benefit over a period of fifteen
(15) years, commencing on the first day of the month following the Executive’s separation from service: (i) occurring on
or after reaching normal retirement age (age 70); (ii) due to disability; (iii) due to death; or (iv) within two (2) years
following a change in control of the Bank. One-half of the benefit vests on January 1, 2022, with an additional 10%
vesting each January 1 thereafter until fully vested on January 1, 2027. Any unvested portion of the benefit fully vests
upon a change in control of the Bank. The accrued liability for the supplemental retirement plans was $73,000 as of
December 31, 2018.
108
MID PENN BANCORP, INC.
(18) Federal Income Taxes
The following temporary differences gave rise to the net deferred tax asset at December 31, 2018 and 2017.
(Dollars in thousands)
Deferred tax assets:
$
Allowance for loan and lease losses
Loan fees
Deferred compensation
Benefit plans
Unrealized loss on securities
Sale/leaseback adjustment
Business combination adjustments
Acquired NOL and charitable contribution carryforwards
Acquired AMT carryforward
Other
Deferred tax liabilities:
Depreciation
Bond accretion
Goodwill and intangibles
Prepaid expenses
Business combination adjustments
Benefit plans
Other
Deferred tax asset, net
$
2018
2017
1,763 $
136
508
134
862
66
1,692
1,391
1,433
128
8,113
(1,073 )
(29 )
(348 )
(515 )
(948 )
(459 )
(45 )
(3,417 )
4,696 $
1,597
105
221
320
574
72
358
—
—
108
3,355
(619 )
(9 )
(329 )
(333 )
(176 )
—
(1 )
(1,467 )
1,888
As reflected Notes 4 and 5, a substantial portion of the net deferred tax asset increase year-over-year relates to the deferred tax
assets generated by or acquired from the mergers of Scottdale and First Priority.
At December 31, 2018, the Company had no valuation allowance established against its NOL and charitable contribution
carryforwards, as management believes the Corporation will generate sufficient future taxable income to fully utilize these
deferred tax assets. The charitable contribution carryforwards will expire between 2019 and 2021. The Tax Cuts and Jobs Act
enacted on December 22, 2017 repealed Corporate Alternative Minimum Tax (AMT). As a result, AMT carryforwards as of
December 31, 2018 will be systematically refunded with each return until fully refunded no later than the filing of the
Corporation’s December 31, 2021 tax return. At December 31, 2018, Mid Penn had net operating loss carryforwards of
$5,465,000 which are all due to acquisitions that occurred in 2018 and are available to offset future taxable income. The NOL
carryforwards do not expire, however, Mid Penn is limited to a deduction of the lesser of the available NOL carryforward or 80
percent of pre-NOL deductible taxable income in a single tax year as set forth in the Tax Cuts and Jobs Act. Due to the fact that
these NOLs were acquired, there are Section 382 limitations that establish the amount allowable to be used to offset taxable
income in the amount of $1,854,000 per year.
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.
On December 22, 2017, the TCJA was signed into law, reducing the federal tax rate to 21% beginning on January 1, 2018. The
revaluation of net deferred tax assets as of December 22, 2017 resulted in $1,169,000 of additional tax expense on the date of
enactment included in deferred expense in the tables below.
109
MID PENN BANCORP, INC.
The provision for income taxes consists of the following:
(Dollars in thousands)
Current expense
Deferred expense (benefit)
Total provision for income taxes
2018
2017
2016
$
$
812 $
1,317
2,129 $
2,672 $
1,828
4,500 $
2,613
(336 )
2,277
A reconciliation of income tax at the statutory rate of 21% for 2018 and 34% for 2017 and 2016 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
Rate change adjustment
Other items
Provision for income taxes
2018
2017
2016
$
$
2,672 $
(704 )
(60 )
40
193
—
(12 )
2,129 $
3,940 $
(668 )
(89 )
30
191
1,169
(73 )
4,500 $
3,428
(1,089 )
(90 )
41
—
—
(13 )
2,277
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, 2018, 2017, or 2016. There were no amounts accrued for interest and penalties at December 31, 2018 or
2017.
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 2015.
(19) 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, 2018 and December 31, 2017, 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.
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, which 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 increased 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.
110
MID PENN BANCORP, INC.
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, 2018, $4,207,000 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,
2018, and December 31, 2017:
(Dollars in thousands)
Capital Adequacy
To Be
Well-Capitalized
Under Prompt
Minimum Capital
Corrective
Actual
Required (1)
Amount Ratio
Amount Ratio
Action Provisions
Amount Ratio
$ 155,662
8.0 % $ 77,499
4.000 % $
N/A
N/A
155,662
155,662
191,300
10.0 % 98,977
10.0 % 122,265
12.3 % 153,317
6.375 %
7.875 %
9.875 %
N/A
N/A
N/A
N/A
N/A
N/A
$ 171,776
8.9 % $ 77,230
4.000 % $ 96,537
5.0 %
171,776
171,776
180,332
11.1 % 98,963
11.1 % 122,248
11.6 % 153,295
6.375 % 100,903
7.875 % 124,189
9.875 % 155,236
6.5 %
8.0 %
10.0 %
$ 74,417
6.5 % $ 45,857
4.000 % $
N/A
N/A
74,417
74,417
99,466
8.4 % 50,661
8.4 % 63,877
11.3 % 81,498
5.750 %
7.250 %
9.250 %
N/A
N/A
N/A
N/A
N/A
N/A
$ 88,294
7.7 % $ 45,846
4.000 % $ 57,308
5.0 %
88,294
88,294
96,005
10.0 % 50,661
10.0 % 63,877
10.9 % 81,498
5.750 % 57,269
7.250 % 70,485
9.250 % 88,106
6.5 %
8.0 %
10.0 %
Corporation
As of December 31, 2018
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, 2018
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, 2017
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, 2017
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)
(1) The minimum amounts and ratios as of December 31, 2018 include the third year phase in of the capital conservation buffer of
1.875% required by the Basel III framework. As of December 31, 2017, minimum amounts and ratios include the second year phase
in of the capital conservation buffer of 1.25% required by the Basel III framework.
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MID PENN BANCORP, INC.
(20) 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, 2018 and 2017 for guarantees under letters of credit issued is not considered material.
As of December 31, 2018, commitments to extend credit amounted to $346,238,000 and standby letters of credit amounted to
$20,839,000. As of December 31, 2017, commitments to extend credit amounted to $199,240,000 and standby letters of credit
amounted to $20,496,000.
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 $5,836,000 and $7,314,000 for the years ended December 31, 2018 and
2017.
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, 2018, 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 twelve counties in Pennsylvania.
The Bank's highest industry concentration within the loan portfolio is in commercial real estate financing, which was 61.8 %
and 51.1%, as of December 31, 2018 and 2017, respectively.
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MID PENN BANCORP, INC.
(21) Commitments and Contingencies
Commitments
During the second quarter of 2018, Mid Penn entered into a commitment to purchase a limited partnership interest in a low-
income housing project to construct thirty-seven apartments and common amenities in Dauphin County, Pennsylvania. All of
the units are intended to qualify for Federal Low-Income Housing Tax Credits (“LIHTCs”) as provided for in Section 42 of the
Internal Revenue Code of 1986, as amended. Mid Penn’s limited partner capital contribution commitment is $7,579,000, which
will be paid in installments over the course of construction of the low-income housing facilities. Each installment payment is
conditional upon both Mid Penn’s review and approval of the installment payment certificate and continued compliance with the
terms of the original partnership agreement. The investment in the limited partnership will be reported in other assets on the
Consolidated Balance Sheet and amortized using the straight-line method over a ten year period. The project has been
conditionally awarded $861,000 in annual LIHTCs by the Pennsylvania Housing Finance Agency, with a total anticipated
LIHTC amount of $8,613,000 to be awarded to Mid Penn over the ten year amortization period. Mid Penn’s commitment to
initiate investments in the limited partnership interest was conditional upon (i) the review and approval of all closing documents,
(ii) an opinion letter for tax counsel to the Partnership that the project qualifies for the LIHTCs, and (iii) review and approval by
Mid Penn of other documents it deemed necessary. All such initial conditions were satisfied and Mid Penn began funding the
investment during 2018. As of December 31, 2018, the total investment in the limited partnership was $1,710,000 and was
reported in other assets on the Consolidated Balance Sheet.
Contingencies
In a letter dated January 24, 2019, notification was received from the FDIC indicating that Mid Penn was eligible for small bank
assessment credits. In general, banks that did not pay surcharges during the credit calculation period, defined as the third
quarter of 2016 through the third quarter of 2018, are eligible for small bank assessment credits. Small banks with total
consolidated assets of less than $10 billion were awarded assessment credits for the portion of their assessments that contributed
to the growth in the reserve ratio from 1.15 percent to 1.35 percent. Each individual bank’s credit share is calculated as the
product of the apportioned share of credits to an individual eligible institution multiplied by the total aggregate credits, and the
FDIC’s preliminary estimate of Mid Penn’s total assessment credit is $492,000. The small bank assessment credits are
contingent on the reserve ratio reaching at least 1.38 percent, which had not occurred as of December 31, 2018. The credit can
only be applied against future assessments, is not refundable in cash, and cannot be sold.
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.
(22) Common Stock
Dividend Reinvestment Plan
Under Mid Penn’s amended and restated dividend reinvestment plan (“DRIP”), 330,750 shares of Mid Penn’s authorized but
unissued common stock are reserved for issuance. The DRIP also allows for voluntary cash payments, within specified limits,
to be used 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. As of December
31, 2018, 36,859 shares have been granted under the Plan. During 2018, Mid Penn granted 12,250 restricted shares, 7,450 of
which were granted to employees, while 4,800 were granted to directors. Mid Penn granted 10,440 restricted shares in 2017,
6,040 of which were granted to employees, while 4,400 were granted to directors. Throughout 2016, Mid Penn granted 7,450
restricted shares to employees. In 2018, 1,876 granted shares were forfeited to Mid Penn due to the termination of employment
of three plan participants, while no shares were forfeited in 2017, and 470 shares were forfeited in 2016.
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MID PENN BANCORP, INC.
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. Restricted shares granted to employees vest in equal amounts
on the anniversary of the grant date over a four year vesting period. Restricted shares granted to directors have a twelve month
vesting period. The following table presents compensation expense and related tax benefits for restricted stock awards
recognized on the consolidated statements of income.
(Dollars in thousands)
Compensation expense
Tax benefit
Net income effect
2018 2017 2016
53
$ 267 $ 145 $
(18 )
(49 )
35
96 $
(56 )
$ 211 $
At December 31, 2017, there was $582,000 of unrecognized compensation cost related to all non-vested share-based
compensation awards. This cost is expected to be recognized through July 2022 with a weighted average recognition period of
2.3 years. Mid Penn recognizes the impact of forfeitures as of the forfeiture date.
The following table presents information regarding the non-vested restricted stock for the year ended December 31, 2018.
Non-vested at January 1, 2018
Vested
Forfeited
Granted
Non-vested at December 31, 2018
Weighted-
Average
Grant
Date Fair
Value
Shares
19,499 $
(9,647 )
(1,876 )
12,250
20,226
22.54
22.85
24.20
33.50
28.76
(23) Preferred Stock
In accordance with the terms and conditions of the Agreement and Plan of Merger dated January 16, 2018 between Mid Penn
and First Priority (the “Merger Agreement”), each share of First Priority Fixed Rate Cumulative Perpetual Preferred Stock,
Series C (the “First Priority Preferred Stock”) outstanding as of July 31, 2018 was converted into the right to receive one share
of Mid Penn Fixed Rate Cumulative Perpetual Preferred Stock, Series D, having a $1,000 liquidation preference per share (the
“Mid Penn Preferred Stock”). In connection with the Merger, Mid Penn issued 3,404 shares of Mid Penn Preferred Stock
totaling $3,404,000.
The terms of the Mid Penn Preferred Stock were no less favorable than those of the First Priority Preferred Stock as in effect
immediately prior to the Merger. Under the terms of the Mid Penn Preferred Stock, no repurchases may be effected, and no
dividends may be declared or paid on preferred shares ranking pari passu with the Mid Penn Preferred Stock, junior preferred
shares, or other junior securities (including the common stock) unless all accrued and unpaid dividends on the Mid Penn
Preferred Stock for all past dividend periods are paid in full. The Mid Penn Preferred Stock was redeemable at the option of Mid
Penn, subject to the prior receipt of any requisite regulatory approval.
Dividends were payable quarterly on February 15, May 15, August 15 and November 15 of each year. The dividend rate on the
Mid Penn Preferred Stock was fixed at 9%.
During the fourth quarter of 2018, the Federal Reserve Bank approved Mid Penn’s request to redeem all 3,404 shares of the Mid
Penn Preferred Stock at the $1,000 liquidation value. The redemption of the $3,404,000 of the Mid Penn Preferred Stock was
completed and final dividend payment made on December 14, 2018.
(24) Revenue Recognition
Mid Penn recognizes revenues when earned based upon (i) contractual terms as transactions occur, or (ii) as related services are
provided and collectability is reasonably assured. The largest source of revenue for Mid Penn is interest income, which is
primarily recognized on an accrual basis according to a written contract, such as loan and lease agreements or investment
securities contracts. Mid Penn earns noninterest income through a variety of financial and transactional services such as trust
and wealth management services, deposit account transaction fees, ATM debit card fees, and mortgage banking fees. Revenue
is recorded for noninterest income based on the contractual terms for the service or transaction performed. In certain
circumstances, noninterest income is reported net of associated expenses.
114
MID PENN BANCORP, INC.
On January 1, 2018, Mid Penn adopted FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Results for
reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted
and continue to be reported in accordance with the previous accounting guidance under ASC 605.This ASU establishes
principles for reporting information about the nature, timing, and uncertainty of revenue and cash flows arising from the entity’s
contracts to provide goods and services to customers. ASU 2014-09 applies primarily to transactional-based non-interest
income revenue streams and excludes mortgage banking income, earnings from cash surrender value of life insurance, and gains
on SBA loans.
Mid Penn’s non-interest income revenue streams of income from fiduciary activities, service charges on deposits, ATM debit
card interchange income, merchant service fees and certain components of other income are within the scope of Topic 606 and
are discussed in greater detail below.
Income from Fiduciary Activities
Income from fiduciary activities consist of investment management fee income, brokerage transaction fee income, and estate fee
income. Investment management fee income consists of advisory fees that are based on market values of clients’ managed
portfolios and transaction fees for fiduciary services performed, both of which are recognized as earned. Brokerage transaction
fee income includes advisory fees which are recognized as earned on a monthly basis and transaction fees that are recognized
when transactions occur. Payment is typically received in the following month. Estate fee income is recognized as services are
performed over the service period, generally eighteen months.
Service Charges on Deposits
Service charges on deposits consist of cash management, overdraft, non-sufficient fund fees and other service charges on
deposit accounts. Revenue is primarily transactional and recognized when earned, which is at the time the respective initiating
transaction occurs and the related service charge is subsequently processed. Payment for service charges on deposit accounts is
primarily received immediately or in the following month through a direct charge to the customers’ accounts.
ATM Debit Card Interchange Income
ATM debit card interchange income consists interchange fees earned when Mid Penn’s debit cards are processed through card
payments networks. The interchange fee is calculated as a percentage of the total electronic funds transfer (EFT) transaction
plus a per-transaction fee, which varies based on the type of card used, the method used to process the EFT transaction, and the
type of business at which the transaction was processed. Revenue is recognized daily as transactions occur and interchange fees
are subsequently processed. Payment for interchange activity is received primarily daily, while some fees are aggregated and
payment is received in the following month.
Merchant Services Income
Merchant services income is processed through a third party provider with whom Mid Penn has partnered to provide merchant
services to its business customers. Fees are charged to merchants to process their debit card transactions, cash advance services,
and other related products. Mid Penn receives a percentage of the revenue generated from each joint customer relationship after
the third party has collected the fee income from the merchant. Payment is primarily received in the following month.
Other Income
Certain aspects of other income, such as credit card royalties, check orders, and letter of credit fees, are within the scope of
Topic 606. These fees are primarily transactional, and revenue is recognized when transactions occur and the related services
are subsequently processed. Payment is primarily received immediately or in the following month.
Mid Penn does not exercise significant judgements in the recognition of income, as typically income is not recognized until the
performance obligation has been satisfied. Mid Penn has not recognized any assets from the costs to obtain or fulfill a contract
with customers for revenue streams that fall within the guidance of Topic 606.
115
December 31,
2018
2017
$
$
$
$
1,572 $
239,323
296
241,191 $
17,694 $
288
223,209
241,191 $
4,686
89,581
—
94,267
17,338
1,226
75,703
94,267
For Years Ended December 31,
2017
2016
2018
$
$
$
10,837 $
—
10,837
(5,668 )
(5,668 )
5,169
4,207
9,376
1,220
10,596
102
10,494 $
10,257 $
9,657 $
19
9,676
(1,899 )
(1,899 )
7,777
(1,136 )
6,641
448
7,089
—
7,089 $
8,209 $
2,871
33
2,904
(606 )
(606 )
2,298
5,311
7,609
195
7,804
—
7,804
3,139
MID PENN BANCORP, INC.
(25) Parent Company Statements
CONDENSED BALANCE SHEETS
(Dollars in thousands)
ASSETS
Cash and cash equivalents
Investment in subsidiaries
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
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
subsidiary
Equity in undistributed earnings (loss) of subsidiary
Income before income tax
Income tax benefit
Net income
Series D preferred stock dividends
Net income available to common shareholders
Comprehensive income
116
MID PENN BANCORP, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Equity in undistributed loss (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 acquisitions
Proceeds from the sale of investment securities
Repayment from (investment in) subsidiary
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid
Series D preferred stock dividends
Series D preferred stock redemption
Employee Stock Purchase Plan
Director Stock Purchase Plan
Deferred financing fees paid for subordinated debt issuance
Subordinated debt issuance
Net cash provided by (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
(26) Recent Accounting Pronouncements
For Years Ended December 31,
2017
2016
2018
$
10,596 $
(4,207 )
(49 )
1,120
7,460
7,089 $
1,136
240
626
9,091
(2,798 )
—
—
(2,798 )
—
618
(12,600 )
(11,982 )
(4,513 )
(102 )
(3,404 )
119
124
—
—
(7,776 )
(3,114 )
4,686
1,572 $
(3,264 )
—
—
104
42
(85 )
10,000
6,797
3,906
780
4,686 $
$
7,804
(5,311 )
59
457
3,009
—
—
—
—
(2,875 )
—
—
82
—
—
—
(2,793 )
216
564
780
ASU 2017-07: The FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement
Benefit Cost.
The ASU requires that an employer disaggregate the service cost component from the other components of net benefit cost. Service cost
must be presented in the same line item(s) as other employee compensation costs. These costs are generally included within income from
continuing operations, but in some cases may be eligible for capitalization, if certain criteria are met. All other components of net benefit
cost must be presented in the income statement separately from the service cost component and outside a subtotal of income from
operations, if one is presented. These generally include interest cost, actual return on plan assets, amortization of prior service cost included
in accumulated other comprehensive income, and gains or losses from changes in the value of the projected benefit obligation or plan
assets. If a separate line item is used to present the other components of net benefit cost, it must be appropriately described. If a separate
line item is not used, an entity must disclose the line item(s) in the income statement that includes the other components of net benefit cost.
The ASU clarifies that these costs are not eligible for capitalization.
The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods
within those years. For other entities, the amendments are effective for annual periods beginning after December 15, 2018, and interim
periods within annual periods beginning after December 15, 2019. Early adoption is permitted as of the beginning of an annual period.
Mid Penn adopted this ASU in the first quarter of 2018. For the year ended December 31, 2018, service costs totaling $287,000 related to
plans benefiting Mid Penn employees are reported as a component of salaries and employee benefits on the Consolidated Statements of
Income, while interest costs, expected return on plan assets, amortization (accretion) of prior service cost, and settlement gain were
reported as a component of other income and collectively totaled $768,000. Service costs, interest costs, and amortization of prior service
costs related to plans benefiting Mid Penn’s nonemployee directors totaling $93,000 are reported as a component of director fees and
benefits expense within the other expense line item on the Consolidated Statement of Income. The components of net benefit cost were
impacted by the acquisition of a defined benefit plan from Scottdale in 2018. Net benefit costs in 2017 and 2016 were immaterial. The
adoption of this standard did not impact Mid Penn’s results of operations.
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MID PENN BANCORP, INC.
ASU 2017-05: The FASB issued ASU 2017-05, Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of
Nonfinancial Assets.
The ASU was issued to clarify the scope of Subtopic 610-20 and to add guidance for partial sales of nonfinancial assets, including partial
sales of real estate. Historically, U.S. GAAP contained several different accounting models to evaluate whether the transfer of certain assets
qualified for sale treatment. Moving forward, the new standard reduces the number of potential accounting models that might apply and
clarifies which model does apply in various circumstances. Specifically, it clarifies the scope of Subtopic 610-20 by defining the term “in
substance nonfinancial asset”. If substantially all of the fair value of the assets (recognized and unrecognized) promised to a counterparty
in a contract is concentrated in nonfinancial assets, a financial asset in the same arrangement would still be considered part of an in
substance nonfinancial asset. Also, nonfinancial assets may include nonfinancial assets contained within a legal entity that is transferred to
a counterparty (e.g., through transfer of ownership interest). It clarifies also that derecognition of a business is not within the scope of
Subtopic 610-20, but rather, is governed by Topic 810.
In addition, the ASU indicates an entity should identify each distinct nonfinancial asset (e.g., real estate and inventory) or in substance
nonfinancial asset promised to a counterparty and derecognize each asset when a counterparty obtains control of it.
Finally, the ASU adds guidance on accounting for partial sales of nonfinancial assets. It requires an entity to derecognize a distinct
nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when two criteria are met: 1) the entity does not
have (or ceases to have) a controlling financial interest in the legal entity that holds the asset in accordance with Topic 810, and 2) the
entity transfers control of the asset in accordance with Topic 606.
The effective date and transition requirements for the ASU are the same as the effective date and transition requirements of Topic 606, and
must be applied at the same date that Topic 606 is initially applied. That is, the amendments are effective for public entities for annual
reporting periods beginning after December 15, 2017, including interim periods within those periods, and for nonpublic entities for annual
reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15,
2019. Consistent with Topic 606, early adoption is permitted but no earlier than annual reporting periods beginning after December 15,
2016 for all entities.
Mid Penn adopted this ASU in the first quarter of 2018. The adoption did not have a material impact on its consolidated financial
statements as Mid Penn typically does not engage in partial sale transactions.
ASU 2016-15: The FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments.
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.
118
MID PENN BANCORP, INC.
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 adopted the amendments in the first quarter of 2018. As a result of the adoption of this standard, there were no changes required
to cash flow presentation and no impact on Mid Penn’s operating results. Mid Penn will continue to monitor for transactions that may be
impacted by this standard, 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.
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.
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.
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 may 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 change
in the allowance for credit losses, if any, 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. Mid Penn has selected a software vendor to
support both the implementation of ASU 2016-13 and the ongoing compliance requirements. We have provided our core data to the
vendor and completed an assessment of the information to see what, if any, additional data elements may be need to be collected to perform
the calculation. After all required data elements are collected and loaded into the software, Mid Penn plans to run one quarter of reports
based on our current methodology to validate the data flow, and intends to run two quarters under the CECL methodology prior to the
implementation of the standard on January 1, 2020.
ASU 2016-02: The FASB issued ASU 2016-02, Leases.
The new leases standard applies a right-of-use (“ROU”) model that requires a lessee to record, for all leases with a lease term of more than
12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12
months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or
lease liability. At inception, lessees must classify all leases as either finance or operating based on five criteria. Balance sheet recognition
of finance and operating leases is similar, but the pattern of expense recognition in the income statement, as well as the effect on the
statement of cash flows, differs depending on the lease classification.
The new leases standard requires a lessor to classify leases as either sales-type, direct financing or operating, similar to existing U.S.
GAAP. Classification depends on the same five criteria used by lessees plus certain additional factors. The subsequent accounting
treatment for all three lease types is substantially equivalent to existing U.S. GAAP for sales-type leases, direct financing leases, and
operating leases. However, the new standard updates certain aspects of the lessor accounting model to align it with the new lessee
accounting model, as well as with the new revenue standard under Topic 606.
Lessees and lessors are required to provide certain qualitative and quantitative disclosures to enable users of financial statements to assess
the amount, timing, and uncertainty of cash flows arising from leases. The new leases standard addresses other considerations including
identification of a lease, separating lease and non-lease components of a contract, sale and leaseback transactions, modifications,
combining contracts, reassessment of the lease term, and re-measurement of lease payments. It also contains comprehensive
implementation guidance with practical examples.
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MID PENN BANCORP, INC.
On July 30, 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an option to apply the
transition provisions of the new standard at the adoption date instead of the earliest comparative period presented. Additionally, the ASU
provides a practical expedient permitting lessors to not separate non-lease components from the associated lease component if certain
conditions are met.
The amendments for both ASUs 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.
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 adopted this standard in the first quarter of 2019 using the option to apply the transition provisions of the new standard at the
adoption date instead of the earliest period presented as provided in ASU 2018-11. Additionally, Mid Penn elected to apply all practical
expedients as provided in ASU 2016-02, with the exception of the hindsight practical expedient which was not elected. As a result of the
adoption of this standard, effective January 1, 2019, Mid Penn recognized (i) a ROU asset of $11,661,000 to be recorded in other assets on
the balance sheet, (ii) a lease liability of $12,866,000 to be recorded in other liabilities on the balance sheet, and (iii) an opening adjustment
to retaining earnings of $316,000 to eliminate the remaining balance of the deferred sale/leaseback gain on two retail branch locations
which had originally been recorded in 2016. The lease liability represents the present value of future payments on twenty-four leased
properties within the Mid Penn footprint as of the January 1, 2019 adoption date, while the ROU asset reflects the lease liability, adjusted
for deferred/accrued rent balances and the balance of acquisition accounting fair value adjustments of the respective properties as of the
adoption date of January 1, 2019. The adoption of this standard is not expected to have a material impact on Mid Penn’s capital ratios or
cause Mid Penn to no longer be well capitalized.
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 financial assets and liabilities based on form and measurement category. In addition, for liabilities measured at 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, and was adopted by
Mid Penn effective January 1, 2018. The adoption of this ASU resulted in the reclassification of equity securities to other assets (equity
securities had previously been classified as available-for-sale investment securities). Also, related to this reclassification, a one-time
cumulative-effect adjustment was recorded on January 1, 2018 that decreased retained earnings by $44,000, increased accumulated other
comprehensive loss by $35,000, and decreased the deferred tax asset by $9,000. The impact on net income as a result of the adoption of
this standard was immaterial for the year ended December 31, 2018.
Additionally, the adoption of this ASU resulted in the refinement of our loan fair value calculation to comply with the exit price
measurement requirement. The adoption of the exit price measurement requirement portion of this ASU did not have a material impact on
Mid Penn’s fair value disclosures.
In February 2018, the FASB issued ASU 2018-03, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities, which clarifies certain amendments included in ASU 2016-01 primarily related to measurement
of equity securities without a readily determinable fair value and financial liabilities for which the fair value option was elected. This ASU
was effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and was adopted by Mid
Penn effective January 1, 2018. Mid Penn’s equity securities have a determinable fair value and, as of December 31, 2018, we do not have
any financial liabilities for which the fair value option was elected; therefore, the adoption of this ASU did not have a material impact on
the results of operations.
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.
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MID PENN BANCORP, INC.
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.
In November 2017, the FASB issued ASU 2017-14, Income Statement – Reporting Comprehensive Income (Topic 220), Revenue
Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606) – Amendments to SEC Paragraphs Pursuant to Staff
Accounting Bulletin No. 116 and SEC Release No. 33-10403. The ASU adds guidance to the existing Staff Bulletin No. 116 stating that
SAB Topic 13 (Revenue Recognition) and SAB Topic 8 (Retail Companies) are no longer applicable once a registrant adopts Topic 606.
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 adopted the standard effective January 1, 2018. Through our assessment, we identified certain non-interest income financial
statement revenue streams that met the criteria of this Standard and worked through the five step assessment process for each revenue
stream within the scope of the Standard. Mid Penn has concluded that the adoption of the Standard using the modified retrospective
approach did not have a financial statement impact as the current financial statement line items within the scope of this Standard were in
compliance with the new guidance. As a result of the adoption of this standard, additional qualitative disclosures related to revenue
recognition can be found in Note 11, Revenue Recognition. We will update our internal assessment at least annually, or more frequently if
necessary.
ASU 2018-07: The FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-
Based Payment Accounting
The ASU makes certain changes to the accounting for nonemployee awards to align the accounting for share-based payment awards issued
to employees and nonemployees. The changes require that the compensation expense associated with nonemployee equity awards with
performance conditions be recognized when the achievement of the performance condition is probable, rather than upon achievement of the
performance condition. Additionally, the new ASU requires that equity-classified share-based payment awards issued to nonemployees be
measured on the grant date, versus the previous GAAP requirement to re-measure the awards through the performance completion date.
The current requirement to reassess the classification (equity or liability) for the nonemployee awards upon vesting will be eliminated.
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, including interim periods.
Mid Penn currently issues restricted stock awards to nonemployee directors through the 2014 Restricted Stock Plan (the “Plan”). The
single performance condition of the award is that the individual remain a director of Mid Penn through the duration of the vesting period.
Mid Penn is currently evaluating the details of this ASU and expects that the adoption of this ASU will not have a material impact on our
consolidated financial statements as the compensation expense related to nonemployee equity awards is immaterial to Mid Penn’s overall
financial condition.
ASU 2018-13: The FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement
This ASU, issued as part of the FASB’s disclosure framework project to improve the effectiveness of disclosures in financial statements,
amends the disclosure requirements related to recurring and nonrecurring fair value measurements by removing, modifying, and adding
certain disclosures.
The ASU is effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
Early adoption is permitted.
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MID PENN BANCORP, INC.
As a result of this ASU, several disclosures were removed from Topic 820, including: (i) disclosure of the valuation process for Level 3 fair
value measurements, and (ii) amounts of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. However, some
additional disclosures will be required as a result of this ASU, including the requirement to disclose the changes in unrealized gains and
losses included in other comprehensive income for the period related to Level 3 recurring fair value measurements, as well as the range and
weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.. Mid Penn is currently evaluating
the impact of this ASU on our current disclosures. The adoption of this standard will result in disclosure changes only and will not impact
Mid Penn’s overall financial condition.
ASU 2018-14: The FASB issued ASU 2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-
20): Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans
This ASU, issued as part of the FASB’s disclosure framework project to improve the effectiveness of disclosures in financial statements,
amends the disclosure requirements related to defined benefit pension and other postretirement plans by removing and adding certain
disclosures.
The ASU is effective for public business entities for fiscal years ending after December 15, 2020. Early adoption is permitted.
As a result of this ASU, several disclosures were removed from Topic 715, including: (i) disclosures of the amounts in accumulated
comprehensive income expected to be recognized as components of net periodic benefit cost over the next fiscal year, and (ii) the effects of
a one-percentage point change in the assumed health care cost trend rates on the aggregate of service and interest cost components of net
periodic postretirement health care benefit costs. However, some additional disclosures will be required as a result of this ASU, including
the requirement to disclose an explanation for significant gains and losses related to changes in the benefit obligation for the period. Mid
Penn is currently evaluating the impact of this ASU on our current disclosures. The adoption of this standard will result in disclosure
changes only and will not impact Mid Penn’s overall financial condition.
(27) Summary of Quarterly Consolidated Financial Data (Unaudited)
The following table presents summarized quarterly financial data for 2018 and 2017. Due to the methodology and rounding of
quarterly earnings per share versus full-year earnings per share calculations, the quarterly measures may not equal to the full-
year measurement disclosed on the respective year’s income statement.
(Dollars in thousands, except per share data)
2018 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 D Preferred Stock Dividends
Net Income Available to Common
Shareholders
Per Share Data:
$
12,980 $
2,102
10,878
125
10,753
1,647
11,183
1,217
213
1,004
—
13,720 $
2,306
11,414
—
11,414
1,559
9,742
3,231
452
2,779
—
19,583 $
3,672
15,911
100
15,811
2,165
15,264
2,712
548
2,164
38
1,004 $
2,779 $
2,126 $
22,371
4,640
17,731
275
17,456
2,091
13,982
5,565
916
4,649
64
4,585
Basic Earnings Per Common
Share
Cash Dividends Declared
$
0.17 $
0.00
0.45 $
0.15
0.28 $
0.15
0.54
0.15
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MID PENN BANCORP, INC.
(Dollars in thousands, except per share data)
2017 Quarter Ended
March 31
June 30
September 30
December 31
11,304
1,817
9,487
100
9,387
1,331
8,047
2,671
2,170
501
0.12
0.38
$
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:
$
10,559 $
1,384
9,175
125
9,050
1,436
7,802
2,684
690
10,879 $
1,469
9,410
100
9,310
1,362
7,558
3,114
769
11,150 $
1,634
9,516
-
9,516
1,564
7,960
3,120
871
1,994 $
2,345 $
2,249 $
Basic Earnings Per Common
Share
Cash Dividends Declared
$
0.47 $
0.13
0.55 $
0.13
0.53 $
0.13
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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, 2018. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded, as of December 31, 2018, 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.
Management’s Report on Internal Controls over Financial Reporting is located on page 49 of this report, and is incorporated herein by
reference.
Our independent registered public accounting firm, BDO USA, LLP, also attested to, and reported on, the effectiveness of Mid Penn’s
internal control over financial reporting as of December 31, 2018. BDO USA, LLP’s attestation report appears in Part II, Item 8,
“Financial Statements and Supplemental Data.”
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 2018 that have
materially affected, or are reasonably likely to materially affect, Mid Penn’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None
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 2019 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 28, 2018. A copy is posted under Governance Documents in the Corporate
Information section under the Investors link on the Corporation’s website, www.midpennbank.com. The Corporation’s Code of
Ethics may be viewed on the Mid Penn website at www.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 2019 Annual Meeting of
Shareholders, which pages are incorporated herein by reference.
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MID PENN BANCORP, INC.
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 2019 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, 2018:
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
20,226
—
20,226
— (1)
—
—
63,141
—
63,141
(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 2019 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 2019” of Mid Penn’s definitive proxy statement to be used in connection with the
2019 Annual Meeting of Shareholders, which pages are incorporated herein by reference.
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.
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MID PENN BANCORP, INC.
(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 Registration
Statement on Form S-4 (File No. 333-199740) filed with the SEC on October 31, 2014.)
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
The Registrant’s Dividend Reinvestment Plan, as amended and restated. (Incorporated by reference to Exhibit 99.1 of
Registrant’s Registration Statement on Form S-3, filed with the SEC on October 12, 2005.)
10.2
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.)
10.3
Form of Mid Penn Bancorp, Inc. Restricted Stock Agreement. (Incorporated by reference to Exhibit 10.4 of the Registrant’s
Annual Report on Form 10-K filed with the SEC on March 12, 2018.)
10.4
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.)
10.5
Mid Penn Bancorp, Inc. Director Stock Purchase Plan (Incorporated by reference to Exhibit 99.1 of Registrant’s
Registration Statement on Form S-8, filed with the SEC on June 8, 2017.)
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 the Registrant’s Current Report on Form 8-K filed on November 4, 2016.)
10.7
Offer letter, dated March 4, 2016, between Michael D. Peduzzi and Mid Penn Bank. (Incorporated by reference to Exhibit
10.7 of the Registrant’s Annual Report on Form 10-K filed with the SEC on March 23, 2017.)
10.8
10.9
Form of Supplemental Executive Retirement Plan Agreement dated August 31, 2018 by and among Mid Penn Bank and
each of Rory G. Ritrievi, Michael D. Peduzzi, Scott W. Micklewright, and Justin T. Webb (Incorporated by reference to
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K, filed with the Commission on September 5, 2018.)
Amendment No. 1 to Employment Agreement, dated August 13, 2018, among Mid Penn Bancorp, Inc., Mid Penn Bank,
and Rory G. Ritrievi (Incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K, filed with
the Commission on September 5, 2018.)
10.10
Form of Amendment No. 1 to Change in Control Severance Agreement of Messrs. Micklewright, Peduzzi, and Webb
(Incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K, filed with the Commission on
September 5, 2018.)
11
Statement re: Computation of Per Share Earnings. (Incorporated by reference to Part II, Item 8 of this Annual Report on
Form 10-K.)
21
23
Subsidiaries of Registrant.
Consent of BDO USA, LLP.
31.1
31.2
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.
32
Principal Executive and Financial Officer’s §1350 Certifications.
99.1
Listing of Mid-Atlantic Custom Peer Group Banks.
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.
ITEM 16. FORM 10-K SUMMARY
None.
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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 18, 2019
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
Sr. Executive Vice President and
Chief Financial Officer
By: /s/ Robert A. Abel
Robert A. Abel, Director
By: /s/ Steven T. Boyer
Steven T. Boyer, Director
By: /s/ Kimberly J. Brumbaugh
Kimberly J. Brumbaugh, Director
By: /s/ Matthew G. DeSoto
Matthew G. DeSoto, Director
By: /s/ Joel L. Frank
Joel L. Frank, Director
By: /s/ Robert C. Grubic
Robert C. Grubic, Director
By: /s/ Gregory M. Kerwin
Gregory M. Kerwin, Director
By: /s/ Donald F. Kiefer
Donald F. Kiefer, 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
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
127
MID PENN BANCORP, INC.
By: /s/ John E. Noone
John E. Noone, Director
By: /s/ Alan P. Novak, Esq.
Alan P. Novak, Esq., Director
By: /s/ Noble C. Quandel, Jr.
Noble C. Quandel, Jr., Director
By: /s/ Patrick M. Smith
Patrick M. Smith, Director
By: /s/ David E. Sparks
David E. Sparks, Director
By: /s/ William A. Specht, III
William A. Specht, Director
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
March 18, 2019
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MID PENN BANCORP, INC.
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
Name
Mid Penn Bank
State of Incorporation
Pennsylvania
MID PENN BANCORP, INC.
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. 333-218592, 333-197024, and
333-170833) and Form S-3 (No. 333-128958) of Mid Penn Bancorp, Inc. of our reports dated March 18, 2019, relating to the
consolidated financial statements and the effectiveness of Mid Penn Bancorp, Inc.’s internal control over financial reporting, which
appear in this Form 10-K.
/s/ BDO USA, LLP
Harrisburg, Pennsylvania
March 18, 2019
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 18, 2019
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 18, 2019
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, 2018, 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 18, 2019
By: /s/ Michael D. Peduzzi, CPA
Chief Financial Officer
Date: March 18, 2019
MID PENN BANCORP, INC.
1st Constitution Bancorp
1st Summit Bancorp of Johnstown, Inc.
ACNB Corporation
Adirondack Trust Company
AmeriServ Financial, Inc.
Bank of Princeton
Bank of Utica
Capital Bancorp, Inc.
CB Financial Services, Inc.
Chemung Financial Corporation
Citizens & Northern Corporation
Citizens Financial Services, Inc.
Codorus Valley Bancorp, Inc.
Community Financial Corporation
DNB Financial Corporation
Embassy Bancorp, Inc.
ENB Financial Corp
ESSA Bancorp, Inc.
Evans Bancorp, Inc.
First Bank
First Keystone Corporation
First United Corporation
FNCB Bancorp, Inc.
Franklin Financial Services Corporation
Greene County Bancorp, Inc. (MHC)
Malvern Bancorp, Inc.
Marlin Business Services Corp.
Metropolitan Bank Holding Corp.
Norwood Financial Corp.
Orange County Bancorp, Inc.
Orrstown Financial Services, Inc.
Parke Bancorp, Inc.
PCSB Financial Corporation
Penns Woods Bancorp, Inc.
Prudential Bancorp, Inc.
QNB Corp.
Riverview Financial Corporation
SB One Bancorp
Shore Bancshares, Inc.
Somerset Trust Holding Company
Mid-Atlantic Custom Peer Group
Company
City
State
Exhibit 99.1
Cranbury
Johnstown
Gettysburg
Saratoga Springs
Johnstown
Princeton
Utica
Rockville
Carmichaels
Elmira
Wellsboro
Mansfield
York
Waldorf
Downingtown
Bethlehem
Ephrata
Stroudsburg
Hamburg
Hamilton
Berwick
Oakland
Dunmore
Chambersburg
Catskill
Paoli
Mount Laurel
New York
Honesdale
Middletown
Shippensburg
Sewell
Yorktown Heights
Williamsport
Philadelphia
Quakertown
Harrisburg
Rockaway
Easton
Somerset
NJ
PA
PA
NY
PA
NJ
NY
MD
PA
NY
PA
PA
PA
MD
PA
PA
PA
PA
NY
NJ
PA
MD
PA
PA
NY
PA
NJ
NY
PA
NY
PA
NJ
NY
PA
PA
PA
PA
NJ
MD
PA
COMMUNITY GIVING
Our core values guide our direction and growth as a community bank.
We are committed to serving our local communities through giving campaigns,
community events, employee volunteerism and giving, educational outreach
and corporate donations.
2018 GIVING HIGHLIGHTS
$711,000
EITC & COMMUNITY
CONTRIBUTIONS
3,000+
HOURS OF EMPLOYEE
VOLUNTEER TIME
$57,000
133
RAISED BY EMPLOYEES FOR
CHARITABLE CAUSES
COMMUNITY EVENTS
PARTICIPATED IN
We are a proud recipient of the Pennsylvania Association of
Community Bankers “Grow Your Community” award for five years
running. Our No Shave November campaign, a partnership with
Penn State Health’s Urology division was the winning project for the
award in 2018. We raised $40,000 for prostate cancer research in
2018, a 333% increase over the previous year.
Mid Penn Bank continues to champion the cause of finding a cure for
breast cancer through the Mid Penn Bank Celebrity Golf Tournament
for Charity. This event, spanning two days and engaging more than
30 celebrities and athletes from the world of college and professional
football and basketball, raised $100,000 in 2018. The dollars
raised were donated to the Pennsylvania Breast Cancer Coalition (PBCC) and the American Cancer Society for
breast cancer research. As a result of our three year-long partnership with PBCC, Mid Penn President and CEO,
Rory Ritrievi, was honored with PBCC’s Pink Ribbon Award in October 2018 for his leadership and dedication to
the cause of finding a cure for breast cancer. He has committed the bank to raising $1 million for breast cancer
research through the golf tournament and additional fundraising efforts.
THE COMMUNITY
BANK DIFFERENCE
Mid Penn has established a regional management presence in each distinct community
we serve. Our team is committed to providing local, prompt service and personalized
banking solutions.
ECBM Insurance Brokers
and Consultants
ECBM is based in Media, PA and serves the
Greater Philadelphia area as a commercial
insurance brokerage offering corporate and
personal insurance and risk management solutions.
ECBM continues to expand their business, and
our team in the Delaware Valley works closely with
the firm’s executives to facilitate a strong loan and
deposit relationship.
Pictured (left to right): Stan Michonski, Senior Agricultural Lender, Mid Penn Bank; Gordie and
Bertie Ziegler
Paul Risk Construction
A fourth-generation, family-owned construction
company based in Quarryville, PA, Paul Risk
Construction offers values-based construction
services. A customer since 2014, Paul Risk
appreciates the principles of community banking
and the personalized service that the Mid
Penn team provides. Our relationship includes
commercial lending and cash management
services, along with a line of credit for working
capital and commercial mortgages.
Pictured (left to right): Charlie E.Bernier, President of Cyber Division & Corporate Counsel, ECBM;
Daniel Krewson, Regional President, First Priority Bank; Charlie H. Bernier, President & CEO, ECBM;
Rick Eckert, CFO, ECBM; Gloria Forbes, Executive Vice President, ECBM
The Zieglers
The Zieglers of Mount Joy, PA have a three-decade
long and multi-faceted relationship with Mid Penn
Bank, originally receiving financing from our
Millersburg branch for a real estate venture. Their
relationship has grown over the years to include
financing for their agricultural businesses, along
with local support from our Lancaster County team.
Pictured (left to right): DJ Risk, President, Paul Risk Construction; Joan Dickinson, Chief of Staff, Mid
Penn Bank; Steve Risk, Chairman of the Board, Paul Risk Construction
McClure Company
Based in Harrisburg, PA, McClure Company
is a mechanical engineering firm that offers a
full spectrum of design, implementation and
maintenance services for its clients. Market
President Heather Hall has developed a
commercial and industrial banking relationship
with the firm that has supported both short- and
long-term financing needs, as well as day-to-day
banking services.
Pictured: Alex Kauffman, Regional President, Mid Penn Bank; Judy Craig, Franchise Developer, Lynn
Dairy Queens, Inc.
Miller Distributing
Miller Distributing, based in St. Clair, PA, is a
wholesale meat distributor. Our team in Schuylkill
County works closely with owner Fred Miller to
ensure his everyday banking needs are being
met through lending services, cash management
solutions and deposit products.
Pictured: Chip Brown, President, McClure Company; Heather Hall, Market President, Mid Penn Bank
Lynn Dairy Queens, Inc.
Lynn Dairy Queens, Inc. owns several Dairy Queen
stores throughout the Scottdale Bank & Trust region. In
2018, Regional President Alex Kauffman worked with
franchise developer Judy Craig to finance the seventh
location that the company now owns and operates in
California, PA. Judy’s connection to the bank spans
multiple generations as her father previously served on
the Scottdale Bank & Trust Board of Directors.
Pictured (L to R): Mark Ketch, Regional President, Mid Penn Bank; Sandra Bigg, Branch Manager, Mid
Penn Bank; W. Fred Miller, Owner, Miller Distributing; James Brennan, Commercial Loan Officer, Mid
Penn Bank; Keith Kirby, Cash Management Officer, Mid Penn Bank
BOARD OF DIRECTORS
ROBERT C. GRUBIC
CHAIRMAN MID PENN BANCORP, INC. AND MID PENN BANK
PRESIDENT & CEO HERBERT, ROWLAND AND GRUBIC, INC.
WILLIAM A. SPECHT, III
VICE-CHAIRMAN MID PENN BANCORP, INC. AND MID PENN BANK
PRESIDENT & CEO SEAL GLOVE MANUFACTURING, INC.
AND ARK SAFETY
RORY G. RITRIEVI
PRESIDENT & CEO MID PENN BANCORP, INC.
AND MID PENN BANK
ROBERT A. ABEL
PRINCIPAL, SHAREHOLDER & BOARD MEMBER
BROWN SCHULTZ SHERIDAN & FRITZ
STEVEN T. BOYER
PRESIDENT OF THE CUTTING TOOL DIVISIONS
ALVORD-POLK, INC.
KIMBERLY J. BRUMBAUGH
FOUNDER & CEO BRUMBAUGH WEALTH MANAGEMENT, LLC
MATTHEW G. DESOTO
PRESIDENT & CEO MI WINDOWS AND DOORS
JOEL L. FRANK
CHAIRMAN, MANAGING PARTNER & EXECUTIVE
COMMITTEE CHAIRMAN LAMB MCERLANE P.C.
GREGORY M. KERWIN
SENIOR PARTNER KERWIN & KERWIN, LLP
DONALD F. KIEFER
FORMER PRESIDENT & CEO THE SCOTTDALE BANK
& TRUST COMPANY
ROBERT E. KLINGER
FORMER PRESIDENT KLINGER LUMBER COMPANY, INC.
ROBERT J. MOISEY
PRESIDENT/ADMINISTRATOR THE LAURELS SENIOR
LIVING, INC.
THEODORE W. MOWERY
PARTNER GUNN MOWERY, LLC
JOHN E. NOONE
PRESIDENT SHAMROCK INVESTMENTS, LLC
ALAN P. NOVAK
PRESIDENT NOVAK STRATEGIC ADVISORS
PARTNER ROONEY NOVAK ISENHOUR GROUP
NOBLE C. QUANDEL, JR.
CHAIRMAN & CEO QUANDEL ENTERPRISES, INC.
PATRICK M. SMITH
MANAGING PARTNER ROSENBERG, SMITH, COONEY &
MIGLIORE P.C.
DAVID E. SPARKS
MARKET CHAIRMAN FIRST PRIORITY DIVISION
MISSION
To be the best financial institution for our shareholders, customers,
employees and the communities we serve while upholding the core values
of Mid Penn Bank and the virtues of community banking.
For the fifth year in a row,
Mid Penn was recognized as being one of the “Top 200 Community
Banks” in the country
by American Banker magazine for our
performance in return on equity.
For the fifth year in a row, Mid Penn won the
“Grow Your Community
Award” from the Pennsylvania
Association of Community Bankers.
As a leader in
breast cancer research funding,
Mid Penn received the prestigious
“Pink Ribbon Award”
from the Pennsylvania Breast
Cancer Coalition.
“IF THE BEST WAY TO PREDICT OUR FUTURE IS TO CREATE IT, THEN WE ARE CONFIDENT
THAT WE ARE CREATING THE BEST BANK IN THE STATE OF PENNSYLVANIA.”
—Rory G. Ritrievi
President and CEO
349 Union Street, Millersburg, PA 17061 | 1-866-642-7736 | midpennbank.com