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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2020

OR

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

For the transition period from              to             

Commission file number 1-13677

MID PENN BANCORP, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Pennsylvania

 

25-1666413

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

 

349 Union Street

Millersburg, Pennsylvania

 

17061

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code 1.866.642.7736

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, $1.00 par value per share

 

MPB

 

The NASDAQ Stock Market LLC

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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  

Accelerated filer  

Non-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 

As of August 6, 2020, the registrant had 8,420,624 shares of common stock outstanding.

 

1


FORM 10-Q

TABLE OF CONTENTS

 

PART 1 – FINANCIAL INFORMATION

3

 

 

 

 

Item 1 – Financial Statements

3

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 (Unaudited)

3

 

 

 

 

 

 

Consolidated Statements of Income for the Three and Six Months Ended
June 30, 2020 and June 30, 2019 (Unaudited)

4

 

 

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended
June 30, 2020 and June 30, 2019 (Unaudited)

5

 

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended
June 30, 2020 and June 30, 2019 (Unaudited)

6

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2020 and June 30, 2019 (Unaudited)

7

 

 

 

 

 

 

Notes to Consolidated Financial Statements (Unaudited)

9

 

 

 

 

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

44

 

 

 

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

61

 

 

 

 

Item 4 – Controls and Procedures

61

 

 

PART II – OTHER INFORMATION

62

 

 

 

 

Item 1 – Legal Proceedings

62

 

 

 

 

Item 1A – Risk Factors

62

 

 

 

 

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

62

 

 

 

 

Item 3 – Defaults upon Senior Securities

62

 

 

 

 

Item 4 – Mine Safety Disclosures

62

 

 

 

 

Item 5 – Other Information

62

 

 

 

 

Item 6 – Exhibits

62

 

 

 

 

Signatures

63

 

Unless the context otherwise requires, the terms “Mid Penn”, “we”, “us”, and “our” refer to Mid Penn Bancorp, Inc. its consolidated wholly-owned banking subsidiary, and its nonbank subsidiaries.

 

2


 

MID PENN BANCORP, INC.

 

 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS

 

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(Dollars in thousands, except share data)

 

June 30, 2020

 

 

December 31, 2019

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

33,495

 

 

$

25,746

 

Interest-bearing balances with other financial institutions

 

 

3,322

 

 

 

4,657

 

Federal funds sold

 

 

106,938

 

 

 

108,627

 

Total cash and cash equivalents

 

 

143,755

 

 

 

139,030

 

 

 

 

 

 

 

 

 

 

Investment securities available for sale, at fair value

 

 

23,492

 

 

 

37,009

 

Investment securities held to maturity, at amortized cost (fair value $139,491 and $137,476)

 

 

135,387

 

 

 

136,477

 

Loans held for sale

 

 

21,812

 

 

 

8,422

 

Loans and leases, net of unearned interest

 

 

2,445,765

 

 

 

1,762,756

 

Less:  Allowance for loan and lease losses

 

 

(11,067

)

 

 

(9,515

)

Net loans and leases

 

 

2,434,698

 

 

 

1,753,241

 

 

 

 

 

 

 

 

 

 

Bank premises and equipment, net

 

 

26,038

 

 

 

24,937

 

Operating lease right of use asset

 

 

10,587

 

 

 

11,442

 

Finance lease right of use asset

 

 

3,357

 

 

 

3,447

 

Cash surrender value of life insurance

 

 

17,033

 

 

 

16,881

 

Restricted investment in bank stocks

 

 

7,079

 

 

 

4,902

 

Accrued interest receivable

 

 

12,743

 

 

 

7,964

 

Deferred income taxes

 

 

1,533

 

 

 

2,810

 

Goodwill

 

 

62,840

 

 

 

62,840

 

Core deposit and other intangibles, net

 

 

5,108

 

 

 

5,758

 

Foreclosed assets held for sale

 

 

1,718

 

 

 

196

 

Other assets

 

 

15,185

 

 

 

15,819

 

Total Assets

 

$

2,922,365

 

 

$

2,231,175

 

 

 

 

 

 

 

 

 

 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing demand

 

$

564,834

 

 

$

310,036

 

Interest-bearing demand

 

 

518,857

 

 

 

458,451

 

Money Market

 

 

632,439

 

 

 

488,748

 

Savings

 

 

189,465

 

 

 

177,737

 

Time

 

 

420,718

 

 

 

477,422

 

Total Deposits

 

 

2,326,313

 

 

 

1,912,394

 

 

 

 

 

 

 

 

 

 

Short-term borrowings

 

 

203,937

 

 

 

 

Long-term debt

 

 

85,282

 

 

 

32,903

 

Subordinated debt

 

 

42,009

 

 

 

27,070

 

Operating lease liability

 

 

11,643

 

 

 

12,544

 

Accrued interest payable

 

 

2,590

 

 

 

2,208

 

Other liabilities

 

 

7,246

 

 

 

6,182

 

Total Liabilities

 

 

2,679,020

 

 

 

1,993,301

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity:

 

 

 

 

 

 

 

 

Common stock, par value $1.00 per share; 20,000,000 shares authorized;

Shares issued: 8,488,924 at June 30, 2020 and 8,480,938 at December 31, 2019; and shares outstanding:  8,408,401 at June 30, 2020 and 8,480,938 at December 31, 2019

 

 

8,489

 

 

 

8,481

 

Additional paid-in capital

 

 

178,497

 

 

 

178,159

 

Retained earnings

 

 

58,069

 

 

 

50,891

 

Accumulated other comprehensive (loss) income

 

 

(150

)

 

 

343

 

Treasury stock, at cost; 80,523 shares at June 30, 2020

 

 

(1,560

)

 

 

 

Total Shareholders’ Equity

 

 

243,345

 

 

 

237,874

 

Total Liabilities and Shareholders' Equity

 

$

2,922,365

 

 

$

2,231,175

 

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

3


 

MID PENN BANCORP, INC.

 

 

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

2020

 

 

 

2019

 

 

 

2020

 

 

 

2019

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans and leases

 

$

25,116

 

 

$

22,214

 

 

$

47,365

 

 

$

43,292

 

Interest on interest-bearing balances

 

 

18

 

 

 

27

 

 

 

33

 

 

 

57

 

Interest on federal funds sold

 

 

23

 

 

 

130

 

 

 

413

 

 

 

198

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and government agencies

 

 

460

 

 

 

839

 

 

 

1,131

 

 

 

1,732

 

State and political subdivision obligations, tax-exempt

 

 

248

 

 

 

584

 

 

 

469

 

 

 

1,203

 

Other securities

 

 

323

 

 

 

204

 

 

 

476

 

 

 

382

 

Total Interest Income

 

 

26,188

 

 

 

23,998

 

 

 

49,887

 

 

 

46,864

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

4,009

 

 

 

5,276

 

 

 

9,389

 

 

 

9,862

 

Interest on short-term borrowings

 

 

45

 

 

 

157

 

 

 

45

 

 

 

389

 

Interest on long-term and subordinated debt

 

 

788

 

 

 

795

 

 

 

1,442

 

 

 

1,537

 

Total Interest Expense

 

 

4,842

 

 

 

6,228

 

 

 

10,876

 

 

 

11,788

 

Net Interest Income

 

 

21,346

 

 

 

17,770

 

 

 

39,011

 

 

 

35,076

 

PROVISION FOR LOAN AND LEASE LOSSES

 

 

1,050

 

 

 

465

 

 

 

1,600

 

 

 

590

 

Net Interest Income After Provision for Loan and Lease Losses

 

 

20,296

 

 

 

17,305

 

 

 

37,411

 

 

 

34,486

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from fiduciary and wealth management activities

 

 

421

 

 

 

347

 

 

 

805

 

 

 

706

 

Service charges on deposits

 

 

115

 

 

 

218

 

 

 

320

 

 

 

435

 

ATM debit card interchange income

 

 

475

 

 

 

380

 

 

 

891

 

 

 

714

 

Mortgage banking income

 

 

1,638

 

 

 

1,077

 

 

 

2,820

 

 

 

1,514

 

Net gain on sales of SBA loans

 

 

178

 

 

 

233

 

 

 

262

 

 

 

435

 

Merchant services income

 

 

98

 

 

 

104

 

 

 

181

 

 

 

189

 

Earnings from cash surrender value of life insurance

 

 

76

 

 

 

79

 

 

 

152

 

 

 

157

 

Net gain on sales of investment securities

 

 

111

 

 

 

17

 

 

 

243

 

 

 

24

 

Other income

 

 

510

 

 

 

419

 

 

 

882

 

 

 

749

 

Total Noninterest Income

 

 

3,622

 

 

 

2,874

 

 

 

6,556

 

 

 

4,923

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

7,986

 

 

 

7,786

 

 

 

16,267

 

 

 

15,545

 

Occupancy expense, net

 

 

1,333

 

 

 

1,344

 

 

 

2,772

 

 

 

2,745

 

Equipment expense

 

 

722

 

 

 

658

 

 

 

1,435

 

 

 

1,285

 

Pennsylvania bank shares tax expense

 

 

55

 

 

 

245

 

 

 

460

 

 

 

381

 

FDIC Assessment

 

 

357

 

 

 

314

 

 

 

669

 

 

 

673

 

Legal and professional fees

 

 

349

 

 

 

471

 

 

 

701

 

 

 

893

 

Marketing and advertising expense

 

 

98

 

 

 

226

 

 

 

302

 

 

 

405

 

Software licensing and utilization

 

 

1,297

 

 

 

1,111

 

 

 

2,518

 

 

 

2,132

 

Telephone expense

 

 

137

 

 

 

161

 

 

 

271

 

 

 

315

 

Loss on sale or write-down of foreclosed assets, net

 

 

 

 

 

18

 

 

 

 

 

 

14

 

Intangible amortization

 

 

326

 

 

 

360

 

 

 

649

 

 

 

723

 

Other expenses

 

 

2,743

 

 

 

2,102

 

 

 

4,940

 

 

 

3,988

 

Total Noninterest Expense

 

 

15,403

 

 

 

14,796

 

 

 

30,984

 

 

 

29,099

 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

 

8,515

 

 

 

5,383

 

 

 

12,983

 

 

 

10,310

 

Provision for income taxes

 

 

1,682

 

 

 

980

 

 

 

2,332

 

 

 

1,830

 

NET INCOME

 

 

6,833

 

 

 

4,403

 

 

 

10,651

 

 

 

8,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PER COMMON SHARE DATA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Earnings Per Common Share

 

$

0.81

 

 

$

0.52

 

 

$

1.26

 

 

$

1.00

 

Cash Dividends Paid

 

$

0.18

 

 

$

0.18

 

 

$

0.41

 

 

$

0.43

 

 

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

4


 

MID PENN BANCORP, INC.

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

 

(Dollars in thousands)

 

Three Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

Net income

 

$

6,833

 

 

$

4,403

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

securities, net of income taxes of $21 and $313, respectively

 

 

79

 

 

 

1,179

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

included in net income, net of income taxes of ($23) and ($3), respectively (a)

 

 

(88

)

 

 

(14

)

 

 

 

 

 

 

 

 

 

Change in defined benefit plans, net of income taxes of ($27) and ($90), respectively (b)

 

 

(102

)

 

 

(339

)

 

 

 

 

 

 

 

 

 

Reclassification adjustment for settlement losses (gains) and activity related to benefit plans, net

 

 

 

 

 

 

 

 

of income taxes of $4 and ($8), respectively (c)

 

 

13

 

 

 

(29

)

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

 

(98

)

 

 

797

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

6,735

 

 

$

5,200

 

 

(Dollars in thousands)

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,651

 

 

$

8,480

 

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

securities, net of income taxes of $87 and $796, respectively

 

 

329

 

 

 

2,998

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

included in net income, net of income taxes of ($51) and ($5), respectively (a)

 

 

(192

)

 

 

(19

)

 

 

 

 

 

 

 

 

 

Change in defined benefit plans, net of income tax impact of ($170) and ($91), respectively (b)

 

 

(639

)

 

 

(346

)

 

 

 

 

 

 

 

 

 

Reclassification adjustment for settlement losses (gains) and activity related to benefit plans, net

 

 

 

 

 

 

 

 

of income taxes of $3 and ($8), respectively (c)

 

 

9

 

 

 

(29

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

 

(493

)

 

 

2,604

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

$

10,158

 

 

$

11,084

 

 

 

(a)

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

 

(b)

The change in defined benefit plans consists primarily of unrecognized actuarial (losses) gains on defined benefit plans during the period.  

 

(c)

The reclassification adjustment for benefit plans includes settlement gains, amortization of prior service costs, and amortization of net gain or loss.  Amounts are included in other income on the Consolidated Statements of Income within total noninterest income.  Please reference Note 11 – Defined Benefit Plans, for more information.

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

 

 

5


 

 

MID PENN BANCORP, INC.

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

Total

 

 

 

Common

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Treasury

 

 

Shareholders'

 

 

 

Stock

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Stock

 

 

Equity

 

Balance, January 1, 2020

 

$

8,481

 

 

$

178,159

 

 

$

50,891

 

 

$

343

 

 

$

 

 

$

237,874

 

Net income

 

 

 

 

 

 

 

 

3,818

 

 

 

 

 

 

 

 

 

3,818

 

Total other comprehensive loss, net of taxes

 

 

 

 

 

 

 

 

 

 

 

(395

)

 

 

 

 

 

(395

)

Common stock dividends declared

 

 

 

 

 

 

 

 

(1,950

)

 

 

 

 

 

 

 

 

(1,950

)

Employee Stock Purchase Plan (1,647 shares)

 

 

1

 

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

33

 

Director Stock Purchase Plan (1,743 shares)

 

 

2

 

 

 

33

 

 

 

 

 

 

 

 

 

 

 

 

35

 

Restricted stock activity

 

 

 

 

 

96

 

 

 

 

 

 

 

 

 

 

 

 

96

 

Balance, March 31, 2020

 

$

8,484

 

 

$

178,320

 

 

$

52,759

 

 

$

(52

)

 

$

 

 

$

239,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

6,833

 

 

 

 

 

 

 

 

 

6,833

 

Total other comprehensive loss, net of taxes

 

 

 

 

 

 

 

 

 

 

 

(98

)

 

 

 

 

 

(98

)

Common stock dividends declared

 

 

 

 

 

 

 

 

(1,523

)

 

 

 

 

 

 

 

 

(1,523

)

Repurchased stock (80,523 shares)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,560

)

 

 

(1,560

)

Employee Stock Purchase Plan (2,365 shares)

 

 

3

 

 

 

42

 

 

 

 

 

 

 

 

 

 

 

 

45

 

Director Stock Purchase Plan (2,231 shares)

 

 

2

 

 

 

39

 

 

 

 

 

 

 

 

 

 

 

 

41

 

Restricted stock activity

 

 

 

 

 

96

 

 

 

 

 

 

 

 

 

 

 

 

96

 

Balance, June 30, 2020

 

$

8,489

 

 

$

178,497

 

 

$

58,069

 

 

$

(150

)

 

$

(1,560

)

 

$

243,345

 

 

 

Balance, January 1, 2019

 

$

8,460

 

 

$

177,565

 

 

$

39,562

 

 

$

(2,378

)

 

$

 

 

$

223,209

 

Impact of adoption of new accounting standard (a)

 

 

 

 

 

 

 

 

316

 

 

 

 

 

 

 

 

 

316

 

Balance at January 1, 2019, adjusted

 

 

8,460

 

 

 

177,565

 

 

 

39,878

 

 

 

(2,378

)

 

 

 

 

 

223,525

 

Net income

 

 

 

 

 

 

 

 

4,077

 

 

 

 

 

 

 

 

 

4,077

 

Total other comprehensive income, net of taxes

 

 

 

 

 

 

 

 

 

 

 

1,807

 

 

 

 

 

 

1,807

 

Common stock dividends declared

 

 

 

 

 

 

 

 

(2,113

)

 

 

 

 

 

 

 

 

(2,113

)

Employee Stock Purchase Plan (1,152 shares)

 

 

1

 

 

 

27

 

 

 

 

 

 

 

 

 

 

 

 

28

 

Director Stock Purchase Plan (1,361 shares)

 

 

1

 

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

33

 

Restricted stock activity

 

 

 

 

 

80

 

 

 

 

 

 

 

 

 

 

 

 

80

 

Balance, March 31, 2019

 

$

8,462

 

 

$

177,704

 

 

$

41,842

 

 

$

(571

)

 

$

 

 

$

227,437

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

4,403

 

 

 

 

 

 

 

 

 

4,403

 

Total other comprehensive income, net of taxes

 

 

 

 

 

 

 

 

 

 

 

797

 

 

 

 

 

 

797

 

Common stock dividends declared

 

 

 

 

 

 

 

 

(1,524

)

 

 

-

 

 

 

 

 

 

(1,524

)

Employee Stock Purchase Plan (1,411 shares)

 

 

2

 

 

 

34

 

 

 

 

 

 

 

 

 

 

 

 

36

 

Director Stock Purchase Plan (1,336 shares)

 

 

1

 

 

 

32

 

 

 

 

 

 

 

 

 

 

 

 

33

 

Restricted stock activity

 

 

 

 

 

80

 

 

 

 

 

 

 

 

 

 

 

 

80

 

Balance, June 30, 2019

 

$

8,465

 

 

$

177,850

 

 

$

44,721

 

 

$

226

 

 

$

 

 

$

231,262

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

Represents the impact of adopting Accounting Standard Update ASU 2016-02, Leases. See Note 2 to the consolidated financial statements for more information.

 

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

 

 

 

6


MID PENN BANCORP, INC.

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

(Dollars in thousands)

 

Six Months Ended June 30,

 

 

 

 

2020

 

 

 

2019

 

Operating Activities:

 

 

 

 

 

 

 

 

Net Income

 

$

10,651

 

 

$

8,480

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Provision for loan and lease losses

 

 

1,600

 

 

 

590

 

Depreciation

 

 

1,576

 

 

 

1,398

 

Amortization of intangibles

 

 

649

 

 

 

723

 

Net amortization of security discounts/premiums

 

 

362

 

 

 

196

 

Amortization of operating lease right of use assets

 

 

855

 

 

 

826

 

Amortization of finance lease right of use asset

 

 

90

 

 

 

60

 

Gain on sales of investment securities

 

 

(243

)

 

 

(24

)

Earnings on cash surrender value of life insurance

 

 

(152

)

 

 

(174

)

Mortgage loans originated for sale

 

 

(114,714

)

 

 

(65,989

)

Proceeds from sales of mortgage loans originated for sale

 

 

104,144

 

 

 

61,066

 

Gain on sale of mortgage loans

 

 

(2,820

)

 

 

(1,514

)

SBA loans originated for sale

 

 

(2,446

)

 

 

(7,109

)

Proceeds from sales of SBA loans originated for sale

 

 

2,708

 

 

 

7,544

 

Gain on sale of SBA loans

 

 

(262

)

 

 

(435

)

Loss on write-down or disposal of property, plant, and equipment

 

 

10

 

 

 

163

 

Loss on sale or write-down of foreclosed assets

 

 

 

 

 

14

 

Stock compensation expense

 

 

192

 

 

 

160

 

Deferred income tax expense (benefit)

 

 

611

 

 

 

(388

)

Increase in accrued interest receivable

 

 

(4,779

)

 

 

(639

)

Decrease (increase) in other assets

 

 

353

 

 

 

(4,296

)

Increase in accrued interest payable

 

 

382

 

 

 

434

 

Net change in operating lease liability

 

 

(901

)

 

 

(883

)

Increase (decrease) in other liabilities

 

 

1,065

 

 

 

(81

)

Net Cash (Used In) Provided By Operating Activities

 

 

(1,069

)

 

 

122

 

 

 

 

 

 

 

 

 

 

Investing Activities:

 

 

 

 

 

 

 

 

Proceeds from the sale of available-for-sale securities

 

 

68,811

 

 

 

40,455

 

Proceeds from the maturity or call of available-for-sale securities

 

 

8,513

 

 

 

3,436

 

Purchases of available-for-sale securities

 

 

(63,503

)

 

 

(11,556

)

Proceeds from the maturity or call of held-to-maturity securities

 

 

82,001

 

 

 

10,968

 

Purchases of held-to-maturity securities

 

 

(80,880

)

 

 

(2,997

)

(Purchases) redemptions of restricted investment in bank stock

 

 

(2,177

)

 

 

166

 

Net increase in loans and leases

 

 

(684,579

)

 

 

(64,616

)

Proceeds from bank owned life insurance

 

 

 

 

 

140

 

Purchases of bank premises and equipment

 

 

(2,687

)

 

 

(1,115

)

Proceeds from the sale of foreclosed assets

 

 

 

 

 

907

 

Net Cash Used In Investing Activities

 

 

(674,501

)

 

 

(24,212

)

 

 

 

 

 

 

 

 

 

Financing Activities:

 

 

 

 

 

 

 

 

Net increase in deposits

 

 

413,919

 

 

 

52,375

 

Net increase (decrease) in short-term borrowings

 

 

203,937

 

 

 

(30,100

)

Common stock dividends paid

 

 

(3,473

)

 

 

(3,637

)

Proceeds from Employee Stock Purchase Plan stock issuance

 

 

78

 

 

 

63

 

Proceeds from Director Stock Purchase Plan stock issuance

 

 

76

 

 

 

67

 

Treasury stock purchased

 

 

(1,560

)

 

 

 

Net change in finance lease liability

 

 

(41

)

 

 

(6

)

Proceeds from the issuance of subordinated debt

 

 

15,000

 

 

 

 

Issuance of long-term debt

 

 

70,000

 

 

 

13,500

 

Long-term debt repayment

 

 

(17,641

)

 

 

(92

)

Net Cash Provided By Financing Activities

 

 

680,295

 

 

 

32,170

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

4,725

 

 

 

8,080

 

Cash and cash equivalents, beginning of period

 

 

139,030

 

 

 

40,065

 

Cash and cash equivalents, end of period

 

$

143,755

 

 

$

48,145

 

7


MID PENN BANCORP, INC.

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)

 

 

(Dollars in thousands)

 

Six Months Ended June 30,

 

 

 

 

2020

 

 

 

2019

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

10,494

 

 

$

11,354

 

Cash paid for income taxes

 

 

1,060

 

 

 

2,200

 

 

 

 

 

 

 

 

 

 

Supplemental Noncash Disclosures:

 

 

 

 

 

 

 

 

Recognition of operating lease right of use assets

 

$

 

 

$

11,661

 

Recognition of operating lease liabilities

 

 

 

 

 

12,866

 

Recognition of finance lease right of use asset

 

 

 

 

 

3,597

 

Recognition of finance lease liability

 

 

 

 

 

3,597

 

Asset transferred to bank premises and equipment held for sale

 

 

 

 

 

1,274

 

Loans transferred to foreclosed assets held for sale

 

 

1,522

 

 

 

294

 

 

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

 


8


MID PENN BANCORP, INC.

 

 

(1)Basis of Presentation

The accompanying consolidated financial statements include the accounts of Mid Penn Bancorp, Inc. (“Mid Penn” or the “Corporation”) and its wholly-owned subsidiary, Mid Penn Bank (the “Bank”). During the first six months of 2020, Mid Penn established a non-bank subsidiary, MPB Financial Services, LLC under which two additional non-bank subsidiaries have been established: (i) MPB Wealth Management, LLC, created to expand the wealth management function of the Corporation, and (ii) MPB Risk Services, LLC, created to fulfill the insurance needs of both existing and potential customers of the Corporation. As of June 30, 2020, the accounts and activities of these three new non-bank subsidiaries were not material to warrant separate disclosure or segment reporting.  All material intercompany accounts and transactions have been eliminated in consolidation.

Certain information and disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  Mid Penn believes the information presented is not misleading and the disclosures are adequate.  For comparative purposes, the period ending June 30, 2019 and December 31, 2019 balances have been reclassified, when necessary, to conform to the 2020 presentation.  Such reclassifications had no impact on net income. The results of operations for interim periods are not necessarily indicative of operating results expected for the full year.  Except for adjustments made related to the adoption of new accounting standards, in the opinion of management, all adjustments necessary for fair presentation of the periods presented have been reflected in the accompanying consolidated financial statements.  All such adjustments are of a normal, recurring nature.  These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019.  

Mid Penn has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2020, for items that should potentially be recognized or disclosed in these consolidated financial statements.  The evaluation was conducted through the issuance date of these consolidated financial statements.

 

(2)Summary of Significant Accounting Policies

 

The accounting and reporting policies of Mid Penn conform with accounting principles as required under GAAP and general practices within the financial industry.  The following is a description of the more significant accounting policies.

 

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, pledging requirements, and other factors related to effective portfolio management.  Securities to be held to maturity are carried at amortized cost.

For available-for-sale debt securities, realized gains and losses on dispositions are based on the difference between net proceeds and the amortized cost of the securities sold, using the specific identification method.  Unrealized gains and losses on debt securities are based on the difference between the amortized cost and fair value of each security as of the respective reporting date. Unrealized gains and losses are credited or charged to other comprehensive income, whereas realized gains and losses flow through Mid Penn’s consolidated statement of income for the respective period.

ASC Topic 320, Investments – Debt and Equity Securities, clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired.  For debt securities, management must assess, in addition to the credit condition of the underlying issuer, 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 Corporation will recover the cost basis of the investment.

In instances when a determination is made that other-than-temporary impairment exists but the Corporation 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.

 

Equity Securities

In accordance with Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, Mid Penn reports its equity securities with readily determinable fair values 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.  Mid Penn’s equity securities consisted of Community Reinvestment Act (“CRA”) funds totaling $518,000 and $507,000 as of June 30, 2020 and December 31, 2019, respectively.  No equity securities were sold during the three or six months ended June 30, 2020 or June 30, 2019.

 

Loans

9


MID PENN BANCORP, INC.

 

 

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

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

For all classes of loans, the accrual of interest generally 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 past due 90 days or more 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, is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal.  Nonaccrual loans may be restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally, at least nine consecutive months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt.  The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

Commercial and Industrial Loans

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 percent 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 Loans

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 Loans

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 percent 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 percent loan to value level.  Residential mortgage loans generally do not include prepayment penalties.

In underwriting residential mortgage loans, the Bank evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan.  Most properties securing real estate loans made by Mid Penn are appraised by independent fee appraisers.  The Bank generally requires borrowers to obtain title insurance and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan.  Real estate loans originated by the Bank generally contain a “due on sale” clause allowing the Bank to declare the unpaid principal balance due and payable upon the sale of the security property.

The Bank underwrites residential mortgage loans to the standards established by the secondary mortgage market, i.e., Fannie Mae, Ginnie Mae, Freddie Mac, Federal Home Loan Bank, or Pennsylvania Housing Finance Agency standards, with the intention of selling the

10


MID PENN BANCORP, INC.

 

 

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 the required underwriting conditions of the secondary mortgage market, the Bank will evaluate the failed conditions and evaluate the potential risk of holding the residential mortgage in the Bank’s portfolio rather than rejecting the loan request.  In the event that the loan is funded and held in the Bank’s portfolio, the interest rate on the residential mortgage would be increased to compensate for the added portfolio risk.

Consumer Loans, Including Home Equity Credits

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 junior lien mortgages on principal residences.  The Bank will lend amounts, which, together with all prior liens, typically may be up to 85 percent 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.

Payroll Protection Program (“PPP”) Loans

On March 27, 2020, in response to the novel coronavirus (“COVID-19”) pandemic, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law by President Donald Trump.  This legislation created the federal Paycheck Protection Program (“PPP”) which permitted eligible business entities to apply for loans through a participating financial institution to cover payroll, rent, and other business expenses during the COVID-19 pandemic.  The PPP loans, which are 100 percent guaranteed by the Small Business Administration (“SBA”), have up to a five-year term to maturity and carry a low interest rate of 1 percent throughout the loan term.  The vast majority of Mid Penn’s PPP loans have a two-year term to maturity.  The SBA may forgive the PPP loans if at least 60 percent of the proceeds are used for payroll costs.  Also, the borrowers will not have to make any payments for six months following the date of disbursement of the loan, though interest will continue to accrue during the deferment period.   The SBA also provided a processing fee to financial institutions who participated in the PPP, with the amount of such fee pre-determined by the SBA dependent upon the size of each credit.  As of June 30, 2020, Mid Penn had received $20,329,000 of nonrefundable loan processing fees related to the loans disbursed as a result of Mid Penn’s participation in the PPP initiative.   These fees are offset against loan origination costs, and are deferred in accordance with FASB ASC 310-20, Receivables—Nonrefundable Fees and Other Costs and will be amortized to interest and fees on loans and leases on the Consolidated Statements of Income over the life of the loan.  During the three and six months ended June 30, 2020, Mid Penn recognized $2,371,000 of PPP processing fees within interest and fees on loans and leases on the Consolidated Statements of Income.  

As of June 30, 2020, Mid Penn had $588,667,000 of PPP loans outstanding, net of deferred PPP processing fees of $17,958,000 with all of these loans being recorded in the commercial and industrial loan portfolio classification.  

 


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Allowance for Loan and Lease Losses

The allowance for credit losses (“allowance”) and the related provision reflect Mid Penn’s continued application of the incurred loss method for estimating credit losses as Mid Penn is not required to adopted the current expected credit loss (“CECL”) accounting standard until January 1, 2023.  The allowance consists of (i) the allowance for loan and lease losses, and (ii) the reserve for unfunded lending commitments. The allowance for loan and lease losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet.  The reserve for unfunded lending commitments was $77,000 at June 30, 2020 and $80,000 at December 31, 2019.  

The allowance is increased by the provision for loan and lease losses, and decreased by charge-offs, net of recoveries.  Loans deemed to be uncollectible are charged against the allowance, and subsequent recoveries, if any, are credited to the allowance.  All, or part, of the principal balance of loans are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.  Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis, or earlier in the event of either bankruptcy or if there is an amount deemed uncollectible.  Because all identified losses are immediately charged off, no portion of the allowance is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

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

The allowance consists of specific, general and unallocated components.  The specific component relates to loans that are classified as impaired.  For loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan.

The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans.  These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors.  These qualitative risk factors include changes in economic conditions, fluctuations in loan quality measures, changes in collateral values, changes in the experience of the lending staff and loan review systems, changes in lending policies and procedures (including underwriting standards), changes in the mix and volume of loans originated, the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing loan portfolio, shifting industry or portfolio concentrations, and other relevant factors.

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation.  Adjustments to the factors are supported through documentation of changes in conditions in relevant analyses and a narrative accompanying the allowance for loan loss calculation.

 

The unallocated component of the allowance for loan and lease losses covers several considerations that are not specifically measurable through either the specific and general components. For example, at times Mid Penn could face increasing credit risks and uncertainties, not yet 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. Also, the unallocated component 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 don’t necessarily correlate to future loss trends, and unexpected changes to specific-credit or general portfolio future cash flows and collateral values which could negatively impact unimpaired portfolio loss factors.

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

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


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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 classified as substandard nonaccrual, doubtful, having probable loss will first have a collateral evaluation completed in accordance with the guidance on impaired loans.  Once the collateral evaluation has been completed, a specific allocation of allowance is made based upon the results of the evaluation.  The remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured).  In the event the loan is unsecured, the loan would have been charged-off at the recognition of impairment.  Commercial real estate loans determined to be impaired will also have an initial collateral evaluation completed in accordance with the guidance on impaired loans.  An updated real estate valuation is ordered and the collateral evaluation is modified to reflect any variations in value.  A specific allocation of allowance is made for any anticipated collateral shortfall. The remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured).  The process of charging off a residential mortgage loan begins when a loan becomes delinquent for 90 days and is 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.  Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis, or earlier in the event of either bankruptcy or if there is an amount deemed uncollectible.  The collateral shortfall of the consumer loan is recommended for charge-off at this point.

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

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

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

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

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

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 nine consecutive months after modification.  Loans classified as troubled debt restructurings are designated as impaired.

The allowance calculation methodology includes 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.

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

As of June 30, 2020, Mid Penn had $588,667,000 of PPP loans outstanding, net of deferred fees, which are guaranteed by the Small Business Administration and, thus, have no loss reserve allocated to that pool.

Acquired Loans

Loans that Mid Penn acquires in connection with business combinations are recorded at fair value with no carryover of the acquired entity’s related allowance for loan losses.  The balance of loans acquired at fair value and included in the balance of loans and leases, net of unearned interest on the Consolidated Balance Sheets totaled $324,159,000 and $414,498,000 as of June 30, 2020 and December 31, 2019, respectively.  The fair value of the acquired loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan.  The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount.  These loans are accounted for under 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.  Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount which Mid Penn will then reclassify as accretable discount that will be recognized into interest income over the remaining life of the loan.

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

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

Acquired loans that met the criteria for impaired or nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if Mid Penn expects to fully collect the new carrying value (i.e. fair value) of the loans.  As such, Mid Penn may no longer consider the loan to be nonaccrual or nonperforming at the date of acquisition 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.

Loan-Level Interest Rate Swaps

Beginning during the second quarter of 2020, Mid Penn entered into loan-level interest rate swaps (“swaps”) to facilitate customer transactions and meet their financing needs.  These swaps qualify as derivatives, but are not designated as hedging instruments.   A loan-level interest rate swap is a contract in which the series of interest rate flows (fixed and variable) are exchanged over the term of a loan with certain qualifying commercial loan customers, and Mid Penn simultaneously enters into an interest rate swap with a dealer counterparty with identical notional amounts and terms. The net result of these swaps is that the customer pays a fixed interest rate and Mid Penn receives a floating interest rate.  The swap positions with customers are equally offset with the dealer counterparties to minimize the potential impact on Mid Penn’s financial statements. 

Pursuant to our agreements with the dealer counterparties, we may receive collateral or may be required to post collateral based upon mark-to-market positions. Beyond unsecured threshold levels, collateral in the form of cash or securities may be made available to counterparties of interest rate swap transactions. Based upon our current positions and related future collateral requirements relating to them, we believe any effect on our cash flow or liquidity position to be immaterial.

Derivatives contain an element of credit risk, including the possibility that we will incur a loss because a party to the agreements, which may be a dealer counterparty or a customer, fails to meet its contractual obligations. Derivative contracts may only be executed with dealer counterparties as approved by our Board of Directors.  Similarly, derivatives with customers may only be executed with customers within credit exposure limits as approved by our Board of Directors. Loan-level interest rate swaps are considered derivatives but are not accounted for using hedge accounting.

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Bank Premises and Equipment Held for Sale

 

Bank premises and equipment designated as held for sale are carried at the lower of cost or market value. There were no premises and equipment classified as held for sale as of June 30, 2020 or December 31, 2019. During 2019, Mid Penn sold the land and facility formerly used as a full-service retail banking property. An impairment charge of $105,000 was recorded during the first six months of 2019 related to this property and is included in other expenses on the Consolidated Statement of Income.  Similar impairment charges were not recorded during the six months ended June 30, 2020.

 

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 the selling costs 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 estimated 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 June 30, 2020, Mid Penn had $135,000 of residential real estate held in other real estate owned and $90,000 in loans for which formal foreclosure proceedings were in process.  As of December 31, 2019, Mid Penn had $78,000 of residential real estate held in other real estate owned and $84,000 in loans for which formal foreclosure proceedings were in process.

 

Leases

 

Mid Penn leases certain premises and equipment and, as of January 1, 2019, for all leases in effect upon adoption of Accounting Standards Update 2016-02, Leases (Topic 842), as well as any leases commencing thereafter, Mid Penn has recognized a right-of-use asset and a related lease liability for each distinct lease agreement.  The lease right-of-use asset consists of the amount of the initial measurement of the lease liability, adjusted for (i) any lease payments made to the lessor at or before the commencement date, minus any lease incentives received, and (ii) any initial direct costs incurred by the lessee (defined as costs of a lease that would not have been incurred had the lease not been executed).  The related lease liability is equal to the present value of the future lease payments, discounted using the rate implicit in the lease (or if that rate cannot be readily determined, the lessee’s incremental borrowing rate). Given that the rate implicit in the lease is rarely available, all lease liability amounts were calculated using Mid Penn’s incremental borrowing rate at lease inception, on a collateralized basis, for a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. As a result of the adoption of this standard, effective January 1, 2019, Mid Penn recognized (i) an operating lease ROU asset of $11,661,000, (ii) an operating lease liability of $12,866,000, and (iii) an opening adjustment to retained 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.  

 

Operating lease expense, recognized as a component of occupancy expense on the Consolidated Statements of Income, consists of a single lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term on a straight-line basis.  Operating lease expense also includes variable lease payments not included in the lease liability, and any impairment of the right-of-use asset.  Finance lease expense consists of the amortization of the right-of-use asset, recognized as a component of occupancy expense on the Consolidated Statements of Income, and interest expense on the lease liability, which is recorded as a component of other interest expense on the Consolidated Statements of Income.

 

In assessing whether a contract contains a lease, Mid Penn reviews third-party agreements to determine if the contract conveys the right to control the use of identified property, plant, or equipment (defined as an identified asset by Topic 842) for a period of time in exchange for consideration, and grants Mid Penn the right to both (i) obtain substantially all of the economic benefits from the identified asset’s use, and (ii) direct the use of the identified asset throughout the term of the agreement.  

 

Upon identification that a lease agreement exists, Mid Penn performs an assessment of the consideration to be paid related to the identified asset and quantifies both the (i) lease components, consisting of consideration paid to transfer a good or service to Mid Penn, and (ii) non-lease components, consisting of consideration paid for distinct elements of the contract that are not related to securing the use of the leased asset, such as property taxes, common area maintenance, utilities, and insurance.  

 

Many of Mid Penn’s lease agreements include options to extend or renew contracts subsequent to the expiration of the initial lease term.  These renewal and extension options were not included in the calculation of the right-of-use assets and lease liabilities as Mid Penn is not reasonably certain that these renewals and extensions will be utilized.  Additionally, for leases that contain escalation clauses related to consumer or other price indices, Mid Penn includes the known lease payment amount as of the commencement date in the calculation of right-of-use assets and related lease liabilities. Subsequent increases in rental payments over the known amount at the commencement date due to increase in the indices will be expensed as incurred.

 

None of Mid Penn’s lease agreements include residual value guarantees or material variable lease payments.  Mid Penn does not have material restrictions or covenants imposed by leases that would impact Mid Penn’s ability to pay dividends or cause Mid Penn to incur additional financial obligations.

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Investments in Limited Partnerships

 

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 $168,000 at June 30, 2020, and $190,000 at December 31, 2019, net of amortization, using the straight-line method.  The investment in this limited partnership is reported in other assets on the Consolidated Balance Sheets, and Mid Penn’s maximum exposure to loss is limited to the carrying value of the investment.  

 

Mid Penn also has a limited partnership interest in a low-income housing project to construct thirty-seven apartments and common amenities in Dauphin County, Pennsylvania.  The total investment in this limited partnership, net of amortization, was $7,061,000 and $7,249,000 on June 30, 2020 and December 31, 2019, respectively, and was included in the reported balance of other assets on the Consolidated Balance Sheet.  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.  Investments made to date, and future payments under this commitment are 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 is reported in other assets on the Consolidated Balance Sheet and is being amortized over a ten-year period as the facilities became operational and began to be occupied beginning in December 2019.  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 and the investment is expected to be fully funded in 2020.  Mid Penn recognizes the related amortization and tax credits using the cost amortization method over a ten-year period.  

 

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 intangible was $4,907,000 and $5,526,000 at June 30, 2020 and December 31, 2019, respectively.  Core deposit amortization expense is reflected in the Consolidated Statements of Income in intangible amortization and was $619,000 and $695,000 for the six months ended June 30, 2020 and 2019, respectively.  Core deposit amortization expense was $309,000 and $347,000 for the three months ended June 30, 2020 and 2019, respectively.   The core deposit intangible for each respective acquisition (Phoenix in March 2015; Scottdale in January 2018; and First Priority in July 2018) is being amortized over a ten-year period starting at the respective acquisition date and using a sum-of-the-year’s digits basis.  Core deposit intangible assets are subject to impairment testing whenever events or changes in circumstances indicate the need for such evaluation.  During the first quarter of 2020 and continuing through the period subsequent to June 30, 2020, the novel coronavirus (“COVID-19”) global pandemic impacted the United States including the State of Pennsylvania and Mid Penn’s market area and communities and customers.  Accordingly, Mid Penn management evaluated whether this COVID-19 event resulted in any impairment to Mid Penn’s business and the value of its acquired consumer demand and savings deposit base.  Management’s determination was that there was no impairment to its core deposit intangible to date as a result of the pandemic or related factors.  Supporting this assertion, as reflected in the Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, Mid Penn has recognized substantial total deposit growth of $413,919,000 or over 21 percent during the first six months of 2020, with none of this growth attributable to brokered deposits.  Subsequent to June 30, 2020, and through the date of this filing, these increased deposit levels were sustained and continued to reflect no evidence of impairment.

 

 


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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 was $62,840,000 at both June 30, 2020 and December 31, 2019, and 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 would be tested for impairment when such events occur.  In making a potential impairment assessment of goodwill, 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.  Mid Penn did not identify any impairment on its outstanding goodwill from its evaluation which was performed as of October 31, 2019 using a qualitative analysis.  Changes in economic and operating conditions could result in goodwill impairment in future periods.  During the first half of 2020, and in support of its March 31, 2020 financial reports, Mid Penn management performed a “Step One” goodwill analysis to determine whether the current or expected impact from the COVID-19 global pandemic resulted in any impairment to Mid Penn’s business and the recorded value of its goodwill intangible asset.  Based upon this goodwill analysis, Mid Penn management determined that there was no impairment to its goodwill. A subsequent “Step One” goodwill analysis was not performed as of June 30, 2020; however, in response to the continued presence of the COVID-19 pandemic event and its impacts on the capital markets and the economy, management reviewed the criteria supporting the “Step One” assessment performed for the first quarter of 2020, including economic projections, anticipated cash flows, and current market data. Mid Penn management determined there were no adverse changes to key considerations from this previous assessment, or additional events that occurred since this previous assessment, and affirmed its determination that there is no impairment to its goodwill as of June 30, 2020.  As the COVID-19 event continues and its implications to the country, the economy, and specifically Mid Penn evolve, management will perform additional goodwill evaluations as necessary.

 

Revenue from Contracts with Customers

 

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.

 

On January 1, 2018, Mid Penn adopted FASB ASU 2014-09, Revenue from Contracts with Customers (Topic 606). 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.  Topic 606 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 and Wealth Management Activities

 

Income from fiduciary and wealth management activities consist of trust, wealth management, and investment management fee income, brokerage transaction fee income, and estate fee income.  Trust, wealth management, and investment management fee income consists of advisory fees that are typically 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 of 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 most interchange activity is received daily, while some fees are aggregated and payment is received in the following month.

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Merchant Services Income

 

Merchant services income is processed through third party providers 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 respective third-party provider 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.

 

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 also recognizes other comprehensive income (loss) from 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 Mid Penn recognizes 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.

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

 

(Dollars in thousands)

 

Unrealized Gain (Loss)

on Securities

 

 

Defined Benefit

Plans

 

 

Accumulated Other

Comprehensive

(Loss) Income

 

Balance - June 30, 2020

 

$

9

 

 

$

(159

)

 

$

(150

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance - December 31, 2019

 

$

(128

)

 

$

471

 

 

$

343

 

 

During the six months ended June 30, 2020, the fair value of plan assets in Mid Penn’s defined benefit pension plan was impacted by the economic implications of the COVID-19 pandemic, resulting in a decrease in the fair value of the plan assets and a corresponding decrease in accumulated other comprehensive (loss) income, net of taxes, of $620,000 when comparing December 31, 2019 to June 30, 2020.

 

 


18


MID PENN BANCORP, INC.

 

 

Earnings Per Common Share

 

Basic earnings per common share are computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each of the periods presented. Diluted earnings per common share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding plus common shares that would have been outstanding if dilutive potential common shares, consisting of unvested restricted stock, had been issued.  The effect of dilutive unvested restricted stock was not material and did not result in a difference, when rounded to the whole cent, between the basic earnings per share compared to the diluted earnings per share for any of the periods presented. The following data shows the amounts used in computing basic and diluted earnings per common share.

 

(Dollars in thousands, except per share data)

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2020

 

 

 

2019

 

 

2020

 

 

 

2019

 

Net income

$

6,833

 

 

$

4,403

 

 

 

$

10,651

 

 

$

8,480

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding (basic)

 

8,446,377

 

 

 

8,462,522

 

 

 

 

8,463,676

 

 

 

8,461,269

 

Effect of dilutive unvested restricted stock grants

 

3,973

 

 

 

5,689

 

 

 

 

4,528

 

 

 

4,015

 

Weighted average common shares outstanding (diluted)

 

8,450,350

 

 

 

8,468,211

 

 

 

 

8,468,204

 

 

 

8,465,284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

$

0.81

 

 

$

0.52

 

 

 

$

1.26

 

 

$

1.00

 

Diluted earnings per common share

$

0.81

 

 

$

0.52

 

 

 

$

1.26

 

 

$

1.00

 

 

There were no antidilutive shares at June 30, 2020 and 2019.

 

(3)

Investment Securities

 

The majority of the investment portfolio is comprised of securities issued by U.S. government agencies, and state and political subdivision obligations.  The amortized cost, fair value, and unrealized gains and losses on investment securities at June 30, 2020 and December 31, 2019 are as follows:

 

(Dollars in thousands)

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

June 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed U.S. government agencies

 

$

2

 

 

$

 

 

$

 

 

$

2

 

State and political subdivision obligations

 

 

7,014

 

 

 

36

 

 

 

 

 

 

7,050

 

Corporate debt securities

 

 

16,464

 

 

 

42

 

 

 

66

 

 

 

16,440

 

Total available-for-sale debt securities

 

 

23,480

 

 

 

78

 

 

 

66

 

 

 

23,492

 

Held-to-maturity debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

24,004

 

 

$

228

 

 

$

 

 

$

24,232

 

Mortgage-backed U.S. government agencies

 

 

41,312

 

 

 

1,072

 

 

 

4

 

 

 

42,380

 

State and political subdivision obligations

 

 

60,525

 

 

 

2,642

 

 

 

23

 

 

 

63,144

 

Corporate debt securities

 

 

9,546

 

 

 

205

 

 

 

16

 

 

 

9,735

 

Total held-to-maturity debt securities

 

 

135,387

 

 

 

4,147

 

 

 

43

 

 

 

139,491

 

Total

 

$

158,867

 

 

$

4,225

 

 

$

109

 

 

$

162,983

 

19


MID PENN BANCORP, INC.

 

 

 

(Dollars in thousands)

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

22,894

 

 

$

6

 

 

$

70

 

 

$

22,830

 

Mortgage-backed U.S. government agencies

 

 

12,996

 

 

 

7

 

 

 

113

 

 

 

12,890

 

State and political subdivision obligations

 

 

30

 

 

 

 

 

 

 

 

 

30

 

Corporate debt securities

 

 

1,250

 

 

 

9

 

 

 

 

 

 

1,259

 

Total available-for-sale debt securities

 

 

37,170

 

 

 

22

 

 

 

183

 

 

 

37,009

 

Held-to-maturity debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

50,210

 

 

$

46

 

 

$

220

 

 

$

50,036

 

Mortgage-backed U.S. government agencies

 

 

42,098

 

 

 

95

 

 

 

102

 

 

 

42,091

 

State and political subdivision obligations

 

 

44,169

 

 

 

1,193

 

 

 

13

 

 

 

45,349

 

Total held-to-maturity debt securities

 

 

136,477

 

 

 

1,334

 

 

 

335

 

 

 

137,476

 

Total

 

$

173,647

 

 

$

1,356

 

 

$

518

 

 

$

174,485

 

 

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.  Please refer to Note 7, Fair Value Measurement, for more information on the fair value of investment securities.

Investment securities having a fair value of $128,301,000 at June 30, 2020 and $147,283,000 at December 31, 2019 were pledged to secure public deposits, some trust account holdings, and certain other borrowings.  Mid Penn also obtains letters of credit from the Federal Home Loan Bank of Pittsburgh (“FHLB”) to secure certain public deposits.  These FHLB letter of credit commitments totaled $212,401,000 as of June 30, 2020 and $169,051,000 as of December 31, 2019.

The following tables present gross unrealized losses and fair value of debt security investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2020 and December 31, 2019.

 

(Dollars in thousands)

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

 

 

Number

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

 

of

 

Fair

 

 

Unrealized

 

 

of

 

Fair

 

 

Unrealized

 

 

of

 

Fair

 

 

Unrealized

 

June 30, 2020

 

Securities

 

Value

 

 

Losses

 

 

Securities

 

Value

 

 

Losses

 

 

Securities

 

Value

 

 

Losses

 

Available-for-sale debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate debt securities

 

5

 

$

9,895

 

 

$

66

 

 

0

 

$

 

 

$

 

 

5

 

$

9,895

 

 

$

66

 

Total temporarily impaired available-for-sale debt securities

 

5

 

$

9,895

 

 

$

66

 

 

0

 

$

 

 

$

 

 

5

 

$

9,895

 

 

$

66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed U.S. government agencies

 

1

 

$

1,135

 

 

$

4

 

 

0

 

$

 

 

$

 

 

1

 

$

1,135

 

 

$

4

 

State and political subdivision obligations

 

2

 

 

2,668

 

 

 

23

 

 

0

 

 

 

 

 

 

 

2

 

 

2,668

 

 

 

23

 

Corporate debt securities

 

2

 

 

1,983

 

 

 

16

 

 

0

 

 

 

 

 

 

 

2

 

 

1,983

 

 

 

16

 

Total temporarily impaired held-to-maturity debt securities

 

5

 

$

5,786

 

 

$

43

 

 

0

 

$

 

 

$

 

 

5

 

$

5,786

 

 

$

43

 

Total

 

10

 

$

15,681

 

 

$

109

 

 

0

 

$

 

 

$

 

 

10

 

$

15,681

 

 

$

109

 

 

 

 

 

20


MID PENN BANCORP, INC.

 

 

(Dollars in thousands)

 

Less Than 12 Months

 

 

12 Months or More

 

 

Total

 

 

 

Number

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

Number

 

 

 

 

 

 

 

 

 

 

of

 

Fair

 

 

Unrealized

 

 

of

 

Fair

 

Unrealized

 

 

of

 

Fair

 

 

Unrealized

 

December 31, 2019

 

Securities

 

Value

 

 

Losses

 

 

Securities

 

Value

 

Losses

 

 

Securities

 

Value

 

 

Losses

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

4

 

$

4,652

 

 

$

24

 

 

7

 

$

11,982

 

 

$

46

 

 

11

 

$

16,634

 

 

$

70

 

Mortgage-backed U.S. government agencies

 

1

 

 

1,643

 

 

 

4

 

 

14

 

 

10,603

 

 

 

109

 

 

15

 

 

12,246

 

 

 

113

 

Total temporarily impaired available-for-sale securities

 

5

 

$

6,295

 

 

$

28

 

 

21

 

$

22,585

 

 

$

155

 

 

26

 

$

28,880

 

 

$

183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

18

 

$

29,024

 

 

$

219

 

 

1

 

$

2,999

 

 

$

1

 

 

19

 

$

32,023

 

 

$

220

 

Mortgage-backed U.S. government agencies

 

6

 

 

8,445

 

 

 

35

 

 

13

 

 

11,050

 

 

 

67

 

 

19

 

 

19,495

 

 

 

102

 

State and political subdivision obligations

 

3

 

 

1,383

 

 

 

13

 

 

0

 

 

 

 

 

 

 

3

 

 

1,383

 

 

 

13

 

Total temporarily impaired held to maturity securities

 

27

 

$

38,852

 

 

$

267

 

 

14

 

$

14,049

 

 

$

68

 

 

41

 

$

52,901

 

 

$

335

 

Total

 

32

 

$

45,147

 

 

$

295

 

 

35

 

$

36,634

 

 

$

223

 

 

67

 

$

81,781

 

 

$

518

 

 

Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such additional evaluation. Consideration is given to the length of time and the extent to which the fair value of the security has been less than amortized cost, as well as the overall financial condition of the issuer.  In addition, for debt securities, Mid Penn considers (i) whether management has the intent to sell the security, (ii) whether it is more likely than not that management will be required to sell the security prior to its anticipated recovery, and (iii) whether management expects to recover the entire amortized cost basis.  At both June 30, 2020 and December 31, 2019, the majority of available-for-sale securities and held-to-maturity securities in an unrealized loss position were corporate debt securities.

Mid Penn had no securities considered by management to be other-than-temporarily impaired as of June 30, 2020, December 31, 2019, or June 30, 2019, and did not record any securities impairment charges in the respective periods ended on these dates.  This determination reflects management’s assessment that no securities in its portfolio were impaired as a result of any COVID-19 pandemic impacts, to date, to the underlying issuers of securities.  Mid Penn does not consider the securities with unrealized losses on the respective dates to be other-than-temporarily impaired as the unrealized losses were deemed to be temporary changes in value related to market movements in interest yields at various periods similar to the maturity dates of holdings in the investment portfolio, and not reflective of an erosion of credit quality.

Gross realized gains and losses on sales of available-for-sale debt securities for the three and six months ended June 30, 2020 and 2019 are shown in the table below.

 

(Dollars in thousands)

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Realized gains

 

$

118

 

 

 

$

43

 

 

 

$

255

 

 

 

$

69

 

Realized losses

 

 

(7

)

 

 

 

(26

)

 

 

 

(12

)

 

 

 

(45

)

Net gains

 

$

111

 

 

 

$

17

 

 

 

$

243

 

 

 

$

24

 

 

 

 


21


MID PENN BANCORP, INC.

 

 

The table below illustrates the maturity distribution of investment securities at amortized cost and fair value as of June 30, 2020.

 

(Dollars in thousands)

 

Available-for-sale

 

 

Held-to-maturity

 

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

June 30, 2020

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Due in 1 year or less

 

$

 

 

$

 

 

$

3,162

 

 

$

3,191

 

Due after 1 year but within 5 years

 

 

2,975

 

 

 

2,994

 

 

 

19,478

 

 

 

20,195

 

Due after 5 years but within 10 years

 

 

17,679

 

 

 

17,667

 

 

 

67,984

 

 

 

70,266

 

Due after 10 years

 

 

2,824

 

 

 

2,829

 

 

 

3,451

 

 

 

3,459

 

 

 

 

23,478

 

 

 

23,490

 

 

 

94,075

 

 

 

97,111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

 

2

 

 

 

2

 

 

 

41,312

 

 

 

42,380

 

 

 

$

23,480

 

 

$

23,492

 

 

$

135,387

 

 

$

139,491

 

 

(4)

Loans and Allowance for Loan and Lease Losses

The types of loans in Mid Penn’s portfolio, summarized by those rated as “pass” (net of deferred fees and costs of $18,066,000 as of June 30, 2020 and $1,081,000 as of December 31, 2019), and the loans classified as “special mention” and “substandard” within Mid Penn’s internal risk rating system as of June 30, 2020 and December 31, 2019, are as follows:

 

(Dollars in thousands)

 

 

 

Special

 

 

 

 

 

 

June 30, 2020

 

Pass

 

 

Mention

 

 

Substandard

 

 

Total

 

Commercial and industrial

 

$

916,886

 

 

$

9,712

 

 

$

2,792

 

 

$

929,390

 

Commercial real estate

 

 

983,198

 

 

 

2,752

 

 

 

12,723

 

 

 

998,673

 

Commercial real estate - construction

 

 

224,325

 

 

 

 

 

 

32

 

 

 

224,357

 

Residential mortgage

 

 

216,948

 

 

 

54

 

 

 

1,350

 

 

 

218,352

 

Home equity

 

 

65,744

 

 

 

7

 

 

 

2,414

 

 

 

68,165

 

Consumer

 

 

6,828

 

 

 

 

 

 

 

 

 

6,828

 

 

 

$

2,413,929

 

 

$

12,525

 

 

$

19,311

 

 

$

2,445,765

 

 

(Dollars in thousands)

 

 

 

 

 

Special

 

 

 

 

 

 

 

 

 

December 31, 2019

 

Pass

 

 

Mention

 

 

Substandard

 

 

Total

 

Commercial and industrial

 

$

326,573

 

 

$

9,558

 

 

$

3,016

 

 

$

339,147

 

Commercial real estate

 

 

913,001

 

 

 

2,426

 

 

 

13,711

 

 

 

929,138

 

Commercial real estate - construction

 

 

181,650

 

 

 

 

 

 

40

 

 

 

181,690

 

Residential mortgage

 

 

235,252

 

 

 

55

 

 

 

1,417

 

 

 

236,724

 

Home equity

 

 

68,224

 

 

 

 

 

 

47

 

 

 

68,271

 

Consumer

 

 

7,786

 

 

 

 

 

 

 

 

 

7,786

 

 

 

$

1,732,486

 

 

$

12,039

 

 

$

18,231

 

 

$

1,762,756

 

 

The increase in deferred fees and costs from December 31, 2019 to June 30, 2020 was the result of collected but unearned PPP loan processing fees related to the PPP loans which Mid Penn processed and disbursed during the second quarter of 2020.  PPP loans are included in commercial and industrial loans and are fully guaranteed by the SBA, therefore all PPP loans outstanding are classified as “pass” within Mid Penn’s internal risk rating system as of June 30, 2020.  

 

Mid Penn had no loans classified as doubtful as of June 30, 2020 and December 31, 2019.

 

 


22


MID PENN BANCORP, INC.

 

 

Impaired loans by loan portfolio class as of June 30, 2020 and December 31, 2019 are summarized as follows:

 

 

 

June 30, 2020

 

 

December 31, 2019

 

(Dollars in thousands)

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

 

Recorded Investment

 

 

Unpaid Principal Balance

 

 

Related Allowance

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,012

 

 

$

1,061

 

 

$

 

 

$

890

 

 

$

890

 

 

$

 

Commercial real estate

 

 

7,126

 

 

 

7,465

 

 

 

 

 

 

7,973

 

 

 

8,366

 

 

 

 

Commercial real estate - construction

 

 

32

 

 

 

34

 

 

 

 

 

 

40

 

 

 

61

 

 

 

 

Residential mortgage

 

 

776

 

 

 

798

 

 

 

 

 

 

817

 

 

 

838

 

 

 

 

Home equity

 

 

2,406

 

 

 

2,436

 

 

 

 

 

 

25

 

 

 

27

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded and acquired with credit deterioration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

 

$

 

 

$

 

 

$

3

 

 

$

68

 

 

$

 

Commercial real estate

 

 

1,430

 

 

 

1,700

 

 

 

 

 

 

1,423

 

 

 

1,708

 

 

 

 

Commercial real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

354

 

 

 

494

 

 

 

 

 

 

381

 

 

 

578

 

 

 

 

Home equity

 

 

1

 

 

 

4

 

 

 

 

 

 

1

 

 

 

5

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

198

 

 

$

198

 

 

$

53

 

 

$

 

 

$

 

 

$

 

Commercial real estate

 

 

902

 

 

 

944

 

 

 

190

 

 

 

338

 

 

 

380

 

 

 

166

 

Commercial real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Impaired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,210

 

 

$

1,259

 

 

$

53

 

 

$

893

 

 

$

958

 

 

$

 

Commercial real estate

 

 

9,458

 

 

 

10,109

 

 

 

190

 

 

 

9,734

 

 

 

10,454

 

 

 

166

 

Commercial real estate - construction

 

 

32

 

 

 

34

 

 

 

 

 

 

40

 

 

 

61

 

 

 

 

Residential mortgage

 

 

1,130

 

 

 

1,292

 

 

 

 

 

 

1,198

 

 

 

1,416

 

 

 

 

Home equity

 

 

2,407

 

 

 

2,440

 

 

 

 

 

 

26

 

 

 

32

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23


MID PENN BANCORP, INC.

 

 

The average recorded investment of impaired loans and related interest income recognized for the three and six months ended June 30, 2020 and 2019 are summarized as follows:

 

 

 

Three Months Ended

 

 

 

June 30, 2020

 

 

June 30, 2019

 

(Dollars in thousands)

 

Average Recorded Investment

 

 

Interest Income Recognized

 

 

Average Recorded Investment

 

 

Interest Income Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

955

 

 

$

 

 

$

 

 

$

 

Commercial real estate

 

 

7,004

 

 

 

 

 

 

2,273

 

 

 

 

Commercial real estate - construction

 

 

36

 

 

 

 

 

 

40

 

 

 

 

Residential mortgage

 

 

762

 

 

 

6

 

 

 

880

 

 

 

7

 

Home equity

 

 

1,215

 

 

 

 

 

 

29

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded and acquired with credit deterioration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

 

 

$

 

 

$

29

 

 

$

 

Commercial real estate

 

 

1,423

 

 

 

 

 

 

1,602

 

 

 

 

Commercial real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

360

 

 

 

 

 

 

1,222

 

 

 

 

Home equity

 

 

1

 

 

 

 

 

 

4

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

99

 

 

$

 

 

$

140

 

 

$

 

Commercial real estate

 

 

835

 

 

 

 

 

 

513

 

 

 

 

Commercial real estate - construction

 

 

 

 

 

 

 

 

183

 

 

 

 

Residential mortgage

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Impaired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,054

 

 

$

 

 

$

169

 

 

$

 

Commercial real estate

 

 

9,262

 

 

 

 

 

 

4,388

 

 

 

 

Commercial real estate - construction

 

 

36

 

 

 

 

 

 

223

 

 

 

 

Residential mortgage

 

 

1,122

 

 

 

6

 

 

 

2,102

 

 

 

7

 

Home equity

 

 

1,216

 

 

 

 

 

 

33

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

24


MID PENN BANCORP, INC.

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 2020

 

 

June 30, 2019

 

(Dollars in thousands)

 

Average Recorded Investment

 

 

Interest Income Recognized

 

 

Average Recorded Investment

 

 

Interest Income Recognized

 

With no related allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

933

 

 

$

 

 

$

 

 

$

 

Commercial real estate

 

 

7,362

 

 

 

 

 

 

2,289

 

 

 

 

Commercial real estate - construction

 

 

37

 

 

 

 

 

 

27

 

 

 

 

Residential mortgage

 

 

780

 

 

 

13

 

 

 

857

 

 

 

14

 

Home equity

 

 

818

 

 

 

 

 

 

29

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With no related allowance recorded and acquired with credit deterioration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1

 

 

$

 

 

$

29

 

 

$

 

Commercial real estate

 

 

1,421

 

 

 

 

 

 

1,589

 

 

 

 

Commercial real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

367

 

 

 

 

 

 

1,219

 

 

 

 

Home equity

 

 

1

 

 

 

 

 

 

4

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

66

 

 

$

 

 

$

1,603

 

 

$

3

 

Commercial real estate

 

 

634

 

 

 

 

 

 

477

 

 

 

 

Commercial real estate - construction

 

 

 

 

 

 

 

 

245

 

 

 

 

Residential mortgage

 

 

 

 

 

 

 

 

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Impaired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

1,000

 

 

$

 

 

$

1,632

 

 

$

3

 

Commercial real estate

 

 

9,417

 

 

 

 

 

 

4,355

 

 

 

 

Commercial real estate - construction

 

 

37

 

 

 

 

 

 

272

 

 

 

 

Residential mortgage

 

 

1,147

 

 

 

13

 

 

 

2,076

 

 

 

14

 

Home equity

 

 

819

 

 

 

 

 

 

33

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 


25


MID PENN BANCORP, INC.

 

 

Nonaccrual loans by loan portfolio class, including loans acquired with credit deterioration, as of June 30, 2020 and December 31, 2019 are summarized as follows:

 

(Dollars in thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Commercial and industrial

 

$

1,210

 

 

$

894

 

Commercial real estate

 

 

9,458

 

 

 

9,800

 

Commercial real estate - construction

 

 

32

 

 

 

40

 

Residential mortgage

 

 

697

 

 

 

711

 

Home equity

 

 

2,407

 

 

 

26

 

Consumer

 

 

 

 

 

 

 

 

$

13,804

 

 

$

11,471

 

 

The performance and credit quality of the loan portfolio is also monitored by 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 June 30, 2020 and December 31, 2019 are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

(Dollars in thousands)

 

30-59

 

 

60-89

 

 

Greater

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivable >

 

 

 

Days Past

 

 

Days Past

 

 

than 90

 

 

Total Past

 

 

 

 

 

 

 

 

 

 

90 Days and

 

June 30, 2020

 

Due

 

 

Due

 

 

Days

 

 

Due

 

 

Current

 

 

Total Loans

 

 

Accruing

 

Commercial and industrial

 

$

859

 

 

$

233

 

 

$

953

 

 

$

2,045

 

 

$

927,345

 

 

$

929,390

 

 

$

800

 

Commercial real estate

 

 

325

 

 

 

146

 

 

 

7,519

 

 

 

7,990

 

 

 

989,253

 

 

 

997,243

 

 

 

 

Commercial real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

224,357

 

 

 

224,357

 

 

 

 

Residential mortgage

 

 

99

 

 

 

49

 

 

 

250

 

 

 

398

 

 

 

217,600

 

 

 

217,998

 

 

 

 

Home equity

 

 

254

 

 

 

7

 

 

 

2,406

 

 

 

2,667

 

 

 

65,497

 

 

 

68,164

 

 

 

 

Consumer

 

 

4

 

 

 

 

 

 

 

 

 

4

 

 

 

6,824

 

 

 

6,828

 

 

 

 

Loans acquired with credit deterioration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial real estate

 

 

 

 

 

 

 

 

1,419

 

 

 

1,419

 

 

 

11

 

 

 

1,430

 

 

 

 

Commercial real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

 

 

 

 

 

 

189

 

 

 

189

 

 

 

165

 

 

 

354

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,541

 

 

$

435

 

 

$

12,736

 

 

$

14,712

 

 

$

2,431,053

 

 

$

2,445,765

 

 

$

800

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

(Dollars in thousands)

 

30-59

 

 

60-89

 

 

Greater

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receivable >

 

 

 

Days Past

 

 

Days Past

 

 

than 90

 

 

Total Past

 

 

 

 

 

 

 

 

 

 

90 Days and

 

December 31, 2019

 

Due

 

 

Due

 

 

Days

 

 

Due

 

 

Current

 

 

Total Loans

 

 

Accruing

 

Commercial and industrial

 

$

 

 

$

1,059

 

 

$

890

 

 

$

1,949

 

 

$

337,195

 

 

$

339,144

 

 

$

 

Commercial real estate

 

 

1,298

 

 

 

11

 

 

 

7,819

 

 

 

9,128

 

 

 

918,587

 

 

 

927,715

 

 

 

 

Commercial real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

181,690

 

 

 

181,690

 

 

 

 

Residential mortgage

 

 

145

 

 

 

 

 

 

326

 

 

 

471

 

 

 

235,872

 

 

 

236,343

 

 

 

 

Home equity

 

 

34

 

 

 

 

 

 

 

 

 

34

 

 

 

68,236

 

 

 

68,270

 

 

 

 

Consumer

 

 

5

 

 

 

3

 

 

 

 

 

 

8

 

 

 

7,778

 

 

 

7,786

 

 

 

 

Loans acquired with credit deterioration:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

3

 

 

 

3

 

 

 

 

 

 

3

 

 

 

 

Commercial real estate

 

 

16

 

 

 

473

 

 

 

934

 

 

 

1,423

 

 

 

 

 

 

1,423

 

 

 

 

Commercial real estate - construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage

 

 

5

 

 

 

 

 

 

203

 

 

 

208

 

 

 

173

 

 

 

381

 

 

 

 

Home equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,503

 

 

$

1,546

 

 

$

10,175

 

 

$

13,224

 

 

$

1,749,532

 

 

$

1,762,756

 

 

$

 

26


MID PENN BANCORP, INC.

 

 

The allowance for loan losses and the related loan loss provision for the periods presented reflect Mid Penn’s continued application of the incurred loss method for estimating credit losses, as Mid Penn is not required to adopt the current expected credit loss (“CECL”) accounting standard until January 1, 2023.  PPP loans are included in the commercial and industrial classification and, as the PPP loans are fully guaranteed by the Small Business Administration, no allowance for loan losses was recorded against the $588,667,000 balance of PPP loans outstanding as of June 30, 2020.

.  

The following tables summarize the allowance and recorded investments in loans receivable.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of, and for the

three months ended,

June 30, 2020

 

Commercial and industrial

 

 

Commercial real estate

 

 

Commercial real estate - construction

 

 

Residential mortgage

 

 

Home equity

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 1, 2020

 

$

2,427

 

 

$

6,630

 

 

$

57

 

 

$

436

 

 

$

448

 

 

$

2

 

 

$

14

 

 

$

10,014

 

Charge-offs

 

 

(1

)

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

 

(12

)

Recoveries

 

 

2

 

 

 

 

 

 

2

 

 

 

 

 

 

1

 

 

 

10

 

 

 

 

 

 

15

 

Provisions

 

 

358

 

 

 

611

 

 

 

13

 

 

 

(9

)

 

 

68

 

 

 

(6

)

 

 

15

 

 

 

1,050

 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2020

 

$

2,786

 

 

$

7,241

 

 

$

65

 

 

$

427

 

 

$

517

 

 

$

2

 

 

$

29

 

 

$

11,067

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of, and for the

six months ended,

June 30, 2020

 

Commercial

and

industrial

 

 

Commercial real estate

 

 

Commercial real estate - construction

 

 

Residential mortgage

 

 

Home equity

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2020

 

$

2,341

 

 

$

6,259

 

 

$

51

 

 

$

417

 

 

$

442

 

 

$

2

 

 

$

3

 

 

$

9,515

 

Charge-offs

 

 

(45

)

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

 

(18

)

 

 

 

 

 

(70

)

Recoveries

 

 

2

 

 

 

1

 

 

 

2

 

 

 

3

 

 

 

1

 

 

 

13

 

 

 

 

 

 

22

 

Provisions

 

 

488

 

 

 

981

 

 

 

19

 

 

 

7

 

 

 

74

 

 

 

5

 

 

 

26

 

 

 

1,600

 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2020

 

 

2,786

 

 

 

7,241

 

 

 

65

 

 

 

427

 

 

 

517

 

 

 

2

 

 

 

29

 

 

 

11,067

 

Individually evaluated for impairment

 

 

53

 

 

 

190

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

243

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

collectively evaluated for impairment

 

$

2,733

 

 

$

7,051

 

 

$

65

 

 

$

427

 

 

$

517

 

 

$

2

 

 

$

29

 

 

$

10,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

929,390

 

 

$

998,673

 

 

$

224,357

 

 

$

218,352

 

 

$

68,165

 

 

$

6,828

 

 

$

 

 

$

2,445,765

 

Ending balance: individually evaluated for impairment

 

 

1,210

 

 

 

8,028

 

 

 

32

 

 

 

776

 

 

 

2,406

 

 

 

 

 

 

 

 

 

12,452

 

Ending balance: acquired with credit deterioration

 

 

 

 

 

1,430

 

 

 

 

 

 

354

 

 

 

1

 

 

 

 

 

 

 

 

 

1,785

 

Ending balance: collectively evaluated for impairment

 

$

928,180

 

 

$

989,215

 

 

$

224,325

 

 

$

217,222

 

 

$

65,758

 

 

$

6,828

 

 

$

 

 

$

2,431,528

 

27


MID PENN BANCORP, INC.

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

Commercial

and

industrial

 

 

Commercial real estate

 

 

Commercial real estate - construction

 

 

Residential mortgage

 

 

Home equity

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

2,341

 

 

$

6,259

 

 

$

51

 

 

$

417

 

 

$

442

 

 

$

2

 

 

$

3

 

 

$

9,515

 

Ending balance: individually evaluated for impairment

 

 

 

 

 

166

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

166

 

Ending balance: collectively evaluated for impairment

 

$

2,341

 

 

$

6,093

 

 

$

51

 

 

$

417

 

 

$

442

 

 

$

2

 

 

$

3

 

 

$

9,349

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

339,147

 

 

$

929,138

 

 

$

181,690

 

 

$

236,724

 

 

$

68,271

 

 

$

7,786

 

 

$

 

 

$

1,762,756

 

Ending balance: individually evaluated for impairment

 

 

890

 

 

 

8,311

 

 

 

40

 

 

 

817

 

 

 

25

 

 

 

 

 

 

 

 

 

10,083

 

Ending balance: acquired with credit deterioration

 

 

3

 

 

 

1,423

 

 

 

 

 

 

381

 

 

 

1

 

 

 

 

 

 

 

 

 

1,808

 

Ending balance: collectively evaluated for impairment

 

$

338,254

 

 

$

919,404

 

 

$

181,650

 

 

$

235,526

 

 

$

68,245

 

 

$

7,786

 

 

$

 

 

$

1,750,865

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of, and for the

three months ended,

June 30, 2019

 

Commercial and industrial

 

 

Commercial real estate

 

 

Commercial real estate - construction

 

 

Residential mortgage

 

 

Home equity

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 1, 2019

 

$

2,443

 

 

$

5,031

 

 

$

81

 

 

$

477

 

 

$

450

 

 

$

6

 

 

$

14

 

 

$

8,502

 

Charge-offs

 

 

(205

)

 

 

 

 

 

(20

)

 

 

 

 

 

 

 

 

(38

)

 

 

 

 

 

(263

)

Recoveries

 

 

42

 

 

 

15

 

 

 

 

 

 

 

 

 

1

 

 

 

9

 

 

 

 

 

 

67

 

Provisions

 

 

168

 

 

 

266

 

 

 

(16

)

 

 

(1

)

 

 

31

 

 

 

30

 

 

 

(13

)

 

 

465

 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

$

2,448

 

 

$

5,312

 

 

$

45

 

 

$

476

 

 

$

482

 

 

$

7

 

 

$

1

 

 

$

8,771

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of, and for the

six months ended,

June 30, 2019

 

Commercial and industrial

 

 

Commercial real estate

 

 

Commercial real estate - construction

 

 

Residential mortgage

 

 

Home equity

 

 

Consumer

 

 

Unallocated

 

 

Total

 

Allowance for loan and lease losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2019

 

 

2,391

 

 

 

4,703

 

 

 

75

 

 

 

453

 

 

 

528

 

 

 

7

 

 

 

240

 

 

$

8,397

 

Charge-offs

 

 

(205

)

 

 

(12

)

 

 

(40

)

 

 

 

 

 

 

 

 

(47

)

 

 

 

 

 

(304

)

Recoveries

 

 

43

 

 

 

33

 

 

 

 

 

 

 

 

 

1

 

 

 

11

 

 

 

 

 

 

88

 

Provisions

 

 

219

 

 

 

588

 

 

 

10

 

 

 

23

 

 

 

(47

)

 

 

36

 

 

 

(239

)

 

 

590

 

Ending balance,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

2,448

 

 

 

5,312

 

 

 

45

 

 

 

476

 

 

 

482

 

 

 

7

 

 

 

1

 

 

 

8,771

 

Individually evaluated for impairment

 

 

13

 

 

 

243

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

256

 

Ending balance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

collectively evaluated for impairment

 

$

2,435

 

 

$

5,069

 

 

$

45

 

 

$

476

 

 

$

482

 

 

$

7

 

 

$

1

 

 

$

8,515

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance

 

$

301,271

 

 

$

883,317

 

 

$

173,900

 

 

$

249,114

 

 

$

70,442

 

 

$

10,129

 

 

$

 

 

$

1,688,173

 

Ending balance: individually evaluated for impairment

 

 

76

 

 

 

2,745

 

 

 

40

 

 

 

897

 

 

 

28

 

 

 

 

 

 

 

 

 

3,786

 

Ending balance: acquired with credit deterioration

 

 

29

 

 

 

1,616

 

 

 

 

 

 

1,234

 

 

 

4

 

 

 

 

 

 

 

 

 

2,883

 

Ending balance: collectively evaluated for impairment

 

$

301,166

 

 

$

878,956

 

 

$

173,860

 

 

$

246,983

 

 

$

70,410

 

 

$

10,129

 

 

$

 

 

$

1,681,504

 

 


28


MID PENN BANCORP, INC.

 

 

Mid Penn entered into forbearance or modification agreements on all loans currently classified as troubled debt restructures and all of these agreements have resulted in additional principal repayment.  The terms of these forbearance agreements vary and generally involve modifications from the original loan agreements, including either a reduction in the amount of principal payments for certain or extended periods, interest rate reductions, and/or the intent for the loan to be repaid as collateral is sold.

Mid Penn’s troubled debt restructured loans at June 30, 2020 totaled $948,000 and included three accruing impaired residential mortgage loans to unrelated borrowers in compliance with the terms of the modifications totaling $477,000. The remaining $471,000 of troubled debt restructurings was attributable to seven loans among five relationships which were classified as nonaccrual impaired based upon a collateral evaluation in accordance with the guidance on impaired loans.  The balance of nonaccrual impaired troubled debt restructured loans as of June 30, 2020 was comprised of $420,000 in commercial real estate loans amongst two borrowers, one commercial real estate construction loan for $32,000, one residential mortgage loan for $11,000, and one commercial and industrial loan for $7,000.  As of June 30, 2020, 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 2020.  

Mid Penn’s troubled debt restructured loans at December 31, 2019 totaled $2,238,000, and included three accruing impaired residential mortgage loans to unrelated borrowers in compliance with the terms of the modifications totaling $490,000.  The remaining $1,748,000 of troubled debt restructurings was attributable to eight loans among five relationships which were classified as nonaccrual impaired based upon a collateral evaluation in accordance with the guidance on impaired loans.  One large relationship accounted for $1,252,000 of the total $1,748,000 in nonaccrual impaired troubled debt restructured loans.  As of December 31, 2019, 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 2019.

The recorded investments in troubled debt restructured loans at June 30, 2020 and December 31, 2019 are as follows:

(Dollars in thousands)

Pre-Modification

 

 

Post-Modification

 

 

 

 

June 30, 2020

Outstanding Recorded Investment

 

 

Outstanding Recorded Investment

 

 

Recorded Investment

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

$

8

 

 

$

8

 

 

$

7

 

Commercial real estate

 

1,214

 

 

 

1,115

 

 

 

420

 

Commercial real estate - construction

 

40

 

 

 

40

 

 

 

32

 

Residential mortgage

 

689

 

 

 

687

 

 

 

489

 

 

$

1,951

 

 

$

1,850

 

 

$

948

 

 

(Dollars in thousands)

Pre-Modification

 

 

Post-Modification

 

 

 

 

December 31, 2019

Outstanding Recorded Investment

 

 

Outstanding Recorded Investment

 

 

Recorded Investment

 

Commercial and industrial

$

3

 

 

$

3

 

 

$

3

 

Commercial real estate

 

2,562

 

 

 

2,463

 

 

 

1,705

 

Commercial real estate - construction

 

40

 

 

 

40

 

 

 

40

 

Residential mortgage

 

677

 

 

 

675

 

 

 

490

 

 

$

3,282

 

 

$

3,181

 

 

$

2,238

 

29


MID PENN BANCORP, INC.

 

 

The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act provided that qualifying short-term modifications made in response to COVID-19 do not need to be accounted for as troubled debt restructurings. The federal financial institution regulatory agencies, in consultation with state financial regulators, affirmed the CARES Act provisions in a revised interagency statement issued on April 7, 2020. As of June 30, 2020, Mid Penn had provided loan modifications meeting the CARES Act qualifications to 1,019 borrowers with aggregate loans outstanding of $444,886,000.  Depending upon the specific needs and circumstances affecting each borrower, the majority of these modifications range from deferrals of both principal and interest payments for three to six months, or borrowers reverting to interest-only payments for a period of three to six months.  Interest will continue to accrue on loans modified under the CARES Act during the deferral period.  Mid Penn remains in communication with each of these borrowers to assess the ongoing credit status of the borrowers, and may make further adjustments to a borrower’s modification at some future time if warranted for the specific situation.

The following tables provide activity for the accretable yield of acquired impaired loans from the Phoenix Bancorp, Inc. (March 2015), Scottdale (January 2018), and First Priority (July 2018) acquisitions for the three and six months ended June 30, 2020.

 

(Dollars in thousands)

 

 

 

 

 

 

Three Months Ended June 30,

 

 

 

2020

 

 

2019

 

Accretable yield, beginning of period

 

$

72

 

 

$

254

 

Accretable yield amortized to interest income

 

 

(16

)

 

 

(57

)

Accretable yield, end of period

 

$

56

 

 

$

197

 

 

(Dollars in thousands)

 

Six Months Ended June 30,

 

 

 

2020

 

 

2019

 

 

 

 

 

 

 

 

 

 

Accretable yield, beginning of period

 

$

89

 

 

$

309

 

Accretable yield amortized to interest income

 

 

(33

)

 

 

(112

)

Accretable yield, end of period

 

$

56

 

 

$

197

 

 

(5)Leases

 

On January 1, 2019, Mid Penn adopted ASU No. 2016-02, Leases (Topic 842), and all subsequent ASUs that modified Topic 842, which primarily affected the accounting treatment for operating lease agreements in which Mid Penn is the lessee.  As of the January 1, 2019 adoption date, Mid Penn leased twenty-four branch locations under non-cancelable operating leases, which expire at various dates through the year ending December 31, 2035.  Three of Mid Penn’s operating leases are with related parties.  Subsequent to the adoption of Topic 842, Mid Penn entered into a lease agreement for one facility under a non-cancelable finance lease, which commenced March 1, 2019 and expires February 28, 2039.

 

In 2016, Mid Penn entered into two subleasing agreements with unrelated parties on one of its properties under an operating lease.  Both subleases included escalation clauses.  The first sublease agreement began on April 1, 2016, while the second sublease began on July 1, 2016.  One sublease was terminated during the first quarter of 2019 due to the bankruptcy of the tenant.  The remaining sublease ends on March 31, 2021.  

 

Operating and finance lease right-of-use assets, as well as operating lease liabilities, are presented as separate line items on the Consolidated Balance Sheet, while finance lease liabilities are classified as a component of long-term debt.  Mid Penn has elected not to include short-term leases (i.e., leases with initial terms of twelve months or less) or equipment leases (deemed immaterial) on the Consolidated Balance Sheet.

 

There were no sale and leaseback transactions, leveraged leases, or leases that had not commenced as of June 30, 2020.  

 

 


30


MID PENN BANCORP, INC.

 

 

Below is a summary of the operating and finance lease right-of-use assets and related lease liabilities, as well as the weighted average lease term (in years) and weighted average discount rate for each of the lease classifications as of June 30, 2020 and December 31, 2019.

 

(Dollars in thousands)

 

June 30, 2020

 

 

December 31, 2019

 

 

 

Operating Leases

 

 

Finance Lease

 

 

Operating Leases

 

 

Finance Lease

 

Right of use asset

 

$

10,587

 

 

$

3,357

 

 

$

11,442

 

 

$

3,447

 

Lease liability

 

$

11,643

 

 

$

3,509

 

 

$

12,544

 

 

$

3,551

 

Weighted average remaining lease term (in years)

 

 

8.44

 

 

 

18.67

 

 

 

8.64

 

 

 

19.17

 

Weighted average discount rate

 

 

3.34

%

 

 

3.81

%

 

 

3.33

%

 

 

3.81

%

 

A summary of lease costs during the three and six months ended June 30, 2020 and 2019 are presented below.  Interest expense on finance lease liabilities is included in other interest expense, while all other lease costs are included in occupancy expense on Mid Penn’s Consolidated Statements of Income.

 

(Dollars in thousands)

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30, 2020

 

 

June 30, 2019

 

 

June 30, 2020

 

 

June 30, 2019

 

Finance lease cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of right-of-use asset

 

$

45

 

 

$

45

 

 

$

90

 

 

$

60

 

Interest expense on lease liability

 

 

33

 

 

 

35

 

 

 

67

 

 

 

46

 

Total finance lease cost

 

 

78

 

 

 

80

 

 

 

157

 

 

 

106

 

Operating lease cost

 

 

505

 

 

 

515

 

 

 

1,033

 

 

 

1,030

 

Short-term and equipment lease cost

 

 

12

 

 

 

3

 

 

 

21

 

 

 

31

 

Variable lease cost

 

 

 

 

 

 

 

 

 

 

 

 

Sublease income

 

 

(4

)

 

 

(7

)

 

 

(10

)

 

 

(12

)

Total lease costs

 

$

591

 

 

$

591

 

 

$

1,201

 

 

$

1,155

 

 

A summary of cash paid for amounts included in the measurement of lease liabilities is presented below.

 

(Dollars in thousands)

 

Six Months Ended

 

 

 

June 30, 2020

 

 

June 30, 2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

Operating cash flows from finance leases

 

$

67

 

 

$

46

 

Operating cash flows from operating leases

 

 

1,064

 

 

 

1,087

 

Financing cash flows from finance leases

 

 

41

 

 

 

6

 

 

A maturity analysis of operating and finance lease liabilities and a reconciliation of the undiscounted cash flows to the total operating and finance lease liability amounts is presented below.

 

(Dollars in thousands)

 

June 30, 2020

 

 

 

Operating Leases

 

 

Finance Lease

 

Lease payments due:

 

 

 

 

 

 

 

 

Within one year

 

$

1,042

 

 

$

108

 

After one but within two years

 

 

1,868

 

 

 

216

 

After two but within three years

 

 

1,824

 

 

 

217

 

After three but within four years

 

 

1,572

 

 

 

217

 

After four but within five years

 

 

1,512

 

 

 

252

 

After five years

 

 

5,584

 

 

 

3,992

 

Total undiscounted cash flows

 

 

13,402

 

 

 

5,002

 

Discount on cash flows

 

 

(1,759

)

 

 

(1,493

)

Total lease liability

 

$

11,643

 

 

$

3,509

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31


MID PENN BANCORP, INC.

 

 

(6)

Loan-Level Interest Rate Swaps

 

Mid Penn enters into loan-level interest rate swaps with certain qualifying commercial loan customers to meet their interest rate risk management needs. Mid Penn simultaneously enters into interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of the offsetting customer and dealer counterparty swap agreements is that the customer pays a fixed rate of interest and Mid Penn receives a floating rate. Mid Penn’s loan-level interest rate swaps are considered derivatives but are not accounted for using hedge accounting.

 

The fair value, notional amount, and collateral posted related to loan-level interest rate swaps are presented below.

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Interest Rate Swap Contracts - Commercial Loans:

 

 

 

 

 

 

 

 

Gross Fair Value (a)

 

$

239

 

 

$

 

Notional Amount

 

 

8,907

 

 

 

 

Cash Collateral Posted (b)

 

 

250

 

 

 

 

 

 

(a)

Included in other assets on the Consolidated Balance Sheet

 

(b)

Included in cash and due from banks on the Consolidated Balance Sheet

 

The gross amounts of commercial loan swap derivatives, the amounts offset and the carrying values in the Consolidated Balance Sheets, and the collateral pledged to support such agreements are presented below.

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

June 30, 2020

 

 

December 31, 2019

 

Interest Rate Swap Contracts - Commercial Loans:

 

 

 

 

 

 

 

 

Gross amounts recognized

 

$

239

 

 

$

 

Gross amounts offset

 

 

239

 

 

 

 

Net Amounts Presented in the Consolidated Balance Sheets

 

 

 

 

 

 

Gross amounts not offset:

 

 

 

 

 

 

 

 

Financial instruments

 

 

 

 

 

 

Cash collateral

 

 

250

 

 

 

 

Net Amounts

 

$

250

 

 

$

 

 

(7)

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.  Information on identifying circumstances when a transaction may not be considered orderly is also included within the guidance.

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.


32


MID PENN BANCORP, INC.

 

 

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

Level 1 Inputs - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2 Inputs - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

Level 3 Inputs - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

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

There were no transfers of assets between fair value Level 1 and Level 2 during the six months ended June 30, 2020 and 2019.

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

 

 

 

 

 

 

 

Fair value measurements at June 30, 2020 using:

 

(Dollars in thousands)

 

Total carrying value at

 

 

Quoted prices in active markets

 

 

Significant other

observable inputs

 

 

Significant

unobservable

inputs

 

Assets:

 

June 30, 2020

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed U.S. government agencies

 

$

2

 

 

$

 

 

$

2

 

 

$

 

State and political subdivision obligations

 

 

7,050

 

 

 

 

 

 

7,050

 

 

 

 

Corporate debt securities

 

 

16,440

 

 

 

 

 

 

16,440

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

518

 

 

 

518

 

 

 

 

 

 

 

Interest rate swap agreements

 

 

239

 

 

 

 

 

 

239

 

 

 

 

Total

 

$

24,249

 

 

$

518

 

 

$

23,731

 

 

$

 

 

 

 

 

 

 

 

 

Fair value measurements at December 31, 2019 using:

 

(Dollars in thousands)

 

Total carrying value at

 

 

Quoted prices in active markets

 

 

Significant other

observable inputs

 

 

Significant

unobservable

inputs

 

Assets:

 

December 31, 2019

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies

 

$

22,830

 

 

$

 

 

$

22,830

 

 

$

 

Mortgage-backed U.S. government agencies

 

 

12,890

 

 

 

 

 

 

12,890

 

 

 

 

State and political subdivision obligations

 

 

30

 

 

 

 

 

 

30

 

 

 

 

Corporate debt securities

 

 

1,259

 

 

 

 

 

 

1,259

 

 

 

 

Other assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

507

 

 

 

507

 

 

 

 

 

 

 

Total

 

$

37,516

 

 

$

507

 

 

$

37,009

 

 

$

 

 

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).

33


MID PENN BANCORP, INC.

 

 

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

 

 

 

 

 

 

 

Fair value measurements at June 30, 2020 using:

 

(Dollars in thousands)

 

Total carrying value at

 

 

Quoted prices in active markets

 

 

Significant other

observable inputs

 

 

Significant

unobservable

inputs

 

Assets:

 

June 30, 2020

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Impaired Loans

 

$

812

 

 

$

 

 

$

 

 

$

812

 

 

 

 

 

 

 

 

Fair value measurements at December 31, 2019 using:

 

(Dollars in thousands)

 

Total carrying value at

 

 

Quoted prices in active markets

 

 

Significant other

observable inputs

 

 

Significant

unobservable

inputs

 

Assets:

 

December 31, 2019

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Impaired Loans

 

$

271

 

 

$

 

 

$

 

 

$

271

 

Foreclosed Assets Held for Sale

 

 

122

 

 

 

 

 

 

 

 

 

122

 

 

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Mid Penn has utilized Level 3 inputs to determine the fair value.

 

(Dollars in thousands)

 

Quantitative Information about Level 3 Fair Value Measurements

 

June 30, 2020

 

Fair Value Estimate

 

 

Valuation Technique

 

Unobservable Input

 

Range

 

Weighted Average

 

Impaired Loans

 

$

812

 

 

Appraisal of collateral (a), (b)

 

Appraisal adjustments (b)

 

26% - 100%

 

32%

 

 

(Dollars in thousands)

 

Quantitative Information about Level 3 Fair Value Measurements

 

December 31, 2019

 

Fair Value Estimate

 

 

Valuation Technique

 

Unobservable Input

 

Range

 

Weighted Average

 

Impaired Loans

 

$

271

 

 

Appraisal of collateral (a), (b)

 

Appraisal adjustments (b)

 

26% - 85%

 

36%

 

Foreclosed Assets Held for Sale

 

 

122

 

 

Appraisal of collateral (a), (b)

 

Appraisal adjustments (b)

 

8% - 27%

 

16%

 

 

 

(a)

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

 

(b)

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

 

There were no changes in unrealized gains and losses included in other comprehensive income for the six months ended June 30, 2020 related to Level 3 recurring fair value measurements as Mid Penn has no assets measured at fair value on a Level 3 recurring basis.

 

Mid Penn uses the following methodologies and assumptions to estimate the fair value of certain assets and liabilities.

Securities:

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.

 

Interest Rate Swap Agreements:

Interest rate swap agreements are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature Level 1 markets. These markets do however have comparable, observable inputs in which an alternative pricing source values these assets in order to arrive at a fair market value. These characteristics classify interest rate swap agreements as Level 2.

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

All performing troubled debt restructured loans and loans classified as nonaccrual are deemed to be impaired, and all of these loans are considered collateral dependent; therefore, all of Mid Penn’s impaired loans, whether reporting a specific allowance allocation or not, are considered collateral dependent.

 

34


MID PENN BANCORP, INC.

 

 

It is Mid Penn’s policy to obtain updated third-party valuations on all impaired loans collateralized by real estate within 30 days of the credit being classified as substandard nonaccrual.  Prior to receipt of the updated real estate valuation, Mid Penn will use existing real estate valuations 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, either in a positive or negative way, due to the passage of time or some other change in one or more valuation inputs.  Collateral values for impaired loans will be reassessed by management at least every 12 months for possible revaluation by an independent third party.

Foreclosed Assets Held for Sale:

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

The following table summarizes the carrying value and fair value of financial instruments at June 30, 2020 and December 31, 2019.

 

(Dollars in thousands)

June 30, 2020

 

 

December 31, 2019

 

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

 

Value

 

 

Value

 

 

Value

 

 

Value

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

143,755

 

 

$

143,755

 

 

$

139,030

 

 

$

139,030

 

Available-for-sale investment securities

 

23,492

 

 

 

23,492

 

 

 

37,009

 

 

 

37,009

 

Held-to-maturity investment securities

 

135,387

 

 

 

139,491

 

 

 

136,477

 

 

 

137,476

 

Equity securities

 

518

 

 

 

518

 

 

 

507

 

 

 

507

 

Loans held for sale

 

21,812

 

 

 

22,120

 

 

 

8,422

 

 

 

8,630

 

Net loans and leases

 

2,434,698

 

 

 

2,522,315

 

 

 

1,753,241

 

 

 

1,789,402

 

Restricted investment in bank stocks

 

7,079

 

 

 

7,079

 

 

 

4,902

 

 

 

4,902

 

Accrued interest receivable

 

12,743

 

 

 

12,743

 

 

 

2,810

 

 

 

2,810

 

Interest rate swap agreements

 

239

 

 

 

239

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

$

2,326,313

 

 

 

2,336,221

 

 

$

1,912,394

 

 

$

1,916,624

 

Short-term borrowings

 

203,937

 

 

 

203,937

 

 

 

 

 

 

 

Long-term debt (a)

 

81,773

 

 

 

81,686

 

 

 

29,352

 

 

 

30,216

 

Subordinated debt

 

42,009

 

 

 

40,439

 

 

 

27,070

 

 

 

25,273

 

Accrued interest payable

 

2,590

 

 

 

2,590

 

 

 

2,208

 

 

 

2,208

 

 

(a)

Long-term debt excludes finance lease obligations.

 

The Bank’s outstanding and unfunded credit commitments and financial standby letters of credit were deemed to have no significant fair value as of June 30, 2020 and December 31, 2019.

35


MID PENN BANCORP, INC.

 

 

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of Mid Penn’s financial instruments as of June 30, 2020 and December 31, 2019.  Carrying values approximate fair values for cash and cash equivalents, 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 and mortgage servicing rights, which are Level 3 Inputs, these instruments are Level 2 Inputs. These tables exclude financial instruments for which the carrying amount approximates fair value, not previously disclosed.

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in Active Markets

 

 

 

 

 

Significant

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

for Identical Assets

 

 

Significant Other

 

 

Unobservable

 

 

 

Carrying

 

 

 

 

 

 

or Liabilities

 

 

Observable Inputs

 

 

Inputs

 

June 30, 2020

 

Amount

 

 

Fair Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Financial instruments - assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity investment

   securities

 

$

135,387

 

 

$

139,491

 

 

$

 

 

$

139,491

 

 

$

 

Loans held for sale

 

 

21,812

 

 

 

22,120

 

 

 

 

 

 

22,120

 

 

 

 

Net loans and leases

 

 

2,434,698

 

 

 

2,522,315

 

 

 

 

 

 

 

 

 

2,522,315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments -

   liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,326,313

 

 

$

2,336,221

 

 

$

 

 

$

2,336,221

 

 

$

 

Long-term debt (a)

 

 

81,773

 

 

 

81,686

 

 

 

 

 

 

81,686

 

 

 

 

Subordinated debt

 

 

42,009

 

 

 

40,439

 

 

 

 

 

 

40,439

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

in Active Markets

 

 

 

 

 

Significant

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

for Identical Assets

 

 

Significant Other

 

 

Unobservable

 

 

 

Carrying

 

 

 

 

 

 

or Liabilities

 

 

Observable Inputs

 

 

Inputs

 

December 31, 2019

 

Amount

 

 

Fair Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

Financial instruments - assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity investment

   securities

 

$

136,477

 

 

$

137,476

 

 

$

 

 

$

137,476

 

 

$

 

Loans held for sale

 

 

8,422

 

 

 

8,630

 

 

 

 

 

 

8,630

 

 

 

 

Net loans and leases

 

 

1,753,241

 

 

 

1,789,402

 

 

 

 

 

 

 

 

 

1,789,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial instruments -

   liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,912,394

 

 

$

1,916,624

 

 

$

 

 

$

1,916,624

 

 

$

 

Long-term debt (a)

 

 

29,352

 

 

 

30,216

 

 

 

 

 

 

30,216

 

 

 

 

Subordinated debt

 

 

27,070

 

 

 

25,273

 

 

 

 

 

 

25,273

 

 

 

 

 

 

(a)

Long-term debt excludes finance lease obligations.

 

(8)

Guarantees, Commitments, and Contingencies

Guarantees

In the normal course of business, Mid Penn makes various commitments and incurs certain contingent liabilities which are not reflected in the accompanying consolidated financial statements.  The commitments include various guarantees and commitments to extend credit.  Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Mid Penn evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the customer.  Standby letters of credit and financial guarantees written are conditional commitments to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.  Mid Penn had $28,589,000 and $26,574,000 of standby letters of credit outstanding as of June 30, 2020 and December 31, 2019, respectively.  Mid Penn does not anticipate any losses because of these transactions.  The amount of the liability as of June 30, 2020 and December 31, 2019 for payment under standby letters of credit issued was not material.

 


36


MID PENN BANCORP, INC.

 

 

Commitments

 

Mid Penn also has a limited partnership interest in a low-income housing project to construct thirty-seven apartments and common amenities in Dauphin County, Pennsylvania.  The total investment in this limited partnership, net of amortization, was $7,061,000 and $7,249,000 on June 30, 2020 and December 31, 2019, respectively, and was included in the reported balance of other assets on the Consolidated Balance Sheet.  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.  Investments made to date, and future payments under this commitment are 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 is reported in other assets on the Consolidated Balance Sheet and is being amortized over a ten-year period as the facilities became operational and began to be occupied beginning in December 2019.  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 and the investment is expected to be fully funded in 2020.  Mid Penn recognizes the related amortization and tax credits using the cost amortization method over a ten-year period.  

 

Contingencies

 

As of June 30, 2020, Mid Penn had received $20,329,000 of nonrefundable loan processing fees related to the loans disbursed as a result of the SBA’s Paycheck Protection Program (“PPP”) created when the CARES Act was signed into law on March 27, 2020.  These fees are offset against loan origination costs, and are deferred in accordance with FASB ASC 310-20, Receivables—Nonrefundable Fees and Other Costs and will be amortized to interest and fees on loans and leases on the Consolidated Statements of Income over the life of the loan.  

 

The processing fees received from the SBA for administering the application for, and disbursing of, the PPP loans may be subject to clawback (or if the SBA has not yet paid the fee, the fee may not be paid), after full disbursement of a PPP loan if (i) the PPP loan is cancelled or voluntarily terminated and repaid after disbursement but before the borrower certification safe harbor date, (ii) the PPP loan is cancelled, terminated, or repaid after disbursement (and after the borrower certification safe harbor date) because the SBA conducted a loan review and determined that the borrower was ineligible for a PPP loan, or (iii) the lender has not fulfilled its obligations under the PPP regulations.

 

As of June 30, 2020, Mid Penn is not aware of any PPP loans outstanding, or for which fees have been received from the SBA, that have been cancelled, terminated, or repaid due to a borrower being determined to be ineligible for a PPP loan.

 

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.

 

(9)

Debt

 

Short-term FHLB and Correspondent Bank Borrowings

 

Short-term borrowings generally consist 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 of real estate secured loans within the Bank’s portfolio totaling $1,168,684,000 at June 30, 2020.  The Bank had short-term borrowing capacity from the FHLB up to the Bank’s unused borrowing capacity of $814,982,000 at June 30, 2020 upon satisfaction of any stock purchase requirements of the FHLB.  No draws were outstanding on short-term FHLB or correspondent bank borrowings as of June 30, 2020 and December 31, 2019.

 

The Bank also has unused overnight lines of credit with other correspondent banks amounting to $35,000,000 at June 30, 2020.  No draws have been made on these lines of credit and on June 30, 2020 and December 31, 2019, the balance was zero.

 


37


MID PENN BANCORP, INC.

 

 

Short-term PPPLF Borrowings

 

The entire balance of short-term borrowings of $203,937,000 at June 30, 2020 consisted of funding obtained from the Federal Reserve through the Paycheck Protection Program Liquidity Facility (“PPPLF”).  The PPPLF allows banks to pledge PPP loans as collateral to borrow funds for up to a term of two years (to match the term of the respective PPP loans) at an interest rate of 0.35%.  Draws of PPPLF funds must be repaid to the Federal Reserve immediately after the specific PPP loans collateralizing the related draws are repaid to the Bank.  Mid Penn had no short-term PPPLF borrowings as of December 31, 2019.

 

Long-term Debt

 

As a member of the FHLB, the Bank can access a number of credit products which are utilized to provide liquidity.  As of June 30, 2020, and December 31, 2019, the Bank had long-term debt outstanding in the amount of $85,282,000 and $32,903,000, respectively, consisting of FHLB fixed rate instruments, and a finance lease obligation executed during the first quarter of 2019.  

 

The FHLB fixed rate instruments 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.  Mid Penn also obtains letters of credit from the FHLB to secure certain public fund deposits of municipality and school district customers who agree to use of the FHLB letters of credit. These FHLB letter of credit commitments totaled $212,401,000 as of June 30, 2020 and $169,051,000 as of December 31, 2019.  

 

The following table presents a summary of long-term debt as of June 30, 2020 and December 31, 2019.

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

June 30, 2020

 

 

December 31, 2019

 

FHLB fixed rate instruments:

 

 

 

 

 

 

 

 

Due June 2020, 1.72%

 

$

 

 

$

2,000

 

Due July 2020, 2.45%

 

 

 

 

 

5,000

 

Due August 2020, 3.05%

 

 

5,000

 

 

 

5,000

 

Due September 2020, 2.38%

 

 

 

 

 

2,500

 

Due October 2020, 3.06%

 

 

5,000

 

 

 

5,000

 

Due November 2020, 2.32%

 

 

 

 

 

3,000

 

Due December 2020, 1.78%

 

 

 

 

 

2,000

 

Due December 2020, 2.31%

 

 

 

 

 

3,000

 

Due April 2022, 0.86%

 

 

70,000

 

 

 

 

Due August 2026, 4.80%

 

 

1,728

 

 

 

1,846

 

Due February 2027, 6.71%

 

 

45

 

 

 

47

 

Less: fair value adjustments on debt assumed in acquisitions

 

 

 

 

 

(41

)

Total FHLB fixed rate instruments

 

 

81,773

 

 

 

29,352

 

Lease obligations included in long-term debt

 

 

3,509

 

 

 

3,551

 

Total long-term debt

 

$

85,282

 

 

$

32,903

 

 

Mid Penn prepaid $17,500,000 of FHLB fixed rate instruments originally due in 2020 and recognized prepayment penalties of $76,000 for the three months ended June 30, 2020, and $139,000 for the six months ended June 30, 2020. Prepayment penalties are included in other expenses on the Consolidated Statement of Income. No prepayment penalties were recognized during the three and six months ended June 30, 2019.

 

(10)

Subordinated Debt

Subordinated Debt Issued March 2020

On March 20, 2020, Mid Penn entered into agreements with accredited investors who purchased $15,000,000 aggregate principal amount of Mid Penn Subordinated Notes due 2030 (the “2020 Notes”).  The 2020 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes.

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MID PENN BANCORP, INC.

 

 

The 2020 Notes bear interest at a rate of 4.0% per year for the first five years and then float at the Wall Street Journal’s Prime Rate, provided that the interest rate applicable to the outstanding principal balance during the period the 2020 Notes are floating will at no time be less than 4.25%.  Interest will be payable semi-annually in arrears on June 30 and December 30 of each year, beginning on June 30, 2020, for the first five years after issuance and will be payable quarterly in arrears thereafter on March 30, June 30, September 30 and December 30.  The 2020 Notes will mature on March 30, 2030 and are redeemable in whole or in part, without premium or penalty, at any time on or after March 30, 2025 and prior to March 30, 2030.  Additionally, if all or any portion of the 2020 Notes cease to be deemed Tier 2 Capital, Mid Penn may redeem, on any interest payment date, all or part of the 2020 Notes.  In the event of a redemption described in the previous sentence, Mid Penn will redeem the 2020 Notes at 100% of the principal amount of the 2020 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption.  

Holders of the 2020 Notes may not accelerate the maturity of the 2020 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar event of Mid Penn or Mid Penn Bank, its principal banking subsidiary.  Related parties held $1,700,000 of the 2020 Notes as of June 30, 2020.  

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, which is amortized through interest expense until the maturity date of November 30, 2025. The First Priority 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 First Priority 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 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 is 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.  Related parties held $1,450,000 of the 2017 Notes as of June 30, 2020 and December 31, 2019.  

Subordinated Debt Issued December 2015

On December 9, 2015, Mid Penn sold $7,500,000 aggregate principal amount of Subordinated Debt (the “2015 Notes”) due 2025.  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 time be less than 4.0%.  Interest is payable 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.

39


MID PENN BANCORP, INC.

 

 

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.  Related parties held $1,930,000 of the 2015 Notes as of June 30, 2020 and December 31, 2019.  

ASC Subtopic 835-30, Simplifying the Presentation of Debt Issuance Costs, requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability.  The unamortized debt issuance costs associated with the 2015 Notes and the 2017 Notes were collectively $84,000 at June 30, 2020 and $103,000 at December 31, 2019.

 

(11)

Defined Benefit Plans

Mid Penn has an unfunded noncontributory defined benefit retirement plan for directors.  The plan provides defined benefits based on years of service.  Mid Penn also sponsors a defined benefit healthcare plan that provides post-retirement medical benefits and life insurance to qualifying full-time employees.  These healthcare and life insurance plans are noncontributory and each plan uses a December 31 measurement date.  

As a result of the acquisition of Scottdale, Mid Penn has assumed a noncontributory defined benefit pension plan covering certain former employees of Scottdale.  Mid Penn estimates that it will contribute $200,000 to the defined benefit pension plan during 2020.  A December 31 measurement date for the plan is used.

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

 

 

Three Months Ended June 30,

 

(Dollars in thousands)

Pension Benefits

 

 

Other Benefits

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Service cost

$

45

 

 

$

36

 

 

$

1

 

 

$

1

 

Interest cost

 

60

 

 

 

65

 

 

 

6

 

 

 

4

 

Expected return on plan assets

 

(68

)

 

 

(63

)

 

 

 

 

 

 

Accretion of prior service cost

 

 

 

 

 

 

 

(5

)

 

 

(5

)

Amortization of net gain

 

 

 

 

(15

)

 

 

 

 

 

(1

)

Settlement loss (gain)

 

22

 

 

 

(37

)

 

 

 

 

 

 

Net periodic benefit expense (income)

$

59

 

 

$

(14

)

 

$

2

 

 

$

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

(Dollars in thousands)

Pension Benefits

 

 

Other Benefits

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Service cost

$

64

 

 

$

72

 

 

$

1

 

 

$

2

 

Interest cost

 

105

 

 

 

129

 

 

 

6

 

 

 

8

 

Expected return on plan assets

 

(136

)

 

 

(127

)

 

 

 

 

 

 

Accretion of prior service cost

 

 

 

 

 

 

 

(10

)

 

 

(10

)

Amortization of net gain

 

 

 

 

(30

)

 

 

 

 

 

(2

)

Settlement loss (gain)

 

22

 

 

 

(37

)

 

 

 

 

 

 

Net periodic benefit expense (income)

$

55

 

 

$

7

 

 

$

(3

)

 

$

(2

)

  

Service costs 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 amortization of (gain) loss are reported as a component of other income.

 

(12)

Common Stock

 

Treasury Stock Repurchase Program

 

During the first quarter of 2020, Mid Penn announced the adoption of a treasury stock repurchase program authorizing the repurchase of up to $15,000,000 of Mid Penn’s outstanding common stock, which represents approximately 9.6% of the issued shares based on Mid Penn’s closing stock price and shares issued as of June 30, 2020.  Under the treasury stock purchase program, Mid Penn may conduct repurchases of its common stock through open market transactions (which may be by means of a trading plan adopted under SEC Rule 10b5-1) or in privately negotiated transactions.  Repurchases under the program are made at the discretion of management and are subject to market conditions and other factors.  There is no guarantee as to the exact number of shares that Mid Penn may repurchase.  The repurchase plan became effective March 19, 2020 and is authorized to continue through March 19, 2021, unless otherwise extended by Mid Penn’s Board of Directors.  

 

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MID PENN BANCORP, INC.

 

 

The repurchase plan may be modified, suspended or terminated at any time, in Mid Penn’s discretion, based upon a number of factors, including liquidity, market conditions, the availability of alternative investment opportunities and other factors Mid Penn deems appropriate.  The repurchase program does not obligate Mid Penn to repurchase any shares.  

 

As of June 30, 2020, Mid Penn had repurchased 80,523 shares of common stock at an average price of $19.37 per share under the treasury stock repurchase program.

 

Authorized Shares

 

At the May 14, 2019 annual shareholder meeting, Mid Penn shareholders approved an amendment to the Articles of Incorporation to increase the number of authorized shares of common stock from 10,000,000 shares to 20,000,000 shares.

 

Restricted Stock Plan

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 Corporation, and the recipients are 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.  As of June 30, 2020, a total of 57,655 restricted shares were granted under the Plan, of which 2,446 shares were forfeited and available for reissuance, 27,271 shares were vested, and the remaining 27,938 shares were unvested. One hundred shares were forfeited due to a voluntary termination of an employee during the six months ended June 30, 2020, while no shares were forfeited during the six months ended June 30, 2019. The Plan shares granted and vested resulted in $96,000 in share-based compensation expense for the three months ended June 30, 2020, while $80,000 of share-based compensation expense was recorded for the three months ended June 30, 2019.  Compensation expense related to the Plan was $192,000 for the six months ended June 30, 2020 and $160,000 for the same period in 2019.

 

(13)

Recent Accounting Pronouncements

 

Accounting Standards Adopted in 2020

 

ASU 2018-15: The FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

This ASU requires an entity in a cloud computing arrangement (i.e., hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets or expense as incurred. Capitalized implementation costs should be presented in the same line item on the balance sheet as amounts prepaid for the hosted service, if any (generally as an “other asset”). The capitalized costs will be amortized over the term of the hosting arrangement, with the amortization expense being presented in the same income statement line item as the fees paid for the hosted service. ASU 2018-15 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted. Mid Penn adopted ASU 2018-15 effective January 1, 2020 on a prospective basis. ASU 2018-15 did not have a material impact on the results of operations.

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.

 

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 are 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 adopted ASU 2018-13 effective January 1, 2020 on a prospective basis.  The adoption of this ASU resulted in disclosure changes only and did not impact Mid Penn’s overall financial condition.

 


41


MID PENN BANCORP, INC.

 

 

Accounting Standards Pending Adoption

 

ASU 2016-13:  The FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as further amended.

 

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.

 

Subsequently, the FASB issued ASU 2018-19, ASU 2019-04, ASU 2019-05, ASU 2019-10, and ASU 2019-11 to clarify, improve, or defer the adoption of ASU 2016-13.

 

In October 2019, the FASB issued ASU 2019-10 which deferred the implementation date of ASU 2016-13 for smaller reporting companies (SRCs) until January 1, 2023.  The effective date for larger SEC filers would remain unchanged at January 1, 2020.  Mid Penn qualifies as an SRC as of the most recent measurement date of June 30, 2019; therefore, Mid Penn has chosen to delay the adoption of ASU 2016-13.  

 

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 will continue to collect the required data elements needed to perform the calculation in advance of the January 1, 2023 adoption date.

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.


42


MID PENN BANCORP, INC.

 

 

(14)         COVID-19 Pandemic Implications

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency due the Novel Coronavirus (“COVID-19”), and on March 11, 2020, the WHO classified COVID-19 as a pandemic based on the rapid increase in exposure globally.

 

To curtail the spread of the virus, beginning March 17, 2020, Mid Penn temporarily closed all bank branch lobbies, and the branch lobbies have remained closed through June 30, 2020 with no targeted time frame for reopening them. Our retail employees continue to work providing access to customers through drive-through banking services and night depositories.  Services that cannot be performed through drive-through (i.e. business cash orders, loan closings and new account openings) are accommodated in the branches by appointment.   We are continuously cleaning bank facilities during business hours with disinfecting wipes to sanitize all facets of our common areas, including door handles, work stations, ATM’s and service counters. We have mandated that all employees who handle cash use latex gloves when doing so, and we are requiring all employees to use hand sanitizer after each transaction and wash their hands with soap and hot water several times every hour.  Additionally, employees having face-to-face interaction with customers are required to wear a mask.  Importantly, we maintain appropriate social distancing standards when individuals are required by their job duties to be in the same location. 

 

Mid Penn was a significant lender under the federal Paycheck Protection Program (“PPP”) which was created when the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law on March 27, 2020, by President Trump. Asset growth during the second quarter of 2020 included the significant volume of $588,667,000 of PPP loans still outstanding, net of deferred fees, as of June 30, 2020.  The Paycheck Protection Program permitted eligible business entities to apply for loans through a participating financial institution to cover payroll, rent, and other business expenses during the COVID-19 pandemic.  The PPP loans, which are 100 percent guaranteed by the SBA, have up to a five-year term to maturity and carry a low interest rate of 1 percent throughout the loan term.  The vast majority of Mid Penn’s PPP loans have a two-year term to maturity.  The SBA may forgive the PPP loans if at least 60 percent of the proceeds are used for payroll costs.  Also, the borrowers will not have to make any payments for six months following the date of disbursement of the loan, though interest will continue to accrue during the deferment period.  

 

The SBA provided a processing fee to financial institutions who participated in the PPP, with the amount of such fee pre-determined by the SBA dependent upon the size of each credit.  As of June 30, 2020, Mid Penn had received $20,329,000 of nonrefundable loan processing fees related to the loans disbursed as a result of Mid Penn’s participation in the PPP initiative.  These fees are offset against loan origination costs, and are deferred in accordance with FASB ASC 310-20, Receivables—Nonrefundable Fees and Other Costs.  The PPP loan processing fees will be amortized over the life of the loan.  During the three and six months ended June 30, 2020, Mid Penn recognized $2,371,000 of PPP processing fees within interest and fees on loans and leases on the Consolidated Statements of Income.  As of June 30, 2020, the balance of deferred PPP processing fees totaled $17,958,000 and are offset against loan origination costs as a component of Loans and leases, net of unearned interest on the Consolidated Balance Sheet.

 

On March 22, 2020, the federal financial institution regulatory agencies and the state banking regulators issued an interagency statement encouraging financial institutions to work constructively with borrowers affected by COVID-19 and providing additional information regarding loan modifications.  Concurrently, the Financial Accounting Standards Board (FASB) released a statement indicating that the interagency guidance was developed in consultation with the FASB staff.  The banking agencies encouraged financial institutions to work with borrowers, and indicated that they will not criticize institutions for doing so in a safe and sound manner, and will not direct supervised institutions to automatically categorize loan modifications as troubled debt restructurings (TDRs).  The statement indicated that the agencies view prudent loan modification programs offered to financial institution customers affected by COVID-19 as positive and proactive actions that can manage or mitigate adverse impacts on borrowers, and lead to improved loan performance and reduced credit risk.  Prior to this interagency guidance being issued, Mid Penn had proactively reached out to its borrowers to assess how the COVID-19 situation was impacting them, and was evaluating taking similar forbearance and payment deferral measures.  In response to these customer outreaches and respectful of the interagency guidance, Mid Penn has provided related loan modifications to over 1,000 borrowers, and as of June 30, 2020, the amount of loans outstanding which had such a deferral totaled $444,886,000.   Depending upon the specific needs and circumstances affecting each borrower, the majority of these modifications range from deferrals of both principal and interest payments for three to six months, or borrowers reverting to interest-only payments for a period of three to six months.  Interest will continue to accrue on loans modified under the CARES Act during the deferral period.  Mid Penn remains in communication with each of these borrowers to assess the ongoing credit status of the borrowers, and may make further adjustments to a borrower’s modification at some future time if warranted for the specific situation.

 

The full impact of the coronavirus continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Corporation’s financial condition, liquidity, capital position, and future results of operations. In addition, the adverse economic effects of the coronavirus may lead to an increase in credit risk on the Corporation’s commercial and residential loan portfolios.  Also, the Corporation is also monitoring the fluctuations in the markets as it pertains to interest rates and the fair value of our investments, as well as the impact of the pandemic of underlying bond issuers and the potential for OTTI.

 

 Management is actively monitoring the global situation on its financial condition, liquidity, capital position, operations, industry, and workforce. Given the daily evolution of the coronavirus and the global responses to curb its spread, the Corporation is not able to estimate the effects of the coronavirus on its results of operations, financial condition, capital position, or liquidity for fiscal year 2020.

43


MID PENN BANCORP, INC.

 

 

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

 

The following is Management’s Discussion and Analysis of Consolidated Financial Condition as of June 30, 2020, compared to year-end 2019, and the Results of Operations for the three and six months ended June 30, 2020, compared to the same periods in 2019.  For comparative purposes, the June 30, 2020 and December 31, 2019 balances have been reclassified when, and if necessary, to conform to the 2020 presentation.  Such reclassifications had no impact on net income.  This discussion should be read in conjunction with the financial tables, statistics, and the audited financial statements and notes thereto included in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”).  The results of operations for interim periods are not necessarily indicative of operating results expected for the full year.

 

Caution About Forward-Looking Statements

 

Forward-looking statements involve risks, uncertainties and assumptions.  Although Mid Penn generally does not make forward-looking statements unless Mid Penn’s management believes its management has a reasonable basis for doing so, Mid Penn cannot guarantee the accuracy of any forward-looking statements.  Actual results may differ materially from those expressed in any forward-looking statements due to a number of uncertainties and risks, including the risks described in this Quarterly Report on Form 10-Q, the 2019 Annual Report, and other unforeseen risks.  You should not put undue reliance on any forward-looking statements.  These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by us on Mid Penn’s website or otherwise, and Mid Penn undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

 

Certain of the matters discussed in this document and in documents incorporated by reference herein, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Mid Penn to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.  The words “expect”, “anticipates”, “intend”, “plan”, “believe”, “estimate”, and similar expressions are intended to identify such forward-looking statements.  Mid Penn’s actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:

 

 

the effects of potentially slowing or volatile future economic conditions on Mid Penn and its customers;

 

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

 

future actions or inactions of the federal or state governments, including a failure to increase the government debt limit or a prolonged shutdown of the federal government, or a federal or state government-mandated shutdowns of significant segments of the economy;

 

business or economic disruptions from national or global epidemic or pandemic events, including those from the ongoing COVID-19 pandemic;

 

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 Mid Penn or Mid Penn Bank;

 

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

 

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

 

the risks of changes in interest rates and the yield curve on the level and composition of deposits and other funding sources, loan demand and yields, values of loan collateral, securities and yields, and interest rate protection agreements;

 

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

 

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

 

technological changes and changes to data security systems including those with third-party information technology providers;

 

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

 

our ability to implement organic branch, product and service expansion strategies;

 

our current and future acquisition strategies may not be successful in locating or acquiring advantageous targets at favorable prices;

 

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

 

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

 

our ability to attract and retain qualified management and personnel;

 

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

 

results of regulatory examination and supervision processes;

 

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

 

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

 

acts of war or terrorism; disruptions due to flooding, severe weather, or other natural disasters or Acts of God; and

 

volatility in the securities markets.

 

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

 

44


MID PENN BANCORP, INC.

 

 

Critical Accounting Estimates

 

Mid Penn’s consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and conform to general practices within the banking industry.  Application of these principles involves significant judgments and estimates by management that have a material impact on the carrying value of certain assets and liabilities.  The judgments and estimates that we used are also based on historical experiences and other factors, which are believed to be reasonable under the circumstances.  Because of the nature of the judgments and estimates that we have made, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of our operations.  Management of the Corporation considers the accounting judgments relating to the allowance, the evaluation of the Corporation’s investment securities for other-than-temporary impairment, the valuation of the Corporation’s goodwill and other merger-related intangible assets 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 represents management’s estimate of probable incurred credit losses inherent in the loan and lease portfolio.  Determining the amount of the allowance is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change.  The loan and lease portfolio also represents the largest asset type on the consolidated balance sheet.  Throughout the remainder of this report, the terms “loan” or “loans” refers to both loans and leases.

 

Valuations for the investment portfolio are determined using quoted market prices, where available.  If quoted market prices are not available, investment valuation is based on pricing models, quotes for similar investment securities, and observable yield curves and spreads.  In addition to securities valuation, management must assess whether there are any declines in value below the carrying value of the investments that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of the loss in the consolidated statement of income.

 

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.  Changes in economic and operating conditions could result in goodwill or core deposit intangible or trade name intangible impairment in future periods.  

 

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

 

Results of Operations

 

Overview

 

Net income available to common shareholders was $6,833,000 or $0.81 per common share, for the quarter ended June 30, 2020, compared to net income of $4,403,000 or $0.52 per common share for the quarter ended June 30, 2019. During the six months ended June 30, 2020, net income was $10,651,000 or $1.26 per common share, versus $8,480,000 or $1.00 per common share for the six months ended June 30, 2019.

 

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

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Return on average assets

 

0.99

%

 

 

0.83

%

 

 

0.85

%

 

 

0.81

%

Return on average equity

 

11.41

%

 

 

7.71

%

 

 

8.93

%

 

 

7.54

%

 

Net Interest Income/Funding Sources

Net interest income, Mid Penn’s primary source of revenue, is the amount by which interest income on loans and investments exceeds interest incurred on deposits and borrowings.  The amount of net interest income is affected by changes in interest rates and changes in the volume and mix of interest-sensitive assets and liabilities.  Net interest income and corresponding yields are presented in the analysis below on a taxable-equivalent basis.  Income from tax-exempt assets, primarily loans to or securities issued by state and local governments, is adjusted by an amount equivalent to the federal income taxes which would have been paid if the income received on these assets was taxable at the statutory rate of 21 percent for the three and six months ended June 30, 2020 and 2019.


45


MID PENN BANCORP, INC.

 

 

The following tables include average balances, amounts, and rates of interest income and expense, interest rate spread, and net interest margin for the three months ended June 30, 2020 and 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balances, Income and Interest Rates on a Taxable Equivalent Basis

 

 

 

For the Three Months Ended

 

(Dollars in thousands)

 

June 30, 2020

 

 

June 30, 2019

 

 

 

Average

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

Average

 

 

 

Balance

 

 

Interest

 

 

Rates

 

 

Balance

 

 

Interest

 

 

Rates

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Balances

 

$

 

6,307

 

 

$

 

18

 

 

 

1.15

%

 

$

 

5,030

 

 

$

 

27

 

 

 

2.15

%

Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

 

124,524

 

 

 

 

749

 

 

 

2.42

%

 

 

 

159,252

 

 

 

 

938

 

 

 

2.36

%

Tax-Exempt

 

 

 

48,734

 

 

 

 

314

 

(a)

 

2.59

%

 

 

 

101,088

 

 

 

 

739

 

(a)

 

2.93

%

Total Securities

 

 

 

173,258

 

 

 

 

1,063

 

 

 

2.47

%

 

 

 

260,340

 

 

 

 

1,677

 

 

 

2.58

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds Sold

 

 

 

90,013

 

 

 

 

23

 

 

 

0.10

%

 

 

 

21,554

 

 

 

 

130

 

 

 

2.42

%

Loans and Leases, Net

 

 

 

2,287,260

 

 

 

 

25,207

 

(b)

 

4.43

%

 

 

 

1,665,568

 

 

 

 

22,292

 

(b)

 

5.37

%

Restricted Investment in Bank Stocks

 

 

 

7,039

 

 

 

 

34

 

 

 

1.94

%

 

 

 

5,996

 

 

 

 

105

 

 

 

7.02

%

Total Earning Assets

 

 

 

2,563,877

 

 

 

 

26,345

 

 

 

4.13

%

 

 

 

1,958,488

 

 

 

 

24,231

 

 

 

4.96

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Due from Banks

 

 

 

28,417

 

 

 

 

 

 

 

 

 

 

 

 

 

27,202

 

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

174,467

 

 

 

 

 

 

 

 

 

 

 

 

 

148,054

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

 

2,766,761

 

 

 

 

 

 

 

 

 

 

 

$

 

2,133,744

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing Demand

 

$

 

512,592

 

 

 

 

787

 

 

 

0.62

%

 

$

 

399,187

 

 

 

 

984

 

 

 

0.99

%

Money Market

 

 

 

575,195

 

 

 

 

881

 

 

 

0.62

%

 

 

 

429,180

 

 

 

 

1,897

 

 

 

1.77

%

Savings

 

 

 

184,680

 

 

 

 

79

 

 

 

0.17

%

 

 

 

190,031

 

 

 

 

161

 

 

 

0.34

%

Time

 

 

 

451,410

 

 

 

 

2,262

 

 

 

2.02

%

 

 

 

471,025

 

 

 

 

2,234

 

 

 

1.90

%

Total Interest-bearing Deposits

 

 

 

1,723,877

 

 

 

 

4,009

 

 

 

0.94

%

 

 

 

1,489,423

 

 

 

 

5,276

 

 

 

1.42

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term Borrowings

 

 

 

52,293

 

 

 

 

45

 

 

 

0.35

%

 

 

 

21,320

 

 

 

 

157

 

 

 

2.95

%

Long-term Debt

 

 

 

81,487

 

 

 

 

281

 

 

 

1.39

%

 

 

 

56,153

 

 

 

 

407

 

 

 

2.91

%

Subordinated Debt

 

 

 

42,031

 

 

 

 

507

 

 

 

4.85

%

 

 

 

27,074

 

 

 

 

388

 

 

 

5.75

%

Total Interest-bearing Liabilities

 

 

 

1,899,688

 

 

 

 

4,842

 

 

 

1.03

%

 

 

 

1,593,970

 

 

 

 

6,228

 

 

 

1.57

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing Demand

 

 

 

601,650

 

 

 

 

 

 

 

 

 

 

 

 

 

288,268

 

 

 

 

 

 

 

 

 

 

Other Liabilities

 

 

 

24,632

 

 

 

 

 

 

 

 

 

 

 

 

 

22,625

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

240,791

 

 

 

 

 

 

 

 

 

 

 

 

 

228,881

 

 

 

 

 

 

 

 

 

 

Total Liabilities & Shareholders' Equity

 

$

 

2,766,761

 

 

 

 

 

 

 

 

 

 

 

$

 

2,133,744

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income (taxable equivalent basis)

 

 

 

 

 

 

$

 

21,503

 

 

 

 

 

 

 

 

 

 

 

$

 

18,003

 

 

 

 

 

Taxable Equivalent Adjustment

 

 

 

 

 

 

 

 

(157

)

 

 

 

 

 

 

 

 

 

 

 

 

(233

)

 

 

 

 

Net Interest Income

 

 

 

 

 

 

$

 

21,346

 

 

 

 

 

 

 

 

 

 

 

$

 

17,770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Yield on Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

4.13

%

 

 

 

 

 

 

 

 

 

 

 

 

4.96

%

Rate on Supporting Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

1.03

%

 

 

 

 

 

 

 

 

 

 

 

 

1.57

%

Average Interest Spread

 

 

 

 

 

 

 

 

 

 

 

 

3.11

%

 

 

 

 

 

 

 

 

 

 

 

 

3.40

%

Net Interest Margin

 

 

 

 

 

 

 

 

 

 

 

 

3.37

%

 

 

 

 

 

 

 

 

 

 

 

 

3.69

%

 

(a)

Includes tax-equivalent adjustments on interest from tax-free municipal securities of $66,000 and $155,000 for the three months ended June 30, 2020 and 2019, respectively.  Tax-equivalent adjustments were calculated using statutory tax rate of 21% at June 30, 2020 and 2019.

(b)

Includes tax-equivalent adjustments on interest from tax-free municipal loans of $91,000 and $78,000 for the three months ended June 30, 2020 and 2019, respectively.  Tax-equivalent adjustments were calculated using statutory tax rate of 21% at June 30, 2020 and 2019.

 

 

 

46


MID PENN BANCORP, INC.

 

 

 

 

Three months ended

 

 

 

June 30, 2020 vs. 2019

 

(Dollars in thousands on a Taxable Equivalent Basis)

 

Increase (decrease)

 

 

 

Volume

 

 

Rate

 

 

Net

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Balances

 

$

7

 

 

$

(16

)

 

$

(9

)

Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

(204

)

 

 

15

 

 

 

(189

)

Tax-Exempt

 

 

(382

)

 

 

(43

)

 

 

(425

)

Total Securities

 

 

(586

)

 

 

(28

)

 

 

(614

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds Sold

 

 

412

 

 

 

(519

)

 

 

(107

)

Loans and Leases, Net

 

 

8,298

 

 

 

(5,383

)

 

 

2,915

 

Restricted Investment Bank Stocks

 

 

18

 

 

 

(89

)

 

 

(71

)

Total Interest Income

 

 

8,149

 

 

 

(6,035

)

 

 

2,114

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Demand

 

 

279

 

 

 

(476

)

 

 

(197

)

Money Market

 

 

644

 

 

 

(1,660

)

 

 

(1,016

)

Savings

 

 

(5

)

 

 

(77

)

 

 

(82

)

Time

 

 

(93

)

 

 

121

 

 

 

28

 

Total Interest Bearing Deposits

 

 

825

 

 

 

(2,092

)

 

 

(1,267

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term Borrowings

 

 

227

 

 

 

(339

)

 

 

(112

)

Long-term Debt

 

 

183

 

 

 

(309

)

 

 

(126

)

Subordinated Debt

 

 

214

 

 

 

(95

)

 

 

119

 

Total Interest Expense

 

 

1,449

 

 

 

(2,835

)

 

 

(1,386

)

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

$

6,700

 

 

$

(3,200

)

 

$

3,500

 

Taxable-equivalent net interest income was $21,503,000 for the three months ended June 30, 2020, an increase of $3,500,000 or 19 percent compared to the three months ended June 30, 2019.  

 

For the three months ended June 30, 2020, Mid Penn’s tax-equivalent net interest margin was 3.37% for the second quarter of 2020 compared to 3.69% for the second quarter of 2019. Though the quarterly average balance of interest-earning assets increased year over year, the yields on interest earning assets declined due to both (i) the significant average balance of PPP loans outstanding totaling $480,409,000 during the three months ended June 30, 2020 which earn interest at a rate of 1 percent, and (ii) reductions in the yield curve subsequent to June 2019, including the impact of the three rate decreases approved by the  Federal Open Market Committee (“FOMC”), for 0.75% combined during the latter half of 2019, and the 1.50% of combined rate cuts, during March 2020 in response to the COVID-19 pandemic.  Decreases in the yields on interest earning assets were partially offset by the recognition of $2,371,000 of PPP loan processing fees in total interest income. The total cost of deposits for the three months ended June 30, 2020 favorably decreased compared to the same periods in 2019 as a result of the aforementioned yield curve reductions and FOMC rate cuts providing for management to significantly reduce deposit account rates while still maintaining and growing core deposit balances.

 

 


47


MID PENN BANCORP, INC.

 

 

 

The following tables include average balances, amounts, and rates of interest income and expense, interest rate spread, and net interest margin for the six months ended June 30, 2020 and 2019.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Balances, Income and Interest Rates on a Taxable Equivalent Basis

 

 

 

For the Six Months Ended

 

(Dollars in thousands)

 

June 30, 2020

 

 

June 30, 2019

 

 

 

Average

 

 

 

 

 

Average

 

 

Average

 

 

 

 

 

Average

 

 

 

Balance

 

 

Interest

 

 

Rates

 

 

Balance

 

 

Interest

 

 

Rates

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Balances

 

$

 

5,414

 

 

$

 

33

 

 

 

1.23

%

 

$

 

5,592

 

 

$

 

57

 

 

 

2.06

%

Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

 

129,035

 

 

 

 

1,489

 

 

 

2.32

%

 

 

 

162,339

 

 

 

 

1,927

 

 

 

2.39

%

Tax-Exempt

 

 

 

45,749

 

 

 

 

594

 

(a)

 

2.61

%

 

 

 

104,385

 

 

 

 

1,523

 

(a)

 

2.94

%

Total Securities

 

 

 

174,784

 

 

 

 

2,083

 

 

 

2.40

%

 

 

 

266,724

 

 

 

 

3,450

 

 

 

2.61

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds Sold

 

 

 

106,324

 

 

 

 

413

 

 

 

0.78

%

 

 

 

16,452

 

 

 

 

198

 

 

 

2.43

%

Loans and Leases, Net

 

 

 

2,029,352

 

 

 

 

47,548

 

(b)

 

4.71

%

 

 

 

1,647,624

 

 

 

 

43,454

 

(b)

 

5.32

%

Restricted Investment in Bank Stocks

 

 

 

5,850

 

 

 

 

118

 

 

 

4.06

%

 

 

 

5,992

 

 

 

 

187

 

 

 

6.29

%

Total Earning Assets

 

 

 

2,321,724

 

 

 

 

50,195

 

 

 

4.35

%

 

 

 

1,942,384

 

 

 

 

47,346

 

 

 

4.92

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and Due from Banks

 

 

 

29,478

 

 

 

 

 

 

 

 

 

 

 

 

 

27,687

 

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

160,755

 

 

 

 

 

 

 

 

 

 

 

 

 

143,124

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

 

2,511,957

 

 

 

 

 

 

 

 

 

 

 

$

 

2,113,195

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES & SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing Demand

 

$

 

484,139

 

 

 

 

1,959

 

 

 

0.81

%

 

$

 

390,879

 

 

 

 

1,837

 

 

 

0.95

%

Money Market

 

 

 

539,060

 

 

 

 

2,478

 

 

 

0.92

%

 

 

 

408,468

 

 

 

 

3,360

 

 

 

1.66

%

Savings

 

 

 

180,302

 

 

 

 

199

 

 

 

0.22

%

 

 

 

195,343

 

 

 

 

337

 

 

 

0.35

%

Time

 

 

 

465,863

 

 

 

 

4,753

 

 

 

2.05

%

 

 

 

479,250

 

 

 

 

4,328

 

 

 

1.82

%

Total Interest-bearing Deposits

 

 

 

1,669,364

 

 

 

 

9,389

 

 

 

1.13

%

 

 

 

1,473,940

 

 

 

 

9,862

 

 

 

1.35

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term Borrowings

 

 

 

26,146

 

 

 

 

45

 

 

 

0.35

%

 

 

 

27,869

 

 

 

 

389

 

 

 

2.81

%

Long-term Debt

 

 

 

55,135

 

 

 

 

533

 

 

 

1.94

%

 

 

 

52,161

 

 

 

 

761

 

 

 

2.94

%

Subordinated Debt

 

 

 

35,539

 

 

 

 

909

 

 

 

5.14

%

 

 

 

27,077

 

 

 

 

776

 

 

 

5.78

%

Total Interest-bearing Liabilities

 

 

 

1,786,184

 

 

 

 

10,876

 

 

 

1.22

%

 

 

 

1,581,047

 

 

 

 

11,788

 

 

 

1.50

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing Demand

 

 

 

461,083

 

 

 

 

 

 

 

 

 

 

 

 

 

282,503

 

 

 

 

 

 

 

 

 

 

Other Liabilities

 

 

 

24,860

 

 

 

 

 

 

 

 

 

 

 

 

 

22,740

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

239,830

 

 

 

 

 

 

 

 

 

 

 

 

 

226,905

 

 

 

 

 

 

 

 

 

 

Total Liabilities & Shareholders' Equity

 

$

 

2,511,957

 

 

 

 

 

 

 

 

 

 

 

$

 

2,113,195

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income (taxable equivalent basis)

 

 

 

 

 

 

$

 

39,319

 

 

 

 

 

 

 

 

 

 

 

$

 

35,558

 

 

 

 

 

Taxable Equivalent Adjustment

 

 

 

 

 

 

 

 

(308

)

 

 

 

 

 

 

 

 

 

 

 

 

(482

)

 

 

 

 

Net Interest Income

 

 

 

 

 

 

$

 

39,011

 

 

 

 

 

 

 

 

 

 

 

$

 

35,076

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Yield on Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

4.35

%

 

 

 

 

 

 

 

 

 

 

 

 

4.92

%

Rate on Supporting Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

1.22

%

 

 

 

 

 

 

 

 

 

 

 

 

1.50

%

Average Interest Spread

 

 

 

 

 

 

 

 

 

 

 

 

3.12

%

 

 

 

 

 

 

 

 

 

 

 

 

3.41

%

Net Interest Margin

 

 

 

 

 

 

 

 

 

 

 

 

3.41

%

 

 

 

 

 

 

 

 

 

 

 

 

3.69

%

 

(a)

Includes tax-equivalent adjustments on interest from tax-free municipal securities of $125,000 and $320,000 for the six months ended June 30, 2020 and 2019, respectively.  Tax-equivalent adjustments were calculated using statutory tax rate of 21% at June 30, 2020 and 2019.

(b)

Includes tax-equivalent adjustments on interest from tax-free municipal loans of $183,000 and $162,000 for the six months ended June 30, 2020 and 2019, respectively.  Tax-equivalent adjustments were calculated using statutory tax rate of 21% at June 30, 2020 and 2019.

48


MID PENN BANCORP, INC.

 

 

 

 

Six months ended

 

 

 

June 30, 2020 vs. 2019

 

(Dollars in thousands on a Taxable Equivalent Basis)

 

Increase (decrease)

 

 

 

Volume

 

 

Rate

 

 

Net

 

INTEREST INCOME:

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Balances

 

$

(2

)

 

$

(22

)

 

$

(24

)

Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

(396

)

 

 

(42

)

 

 

(438

)

Tax-Exempt

 

 

(858

)

 

 

(71

)

 

 

(929

)

Total Securities

 

 

(1,254

)

 

 

(113

)

 

 

(1,367

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal Funds Sold

 

 

1,085

 

 

 

(870

)

 

 

215

 

Loans and Leases, Net

 

 

10,096

 

 

 

(6,002

)

 

 

4,094

 

Restricted Investment Bank Stocks

 

 

(4

)

 

 

(65

)

 

 

(69

)

Total Interest Income

 

 

9,921

 

 

 

(7,072

)

 

 

2,849

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

Interest Bearing Demand

 

 

440

 

 

 

(318

)

 

 

122

 

Money Market

 

 

1,077

 

 

 

(1,959

)

 

 

(882

)

Savings

 

 

(26

)

 

 

(112

)

 

 

(138

)

Time

 

 

(121

)

 

 

546

 

 

 

425

 

Total Interest Bearing Deposits

 

 

1,370

 

 

 

(1,843

)

 

 

(473

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term Borrowings

 

 

(24

)

 

 

(320

)

 

 

(344

)

Long-term Debt

 

 

44

 

 

 

(272

)

 

 

(228

)

Subordinated Debt

 

 

243

 

 

 

(110

)

 

 

133

 

Total Interest Expense

 

 

1,633

 

 

 

(2,545

)

 

 

(912

)

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INTEREST INCOME

 

$

8,288

 

 

$

(4,527

)

 

$

3,761

 

 

Taxable-equivalent net interest income was $39,319,000 for the six months ended June 30, 2020, an increase of $3,761,000 or 11 percent compared to the six months ended June 30, 2019.  

 

For the six months ended June 30, 2020, Mid Penn’s tax-equivalent net interest margin was 3.41% compared to 3.69% for the same period in 2019. Though the year-to-date average balance of interest-earning assets increased year over year, the yields on interest earning assets declined due to both (i) the significant average balance of PPP loans outstanding totaling $240,204,000 during the six months ended June 30, 2020 which earn interest at a rate of 1 percent, and (ii) reductions in the yield curve subsequent to June 2019, including the impact of the three rate decreases approved by the  Federal Open Market Committee (“FOMC”), for 0.75% combined during the latter half of 2019, and the 1.50% of combined rate cuts, during March 2020 in response to the COVID-19 pandemic.  Decreases in the yields on interest earning assets were partially offset by the recognition of $2,371,000 of PPP loan processing fees in total interest income. The total cost of deposits for the six months ended June 30, 2020 favorably decreased compared to the same periods in 2019 as a result of the aforementioned yield curve reductions and FOMC rate cuts providing for management to significantly reduce deposit account rates while still maintaining and growing core deposit balances.

 

Although the effective interest rate impact on earning assets and funding sources can be reasonably estimated at current interest rate levels, the interest-bearing product and pricing options selected by customers, and the future mix of the loan, investment, and deposit products in the Bank's portfolios, may significantly change the estimates used in Mid Penn’s asset and liability management and related interest rate risk simulation models.  In addition, our net interest income may be impacted by further interest rate actions of FOMC.

Provision for Loan Losses

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

49


MID PENN BANCORP, INC.

 

 

Mid Penn has maintained the allowance in accordance with Mid Penn’s assessment process, which takes into consideration, among other relevant factors, the risk characteristics of the loan portfolio, the growth in the loan portfolio during the first six months of 2020, and shifting collateral values from December 31, 2019 to June 30, 2020.

 

Management performed a current evaluation of the adequacy of the loan and lease loss allowance and based on this evaluation, a loan loss provision of $1,050,000 and $465,000 was recorded for the three months ended June 30, 2020 and 2019, respectively.  During the six months ended June 30, 2020, the provision for the loan and lease losses was $1,600,000 compared to $590,000 for the six months ended June 30, 2019. The allowance for loan losses and the related provision reflect Mid Penn’s continued application of the incurred loss method for estimating credit losses as Mid Penn is not required to adopt the current expected credit loss (“CECL”) accounting standard until January 1, 2023.  The increase in the loan loss reserves and the quarterly provision was primarily the result of an increase in qualitative factors related to economic and external conditions when compared to prior periods, with such changes driven by the potential for ongoing financial implications from the COVID-19 pandemic on Mid Penn’s customers and market area. Mid Penn’s allowance and other asset quality measures did not reflect any new impaired assets or specific reserve allocations related to the early impact of the COVID-19 pandemic, though Bank management is continuously and closely monitoring and evaluating the impact of the COVID-19 situation on the portfolio.  

 

Noninterest Income

 

During the three months ended June 30, 2020, noninterest income totaled $3,622,000, an increase of $748,000 or 26 percent, compared to noninterest income of $2,874,000 for the three months ended June 30, 2019. For the six months ended June 30, 2020, noninterest income totaled $6,556,000, an increase of $1,633,000 or 33 percent, compared to noninterest income of $4,923,000 for the same period 2019.

 

The following components of noninterest income showed significant changes:

 

(Dollars in Thousands)

Three Months Ended June 30,

 

 

2020

 

 

2019

 

 

$ Variance

 

 

% Variance

 

Income from fiduciary and wealth management activities

$

421

 

 

$

347

 

 

$

74

 

 

 

21

%

Service charges on deposits

 

115

 

 

 

218

 

 

 

(103

)

 

 

-47

%

ATM debit card interchange income

 

475

 

 

 

380

 

 

 

95

 

 

 

25

%

Mortgage banking income

 

1,638

 

 

 

1,077

 

 

 

561

 

 

 

52

%

Net gain on sales of SBA loans

 

178

 

 

 

233

 

 

 

(55

)

 

 

-24

%

Net gain on sales of investment securities

 

111

 

 

 

17

 

 

 

94

 

 

 

553

%

Other income

 

510

 

 

 

419

 

 

 

91

 

 

 

22

%

 

(Dollars in Thousands)

Six Months Ended June 30,

 

 

2020

 

 

2019

 

 

$ Variance

 

 

% Variance

 

Income from fiduciary and wealth management activities

$

805

 

 

$

706

 

 

$

99

 

 

 

14

%

Service charges on deposits

 

320

 

 

 

435

 

 

 

(115

)

 

 

-26

%

ATM debit card interchange income

 

891

 

 

 

714

 

 

 

177

 

 

 

25

%

Mortgage banking income

 

2,820

 

 

 

1,514

 

 

 

1,306

 

 

 

86

%

Net gain on sales of SBA loans

 

262

 

 

 

435

 

 

 

(173

)

 

 

-40

%

Net gain on sales of investment securities

 

243

 

 

 

24

 

 

 

219

 

 

 

913

%

Other income

 

882

 

 

 

749

 

 

 

133

 

 

 

18

%

 

Income from fiduciary and wealth management activities was $805,000 for the six months ended June 30, 2020, an increase of $99,000 or 14 percent, compared to fiduciary income of $706,000 for the same period in 2019. These additional revenues were attributed to growth in trust assets under management and increased sales of retail investment products, as well as additional fee income from Mid Penn’s expanded wealth management team.

 

Mortgage banking income was $2,820,000 for the six months ended June 30, 2020, an increase of $1,306,000 or 86 percent compared to mortgage banking income of $1,514,000 for the six months ended June 30, 2019.  Longer-term mortgage interest rates have declined significantly over the past twelve months, resulting in a higher level of mortgage originations (both purchase and refinance activity) and secondary-market loan sales when comparing the first six months of 2020 to the same period in 2019.

 

ATM debit card interchange income was $891,000 for the six months ended June 30, 2020, an increase of $177,000 or 25 percent compared to interchange income of $714,000 for the six months ended June 30, 2019. The increase resulted from increasing card-based transaction usage across our expanding transactional account customer base.

 

Net gains on sales of securities were $243,000 for the six months ended June 30, 2020, an increase of $219,000 compared to net gains on sales of securities of $24,000 for the six months ended June 30, 2019.  Sales volume and gains were driven by the implementation of asset/liability management strategies, which vary from quarter to quarter based upon market conditions and related yield curve and valuation changes.

 

Service charges on deposits were $320,000 for the six months ended June 30, 2020, a decrease of $115,000 or 26 percent compared to service charges on deposits of $435,000 for the six months ended June 30, 2019.  The decrease is due to lower non-sufficient funds fees incurred through the first half of 2020 when compared to the same period in 2019.

50


MID PENN BANCORP, INC.

 

 

 

Net gains on sales of SBA loans were $262,000 for the six months ended June 30, 2020, a decrease of $173,000 or 40 percent compared to net gains on sales of SBA loans of $435,000 during the same period of 2019.  Much of the decrease is due to the shift of the SBA lending function to documenting, processing, and funding PPP loans during the second quarter of 2020.

 

Other income was $882,000 for the six months ended June 30, 2020, an increase of $133,000 compared to other income of $749,000 for the six months ended June 30, 2019.  The increase in other income was primarily driven by higher volumes of fee-based income, including wire transfer fees, letter of credit fees, and credit card program referrals and royalties.

 

Noninterest Expense

 

For the three months ended June 30, 2020, noninterest expense totaled $15,403,000, an increase of $607,000 or 4 percent, compared to noninterest expense of $14,796,000 for the three months ended June 30, 2019. For the six months ended June 30, 2020, noninterest expense totaled $30,984,000, reflecting an increase of $1,885,000 or 6 percent, compared to noninterest expense of $29,099,000 for the six months ended June 30, 2019. The year-over-year increase in quarterly noninterest expense was attributable to both (i) growth-related business development officer additions since June 30, 2019, including those in Mid Penn’s expanded wealth management services, and (ii) increases across other expense categories reflective of the overall growth of the organization, including software licensing and utilization, Pennsylvania bank shares tax, and occupancy and equipment expenses.  Also, other expenses for the first two quarters of 2020 included approximately $138,000 of non-recurring FHLB prepayment costs resulting from Mid Penn’s early redemption of $17,500,000 of higher-cost term advances.  No FHLB borrowing prepayments occurred during the first six months of 2019.

 

The changes were primarily a result of the following components of noninterest expense, which had significant variances when comparing results for periods ending in 2020 versus the corresponding period in 2019:

 

(Dollars in Thousands)

Three Months Ended June 30,

 

 

2020

 

 

2019

 

 

$ Variance

 

 

% Variance

 

Salaries and employee benefits

$

7,986

 

 

$

7,786

 

 

$

200

 

 

 

3

%

Equipment expense

 

722

 

 

 

658

 

 

 

64

 

 

 

10

%

Pennsylvania bank shares tax expense

 

55

 

 

 

245

 

 

 

(190

)

 

 

-78

%

Legal and professional fees

 

349

 

 

 

471

 

 

 

(122

)

 

 

-26

%

Marketing and advertising expense

 

98

 

 

 

226

 

 

 

(128

)

 

 

-57

%

Software licensing and utilization

 

1,297

 

 

 

1,111

 

 

 

186

 

 

 

17

%

Intangible amortization

 

326

 

 

 

360

 

 

 

(34

)

 

 

-9

%

Other expenses

 

2,743

 

 

 

2,102

 

 

 

641

 

 

 

30

%

 

(Dollars in Thousands)

Six Months Ended June 30,

 

 

2020

 

 

2019

 

 

$ Variance

 

 

% Variance

 

Salaries and employee benefits

$

16,267

 

 

$

15,545

 

 

$

722

 

 

 

5

%

Equipment expense

 

1,435

 

 

 

1,285

 

 

 

150

 

 

 

12

%

Pennsylvania bank shares tax expense

 

460

 

 

 

381

 

 

 

79

 

 

 

21

%

Legal and professional fees

 

701

 

 

 

893

 

 

 

(192

)

 

 

-22

%

Marketing and advertising expense

 

302

 

 

 

405

 

 

 

(103

)

 

 

-25

%

Software licensing and utilization

 

2,518

 

 

 

2,132

 

 

 

386

 

 

 

18

%

Intangible amortization

 

649

 

 

 

723

 

 

 

(74

)

 

 

-10

%

Other expenses

 

4,940

 

 

 

3,988

 

 

 

952

 

 

 

24

%

 

Salaries and employee benefits were $16,267,000 for the six months ended June 30, 2020, an increase of $722,000 or 5 percent, versus the same period in 2019, with the increase primarily attributable to (i) retail staff added as part of the new Hazle Township branch location opened during the fourth quarter of 2019, (ii) the addition of private banking and insurance business development professionals to enhance our wealth management and insurance activities, (iii) increased commissions commensurate with the successes of the mortgage banking group, and (iv) increased expense for the substantial time and effort devoted to business development activities by many of our staff members during the second quarter of 2020.

 

Equipment expense increased $150,000 or 12 percent during the six months ended June 30, 2020 compared to the same period in 2019, and related to the expansion of the corporate administrative facilities to centralize back-office functions, as well as additional hardware and software enhancements placed in service to improve operations and efficiencies across the Mid Penn footprint.

 

Pennsylvania bank shares tax expense was $460,000 for the six months ended June 30, 2020, an increase of $79,000 or 20 percent compared to $381,000 for the six months ended June 30, 2019.  The increase in shares tax expense generally reflects the organic growth in the past year of the total shareholder equity balance upon which the tax is based, with some of the increase offset by non-recurring tax-credit-generating donations made during the second quarter of 2020.

 


51


MID PENN BANCORP, INC.

 

 

Software licensing and utilization costs were $2,518,000 for the six months ended June 30, 2020, an increase of $386,000 or 18 percent compared to $2,132,000 for the six months ended June 30, 2019.  This increase reflects the additional costs from both transaction volume-based charges, and licensing fees related to the addition of new staff and locations added since June 30, 2019, as well as costs associated with ensuring remote connectivity for an increased volume of employees in response to the COVID-19 work-from-home restrictions.  Additionally, Mid Penn continued to invest in upgrades to internal systems, networks, storage capabilities, and data security mechanisms to enhance data management and security capabilities responsive to both the larger company profile and increasing complexity of information technology management.

 

Legal and professional fees for the six months ended June 30, 2020 decreased by $192,000 or 22 percent compared to the same period in 2019, due primarily to the first six months of 2019 including additional services supporting a new third-party loan review service, as well as costs associated with supporting both trust and wealth management activities, and the update and revision of Mid Penn’s corporate governance and Board structure.

 

Marketing and advertising expense was $302,000 for the six months ended June 30, 2020, a decrease of $103,000 or 25 percent compared to $405,000 during the first six months of 2019.  The first six months of 2019 reflected additional advertising expense and promotional items expense to increase recognition and knowledge of Mid Penn’s Southeastern Pennsylvania mortgage origination team.  Similar expenses were not recognized in 2020.

Intangible amortization decreased from $723,000 during the six months ended June 30, 2019 to $649,000 during the six months ended June 30, 2020, as the core deposit intangible (“CDI”) amortization from the 2018 acquisitions of both (i) the Scottdale Bank and Trust on January 8, 2018, and (ii) First Priority Bancorp on July 31, 2018 continues to decrease as it is amortized using the sum-of-the-years digits method over a ten year term (which results in decreasing expense recognized in each year following the respective acquisition).

Income Taxes

 

The provision for income taxes was $1,682,000 during the three months ended June 30, 2020, an increase of $700,000 or 72 percent compared to $980,000 for the same period in 2019.  The provision for income taxes for the three months ended June 30, 2020 reflects an effective tax rate of 19.8%, compared to an effective tax rate of 18.2% for the three months ended June 30, 2019. The provision for income taxes was $2,332,000 during the six months ended June 30, 2020, an increase of $502,000 or 27 percent compared to $1,830,000 for the same period in 2019.   The provision for income taxes for the six months ended June 30, 2020 reflects an effective tax rate of 18.0%, compared to an effective tax rate of 17.8% for the six months ended June 30, 2019. The increase in the effective tax rate for 2020 reflects (i) the additional pre-tax income generated year-to-date when compared to 2019, (ii) less tax-exempt income generated in 2020 due to strategic reductions in the tax-exempt investment security portfolio, and (iii) an increase in the expected tax liability for New Jersey taxes in 2020.  Some of the increase was offset by federal tax credits recognized related to Mid Penn’s investment in a low-income housing project in Dauphin County, Pennsylvania.  The units were substantially completed and met the occupancy requirements necessary to begin recognizing the related amortization and tax credits during the fourth quarter of 2019.  Similar credits were not recognized during the six months ended June 30, 2019.

Generally, Mid Penn’s effective tax rate is below the statutory rate due to earnings on tax-exempt loans, investments, and earnings from the cash surrender value of life insurance, as well as the impact of tax credits.  The realization of Mid Penn’s deferred tax assets is dependent on future earnings.  Mid Penn currently anticipates that future earnings will be adequate to fully realize the currently recorded deferred tax assets.

 

Financial Condition

 

Overview

 

Mid Penn’s total assets were $2,922,365,000 as of June 30, 2020, reflecting an increase of $691,190,000 or 31 percent compared to total assets of $2,231,175,00 as of December 31, 2019, and an increase of $786,243,000 or 37 percent compared to total assets of $2,136,122,000 as of June 30, 2019.  Asset growth during the second quarter of 2020 included the significant volume of $588,667,000 of PPP loans still outstanding, net of deferred fees, as of June 30, 2020.  Additionally, total core banking loans (total loans excluding both the PPP portfolio and mortgage loans held for sale) increased to $1,857,098,000 as of June 30, 2020, representing an annualized core loan growth rate of over 10 percent since the end of 2019.  The asset growth was funded by both (i) $413,919,000 of deposit growth, representing an annualized deposit growth rate of 43 percent, with more than half of such growth favorably being in noninterest-bearing deposits; and (ii) a $256,316,000 net increase in wholesale borrowings, including $203,937,000 of funding obtained from the Federal Reserve PPPLF.  

 


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MID PENN BANCORP, INC.

 

 

Loans

 

Total loans at June 30, 2020 were $2,445,765,000 compared to $1,762,756,000 at December 31, 2019, an increase of $683,009,000 or 39 percent since year-end 2019.  Much of the growth is attributable to the funding of PPP loans during the second quarter of 2020, with $588,667,000 of PPP loans outstanding, net of deferred PPP processing fees of $17,958,000 as of June 30, 2020.  The remaining increase of $94,342,000 (annualized growth rate of nearly 9 percent) was driven by organic growth, particularly within both commercial real estate credits, and commercial and industrial financing loans.

 

(Dollars in thousands)

June 30, 2020

 

 

December 31, 2019

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Commercial and industrial

$

929,390

 

 

 

38.0

%

 

$

339,147

 

 

 

19.2

%

Commercial real estate

 

998,673

 

 

 

40.8

%

 

 

929,138

 

 

 

52.7

%

Commercial real estate - construction

 

224,357

 

 

 

9.2

%

 

 

181,690

 

 

 

10.3

%

Residential mortgage

 

218,352

 

 

 

8.9

%

 

 

236,724

 

 

 

13.4

%

Home equity

 

68,165

 

 

 

2.8

%

 

 

68,271

 

 

 

3.9

%

Consumer

 

6,828

 

 

 

0.3

%

 

 

7,786

 

 

 

0.5

%

 

$

2,445,765

 

 

 

100.0

%

 

$

1,762,756

 

 

 

100.0

%

 

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

 

The allowance for loan losses and the related provision reflect Mid Penn’s continued application of the incurred loss method for estimating credit losses, as Mid Penn is not required to adopt the current expected credit loss (“CECL”) accounting standard until January 1, 2023.  Mid Penn’s allowance and other asset quality measures did not reflect any new impaired assets or specific reserve allocations related to the early impact of the COVID-19 pandemic, though Bank management is continuously and closely monitoring and evaluating the impact of the COVID-19 situation on the portfolio.  Also, PPP loans, which are included in the commercial and industrial classification, are fully guaranteed by the Small Business Administration, and, as such, no allowance for loan losses was recorded against the $588,667,000 balance of PPP loans outstanding as of June 30, 2020.

For the six months ended June 30, 2020, Mid Penn had net loan charge-offs of $48,000 compared to net charge-offs of $216,000 during the same period in 2019.  None of the charge offs in the first six months of 2020 were a result of the COVID-19 pandemic.  Loans charged off during the first six months of 2020 totaled $70,000 and included three commercial and industrial loans for $45,000, one commercial real estate (construction) loan for $7,000, one consumer loan for $5,000, and $13,000 in deposit account charge-offs.  Mid Penn may need to make future adjustments to the allowance and the provision for loan and lease losses if economic conditions or loan credit quality differs substantially from the assumptions used in making Mid Penn’s evaluation of the level of the allowance for loan losses as compared to the balance of outstanding loans.

Changes in the allowance for the six months ended June 30, 2020 and 2019 are summarized as follows:

 

(Dollars in thousands)

Six Months Ended June 30,

 

 

2020

 

 

2019

 

Balance, beginning of period

$

9,515

 

 

$

8,397

 

 

 

 

 

 

 

 

 

Loans charged off during period

 

(70

)

 

 

(304

)

Recoveries of loans previously charged off

 

22

 

 

 

88

 

Net charge-offs

 

(48

)

 

 

(216

)

 

 

 

 

 

 

 

 

Provision for loan and lease losses

 

1,600

 

 

 

590

 

Balance, end of period

$

11,067

 

 

$

8,771

 

 

 

 

 

 

 

 

 

Ratio of net loan charge-offs to average loans outstanding, annualized

 

0.01

%

 

 

0.00

%

 

 

 

 

 

 

 

 

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

 

0.45

%

 

 

0.52

%

 

Improvements in the ratio of allowance for loan losses to net loans since December reflect the substantial increase in outstanding loans due to Mid Penn’s participation in the PPP program.  The allowance for loan and lease losses as a percentage of loans, excluding PPP loans which are guaranteed by the SBA and have no associated allowance, was 0.60% as of June 30, 2020. 

 

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MID PENN BANCORP, INC.

 

 

Other than as described herein, including the disclosures in previous sections regarding the continued impact of the COVID-19 pandemic, Mid Penn does not believe there are any trends or events at this time that are reasonably expected to have a material impact on future results of operations, liquidity, or capital resources.  Based on known information, Mid Penn believes that the effects of current and past economic conditions and other unfavorable business conditions, including those related to COVID-19, may eventually impact some borrowers’ abilities to comply with their repayment terms.  Accordingly, Mid Penn increased its qualitative factors for economic and external conditions as part of its general component determination.  Mid Penn continues to monitor closely the financial strength of these borrowers and the economic conditions impacting them, including the impacts from the COVID-19 pandemic.  

 

Mid Penn does not ordinarily engage in practices which may be used to artificially shield certain borrowers from the negative economic or business cycle effects that may compromise their ability to repay.  Mid Penn does not normally structure construction loans with interest reserve components.  Mid Penn has not in the past performed any commercial real estate or other type 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.

The following table presents the change in nonperforming asset categories as of June 30, 2020, December 31, 2019, and June 30, 2019.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2020

 

 

December 31, 2019

 

 

June 30, 2019

 

Nonperforming Assets:

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans

$

13,804

 

 

$

11,471

 

 

$

6,165

 

Accruing troubled debt restructured loans

 

477

 

 

 

490

 

 

 

503

 

Total nonperforming loans

 

14,281

 

 

 

11,961

 

 

 

6,668

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreclosed real estate

 

1,718

 

 

 

196

 

 

 

390

 

Total non-performing assets

 

15,999

 

 

 

12,157

 

 

 

7,058

 

 

 

 

 

 

 

 

 

 

 

 

 

Accruing loans 90 days or more past due

 

800

 

 

 

 

 

 

 

Total risk elements

$

16,799

 

 

$

12,157

 

 

$

7,058

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming loans as a % of total

 

 

 

 

 

 

 

 

 

 

 

loans outstanding

 

0.58

%

 

 

0.68

%

 

 

0.39

%

 

 

 

 

 

 

 

 

 

 

 

 

Nonperforming assets as a % of total

 

 

 

 

 

 

 

 

 

 

 

loans outstanding and other real estate

 

0.65

%

 

 

0.69

%

 

 

0.42

%

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of allowance for loan losses

 

 

 

 

 

 

 

 

 

 

 

to nonperforming loans

 

77.49

%

 

 

79.55

%

 

 

131.54

%

 

In the table above, troubled debt restructured loans that are no longer accruing interest are included in nonaccrual loans.  

 

Nonperforming loans increased from $11,961,000 at December 31, 2019 to $14,281,000 at June 30, 2020 primarily due to one home equity loan relationship totaling $2,378,000 being designated as nonaccrual. One loan relationship which accounts for $7,385,000 of the nonperforming loan balance is discussed in more detail below.  None of the nonperforming assets were impaired as a result of the COVID-19 pandemic as the conditions resulting in the respective asset’s impairment preceded the pandemic.  However, as Mid Penn pursues full collection of these assets, the timing or extent of resolution may ultimately be impacted if the pandemic persists.

 

Loan relationship no. 1 – At June 30, 2020, the contractual outstanding principal balance of this loan relationship was $7,385,000 and was comprised of two commercial and industrial loans and one commercial real estate credit acquired in 2018.  Given that the fair value of the collateral, primarily comprised of a significant amount of commercial real estate, exceeds the outstanding principal balance, no specific allowance allocation has been assigned to this relationship.  Management is diligently pursuing its full rights given its priority liens to the collateral under the loan agreements to collect the remaining outstanding balance.

 

The increase in foreclosed real estate from $196,000 at December 31, 2019 to $1,718,000 at June 30, 2020 was primarily driven by the transfer of one loan relationship totaling $1,465,000 from nonaccrual status to foreclosed real estate during the first six months of 2020, which is discussed in more detail below.  

 

Foreclosed real estate no. 1 – At June 30, 2020, this property consisted of a commercial property and was carried at a net realizable value of $1,465,000.  Management has actively listed the property for sale and expects to recover its full investment in this property at the time of sale.

 


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MID PENN BANCORP, INC.

 

 

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

(Dollars in thousands)

 

 

 

 

 

 

 

 

June 30, 2020

 

 

December 31, 2019

 

Period ending total loans outstanding

$

2,445,765

 

 

$

1,762,756

 

Allowance for loan and lease losses

 

11,067

 

 

 

9,515

 

Total Nonperforming loans

 

14,281

 

 

 

11,961

 

Nonperforming and impaired loans with partial charge-offs

 

103

 

 

 

332

 

 

 

 

 

 

 

 

 

Ratio of nonperforming loans with partial charge-offs

 

 

 

 

 

 

 

to total loans

 

0.00

%

 

 

0.02

%

 

 

 

 

 

 

 

 

Ratio of nonperforming loans with partial charge-offs

 

 

 

 

 

 

 

to total nonperforming loans

 

0.72

%

 

 

2.78

%

 

 

 

 

 

 

 

 

Coverage ratio net of nonperforming loans with

 

 

 

 

 

 

 

partial charge-offs

 

78.06

%

 

 

81.82

%

 

 

 

 

 

 

 

 

Ratio of total allowance to total loans less

 

 

 

 

 

 

 

nonperforming loans with partial charge-offs

 

0.45

%

 

 

0.54

%

 

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 well-secured or otherwise not probable for collection.  This methodology assumes the borrower cannot or will not continue to make additional payments.  At that time the loan would be considered collateral dependent as the discounted cash flow method indicates no operating income is available for evaluating the collateral position; therefore, most impaired loans are deemed to be collateral dependent.

Mid Penn evaluates loans for charge-off on a monthly basis.  Policies that govern the recommendation for charge-off are unique to the type of loan being considered.  Commercial loans rated as nonaccrual or lower will first have a collateral evaluation completed in accordance with the guidance on impaired loans.  Once the collateral evaluation has been completed, a specific allocation of allowance is made based upon the results of the evaluation.  The balance remains a nonperforming loan with the original terms and interest rate intact (not restructured).  In the event the loan is unsecured, the loan would have been charged-off at the recognition of impairment.  Commercial real estate loans rated as impaired will also have an initial collateral evaluation completed in accordance with the guidance on impaired loans.  An updated real estate valuation is ordered and the collateral evaluation is modified to reflect any variation in value.  A specific allocation of allowance is made for any anticipated collateral shortfall.  The balance remains a nonperforming loan with the original terms and interest rate intact (not restructured).  The process of charge-off for residential mortgage loans begins upon a loan becoming delinquent for 90 days and not in the process of collection.  The existing appraisal is reviewed and a lien search is obtained to determine lien position and any instances of intervening liens.  A new appraisal of the property will be ordered if deemed necessary by management and a collateral evaluation is completed. The loan will then be charged down to the value indicated in the evaluation.  Consumer loans are recommended for charge-off after reaching delinquency of 90 days and the loan is not well-secured or otherwise not probable for 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 practically possible following the credit being classified as substandard nonaccrual.  Prior to receipt of the updated real estate valuation Mid Penn will use any existing real estate valuation to determine any potential allowance issues; however, no allowance recommendation will be made until such time Mid Penn is in receipt of the updated valuation.  The Asset Recovery department employs an electronic tracking system to monitor the receipt of and need for updated appraisals.  To date, there have been no material time lapses noted with the above processes.

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MID PENN BANCORP, INC.

 

 

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

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

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

Mid Penn had loans with an aggregate balance of $14,237,000 which were deemed by management to be impaired at June 30, 2020, including $1,785,000 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.  Of the $12,452,000 of impaired loan relationships excluding the loans acquired with credit deterioration, $1,210,000 were commercial and industrial relationships, $8,028,000 were commercial real estate relationships, $2,406,000 were home equity relationships, $776,000 were residential relationships, and $32,000 were commercial real estate – construction relationships.  There were specific loan loss reserve allocations of $190,000 against $902,000 of commercial real estate loan relationships and $53,000 of specific loan loss reserve allocations against $198,000 of commercial and industrial loan relationships.  Management currently believes that the specific reserves are adequate to cover probable future losses related to these relationships.

The allowance 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 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 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 (and the potential adverse impacts on the economy from the COVID-19 pandemic);

 

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, legal and regulatory requirements, governmental restrictions impacting business activity as a result of the COVID-19 pandemic, and other factors beyond the control of Mid Penn which could affect 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.

56


MID PENN BANCORP, INC.

 

 

While the allowance is maintained at a level believed to be adequate by management to provide for probable losses inherent in the loan and lease portfolio, determination of the allowance is inherently subjective, as it requires estimates, all of which may be susceptible to significant change.  The unallocated component of the allowance for loan and lease losses covers several considerations that are not specifically measurable through either the specific or general components. For example, we believe that we could face increasing credit risks and uncertainties, not yet 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, including the prospective unknown impacts of the COVID-19 pandemic.  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. Also, the unallocated component 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 don’t necessarily correlate to future loss trends, and unexpected changes to specific-credit or general portfolio future cash flows and collateral values which could negatively impact unimpaired portfolio loss factors. Changes from these various other uncertainties and considerations may impact the provisions charged to expense in future periods.

Management believes, based on information currently available, that the allowance for loan losses of $11,067,000 is adequate as of June 30, 2020 to cover specifically identifiable loan losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.

Liquidity

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

 

a growing core deposit base;

 

proceeds from the sale or maturity of investment securities;

 

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

 

payments received on loans and mortgage-backed securities;

 

overnight correspondent bank borrowings on various credit lines; and

 

borrowing capacity available from the FHLB, the Federal Reserve Discount Window, and other lines of credit currently available to Mid Penn.

The major sources of cash received in the first six months of 2020 were from the $413,919,000 net increase in deposits, $203,937,000 net increase in short-term borrowings, and $104,144,000 of proceeds from sales of mortgage loans originated for sale.

Major uses of cash in the first six months of 2020 were $684,579,000 to fund portfolio loan growth (primarily PPP commercial loans), $114,714,000 to fund mortgage loans originated for sale, and $80,880,000 to fund the purchase of held-to-maturity investment securities.

Mid Penn believes its core deposits are generally stable even in periods of changing interest rates.  Liquidity is measured and monitored daily, allowing management to better understand and react to balance sheet trends.  These measurements indicate that liquidity generally remains stable and exceeds our minimum defined levels of adequacy.  Other than the trends of continued competitive pressures and volatile interest rates, and the uncertain impact of the COVID-19 event, there are no known demands, commitments, events, or uncertainties that will result in, or that are reasonably likely to result in, liquidity increasing or decreasing in any material way.

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

Subordinated Debt

Subordinated Debt Issued March 2020

On March 20, 2020, Mid Penn entered into agreements with accredited investors who purchased $15,000,000 aggregate principal amount of Mid Penn’s Subordinated Notes due 2030 (the “2020 Notes”), on a private placement basis, to accredited investors.  The 2020 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes.

The 2020 Notes bear interest at a rate of 4.0% per year for the first five years and then float at the Wall Street Journal’s Prime Rate, provided that the interest rate applicable to the outstanding principal balance during the period the 2020 Notes are floating will at no time be less than 4.25%.  Interest will be payable semi-annually in arrears on June 30 and December 30 of each year, beginning on June 30, 2020, for the first five years after issuance and will be payable quarterly in arrears thereafter on March 30, June 30, September 30 and December 30.  The 2020 Notes will mature on March 30, 2030 and are redeemable in whole or in part, without premium or penalty, at any time on or after March 30, 2025 and prior to March 30, 2030.  Additionally, if all or any portion of the 2020 Notes cease to be deemed Tier 2 Capital, Mid Penn may redeem, on any interest payment date, all or part of the 2020 Notes.  In the event of a redemption described in the previous sentence, Mid Penn will redeem the 2020 Notes at 100% of the principal amount of the 2020 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption.  

57


MID PENN BANCORP, INC.

 

 

Holders of the 2020 Notes may not accelerate the maturity of the 2020 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar event of Mid Penn or Mid Penn Bank, its principal banking subsidiary. 

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 which is being amortized through interest expense until the maturity date of November 30, 2025. The First Priority 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 First Priority 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 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 is 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.  

Subordinated Debt Issued December 2015

On December 9, 2015, Mid Penn sold $7,500,000 aggregate principal amount of Subordinated Debt (the “2015 Notes”) due 2025.  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 time be less than 4.0%.  Interest is payable 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.

Regulatory Capital Changes

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.  The final rules implemented higher minimum capital requirements, added a new common equity Tier 1 capital requirement, and established criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital.  Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements, which amount must be greater than 2.5% of total risk-weighted assets.  


58


MID PENN BANCORP, INC.

 

 

A summary of the payout restrictions based on the capital conservation buffer is as follows:

 

Capital Conservation Buffer

(as a % of risk-weighted assets)

 

Maximum Payout

(as a % of eligible retained income)

 

> 2.5%

 

No payout limitation applies

 

≤2.5% and >1.875%

 

60%

 

≤1.875% and >1.25%

 

40%

 

≤1.25% and >0.625%

 

20%

 

≤0.625%

 

0%

 

 

The final rules 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.

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

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

Mid Penn has implemented these changes in determining and reporting the regulatory ratios of Mid Penn and the Bank, and has concluded that the new rules do not have a material adverse effect on Mid Penn’s financial condition.

Capital Resources

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

 

Shareholders’ equity increased by $5,471,000 or 2 percent from $237,874,000 as of December 31, 2019 to $243,345,000 as of June 30, 2020. The increase in shareholders’ equity reflects the growth in retained earnings through year-to-date net income, net of dividends paid.  Some of the increase was offset by the initiation of Mid Penn’s treasury stock repurchase program, resulting in a treasury stock balance of $1,560,000 as of June 30, 2020.  Regulatory capital ratios for both Mid Penn and its banking subsidiary exceeded regulatory “well-capitalized” levels at both June 30, 2020 and December 31, 2019.

 

Banks are evaluated for capital adequacy based on the ratio of capital to risk-weighted assets and total assets.  The minimum capital to risk-weighted assets requirements, including the capital conservation buffers, which became effective for Mid Penn and the Bank on January 1, 2016 are illustrated below.  At June 30, 2020, regulatory capital ratios for both Mid Penn and the Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective action, and exceeded the minimum capital requirements under Basel III.


59


MID PENN BANCORP, INC.

 

 

Mid Penn and Mid Penn Bank maintained the following regulatory capital levels, leverage ratios, and risk-based capital ratios as of June 30, 2020 and December 31, 2019:

 

Capital Adequacy

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To Be Well-Capitalized

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Under Prompt

 

 

 

 

 

 

 

 

 

 

Minimum Capital

 

 

Corrective

 

 

Actual:

 

 

Required:

 

 

Action Provisions:

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

Mid Penn Bancorp, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

174,941

 

 

 

6.6

%

 

$

105,830

 

 

 

4.0

%

 

N/A

 

 

N/A

 

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

174,941

 

 

 

9.5

%

 

 

129,072

 

 

 

7.0

%

 

N/A

 

 

N/A

 

Tier 1 Capital (to Risk Weighted Assets)

 

174,941

 

 

 

9.5

%

 

 

156,731

 

 

 

8.5

%

 

N/A

 

 

N/A

 

Total Capital (to Risk Weighted Assets)

 

228,094

 

 

 

12.4

%

 

 

193,608

 

 

 

10.5

%

 

N/A

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid Penn Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

193,774

 

 

 

7.3

%

 

$

105,805

 

 

 

4.0

%

 

$

132,256

 

 

 

5.0

%

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

193,774

 

 

 

10.5

%

 

 

128,993

 

 

 

7.0

%

 

 

119,779

 

 

 

6.5

%

Tier 1 Capital (to Risk Weighted Assets)

 

193,774

 

 

 

10.5

%

 

 

156,635

 

 

 

8.5

%

 

 

147,421

 

 

 

8.0

%

Total Capital (to Risk Weighted Assets)

 

214,418

 

 

 

11.6

%

 

 

193,490

 

 

 

10.5

%

 

 

184,276

 

 

 

10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid Penn Bancorp, Inc.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

168,146

 

 

 

7.8

%

 

$

86,773

 

 

 

4.00

%

 

N/A

 

 

N/A

 

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

168,146

 

 

 

9.8

%

 

 

120,020

 

 

 

7.00

%

 

N/A

 

 

N/A

 

Tier 1 Capital (to Risk Weighted Assets)

 

168,146

 

 

 

9.8

%

 

 

145,738

 

 

 

8.50

%

 

N/A

 

 

N/A

 

Total Capital (to Risk Weighted Assets)

 

204,811

 

 

 

11.9

%

 

 

180,030

 

 

 

10.50

%

 

N/A

 

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid Penn Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2019:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital (to Average Assets)

$

185,101

 

 

 

8.5

%

 

$

86,760

 

 

 

4.00

%

 

$

108,450

 

 

 

5.0

%

Common Equity Tier 1 Capital (to Risk Weighted Assets)

 

185,101

 

 

 

10.8

%

 

 

119,995

 

 

 

7.00

%

 

 

111,424

 

 

 

6.5

%

Tier 1 Capital (to Risk Weighted Assets)

 

185,101

 

 

 

10.8

%

 

 

145,708

 

 

 

8.50

%

 

 

137,137

 

 

 

8.0

%

Total Capital (to Risk Weighted Assets)

 

204,196

 

 

 

11.9

%

 

 

179,992

 

 

 

10.50

%

 

 

171,421

 

 

 

10.0

%

 

60


MID PENN BANCORP, INC.

 

 

ITEM 3 – 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 the table below, 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 June 30, 2020, all interest rate risk levels according to the model were within the tolerance limits of the Board-approved policy.

 

June 30, 2020

 

December 31, 2019

 

 

% Change in

 

 

 

 

 

 

% Change in

 

 

 

Change in

 

Net Interest

 

 

Policy

 

Change in

 

Net Interest

 

 

Policy

Basis Points

 

Income

 

 

Risk Limit

 

Basis Points

 

Income

 

 

Risk Limit

300

 

13.32%

 

 

≥ -20%

 

300

 

10.43%

 

 

≥ -20%

200

 

9.11%

 

 

≥ -15%

 

200

 

6.84%

 

 

≥ -15%

100

 

4.24%

 

 

≥ -10%

 

100

 

3.37%

 

 

≥ -10%

0

 

 

 

 

 

 

 

0

 

 

 

 

 

 

(100)

 

-4.30%

 

 

≥ -10%

 

(100)

 

-2.87%

 

 

≥ -10%

(200)

 

-9.39%

 

 

≥ -15%

 

(200)

 

-4.99%

 

 

≥ -15%

(300)

 

-14.46%

 

 

≥ -20%

 

(300)

 

-8.66%

 

 

≥ -20%

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Mid Penn maintains controls and procedures designed to ensure that information required to be disclosed in the reports that Mid Penn files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.  Based upon their evaluation of those controls and procedures as of June 30, 2020, Mid Penn’s management, with the participation of the Principal Executive Officer and Principal Financial Officer, concluded that the disclosure controls and procedures were effective as of such date.

Changes in Internal Controls

There were no changes in Mid Penn’s internal control over financial reporting that have materially affected, or are reasonable likely to materially affect, Mid Penn’s internal control over financial reporting during the six months ended June 30, 2020.

 

 

61


MID PENN BANCORP, INC.

 

 

PART II – OTHER INFORMATION

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

 

ITEM 1A – RISK FACTORS

Management has reviewed the risk factors that were previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2019, to determine if there were material changes applicable to the three and six months ended June 30, 2020.  There are no material changes to such risk factors, other than as described below.

Interest rate volatility stemming from COVID-19 could negatively affect our net interest income, lending activities, deposits and profitability.

Our net interest income, lending activities, deposits and profitability could be negatively affected by volatility in interest rates caused by uncertainties stemming from COVID-19. In March 2020, the Federal Reserve lowered the target range for the federal funds rate to a range from 0 to 0.25 percent, citing concerns about the impact of COVID-19 on markets and stress in the energy sector. A prolonged period of extremely volatile and unstable market conditions would likely increase our funding costs and negatively affect market risk mitigation strategies. Higher income volatility from changes in interest rates and spreads to benchmark indices could cause a loss of future net interest income and a decrease in current fair market values of our assets. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities and the market value of all interest-earning assets and interest-bearing liabilities, which in turn could have a material adverse effect on our net income, operating results, or financial condition.

For a more detailed description of these and other factors which would affect our results, please see Mid Penn’s filings with the SEC, including those risk factors identified in the "Risk Factors" section and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2019 and subsequent filings.

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

None

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 – MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5 – OTHER INFORMATION

None

ITEM 6 – EXHIBITS

 

Exhibit 3(i) – The Registrant’s amended Articles of Incorporation (Incorporated by reference to Exhibit 3(i) to Registrant’s Quarterly Report on Form 10-Q filed for the quarterly period ended June 30, 2019).

 

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

 

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

 

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

 

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

 

Exhibit 101.SCH – Inline XBRL Taxonomy Extension Schema Document

 

Exhibit 101.CAL – Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

Exhibit 101.DEF – Inline XBRL Taxonomy Extension Definition Linkbase Document

 

Exhibit 101.LAB – Inline XBRL Taxonomy Extension Label Linkbase Document

 

Exhibit 101.PRE – Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

Exhibit 104 – Cover Page Interactive Data File (formatted in inline XBRL and contained in Exhibit 101)

 

62


MID PENN BANCORP, INC.

 

 

SIGNATURES

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

 

 

 

Mid Penn Bancorp, Inc.

(Registrant)

 

 

 

By:

 

/s/ Rory G. Ritrievi

 

 

Rory G. Ritrievi

 

 

President and CEO

 

 

(Principal Executive Officer)

 

 

 

Date:

 

August 7, 2020

 

 

 

 

 

 

 

 

 

By:

 

/s/ Michael D. Peduzzi, CPA

 

 

Michael D. Peduzzi, CPA

 

 

Senior Executive Vice President and

Chief Financial Officer

 

 

 

Date:

 

August 7, 2020

 

 

63