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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, 2015

 

OR

 

 

 

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

 

For the transition period from              to             

 

Commission file number 1-13677

MID PENN BANCORP, INC.

(Exact Name of Registrant as Specified in its Charter)

  

 

 

 

 

 

 

Pennsylvania

 

25-1666413

(State or Other Jurisdiction of 

Incorporation or Organization) 

 

(I.R.S. Employer 

Identification Number) 

 

 

349 Union Street

Millersburg, Pennsylvania

 

17061

(Address of Principal Executive Offices) 

 

(Zip Code) 

 

Registrant’s telephone number, including area code 1.866.642.7736

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One).

Large accelerated filer       Accelerated Filer       Non-accelerated Filer       Smaller Reporting Company 

 

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes       No  

 

As of August 14, 2015, the registrant had 4,223,695 shares of common stock outstanding.

 

 


 

MID PENN BANCORP, INC.

FORM 10-Q

TABLE OF CONTENTS

 

 

 

 

 

 

PART 1 – FINANCIAL INFORMATION

2

 

Item 1 – Financial Statements

2

 

 

Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014 (Unaudited)

2

 

 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and June 30,  2014 (Unaudited)

3

 

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and June 30,  2014 (Unaudited)

4

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2015 and June 30,  2014 (Unaudited)

5

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2015 and June 30,  2014 (Unaudited)

6

 

 

Notes to Consolidated Financial Statements (Unaudited)

8

 

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

35

 

Item 3 – Quantitative and Qualitative Disclosures about Market Risk

46

 

Item 4 – Controls and Procedures

46

 

PART II – OTHER INFORMATION

47

 

Item 1 – Legal Proceedings

47

 

Item 1A – Risk Factors

47

 

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

47

 

Item 3 – Defaults upon Senior Securities

47

 

Item 4 – Mine Safety Disclosures

47

 

Item 5 – Other Information

47

 

Item 6 – Exhibits

47

 

Signatures

48

 

 

Unless the context otherwise requires, the terms “Mid Penn”, “we”, “us”, and “our” refer to Mid Penn Bancorp, Inc. and its consolidated subsidiaries

 

 

 

1


 

MID PENN BANCORP, INC.                                                                    Consolidated Balance Sheets (Unaudited)

 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

June 30, 2015

 

December 31, 2014

ASSETS

 

 

 

 

 

 Cash and due from banks

$

9,712 

 

$

8,869 

 Interest-bearing balances with other financial institutions

 

831 

 

 

1,013 

 Federal funds sold

 

838 

 

 

 -

   Total cash and cash equivalents

 

11,381 

 

 

9,882 

 Interest-bearing time deposits with other financial institutions

 

5,669 

 

 

5,772 

 Available for sale investment securities

 

137,198 

 

 

141,634 

 Loans and leases, net of unearned interest

 

705,152 

 

 

571,533 

   Less:  Allowance for loan and lease losses

 

(6,851)

 

 

(6,716)

 Net loans and leases

 

698,301 

 

 

564,817 

 Bank premises and equipment, net

 

14,344 

 

 

12,225 

 Restricted investment in bank stocks

 

3,824 

 

 

3,181 

 Foreclosed assets held for sale

 

767 

 

 

565 

 Accrued interest receivable

 

3,465 

 

 

3,058 

 Deferred income taxes

 

2,973 

 

 

2,125 

 Goodwill

 

3,918 

 

 

1,016 

 Core deposit and other intangibles, net

 

735 

 

 

187 

 Cash surrender value of life insurance

 

12,375 

 

 

8,575 

 Other assets

 

4,392 

 

 

2,620 

      Total Assets

$

899,342 

 

$

755,657 

LIABILITIES & SHAREHOLDERS’ EQUITY

 

 

 

 

 

 Deposits:

 

 

 

 

 

   Noninterest bearing demand

$

85,097 

 

$

60,613 

   Interest bearing demand

 

234,702 

 

 

222,712 

   Money Market

 

217,914 

 

 

197,418 

   Savings

 

58,048 

 

 

32,394 

   Time

 

158,164 

 

 

124,785 

       Total Deposits 

 

753,925 

 

 

637,922 

 Short-term borrowings

 

14,981 

 

 

578 

  Long-term debt

 

51,421 

 

 

52,961 

  Accrued interest payable

 

541 

 

 

349 

  Other liabilities

 

5,089 

 

 

4,717 

     Total Liabilities

 

825,957 

 

 

696,527 

 Shareholders' Equity:

 

 

 

 

 

   Series B Preferred stock, par value $1.00; liquidation value $1,000; authorized 5,000 shares;

 

 

 

 

 

       7% non-cumulative dividend; 5,000 shares issued and outstanding at June 30, 2015 and

 

 

 

 

 

       at December 31, 2014; total redemption value $5,100,000

 

5,000 

 

 

5,000 

   Series C Preferred stock, par value $1.00; liquidation value $1,000; authorized 1,750 shares;

 

 

 

 

 

       1% non-cumulative dividend; 1,750 shares issued and outstanding at June 30, 2015 and

 

 

 

 

 

       0 shares issued and outstanding at December 31, 2014; total redemption value $1,750,000

 

1,750 

 

 

 -

   Common stock, par value $1.00; authorized 10,000,000 shares; 4,223,695 shares

 

 

 

 

 

       issued and outstanding at June 30, 2015 and 3,497,829 at December 31, 2014

 

4,224 

 

 

3,498 

   Additional paid-in capital

 

40,507 

 

 

29,902 

   Retained earnings

 

21,273 

 

 

19,217 

   Accumulated other comprehensive income

 

631 

 

 

1,513 

 Total Shareholders’ Equity

 

73,385 

 

 

59,130 

       Total Liabilities and Shareholders' Equity

$

899,342 

 

$

755,657 

 

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

 

 

 

2


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2015

 

2014

 

2015

 

2014

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

Interest & fees on loans and leases

$

8,743 

 

$

6,925 

 

$

15,897 

 

$

13,465 

Interest on interest-bearing balances

 

11 

 

 

10 

 

 

22 

 

 

20 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and government agencies

 

304 

 

 

358 

 

 

635 

 

 

635 

State and political subdivision obligations, tax-exempt

 

517 

 

 

536 

 

 

1,048 

 

 

1,055 

Other securities

 

68 

 

 

41 

 

 

199 

 

 

75 

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

 

 

 

 -

 

 

 

 

 -

Total Interest Income 

 

9,644 

 

 

7,870 

 

 

17,802 

 

 

15,250 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

980 

 

 

990 

 

 

1,894 

 

 

1,968 

Interest on short-term borrowings

 

11 

 

 

 

 

22 

 

 

21 

Interest on long-term debt

 

167 

 

 

122 

 

 

362 

 

 

238 

Total Interest Expense 

 

1,158 

 

 

1,119 

 

 

2,278 

 

 

2,227 

Net Interest Income 

 

8,486 

 

 

6,751 

 

 

15,524 

 

 

13,023 

PROVISION FOR LOAN AND LEASE LOSSES

 

300 

 

 

275 

 

 

600 

 

 

822 

Net Interest Income After Provision for Loan and Lease Losses

 

8,186 

 

 

6,476 

 

 

14,924 

 

 

12,201 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

Income from fiduciary activities

 

120 

 

 

167 

 

 

247 

 

 

325 

Service charges on deposits

 

167 

 

 

136 

 

 

317 

 

 

263 

Net gain on sales of investment securities

 

 -

 

 

 -

 

 

177 

 

 

150 

Earnings from cash surrender value of life insurance

 

71 

 

 

51 

 

 

127 

 

 

102 

Mortgage banking income

 

153 

 

 

75 

 

 

220 

 

 

113 

ATM debit card interchange income

 

196 

 

 

139 

 

 

351 

 

 

265 

Merchant services income

 

61 

 

 

66 

 

 

111 

 

 

133 

Net gain on sales of SBA loans

 

143 

 

 

27 

 

 

143 

 

 

78 

Other income

 

182 

 

 

113 

 

 

349 

 

 

239 

Total Noninterest Income 

 

1,093 

 

 

774 

 

 

2,042 

 

 

1,668 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

3,440 

 

 

2,843 

 

 

6,760 

 

 

5,391 

Occupancy expense, net

 

496 

 

 

322 

 

 

950 

 

 

704 

Equipment expense

 

422 

 

 

310 

 

 

735 

 

 

611 

Pennsylvania Bank Shares tax expense

 

116 

 

 

109 

 

 

231 

 

 

208 

FDIC Assessment

 

165 

 

 

139 

 

 

304 

 

 

271 

Legal and professional fees

 

161 

 

 

168 

 

 

304 

 

 

265 

Director fees and benefits expense

 

92 

 

 

76 

 

 

175 

 

 

155 

Marketing and advertising expense

 

147 

 

 

84 

 

 

235 

 

 

132 

Software licensing

 

404 

 

 

212 

 

 

723 

 

 

449 

Telephone expense

 

140 

 

 

100 

 

 

263 

 

 

196 

(Gain) loss on sale/write-down of foreclosed assets

 

(15)

 

 

(30)

 

 

17 

 

 

57 

Intangible amortization

 

26 

 

 

 

 

35 

 

 

14 

Loan collection costs

 

88 

 

 

82 

 

 

168 

 

 

153 

Merger and acquisition expense

 

 -

 

 

 -

 

 

784 

 

 

 -

Other expenses

 

960 

 

 

646 

 

 

1,598 

 

 

1,200 

Total Noninterest Expense 

 

6,642 

 

 

5,068 

 

 

13,282 

 

 

9,806 

INCOME BEFORE PROVISION FOR INCOME TAXES

 

2,637 

 

 

2,182 

 

 

3,684 

 

 

4,063 

Provision for income taxes

 

593 

 

 

475 

 

 

677 

 

 

845 

NET INCOME

 

2,044 

 

 

1,707 

 

 

3,007 

 

 

3,218 

Series B preferred stock dividends

 

88 

 

 

88 

 

 

175 

 

 

175 

Series C preferred stock dividend

 

 

 

 -

 

 

 

 

 -

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

$

1,952 

 

$

1,619 

 

$

2,828 

 

$

3,043 

 

 

 

 

 

 

 

 

 

 

 

 

PER COMMON SHARE DATA:

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per Common Share

$

0.46 

 

$

0.46 

 

$

0.71 

 

$

0.87 

Cash Dividends

$

0.10 

 

$

0.10 

 

$

0.20 

 

$

0.15 

 

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

 

 

3


 

MID PENN BANCORP, INC.                            Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Three Months Ended June 30,

 

2015

 

2014

 

 

 

 

 

 

Net income

$

2,044 

 

$

1,707 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains arising during the period on available for sale

 

 

 

 

 

securities, net of income taxes of ($642) and $532, respectively

 

(1,245)

 

 

1,031 

 

 

 

 

 

 

Change in defined benefit plans, net of income taxes of $1 and $2, respectively   (2) (3)

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

(1,243)

 

 

1,035 

 

 

 

 

 

 

Total comprehensive income

$

801 

 

$

2,742 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Six Months Ended June 30,

 

2015

 

2014

 

 

 

 

 

 

Net income

$

3,007 

 

$

3,218 

 

 

 

 

 

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

Unrealized (losses) gains arising during the period on available for sale

 

 

 

 

 

securities, net of income taxes of ($398) and $1,131, respectively

 

(770)

 

 

2,193 

 

 

 

 

 

 

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

 

 

 

 

 

included in net income, net of income taxes of ($60) and ($51), respectively   (1) (3)

 

(117)

 

 

(99)

 

 

 

 

 

 

Change in defined benefit plans, net of income taxes of $2 and $3, respectively   (2) (3)

 

 

 

 

 

 

 

 

 

Total other comprehensive (loss) income

 

(882)

 

 

2,100 

 

 

 

 

 

 

Total comprehensive income

$

2,125 

 

$

5,318 

 

 

 

 

(1)

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

 

(2)

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

 

(3)

Income tax amounts are included in the provision for income taxes in the Consolidated Statements of Income

 

 

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

 

 

 

 

4


 

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

FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

Preferred

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Shareholders'

 

Stock

 

Stock

 

Capital

 

Earnings

 

Income (Loss)

 

Equity

Balance, January 1, 2015

$

5,000 

 

$

3,498 

 

$

29,902 

 

$

19,217 

 

$

1,513 

 

$

59,130 

   Net income

 

 -

 

 

 -

 

 

 -

 

 

3,007 

 

 

 -

 

 

3,007 

   Total other comprehensive loss, net of taxes

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(882)

 

 

(882)

   Employee Stock Purchase Plan (1,002 shares)

 

 -

 

 

 

 

29 

 

 

 -

 

 

 -

 

 

31 

   Common stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(772)

 

 

 -

 

 

(772)

   Series B preferred stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(175)

 

 

 -

 

 

(175)

   Series C preferred stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(4)

 

 

 -

 

 

(4)

   SBLF preferred stock in connection with Phoenix acquisition

 

1,750 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,750 

   Common stock issued to Phoenix shareholders

 

 -

 

 

724 

 

 

10,568 

 

 

 -

 

 

 -

 

 

11,292 

   Restricted stock compensation expense

 

 -

 

 

 -

 

 

 

 

 -

 

 

 -

 

 

Balance, June 30, 2015

$

6,750 

 

$

4,224 

 

$

40,507 

 

$

21,273 

 

$

631 

 

$

73,385 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2014

$

5,000 

 

$

3,494 

 

$

29,853 

 

$

15,441 

 

$

(872)

 

$

52,916 

   Net income

 

 -

 

 

 -

 

 

 -

 

 

3,218 

 

 

 -

 

 

3,218 

   Total other comprehensive income, net of taxes

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

2,100 

 

 

2,100 

   Employee Stock Purchase Plan (1,657 shares)

 

 -

 

 

 

 

23 

 

 

 -

 

 

 -

 

 

25 

   Common stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(524)

 

 

 -

 

 

(524)

   Series B preferred stock dividends

 

 -

 

 

 -

 

 

 -

 

 

(175)

 

 

 -

 

 

(175)

Balance, June 30, 2014

$

5,000 

 

$

3,496 

 

$

29,876 

 

$

17,960 

 

$

1,228 

 

$

57,560 

 

 

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

 

 

5


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Six Months Ended June 30,

 

2015

 

2014

Operating Activities:

 

 

 

 

 

   Net Income

$

3,007 

 

$

3,218 

   Adjustments to reconcile net income to net cash

 

 

 

 

 

       provided by operating activities:

 

 

 

 

 

           Provision for loan and lease losses

 

600 

 

 

822 

           Depreciation

 

708 

 

 

624 

           Amortization of intangibles

 

30 

 

 

19 

           Net amortization (accretion) of security premiums

 

1,905 

 

 

(441)

   Gain on sales of investment securities

 

(177)

 

 

(150)

           Earnings on cash surrender value of life insurance

 

(127)

 

 

(102)

           SBA loans originated for sale

 

(1,897)

 

 

(733)

           Proceeds from sales of SBA loans originated for sale

 

2,040 

 

 

811 

           Gain on sale of loans

 

(143)

 

 

(78)

           Loss on disposal of property, plant, and equipment

 

 -

 

 

           Loss on sale / write-down of foreclosed assets

 

17 

 

 

57 

           Restricted stock compensation expense

 

 

 

 -

           Deferred income tax expense

 

69 

 

 

158 

           Increase in accrued interest receivable

 

(19)

 

 

(183)

           Increase in other assets

 

(1,148)

 

 

(409)

           Increase in accrued interest payable

 

160 

 

 

207 

           (Decrease) increase in other liabilities

 

(504)

 

 

933 

Net Cash Provided By Operating Activities 

 

4,529 

 

 

4,756 

Investing Activities:

 

 

 

 

 

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

 

103 

 

 

1,641 

    Proceeds from the maturity of investment securities

 

4,964 

 

 

6,644 

    Proceeds from the sale of investment securities

 

16,091 

 

 

7,199 

   Purchases of investment securities

 

(8,312)

 

 

(30,111)

   Net cash received from acquisition

 

8,095 

 

 

 -

   (Purchases) redemptions of restricted investment in bank stock

 

(134)

 

 

240 

   Net increase in loans and leases

 

(24,202)

 

 

(3,840)

   Purchases of bank premises and equipment

 

(1,035)

 

 

(673)

   Proceeds from sale of foreclosed assets

 

262 

 

 

503 

Net Cash Used In Investing Activities 

 

(4,168)

 

 

(18,397)

Financing Activities:

 

 

 

 

 

   Net (decrease) increase in deposits

 

(7,235)

 

 

23,875 

    Net increase (decrease) in short-term borrowings

 

14,403 

 

 

(16,213)

   Series B preferred stock dividends paid

 

(175)

 

 

(175)

   Series C preferred stock dividend paid

 

(4)

 

 

 -

   Common stock dividends paid

 

(772)

 

 

(524)

Employee Stock Purchase Plan

 

31 

 

 

25 

   Proceeds from long-term debt borrowings

 

 -

 

 

10,000 

   Long-term debt repayment

 

(5,110)

 

 

(91)

Net Cash Provided By Financing Activities 

 

1,138 

 

 

16,897 

Net increase in cash and cash equivalents

 

1,499 

 

 

3,256 

Cash and cash equivalents, beginning of year

 

9,882 

 

 

8,623 

Cash and cash equivalents, end of year

$

11,381 

 

$

11,879 

 

 

6


 

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

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

 

   Interest paid

$

2,086 

 

$

2,020 

   Income taxes paid

$

630 

 

$

870 

 

 

 

 

 

 

Supplemental Noncash Disclosures:

 

 

 

 

 

   Loan transfers to foreclosed assets held for sale

$

481 

 

$

678 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets, Liabilities, and Equity in Connection with Merger:

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Assets Acquired:

 

 

 

 

 

Securities

$

11,331 

 

$

 -

Loans

 

110,363 

 

 

 -

Restricted stock

 

509 

 

 

 -

Property and equipment

 

1,792 

 

 

 -

Accrued interest receivable

 

388 

 

 

 -

Core deposit and other intangible assets

 

578 

 

 

 -

Cash surrender value of life insurance

 

3,673 

 

 

 -

Other assets

 

1,127 

 

 

 -

 

$

129,761 

 

$

 -

 

 

 

 

 

 

       Liabilities Assumed:

 

 

 

 

 

Deposits

$

123,238 

 

$

 -

Accrued interest payable

 

32 

 

 

 -

Long-term debt

 

3,570 

 

 

 -

Other liabilities

 

876 

 

 

 -

 

$

127,716 

 

$

 -

 

 

 

 

 

 

       Equity Acquired:

 

 

 

 

 

Preferred stock

$

1,750 

 

$

 -

 

 

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

 

 

 

7


 

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

(1)          Basis of Presentation

 

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

 

Certain information and footnote 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 June 30,  2014 and December 31, 2014 balances have been reclassified to conform to the 2015 presentation.  Such reclassifications had no impact on net income. The results of operations for interim periods are not necessarily indicative of operating results expected for the full year.  These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

 

Mid Penn has evaluated events and transactions occurring subsequent to the balance sheet date of June 30, 2015, for items that should potentially be recognized or disclosed in these consolidated financial statements.  The evaluation was conducted through the date these consolidated financial statements were issued.

 

 

(2)           Merger

 

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

 

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

 

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

 

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

 

Included in the purchase price was goodwill and a core deposit intangible of $2,902,000 and $578,000, respectively.  The core deposit intangible will be amortized over a ten-year period using a sum of the year’s digits basis.  The goodwill will not be amortized, but will be measured annually for impairment or more frequently if circumstances require.  Core deposit intangible amortization expense projected for the succeeding five years beginning 2015 is estimated to be $88,000, $96,000, $86,000, $75,000, and $65,000 per year, respectively, and $168,000 in total for years after 2019.

 

 

8


 

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

The allocation of the purchase price is as follows:

 

 

 

 

 

(Dollars in thousands)

 

Purchase price assigned to Phoenix common shares exchanged for 723,851 Mid Penn common shares

$

11,292 

Purchase price assigned to Phoenix common shares exchanged for cash

 

2,949 

Total purchase price

 

14,241 

Phoenix net assets acquired:

 

 

Tangible Common Equity

 

12,292 

Estimated adjustments to reflect assets acquired and liabilities assumed at fair value:

 

 

Total fair value adjustments

 

(1,456)

Associated deferred income taxes

 

503 

Fair value adjustment to net assets acquired, net of tax

 

(953)

Total Phoenix net assets acquired

 

11,339 

Goodwill resulting from the merger

$

2,902 

 

While Mid Penn believes that the accounting for the merger is complete, Accounting Standards Codification (“ASC”) Topic 805, Business Combinations, allows for adjustments to goodwill for a period of up to one year after the merger date for information that becomes available that reflects circumstances at the merger date.  Adjustments to certain amounts associated with the merger were made during the current quarter and were not considered significant.  The following table summarizes the estimated fair value of the assets acquired and liabilities and equity assumed.

 

 

 

 

 

(Dollars in thousands)

 

Total purchase price

$

14,241 

 

 

 

Net assets acquired:

 

 

Cash and cash equivalents

 

11,044 

Investment securities

 

11,331 

Restricted stock

 

509 

Loans

 

110,363 

Bank owned life insurance

 

3,673 

Premises and equipment

 

1,792 

Accrued interest receivable

 

388 

Core deposit and other intangibles

 

578 

Other assets

 

1,127 

Deposits

 

(123,238)

FHLB borrowings

 

(3,570)

Accrued interest payable

 

(32)

Other liabilities

 

(876)

Preferred stock

 

(1,750)

 

 

11,339 

Goodwill

$

2,902 

 

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

 

 

 

 

 

(Dollars in thousands)

 

Gross amortized cost basis at March 1, 2015

$

112,816 

Market rate adjustment

 

270 

Credit fair value adjustment on pools of homogeneous loans

 

(1,461)

Credit fair value adjustment on impaired loans

 

(1,262)

Fair value of purchased loans at March 1, 2015

$

110,363 

 

The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the stated rates of the acquired loans.  The credit adjustment made on pools of homogeneous loans represents the changes in credit quality of the

 

9


 

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

underlying borrowers from the loan inception to the acquisition date.  The credit adjustment on impaired loans is derived in accordance with ASC 310-30-30 and represents the portion of the loan balance that has been deemed uncollectible based on our expectations of future cash flows for each respective loan.

 

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

 

 

 

 

 

(Dollars in thousands)

 

Contractually required principal and interest at acquisition

$

3,548 

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

 

(804)

Expected cash flows at acquisition

 

2,744 

Interest component of expected cash flows (accretable discount)

 

(458)

Fair value of acquired loans

$

2,286 

 

The following table presents pro forma information as if the merger between Mid Penn and Phoenix had been completed on January 1, 2014.  The pro forma information does not necessarily reflect the results of operations that would have occurred had Mid Penn merged with Phoenix at the beginning of 2014.  Supplemental pro forma earnings for 2015 were adjusted to exclude $784,000 of merger related costs incurred in the first three and six months of 2015; the results for the first three and six months of 2014 were adjusted to include these charges.  The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies, or other factors.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands, except per share data)

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2015

 

2014

 

2015

 

2014

Net interest income after loan loss provision

$

8,186 

 

$

7,768 

 

$

15,560 

 

$

14,818 

Noninterest income

 

1,093 

 

 

948 

 

 

2,107 

 

 

2,077 

Noninterest expense

 

6,642 

 

 

5,141 

 

 

13,582 

 

 

12,564 

Net income available to common shareholders

 

1,952 

 

 

2,625 

 

 

3,152 

 

 

3,244 

Net income per common share

 

0.46 

 

 

0.62 

 

 

0.75 

 

 

0.77 

 

The amount of total revenue, consisting of interest income plus noninterest income specifically related to Phoenix for the period beginning March 1, 2015, included in the consolidated statements of income of Mid Penn for the three and six months ended June 30, 2015, was $1,333,000 and $1,828,000, respectively.  The net income specifically related to Phoenix for the period beginning March 1, 2015, included in the consolidated statements of income of Mid Penn for the three and six months ended June 30, 2015, was $247,000 and $297,000, respectively.

 

 

(3)           Investment Securities

 

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

 

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

 

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

 

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

 

10


 

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

earnings.  The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

 

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

 

At June 30, 2015 and December 31, 2014, amortized cost, fair value, and unrealized gains and losses on investment securities are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

Value

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

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

$

26,330 

 

$

646 

 

$

 

$

26,967 

Mortgage-backed U.S. government agencies

 

34,374 

 

 

192 

 

 

197 

 

 

34,369 

State and political subdivision obligations

 

73,106 

 

 

1,266 

 

 

788 

 

 

73,584 

Equity securities

 

2,271 

 

 

84 

 

 

77 

 

 

2,278 

 

$

136,081 

 

$

2,188 

 

$

1,071 

 

$

137,198 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Cost

 

Gains

 

Losses

 

Value

December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities:

 

 

 

 

 

 

 

 

 

 

 

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

$

26,343 

 

$

752 

 

$

29