UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2008
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 001-13677
MID PENN BANCORP, INC.
----------------------
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 25-1666413
------------ ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
349 Union Street
Millersburg, Pennsylvania 17061
------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(717) 692-2133
--------------
(Registrant's Telephone Number, Including Area Code)
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 [X] 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 "accelerated filer, large accelerated filer and smaller reporting
company" in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes [ ] No [X]
As of August 1, 2008, there were 3,479,780 shares of the registrant's common
stock outstanding, par value $1.00 per share.
MID PENN BANCORP, INC.
INDEX
PAGE
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PART I - FINANCIAL INFORMATION
---------------------
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets............................................ 1
Consolidated Statements of Income...................................... 2 - 3
Consolidated Statements of Cash Flows.................................. 4 - 5
Notes to Consolidated Financial Statements............................. 5 - 10
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 11 - 19
Item 3 - Quantitative and Qualitative Disclosures about Market Risk............. 19
Item 4 - Controls and Procedures................................................ 20
PART II - OTHER INFORMATION
-----------------
Item 1 - Legal Proceedings ..................................................... 20
Item 1A - Risk Factors........................................................... 20
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds............ 20
Item 3 - Defaults upon Senior Securities........................................ 20
Item 4 - Submission of Matters to a Vote of Security Holders.................... 21
Item 5 - Other Information...................................................... 21
Item 6 - Exhibits............................................................... 21 - 22
Signature Page.......................................................................... 23
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............................................. 24
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............................................. 25
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.................................. 26
UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERMS "MID PENN," "WE," "US," AND
"OUR" REFER TO MID PENN BANCORP, INC. AND ITS CONSOLIDATED SUBSIDIARIES.
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MID PENN BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data) June 30, 2008 December 31, 2007
------------- -----------------
(Unaudited) (Audited)
ASSETS
Cash and due from banks $ 10,667 $ 10,599
Interest-bearing balances with other financial
institutions 57,742 46,830
Available-for-sale investment securities 49,879 54,072
Federal funds sold -- --
Loans and leases 402,454 378,741
Less: Unearned Income (1,344) (1,613)
Allowance for loan and lease losses (5,024) (4,790)
------------- -----------------
Net loans and leases 396,086 372,338
------------- -----------------
Bank premises and equipment, net 10,789 10,638
Foreclosed assets held for sale 495 529
Accrued interest receivable 2,641 2,818
Deferred income taxes 2,374 2,053
Goodwill 1,016 1,016
Core deposit intangible, net 330 362
Cash surrender value of life insurance 7,295 6,961
Other assets 1,385 1,541
------------- -----------------
Total Assets $ 540,699 $ 509,757
============= =================
LIABILITIES & STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing demand $ 47,525 $ 46,478
Interest-bearing demand 37,040 36,627
Money Market 65,700 62,596
Savings 25,682 24,844
Time 226,603 202,272
------------- -----------------
Total Deposits 402,550 372,817
Short-term borrowings 35,809 37,349
Accrued interest payable 3,003 1,990
Other liabilities 3,516 2,576
Long-term debt 55,303 54,581
------------- -----------------
Total Liabilities 500,181 469,313
Stockholders' Equity:
Common stock, par value $1 per share;
authorized 10,000,000 shares; 3,533,340
shares issued at June 30, 2008 and
December 31, 2007, respectively 3,533 3,533
Additional paid-in capital 31,107 31,107
Retained earnings 7,222 6,660
Accumulated other comprehensive income 48 284
Treasury stock, at cost (53,560 and 43,706
shares at June 30, 2008 and December 31,
2007, respectively) (1,392) (1,140)
------------- -----------------
Stockholders' Equity, Net 40,518 40,444
------------- -----------------
Total Liabilities and Stockholders' Equity $ 540,699 $ 509,757
============= =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
1
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,
--------------------------- -------------------------
2008 2007 2008 2007
------------ ------------ ----------- -----------
INTEREST INCOME
Interest & fees on loans and leases $ 6,531 $ 6,521 $ 13,308 $ 12,936
Interest on interest-bearing balances 696 631 1,369 1,257
Interest and dividends on investment
securities:
U.S. Treasury and government agencies 206 239 437 498
State and political subdivision
obligations, tax-exempt 318 332 663 660
Other securities 35 49 86 101
Interest on federal funds sold and
securities purchased under agreements to
resell -- 8 -- 33
--------------------------- -------------------------
Total Interest Income 7,786 7,780 15,863 15,485
--------------------------- -------------------------
INTEREST EXPENSE
Interest on deposits 2,794 2,893 5,781 5,692
Interest on short-term borrowings 163 145 425 344
Interest on long-term debt 682 728 1,309 1,457
--------------------------- -------------------------
Total Interest Expense 3,639 3,766 7,515 7,493
--------------------------- -------------------------
Net Interest Income 4,147 4,014 8,348 7,992
PROVISION FOR LOAN AND LEASE LOSSES 155 125 255 200
--------------------------- -------------------------
Net Interest Income After Provision for Loan
and Lease Losses 3,992 3,889 8,093 7,792
--------------------------- -------------------------
NONINTEREST INCOME
Trust department income 68 75 135 156
Service charges on deposits 437 365 845 732
Investment securities gains (losses), net -- -- -- --
Income on bank-owned life insurance 65 66 127 135
Mortgage banking income 42 21 81 21
Other income 289 330 606 650
--------------------------- -------------------------
Total Noninterest Income 901 857 1,794 1,694
--------------------------- -------------------------
NONINTEREST EXPENSE
Salaries and employee benefits 1,794 1,601 3,611 3,324
Occupancy expense, net 239 222 528 438
Equipment expense 203 200 426 418
Pennsylvania Bank Shares tax expense 92 82 184 163
ATM and debit card processing expense 70 62 111 109
Professional fees 156 128 296 240
Director fees and benefits expense 90 100 168 193
Advertising expense 103 142 182 226
Computer expense 111 85 249 234
Stationery and supplies expense 55 55 127 117
Other expenses 560 513 1,035 1,019
--------------------------- -------------------------
Total Noninterest Expense 3,473 3,190 6,917 6,481
--------------------------- -------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1,420 1,556 2,970 3,005
Provision for income taxes 360 377 737 742
--------------------------- -------------------------
NET INCOME $ 1,060 $ 1,179 $ 2,233 $ 2,263
=========================== =========================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS
2
MID PENN BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - CONTINUED
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2008 2007 2008 2007
------------ ------------ ----------- -----------
PER SHARE INFORMATION
Net Income $ 0.30 $ 0.34 $ 0.64 $ 0.65
Cash Dividends $ 0.20 $ 0.20 $ 0.40 $ 0.40
Weighted Average Number of Shares Outstanding 3,484,073 3,496,680 3,486,449 3,502,667
3
MID PENN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands) For the Six Months Ended June 30,
----------------------------------
2008 2007
--------------- ----------------
Operating Activities:
Net Income $ 2,233 $ 2,263
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses 255 200
Depreciation 411 387
Amortization of core deposit intangible 32 66
Increase in cash surrender value of life insurance (334) (135)
Loss on sale of other real estate 32 21
(Gain) on sale of loans -- (21)
Deferred income taxes (199) 93
Change in accrued interest receivable 177 61
Change in other assets 156 (512)
Change in accrued interest payable 1,013 819
Change in other liabilities 664 (123)
----------------------------------
Net Cash Provided By Operating Activities 4,440 3,119
----------------------------------
Investing Activities:
Net (increase) decrease in interest-bearing balances (10,912) 570
Proceeds from the maturity of investment securities 14,544 5,306
Proceeds from the sale of investment securities -- --
Purchases of investment securities (10,709) (2,071)
Net increase in loans and leases (24,053) (5,763)
Purchases of bank premises and equipment (562) (1,620)
Proceeds from sale of foreclosed assets 52 137
----------------------------------
Net Cash Used In Investing Activities (31,640) (3,441)
----------------------------------
Financing Activities:
Net increase in demand deposits and savings accounts 5,417 4,760
Net increase in time deposits 24,316 4,375
Net decrease in short-term borrowings (1,540) (4,525)
Cash dividend paid (1,395) (1,374)
Long-term debt repayment (15,073) (5,065)
Purchase of treasury stock (252) (385)
Increase in long-term borrowings 15,795 --
----------------------------------
Net Cash Provided By (Used In) Financing Activities 27,268 (2,214)
----------------------------------
Net increase (decrease) in cash and due from banks 68 (2,536)
Cash and due from banks, beginning of period 10,599 9,498
----------------------------------
Cash and due from banks, end of period $ 10,667 $ 6,962
==================================
4
MID PENN BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
(Dollars in thousands) For the Six Months Ended June 30,
---------------------------------
2008 2007
--------------- ---------------
Supplemental Disclosures of Cash Flow Information:
Interest paid $ 6,502 $ 6,674
Income taxes paid $ 870 $ 880
Supplemental Noncash Disclosures:
Loan chargeoffs $ 87 $ 164
Transfers to foreclosed assets held for sale $ 50 $ 80
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
MID PENN BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements for 2008 and 2007 include the accounts of
Mid Penn Bancorp ("Mid Penn"), its subsidiaries Mid Penn Bank (the "Bank"), Mid
Penn Insurance Services, LLC, and Mid Penn Investment Corporation (collectively
the "Corporation"). 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"). We believe the information presented is not misleading and the
disclosures are adequate. The financial information included herein, with the
exception of the consolidated balance sheet dated December 31, 2007, is
unaudited; however, such information reflects all adjustments (consisting only
of normal recurring accruals and adjustments) necessary to present fairly our
financial position, results of operations and cash flows for the interim
periods. 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
financial statements and notes thereto included in Mid Penn's Annual Report on
Form 10-K for the year ended December 31, 2007, and with Mid Penn's Forms 8-K,
that were filed during 2008 with the SEC.
2. USE OF ESTIMATES
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates. A material
estimate that is particularly susceptible to significant change relates to the
determination of the allowance for loan and lease losses.
5
3. SHORT-TERM BORROWINGS
Short-term borrowings as of June 30, 2008, and December 31, 2007 consisted of:
(Dollars in thousands)
June 30, 2008 December 31, 2007
----------------- -----------------
Federal funds purchased $ 27,000 $ 29,600
Securities sold under repurchase agreements 8,002 7,156
Treasury tax and loan note 807 593
----------------- -----------------
$ 35,809 $ 37,349
================= =================
Federal funds purchased represent overnight funds. Securities sold under
repurchase agreements generally mature between one day and one year. Treasury
tax and loan notes are open-ended interest bearing notes payable to the U.S.
Treasury upon call. All tax deposits accepted by the Bank are placed in the
Treasury note option account.
4. LONG-TERM DEBT
During the quarter ended June 30, 2008, Mid Penn Bank entered into three
long-term borrowings with the Federal Home Loan Bank of Pittsburgh. The details
of these arrangements are as follows:
Amount Type Rate Maturity
------------ ----------------- ----- ---------
$ 5,000,000 Fixed Rate Bullet 4.15% 4/25/2013
$ 5,000,000 Fixed Rate Bullet 4.18% 5/1/2015
$ 5,000,000 Fixed Rate Bullet 3.90% 5/8/2013
5. 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 has other postretirement benefit plans covering full-time employees.
These health care and life insurance plans are noncontributory. A December 31
measurement date for our plans is used.
The components of net periodic benefit costs from these benefit plans are as
follows:
Six months ended June 30:
-------------------------------------------------
(Dollars in thousands) Pension Benefits Other Benefits
------------------------ -----------------------
2008 2007 2008 2007
----------- ----------- ---------- ----------
Service cost $ 24 $ 20 $ 12 $ 12
Interest cost 18 16 30 30
Amortization of transition obligation 8 8 -- --
Amortization of prior service cost -- -- 10 14
Amortization of net gain (2) (4) -- --
------------------------ -----------------------
Net periodic benefit cost $ 48 $ 40 $ 52 $ 56
======================== =======================
6
6. EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding during each of the periods
presented, giving retroactive effect to stock dividends and splits. The basic
and diluted earnings per share are the same since there are no potentially
dilutive securities outstanding.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2008 2007 2008 2007
------------ ------------ ------------ ------------
Net Income $ 1,060,000 $ 1,179,000 $ 2,233,000 $ 2,263,000
Weighted average number of
common shares outstanding 3,484,073 3,496,680 3,486,449 3,502,667
--------------------------- ---------------------------
Basic earnings per share $ 0.30 $ 0.34 $ 0.64 $ 0.65
=========================== ===========================
7. COMPREHENSIVE INCOME
The purpose of reporting comprehensive income (loss) is to report a measure of
all changes in Mid Penn's equity resulting from economic events other than
transactions with stockholders in their capacity as stockholders. For Mid Penn,
comprehensive income (loss) includes traditional income statement amounts as
well as unrealized gains and losses on certain investments in debt and equity
securities (i.e. available-for-sale securities). Because unrealized gains and
losses are part of comprehensive income (loss), comprehensive income (loss) may
vary substantially between reporting periods due to fluctuations in the market
prices of securities held. Other comprehensive income also includes a pension
component in accordance with Financial Accounting Standards Board No. 158. The
components of comprehensive income, and the related tax effects, are as follows:
(Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
---------------------------- --------------------------
2008 2007 2008 2007
------------- ------------- ------------ ------------
NET INCOME $ 1,060 $ 1,179 $ 2,233 $ 2,263
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized holding gains (losses) on available-for-sale
investment securities arising during the period (713) (562) (358) (583)
Reclassification adjustment for (gains) losses included
in net income -- -- -- --
---------------------------- --------------------------
Other comprehensive income (loss) before
income tax (provision) benefit (713) (562) (358) (583)
Amortization of net transition obligation, prior service
cost, and net actuarial gain included in net
benefit cost -- -- -- (311)
Income tax benefit related to other
comprehensive income (loss) 242 191 122 304
---------------------------- --------------------------
TOTAL OTHER COMPREHENSIVE LOSS (471) (371) (236) (590)
---------------------------- --------------------------
TOTAL COMPREHENSIVE INCOME $ 589 $ 808 $ 1,997 $ 1,673
============================ ==========================
8. GUARANTEES
In the normal course of business, Mid Penn makes various commitments and incurs
certain contingent liabilities, which are not reflected in the accompanying
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
7
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 credit-worthiness 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. The Bank holds collateral supporting those
commitments when deemed necessary by management. Mid Penn had $11,372,000 and
$11,480,000 of standby letters of credit outstanding as of June 30, 2008 and
December 31, 2007, respectively. The Company does not anticipate any losses as a
result of these transactions.
9. SPLIT DOLLAR LIFE INSURANCE POSTRETIREMENT BENEFITS
Effective January 1, 2008, Mid Penn Bank adopted the provisions of Emerging
Issues Task Force ("EITF") Issue No. 06-4, "Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance
Arrangements" ("EITF 06-4"). EITF 06-4 requires the recognition of a liability
related to the postretirement benefits covered by an endorsement split-dollar
life insurance arrangement, and the liability for the future death benefit
should be recognized by following the guidance in SFAS No. 106 or Accounting
Principles Board Opinion No. 12, as appropriate. In adopting EITF 06-4, Mid Penn
recorded a cumulative effect adjustment to the balance of retained earnings of
$276,000 as of January 1, 2008.
10. FAIR VALUE MEASUREMENT OF ASSETS AND LIABILITIES
Effective January 1, 2008, Mid Penn adopted Statement of Financial Accounting
Standards ("SFAS") No. 157, "Fair Value Measurements" for financial assets and
financial liabilities. In accordance with Financial Accounting Standards Board
Staff Position (FSP) No. 157-2, "Effective Date of FASB Statement No. 157," Mid
Penn will delay application of SFAS No. 157 for non-financial assets and
non-financial liabilities, until January 1, 2009. SFAS 157 defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement dates. Inputs to valuation techniques refer to the assumptions
that market participants would use in pricing the asset or liability. Inputs may
be observable, meaning those that reflect the assumptions market participants
would use in pricing the asset or liability developed based on market data
obtained from independent sources, or unobservable, meaning those that reflect
the reporting entity's own assumptions about the assumptions market participants
would use in pricing the asset or liability based upon the best information
available in the circumstances. SFAS 157 establishes a fair value hierarchy for
valuation inputs that gives the highest priority to quoted prices in active
markets for identical assets or liabilities and the lowest priority to
unobservable inputs. The fair value hierarchy is as follows:
LEVEL 1 INPUTS - Unadjusted quoted prices in active markets that are
accessible at the measurement date for identical,
unrestricted assets or liabilities;
LEVEL 2 INPUTS - Quoted prices in markets that are not active, or inputs
that are observable either directly or indirectly, for
substantially the full term of the asset or liability;
LEVEL 3 INPUTS - Prices or valuation techniques that require inputs that
are both significant to the fair value measurement and
unobservable (i.e., supported by little or no market
activity).
A description of the valuation methodologies used for instruments measured at
fair value, as well as the general classification of such instruments pursuant
to the valuation hierarchy, is set forth below. These valuation methodologies
were applied to all of Mid Penn's financial assets and financial liabilities
carried at fair value effective January 1, 2008.
SECURITIES AVAILABLE FOR SALE
Securities classified as available for sale are generally reported at fair value
utilizing Level 2 inputs. For these securities, we obtain fair value
measurements from an independent pricing service. These valuation services
estimate fair value using pricing models and other accepted valuation
methodologies, such as quotes for similar securities and observable yield
8
curves and spreads. Level 3 inputs are for investment security positions that
are not traded in active markets or are subject to transfer restrictions. Such
inputs are generally based on available market evidence. In the absence of such
evidence, management's best estimate is used.
IMPAIRED LOANS
Certain loans are evaluated for impairment using the practical expedients
permitted by SFAS No. 114, "Accounting by Creditors for Impairment of a Loan",
including impaired loans measured at an observable market price (if available),
or at the fair value of the loan's collateral (if the loan is collateral
dependent). The value of the collateral is determined through appraisals
performed by independent licensed appraisers. When the value of the collateral,
less estimated costs to sell, is less than the principal balance of the loan, a
specific reserve is established. Mid Penn considers the appraisals used in its
impairment analysis to be Level 3 inputs. Impaired loans are reviewed and
evaluated at least quarterly for additional impairment, and reserves are
adjusted accordingly.
The following table illustrates the financial instruments measured at fair value
on a recurring basis segregated by hierarchy fair value levels:
Fair value measurements at June 30, 2008 using:
---------------------------------------------------------------
(Dollars in thousands) Total carrying Quoted prices in Significant other Significant
value at active markets observable inputs unobservable inputs
Assets: June 30, 2008 (Level 1) (Level 2) (Level 3)
----------------------------- -------------- ---------------- ----------------- ------------------------
Securities available for sale $ 49,879 $ 49,879
Certain financial assets and financial liabilities are measured at fair value on
a nonrecurring basis; that is, the instruments are not measured at fair value on
an ongoing basis, but are subject to fair value adjustments in certain
circumstances (for example, when there is evidence of impairment). The following
table illustrates the financial instruments measured at fair value on a
nonrecurring basis segregated by hierarchy fair value levels:
Fair value measurements at June 30, 2008 using:
---------------------------------------------------------------
(Dollars in thousands) Total carrying Quoted prices in Significant other Significant unobservable
value at active markets observable inputs inputs
Assets: June 30, 2008 (Level 1) (Level 2) (Level 3)
----------------------------- -------------- ---------------- ----------------- ------------------------
Impaired Loans $ 5,272 $ 5,272
Effective January 1, 2008, Mid Penn adopted the provisions of SFAS No. 159, "The
Fair Value Option for Financial Assets and Financial Liabilities-Including an
amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of
fair value accounting but does not affect existing standards, which require
assets and liabilities to be carried at fair value. Under SFAS 159, a company
may elect to use fair value to measure accounts and loans receivable,
available-for-sale and held-to-maturity securities, accounts payable,
guarantees, issued debt and other eligible financial instruments. At June 30,
2008, Mid Penn had made no elections to use fair value as an alternative
measurement for selected financial assets and liabilities not previously carried
at fair value.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued SFAS No. No. 141(R) "Business Combinations"
("SFAS 141(R)"). SFAS 141(R) establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. SFAS 141(R) also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. The guidance will
become effective as of the beginning of a company's fiscal year beginning after
December 15, 2008. SFAS 141(R) will impact the Company's accounting for business
combinations beginning January 1, 2009.
In December 2007, the FASB issued SFAS No. 160 "Noncontrolling Interests in
Consolidated Financial Statements--an
9
amendment of ARB No.51" ("SFAS 160"). SFAS 160 establishes accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance will become effective as of the
beginning of a company's fiscal year beginning after December 15, 2008.
Management does not believe that SFAS 160 will have a material impact on Mid
Penn's consolidated financial position and results of operations.
In February 2008, the FASB issued FASB Staff Position (FSP) FAS 140-3,
"Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions." This FSP addresses the issue of whether or not these transactions
should be viewed as two separate transactions or as one "linked" transaction.
The FSP includes a "rebuttable presumption" that presumes linkage of the two
transactions unless the presumption can be overcome by meeting certain criteria.
The FSP will be effective for fiscal years beginning after November 15, 2008,
and will apply only to original transfers made after that date; early adoption
will not be allowed. Management is currently evaluating the potential impact the
new pronouncement will have on its consolidated financial statements.
In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133"
("Statement 161"). Statement 161 requires entities that utilize derivative
instruments to provide qualitative disclosures about their objectives and
strategies for using such instruments, as well as any details of
credit-risk-related contingent features contained within derivatives. Statement
161 also requires entities to disclose additional information about the amounts
and location of derivatives located within the financial statements, how the
provisions of SFAS 133 have been applied, and the impact that hedges have on an
entity's financial position, financial performance, and cash flows. Statement
161 is effective for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. Management does not believe that
Statement 161 will have a material impact on Mid Penn's consolidated financial
position and results of operations.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is Management's Discussion of Consolidated Financial Condition as
of June 30, 2008, compared to year-end 2007 and the Results of Operations for
the second quarter and the first six months of 2008 compared to the same periods
in 2007.
This discussion should be read in conjunction with the financial tables,
statistics, and the audited financial statements and notes thereto included in
Mid Penn's Annual Report on Form 10-K for the year ended December 31, 2007, and
with Mid Penn's Forms 8-K, that were filed during 2008 with the SEC. The results
of operations for interim periods are not necessarily indicative of operating
results expected for the full year.
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 the corporation 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.
The Corporation's actual results may differ materially from the results
anticipated in these forward-looking statements due to a variety of factors,
including, without limitation:
o The effects of future economic conditions on Mid Penn and its
customers;
o The costs and effects of litigation and of unexpected or adverse
outcomes in such litigation;
o Governmental monetary and fiscal policies, as well as legislative
and regulatory changes;
o The effect of changes in accounting policies and practices, as may
be adopted by the regulatory agencies, as well as the Financial
Accounting Standards Board and other accounting standard setters;
o The risks of changes in interest rates on the level and composition
of deposits, loan demand, and the values of loan collateral,
securities and interest rate protection agreements, as well as
interest rate risks;
o 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;
o Technological changes;
o Acquisitions and integration of acquired businesses;
o 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; and
o Acts of war or terrorism.
Mid Penn undertakes no obligation to publicly revise or update these
forward-looking statements to reflect events or circumstances that arise after
the date of this report. Readers should carefully review the risk factors
described in the Annual Report and other documents that we periodically file
with the Securities and Exchange Commission, including Mid Penn's Annual Report
on Form 10-K for the year ended December 31, 2007.
CRITICAL ACCOUNTING POLICIES
----------------------------
Management of the Company considers the accounting policy relating to the
allowance for loan and lease losses to be a critical accounting policy given the
uncertainty in evaluating the level of the allowance required to cover credit
losses inherent in the loan and lease portfolio and the material effect that
such judgments can have on the results of operations. While management's current
evaluation of the allowance indicates that the allowance is adequate, under
adversely different conditions or assumptions, the allowance may need to be
increased. For example, if historical loan and lease loss experience
significantly worsened or if current economic conditions significantly
deteriorated, additional provisions for loan and lease losses may be required to
increase the allowance. In addition, the assumptions and estimates used in the
internal reviews of the Company's non-performing loans and leases and potential
problem loans and leases have a significant impact on the
11
overall analysis of the adequacy of the allowance. While management has
concluded that the current evaluation of collateral values is reasonable under
the circumstances, if collateral evaluations were significantly lowered, the
Company's allowance may also require additional provisions for loan and lease
losses. Throughout the remainder of this presentation, the terms "loans" or
"loan" refers to both loans and leases.
RESULTS OF OPERATIONS
---------------------
OVERVIEW
Net income was $1,060,000 or $0.30 earnings per share for the quarter ended June
30, 2008, as compared to net income of $1,179,000 or $0.34 earnings per share
for the quarter ended June 30, 2007. Net interest income in the second quarter
increased from $4,014,000 in 2007 to $4,147,000 in 2008.
Higher personnel and computer expenses offset the increases in service charge
income during the quarter as we added additional talent to our staff and as we
continue to update our computer systems with a goal of continuing to improve our
information technology capabilities.
The provision for loan and lease losses in the second quarter of 2008 was
$155,000, as compared to $125,000 in the second quarter of 2007. The increased
provision reflects both strong loan growth during the quarter as well as
weakening economic conditions.
Net income as a percent of average assets, (return on average assets or "ROA"),
and stockholders' equity, (return on average equity or "ROE"), were as follows
on an annualized basis:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2008 2007 2008 2007
------------ ------------ ------------ ----------
Return on average assets 0.80% 0.96% 0.85% 0.93%
Return on average equity 10.47% 12.18% 11.10% 11.83%
Efficiency ratio 65.92% 62.55% 64.73% 63.83%
Total assets grew to $540,699,000 at June 30, 2008, from $509,757,000 on
December 31, 2007. This asset growth was boosted by strong loan demand with net
loans of $396,086,000 at June 30, 2008 compared to $372,338,000 at year-end, an
increase of approximately $24 million.
Deposit growth was also quite strong during the first six months of 2008. Total
deposits were $402,550,000 at June 30, 2008, compared to $372,817,000 at
December 31, 2007, an increase of approximately $30 million. This increase in
deposits was boosted by a successful special-rate certificate of deposit
promotion launched early in 2008.
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 34%.
12
AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS
Interest rates and interest differential - taxable equivalent basis
For the Six Months Ended For the Six Months Ended
June 30, 2008 June 30, 2007
-------------------------------- --------------------------------
(Dollars in thousands) Average Average
Balance Interest Rate (%) Balance Interest Rate (%)
---------- -------- -------- ---------- -------- --------
ASSETS:
Interest Earning Balances $ 57,581 $ 1,369 4.78% $ 46,773 $ 1,257 5.42%
Investment Securities:
Taxable 24,065 523 4.37% 26,097 599 4.63%
Tax-Exempt 29,091 1,004 6.94% 28,849 1,000 6.99%
---------- ----------
Total Investment Securities 53,156 54,946
---------- ----------
Federal Funds Sold -- -- 0.00% 1,258 33 5.26%
Loans and Leases, Net:
Taxable 379,908 13,102 6.94% 351,026 12,709 7.30%
Tax-Exempt 8,554 312 7.33% 9,117 344 7.61%
---------- ----------
Total Loans and Leases, Net 388,462 360,143
--------------------- ---------------------
Total Earning Assets 499,199 16,310 6.57% 463,120 15,942 6.94%
-------- --------
Cash and Due from Banks 7,764 7,390
Other Assets 21,568 20,600
---------- ----------
Total Assets $ 528,531 $ 491,110
========== ==========
LIABILITIES & STOCKHOLDERS' EQUITY:
Interest Bearing Deposits:
NOW $ 36,105 62 0.35% $ 34,411 67 0.39%
Money Market 67,070 713 2.14% 63,612 1,112 3.53%
Savings 25,635 34 0.27% 26,354 38 0.29%
Time 224,915 4,972 4.45% 206,214 4,475 4.38%
Short-term Borrowings 32,056 425 2.67% 14,198 344 4.89%
Long-term Debt 50,397 1,309 5.22% 59,238 1,457 4.96%
--------------------- ---------------------
Total Interest Bearing Liabilities 436,178 7,515 3.46% 404,028 7,493 3.74%
-------- --------
Demand Deposits 45,729 42,907
Other Liabilities 6,152 5,609
Stockholders' Equity 40,472 38,566
---------- ----------
Total Liabilities and Stockholders' Equity $ 528,531 $ 491,110
========== ==========
Net Interest Income $ 8,795 $ 8,449
======== ========
Net Yield on Interest Earning Assets:
Total Yield on Earning Assets 6.57% 6.94%
Rate on Supporting Liabilities 3.46% 3.74%
Average Interest Spread 3.11% 3.20%
Net Interest Margin 3.54% 3.68%
For the six months ended June 30, 2008, Mid Penn's taxable-equivalent net
interest margin declined to 3.54% from 3.68% during the six months ended June
30, 2007, driven primarily by the recent reduction in interest rates and the
tightening spread between the yield on earning assets and the cost of supporting
liabilities. In spite of this margin compression, net interest income, on a
taxable-equivalent basis, in the first six months of 2008 increased to
$8,795,000 from $8,449,000 in the first six months of 2007, due to the strong
growth in average earning assets, which increased 7.79% from June 30, 2007.
13
Although the effective interest rate impact on earning assets and funding
sources can be reasonably estimated at current interest rate levels, the 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 the simulation models. In addition, our net interest income may be impacted
by further interest rate actions of the Federal Reserve Bank.
PROVISION FOR LOAN LOSSES
The provision for loan and lease losses is the expense necessary to maintain the
allowance for loan and lease losses at a level adequate to absorb management's
estimate of probable losses in the loan and lease portfolio. Our provision for
loan and lease losses is based upon management's quarterly review of the loan
portfolio. The purpose of the review is to assess loan quality, identify
impaired loans and leases, analyze delinquencies, ascertain loan and lease
growth, evaluate potential charge-offs and recoveries, and assess general
economic conditions in the markets we serve.
During the second quarter of 2008, we continued to experience a challenging
operating environment. Given the economic pressures that impact some of our
borrowers, we have increased our allowance for loan and lease losses in
accordance with our assessment process, which took into consideration our
increase in nonperforming loans from June 30, 2007. The provision for loan and
lease losses was $255,000 for the six months ended June 30, 2008, as compared to
$200,000 for the six months ended June 30, 2007. For further discussion of
factors affecting the provision for loan and lease losses please see CREDIT
QUALITY, CREDIT RISK, AND ALLOWANCE FOR LOAN AND LEASE LOSSES in the Financial
Condition section of this Management Discussion and Analysis.
NONINTEREST INCOME
Noninterest income increased by $44,000 or 5.1% during the second quarter of
2008 versus the second quarter of 2007. During the first six months of 2008,
Noninterest income increased $100,000 or 5.9% over the same period in 2007. The
net increases were a result of increases (decreases) in the following components
of Noninterest income:
(Dollars in Thousands) Three Months Ended June 30,
--------------------------------------------
2008 2007 $ Variance % Variance
-------- ------- ---------- ----------
Service charges on deposits $ 437 $ 365 $ 72 19.7%
Mortgage banking income 42 21 21 100.0%
Gain on sale of loans -- 21 (21) -100.0%
Letter of credit fees 17 37 (20) -54.1%
(Dollars in Thousands) Six Months Ended June 30,
--------------------------------------------
2008 2007 $ Variance % Variance
-------- ------- ---------- ----------
Service charges on deposits $ 845 $ 732 $ 113 15.4%
Mortgage banking income 81 21 60 285.7%
Gain on sale of loans -- 21 (21) -100.0%
Letter of credit fees 22 62 (40) -64.5%
The increases in service charges on deposits in both the three-month and
six-month periods reflect an increase in Mid Penn's overdraft fee during the
first quarter of 2008. The waning letter of credit fees during both periods are
a result of the slowing economy and reduced demand for this type of
accommodation.
14
NONINTEREST EXPENSES
Noninterest expenses increased by $283,000 or 8.9% during the second quarter of
2008, versus the same period in 2007. During the first six months of 2008,
Noninterest expenses increased $436,000 or 6.7% over the same period in 2007.
The net increases were a result of (increases) decreases in the following
components of Noninterest expense:
(Dollars in Thousands) Three Months Ended June 30,
--------------------------------------------
2008 2007 $ Variance % Variance
-------- ------- ---------- ----------
Salaries and employee benefits $ 1,794 $ 1,601 $ (193) -12.1%
Occupancy expense 239 222 (17) -7.7%
Advertising expense 103 142 39 27.5%
Computer expense 111 85 (26) -30.6%
Check fraud 53 17 (36) -211.8%
(Dollars in Thousands) Six Months Ended June 30,
--------------------------------------------
2008 2007 $ Variance % Variance
-------- ------- ---------- ----------
Salaries and employee benefits $ 3,611 $ 3,324 $ (287) -8.6%
Occupancy expense 528 438 (90) -20.5%
Professional fees 296 240 (56) -23.3%
Advertising expense 182 226 44 19.5%
Computer expense 249 234 (15) -6.4%
The increases in Salaries and employee benefits reflect the impact of the
current initiative to add talented team members throughout the organization to
position Mid Penn for handling current needs and future growth. This is coupled
with the increases in computer expenses as we bolster our technological
capabilities for future customer and infrastructure needs. Increased occupancy
expenses reflect the first full year of operation of our Camp Hill office,
opened in September of 2007. Advertising expenses were higher in 2007 due to a
branding campaign, which spanned most of the year, as well as the promotion of
our relocated Elizabethville Office and the new Camp Hill Office. During the
second quarter of 2008, Mid Penn experienced increasing incidents of
substantially overdrawn deposit accounts and check fraud resulting in increasing
write-offs when compared to the same period in 2007.
FINANCIAL CONDITION
-------------------
INVESTMENT SECURITIES
Securities to be held for indefinite periods of time, but not intended to be
held to maturity, are classified as available for sale and carried at fair
value. Securities held for indefinite periods of time include securities that
management intends to use as part of its asset and liability management strategy
and that may be sold in response to changes in interest rates, resultant
prepayment risk, and other factors related to interest rate and resultant
prepayment risk changes.
Realized gains and losses on dispositions are based on the net proceeds and the
adjusted book value of the securities sold, using the specific identification
method. Unrealized gains and losses on investment securities available for sale
are based on the difference between book value and fair value of each security.
These gains and losses are credited or charged to other comprehensive income,
whereas realized gains and losses flow through the Company's results of
operations.
15
As of June 30, 2008 and December 31, 2007, all of our investment securities are
classified as available-for-sale, with the stratification noted in the table
below:
(Dollars in thousands) June 30, 2008 December 31, 2007
---------------------- ----------------------
Amortized Amortized
Cost Fair Value Cost Fair Value
---------------------- ----------------------
Available-for-sale:
U.S. Government agencies $ 13,383 $ 13,102 $ 12,044 $ 12,063
Mortgage-backed U.S. government agencies 5,278 5,302 6,862 6,858
State and political subdivision obligations 26,731 27,300 30,437 31,088
Restricted equity securities 4,188 4,175 4,072 4,063
---------------------- ----------------------
Total investment securities $ 49,580 $ 49,879 $ 53,415 $ 54,072
====================== ======================
At December 31, 2007, fair value exceeded amortized cost by $657,000 and at June
30, 2008, fair value exceeded amortized cost by $299,000. In shareholders'
equity, the balance of accumulated other comprehensive income decreased to
$48,000 at June 30, 2008 from $284,000 at December 31, 2007.
CREDIT QUALITY, CREDIT RISK AND ALLOWANCE FOR LOAN AND LEASE LOSSES
During the first six months of 2008, we had net charge-offs of $21,000
(primarily related to losses on leases and consumer loans) as compared to net
charge-offs of $127,000 during the same period of 2007. We may need to make
future adjustments to the allowance, and the provision for loan and lease
losses, if economic conditions or loan credit quality differ substantially from
the assumptions we used in making our evaluation of the level of the allowance
for loan losses as compared to the balance of outstanding loans.
ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES:
(Dollars in thousands) Six Months Ended Six Months Ended
---------------- ----------------
June 30, 2008 June 30, 2007
---------------- ----------------
Average total loans outstanding (net of unearned income) $ 388,462 $ 360,143
Period ending total loans outstanding (net of unearned income) 401,110 364,150
Balance, beginning of period $ 4,790 $ 4,187
Loans charged off during period (87) (164)
Recoveries of loans previously charged off 66 37
---------------- ----------------
Net chargeoffs (21) (127)
---------------- ----------------
Provision for loan and lease losses 255 200
---------------- ----------------
Balance, end of period $ 5,024 $ 4,260
================ ================
Ratio of net loans charged off to average loans outstanding
(annualized) 0.01% 0.07%
Ratio of allowance for loan losses to net loans at end of period 1.25% 1.17%
Other than as described herein, we do not believe there are any trends, events
or uncertainties that are reasonably expected to have a material impact on
future results of operations, liquidity or capital resources. Further, based on
known information, we believe that the effects of current and past economic
conditions and other unfavorable business conditions may impact certain
borrowers' abilities to comply with their repayment terms. We continue to
closely monitor these borrowers' financial strength.
16
At June 30, 2008, total nonperforming loans amounted to $5,272,000, or 1.31% of
loans and leases net of unearned income, as compared to levels of $4,317,000, or
1.14%, at December 31, 2007 and $1,975,000, or .54%, at June 30, 2007.
SCHEDULE OF NONPERFORMING ASSETS:
(Dollars in thousands)
June 30, 2008 December 31, 2007 June 30, 2007
------------- ----------------- -------------
Nonperforming Assets:
Nonaccrual loans $ 5,272 $ 4,317 $ 1,975
Loans renegotiated with borrowers -- -- --
------------- ----------------- -------------
Total nonperforming loans 5,272 4,317 1,975
Foreclosed real estate 495 529 --
Other repossessed property 7 58 68
------------- ----------------- -------------
Total non-performing assets 5,774 4,904 2,043
Accruing loans 90 days or more past due 968 2,439 1,285
------------- ----------------- -------------
Total risk elements $ 6,742 $ 7,343 $ 3,328
============= ================= =============
Nonperforming loans as a % of total
loans outstanding 1.31% 1.14% 0.54%
Nonperforming assets as a % of total
loans outstanding + other real estate 1.44% 1.30% 0.56%
Ratio of allowance for loan losses
to nonperforming loans 95.30% 110.96% 215.70%
As of June 30, 2008, only the loans that were not accruing interest were
considered to be impaired. The increase in impaired loans relates to certain
larger commercial credits, which were rated as classified as of June 30, 2008.
Mid Penn considers a loan or lease to be impaired when, based upon current
information and events, it is probable that all interest and principal payments
due according to the contractual terms of the loan or lease agreement will not
be collected. An insignificant delay or shortfall in the amounts of payments
would not cause a loan or lease to be considered impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan
or lease and the borrower, including the length of the delay, the reasons for
the delay, the borrower's prior payment record and the amount of the shortfall
in relation to the principal and interest owed. Larger groups of small-balance
loans, such as residential mortgages and consumer installment loans, are
collectively evaluated for impairment. Accordingly, we do not separately
identify individual consumer and residential loans for impairment disclosures
unless such loans are the subject of a restructuring agreement. As previously
discussed in Note 10 to the consolidated financial statements, Mid Penn
determines the fair value of impaired loans on a case-by-case basis based
primarily upon the fair value of the underlying collateral using Level 3 inputs
comprised of customized collateral value discounting analyses.
We maintain the allowance for loan losses at a level that we believe adequate to
absorb estimated probable loan losses. We are responsible for the adequacy of
the allowance for loan losses, which is formally reviewed on a quarterly basis.
Provisions charged to operating expense and reduced by net charge-offs increase
the allowance. Our evaluation of the adequacy of the allowance is based on our
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay (including the timing
of future payments), the estimated value of any underlying collateral,
composition of the loan portfolio, current economic conditions and other
relevant factors. While we use available information to make such evaluations,
future adjustments to the allowance may be necessary if economic conditions
differ substantially from the assumptions we used in making the evaluation.
In addition, various regulatory agencies, as an integral part of their
examination process, review the Bank's allowance for loan losses. Such agencies
may require us to recognize additions to the allowance based on their judgment
of information available to them at the time of their examination. We determined
that no adjustment to the allowance for loan losses was necessary as a result of
our most recent regulatory examination.
17
We believe, based on information currently available, that the current allowance
for loan and lease losses of $5,024,000 is adequate to meet potential loan and
lease losses.
INCOME TAXES
The provision for income taxes was $360,000 for the three months ended June 30,
2008, as compared to $377,000 the same period of last year. The effective tax
rate as of June 30, 2008 was 24.8%. Generally, our effective tax rate is below
the statutory rate due to earnings on tax-exempt loans, investments, and
bank-owned life insurance, and the impact of tax credits. The realization of
deferred tax assets is dependent on future earnings. As a result of Mid Penn's
adoption of FIN 48 and FIN 48-1 effective January 1, 2007, no significant income
tax uncertainties were identified, therefore, Mid Penn recognized no adjustment
for unrealized income tax benefits for the periods ended June 30, 2008 and
December 31, 2007. We currently anticipate that future earnings will be adequate
to fully utilize deferred tax assets.
LIQUIDITY
Mid Penn Bank'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:
o A growing core retail deposit base;
o Proceeds from the sale or maturity of investment securities;
o Proceeds from the maturity of certificates of deposit in other
financial institutions;
o Payments received on loans and mortgage-backed securities; and,
o Overnight correspondent bank borrowings on various credit lines, and
borrowing capacity available from the FHLB.
We believe that our core deposits are fairly stable even in periods of changing
interest rates like we are currently experiencing. Liquidity and funds
management are governed by policies and are measured on a monthly basis. 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, 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.
18
CAPITAL
Mid Penn Bancorp, Inc. is a financial holding company and, as such, must
maintain a well-capitalized status in its bank subsidiary. Quantitative measures
established by regulation to ensure capital adequacy require Mid Penn to
maintain minimum amounts and ratios (set forth below) of Tier 1 capital to
average assets and of total capital (as defined in the regulations) to
risk-weighted assets. As of June 30, 2008 and December 31, 2007, Mid Penn met
all capital adequacy requirements to which the Bank is subject, and the Bank is
considered "well-capitalized" under the regulatory framework for prompt
corrective action. Management is not aware of any current recommendations by
regulatory authorities, which, if implemented, would have a material effect on
Mid Penn's liquidity, capital resources or operations.
Mid Penn maintained the following regulatory capital levels and leverage and
risk-based capital ratios in its bank subsidiary as of June 30, 2008, and
December 31, 2007, as follows:
(Dollars in thousands) June 30, 2008 December 31, 2007
----------------- -----------------
Amount % Amount %
-------- ------ -------- ------
Leverage Ratio:
Tier I capital to average total assets $ 38,960 7.31% $ 38,591 7.67%
Minimum required for capital adequacy
purposes 21,316 4.00% 20,115 4.00%
To be well-capitalized under prompt
corrective action provisions 26,645 5.00% 25,144 5.00%
Risk-based Capital Ratios:
Tier I capital ratio - actual 38,960 9.42% 38,591 9.46%
Minimum required for capital adequacy
purposes 16,551 4.00% 16,326 4.00%
To be well-capitalized under prompt
corrective action provisions 24,827 6.00% 24,489 6.00%
Total capital ratio - actual 43,984 10.63% 43,381 10.63%
Minimum required for capital adequacy
purposes 33,103 8.00% 32,652 8.00%
To be well-capitalized under prompt
corrective action provisions 41,379 10.00% 40,815 10.00%
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is defined as the exposure to interest rate risk, foreign currency
exchange rate risk, commodity price risk, and other relevant market rate or
price risks. For domestic banks, the majority of market risk is related to
interest rate risk.
Interest rate sensitivity management requires the maintenance of an appropriate
balance between interest sensitive assets and liabilities. Interest bearing
assets and liabilities that are maturing or repricing should be adequately
balanced to avoid fluctuating net interest margins and to enhance consistent
growth of net interest income through periods of changing interest rates. Mid
Penn has consistently followed a strategy of pricing assets and liabilities
according to prevailing market rates while largely matching maturities, within
the guidelines of sound marketing and competitive practices. Rate sensitivity is
measured by monthly gap analysis, quarterly rate shocks, and periodic
simulation.
No material changes in the market risk strategy occurred during the current
period and no material changes have been noted in the Corporation's equity value
at risk. A detailed discussion of market risk is provided in the Form 10-K for
the year ended December 31, 2007. Mid Penn enjoys a closely balanced position
that does not place it at undue risk under any interest rate scenario. Many of
the deposit dollars in transaction accounts are discretionarily priced so
management maintains significant pricing flexibility.
19
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 the company 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, 2008, the Corporation's Chief Executive
Officer and Chief Financial Officer concluded that the disclosure controls and
procedures were adequate.
CHANGES IN INTERNAL CONTROLS
----------------------------
During the three months ended June 30, 2008, there were no changes in our
internal controls over financial reporting that have materially affected, or are
reasonable likely to materially affect, these controls.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Management is not aware of any litigation that would have a material adverse
effect on the consolidated financial position of Mid Penn. There are no
proceedings pending other than the ordinary routine litigation incident to the
business of Mid Penn. In addition, management does not know of any material
proceedings contemplated by governmental authorities against the Corporation or
any of its properties.
ITEM 1A - RISK FACTORS
There have been no material changes to the risk factors described in our Annual
Report on Form 10-K for the year ended December 31, 2007.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In September of 2005, Mid Penn Bancorp's Board of Directors approved a Stock
Repurchase Program under which the Corporation could buy back up to 250,000
shares of Mid Penn Bancorp, Inc. common stock. Through June 30, 2008, 34,504
shares have been repurchased at an average price of $24.75 per share. During the
second quarter of 2008, 6,476 shares were repurchased at an average price of
$25.58. The Board of Directors, at their June 25, 2008 meeting, voted to end the
Stock Repurchase Program effective June 30, 2008.
Issuer Purchase of Equity Securities During the Quarter:
-------------------------------------------------------------------------------------------
Maximum Number of
Cumulative Number Shares that May Yet
Total Number of Average Price of Shares Purchased Be Purchased Under
Period Shares Purchased Paid per Share as Part of Plan Plan
-------------------------------------------------------------------------------------------
April 2008 161 $ 25.30 28,189 221,811
-------------------------------------------------------------------------------------------
May 2008 5,100 $ 25.32 33,289 216,711
-------------------------------------------------------------------------------------------
June 2008 1,215 $ 26.73 34,504 215,496
-------------------------------------------------------------------------------------------
Total 6,476 $ 25.58 34,504 215,496
-------------------------------------------------------------------------------------------
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
20
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on April 22, 2008, a vote was held
for the election of three Class A directors to serve for a three-year term. The
results of the election were as follows:
Votes For Votes Withheld
--------- --------------
Matthew G. DeSoto 3,068,808 85,654
Robert C. Grubic 3,078,523 75,939
Gregory M. Kerwin 3,078,523 75,939
Additionally, a shareholder proposal to eliminate the classified board of
directors was presented for a vote of the shareholders with 233,063 votes for,
2,100,150 votes against and 187,585 votes abstaining.
The Board of Directors is comprised of three classes of directors, each serving
a three-year term. With the election of the Class A directors noted above, the
current board composition is as follows:
Expiration of
Class Current Term
----- -------------
Matthew G. DeSoto A 2011
Robert C. Grubic A 2011
Gregory M. Kerwin A 2011
Jere M. Coxon B 2009
Alan W. Dakey B 2009
Edwin D. Schlegel B 2009
A. James Durica C 2010
Theodore W. Mowery C 2010
Donald E. Sauve C 2010
William A. Specht, III C 2010
ITEM 5 - OTHER INFORMATION
The Bank has entered into an agreement to purchase a future operations center
located at 906 N. River Road in Halifax, Dauphin County, PA. Final settlement on
the property is anticipated during the third quarter of 2008.
ITEM 6 - EXHIBITS
o Exhibit No. 3(i) - The Registrant's Articles of Incorporation.
(Incorporated by reference to Registrant's Annual Report on
form 10-K filed with the Securities and Exchange Commission on
March 10, 2008.)
o Exhibit 3(ii) - The Registrant's By-laws. (Incorporated by
reference to Registrant's Annual Report on form 10-K filed
with the Securities and Exchange Commission on March 10,
2008.)
o Exhibit 10.1 - Mid Penn Bank's Profit Sharing Retirement Plan.
(Incorporated by reference to Registrant's Annual Report on
form 10-K filed with the Securities and Exchange Commission on
March 10, 2008.)
o Exhibit 10.2 - Mid Penn Bank's Employee Stock Ownership Plan.
(Incorporated by reference to Registrant's Annual Report on
form 10-K filed with the Securities and Exchange Commission on
March 10, 2008.)
o Exhibit 10.3 - The Registrant's Dividend Reinvestment Plan, as
amended and restated. (Incorporated
21
by reference to Registrant's Registration Statement on Form
S-3, filed with the Securities and Exchange Commission on
October 12, 2005.)
o Exhibit 10.4 - Salary Continuation Agreement between Mid Penn
Bank and Alan W. Dakey. (Incorporated by reference to
Registrant's Annual Report on form 10-K filed with the
Securities and Exchange Commission on March 28, 2003.)
o Exhibit 10.5 - Split Dollar Agreement between Mid Penn Bank
and Eugene F. Shaffer. (Incorporated by reference to
Registrant's Annual Report on Form 10-K files with the
Securities and Exchange Commission on March 14, 2005.)
o Exhibit 10.6 - Death Benefit Plan and Agreement between Mid
Penn Bank and the Trustee of the Eugene F. Shaffer Irrevocable
Trust. (Incorporated by reference to Registrant's Annual
Report on form 10-K filed with the Securities and Exchange
Commission on March 14, 2005.)
o Exhibit 10.7 - Executive Employment Agreement between Mid Penn
Bank and Alan W. Dakey dated as of August 31, 2007.
Incorporated by reference to Registrant's Current Report on
Form 8-K filed with the Securities and Exchange Commission on
August 6, 2007.)
o Exhibit 10.8 - Key Executive Management Change of Control
between Mid Penn Bancorp, Inc. and Kevin W. Laudenslager dated
as of April 1, 2008. (Incorporated by reference to
Registrant's Current Report on form 8-K filed with the
Securities and Exchange Commission on April 4, 2008.)
o Exhibit 10.9 - Revised Directors' Retirement Plan
(Incorporated by reference to Registrant's Quarterly Report on
Form 10-Q filed with the Securities and Exchange Commission on
May 8, 2008.)
o Exhibit 10.10 - Executive Deferred Compensation Agreement by
and between Mid Pen Bank and Alan W. Dakey dated as of July
24, 2002.
o Exhibit 10.11 - Split Dollar Agreement between Mid Penn Bank
and Alan W. Dakey effective January 1, 1999.
o Exhibit 10.12 - Executive Deferred Bonus Agreement between Mid
Penn Bank and Alan W. Dakey dated as of January 15, 1999.
o Exhibit 10.13 - Amended and Restated Director Deferred Fee
Agreement effective January 1, 2005 between Mid Penn Bank and
Alan W. Dakey.
o Exhibit 11.1 - Statement regarding the computation of Per
Share Earnings. (Included in body of 10-Q.)
o Exhibit No. 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
o Exhibit No. 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
o Exhibit No. 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
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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/ Alan W. Dakey
---------------------
Alan W. Dakey
President and CEO
(Principal Executive Officer)
Date: August 6, 2008
By /s/ Kevin W. Laudenslager
--------------------------------
Kevin W. Laudenslager
Treasurer
(Principal Financial and Accounting Officer)
Date: August 6, 2008
23