UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

 (Mark One)

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

For the quarterly period ended September 30, 2013

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  þ    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   þ    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  þ

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

As of November 14, 2013, the registrant had 3,493,529 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 September 30, 2013 and December 31, 2012 (Unaudited)	2
		Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2013 and September 30, 2012 (Unaudited)	3
		Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and September 30, 2012 (Unaudited)	4
		Consolidated Statements of Changes in Shareholders’ Equity for theNine Months Ended September 30, 2013 and September 30, 2012 (Unaudited)	5
		Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and September 30, 2012 (Unaudited)	6
		Notes to Consolidated Financial Statements (Unaudited)	7
	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
	Item 3 – Quantitative and Qualitative Disclosures about Market Risk		39
	Item 4 – Controls and Procedures		39
PART II – OTHER INFORMATION			40
	Item 1 – Legal Proceedings		40
	Item 1A – Risk Factors		40
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		40
	Item 3 – Defaults upon Senior Securities		40
	Item 4 – Mine Safety Disclosures		40
	Item 5 – Other Information		40
	Item 6 – Exhibits		40
	Signatures		41

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 share and per share data)	September 30, 2013		December 31, 2012
ASSETS
Cash and due from banks	$	12,052	$	11,200
Interest-bearing balances with other financial institutions		1,165		1,273
Federal funds sold		-		3,000
Total cash and cash equivalents		13,217		15,473
Interest-bearing time deposits with other financial institutions		7,861		23,563
Available for sale investment securities		119,770		154,295
Loans and leases, net of unearned interest		528,546		484,220
Less:  Allowance for loan and lease losses		(5,793)		(5,509)
Net loans and leases		522,753		478,711
Bank premises and equipment, net		12,759		13,123
Restricted investment in bank stocks		1,895		2,503
Foreclosed assets held for sale		2,047		843
Accrued interest receivable		2,684		2,893
Deferred income taxes		3,326		1,789
Goodwill		1,016		1,016
Core deposit and other intangibles, net		191		288
Cash surrender value of life insurance		8,317		8,143
Other assets		2,152		2,560
Total Assets	$	697,988	$	705,200
LIABILITIES & SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing demand	$	48,495	$	57,977
Interest bearing demand		202,285		164,837
Money Market		197,837		210,588
Savings		29,666		28,406
Time		142,571		163,653
Total Deposits		620,854		625,461
Short-term borrowings		9,245		-
Long-term debt		8,190		22,510
Accrued interest payable		803		620
Other liabilities		6,343		4,389
Total Liabilities		645,435		652,980
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
September 30, 2013 and 4,880 shares issued and outstanding at December 31, 2012		5,000		4,880
Common stock, par value $1.00; authorized 10,000,000 shares; 3,493,529 shares
issued and outstanding at September 30, 2013 and 3,489,684 shares issued and
outstanding at December 31, 2012		3,494		3,490
Additional paid-in capital		29,841		29,816
Retained earnings		14,651		11,741
Accumulated other comprehensive (loss) income		(433)		2,293
Total Shareholders’ Equity		52,553		52,220
Total Liabilities and Shareholders' Equity	$	697,988	$	705,200

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 September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
INTEREST INCOME
Interest & fees on loans and leases	$	6,962	$	6,742	$	19,717	$	20,619
Interest on interest-bearing balances		21		55		97		180
Interest and dividends on investment securities:
U.S. Treasury and government agencies		170		232		393		997
State and political subdivision obligations, tax-exempt		466		419		1,442		1,232
Other securities		14		5		28		15
Interest on federal funds sold and securities purchased
under agreements to resell		-		5		11		10
Total Interest Income		7,633		7,458		21,688		23,053
INTEREST EXPENSE
Interest on deposits		1,068		1,443		3,403		4,850
Interest on short-term borrowings		12		-		19		1
Interest on long-term debt		112		245		519		732
Total Interest Expense		1,192		1,688		3,941		5,583
Net Interest Income		6,441		5,770		17,747		17,470
PROVISION FOR LOAN AND LEASE LOSSES		575		150		1,485		675
Net Interest Income After Provision for Loan and Lease Losses		5,866		5,620		16,262		16,795
NONINTEREST INCOME
Income from fiduciary activities		111		128		360		429
Service charges on deposits		150		153		430		418
Net gain on sales of investment securities		108		241		220		267
Earnings from cash surrender value of life insurance		58		61		174		186
Mortgage banking income		75		184		300		443
ATM debit card interchange income		130		114		376		354
Other income		176		176		636		629
Total Noninterest Income		808		1,057		2,496		2,726
NONINTEREST EXPENSE
Salaries and employee benefits		2,657		2,671		8,199		7,886
Occupancy expense, net		256		263		835		799
Equipment expense		323		343		984		923
Pennsylvania Bank Shares tax expense		104		92		365		351
FDIC Assessment		6		301		339		904
Legal and professional fees		191		186		511		431
Director fees and benefits expense		81		97		238		232
Marketing and advertising expense		87		91		192		288
Computer expense		239		166		666		489
Telephone expense		116		107		318		317
(Gain) loss on sale/write-down of foreclosed assets		(54)		43		(376)		102
Intangible amortization		8		7		22		38
Loan collection costs		32		92		178		239
Other expenses		700		623		1,924		1,768
Total Noninterest Expense		4,746		5,082		14,395		14,767
INCOME BEFORE PROVISION FOR INCOME TAXES		1,928		1,595		4,363		4,754
Provision for income taxes		440		329		824		994
NET INCOME		1,488		1,266		3,539		3,760
Series A preferred stock dividends and discount accretion		-		128		14		385
Series B preferred stock dividends		88		-		222		-
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	1,400	$	1,138	$	3,303	$	3,375
PER COMMON SHARE DATA:
Basic Earnings Per Common Share	$	0.40	$	0.33	$	0.95	$	0.97
Diluted Earnings Per Common Share	$	0.40	$	0.33	$	0.95	$	0.97
Cash Dividends	$	0.05	$	0.05	$	0.10	$	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 September 30,
	2013		2012
Net income	$	1,488	$	1,266
Other comprehensive income:
Unrealized gains arising during the period on available for sale
securities, net of income taxes of $147 and $216, respectively		286		418
Reclassification adjustment for net gain on sales of available for sale securities
included in net income, net of income taxes of $(37) and $(82), respectively   (1) (3)		(71)		(159)
Change in defined benefit plans, net of income taxes of $2 and $(7), respectively   (2) (3)		4		(13)
Total other comprehensive income		219		246
Total comprehensive income	$	1,707	$	1,512

(Dollars in thousands)	Nine Months Ended September 30,
	2013		2012
Net income	$	3,539	$	3,760
Other comprehensive (loss) income:
Unrealized (losses) gains arising during the period on available for sale
securities, net of income taxes of $(1,334) and $412, respectively		(2,591)		799
Reclassification adjustment for net gain on sales of available for sale securities
included in net income, net of income taxes of $(75) and $(91), respectively   (1) (3)		(145)		(176)
Change in defined benefit plans, net of income taxes of $5 and $(8), respectively   (2) (3)		10		(15)
Total other comprehensive (loss) income		(2,726)		608
Total comprehensive income	$	813	$	4,368

(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 NINE MONTHS ENDEDSEPTEMBER 30, 2013 AND 2012

(Dollars in thousands)									Accumulated
					Additional				Other		Total
	Preferred		Common		Paid-in		Retained		Comprehensive		Shareholders'
	Stock		Stock		Capital		Earnings		(Loss) Income		Equity
Balance, December 31, 2012	$	4,880	$	3,490	$	29,816	$	11,741	$	2,293	$	52,220
Net income		-		-		-		3,539		-		3,539
Total other comprehensive loss, net of taxes		-		-		-		-		(2,726)		(2,726)
Common stock dividends		-		-		-		(349)		-		(349)
Employee Stock Purchase Plan		-		4		39		-		-		43
Series B Preferred stock issuance		120		-		-		-		-		120
Series B Preferred stock dividends		-		-		-		(222)		-		(222)
Amortization of warrant cost		-		-		(14)		-		-		(14)
Warrant repurchase		-		-		-		(58)		-		(58)
Balance, September 30, 2013	$	5,000	$	3,494	$	29,841	$	14,651	$	(433)	$	52,553
Balance, December 31, 2011	$	10,000	$	3,484	$	29,830	$	8,222	$	1,916	$	53,452
Net income		-		-		-		3,760		-		3,760
Total other comprehensive income, net of taxes		-		-		-		-		608		608
Common stock dividends		-		-		-		(522)		-		(522)
Employee Stock Purchase Plan		-		5		38		-		-		43
Series A Preferred stock dividends		-		-		-		(375)		-		(375)
Amortization of warrant cost		-		-		(10)		-		-		(10)
Balance, September 30, 2012	$	10,000	$	3,489	$	29,858	$	11,085	$	2,524	$	56,956

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)	Nine Months Ended September 30,
	2013		2012
Operating Activities:
Net Income	$	3,539	$	3,760
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses		1,485		675
Depreciation		936		853
Amortization of intangibles		97		15
Net amortization of security premiums		2,082		973
Gain on sales of investment securities		(220)		(267)
Earnings on cash surrender value of life insurance		(174)		(186)
Gain on disposal of property, plant, and equipment		(8)		(1)
(Gain) loss on sale / write-down of foreclosed assets		(376)		102
Deferred income tax (benefit) expense		(1,223)		688
Decrease in accrued interest receivable		209		71
Decrease in other assets		1,503		795
Increase in accrued interest payable		183		115
Increase in other liabilities		1,949		8,676
Net Cash Provided By Operating Activities		9,982		16,269
Investing Activities:
Net decrease in interest-bearing balances		15,702		3,416
Proceeds from the maturity of investment securities		31,777		26,876
Proceeds from the sale of investment securities		15,118		17,895
Purchases of investment securities		(18,376)		(52,604)
Redemptions of restricted investment in bank stock		608		571
Net increase in loans and leases		(48,175)		(3,367)
Purchases of bank premises and equipment		(564)		(777)
Proceeds from sale of bank premises and equipment		-		16
Proceeds from sale of foreclosed assets		1,820		2,105
Net Cash Used In Investing Activities		(2,090)		(5,869)
Financing Activities:
Net increase in demand deposits and savings accounts		16,475		25,647
Net decrease in time deposits		(21,082)		(29,678)
Net increase in short-term borrowings		9,245		-
Series A preferred stock dividend paid		-		(375)
Series B preferred stock dividend paid		(222)		-
Common stock dividend paid		(349)		(522)
Series B preferred stock issuance		120		-
Employee Stock Purchase Plan		43		43
Warrant repurchase		(58)		-
Long-term debt repayment		(14,320)		(143)
Net Cash Used In Financing Activities		(10,148)		(5,028)
Net (decrease) increase in cash and cash equivalents		(2,256)		5,372
Cash and cash equivalents, beginning of year		15,473		17,841
Cash and cash equivalents, end of year	$	13,217	$	23,213

Supplemental Disclosures of Cash Flow Information:
Interest paid	$	3,758	$	5,468
Income taxes paid	$	550	$	1,250
Supplemental Noncash Disclosures:
Loan transfers to foreclosed assets held for sale	$	2,648	$	1,865

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

6

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. and its wholly-owned subsidiaries, Mid Penn Bank (“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”).  We believe the information presented is not misleading and the disclosures are adequate.  For comparative purposes, the September 30, 2012 and December 31, 2012 balances have been reclassified to conform to the 2013 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 Mid Penn’s Annual Report on Form 10-K for the year ended December 31, 2012.

Mid Penn has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2013, 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)           Investment Securities

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

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

Accounting Standards Codification (“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. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing other-than-temporary impairment.  This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.

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

7

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

At September 30, 2013 and December 31, 2012, 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
September 30, 2013
Available for sale securities:
U.S. Treasury and U.S. government agencies	$	12,149	$	765	$	-	$	12,914
Mortgage-backed U.S. government agencies		42,458		377		462		42,373
State and political subdivision obligations		64,072		864		1,997		62,939
Equity securities		1,550		20		26		1,544
	$	120,229	$	2,026	$	2,485	$	119,770

(Dollars in thousands)	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
December 31, 2012
Available for sale securities:
U.S. Treasury and U.S. government agencies	$	16,394	$	1,346	$	-	$	17,740
Mortgage-backed U.S. government agencies		66,783		393		490		66,686
State and political subdivision obligations		67,033		2,542		96		69,479
Equity securities		400		-		10		390
	$	150,610	$	4,281	$	596	$	154,295

Estimated fair values of debt securities are based on quoted market prices, where applicable.  If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments, adjusted for differences between the quoted instruments and the instruments being valued.

Included in equity securities is an investment in Access Capital Strategies, an equity fund that invests in low to moderate income financing projects. This initial investment was purchased in 2004 to help fulfill the Bank’s regulatory requirement of the Community Reinvestment Act and additional investments were purchased in 2011 and 2013.  At September 30, 2013 and December 31, 2012, the investment is reported at fair value.

Investment securities having a fair value of $103,237,000 at September 30, 2013 and $96,124,000  at December 31, 2012, were pledged to secure public deposits and other borrowings.

Mid Penn realized gross gains of $108,000and $220,000on sales of securities available for sale during the three and ninemonth periods ended September 30, 2013.  Mid Penn realized gross gains of $241,000 and $267,000 on sales of securities available for sale during the three and nine months endedSeptember 30, 2012.  Mid Penn realized gross losses on the sale of securities available for sale of $0 during the three and ninemonth periods ended September 30, 2013and September 30, 2012.

8

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

The following table presents gross unrealized losses and fair value of investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2013and December 31, 2012.

(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
September 30, 2013	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Available for sale securities:
Mortgage-backed U.S. government agencies	$	9,958	$	203	$	10,775	$	259	$	20,733	$	462
State and political subdivision obligations		30,830		1,868		2,175		129		33,005		1,997
Equity securities		-		-		550		26		550		26
Total temporarily impaired
available for sale securities	$	40,788	$	2,071	$	13,500	$	414	$	54,288	$	2,485

(Dollars in thousands)	Less Than 12 Months				12 Months or More				Total
December 31, 2012	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Available for sale securities:
Mortgage-backed U.S. government agencies	$	30,345	$	270	$	15,839	$	220	$	46,184	$	490
State and political subdivision obligations		9,389		66		1,231		30		10,620		96
Equity securities		-		-		390		10		390		10
Total temporarily impaired
available for sale securities	$	39,734	$	336	$	17,460	$	260	$	57,194	$	596

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis; and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, and the financial condition and near term prospects of the issuer.  In addition, for debt securities, the Corporation considers (a) whether management has the intent to sell the security, (b) it is more likely than not that management will be required to sell the security prior to its anticipated recovery, and (c) whether management expects to recover the entire amortized cost basis.  For equity securities, management considers the intent and ability to hold securities until recovery of unrealized losses.

At September 30, 2013,  97 debt securities with unrealized losses depreciated 4.58% from their amortized cost basis.  At December 31, 2012, 73 debt securities with unrealized losses depreciated 1.03% from their amortized cost basis.  These securities are issued by either the U.S. Government or other governmental agencies. The unrealized losses were determined principally by reference to current interest rates for similar types of securities. In analyzing an issuer's financial condition, management considers whether the U.S. Government or its agencies issued the securities, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer's financial condition. Based on the above conditions management has determined that no declines are deemed to be other-than-temporary.

The table below is the maturity distribution of investment securities at amortized cost and fair value.

(Dollars in thousands)	September 30, 2013
	Amortized		Fair
	Cost		Value
Due in 1 year or less	$	-	$	-
Due after 1 year but within 5 years		16,646		17,636
Due after 5 years but within 10 years		26,939		26,896
Due after 10 years		32,636		31,321
		76,221		75,853
Mortgage-backed securities		42,458		42,373
Equity securities		1,550		1,544
	$	120,229	$	119,770

Mortgage-backed securities at September 30, 2013, had an average life of 3.4 years.

9

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

(3)           Loans and Allowance for Loan and Lease Losses

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

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

For all classes of loans, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days or more past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and unpaid interest accrued in prior years is charged against the allowance for loan and lease losses. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt.  The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

Commercial and industrial

Mid Penn originates commercial and industrial loans.  Most of the Bank’s commercial and industrial loans have been extended to finance local and regional businesses and include short-term loans to finance machinery and equipment purchases, inventory, and accounts receivable.  Commercial loans also involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies.

The maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment.  Generally, the maximum term on non-mortgage lines of credit is one year.  The loan-to-value ratio on such loans and lines of credit generally may not exceed 80% of the value of the collateral securing the loan.  The Bank’s commercial business lending policy includes credit file documentation and analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of conditions affecting the borrower.  Analysis of the borrower’s past, present, and future cash flows is also an important aspect of the Bank’s current credit analysis.  Nonetheless, such loans are believed to carry higher credit risk than more traditional investments.

Commercial and industrial loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.  As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself, which, in turn, is likely to be dependent upon the general economic environment.  Mid Penn’s commercial and industrial loans are usually, but not always, secured by business assets and personal guarantees.  However, the collateral securing the loans may depreciate over time, may be difficult to appraise, and may fluctuate in value based on the success of the business.

Commercial real estate and commercial real estate - construction

Commercial real estate and commercial real estate construction loans generally present a higher level of risk than loans secured by one to four family residences.  This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans.  In addition, the repayment of loans secured by commercial real estate is typically dependent upon the successful operation of the related real estate project.  If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

Lease financing

Mid Penn originates leases for select commercial and state and municipal government lessees.  The nature of the leased asset is often subject to rapid depreciation in salvage value over a relatively short time frame or may be of an industry specific nature, making appraisal or liquidation of the asset difficult.  These factors have led the Bank to severely curtail the origination of new leases to state or municipal government agencies where default risk is extremely limited and to only the most credit-worthy commercial customers.  These commercial customers are primarily leasing fleet vehicles for use in their primary line of business, mitigating some of the asset

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

value concerns within the portfolio.  Leasing has been a declining percentage of the Mid Penn’s portfolio since 2006, representing 0.28% of the portfolio at September 30, 2013.

Residential mortgage

Mid Penn offers a wide array of residential mortgage loans for both permanent structures and those under construction.  The Bank’s residential mortgage originations are secured primarily by properties located in its primary market and surrounding areas.  Residential mortgage loans have terms up to a maximum of 30 years and with loan to value ratios up to 100% of the lesser of the appraised value of the security property or the contract price.  Private mortgage insurance is generally required in an amount sufficient to reduce the Bank’s exposure to at or below the 85% loan to value level.  Residential mortgage loans generally do not include prepayment penalties.

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

The Bank underwrites residential mortgage loans to the standards established by the secondary mortgage market, i.e., Fannie Mae, Ginnie Mae, Freddie Mac, or Pennsylvania Housing Finance Agency standards, with the intention of selling the majority of residential mortgages originated into the secondary market.  In the event that the facts and circumstances surrounding a residential mortgage application do not meet all underwriting conditions of the secondary mortgage market, the Bank will evaluate the failed conditions and the potential risk of holding the residential mortgage in the Bank’s portfolio rather than rejecting the loan request.  In the event that the loan is held in the Bank’s portfolio, the interest rate on the residential mortgage would be increased to compensate for the added portfolio risk.

Consumer, including home equity

Mid Penn offers a variety of secured consumer loans, including home equity, automobile, and deposit secured loans.  In addition, the Bank offers other secured and unsecured consumer loans.  Most consumer loans are originated in Mid Penn’s primary market and surrounding areas. 

The largest component of Mid Penn’s consumer loan portfolio consists of fixed rate home equity loans and variable rate home equity lines of credit.  Substantially all home equity loans and lines of credit are secured by second mortgages on principal residences.  The Bank will lend amounts, which, together with all prior liens, typically may be up to 85% of the appraised value of the property securing the loan.  Home equity term loans may have maximum terms up to 20 years while home equity lines of credit generally have maximum terms of five years.

Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower.  The underwriting standards employed by the Bank for consumer loans include an application, a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan.  Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, in relation to the proposed loan amount.

Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment.  In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance.  In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances.  Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

The allowance for credit losses consists of the allowance for loan and lease losses and the reserve for unfunded lending commitments. The allowance for loan and lease losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet.  The allowance for loan and lease losses is increased by the provision for loan and lease losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan and lease losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans are charged off to the allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely.  Non-residential consumer loans are generally charged off no later than 120 days past due on a contractual basis, earlier in the event of bankruptcy, or if there is an amount deemed

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

uncollectible.  Because all identified losses are immediately charged off, no portion of the allowance for loan and lease losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

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

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans.  These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors.  These qualitative risk factors include changes in economic conditions, fluctuations in loan quality measures, changes in the experience of the lending staff and loan review systems, growth or changes in the mix of loans originated, and shifting industry or portfolio concentrations.

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

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

In addition, Mid Penn’s rating system assumes any loans classified as sub-standard non-accrual to be impaired, and all of these loans are considered collateral dependent; therefore, all of Mid Penn’s impaired loans, whether reporting a specific allocation or not, are considered collateral dependent.

Mid Penn evaluates loans for charge-off on a monthly basis.  Policies that govern the recommendation for charge-off are unique to the type of loan being considered.  Commercial loans rated as nonaccrual or lower will first have a collateral evaluation completed in accordance with the guidance on impaired loans.  Once the collateral evaluation has been completed, a specific allocation of allowance is made based upon the results of the evaluation.  In the event the loan is unsecured, the loan would have been charged-off at the recognition of impairment.  If the loan is secured, it will undergo a 90 day waiting period to ensure the collateral shortfall identified in the evaluation is accurate and then charged down by the specific allocation. Once the charge down is taken, the remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured).  Commercial loans secured by real estate rated as impaired will also have an initial collateral evaluation completed in accordance with the guidance on impaired loans.  An updated real estate valuation is ordered and the collateral evaluation is modified to reflect any variations in value.  A specific allocation of allowance is made for any anticipated collateral shortfall and a 90 day waiting period begins to ensure the accuracy of the collateral shortfall.  The loan is then charged down by the specific allocation.  Once the charge down is taken, the remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured).  The process of charge-off for residential mortgage loans begins upon a loan becoming delinquent for 90 days and not in the process of collection.  The existing appraisal is reviewed and a lien search is obtained to determine lien position and any instances of intervening liens.  A new appraisal of the property will be ordered if deemed necessary by management and a collateral evaluation is completed. The loan will then be charged down to the value indicated in the evaluation.  Consumer loans (including home equity loans and other consumer loans) are recommended for charge-off after reaching delinquency of 90 days and the loan is not in the process of collection.  The entire balance of the consumer loan is recommended for charge-off at this point.

As noted above, Mid Penn assesses a sp