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

PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS


(Dollars in thousands, except per share data)	September 30, 2015		December 31, 2014
(Dollars in thousands, except share data)					March 31, 2016		December 31, 2015
ASSETS
Cash and due from banks	$	17,153	$	8,869	$	9,707	$	12,329
Interest-bearing balances with other financial institutions		2,081		1,013		1,490		955
Federal funds sold						2,125		-
Total cash and cash equivalents		19,234		9,882		13,322		13,284
Interest-bearing time deposits with other financial institutions		5,313		5,772		2,332		4,317
Available for sale investment securities		133,696		141,634
Investment securities available for sale						161,910		135,721
Loans and leases, net of unearned interest		719,085		571,533		746,452		739,191
Less: Allowance for loan and lease losses		(6,984)		(6,716)		(6,439)		(6,168)
Net loans and leases		712,101		564,817		740,013		733,023
Bank premises and equipment, net		14,196		12,225		13,728		13,993
Cash surrender value of life insurance						12,586		12,516
Restricted investment in bank stocks		3,919		3,181		2,871		4,266
Foreclosed assets held for sale		990		565		794		1,185
Accrued interest receivable		3,415		3,058		3,919		3,813
Deferred income taxes		2,976		2,125		1,466		1,821
Goodwill		3,918		1,016		3,918		3,918
Core deposit and other intangibles, net		699		187		627		665
Cash surrender value of life insurance		12,446		8,575
Other assets		2,362		2,620		3,408		3,116
Total Assets	$	915,265	$	755,657	$	960,894	$	931,638
LIABILITIES & SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing demand	$	96,916	$	60,613	$	107,369	$	103,721
Interest bearing demand		255,672		222,712		275,011		247,356
Money Market		204,928		197,418		224,656		208,386
Savings		56,032		32,394		59,147		56,731
Time		161,602		124,785		166,398		160,849
Total Deposits		775,150		637,922		832,581		777,043
Short-term borrowings		5,712		578		-		31,596
Long-term debt		51,363		52,961		40,250		40,305
Subordinated debt						7,407		7,414
Accrued interest payable		605		349		586		390
Other liabilities		6,915		4,717		8,848		4,822
Total Liabilities		839,745		696,527		889,672		861,570
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, 2015
and at December 31, 2014; total redemption value $5,100,000		5,000		5,000
Series C Preferred stock, par value $1.00; liquidation value $1,000; authorized 1,750 shares; 1%
non-cumulative dividend; 1,750 shares issued and outstanding at September 30, 2015 and 0
shares issued and outstanding at December 31, 2014; total redemption value $1,750,000		1,750		-
Common stock, par value $1.00; authorized 10,000,000 shares; 4,225,720 shares issued and
outstanding at September 30, 2015 and 3,497,829 at December 31, 2014		4,226		3,498
Common stock, par value $1.00; authorized 10,000,000 shares;
4,227,981 and 4,226,717 shares issued and outstanding at
March 31, 2016 and at December 31, 2015, respectively						4,228		4,227
Additional paid-in capital		40,535		29,902		40,585		40,559
Retained earnings		22,569		19,217		24,345		23,470
Accumulated other comprehensive income		1,440		1,513		2,064		1,812
Total Shareholders’ Equity		75,520		59,130		71,222		70,068
Total Liabilities and Shareholders' Equity	$	915,265	$	755,657	$	960,894	$	931,638

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

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,				Three Months Ended March 31,
	2015		2014		2015		2014		2016		2015
INTEREST INCOME
Interest & fees on loans and leases	$	8,448	$	6,657	$	24,345	$	20,122	$	8,807	$	7,154
Interest on interest-bearing balances		12		11		34		31		7		11
Interest and dividends on investment securities:
U.S. Treasury and government agencies		293		359		928		994		322		331
State and political subdivision obligations, tax-exempt		484		563		1,532		1,618		464		531
Other securities		102		43		301		118		94		131
Interest on federal funds sold and securities purchased under
agreements to resell		-		-		1		-
Interest on federal funds sold and securities purchased under agreements to resell										3		-
Total Interest Income		9,339		7,633		27,141		22,883		9,697		8,158
INTEREST EXPENSE
Interest on deposits		987		953		2,881		2,921		1,039		914
Interest on short-term borrowings		14		5		36		26		13		11
Interest on long-term debt		149		131		511		369		230		195
Total Interest Expense		1,150		1,089		3,428		3,316		1,282		1,120
Net Interest Income		8,189		6,544		23,713		19,567		8,415		7,038
PROVISION FOR LOAN AND LEASE LOSSES		265		395		865		1,217		340		300
Net Interest Income After Provision for Loan and Lease Losses		7,924		6,149		22,848		18,350		8,075		6,738
NONINTEREST INCOME
Income from fiduciary activities		120		120		367		445		106		127
Service charges on deposits		186		154		503		417		155		150
Net gain on sales of investment securities		138		-		315		150		-		177
Earnings from cash surrender value of life insurance		71		50		198		152		70		56
Mortgage banking income		106		95		326		208		186		67
ATM debit card interchange income		189		138		540		403		200		155
Merchant services income		64		65		175		198		67		50
Net gain on sales of SBA loans		73		19		216		97		190		-
Other income		138		100		487		339		258		167
Total Noninterest Income		1,085		741		3,127		2,409		1,232		949
NONINTEREST EXPENSE
Salaries and employee benefits		3,471		2,635		10,231		8,026		3,723		3,195
Occupancy expense, net		498		282		1,448		986		547		454
Equipment expense		346		297		1,081		908		435		313
Pennsylvania Bank Shares tax expense		106		64		337		272		203		115
FDIC Assessment		166		134		470		405		153		139
Legal and professional fees		151		101		455		366		202		143
Director fees and benefits expense		92		83		267		238		89		83
Marketing and advertising expense		137		95		372		227		84		88
Software licensing		380		238		1,103		687		331		319
Telephone expense		169		108		432		304		142		123
Loss on sale/write-down of foreclosed assets		47		52		64		109		104		32
Intangible amortization		26		8		61		22		37		9
Loan collection costs		67		76		235		229		39		80
Merger and acquisition expense		-		11		784		11		-		762
Other expenses		913		745		2,511		1,945		893		785
Total Noninterest Expense		6,569		4,929		19,851		14,735		6,982		6,640
INCOME BEFORE PROVISION FOR INCOME TAXES		2,440		1,961		6,124		6,024		2,325		1,047
Provision for income taxes		546		366		1,223		1,211		520		84
NET INCOME		1,894		1,595		4,901		4,813		1,805		963
Series B preferred stock dividends		88		88		263		263		-		87
Series C preferred stock dividends		4		-		8		-
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	1,802	$	1,507	$	4,630	$	4,550	$	1,805	$	876

PER COMMON SHARE DATA:
Basic Earnings Per Common Share	$	0.43	$	0.43	$	1.14	$	1.30	$	0.43	$	0.23
Cash Dividends	$	0.12	$	0.10	$	0.32	$	0.25	$	0.22	$	0.10

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

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



(Dollars in thousands)	Three Months Ended September 30,				Three Months Ended March 31,
	2015		2014		2016		2015

Net income	$	1,894	$	1,595	$	1,805	$	963

Other comprehensive income:

Unrealized gains arising during the period on available for sale
securities, net of income taxes of $464 and $40, respectively		898		77
securities, net of income taxes of $189 and $244, respectively						366		475

Reclassification adjustment for net gain on sales of available for sale securities
included in net income, net of income taxes of ($47) and $0, respectively (1) (3)		(91)		-
included in net income, net of income taxes of $0 and ($60), respectively (a)						-		(117)

Change in defined benefit plans, net of income taxes of $2 and $3, respectively (2) (3)		2		4
Change in defined benefit plans, net of income taxes of ($56) and $1, respectively (b)						(114)		3

Total other comprehensive income		809		81		252		361

Total comprehensive income	$	2,703	$	1,676	$	2,057	$	1,324

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

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

FOR THE ~~NINE~~THREE MONTHS ENDED ~~SEPTEMBER 30,~~MARCH 31, 2016 AND 2015 ~~AND 2014~~



(Dollars in thousands)									Accumulated												Accumulated
					Additional				Other		Total						Additional				Other		Total
	Preferred		Common		Paid-in		Retained		Comprehensive		Shareholders'		Preferred		Common		Paid-in		Retained		Comprehensive		Shareholders'
	Stock		Stock		Capital		Earnings		Income (Loss)		Equity		Stock		Stock		Capital		Earnings		Income		Equity
Balance, January 1, 2016													$	-	$	4,227	$	40,559	$	23,470	$	1,812	$	70,068
Net income														-		-		-		1,805		-		1,805
Total other comprehensive income, net of taxes														-		-		-		-		252		252
Employee Stock Purchase Plan (1,264 shares)														-		1		18		-		-		19
Common stock dividends														-		-		-		(930)		-		(930)
Restricted stock compensation expense														-		-		8		-		-		8
Balance, March 31, 2016													$	-	$	4,228	$	40,585	$	24,345	$	2,064	$	71,222


Balance, January 1, 2015	$	5,000	$	3,498	$	29,902	$	19,217	$	1,513	$	59,130	$	5,000	$	3,498	$	29,902	$	19,217	$	1,513	$	59,130
Net income		-		-		-		4,901		-		4,901		-		-		-		963		-		963
Total other comprehensive loss, net of taxes		-		-		-		-		(73)		(73)
Employee Stock Purchase Plan (3,166 shares)		-		3		47		-		-		50
Total other comprehensive income, net of taxes														-		-		-		-		361		361
Employee Stock Purchase Plan (1,013 shares)														-		1		15		-		-		16
Common stock dividends		-		-		-		(1,278)		-		(1,278)		-		-		-		(350)		-		(350)
Series B preferred stock dividends		-		-		-		(263)		-		(263)		-		-		-		(87)		-		(87)
Series C preferred stock dividends		-		-		-		(8)		-		(8)
SBLF preferred stock in connection with Phoenix acquisition		1,750		-		-		-		-		1,750		1,750		-		-		-		-		1,750
Common stock issued to Phoenix shareholders		-		724		10,568		-		-		11,292		-		724		10,568		-		-		11,292
Restricted stock purchase (875 shares)		-		1		-		-		-		1
Restricted stock compensation expense		-		-		18		-		-		18		-		-		8		-		-		8
Balance, September 30, 2015	$	6,750	$	4,226	$	40,535	$	22,569	$	1,440	$	75,520


Balance, January 1, 2014	$	5,000	$	3,494	$	29,853	$	15,441	$	(872)	$	52,916
Net income		-		-		-		4,813		-		4,813
Total other comprehensive income, net of taxes		-		-		-		-		2,181		2,181
Employee Stock Purchase Plan (2,519 shares)		-		3		35		-		-		38
Common stock dividends		-		-		-		(874)		-		(874)
Series B Preferred stock dividends		-		-		-		(263)		-		(263)
Balance, September 30, 2014	$	5,000	$	3,497	$	29,888	$	19,117	$	1,309	$	58,811
Balance, March 31, 2015													$	6,750	$	4,223	$	40,493	$	19,743	$	1,874	$	73,083

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

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



(Dollars in thousands)	Nine Months Ended September 30,				Three Months Ended March 31,
	2015		2014		2016		2015
Operating Activities:
Net Income	$	4,901	$	4,813	$	1,805	$	963
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan and lease losses		865		1,217		340		300
Depreciation		1,082		934		419		314
Amortization of intangibles		66		46		37		13
Net amortization of security premiums		1,867		925		665		384
Gain on sales of investment securities		(315)		(150)		-		(177)
Earnings on cash surrender value of life insurance		(198)		(152)		(70)		(56)
SBA loans originated for sale		(2,915)		(943)		(2,500)		-
Proceeds from sales of SBA loans originated for sale		3,131		1,040		2,690		-
Gain on sale of loans		(216)		(97)		(190)		-
Loss on disposal of property, plant, and equipment		-		8
Loss on sale / write-down of foreclosed assets		64		109		104		32
Restricted stock compensation expense		19		-		8		8
Deferred income tax (benefit) expense		(300)		71
Decrease (increase) in accrued interest receivable		31		(296)
Decrease (increase) in other assets		882		(94)
Deferred income tax expense (benefit)						53		(76)
(Increase) decrease in accrued interest receivable						(106)		52
Increase in other assets						(290)		(47)
Increase in accrued interest payable		224		253		196		117
Increase (decrease) in other liabilities		1,322		(621)		4,026		(40)
Net Cash Provided By Operating Activities		10,510		7,063		7,187		1,787
Investing Activities:
Net decrease in interest-bearing time deposits with other financial institutions		459		1,741		1,985		103
Proceeds from the maturity of investment securities		8,080		10,497		3,045		2,594
Proceeds from the sale of investment securities		33,962		7,199		-		16,091
Purchases of investment securities		(24,446)		(40,511)		(29,345)		(8,065)
Net cash received from acquisition		8,095		-		-		8,118
Purchases of restricted investment in bank stock		(229)		(426)
Redemptions of restricted investment in bank stock						1,395		173
Net increase in loans and leases		(38,671)		(23,613)		(7,359)		(13,579)
Purchases of bank premises and equipment		(1,261)		(776)		(154)		(393)
Proceeds from sale of foreclosed assets		396		798		315		27
Net Cash Used In Investing Activities		(13,615)		(45,091)
Net Cash (Used In) Provided By Investing Activities						(30,118)		5,069
Financing Activities:
Net increase in deposits		13,990		37,867
Net increase (decrease) in short-term borrowings		5,134		(1,979)
Net increase (decrease) in deposits						55,538		(2,114)
Net (decrease) increase in short-term borrowings						(31,596)		43
Series B preferred stock dividend paid		(263)		(263)		-		(87)
Series C preferred stock dividend paid		(8)		-
Common stock dividend paid		(1,278)		(874)		(930)		(350)
Employee Stock Purchase Plan		50		38		19		16
Proceeds from long-term debt borrowings		-		10,000
Long-term debt repayment		(5,168)		(137)		(62)		(51)
Net Cash Provided By Financing Activities		12,457		44,652
Net Cash Provided By (Used In) Financing Activities						22,969		(2,543)
Net increase in cash and cash equivalents		9,352		6,624		38		4,313
Cash and cash equivalents, beginning of year		9,882		8,623		13,284		9,882
Cash and cash equivalents, end of year	$	19,234	$	15,247	$	13,322	$	14,195

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

Effective March 1, 2016, Mid Penn Insurance Services, LLC, an immaterial subsidiary of Mid Penn, was liquidated due to the lack of consistent profitability and growth.

Certain information and ~~footnote~~ disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Mid Penn believes the information presented is not misleading and the disclosures are adequate. For comparative purposes, the ~~September 30, 2014~~March 31, 2015 and December 31, ~~2014~~2015 balances have been reclassified, when, and if necessary, to conform to the ~~2015~~2016 presentation. Such reclassifications had no impact on net income. The results of operations for interim periods are not necessarily indicative of operating results expected for the full year. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2014.~~2015.

Mid Penn has evaluated events and transactions occurring subsequent to the balance sheet date of ~~September 30, 2015,~~March 31, 2016, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

(2) ~~Merger~~Mergers and Acquisitions

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

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

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

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

Included in the purchase price was goodwill and a core deposit intangible of $2,902,000 and $578,000, respectively. The core deposit intangible will be amortized over a ten-year period using a sum of the year’s digits basis. The goodwill will not be amortized, but will be measured annually for impairment or more frequently if circumstances require. Core deposit intangible amortization expense projected for the succeeding five years beginning ~~2015~~2016 is estimated to be ~~$88,000,~~ $96,000, $86,000, $75,000, $65,000, and ~~$65,000~~$54,000 per year, respectively, and ~~$168,000~~$114,000 in total for years after ~~2019.~~2020.

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

The allocation of the purchase price is as follows:


(Dollars in thousands)
~~Purchase price assigned to Phoenix common shares exchanged for 723,851 Mid Penn common shares~~	$	~~11,292~~
~~Purchase price assigned to Phoenix common shares exchanged for cash~~		~~2,949~~
~~Total purchase price~~		~~14,241~~
~~Phoenix net assets~~Assets acquired:
~~Tangible Common Equity~~Cash and cash equivalents	$	11,044
Investment securities		~~12,292~~11,331
~~Estimated adjustments to reflect~~Loans		110,363
Goodwill		2,902
Core deposit and other intangibles		578
Other assets		7,489
Total assets acquired ~~and liabilities assumed at fair value:~~		143,707
Liabilities assumed:
~~Total fair value adjustments~~Deposits		~~(1,456)~~123,238
~~Associated deferred income taxes~~FHLB borrowings		~~503~~3,570
Other liabilities		908
Total liabilities assumed		127,716
Equity acquired:
Preferred stock		1,750
Total equity acquired and liabilities assumed		129,466
Consideration paid	$	14,241

Cash paid	$	2,949
Fair value ~~adjustment to net assets acquired, net~~ of ~~tax~~common stock issued, including replacement equity awards		~~(953)~~
~~Total Phoenix net assets acquired~~		~~11,339~~
~~Goodwill resulting from the merger~~	$	~~2,902~~11,292

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


(Dollars in thousands)
Total purchase price	$	14,241

Net assets acquired:
Cash and cash equivalents		11,044
Investment securities		11,331
Restricted stock		509
Loans		110,363
Bank owned life insurance		3,673
Premises and equipment		1,792
Deferred income taxes		503
Accrued interest receivable		388
Core deposit and other intangibles		578
Other assets		~~1,127~~624
Deposits		(123,238)
FHLB borrowings		(3,570)
Accrued interest payable		(32)
Other liabilities		(876)
Preferred stock		(1,750)
		11,339
Goodwill	$	2,902

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

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

(Dollars in thousands)
Gross amortized cost basis at March 1, 2015	$	112,816
Market rate adjustment		270
Credit fair value adjustment on pools of homogeneous loans		(1,461)
Credit fair value adjustment on impaired loans		(1,262)
Fair value of purchased loans at March 1, 2015	$	110,363

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

The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the stated rates of the acquired loans. The credit adjustment made on pools of homogeneous loans represents the changes in credit quality of the underlying borrowers from the loan inception to the acquisition date. The credit adjustment on impaired loans is derived in accordance with ASC 310-30-30 and represents the portion of the loan balance that has been deemed uncollectible based on our expectations of future cash flows for each respective loan.

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


(Dollars in thousands)
Contractually required principal and interest at acquisition	$	3,548
Contractual cash flows not expected to be collected (nonaccretable discount)		(804)
Expected cash flows at acquisition		2,744
Interest component of expected cash flows (accretable discount)		(458)
Fair value of acquired loans	$	2,286

The following table presents pro forma information as if the merger between Mid Penn and Phoenix had been completed on January 1, 2014. The pro forma information does not necessarily reflect the results of operations that would have occurred had Mid Penn merged with Phoenix at the beginning of 2014. Supplemental pro forma earnings for 2015 were adjusted to exclude ~~$784,000~~$762,000 of merger related costs incurred for the three ~~and nine~~ months ended ~~September 30, 2015; the results for the first three and nine months of 2014 were adjusted to include these charges.~~March 31, 2015. The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies, or other factors.

The pro forma data is intended for informational purposes and is not indicative of the future results of operations.

(Dollars in thousands, except per share data)
Three Months Ended September 30,

Nine Months Ended September 30,

2015

2014

2015

2014
Net interest income after loan loss provision
$
7,924

$
7,439

$
23,484

$
22,257
Noninterest income

1,085

980

3,192

3,057
Noninterest expense

7,353

7,318

20,934

18,982
Net income available to common shareholders

1,251

1,568

4,403

4,812
Net income per common share

0.30

0.37

1.04

1.14


(Dollars in thousands)	March 31, 2015
Net interest income after loan loss provision	$	7,374
Noninterest income		1,014
Noninterest expense		6,815
Net income available to common shareholders		1,276
Net income per common share		0.30

The amount of total revenue, consisting of interest income plus noninterest income specifically related to Phoenix for the period beginning March 1, 2015, included in the consolidated statements of income of Mid Penn for the three and nine months ended September 30, 2015, was $1,329,000 and $3,157,000, respectively. The net income specifically related to Phoenix for the period beginning March 1, 2015, included in the consolidated statements of income of Mid Penn for the three and nine months ended September 30, 2015, was $243,000 and $540,000, respectively.

(3) Investment Securities

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

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

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

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

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.

In assessing potential other-than-temporary impairment for equity securities, consideration is given to management’s intent and ability to hold the securities until recovery of unrealized losses. Because Mid Penn does not intend to sell these investments and it is not likely it will be required to sell these investments before a recovery of fair value, which may be maturity, Mid Penn does not consider the securities with unrealized losses to be other-than-temporarily impaired as losses relate to changes in interest rates and not erosion of credit quality.

~~At September 30,~~Mid Penn had no securities considered other than temporarily impaired as of March 31, 2016 or December 31, 2015, and ~~December 31, 2014,~~did not record any securities impairment charges in the respective periods ended on these dates.

The amortized cost, fair value, and unrealized gains and losses on investment securities at March 31, 2016 and December 31, 2015 are as follows:



(Dollars in thousands)	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value		Amortized		Unrealized		Unrealized		Fair
September 30, 2015
March 31, 2016									Cost		Gains		Losses		Value
Available for sale securities:
U.S. Treasury and U.S. government agencies	$	26,323	$	1,060	$	41	$	27,342	$	26,309	$	1,076	$	38	$	27,347
Mortgage-backed U.S. government agencies		36,136		170		117		36,189		49,762		134		185		49,711
State and political subdivision obligations		65,630		1,482		230		66,882		79,647		2,162		156		81,653
Equity securities		3,266		90		73		3,283		3,266		24		91		3,199
	$	131,355	$	2,802	$	461	$	133,696	$	158,984	$	3,396	$	470	$	161,910

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.

Investment securities having a fair value of ~~$127,025,000~~$155,153,000 at ~~September 30, 2015~~March 31, 2016 and ~~$134,740,000~~$130,298,000 at December 31, ~~2014,~~2015, were pledged to secure public deposits and other borrowings.

Mid Penn realized gross gains of ~~$138,000~~$0 and $0$177,000 on sales of securities available for sale during the three months ended ~~September 30, 2015~~March 31, 2016 and ~~September 30, 2014. For the nine months ended September 30, 2015 and September 30, 2014,~~March 31, 2015. Mid Penn realized ~~$315,000 and $150,000, respectively, on sales of securities available for sale. Mid Penn realized~~no gross losses on the sale of securities available for sale ~~of $0~~ during the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 and ~~September 30, 2014.~~March 31, 2015.

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, 2015~~March 31, 2016 and December 31, ~~2014.~~2015.



(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total					Less Than 12 Months					12 Months or More					Total
September 30, 2015	Number of	Fair		Unrealized		Number of	Fair		Unrealized		Number of	Fair		Unrealized
	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Number					Number					Number
																of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized
March 31, 2016																Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
Available for sale securities:
U.S. Treasury and U.S. government agencies	3	$	2,895	$	29	2	$	1,456	$	12	5	$	4,351	$	41	4	$	3,817	$	28	2	$	1,320	$	10	6	$	5,137	$	38
Mortgage-backed U.S. government agencies	8		8,276		46	7		4,128		71	15		12,404		117	16		22,011		125	10		6,248		60	26		28,259		185
State and political subdivision obligations	31		14,564		120	4		2,936		110	35		17,500		230	19		10,899		110	4		1,792		46	23		12,691		156
Equity securities	1		997		3	3		1,196		70	4		2,193		73	1		985		15	2		1,142		76	3		2,127		91
Total temporarily impaired
available for sale securities	43	$	26,732	$	198	16	$	9,716	$	263	59	$	36,448	$	461
Total temporarily impaired available for sale securities																40	$	37,712	$	278	18	$	10,502	$	192	58	$	48,214	$	470



(Dollars in thousands)	Less Than 12 Months					12 Months or More					Total					Less Than 12 Months					12 Months or More					Total
December 31, 2014	Number of	Fair		Unrealized		Number of	Fair		Unrealized		Number of	Fair		Unrealized
	Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses		Number					Number					Number
																of	Fair		Unrealized		of	Fair		Unrealized		of	Fair		Unrealized
December 31, 2015																Securities	Value		Losses		Securities	Value		Losses		Securities	Value		Losses
Available for sale securities:
U.S. Treasury and U.S. government agencies	5	$	6,059	$	29	-	$	-	$	-	5	$	6,059	$	29	6	$	6,259	$	43	2	$	1,383	$	12	8	$	7,642	$	55
Mortgage-backed U.S. government agencies	15		9,511		62	5		4,416		115	20		13,927		177	13		12,759		124	11		6,282		104	24		19,041		228
State and political subdivision obligations	9		4,444		33	28		13,947		285	37		18,391		318	9		4,041		32	3		1,631		45	12		5,672		77
Equity securities	-		-		-	2		583		23	2		583		23	1		990		10	2		615		33	3		1,605		43
Total temporarily impaired
available for sale securities	29	$	20,014	$	124	35	$	18,946	$	423	64	$	38,960	$	547
Total temporarily impaired available for sale securities																29	$	24,049	$	209	18	$	9,911	$	194	47	$	33,960	$	403

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~~Mid Penn considers (a) whether management has the intent to sell the security, (b) it is more likely than not that management will be required to sell the security prior to its anticipated recovery, and (c) whether management expects to recover the entire amortized cost basis. For equity securities, management considers the intent and ability to hold securities until recovery of unrealized losses.

The majority of the investment portfolio is comprised of mortgage-backed U.S. government agencies and state and political subdivision ~~obligations with school districts and municipal authorities throughout the U.S.~~obligations. For the investment securities with an unrealized loss, Mid Penn has concluded, based on its analysis, that the unrealized losses in the investments are primarily caused by the movement of interest rates, and the contractual terms of these investments do not permit the issuer to settle the securities at a price less than the par value of the investment.

At ~~September 30, 2015,~~March 31, 2016, 55 debt securities and 43 equity securities with unrealized losses totaling ~~$461,000~~$470,000 were temporarily depreciated ~~1.26%~~0.97% from their amortized cost basis. At ~~September 30, 2015, 13 debt~~March 31, 2016, the majority of securities ~~and 3 equity securities had~~in an unrealized ~~losses for twelve months or longer totaling $266,000, of which the largest~~ loss ~~was~~position were attributed to state and political subdivision obligations ~~with $110,000 in unrealized losses.~~and mortgage-backed U.S. government agencies. At December 31, ~~2014, 62~~2015, 44 debt securities and 23 equity securities with unrealized losses totaling ~~$547,000~~$403,000 were temporarily depreciated ~~1.40%~~1.19% from their amortized cost basis.

At December 31, ~~2014, 33 debt securities and 2 equity securities had~~2015, the majority of the unrealized losses ~~for twelve months or longer totaling $423,000, of which the majority was~~on securities in an unrealized loss position were attributed to mortgage-backed U.S. government ~~agencies and state and political subdivision obligations with $115,000 and $285,000 in unrealized losses, respectively.~~

Because Mid Penn does not intend to sell these investments and it is not likely it will be required to sell these investments before a recovery of fair value, which may be maturity, Mid Penn does not consider the securities with unrealized losses to be other-than-temporarily impaired as losses relate to changes in interest rates and not erosion of credit quality.agencies.

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

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 is 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.~~income. Interest received on nonaccrual loans, including impaired loans, generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally, at least six consecutive months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments.

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.~~other extensions of credit.

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

Commercial real estate and commercial real estate construction loans generally present a higher level of risk than loans secured by ~~one to four~~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.

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~~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 evaluate the potential risk of holding the residential mortgage in the Bank’s portfolio rather than rejecting the loan request. In the event that the loan is held in the Bank’s portfolio, the interest rate on the residential mortgage would be increased to compensate for the added portfolio risk.

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

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

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

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

Junior liens inherently have more credit risk by virtue of the fact that another financial institution may have a higher security position in the case of foreclosure liquidation of collateral to extinguish the debt. Generally, foreclosure actions could become more prevalent if the real estate market ~~continues to be weak~~weakens and property values deteriorate.

The allowance for credit losses consists of (i) the allowance for loan and lease losses, and (ii) the reserve for unfunded lending commitments. The allowance for loan and lease losses ~~(“allowance”)~~ represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded loan commitments and is recorded in other liabilities on the consolidated balance sheet. The reserve for unfunded lending commitments was $117,000 at March 31, 2016 and $94,500 at December 31, 2015. 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, or earlier in the event of bankruptcy, or if there is an amount deemed uncollectible. Because all identified losses are immediately charged off, no portion of the allowance for loan and lease losses is restricted to any individual loan or groups of loans, and the entire allowance is available to absorb any and all loan losses.

The allowance for credit losses is maintained at a level ~~that management~~ 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, ~~including loans classified as troubled debt restructurings,~~ an allowance is established when the discounted cash flows, collateral value, or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include changes in economic conditions, fluctuations in loan quality measures, changes in collateral values, changes in the experience of the lending staff and loan review systems, ~~growth or~~changes in lending policies and procedures (including underwriting standards), changes in the mix and volume of loans originated, the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing loan portfolio, shifting industry or portfolio ~~concentrations.~~concentrations, and other relevant factors.

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

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

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

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

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

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

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

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

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

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, Mid Penn does not separately identify individual residential mortgage loans, home equity loans and other consumer loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.

Loans whose terms are modified are classified as troubled debt restructurings if the borrowers have been granted concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. Nonaccrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.

The allowance calculation methodology includes further segregation of loan classes into risk rating categories. The borrower’s overall financial condition, repayment sources, guarantors, and value of collateral, if appropriate, are evaluated annually for commercial loans or when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful, and loss. Loans criticized as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Any loans not classified as noted above are rated pass.

In addition, Mid Penn’s rating system assumes any loans classified as substandard 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 an impaired 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 an impaired 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 specific allocation for commercial loans prior to charging down or charging off the loan. Once the charge down is taken, the remaining balance remains a nonperforming loan with the original terms and interest rate intact (not restructured). In addition, Mid Penn takes a preemptive step when any commercial loan becomes classified under its internal classification system. A preliminary collateral evaluation in accordance with the guidance on impaired loans is prepared using the existing collateral information in the loan file. This process allows Mid Penn to review both the credit and documentation files to determine the status of the information needed to make a collateral evaluation. This collateral evaluation is preliminary but allows Mid Penn to determine if any potential collateral shortfalls exist.

It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate within 30 days of the credit being classified as impaired. Prior to receipt of the updated real estate valuation Mid Penn will use any existing real estate valuation to determine any potential allowance issues; however no allowance recommendation will be made until which time Mid Penn is in receipt of the updated valuation. The credit department employs an electronic tracking system to monitor the receipt of and need for updated appraisals. To date, there have been no significant time lapses noted with the above processes.

For impaired loans with no valuation allowance required, Mid Penn’s practice of obtaining independent third party market valuations on the subject property within 30 days of being placed on non-accrual status sometimes indicates that the loan to value ratio is sufficient to obviate the need for a specific allocation in spite of significant deterioration in real estate values in Mid Penn’s primary market area. These circumstances are determined on a case by case analysis of the impaired loans.

Mid Penn actively monitors the values of collateral on impaired loans. This monitoring may require the modification of collateral values over time or changing circumstances by some factor, either positive or negative, from the original values. All collateral values will be assessed by management at least every 18 months for possible revaluation by an independent third party.

Loans whose terms are modified are classified as troubled debt restructurings if the borrowers have been granted concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.

~~In addition,~~ Federal and State regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan and lease losses and may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the current level of the allowance for loan losses is adequate.

Loans that Mid Penn acquires in connection with ~~acquisitions~~business combinations are recorded at fair value with no carryover of the existing related allowance for loan losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. These loans are accounted for under the ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows will require Mid Penn to evaluate the need for an additional allowance for credit losses. Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount which Mid Penn will then reclassify as accretable discount that will be recognized into interest income over the remaining life of the loan.

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

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

Acquired loans that met the criteria for impaired or nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent if Mid Penn expects to fully collect the new carrying value (i.e. fair value) of the loans. As such, Mid Penn may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. In addition, charge-offs on such loans would be first applied to the nonaccretable difference portion of the fair value adjustment.

~~Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30, but for which a discount is attributable at least in part~~

The classes of the loan portfolio, summarized by the aggregate pass rating, net of deferred fees and costs of ($209,000) as of March 31, 2016 and ($178,000) as of December 31, 2015, and the classified ratings of special mention, substandard, and doubtful within Mid Penn’s internal risk rating system as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014~~2015, are as follows:



(Dollars in thousands)			Special										Special
September 30, 2015	Pass		Mention		Substandard		Doubtful		Total
March 31, 2016											Pass		Mention		Substandard		Doubtful		Total

Commercial and industrial	$	159,219	$	1,497	$	705	$	-	$	161,421	$	160,227	$	789	$	1,402	$	-	$	162,418
Commercial real estate		337,917		2,256		10,574		-		350,747		382,438		5,105		7,090		-		394,633
Commercial real estate - construction		65,785		3,167		-		-		68,952		45,523		2,210		-		-		47,733
Lease financing		804		-		-		-		804		656		-		-		-		656
Residential mortgage		99,335		478		1,272		-		101,085		102,077		184		1,753		-		104,014
Home equity		32,587		278		300		-		33,165		33,431		246		187		-		33,864
Consumer		2,911		-		-		-		2,911		3,134		-		-		-		3,134
	$	698,558	$	7,676	$	12,851	$	-	$	719,085	$	727,486	$	8,534	$	10,432	$	-	$	746,452



(Dollars in thousands)			Special
December 31, 2015	Pass		Mention		Substandard		Doubtful		Total

Commercial and industrial	$	158,302	$	1,289	$	670	$	-	$	160,261
Commercial real estate		359,859		2,088		7,517		-		369,464
Commercial real estate - construction		65,665		2,403		-		-		68,068
Lease financing		727		-		-		-		727
Residential mortgage		101,507		475		1,361		-		103,343
Home equity		32,928		261		222		-		33,411
Consumer		3,917		-		-		-		3,917
	$	722,905	$	6,516	$	9,770	$	-	$	739,191

Impaired loans by loan portfolio class as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014~~2015 are summarized as follows:



	September 30, 2015						December 31, 2014						March 31, 2016						December 31, 2015
(Dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no related allowance recorded:
Commercial and industrial:
Commercial and industrial	$	17	$	51	$	-	$	395	$	430	$	-	$	12	$	49	$	-	$	14	$	49	$	-
Commercial real estate:
Commercial real estate		969		1,948		-		1,971		4,481		-		1,009		2,020		-		1,023		2,020		-
Acquired with credit deterioration*		927		927		-		-		-		-
Acquired with credit deterioration														929		-		-		931		-		-
Residential mortgage:
Residential mortgage		770		854		-		1,146		1,286		-		1,332		1,421		-		1,329		1,434		-
Acquired with credit deterioration*		419		419		-		-		-		-
Home equity:
Acquired with credit deterioration														361		-		-		400		-		-
Home equity		20		37		-		29		88		-		68		73		-		115		137		-

With an allowance recorded:
Commercial and industrial	$	123	$	134	$	58	$	223	$	231	$	137	$	104	$	128	$	40	$	113	$	128	$	51
Commercial real estate		5,355		6,402		1,531		6,954		7,255		1,382		1,835		1,889		428		1,947		1,981		429
Residential mortgage		31		31		23		-		-		-		-		-		-		32		32		23
Home equity		165		168		129		211		213		115		18		37		3		-		-		-

Total:
Commercial and industrial	$	140	$	185	$	58	$	618	$	661	$	137	$	116	$	177	$	40	$	127	$	177	$	51
Commercial real estate		7,251		9,277		1,531		8,925		11,736		1,382		3,773		3,909		428		3,901		4,001		429
Residential mortgage		1,220		1,304		23		1,146		1,286		-		1,693		1,421		-		1,761		1,466		23
Home equity		185		205		129		240		301		115		86		110		3		115		137		-

* Loans acquired with credit deterioration are presented net of credit fair value adjustment.

Average recorded investment of impaired loans and related interest income recognized for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and March 31, 2015 ~~and September 30, 2014~~ are summarized as follows:



	Three Months Ended
	September 30, 2015				September 30, 2014				March 31, 2016				March 31, 2015
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial:
Commercial and industrial	$	18	$	-	$	48	$	-	$	13	$	-	$	31	$	-
Acquired with credit deterioration		-		100		-		-		-		-		55		-
Commercial real estate:
Commercial real estate		991		14		2,057		-		1,016		-		1,933		-
Acquired with credit deterioration		926		-		-		-		925		-		335		-
Residential mortgage:
Residential mortgage		735		8		908		-		1,325		2		932		-
Acquired with credit deterioration		426		-		-		-		372		4		85		-
Home equity:
Home equity		21		-		31		-		71		-		32		-
Acquired with credit deterioration		-		3		-		-		-		-		4		-

With an allowance recorded:
Commercial and industrial	$	124	$	-	$	133	$	-	$	109	$	-	$	583	$	-
Commercial real estate		5,167		-		6,930		-		1,845		-		5,177		-
Residential mortgage		31		-		-		-		-		-		16		-
Home equity		182		-		112		-		18		-		208		-

Total:
Commercial and industrial	$	142	$	100	$	181	$	-	$	122	$	-	$	669	$	-
Commercial real estate		7,084		14		8,987		-		3,786		-		7,445		-
Residential mortgage		1,192		8		908		-		1,697		6		1,033		-
Home equity		203		3		143		-		89		-		244		-

Nine Months Ended

September 30, 2015

September 30, 2014
(Dollars in thousands)
Average Recorded Investment

Interest Income Recognized

Average Recorded Investment

Interest Income Recognized
With no related allowance recorded:

Commercial and industrial:

Commercial and industrial
$
22

$
-

$
51

$
-
Acquired with credit deterioration

-

205

-

-
Commercial real estate:

Commercial real estate

1,072

14

2,127

346
Acquired with credit deterioration

947

347

-

-
Residential mortgage:

Residential mortgage

673

8

930

-
Acquired with credit deterioration

427

-

-

-
Home equity:

Home equity

22

-

54

-
Acquired with credit deterioration

-

3

-

-

With an allowance recorded:

Commercial and industrial
$
127

$
-

$
135

$
-
Commercial real estate

5,077

-

7,008

-
Residential mortgage

19

-

-

-
Home equity

178

-

115

-

Total:

Commercial and industrial
$
149

$
205

$
186

$
-
Commercial real estate

7,096

361

9,135

346
Residential mortgage

1,119

8

930

-
Home equity

200

3

169

-

~~Non-accrual~~Nonaccrual loans by loan portfolio class as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014~~2015 are summarized as follows:

The performance and credit quality of the loan portfolio is also monitored by the analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The classes of the loan portfolio summarized by the past due status as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014~~2015 are summarized as follows:



(Dollars in thousands)
September 30, 2015	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Loans Receivable > 90 Days and Accruing
Commercial and industrial:
March 31, 2016															30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Loans Receivable > 90 Days and Accruing
Commercial and industrial	$	-	$	219	$	78	$	297	$	161,124	$	161,421	$	-	$	205	$	-	$	56	$	261	$	162,157	$	162,418	$	-
Commercial real estate:
Commercial real estate		1,128		865		4,052		6,045		343,775		349,820		-		9		170		1,349		1,528		392,176		393,704		-
Acquired with credit deterioration		-		-		53		53		874		927		53		-		-		56		56		873		929		56
Commercial real estate - construction:
Commercial real estate - construction		-		-		-		-		68,952		68,952		-		-		-		-		-		47,733		47,733		-
Lease financing:
Lease financing		-		-		-		-		804		804		-		-		-		-		-		656		656		-
Residential mortgage:
Residential mortgage		75		480		715		1,270		99,396		100,666		-		350		-		186		536		103,117		103,653		-
Acquired with credit deterioration		117		-		218		335		84		419		-		72		-		214		286		75		361		-
Home equity:
Home equity		20		-		139		159		33,006		33,165		-		87		-		69		156		33,708		33,864		-
Consumer:
Consumer		5		-		-		5		2,906		2,911		-		4		-		-		4		3,130		3,134		-
Total	$	1,345	$	1,564	$	5,255	$	8,164	$	710,921	$	719,085	$	53	$	727	$	170	$	1,930	$	2,827	$	743,625	$	746,452	$	56



(Dollars in thousands)
December 31, 2014	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Loans Receivable > 90 Days and Accruing
December 31, 2015															30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Loans Receivable > 90 Days and Accruing
Commercial and industrial	$	172	$	290	$	87	$	549	$	118,461	$	119,010	$	-	$	55	$	204	$	66	$	325	$	159,936	$	160,261	$	-
Commercial real estate:
Commercial real estate		403		197		6,585		7,185		290,172		297,357		-		211		608		1,456		2,275		366,258		368,533		-
Acquired with credit deterioration																215		518		55		788		143		931		55
Commercial real estate - construction		-		-		-		-		56,076		56,076		-		-		-		-		-		68,068		68,068		-
Lease financing		-		-		-		-		1,121		1,121		-		-		-		-		-		727		727		-
Residential mortgage:
Residential mortgage		328		82		1,117		1,527		64,915		66,442		-		694		550		778		2,022		100,921		102,943		-
Acquired with credit deterioration																12		-		222		234		166		400		-
Home equity		93		63		157		313		28,193		28,506		-		-		50		23		73		33,338		33,411		-
Consumer		6		-		-		6		3,015		3,021		-		10		5		-		15		3,902		3,917		-
Total	$	1,002	$	632	$	7,946	$	9,580	$	561,953	$	571,533	$	-	$	1,197	$	1,935	$	2,600	$	5,732	$	733,459	$	739,191	$	55

The following tables summarize the allowance for loan and lease losses and recorded investments in loans receivable.


(Dollars in thousands)
As of, and for the periods ended, September 30, 2015	Commercial and industrial		Commercial real estate		Commercial real estate - construction		Lease financing		Residential mortgage		Home equity		Consumer		Unallocated		Total
As of, and for the period ended, March 31, 2016																			Commercial and industrial		Commercial real estate		Commercial real estate - construction		Lease financing		Residential mortgage		Home equity		Consumer		Unallocated		Total
Allowance for loan and lease losses:
Beginning balance,
July 1, 2015	$	1,748	$	3,891	$	40	$	2	$	481	$	611	$	40	$	38	$	6,851
Beginning balance																			$	1,393	$	3,552	$	153	$	1	$	534	$	317	$	12	$	206	$	6,168
Charge-offs		(130)		-		-		-		(34)		(7)		(2)		-		(173)		-		(96)		-		-		-		-		(3)		-		(99)
Recoveries		10		5		-		-		23		-		3		-		41		1		25		-		-		-		-		4		-		30
Provisions		(67)		237		86		(1)		33		22		(7)		(38)		265		33		296		(34)		-		(18)		(14)		(4)		81		340
Ending balance,
September 30, 2015	$	1,561	$	4,133	$	126	$	1	$	503	$	626	$	34	$	-	$	6,984
Ending balance																				1,427		3,777		119		1		516		303		9		287		6,439

Commercial and industrial

Commercial real estate

Commercial real estate - construction

Lease financing

Residential mortgage

Home equity

Consumer

Unallocated

Total
Allowance for loan and lease losses:

Beginning balance,

January 1, 2015
$
1,393

$
3,925

$
33

$
2

$
450

$
653

$
35

$
225

$
6,716
  Charge-offs

(130)

(505)

-

-

(35)

(36)

(13)

-

(719)
  Recoveries

10

48

-

-

23

29

12

-

122
  Provisions

288

665

93

(1)

65

(20)

-

(225)

865
Ending balance,

September 30, 2015
$
1,561

$
4,133

$
126

$
1

$
503

$
626

$
34

$
-

$
6,984
Ending balance: individually evaluated for impairment
$
58

$
1,531

$
-

$
-

$
23

$
129

$
-

$
-

$
1,741
Ending balance: collectively evaluated for impairment
$
1,503

$
2,602

$
126

$
1

$
480

$
497

$
34

$
-

$
5,243

Loans receivables:

Ending balance
$
161,421

$
350,747

$
68,952

$
804

$
101,085

$
33,165

$
2,911

$
-

$
719,085
Ending balance: individually evaluated  for impairment
$
140

$
6,324

$
-

$
-

$
801

$
185

$
-

$
-

$
7,450
Ending balance: collectively evaluated for impairment
$
161,281

$
343,496

$
68,952

$
804

$
99,865

$
32,980

$
2,911

$
-

$
710,289
Ending balance: acquired with credit deterioration
$
-

$
927

$
-

$
-

$
419

$
-

$
-

$
-

$
1,346

(Dollars in thousands)

As of, and for the periods ended, September 30, 2014
Commercial and industrial

Commercial real estate

Commercial real estate - construction

Lease financing

Residential mortgage

Home equity

Consumer

Unallocated

Total
Allowance for loan and lease losses:

Beginning balance,

July 1, 2014
$
1,341

$
3,458

$
19

$
1

$
592

$
483

$
63

$
173

$
6,130
  Charge-offs

(21)

(72)

-

-

(47)

-

(5)

-

(145)
  Recoveries

7

9

-

-

-

1

14

-

31
  Provisions

(9)

209

-

-

(39)

189

(10)

55

395
Ending balance,

September 30, 2014
$
1,318

$
3,604

$
19

$
1

$
506

$
673

$
62

$
228

$
6,411


Ending balance: individually evaluated for impairment		40		428		-		-		-		3		-		-		471
Ending balance: acquired with credit deterioration		-		-		-		-		-		-		-		-		-
Ending balance: collectively evaluated for impairment	$	1,387	$	3,349	$	119	$	1	$	516	$	300	$	9	$	287	$	5,968

Loans receivables:
Ending balance	$	162,418	$	394,633	$	47,733	$	656	$	104,014	$	33,864	$	3,134	$	-	$	746,452
Ending balance: individually evaluated for impairment		116		2,844		-		-		1,332		86		-		-		4,378
Ending balance: acquired with credit deterioration		-		929		-		-		361		-		-		-		1,290
Ending balance: collectively evaluated for impairment	$	162,302	$	390,860	$	47,733	$	656	$	102,321	$	33,778	$	3,134	$	-	$	740,784

Commercial and industrial

Commercial real estate

Commercial real estate - construction

Lease financing

Residential mortgage

Home equity

Consumer

Unallocated

Total
Allowance for loan and lease losses:

Beginning balance,

January 1, 2014
$
1,187

$
4,006

$
9

$
-

$
581

$
441

$
72

$
21

$
6,317
  Charge-offs

(62)

(934)

-

-

(133)

(43)

(31)

-

(1,203)
  Recoveries

13

11

-

-

-

1

55

-

80
  Provisions

180

521

10

1

58

274

(34)

207

1,217
Ending balance,

September 30, 2014
$
1,318

$
3,604

$
19

$
1

$
506

$
673

$
62

$
228

$
6,411
Ending balance: individually evaluated for impairment
$
73

$
1,162

$
-

$
-

$
-

$
8

$
-

$
-

$
1,243
Ending balance: collectively evaluated for impairment
$
1,245

$
2,442

$
19

$
1

$
506

$
665

$
62

$
228

$
5,168

Loans receivables:

Ending balance
$
116,563

$
294,803

$
55,189

$
1,215

$
68,450

$
27,895

$
4,046

$
-

$
568,161
Ending balance: individually evaluated  for impairment
$
171

$
8,921

$
-

$
-

$
877

$
141

$
-

$
-

$
10,110
Ending balance: collectively evaluated for impairment
$
116,392

$
285,882

$
55,189

$
1,215

$
67,573

$
27,754

$
4,046

$
-

$
558,051

(Dollars in thousands)

December 31, 2014
Commercial and industrial

Commercial real estate

Commercial real estate - construction

Lease financing

Residential mortgage

Home equity

Consumer

Unallocated

Total
Allowance for loan and lease losses:

Ending balance
$
1,393

$
3,925

$
33

$
2

$
450

$
653

$
35

$
225

$
6,716
Ending balance: individually evaluated for impairment
$
137

$
1,382

$
-

$
-

$
-

$
115

$
-

$
-

$
1,634
Ending balance: collectively evaluated for impairment
$
1,256

$
2,543

$
33

$
2

$
450

$
538

$
35

$
225

$
5,082

Loans receivables:

Ending balance
$
119,010

$
297,357

$
56,076

$
1,121

$
66,442

$
28,506

$
3,021

$
-

$
571,533
Ending balance: individually evaluated for impairment
$
618

$
8,925

$
-

$
-

$
1,146

240

$
-

$
-

$
10,929
Ending balance: collectively evaluated for impairment
$
118,392

$
288,432

$
56,076

$
1,121

$
65,296

$
28,266

$
3,021

$
-

$
560,604


(Dollars in thousands)
As of, and for the period ended, March 31, 2015	Commercial and industrial		Commercial real estate		Commercial real estate - construction		Lease financing		Residential mortgage		Home equity		Consumer		Unallocated		Total
Allowance for loan and lease losses:
Beginning balance	$	1,393	$	3,925	$	33	$	2	$	450	$	653	$	35	$	225	$	6,716
Charge-offs		-		(450)		-		-		(1)		(29)		(5)		-		(485)
Recoveries		-		2		-		-		-		29		4		-		35
Provisions		246		149		2		(1)		95		(134)		3		(60)		300
Ending balance		1,639		3,626		35		1		544		519		37		165		6,566


Ending balance: individually evaluated for impairment		223		1,103		-		-		23		139		-		-		1,488
Ending balance: acquired with credit deterioration		-		-		-		-		-		-		-		-		-
Ending balance: collectively evaluated for impairment	$	1,416	$	2,523	$	35	$	1	$	521	$	380	$	37	$	165	$	5,078

Loans receivables:
Ending balance	$	160,254	$	340,647	$	60,386	$	1,016	$	97,533	$	32,110	$	3,207	$	-	$	695,153
Ending balance: individually evaluated for impairment		610		7,058		-		-		966		246		-		-		8,880
Ending balance: acquired with credit deterioration		272		1,675		-		-		425		21		-		-		2,393
Ending balance: collectively evaluated for impairment	$	159,372	$	331,914	$	60,386	$	1,016	$	96,142	$	31,843	$	3,207	$	-	$	683,880



(Dollars in thousands)
December 31, 2015	Commercial and industrial		Commercial real estate		Commercial real estate - construction		Lease financing		Residential mortgage		Home equity		Consumer		Unallocated		Total
Allowance for loan and lease losses:
Ending balance	$	1,393	$	3,552	$	153	$	1	$	534	$	317	$	12	$	206	$	6,168
Ending balance: individually evaluated for impairment		51		429		-		-		23		-		-		-		503
Ending balance: collectively evaluated for impairment	$	1,342	$	3,123	$	153	$	1	$	511	$	317	$	12	$	206	$	5,665

Loans receivable:
Ending balance	$	160,261	$	369,464	$	68,068	$	727	$	103,343	$	33,411	$	3,917	$	-	$	739,191
Ending balance: individually evaluated for impairment		127		2,970		-		-		1,361		115		-		-		4,573
Ending balance: acquired with credit deterioration		-		931		-		-		400		-		-		-		1,331
Ending balance: collectively evaluated for impairment	$	160,134	$	365,563	$	68,068	$	727	$	101,582	$	33,296	$	3,917	$	-	$	733,287

The recorded investments in troubled debt restructured loans at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014~~2015 are as follows:

Mid Penn entered into forbearance agreements on all loans currently classified as troubled debt restructures and all of these agreements have resulted in additional principal repayment. The terms of these forbearance agreements vary whereby principal payments have been decreased, interest rates have been reduced and/or the loan will be repaid as collateral is sold.

Mid Penn’s troubled debt restructured loans at ~~September 30, 2015~~March 31, 2016 totaled ~~$6,311,000,~~$2,781,000, of which ~~four~~five loans totaling ~~$483,000~~$960,000 represented accruing impaired loans in compliance with the terms of the modification. ~~Of the $483,000, three~~Four of these loans totaling $587,000 are accruing impaired residential mortgages to unrelated borrowers, ~~totaling $66,000 and the~~with one loan comprising $525,000 of this total. The other loan is an accruing impaired commercial real estate loan for ~~$417,000.~~$373,000. The remaining ~~$5,828,000,~~$1,821,000, representing 11eight loans among ~~six~~three relationships, are nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired loans. ~~Two~~One large ~~relationships account~~relationship accounted for ~~$4,535,000~~$1,347,000 of the ~~$5,828,000~~total $1,821,000 in nonaccrual impaired troubled debt restructured ~~loan total.~~loans.

At December 31, ~~2014,~~2015, Mid Penn’s troubled debt restructured loans totaled ~~$8,746,000,~~$2,805,000, of which ~~six~~four loans totaling ~~$2,035,000,~~$459,000, represented accruing impaired loans in compliance with the terms of the modification. Of the ~~$2,035,000,~~$459,000, three are accruing impaired residential mortgages to unrelated borrowers totaling ~~$71,000~~$64,000 and the other ~~three are~~one is an accruing impaired commercial real estate ~~loans spread among two relationships totaling $1,964,000.~~loan for $395,000. The remaining ~~$6,711,000,~~$2,346,000, representing 14nine loans among ~~nine~~four relationships, are nonaccrual impaired loans, and resulted in a collateral evaluation in accordance with the guidance on impaired loans. ~~Two~~One large ~~relationships account~~relationship accounts for ~~$4,680,000~~$1,370,000 of the ~~$6,711,000~~$2,346,000 nonaccrual impaired troubled debt restructured loan total.

As a result of the evaluations at ~~September 30,~~March 31, 2016 and March 31, 2015, ~~and September 30, 2014, a~~any specific ~~allocation~~allocations and ~~subsequently,~~ charge-offs have been taken as appropriate. As of ~~September 30,~~March 31, 2016 and March 31, 2015, ~~and September 30, 2014,~~there were no charge-offs associated with troubled debt restructured loans while under forbearance agreement ~~totaled $0. There were~~and no troubled debt restructured loans that defaulted within twelve months of restructure for the three months ended September 30, 2015 and 2014. There were two troubled debt restructured loans to unrelated borrowers that defaulted within twelve months of restructure totaling $3,404,000 for the nine months ended September 30, 2015, while there were none for the nine months ended September 30, 2014.restructure. As of ~~September 30, 2015,~~March 31, 2016, one forbearance agreement was negotiated during 2008, nine forbearance agreements were negotiated during 2009, ~~three~~two forbearance agreements were negotiated in 2013, and ~~two~~one forbearance agreements were negotiated during 2014.

There were no new loans modified during the three months ended March 31, 2016 or 2015.

As of March 31, 2016, Mid Penn had $203,000 of residential real estate held in other real estate owned and no loans for which formal foreclosure proceedings were in process. As of December 31, 2015, Mid Penn had $358,000 of residential real estate held in other real estate owned and no loans for which formal foreclosure proceedings were in process.

There were no new loans modified during the three months ended September 30, 2015 or 2014, nor were there any during the nine months ended September 30, 2015 that resulted in troubled debt restructurings. The table below lists the new loans modified during the nine months ended September 30, 2014 that resulted in troubled debt restructurings.

~~There were no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process at September 30, 2015 and $485,000 at December 31, 2014.~~

The following table provides activity for the accretable yield of purchased impaired loans for the three ~~and nine~~ months ended ~~September 30, 2015.~~

~~(1)~~(a) Reclassification from non-accretable difference represents an increase to the estimated cash flows to be collected on the underlying portfolio.

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This guidance provides additional information on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes information on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed and significant adjustments to the related prices may be necessary to estimate fair value in accordance with the fair value measurement and disclosure guidance.

This guidance clarifies that when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

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

Level 1 Inputs - Unadjusted quoted prices in active markets that are accessible at the measurement date for

Level 2 Inputs - Quoted prices in markets that are not active, or inputs that are observable either directly or

Level 3 Inputs - Prices or valuation techniques that require inputs that are both significant to the fair value

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

There were no transfers of assets between fair value Level 1 and Level 2 for the three ~~and nine~~ months ended ~~September 30, 2015.~~March 31, 2016.

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

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis, but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

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

The following tables present additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Mid Penn has utilized Level 3 inputs to determine the fair value as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014.~~2015.

The following methodologies and assumptions were used to estimate the fair value of Mid Penn’s financial instruments:

The carrying value of cash and cash equivalents is considered to be a reasonable estimate of fair value.

The estimate of fair value was determined by comparing the present value of quoted interest rates on like deposits with the weighted average yield and weighted average maturity of the balances.

The fair value of securities classified as available for sale is determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather relying on the securities’ relationship to other benchmark quoted prices.

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

Mid Penn’s rating system assumes any loans classified as substandard and ~~non-accrual~~nonaccrual 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.

It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate within 30 days of the credit being classified as substandard ~~non-accrual.~~nonaccrual. Prior to receipt of the updated real estate valuation Mid Penn will use any existing real estate valuation to determine any potential allowance issues; however no allowance recommendation will be made until which time Mid Penn is in receipt of the updated valuation.

Mid Penn actively monitors the values of collateral on impaired loans. This monitoring may require the modification of collateral values over time or changing circumstances by some factor, either positive or negative, from the original values. All collateral values will be assessed by management at least every 1812 months for possible revaluation by an independent third party.

For variable rate loans that reprice frequently and which entail no significant changes in credit risk, carrying values approximated fair value. The fair value of other loans are estimated by calculating the present value of the cash flow difference between the current rate and the market rate, for the average maturity, discounted quarterly at the market rate.

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

The carrying amount of accrued interest receivable and payable approximates their fair values.

The carrying amount of required and restricted investment in correspondent bank stock approximates fair value, and considers the limited marketability of such securities.

The fair value of servicing rights is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and maturity date.

The fair value for demand deposits (e.g., interest and noninterest checking, savings, and money market deposit accounts) is by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying amounts). Fair value for fixed-rate certificates of deposit was estimated using a discounted cash flow calculation by combining all fixed-rate certificates into a pool with a weighted average yield and a weighted average maturity for the pool and comparing the pool with interest rates currently being offered on a similar maturity.

Because of time to maturity, the estimated fair value of short-term borrowings approximates the book value.

The estimated fair values of long-term and subordinated debt were determined using discounted cash flow analysis, based on currently available borrowing rates for similar types of borrowing arrangements.

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms and present credit worthiness of the counterparties. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements.

The following table summarizes the carrying value and fair value of financial instruments at ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014.~~2015.



(Dollars in thousands)	September 30, 2015				December 31, 2014				March 31, 2016				December 31, 2015
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value		Value		Value		Value		Value
Financial assets:
Cash and cash equivalents	$	19,234	$	19,234	$	9,882	$	9,882	$	13,322	$	13,322	$	13,284	$	13,284
Interest-bearing time balances with other financial institutions		5,313		5,313		5,772		5,772		2,332		2,332		4,317		4,317
Investment securities		133,696		133,696		141,634		141,634		161,910		161,910		135,721		135,721
Net loans and leases		712,101		720,133		564,817		572,487		746,452		750,824		733,023		738,773
Restricted investment in bank stocks		3,919		3,919		3,181		3,181		2,871		2,871		4,266		4,266
Accrued interest receivable		3,415		3,415		3,058		3,058		3,919		3,919		3,813		3,813
Mortgage servicing rights		171		171		187		187		162		162		174		174

Financial liabilities:
Deposits	$	775,150	$	776,679	$	637,922	$	639,226	$	832,581	$	833,705	$	777,043	$	777,320
Short-term borrowings		5,712		5,712		578		578		-		-		31,596		31,596
Long-term debt		51,363		50,581		52,961		52,514		40,250		39,917		40,305		39,626
Subordinated debt										7,407		7,407		7,414		7,414
Accrued interest payable		605		605		349		349		586		586		390		390

Off-balance sheet financial instruments:
Commitments to extend credit	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Financial standby letters of credit		-		-		-		-		-		-		-		-

The following tables present the carrying amount, fair value, and placement in the fair value hierarchy of Mid Penn’s financial instruments as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014.~~2015. Carrying values approximate fair values for cash and cash equivalents, interest-bearing time balances with other financial institutions, restricted investment in bank stocks, mortgage servicing rights, accrued interest receivable and payable, and short-term borrowings. Other than cash and cash equivalents, which are considered Level 1 Inputs and mortgage servicing rights, which are Level 3 inputs, these instruments are Level 2 Inputs. These tables exclude financial instruments for which the carrying amount approximates fair ~~value.~~

Fair Value Measurements

Quoted Prices

in Active Markets

Significant
(Dollars in thousands)

for Identical Assets

Significant Other

Unobservable

Carrying

or Liabilities

Observable Inputs

Inputs
September 30, 2015

Amount

Fair Value

(Level 1)

(Level 2)

(Level 3)
Financial instruments - assets

Net loans and leases

$
712,101

$
720,133

$
-

$
-

$
720,133

Financial instruments - liabilities

Deposits

$
775,150

$
776,679

$
-

$
776,679

$
-
Long-term debt

51,363

50,581

-

50,581

-



					Fair Value Measurements										Fair Value Measurements
					Quoted Prices										Quoted Prices
					in Active Markets				Significant						in Active Markets				Significant
(Dollars in thousands)					for Identical Assets		Significant Other		Unobservable						for Identical Assets		Significant Other		Unobservable
	Carrying				or Liabilities		Observable Inputs		Inputs		Carrying				or Liabilities		Observable Inputs		Inputs
December 31, 2014	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
March 31, 2016											Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial instruments - assets
Net loans and leases	$	564,817	$	572,487	$	-	$	-	$	572,487	$	746,452	$	750,824	$	-	$	-	$	750,824

Financial instruments - liabilities
Deposits	$	637,922	$	639,226	$	-	$	639,226	$	-	$	832,581	$	833,705	$	-	$	833,705	$	-
Long-term debt		52,961		52,514		-		52,514		-		40,250		39,917		-		39,917		-


					Fair Value Measurements
					Quoted Prices
					in Active Markets				Significant
(Dollars in thousands)					for Identical Assets		Significant Other		Unobservable
	Carrying				or Liabilities		Observable Inputs		Inputs
December 31, 2015	Amount		Fair Value		(Level 1)		(Level 2)		(Level 3)
Financial instruments - assets
Net loans and leases	$	733,023	$	738,773	$	-	$	-	$	738,773

Financial instruments - liabilities
Deposits	$	777,043	$	777,320	$	-	$	777,320	$	-
Long-term debt		40,305		39,626		-		39,626		-

In the normal course of business, Mid Penn makes various commitments and incurs certain contingent liabilities, which are not reflected in the accompanying consolidated financial statements. The commitments include various guarantees and commitments to extend credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Mid Penn evaluates each customer’s ~~credit-worthiness~~creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the customer. Standby letters of credit and financial guarantees written are conditional commitments to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Mid Penn had ~~$14,604,000~~$13,821,000 and ~~$9,837,000~~$15,805,000 standby letters of credit outstanding as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014,~~2015, respectively. Mid Penn does not anticipate any losses because of these transactions. The current amount of the liability as of ~~September 30, 2015~~March 31, 2016 for payment under standby letters of credit issued was not material.

On December 9, 2015, Mid Penn sold $7,500,000 aggregate principal amount of Subordinated Debt (“Notes”) due 2025. The Notes are treated as Tier 2 capital for regulatory capital purposes.

The Notes bear interest at a rate of 5.15% per year for the first five years and then float at the Wall Street Journal’s Prime Rate plus 0.50%, provided that the interest rate applicable to the outstanding principal balance will at no times be less than 4.0%. Interest will be payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, beginning on January 1, 2016. The Notes will mature on December 9, 2025 and are redeemable in whole or in part, without premium or penalty, at any time on or after December 9, 2020, and prior to December 9, 2025. Additionally, Mid Penn may redeem the Notes in whole at any time, or in part from time to time, upon at least 30 days’ notice if: (i) a change or prospective change in law occurs that could prevent Mid Penn from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) an event occurs that precludes the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) Mid Penn becomes required to register as an investment company under the Investment Company Act of 1940, as amended, in each case at 100% of the principal amount of the subordinated notes, plus accrued and unpaid interest thereon to but excluding the date of redemption.

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

ASC Subtopic 835-30, Simplifying the Presentation of Debt Issuance Costs, requires that debt issuance costs be reported in the balance sheet as a direct deduction from the face amount of the related liability. The debt issuance costs associated with the Notes were $93,000 at March 31, 2016 and $86,000 at December 31, 2015.

Mid Penn has an unfunded noncontributory defined benefit retirement plan for directors. The plan provides defined benefits based on years of service. In addition, Mid Penn sponsors a defined benefit health care plan that provides post-retirement medical benefits and life insurance to qualifying full-time employees. These health care and life insurance plans are noncontributory. A December 31 measurement date for the plans is used.

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

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

On May 6, 2014, the Mid Penn Bancorp, Inc. 2014 Restricted Stock Plan (the “Plan”) was approved by shareholders. The Plan provides that awards shall not exceed, in the aggregate 100,000 shares of common stock. Awards under the Plan are limited to employees and directors of the Company and the Bank selected by the Compensation Committee of the Board of Directors. Current outstanding awards under the Plan require recipients to acquire specified ownership interest levels in Mid Penn in order for such award to ~~vest.~~vest, and thereby, encouraging them to contribute to the success of the company.

Share-based compensation expense relating to restricted stock is recognized on a straight-line basis over the vesting periods of the awards and is a component of salaries and benefits expense. As of ~~September 30, 2015,~~March 31, 2016, 8,975 shares have been granted under the plan, which resulted in ~~$19,000 of~~$8,000 in compensation expense ~~while there was no compensation expense in 2014.~~for the three months ended March 31, 2016 and 2015. On August 27, 2015, 875 of the granted shares ~~vested.~~vested, while the remaining granted shares remain unvested as of March 31, 2016.

On March 1, 2015, ~~the Company~~Mid Penn assumed all of the issued and outstanding shares of Phoenix with respect to 1,750 shares of Phoenix’s preferred stock issued to the Treasury in connection with the Small Business Lending Fund and issued 1,750 shares of SBLF Preferred Shares, having a $1,000 liquidation preference per share, to the Treasury. The SBLF Preferred Shares ~~qualify~~qualified as Tier 1 capital and ~~have~~had terms and conditions identical to those shares of preferred stock issued by Phoenix to the Treasury. Mid Penn ~~will pay~~paid noncumulative dividends payable quarterly on January 1, April 1, July 1, and October ~~1 of each year.~~1. The ~~current~~ dividend rate iswas 1.00% per annum for payment dates up to January 19, 2016. ~~From and after this date, the dividend rate will increase to 9% per annum thereafter.~~

On December 15, 2015, Mid Penn, using a portion of the proceeds from the offering of its Notes, redeemed all of the outstanding shares of its SBLF Preferred Shares ~~may be redeemed at any time at~~which were held by the ~~option of Mid Penn, subject to the approval of the appropriate federal banking agency. All redemptions must be made at a per share~~Treasury for an aggregate redemption price ~~equal to 100%~~ of ~~the liquidation preference, plus~~$1,754,000, including accrued ~~and~~but unpaid dividends as of the date of the redemption (“Redemption Date”) for the quarter that includes the Redemption Date, and a pro rata portion of any lending incentive fee. All redemptions must be in amounts equal to at least 25% of the number of originally issued shares, or 100% of the then outstanding shares, if less than 25% of the number of originally issued shares.dividends.

Between September 26, 2012 and ~~December 31, 2012, the Company sold 4,880~~January 3, 2013, Mid Penn issued, via private placement, 5,000 shares of its 7% Non-Cumulative Non-Voting Non-Convertible Perpetual Preferred Stock, Series B (“Series B Preferred Stock”) pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, for total gross proceeds of $4,880,000, which offset issuance costs of $50,000. On January 3, 2013, 120 additional shares were sold resulting in total gross proceeds of $5,000,000 for the offering. ~~No additional~~On December 9, 2015, Mid Penn, using a portion of the proceeds from the offering of the Notes, redeemed all of its issued and outstanding shares of Series B Preferred Stock ~~have been sold by the Company since January 3, 2013.~~

~~The following table summarizes the Series B Preferred Stock shares sold and the gross proceeds received through the private placement offering as of September 30, 2015:~~

The annual dividend rate for the Series B Preferred Stock is 7% per annum of the liquidation preference of the Series B Preferred Stock, or $70.00 per annum for each share of Series B Preferred Stock. The Board of Directors must approve each dividend payment from legally available funds. Dividends are payable to holders of record of the Series B Preferred Stock as they appear on our books on the record dates fixed by our Board of Directors. Dividends on any of Series B Preferred Stock are non-cumulative. If and when dividends are declared, they will be paid on February 15, May 15, August 15, and November 15 of each year. If a dividend payment date is not a business day, the dividend will be paid on the immediately preceding business day but no additional dividend payment will be prorated from the date of purchase to the first dividend payment date over a quarterly dividend period of 90 days.

~~Mid Penn may redeem shares of its Series B Preferred Stock at its option, in whole or in part, at any time subject to prior approval of the Federal Reserve Board, if then required,~~ at a ~~redemption~~ price ofequal to $1,024.67 per share, which is equal to $1,020 per share ~~of Series B Preferred Stock~~ plus an amount equal to ~~any~~ declared but unpaid dividends ~~and in accordance with the terms and conditions set forth in~~on December 9, 2015, for a ~~Certificate~~total redemption price of ~~Designations for the Series B Preferred Stock as filed with the Pennsylvania Department of State.~~$5,123,000.

Earnings per share are computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each of the years presented. The following data show the amounts used in computing basic and diluted earnings per share.

Mid Penn ~~did not have~~had no dilutive ~~securities~~instruments outstanding as of ~~September 30, 2015~~March 31, 2016 and ~~2014.~~2015.

ASU ~~2014-09:~~2016-09: The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2014-09,~~2016-09, ~~Revenue~~Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.

ASU 2016-09 introduces targeted amendments intended to simplify the accounting for stock compensation. Specifically, the ASU requires all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) to be recognized as income tax expense or benefit in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits, and assess the need for a valuation allowance, regardless of whether the benefit reduces taxes payable in the current period. That is, off balance sheet accounting for net operating losses stemming from ~~Contracts~~excess tax benefits would no longer be required and instead such net operating losses would be recognized when they arise. Existing net operating losses that are currently tracked off balance sheet would be recognized, net of a valuation allowance if required, through an adjustment to opening retained earnings in the period of adoption. Entities will no longer need to maintain and track an “APIC pool.” The ASU also requires excess tax benefits to be classified along with ~~Customers (Topic 606)~~other income tax cash flows as an operating activity in the statement of cash flows.

In addition, the ASU elevates the statutory tax withholding threshold to qualify for equity classification up to the maximum statutory tax rates in the applicable jurisdiction(s). The ASU also clarifies that cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The ASU provides an optional accounting policy election (with limited exceptions), to be applied on an entity-wide basis, to either estimate the number of awards that are expected to vest (consistent with existing U.S. GAAP) or account for forfeitures when they occur.

The amendments ~~in this Update establish a comprehensive revenue recognition standard~~are effective for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

~~The ASU is effective~~public business entities for annual periods beginning after December 15, 2016, ~~including~~and interim periods therein. Three basic transition methods are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. Under the this alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application (e.g. January 1, 2017) and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings. That is, prior years would not be restated and additional disclosures would be required to enable users of the financial statements to understand the impact of adopting the new standard in the current year compared to prior years that are presented under legacy U.S. GAAP.within those annual periods. Early adoption is prohibited. In July 2015, the FASB approved a one-year delay of the effective date of the revenue recognition standard. The deferral would require public entities to apply the new revenue standard for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein. Public entities would be permitted to elect to early adopt for annual reporting periods beginning after December 15, 2016.

~~ASU 2014-17:~~ ~~The FASB issued ASU 2014-17,~~ ~~Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force).~~

The ASU amends Topic 805 so that a reporting entity that is a business or nonprofit activity (an “acquiree”) has the option to apply pushdown accounting to its separate financial statements when an acquirer obtains control of the acquiree. The option is available for each individual change-in-control event. Control has the same meaning as a “controlling financial interest” under Topic 810, such that pushdown accounting may be applied if an acquirer obtains control through a simple majority of the outstanding voting shares of the acquiree (e.g., 51%). Similarly, a Variable Interest Entity is considered an “acquiree” of its primary beneficiary and may also elect pushdown accounting.

IfMid Penn is currently evaluating this ASU to determine the acquiree elects to apply pushdown accounting, it must do so as of the acquisition date of the change-in-control event. Further, any subsidiary of the acquiree may elect to apply pushdown accounting toimpact on its ~~separate~~consolidated financial statements, regardless of whether the acquiree elects to apply pushdown accounting. Upon election, the acquiree would adjust its standalone financial statements to reflect the acquirer’s new basis in the acquired entity’s assets and liabilities, and would provide relevant disclosures under Topic 805 to enable users to evaluate the effect of pushdown accounting. The ASU became effective upon issuance on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change-in-control events or to its most recent change-in-control event.statements.

ASU ~~2015-03:~~2016-08: The FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).

ASU 2016-08 updates the new revenue standard by clarifying the principal versus agent implementation guidance, but does not change the core principle of the new standard. The updates to the principal versus agent guidance:

The effective date and transition requirements for ASU 2016-08 are the same as the effective date and transition requirements of Topic 606, which is described below under ASU 2015-14.

Mid Penn is currently evaluating this ASU to determine the impact on its consolidated financial statements.

ASU 2016-07: The FASB issued ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.

ASU 2016-07 requires an investor to initially apply the equity method of accounting from the date it qualifies for that method, i.e., the date the investor obtains significant influence over the operating and financial policies of an investee. The ASU eliminates the previous requirement to retroactively adjust the investment and record a cumulative catch up for the periods that the investment had been held, but did not qualify for the equity method of accounting.

The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the application of the equity method. Early adoption is permitted.

Mid Penn is currently evaluating this ASU to determine the impact on its consolidated financial statements.

ASU 2016-02: The FASB issued ASU ~~2015-03,~~2016-02, ~~Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.~~Leases.

The ~~ASU~~new leases standard applies a right-of-use (ROU) model that requires ~~that debt issuance costs be reported~~a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. For leases with a term of 12 months or less, a practical expedient is available whereby a lessee may elect, by class of underlying asset, not to recognize an ROU asset or lease liability. At inception, lessees must classify all leases as either finance or operating based on five criteria. Balance sheet recognition of finance and operating leases is similar, but the pattern of expense recognition in the ~~balance sheet~~income statement, as well as the effect on the statement of cash flows, differs depending on the lease classification.

The new leases standard requires a lessor to classify leases as either sales-type, direct ~~deduction from~~financing or operating, similar to existing U.S. GAAP. Classification depends on the ~~face amount~~same five criteria used by lessees plus certain additional factors. The subsequent accounting treatment for all three lease types is substantially equivalent to existing U.S. GAAP for sales-type leases, direct financing leases, and operating leases. However, the new standard updates certain aspects of the ~~related liability, consistent~~lessor accounting model to align it with the ~~presentation~~new lessee accounting model, as well as with the new revenue standard under Topic 606.

Lessees and lessors are required to provide certain qualitative and quantitative disclosures to enable users of ~~debt discounts. Prior~~financial statements to assess the ~~amendments, debt issuance costs were presented as~~amount, timing, and uncertainty of cash flows arising from leases. The new leases standard addresses other considerations including identification of a ~~deferred charge (i.e., an asset) on~~lease, separating lease and nonlease components of a contract, sale and leaseback transactions, modifications, combining contracts, reassessment of the ~~balance sheet. The ASU provides examples illustrating the balance sheet presentation~~lease term, and remeasurement of notes net of their related discounts and debt issuance costs. Further, the amendments require the amortization of debt issuance costs to be reported as interest expense. Similarly, debt issuance costs and any discount or premium are considered in the aggregate when determining the effective interest rate on the debt.lease payments. It also contains comprehensive implementation guidance with practical examples.

The amendments are effective for public business entities for fiscal years beginning after December 15, ~~2015,~~2018, including interim periods within those fiscal years. Early adoption is permitted. Specific transition requirements apply.

Mid Penn is currently evaluating the effects this ASU will have on its consolidated financial statements.

ASU 2016-01: The FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.

This ASU requires equity investments to be measured at fair value with changes in fair value recognized in net income, excluding equity investments that are consolidated or accounted for under the equity method of accounting. The ASU allows equity investments without readily determinable fair values to be measured at cost minus impairment, with a qualitative assessment required to identify impairment. The ASU also requires public companies to use exit prices to measure the fair value of financial instruments, eliminates the disclosure requirements related to measurement assumptions for the fair value of instruments measured at amortized cost, and requires separate presentation of financials assets and liabilities based on form and measurement category. In addition, for liabilities measured a fair value under the fair value option, the changes in fair value due to changes in instrument-specific credit risk should be recognized in OCI.

This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The amendments are effective for all other entities for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. The amendments must be applied retrospectively. All entities have

Mid Penn is currently evaluating this ASU to determine the ~~option of adopting the new requirements as of an earlier date for~~impact on its consolidated financial ~~statements that have not been previously issued.~~statements.

ASU ~~2015-08:~~2015-16: The FASB issued ASU ~~2015-08,~~2015-16, Business ~~Combinations~~Combination (Topic 805): ~~Pushdown Accounting—Amendments to SEC Paragraphs Pursuant to Staff~~Simplifying the Accounting ~~Bulletin No. 115 (SEC Update)~~for Measurement-Period Adjustments).

The ASU requires adjustments to provisional amounts that are identified during the measurement period to be recognized in the reporting period in which the adjustment amounts are determined. This ~~ASU amends the FASB ASC pursuant to SEC Staff Accounting Bulletin (SAB) 115, which rescinds certain SEC guidance~~includes any effect on earnings of changes in ~~order to conform with ASU 2014-17,~~ ~~Pushdown Accounting. ASU 2014-17 was issued in November 2014 and provides~~depreciation, amortization, or other income effects as a ~~reporting entity that is a business or nonprofit activity (an “acquiree”) the option to apply pushdown accounting to its separate financial statements when an acquirer obtains control~~result of the ~~acquiree.~~ change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.

~~SAB 115 became effective November 21, 2014 upon issuance.~~In addition, the amendments in the proposed ASU would require an entity to disclose (either on the face of the income statement or in the notes) the nature and amount of measurement-period adjustments recognized in the current period, including separately the amounts in current-period income statement line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.

The amendments are effective for public business entities for fiscal years, ~~beginning after December 15, 2015,~~ and for interim periods within those ~~fiscal years. The amendments are effective for all other entities for~~ fiscal years, beginning after December 15, ~~2015, and interim periods within fiscal years beginning after December 15, 2016.~~2015Early adoption is permitted. The amendments ~~must~~in this ASU should be applied ~~retrospectively. All entities have~~prospectively to measurement-period adjustments that occur after the ~~option~~effective date of ~~adopting~~this ASU.

Mid Penn early adopted this guidance in 2015. The adoption of this guidance was not material to the ~~new requirements as of an earlier date for~~consolidated financial ~~statements that have not been previously issued.~~statements.

ASU 2015-14: The FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date.

The ASU defers the effective date of the new revenue recognition standard by one year. As such, it now takes effect for public entities in fiscal years beginning after December 15, 2017. All other entities have an additional year. However, early adoption is permitted for any entity that chooses to adopt the new standard as of the original effective date. Public business entities will adopt the standard for annual reporting periods beginning after December 15, 2017, including interim periods within that year. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year. All other entities will adopt the standard for annual reporting periods beginning after December 15, 2018, and interim periods within annual reporting periods beginning after December 15, 2019. Early adoption is permitted as of either an annual reporting period beginning after December 15, 2016, including interim periods within that year, or an annual reporting period beginning after December 15, 2016 and interim periods within annual reporting periods beginning one year after the annual period in which an entity first applies the new standard.

~~ASU 2015-16:~~ ~~The FASB issued ASU 2015-16,~~ ~~Business Combination (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments).~~

The ASU requires adjustments to provisional amounts that are identified during the measurement period to be recognized in the reporting period in which the adjustment amounts are determined. This includes any effect on earnings of changes in depreciation, amortization, or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.

In addition, the amendments in the proposed Update would require an entity to disclose (either on the face of the income statement or in the notes) the nature and amount of measurement-period adjustments recognized in the current period, including separately the amounts in current-period income statement line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.

The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. For all other entities, the amendments in this Update are effective for fiscal years beginning after December 15, 2016, and for interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted. The amendments in this Update should be applied prospectively to measurement-period adjustments that occur after the effective date of this Update.

Mid Penn is currently evaluating the effects ~~these Updates~~this ASU will have on its consolidated financial statements.

~~On November 9, 2015, Mid Penn entered into agreements with investors to purchase $7,500,000~~ ~~aggregate principal amount of its~~ ~~Subordinated~~ ~~Notes due 2025 (the “Notes”). The Notes, when issued, will be treated as Tier 2 capital for regulatory capital purposes. Closing of the offering is expected to occur on December 9, 2015.~~

The Notes will bear interest at a rate of 5.15% per year for the first five years and then float at the Wall Street Journal’s Prime Rate plus 0.50%, provided that the interest rate applicable to the outstanding principal balance will at no times be less than 4.00%. Interest will be payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, beginning on January 1, 2016. The Notes will mature on December 9, 2025 and are redeemable in whole or in part, without premium or penalty, at any time on or after December 9, 2020, and prior to December 9, 2025. Additionally, Mid Penn may redeem the Notes in whole at any time, or in part from time to time, upon at least 30 days notice if: (i) a change or prospective change in law occurs that could prevent Mid Penn from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) an event occurs that precludes the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) Mid Penn becomes required to register as an investment company under the Investment Company Act of 1940, as amended, in each case at 100% of the principal amount of the ~~subordinated~~ ~~notes, plus accrued and unpaid interest thereon to but excluding the date of redemption.~~

~~Holders of the Notes may not accelerate the maturity of the Notes, except upon Mid Penn’s or the Bank’s bankruptcy, insolvency, liquidation, receivership or similar event.~~

Also on November 9, 2015, Mid Penn called for redemption all of its issued and outstanding shares of its Series B Preferred Stock on December 9, 2015, at a price equal to $1,024.67 per share, which is equal to $1,020.00 per share plus an amount equal to declared but unpaid dividends, if any, to the date fixed for redemption.

Mid Penn intends to use the proceeds from the offering of the Notes to redeem the Series B Preferred Stock with the balance available for general corporate purposes, including the redemption, if approved by the appropriate federal banking regulators, of all of its issued and outstanding SBLF Preferred Shares, which are held by the U.S. Department of Treasury and issued pursuant to its Small Business Lending Fund program.

3534

MID PENN BANCORP, INC. ~~Management’s Discussion and Analysis~~

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 ~~September 30, 2015,~~March 31, 2016, compared to year-end ~~2014,~~2015, and the Results of Operations for the three ~~and nine~~ months ended ~~September 30, 2015,~~March 31, 2016, compared to the same period in ~~2014. The comparability of~~2015. For comparative purposes, the ~~financial condition and results of operations as of and for the three and nine month periods ended September 30,~~March 31, 2015 and ~~2014, in general,~~December 31, 2015 balances have been ~~impacted by the acquisition of Phoenix. The recorded amounts of assets purchased~~reclassified, when, and ~~liabilities assumed in the Phoenix acquisition may be adjusted for up~~if necessary, to ~~one year subsequent~~conform to the ~~acquisition.~~2016 presentation. Such ~~adjustments, if any, are not expected to be significant.~~reclassifications had no impact on net income.

This discussion should be read in conjunction with the financial tables, statistics, and the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2014~~2015 (the ~~“2014~~“2015 Annual Report”). The results of operations for interim periods are not necessarily indicative of operating results expected for the full year.

Forward-looking statements involve risks, uncertainties and assumptions. Although Mid Penn does not make forward-looking statements unless Mid Penn’s management believes its management has a reasonable basis for doing so, Mid Penn cannot guarantee their accuracy. Actual results may differ materially from those expressed in these forward-looking statements due to a number of uncertainties and risks, including the risks described in the ~~2014~~2015 Annual Report and other unforeseen risks. You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by us on Mid Penn’s website or otherwise, and Mid Penn undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

Certain of the matters discussed in this document and in documents incorporated by reference herein, including matters discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Mid Penn to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. The words “expect”, “anticipates”, “intend”, “plan”, “believe”, “estimate”, and similar expressions are intended to identify such forward-looking statements.

Mid Penn’s actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:

the effects of future economic conditions on Mid Penn and its customers;

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

future actions or inactions of the United States government, including a failure to increase the government debt limit or a prolonged shutdown of the federal government;

an increase in the Pennsylvania Bank Shares Tax to which Mid Penn Bank’s capital stock is currently subject, or imposition of any additional taxes on the capital stock of Mid Penn or Mid Penn Bank;

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

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

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;

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

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

technological changes;

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

our acquisition strategy may not be successful in locating advantageous targets or acquiring targets at advantageous prices;

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

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

our ability to attract and retain qualified management and personnel;

results of the regulator examination and supervision process;

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

acts of war or terrorism;

MID PENN BANCORP, INC.

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

~~MID PENN BANCORP, INC. Management’s Discussion and Analysis~~

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

disruptions due to flooding, severe weather, or other natural disasters of Acts of God;

volatilities in the securities markets; and

slow economic conditions.

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

Critical Accounting Estimates

Mid Penn’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America GAAP and conform to general practices within the banking industry. Application of these principles involves significant judgments and estimates by management that have a material impact on the carrying value of certain assets and liabilities. The judgments and estimates ~~Mid Penn~~that we used are based on historical experiences and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and estimates that ~~Mid Penn has~~we have made, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of our operations.

Management of ~~Mid Penn~~the Corporation considers the accounting judgments relating to the allowance for loan and lease losses, the evaluation of the Corporation’s investment securities for other-than-temporary impairment, the valuation of the Corporation’s goodwill for impairment, and the valuation of assets acquired and liabilities assumed in business combinations, to be the accounting areas that require the most subjective and complex judgments.

The allowance for loan and lease losses represents management’s estimate of probable incurred credit losses inherent in the loan and lease portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan and lease portfolio also represents the largest asset type on the consolidated balance sheet. Throughout the remainder of this report, the terms “loan” or “loans” refers to both loans and leases.

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

Goodwill recorded in connection with acquisitions is tested annually for impairment. If certain events occur, which indicate goodwill might be impaired between annual tests, goodwill must be tested when such events occur. In making this assessment, Mid Penn considers a number of factors including operating results, business plans, economic projections, anticipated future cash flows, current market data, stock price, etc. There are inherent uncertainties related to these factors and Mid Penn’s judgment in applying them to the analysis of goodwill impairment. Changes in economic and operating conditions could result in goodwill impairment in future periods.

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

Results of Operations

The comparability of the financial condition and results of operations as of and for the three months ended March 31, 2016 and ~~nine month periods ended September 30,~~ 2015, ~~and 2014,~~ in general, have been impacted by the acquisition of ~~Phoenix.~~Phoenix; however, the three months ended March 31, 2015 contained only one month of Phoenix’s results of operations since the acquisition date was March 1, 2015.

Overview

Net income available to common shareholders was ~~$1,802,000,~~$1,805,000 or $0.43 per basic earnings per common share, for the quarter ended ~~September 30, 2015,~~March 31, 2016, as compared to net income available to common shareholders of ~~$1,507,000,~~$876,000 or ~~$0.43~~$0.23 per basic earnings per common share, for the quarter ended ~~September 30, 2014, a 19.6% increase.During the nine months ended September 30, 2015, net income available to common shareholders was $4,630,000, or $1.14 basic earnings per common share, versus $4,550,000, or $1.30 basic earnings~~March 31, 2015. Earnings per common share for the ~~nine~~first quarter of 2016 increased 87.0% over the same period in 2015. The results for the three months ended ~~September 30, 2014, a 1.8% increase. Excluding merger and acquisition~~March 31, 2015 were impacted by $762,000 in non-recurring merger-related expenses ~~incurred in conjunction~~associated with ~~the~~Mid Penn’s acquisition of Phoenix ~~Bancorp, Inc. (“Phoenix”), and the corresponding tax impact, net income available to common shareholders~~on March 1, 2015. Mid Penn’s earnings for the ~~nine~~three months ended ~~September 30, 2015 would have been $5,181,000, an increase of 13.9% over the unadjusted results~~March 31, 2016 were 27.7% higher than adjusted earnings for the ~~nine months ended September 30, 2014.~~

~~Net interest income increased $1,645,000, or 25.1%, to $8,189,000 for the quarter ended September 30, 2015 from $6,544,000 during the quarter ended September 30, 2014. Through the~~ first ~~nine months of 2015, net interest income increased $4,146,000, or 21.2%, to $23,713,000 from $19,567,000 during the first nine months of 2014.~~

~~The provision for loan and lease losses in the third~~ quarter of 2015 ~~was $265,000, compared to $395,000 in~~of $1,413,000, which excluded the ~~third quarter~~after-tax impact of ~~2014. During~~ the ~~nine months ended September 30, 2015, the provision for loan and lease losses was $865,000, compared to $1,217,000 for the nine months ended September 30, 2014.~~Phoenix merger-related expenses.

3736

MID PENN BANCORP, INC. ~~Management’s Discussion and Analysis~~

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



	Three Months Ended September 30,		Nine Months Ended September 30,		Three Months Ended March 31,
	2015	2014	2015	2014	2016	2015
Return on average assets	0.79%	0.84%	0.71%	0.89%	0.77%	0.49%
Return on average equity	9.60%	10.73%	8.79%	11.39%	10.22%	6.17%

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%.

Net interest income increased $1,377,000 or 19.6% to $8,415,000 for the quarter ended March 31, 2016 from $7,038,000 during the quarter ended March 31, 2015. Net interest income was positively impacted by the core loan growth in the year beyond the first quarter of 2015, as well as the full quarter earnings on loans from the Phoenix acquisition.

For the three months ended ~~September 30, 2015,~~March 31, 2016, Mid Penn’s taxable-equivalent net interest margin ~~increased~~decreased to ~~4.00%,~~3.95% from ~~3.93%,~~3.97% for the three months ended ~~September 30, 2014. For the nine months ended September 30, 2015, Mid Penn’s taxable-equivalent net interest margin increased to 4.06% from 4.03% for the nine months ended September 30, 2014.~~March 31, 2015. The ~~increases in both the three and nine months ended September 30, 2015 were mainly~~decrease was predominantly the result of a lower investment portfolio yield, which declined from 3.65% during the ~~additional loan interest income provided by the Phoenix loan portfolio, as well as the recognition~~first quarter of ~~income for the successful resolution of legacy Phoenix loans acquired with credit deterioration. Included in the three months ended September 30,~~ 2015 was the recognition of $100,000 from the successful resolution of a legacy Phoenix loan acquired with credit deterioration. Included in the nine months ended September 30, 2015 was $552,000 in income from the successful resolution of four legacy Phoenix loans acquired with credit deterioration. The addition of Phoenix’s low-cost deposit products also aided in improving Mid Penn’s taxable equivalent net interest margin by reducing the overall cost of funds. For the three months ended September 30, 2015, Mid Penn’s cost of funds decreased by 0.06%, to ~~0.63% compared to the three months ended September 30, 2014 and by 0.08%, to 0.64%, for the nine months ended September 30, 2015, versus~~3.13% during the same period in ~~2014.~~2016. The yields on investments that matured or were called in the past year were higher than yields on recent investment purchases, reflecting the continued low market rates for fixed income securities.

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.

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

Mid Penn has maintained the allowance for loan and lease losses in accordance with Mid Penn’s assessment process, which takes into consideration the risk characteristics of the loan portfolio, the growth in the loan portfolio during the first ~~nine~~three months of ~~2015,~~2016, and shifting collateral values from December 31, ~~2014~~2015 to ~~September 30, 2015.~~March 31, 2016.

Following its model for loan and lease loss allowance adequacy, management recorded a ~~$265,000~~$340,000 provision for the three months ended ~~September 30, 2015, as~~March 31, 2016 compared to a provision of ~~$395,000~~$300,000 for the three months ended ~~September 30, 2014. During the nine months ended September 30, 2015, the provision for loan and lease losses was $865,000, as compared to $1,217,000 for the nine months ended September 2014.~~March 31, 2015. The allowance for loan and lease losses as a percentage of total loans was ~~0.97%~~0.86% at ~~September 30, 2015,~~March 31, 2016, compared to ~~1.18%~~0.83% at December 31, ~~2014. This decrease was mainly due to the addition of the Miners loan portfolio without a corresponding allowance for loan and lease losses in conformity with purchase accounting treatment.~~2015. 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’s Discussion and Analysis.

Noninterest income increased ~~$344,000,~~$283,000 or ~~46.4%,~~29.8% during the ~~third~~first quarter of ~~2015~~2016 versus the same period in ~~2014. During the nine months ended September 30, 2015, noninterest income increased $718,000, or 29.8%, versus the same period in 2014.~~2015. The following components of noninterest income showed significant changes:

~~During the three and nine months ended September 30, 2015,~~ Mid Penn ~~took~~has experienced significantly increased activity in Small Business Administration (“SBA”) loans during the first quarter of 2016 as more qualified borrowers have taken advantage of ~~opportunities within its investment portfolio to better align~~Mid Penn’s Preferred Lender status with the ~~portfolio for a rising interest rate environment thereby realizing~~SBA. Mid Penn recorded $190,000 in increased SBA gains ~~on sales of investments of $138,000 and $315,000, respectively.~~during the quarter versus the same period in the prior year. Mortgage banking income favorably increased ~~$118,000 in~~$119,000 for the ~~nine months ended September 30, 2015~~first quarter of 2016 over ~~September 30, 2014.~~the first quarter of 2015. Improved real estate activity throughout Mid Penn’s footprint, ~~and~~ favorable interest rate conditions, and the addition of seasoned loan originators have contributed to increasing revenue from this business line. ATM debit card interchange income increased ~~$51,000 and $137,000 during~~$45,000 for the three ~~and nine~~ months ended September 30, 2015 over the same periods in 2014, due to the acquisition of the Phoenix card portfolio. Mid Penn has experienced significant activity in Small Business Administration (“SBA”) loans during the quarter and year-to-date as we see more qualified borrowers and take advantage of Mid Penn’s Preferred Lender status with the SBA.

~~Noninterest expenses increased $1,640,000, or 33.3%, during the third quarter of 2015,~~March 31, 2016 versus the same period in ~~2014.~~ 2015 primarily due to increased transaction volume from demand deposit account growth, including the addition of the customer base from the Phoenix acquisition late in the first quarter of 2015. Other income increased $91,000 for the three months ended March 31, 2016 over the three months ended March 31, 2015, primarily as a result of the $86,000 gain on the sale of insurance policies upon the dissolution of Mid Penn Insurance Services, LLC, the Bank’s wholly-owned subsidiary, effective March 1, 2016. The decision was made to liquidate the subsidiary due to the lack of consistent profitability and growth.

During the ~~nine months ended September 30,~~first quarter of 2015, ~~noninterest expenses~~Mid Penn did some investment portfolio repositioning and took advantage of the increased ~~$5,116,000,~~fair values of certain holdings, thereby selling certain securities and realizing $177,000 of securities gains. No investment sales or ~~34.7%,~~gains occurred during the first quarter of 2016.

Noninterest expense increased $342,000 or 5.2% during the first quarter of 2016, versus the same period in ~~2014.~~2015. The changes were primarily a result of the following components of noninterest expense:

Salaries and employee ~~benefits~~benefit expenses increased during the ~~three and nine months~~quarter ended ~~September 30, 2015~~March 31, 2016 by ~~$836,000 and $2,205,000, respectively,~~$528,000 versus the same ~~periods~~period in ~~2014.~~2015. The increase was driven by the addition of the Phoenix employees to Mid Penn’s employee pool, an increase in staffing levels due to Mid Penn’s entry into the ~~Lancaster County and~~ Mechanicsburg ~~markets,~~market, and an increase in lending personnel and support staff ~~to augment the expanding reach of~~in alignment with Mid ~~Penn.~~Penn’s core banking growth. Occupancy expenses for the three ~~and nine~~ months ended ~~September 30, 2015~~March 31, 2016 increased by ~~$216,000 and $462,000, respectively.~~$93,000 compared to the same period in 2015. This increase was impacted by the inclusion of rent ~~for~~and other occupancy costs from the new Corporate Administration offices on North Front Street in Harrisburg, and the new Elizabethtown ~~branch office,~~ and ~~the new~~ Simpson Ferry Road branch ~~office. Equipment, marketing~~offices. Legal and ~~advertising, software licensing, and other expenses all saw increases related~~professional fees increased $59,000 during the three months ended March 31, 2016 compared to the ~~inclusion~~same period in 2015 primarily due to $24,000 in recruitment services for the Bank’s two new agricultural lending officers, and $13,000 in realtor commissions to assist in the sublet of ~~Phoenix’s normal operating expenses to Mid Penn’s expense stream~~leased space acquired in the Phoenix transaction. Loss on sale/write-down of foreclosed assets increased $72,000 during the first quarter of 2016 versus the same period in 2015 due to the sale and ~~year-to-date. Merger and acquisition~~continued workout of certain holdings in the Bank’s portfolio of other real estate owned. Merger-related expenses ~~of $784,000~~ in connection with the acquisition of Phoenix were $762,000 in the first quarter of 2015, while no merger-related expenses were incurred ~~during~~in the ~~nine months ended September 30, 2015.~~first quarter of 2016. Equipment expenses, Pennsylvania bank shares tax, and other expenses all saw increases for the first quarter of 2016 compared to the first quarter of 2015 related to the inclusion of certain Phoenix facilities, personnel, and other normal operating expenses to Mid Penn’s noninterest expense stream.

The provision for income taxes was ~~$546,000~~$520,000 for the three months ended ~~September 30, 2015,~~March 31, 2016, as compared to the provision for income taxes of ~~$366,000~~$84,000 in the same period last year. The effective tax rate for the three months ended ~~September 30, 2015~~March 31, 2016 was 22.4%, compared to ~~18.7%~~8.1% for the three months ended ~~September 30, 2014. This increase was due to a higher net income in the third quarter of 2015 versus the same period in 2014.~~March 31, 2015. The low provision for the three months ended March 31, 2015 was caused by the $762,000 in merger-related expenses, of which $661,000 was deemed a deductible expense thereby substantially decreasing Mid Penn’s pre-tax income ~~taxes~~ for the nine months ended September 30, 2015 was $1,223,000, compared to $1,211,000 during the same period in 2014. The effective tax rate for the nine months ended September 30, 2015 was 20.0%, compared to 20.1% for the nine months ended September 30, 2014.period. Generally, Mid Penn’s effective tax rate is below the statutory rate due to earnings on tax-exempt loans, investments, and bank-owned life insurance, as well as the impact of tax credits. The realization of deferred tax assets is dependent on future earnings. Mid Penn currently anticipates that future earnings will be adequate to fully utilize deferred tax assets.

~~The increase in~~ Mid Penn’s total assets increased 29,256,000 or 3.1% to $960,894,000 at March 31, 2016 from $931,638,000 at December 31, 2015. The increase in total assets was impacted by strong deposit growth, particularly in new retail customers, and increases in nonprofit and government deposits. Increased public fund deposits required the Bank to purchase some additional investments for pledging purposes, contributing to the increase in the investment portfolio during the first ~~nine months~~quarter of ~~2015 was impacted by~~2016. In addition, these increased deposits allowed the ~~inclusion of assets and liabilities from Phoenix on~~Bank to payoff short-term borrowings during the balance sheet. Total loans at September 30, 2015 were $719,085,000 compared to $571,533,000 at December 31, 2014, an increase of $147,552,000, or 25.8%. Along with the addition of Phoenix’s’ loan portfolio, the other main driver of Mid Penn’s loan growth came as a result of business development efforts by a more experienced loan team. Mid Penn’s investment portfolio decreased $7,938,000 from December 31, 2014 to September 30, 2015, to provide liquidity to fund loan growth and to better align the portfolio for a rising rate environment thereby realizing gains on sales of investment securities. Total deposits increased $137,228,000 from $637,922,000 at December 31, 2014 to $775,150,000 at September 30, 2015. The largest increases over this period were in the noninterest and interest bearing demand, as well as in time deposits, increasing $106,080,000 from December 31, 2014 to September 30, 2015, mainly due to the inclusion of Phoenix’s’ deposits, but also from strong cash management efforts. Short-term borrowings increased $5,134,000 from $578,000 at December 31, 2014 to $5,712,000 at September 30, 2015, while long-term debt decreased $1,598,000 from $52,961,000 at December 31, 2014 to $51,363,000 at September 30, 2015.quarter.

During the first ~~nine~~three months of ~~2015,~~2016, Mid Penn experienced an increase in loans outstanding of ~~$147,552,000,~~$7,261,000 or ~~25.8%~~1.0%, ~~with Phoenix contributing $110,707,000 of the increase,~~ mainly in the commercial real estate ~~commercial and industrial and residential mortgage categories.~~category. Overall, commercial real estate, commercial and industrial, and residential mortgage loans accounted for the majority of Mid Penn’s loan growth as noted in the table below.

During the first ~~nine~~three months of ~~2015,~~2016, Mid Penn had net charge-offs of ~~$597,000~~$69,000 compared to net charge-offs of ~~$1,123,000~~$450,000 during the same period of ~~2014.~~2015. Loans charged off during the first ~~nine~~three months of ~~2015 were comprised of 13 loans among 11 relationships. There were four~~2016 included six commercial real estate loans among ~~three~~five relationships totaling $505,000, with one relationship accounting for $450,000 of the total. There were also two commercial and industrial loans comprising one relationship totaling $130,000, one home equity loan for $36,000, and five residential real estate loans to unrelated borrowers totaling $35,000.$96,000. The remaining ~~$13,000~~$3,000 was comprised of ~~consumer loans and~~ deposit account charge-offs. Mid Penn may need to make future adjustments to the allowance and the provision for loan and lease losses if economic conditions or loan credit quality differs substantially from the assumptions used in making Mid Penn’s evaluation of the level of the allowance for loan losses as compared to the balance of outstanding loans.

Changes in the allowance for loan and lease losses for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2016 and 2015 ~~and 2014~~ are summarized as follows:

Other than as described herein, Mid Penn does 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, Mid Penn believes that the effects of current and past economic conditions and other unfavorable business conditions may influence certain borrowers’ abilities to comply with their repayment terms. Mid Penn continues to monitor closely the financial strength of these borrowers. Mid Penn does not engage in practices which may be used to artificially shield certain borrowers from the negative economic or business cycle effects that may compromise their ability to repay. Mid Penn does not normally structure construction loans with interest reserve components. Mid Penn has not in the past performed any commercial real estate or other type loan workouts whereby an existing loan was restructured into multiple new loans. Also, Mid Penn does not extend loans at maturity solely due to the existence of guarantees, without recognizing the credit as impaired. While the existence of a guarantee may be a mitigating factor in determining the proper level of allowance once impairment has been identified, the guarantee does not affect the impairment analysis.

At ~~September 30, 2015,~~March 31, 2016, total nonperforming loans amounted to ~~$7,773,000,~~$4,667,000 or ~~1.08%~~0.63% of loans and leases net of unearned income, as compared to levels of ~~$10,942,000,~~$4,877,000 or ~~1.91%,~~0.66% at December 31, ~~2014~~2015, and ~~$10,684,000,~~$9,411,000 or ~~1.88%,~~1.35% at ~~September 30, 2014. The inclusion of the Phoenix loan portfolio aided in decreasing Mid Penn’s nonperforming ratios.~~March 31, 2015.



(Dollars in thousands)
	September 30, 2015		December 31, 2014		September 30, 2014		March 31, 2016		December 31, 2015		March 31, 2015
Nonperforming Assets:
Nonaccrual loans	$	7,290	$	8,907	$	8,613	$	3,707	$	4,418	$	7,417
Accruing troubled debt restructured loans		483		2,035		2,071		960		459		1,994
Total nonperforming loans		7,773		10,942		10,684		4,667		4,877		9,411

Foreclosed real estate		990		565		849		794		1,185		722
Total non-performing assets		8,763		11,507		11,533
Total nonperforming assets								5,461		6,062		10,133

Accruing loans 90 days or more past due		53		-		-		56		55		50
Total risk elements	$	8,816	$	11,507	$	11,533	$	5,517	$	6,117	$	10,183

Nonperforming loans as a % of total
loans outstanding		1.08%		1.91%		1.88%		0.63%		0.66%		1.35%
Nonperforming assets as a % of total
loans outstanding and other real estate		1.22%		2.01%		2.03%		0.73%		0.82%		1.46%
Ratio of allowance for loan losses
to nonperforming loans		89.85%		61.37%		60.01%		137.97%		126.46%		69.77%

In the table above, loans renegotiated with borrowers represent Mid Penn’s accruing troubled debt restructured loans. Troubled debt restructured loans that are no longer accruing interest are included in nonaccrual loans.

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

Mid Penn had ~~one loan at September 30, 2015 for $7,000 and none at December 31, 2014,~~no loans that received an ~~additional~~addition al charge-offs for which a partial charge-off had originally been ~~taken.~~taken at March 31, 2016 or December 31, 2015.

Mid Penn considers a commercial loan or commercial real estate loan to be impaired when it becomes 90 days or more past due and not in the process of collection. 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 ~~DCF~~discounted cash flow method indicates no operating income is available for evaluating the collateral position; therefore, ~~all~~most impaired loans are deemed to be collateral dependent.

Mid Penn evaluates loans for charge-off on a monthly basis. Policies that govern the recommendation for charge-off are unique to the type of loan being considered. Commercial loans rated as nonaccrual or lower will first have a collateral evaluation completed in accordance with the guidance on impaired loans. Once the collateral evaluation has been completed, a specific allocation of allowance is made based upon the results of the evaluation. The balance remains a nonperforming loan with the original terms and interest rate intact (not restructured). In the event the loan is unsecured, the loan would have been charged-off at the recognition of impairment. 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 real estate loans rated as impaired will also have an initial collateral evaluation completed in accordance with the guidance on impaired loans. An updated real estate valuation is ordered and the collateral evaluation is modified to reflect any ~~variations~~variation 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 are recommended for charge-off after reaching delinquency of 90 days and the loan is not in the process of collection. The ~~entire balance~~collateral shortfall of the consumer loan is recommended for charge-off at this point.

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

Larger groups of small-balance loans, such as residential mortgages and consumer installment loans are collectively evaluated for impairment. Accordingly, individual consumer and residential loans are not separately identified for impairment disclosures unless such loans are the subject of a restructuring agreement.

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

It is Mid Penn’s policy to obtain updated third party valuations on all impaired loans collateralized by real estate ~~within 30 days~~as soon as practically possible of the credit being classified as substandard ~~non-accrual.~~nonaccrual. Prior to receipt of the updated real estate valuation Mid Penn will use any existing real estate valuation to determine any potential allowance issues; however no allowance recommendation will be made until ~~which~~such time Mid Penn is in receipt of the updated valuation. The ~~credit~~Asset Recovery department employs an electronic tracking system to monitor the receipt of and need for updated appraisals. To date, there have been no ~~significant~~material time lapses noted with the above processes.

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

For impaired loans with no valuation allowance required, Mid Penn’s practice of obtaining independent third party market valuations on the subject property ~~within 30 days~~as soon as practically possible of being placed on ~~non-accrual~~nonaccrual status sometimes indicates that the loan to value ratio is sufficient to obviate the need for a specific allocation in spite of significant deterioration in real estate values in Mid Penn’s primary market area. These circumstances are determined on a case by case analysis of the impaired loans.

Excluding ~~the~~$1,290,000 in loans acquired with credit deterioration, of which none were subsequently impaired after being acquired as of ~~September 30, 2015,~~March 31, 2016, Mid Penn had several loan relationships deemed impaired with an aggregate carrying balance of ~~$7,450,000, deemed impaired.~~$4,378,000. This pool of loans was further broken down into a group of loans with an aggregate carrying balance of ~~$5,674,000~~$1,957,000 for which specific allocations totaling ~~$1,741,000~~$471,000 were included within the loan loss reserve for these loans. The remaining ~~$1,776,000~~$2,421,000 of loans required no specific allocation within the loan loss reserve. The ~~$7,450,000~~$4,378,000 pool of impaired loan relationships was comprised of ~~$6,324,000~~$2,844,000 in commercial real estate relationships, ~~$801,000~~$1,332,000 in residential relationships, ~~$185,000 in home equity relationships, and $140,000~~$116,000 in commercial and industrial relationships, and $86,000 in home equity relationships. There were specific loan loss reserve allocations of ~~$1,531,000~~$428,000 against the commercial real estate relationships, ~~with $1,168,000 of this total to one borrower. There was also $129,000 against the home equity relationships, $58,000~~$40,000 against the commercial and industrial relationships, and ~~$23,000~~$3,000 against ~~residential~~home equity relationships. Management currently believes that the specific reserves are adequate to cover probable future losses related to these relationships.

The allowance for loan and lease losses is a reserve established in the form of a provision expense for loan and lease losses and is reduced by loan charge-offs net of recoveries. In conjunction with an internal loan review function that operates independently of the lending function, management monitors the loan portfolio to identify risk on a monthly basis so that an appropriate allowance is maintained. Based on an evaluation of the loan portfolio, management presents a monthly review of the allowance for loan and lease losses to the Board of Directors, indicating any changes in the allowance since the last review. In making the evaluation, management considers the results of recent regulatory examinations, which typically include a review of the allowance for loan and lease losses an integral part of the examination process. As part of the examination process, federal or state regulatory agencies may require Mid Penn to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management.

In establishing the allowance, management evaluates on a quantitative basis individual classified loans and nonaccrual loans, and determines an aggregate reserve for those loans based on that review. In addition, an allowance for the remainder of the loan and lease portfolio is determined based on historical loss experience within certain components of the portfolio. These allocations may be modified if current conditions indicate that loan and lease losses may differ from historical experience.

In addition, a portion of the allowance is established for losses inherent in the loan and lease portfolio which have not been identified by the quantitative processes described above. This determination inherently involves a higher degree of subjectivity, and considers risk factors that may not have yet manifested themselves in historical loss experience. These factors include:

While the allowance for loan and lease losses is maintained at a level believed to be adequate by management to provide for ~~covering estimated~~probable losses inherent in the loan and lease portfolio, determination of the allowance is inherently subjective, as it requires estimates, all of which may be susceptible to significant change. Changes in these estimates may impact the provisions charged to expense in future periods.

Management believes, based on information currently available, that the allowance for loan and lease losses of ~~$6,984,000~~$6,439,000 is adequate as of ~~September 30, 2015.~~March 31, 2016 is adequate to cover specifically identifiable loan losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable.

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

~~Major sources~~The major source of cash received in the ~~nine~~first three months of ~~2015~~2016 came from the ~~sale of investment securities of $33,962,000 and the $13,990,000~~$55,538,000 net increase in deposits.

Major uses of cash in the first ~~nine~~three months of 2016 were the $31,596,000 net decrease in short-term borrowings and the $29,345,000 in investment purchases.

Major sources of cash received in the first quarter of 2015 came from the sale of investment securities of $16,091,000 and the net cash received from acquisitions of $8,118,000.

Major uses of cash in the first quarter of 2015 were the increase in net loans and leases of ~~$38,671,000~~$13,579,000 and the purchases of investment securities of ~~$24,446,000.~~

Major sources of cash in the first nine months of 2014 came from the increase in deposits totaling $37,867,000, proceeds from the maturity of investment securities of $10,497,000, and long-term debt borrowings of $10,000,000.

~~Major uses of cash in the first nine months of 2014 were the purchases of investment securities of $40,511,000 and the net increase in loans and leases of $23,613,000.~~$8,065,000.

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

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

On November 9, 2015, Mid Penn entered into agreements with investors to purchase $7,500,000 aggregate principal amount of its Notes due 2025. The Notes are treated as Tier 2 capital for regulatory capital purposes. The offering closed in December 2015.

The Notes bear interest at a rate of 5.15% per year for the first five years and then float at the Wall Street Journal’s Prime Rate plus 0.50%, provided that the interest rate applicable to the outstanding principal balance will at no times be less than 4.0%. Interest is paid quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, beginning on January 1, 2016. The Notes will mature on December 9, 2025 and are redeemable in whole or in part, without premium or penalty, at any time on or after December 9, 2020, and prior to December 9, 2025. Additionally, Mid Penn may redeem the Notes in whole at any time, or in part from time to time, upon at least 30 days’ notice if: (i) a change or prospective change in law occurs that could prevent Mid Penn from deducting interest payable on the Notes for U.S. federal income tax purposes; (ii) an event occurs that precludes the Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) Mid Penn becomes required to register as an investment company under the Investment Company Act of 1940, as amended, in each case at 100% of the principal amount of the subordinated notes, plus accrued and unpaid interest thereon to but excluding the date of redemption. The debt issuance costs associated with the Notes were $93,000 at March 31, 2016 and $86,000 at December 31, 2015.

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

In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The phase-in period for community banking organizations began January 1, 2015. The final rules implemented higher minimum capital requirements, added a new common equity Tier 1 capital requirement, and established criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital. Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements, which amount must be greater than 2.5% of total risk-weighted assets at January 1, 2019. The phase-in period for the capital conservation and countercyclical capital buffers for all banking organizations began on January 1, 2016 at the 0.625% level. A summary of the payout restrictions based on the capital conservation buffer is as follows:

Implementation of the deductions and other adjustments to common equity tier 1 capital began on January 1, 2015 and will be phased-in over a three-year period. The final rules called for the following minimum capital requirements to be considered “well-capitalized” (which include the impact of the capital conservation buffer effective January 1, 2016):

The final rules allow community banks to make a one-time election not to include the additional components of accumulated other comprehensive income (“AOCI”) in regulatory capital and instead use the existing treatment under the general risk-based capital rules that excludes most AOCI components from regulatory capital. Mid Penn made the election not to include the additional components of AOCI in regulatory capital.

The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities and cumulative perpetual preferred stock) issued before May 19, 2010 for inclusion in the tier 1 capital of banking organizations with total consolidated assets less than $15 billion as of December 31, 2009 and banking organizations that were mutual holding companies as of May 19, 2010.

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

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

Mid Penn has assessed the impact of these changes on the regulatory ratios of Mid Penn and the Bank on the capital, operations, liquidity and earnings of Mid Penn and the Bank, and concluded that the new rules did not have a material negative effect on Mid Penn’s financial condition.

The Federal Reserve adopted a new policy statement, effective May 15, 2015, that changes the definition of “small bank holding company” from those under $500 million in total assets to those under $1 billion in total assets. Small bank holding companies are not subject to holding company level capital requirements, although their subsidiary banks are still subject to all capital requirements. Since Mid Penn is currently under $1 billion in total assets, this policy statement will give Mid Penn greater flexibility to issue instruments that do not qualify as capital under the Federal Reserve’s regulations, if it chooses to do so.

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

Shareholders’ equity increased during the ~~nine~~three months ended ~~September 30, 2015~~March 31, 2016 by ~~$16,390,000,~~$1,154,000 or ~~27.7%,~~1.7% from December 31, ~~2014.~~2015. Capital ~~has been~~was positively impacted ~~in 2015~~ by positive earnings ~~available to~~of $1,805,000 and an increase in accumulated other comprehensive income of $252,000. Capital was reduced by the payment of $930,000 in common ~~shareholders of $4,630,000. Also positively impacting capital~~stock dividends during the ~~nine months ended September 30, 2015 was the issuance~~first quarter of 723,851 shares of common stock to fund the acquisition of Phoenix. This transaction added an additional $11,292,000 to shareholders’ equity. As part of the acquisition, Mid Penn also issued SBLF preferred stock totaling $1,750,000.2016. All of Mid Penn’s investment securities are classified as available for sale, making ~~this portion of the balance sheet more~~accumulated other comprehensive income sensitive to the changing market value of investments.

Banks are evaluated for capital adequacy based on the ratio of capital to risk-weighted assets and total assets. ~~In July 2013, the federal banking agencies issued final rules to implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.~~ The phase-in period for community banking organizations began January 1, 2015. The final rules generally implement higher minimum capital requirements, add a new common equity Tier 1 capital requirement, and establish criteria that instruments must meet to be considered common equity Tier 1 capital, additional Tier 1 capital or Tier 2 capital. As of January 1, 2015, the new minimum capital to risk-adjusted assets requirements including the capital conservation buffers began on January 1, 2016 and are a common equity Tier 1 capital ratio of 4.5% (6.5% to be considered “well capitalized”) and a Tier 1 capital ratio of 6.0%, increased from 4.0% (and increased from 6.0% to 8.0% to be considered “well capitalized”); the total capital (including Tier 1 capital) ratio remains at 8.0% under the new rules (10.0% to be considered “well capitalized”).illustrated below. At ~~September 30, 2015,~~March 31, 2016, Mid Penn Bank met the definition of a “well-capitalized” institution under the regulatory framework for prompt corrective ~~action.~~action and the minimum capital requirements under Basel III.

~~The following table illustrates the Bank’s capital ratios, which are not materially different from~~ Mid ~~Penn’s ratios. As noted below, the Bank~~Penn maintained the following regulatory capital levels, leverage ratios, and risk-based capital ratios as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014.~~2015:



(Dollars in thousands)	Capital Adequacy									Capital Adequacy
							To Be Well-Capitalized									To Be Well-Capitalized
							Under Prompt									Under Prompt
				Minimum Capital			Corrective						Minimum Capital			Corrective
	Actual:			Required:			Action Provisions:			Actual:			Required:			Action Provisions:
	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio	Amount		Ratio

September 30, 2015
Corporation
As of March 31, 2016:
Tier 1 Capital (to Average Assets)	$	69,356	7.7%	$	35,875	4.0%	$	44,843	5.0%	$	64,898	6.9%	$	37,639	4.0%		N/A	N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)		69,356	10.1%		40,359	4.5%		58,296	6.5%		64,898	9.2%		36,111	5.125%		N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)		69,356	10.1%		41,393	6.0%		55,191	8.0%		64,898	9.2%		46,680	6.625%		N/A	N/A
Total Capital (to Risk Weighted Assets)		76,435	11.1%		55,191	8.0%		68,989	10.0%		78,954	11.2%		60,773	8.625%		N/A	N/A

As of December 31, 2014:
Bank
As of March 31, 2016:
Tier 1 Capital (to Average Assets)	$	56,647	7.5%	$	30,360	4.0%	$	37,950	5.0%	$	72,686	7.8%	$	37,513	4.0%	$	46,891	5.0%
Common Equity Tier 1 Capital (to Risk Weighted Assets)											72,686	10.3%		36,080	5.125%		45,761	6.5%
Tier 1 Capital (to Risk Weighted Assets)		56,647	10.2%		22,295	4.0%		33,442	6.0%		72,686	10.3%		46,641	6.625%		56,321	8.0%
Total Capital (to Risk Weighted Assets)		63,423	11.4%		44,590	8.0%		55,737	10.0%		79,242	11.3%		60,721	8.625%		70,401	10.0%

Corporation
As of December 31, 2015:
Tier 1 Capital (to Average Assets)										$	64,089	7.1%	$	35,098	4.0%		N/A	N/A
Common Equity Tier 1 Capital (to Risk Weighted Assets)											64,089	9.1%		31,731	4.5%		N/A	N/A
Tier 1 Capital (to Risk Weighted Assets)											64,089	9.1%		42,308	6.0%		N/A	N/A
Total Capital (to Risk Weighted Assets)											77,852	11.0%		56,410	8.0%		N/A	N/A

Bank
As of December 31, 2015:
Tier 1 Capital (to Average Assets)										$	70,351	7.8%	$	36,245	4.0%	$	45,306	5.0%
Common Equity Tier 1 Capital (to Risk Weighted Assets)											70,351	10.0%		31,698	4.5%		45,786	6.5%
Tier 1 Capital (to Risk Weighted Assets)											70,351	10.0%		42,264	6.0%		56,352	8.0%
Total Capital (to Risk Weighted Assets)											76,614	10.9%		56,352	8.0%		70,440	10.0%

Under the new rules, in order to avoid limitations on capital distributions (including dividend payments and certain discretionary bonus payments to executive officers), a banking organization must hold a capital conservation buffer comprised of common equity Tier 1 capital above its minimum risk-based capital requirements, which amount must be greater than 2.5% of total risk-weighted assets at January 1, 2019. The capital contribution buffer requirements phase in over a three-year period beginning January 1, 2016.Series B Preferred Stock Redemption

~~The final rules permanently grandfather non-qualifying capital instruments (such as trust preferred securities~~Between September 26, 2012 and ~~cumulative perpetual preferred stock)~~January 3, 2013, Mid Penn issued, ~~before May 19, 2010 for inclusion~~via a private placement, 5,000 shares of its Series B Preferred Stock, resulting in ~~the tier 1 capital~~total gross proceeds of ~~banking organizations with total consolidated assets less than $15 billion as of December 31, 2009 and banking organizations that were mutual holding companies as of May 19, 2010.~~$5,000,000.

~~The proposed rules would have modified~~On December 9, 2015, Mid Penn, using a portion of the ~~risk-weight framework applicable~~proceeds from the offering of the Notes previously described on page 42, redeemed all of its issued and outstanding shares of Series B Preferred Stock at a price equal to residential mortgage exposures to require banking organizations to divide residential mortgage exposures into two categories in order to determine the applicable risk weight. In response to commenter concerns about the burden of calculating the risk weights and the potential negative effect on credit availability, the final rules do not adopt the proposed risk weights but retain the current risk weights for mortgage exposures under the general risk-based capital rules.

~~Consistent with the Dodd-Frank Act, the new rules replace the ratings-based approach to securitization exposures,~~$1,024.67 per share, which is ~~based~~equal to $1,020 per share plus an amount equal to declared but unpaid dividends on ~~external credit ratings, with the simplified supervisory formula approach in order to determine the appropriate risk weights~~December 9, 2015, for ~~these exposures. Alternatively, banking organizations may use the existing gross-ups approach to assign securitization exposures to~~ a ~~risk weight category or choose to assign such exposures a 1,250% risk weight.~~

~~The Federal Reserve adopted a new policy statement, effective May 15, 2015, that changes the definition~~total redemption price of “small bank holding company” from those under $500 million in total assets to those under $1 billion in total assets. Small bank holding companies are not subject to holding company level capital requirements, although their subsidiary banks are still subject to all capital requirements. Since the Company is currently under $1 billion in total assets, this policy statement will give the Company greater flexibility to issue instruments that do not qualify as capital under the Federal Reserve’s regulations, if it chooses to do so.$5,123,000.

On March 1, 2015, Mid Penn assumed all of the issued and outstanding shares of Phoenix with respect to 1,750 shares of Phoenix’s preferred stock issued to the Treasury in connection with the Small Business Lending Fund and issued 1,750 shares of Mid Penn’s SBLF Preferred Shares, having a $1,000 liquidation preference per share, to the Treasury. The SBLF Preferred Shares qualify as Tier 1 Capital and have terms and conditions identical to those shares of preferred stock issued by Phoenix to Treasury. Mid Penn paid noncumulative dividends payable quarterly on January 1, April 1, July 1, and October 1. The dividend rate was 1.00% per annum for payment dates up to its redemption.

~~MID PENN BANCORP, INC.~~

~~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~~

~~CERTIFICATION~~

~~I, Rory G. Ritrievi, certify that:~~

1.~~I have reviewed this report on Form 10-Q of Mid Penn Bancorp, Inc.;~~

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

~~(a)~~Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

~~(b)~~Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

~~(c)~~Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

~~(d)~~Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

~~(a)~~All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

~~(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.~~



~~By:~~	~~/s/ Rory G. Ritrievi~~
	~~President and CEO~~
~~Date:~~	~~November 13, 2015~~

~~MID PENN BANCORP, INC.~~

~~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~~

~~CERTIFICATION~~

~~I, Edward P. Williams, certify that:~~

1.~~I have reviewed this report on Form 10-Q of Mid Penn Bancorp, Inc.;~~

~~(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.~~




~~By:~~	~~/s/ Edward P. Williams~~
	~~Interim Principal Financial Officer~~
~~Date:~~	~~November 13, 2015~~

~~MID PENN BANCORP, INC.~~

~~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~~

In connection with the annual report of Mid Penn Bancorp, Inc. (the “Corporation”) on Form 10-Q for the period ending September 30, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rory G. Ritrievi, President and CEO, and I, Edward P. Williams, Interim Principal Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as added pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

~~The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.~~

To my knowledge, the information contained in the Report fairly presents, in all material respects the financial condition and results of operations of Mid Penn Bancorp, Inc. as of the dates and for the periods expressed in the Report.




~~By:~~	~~/s/ Rory G. Ritrievi~~
	~~President and CEO~~
~~Date:~~	~~November 13, 2015~~





~~By:~~	~~/s/ Edward P. Williams~~
	~~Interim Principal Financial Officer~~
~~Date:~~	~~November 13, 2015~~

5248



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)


PART 1 – FINANCIAL INFORMATION			2
	Item 1 – Financial Statements		2
		Consolidated Balance Sheets as of ~~September 30, 2015~~March 31, 2016 and December 31, ~~2014~~2015 (Unaudited)	2
		Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2016 and March 31, 2015 ~~and September 30, 2014~~ (Unaudited)	3
		Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2016 and March 31, 2015 ~~and September 30, 2014~~ (Unaudited)	4
		Consolidated Statements of Changes in Shareholders’ Equity for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2016 and March 31, 2015 ~~and September 30, 2014~~ (Unaudited)	5
		Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2016 and March 31, 2015 ~~and September 30, 2014~~ (Unaudited)	6
		Notes to Consolidated Financial Statements (Unaudited)	8
	Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		3635
	Item 3 – Quantitative and Qualitative Disclosures about Market Risk		4746
	Item 4 – Controls and Procedures		4746
PART II – OTHER INFORMATION			4847
	Item 1 – Legal Proceedings		4847
	Item 1A – Risk Factors		4847
	Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		4847
	Item 3 – Defaults upon Senior Securities		4847
	Item 4 – Mine Safety Disclosures		4846
	Item 5 – Other Information		4846
	Item 6 – Exhibits		4847
	Signatures		4948


(Dollars in thousands)					Three Months Ended March 31,
					2016		2015
Supplemental Disclosures of Cash Flow Information:
Interest paid	$	3,173	$	3,063	$	1,086	$	971
Income taxes paid	$	930	$	870	$	200	$	100

Supplemental Noncash Disclosures:
Loan transfers to foreclosed assets held for sale	$	885	$	791	$	28	$	216



Assets, Liabilities, and Equity in Connection with Merger:
~~(Dollars in thousands)~~

Assets Acquired:
Securities	$	~~11,331~~ -	$	- 11,331
Loans		~~110,363~~ -		- 110,707
Restricted stock		~~509~~ -		- 509
Property and equipment		~~1,792~~ -		- 1,792
Accrued interest receivable		~~388~~ -		- 388
Core deposit and other intangible assets		~~578~~ -		- 578
Bank-owned life insurance		~~3,673~~ -		- 3,673
Other assets		~~1,127~~ -		- 933
	$	~~129,761~~	$	-	$	129,911

Liabilities Assumed:
Deposits	$	~~123,238~~ -	$	- 123,238
Accrued interest payable		32 -		- 32
Long-term debt		~~3,570~~ -		- 3,570
Other liabilities		~~876~~ -		- 744
	$	~~127,716~~	$	-	$	127,584

Equity Acquired:
Preferred stock	$	~~1,750~~ -	$	- 1,750



(Dollars in thousands)	March 31, 2016
	Amortized		Fair
	Cost		Value
Due in 1 year or less	$	4,153	$	4,208
Due after 1 year but within 5 years		39,196		40,527
Due after 5 years but within 10 years		54,222		55,940
Due after 10 years		8,385		8,325
		105,956		109,000
Mortgage-backed securities		49,762		49,711
Equity securities		3,266		3,199
	$	158,984	$	161,910


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


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



	Nine Months Ended
	September 30, 2015				September 30, 2014
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial and industrial:
Commercial and industrial	$	22	$	-	$	51	$	-
Acquired with credit deterioration		-		205		-		-
Commercial real estate:
Commercial real estate		1,072		14		2,127		346
Acquired with credit deterioration		947		347		-		-
Residential mortgage:
Residential mortgage		673		8		930		-
Acquired with credit deterioration		427		-		-		-
Home equity:
Home equity		22		-		54		-
Acquired with credit deterioration		-		3		-		-

With an allowance recorded:
Commercial and industrial	$	127	$	-	$	135	$	-
Commercial real estate		5,077		-		7,008		-
Residential mortgage		19		-		-		-
Home equity		178		-		115		-

Total:
Commercial and industrial	$	149	$	205	$	186	$	-
Commercial real estate		7,096		361		9,135		346
Residential mortgage		1,119		8		930		-
Home equity		200		3		169		-



(Dollars in thousands)	Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
September 30, 2015	Outstanding Recorded Investment		Outstanding Recorded Investment		Recorded Investment
March 31, 2016							Outstanding Recorded Investment		Outstanding Recorded Investment		Recorded Investment
Commercial and industrial	$	40	$	35	$	15	$	40	$	35	$	11
Commercial real estate		7,528		6,558		5,726		3,634		3,117		2,178
Residential mortgage		733		727		570		733		727		592
	$	8,301	$	7,320	$	6,311	$	4,407	$	3,879	$	2,781


~~(Dollars in thousands)~~
~~Accretable yield, July 1, 2015~~	$	~~286~~
~~Acquisition of impaired loans~~		-
~~Accretable yield amortized to interest income~~		~~(72)~~
~~Reclassification from nonaccretable difference (1)~~		-
~~Accretable yield, September 30, 2015~~	$	~~214~~


(Dollars in thousands)
Accretable yield, January 1, ~~2015~~2016	$	-
~~Acquisition of impaired loans~~		~~458~~178
Accretable yield amortized to interest income		~~(244)~~(34)
Reclassification from nonaccretable difference ~~(1)~~(a)		- 30
Accretable yield, ~~September 30, 2015~~March 31, 2016	$	~~214~~174



			Fair value measurements at September 30, 2015 using:								Fair value measurements at March 31, 2016 using:
(Dollars in thousands)	Total carrying value at		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs		Total carrying value at		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
Assets:	September 30, 2015		(Level 1)		(Level 2)		(Level 3)		March 31, 2016		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury and U.S. government agencies	$	27,342	$	-	$	27,342	$	-	$	27,347	$	-	$	27,347	$	-
Mortgage-backed U.S. government agencies		36,189		-		36,189		-		49,711		-		49,711		-
State and political subdivision obligations		66,882		-		66,882		-		81,653		-		81,653		-
Equity securities		3,283		1,195		2,088		-		3,199		1,142		2,057		-
	$	133,696	$	1,195	$	132,501	$	-	$	161,910	$	1,142	$	160,768	$	-



			Fair value measurements at December 31, 2014 using:								Fair value measurements at December 31, 2015 using:
(Dollars in thousands)	Total carrying value at		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs		Total carrying value at		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
Assets:	December 31, 2014		(Level 1)		(Level 2)		(Level 3)		December 31, 2015		(Level 1)		(Level 2)		(Level 3)
U.S. Treasury and U.S. government agencies	$	27,066	$	-	$	27,066	$	-	$	26,990	$	-	$	26,990	$	-
Mortgage-backed U.S. government agencies		33,776		-		33,776		-		38,804		-		38,804		-
State and political subdivision obligations		79,171		-		79,171		-		66,617		-		66,617		-
Equity securities		1,621		561		1,060		-		3,310		1,240		2,070		-
	$	141,634	$	561	$	141,073	$	-	$	135,721	$	1,240	$	134,481	$	-


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

			Fair value measurements at September 30, 2015 using:								Fair value measurements at March 31, 2016 using:
(Dollars in thousands)	Total carrying value at		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs		Total carrying value at		Quoted prices in active markets		Significant other observable inputs		Significant unobservable inputs
Assets:	September 30, 2015		(Level 1)		(Level 2)		(Level 3)		March 31, 2016		(Level 1)		(Level 2)		(Level 3)
Impaired Loans	$	4,476	$	-	$	-	$	4,476	$	1,958	$	-	$	-	$	1,958
Foreclosed Assets Held for Sale		205		-		-		205		516		-		-		516
Mortgage Servicing Rights		182		-		-		182		162		-		-		162



(Dollars in thousands)	Quantitative Information about Level 3 Fair Value Measurements						Quantitative Information about Level 3 Fair Value Measurements
September 30, 2015	Fair Value Estimate		Valuation Technique	Unobservable Input	Range	Weighted Average
March 31, 2016							Fair Value Estimate		Valuation Technique	Unobservable Input	Range	Weighted Average
Impaired Loans	$	4,476	Appraisal of collateral (1)	Appraisal adjustments (2)	10% - 50%	29%	$	1,958	Appraisal of collateral (a)	Appraisal adjustments (b)	10% - 60%	30%
Foreclosed Assets Held for Sale		205	Appraisal of collateral (1), (3)	Appraisal adjustments (2)	27% - 59%	33%		516	Appraisal of collateral (a), (c)	Appraisal adjustments (b)	17% - 31%	27%
Mortgage Servicing Rights		182	Multiple of annual service fee	Estimated prepayment speed based on rate and term	240% - 400%	352%		162	Multiple of annual service fee	Estimated prepayment speed based on rate and term	210% - 400%	360%



	Three Months Ended September 30,
(Dollars in thousands)	Pension Benefits				Other Benefits
	2015		2014		2015		2014
Service cost	$	8	$	8	$	3	$	3
Interest cost		11		13		8		9
Amortization of prior service cost		4		6		-		1
Net periodic benefit cost	$	23	$	27	$	11	$	13



(Dollars in thousands)	Unrealized Gain on Securities		Defined Benefit Plans Liabilities		Accumulated Other Comprehensive Income

Balance - September 30, 2015	$	1,546	$	(106)	$	1,440

Balance - December 31, 2014	$	1,626	$	(113)	$	1,513


(Dollars in thousands)
Period	Shares	Gross Proceeds
September 26, 2012 - September 30, 2012	345	$	345,000
October 1, 2012 - December 31, 2012	4,535		4,535,000
January 1, 2013 - December 31, 2013	120		120,000
January 1, 2014 - December 31, 2014	-		-
January 1, 2015 - September 30, 2015	-		-
Total	5,000	$	5,000,000


Capital Conservation Buffer (as a % of risk-weighted assets)		Maximum Payout (as a % of eligible retained income)
> 2.5%		No payout limitation applies
≤2.5% and >1.875%		60%
≤1.875% and >1.25%		40%
≤1.25% and >0.625%		20%
≤0.625%		0%


	As of January 1,
	2015	2016	2017	2018	2019
Minimum common equity Tier 1 capital ratio	4.5%	4.5%	4.5%	4.5%	4.5%
Common equity Tier 1 capital conservation buffer	N/A	0.625%	1.25%	1.875%	2.5%
Minimum common equity Tier 1 capital ratio plus capital conservation buffer	4.5%	5.125%	5.75%	6.375%	7.0%
Phase-in of most deductions from common equity Tier 1 capital	40%	60%	80%	100%	100%
Minimum Tier 1 capital ratio	6.0%	6.0%	6.0%	6.0%	6.0%
Minimum Tier 1 capital ratio plus capital conservation buffer	N/A	6.625%	7.25%	7.875%	8.5%
Minimum total capital ratio	8.0%	8.0%	8.0%	8.0%	8.0%
Minimum total capital ratio plus capital conservation buffer	N/A	8.625%	9.25%	9.875%	10.5%


	Mid Penn Bancorp, Inc. (Registrant)
By:	/s/ Rory G. Ritrievi
	Rory G. Ritrievi
	President and CEO
	(Principal Executive Officer)

Date:	~~November 13, 2015~~May 12, 2016
By:	/s/ ~~Edward P. Williams~~Michael D. Peduzzi, CPA
	~~Edward P. Williams~~Michael D. Peduzzi, CPA
	~~Interim Principal~~Chief Financial Officer

Date:	~~November 13, 2015~~May 12, 2016