# MID Penn Bancorp Inc: Form 10-Q for the period ended Mar 31, 2023

- Company: [MID Penn Bancorp Inc](/companies/mpb.md) (CIK 879635)
- Form: 10-Q
- Filed: 2023-05-09
- Accepted by EDGAR: May 9, 2023, 15:46 ET
- Period: 2023-03-31
- Accession: 0000879635-23-000035
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/879635/000087963523000035/mpb-20230331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/879635/000087963523000035/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $14.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $2.6m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $11.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.70 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.71 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 15,931,121 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $12.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $922.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $3.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Total assets | at 2023-03-31 | $4.58bn | us-gaap:Assets |
| Total liabilities | at 2023-03-31 | $4.07bn | us-gaap:Liabilities |
| Short-term borrowings | at 2023-03-31 | $88.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2023-03-31 | $510.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 44,306 characters.

This Management Discussion relates to the Corporation, a financial holding company incorporated in the Commonwealth of Pennsylvania, and its wholly owned subsidiaries. Management's Discussion should be read in conjunction with the consolidated financial statements and other financial information presented in this report.

### Caution About Forward-Looking Statements

Forward-looking statements involve risks, uncertainties and assumptions. Although Mid Penn generally does not make forward-looking statements unless Mid Penn’s management believes its management has a reasonable basis for doing so, Mid Penn cannot guarantee the accuracy of any forward-looking statements. Actual results may differ materially from those expressed in any forward-looking statements due to a number of uncertainties and risks, including the risks described in this Quarterly Report on Form 10-Q, the 2022 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 or the Bank 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, the Bank, its nonbank subsidiaries, and their markets and 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;
- business or economic disruption from national or global epidemic or pandemic events;
- the risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, the value of investment securities, and interest rate protection agreements;
- the effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in Mid Penn’s market area and elsewhere, including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet;
- 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 bank regulatory agencies;
- 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, the SEC, and other accounting and reporting standard setters;
- 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 ability to successfully expand our franchise, including acquisitions or establishing new offices at favorable prices;
- our ability to successfully integrate any banks, companies, offices, 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, or 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 regulatory examination and supervision processes;
- the failure of assumptions underlying the establishment of reserves for loan losses, the assessment of potential impairment of investment securities, and estimations of values of collateral and various financial assets and liabilities;
- our ability to maintain compliance with the listing rules of NASDAQ;
- our ability to maintain the value and image of our brand and protect our intellectual property rights;
- volatility in the securities markets;
- disruptions due to flooding, severe weather, or other natural disasters or Acts of God;
- acts of war, terrorism, or global military conflict;
- supply chain disruption; and
- the factors described in Item 1A of the Corporation's 2022 Annual Report.

The above list of factors that may affect future performance is illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with this understanding of inherent uncertainty. Additional information regarding these as well as other factors that could affect future financial results can be found in the sections entitled "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2022. The results of operations for interim periods are not necessarily indicative of operating results expected for the full year.

### Overview

Mid Penn is a financial holding company, which generates the majority of its revenues through net interest income, or the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Growth in net interest income is dependent upon balance sheet growth and maintaining or increasing the net interest margin, which is FTE net interest income as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through gains on sales of assets, such as loans, investments and properties. Offsetting these revenue sources are provisions for credit losses - loans, non-interest expenses and income taxes.

The following table presents a summary of the Corporation's earnings and selected performance ratios:

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Net Income | $11,227 | $11,354 |
| Diluted EPS | $0.70 | $0.71 |
| Dividends Declared | $0.20 | $0.20 |
| Return on average assets | 1.01% | 0.98% |
| Return on average equity | 8.91% | 9.32% |
| Net interest margin (1) | 3.49% | 3.21% |
| Non-performing assets to total assets | 0.31% | 0.18% |
| Net charge-off (recoveries) to average loans (annualized) | 0.013% | (0.007)% |

(1) Presented on a FTE basis using a 21% Federal tax rate and statutory interest expense disallowances. See also the "Net Interest Income" section.

### Summary of Financial Results

- *Net Income Per Share* - Mid Penn’s net income available to common shareholders ("earnings") for the three months ended March 31, 2023 was $11.2 million or $0.71 and $0.70 per common share basic and diluted, respectively, compared to earnings of $11.4 million or $0.71 per common share basic and diluted for the three

months ended March 31, 2022. The results for the year ended March 31, 2023 were favorably impacted by loan growth and an increase in net interest margin.

- *Net Interest Margin* - For the first quarter of 2023, Mid Penn’s FTE net interest margin was 3.49% versus 3.21% for the same period of 2022. The FOMC has increased rates eight times during the 12 months since March 31, 2022. The yield on interest-earning assets increased 135 bps in the first quarter of 2023 compared to the same period of 2022 and the rate on interest-bearing liabilities increased 141 bps in the first quarter of 2023 compared to the same period of 2022.
- *Loan Growth -* Total loans, net of unearned income, as of March 31, 2023 were $3.6 billion compared to $3.5 billion as of December 31, 2022, an increase of $97.2 million, or 2.8%. Non-owner occupied office commercial real estate exposure represents less than 8% of total loan balances and is primarily limited to suburban offices.
- *Deposit Growth -* Total deposits increased $99.8 million, or 2.6%, from $3.8 billion at December 31, 2022, to $3.9 billion at March 31, 2023. Estimated uninsured deposits represented 26.1% of total deposits at March 31, 2023, and 18.7% of total deposits after adjusting for insured/collateralized public funds and contractual deposits.
- *Asset Quality* - Mid Penn adopted CECL on January 1, 2023. Its ACL at March 31, 2023 was $31.3 million, or 0.87% of total loans, as compared to $19.0 million, or 0.54% of total loans at December 31, 2022.
- *Net Recoveries/Charge-offs* - Mid Penn had net charge-offs of $113 thousand and net recoveries of $50 thousand for the first quarter of March 31, 2023 and 2022, respectively.
- *Non-performing assets* - Total non-performing assets were $14.2 million at March 31, 2023, an increase compared to non-performing assets of $8.6 million at December 31, 2022.
- *Provision for credit losses - loans* - The PCL - loans was $490 thousand for the first quarter of 2023 compared to $500 thousand for the same period of 2022.
- *Noninterest Income* - Noninterest income totaled $4.3 million for the first quarter of 2023, a $1.4 million, or 24.8%, decrease compared to the first quarter of 2022. The decrease was primarily attributable to lower mortgage banking and hedging activity.
- *Noninterest Expense* - Noninterest expense totaled $26.1 million for the first quarter of 2023, an increase of $325 thousand, or 1.3%, compared to noninterest expense of $25.7 million for the first quarter of 2022. The increase was most notably in salaries and benefits as Mid Penn continues to grow.
- *Liquidity* - Current liquidity, including borrowing capacity, enhanced to nearly $1.36 billion or 187% of uninsured and uncollateralized deposits, or approximately 35% of total deposits.

### Critical Accounting Estimates

The Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 includes a summary of critical accounting estimates that the Corporation considers to be most important to the presentation of its financial condition and results of operations, because they require management’s most difficult judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain.

The following discussion is regarding the critical accounting estimates related to the application of CECL, which was adopted on January 1, 2023.

### Allowance for Credit Losses

In accordance with CECL, the ACL, which includes both the ACL - loans and the ACL for OBS credit exposures, is calculated with the objective of maintaining a reserve for current expected credit losses over the remaining expected life of the portfolio. Management's determination of the appropriateness of the reserve is based on continuously monitoring and evaluating the loan portfolio, lending-related commitments, current as well as forecasted economic factors and other relevant factors. The ACL - loans is an estimate of expected losses inherent within Mid Penn's existing loan portfolio.

The loan loss estimation process involves procedures to appropriately consider the unique characteristics of Mid Penn’s loan portfolio segments. When computing allowance levels, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Evaluations of the portfolio and individual credits are inherently subjective, as they require estimates, assumptions and judgments as to the facts and circumstances of particular situations. Determining the appropriateness of the allowance is complex and requires judgement by Management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the ACL and credit loss expense.

Mid Penn estimates the ACL using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Mid Penn uses a third-party software application to calculate the quantitative portion of the ACL using a methodology and assumptions specific to each loan pool. The qualitative portion of the allowance is based on general economic conditions and other internal and external factors affecting Mid Penn as a whole as well as specific loans. Factors considered include the following: lending process, concentrations of credit, and credit quality. The quantitative and qualitative portions of the allowance are added together to determine the total ACL, which reflects Management’s expectations of future conditions based on reasonable and supportable forecasts. As such, the calculation of ACL is inherently subjective and requires management to exercise significant judgment. The CECL estimate is highly sensitive to the economic forecasts used to develop the estimate.

While management uses the best information known to it in order to make ACL valuations, adjustments to the ACL may be necessary based on changes in economic and other conditions, changes in the composition of the loan portfolio, or changes in accounting guidance. In times of economic slowdown, either local, regional or national, the risk inherent in the loan portfolio could increase resulting in the need for additional provisions to the ACL in future periods. An increase could also be necessitated by an increase in the size of the loan portfolio or in any of its components even though the credit quality of the overall portfolio may be improving.

For further discussion of the methodology used in the determination of the ACL, refer to "Note 1, Summary of Significant Accounting Policies", "Note 3 - Investment Securities", "Note 4 - Loans and Allowance for Credit Losses - Loans" and "Note 8 - Commitments and Contingencies". to the Consolidated Financial Statements. To the extent actual outcomes differ from management estimates, additional PCL may be required that would adversely impact earnings in future periods.

### Results of Operations

### Net Interest Income

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 FTE. Income from tax-exempt assets, primarily loans to or securities issued by state and local governments, is adjusted by an amount equivalent to the federal income taxes which would have been paid if the income received on these assets was taxable at the statutory rate of 21% for the periods presented.

The following table includes average balances, amounts, and yields of interest income and rates of expense, interest rate spread, and net interest margin for the periods presented:

*(Dollars in thousands)*

| ASSETS: | Average Balances, Income and Interest Rates on a Taxable-Equivalent Basis For the Three Months Ended March 31, 2023 Average Balance | Interest (1) | Yield/ Rate | March 31, 2022 Average Balance | Interest (1) | Yield/ Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest Bearing Balances | **$5,761** | **$53** | **3.73%** | $91,543 | $13 | 0.06% |
| Investment Securities: |  |  |  |  |  |  |
| Taxable | **556,901** | **3,764** | **2.74%** | 389,034 | 1,822 | 1.90% |
| Tax-Exempt | **79,250** | **493** | **2.52%** | 73,614 | 425 | 2.34% |
| Total Investment Securities | **636,151** | **4,257** | **2.71%** | 462,648 | 2,247 | 1.97% |
| Federal Funds Sold | **3,775** | **45** | **4.83%** | 706,411 | 314 | 0.18% |
| Loans | **3,555,375** | **45,961** | **5.24%** | 3,103,469 | 35,123 | 4.59% |
| Restricted Investment in Bank Stocks | **9,542** | **110** | **4.68%** | 8,347 | 131 | 6.36% |
| Total Interest-earning Assets | **4,210,604** | **50,426** | **4.86%** | 4,372,418 | 37,828 | 3.51% |
| Cash and Due from Banks | **51,444** |  |  | 57,397 |  |  |
| Other Assets | **258,821** |  |  | 267,079 |  |  |
| Total Assets | **$4,520,869** |  |  | $4,696,894 |  |  |
| LIABILITIES & SHAREHOLDERS' EQUITY: |  |  |  |  |  |  |
| Interest-bearing Demand | **$968,951** | **$2,691** | **1.13%** | $1,045,678 | $461 | 0.18% |
| Money Market | **940,286** | **4,084** | **1.76%** | 1,125,094 | 600 | 0.22% |
| Savings | **330,773** | **54** | **0.07%** | 376,006 | 58 | 0.06% |
| Time | **749,598** | **5,172** | **2.80%** | 592,833 | 1,175 | 0.80% |
| Total Interest-bearing Deposits | **2,989,608** | **12,001** | **1.63%** | 3,139,611 | 2,294 | 0.30% |
| Short-term borrowings | **121,898** | **1,490** | **4.96%** | — | — | —% |
| Long-term debt | **4,350** | **44** | **4.10%** | 76,157 | 284 | 1.51% |
| Subordinated debt and trust preferred securities | **56,875** | **642** | **4.58%** | 74,189 | 640 | 3.50% |
| Total Interest-bearing Liabilities | **3,172,731** | **14,177** | **1.81%** | 3,289,957 | 3,218 | 0.40% |
| Noninterest-bearing Demand | **793,382** |  |  | 859,463 |  |  |
| Other Liabilities | **43,899** |  |  | 53,455 |  |  |
| Shareholders' Equity | **510,857** |  |  | 494,019 |  |  |
| Total Liabilities & Shareholders' Equity | **$4,520,869** |  |  | $4,696,894 |  |  |
| Net Interest Income (taxable-equivalent basis) |  | **$36,249** |  |  | $34,610 |  |
| Taxable Equivalent Adjustment |  | **(200)** |  |  | (196) |  |
| Net Interest Income |  | **$36,049** |  |  | $34,414 |  |
| Total Yield on Earning Assets |  |  | **4.86%** |  |  | 3.51% |
| Rate on Supporting Liabilities |  |  | **1.81%** |  |  | 0.40% |
| Average Interest Spread |  |  | **3.04%** |  |  | 3.11% |
| Net Interest Margin |  |  | **3.49%** |  |  | 3.21% |

(1) Presented on a fully taxable-equivalent basis using a 21% federal tax rate and statutory interest expense disallowances.

The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances, volume, and changes in rates for the three months ended March 31, 2023 in comparison to the same period in 2022:

*(Dollars in thousands)*

| INTEREST INCOME: | Three months ended March 31, 2023 vs. March 31, 2022 Increase (decrease) Volume | Rate | Net |
| --- | ---: | ---: | ---: |
| Interest Bearing Balances | $(12) | $52 | $40 |
| Investment Securities: |  |  |  |
| Taxable | 786 | 1,156 | 1,942 |
| Tax-Exempt | 33 | 35 | 68 |
| Total Investment Securities | 819 | 1,191 | 2,010 |
| Federal Funds Sold | (312) | 43 | (269) |
| Loans | 5,114 | 5,724 | 10,838 |
| Restricted Investment Bank Stocks | 19 | (40) | (21) |
| Total Interest Income | 5,628 | 6,970 | 12,598 |
| INTEREST EXPENSE: |  |  |  |
| Interest Bearing Deposits: |  |  |  |
| Interest Bearing Demand | (34) | 2,264 | 2,230 |
| Money Market | (99) | 3,583 | 3,484 |
| Savings | (7) | 3 | (4) |
| Time | 311 | 3,686 | 3,997 |
| Total Interest-Bearing Deposits | 171 | 9,536 | 9,707 |
| Short-term Borrowings | — | 1,490 | 1,490 |
| Long-term Debt | (268) | 28 | (240) |
| Subordinated Debt | (149) | 151 | 2 |
| Total Interest Expense | (246) | 11,205 | 10,959 |
| NET INTEREST INCOME | $5,874 | $(4,235) | $1,639 |

Mid Penn’s FTE net interest margin for the three months ended March 31, 2023 was 3.49% compared to 3.21% for the three months ended March 31, 2022. FTE net interest income was $36.2 million for the three months ended March 31, 2023, an increase of $1.6 million, or 4.7%, compared to the three months ended March 31, 2022. The increase to FTE net interest income was the result of higher yields on interest-earning assets and change in the mix of average interest-earning assets, which contributed $7.0 million and $5.6 million, respectively. The yield on interest-earning assets increased 135 bps to 4.86%, for the first quarter of 2023 compared to 3.51% for the first quarter of 2022. Average interest-earning assets decreased $161.8 million, or 3.7%, during the first quarter of 2023 compared to the same period of 2022, primarily as a result of a decrease in federal funds sold and interest bearing balances, partially offset by an increase in investment securities and loan growth. As previously noted, the FOMC has increased rates eight times during the 12 months since March 31, 2022.

Average investment securities increased $173.5 million and the yield on those investment securities increased 74 bps, contributing $819 thousand and $1.2 million, respectively, to the increase in interest income. Average loans increased $451.9 million, and the yield on those loans increased 65 bps contributing $5.1 million and $5.7 million, respectively, to the increase in interest income.

Interest expense increased $11.0 million during the first quarter of 2023 compared to the first quarter of 2022. The rate of interest-bearing liabilities increased from 0.40% for the first quarter of 2022 to 1.81% for the first quarter of 2023. The increase in the rate was primarily a result of offering higher rates to retain and attract deposits. In addition, short-term borrowings of $121.9 million were used to help fund loan growth, contributing $1.5 million to interest expense during the first quarter of 2023.

### Provision for Credit Losses - Loans

On January 1, 2023, Mid Penn adopted ASU 2016-13, *Financial Instruments - Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments*, which replaces the incurred loss methodology, and is referred to as CECL. The PCL was $490 thousand for the three months ended March 31, 2023 compared to $500 thousand three months ended March 31, 2022. The provision for the three months ended March 31, 2022 reflects the application of the incurred loss method for estimating credit losses.

### Noninterest Income

For the three months ended March 31, 2023, noninterest income totaled $4.3 million, a decrease of $1.4 million or 24.8%, compared to noninterest income of $5.8 million for the same period in 2022.

Noninterest income and variance analysis as of March 31:

*(Dollars in Thousands)*

|  | Three Months Ended March 31, 2023 | 2022 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: |
| Fiduciary and wealth management | $1,236 | $1,052 | $184 | 17.5% |
| ATM debit card interchange | 1,056 | 1,057 | (1) | (0.1) |
| Service charges on deposits | 435 | 684 | (249) | (36.4) |
| Mortgage banking | 384 | 529 | (145) | (27.4) |
| Mortgage hedging | 20 | 566 | (546) | (96.5) |
| Net gain on sales of SBA loans | — | (9) | 9 | (100.0) |
| Earnings from cash surrender value of life insurance | 254 | 246 | 8 | 3.3 |
| Other | 940 | 1,625 | (685) | (42.1) |
| Total | $4,325 | $5,750 | $(1,425) | (24.8)% |

Income from fiduciary and wealth management activities was $1.2 million for the three months ended March 31, 2023, an increase of $184 thousand compared to the three months ended March 31, 2022. The additional revenue was attributable to favorable growth in trust assets under management and increased sales of retail investments products.

Service charges on deposits were $435 thousand for the three months ended March 31, 2023, a decrease of $249 thousand, or 36.4%, compared to the same period in 2022. This decrease was driven by the phasing out of a legacy Riverview overdraft program at the end of the first quarter of 2022.

Mortgage banking income decreased $145 thousand, or 27.4%, for the three months ended March 31, 2023 to $384 thousand compared to the same period in 2022. Mortgage loan originations and secondary-market loan sales and gains continue to slow as a result of increases in interest rates.

Mortgage hedging income was $20 thousand for the three months ended March 31, 2023 compared to $566 thousand for the same period in 2022. The decrease was the result of a slow down in the hedging program related to mortgage derivative activities as a result of an increase in interest rates.

### Noninterest Expense

For the three months ended March 31, 2023, noninterest expense totaled $26.1 million, an increase of $325 thousand, or 1.3%, compared to noninterest expense of $25.7 million for the same period in 2022.

Noninterest expense and variance analysis as of March 31:

*(Dollars in Thousands)*

|  | Three Months Ended March 31, 2023 | 2022 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | **$13,844** | $13,244 | $600 | 4.5% |
| Software licensing and utilization | **1,946** | 2,106 | (160) | (7.6) |
| Occupancy expense, net | **1,886** | 1,799 | 87 | 4.8 |
| Equipment expense | **1,251** | 1,011 | 240 | 23.7 |
| Shares tax | **899** | 920 | (21) | (2.3) |
| Legal and professional fees | **800** | 639 | 161 | 25.2 |
| ATM/card processing | **493** | 517 | (24) | (4.6) |
| Intangible amortization | **344** | 481 | (137) | -28.5 |
| FDIC Assessment | **340** | 591 | (251) | (42.5) |
| Gain on sale or write-down of foreclosed assets, net | **—** | (16) | 16 | (100.0) |
| Merger and acquisition expense | **224** | — | 224 | N/M |
| Post-acquisition restructuring expense | **—** | 329 | (329) | (100.0) |
| Other expenses | **4,043** | 4,124 | (81) | (2.0) |
| Total Noninterest Expense | **$26,070** | $25,745 | $325 | 1.3% |

Salaries and employee benefits were $13.8 million for the three months ended March 31, 2023, an increase of $600 thousand, or 4.5% versus the same period in 2022, with the increase attributable to annual merit increases and staff additions in alignment with Mid Penn’s core banking and non-banking growth initiatives.

Software licensing and utilization costs were $1.9 million for the three months ended March 31, 2023, a decrease of $160 thousand, or 7.6%, compared to $2.1 million for the three months ended March 31, 2022. The decrease is a result of the elimination of duplicate systems and software after the integration in 2022 of Riverview.

Equipment expense increased $240 thousand, or 23.7%, during the three months ended March 31, 2023, compared to the same period in 2022. The increase was primarily driven by the opening of a new branch after the first quarter of 2022.

FDIC assessment decreased $251 thousand, or 42.5%, for the first quarter of 2023 compared to the first quarter of 2022 as a result of a lower asset base as well as an improved rating for the Bank.

Merger and acquisition expenses were $224 thousand during the three months ended March 31, 2023 and consisted of legal and professional fees associated with the Brunswick Acquisition.

### Income Taxes

The provision for income taxes was $2.6 million for both the three months ended March 31, 2023 and the same period in 2022. The provision for income taxes for the three months ended March 31, 2023 and 2022, reflects a combined Federal and State effective tax rate of 18.7% and 18.4%, respectively. Generally, Mid Penn’s effective tax rate is below the federal statutory rate due to earnings on tax-exempt loans, investments, and earnings from the cash surrender value of life insurance, as well as the impact of federal income tax credits, including those awarded from Mid Penn’s low-income housing investments. The realization of Mid Penn’s deferred tax assets is dependent on future earnings. Mid Penn currently anticipates that future earnings will be adequate to fully realize the currently recorded deferred tax assets.

### Financial Condition

Mid Penn’s total assets were $4.6 billion as of March 31, 2023, reflecting an increase of $85.5 million, or 1.9%, compared to total assets of $4.5 billion as of December 31, 2022.

### Investment Securities

Mid Penn’s investment portfolio is utilized primarily to support overall liquidity and interest rate risk management, to provide collateral supporting pledging requirements for public funds on deposit, and to generate additional interest income within reasonable risk parameters. Total investment securities as of March 31, 2023 were $633.4 million compared to $637.4 million as of December 31, 2022.

*(Dollars in thousands)*

| Available-for-sale debt securities: | March 31, 2023 | December 31, 2022 | $ Variance | % Variance |
| --- | ---: | ---: | ---: | ---: |
| U.S. Treasury and U.S. government agencies | $35,250 | $34,914 | $336 | 1% |
| Mortgage-backed U.S. government agencies | 165,604 | 166,915 | (1,311) | (0.8)% |
| State and political subdivision obligations | 3,697 | 3,539 | 158 | 4.5% |
| Corporate debt securities | 32,058 | 32,510 | (452) | (1.4)% |
| Total available-for-sale debt securities | 236,609 | 237,878 | (1,269) | — |
| Held-to-maturity debt securities: |  |  |  |  |
| U.S. Treasury and U.S. government agencies | $245,703 | $245,671 | $32 | —% |
| Mortgage-backed U.S. government agencies | 49,050 | 50,710 | (1,660) | (3.3)% |
| State and political subdivision obligations | 87,048 | 87,125 | (77) | (0.1)% |
| Corporate debt securities | 14,983 | 15,988 | (1,005) | (6.3)% |
| Total held-to-maturity debt securities | 396,784 | 399,494 | (2,710) | (0.7)% |
| Total | $633,393 | $637,372 | $(3,979) | (0.6)% |

### Loans, net of unearned interest

Total loans, net of unearned interest, as of March 31, 2023 were $3.6 billion compared to $3.5 billion as of December 31, 2022. The growth of $97.2 million, or 2.8%, since December 31, 2022 occurred primarily across the commercial and industrial, construction and residential mortgage loan portfolios.

*(Dollars in thousands)*

|  | March 31, 2023 Balance | % of Total Loans | December 31, 2022 Balance | % of Total Loans |
| --- | ---: | ---: | ---: | ---: |
| Commercial real estate (1) | **$1,899,168** | **52.6%** | $2,052,934 | 58.3% |
| Commercial and industrial | **605,610** | **16.8** | 596,042 | 17.0 |
| Construction | **486,172** | **13.5** | 441,246 | 12.6 |
| Residential mortgage (1) | **612,427** | **17.0** | 416,221 | 11.9 |
| Consumer | **7,970** | **0.2** | 7,676 | 0.2 |
|  | **$3,611,347** | **100.0%** | $3,514,119 | 100.0% |

(1) *In accordance with the guidance in FASB ASC Topic 326, Mid Penn redefined its loan portfolio segments and related loan classes based on the level at which risk is monitored within the ACL methodology. As such, $181.9 million of loans were reclassified from Commercial real estate to Residential mortgage upon adoption of CECL on January 1, 2023. Prior periods were not reclassified.*

### Credit Quality, Credit Risk, and Allowance for Credit Losses

Mid Penn adopted FASB ASC Topic 326, in accordance with the amendments of FASB ASU 2016-13, effective January 1, 2023. The guidance in FASB ASC 326 replaces Mid Penn’s previous incurred loss methodology with a methodology that reflects the current expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit losses. Mid Penn’s ACL methodology for loans is based upon guidance within FASB ASC Subtopic 326-20, "Financial Instruments – Credit Losses – Measured at Amortized Cost," as well as regulatory guidance from the FDIC, the Bank's primary federal regulator. The ACL is a valuation account that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans. Credit quality within the loan portfolio is continuously monitored by management and is reflected within the ACL for loans. The ACL is an estimate of expected losses inherent within Mid Penn’s existing loan portfolio. The ACL is adjusted through the provision for credit losses and reduced by the charge off of loan amounts, net of recoveries.

The loan loss estimation process involves procedures to appropriately consider the unique characteristics of Mid Penn’s loan portfolio segments. When computing allowance levels, credit loss assumptions are estimated using a model that categorizes loan pools based on loss history, delinquency status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Evaluations of the portfolio and individual credits are inherently subjective, as they require estimates, assumptions and judgments as to the facts and circumstances of particular situations. Determining the appropriateness of the allowance is complex and requires judgement by management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense.

For a complete description of Mid Penn’s ACL methodology and the quantitative and qualitative factors included in the calculation, please see "Note 4 – Loans and Allowance for Credit Losses – Loans" included in Part I. Item 1. – Financial Statements of this report.

Upon the adoption of FASB ASC Topic 326 on January 1, 2023, Mid Penn recorded an overall increase of $15.0 million to the ACL on January 1, 2023 as a result of the adoption of CECL. Retained earnings decreased $11.5 million and deferred tax assets increased by $3.1 million. Included in the $15.0 million increase to the ACL was $3.1 million for certain OBS credit exposures that were previously recognized in other liabilities before the adoption of CECL. The ACL and the related PCL for the three months ended March 31, 2022 presented reflect Mid Penn’s application of the incurred loss method for estimating credit losses.

Changes in the ACL are summarized as follows:

*(Dollars in thousands)*

|  | Three Months Ended March 31, 2023 | 2022 |
| --- | ---: | ---: |
| Balance, beginning of period | $18,957 | $14,597 |
| Impact of adopting CECL | 11,931 | — |
| Loans charged off during period | (150) | (57) |
| Recoveries of loans previously charged off | 37 | 107 |
| Net (charge-offs) recoveries | (113) | 50 |
| Provision for credit losses | 490 | 500 |
| Balance, end of period | $31,265 | $15,147 |
| Ratio of net charge-offs (recoveries) to average loans outstanding (annualized) | 0.013% | (0.007)% |
| Ratio of ACL - loans to net loans at end of period | 0.87% | 0.49% |

For the three months ended March 31, 2023, Mid Penn had net charge-offs of $113 thousand compared to net recoveries of $50 thousand during the same period in 2022.

The following table presents the change in nonperforming asset categories as of March 31, 2023, December 31, 2022, and March 31, 2022.

*(Dollars in thousands)*

| Non-performing Assets: | March 31, 2023 | December 31, 2022 | March 31, 2022 |
| --- | ---: | ---: | ---: |
| Total non-performing loans | $13,909 | $8,585 | $7,937 |
| Foreclosed real estate | 248 | 43 | 125 |
| Total non-performing assets | 14,157 | 8,628 | 8,062 |
| Accruing loans 90 days or more past due | 7 | 654 | 133 |
| Total risk elements | $14,164 | $9,282 | $8,195 |
| Non-performing loans as a percentage of total loans outstanding | 0.39% | 0.24% | 0.25% |
| Non-performing assets as a percentage of total loans outstanding and foreclosed real estate | 0.39% | 0.25% | 0.26% |
| Ratio of ACL to non-performing loans | 224.78% | 220.82% | 190.84% |

Total nonperforming assets were $14.2 million at March 31, 2023, an increase compared to nonperforming assets of $8.6 million at December 31, 2022. The increase since December 31, 2022 was primarily related to two relationships. One of the relationships was subsequently paid off in full in April 2023. The second relationship is collateralized in excess of the outstanding loan balances based on a current appraisal of the collateral.

### Deposits and Short-term Borrowings

Total deposits increased $99.8 million, or 2.6%, from $3.8 billion on December 31, 2022, to $3.9 billion at March 31, 2023. The growth was primarily due to an increase of $225.3 million, or 34.2%, in time deposits as the result of rate increases in order to retain and attract customers. Estimated uninsured deposits represented 26.1% of total deposits at March 31, 2023, and 18.7% of total deposits after adjusting for insured/collateralized public funds and contractual deposits. Total short-term borrowings decreased $14.6 million, or 14.3%, from December 31, 2022 primarily as a result of the increase in deposits.

### Liquidity

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

- a growing core deposit base;
- proceeds from the sale or maturity of investment securities;
- payments received on loans and mortgage-backed securities;
- overnight correspondent bank borrowings on various credit lines; and
- borrowing capacity available from the FHLB and the Federal Reserve Discount Window available to Mid Penn.

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

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

The Consolidated Statements of Cash Flows provide additional information. Mid Penn’s operating activities during the three months ended March 31, 2023 provided $12.9 million of cash, mainly due to net income. Cash used in investing activities during the three months ended March 31, 2023 was $93.6 million, mainly the result of the net increase in loans. Cash provided by financing activities during the three months ended March 31, 2023 totaled $81.9 million, primarily the result of an increase in net deposits.

### Regulatory Capital

The Corporation and the Bank are subject to regulatory capital requirements administered by banking regulators. Failure to meet minimum capital requirements can trigger certain mandatory, and possibly additional discretionary, actions by the regulators that if, undertaken, could have a direct material effect on the Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory account practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Minimum regulatory capital requirements established by Basel III rules require the Corporation and the Bank to:

- Meet a minimum Common Equity Tier I capital ratio of 4.5% of risk-weighted assets;
- Meet a minimum Tier I capital ratio of 6.0% of risk-weighted assets;
- Meet a minimum Total capital ratio of 8.0% of risk-weighted assets;
- Meet a minimum Tier I leverage capital ratio of 4.0% of average assets;
- Maintain a "capital conservation buffer" of 2.5% above the minimum risk-based capital requirements, which must be maintained to avoid restrictions on capital distributions and certain discretionary bonuses; and
- Comply with the definition of capital to improve the ability of regulatory capital instruments to absorb losses.

The Basel III Rules use a standardized approach for risk weightings that expands the risk-weighting for assets and off-balance sheet exposures from the previous 0%, 20%, 50% and 100% categories to a much larger and more risk-sensitive number of categories, depending on the nature of the assets and off-balance sheet exposures and resulting in higher risk weightings for a variety of asset categories.

Banks are evaluated for capital adequacy by regulatory supervisory agencies based on the ratio of capital to risk-weighted assets and total assets. The minimum capital to risk-weighted assets requirements, including the capital conservation buffers, which became effective for Mid Penn and the Bank on January 1, 2016, are illustrated below. At March 31, 2023, regulatory capital ratios for both Mid Penn and the Bank met the definition of a "well-capitalized" institution under the regulatory framework for prompt corrective action, and exceeded the minimum capital requirements under Basel III.

Mid Penn maintained the following regulatory capital ratios in comparison to regulatory requirements:

|  | March 31, 2023 | December 31, 2022 | Regulatory Minimum for Capital Adequacy | Fully Phased-In, with Capital Conversation Buffers |
| --- | ---: | ---: | ---: | ---: |
| Total Risk-Based Capital (to Risk-Weighted Assets) | **13.13%** | 13.19% | **10.50%** | **10.50%** |
| Tier I Risk-Based Capital (to Risk-Weighted Assets) | **10.77** | 11.18 | **8.50** | **8.50** |
| Common Equity Tier I (to Risk-Weighted Assets) | **10.77** | 11.18 | **7.00** | **7.00** |
| Tier I Leverage Capital (to Average Assets) | **9.21** | 8.57 | **4.00** | **4.00** |

45

As of March 31, 2023 and December 31, 2022, the Corporation and the Bank met all capital adequacy requirements and the Bank was considered "well-capitalized". However, future changes in regulations could increase capital requirements and may have an adverse effect on capital resources.

### Shareholders' Equity

Shareholders' equity, or capital, is evaluated in relation to total assets and the risk associated with those assets, and the desire to collectively maintain and enhance shareholders’ value, and satisfactorily address regulatory capital requirements. Accordingly, capital management has been, and will continue to be, of paramount importance to Mid Penn.

Shareholders’ equity decreased by $1.3 million, or 0.3%, from $512.1 million as of December 31, 2022 to $510.8 million as of March 31, 2023, primarily due to the $11.5 million reduction to retained earnings as a result of the adoption of CECL on January 1, 2023 and the $3.2 million of dividends declared, partially offset by earnings of $11.2 million and an increase in the carrying value of the AFS investment portfolio of $1.8 million.

## Market risk

As filed, 3,328 characters.

As a financial institution, Mid Penn’s primary source of market risk is interest rate risk. Interest rate risk is the exposure to fluctuations in Mid Penn’s future earnings, earnings at risk, resulting from changes in interest rates. This exposure or sensitivity is a function of the repricing characteristics of Mid Penn's portfolio of assets and liabilities. Each asset and liability reprices either at maturity or during the life of the instrument. Interest rate sensitivity is measured as the difference between the volume of assets and liabilities that are subject to repricing in a future period of time.

The principal purpose of asset-liability management is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Net interest income is increased by increasing the net interest margin and by volume growth. Thus, the goal of interest rate risk management is to maintain a balance between risk and reward such that net interest income is maximized while risk is maintained at an acceptable level.

Mid Penn utilizes an asset-liability management model to measure the impact of interest rate movements on its interest rate sensitivity position. Mid Penn’s management also reviews the traditional maturity gap analysis regularly. Mid Penn does not always attempt to achieve an exact match between interest sensitive assets and liabilities because it believes that an actively managed amount of interest rate risk is inherent and appropriate in the management of Mid Penn’s profitability.

Modeling techniques and simulation analysis involve assumptions and estimates that inherently cannot be measured with complete precision. Key assumptions in the analyses include maturity and repricing characteristics of assets and liabilities, prepayments on amortizing assets, non-maturing deposit sensitivity, and loan and deposit pricing. These assumptions are inherently uncertain due to the timing, magnitude and frequency of rate changes and changes in market conditions and management strategies, among other factors. However, the analyses are useful in quantifying risk and provide a relative gauge of Mid Penn’s interest rate risk position over time.

Management reviews interest rate risk on a quarterly basis. This analysis includes earnings scenarios whereby interest rates are increased or decreased by 100, 200, 300 and 400 bps. These scenarios, detailed in the table below, indicate that Mid Penn would experience enhanced net interest income over a one-year time frame due to upward interest rate changes and due to a reduction in interest rates to 300 bps. A reduction in rates greater than 300 bps would result in a decline in net interest income over a one-year time frame; however, actual results could vary significantly from the calculations prepared by management. At March 31, 2023, all interest rate risk levels according to the model were within the tolerance limits of the Board-approved policy.

| Change in Basis Points | % Change in Net Interest Income | Policy Risk Limit |
| ---: | ---: | --- |
| 400 | 2.89% | ≥ -25% |
| 300 | 2.23% | ≥ -20% |
| 200 | 1.55% | ≥ -15% |
| 100 | 0.83% | ≥ -10% |
| (100) | 0.71% | ≥ -10% |
| (200) | 0.76% | ≥ -15% |
| (300) | (1.61)% | ≥ -20% |
| (400) | (4.05)% | ≥ -25% |

## Controls and procedures

As filed, 1,192 characters.

### Evaluation of Disclosure Controls and Procedures

Mid Penn maintains controls and procedures designed to ensure that information required to be disclosed in the reports that Mid Penn files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures as of March 31, 2023, Mid Penn’s management, with the participation of the Principal Executive Officer and Principal Financial Officer, concluded that the disclosure controls and procedures were effective as of such date.

### Changes in Internal Controls

During the three months ended March 31, 2023, the Corporation implemented new CECL accounting policies, procedures, and controls as part of its adoption of ASU No. 2016-13 and subsequent ASUs issued to amend ASC Topic 326. There were no other changes in Mid Penn’s internal control over financial reporting that have materially affected, or are reasonable likely to materially affect, Mid Penn’s internal control over financial reporting during the three months ended March 31, 2023.

## Risk factors

As filed, 2,528 characters.

Management has reviewed the risk factors that were previously disclosed in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022, to determine if there were material changes applicable to the three months ended March 31, 2023. Other then as noted below, there have been no material changes to such risk factors.

*Adverse developments affecting the banking industry, such as recent bank failures or concerns involving liquidity, may have material adverse effects on Mid Penn’s operations.*

Recent events impacting the banking industry, including the failure of Silicon Valley Bank, Signature Bank and First Republic Bank, have resulted in decreased confidence in banks among deposit customers, investors and other counterparties. These banks had elevated levels of uninsured deposits, which may be less likely to remain at the bank over time and less stable as a source of funding than insured deposits.

The failures of these three banks have caused significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events occurred during a period of rapidly rising interest rates, which, among other things, has resulted in unrealized losses in Mid Penn’s available for sale debt securities portfolio and increased competition for bank deposits. These events have, and could continue to have, adverse impacts on the market price and volatility of Mid Penn’s stock. These events could also lead to increases in Mid Penn’s interest expense, as it has raised and may continue to raise interest rates paid to depositors in order to compete with other banks.

Additionally, these bank failures have caused concern and uncertainty regarding the liquidity adequacy of the banking sector as a whole and resulted in some bank customers choosing to maintain deposits with larger financial institutions. A significant reduction in Mid Penn’s deposits could materially adversely impact Mid Penn’s liquidity, ability to fund loans, and results of operations. In addition to customer deposits, Mid Penn borrows on an overnight and short-term basis from third parties in the form of federal funds purchased and repurchase agreements and through lines of credit and borrowings from the FHLB and other correspondent banks. If the Company is not able to access borrowings through those facilities due to an increase in demand from other banks or due to insufficient levels of pledgeable assets, its ability to borrow funds may be materially adversely impacted.

Filed May 9, 2023.
Source: SEC EDGAR, the filing index for accession 0000879635-23-000035. Last ingested by Listed: Nov 5, 2026, 18:25 ET. No prices; not investment advice.