MID PENN BANCORP, INC. The following is Management's Discussion and Analysis of Consolidated Financial Condition as ofMarch 31, 2022 , compared to year-end 2021, and the Results of Operations for the three months endedMarch 31, 2022 , compared to the same period in 2021. For comparative purposes, theMarch 31, 2021 andDecember 31, 2021 balances have been reclassified when, and if necessary, to conform to the 2022 presentation. Such reclassifications had no impact on net income or shareholders' equity. This discussion should be read in conjunction with the financial tables, statistics, and the audited financial statements and notes thereto included in the Corporation's Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "2021 Annual Report"). The results of operations for interim periods are not necessarily indicative of operating results expected for the full year.
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 2021 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 potentially slowing or volatile 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 federal or state governments, including a
failure to increase the government debt limit or a prolonged shutdown of the
federal government, or a federal or state government-mandated shutdowns of
significant segments of the economy;
• business or economic disruptions from national or global epidemic or
pandemic events, including those from the COVID-19 pandemic;
• the risks associated with our acquisition of
fail to realize the anticipated benefits of the merger, and the future
results of the combined company may suffer if the expanded operations are
not effectively managed;
• an increase in the Pennsylvania
capital stock is currently subject, or imposition of any additional taxes on
Mid Penn or
• changes in the capitalization of the Corporation, including the impacts of
any capital and liquidity requirements imposed by regulatory pronouncements
and rules;
• the effect of changes in accounting policies and practices, as may be
adopted by the supervisory agencies, as well as the
Accounting Oversight Board,
accounting standard setters;
• the risks of changes in interest rates and the yield curve on the level and
composition of deposits and other funding sources, loan demand and yields,
values of loan collateral, securities and yields, 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;
• the costs and effects of litigation and of unexpected or adverse outcomes in
such litigation;
• technological changes and changes to data security systems including those
with third-party information technology providers;
• our ability to implement business strategies, including our acquisition
strategy;
• our ability to implement organic branch, product and service expansion
strategies;
• our current and future acquisition strategies may not be successful in
locating or acquiring advantageous targets at favorable 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;
• our ability to maintain the value and image of our brand and protect our
intellectual property rights;
• results of regulatory examination and supervision processes;
• our ability to maintain compliance with the exchange rules of The NASDAQ
• 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;
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• acts of war or terrorism; disruptions due to flooding, severe weather, or
other natural disasters or Acts of God; and
• volatility in the securities markets; and
• other risks and uncertainties, including those detailed in our Annual Report
on Form 10-K for the year ended
Factors" and "Management Discussion and Analysis of Financial Condition and
Results of Operations" and in subsequent filings with the
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.
Critical Accounting Estimates
Mid Penn's consolidated financial statements are prepared in accordance with generally accepted accounting principles inthe 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 that we used are also 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 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 the Corporation considers the accounting judgments relating to the allowance, the evaluation of the Corporation's investment securities for other-than-temporary impairment, the valuation of the Corporation's goodwill and other merger-related intangible assets 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 represents management's estimate of probable incurred credit losses inherent in the loan and lease portfolio. Determining the amount of the allowance 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 securities 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 require an adjustment in carrying value and recognition of the loss in the consolidated statement of income. Certain intangible assets generated in connection with acquisitions are periodically assessed for impairment.Goodwill is tested annually for impairment, and 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. Similarly, the amortized basis of the core deposit intangible asset is periodically assessed for impairment. There are inherent uncertainties related to these factors and Mid Penn's judgment in applying them to the analysis of core deposit intangible, trade name intangible, and goodwill impairment. Changes in economic and operating conditions could result in goodwill, core deposit intangible, customer list intangible, or trade name intangible 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 Overview Net income available to common shareholders was$11,354,000 or$0.71 per common share basic and diluted for the quarter endedMarch 31, 2022 , compared to net income of$9,312,000 or$1.11 per common share basic and$1.10 per common share diluted for the quarter endedMarch 31, 2021 .
Net income as a percentage of average assets (return on average assets, or "ROA") and net income as a percentage of shareholders' equity (return on average equity, or "ROE") were as follows (calculated and reported on an annualized basis):
Three Months Ended March 31,
2022 2021
Return on average assets 0.98 % 1.19 %
Return on average equity 9.32 % 14.58 %
Net Interest Income/Funding Sources
Net interest income, Mid Penn's primary source of revenue, is the amount by which interest income on loans and investments exceeds interest incurred on deposits and borrowings. The amount of net interest income is affected by changes in interest rates and changes in the volume and mix of interest-sensitive assets and liabilities. Net interest income and corresponding yields are presented in the analysis below on a taxable-equivalent
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MID PENN BANCORP, INC. 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 21 percent for the three months endedMarch 31, 2022 and 2021. The following tables include average balances, amounts, and rates of interest income and expense, interest rate spread, and net interest margin for the three months endedMarch 31, 2022 and 2021. Average Balances, Income
and Interest Rates on a Taxable Equivalent Basis
For the Three Months Ended
(Dollars in thousands) March 31, 2022 March 31, 2021
Average Average Average Average
Balance Interest Rates Balance Interest Rates
ASSETS:
Interest Bearing Balances $ 91,543 $ 13 0.06 % $ 1,401 $ 2 0.58 %
Investment Securities :
Taxable 389,034 1,822 1.90 % 78,456 385 1.99 %
Tax-Exempt 73,614 425 (a) 2.34 % 54,937 351 (a) 2.59 %
Total Securities 462,648 2,247 1.97 % 133,393 736 2.24 %
Federal Funds Sold 706,411 314 0.18 % 314,181 79 0.10 %
Loans and Leases, Net 3,103,469 35,123
(b) 4.59 % 2,531,917 28,406 (b) 4.55 %
8,347 131 6.36 % 7,052 95 5.46 %
Total Earning Assets 4,372,418 37,828 3.51 % 2,987,944 29,318 3.98 %
Cash and Due from Banks 57,397 34,040
Other Assets 267,079 164,266
Total Assets $ 4,696,894 $ 3,186,250
LIABILITIES & SHAREHOLDERS'
EQUITY:
Interest-bearing Demand $ 1,045,678 $ 461 0.18 % $ 602,015 $ 578 0.39 %
Money Market 1,125,094 600 0.22 % 743,994 778 0.42 %
Savings 376,006 58 0.06 % 197,873 64 0.13 %
Time 592,833 1,175 0.80 % 413,673 1,546 1.52 %
Total Interest-bearing
Deposits 3,139,611 2,294 0.30 % 1,957,555 2,966 0.61 %
Short-term Borrowings - - 0.00 % 203,518 174 0.35 %
Long-term Debt 76,157 284 1.51 % 75,062 204 1.10 %
Subordinated Debt 74,189 640 3.50 % 44,583 499 4.54 %
Total Interest-bearing
Liabilities 3,289,957 3,218 0.40 % 2,280,718 3,843 0.68 %
Noninterest-bearing Demand 859,463 623,058
Other Liabilities 53,455 23,462
Shareholders' Equity 494,019 259,012
Total Liabilities &
Shareholders' Equity $ 4,696,894 $ 3,186,250
Net Interest Income (taxable
equivalent basis) $ 34,610 $ 25,475
Taxable Equivalent Adjustment (196 ) (150 )
Net Interest Income $ 34,414 $ 25,325
Total Yield on Earning Assets 3.51 % 3.98 %
Rate on Supporting Liabilities 0.40 % 0.68 %
Average Interest Spread 3.11 % 3.30 %
Net Interest Margin 3.21 % 3.46 %
(a) Includes tax-equivalent adjustments (calculated using statutory rates of 21
percent) of
2021, respectively, resulting from tax-free municipal securities in the
investment portfolio.
(b) Includes tax-equivalent adjustments (calculated using statutory rates of 21
percent) of
and 2021, respectively, resulting from tax-free municipal loans in the
commercial loan portfolio.
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MID PENN BANCORP, INC. Three months ended March 31, 2022 vs. March 31, 2021 (Dollars in thousands on a Taxable Equivalent Basis) Increase (decrease) Volume Rate Net INTEREST INCOME: Interest Bearing Balances$ 129 $ (118 ) $ 11 Investment Securities : Taxable 1,524 (87 ) 1,437 Tax-Exempt 119 (45 ) 74Total Securities 1,643 (132 ) 1,511 Federal Funds Sold 99 136 235 Loans and Leases, Net 6,412 305 6,717 Restricted Investment Bank Stocks 17 19 36 Total Interest Income 8,300 210 8,510 INTEREST EXPENSE: Interest Bearing Deposits: Interest Bearing Demand 426 (543 ) (117 ) Money Market 399 (577 ) (178 ) Savings 58 (64 ) (6 ) Time 670 (1,041 ) (371 ) Total Interest Bearing Deposits 1,553 (2,225 ) (672 ) Short-term Borrowings (174 ) - (174 ) Long-term Debt 3 77 80 Subordinated Debt 331 (190 ) 141 Total Interest Expense 1,713 (2,338 ) (625 ) NET INTEREST INCOME$ 6,587 $ 2,548 $ 9,135 Taxable-equivalent net interest income was$34,610,000 for the three months endedMarch 31, 2022 , an increase of$9,135,000 or 36 percent compared to the three months endedMarch 31, 2021 . This increase included the recognition of$2,989,000 of PPP loan processing fees generated as a result of Mid Penn's participation in the PPP program compared to the$5,047,000 of PPP loan processing fees recognized during the first quarter of 2021. These PPP fees are recognized into interest income over the term of the respective loan, or sooner if the loans are forgiven by the SBA, or the borrowers otherwise pay down principal prior to a loan's stated maturity. Mid Penn has been systematically adding to its investment portfolio to better utilize excess funds held in lower yielding accounts with theFederal Reserve , contributing to the growth in net interest income. Additionally, the first quarter of 2022 included three months of net interest income from the assets and liabilities added in theRiverview acquisition. Mid Penn's tax-equivalent net interest margin for the three months endedMarch 31, 2022 was 3.21 percent and comparable to the 3.46 percent net interest margin for the three months endedMarch 31, 2021 . The yield on interest-earning assets decreased from 3.98 percent for the first quarter of 2021 to 3.51 percent for the first quarter of 2022. Though the quarterly average balance of interest-earning assets increased year over year, the yields on interest-earning assets declined due to the reduction in market rates, which was partially offset by the shift of assets from federal funds sold into investments. While this improved the yield on the shifted funds, investment yields for much of the quarter were well below the overall yield on interest earning assets. The decrease in the yield on interest-earning assets was substantially offset by a favorable decrease in the cost of funds, as the total cost of deposits for the three months endedMarch 31, 2022 favorably decreased to 0.40 percent compared to 0.68 percent for the three months endedMarch 31, 2021 . The reduction in the cost of funds primarily reflects deposit rate decreases, many of which resulted in response to market rate cuts from the COVID-19 pandemic.
Although the effective interest rate impact on earning assets and funding
sources can be reasonably estimated at current interest rate levels, the
interest-bearing product and pricing 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 Mid Penn's asset and
liability management and related interest rate risk simulation models. In
addition, our net interest income may be impacted by further interest rate
actions of the
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MID PENN BANCORP, INC. Provision for Loan Losses The provision for loan and lease losses is the expense necessary to maintain the allowance 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 in accordance with Mid Penn's assessment process, which takes into consideration, among other relevant factors, the risk characteristics of the loan portfolio, the growth in the loan portfolio during the first three months of 2022, economic and external factor changes, and shifting collateral values fromDecember 31, 2021 toMarch 31, 2022 . Management performed a current evaluation of the adequacy of the loan and lease loss allowance and, based on this evaluation, a loan loss provision of$500,000 and$1,000,000 was recorded for the three months endedMarch 31, 2022 and 2021, respectively. The allowance for loan losses and the related provision reflect Mid Penn's continued application of the incurred loss method for estimating credit losses as Mid Penn is not yet required to adopt the current expected credit loss ("CECL") accounting standard. The increase in the allowance for loan loss from$14,597,000 atDecember 31, 2021 to$15,147,000 atMarch 31, 2022 was primarily the result of providing for core loan growth during the three months endedMarch 31, 2022 . Noninterest Income
For the three months ended
The following components of noninterest income showed significant changes:
(Dollars in Thousands) Three Months Ended March 31,
2022 2021 $ Variance % Variance
Mortgage banking income $ 529 $ 2,379 $ (1,850 ) -78 %
Income from fiduciary and wealth
management activities 1,052 556 496 89 %
Service charges on deposits 684 152 532 350 %
ATM debit card interchange income 1,057 568 489 86 %
Earnings from cash surrender value of
life insurance 246 74 172 232 %
Other income 2,118 791 1,327 168 %
Mortgage banking income, representing a gain on sale of loans, was $529,000 for
the three months ended March 31, 2022 , a decrease of $1,850,000 , compared to the
$2,379,000 of mortgage banking income for the three months ended March 31,
2021 . Mortgage interest rates declined as a result of market responses to the
pandemic, resulting in a significant increase in mortgage loan originations and
secondary-market loan sales and gains during the first quarter of 2021. During
the first quarter of 2022, the Fed announced one rate increase, and anticipated
several additional increases throughout the remainder of 2022. As a result of
the corresponding mortgage rate increases and an increase in property values
driven by supply shortfalls and high liquidity levels among buyers, the mortgage
loan refinancing market has slowed precipitously, and purchase money mortgage
originations have slowed relative to historical lending volumes.
Income from fiduciary and wealth management activities was $1,052,000 for the
three months ended March 31, 2022 , an increase of $496,000 or 89 percent,
compared to $556,000 during the three months ended March 31, 2021 . The
additional revenue was attributable to favorable growth in trust assets under
management and increased sales of retail investments products, as a result of
successful business development efforts by Mid Penn's trust and wealth
management team.
Service charges on deposits were $684,000 for the three months ended March 31,
2022 , an increase of $532,000 , compared to $152,000 for the same period in 2021.
This increase was driven by an increase in collected charges on a higher volume
of transactional deposit accounts, including deposit accounts assumed in the
Riverview acquisition.
ATM debit card interchange income was $1,057,000 for the three months ended
March 31, 2022 , an increase of $489,000 or 86 percent, compared to the three
months ended March 31, 2021 . The additional income is a result of an increased
volume of checking accounts, and an increase in Mid Penn ATM and debit card
activity, which included an increase in transaction volume resulting from the
accounts acquired in the Riverview transaction.
Earnings from cash surrender value of life insurance was $246,000 for the three
months ended March 31, 2022 , an increase of $172,000 , compared to $74,000 for
the same period of 2021. The increase is a result of additional policies assumed
during the Riverview acquisition.
Other income was $2,118,000 for the three months ended March 31, 2022 , an
increase of $1,327,000 , compared to $791,000 during the three months ended March
31, 2021 . As another prong of Mid Penn's mortgage banking program, a mortgage
hedging program was established in the latter half of 2021. For the three months
ended March 31, 2022 , $533,000 in mortgage hedging gains were recognized as a
component of other income, while no similar gains were recognized during the
same quarter of the prior year. Mid Penn also reflected increases in other
miscellaneous income amounts as a result of the Riverview acquisition.
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MID PENN BANCORP, INC. Noninterest Expense For the three months endedMarch 31, 2022 , noninterest expense totaled$25,745,000 , an increase of$8,187,000 or 47 percent, compared to noninterest expense of$17,558,000 for the same period in 2021. Several components of noninterest expense increased as a result of higher fixed and variable expenses due to both theRiverview acquisition and organic growth.
The changes were primarily a result of the following components of noninterest expense, which had significant variances when comparing results for periods ending in 2022 versus the corresponding period in 2021:
(Dollars in Thousands) Three Months Ended
2022 2021 $ Variance % Variance
Salaries and employee benefits $ 13,244 $ 9,598 $ 3,646 38 %
Occupancy expense, net 1,799 1,480 319 22 %
Equipment expense 1,011 751 260 35 %
Software licensing and utilization 2,106 1,445 661 46 %
FDIC Assessment 591 470 121 26 %
Legal and professional fees 639 426 213 50 %
Charitable contributions qualifying
for state tax credits 65 270 (205 ) -76 %
Intangible amortization 481 281 200 71 %
Post-acquisition restructuring
expenses 329 - 329 100 %
Other expenses 5,351 2,717 2,634 97 %
Salaries and employee benefits were $13,244,000 for the three months ended March
31, 2022 , an increase of $3,646,000 or 38 percent, versus the same period in
2021, with the increase attributable to (i) the retail staff additions at the
seven retail locations added through the Riverview acquisition; (ii) the
retention of various Riverview team members through the completion of the
systems integration, which occurred on March 4, 2022 ; and (iii) the addition of
wealth management professionals, commercial lending professionals, and other
staff additions in alignment with Mid Penn's core banking and nonbanking growth
initiatives.
Occupancy expenses increased $319,000 or 22 percent during the first three
months of 2022 compared to the same period in 2021. Similarly, equipment expense
increased $260,000 or 35 percent during the three months ended March 31, 2022
compared to the three months ended March 31, 2021 . These increases were driven
by the facility operating costs and increased depreciation expense for building,
furniture, and equipment associated with the addition of the Riverview
acquisition.
Software licensing and utilization costs were $2,106,000 for the three months
ended March 31, 2022 , an increase of $661,000 or 46 percent compared to
$1,445,000 for the three months ended March 31, 2021 . The increase is a result
of additional costs to license (i) the additional Riverview branches, (ii)
upgrades to internal systems, networks, storage capabilities, cybersecurity
management, and data security mechanisms to enhance data management and security
capabilities responsive to both the larger company profile and the increasing
complexity of information technology management, and (iii) increases in certain
core processing fees as our customer base and transaction volume continue to
grow.
FDIC assessment expense was $591,000 for the three months ended March 31, 2022 ,
an increase of $121,000 or 26 percent compared to $470,000 for the three months
ended March 31, 2021 . As a result of the Riverview acquisition and organic
growth, the increased FDIC assessment aligns with the year-over-year growth of
the average assets of the Bank on which the assessment is based.
Legal and professional fees were $639,000 for the three months ended March 31,
2022 , an increase of $213,000 or 50 percent compared to $426,000 for the three
months ended March 31, 2021 , with this increase being attributable to consulting
expenses related to personnel arrangements facilitating the assimilation of
Riverview . Additionally, fees were incurred for expanded loan review coverage
and software consulting services in the compliance area.
Charitable contributions qualifying for state tax credits were $65,000 for the
three months ended March 31, 2022 compared to $270,000 for the same three-month
period during 2021. Mid Penn continues to maximize the amount of contributions
qualifying for state credits that can be made during 2022 and makes qualifying
contributions, as allowable.
Intangible amortization increased from $281,000 during the first quarter of 2021
to $481,000 during the first quarter of 2022. Mid Penn recorded a customer list
intangible asset of $2,160,000 , and a core deposit intangible asset of
$4,096,000 as a result of the Riverview acquisition. During the three months
ended March 31, 2022 , Mid Penn recorded $98,000 of expense related to the
customer list and $143,000 of expense related to the core deposit intangible
asset.
Post-acquisition restructuring expenses totaled
Other expenses increased$2,634,000 or 97 percent from$2,717,000 during the three months endedMarch 31, 2021 to$5,351,000 for the same period in 2022. With theRiverview acquisition and organic growth, several categories within other expense experienced increases, including PennsylvaniaBank Shares taxes, constituting$620,000 of the increase, marketing, telephone, postage, courier, ATM and card processing, payroll processing, employee travel costs, and director fees. In addition, the quarter endedMarch 31, 2022 contained an impaired asset write-off of$664,000 , representing the disposal of certain fixed assets and leasehold improvements fromRiverview offices not being retained. 57
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MID PENN BANCORP, INC. Income Taxes The provision for income taxes was$2,565,000 during the three months endedMarch 31, 2022 , compared to$2,167,000 of income tax provision recorded for the same period in 2021. The provision for income taxes for the three months endedMarch 31, 2022 reflects a combined Federal and State effective tax rate of 18.4 percent compared to 18.9 percent for the three months endedMarch 31, 2021 . The decrease in the effective tax rate reflects (i) higher tax-exempt interest recognized due to an increase in tax-exempt securities being held in the investment security portfolio when compared to the prior year, and (ii) the favorable treatment of the increase in cash surrender value on bank owned life insurance policies, which are nontaxable for federal tax purposes. 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
Overview
Mid Penn's total assets were$4,667,174,000 as ofMarch 31, 2022 , reflecting a decrease of$22,251,000 or 0.47 percent compared to total assets of$4,689,425,000 as ofDecember 31, 2021 . Included in total assets as ofMarch 31, 2022 are$34,124,000 of Paycheck Protection Program ("PPP") loans, net of deferred fees. Comparatively, as ofDecember 31, 2021 , Mid Penn had$111,286,000 of PPP loans outstanding, net of deferred fees. Mid Penn had$822,000 of PPP deferred loan processing fees not yet realized as income as ofMarch 31, 2022 , compared to$3,811,000 as ofDecember 31, 2021 . Mid Penn was a significant participating lender under the PPP, which was originally created when the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law onMarch 27, 2020 , extended by the signing of the Consolidated Appropriations Act, 2021 into law onDecember 27, 2020 , and further extended toMay 31, 2021 by the PPP Extension Act of 2021. Core banking loans (a non-GAAP measure calculated as total loans less PPP loans outstanding) totaled$3,087,470,000 as ofMarch 31, 2022 , an increase of$94,297,000 or 3 percent since year-end 2021, with this growth occurring primarily within Mid Penn's commercial real estate and commercial real estate - construction loan portfolios. This increase represents an annualized core banking loan growth rate of 13 percent sinceDecember 31, 2021 . Please refer to the section included herein under the heading "Reconciliation of Non-GAAP Measures (Unaudited)" for a discussion of our use of non-GAAP adjusted financial information, which includes tables reconciling GAAP and non-GAAP adjusted financial measures for these and certain other periods ended fromMarch 31, 2021 throughMarch 31, 2022 . Total deposits decreased$12,979,000 or 0.32 percent, from$4,002,016,000 onDecember 31, 2021 , to$3,989,037,000 atMarch 31, 2022 . The decrease in total deposits since year-end 2021 was attributable to the maturity of certificates of deposit, which have renewed into lower rates, migrated to other deposit or retail investment products, or exited the Bank. Deposit growth of$1,322,210,000 sinceMarch 31, 2021 was positively impacted by theRiverview acquisition and significant increases in noninterest-bearing, interest-bearing, and money market deposits, primarily due to both expanded cash management and commercial deposit account relationships, and new deposits established as a result of Mid Penn's PPP loan funding activities. Additionally, Mid Penn recognized a total core deposit increase, which excludes time deposits, of$60,524,000 or 2 percent (7 percent annualized) during the first three months of 2022.
Loans
Total loans as ofMarch 31, 2022 were$3,121,531,000 compared to$3,104,396,000 as ofDecember 31, 2021 , an increase of$17,135,000 since year-end 2021. This increase was driven by organic loan growth within Mid Penn's commercial real estate and commercial and industrial financing portfolios, net of PPP loan forgiveness. (Dollars in thousands) March 31, 2022 December 31, 2021 Amount % Amount % Commercial and industrial$ 586,444 18.8 %$ 619,562 20.0 % Commercial real estate 1,722,668 55.2 % 1,668,142 53.7 % Commercial real estate - construction 382,131 12.2 % 372,734 12.0 % Residential mortgage 305,311 9.8 % 323,223 10.4 % Home equity 113,519 3.6 % 110,306 3.6 % Consumer 11,458 0.4 % 10,429 0.5 %$ 3,121,531 100.0 %$ 3,104,396 100.0 %
Credit Quality, Credit Risk, and Allowance for Loan and Lease Losses
The allowance for loan losses and the related loan loss provision for the
periods presented reflect Mid Penn's continued application of the incurred loss
method for estimating credit losses, as Mid Penn is not required to adopt the
current expected credit loss ("CECL") accounting standard until January 1, 2023 ,
and Mid Penn has not elected to early adopt CECL. PPP loans, both those
disbursed in 2020 and those disbursed in 2021, are included in the commercial
and industrial classification and, as the PPP loans are fully guaranteed by the
Small Business Administration , no allowance for loan losses was recorded against
the $34,124,000 balance of PPP loans outstanding (net of related deferred PPP
fees) as of March 31, 2022 .
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MID PENN BANCORP, INC. For the three months endedMarch 31, 2022 , Mid Penn had net loan recoveries of$50,000 compared to net loan charge-offs of$791,000 during the same period in 2021. None of the charge-offs during the three months endedMarch 31, 2022 or 2021 were a result of the COVID-19 pandemic. Loans charged off during the first three months of 2022 totaled$57,000 and included three consumer loans for$3,000 and$54,000 in deposit account charge-offs. Mid Penn may need to make future adjustments to the allowance and the provision for loan and lease losses if economic conditions or loan credit quality differs substantially from the assumptions used in making Mid Penn's evaluation of the level of the allowance for loan losses as compared to the balance of outstanding loans. Changes in the allowance for the three months endedMarch 31, 2022 and 2021 are summarized as follows: (Dollars in thousands) Three Months Ended March 31, 2022 2021 Balance, beginning of period$ 14,597 $ 13,382 Loans charged off during period (57 ) (865 ) Recoveries of loans previously charged off 107 74 Net charge-offs 50 (791 ) Provision for loan and lease losses 500 1,000 Balance, end of period$ 15,147
Ratio of net loan charge-offs to average loans outstanding, annualized -0.01 % 0.07 % Ratio of allowance for loan losses to net loans at end of period 0.49 % 0.47 % Excluding PPP loans, which are guaranteed by the SBA and have no associated loss allowance, the allowance for loan and lease losses as a percentage of core loans (a non-GAAP financial measure) were 0.49 percent at bothMarch 31, 2022 andDecember 31, 2021 . Please refer to the section included herein under the heading "Reconciliation of Non-GAAP Measures (Unaudited)" for a discussion of our use of non-GAAP adjusted financial information, which includes tables reconciling GAAP and non-GAAP adjusted financial measures for these and certain other periods ended fromMarch 31, 2021 toMarch 31, 2022 . Other than as described herein, including the disclosures in previous sections regarding the continued impact of the COVID-19 pandemic, Mid Penn does not believe there are any trends or events at this time that are reasonably expected to have a material impact on future results of operations, liquidity, or capital resources. Based on known information, Mid Penn believes that the effects of current and past economic conditions and other unfavorable business conditions, including those related to COVID-19, may eventually impact some borrowers' abilities to comply with their repayment terms. Accordingly, Mid Penn has adjusted its qualitative factors for economic and external conditions as part of its general component determination primarily in response to the economic conditions resulting from the pandemic. Mid Penn continues to monitor closely the financial strength of borrowers and the economic conditions impacting them, including those with a higher risk of impacts from the COVID-19 pandemic. Mid Penn does not ordinarily 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 of 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. 59
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MID PENN BANCORP, INC.
The following table presents the change in nonperforming asset categories as of
(Dollars in thousands)
March 31, 2022 December 31, 2021 March 31, 2021
Nonperforming Assets:
Nonaccrual loans $ 7,507 $ 9,547 $ 6,220
Accruing troubled debt restructured loans 430 435 457
Total nonperforming loans 7,937 9,982 6,677
Foreclosed real estate 125 - 154
Total non-performing assets 8,062 9,982 6,831
Accruing loans 90 days or more past due 133 515 -
Total risk elements $ 8,195 $ 10,497 $ 6,831
Nonperforming loans as a % of total loans outstanding 0.25 % 0.32 % 0.25 % Nonperforming assets as a % of total loans outstanding and other real estate 0.26 % 0.32 % 0.26 % Ratio of allowance for loan losses to nonperforming loans 190.84 % 146.23 % 203.55 %
In the table above, troubled debt restructured loans that are no longer accruing interest are included in nonaccrual loans.
Total nonperforming assets were$8,195,000 atMarch 31, 2022 , a decrease compared to nonperforming assets of$10,497,000 atDecember 31, 2021 and an increase compared to$6,831,000 atMarch 31, 2021 . The decrease in nonperforming assets sinceDecember 31, 2021 was primarily the result of the successful workout of two nonaccrual home equity loans amongst one relationship totaling$2,278,000 during the three months endedMarch 31, 2022 . The nonperforming assets included acquired impaired loans assumed in theRiverview transaction totaled$3,289,000 as ofDecember 31, 2021 . Foreclosed real estate held for sale increased from zero atDecember 31, 2021 to$125,000 as ofMarch 31, 2022 , due to two residential mortgage loans that went into foreclosure during the first quarter of 2022.
One nonaccrual relationship that was settled during the first quarter is discussed in detail below.
During the first quarter of 2022, an unrelated party acquired the real estate for an amount sufficient to completely payoff the contractual outstanding principal balance of a nonaccrual loan relationship, comprised of two home equity loans acquired in 2018, totaling$2,278,000 . As ofMarch 31, 2022 , the outstanding principal, any interest due, and all fees were paid off entirely, with no charge-off related to this loan relationship. These loans were transferred from accrual to nonaccrual status during the second quarter of 2020. Given this substantial settlement, nonperforming assets were 0.26 percent of the total of loans plus other real estate assets as ofMarch 31, 2022 , a favorable reduction compared to 0.32 percent atDecember 31, 2021 , and consistent with 0.26 percent atMarch 31, 2021 . Loan loss reserves as a percentage of nonperforming loans increased to 191 percent atMarch 31, 2022 , compared to 146 percent atDecember 31, 2021 and decreased compared to 203 percent atMarch 31, 2021 .
One loan relationship which accounts for
The contractual outstanding principal balance of this commercial real estate-construction loan was$1,121,000 atMarch 31, 2022 . This loan was acquired inNovember 2021 in nonaccrual status during theRiverview acquisition. This loan is collateralized primarily by commercial real estate, and given that the fair value of the remaining collateral exceeds the outstanding principal balance, no specific allowance allocation has been currently assigned to this relationship. Management expects to recover the remaining outstanding balance through the sale of real estate collateral pledged in support of the loan. Mid Penn assesses a specific allocation for both commercial loans and commercial real estate loans prior to writing down or charging off the loan. Once the write-down is taken, the remaining balance remains a nonperforming loan with the original terms and interest rate intact and is not treated as a restructured credit. The following table provides additional analysis of partially charged-off loans. 60
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MID PENN BANCORP, INC. (Dollars in thousands) March 31, 2022 December 31, 2021 Period ending total loans outstanding$ 3,121,531 $
3,104,396
Allowance for loan and lease losses 15,147
14,597
Total Nonperforming loans 7,937
9,982
Nonperforming and impaired loans with partial charge-offs 113
107
Ratio of nonperforming loans with partial charge-offs to total loans 0.00 %
0.00 %
Ratio of nonperforming loans with partial charge-offs to total nonperforming loans 1.42 %
1.07 %
Coverage ratio net of nonperforming loans with partial charge-offs 193.60 %
147.82 %
Ratio of total allowance to total loans less nonperforming loans with partial charge-offs 0.49 %
0.47 %
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 well-secured or otherwise not probable for collection. This methodology assumes the borrower cannot or will not continue to make additional payments. At that time the loan would be considered collateral dependent as the discounted cash flow method indicates no operating income is available for evaluating the collateral position; therefore, 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. 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 variation in value. A specific allocation of allowance is made for any anticipated collateral shortfall. The 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 well-secured or otherwise not probable for 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 both commercial loans and commercial real estate 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 nonaccrual
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.
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 following
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 or private sales. Management
reviews the estimates of these third parties and discounts them accordingly
based on management's judgment, if deemed necessary.
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MID PENN BANCORP, INC. 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 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. Mid Penn had loans with an aggregate balance of$7,761,000 which were deemed by management to be impaired atMarch 31, 2022 , including$4,700,000 in loans acquired with credit deterioration in connection with the closing of thePhoenix acquisition in 2015, theScottdale and First Priority acquisitions in 2018, and theRiverview acquisition in 2021. Of the$3,061,000 of impaired loan relationships excluding the loans acquired with credit deterioration,$523,000 were commercial and industrial relationships,$1,101,000 were commercial real estate relationships,$99,000 were home equity relationships, and$1,338,000 were residential relationships. There were specific loan loss reserve allocations of$114,000 against$280,000 of commercial real estate loan relationships and$75,000 of specific loan loss reserve allocations against$523,000 of commercial and industrial loan relationships. Management currently believes that the specific reserves are adequate to cover probable future losses related to these relationships. The allowance 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 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 as 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:
• changes in international, national, regional, and local economic and
business conditions and developments that affect the collectability of the
portfolio, including the condition of various market segments (and the
potential adverse impacts on the economy from the COVID-19 pandemic);
• changes in the volume and severity of past due loans, the volume of
nonaccrual loans, and the volume and severity of adversely classified or
graded loans;
• changes in the value of underlying collateral for collateral-dependent loans;
• changes in the experience, ability, and depth of lending management and
other relevant staff;
• changes in lending policies and procedures, including changes inunderwriting standards and collection, charge-off, and recovery practices
not considered elsewhere in estimating credit losses;
• changes in the quality of the institution's loan review system;
• changes in the nature and volume of the portfolio and in the terms of loans;
• the effect of other external factors such as competition, legal and
regulatory requirements, governmental restrictions impacting business
activity as a result of the COVID-19 pandemic, and other factors beyond the
control of Mid Penn which could affect the level of estimated credit losses
in the institution's existing portfolio; and
• the existence and effect of any concentrations of credit and changes in the
level of such concentrations.
While the allowance is maintained at a level believed to be adequate by
management to provide for 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. The
unallocated component of the allowance for loan and lease losses covers several
considerations that are not specifically measurable through either the specific
or general components. For example, we believe that we could face increasing
credit risks and uncertainties, not yet reflected in recent historical losses or
qualitative factor assessments and underlying data and evaluations, associated
with unpredictable changes in economic growth or business conditions in our
markets or for certain industries in which we have commercial loan borrowers, or
unanticipated stresses to the values of real estate held as collateral,
including the prospective unknown impacts of the persisting COVID-19
pandemic. Any or all of these additional issues can adversely affect our
borrowers' ability to timely repay their loans. Additionally, we have
experienced continued strong commercial loan growth, including growth in newer
markets where we have less of a loss history. Also, the unallocated component
allocation recognizes the inherent imprecision in our allowance for loan and
lease loss methodology, or any alternative methodology, for estimating specific
and general loan losses, including the unpredictable timing and amounts of
charge-offs, the fact that historical loss averages don't necessarily correlate
to future loss trends, and unexpected changes to specific-credit or general
portfolio future cash flows and collateral values which could negatively impact
unimpaired
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MID PENN BANCORP, INC.
portfolio loss factors. Changes from these various other uncertainties and considerations may impact the provisions charged to expense in future periods.
Management believes, based on information currently available, that the
allowance for loan losses of
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.
The major sources of cash received in the first three months of 2022 were from$267,867,000 of proceeds from sales of mortgage loans originated for sale,$5,898,000 of proceeds from the maturity or call of held-to-maturity securities, and$1,497,000 from the reduction of restricted investment in bank stock. Major uses of cash in the first three months of 2022 were$90,330,000 of purchases of available-for-sale investment securities,$39,928,000 of purchases of held-to-maturity investment securities, and$17,271,000 net increase in loans and leases. 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 persisting COVID-19 pandemic, 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. Subordinated Debt
Subordinated Debt Assumed
OnNovember 30, 2021 , Mid Penn completed its acquisition ofRiverview and assumed$25,000,000 of Subordinated Notes (the "Riverview Notes"). In accordance with purchase accounting principles, the Riverview Notes were assigned a fair value premium of$2,302,000 . The notes are treated as Tier 2 capital for regulatory reporting purposes. The Riverview Notes were entered into byRiverview onOctober 6, 2020 with certain qualified institutional buyers and accredited institutional investors. The Riverview Notes have a maturity date ofOctober 15, 2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.75% per annum untilOctober 15, 2025 . Commencing on that date, the interest rate applicable to the outstanding principal amount due will be reset quarterly to an interest rate per annum equal to the then current three-month secured overnight financing rate ("SOFR") plus 563 basis points, payable quarterly until maturity. Mid Penn may redeem the Notes at par, in whole or in part, at its option, anytime beginning onOctober 15, 2025 .
Trust Preferred Securities Assumed
As a result of the merger withRiverview , Mid Penn assumed the subordinated debentures thatRiverview had assumed in its acquisition ofCBT Financial Corp. ("CBT") onOctober 1, 2017 (the "CBT 2017 Notes"). In 2003, a trust formed by CBT issued$5,155,000 of floating rate trust preferred securities as part of a pooled offering of such securities. The interest rate prior toRiverview entering into a fixed interest rate swap in 2020 adjusted quarterly to the three-month LIBOR rate plus 2.95%. CBT issued subordinated debentures to the trust in exchange for ownership of all of the common securities of the trust and the proceeds of the offering; the debentures represent the sole asset of the trust. CBT became eligible to redeem the subordinated debentures, in whole but not in part, beginning in 2008 at a price of 100% of face value. The subordinated debentures must be redeemed no later than 2033. 63
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MID PENN BANCORP, INC. Similarly, in 2005, a trust formed by CBT issued$4,124,000 of fixed rate trust preferred securities as part of a pooled offering of such securities (the "CBT 2015 Notes"). CBT issued subordinated debentures to the trust in exchange for ownership of all of the common securities of the trust and the proceeds of the offering; the debentures represent the sole asset of the trust. CBT became eligible to redeem the subordinated debentures, in whole but not in part, beginning in 2010 at a price of 100% of face value. Interest payments on the debentures may be deferred at any time at the election of Mid Penn for up to 20 consecutive quarterly periods. Interest on the debentures will accrue during the extension period, and all accrued principal and interest must be paid at the end of the extension period. During an extension period, Mid Penn may not declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to any of Mid Penn's capital stock. In accordance with purchase accounting principles, the CBT 2017 Notes and CBT 2015 Notes assumed fromRiverview were assigned a fair value premium of$6,000 . The subordinated debentures are treated as Tier 1 capital for regulatory reporting purposes.
Subordinated Debt Issued
OnDecember 22, 2020 ,Mid Penn Bancorp, Inc. entered into agreements for and sold, at 100% of their principal amount, an aggregate of$12,150,000 of its Subordinated Notes dueDecember 2030 (the "December 2020 Notes") on a private placement basis to accredited investors. TheDecember 2020 Notes are treated as Tier 2 capital for regulatory capital purposes. TheDecember 2020 Notes bear interest at a rate of 4.5% per year for the first five years and then float at theWall Street Journal's Prime Rate, provided that the interest rate applicable to the outstanding principal balance during the period theDecember 2020 Notes are floating will at no time be less than 4.5%. Interest is payable quarterly in arrears onMarch 31 ,June 30 ,September 30 andDecember 31 of each year, beginning onMarch 31, 2021 . TheDecember 2020 Notes will mature onDecember 31, 2030 and are redeemable, in whole or in part, without premium or penalty, on any interest payment date on or afterDecember 31, 2025 and prior toDecember 31, 2030 , subject to any required regulatory approvals. Additionally, if (i) all or any portion of theDecember 2020 Notes cease to be deemed Tier 2 Capital, (ii) interest on theDecember 2020 Notes fails to be deductible forUnited States federal income tax purposes, or (iii) Mid Penn will be considered an "investment company," Mid Penn may redeem theDecember 2020 Notes, in whole but not in part, by giving 10 days' notice to the holders of theDecember 2020 Notes. In the event of a redemption described in the previous sentence, Mid Penn will redeem theDecember 2020 Notes at 100% of the principal amount of theDecember 2020 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption.
Holders of the
Subordinated Debt Issued
OnMarch 20, 2020 ,Mid Penn Bancorp, Inc. entered into agreements with accredited investors who purchased$15,000,000 aggregate principal amount of Mid Penn Subordinated Notes dueMarch 2030 (the "March 2020 Notes"). As a result of Mid Penn's merger withRiverview onNovember 30, 2021 ,$6,870,000 of theMarch 2020 Notes balance was redeemed asRiverview was a holder of theMarch 2020 Notes. The balance ofMarch 2020 Notes outstanding as ofMarch 31, 2022 was$8,130,000 . TheMarch 2020 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes. TheMarch 2020 Notes bear interest at a rate of 4.0% per year for the first five years and then float at theWall Street Journal's Prime Rate, provided that the interest rate applicable to the outstanding principal balance during the period theMarch 2020 Notes are floating will at no time be less than 4.25%. Interest is payable semi-annually in arrears onJune 30 andDecember 30 of each year, beginning onJune 30, 2020 , for the first five years after issuance and will be payable quarterly in arrears thereafter onMarch 30 ,June 30 ,September 30 andDecember 30 . TheMarch 2020 Notes will mature onMarch 30, 2030 and are redeemable in whole or in part, without premium or penalty, at any time on or afterMarch 30, 2025 and prior toMarch 30, 2030 . Additionally, if all or any portion of theMarch 2020 Notes cease to be deemed Tier 2 Capital, Mid Penn may redeem, on any interest payment date, all or part of the 2020 Notes. In the event of a redemption described in the previous sentence, Mid Penn will redeem theMarch 2020 Notes at 100% of the principal amount of theMarch 2020 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption. Holders of theMarch 2020 Notes may not accelerate the maturity of theMarch 2020 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar event of Mid Penn orMid Penn Bank , its principal banking subsidiary. Related parties held$1,700,000 of theMarch 2020 Notes as ofMarch 31, 2022 andDecember 31, 2021 . 64
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MID PENN BANCORP, INC.
Subordinated Debt Issued
OnDecember 19, 2017 ,Mid Penn Bancorp, Inc. entered into agreements with investors to purchase$10,000,000 aggregate principal amount of its Subordinated Notes due 2028 (the "2017 Notes"). The 2017 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes. The offering closed inDecember 2017 . The 2017 Notes bear interest at a rate of 5.25% per year for the first five years and then float at theWall Street Journal's Prime Rate plus 0.50%, provided that the interest rate applicable to the outstanding principal balance will at no time be less than 5.0%. Interest is payable semi-annually in arrears onJanuary 15 andJuly 15 of each year, beginning onJuly 15, 2018 , for the first five years after issuance and will be payable quarterly in arrears thereafter onJanuary 15 ,April 15 ,July 15 , andOctober 15 . The 2017 Notes will mature onJanuary 1, 2028 and are redeemable in whole or in part, without premium or penalty, at any time on or afterDecember 21, 2022 , and prior toJanuary 1, 2028 . Additionally, Mid Penn may redeem the 2017 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 2017 Notes forU.S. federal income tax purposes; (ii) an event occurs that precludes the 2017 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 the event of a redemption described in the previous sentence, Mid Penn will redeem the 2017 Notes at 100% of the principal amount of the 2017 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption. Holders of the 2017 Notes may not accelerate the maturity of the 2017 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar event of Mid Penn orMid Penn Bank , its principal banking subsidiary. Related parties held$1,450,000 of the 2017 Notes as ofMarch 31, 2022 andDecember 31, 2021 .
Subordinated Debt Issued
OnDecember 9, 2015 ,Mid Penn Bancorp, Inc. sold$7,500,000 aggregate principal amount of Subordinated Debt (the "2015 Notes") due in 2025. Given that the 2015 Notes are in the sixth year since issuance, eighty percent of the principal balance of the notes is treated as Tier 2 capital for regulatory capital purposes as ofMarch 31, 2022 . The 2015 Notes paid interest at a rate of 5.15% per year for the first five years outstanding, including the three months endedMarch 31, 2020 . BeginningJanuary 1, 2021 , the 2015 Notes bear interest at a floating rate based on theWall Street Journal's Prime Rate plus 0.50%, provided that the interest rate applicable to the outstanding principal balance will at no time be less than 4.0%. Interest is payable quarterly in arrears onJanuary 1 ,April 1 ,July 1 andOctober 1 of each year, beginning onJanuary 1, 2016 . The 2015 Notes will mature onDecember 9, 2025 and are redeemable in whole or in part, without premium or penalty, at any time on or afterDecember 9, 2020 , and prior toDecember 9, 2025 . Additionally, Mid Penn may redeem the 2015 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 2015 Notes forU.S. federal income tax purposes; (ii) an event occurs that precludes the 2015 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 2015 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption. Holders of the 2015 Notes may not accelerate the maturity of the 2015 Notes, except upon Mid Penn's orMid Penn Bank's bankruptcy, insolvency, liquidation, receivership or similar event. Related parties held$1,930,000 of the 2015 Notes as ofMarch 31, 2022 andDecember 31, 2021 . 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 unamortized debt issuance costs associated with the 2015 Notes and the 2017 Notes were collectively$38,000 atMarch 31, 2022 and$44,000 atDecember 31, 2021 . 65
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MID PENN BANCORP, INC. Regulatory Capital Changes InJuly 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 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.
A summary of the payout restrictions based on the capital conservation buffer is as follows:
Capital Conservation Buffer Maximum Payout
(as a % of risk-weighted assets) (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%
The final rules allowed 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.
Consistent with the Dodd-Frank Act, the new rules replaced 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 implemented these changes in determining and reporting the regulatory ratios of Mid Penn and the Bank and has concluded that the new rules do not have a material adverse effect on Mid Penn's financial condition.
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MID PENN BANCORP, INC. Capital Resources 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 increased by$4,085,000 or 0.83 percent from$490,076,000 as ofDecember 31, 2021 to$494,161,000 as ofMarch 31, 2022 , primarily due to (i) earnings for the quarter endedMarch 31, 2022 of$11,354,000 ; less (ii) dividends paid of$3,191,000 during the calendar quarter; and (iii) a decrease in the carrying value of the available-for-sale investment portfolio during the quarter of$5,230,000 . Regulatory capital ratios for both Mid Penn and its banking subsidiary exceeded regulatory "well-capitalized" levels at bothMarch 31, 2022 andDecember 31, 2021 . As previously announced Mid Penn completed a public offering of 2,990,000 shares of common stock at a price of$25.00 per share, with the aggregate gross proceeds of the offering totaling$74,750,000 . The net proceeds of the offering after deducting the underwriting discount and offering expenses were$70,238,000 . The additional shares issued onMay 4, 2021 significantly impacted the weighted average number of shares outstanding used for first quarter of 2022 earnings per share calculations.Banks are evaluated for capital adequacy by regulatory supervisory agencies based on the ratio of capital to risk-weighted assets and total assets. The minimum capital to risk-weighted assets requirements, including the capital conservation buffers, which became effective for Mid Penn and the Bank onJanuary 1, 2016 are illustrated below. AtMarch 31, 2022 , regulatory capital ratios for both Mid Penn and the Bank met the definition of a "well-capitalized" institution under the regulatory framework for prompt corrective action, and exceeded the minimum capital requirements under Basel III. Mid Penn andMid Penn Bank maintained the following regulatory capital levels, leverage ratios, and risk-based capital ratios as ofMarch 31, 2022 andDecember 31, 2021 : Capital Adequacy To Be Well-Capitalized (Dollars in thousands) Minimum for Under Prompt Basel III Capital Corrective Actual Adequacy (a) Action Provisions Amount Ratio Amount Ratio Amount RatioMid Penn Bancorp, Inc. As ofMarch 31, 2022 : Tier 1 Capital (to Average Assets)$ 384,765 8.4 %$ 182,999 4.0 % N/A N/A Common Equity Tier 1 Capital (to Risk Weighted Assets) 375,484 11.7 % 224,033 7.0 % N/A N/A Tier 1 Capital (to Risk Weighted Assets) 384,765 12.0 % 272,040 8.5 % N/A N/A Total Capital (to Risk Weighted Assets) 461,839 14.4 % 336,050 10.5 % N/A N/A Mid Penn Bank As ofMarch 31, 2022 : Tier 1 Capital (to Average Assets)$ 411,966 9.0 %$ 182,917 4.0 %$ 228,646 5.0 % Common Equity Tier 1 Capital (to Risk Weighted Assets) 411,966 12.9 % 223,882 7.0 % 207,890 6.5 % Tier 1 Capital (to Risk Weighted Assets) 411,966 12.9 % 271,856 8.5 % 255,865 8.0 % Total Capital (to Risk Weighted Assets) 427,187 13.4 % 335,823 10.5 % 319,831 10.0 %Mid Penn Bancorp, Inc. As ofDecember 31, 2021 : Tier 1 Capital (to Average Assets)$ 374,368 8.1 %$ 185,764 4.0 % N/A N/A Common Equity Tier 1 Capital (to Risk Weighted Assets) 365,084 11.7 % 217,579 7.0 % N/A N/A Tier 1 Capital (to Risk Weighted Assets) 374,368 12.0 % 264,203 8.5 % N/A N/A Total Capital (to Risk Weighted Assets) 452,527 14.6 % 326,369 10.5 % N/A N/A Mid Penn Bank As ofDecember 31, 2021 : Tier 1 Capital (to Average Assets)$ 398,773 8.6 %$ 185,721 4.0 %$ 232,151 5.0 % Common Equity Tier 1 Capital (to Risk Weighted Assets) 398,773 12.8 % 217,446 7.0 % 201,914 6.5 % Tier 1 Capital (to Risk Weighted Assets) 398,773 12.8 % 264,041 8.5 % 248,510 8.0 % Total Capital (to Risk Weighted Assets) 413,442 13.3 % 326,169 10.5 % 310,637 10.0 % (a) Minimum amounts and ratios include the full phase in of the capital
conservation buffer of 2.5 percent required by the Basel III framework.
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RECONCILIATION OF NON-GAAP MEASURES (Unaudited):
This Form 10-Q contains financial information determined by methods other than in accordance withU.S. Generally Accepted Accounting Principles ("GAAP"). Mid Penn believes that reporting non-PPP core banking loans is useful to investors as they refelct portfolio loans and related growth from traditional bank activities, and excludes short-term or nonrecurring loans from special programs like the PPP. The ratio of the allowance for loan losses to non-PPP core banking loans is useful to investors as it highlights the true coverage ratio of the allowance excluding those loans that are 100 percent guaranteed by the SBA through the PPP and, therefore, do not require an allowance assessment. These non-GAAP disclosures have limitations as an analytical tool, should not be viewed as a substitute for financial measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of Mid Penn's results and financial condition as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. Management believes that this non-GAAP supplemental information will be helpful in understanding Mid Penn's ongoing operating results. This supplemental presentation should not be construed as an inference that Mid Penn's future results will be unaffected by similar adjustments to be determined in accordance with GAAP. (Dollars in thousands) March 31, December 31, March 31, 2022 2021 2021
Loans and leases, net of unearned interest
34,124 111,286 590,035
Non-PPP core banking loans 3,087,407 2,993,110 2,056,201
Allowance for loan and lease losses$ 15,147 $
14,597
Ratio of allowance for loan losses to net loans at end of period 0.49 %
0.47 % 0.51 %
Ratio of allowance for loan losses to non-PPP
core banking loans at end of period 0.49 % 0.49 % 0.66 %
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