株探米国株
英語
エドガーで原本を確認する
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 1-13677
MID PENN BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 25-1666413
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification Number)
2407 Park Drive
Harrisburg, Pennsylvania
17110
(Address of Principal Executive Offices)
(Zip Code)
Registrant’s telephone number, including area code 1.866.642.7736

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $1.00 par value per share MPB The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    x    No    o


Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes    x    No    o


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated Filer x Emerging Growth Company o
Non-accelerated Filer o Smaller Reporting Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o


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

As of October 31, 2023, the registrant had 16,668,569 shares of common stock outstanding, par value $1.00 per share.

1
Table of Contents
FORM 10-Q
TABLE OF CONTENTS
Unless the context otherwise requires, the terms "Mid Penn", "Corporation" "we", "us", and "our" refer to Mid Penn Bancorp, Inc. and its consolidated wholly-owned banking subsidiary and nonbank subsidiaries.
2
Table of Contents

GLOSSARY OF DEFINED ACRONYMS AND TERMS
2014 Plan 2014 Restricted Stock Plan
2022 Annual Report Corporation's Annual Report on Form 10-K for the year ended December 31, 2022
2023 Plan 2023 Stock Incentive Plan
ACL Allowance for Credit Losses
AFS Available for Sale
AOCI Accumulated Other Comprehensive Income
ASC Accounting Standards Codification
ASU Accounting Standards Update
the Bank Mid Penn Bank
Bank Merger Merger of Brunswick Bank with and into Mid Penn Bank
BOLI Bank Owned Life Insurance
bp or bps basis point(s)
Brunswick Brunswick Bancorp
Brunswick Acquisition Merger acquisition of Brunswick
Brunswick Bank Brunswick Bank & Trust Company
CECL Current Expected Credit Losses
DCF Discounted Cash Flow
DRIP Dividend Reinvestment Plan
FASB Financial Accounting Standards Board
FDIC Federal Deposit Insurance Corporation
FHLB Federal Home Loan Bank of Pittsburgh
FICO the Financing Corporation
FOMC Federal Open Market Committee
FTE Fully taxable-equivalent
HFS Held for Sale
HTM Held to Maturity
LDA Loss Driver Analysis
LGD Loss Given Default
LIHTC Low-Income Housing Tax Credits
Loans Loans, net of unearned interest
Management Discussion Management's Discussion and Analysis of Financial Condition and Results of Operations
Merger Merger of Brunswick with and into Mid Penn
Merger Agreement Agreement and Plan of Merger between Mid Penn and Brunswick
Mid Penn or the Corporation Mid Penn Bancorp, Inc.
N/M Not meaningful - (percentage changes greater than +/- 150% not considered meaningful)
OBS Off-Balance Sheet
OCI Other Comprehensive Income
OTTI Other-than-temporary impairment
PCD Purchased Credit Deteriorated
PCL Provision for Credit Losses - Loans
PD Probability of Default
PDR Periodic default rate
Riverview Riverview Financial Corporation
Riverview Acquisition Merger acquisition of Riverview
ROA Return on Assets
ROE Return on Equity
SBA Small Business Association
SEC Securities Exchange Commission
SOFR Secured Overnight Financing Rate
SRC Smaller Reporting Companies
WSJP Wall Street Journal Prime
3
Table of Contents
MID PENN BANCORP, INC.



PART 1 – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except per share data) September 30, 2023 December 31, 2022
ASSETS
Cash and due from banks $ 52,509  $ 53,368 
Interest-bearing balances with other financial institutions 12,739  4,405 
Federal funds sold 52,851  3,108 
Total cash and cash equivalents 118,099  60,881 
Investment securities:
HTM, at amortized cost (fair value $341,006 and $348,505)
 401,561  399,494 
AFS, at fair value 218,064  237,878 
Equity securities available for sale, at fair value 413  430 
Loans held for sale, at fair value 4,270  2,475 
Loans, net of unearned interest 4,145,657  3,514,119 
Less: ACL - Loans (34,004) (18,957)
Net loans 4,111,653  3,495,162 
Premises and equipment, net 38,849  34,471 
Operating lease right of use asset 8,693  8,798 
Finance lease right of use asset 2,773  2,907 
Cash surrender value of life insurance 54,209  50,674 
Restricted investment in bank stocks 13,554  8,315 
Accrued interest receivable 24,230  18,405 
Deferred income taxes 25,509  13,674 
Goodwill 129,752  114,231 
Core deposit and other intangibles, net 6,970  7,260 
Foreclosed assets held for sale 905  43 
Other assets 56,459  42,856 
Total Assets $ 5,215,963  $ 4,497,954 
LIABILITIES & SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand $ 804,785  $ 793,939 
Interest-bearing transaction accounts 2,217,885  2,325,847 
Time 1,358,946  658,545 
Total Deposits 4,381,616  3,778,331 
Short-term borrowings 139,000  102,647 
Long-term debt 58,992  4,409 
Subordinated debt 46,501  56,941 
Operating lease liability 9,097  9,725 
Accrued interest payable 14,657  2,303 
Other liabilities 37,389  31,499 
Total Liabilities 4,687,252  3,985,855 
Shareholders' Equity:
Common stock, par value $1.00 per share; 40,000,000 shares authorized at September 30, 2023 and 20,000,000 at December 31, 2022; 16,993,069 issued at September 30, 2023 and 16,094,486 at December 31, 2022; 16,580,347 outstanding at September 30, 2023 and 15,886,143 at December 31, 2022
 16,993  16,094 
Additional paid-in capital 405,341  386,987 
Retained earnings 137,199  133,114 
Accumulated other comprehensive loss (21,362) (19,216)
Treasury stock, at cost; 412,722 shares at September 30, 2023 and 208,343 shares at December 31, 2022
 (9,460) (4,880)
Total Shareholders’ Equity 528,711  512,099 
Total Liabilities and Shareholders' Equity $ 5,215,963  $ 4,497,954 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Table of Contents
MID PENN BANCORP, INC.



CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
September 30, 		Nine Months Ended
September 30,
(In thousands, except per share data) 2023 2022 2023 2022
INTEREST INCOME
Loans, including fees $ 58,792  $ 38,484  $ 156,751  $ 107,764 
Investment securities:    
Taxable 4,106  3,382  11,942  8,168 
Tax-exempt 382  392  1,162  1,107 
Other interest-bearing balances 86  12  222  33 
Federal funds sold 51  736  145  1,786 
Total Interest Income 63,417  43,006  170,222  118,858 
INTEREST EXPENSE    
Deposits 23,559  2,836  53,487  7,149 
Short-term borrowings 1,584  —  4,581  — 
Long-term and subordinated debt 794  761  2,181  2,453 
Total Interest Expense 25,937  3,597  60,249  9,602 
Net Interest Income 37,480  39,409  109,973  109,256 
  Provision for credit losses - loans 1,427  1,550  3,074  3,775 
Net Interest Income After Provision for Credit Losses - Loans 36,053  37,859  106,899  105,481 
NONINTEREST INCOME    
Fiduciary and wealth management 1,296  1,729  3,736  3,986 
ATM debit card interchange 986  1,078  3,040  3,263 
Service charges on deposits 509  483  1,458  1,617 
Mortgage banking 382  536  1,053  1,370 
Mortgage hedging 67  217  215  1,321 
Net gain on sales of SBA loans 85  152  213  262 
Earnings from cash surrender value of life insurance 278  250  824  758 
Other 1,743  1,518  4,352  4,366 
Total Noninterest Income 5,346  5,963  14,891  16,943 
NONINTEREST EXPENSE    
Salaries and employee benefits 15,259  13,583  44,130  39,167 
Software licensing and utilization 2,085  1,804  6,101  5,731 
Occupancy, net 1,761  1,634  5,397  5,088 
Equipment 1,292  1,121  3,791  3,244 
Shares tax 808  920  2,458  2,626 
Legal and professional fees 890  528  2,292  1,861 
ATM/card processing 641  518  1,666  1,605 
Intangible amortization 484  514  1,289  1,516 
FDIC Assessment 1,746  254  2,770  1,351 
Loss on sale of foreclosed assets, net (18) (57) (144) (88)
Merger and acquisition 352  —  5,568  — 
Post-acquisition restructuring —  —  2,952  329 
Other 4,589  3,896  13,218  11,945 
Total Noninterest Expense 29,889  24,715  91,488  74,375 
INCOME BEFORE PROVISION FOR INCOME TAXES 11,510  19,107  30,302  48,049 
Provision for income taxes 2,274  3,626  5,003  8,962 
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 9,236  $ 15,481  $ 25,299  $ 39,087 
PER COMMON SHARE DATA:
Basic Earnings Per Common Share $ 0.56  $ 0.97  $ 1.56  $ 2.45 
Diluted Earnings Per Common Share $ 0.56  $ 0.97  $ 1.56  $ 2.45 
Weighted-average basic shares outstanding 16,571,825  15,877,592  16,233,006  15,922,945 
Weighted-average diluted shares outstanding 16,594,999  15,887,871  16,264,722  15,945,274 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended September 30, Nine Months Ended
September 30,
(In Thousands) 2023 2022 2023 2022
Net income $ 9,236  $ 15,481  $ 25,299  $ 39,087 
Other comprehensive loss:
Unrealized losses arising during the period on available for sale securities, net of income tax benefit of $1,173, $2,492, $1,514, and $5,162 respectively. (1)
 (4,410) (9,376) (5,694) (19,418)
Unrealized holding gains arising during the period on interest rate derivatives used in cash flow hedges, net of income tax (cost) of ($228), $0, ($948), and $0, respectively. (1)
 859  —  3,568  — 
Change in defined benefit plans, net of income tax benefit (cost) of $2, ($4), $2, and ($37), respectively (1), (2)
 (6) 11  (8) 138 
Reclassification adjustment for settlement gains and activity related to benefit plans, net of income tax benefit of $0, $2, $3, and $2, respectively (1), (3)
 —  (6) (12) (8)
Total other comprehensive loss (3,557) (9,371) (2,146) (19,288)
Total comprehensive income $ 5,679  $ 6,110  $ 23,153  $ 19,799 
(1)The income tax impacts of the components of other comprehensive income are calculated using a 21% statutory tax rate.
(2)The change in defined benefit plans consists primarily of unrecognized actuarial (losses) gains on defined benefit plans during the period.
(3)The reclassification adjustment for benefit plans includes settlement gains, amortization of prior service costs, and amortization of net gain or loss. Amounts are included in other income on the Consolidated Statements of Income within total noninterest income.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
Common Stock Additional
Paid-in
Capital		 Retained
Earnings 		Accumulated
Other
Comprehensive
(Loss) Income		 Treasury
Stock 		Total
Shareholders'
Equity
(In thousands, except per share data) Shares Amount
Balance, January 1, 2023 16,094,486  $ 16,094  $ 386,987  $ 133,114  $ (19,216) $ (4,880) $ 512,099 
Net income —  —  —  11,227  —  —  11,227 
Total other comprehensive income, net of taxes —  —  —  —  1,842  —  1,842 
Common stock cash dividends declared - $0.20 per share
 —  —  —  (3,176) —  —  (3,176)
 Impact of adopting CECL (1)
 —  —  —  (11,548) —  —  (11,548)
Employee Stock Purchase Plan 2,217  2  55  —  —  —  57 
Director Stock Purchase Plan 1,651  2  41  —  —  —  43 
Restricted stock activity —  —  249  —  —  —  249 
Balance, March 31, 2023 16,098,354  16,098  387,332  129,617  (17,374) (4,880) 510,793 
Net income —  —  —  4,836  —  —  4,836 
Total other comprehensive loss, net of taxes —  —  —  —  (431) —  (431)
Common stock cash dividends declared, $0.20 per share
 —  —  —  (3,182) —  —  (3,182)
Common stock issued to Brunswick shareholders (2)
 849,510  850  17,245  —  —  18,095 
Repurchased stock —  —  —  —  —  (4,580) (4,580)
Employee Stock Purchase Plan 2,258  2  48  —  —  —  50 
Director Stock Purchase Plan 2,511  3  53  —  —  —  56 
Restricted stock activity 27,667  27  224  —  —  —  251 
Balance, June 30, 2023 16,980,300  $ 16,980  $ 404,902  $ 131,271  $ (17,805) $ (9,460) $ 525,888 
Net income —  —  —  9,236  —  —  9,236 
Total other comprehensive loss, net of taxes —  —  —  —  (3,557) —  (3,557)
Common stock cash dividends declared, $0.20 per share
 —  —  —  (3,308) —  —  (3,308)
Repurchased stock —  —  —  —  —  —  — 
Employee Stock Purchase Plan 4,833  5  90  —  —  —  95 
Director Stock Purchase Plan 2,263  2  43  —  —  —  45 
Restricted stock activity 5,673  6  306  —  —  —  312 
Balance, September 30, 2023 16,993,069  $ 16,993  $ 405,341  $ 137,199  $ (21,362) $ (9,460) $ 528,711 
(1) The Corporation adopted ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" effective January 1, 2023. See "Note 1 - Summary of Significant Accounting Policies" for further details.
(2) Shares issued on May 19, 2023 as a result of the Brunswick Acquisition. See "Note 2 - Business Combinations" to the Consolidated Financial Statements for more information.

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) (CONTINUED)
Common Stock Additional
Paid-in
Capital		 Retained
Earnings 		Accumulated
Other
Comprehensive
Income (Loss) 		Treasury
Stock 		Total
Shareholders'
Equity
(In thousands, except per share data) Shares Amount
Balance, January 1, 2022 16,056,282  $ 16,056  $ 384,742  $ 91,043  $ 158  $ (1,923) $ 490,076 
Net income —  —  —  11,354  —  —  11,354 
Total other comprehensive loss, net of taxes —  —  —  —  (5,104) —  (5,104)
Common stock cash dividends declared - $0.20 per share
 —  —  —  (3,191) —  —  (3,191)
Riverview restricted stock adjustment —  —  776  —  —  —  776 
Employee Stock Purchase Plan 1,710  2  44  —  —  —  46 
Director Stock Purchase Plan 1,377  1  35  —  —  —  36 
Restricted stock activity —  —  168  —  —  —  168 
Balance, March 31, 2022 16,059,369  $ 16,059  $ 385,765  $ 99,206  $ (4,946) $ (1,923) $ 494,161 
Net income —  —  —  12,252  —  —  12,252 
Total other comprehensive loss, net of taxes —  —  —  —  (4,813) —  (4,813)
Common stock cash dividends declared, $0.20 per share
 —  —  —  (3,193) —  —  (3,193)
Repurchased stock —  —  —  —  —  (2,957) (2,957)
Employee Stock Purchase Plan 1,899  2  49  —  —  —  51 
Director Stock Purchase Plan 1,589  2  41  —  —  —  43 
Restricted stock activity 17,200  18  273  —  —  —  291 
Balance, June 30, 2022 16,080,057  $ 16,081  $ 386,128  $ 108,265  $ (9,759) $ (4,880) $ 495,835 
Net income —  —  —  15,481  —  —  15,481 
Total other comprehensive loss, net of taxes —  —  —  —  (9,371) —  (9,371)
Common stock cash dividends declared, $0.20 per share
 —  —  —  (3,174) —  —  (3,174)
Employee Stock Purchase Plan 1,486  1  53  —  —  —  54 
Director Stock Purchase Plan 1,927  2  41  —  —  —  43 
Restricted stock activity 7,227  7  230  —  —  —  237 
Balance, September 30, 2022 16,090,697  16,091  386,452  120,572  (19,130) (4,880) 499,105 
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
September 30,
(In thousands) 2023 2022
Operating Activities:
Net Income $ 25,299  $ 39,087 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses - loans 3,074  3,775 
Depreciation 3,645  3,056 
Amortization of intangibles 1,289  1,516 
Net amortization of security discounts/premiums 363  530 
Noncash operating lease expense 1,413  1,255 
Amortization of finance lease right of use asset 134  135 
Earnings on cash surrender value of life insurance (824) (758)
Mortgage loans originated for sale (86,451) (116,966)
Proceeds from sales of mortgage loans originated for sale 85,709  123,853 
Gain on sale of mortgage loans (1,053) (1,370)
SBA loans originated for sale (4,015) (5,310)
Proceeds from sales of SBA loans originated for sale 3,802  5,571 
Gain on sale of SBA loans (213) (262)
Gain on sale of property, plant, and equipment (59) (97)
Gain on sale or write-down of foreclosed assets (144) (88)
Loss on sale of bank premises and equipment held for sale —  (114)
Write-off of bank premises and equipment held for sale —  705 
Accretion of subordinated debt (440) (417)
Stock compensation expense 812  696 
Change in deferred income tax benefit (1,501) (23)
Increase accrued interest receivable (4,654) (4,533)
Increase in other assets (621) (712)
Increase (decrease) in accrued interest payable 10,443  50 
Decrease in operating lease liability (1,936) (1,654)
Increase (decrease) in other liabilities 2,332  (6,321)
Net Cash Provided By Operating Activities 36,404  41,604 
Investing Activities:
Proceeds from the sale of available-for-sale securities 1,751  — 
Proceeds from the maturity or call of available-for-sale securities 12,782  9,910 
Purchases of available-for-sale securities —  (213,974)
Proceeds from the maturity or call of held-to-maturity securities 8,145  12,401 
Purchases of held-to-maturity securities —  (85,664)
Stock dividends of FHLB and other bank stock 549  — 
(Purchases) reduction of restricted investment in bank stock (5,788) 4,539 
Net cash received from acquisition 1,068  — 
Net increase in loans (318,079) (218,061)
Purchases of bank premises and equipment (2,707) (3,734)
Proceeds from the sale of premises and equipment 59  1,912 
Proceeds from the sale of foreclosed assets 644  148 
Proceeds from bank-owned life insurance 774  — 
Gain on bank-owned life insurance (125) — 
Net change in investments in tax credits and other partnerships (5,615) — 
Net Cash Used In Investing Activities (306,542) (492,523)

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CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)(CONTINUED)
Financing Activities:
Net increase (decrease) in deposits 320,666  (272,420)
Proceeds from long-term debt 25,000  — 
Common stock dividends paid (9,666) (9,558)
Proceeds from Employee and Director Stock Purchase Plan stock issuance 346  273 
Treasury stock purchased (4,580) (2,957)
Riverview restricted stock (1)
 —  776 
Net change in finance lease liability (69) (67)
Net change in short-term borrowings 36,353  — 
Long-term debt repayment (30,694) (76,702)
Subordinated debt redemption and trust preferred securities (10,000) (7,500)
Net Cash Provided by (Used In) Financing Activities 327,356  (368,155)
Net increase (decrease) in cash and cash equivalents 57,218  (819,074)
Cash and cash equivalents, beginning of period 60,881  913,752 
Cash and cash equivalents, end of period $ 118,099  $ 94,678 
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest $ 56,707  $ 9,552 
Cash paid for income taxes 4,400  3,500 
Supplemental Noncash Disclosures:
Recognition of operating lease right of use assets $ 1,336  $ 552 
Recognition of operating lease liabilities 1,336  552 
Obsolete Riverview asset write-off —  705 
Loans transferred to foreclosed assets held for sale 1,362  109 
Held-to-maturity securities purchased, not settled —  — 
  Fair value of assets acquired in business combination, excluding cash (2)
 $ 370,919  $ — 
Goodwill recorded (2)
 15,521  — 
Liabilities assumed in business combination (2)
 346,288  — 
Stock issued in business combination (2)
 18,095  — 
(1) Additionally, 2,500 shares of restricted stock were paid out in cash resulting in $776 thousand of cash consideration relating to stock awards.
(2) Includes the impact of the Brunswick Acquisition on May 19, 2023. See "Note 2 - Business Combinations" to the Consolidated Financial Statement for additional information.
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
For all periods presented, the accompanying consolidated financial statements include the accounts of Mid Penn Bancorp, Inc., its wholly-owned subsidiary, Mid Penn Bank, and four nonbank subsidiaries, MPB Financial Services, LLC, which includes MPB Wealth Management, LLC and MPB Risk Services, LLC, and MPB Launchpad Fund I, LLC. As of September 30, 2023, the accounts and activities of these nonbank subsidiaries were not material to warrant separate disclosure or segment reporting. As a result, Mid Penn has only one reportable segment for financial reporting purposes. All material intercompany accounts and transactions have been eliminated in consolidation.
Certain information and disclosures normally included in consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. Mid Penn believes the information presented is not misleading, and the disclosures are adequate. For comparative purposes, the September 30, 2022 and December 31, 2022 balances have been reclassified, when necessary, to conform to the 2023 presentation. Such reclassifications had no impact on net income or total shareholders’ equity. In the opinion of management, all adjustments necessary for fair presentation of the periods presented have been reflected in the accompanying consolidated financial statements. All such adjustments are of a normal, recurring nature. These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2022 Annual Report.
Mid Penn has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2023, for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the issuance date of these consolidated financial statements.
CECL Adoption and Updated Significant Accounting Policy

On January 1, 2023, the Corporation 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 measurement of expected credit losses under CECL is applicable to financial assets measured at amortized cost, including loans and HTM debt securities. It also applies to OBS credit exposures (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with ASC Topic 842.

The Corporation adopted CECL using the modified retrospective method for all financial assets measured at amortized cost, net of investments in leases and OBS credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL, while prior period results are reported in accordance with the previously applicable incurred loss methodology. The Corporation 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.

On January 1, 2023, the Corporation adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, which eliminates the accounting guidance for troubled debt restructurings in Accounting Standards Codification ("ASC") Subtopic 310-40, Receivables - Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, ASU 2022-02 requires entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases within the scope of ASC Subtopic 326-20, Financial Instruments - Credit Losses - Measured at Amortized Cost. See "Note 4 - Loans and Allowance for Credit Losses - Loans" for the new financial statement disclosures applicable under this update.
The updates to the significant accounting policies related to CECL are further discussed in "Note 3 - Investment Securities", "Note 4 - Loans and Allowance for Credit Losses - Loans" and "Note 8 - Commitments and Contingencies".
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All other significant accounting policies used in preparation of the Consolidated Financial Statements are disclosed in the 2022 Annual Report. Those significant accounting policies are unchanged at September 30, 2023.
Accounting Standards Pending Adoption
ASU No. 2023-02: The FASB issued ASU 2023-02, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.
The amendments in this update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. A reporting entity may make an accounting policy election to apply the proportional amortization method on a tax-credit-program-by-tax-credit-program basis rather than electing to apply the proportional amortization method at the reporting entity level or to individual investments. The amendments in this update also remove certain guidance for Qualified Affordable Housing Project investments and require the application of the delayed equity contribution guidance to all tax equity investments. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and must be applied on either a modified retrospective or a retrospective basis. Early adoption is permitted in any interim period, however if adopted in an interim period the entity shall adopt the amendments in this update as of the beginning of the fiscal year that includes the interim period. The Corporation does not expect the adoption of ASU No. 2023-02 to have a material impact on its consolidated financial statements.
ASU 2023-06: The FASB issued ASU 2023-06, Disclosure Improvements - Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative.
ASU 2023-06 amends the ASC to incorporate certain disclosure requirements from SEC Release No. 33-10532 - Disclosure Update and Simplification that was issued in 2018. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. ASU 2023-06 is not expected to have a significant impact on our financial statements.

Note 2 - Business Combination
Brunswick Acquisition
On May 19, 2023, Mid Penn completed its acquisition of Brunswick through the merger of Brunswick with and into Mid Penn with Mid Penn being the surviving corporation. In connection with this acquisition, Brunswick Bank, a wholly-owned subsidiary of Brunswick, merged with and into Mid Penn Bank, a wholly-owned subsidiary of Mid Penn.

This transaction included the acquisition of 5 branches and extended Mid Penn’s footprint into Middlesex and Monmouth counties in central New Jersey. Mid Penn issued 849,510 shares of its common stock as well as a net cash payment to Brunswick shareholders of $27.6 million, for total consideration of $45.7 million for all outstanding stock and the cancellation of stock options of Brunswick.
Mid Penn has recognized total goodwill of $15.5 million, which is calculated as the excess of both the consideration exchanged and liabilities assumed compared to the fair market value of identifiable assets acquired. The fair value of the consideration exchanged related to Mid Penn’s common stock was calculated based upon the closing market price of Mid Penn’s common stock as of May 19, 2023. None of the goodwill recognized is expected to be deductible for income tax purposes.

Mid Penn incurred expenses related to the Brunswick Acquisition of $352 thousand for the three months ended September 30, 2023 and $8.5 million for the nine months ended September 30, 2023, which are included in noninterest expense in the Consolidated Statements of Income.

Purchased loans and leases that reflect a more-than-insignificant deterioration of credit from origination are considered PCD. Mid Penn considers various factors in connection with the identification of more-than-insignificant deterioration in credit, including but not limited to nonperforming status, delinquency, risk ratings, FICO scores and other qualitative factors that indicate deterioration in credit quality since origination. For PCD loans and leases, the initial estimate of expected credit losses is recognized in the ACL on the date of acquisition using the same methodology as other loans and leases held-for-investment. As part of the Brunswick Acquisition, Mid Penn acquired PCD loans and leases of $18.7 million. Mid Penn established an ACL at acquisition of $355 thousand with a corresponding gross-up to the amortized cost of the PCD loans and leases. The non-credit discount on the PCD loans and leases was $2.1 million and the Day 1 fair value was $16.6 million.
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The initial provision expense for non-PCD loans associated with the Brunswick Acquisition was $2.0 million.

Estimated fair values of the assets acquired and liabilities assumed in the Brunswick Acquisition as of the closing date are as follows:
(In thousands)
Assets acquired:
Cash and cash equivalents $ 21,029 
Federal funds sold 7,604 
Investment securities 1,825 
Loans 324,471 
Goodwill 15,521 
Core deposit intangible 999 
Premises and equipment 5,315 
Cash surrender value of life insurance 3,361 
Deferred income taxes 6,792 
Accrued interest receivable 1,171 
Other assets 3,860 
Total assets acquired 391,948 
Liabilities assumed:
Deposits:
Noninterest-bearing demand 62,123 
Interest-bearing demand 11,767 
Money Market 47,362 
Savings 14,203 
Time 147,164 
Long-term debt 60,137 
Accrued interest payable 1,911 
Other liabilities 1,621 
Total liabilities assumed 346,288 
Consideration paid $ 45,660 
Cash paid $ 27,565 
Fair value of common stock issued 18,095 

Management has completed its evaluation of fair values of all assets and liabilities shown in the table above and all amounts are considered final. Measurement period adjustments for the three months ending September 30, 2023 were $349 thousand related to securities paydowns received after the acquisition date that relate to the period before the acquisition date, as well as a $6.4 million reclass between noninterest-bearing demand and interest-bearings demand deposits.
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Note 3 - Investment Securities
FASB ASU 2016-13, "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," was adopted by Mid Penn on January 1, 2023. ASU 2016-13 introduces the CECL methodology for estimating allowances for credit losses. ASU 2016-13 applies to all financial instruments carried at amortized cost, including HTM securities, and makes targeted improvements to the accounting for credit losses on AFS securities.
In order to comply with ASC 326, Mid Penn conducted a review of its investment portfolio and determined that for certain classes of securities it would be appropriate to assume the expected credit loss to be zero. This zero-credit loss assumption applies to debt issuances of the U.S. Treasury and agencies and instrumentalities of the United States government. The reasons behind the adoption of the zero-credit loss assumption are as follows:
•High credit rating
•Long history with no credit losses
•Guaranteed by a sovereign entity
•Widely recognized as "risk-free rate"
•Can print its own currency
•Currency is routinely held by central banks, used in international commerce, and commonly viewed as reserve currency
•Currently under the U.S. Government conservatorship or receivership
Mid Penn will continuously monitor any changes in economic conditions, credit downgrades, changes to explicit or implicit guarantees granted to certain debt issuers, and any other relevant information that would indicate potential credit deterioration and prompt Mid Penn to reconsider its zero-credit loss assumption.
At the date of adoption, Mid Penn’s estimated allowance for credit losses on AFS and HTM securities under ASU 2016-13 was deemed immaterial due to the composition of these portfolios. Both portfolios consist primarily of U.S. government agency guaranteed mortgage-backed securities for which the risk of loss is minimal. Therefore, Mid Penn did not recognize a cumulative effect adjustment through retained earnings related to the AFS and HTM securities.
AFS Securities
ASU 2016-13 makes targeted improvements to the accounting for credit losses on AFS securities. The concept of other-than-temporarily impaired has been replaced with the allowance for credit losses. Unlike HTM securities, AFS securities are evaluated on an individual level and pooling of securities is not allowed.
Quarterly, Mid Penn evaluates if any security has a fair value less than its amortized cost. Once these securities are identified, in order to determine whether a decline in fair value resulted from a credit loss or other factors, Mid Penn performs further analysis as outlined below:
•Review the extent to which the fair value is less than the amortized cost and observe the security’s lowest credit rating as reported by third-party credit ratings companies.
•The securities that violate the credit loss triggers above would be subjected to additional analysis that may include, but is not limited to: changes in market interest rates, changes in securities credit ratings, security type, service area economic factors, financial performance of the issuer/or obligor of the underlying issue and third-party guarantee.
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•If Mid Penn determines that a credit loss exists, the credit portion of the allowance will be measured using a DCF analysis using the effective interest rate as of the security’s purchase date. The amount of credit loss Mid Penn records will be limited to the amount by which the amortized cost exceeds the fair value.
The DCF analysis utilizes contractual maturities, as well as third-party credit ratings and cumulative default rates published annually by a reputable third-party.
At September 30, 2023, the results of the analysis did not identify any securities that violate the credit loss triggers; therefore, no DCF analysis was performed and no credit loss was recognized on any of the securities available for sale.
Accrued interest receivable is excluded from the estimate of credit losses for AFS securities. At September 30, 2023, accrued interest receivable totaled $1.0 million for AFS securities and was reported in accrued interest receivable on the accompanying Consolidated Balance Sheet.
HTM Securities
ASU 2016-13 requires institutions to measure expected credit losses on financial assets carried at amortized cost on a collective or pool basis when similar risks exist. Mid Penn uses several levels of segmentation in order to measure expected credit losses:
•The portfolio is segmented into agency and non-agency securities.
•The non-agency securities are separated into state and political subdivision obligations and corporate debt securities.
Each individual segment is categorized by third-party credit ratings.
As discussed above, Mid Penn has determined that for certain classes of securities it would be appropriate to assume the expected credit loss to be zero, which include debt issuances of the U.S. Treasury and agencies and instrumentalities of the United States government. This assumption will be reviewed and attested to quarterly.
At September 30, 2023, Mid Penn’s HTM securities totaled $401.6 million. After applying appropriate probability of default and loss given default assumptions, the total amount of current expected credit losses was deemed immaterial. Therefore, no reserve was recorded at September 30, 2023.
Accrued interest receivable is excluded from the estimate of credit losses for HTM securities. At September 30, 2023, accrued interest receivable totaled $2.4 million for HTM securities and was reported in accrued interest receivable on the accompanying Consolidated Balance Sheet.
At September 30, 2023, Mid Penn had no HTM securities that were past due 30 days or more as to principal or interest payments. Mid Penn had no HTM securities classified as nonaccrual at September 30, 2023.
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The amortized cost and estimated fair value of investment securities for the periods presented:
September 30, 2023
(In thousands) Amortized
Cost		 Gross
Unrealized
Gains		 Gross Unrealized
Losses		 Estimated
Fair Value
Available-for-sale
U.S. Treasury and U.S. government agencies $ 36,609  $ —  $ 1,878  $ 34,731 
Mortgage-backed U.S. government agencies 173,060  —  24,416  148,644 
State and political subdivision obligations 4,338  —  1,026  3,312 
Corporate debt securities 35,729  —  4,352  31,377 
Total available-for-sale debt securities 249,736  —  31,672  218,064 
Held-to-maturity
U.S. Treasury and U.S. government agencies $ 245,771  $ —  $ 40,363  $ 205,408 
Mortgage-backed U.S. government agencies 45,374  —  7,614  37,760 
State and political subdivision obligations 84,942  —  11,330  73,612 
Corporate debt securities 25,474  —  1,248  24,226 
Total held-to-maturity debt securities 401,561  —  60,555  341,006 
Total $ 651,297  $ —  $ 92,227  $ 559,070 
December 31, 2022
(In thousands) Amortized
Cost		 Gross
Unrealized
Gains		 Gross Unrealized
Losses		 Estimated
Fair Value
Available-for-sale
U.S. Treasury and U.S. government agencies $ 36,528  $ —  $ 1,614  $ 34,914 
Mortgage-backed U.S. government agencies 185,993  —  19,078  166,915 
State and political subdivision obligations 4,354  —  815  3,539 
Corporate debt securities 35,467  —  2,957  32,510 
Total available-for-sale debt securities $ 262,342  $ —  $ 24,464  $ 237,878 
Held-to-maturity        
U.S. Treasury and U.S. government agencies $ 245,671  $ —  $ 34,834  $ 210,837 
Mortgage-backed U.S. government agencies 50,710  —  6,676  44,034 
State and political subdivision obligations 87,125  —  8,345  78,780 
Corporate debt securities 15,988  —  1,134  14,854 
Total held-to-maturity debt securities 399,494  —  50,989  348,505 
Total $ 661,836  $ —  $ 75,453  $ 586,383 
Estimated fair values of debt securities are based on quoted market prices, where applicable. If quoted market prices are not available, fair values are based on quoted market prices of instruments of a similar type, credit quality and structure, adjusted for differences between the quoted instruments and the instruments being valued. See "Note 7 - Fair Value Measurement," for additional information.
Investment securities having a fair value of $392.6 million at September 30, 2023 and $338.8 million at December 31, 2022 were pledged to secure public deposits, some Trust department deposit accounts, and certain other borrowings. In accordance with legal provisions for alternatives other than pledging of investments, Mid Penn also obtains letters of credit from the FHLB to secure certain public deposits. These FHLB letter of credit commitments totaled $226.0 million as of September 30, 2023 and $189.0 million as of December 31, 2022.
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The following tables present gross unrealized losses and fair value of debt investment securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position for the periods presented:
(Dollars in thousands) Less Than 12 Months 12 Months or More Total
September 30, 2023 Number
of
Securities		 Estimated
Fair
Value		 Gross
Unrealized
Losses		 Number
of
Securities		 Estimated
Fair
Value		 Gross
Unrealized
Losses		 Number
of
Securities		 Estimated
Fair
Value		 Gross
Unrealized
Losses
Available-for-sale debt securities:
U.S. Treasury and U.S. government agencies — $ —  $ —  19 $ 34,731  $ 1,878  19 $ 34,731  $ 1,878 
Mortgage-backed U.S. government agencies 1 1,455  122  92 147,189  24,294  93 148,644  24,416 
State and political subdivision obligations — —  —  8 3,312  1,026  8 3,312  1,026 
Corporate debt securities — —  —  18 31,377  4,352  18 31,377  4,352 
Total available-for-sale debt securities 1 $ 1,455  $ 122  137 $ 216,609  $ 31,550  138 $ 218,064  $ 31,672 
Held-to-maturity debt securities:
U.S. Treasury and U.S. government agencies 4 5,627  858  141 199,781  39,505  145 205,408  40,363 
Mortgage-backed U.S. government agencies 2 971  61  62 36,789  7,553  64 37,760  7,614 
State and political subdivision obligations 5 1,568  463  194 72,044  10,867  199 73,612  11,330 
Corporate debt securities — —  —  15 24,226  1,248  15 24,226  1,248 
Total held-to-maturity debt securities 11 8,166  1,382  412 332,840  59,173  423 341,006  60,555 
Total 12 $ 9,621  $ 1,504  549 $ 549,449  $ 90,723  561 $ 559,070  $ 92,227 
(Dollars in thousands) Less Than 12 Months 12 Months or More Total
December 31, 2022 Number
of
Securities		 Estimated
Fair
Value		 Gross
Unrealized
Losses		 Number
of
Securities		 Estimated
Fair
Value		 Gross
Unrealized
Losses		 Number
of
Securities		 Estimated
Fair
Value		 Gross
Unrealized
Losses
Available-for-sale securities:
U.S. Treasury and U.S. government agencies 19 $ 34,914  $ 1,614  — $ —  $ —  19 $ 34,914  $ 1,614 
Mortgage-backed U.S. government agencies 69 131,879  11,876  24 35,036  7,202  93 166,915  19,078 
State and political subdivision obligations 6 2,521  671  2 1,018  144  8 3,539  815 
Corporate debt securities 12 25,063  2,153  4 4,196  804  16 29,259  2,957 
Total available-for-sale securities 106 194,377  16,314  30 40,250  8,150  136 234,627  24,464 
Held-to-maturity securities:
U.S. Treasury and U.S. government agencies 54 $ 84,946  $ 10,093  91 $ 125,891  $ 24,741  145 $ 210,837  $ 34,834 
Mortgage-backed U.S. government agencies 40 13,866  1,071  24 30,168  5,605  64 44,034  6,676 
State and political subdivision obligations 185 73,735  7,413  18 4,616  932  203 78,351  8,345 
Corporate debt securities 4 5,721  317  5 5,182  817  9 10,903  1,134 
Total held to maturity securities 283 178,268  18,894  138 165,857  32,095  421 344,125  50,989 
Total 389 $ 372,645  $ 35,208  168 $ 206,107  $ 40,245  557 $ 578,752  $ 75,453 
There were no gross realized gains and losses on sales of available-for-sale debt securities for the three and nine months ended September 30, 2023 and 2022.
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The table below illustrates the contractual maturity of debt investment securities at amortized cost and estimated fair value. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay with or without call or prepayment penalties.
(In thousands) Available-for-sale Held-to-maturity
September 30, 2023 Amortized
Cost		 Fair
Value		 Amortized
Cost		 Fair
Value
Due in 1 year or less $ 6,995  $ 6,878  $ 8,076  $ 7,960 
Due after 1 year but within 5 years 37,872  36,109  94,702  86,955 
Due after 5 years but within 10 years 29,472  24,686  209,213  172,101 
Due after 10 years 2,337  1,747  44,196  36,230 
76,676  69,420  356,187  303,246 
Mortgage-backed securities 173,060  148,644  45,374  37,760 
$ 249,736  $ 218,064  $ 401,561  $ 341,006 
Note 4 - Loans and Allowance for Credit Losses - Loans
Mid Penn adopted the amendments of FASB ASU 2016-13, on January 1, 2023. The amendments of ASU 2016-13 created FASB ASC Topic 326, "Financial Instruments – Credit Losses," which, among other things, replace much of the guidance and disclosures previously provided in FASB ASC Topic 310, "Receivables." The guidance in FASB ASC Topic 326 replaces the incurred loss methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit losses. In accordance with FASB ASC Subtopic 326-20, "Financial Instruments – Credit Losses – Measured at Amortized Cost," Mid Penn has developed an ACL methodology effective January 1, 2023, which replaces its previous allowance for loan losses methodology. See the section captioned "Allowance for Credit Losses, effective January 1, 2023" within this note for additional information regarding Mid Penn’s ACL. Mid Penn adopted FASB ASC Topic 326 using the modified retrospective approach prescribed by the amendments of ASU 2016-13; therefore, prior period balances are presented under legacy GAAP and may not be comparable to current period presentation.
Loans, net of unearned income, are summarized as follows by portfolio segment:
(In thousands) September 30, 2023 December 31, 2022
Commercial real estate (1)
 $ 2,288,396  $ 2,052,934 
Commercial and industrial
648,439  596,042 
Construction
462,215  441,246 
Residential mortgage (1)
 743,533  416,221 
Consumer 3,074  7,676 
Total loans $ 4,145,657  $ 3,514,119 
(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.
Total loans are stated at the amount of unpaid principal, adjusted for net deferred fees and costs. Net deferred loan fees of $3.9 million reduced the carrying value of loans as of September 30, 2023 and December 31, 2022, respectively.
Accrued interest receivable is not included in the amortized cost basis of Mid Penn's loans. At September 30, 2023, accrued interest receivable for loans totaled $20.4 million with no related ACL and was reported in other assets on the accompanying Consolidated Balance Sheet.
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Past Due and Nonaccrual Loans
The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The classes of the loan portfolio summarized by the past due status as of September 30, 2023 and December 31, 2022, are summarized as follows:
(In thousands) 30-59
Days Past
Due		 60-89
Days Past
Due		 Greater
than 90
Days		 Total Past
Due		 Current Total Loans Loans
Receivable
> 90 Days and
Accruing
September 30, 2023
Commercial real estate $ 8,355  $ —  $ 3,006  $ 11,361  $ 2,277,035  $ 2,288,396  $ — 
Commercial and industrial 232  —  1,533  1,765  646,674  648,439  — 
Construction 472  —  2,256  2,728  459,487  462,215  — 
Residential mortgage 4,068  233  1,675  5,976  737,557  743,533  9 
Consumer —  —  3  3  3,071  3,074  3 
Total $ 13,127  $ 233  $ 8,473  $ 21,833  $ 4,123,824  $ 4,145,657  $ 12 
(In thousands) 30-59
Days Past
Due		 60-89
Days Past
Due		 Greater
than 90
Days		 Total Past
Due		 Current Total Loans Loans
Receivable
> 90 Days and
Accruing
December 31, 2022
Commercial real estate $ 1,792  $ —  $ 1,438  $ 3,230  $ 2,047,167  $ 2,050,397  $ — 
Commercial and industrial 1,808  3  1,854  3,665  592,377  596,042  654 
Construction 2,258  —  —  2,258  438,988  441,246  — 
Residential mortgage 3,826  955  670  5,451  409,630  415,081  — 
Consumer 44  19  —  63  7,613  7,676  — 
Loans acquired with credit deterioration:
Commercial real estate 78  —  826  904  1,633  2,537  — 
Commercial and industrial —  —  —  —  —  —  — 
Construction —  —  —  —  —  —  — 
Residential mortgage 223  228  241  692  448  1,140  — 
Consumer —  —  —  —  —  —  — 
Total $ 10,029  $ 1,205  $ 5,029  $ 16,263  $ 3,497,856  $ 3,514,119  $ 654 
Loans are placed on nonaccrual status when management determines that the full repayment of principal and collection of interest according to contractual terms is no longer likely, generally when the loan becomes 90 days or more past due. Nonaccrual loans by loan portfolio class, including loans acquired with credit deterioration, as of September 30, 2023 and December 31, 2022 are summarized as follows:
September 30, 2023 December 31, 2022
Non-accrual Loans Total non-accrual Loans
(In thousands) With a Related Allowance Without a Related Allowance Total
Commercial real estate $ 461  $ 6,228  $ 6,689  $ 4,864 
Commercial and industrial 1,375  181  1,556  1,222 
Construction —  2,256  2,256  — 
Residential mortgage 95  2,862  2,957  1,698 
Consumer —  —  —  411 
$ 1,931  $ 11,527  $ 13,458  $ 8,195 
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The amount of interest income recognized on nonaccrual loans was approximately $551 thousand and $221 thousand during the three months ended September 30, 2023 and 2022, respectively. During the nine months ended September 30, 2023 and 2022, the amount of interest income recognized on nonaccrual loans was approximately $1.0 million and $605 thousand, respectively.
Credit Quality Indicators
Mid Penn categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. On a minimum of a quarterly basis, Mid Penn analyzes loans individually to classify the loans as to their credit risk. The following table presents risk ratings by loan portfolio segment and origination year, which is the year of origination or renewal.

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September 30, 2023
Term Loans Amortized Cost Basis by Origination Year Revolving Loans Amortized
Cost Basis
(In thousands) 2023 2022 2021 2020 2019 Prior Total
Commercial real estate
Pass $ 230,714  $ 555,982  $ 391,929  $ 303,897  $ 188,508  $ 545,699  $ 35,339  $ 2,252,068 
Special mention 200  —  210  —  —  16,825  190  17,425 
Substandard or lower —  5,241  —  3,176  230  10,208  48  18,903 
Total commercial real estate 230,914  561,223  392,139  307,073  188,738  572,732  35,577  2,288,396 
Gross charge offs —  —  —  —  —  (16) —  (16)
Net charge offs —  —  —  —  —  (16) —  (16)
Commercial and industrial
Pass 110,268  111,429  75,748  31,053  52,412  62,133  192,538  635,581 
Special mention —  141  786  —  —  2,652  5,055  8,634 
Substandard or lower —  150  —  —  —  1,587  2,487  4,224 
Total commercial and industrial 110,268  111,720  76,534  31,053  52,412  66,372  200,080  648,439 
Gross charge offs —  (100) —  (111) —  (9) —  (220)
Net charge offs —  (100) —  (111) —  (9) —  (220)
Construction
Pass 104,753  214,316  84,231  22,267  10,282  6,395  15,441  457,685 
Special mention —  573  —  1,700  —  —  —  2,273 
Substandard or lower —  —  —  —  —  2,257  —  2,257 
Total construction 104,753  214,889  84,231  23,967  10,282  8,652  15,441  462,215 
Residential mortgage
Performing 129,139  132,888  87,794  93,336  28,454  184,398  84,569  740,578 
Non-performing —  —  37  226  —  2,692  —  2,955 
Total residential mortgage 129,139  132,888  87,831  93,562  28,454  187,090  84,569  743,533 
Gross charge offs —  —  —  —  —  (4) —  (4)
Current period recoveries —  —  —  —  —  37  —  37 
Net recoveries —  —  —  —  —  33  —  33 
Consumer
Performing 1,497  810  —  —  98  380  289  3,074 
Non-performing —  —  —  —  —  —  —  — 
Total consumer 1,497  810  —  —  98  380  289  3,074 
Gross charge offs (70) —  (8) (9) —  (30) —  (117)
Current period recoveries 26  —  —  —  —  —  —  26 
Net charge offs (44) —  (8) (9) —  (30) —  (91)
Total
Pass $ 445,735  $ 881,727  $ 551,908  $ 357,217  $ 251,202  $ 614,227  $ 243,318  $ 3,345,334 
Special mention 200  714  996  1,700  —  19,477  5,245  28,332 
Substandard or lower —  5,391  —  3,176  230  14,052  2,535  25,384 
Performing 130,636  133,698  87,794  93,336  28,552  184,778  84,858  743,652 
Nonperforming —  —  37  226  —  2,692  —  2,955 
Total $ 576,571  $ 1,021,530  $ 640,735  $ 455,655  $ 279,984  $ 835,226  $ 335,956  $ 4,145,657 
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Mid Penn had no loans classified as "doubtful" as of September 30, 2023 and December 31, 2022.
Collateral-Dependent Loans
A financial asset is considered to be collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. For all classes of financial assets deemed collateral-dependent, Mid Penn elected the practical expedient to estimate expected credit losses based on the collateral’s fair value less cost to sell. In most cases, Mid Penn records a partial charge-off to reduce the loan’s carrying value to the collateral’s fair value less cost to sell. Substantially all of the collateral supporting collateral-dependent financial assets consists of various types of real estate, including residential properties; commercial properties such as retail centers, office buildings, and lodging; agriculture land; and vacant land.
Allowance for Credit Losses, effective January 1, 2023

Mid Penn’s ACL - loans methodology is based upon guidance within FASB ASC Subtopic 326-20, as well as regulatory guidance from the FDIC, its primary federal regulator. The ACL - loans 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 - loans. The ACL - loans is an estimate of expected losses inherent within Mid Penn’s existing loan portfolio. The ACL - loans is adjusted through the PCL 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 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.
The methodology for estimating the amount of expected credit losses reported in the ACL has two basic components: a collective, or pooled, component for estimated expected credit losses for pools of loans that share similar risk characteristics, and an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans. In estimating the ACL for the collective component, loans are segregated into loan pools based on loan purpose codes and similar risk characteristics.
The commercial real estate and residential mortgage loan portfolio segments include loans for both commercial and residential properties that are secured by real estate. The underwriting process for these loans includes analysis of the financial position and strength of both the borrower and, if applicable, guarantor, experience with similar projects in the past, market demand and prospects for successful completion of the proposed project within the established budget and schedule, values of underlying collateral, availability of permanent financing, maximum loan-to-value ratios, minimum equity requirements, acceptable amortization periods and minimum debt service coverage requirements, based on property type. The borrower’s financial strength and capacity to repay their obligations remain the primary focus of underwriting. Financial strength is evaluated based upon analytical tools that consider historical and projected cash flows and performance, in addition to analysis of the proposed project for income-producing properties. Additional support offered by guarantors is also considered when applicable. Ultimate repayment of these loans is sensitive to interest rate changes, general economic conditions, liquidity and availability of long-term financing.
The commercial and industrial loan portfolio segment includes commercial loans made to many types of businesses for various purposes, such as short-term working capital loans that are usually secured by accounts receivable and inventory, equipment and fixed asset purchases that are secured by those assets, and term financing for those within Mid Penn’s geographic markets.
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Mid Penn’s credit underwriting process for commercial and industrial loans includes analysis of historical and projected cash flows and performance, evaluation of financial strength of both borrowers and guarantors as reflected in current and detailed financial information, and evaluation of underlying collateral to support the credit.
The consumer loan portfolio segment is comprised of loans which are underwritten after evaluating a borrower’s capacity, credit and collateral. Several factors are considered when assessing a borrower’s capacity, including the borrower’s employment, income, current debt, assets and level of equity in the property. Credit is assessed using a credit report that provides credit scores and the borrower’s current and past information about their credit history. Loan-to-value and debt-to-income ratios, loan amount and lien position are also considered in assessing whether to originate a loan. These borrowers are particularly susceptible to downturns in economic trends, such as conditions that negatively affect housing prices and demand and levels of unemployment.
Mid Penn utilizes a DCF method to estimate the quantitative portion of the allowance for credit losses for loan pools. The DCF is based off of historical losses, including peer data, which is correlated to national unemployment and GDP.
The PD and LGD measures are used in conjunction with prepayment data as inputs into the DCF model to calculate the cash flows at the individual loan level. Contractual cash flows based on loan terms are adjusted for PD, LGD and prepayments to derive loss cash flows. These loss cash flows are discounted by the loan’s coupon rate to arrive at the discounted cash flow based quantitative loss. The prepayment studies are updated quarterly by a third-party for each applicable pool.
Mid Penn determined that reasonable and supportable forecasts could be made for a twelve-month period for all of its loan pools. To the extent the lives of the loans in the LHFI portfolio extend beyond this forecast period, Mid Penn uses a reversion period of four quarters and reverts to the historical mean on a straight-line basis over the remaining life of the loans.
Qualitative factors used in the ACL methodology include the following:
•Lending process
•Concentrations of credit
The ACL for individual loans, such as non-accrual and PCD, that do not share risk characteristics with other loans is measured as the difference between the discounted value of expected future cash flows, based on the effective interest rate at origination, and the amortized cost basis of the loan, or the net realizable value. The ACL is the difference between the loan’s net realizable value and its amortized cost basis (net of previous charge-offs and deferred loan fees and costs), except for collateral-dependent loans. A loan is collateral dependent when the borrower is experiencing financial difficulty and repayment of the loan is expected to be provided substantially through the sale of the collateral. The expected credit loss for collateral-dependent loans is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral, adjusted for the estimated cost to sell. Fair value estimates for collateral-dependent loans are derived from appraised values based on the current market value or the "as is" value of the collateral, normally from recently received and reviewed appraisals. Current appraisals are ordered on a regular basis based on the inspection date or more often if market conditions necessitate. Appraisals are obtained from state-certified appraisers and are based on certain assumptions, which may include construction or development status and the highest and best use of the property. These appraisals are reviewed by Mid Penn’s Appraisal Review Department to ensure they are acceptable, and values are adjusted down for costs associated with asset disposal. If the calculated expected credit loss is determined to be permanent or not recoverable, the amount of the expected credit loss is charged off.
Mid Penn may also purchase loans or acquire loans through a business combination. At the purchase or acquisition date, loans are evaluated to determine whether there has been more than insignificant credit deterioration since origination. Loans that have experienced more than insignificant credit deterioration since origination are referred to as PCD loans. In its evaluation of whether a loan has experienced more than insignificant deterioration in credit quality since origination, Mid Penn takes into consideration loan grades, past due and nonaccrual status. Mid Penn may also consider external credit rating agency ratings for borrowers and for non-commercial loans, FICO score or band, probability of default levels, and number of times past due. At the purchase or acquisition date, the amortized cost basis of PCD loans is equal to the purchase price and an initial estimate of credit losses. The initial recognition of expected credit losses on PCD loans has no impact on net income. When the initial measurement of expected credit losses on PCD loans is calculated on a pooled loan basis, the expected credit losses are allocated to each loan within the pool. Any difference between the initial amortized cost basis and the unpaid principal balance of the loan represents a noncredit discount or premium, which is accreted (or amortized) into interest income over the life of the loan. Subsequent changes to the ACL on PCD loans are recorded through the PCL. For purchased loans that are not deemed to have experienced more than insignificant credit deterioration since origination and are therefore not deemed PCD, any discounts or premiums included in the purchase price are accreted (or amortized) over the contractual life of the individual loan.
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Loans are charged off against the ACL, with any subsequent recoveries credited back to the ACL account. Expected recoveries may not exceed the aggregate of amounts previously charged off and expected to be charged off.
The following table presents the activity in the ACL - loans by portfolio segment for the three and nine months ended September 30, 2023:
(In thousands) Commercial real estate Commercial and industrial Construction Residential mortgage Consumer Total
Balance at June 30, 2023 $ 14,197  $ 11,403  $ 3,667  $ 3,145  $ 176  $ 32,588 
Purchase credit deteriorated loans —  —  —  —  —  — 
Loans charged off —  —  —  —  (33) (33)
Recoveries —  —  —  7  15  22 
Net loans (charged off) recovered —  —  —  7  (18) (11)
Provision for credit losses (1)
 4,483  (4,072) 2,211  (1,060) (135) 1,427 
Balance at September 30, 2023 $ 18,680  $ 7,331  $ 5,878  $ 2,092  $ 23  $ 34,004 
(In thousands) Commercial real estate Commercial and industrial Construction Residential mortgage Consumer Unallocated Total
Balance at December 31, 2022 $ 13,142  $ 4,593  $ —  $ 1,319  $ 29  $ (126) $ 18,957 
Impact of adopting CECL 288  6,600  3,201  1,562  154  126  11,931 
Purchase credit deteriorated loans 314  5  13  4  —  —  336 
Loans charged off (16) (220) —  (4) (117) —  (357)
Recoveries —  —  —  37  26  —  63 
Net loans (charged off) recovered (16) (220) —  33  (91) —  (294)
Provision for credit losses (1)
 4,952  (3,647) 2,664  (826) (69) —  3,074 
Balance at September 30, 2023 $ 18,680  $ 7,331  $ 5,878  $ 2,092  $ 23  $ —  $ 34,004 
(1) Includes a $2.0 million initial provision for credit losses on non-PCD loans acquired in the Brunswick Acquisition.
The following table presents the ACL for loans and the amortized cost basis of the loans by the measurement methodology used as of September 30, 2023:
(In thousands) ACL - Loans Loans
September 30, 2023 Collectively Evaluated for Credit Loss Individually Evaluated for Credit Loss Total ACL - Loans Collectively Evaluated for Credit Loss Individually Evaluated for Credit Loss Total Loans
Commercial Real Estate $ 18,300  $ 380  $ 18,680  $ 2,281,707  $ 6,689  $ 2,288,396 
Commercial & Industrial 6,623  708  7,331  646,883  1,556  648,439 
Construction 5,878  —  5,878  459,959  2,256  462,215 
Residential Mortgage 2,090  2  2,092  740,573  2,960  743,533 
Consumer 23  —  23  3,074  —  3,074 
Total $ 32,914  $ 1,090  $ 34,004  $ 4,132,196  $ 13,461  $ 4,145,657 


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Allowance for Credit Losses, prior to January 1, 2023
The following table summarizes the allowance and recorded investments in loans receivable:
(In thousands)
As of, and for the
three months ended,
September 30, 2022		 Commercial Real Estate Commercial and industrial Construction Residential mortgage Consumer Unallocated Total
Allowance for loan and lease losses:
July 1, 2022 $ 11,991  $ 3,671  $ 46  $ 1,143  $ 2  $ 23  $ 16,876 
Charge-offs —  (1) —  (3) (11) —  (15)
Recoveries 63  —  —  —  6  —  69 
Provisions 468  879  5  162  5  31  1,550 
September 30, 2022 12,522  4,549  51  1,302  2  54  18,480 
Individually evaluated for impairment 28  831  —  51  —  —  910 
Collectively evaluated for impairment $ 12,494  $ 3,718  $ 51  $ 1,251  $ 2  $ 54  $ 17,570 
(In thousands)
As of, and for the
nine months ended,
September 30, 2022		 Commercial Real Estate Commercial and industrial Construction Residential mortgage Consumer Unallocated Total
Allowance for loan and lease losses:
January 1, 2022 $ 9,415  $ 3,439  $ 38  $ 1,019  $ 2  $ 684  $ 14,597 
Charge-offs —  (1) —  (3) (77) —  (81)
Recoveries 128  13  24  4  20  —  189 
Provisions 2,979  1,098  (11) 282  57  (630) 3,775 
September 30, 2022 12,522  4,549  51  1,302  2  54  18,480 
Individually evaluated for impairment 28  831  —  51  —  —  910 
Collectively evaluated for impairment $ 12,494  $ 3,718  $ 51  $ 1,251  $ 2  $ 54  $ 17,570 
Loans Receivable
Ending Balance $ 1,944,802  $ 556,796  $ 400,188  $ 412,518  $ 8,153  $ —  $ 3,322,457 
Individually Evaluated for impairment 713  1,309  —  1,675  —  —  3,697 
Acquired with credit deterioration 1,364  —  1,222  1,232  —  —  3,818 
$ 1,942,725  $ 555,487  $ 398,966  $ 409,611  $ 8,153  $ —  $ 3,314,942 




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The information presented in the designated internal risk categories by portfolio segment table presented above is not required for periods prior to the adoption of CECL. The following table presents the most comparable required information for the prior period, internal credit risk ratings, for the indicated loan portfolio segments as of December 31, 2022:
(In thousands) Pass Special
Mention		 Substandard Total
December 31, 2022
Commercial real estate $ 2,018,088  $ 12,325  $ 22,521  $ 2,052,934 
Commercial and industrial 582,540  4,212  9,290  596,042 
Construction 438,990  2,256  —  441,246 
Residential mortgage 409,259  3,104  3,858  416,221 
Consumer 7,676  —  —  7,676 
Total loans $ 3,456,553  $ 21,897  $ 35,669  $ 3,514,119 
Modifications to Borrowers Experiencing Financial Difficulty
From time to time, we may modify certain loans to borrowers who are experiencing financial difficulty. In some cases, these modifications may result in new loans. Loan modifications to borrowers experiencing financial difficulty may be in the form of principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay, or a term extension, or a combination thereof, among other things.

There were no new modifications for the quarter ending September 30, 2023. Information related to loans modified (by type of modification), whereby the borrower was experiencing financial difficulty at the time of modification, is set forth in the following table:

(In thousands) Interest Only
Term Extension		 Combination:
Interest Only and
Term Extension		 Total % of Total Class of Financing Receivable
Nine months ended September 30, 2023
Commercial real estate $ 51  $ —  $ 180  $ 231  0.01  %
Commercial and industrial
—  150  —  150  0.02 
Total $ 51  $ 150  $ 180  $ 381  0.01  %

The financial effects of the interest-only loan modifications reduced the monthly payment amounts for the borrower and the term extensions in the table above added a weighted-average of 2.0 years to the life of the loans, which also reduced the monthly payment amounts for the borrowers.

Note 5 - Derivative Financial Instruments
Mid Penn manages its exposure to certain interest rate risks through the use of derivatives; however, none are entered into for speculative purposes. During the first nine months of 2023, Mid Penn entered into outstanding derivative contracts designated as hedges. As of December 31, 2022, Mid Penn did not designate any derivative financial instruments as formal hedging relationships. Mid Penn’s free-standing derivative financial instruments are required to be carried at their fair value on the Consolidated Balance Sheets.
Mortgage Banking Derivative Financial Instruments
In connection with its mortgage banking activities, Mid Penn enters into commitments to originate certain fixed-rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, Mid Penn enters into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured.
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Information related to mortgage banking hedging activity is set forth in the following table:
September 30, 2023 December 31, 2022
(In thousands) Notional Amount Asset (Liability) Fair Value Notional Amount Asset (Liability) Fair Value
Interest Rate Lock Commitments
Positive Fair Values $ 2,233  $ 15  $ 274  $ 3 
Negative Fair Values 4,043  (24) 5,252  (40)
Forward Commitments
Positive Fair Values 4,011  18  4,750  43 
Negative Fair Values 3,146  (44) —  — 
For the three months ended September 30, 2023 and 2022, Mid Penn recorded net gains from mortgage banking hedging activity of $67 thousand and $217 thousand, respectively. For the nine months ended September 30, 2023 and 2022, Mid Penn recorded net gains from mortgage banking hedging activity of $215 thousand and $1.3 million, respectively.
Loan-level Interest Rate Swaps
Mid Penn enters into loan-level interest rate swaps with certain qualifying, creditworthy commercial loan customers to meet their interest rate risk management needs. Mid Penn simultaneously enters into parallel interest rate swaps with dealer counterparties, with identical notional amounts and terms. The net result of the offsetting customer and dealer counterparty swap agreements is that the customer pays a fixed rate of interest and Mid Penn receives a floating rate. Mid Penn’s loan-level interest rate swaps are considered derivatives, but are not accounted for using hedge accounting.
Information related to loan level swaps is set forth in the following table:
September 30, 2023 December 31, 2022
(Dollars in thousands)
 Interest rate swaps on loans with customers
      Notional amount $ 150,769  $ 123,795 
      Weighted average remaining term (years) 6.84 7.85
      Receive fixed rate (weighted average) 4.17  % 3.59  %
      Pay variable rate (weighted average 7.36  % 6.09  %
      Estimated fair value $ 14,070  $ 11,697 
September 30, 2023 December 31, 2022
(Dollars in thousands)
 Interest rate swaps on loans with correspondents
      Notional amount $ 150,769  $ 123,795 
      Weighted average remaining term (years) 6.84 7.85
      Receive variable rate (weighted average) 7.36  % 6.09  %
      Pay fixed rate (weighted average 4.17  % 3.59  %
      Estimated fair value $ 14,070  $ 11,697 
Cash Flow Hedges of Interest Rate Risk

Mid Penn’s objectives in using interest rate derivatives are to reduce volatility in net interest income and to manage its exposure to interest rate movements. To accomplish this objective, Mid Penn primarily uses interest rate swaps as part of its interest rate risk management strategy. During the first nine months of 2023, Mid Penn entered into interest rate swaps designated as cash flow hedges to hedge the cash flows associated with existing brokered CDs.
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Information related to cash flow hedges is set forth in the following table:
September 30, 2023
(Dollars in thousands)
 Cash flow hedges
      Notional amount $ 190,000 
      Weighted average remaining term (years) 2.47
      Pay fixed rate (weighted average) 3.74  %
      Receive variable rate (weighted average 4.78  %
      Estimated fair value $ 4,914 

There were no cash flow hedges at December 31, 2022.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the unrealized gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest income in the same period during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are made on Mid Penn’s variable-rate liabilities. During the next twelve months, Mid Penn estimates that an additional $2.9 million will be reclassified as a decrease to interest expense.

Note 6 - Accumulated Other Comprehensive (Loss) Income
The changes in each component of accumulated other comprehensive loss, net of taxes, are as follows:
(In thousands)
 Unrealized Loss on
Securities		 Unrealized
Holding Losses on
Interest Rate
Derivatives used in
Cash Flow Hedges		 Defined Benefit
Plans		 Total
Balance at June 30, 2023 $ (20,611) $ 2,709  $ 97  $ (17,805)
OCI before reclassifications (4,410) 859  (6) (3,557)
Amounts reclassified from AOCI —  —  —  — 
Balance at September 30, 2023 $ (25,021) $ 3,568  $ 91  (21,362)
Balance at December 31, 2022 $ (19,327) $ —  $ 111  $ (19,216)
OCI before reclassifications (5,694) 3,568  (8) (2,134)
Amounts reclassified from AOCI —  —  (12) (12)
Balance at September 30, 2023 $ (25,021) $ 3,568  $ 91  $ (21,362)
Balance at June 30, 2022 $ (10,297) $ —  $ 538  $ (9,759)
OCI before reclassifications (9,376) —  11  (9,365)
Amounts reclassified from AOCI —  —  (6) (6)
Balance at September 30, 2022 $ (19,673) $ —  $ 543  $ (19,130)
Balance at December 31, 2021 $ (255) $ —  $ 413  $ 158 
OCI before reclassifications (19,418) —  138  (19,280)
Amounts reclassified from AOCI —  —  (8) (8)
Balance at September 30, 2022 $ (19,673) $ —  $ 543  $ (19,130)
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Note 7 - Fair Value Measurement
The Corporation uses estimates of fair value in applying various accounting standards for its consolidated financial statements on either a recurring or non-recurring basis. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between willing and able market participants. Mid Penn groups its assets and liabilities measured at fair value in three hierarchy levels, based on the observability and transparency of the inputs. The fair value hierarchy is as follows:
Level 1 - Inputs that represent quoted prices for identical instruments in active markets.
Level 2 - Inputs that represent quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 - Inputs that are largely unobservable, as little or no market data exists for the instrument being valued.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
There were no transfers of assets between fair value Level 1 and Level 2 during the three and nine months ended September 30, 2023 or the year ended December 31, 2022.
The following tables illustrate the assets measured at fair value on a recurring basis and reported on the Consolidated Balance Sheets.
September 30, 2023
(In thousands) Level 1 Level 2 Level 3 Total
Available-for-sale securities:
U.S. Treasury and U.S. government agencies $ —  $ 34,731  $ —  $ 34,731 
Mortgage-backed U.S. government agencies —  148,644  —  148,644 
State and political subdivision obligations —  3,312  —  3,312 
Corporate debt securities —  31,377  —  31,377 
Equity securities 413  —  —  413 
Loans held for sale —  4,270  —  4,270 
Other assets:
Derivative assets —  18,608  —  18,608 
Total $ 413  $ 240,942  $ —  $ 241,355 
December 31, 2022
(In thousands) Level 1 Level 2 Level 3 Total
Available-for-sale securities:
U.S. Treasury and U.S. government agencies $ —  $ 34,914  $ —  $ 34,914 
Mortgage-backed U.S. government agencies —  166,915  —  166,915 
State and political subdivision obligations —  3,539  —  3,539 
Corporate debt securities —  32,510  —  32,510 
Equity securities 430  —  —  430 
Loans held for sale —  2,475  —  2,475 
Other assets:
Derivative assets —  11,703  —  11,703 
Total $ 430  $ 252,056  $ —  $ 252,486 
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The valuation methodologies and assumptions used to estimate the fair value for the items in the preceding tables are as follows:
Available for sale investment securities - The fair value of equity and debt securities classified as available for sale is determined by obtaining quoted market prices on nationally recognized securities exchanges (Level 1), or matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather, relying on the securities’ relationship to other benchmark quoted prices.
Equity securities - The fair value of equity securities with readily determinable fair values is recorded on the Consolidated Balance Sheet, with realized and unrealized gains and losses reported in other expense on the Consolidated Statements of Income.
Loans held for sale - This category includes mortgage loans held for sale that are measured at fair value. Fair values as of September 30, 2023 were measured as the price that secondary market investors were offering for loans with similar characteristics.
Derivative assets - Interest rate swaps are measured by alternative pricing sources with reasonable levels of price transparency in markets that are not active. Based on the complex nature of interest rate swap agreements, the markets these instruments trade in are not as efficient and are less liquid than that of the more mature Level 1 markets. These markets do, however, have comparable, observable inputs in which an alternative pricing source values these assets in order to arrive at a fair market value. These characteristics classify interest rate swap agreements as Level 2.
Mortgage banking derivatives represent the fair value of mortgage banking derivatives in the form of interest rate locks and forward commitments with secondary market investors and the fair value of interest rate swaps. The fair values of Mid Penn’s interest rate locks, forward commitments and interest rate swaps represent the amounts that would be required to settle the derivative financial instruments at the balance sheet date. These characteristics classify interest rate swap agreements as Level 2. See "Note 5 - Derivative Financial Instruments," for additional information.
Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. The following table illustrates Level 3 financial instruments measured at fair value on a nonrecurring basis:
(In thousands) September 30, 2023 December 31, 2022
Individually evaluated loans, net of ACL $ 12,371  $ 4,022 
Foreclosed assets held for sale 905  43 
Net loans - This category consists of loans that were individually evaluated for credit losses, net of the related ACL, and have been classified as Level 3 assets. In 2022, the amount shown is the balance of individually evaluated loans reporting a specific allocation or that have been partially charged-off. All of these loans are considered collateral-dependent; therefore, all of Mid Penn’s impaired loans, whether reporting a specific allowance allocation or not, are considered collateral- dependent. Mid Penn utilized Level 3 inputs such as independent appraisals of the underlying collateral, which generally includes various Level 3 inputs which are not observable. Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses.
Foreclosed assets held for sale - Values are based on appraisals that consider the sales prices of property in the proximate vicinity.
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The following tables summarize the carrying amount, fair value, and placement in the fair value hierarchy of Mid Penn's financial instruments as of the periods presented:
September 30, 2023
Carrying
Amount		 Estimated Fair Value
(In thousands) Level 1 Level 2 Level 3 Total
Financial instruments - assets
 Cash and cash equivalents $ 118,099  $ 118,099  $ —  $ —  $ 118,099 
 Available-for-sale investment securities 218,064  —  218,064  —  218,064 
Held-to-maturity investment securities 401,561  —  341,006  —  341,006 
 Equity securities 413  413  —  —  413 
 Loans held for sale 4,270  —  4,270  —  4,270 
Net loans 4,111,653  —  —  3,930,893  3,930,893 
  Restricted investment in bank stocks 13,554  13,554  —  —  13,554 
  Accrued interest receivable 24,230  24,230  —  —  24,230 
  Derivative assets 18,608  —  18,608  —  18,608 
Financial instruments - liabilities
Deposits $ 4,381,616  $ —  $ 3,902,627  $ —  $ 3,902,627 
Short-term borrowings 139,000  —  139,000  —  139,000 
Long-term debt (1)
 55,771  —  54,047  —  54,047 
Subordinated debt 46,501  —  38,669  —  38,669 
 Accrued interest payable 14,657  14,657  —  —  14,657 
 Derivative liabilities 14,080  —  14,080  —  14,080 
(1)Long-term debt excludes finance lease obligations.
December 31, 2022
Estimated Fair Value
(In thousands) Carrying
Amount		 Level 1 Level 2 Level 3 Total
Financial instruments - assets
Cash and cash equivalents $ 60,881  $ 60,881  $ —  $ —  $ 60,881 
Available-for-sale investment securities 237,878  —  237,878  —  237,878 
 Held-to-maturity investment securities 399,494  —  348,505  —  348,505 
   Equity securities 430  430  —  —  430 
 Loans held for sale 2,475  —  2,475  —  2,475 
Net loans 3,495,162  —  —  3,439,948  3,439,948 
 Restricted investment in bank stocks 8,315  8,315  —  —  8,315 
 Accrued interest receivable 18,405  18,405  —  —  18,405 
 Derivative assets 11,703  —  11,703  —  11,703 
Financial instruments - liabilities
Deposits $ 3,778,331  $ —  $ 3,761,260  $ —  $ 3,761,260 
Short-term debt 102,647  —  102,647  —  102,647 
Long-term debt (1)
 1,119  —  1,069  —  1,069 
Subordinated debt 56,941  —  55,917  —  55,917 
 Accrued interest payable 2,303  2,303  —  —  2,303 
 Derivative liabilities 11,737  —  11,737  —  11,737 
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(1)Long-term debt excludes finance lease obligations.
The Bank’s outstanding and unfunded credit commitments and financial standby letters of credit were deemed to have no significant fair value as of September 30, 2023 and December 31, 2022.
Note 8 - Commitments and Contingencies
Guarantees and commitments to extend credit
Mid Penn is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The commitments include various guarantees and commitments to extend credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Mid Penn evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the customer. Standby letters of credit and financial guarantees written are conditional commitments to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Mid Penn had $63.8 million and $57.2 million of standby letters of credit outstanding as of September 30, 2023 and December 31, 2022, respectively. Mid Penn does not anticipate any losses because of these transactions. The amount of the liability as of September 30, 2023 and December 31, 2022 for payment under standby letters of credit issued was not considered material.
Mid Penn adopted FASB ASC Topic 326, effective January 1, 2023, which requires Mid Penn to estimate expected credit losses for OBS credit exposures which are not unconditionally cancellable. Mid Penn maintains a separate ACL on OBS credit exposures, including unfunded loan commitments and letters of credit, which is included in other liabilities on the accompanying Consolidated Balance Sheets.
The ACL - OBS is adjusted as a provision for OBS commitments in noninterest expense. The estimate includes consideration of the likelihood that funding will occur, an estimate of exposure at default that is derived from utilization rate assumptions using a non-modeled approach, and PD and LGD estimates that are derived from the same models and approaches for Mid Penn's other loan portfolio segments described in "Note 4 - Loans and Allowance for Credit Losses - Loans" above, as these unfunded commitments share similar risk characteristics with these loan portfolio segments.
The ACL - OBS at September 30, 2023 was $4.5 million compared to $85 thousand at December 31, 2022. On January 1, 2023 in conjunction with adopting ASC 326, Mid Penn recorded an additional $3.1 million of provision for OBS which was included in the adoption cumulative effect adjustment. Provision expense for OBS for the three months ended September 30, 2023 was $661 thousand. Provision expense for OBS for the nine months ended September 30, 2023 was $1.3 million.
Low-income housing project commitments
Mid Penn Bank has a limited partnership interest in a low-income housing project to construct 39 apartments and common amenities in Cumberland County, Pennsylvania. All of the units are expected to qualify for Federal LIHTC as provided for in Section 42 of the Internal Revenue Code of 1986, as amended. Mid Penn’s limited partner capital contribution commitment is expected to be $10.8 million, which will be paid in installments over the course of construction of the low-income housing facilities. The investment in the limited partnership will be reported in other assets on the balance sheet and amortized over a ten-year period. The project has been conditionally awarded $1.2 million in annual LIHTCs by the Pennsylvania Housing Finance Agency, with a total anticipated LIHTC amount of $12.0 million to be received by Mid Penn over the ten-year amortization period. Mid Penn’s commitment to purchase the limited partnership interest is conditional upon (i) the review and approval of all closing documents, (ii) an opinion letter for tax counsel to the Partnership that the project qualifies for the LIHTCs, and (iii) review and approval by Mid Penn of other documents it may deem necessary.
Mid Penn assumed a commitment, as a result of the Riverview Acquisition, to purchase a limited partnership interest in a low-income housing project to preserve and rehabilitate three buildings consisting of 17 apartments and two commercial shops in Schuylkill County, Pennsylvania. All the units are expected to qualify for LIHTCs. Mid Penn’s limited partner capital contribution commitment is expected to be $4.4 million, which will be paid in installments over the course of construction of the low-income housing facilities. The investment in the limited partnership will be reported in other assets on the balance sheet and amortized over a ten-year period. Additionally, the agreement commits Mid Penn to a construction loan in the maximum principal amount of $3.5 million, which will bear interest at 5.5% annum with a term of twenty-four months.
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The project has been conditionally awarded $484 thousand in annual LIHTCs by the Pennsylvania Housing Finance Agency, with a total anticipated LIHTC amount of $4.8 million to be received by Mid Penn over the ten-year amortization period. Mid Penn’s commitment to purchase the limited partnership interest is conditional upon (i) the review and approval of all closing documents, (ii) an opinion letter for tax counsel to the Partnership that the project qualifies for the LIHTCs, and (iii) review and approval by Mid Penn of other documents it may deem necessary.
Litigation
Mid Penn is subject to lawsuits and claims arising out of its normal conduct of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated financial condition of Mid Penn.
Note 9 - Debt
Short-term FHLB and Correspondent Bank Borrowings
Total short-term borrowings were $139.0 million and $102.6 million as of September 30, 2023 and December 31, 2022, respectively. Short-term borrowings generally consist of federal funds purchased and advances from the FHLB with an original maturity of less than a year. Federal funds purchased from correspondent banks mature in one business day and reprice daily based on the Federal Funds rate. Advances from the FHLB are collateralized by the Bank’s investment in the common stock of the FHLB and by a blanket lien on selected loan receivables comprised principally of real estate secured loans within the Bank’s portfolio totaling $1.7 billion at September 30, 2023. The Bank had a short-term borrowing capacity from the FHLB as of September 30, 2023 up to the Bank’s unused borrowing capacity of $1.3 billion (equal to $1.7 billion of maximum borrowing capacity, less the aggregate amount of FHLB letter of credits securing public funds deposits, and other FHLB advances and obligations outstanding) upon satisfaction of any stock purchase requirements of the FHLB.
The Bank also has unused overnight lines of credit with other correspondent banks amounting to $35.0 million at September 30, 2023. No draws were made on these lines as of September 30, 2023 and December 31, 2022.
Long-term Debt
The following table presents a summary of long-term debt as of September 30, 2023 and December 31, 2022.
(Dollars in thousands) September 30, 2023 December 31, 2022
FHLB fixed rate instruments:
Due January 2024, 1.10%
 $ 10,000  $ — 
Due March 2024, 5.60%
 25,000  — 
Due February 2026, 4.51%
 20,000  — 
Due August 2026, 4.80%
 745  1,088 
Due February 2027, 6.71%
 26  31 
Total FHLB fixed rate instruments 55,771  1,119 
Lease obligations included in long-term debt 3,221  3,290 
Total long-term debt $ 58,992  $ 4,409 
As a member of the FHLB, the Bank can access a number of credit products which are utilized to provide liquidity. The FHLB fixed rate instruments obtained by the Bank are secured under the terms of a blanket collateral agreement with the FHLB consisting of FHLB stock and qualifying Bank loan receivables, principally real estate secured loans. The Bank also obtains letters of credit from the FHLB to secure certain public fund deposits of municipality and school district customers who agree to use of the FHLB letters of credit as a legally allowable alternative to investment pledging. These FHLB letter of credit commitments totaled $226.0 million and $189.0 million as of September 30, 2023 and December 31, 2022, respectively.
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Note 10 - Subordinated Debt and Trust Preferred Securities
Subordinated Debt Issued December 2017
On December 19, 2017, Mid Penn entered into agreements with investors to purchase $10.0 million aggregate principal amount of its subordinated notes due 2028 (the "2017 Notes"). The 2017 Notes were treated as Tier 2 capital for regulatory capital purposes. The 2017 Notes were redeemable in whole or in part, without premium or penalty, at any time on or after December 21, 2022, and prior to January 1, 2028. Mid Penn redeemed the 2017 Notes in whole on April 17, 2023.
Subordinated Debt Assumed November 2021 with the Riverview Acquisition
On November 30, 2021, Mid Penn completed its acquisition of Riverview and assumed $25.0 million of subordinated notes (the "Riverview Notes"). In accordance with purchase accounting principles, the Riverview Notes were assigned a fair value premium of $2.3 million. The notes are treated as Tier 2 capital for regulatory reporting purposes.
The Riverview Notes were entered into by Riverview on October 6, 2020 with certain qualified institutional buyers and accredited institutional investors. The Riverview Notes have a maturity date of October 15, 2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.75% per annum until October 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 SOFR plus 563 bps, payable quarterly until maturity. Mid Penn may redeem the Riverview Notes at par, in whole or in part, at its option, anytime beginning on October 15, 2025.
Subordinated Debt Issued December 2020
On December 22, 2020, Mid Penn entered into agreements for and sold, at 100% of their principal amount, an aggregate of $12.2 million of its subordinated notes due December 2030 (the "December 2020 Notes") on a private placement basis to accredited investors. The December 2020 Notes are treated as Tier 2 capital for regulatory capital purposes.
The December 2020 Notes bear interest at a rate of 4.5% per year for the first five years and then float at the Wall Street Journal’s Prime Rate, provided that the interest rate applicable to the outstanding principal balance during the period the December 2020 Notes are floating will at no time be less than 4.5%. Interest is payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, beginning on March 31, 2021. The December 2020 Notes will mature on December 31, 2030 and are redeemable, in whole or in part, without premium or penalty, on any interest payment date on or after December 31, 2025 and prior to December 31, 2030, subject to any required regulatory approvals. Additionally, if (i) all or any portion of the December 2020 Notes cease to be deemed Tier 2 Capital, (ii) interest on the December 2020 Notes fails to be deductible for United States federal income tax purposes, or (iii) Mid Penn will be considered an "investment company," Mid Penn may redeem the December 2020 Notes, in whole but not in part, by giving 10 days’ notice to the holders of the December 2020 Notes. In the event of a redemption described in the previous sentence, Mid Penn will redeem the December 2020 Notes at 100% of the principal amount of the December 2020 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption.
Holders of the December 2020 Notes may not accelerate the maturity of the December 2020 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar event of Mid Penn or the Bank. Related parties held $750 thousand of the December 2020 Notes as of September 30, 2023 and December 31, 2022.
Subordinated Debt Issued March 2020
On March 20, 2020, Mid Penn entered into agreements with accredited investors who purchased $15.0 million aggregate principal amount of its subordinated notes due March 2030 (the "March 2020 Notes"). As a result of Mid Penn’s merger with Riverview on November 30, 2021, $6.9 million of the March 2020 Notes balance was redeemed as Riverview was a holder of the March 2020 Notes. The balance of March 2020 Notes outstanding as of September 30, 2023 was $8.1 million. The March 2020 Notes are intended to be treated as Tier 2 capital for regulatory capital purposes.
The March 2020 Notes bear interest at a rate of 4.0% per year for the first five years and then float at the Wall Street Journal’s Prime Rate, provided that the interest rate applicable to the outstanding principal balance during the period the March 2020 Notes are floating will at no time be less than 4.25%. Interest is payable semi-annually in arrears on June 30 and December 30 of each year, beginning on June 30, 2020, for the first five years after issuance and will be payable quarterly in arrears thereafter on March 30, June 30, September 30 and December 30. The March 2020 Notes will mature on March 30, 2030 and are redeemable in whole or in part, without premium or penalty, at any time on or after March 30, 2025 and prior to March 30, 2030. Additionally, if all or any portion of the March 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.
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In the event of a redemption described in the previous sentence, Mid Penn will redeem the March 2020 Notes at 100% of the principal amount of the March 2020 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption.
Holders of the March 2020 Notes may not accelerate the maturity of the March 2020 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar event of Mid Penn or the Bank. Related parties held $1.7 million of the March 2020 Notes as of September 30, 2023 and December 31, 2022.
Note 11 - Common Stock and Earnings Per Share
Treasury Stock Repurchase Program
Mid Penn adopted a treasury stock repurchase program ("Program") initially effective March 19, 2020, and renewed through May 11, 2024 by Mid Penn’s Board of Directors on May 11, 2023. The Program authorizes the repurchase of up to $15.0 million of Mid Penn’s outstanding common stock. Under the Program, Mid Penn conducts repurchases of its common stock through open market transactions (which may be by means of a trading plan adopted under SEC Rule 10b5-1) or in privately negotiated transactions. Repurchases under the Program are made at the discretion of management and are subject to market conditions and other factors. There is no guarantee as to the exact number of shares that Mid Penn may repurchase. The Program is able to be modified, suspended or terminated at any time, at Mid Penn’s discretion, based upon a number of factors, including liquidity, market conditions, the availability of alternative investment opportunities and other factors Mid Penn deems appropriate. The Program does not obligate Mid Penn to repurchase any shares.
During the three months ended September 30, 2023, Mid Penn did not repurchase any shares of common stock. As of September 30, 2023, Mid Penn had repurchased 412,722 shares of common stock at an average price of $22.92 per share under the Program. The Program had $5.5 million remaining available for repurchase as of September 30, 2023.
Dividend Reinvestment Plan
Under Mid Penn’s amended and restated DRIP, 300,000 shares of Mid Penn’s authorized but unissued common stock are reserved for issuance. The DRIP also allows for voluntary cash payments, within specified limits, to be used for the purchase of additional shares.
Equity Incentive Plans
On May 9, 2023, shareholders approved the 2023 Stock Incentive Plan, which authorizes Mid Penn to grant incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock units and performance shares. The 2023 Plan was established for employees and directors of Mid Penn and the Bank, selected by the Compensation Committee of the Board of Directors, to incentivize the further success of the Company, and replaces the 2014 Restricted Stock Plan. The aggregate number of shares of common stock of the Company available for issuance under the Plan is 350,000 shares.
As of September 30, 2023, a total of 217,514 restricted shares were granted under the 2014 Plan, of which 88,519 shares were unvested. The 2014 Plan shares granted and vested resulted in $324 thousand and $237 thousand in share-based compensation expense for the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023 and 2022, the 2014 Plan shares granted and vested resulted in share-based compensation expense of $825 thousand and $694 thousand, respectively.
Share-based compensation expense relating to restricted stock is calculated using grant date fair value and is recognized on a straight-line basis over the vesting periods of the awards. Restricted shares granted to employees vest in equal amounts on the anniversary of the grant date over the vesting period and the expense is a component of salaries and benefits expense on the Consolidated Statement of Income. The employee grant vesting period is determined by the terms of each respective grant, with vesting periods generally between one and four years. Restricted shares granted to directors have a twelve-month vesting period, and the expense is a component of directors’ fees and benefits within the other expense line item on the Consolidated Statement of Income.
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The following data shows the amounts used in computing basic and diluted earnings per common share:
Three Months Ended September 30, Nine Months Ended September 30,
(In thousands, except per share data) 2023 2022 2023 2022
Net income $ 9,236  $ 15,481  $ 25,299  $ 39,087 
Weighted average common shares outstanding (basic) 16,571,825 15,877,592 16,233,006 15,922,945
Effect of dilutive unvested restricted stock grants 23,174 10,279 31,716 22,329
Weighted average common shares outstanding (diluted) 16,594,999 15,887,871 16,264,722 15,945,274
Basic earnings per common share $ 0.56  $ 0.97  $ 1.56  $ 2.45 
Diluted earnings per common share 0.56  0.97  1.56  2.45 
There were no antidilutive instruments at September 30, 2023 and 2022.
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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, its bank and 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 successfully 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;
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•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 and subsequent filings with the SEC.
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 2022 Annual Report. 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. Mid Penn 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 Mid Penn's earnings and selected performance ratios:
Three Months Ended September 30, Nine Months Ended September 30,
2023 2022 2023 2022
Net Income $ 9,236  $ 15,481  $ 25,299  $ 39,087 
Diluted EPS $ 0.56  $ 0.97  $ 1.56  $ 2.45 
Dividends Declared $ 0.20  $ 0.20  $ 0.60  $ 0.60 
Return on average assets 0.72  % 1.42  % 0.71  % 1.16  %
Return on average equity 6.93  % 12.23  % 6.57  % 10.52  %
Net interest margin 3.16  % 3.90  % 3.33  % 3.50  %
Non-performing assets to total assets 0.28  % 0.22  % 0.28  % 0.22  %
Net charge-off (recoveries) to average loans (annualized) 0.001  % (0.007) % 0.010  % (0.005) %

During the second quarter of 2023, Mid Penn completed the Brunswick Acquisition, which added total assets of $391.9 million comprised primarily of $324.5 million of loans. This transaction resulted in the addition of 5 branches in central New Jersey. Mid Penn issued 849,510 shares of its common stock as well as a net cash payment to Brunswick shareholders of $27.6 million, for total consideration of $45.7 million for all outstanding stock and the cancellation of options of Brunswick.
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Summary of Financial Results
•Net Income Per Share - Mid Penn’s net income available to common shareholders ("earnings") for the three months ended September 30, 2023 was $9.2 million, or $0.56 per both common share basic and diluted, compared to earnings of $15.5 million, or $0.97 per both common share basic and diluted for the three months ended September 30, 2022. Mid Penn’s earnings for the nine months ended September 30, 2023 was $25.3 million, or $1.56 per both common share basic and diluted, compared to earnings of $39.1 million, or $2.45 per both common share basic and diluted for the nine months ended September 30, 2022. The results for the nine months ended September 30, 2023 were impacted by expenses related to the Brunswick Acquisition and lower mortgage banking revenue.
◦Net Interest Margin - For the third quarter of 2023, Mid Penn’s net interest margin was 3.16% versus 3.90% for the same period of 2022. For the nine months ended September 30, 2023, net interest margin was 3.33% versus 3.50% for the same period of 2022. The FOMC has increased rates six times during the 12 months since September 30, 2022. The yield on interest-earning assets for the third quarter of 2023 increased 107 basis points from the same period of 2022. The rate on interest-bearing liabilities increased 231 basis points from the same period of 2022. For the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, the yield on interest-earning assets and rate on interest-bearing liabilities increased 135 basis points and 196 basis points, respectively.
◦Loan Growth - Total loans, net of unearned income, as of September 30, 2023 were $4.1 billion compared to $3.5 billion as of December 31, 2022, an increase of $631.5 million, or 18.0%. As mentioned above, $324.5 million, or 51.4%, of that growth was a result of the Brunswick Acquisition. The mix of commercial real estate and construction portfolios in relation to the total portfolio declined 3.0% and 1.5%, respectively from December 31, 2022 to September 30, 2023 while the proportion of the residential mortgage portfolio grew 6.0% over the same period. 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 $603.3 million, or 16.0%, from $3.8 billion at December 31, 2022, to $4.4 billion at September 30, 2023. The Brunswick Acquisition contributed $282.6 million of additional deposits on the acquisition date. Noninterest bearing deposits increased 1.4% to $804.8 million at September 30, 2023 from $793.9 million at December 31, 2022 and represent 18.4% of total deposits at September 30, 2023. At September 30, 2023, deposits that are uninsured and not collateralized totaled $1.2 billion or 27.0% of total deposits compared to $890.9 or 20.8% at June 30, 2023.
•Asset Quality - Mid Penn adopted CECL on January 1, 2023. Its ACL at September 30, 2023 was $34.0 million, or 0.82% of total loans, as compared to $19.0 million, or 0.54% of total loans at December 31, 2022.
◦Net Charge-offs/Recoveries - Mid Penn had net charge-offs of $11 thousand and net recoveries of $54 thousand for the three months ended September 30, 2023 and 2022, respectively. For the nine months ended September 30, 2023, net charge-offs were $294 thousand compared to net recoveries of $108 thousand for the same period of 2022.
◦Non-performing assets - Total non-performing assets were $14.4 million at September 30, 2023, an increase compared to non-performing assets of $8.6 million at December 31, 2022. The increase was partially a result of $3.9 million of non-accrual loans acquired from Brunswick.
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◦Provision for credit losses - loans - The PCL - loans was $1.4 million for the three months ended September 30, 2023 compared to $1.6 million for the same period of 2022. For the nine months ended September 30, 2023 and 2022, the PCL - loans was $3.1 million and $3.8 million, respectively.
•Noninterest Income - Noninterest income totaled $5.3 million for the three months ended September 30, 2023 and $6.0 million for the three months ended September 30, 2022. For the nine months ended September 30, 2023, noninterest income totaled $14.9 million, compared to $16.9 million for the nine months ended September 30, 2022. The decrease was primarily attributable to lower mortgage banking and hedging activity.
•Noninterest Expense - Noninterest expense totaled $29.9 million for the third quarter of 2023, an increase of $5.2 million, or 20.9%, compared to noninterest expense of $24.7 million for the same period of 2022. Noninterest expense totaled $91.5 million for the nine months ended September 30, 2023, an increase of $17.1 million, or 23.0%, compared to noninterest expense of $74.4 million for the same period of 2022.
•Liquidity - Current liquidity, including borrowing capacity, enhanced to nearly $1.31 billion or 110.5% of uninsured and uncollateralized deposits, or approximately 29.8% of total deposits.
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Critical Accounting Estimates
The 2022 Annual Report includes a summary of critical accounting estimates that Mid Penn 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 and business combinations.
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.
Business Combinations
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 the timing and amount of 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.



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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 is also shown on a taxable-equivalent basis in total. 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.
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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:
Average Balances, Income and Interest Rates
For the Three Months Ended
September 30, 2023 September 30, 2022
(Dollars in thousands) Average Balance Interest Yield/
Rate		 Average Balance Interest Yield/
Rate
ASSETS:
Interest Bearing Balances $ 12,804  $ 86  2.66  % $ 5,583  $ 12  0.85  %
Investment Securities:
Taxable 541,403  3,846  2.82  % 546,439  3,369  2.45  %
Tax-Exempt 77,668  382  1.95  % 80,008  392  2.46  %
Total Investment Securities 619,071  4,228  2.71  % 626,447  3,761  2.45  %
Federal Funds Sold 8,260  51  2.45  % 131,089  736  2.23  %
Loans 4,053,514  58,792  5.75  % 3,237,587  38,484  4.73  %
Restricted Investment in Bank Stocks 10,968  260  9.40  % 4,322  13  1.19  %
Total Interest-earning Assets 4,704,617  63,417  5.35  % 4,005,028  43,006  4.28  %
Cash and Due from Banks 77,122  69,751 
Other Assets 324,364  265,004 
Total Assets $ 5,106,103  $ 4,339,783 
LIABILITIES & SHAREHOLDERS' EQUITY:
Interest-bearing Demand $ 960,052  $ 3,899  1.61  % $ 1,072,496  $ 873  0.32  %
Money Market 929,036  5,969  2.55  % 994,446  1,097  0.44  %
Savings 308,732  60  0.08  % 352,024  43  0.05  %
Time 1,308,945  13,631  4.13  % 464,273  823  0.70  %
Total Interest-bearing Deposits 3,506,765  23,559  2.67  % 2,883,239  2,836  0.39  %
Short-term borrowings 64,282  1,584  9.78  % —  —  —  %
Long-term debt 76,515  333  1.73  % 4,537  150  13.12  %
Subordinated debt and trust preferred securities 46,377  461  3.94  % 69,523  611  3.49  %
Total Interest-bearing Liabilities 3,693,939  25,937  2.79  % 2,957,299  3,597  0.48  %
Noninterest-bearing Demand 854,302  843,419 
Other Liabilities 28,795  36,983 
Shareholders' Equity 529,067  502,082 
Total Liabilities & Shareholders' Equity $ 5,106,103  $ 4,339,783 
Net Interest Income $ 37,480  $ 39,409 
Taxable Equivalent Adjustment (1) 33  193 
Net Interest Income (taxable-equivalent basis) $ 37,513  $ 39,602 
Total Yield on Earning Assets 5.35  % 4.28  %
Rate on Supporting Liabilities 2.79  % 0.48  %
Average Interest Spread 2.56  % 3.80  %
Net Interest Margin 3.16  % 3.90  %
(1)Presented on a fully taxable-equivalent basis using a 21% federal tax rate and statutory interest expense disallowances.
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The following table summarizes the changes in interest income and interest expense resulting from changes in average balances, volume, and changes in rates for the three months ended September 30, 2023 in comparison to the same period in 2022:
Three months ended
September 30, 2023 vs. September 30, 2022
Increase (decrease)
(Dollars in thousands) Volume Rate Net
INTEREST INCOME:
Interest Bearing Balances $ 15  $ 59  $ 74 
Investment Securities:
Taxable (31) 508  477 
Tax-Exempt (15) 5  (10)
Total Investment Securities (46) 513  467 
Federal Funds Sold (690) 5  (685)
Loans 9,728  10,580  20,308 
Restricted Investment Bank Stocks 20  227  247 
Total Interest Income 9,027  11,384  20,411 
INTEREST EXPENSE:
Interest Bearing Deposits:
Interest Bearing Demand (91) 3,117  3,026 
Money Market (73) 4,945  4,872 
Savings (5) 22  17 
Time 1,490  11,318  12,808 
Total Interest-Bearing Deposits 1,321  19,402  20,723 
Short-term Borrowings 1,584  —  1,584 
Long-term Debt 2,380  (2,197) 183 
Subordinated Debt (204) 54  (150)
Total Interest Expense 5,081  17,259  22,340 
NET INTEREST INCOME $ 3,946  $ (5,875) $ (1,929)
Net interest income was $37.5 million for the three months ended September 30, 2023, a decrease of $2.1 million, or 5.4%, compared to the three months ended September 30, 2022. Mid Penn’s net interest margin for the three months ended September 30, 2023 was 3.16% compared to 3.90% for the three months ended September 30, 2022. The decrease to net interest margin was primarily a result of an increase in funding costs and growth in average interest-bearing liabilities, partially offset by higher yields on interest-earning assets and growth in average interest-earning assets. As previously noted, the FOMC has increased rates six times during the 12 months since September 30, 2022. The growth in both average interest-earning assets and average interest-bearing liabilities was largely the result of the Brunswick Acquisition. Both interest-earning assets and interest-bearing liabilities associated with the Brunswick Acquisition had substantially similar yields to the corresponding Mid Penn portfolios.
The higher yields and the growth in interest-earning assets contributed $11.4 million and $9.0 million, respectively, to the increase in interest income. The yield on interest-earning assets increased 107 bps to 5.35%, for the third quarter of 2023 compared to 4.28% for the third quarter of 2022. Average interest-earning assets increased $699.6 million, or 17.5%, during the third quarter of 2023 compared to the same period of 2022.
Average investment securities decreased $7.4 million and the yield on those investment securities increased 26 bps during the third quarter of 2023 compared to the third quarter of 2022, reducing interest income due to volume by $46 thousand offset by increased rates contributing $513 thousand to interest income.
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Average loans increased $815.9 million, and the yield on those loans increased 102 bps contributing $9.7 million and $10.6 million, respectively, to the increase in interest income.
Interest expense increased $22.3 million during the third quarter of 2023 compared to the third quarter of 2022. The rate of interest-bearing liabilities increased from 0.48% for the third quarter of 2022 to 2.79% for the third quarter of 2023. The increase in the rate was primarily a result of a shift in the mix of deposits from demand, money market and savings to higher yielding time deposits. Mid Penn continued to offer higher rates to both retain and attract deposits. In addition, average short-term borrowings of $64.3 million were used to help fund loan growth, contributing $1.6 million to interest expense during the third quarter of 2023.

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Average Balances, Income and Interest Rates
For the Nine Months Ended September 30,
2023 2022
(Dollars in thousands) Average Balance Interest Yield/
Rate		 Average Balance Interest Yield/
Rate
ASSETS:
Interest Bearing Balances $ 8,806  $ 222  3.37  % $ 34,034  $ 33  0.13  %
Investment Securities:
Taxable 549,883  11,394  2.77  479,611  7,950  2.21 
Tax-Exempt 78,606  1,162  1.98  77,489  1,107  2.42 
Total Investment Securities 628,489  12,556  2.67  557,100  9,057  2.17 
Federal Funds Sold 5,455  145  3.55  415,528  1,786  0.57 
Loans, Net of unearned interest 3,756,159  156,751  5.58  3,157,288  107,764  4.58 
Restricted Investment in Bank Stocks 10,234  548  7.16  5,826  218  5.46 
Total Interest-earning Assets 4,409,143  170,222  5.16  4,169,776  118,858  3.81 
Cash and Due from Banks 66,546  62,369 
Other Assets 289,667  267,309 
Total Assets $ 4,765,356  $ 4,499,454 
LIABILITIES & SHAREHOLDERS' EQUITY:
Interest-bearing Demand $ 954,396  $ 9,806  1.37  % $ 1,049,569  $ 1,796  0.23  %
Money Market 926,079  15,158  2.19  1,066,001  2,281  0.29 
Savings 317,544  177  0.07  361,733  144  0.05 
Time 1,019,034  28,346  3.72  524,013  2,928  0.75 
Total Interest-bearing Deposits 3,217,053  53,487  2.22  3,001,316  7,149  0.32 
Short-term borrowings 93,205  4,581  6.57  —  —  — 
Long-term debt 40,693  602  1.98  29,715  541  2.43 
Subordinated debt and trust preferred securities 50,307  1,579  4.20  72,574  1,912  3.52 
Total Interest-bearing Liabilities 3,401,258  60,249  2.37  3,103,605  9,602  0.41 
Noninterest-bearing Demand 798,803  851,975 
Other Liabilities 50,392  46,960 
Shareholders' Equity 514,903  496,914 
Total Liabilities & Shareholders' Equity $ 4,765,356  $ 4,499,454 
Net Interest Income $ 109,973  $ 109,256 
Taxable Equivalent Adjustment (1) 232  580 
Net Interest Income (taxable-equivalent basis) $ 110,205  $ 109,836 
Total Yield on Earning Assets 5.16  % 3.81  %
Rate on Supporting Liabilities 2.37  0.41 
Average Interest Spread 2.79  3.40 
Net Interest Margin 3.33  3.50 
(1)Presented on a fully taxable-equivalent basis using a 21% federal tax rate and statutory interest expense disallowances.
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The following table summarizes the changes in interest income and interest expense resulting from changes in average balances, volume, and changes in rates for the nine months ended September 30, 2023 in comparison to the same period in 2022:
Nine Months Ended
September 30, 2023 vs. September 30, 2022
(Dollars in thousands) Increase (decrease)
Volume Rate Net
INTEREST INCOME:
Interest Bearing Balances $ (25) $ 214  $ 189 
Investment Securities:
Taxable 1,162  2,282  3,444 
Tax-Exempt 20  35  55 
Total Investment Securities 1,182  2,317  3,499 
Federal Funds Sold (1,748) 107  (1,641)
Loans, Net 20,515  28,472  48,987 
Restricted Investment Bank Stocks 180  150  330 
Total Interest Income 20,104  31,260  51,364 
INTEREST EXPENSE:
Interest Bearing Deposits:
Interest Bearing Demand (165) 8,174  8,009 
Money Market (303) 13,180  12,877 
Savings (17) 50  33 
Time 2,777  22,641  25,418 
Total Interest-Bearing Deposits 2,292  44,045  46,337 
Short-term Borrowings 4,581  —  4,581 
Long-term Debt 201  (139) 62 
Subordinated Debt (586) 253  (333)
Total Interest Expense 6,488  44,159  50,647 
NET INTEREST INCOME $ 13,616  $ (12,899) $ 717 
Net interest income was $110.0 million for the nine months ended September 30, 2023, an increase of $717 thousand, or 0.7%, compared to the same period of September 30, 2022. Mid Penn’s net interest margin for the nine months ended September 30, 2023 was 3.33% compared to 3.50% for the same period of September 30, 2022. The decrease to net interest margin was primarily a result of growth in average interest-earning assets and higher yields on interest-earning assets, more than offset by higher funding costs and growth in average interest-bearing liabilities. The growth in both average interest-earning assets and average interest-bearing liabilities was impacted by the Brunswick Acquisition during the second quarter of 2023. As mentioned above, both interest-earning assets and interest-bearing liabilities associated with the Brunswick Acquisition had substantially similar yields to the corresponding Mid Penn portfolios.
The higher yields and the growth in interest-earning assets contributed $31.3 million and $20.1 million, respectively, to the increase in interest income. The yield on interest-earning assets increased 135 bps to 5.16%, for the nine months ended September 30, 2023 compared to 3.81% for the same period of 2022. Average interest-earning assets increased $239.4 million, or 5.74%, during the nine months ended September 30, 2023 compared to the same period of 2022.
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Average investment securities increased $71.4 million, or 12.81%, and the yield on those investment securities increased 50 bps, contributing $1.2 million and $2.3 million, respectively, to the increase in interest income. Average loans increased $598.9 million, and the yield on those loans increased 100 bps contributing $20.5 million and $28.5 million, respectively, to the increase in interest income.
Interest expense increased $50.6 million during the first nine months of 2023 compared to the same period of 2022. The rate of interest-bearing liabilities increased from 0.41% for the first nine months of 2022 to 2.37% for the first nine months of 2023. The increase in the rate was primarily a result of a shift in the mix of deposits from demand, money market and savings to higher yielding time deposits. The rate on average interest-bearing deposits increased 190 bps contributing $44.0 million to the increase in interest expense during the nine months ended September 30, 2023 compared to the same period in 2022. In addition, average short-term borrowings of $93.2 million were used to help fund loan growth, contributing $4.6 million to interest expense during the nine months ended September 30, 2023 compared to the same period in 2022.
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 $1.4 million for the three months ended September 30, 2023 compared to $1.6 million for the three months ended September 30, 2022. The PCL was $3.1 million for the nine months ended September 30, 2023 compared to $3.8 million for the nine months ended September 30, 2022. The PCL for the nine months ended September 30, 2023 includes an initial provision for credit losses on non-PCD loans acquired in the Brunswick Acquisition of $2.0 million. The provision for both periods ended September 30, 2022 reflect the application of the incurred loss method for estimating credit losses.
Noninterest Income
Noninterest income for the three months ended September 30, 2023 was $5.3 million and $6.0 million for the three months ended September 30, 2022. The following table and explanations that follow provide additional analysis of noninterest income.
Noninterest income and variance analysis:
Three Months Ended September 30,
(Dollars in Thousands) 2023 2022 $ Variance % Variance
Fiduciary and wealth management $ 1,296  $ 1,729  $ (433) (25.0  %)
ATM debit card interchange 986  1,078  (92) (8.5)
Service charges on deposits 509  483  26  5.4 
Mortgage banking 382  536  (154) (28.7)
Mortgage hedging 67  217  (150) (69.1)
Net gain on sales of SBA loans 85  152  (67) (44.1)
Earnings from cash surrender value of life insurance 278  250  28  11.2 
Other 1,743  1,518  225  14.8 
Total $ 5,346  $ 5,963  $ (617) (10.3  %)

Fiduciary and wealth management income declined $433 thousand or 25% during the third quarter of 2023. The decline was due to the timing of trust related activities which are often unpredictable.
Mortgage banking and mortgage hedging income declined significantly for the three months ending September 30, 2023 compared to the three months ending September 30, 2022 due to mortgage volumes. As mortgage rates have risen, demand for mortgages have slowed significantly. As such, it is more difficult to properly hedge lower volumes within the mortgage pipeline.
Other noninterest income increased $225 thousand to $1.7 million from $1.5 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase was primarily due to growth within insurance offerings as a result of an acquisition which occurred at the end of 2022.
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For the nine months ended September 30, 2023, noninterest income totaled $14.9 million, a decrease of $2.1 million or 12.1%, compared to noninterest income of $16.9 million for the same period in 2022.
Nine Months Ended September 30,
(Dollars in Thousands) 2023 2022 $ Variance % Variance
Fiduciary and wealth management $ 3,736  $ 3,986  $ (250) (6.3) %
ATM debit card interchange 3,040  3,263  (223) (6.8)
Service charges on deposits 1,458  1,617  (159) (9.8)
Mortgage banking 1,053  1,370  (317) (23.1)
Mortgage hedging 215  1,321  (1,106) (83.7)
Net gain on sales of SBA loans 213  262  (49) (18.7)
Earnings from cash surrender value of life insurance 824  758  66  8.7 
Other 4,352  4,366  (14) (0.3)
Total $ 14,891  $ 16,943  $ (2,052) (12.1  %)
Mortgage banking and mortgage hedging income decreased $317 thousand and $1.1 million, respectively, for the nine months ended September 30, 2023 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.
Noninterest Expense
For the three months ended September 30, 2023, noninterest expense totaled $29.9 million, an increase of $5.2 million, or 20.9%, compared to noninterest expense of $24.7 million for the same period in 2022. The following table and explanations that follow provide additional analysis of noninterest expense:
Three Months Ended September 30,
(Dollars in Thousands) 2023 2022 $ Variance % Variance
Salaries and employee benefits $ 15,259  $ 13,583  $ 1,676  12.3  %
Software licensing and utilization 2,085  1,804  281  15.6 
Occupancy expense, net 1,761  1,634  127  7.8 
Equipment expense 1,292  1,121  171  15.3 
Shares tax 808  920  (112) (12.2)
Legal and professional fees 890  528  362  68.6 
ATM/card processing 641  518  123  23.7 
Intangible amortization 484  514  (30) (5.8)
FDIC Assessment 1,746  254  1,492  587.4 
Gain on sale of foreclosed assets, net (18) (57) 39  N/M
Merger and acquisition expense 352  —  352  N/M
Post-acquisition restructuring expense —  —  —  N/M
Other expenses 4,589  3,896  693  17.8 
Total Noninterest Expense $ 29,889  $ 24,715  $ 5,174  20.9  %
Salaries and employee benefits were $15.3 million for the three months ended September 30, 2023, an increase of $1.7 million, or 12.3% versus the same period in 2022, with the increase attributable to the addition of staff from the Brunswick Acquisition and severance costs.
Software licensing and utilization costs and equipment expenses increased as a result of the Brunswick Acquisition.
FDIC assessment increased $1.4 million for the third quarter of 2023 compared to the third quarter of 2022 as a result of a lower capital ratios following the Brunswick acquisition leading to a higher assessment rate.
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For the nine months ended September 30, 2023, noninterest expense totaled $91.5 million, an increase of $17.1 million, or 23.0%, compared to noninterest expense of $74.4 million for the same period in 2022. The increase was primarily due to the $8.5 million of expenses incurred to complete the Brunswick Acquisition. The following table and explanations that follow provide additional analysis of noninterest expense:
Noninterest expense and variance analysis:
Nine Months Ended September 30,
(Dollars in Thousands) 2023 2022 $ Variance % Variance
Salaries and employee benefits $ 44,130  $ 39,167  $ 4,963  12.7 
Software licensing and utilization 6,101  5,731  370  6.5 
Occupancy expense, net 5,397  5,088  309  6.1 
Equipment expense 3,791  3,244  547  16.9 
Shares tax 2,458  2,626  (168) (6.4)
Legal and professional fees 2,292  1,861  431  23.2 
ATM/card processing 1,666  1,605  61  3.8 
Intangible amortization 1,289  1,516  (227) (15.0)
FDIC Assessment 2,770  1,351  1,419  105.0 
Gain on sale of foreclosed assets, net (144) (88) (56) N/M
Merger and acquisition expense 5,568  —  5,568  N/M
Post-acquisition restructuring expense 2,952  329  2,623  N/M
Other expenses 13,218  11,945  1,273  10.7 
Total Noninterest Expense $ 91,488  $ 74,375  $ 17,113  23.0  %
Salaries and employee benefits were $44.1 million for the nine months ended September 30, 2023, an increase of $5.0 million, or 12.7%, versus the same period in 2022, with the increase attributable to annual merit increases, staff additions in alignment with Mid Penn’s core banking and non-banking growth initiatives, higher payroll tax limits, increased cost of employee benefits and the addition of staff from the Brunswick Acquisition.
Equipment expense increased $547 thousand, or 16.9%, during the nine months ended September 30, 2023, compared to the same period in 2022. The increase was primarily driven by the Brunswick Acquisition.
Intangible amortization decreased $227 thousand, or 15.0%, during the nine months ended September 30, 2023, compared to the same period in 2022. The decrease is a result of some legacy CDI and customer lists being fully amortized.
FDIC assessment increased $1.4 million for the nine months ending September 30, 2023 compared to the nine months ending September 30, 2022 as a result of a lower capital ratios following the Brunswick acquisition leading to a higher assessment rate.
Income Taxes
The provision for income taxes was $2.3 million for the three months ended September 30, 2023 compared to $3.6 million for the same period in 2022. The provision for income taxes was $5.0 million for the nine months ended September 30, 2023 compared to $9.0 million for the same period in 2022. The decrease in the provision was the result of lower net income before taxes in both periods of 2023 compared to the same periods of 2022. The provision for income taxes for the three and nine months ended September 30, 2023 reflects a combined Federal and State effective tax rate of 19.8% and 16.5%, respectively, compared to 19.0% for both periods in 2022. The decrease in the effective tax rates in 2023 compared to 2022 was a result of recalculating Mid Penn's deferred tax assets as a result of now doing business in New Jersey due to the Brunswick Acquisition and receiving a benefit in state tax expense. 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.
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Financial Condition
Mid Penn’s total assets were $5.2 billion as of September 30, 2023, reflecting an increase of $718.0 million, or 16.0%, compared to total assets of $4.5 billion as of December 31, 2022. The increase was evenly split between the Brunswick Acquisition and organic loan growth.
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 September 30, 2023 were $619.6 million compared to $637.4 million as of December 31, 2022. Mid Penn does not intend to grow the investment portfolio beyond levels necessary to support pledging requirements.

The following table presents the expected maturities of the investment portfolio and the weighted average yields (calculated based on historical cost):
Maturing
(In Thousands) One Year
and Less		 After One Year
thru Five Years		 After Five Years
Thru Ten Years		 After Ten
Years
As of September 30, 2023
 Amount Weighted Average Yield Amount Weighted Average Yield Amount Weighted Average Yield Amount Weighted Average Yield
Available for sale securities, at fair value:
U.S. Treasury and U.S. government agencies $ 6,878  3.31  % $ 24,404  3.36  % $ 3,449  2.84  % $ —  —  %
Mortgage-backed U.S. government agencies —  —  —  —  5,262  2.65  143,382  2.96 
State and political subdivision obligations —  —  —  —  1,564  1.66  1,748  2.51 
Corporate debt securities —  —  11,705  4.68  19,672  4.56  —  — 
$ 6,878  3.31  % $ 36,109  3.79  % $ 29,947  3.87  % $ 145,130  2.96  %
Held to maturity securities, at amortized cost:
U.S. Treasury and U.S. government agencies $ 4,000  4.03  % $ 56,990  2.13  % $ 171,322  2.00  % $ 13,459  2.39  %
Mortgage-backed U.S. government agencies —  —  2,160  1.98  7,920  2.84  35,294  1.84 
State and political subdivision obligations 4,076  2.43  32,687  0.37  27,941  2.16  20,238  2.40 
Corporate debt securities —  —  5,025  3.52  20,449  4.09  —  — 
$ 8,076  3.22  % $ 96,862  1.61  % $ 227,632  2.26  % $ 68,991  2.11  %
Loans, net of unearned interest
Total loans, net of unearned interest, as of September 30, 2023 were $4.1 billion compared to $3.5 billion as of December 31, 2022. The growth of $631.5 million, or 18.0%, since December 31, 2022 was the result of the Brunswick Acquisition and organic loan growth. Organic growth occurred primarily across the commercial and industrial and residential mortgage loan portfolios.
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September 30, 2023 December 31, 2022 Change in Balance
(Dollars in thousands) Balance % of Total Loans Balance % of Total Loans $ %
Commercial real estate (1)
 $ 2,288,396  55.3  % $ 2,052,934  58.3  % $ 235,462  11.5  %
Commercial and industrial
648,439  15.6  596,042  17.0  52,397  8.8 
Construction 462,215  11.1  441,246  12.6  20,969  4.8 
Residential mortgage (1)
 743,533  17.9  416,221  11.9  327,312  78.6 
Consumer 3,074  0.1  7,676  0.2  (4,602) (60.0)
$ 4,145,657  100.0  % $ 3,514,119  100.0  % $ 631,538  18.0  %
(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.
Maturity distribution by contractual maturity date and rate sensitivity information related to the loan portfolio is reflected in
the table below:
(In Thousands)
As of September 30, 2023 One Year
and Less		 One to
Five Years		 Five to
Fifteen Years		 Over
Fifteen Years		 Total
Commercial and industrial $ 11,116  $ 316,563  $ 127,001  $ 193,759  $ 648,439 
Commercial real estate 83,343  544,533  1,540,811  119,709  2,288,396 
Construction 102,713  254,506  83,864  21,132  462,215 
Residential mortgage 34,294  86,806  361,063  261,370  743,533 
Consumer 1,056  373  1,537  108  3,074 
Total loans held in portfolio $ 232,522  $ 1,202,781  $ 2,114,276  $ 596,078  $ 4,145,657 
Predetermined (fixed) interest rates 128,365  740,160  256,599  118,744  $ 1,243,868 
Floating interest rates 104,156  462,621  1,857,677  477,335  $ 2,901,789 
Total 232,521  1,202,781  2,114,276  596,079  4,145,657 

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.
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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 nine months ended September 30, 2022 reflect Mid Penn’s application of the incurred loss method for estimating credit losses.

Changes in the ACL are summarized as follows:
Three Months Ended
September 30, 		Nine Months Ended
September 30,
(Dollars in thousands) 2023 2022 2023 2022
Balance, beginning of period $ 32,588  $ 16,876  $ 18,957  $ 14,597 
Impact of adopting CECL —  —  11,931  — 
Purchase credit deteriorated loans —  —  336  — 
Loans charged off during period (33) (15) (357) (81)
Recoveries of loans previously charged off 22  69  63  189 
Net (charge-offs) recoveries (11) 54  (294) 108 
Provision for credit losses (1)
 1,427  1,550  3,074  3,775 
Balance, end of period $ 34,004  $ 18,480  $ 34,004  $ 18,480 
Ratio of net charge-offs (recoveries) to average loans outstanding (annualized) 0.001  % (0.007) % 0.010  % (0.005) %
Ratio of ACL - loans to net loans at end of period 0.82  % 0.56  % 0.82  % 0.56  %
(1) Includes a $2.0 million initial provision for credit losses on non-PCD loans acquired in the Brunswick Acquisition.

The ratio of allowance for credit losses to total loans was 0.82% at September 30, 2023 compared to 0.56% at September 30, 2022. The allowance at September 30, 2022 reflects Mid Penn’s application of the incurred loss method for estimating credit losses.
The following table presents the change in nonperforming asset categories as of September 30, 2023, December 31, 2022, and September 30, 2022.
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(Dollars in thousands) September 30, 2023 December 31, 2022 September 30, 2022
Non-performing Assets:
Total non-performing loans $ 13,458  $ 8,585  $ 7,629 
Foreclosed real estate 905  43  49 
Total non-performing assets 14,363  8,628  7,678 
Accruing loans 90 days or more past due 12  654  633 
Total risk elements $ 14,375  $ 9,282  $ 8,311 
Non-performing loans as a percentage of total loans outstanding 0.32  % 0.24  % 0.23  %
Non-performing assets as a percentage of total loans outstanding and foreclosed real estate 0.35  % 0.25  % 0.23  %
Ratio of ACL to non-performing loans 252.67  % 220.82  % 242.23  %
Total nonperforming assets were $14.4 million at September 30, 2023, an increase compared to nonperforming assets of $8.6 million at December 31, 2022. The increase since December 31, 2022 was primarily the result of the addition of $3.9 million of non-accrual loans from the Brunswick Acquisition. In addition, one relationship moved to non-accrual during the first quarter of 2023 and is collateralized in excess of the outstanding loan balances based on a current appraisal of the collateral.

Goodwill

Mid Penn evaluates goodwill annually for impairment unless events occur which indicate that impairment is possible, a triggering event. In response to bank failures during the late first and early second quarters of 2023, Management performed a Step 1 Goodwill analysis as of May 31, 2023, given that the decline in the price of Mid Penn's stock below its book value following these events was deemed a triggering event. At September 30, 2023, Mid Penn had goodwill of $130.0 million and Mid Penn's stock continues to trade below book value. Management has not noted any factors either internally or externally which would indicate that a triggering event has occurred during the third quarter of 2023 warranting an additional impairment test. Factors considered include actual earnings in relation to forecasted earnings, liquidity levels, changes in deposit balances, and credit quality, among others. Management will continue to monitor internal metrics and macroeconomic trends to determine if there is likelihood of Goodwill impairment. Additionally, our annual impairment test will be conducted as of October 31, 2023.
Deposits, Borrowings and Subordinated Debt
Total deposits increased $603.3 million, or 16.0%, from $3.8 billion on December 31, 2022, to $4.4 billion at September 30, 2023. The Brunswick Acquisition contributed $282.6 million to the deposit growth. The remaining growth was primarily due to an increase of $553.2 million, or 84.0%, in time deposits as the result of rate increases, partially offset by decreases in interest-bearing transaction accounts.

Total short-term borrowings increased $36.4 million, or 35.4%, from December 31, 2022 in order to fund loan growth. Total long-term borrowings were $59.0 million at September 30, 2023, an increase of $54.6 million from December 31, 2022, of which $30.0 million was a result of the Brunswick Acquisition and $25.0 million was an additional borrowing entered into by Mid Penn. In April of 2023, Mid Penn redeemed its $10.0 million subordinated debt issued in December of 2017. See "Note 10 - Subordinated Debt and Trust Preferred Securities" included in Part I. Item 1. – Financial Statements of this report.
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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 nine months ended September 30, 2023 provided $36.4 million of cash, mainly due to net income. Cash used in investing activities during the nine months ended September 30, 2023 was $306.5 million, mainly the result of the net increase in loans. Cash provided by financing activities during the nine months ended September 30, 2023 totaled $327.4 million, primarily the result of an increase in net deposits. The net cash received from the Brunswick Acquisition totaled $1.1 million.
Regulatory Capital
Mid Penn 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 Mid Penn'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 Mid Penn 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.
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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 September 30, 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:
September 30, 2023 December 31, 2022 Regulatory Minimum for Capital Adequacy Fully Phased-In, with Capital Conversation Buffers
Tier I Leverage Capital (to Average Assets) 8.37  % 9.57  % 4.00  % 4.00  %
Common Equity Tier I (to Risk-Weighted Assets) 9.74  11.18  7.00  7.00 
Tier I Risk-Based Capital (to Risk-Weighted Assets) 9.74  11.18  8.50  8.50 
Total Risk-Based Capital (to Risk-Weighted Assets) 11.70  13.19  10.50  10.50 
As of September 30, 2023 and December 31, 2022, Mid Penn 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 increased by $16.6 million, or 3.2%, from $512.1 million as of December 31, 2022 to $528.7 million as of September 30, 2023, primarily due to the $18.1 million in common stock issued to Brunswick shareholders, earnings of $25.3 million, partially offset by the $11.5 million reduction to retained earnings as a result of the adoption of CECL on January 1, 2023, stock repurchases of $4.6 million and dividends declared of $9.7 million.


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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 200 bps. A reduction in rates greater than 200 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 September 30, 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 2.10% ≥ -25%
300 1.70% ≥ -20%
200 1.10% ≥ -15%
100 0.60% ≥ -10%
(100) -0.20% ≥ -10%
(200) -0.70% ≥ -15%
(300) (1.90)% ≥ -20%
(400) (5.10)% ≥ -25%
ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Mid Penn maintains controls and procedures designed to ensure that information required to be disclosed in the reports that 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 September 30, 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.
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Changes in Internal Controls
During the first quarter of 2023, Mid Penn 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 nine months ended September 30, 2023.
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PART II – OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
Based on information currently available, management is not aware of any litigation that would reasonably be expected to have a material adverse effect on the consolidated financial position of Mid Penn or its subsidiaries taken as a whole. There are no proceedings pending other than ordinary routine litigation occurring in the normal course of business. In addition, management does not know of any material proceedings contemplated by governmental authorities against Mid Penn or any of its properties.
ITEM 1A – RISK FACTORS
Management has reviewed the risk factors that were previously disclosed in the 2022 Annual Report and subsequent reports filed with the SEC, to determine if there were material changes applicable to the nine months ended September 30, 2023. There have been no material changes to such risk factors.


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ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(1)None.
(2)None.

Mid Penn adopted a treasury stock repurchase program ("Program") initially effective March 19, 2020, and renewed through May 11, 2024 by Mid Penn’s Board of Directors on May 11, 2023. The Program authorizes the repurchase of up to $15.0 million of Mid Penn’s outstanding common stock. Under the Program, Mid Penn conducts repurchases of its common stock through open market transactions (which may be by means of a trading plan adopted under SEC Rule 10b5-1) or in privately negotiated transactions. Repurchases under the Program are made at the discretion of management and are subject to market conditions and other factors. There is no guarantee as to the exact number of shares that Mid Penn may repurchase. The Program is able to be modified, suspended or terminated at any time, at Mid Penn’s discretion, based upon a number of factors, including liquidity, market conditions, the availability of alternative investment opportunities and other factors Mid Penn deems appropriate. The Program does not obligate Mid Penn to repurchase any shares. During the three months ended September 30, 2023, Mid Penn did not repurchase any shares of common stock.
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ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 – MINE SAFETY DISCLOSURES
Not Applicable
ITEM 5 – OTHER INFORMATION
None
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ITEM 6 – EXHIBITS
•Exhibit 3.1 – The Registrant’s Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to Registrant's Quarterly Report on form 10-Q with the SEC on May 9, 2023.)
•Exhibit 3.2 – The Registrant’s By-laws. (Incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed with the SEC on February 24, 2022.)
•Exhibit 31.1 – Certification of Principal Executive Officer Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley Act of 2002.
•Exhibit 31.2 - Certification of Principal Financial Officer Pursuant to Exchange Act Rules 13a-14(a)/15d-14(a) as added by Section 302 of the Sarbanes-Oxley Act of 2002.
•Exhibit 32 – Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as added by Section 906 of the Sarbanes-Oxley Act of 2002.
•Exhibit 101.SCH – Inline XBRL Taxonomy Extension Schema Document.
•Exhibit 101.CAL – Inline XBRL Taxonomy Extension Calculation Linkbase Document.
•Exhibit 101.DEF – Inline XBRL Taxonomy Extension Definition Linkbase Document.
•Exhibit 101.LAB – Inline XBRL Taxonomy Extension Label Linkbase Document.
•Exhibit 101.PRE – Inline XBRL Taxonomy Extension Presentation Linkbase Document.
•Exhibit 104 – Cover Page Interactive Data File (formatted in inline XBRL and contained in Exhibit 101).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Mid Penn Bancorp, Inc.
(Registrant)
By: /s/ Rory G. Ritrievi
Rory G. Ritrievi
President and CEO
(Principal Executive Officer)
Date:
November 9, 2023
By: /s/ Allison S. Johnson
Allison S. Johnson
Chief Financial Officer
(Principal Financial Officer)
Date:
November 9, 2023
63
EX-31.1 2 mpb-20230930xexx311xq.htm EX-31.1 Document

EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO EXCHANGE ACT RULES
13A-14(A)/15D-14(A) AS ADDED BY SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Rory G. Ritrievi, certify that:
1.I have reviewed this report on Form 10-Q of Mid Penn Bancorp, Inc.
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)Significant deficiencies and material weaknesses, if any, in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
By: /s/ Rory G. Ritrievi
Rory G. Ritrievi
President and CEO
Date:
November 9, 2023

EX-31.2 3 mpb-20230930xexx312xq.htm EX-31.2 Document

EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO EXCHANGE ACT RULES
13A-14(A)/15D-14(A) AS ADDED BY SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
I, Allison S. Johnson, certify that:
1.I have reviewed this report on Form 10-Q of Mid Penn Bancorp, Inc.
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and
(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a)Significant deficiencies and material weaknesses, if any, in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
By: /s/ Allison S. Johnson
Allison S. Johnson
Chief Financial Officer
Date:
November 9, 2023

EX-32 4 mpb-20230930xexx32xq.htm EX-32 Document

EXHIBIT 32
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADDED BY SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Mid Penn Bancorp, Inc. (the “Corporation”) on Form 10-Q for the period ending September 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rory G. Ritrievi, President and CEO, and I, Allison S. Johnson, Chief Financial Officer, certify, pursuant to 18 U.S.C. Section 1350, as added pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.
2.To my knowledge, the information contained in the Report fairly presents, in all material respects the financial condition and results of operations of Mid Penn Bancorp, Inc. as of the dates and for the periods expressed in the Report.
By: /s/ Rory G. Ritrievi
Rory G. Ritrievi
President and CEO
Date:
November 9, 2023
By: /s/ Allison S. Johnson
Allison S. Johnson
Chief Financial Officer
Date:
November 9, 2023