Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document or 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 within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, or Exchange Act. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections and statements of our beliefs concerning future events, business plans, objectives, and expected operating results, including after giving effect to the Merger, and the assumptions upon which those statements are based. Forward looking statements include without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” or words or phrases of similar meaning. We caution that the forward-looking statements are based largely on our expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond our control. Actual results, performance or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements.
The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements:
• Mid Penn’s ability to efficiently integrate acquisitions, including the Merger, into its business and operations, which may take longer than anticipated, may be more costly than anticipated and may have unanticipated adverse results relating to Mid Penn’s existing business and operations;
• the possibility that the anticipated benefits of the Merger, including anticipated cost savings and other synergies of the Merger may take longer to be realized or may not be achieved in their entirety, and attrition in key client, partner and other relationships relating to the Merger may be greater than expected;
• the effects of future economic conditions on Mid Penn, the Bank, our nonbank subsidiaries, and our 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 our 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 the Bank’s capital stock is currently subject, or imposition of any additional taxes on the capital stock of Mid Penn or the 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 regulatory agencies, as well as the Public Company Accounting Oversight Board, Financial Accounting Standards Board, the SEC, and other accounting and reporting rule making authorities;
• the costs and effects of litigation and of unexpected or adverse outcomes in such litigation, including litigation related to the Merger;
• changes in technology;
• our ability to implement business strategies, including our acquisition strategy;
• our ability to successfully expand our franchise, including through acquisitions or establishing new offices at favorable prices;
• our ability to successfully integrate any banks, companies, offices, assets, liabilities, customers, systems and management personnel we acquire into our operations and our ability to realize related revenue synergies and cost savings within expected time frames;
• potential goodwill impairment charges, or future impairment charges and fluctuations in the fair values of reporting units or of assets in the event projected financial results are not achieved within expected time frames;
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MID PENN BANCORP, INC. Management’s Discussion and Analysis
• our ability to attract and retain qualified management and personnel;
• results of regulatory examination and supervision processes;
• the ability to obtain regulatory approvals and satisfy other closing conditions to the Merger, including approval by the shareholders of Mid Penn and William Penn;
• the possibility of increased scrutiny by, and/or additional regulatory requirements of, governmental authorities as a result of the Merger;
• potential exposure to unknown or contingent risks and liabilities we have acquired, or may acquire, or target for acquisition, including in connection with the Merger;
• the failure of assumptions underlying the establishment of reserves for loan and lease 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 The NASDAQ Stock Market;
• 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 risk factors described in Item 1A of this Annual Report.
All written or oral forward-looking statements attributable to Mid Penn are expressly qualified in their entirety by these cautionary factors.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of Mid Penn’s Consolidated Financial Statements from the view of management and should be read in conjunction with the Consolidated Financial Statements of the Corporation and Notes thereto and other detailed information appearing elsewhere in this Annual Report on Form 10-K. The comparability of the results of operations for the years ended 2024 and 2023, compared to 2022, in general, have been materially impacted by the Brunswick Acquisition, which closed on May 19, 2023.
Mid Penn is not aware of any current trends, events, uncertainties or any current recommendations by the regulatory authorities which, if they were to be implemented, would have a material effect on Mid Penn’s or the Bank’s liquidity, capital resources, or operations.
Executive Overview
Mid Penn is a financial holding company incorporated in August 1991 in the Commonwealth of Pennsylvania.
Mid Penn 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 fully taxable-equivalent basis ("FTE") net interest income as a percentage of average interest-earning assets. The Corporation also generates revenue through fees earned on the various services and products offered to its customers and through gains on sales of assets, such as loans, investments and properties. Offsetting these revenue sources are provisions for credit losses, non-interest expenses and income taxes.
36
MID PENN BANCORP, INC. Management’s Discussion and Analysis
The following table presents a summary of the Corporation's earnings and selected performance ratios:
December 31,
2024 2023 2022
Net Income $ 49,437 $ 37,397 $ 54,806
Diluted EPS $ 2.90 $ 2.29 $ 3.44
Dividends Declared $ 0.80 $ 0.80 $ 0.80
Return on average assets (2)
0.91 % 0.77 % 1.22 %
Return on average equity (2)
8.61 % 7.16 % 10.98 %
Net interest margin (1)
3.11 % 3.26 % 3.59 %
Non-performing assets to total assets 0.41 % 0.27 % 0.21 %
Net charge-off to average loans 0.019 % 0.009 % (0.002) %
(1) Presented on a FTE basis using a 21% Federal tax rate and statutory interest expense disallowances. See also the "Net Interest Income" section.
(2) Annualized ratios
During the second quarter of 2023, Mid Penn completed the Brunswick Acquisition, which added total assets of $390.7 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.
Summary of Financial Results
• Net Income Per Share - Mid Penn’s net income available to common shareholders ("earnings") for the year ended December 31, 2024 was $49.4 million or $2.90 per common share basic and diluted, compared to earnings of $37.4 million or $2.29 per common share basic and diluted for the year ended December 31, 2023. The results for the year ended December 31, 2024 were favorably impacted by loan growth, and interest income growth.
• Net Interest Income
◦ Net Interest Margin - For the year ended December 31, 2024, Mid Penn’s FTE net interest margin was 3.11% versus 3.26% for the year ended December 31, 2023. The Federal Reserve’s Federal Open Market Committee ("FOMC") decreased rates three times during 2024. The yield on interest-earning assets increased 44 basis point(s) ("bp") for the year ended December 31, 2024 compared to the year ended December 31, 2023 and the rate on interest-bearing liabilities increased 70 bp for the year ended December 31, 2024 compared to the year ended December 31, 2023.
◦ Loan Growth - Total loans, net of unearned income, as of December 31, 2024 were $4.4 billion compared to $4.3 billion as of December 31, 2023 , an increase of $190.3 million, or 4.5%. The loan growth occurred primarily within Mid Penn’s commercial real estate loan portfolio. The mix of commercial real estate and commercial portfolios in relation to the total change in the loan portfolio increased 111.1% and 15.9%, respectively from December 31, 2023 to December 31, 2024. Non-owner occupied office commercial real estate exposure represents 28.2% of total loan balances and is primarily limited to suburban offices.
◦ Deposit Growth - Total deposits increased $343.7 million, or 7.9%, from $4.3 billion at December 31, 2023, to $4.7 billion at December 31, 2024.
• Asset Quality - ACL at December 31, 2024 was $35.5 million, or 0.80% of total loans, as compared to $34.2 million, or 0.80% of total loans at December 31, 2023.
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MID PENN BANCORP, INC. Management’s Discussion and Analysis
◦ Net Charge-offs/Recoveries - Mid Penn had net loan charge-offs of $817 thousand and net loan charge-offs of $332 thousand for the years ended December 31, 2024 and 2023, respectively.
◦ Non-performing assets - Total non-performing assets were $22.7 million at December 31, 2024, an increase compared to non-performing assets of $14.5 million at December 31, 2023. The increase was partially a result of the addition of two commercial loans with a combined balance of $3.0 million, and two commercial real estate loans with a combined balance of $2.3 million being placed on nonaccrual in the fourth quarter of 2024.
◦ Provision/Benefit for credit losses - Loans - The provision for credit losses - loans was $2.1 million for the year ended December 31, 2024 compared to $3.3 million for the year ended December 31, 2023. The decrease in provision for the year ended December 31, 2024, is primarily due to a decrease in loss factors across most portfolios. Prior to 2023, ACL and related provision are presented in accordance with the previous accounting guidance using the incurred loss method. The PCL for the year ended December 31, 2023 includes an initial provision for credit losses on non-PCD loans acquired in the Brunswick Acquisition of $2.0 million.
• Noninterest Income - Noninterest income totaled $22.5 million for the year ended December 31, 2024, a $2.5 million, or 12.4%, increase compared to the year ended December 31, 2023. The increase was primarily attributable to a $2.2 million increase in other miscellaneous income, driven by increases in Bank-owned life insurance benefits received, and a $1.1 million increase in mortgage banking income, partially offset by a $379 thousand decrease in fiduciary and wealth management and a $314 thousand decrease in mortgage hedging.
• Noninterest Expense - Noninterest expense totaled $117.6 million, a decrease of $972 thousand, or 0.8%, compared to noninterest expense of $118.6 million for the year ended December 31, 2023. The decrease was primarily driven by a $5.0 million decrease in merger and acquisition expenses and a $3.0 million decrease in post-acquisition restructuring expenses, partially offset by a $4.8 million increase in salaries and benefits expense, driven by year-end employee bonus incentives, increases in employee salaries, and increased costs of employee medical benefits, a $1.4 million increase in legal and professional fees, and a $1.4 million increase in software licensing and utilization expense.
• Borrowings paid downs - During 2024, Mid Penn paid off $35.3 million of long-term debt.
• Share Repurchases - Mid Penn repurchased 15,500 shares during 2024 at an average price per share of $20.81 under its share repurchase program.
• Business Combinations
◦ On July 31, 2024, Mid Penn acquired the insurance business and related accounts of a full-service employee benefits firm that serves mid to large employers across central and eastern Pennsylvania, northern Maryland, and northern Virginia, for a purchase price of $2.0 million at closing and an additional $800 thousand potentially payable pursuant to a three year earnout.
◦ 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.
Critical Accounting Estimates
Mid Penn’s Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and conform to general practices within the banking industry. Application of certain principles involves significant judgments and estimates by management that have a material impact on the carrying value of certain assets and liabilities. The judgments and estimates used in applying these principles are based on historical experiences and
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MID PENN BANCORP, INC. Management’s Discussion and Analysis
other factors which are believed to be reasonable under the circumstances. Because of the nature of the judgments and estimates that have been made, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the reported results of operations.
Management of the Corporation considers the accounting judgments relating to the allowance for credit losses and goodwill impairment to be the accounting area that requires the most subjective and complex judgments.
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 18 - 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.
The allowance for credit losses - Loans was $35.5 million as of December 31, 2024, an increase of $1.3 million, or 3.9%, compared to $34.2 million as of December 31, 2023. The increase was primarily the result of an increase in the reserve for individually analyzed loans during the fourth quarter of 2024.
Goodwill
Mid Penn evaluates goodwill annually for impairment unless events occur which indicate that impairment is possible, a triggering event. At December 31, 2024, Mid Penn had goodwill of $128.2 million and Mid Penn's stock continues to trade below book value.
Our annual impairment test was conducted during the fourth quarter of 2024. Goodwill is calculated as a purchase premium using the market participant and peer group control premium approach. Additional factors considered include actual earnings in relation to forecasted earnings, liquidity levels, changes in deposit balances, and credit quality, among
39
MID PENN BANCORP, INC. Management’s Discussion and Analysis
others. No goodwill impairment has been recorded for 2024. Management will continue to monitor internal metrics and macroeconomic trends to determine if there is likelihood of goodwill impairment.
Refer to Note 1 - Summary of Significant Accounting Policies and Note 6 - Goodwill and Intangible Assets for further details on the Company's goodwill.
Results of Operations
Net Interest Income
Net interest income, Mid Penn's primary source of earnings, represents the difference between interest income received on loans, investments, and overnight funds, and interest expense paid on deposits and short- and long-term borrowings. Net interest income is affected by changes in interest rates and changes in average balances (volume) in the various interest-sensitive assets and liabilities. Interest and average rates in the table below are presented on a fully taxable-equivalent basis ("FTE"). Tax-equivalent adjustments were calculated using a statutory corporate tax rate of 21% for the years ended December 31, 2024, 2023 and 2022. For purposes of calculating loan yields, average loan balances include non-accrual loans. Loan fees of $4.8 million, $4.6 million and $8.4 million are included with loan interest income in the following table for the years ended December 31, 2024, 2023, and 2022, respectively.
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MID PENN BANCORP, INC. Management’s Discussion and Analysis
The following table includes average balances, effective interest differential and interest yields for the years ended December 31:
Average Balances, Income and Interest Rates
2024 2023 2022
(Dollars in thousands) Average Balance Interest Yield/
Rate Average Balance Interest Yield/
Rate Average Balance Interest Yield/
Rate
ASSETS:
Interest Bearing Balances $ 30,576 $ 1,127 3.69 % $ 24,270 $ 361 1.49 % $ 26,633 $ 69 0.26 %
Investment Securities:
Taxable 543,157 15,254 2.81 544,896 15,141 2.78 500,156 11,663 2.33
Tax-Exempt 73,834 1,464 1.98 78,163 1,540 2.49 78,039 1,497 2.43
Total Investment Securities 616,991 16,718 2.71 623,059 16,681 2.68 578,195 13,160 2.34
Federal Funds Sold 36,436 1,928 5.29 7,161 373 5.21 311,989 1,826 0.59
Loans, net of unearned income 4,373,922 265,522 6.07 3,868,307 218,060 5.65 3,217,282 150,256 4.68
Restricted Investment in Bank Stocks 14,155 1,288 9.10 11,121 864 7.77 6,045 289 4.78
Total Interest-earning Assets 5,072,080 286,583 5.65 4,533,918 236,339 5.21 4,140,144 165,600 4.02
Cash and Due from Banks 39,995 49,503 63,608
Other Assets 300,904 299,666 272,422
Total Assets $ 5,412,979 $ 4,883,087 $ 4,476,174
LIABILITIES & SHAREHOLDERS' EQUITY:
Interest-bearing Demand $ 1,001,813 $ 19,001 1.90 % $ 950,326 $ 13,893 1.46 % $ 1,051,605 $ 3,847 0.37 %
Money Market 913,311 26,580 2.91 926,034 21,424 2.31 1,040,762 5,277 0.51
Savings 275,692 244 0.09 312,053 230 0.07 355,229 193 0.05
Time 1,541,654 70,495 4.57 1,116,552 43,749 3.92 524,944 4,827 0.92
Total Interest-bearing Deposits 3,732,470 116,320 3.12 3,304,965 79,296 2.40 2,972,540 14,144 0.48
Short-term borrowings 190,885 10,575 5.54 107,323 7,087 6.60 11,914 441 3.70
Long-term debt 27,937 1,321 4.73 45,304 975 2.15 23,344 352 1.51
Subordinated debt and trust preferred securities 46,045 1,696 3.68 49,328 2,008 4.07 70,583 2,830 4.01
Total Interest-bearing Liabilities 3,997,337 129,912 3.25 3,506,920 89,366 2.55 3,078,381 17,767 0.58
Noninterest-bearing Demand 780,538 800,582 848,991
Other Liabilities 62,820 53,530 49,864
Shareholders' Equity 572,284 522,055 498,938
Total Liabilities & Shareholders' Equity $ 5,412,979 $ 4,883,087 $ 4,476,174
Net Interest Income $ 156,671 $ 146,973 $ 147,833
Taxable Equivalent Adjustment (1)
1,018 811 778
Net Interest Income (taxable-equivalent basis) $ 157,689 $ 147,784 $ 148,611
Total Yield on Earning Assets 5.65 % 5.21 % 4.02 %
Rate on Supporting Liabilities 3.25 2.55 0.58
Average Interest Spread 2.40 2.66 3.44
Net Interest Margin (1)
3.11 3.26 3.59
(1) Presented on a fully taxable-equivalent basis using a 21% federal tax rate and statutory interest expense disallowances.
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MID PENN BANCORP, INC. Management’s Discussion and Analysis
The volume analysis of changes in net interest income as of December 31 are as follows:
Years Ended
December 31, 2024 vs. December 31, 2023 Years ended
December 31, 2023 vs. December 31, 2022
Increase (decrease) Increase (decrease)
(Dollars in thousands) Volume Rate Net Volume Rate Net
INTEREST INCOME:
Interest Bearing Balances $ 94 $ 672 $ 766 $ (6) $ 298 $ 292
Investment Securities:
Taxable (48) 161 113 1,042 2,436 3,478
Tax-Exempt (108) 32 (76) 3 40 43
Total Investment Securities (156) 193 37 1,045 2,476 3,521
Federal Funds Sold 1,525 30 1,555 (1,798) 345 (1,453)
Loans, net of unearned income 28,567 18,895 47,462 30,468 37,336 67,804
Restricted Investment Bank Stocks 236 188 424 243 332 575
Total Interest Income 30,266 19,978 50,244 29,952 40,787 70,739
INTEREST EXPENSE:
Interest Bearing Deposits:
Interest Bearing Demand 752 4,356 5,108 (375) 10,421 10,046
Money Market (294) 5,450 5,156 (585) 16,732 16,147
Savings (25) 39 14 (22) 59 37
Time 16,664 10,082 26,746 5,443 33,479 38,922
Total Interest-Bearing Deposits 17,097 19,927 37,024 4,461 60,691 65,152
Short-term Borrowings 4,629 (1,141) 3,488 6,300 346 6,646
Long-term Debt (373) 719 346 332 291 623
Subordinated Debt (134) (178) (312) (852) 30 (822)
Total Interest Expense 21,219 19,327 40,546 10,241 61,358 71,599
NET INTEREST INCOME $ 9,047 $ 651 $ 9,698 $ 19,711 $ (20,571) $ (860)
(1) The effect of changing volume and rate, which cannot be segregated, has been allocated entirely to the rate column. Tax-exempt income is shown on a tax equivalent basis using a statutory corporate tax rate of 21% for the years ended December 31, 2024, 2023 and 2022.
For the year ended December 31, 2024, Mid Penn’s FTE net interest margin was 3.11% versus 3.26% for the year ended December 31, 2023 and 3.59% for the year ended December 31, 2022. During 2024, FTE net interest income increased $9.7 million, or 6.6%, compared to 2023. Interest income increased $30.3 million as the result of a $538.2 million, or 11.9%, increase in average interest-earning assets in 2024 compared to 2023, and increased $20.0 million as the result of a 44 bp increase in the yield on interest-earning assets in 2024 compared to 2023. 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.
Average total loans, net, increased $505.6 million , or 13.1%, contributing $28.6 million to the increase in interest income. The yield on average total loans, net, increased from 5.65% for 2023 to 6.07% for 2024. The increase in the yield was primarily the result of the higher interest rate environment during 2024.
Total average federal funds sold increased $29.3 million , contributing $1.5 million to the increase in FTE interest income, and the average yield on federal funds sold increased 8 bps, contributing $30 thousand to the increase in FTE interest income.
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MID PENN BANCORP, INC. Management’s Discussion and Analysis
Interest expense for 2024 increased by $40.5 million or 45.4% when compared to 2023. The cost of interest-bearing liabilities increased to 3.25% in 2024 from 2.55% in 2023 and 0.58% in 2022. The rate on total interest-bearing deposits increased to 3.12% in 2024 from 2.40% in 2023 and 0.48% in 2022. The increase in the rate was primarily a result of deposit growth and a shift in the mix of deposits from noninterest-bearing to higher yielding demand, money market and time deposits. Mid Penn continued to offer higher rates to both retain and attract deposits. In addition, average short-term borrowings of $190.9 million were used to help fund loan growth, contributing to the $3.5 million increase in interest expense on short-term borrowings for the year ended December 31, 2024 as compared to 2023.
Although the effective interest rate impact on interest-earning assets and funding sources can be reasonably estimated at current interest rate levels, the interest-bearing product and pricing options selected by customers, and the future mix of the loan, investment, and deposit products in the Bank's portfolios, may significantly change the estimates used in Mid Penn’s asset and liability management and related interest rate risk simulation models. In addition, our net interest income may be impacted by further interest rate actions of the Federal Reserve’s FOMC.
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MID PENN BANCORP, INC. Management’s Discussion and Analysis
Provision for Credit Losses - Loans
The provision for credit losses on loans was $2.1 million for the year ended December 31, 2024, a decrease of $1.2 million or 34.9% compared to a provision for credit losses of $3.3 million for the year ended December 31, 2023. The provision for credit losses on loans for the year ended December 31, 2023 decreased $1.0 million, or 23.4%, from the $4.3 million provision for credit losses on loans for the year ended December 31, 2022. The decrease in provision for the year ended December 31, 2024 was primarily due to a decrease in loss factors across most portfolios. The benefit for credit losses on off-balance sheet credit exposures was $628 thousand for the year ended December 31, 2024, compared to a provision of $404 thousand or the year ended December 31, 2023. Prior to 2023, ACL and related provision are presented in accordance with the previous accounting guidance using the incurred loss method.
For the year ended December 31, 2024, Mid Penn had net charge-offs of $817 thousand compared to net charge-offs of $332 thousand for the year ended December 31, 2023, and net recoveries of $60 thousand for the year ended December 31, 2022 . A summary of charge-offs and recoveries of loans and the provision for loan losses is shown in the table below.
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MID PENN BANCORP, INC. Management’s Discussion and Analysis
The following table represents the analysis of the allowance for credit losses:
Years ended December 31,
(In Thousands) 2024 2023 2022
Balance, beginning of year $ 34,187 $ 18,957 $ 14,597
Loans charged off:
Commercial real estate
CRE Nonowner Occupied — — 7
CRE Owner Occupied — 16 —
Total Commercial real estate — 16 7
Commercial and industrial 819 238 1
Residential mortgage
1-4 Family 1st Lien 7 13 25
1-4 Family Rental 2 — —
HELOC and Junior Liens 21 — 1
Total residential mortgage 30 13 26
Consumer 52 135 97
Total loans charged off 901 402 131
Recoveries on loans previously charged off:
Commercial real estate
CRE Nonowner Occupied 2 — —
CRE Owner Occupied 4 — 128
Total commercial real estate 6 — 128
Commercial and industrial 1 — 13
Construction
Other Construction — — 24
Total construction — — 24
Residential mortgage
1-4 Family 1st Lien 16 7 2
1-4 Family Rental 22 31 —
HELOC and Junior Liens — — 2
Total residential mortgage 38 38 4
Consumer 39 32 22
Total loans recovered 84 70 191
Net charge-offs (recoveries) 817 332 (60)
Provision for loan losses 2,144 3,295 4,300
Impact from the adoption of CECL — 11,931 —
Purchase Credit Deteriorated loans — 336 —
Balance, end of year $ 35,514 $ 34,187 $ 18,957
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MID PENN BANCORP, INC. Management’s Discussion and Analysis
The following table represents the ratio of net charge-offs (recoveries) to total average loans outstanding:
(In thousands)
As of December 31, 2024 Net charge-offs (Recoveries) Average Loans outstanding Ratio of net charge-offs (recoveries) to total average loans outstanding
Commercial real estate
CRE Nonowner Occupied $ (2) $ 1,204,473 0.000 %
CRE Owner Occupied (4) 624,542 (0.001)
Multifamily — 384,374 0.000
Farmland — 217,667 0.000
Total Commercial Real Estate (6) 2,431,056 0.000
Commercial and industrial
818 695,730 0.118
Construction
Residential Construction — 101,234 0.000
Other Construction — 349,481 0.000
Total Construction — 450,715 0.000
Residential mortgage
1-4 Family 1st Lien (9) 323,524 (0.003)
1-4 Family Rental (20) 344,261 (0.006)
HELOC and Junior Liens 21 136,634 0.015
Total Residential Mortgage (8) 804,419 (0.001)
Consumer 13 7,276 0.179
Total Loans $ 817 $ 4,389,196 0.019 %
As of December 31, 2023
Commercial real estate
CRE Nonowner Occupied $ — $ 1,111,413 0.000 %
CRE Owner Occupied 16 586,357 0.003
Multifamily — 261,289 0.000
Farmland — 199,452 0.000
Total Commercial Real Estate 16 2,158,511 0.001
Commercial and industrial
238 641,264 0.037
Construction
Residential Construction — 100,851 0.000
Other Construction — 378,962 0.000
Total Construction — 479,813 0.000
Residential mortgage
1-4 Family 1st Lien 6 342,485 0.002
1-4 Family Rental (31) 253,606 (0.012)
HELOC and Junior Liens — 128,912 0.000
Total Residential Mortgage (25) 725,003 (0.003)
Consumer 103 6,486 1.588
Total Loans $ 332 $ 4,011,077 0.008 %
46
MID PENN BANCORP, INC. Management’s Discussion and Analysis
As of December 31, 2022
Commercial real estate
CRE Nonowner Occupied $ 7 $ 961,766 0.001 %
CRE Owner Occupied (128) 479,599 (0.027)
Multifamily — 188,040 0.000
Farmland — 158,844 0.000
Total Commercial Real Estate (121) 1,788,249 (0.007)
Commercial and industrial
(12) 572,291 (0.002)
Construction
Residential Construction — 59,170 0.000
Other Construction (24) 340,751 (0.007)
Total Construction (24) 399,921 (0.006)
Residential mortgage
1-4 Family 1st Lien 23 285,331 0.008
1-4 Family Rental — 114,992 0.000
HELOC and Junior Liens (1) 114,610 (0.001)
Total Residential Mortgage 22 514,933 0.004
Consumer 75 9,141 0.821
Total Loans $ (60) $ 3,284,535 (0.002) %
Noninterest Income
Noninterest income and variance analysis as of December 31:
Years Ended December 31,
(Dollars in thousands) 2024 2023 2022 $ Variance 2024 vs. 2023 % Variance 2024 vs. 2023
Income from fiduciary and wealth management activities $ 4,680 $ 5,059 $ 5,071 $ (379) (7.5) %
ATM debit card interchange income 3,851 4,019 4,362 (168) (4.2)
Service charges on deposits 2,176 1,943 2,078 233 12.0
Mortgage banking income 2,476 1,353 1,607 1,123 83.0
Mortgage hedging income 10 324 1,471 (314) (96.9)
Net gain on sales of SBA loans 347 571 262 (224) (39.2)
Earnings from cash surrender value of life insurance 1,141 1,112 1,013 29 2.6
Other income 7,812 5,627 7,793 2,185 38.8
Total Noninterest Income $ 22,493 $ 20,008 $ 23,657 $ 2,485 12.4 %
For the year ended December 31, 2024, noninterest income totaled $22.5 million, an increase of $2.5 million or 12.4%, compared to noninterest income of $20.0 million for the year ended December 31, 2023. Income from mortgage banking, service charges on deposits, earnings from cash surrender value of life insurance, and other income all increased compared to the prior year.
Mortgage banking income increase d $1.1 million for the year ended December 31, 2024 compared to the year ended December 31, 2023 . Mortgage loan originations and secondary-market loan sales and gains increased during 2024 as a result of decreases in interest rates. Mortgage hedging income was $10 thousand for the year ended December 31, 2024 compared to $324 thousand for the same period in 2023.
47
MID PENN BANCORP, INC. Management’s Discussion and Analysis
Other income increased $2.2 million for the year ended December 31, 2024 compared to the year ended December 31, 2023. The increase in noninterest income is primarily driven by a $2.2 million increase in other miscellaneous noninterest income, driven by increases in Bank-owned life insurance benefits received.
For details on the variances of noninterest income for the year ended December 31, 2023 compared to the year ended December 31, 2022 refer to the "Noninterest Income" section of the Management's Discussion and Analysis in the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Noninterest expense and variance analysis as of December 31:
Years Ended December 31,
(In Thousands) 2024 2023 2022 $ Variance
2024 vs. 2023 % Variance
2024 vs. 2023
Salaries and employee benefits $ 64,098 $ 59,345 $ 52,601 $ 4,753 8.0 %
Software licensing and utilization 9,300 7,927 7,524 1,373 17.3
Occupancy expense, net 7,571 7,349 6,900 222 3.0
Equipment expense 4,928 5,121 4,493 (193) (3.8)
Shares tax 2,350 2,713 2,786 (363) (13.4)
Legal and professional fees 4,306 2,945 2,761 1,361 46.2
ATM/card processing 2,284 2,108 2,139 176 8.3
Intangible amortization 1,784 1,780 2,012 4 0.2
FDIC assessment 4,170 3,500 1,594 670 19.1
(Gain) loss on sale or write-down of foreclosed assets, net 80 (144) (133) 224 N/M
Merger and acquisition expense 545 5,544 294 (4,999) (90.2)
Post-acquisition restructuring expense — 2,952 329 (2,952) (100.0)
Other expenses 16,200 17,448 16,139 (1,248) (7.2)
Total Noninterest Expense $ 117,616 $ 118,588 $ 99,439 $ (972) (0.8) %
N/M - Not Meaningful
For the year ended December 31, 2024, noninterest expense totaled $117.6 million, a decrease of $1.0 million, or 0.8%, compared to noninterest expense of $118.6 million for the year ended December 31, 2023. The decrease was primarily driven by a $5.0 million decrease in merger and acquisition expenses, and a $3.0 million decrease in post-acquisition restructuring, partially offset by a $4.8 million increase in salaries and benefits expense, driven by year-end employee bonus incentives, increases in employee salaries, and increased costs of employee medical benefits, a $1.4 million increase in legal and professional fees, and a $1.4 million increase in software licensing and utilization.
For details on the variances of noninterest expense for the year ended December 31, 2023 compared to the year ended December 31, 2022 refer to the "Noninterest Expense" section of the Management's Discussion and Analysis in the Corporation's Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Income Taxes
The provision for income taxes was $10.6 million during the year ended December 31, 2024 , an increase of $3.3 million compared to $7.3 million for the same period in 2023 . The provision for income taxes for the year ended December 31, 2024 reflects an effective combined Federal and state tax rate ("ETR") of 17.6%, compared to an ETR of 16.3% for the year ended December 31, 2023 . The increase in the effective tax rates in 2024 compared to 2023 was a result of higher state taxes, driven by a prior year's benefit from the Brunswick acquisition. 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-
48
MID PENN BANCORP, INC. Management’s Discussion and Analysis
income housing investments. The realization of Mid Penn’s deferred tax assets is dependent on future earnings. Mid Penn currently anticipates that future earnings will be adequate to fully realize the currently recorded deferred tax assets.
Financial Condition
Mid Penn’s total assets were $5.5 billion as of December 31, 2024, reflecting an increase of $180.1 million, or 3.4%, compared to total assets of $5.3 billion as of December 31, 2023. The increase was primarily driven by organic loan growth, increases in investment securities, and an increase in Fed Funds Sold.
Investment Securities
Mid Penn’s portfolio of held-to-maturity ("HTM") securities, recorded at amortized cost, decreased $16.7 million to $382.4 million as of December 31, 2024, as compared to $399.1 million as of December 31, 2023. Mid Penn’s total available-for-sale ("AFS") securities portfolio increased $36.9 million from $223.6 million at December 31, 2023 to $260.5 million at December 31, 2024.
At December 31, 2024, the unrealized loss on AFS investment securities resulted in a negative impact to shareholders’ equity of $1.6 million (comprised of a gross unrealized loss on securities of $2.0 million, net of deferred income tax). At December 31, 2023, the unrealized gain on AFS investment securities resulted in a positive impact to shareholders’ equity of $2.0 million (comprised of a gross unrealized gain on securities of $2.1 million, net of deferred income tax). Mid Penn does not have any significant concentrations of non-governmental securities within its investment portfolio.
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. Mid Penn’s investment portfolio includes both held-to-maturity securities and available-for-sale securities.
49
MID PENN BANCORP, INC. Management’s Discussion and Analysis
The following table presents the expected maturities of the investment portfolio and the weighted average yields (calculated based on historical cost and net of tax) as of December 31, 2024:
Maturing
(In Thousands) One Year
and Less After One Year
thru Five Years After Five Years
Thru Ten Years After Ten
Years
As of December 31, 2024 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 $ 5,476 3.49 % $ 14,224 2.40 % $ 1,807 3.30 % $ — — %
Mortgage-backed U.S. government agencies — — — — 5,292 2.53 197,652 3.72
State and political subdivision obligations — — — — 2,948 2.49 648 2.23
Corporate debt securities 4,990 5.15 7,190 4.32 20,250 4.42 — —
$ 10,466 4.28 % $ 21,414 3.05 % $ 30,297 3.84 % $ 198,300 3.71 %
Held to maturity securities, at amortized cost:
U.S. Treasury and U.S. government agencies $ 8,100 3.07 % $ 99,111 1.88 % $ 134,730 2.10 % $ — — %
Mortgage-backed U.S. government agencies — — 1,937 2.97 4,865 2.80 30,791 2.01
State and political subdivision obligations 9,457 2.39 37,111 2.45 15,010 2.27 15,884 2.59
Corporate debt securities 2,006 3.89 3,995 3.18 19,450 4.10 — —
$ 19,563 2.83 % $ 142,154 2.08 % $ 174,055 2.36 % $ 46,675 2.21 %
50
MID PENN BANCORP, INC. Management’s Discussion and Analysis
Loans, net of unearned income
The following table presents the ending balance of loans outstanding, by type, as of December 31:
2024 2023 Change in Balance
(Dollars in thousands) Balance % of Total Loans Balance % of Total Loans $ %
Commercial real estate
CRE Nonowner Occupied $ 1,251,010 28.1 % $ 1,149,553 27.0 % $ 101,457 8.8 %
CRE Owner Occupied 624,007 14.0 629,904 14.8 (5,897) (0.9)
Multifamily 412,900 9.3 309,059 7.3 103,841 33.6
Farmland 224,709 5.1 212,690 5.0 12,019 5.7
Total Commercial Real Estate 2,512,626 56.5 2,301,206 54.1 211,420 9.2
Commercial and industrial
705,392 15.9 675,079 15.9 30,313 4.5
Construction
Residential Construction 99,399 2.2 92,843 2.2 6,556 7.1
Other Construction 326,171 7.3 362,624 8.5 (36,453) (10.1)
Total Construction 425,570 9.5 455,467 10.7 (29,897) (6.6)
Residential mortgage
1-4 Family 1st Lien 313,592 7.1 339,142 8.0 (25,550) (7.5)
1-4 Family Rental 336,636 7.6 341,937 8.0 (5,301) (1.6)
HELOC and Junior Liens 140,392 3.2 132,795 3.1 7,597 5.7
Total Residential Mortgage 790,620 17.9 813,874 19.1 (23,254) (2.9)
Consumer 8,862 0.2 7,166 0.2 1,696 23.7
$ 4,443,070 100.0 % $ 4,252,792 100.0 % $ 190,278 4.5 %
Total loans, net of unearned income, as of December 31, 2024 were $4.4 billion compared to $4.3 billion as of December 31, 2023, an increase of $190.3 million.
The majority of the Bank's loan portfolio is to businesses and individuals located within the Bank's primary market area of the Pennsylvania counties of Berks, Blair, Bucks, Chester, Clearfield, Cumberland, Dauphin, Fayette, Huntingdon, Lancaster, Lehigh, Luzerne, Montgomery, Perry, Schuylkill and Westmoreland, along with Middlesex and Monmouth counties of New Jersey. Commercial real estate, construction, and land development loans are collateralized mainly by mortgages on the income-producing real estate or land involved. Commercial, industrial, and agricultural loans are primarily made to business entities and may be secured by business assets, including commercial real estate, or may be unsecured. Residential real estate loans are secured by liens on the residential property. Consumer loans include installment loans, lines of credit and home equity loans. The Bank has no significant concentration of credit to any one borrower. The Bank’s highest concentration of credit by loan type is in commercial real estate.
Credit risk is managed through portfolio diversification, underwriting policies and procedures, and loan monitoring practices. Lenders are provided with detailed underwriting policies for all types of credit risks accepted by the Bank and must obtain appropriate internal approvals for credit extensions. The Bank also maintains strict documentation requirements and robust credit quality assurance practices in order to identify credit portfolio weaknesses as early as possible, so any exposures that are discovered might be mitigated or potential losses reduced. The Bank generally secures its loans with real estate, with such collateral values dependent and subject to change based on real estate market conditions within its market area.
51
MID PENN BANCORP, INC. Management’s Discussion and Analysis
The following table represents the Commercial Real Estate portfolio by property type along with the weighted average loan to value as of December 31, 2024:
(Dollars in thousands) December 31, 2024 December 31, 2023
Commercial Real Estate Balance % of portfolio Weighted Average LTV (2)
Balance % of portfolio Weighted Average LTV (2)
Owner Occupied (1)
$ 624,007 24.8 % N/A $ 629,904 27.5 % N/A
Farmland (1)
224,709 8.9 N/A 212,690 9.2 N/A
Multifamily 412,900 16.4 63.8 309,059 13.4 58.9
Non Owner Occupied
Retail 426,171 17.0 60.3 414,485 18.0 51.0
Office 296,468 11.8 63.2 301,810 13.1 64.4
Industrial 161,683 6.4 53.2 156,075 6.8 49.3
Hospitality 152,060 6.1 51.2 137,718 6.0 49.4
Flex 44,187 1.8 44.2 39,374 1.7 56.0
Mobile Home Park 17,748 0.7 67.7 21,298 0.9 68.4
Health Care 14,511 0.6 55.3 15,618 0.7 54.6
Other Property Types 138,182 5.5 64.1 63,175 2.7 43.2
Total Commercial Real Estate $ 2,512,626 100.0 % 59.9 % $ 2,301,206 100.0 % 55.4 %
(1) LTV not available for Owner Occupied and Farmland properties.
(2) Weighted average Loan to Value is calculated based on estimated current market values of the properties.
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 December 31, 2024 One Year
and Less One to
Five Years Five to
Fifteen Years Over
Fifteen Years Total
Commercial real estate
CRE Nonowner Occupied $ 59,218 $ 402,110 $ 499,042 $ 290,640 $ 1,251,010
CRE Owner Occupied 24,643 66,949 258,018 274,397 624,007
Multifamily 43,742 157,530 107,420 104,208 412,900
Farmland 648 8,603 61,388 154,070 224,709
Total Commercial real estate 128,251 635,192 925,868 823,315 2,512,626
Commercial and industrial 28,535 335,077 105,795 235,985 705,392
Construction
Residential Construction 61,942 24,436 11,742 1,279 99,399
Other Construction 148,374 138,126 17,267 22,404 326,171
Total Construction 210,316 162,562 29,009 23,683 425,570
Residential mortgage
1-4 Family 1st Lien 4,749 26,252 80,764 201,827 313,592
1-4 Family Rental 10,733 54,091 99,131 172,681 336,636
HELOC and Junior Liens 8,956 14,778 34,165 82,493 140,392
Total Residential Mortgage 24,438 95,121 214,060 457,001 790,620
Consumer 2,698 1,805 1,404 2,955 8,862
Total loans held in portfolio $ 394,238 $ 1,229,757 $ 1,276,136 $ 1,542,939 $ 4,443,070
52
MID PENN BANCORP, INC. Management’s Discussion and Analysis
Fixed interest rates:
Commercial real estate
CRE Nonowner Occupied $ 48,354 $ 206,561 $ 73,775 $ 9,349 $ 338,039
CRE Owner Occupied 17,627 46,818 21,985 2,054 88,484
Multifamily 37,898 84,222 6,755 — 128,875
Farmland 483 7,422 6,620 56 14,581
Total Commercial real estate 104,362 345,023 109,135 11,459 569,979
Commercial and industrial 15,481 203,308 20,008 11,207 250,004
Construction
Residential Construction 25,215 7,324 315 — 32,854
Other Construction 24,555 37,269 1,094 808 63,726
Total Construction 49,770 44,593 1,409 808 96,580
Residential mortgage
1-4 Family 1st Lien 4,713 21,152 50,657 132,028 208,550
1-4 Family Rental 7,395 49,140 4,893 8,532 69,960
HELOC and Junior Liens 454 6,665 23,972 2,400 33,491
Total Residential Mortgage 12,562 76,957 79,522 142,960 312,001
Consumer 1,409 1,782 1,404 503 5,098
Total fixed interest rates $ 183,584 $ 671,663 $ 211,478 $ 166,937 $ 1,233,662
Floating interest rates:
Commercial real estate
CRE Nonowner Occupied $ 10,864 $ 195,549 $ 425,267 $ 281,291 $ 912,971
CRE Owner Occupied 7,016 20,131 236,033 272,343 535,523
Multifamily 5,843 73,309 100,665 104,208 284,025
Farmland 165 1,180 54,769 154,014 210,128
Total Commercial real estate 23,888 290,169 816,734 811,856 1,942,647
Commercial and industrial 13,054 131,768 85,787 224,779 455,388
Construction
Residential Construction 36,727 17,113 11,426 1,279 66,545
Other Construction 123,819 100,856 16,173 21,597 262,445
Total Construction 160,546 117,969 27,599 22,876 328,990
Residential mortgage
1-4 Family 1st Lien 36 5,100 30,107 69,799 105,042
1-4 Family Rental 3,338 4,951 94,238 164,149 266,676
HELOC and Junior Liens 8,502 8,114 10,193 80,092 106,901
Total Residential Mortgage 11,876 18,165 134,538 314,040 478,619
Consumer 1,290 23 — 2,451 3,764
Total floating interest rates 210,654 558,094 1,064,658 1,376,002 3,209,408
Total fixed and floating interest rates $ 394,238 $ 1,229,757 $ 1,276,136 $ 1,542,939 $ 4,443,070
Credit Quality, Credit Risk, and Allowance for Credit Losses
Mid Penn adopted FASB ASC 326, in accordance with the amendments of FASB ASU 2016-13, effective January 1, 2023. The guidance in FASB ASC 326 replaced 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
53
MID PENN BANCORP, INC. Management’s Discussion and Analysis
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.
The following table represents the allowance for credit loss as a percentage of total loans:
(In Thousands)
As of December 31, 2024 Total ACL - Loans Total Loans % of Total Loans Outstanding Allowance as a % of Loan Category
Commercial real estate
CRE Nonowner Occupied $ 11,047 $ 1,251,010 28.1 % 0.9 %
CRE Owner Occupied 5,243 624,007 14.0 0.8
Multifamily 3,432 412,900 9.3 0.8
Farmland 1,932 224,709 5.1 0.9
Total Commercial real estate 21,654 2,512,626 56.5 0.9
Commercial and industrial 7,122 705,392 15.9 1.0
Construction
Residential Construction 931 99,399 2.2 0.9
Other Construction 2,131 326,171 7.3 0.7
Total Construction 3,062 425,570 9.5 0.7
Residential mortgage
1-4 Family 1st Lien 1,503 313,592 7.1 0.5
1-4 Family Rental 1,756 336,636 7.6 0.5
HELOC and Junior Liens 392 140,392 3.2 0.3
Total Residential mortgage 3,651 790,620 17.9 0.5
Consumer 25 8,862 0.2 0.3
Total $ 35,514 $ 4,443,070 100.0 % 0.8 %
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 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 year ended December 31, 2022 reflects Mid Penn’s application of the incurred loss method for estimating credit losses.
54
MID PENN BANCORP, INC. Management’s Discussion and Analysis
The following table represents non-performing assets as of:
December 31,
(Dollars in thousands) 2024 2023 2022
Non-performing Assets:
Total non-accrual loans $ 22,610 $ 14,216 $ 8,585
Foreclosed real estate 44 293 43
Total non-performing assets 22,654 14,509 8,628
Accruing loans 90 days or more past due — — 654
Total risk elements $ 22,654 $ 14,509 $ 9,282
Non-accrual loans as a percentage of total loans outstanding 0.51 % 0.33 % 0.24 %
Non-performing assets as a percentage of total loans outstanding and foreclosed real estate 0.51 % 0.34 % 0.25 %
Allowance for credit losses as a percentage of total loans 0.80 % 0.80 % 0.54 %
Ratio of ACL to non-performing loans 157.07 % 240.48 % 220.82 %
Total nonperforming assets were $22.7 million at December 31, 2024, an increase compared to nonperforming assets of $14.5 million at December 31, 2023. The increase since December 31, 2023 was primarily the result of the addition of two commercial loans with a combined balance of $3.0 million, and two commercial real estate loans with a combined balance of $2.3 million being placed on nonaccrual in the fourth quarter of 2024.
Deposits and Other Funding Sources
Mid Penn's primary source of funds are retail deposits from businesses, public funds depositors, and consumers in its market area. For the year ended December 31, 2024, deposits totaled $4.7 billion, an increase of $343.7 million, or 7.9%, compared to $4.3 billion as of December 31, 2023.
Average balances and average interest rates applicable to deposits by major classification for the years ended December 31:
2024 2023 Change
(Dollars in thousands) Balance Rate Balance Rate $ %
Noninterest-bearing demand deposits $ 780,538 0.00 % $ 800,582 0.00 % $ (20,044) (2.50) %
Interest-bearing demand deposits 1,001,813 1.90 950,326 1.46 51,487 5.42
Money market 913,311 2.91 926,034 2.31 (12,723) (1.37)
Savings 275,692 0.09 312,053 0.07 (36,361) (11.65)
Time 1,541,654 4.57 1,116,552 3.92 425,102 38.07
$ 4,513,008 2.58 % $ 4,105,547 1.93 % $ 407,461 9.92 %
55
MID PENN BANCORP, INC. Management’s Discussion and Analysis
As of December 31, 2024, uninsured deposits were approximately $1.4 billion compared to $1.2 billion as of December 31, 2023. The maturities of the uninsured time deposits as of December 31, 2024 were as follows:
(In thousands) 2024
Three months or less $ 183,138
Over three months to six months 89,493
Over six months to twelve months 72,526
Over twelve months 15,552
$ 360,709
Short-term borrowings as of December 31, 2024 totaled $2.0 million, compared to $241.5 million as of December 31, 2023, and consisted of $2.0 million of FHLB overnight borrowings. As of December 31, 2024, the Bank had long-term debt outstanding in the amount of $23.6 million compared to $59.0 million as of December 31, 2023.
Subordinated debt and trust preferred securities totaled $45.7 million as of December 31, 2024 compared to $46.4 million as of December 31, 2023. There were no redemptions of subordinated debt in 2024. In April 2023, Mid Penn redeemed $10.0 million subordinated debt issued in December of 2017. See "Note 11 - Subordinated Debt and Trust Preferred Securities " , within Item 8, Notes to Consolidated Financial Statements.
Shareholders' Equity and Capital
Shareholders' equity, or capital, is evaluated in relation to total assets and the risk associated with those assets. The detailed computation of Mid Penn’s regulatory capital ratios can be found in "Note 17 - Regulatory Matters " , within Item 8, Notes to Consolidated Financial Statements. The greater the Corporation’s capital resources, the more likely it is to meet its cash obligations and absorb unforeseen losses. Capital management practices have been, and will continue to be, of paramount importance to the Corporation in support of both its regulatory capital requirements and its shareholders.
Shareholders’ equity increased $112.7 million, or 20.8%, to $655.0 million as of December 31, 2024 from $542.4 million as of December 31, 2023, primarily as result of completion of the underwritten public offering of 2,375,000 shares of common stock in November 2024, and net income, partially offset by dividends declared of $13.8 million and share repurchases totaling $323 thousand.
Mid Penn maintained regulatory capital levels, leverage ratios, and risk-based capital ratios as of December 31, 2024 and 2023, as follows:
December 31, 2024 December 31, 2023 Regulatory Minimum for Capital Adequacy
Tier I Leverage Capital (to Average Assets) 9.98 % 8.32 % 4.00 %
Common Equity Tier I (to Risk-Weighted Assets) 12.09 9.78 7.00
Tier I Risk-Based Capital (to Risk-Weighted Assets) 12.09 9.78 8.50
Total Risk-Based Capital (to Risk-Weighted Assets) 13.98 % 11.69 % 10.50 %
As of December 31, 2024 and December 31, 2023, 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.
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.
56
MID PENN BANCORP, INC. Management’s Discussion and Analysis
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 year ended December 31, 2024 provided $51.4 million of cash, mainly due to net income. Cash used in investing activities during the year ended December 31, 2024 was $208.7 million, mainly the result of the net increase in loans. Cash provided by financing activities during the year ended December 31, 2024 totaled $131.2 million, primarily the result of an increase in net deposits.
Contractual Obligations
Mid Penn has substantial aggregate contractual obligations to make future cash payments as of December 31, 2024 as outlined below:
Total Payments Due by Period
(Dollars in thousands) One Year or
Less One to Three
Years Three to Five
Years More than Five
Years
Operating lease obligations $ 8,978 $ 2,361 $ 4,057 $ 1,943 $ 617
Finance lease obligation 3,992 260 520 535 2,677
Certificates of deposit 1,684,672 1,511,996 152,422 16,530 3,724
Long-term debt 20,586 344 20,241 1 —
Subordinated debt 45,741 — — — 45,741
$ 1,763,969 $ 1,514,961 $ 177,240 $ 19,009 $ 52,759
Details on expected maturities of investments, loans and deposits are presented in the above sections of Management's Discussion and Analysis. We are not aware of any other commitments or contingent liabilities which may have a material adverse impact on Mid Penn’s liquidity or capital resources.
Effects of Inflation
A bank's asset and liability structure is substantially different from that of an industrial company in that virtually all assets and liabilities of a bank are monetary in nature. Management believes the impact of inflation on its financial results depends principally upon Mid Penn's ability to measure its sensitivity to changes in interest rates and to take appropriate actions, as needed or controllable by the Bank, to mitigate the impacts of inflation on performance. Interest rates do not necessarily move in the same direction or at the same magnitude as the prices of other goods and services. As discussed
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MID PENN BANCORP, INC. Management’s Discussion and Analysis
previously, management seeks to manage the relationship between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.
Information included elsewhere in this report will assist in the understanding of how Mid Penn is positioned to react to changing interest rates and inflationary trends. In particular, the previously discussed risk factors, the composition of and yields on loans and investments, and the composition and costs of deposits and other interest-bearing liabilities, should be considered.
Off-Balance Sheet Risk
Mid Penn makes contractual commitments to extend credit and extends lines of credit, which are subject to Mid Penn's credit approval and monitoring procedures. As of December 31, 2024, commitments to extend credit amounted to $1.2 billion compared to $1.5 billion as of December 31, 2023.
Mid Penn also issues standby letters of credit to its customers. The risk associated with standby letters of credit is essentially the same as the credit risk involved in loan extensions to customers. Standby letters of credit increased to $64.3 million at December 31, 2024, from $62.2 million at December 31, 2023.