MID Penn Bancorp Inc: Form 10-Q for the period ended Sep 30, 2024

This Management Discussion relates to the Corporation, a financial holding company incorporated in the Commonwealth of Pennsylvania, and its wholly-owned subsidiaries, and 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 2023 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 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, expected operating results, including after giving effect to the Merger with William Penn Bancorporation 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. These forward-looking statements include the expectations of Mid Penn relating to the anticipated opportunities and financial and other benefits of the Merger, and the projections of, or guidance on, Mid Penn’s or the combined company’s future financial performance, asset quality, liquidity, capital levels, expected levels of future expenses, including future credit losses, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in Mid Penn’s business or financial results. 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 as a result of 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;
• 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;
• the risk factors described in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 and subsequent filings with the SEC; and
• other risks and uncertainties contained in this prospectus supplement or incorporated by reference into this prospectus supplement from the other reports and filings with the SEC.

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, non-interest expenses and income taxes.

The following table presents a summary of Mid Penn's earnings and selected performance ratios:

(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 three months ended September 30, 2024 was $12.3 million, or $0.74 per both common share basic and diluted, compared to earnings of $9.2 million, or $0.56 per both common share basic and diluted for the three months ended September 30, 2023. Mid Penn's earnings for the nine months ended September 30, 2024 was $36.2 million, or $2.18 per both common share basic and diluted, compared to earnings of $25.3 million, or $1.56 per both common share basic and diluted for the nine months ended September 30, 2023.
• Net Interest Margin - For the third quarter of 2024, Mid Penn’s net interest margin was 3.13% versus 3.16% for the same period of 2023. For the nine months ended September 30, 2024, net interest margin was 3.07% versus 3.34% for the same period of 2023. The decrease is primarily driven by higher interest rates resulting from persistent inflation. The yield on interest-earning assets for the third quarter of 2024 increased 38 basis points from the same period of 2023. The rate on interest-bearing liabilities increased 51 basis points from the same period of 2023.
• Loan Growth - Total loans, net of unearned income, as of September 30, 2024 were $4.4 billion compared to $4.3 billion as of December 31, 2023, an increase of $178.9 million, or 4.2%. The growth was primarily driven by an increase in multifamily of $106.4 million, an increase in nonowner occupied commercial real estate of $55.5 million, and an increase in commercial and industrial loans of $38.4 million.
• Deposit Growth - Total deposits increased $360.6 million, or 8.3%, from $4.3 billion at December 31, 2023, to $4.7 billion at September 30, 2024. The growth was driven by an increase of $202.3 million in interest-bearing transaction accounts, and an increase of $167.6 million in time deposits, offset by a $9.3 million decrease in non-interest bearing accounts.
• Asset Quality - ACL at September 30, 2024 was $35.6 million, or 0.80% of total loans, as compared to $34.2 million, or 0.80% of total loans at December 31, 2023.
• Net Charge-offs/Recoveries - Mid Penn had net charge-offs of $347 thousand and $11 thousand for the three months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024, net charge-offs were $409 thousand compared to $294 thousand for the same period of 2023.
• Non-performing assets - Total non-performing assets were $17.7 million at September 30, 2024, an increase compared to non-performing assets of $14.5 million at December 31, 2023. The increase is primarily related to the addition of one commercial property with a balance of $7.7 million being placed on nonaccrual in the third quarter of 2024, offset by the sale of one foreclosed property with a balance of $4.7 million in the second quarter of 2024. Delinquency, measured as loans past due 30 days or more, as a percentage of total loans was 0.61% at September 30, 2024, compared to 0.57% and 0.49% as of June 30, 2024, and December 31, 2023, respectively.
• Provision/Benefit for credit losses - loans - The provision for credit losses - loans was $621 thousand for the three months ended September 30, 2024 compared to $1.4 million for the same period of 2023. The benefit for credit losses on off-balance sheet credit exposures was $105 thousand for the three months ended September 30, 2024, compared to a benefit of $660 thousand for the same period of 2023. The provision for credit losses - loans was $1.8 million for the nine months ended September 30, 2024 compared to $3.1 million for the same period of 2023. The decrease in provision for the nine months ended September 30, 2024, is primarily due to a decrease in loss factors across all portfolios.
• Noninterest Income - Noninterest income totaled $5.2 million for the three months ended September 30, 2024 compared to $5.3 million for the same period of 2023. The decrease is primarily due to a $474 thousand decrease in other miscellaneous noninterest income, driven by a $482 thousand decrease in Bank owned life insurance benefits received, and a $92 thousand decrease in income from Fiduciary activities, partially offset by a $386 thousand increase in mortgage banking income, and a $66 thousand increase in the gain on sales of SBA loans. Noninterest income totaled $16.3 million for the nine months ended September 30, 2024 compared to $14.9 million for the same period of 2023.
• Noninterest Expense - Noninterest expense totaled $30.0 million for the three months ended September 30, 2024, an increase of $730 thousand, or 2.5%, compared to noninterest expense of $29.2 million for the same period of 2023. The increase was driven by a $897 thousand increase in salaries and employee benefits, and a $723 thousand increase in legal and professional fees, partially offset by a $596 thousand decrease in FDIC assessments, a $243 thousand decrease in Merger and Acquisition costs from the Brunswick acquisition in 2023, and a $240 thousand decrease in other miscellaneous noninterest expense. Noninterest expense totaled $86.7 million for the nine months ended September 30, 2024, a decrease of $3.5 million, or 3.88%, compared to noninterest expense of $90.2 million for the same period of 2023.
• Liquidity - Current liquidity, including borrowing capacity, enhanced to nearly $1.91 billion or 141.5% of uninsured and uncollateralized deposits, or approximately 40.5% of total deposits.

Critical Accounting Estimates

The 2023 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 regards 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 endeavors to use 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 9 - 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.

Goodwill

Mid Penn evaluates goodwill annually for impairment unless events occur which indicate that impairment is possible: a triggering event.

Our most recent annual impairment test was conducted during the fourth quarter of 2023. Factors considered include actual earnings in relation to forecasted earnings, liquidity levels, changes in deposit balances, and credit quality, among others. At September 30, 2024, Mid Penn had goodwill of $128.2 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 2024 warranting an additional impairment test. 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.

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.

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.

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

(Dollars in thousands)

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

(2) Annualized ratios

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, 2024 in comparison to the same period in 2023:

(Dollars in thousands)

For the three months ended September 30, 2024, net interest income was $40.2 million compared to net interest income of $37.5 million for the three months ended September 30, 2023. The tax-equivalent net interest margin for the three months ended September 30, 2024 was 3.13% compared to 3.16% for the third quarter of 2023, representing a 3 bp decrease compared to the same period in 2023.

The yield on interest-earning assets increased to 5.73% for the quarter ended September 30, 2024, from 5.35% for the quarter ended September 30, 2023. These increases were due to assets continuing to reprice at higher rates during the third quarter of 2024, continued discipline on new loan pricing, and an increase in Fed Funds Sold. Increased yields on interest-earning assets were offset by increases in funding costs for the third quarter of 2024, with the overall cost of interest-bearing liabilities increasing to 3.30% during the third quarter of 2024, compared to 2.79% for the three months ended September 30, 2023.

Average investment securities decreased $8.5 million and the yield on those investment securities decreased 7 bps during the third quarter of 2024 compared to the third quarter of 2023, reducing interest income due to volume by $50 thousand, and reducing interest income due to rates by $137 thousand. Average loans increased $352.5 million, and the yield on those loans increased 39 bps, contributing $5.1 million and $4.2 million, respectively, to the increase in interest income.

Interest expense increased $7.7 million during the third quarter of 2024 compared to the third quarter of 2023. The rate of interest-bearing liabilities increased from 2.79% for the third quarter of 2023 to 3.30% for the third quarter of 2024. 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 over the comparable period to both retain and attract deposits. In addition, average short-term borrowings of $169.8 million were used to help fund loan growth, contributing $712 thousand to interest expense during the third quarter of 2024.

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.

MID PENN BANCORP, INC.

(Dollars in thousands)

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

(2) Annualized ratios

The following table summarizes the changes in FTE interest income and interest expense resulting from changes in average balances, volume, and changes in rates for the nine months ended September 30, 2024 in comparison to the same period in 2023:

(Dollars in thousands)

For the nine months ended September 30, 2024, net interest income was $115.4 million compared to net interest income of $110.0 million for the nine months ended September 30, 2023. FTE net interest income was $116.2 million for the nine months ended September 30, 2024, an increase of $6.0 million, or 5.4%, compared to the same period of September 30, 2023. Mid Penn’s FTE net interest margin for the nine months ended September 30, 2024 was 3.07% compared to 3.34% for the same period of September 30, 2023, representing a 27 bp decrease compared to the same period in 2023, primarily driven by higher interest rates resulting from persistent inflation.

The higher yields and the growth in interest-earning assets contributed $16.8 million and $26.3 million, respectively, to the increase in interest income. The yield on interest-earning assets increased 48 bps to 5.64% for the nine months ended September 30, 2024 compared to 5.16% for the same period of 2023. Average interest-earning assets increased $24.7 million, or 14.5%, during the nine months ended September 30, 2024 compared to the same period of 2023.

Average investment securities decreased $17.0 million, or 2.7%, and the yield on those investment securities increased 1 bp, deducting $329 thousand and contributing $62 thousand, respectively, to interest income. Average loans increased $595.1 million, and the yield on those loans increased 48 bps contributing $24.9 million and $15.8 million, respectively, to the increase in interest income.

Interest expense increased $37.6 million during the first nine months of 2024 compared to the same period of 2023. The rate of interest-bearing liabilities increased from 2.37% for the first nine months of 2023 to 3.27% for the first nine months of 2024. 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 91 bps contributing $18.4 million to the increase in interest expense during the nine months ended September 30, 2024 compared to the same period in 2023. In addition, average short-term borrowings of $242.2 million were used to help fund loan growth, contributing $5.5 million to interest expense during the nine months ended September 30, 2024 compared to the same period in 2023.

Provision for Credit Losses - Loans

On January 1, 2023, Mid Penn adopted ASU 2016-13, Financial Instruments - Credit Losses (ASC Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology, and is referred to as CECL. The provision for credit losses on loans was $621 thousand for the three months ended September 30, 2024 compared to a provision of $1.4 million for the three months ended September 30, 2023. The decrease in provision was driven by a decrease in loss factors across all portfolios. The provision for credit losses on loans was $1.8 million for the nine months ended September 30, 2024 compared to a provision of $3.1 million for the nine months ended September 30, 2023. The decrease is primarily due to a decrease in loss factors across all portfolios.

Noninterest Income

Noninterest income for the three months ended September 30, 2024 was $5.2 million and $5.3 million for the three months ended September 30, 2023. The following table and explanations that follow provide additional analysis of noninterest income.

Noninterest income and variance analysis:

(Dollars in Thousands)

For the three months ended September 30, 2024, noninterest income totaled $5.2 million, a decrease of $168 thousand, or 3.14%, compared to noninterest income of $5.3 million for the three months ended September 30, 2023. The decrease is primarily due to a $474 thousand decrease in other miscellaneous noninterest income, driven by a $482 thousand decrease in Bank owned life insurance benefits received, partially offset by a $386 thousand increase in mortgage banking income, a $76 thousand increase in the gain on sales of SBA loans, and a $74 thousand increase in income from Fiduciary activities.

MID PENN BANCORP, INC.

(Dollars in Thousands)

For the nine months ended September 30, 2024, noninterest income totaled $16.3 million, an increase of $1.5 million, or 9.76%, compared to noninterest income of $14.9 million for the nine months ended September 30, 2023. The increase in noninterest income is primarily driven by a $1.0 million increase in other miscellaneous noninterest income, driven by increases in Bank owned life insurance benefits received, and a $767 thousand increase in mortgage banking income.

Noninterest Expense

For the three months ended September 30, 2024, noninterest expense totaled $30.0 million, an increase of $730 thousand, or 2.5%, compared to noninterest expense of $29.2 million for the same period in 2023. The following table and explanations that follow provide additional analysis of noninterest expense:

(Dollars in Thousands)

For the nine months ended September 30, 2024, noninterest expense totaled $86.7 million, a decrease of $3.5 million, or 3.9%, compared to noninterest expense of $90.2 million for the nine months ended September 30, 2023. The decrease was primarily driven by $7.9 million of Brunswick acquisition costs in 2023, partially offset by a $3.0 million increase in salaries and benefits expense, and a $1.0 million increase in legal and professional fees.

MID PENN BANCORP, INC.

(Dollars in Thousands)

Income Taxes

The provision for income taxes was $2.6 million for the three months ended September 30, 2024 compared to $2.3 million for the same period in 2023. The provision for income taxes for the nine months ended September 30, 2024 reflects a combined Federal and State effective tax rate of 17.4% and 16.5%, for the nine months ended September 30, 2024 and September 30, 2023, respectively. Generally, Mid Penn’s effective tax rate is below the federal statutory rate due to earnings on tax-exempt loans, investments, and earnings from the cash surrender value of life insurance, as well as the impact of federal income tax credits, including those awarded from Mid Penn’s low-income housing investments. The realization of Mid Penn’s deferred tax assets is dependent on future earnings. Mid Penn currently anticipates that future earnings will be adequate to fully realize the currently recorded deferred tax assets.

Financial Condition

Mid Penn’s total assets were $5.5 billion as of September 30, 2024, reflecting an increase of $236.2 million, or 4.5%, 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 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. The carrying value of total investment securities as of September 30, 2024 were $641.8 million compared to $622.7 million as of December 31, 2023. 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):

(In Thousands)

Loans, net of unearned income

Total loans, net of unearned income, as of September 30, 2024 were $4.4 billion compared to $4.3 billion as of December 31, 2023. The growth of $178.9 million, or 4.2%, since December 31, 2023 was primarily the result of organic loan growth across the commercial real estate and commercial and industrial portfolios, offset by decreases in residential mortgage loan portfolios.

MID PENN BANCORP, INC.

(Dollars in thousands)

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, Centre, 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.

The following table presents the commercial real estate portfolio by property type along with the weighted average loan to value:

MID PENN BANCORP, INC.

(Dollars in thousands)

(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)

64

MID PENN BANCORP, INC.

65

Credit Quality, Credit Risk, and Allowance for Credit Losses

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

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

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

Upon the adoption of FASB ASC Topic 326 on January 1, 2023, Mid Penn recorded an overall increase of $15.0 million to the ACL on January 1, 2023 as a result of the adoption of CECL. Retained earnings decreased $11.5 million and deferred tax assets increased by $3.1 million.

Changes in the ACL are summarized as follows:

(Dollars in thousands)

.(1) Includes a $2.0 million initial provision for the nine months ended September 30, 2023, for credit losses on non-PCD loans acquired in the Brunswick Acquisition. in 2023.

The following table presents the change in nonperforming asset categories as of September 30, 2024, December 31, 2023, and September 30, 2023.

(Dollars in thousands)

Total nonperforming assets were $17.7 million at September 30, 2024, an increase compared to nonperforming assets of $14.5 million at December 31, 2023. The increase during the third quarter of 2024 is primarily related to the addition of one commercial property with a balance of $7.7 million being placed on nonaccrual in the third quarter of 2024, offset by the sale of one foreclosed property with a balance of $4.7 million in the second quarter of 2024. Delinquency, measured as loans past due 30 days or more, as a percentage of total loans was 0.61% at September 30, 2024, compared to 0.57% and 0.49% as of June 30, 2024, and December 31, 2023, respectively.

Goodwill

Mid Penn evaluates goodwill annually for impairment unless events occur which indicate that impairment is possible: a triggering event. At September 30, 2024, Mid Penn had goodwill of $128.2 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 2024 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. Mid Penn's annual impairment test is scheduled to be conducted as of October 31, 2024.

Deposits

Total deposits increased $360.6 million, or 8.3%, from $4.3 billion on December 31, 2023, to $4.7 billion at September 30, 2024. The growth was driven by a $202.3 million increase in interest bearing accounts, and a $167.6 million increase in time deposits, offset by a $9.3 million decrease in noninterest bearing accounts.

As of September 30, 2024, uninsured deposits were approximately $1.3 billion compared to $1.2 billion as of December 31, 2023. The maturities of the uninsured time deposits as of September 30, 2024 were as follows:

(In thousands)

Borrowings

Total short-term borrowings decreased $127.4 million, or 52.8%, from December 31, 2023. FHLB overnight borrowings decreased $112.4 million, along with a decrease of $15.0 million in short term FHLB borrowings. Total long-term borrowings were $23.7 million at September 30, 2024, a decrease of $35.3 million from December 31, 2023.

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, 2024 provided $47.3 million of cash, mainly due to net income. Cash used in investing activities during the nine months ended September 30, 2024 was $187.6 million, mainly the result of the net increase in loans. Cash provided by financing activities during the nine months ended September 30, 2024 totaled $188.0 million, primarily the result of an increase in net deposits.

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.

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, 2024, 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:

As of September 30, 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.

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 $30.7 million, or 5.7%, from $542.4 million as of December 31, 2023 to $573.1 million as of September 30, 2024, primarily due to earnings of $36.2 million, partially offset by dividends declared of $10.0 million and stock repurchases of $323 thousand.

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 downward interest rate changes, while an increase in interest rates 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, 2024, all interest rate risk levels according to the model were within the tolerance limits of the Board-approved policy.

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, 2024, Mid Penn’s management, with the participation of the Principal Executive Officer and Principal Financial Officer, concluded that the disclosure controls and procedures were effective as of such date.

Changes in Internal Controls

There were no 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, 2024.

Management has reviewed the risk factors that were previously disclosed in the 2023 Annual Report and subsequent reports filed with the SEC to determine if there were material changes applicable to the nine months ended September 30, 2024. Aside from the following risk factors, there have been no material changes to the risk factors that were previously disclosed in the 2023 Annual Report.

Risks Related to the Merger

Failure to complete the Merger could negatively affect our market price, future business and financial results.

Although we anticipate closing the Merger in the second quarter of 2025, we cannot guarantee when, or whether, the Merger will be completed. If the Merger is not completed for any reason, we will be subject to a number of material risks, including the following:

• Costs related to the Merger, such as legal, accounting and financial advisory fees, and, in specific circumstances, additional reimbursement and termination fees, must be paid even if the Merger is not completed.
• Declines in our market price to the extent that the current market price of our common stock already reflects a market assumption that the Merger will be completed.
• The diversion of management’s attention from the day-to-day business operations and the potential disruption to each company’s employees and business relationships during the period before the completion of the Merger may make it difficult to regain financial and market positions if the Merger does not occur.
• Becoming subject to litigation related to any failure to complete the Merger.

Regulatory waivers and approvals may not be received or may be received and subsequently expire, be revoked or be amended to impose conditions that are not presently anticipated or cannot be met.

Before the transactions contemplated in the Merger Agreement, including the Merger, may be completed, various waivers, approvals or consents must be obtained from various bank regulatory and other authorities, including the Board of Governors of the Federal Reserve System, the FDIC, and the Pennsylvania Department of Banking and Securities. In determining whether to grant these approvals, regulatory authorities consider a variety of factors, including the regulatory standing of each party. These approvals could be delayed or not obtained at all, including due to any or all of the following: an adverse development in any party’s regulatory standing or any other factors considered by regulators in granting such approvals; governmental, political, or community group inquiries, investigations or opposition; or changes in legislation or the political or regulatory environment generally, including as a result of changes of the U.S. executive administration, or Congressional leadership and regulatory agency leadership.

Even if the approvals are granted, they may impose terms and conditions, limitations, obligations or costs, or place restrictions on the conduct of the combined company’s business or require changes to the terms of the transactions contemplated by the Merger Agreement. There can be no assurance that regulators will not impose any such conditions, limitations, obligations, or restrictions or that such conditions, limitations, obligations, or restrictions will not have the effect of delaying the completion of any of the transactions contemplated by the Merger Agreement, imposing additional material costs on or materially limiting the revenues of the combined company following the Merger or otherwise reduce the anticipated benefits of the Merger if the Merger were completed successfully within the expected timeframe. In addition, there can be no assurance that any such conditions, limitations, obligations, or restrictions will not result in the delay or abandonment of the Merger. The completion of the Merger is conditioned on the receipt of the requisite regulatory approvals without the imposition of any materially burdensome regulatory condition and the expiration of all statutory waiting periods. Additionally, the completion of the Merger is conditioned on the absence of certain orders, injunctions, or decrees issued by any court or any governmental entity of competent jurisdiction that would prevent, prohibit, or make illegal the completion of the Merger or any of the other transactions contemplated by the Merger Agreement.

Despite the parties’ expected commitment to use their reasonable best efforts to respond to any request for information and resolve any objection that may be asserted by any governmental entity with respect to the Merger Agreement, neither party is required under the terms of the Merger Agreement to take any action, commit to take any action, or agree to any condition or restriction in connection with obtaining these approvals, that would reasonably be expected to have a material adverse effect on the combined company and its subsidiaries, taken as a whole, after giving effect to the proposed Merger.

Further, such approvals are subject to expiration if the transaction is not consummated within the time period provided in the approval.

Combining Mid Penn and William Penn may be more difficult, costly or time consuming than expected, and we may fail to realize the anticipated benefits of the Merger.

The success of the Merger will depend on, among other things, our ability to integrate William Penn into our business in a manner that facilitates growth opportunities and achieves the anticipated benefits of the Merger, including those described under “Summary—Recent Developments—William Penn Transaction.” If we are not able to successfully achieve these objectives, the anticipated benefits of the Merger may not be realized fully or at all or may take longer to realize than expected. In addition, the actual cost and savings and anticipated benefits of the Merger could be less than anticipated, and integration may result in additional unforeseen expenses.

Litigation relating to the Merger could require us to incur significant costs and suffer management distraction, as well as delay and/or enjoin the Merger.

Neither William Penn nor Mid Penn is currently able to predict the outcome of any suit arising out of or relating to the proposed transaction that may be filed in the future. If any letters or complaints are filed, absent allegations that are material, William Penn and Mid Penn will not necessarily announce such filings.

William Penn and Mid Penn could be subject to demands or litigation related to the Merger, whether or not the Merger is consummated. Such actions may create additional uncertainty relating to the Merger, and responding to such demands and defending such actions may be costly and distracting to management. Although there can be no assurance as to the ultimate outcomes of any demand or any subsequent litigation, we do not believe that the resolution of such demands or any subsequent litigation will have a material adverse effect on our financial position, results of operations or cash flow.

We and William Penn will be subject to various uncertainties while the Merger is pending that could adversely affect our financial results or the anticipated benefits of the Merger.

Uncertainty about the effect of the Merger on counterparties to contracts, employees and other parties may have an adverse effect on us or the anticipated benefits of the Merger. These uncertainties could cause contract counterparties and others who deal with us or William Penn to seek to change existing business relationships with us or William Penn, and may impair our or William Penn’s ability to attract, retain and motivate key personnel until the Merger is completed and for a period of time thereafter. Employee retention and recruitment may be particularly challenging prior to the completion of the Merger, as our employees and prospective employees, and the employees and prospective employees of William Penn, may experience uncertainty about their future roles with us following the Merger.

The pursuit of the Merger and the preparation for the integration of the two companies may place a significant burden on management and internal resources. Any significant diversion of management attention away from ongoing business and any difficulties encountered in the transition and integration process could affect our financial results prior to and/or following the completion of the Merger and could limit us from pursuing attractive business opportunities and making other changes to our business prior to completion of the Merger or termination of the Merger Agreement.

William Penn may have liabilities that are not known to us.

In connection with the Merger, we will assume all of William Penn’s liabilities by operation of law. There may be liabilities that we failed or were unable to discover in the course of performing due diligence investigations into William Penn, or we may not have correctly assessed the significance of certain liabilities of William Penn identified in the course of our due diligence. Any such liabilities, individually or in the aggregate, could have an adverse effect on our business, financial condition, and results of operations.

We expect to incur substantial transaction costs in connection with the Merger.

We expect to incur a significant amount of non-recurring expenses in connection with the Merger, including legal, accounting, consulting and other expenses. In general, these expenses are payable by us whether or not the Merger is completed. Additional unanticipated costs may be incurred following consummation of the Merger in the course of the integration of our businesses and the business of William Penn. We cannot be certain that the elimination of duplicative costs or the realization of other efficiencies related to the integration of the two businesses will offset the transaction and integration costs in the near term, or at all.

The unaudited pro forma financial information incorporated by reference into this prospectus supplement is presented for illustrative purposes only and does not purport to be indicative of our financial condition or results of operations following the completion of the Merger.

The unaudited pro forma financial information incorporated by reference into this prospectus supplement is presented for illustrative purposes only, is based on various adjustments, assumptions and preliminary estimates and may not be an indication of our financial condition or results of operations following the consummation of the offering made pursuant to this prospectus supplement or the Merger for several reasons. Our actual financial condition and results of operations following the consummation of the offering made pursuant to this prospectus supplement and the Merger may not be consistent with, or evident from, these pro forma financial statements. In addition, the assumptions used in preparing the pro forma financial information may not prove to be accurate, and other factors may affect our financial condition or results of operations following the consummation of the offering made pursuant to this prospectus supplement and the Merger. Our potential for future business success and operating profitability must be considered in light of the risks, uncertainties, expenses and difficulties typically encountered by recent combined companies.

The Merger may be completed on different terms from those contained in the Merger Agreement.

Prior to the completion of the Merger, we and William Penn may, by mutual agreement, amend or alter the terms of the Merger Agreement, including with respect to, among other things, the Merger consideration or any covenants or agreements with respect to the parties’ respective operations during the pendency of the Merger Agreement. Any such amendments or alterations may have negative consequences to us.

The Merger will not be completed unless important conditions are satisfied or waived, including approval of the Merger Agreement by our shareholders and William Penn’s shareholders.

Specified conditions set forth in the Merger Agreement must be satisfied or waived to complete the Merger. If the conditions are not satisfied or, subject to applicable law, waived, the Merger will not occur or will be delayed and each of William Penn and us may lose some or all of the intended benefits of the Merger.