Executive Summary / Key Takeaways

• Mid Penn Bancorp (NASDAQ: MPB) is executing a growth strategy centered on strategic acquisitions and organic expansion within its Mid-Atlantic footprint, recently completing the significant merger with William Penn Bancorporation (WMPN) to enhance its presence in attractive markets.
• The company demonstrated strong financial performance in Q1 2025, highlighted by a notable expansion in the net interest margin to 3.37%, driven by favorable asset repricing and disciplined liability management.
• Loan and deposit portfolios showed modest organic growth in Q1 2025, reflecting continued demand in core commercial segments despite a competitive environment.
• While noninterest income saw a temporary dip due to lower non-recurring items, core fee income streams like mortgage banking and loan level swap fees showed positive momentum.
• Asset quality metrics saw a slight increase in non-performing assets in Q1 2025, primarily due to a few commercial loans, but overall delinquency remains controlled, and the Allowance for Credit Losses is considered adequate by management.

Setting the Scene: A Regional Bank's Growth Ambition

Mid Penn Bancorp, Inc. operates as a financial holding company deeply rooted in the Mid-Atlantic region, primarily serving communities across Pennsylvania and extending into three counties in New Jersey. Through its wholly-owned subsidiary, Mid Penn Bank, the company offers a comprehensive suite of financial services, spanning commercial and consumer banking, trust and wealth management, and insurance. This full-service model caters to a diverse clientele, from individuals and small businesses to larger corporations and non-profit organizations.

MPB's overarching strategy is one of purposeful growth, combining organic expansion within its established markets with strategic, value-accretive acquisitions. This approach is designed to build scale, diversify revenue streams, and deepen its presence in attractive geographic areas. The recent completion of the William Penn Bancorporation merger on April 30, 2025, stands as a testament to this strategy, significantly increasing MPB's footprint, particularly in southeastern Pennsylvania and southern New Jersey. This follows the earlier acquisition of the Commonwealth Benefits Group insurance business in July 2024, broadening the non-interest income base.

The competitive landscape for MPB is dynamic and multifaceted. It faces direct competition from a range of regional banks, including larger players like Fulton Financial (FULT) and M&T Bank (MTB), as well as similarly sized institutions such as Peoples Financial Services (PFIS) and WSFS Financial (WSFS). Competition exists across all service lines, from deposit gathering and loan origination to wealth management and insurance. Beyond traditional banks, MPB also contends with indirect competitors like fintech firms and online banks, particularly in the digital services space.

In this competitive arena, MPB leverages its community-focused network and localized decision-making as key differentiators. While larger competitors like MTB and FULT benefit from greater scale and potentially lower operating costs per unit, MPB aims to provide a more personalized banking experience. The company's investments in operational technology and digital capabilities, while perhaps not a single, unique core technology like a manufacturing process, are crucial competitive factors. These investments, reflected in increasing software licensing and ATM/card processing expenses, support digital offerings like mobile banking. The competitive analysis suggests MPB's mobile banking adoption shows innovation speed, with reported 20% faster transaction processing and 5-10% lower operating costs per transaction compared to some peers. The company's R&D investment, partly supported by recent capital raises, is noted as contributing to 5-10% faster innovation cycles. These technological advancements, while not necessarily proprietary "moats" in isolation, contribute to efficiency and customer experience, helping MPB compete against rivals who may have simpler tech infrastructure (like PFIS) or more advanced automation (like WSFS). The strategic intent behind these investments is to enhance operational effectiveness and customer engagement, which is vital for maintaining market share and supporting growth in a digitally evolving industry.

Recent Performance: Margin Strength and Strategic Integration

Mid Penn Bancorp's financial results for the first quarter of 2025 reflect a company benefiting from the current interest rate environment while strategically positioning itself for future growth through acquisition. Net income available to common shareholders for the three months ended March 31, 2025, was $13.7 million, or $0.71 per diluted common share. This compares favorably to net income of $12.1 million, or $0.73 per diluted common share, for the same period in 2024. The slight decrease in EPS despite higher net income is attributable to an increase in the weighted-average diluted shares outstanding, reflecting capital raising activities.

The primary driver of the improved bottom line was a significant expansion in net interest income. For Q1 2025, net interest income reached $42.5 million, up from $36.5 million in Q1 2024. On a tax-equivalent basis, the net interest margin widened by 40 basis points, climbing from 2.97% in Q1 2024 to 3.37% in Q1 2025. This margin expansion was a function of both volume and rate dynamics. The yield on interest-earning assets increased to 5.65% in Q1 2025 from 5.51% in Q1 2024, as assets continued to reprice at higher rates and the company maintained discipline on new loan pricing. Simultaneously, the rate on interest-bearing liabilities decreased from 3.24% to 2.95%, primarily due to decreases in the cost of short-term borrowings, long-term debt, and time deposits, even as the company strategically offered higher rates to retain and attract deposits in a competitive funding environment.

Balance sheet growth in the first quarter of 2025 was modest organically, preceding the impact of the William Penn merger. Total loans, net of unearned income, increased by $48.1 million, or 1.1%, from $4.44 billion at December 31, 2024, to $4.49 billion at March 31, 2025. This growth was concentrated in owner-occupied commercial real estate ($30.3 million increase), nonowner-occupied commercial real estate ($21.1 million increase), and commercial and industrial loans ($15.3 million increase), partially offset by a decrease in residential construction loans. Total deposits saw a similar modest increase of $42.3 million, or 0.9%, from $4.69 billion to $4.73 billion over the same period, driven by increases in interest-bearing transaction accounts and non-interest bearing accounts, which helped offset a decrease in higher-cost time deposits.

Noninterest income experienced a decrease, totaling $5.2 million in Q1 2025 compared to $5.8 million in Q1 2024. This $0.6 million decrease was primarily attributed to a $1.4 million decrease in Bank-owned life insurance benefits received, which can be volatile. However, underlying fee income streams showed positive movement, with increases in loan level swap fees ($0.36 million increase), other letter of credit income ($0.11 million increase), and Mortgage Banking income ($0.17 million increase).

Noninterest expense increased by $2.1 million, or 7.4%, to $30.6 million in Q1 2025 compared to $28.5 million in Q1 2024. Key drivers included higher salaries and employee benefits ($0.85 million increase), increased software licensing costs ($0.45 million increase) reflecting ongoing technology investments, occupancy expenses ($0.29 million increase), and $0.31 million in merger and acquisition expenses related to the William Penn transaction. These increases were partially offset by a decrease in legal and professional fees.

Overall, the financial performance in Q1 2025 highlights MPB's ability to expand its net interest margin in the current rate environment and demonstrates continued organic growth in core lending areas. The increase in noninterest expense, particularly related to M&A and technology, reflects strategic investments aimed at future scale and efficiency.

Asset Quality and Risk Management: Vigilance in a Changing Environment

Managing credit risk is paramount for any financial institution, and MPB employs a detailed framework to monitor the health of its loan portfolio. The company categorizes loans based on borrower financial health, payment history, collateral, and economic trends, using a multi-tiered risk rating system (PASS, SPECIAL MENTION, SUBSTANDARD, DOUBTFUL, LOSS).

As of March 31, 2025, the Allowance for Credit Losses (ACL) for loans stood at $35.8 million, representing 0.80% of total loans, a slight increase from $35.5 million (0.80% of total loans) at December 31, 2024. The provision for credit losses on loans was $321 thousand for the three months ended March 31, 2025, compared to a benefit of $619 thousand for the same period in 2024. This increase in provision was primarily attributed to an increase in loss factors across certain portfolios, reflecting a more cautious stance in the current economic climate. Net loan recoveries were $3 thousand in Q1 2025, a positive shift from net charge-offs of $44 thousand in Q1 2024.

Non-performing assets saw an increase in the first quarter, totaling $25.4 million at March 31, 2025, up from $22.7 million at December 31, 2024. This increase was primarily driven by three commercial loans with a combined balance of $7.0 million being placed on nonaccrual status, partially offset by the payoff of two commercial loans totaling $3.0 million. Despite this increase, the ratio of non-performing assets to total assets remained relatively low at 0.46% (up from 0.29% a year prior), and the ratio of ACL to non-performing loans was a robust 149.05%. Delinquency (loans past due 30 days or more) as a percentage of total loans slightly decreased to 0.50% at March 31, 2025, from 0.52% at December 31, 2024.

MPB's risk management also extends to market risk, primarily interest rate risk. The company uses an asset-liability management model to assess the impact of interest rate movements on net interest income. As of March 31, 2025, the model indicated that MPB is positioned to benefit from rising interest rates, with projected increases in net interest income over a one-year horizon across various upward rate shock scenarios (e.g., +3.30% for a +100 bps shock, +12.50% for a +400 bps shock). Conversely, falling rates would negatively impact net interest income. This positioning reflects the asset-sensitive nature of the balance sheet in the near term.

Beyond financial risks, MPB highlights potential impacts from changes in financial regulations and economic policies under the current U.S. administration. While deregulation efforts could reduce compliance costs, they might also intensify competition. Shifts in trade policies could affect customer creditworthiness and loan demand, and changes to corporate tax structures could alter the financial landscape. Litigation risk is also a standard consideration, though current matters are not expected to be material to the financial position.

Capital, Liquidity, and Strategic Momentum

Maintaining strong capital and liquidity positions is fundamental for a bank's stability and growth. Mid Penn Bancorp and Mid Penn Bank both exceeded the minimum capital requirements under Basel III and were considered well-capitalized as of March 31, 2025. This strong capital base provides a buffer against potential losses and supports future growth initiatives, including acquisitions.

Liquidity management is a daily focus for MPB, ensuring sufficient resources to meet funding needs, depositor withdrawals, and loan demand. Key liquidity sources include a growing core deposit base, investment securities, loan payments, and borrowing capacity from the Federal Home Loan Bank (FHLB) and correspondent banks. As of March 31, 2025, current liquidity, including borrowing capacity, stood at $1.6 billion, representing a healthy 104.2% of uninsured and uncollateralized deposits. The Bank had significant unused borrowing capacity from the FHLB ($1.5 billion) and unused overnight lines of credit with correspondent banks ($35.0 million), providing ample contingent liquidity.

Shareholders' equity increased by $12.9 million, or 2.0%, in Q1 2025, primarily driven by net income. The company also continues to execute its treasury stock repurchase program, which was recently renewed through April 30, 2026, with approximately $5.0 million remaining available for repurchase as of March 31, 2025. This program signals a commitment to returning capital to shareholders.

The most significant recent strategic development is the completion of the William Penn Bancorporation merger on April 30, 2025. This transaction, which received overwhelming shareholder and regulatory support, is expected to significantly increase MPB's presence in attractive markets. As CEO Rory G. Ritrievi stated, "The first quarter of 2025 was highlighted by the completion of the William Penn Bancorporation merger on April 30, 2025, which significantly increased our presence in the attractive southeastern Pennsylvania and southern New Jersey markets. We are excited about the opportunities this combination presents to enhance shareholder value." This merger represents a substantial step in MPB's inorganic growth strategy and is anticipated to contribute to future scale and profitability.

Conclusion

Mid Penn Bancorp is a regional bank actively pursuing growth through a combination of strategic acquisitions and organic initiatives. The first quarter of 2025 demonstrated solid underlying performance, marked by notable net interest margin expansion driven by effective asset-liability management in the current rate environment. While noninterest income saw a temporary dip, core fee-generating activities showed promise. The company maintains a sound capital position and ample liquidity, providing a stable foundation for operations and future expansion.

The recently completed acquisition of William Penn Bancorporation is a pivotal moment for MPB, significantly enhancing its market presence and offering potential for increased scale and profitability. While asset quality metrics warrant careful monitoring, particularly the increase in non-performing commercial loans in Q1, overall delinquency remains manageable, and the ACL appears adequate. Investors should watch the successful integration of the William Penn acquisition, the trajectory of asset quality in a potentially slowing economy, and the continued impact of interest rate changes on the net interest margin as key factors influencing MPB's future performance and the realization of its growth strategy.