MID PENN BANCORP, INC. SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this document may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Mid Penn or the Bank to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. The words "expect," "anticipate," "intend," "plan," "believe," "estimate," and similar expressions are intended to identify such forward-looking statements. Mid Penn's actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:
• the effects of future economic conditions on Mid Penn, the Bank, its
nonbank subsidiaries, and their markets and customers;
• governmental monetary and fiscal policies, as well as legislative and
regulatory changes;
• future actions or inactions of
failure to increase the government debt limit or a prolonged shutdown of
the federal government;
• business or economic disruption from national or global epidemic or
pandemic events;
• the risks of changes in interest rates on the level and composition of
deposits, loan demand, and the values of loan collateral, the value of
investment securities, and interest rate protection agreements;
• the effects of competition from other commercial banks, thrifts, mortgage
banking firms, consumer finance companies, credit unions, securities
brokerage firms, insurance companies, money market and other mutual funds
and other financial institutions operating in Mid Penn's market area and
elsewhere, including institutions operating locally, regionally,
nationally and internationally, together with such competitors offering
banking products and services by mail, telephone, computer and the
internet;
• an increase in the Pennsylvania
capital stock is currently subject, or imposition of any additional taxes
on the capital stock of Mid Penn or Mid Penn Bank ;
• impacts of the capital and liquidity requirements imposed by bank
regulatory agencies;
• the effect of changes in accounting policies and practices, as may be
adopted by the regulatory agencies, as well as the
Accounting Oversight Board,
and other accounting and reporting standard setters;
• the costs and effects of litigation and of unexpected or adverse outcomes
in such litigation;
• technological changes;
• our ability to implement business strategies, including our acquisition
strategy;
• our ability to successfully expand our franchise, including acquisitions
or establishing new offices at favorable prices;
• our ability to successfully integrate any banks, companies, offices,
assets, labilities, 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 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 NASDAQ;
• our ability to maintain the value and image of our brand and protect our
intellectual property rights;
• volatility in the securities markets;
• disruptions due to flooding, severe weather, or other natural disasters or
Acts of God;
• acts of war, terrorism, or global military conflict;
• supply chain disruption; and
• the factors described in Item 1A of this Annual Report.
All written or oral forward-looking statements attributable to Mid Penn are expressly qualified in their entirety by these cautionary factors.
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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 year ended 2021, compared to 2020 and 2019, in general, have been materially impacted by the acquisition ofRiverview Financial Corporation , which closed onNovember 30, 2021 . For comparative purposes, some 2020 and 2019 balances have been reclassified to conform to the 2021 presentation. Such reclassifications had no impact on net income available to common shareholders or shareholders' equity. 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.
Critical Accounting Estimates
Mid Penn's consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America ("GAAP") and conform to general practices within the banking industry for smaller reporting public companies. 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 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 loan and lease losses, the evaluation of the Corporation's investment securities for other-than-temporary impairment, the valuation of the Corporation's goodwill for impairment, and the valuation of assets acquired and liabilities assumed in business combinations, to be the accounting areas that require the most subjective and complex judgments. The allowance for loan and lease losses represents management's estimate of probable incurred credit losses inherent in the loan and lease portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience adjusted for subjectively determined qualitative factors, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan and lease portfolio also represents the largest asset type on the consolidated balance sheet. Throughout the remainder of this report, the terms "loan" or "loans" refers to both loans and leases. Valuations for the investment portfolio are determined using quoted market prices, where available. If quoted market prices are not available, investment valuation is based on pricing models, quotes for similar investment securities, and observable values based upon yield curves and spreads. In addition to valuation of securities, management must assess whether there are any declines where the fair value is below the carrying value of any investments such that the decline should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of a loss in the consolidated statement of income. Certain intangible assets generated in connection with acquisitions are periodically assessed for impairment.Goodwill is tested at least annually for impairment, and if certain events occur which indicate goodwill might be impaired between annual tests, such as the potential impact of the COVID-19 pandemic, goodwill must be tested when such events occur. In making this assessment, Mid Penn considers a number of factors including operating results, business plans, economic projections, anticipated future cash flows, current market data, stock price, etc. Similarly, the amortized basis of the core deposit intangible asset and trade name intangible are periodically assessed for impairment. There are inherent uncertainties related to these factors and Mid Penn's judgment in applying them to the analysis of core deposit intangible, trade name intangible, and goodwill impairment. Future changes in economic and operating conditions could result in goodwill or core deposit intangible or trade name intangible impairment in subsequent periods. Valuations of assets acquired and liabilities assumed in business combinations are measured at fair value as of the acquisition date. In many cases, determining the fair value of the assets acquired and liabilities assumed requires Mid Penn to estimate 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. 30
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Financial Summary 2021 versus 2020
As noted above, the comparability of the results of operations for the years
ended 2021 and 2020, in general, have been materially impacted by the
acquisition of Riverview, which closed on
Mid Penn's net income to common shareholders (earnings) for the year endedDecember 31, 2021 was$29,319,000 or$2.71 per common share basic and diluted, compared to earnings of$26,209,000 or$3.11 per common share basic and$3.10 per share diluted for the year endedDecember 31, 2020 . The results for the year endedDecember 31, 2021 included the recognition of$21,954,000 of PPP loan processing fees generated as a result of Mid Penn's participation in the PPP. These PPP fees are recognized into interest income over the term of the respective loan, or sooner if the loans are forgiven by theSmall Business Administration or the borrowers otherwise pay down principal prior to a loan's stated maturity. The twelve months endedDecember 31, 2021 also include merger and acquisition expenses of$3,067,000 resulting from the Riverview merger, which was announced onJune 30, 2021 and legally closed onNovember 30, 2021 . Additionally, during the fourth quarter of 2021, Mid Penn recognized non-recurring post-acquisition restructuring expenses totaling$9,880,000 consisting of (i)$2,292,000 related to branch closures as a result of the recently announced Retail Network Optimization Plan, and (ii)$7,588,000 of termination fees and severance costs in connection with the Riverview acquisition. Mid Penn also recognized other period costs related to the merger of$310,000 . Total assets of Mid Penn were$4,689,425,000 as ofDecember 31, 2021 , reflecting an increase of$1,690,477,000 or 56 percent compared to total assets of$2,998,948,000 as ofDecember 31, 2020 . The majority of this increase reflects the assets acquired as a result of the Riverview merger onNovember 30, 2021 totaling$1,272,921,000 . Total loans as ofDecember 31, 2021 were$3,104,396,000 compared to$2,384,041,000 as ofDecember 31, 2020 , an increase of$720,355,000 since year-end 2020. This significant increase was driven by the Riverview acquisition. As ofDecember 31, 2021 , the outstanding balance of Riverview acquired loans was$811,038,000 , net of purchase accounting adjustments. Total loans were also significantly impacted by both (i) organic loan growth within Mid Penn's legacy markets of$191,245,000 equating to 9 percent organic growth sinceDecember 31, 2020 , less (ii) net forgiveness of PPP loans originated by Mid Penn of$281,928,000 . Organic loan growth occurred primarily within Mid Penn's commercial real estate and commercial and industrial financing loan portfolios. Total deposits increased$1,527,436,000 or 62 percent, from$2,474,580,000 atDecember 31, 2020 , to$4,002,016,000 atDecember 31, 2021 . The increase in total deposits since year-end 2020 was attributable primarily to the balance of deposits assumed through the acquisition of Riverview totaling$1,052,435,000 as ofDecember 31, 2021 , net of purchase accounting adjustments. Organic deposit growth of$475,436,000 or 19 percent sinceDecember 31, 2020 was driven by significant increases in noninterest-bearing, interest-bearing, and money market deposits, primarily due to both expanded cash management and commercial deposit account relationships, and new deposits established as a result of Mid Penn's PPP loan funding activities. Shareholders' equity increased by$234,388,000 or 92 percent from$255,688,000 as ofDecember 31, 2020 to$490,076,000 as ofDecember 31, 2021 , primarily due to both (i) the issuance of 4,519,776 shares of Mid Penn common stock onNovember 30, 2021 , in connection with the acquisition of Riverview, and, (ii) the completion of theMay 4, 2021 public offering of 2,990,000 shares of common stock at a price of$25.00 per share, with the aggregate gross proceeds of the offering totaling$74,750,000 . The net proceeds of the offering after deducting the underwriting discount and offering expenses were$70,238,000 . The additional shares issued as a result of the Riverview acquisition and the public offering significantly impacted the weighted average number of shares outstanding used for both the fourth quarter of 2021 and year-to-date 2021 earnings per share calculations. Regulatory capital ratios for both Mid Penn and its banking subsidiary exceeded regulatory "well-capitalized" levels at bothDecember 31, 2021 andDecember 31, 2020 . Mid Penn's return on average shareholders' equity ("ROE"), a widely recognized performance indicator in the financial industry, was 8.91% in 2021 and 10.76% in 2020. Return on average assets ("ROA"), another performance indicator, was 0.83% in 2021 and 0.95% in 2020. 31
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For the year endedDecember 31, 2021 , Mid Penn's tax-equivalent net interest margin was 3.30 percent versus 3.48 percent during the year endedDecember 31, 2020 . The overall decrease in net interest margin for the year endedDecember 31, 2021 was driven by the full-year impact to loan yields as a result of market rate cuts initiated by theFederal Open Market Committee ("FOMC") inMarch 2020 in response to the COVID-19 pandemic. The impact to loan yields was favorably offset by a decrease in the cost of funds, driven by deposit rate decreases in response to the above-mentioned market rate cuts. Additionally, the favorable impacts of the recognition of$21,954,000 of PPP fees within interest income, as well as volume-driven increases in interest income due to higher average balances of loans and federal funds sold, helped to lessen the impact of the lower loan yield on net interest margin. Further discussion of the net interest margin can be found in the Net Interest Income section below. Mid Penn's allowance for loan and lease losses atDecember 31, 2021 was$14,597,000 or 0.47 percent of total loans as compared to$13,382,000 or 0.56 percent atDecember 31, 2020 . Mid Penn had net loan charge-offs of$1,730,000 and$333,000 for the years endedDecember 31, 2021 and 2020, respectively.
Further discussion of these items can be found in the Provision for Loan and Lease Losses section below.
Total nonperforming assets were$10,497,000 atDecember 31, 2021 , a decrease compared to nonperforming assets of$15,644,000 atDecember 31, 2020 . Further discussion of the components of nonperforming assets can be found in the Credit Quality, Credit Risk, and Allowance for Loan and Lease Losses section below. The Corporation's regulatory capital measures of Tier 1 Capital (to risk weighted assets) of$374,368,000 or 8.06 percent, and Total Capital (to risk weighted assets) of$452,527,000 or 14.6 percent, atDecember 31, 2021 , are above the regulatory "well capitalized" requirements. Tier 1 Capital consists primarily of Mid Penn's shareholders' equity less the value of goodwill and other intangible assets, and excluding the impact of the accumulated other comprehensive income/loss component. Total Capital includes the Tier 1 Capital, as well as Mid Penn's qualifying subordinated debt and the allowance for loan and lease losses, within permitted regulatory limits. Risk-weighted assets are determined by assigning various levels of risk, in accordance with regulatory risk-weighting definitions, to different categories of assets and off-balance sheet activities. 2020 versus 2019 Mid Penn's net income to common shareholders (earnings) for the year endedDecember 31, 2020 was$26,209,000 or$3.11 per common share basic and$3.10 per share diluted, compared to earnings of$17,701,000 or$2.09 per common share basic and diluted for the year endedDecember 31, 2019 . The results for the year endedDecember 31, 2020 included the recognition of$13,137,000 of PPP loan processing fees generated as a result of Mid Penn's participation in the PPP. These PPP fees are recognized into interest income over the term of the respective loan (most have a 24-month maturity), or sooner if the loans are forgiven by theSmall Business Administration or the borrowers otherwise pay down principal prior to a loan's stated maturity. Total assets of Mid Penn were$2,998,948,000 as ofDecember 31, 2020 , reflecting an increase of$767,773,000 or 34 percent compared to total assets of$2,231,175,000 as ofDecember 31, 2019 . Included in this increase is the significant volume of$388,313,000 of Paycheck Protection Program ("PPP") loans outstanding, net of deferred fees, as ofDecember 31, 2020 . Total core banking loans (total loans excluding both the PPP portfolio and mortgage loans held for sale) increased to$1,995,728,000 as ofDecember 31, 2020 , representing an annualized core loan growth rate of over 13 percent since the end of 2019. The asset growth was funded primarily by both (i)$562,186,000 of deposit growth, representing an annual deposit growth rate of over 29 percent, including an increase of$226,188,000 in noninterest-bearing deposits for the year endedDecember 31, 2020 ; and (ii) a$167,829,000 net increase in borrowings, including$125,617,000 of funding obtained from theFederal Reserve through the Paycheck Protection Program Liquidity Facility ("PPPLF"). Under the PPPLF, theFederal Reserve supplies financing to the Bank at a rate of 35 basis points (0.35%) for a term and amount determined based on the principal amount of PPP loans fully and specifically pledged as collateral in support of the PPPLF borrowings. Draws of PPPLF funds must be repaid to theFederal Reserve immediately after the specific PPP loans collateralizing the related draws are repaid to the Bank. As part of the annual increase in borrowings, long-term debt increased from$32,903,000 atDecember 31, 2019 to$75,115,000 atDecember 31, 2020 . During the second quarter of 2020, Mid Penn executed a newFederal Home Loan Bank ("FHLB") two-year term lower cost borrowing of$70,000,000 to fund anticipated core loan growth. This increase was partially offset by the prepayment of$27,500,000 of higher-cost long-term FHLB borrowings. Mid Penn recognized$165,000 of FHLB prepayment penalties, which were recorded within other noninterest expenses on the Consolidated Statements of Income. Mid Penn recognized$93,000 of FHLB prepayment penalties during the year endedDecember 31, 2019 attributable to the prepayment of$20,000,000 of higher-cost FHLB borrowings. 32
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Subordinated debt outstanding increased
• In
Notes due
five years and then float at the
intended to be treated as Tier 2 capital for regulatory capital purposes.
• In
Notes due
investors. The
year for the first five years and then float at the
Prime Rate and are intended to be treated as Tier 2 capital for regulatory
capital purposes.
• Also, during the fourth quarter of 2020, Mid Penn redeemed
subordinated debt assumed in 2018 in conjunction with Mid Penn's acquisition
of
fixed rate of interest of 7 percent and was redeemed promptly following the
expiration of the noncallable period and after receiving the required
regulatory approval for the redemption. Mid Penn recognized prepayment fees of
$143,000 related to the early redemption, which are included in other noninterest expenses. Mid Penn's return on average shareholders' equity ("ROE"), a widely recognized performance indicator in the financial industry, was 10.76% in 2020 and 7.67% in 2019. Return on average assets ("ROA"), another performance indicator, was 0.95% in 2020 and 0.82% in 2019. Mid Penn's tax-equivalent net interest margin for the year endedDecember 31, 2020 was 3.48 percent versus 3.57 percent for the year endedDecember 31, 2019 . The yield on interest-earning assets decreased from 4.83 percent for 2019 to 4.25 percent for 2020. The net interest margin and yields on loans and interest-earning assets reflect the recognition of PPP loan processing fees in total interest income. Though the average balance of interest-earning assets increased year over year, the yields on interest-earning assets declined due to both (i) the significant average balance of PPP loans, which earn interest at a rate of 1 percent while outstanding, and (ii) reductions in market interest rates and the impact on the yields of loans, investments, and overnight funds subsequent toDecember 2019 as a result of the 1.50 percent of combinedFederal Open Market Committee ("FOMC") rate cuts duringMarch 2020 in response to the COVID-19 pandemic. The total cost of deposits for the year endedDecember 31, 2020 favorably decreased to 0.72 percent compared to 1.19 percent for the year endedDecember 31, 2019 as a result of the aforementioned growth in noninterest-bearing deposits, and from deposit rate decrease adjustments made during the year, including those made in response to theMarch 2020 FOMC rate cuts. Further discussion of the net interest margin can be found in the Net Interest Income section below. Mid Penn's allowance for loan and lease losses atDecember 31, 2020 was$13,382,000 or 0.56% of total loans (less unearned discount), as compared to$9,515,000 or 0.54% atDecember 31, 2019 . Mid Penn had net loan charge-offs of$333,000 and$272,000 for the years endedDecember 31, 2020 and 2019, respectively. Further discussion of these items can be found in the Provision for Loan and Lease Losses section below. Total nonperforming assets were$15,644,000 atDecember 31, 2020 , an increase compared to nonperforming assets of$12,157,000 atDecember 31, 2019 . Further discussion of the components of nonperforming assets can be found in the Credit Quality, Credit Risk, and Allowance for Loan and Lease Losses section below. The Corporation's regulatory capital measures of Tier 1 Capital (to risk weighted assets) of$188,501,000 or 9.6%, and Total Capital (to risk weighted assets) of$246,529,000 or 12.6%, atDecember 31, 2020 , are above the regulatory "well capitalized" requirements. Tier 1 Capital consists primarily of Mid Penn's shareholders' equity less the value of goodwill and other intangible assets, and excluding the impact of the accumulated other comprehensive income/loss component. Total Capital includes the Tier 1 Capital, as well as Mid Penn's qualifying subordinated debt and the allowance for loan and lease losses, within permitted regulatory limits. Risk-weighted assets are determined by assigning various levels of risk, in accordance with regulatory risk-weighting definitions, to different categories of assets and off-balance sheet activities. 33
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TABLE 1: AVERAGE BALANCES, EFFECTIVE INTEREST DIFFERENTIAL AND INTEREST YIELDS
Income and Rates on a Taxable Equivalent Basis for Years Ended (Dollars in thousands)
December 31, 2021 December 31, 2020 December 31, 2019
Average Average Average Average Average Average
Balance Interest Rates Balance Interest Rates Balance Interest RatesASSETS:
Interest Bearing Balances$ 15,916 $ 13 0.08 %$ 3,593 $ 39 1.09 %$ 5,236 $ 100 1.91 %Investment Securities : Taxable 124,692 2,257 1.81 % 112,636 2,524 2.24 % 149,187 3,442 2.31 % Tax-Exempt 57,361 1,420 (a) 2.48 % 49,410 1,276 (a) 2.58 % 89,011 2,590 (a) 2.91 %Total Securities 182,053 3,677 2.02 % 162,046 3,800 2.35 % 238,198 6,032 2.53 % Federal Funds Sold 567,647 809 0.14 % 135,243 497 0.37 % 63,436 1,222 1.93 % Loans and Leases, Net 2,539,074 119,082 (b) 4.69 % 2,247,002 103,871 (b) 4.62 % 1,678,000 88,398 (b) 5.27 %Restricted Investment in Bank Stocks 7,351 345 4.69 % 6,554 360 5.49 % 5,964 424 7.11 % Total Earning Assets 3,312,041 123,926 3.74 % 2,554,438 108,567 4.25 % 1,990,834 96,176 4.83 % Cash and Due from Banks 38,518 33,485 30,134 Other Assets 169,946 170,506 145,996 Total Assets$ 3,520,504 $ 2,758,429 $ 2,166,964 LIABILITIES & SHAREHOLDERS' EQUITY: Interest-bearing Demand$ 688,595 $ 2,330 0.34 %$ 538,385 $ 3,423 0.64 %$ 415,359 $ 4,331 1.04 % Money Market 842,107 3,157 0.37 % 605,552 4,072 0.67 % 443,248 7,355 1.66 % Savings 218,546 237 0.11 % 186,132 346 0.19 % 187,927 641 0.34 % Time 451,277 5,603 1.24 % 443,607 8,558 1.93 % 471,241 9,223 1.96 % Total Interest-bearing Deposits 2,200,525 11,327 0.51 % 1,773,676 16,399 0.92 % 1,517,775 21,550 1.42 % Federal Funds Purchased - - 0.00 % - - 0.00 % 3,739 111 2.97 % Short-term Borrowings 153,850 539 0.35 % 106,233 371 0.35 % 12,818 359 2.80 % Long-term Debt 75,483 831 1.10 % 66,609 999 1.50 % 54,634 1,580 2.89 % Subordinated Debt 47,116 2,057 4.37 % 38,740 1,958 5.05 % 27,073 1,564 5.78 % Total Interest-bearing Liabilities 2,476,974 14,754 0.60 % 1,985,258 19,727 0.99 % 1,616,039 25,164 1.56 % Noninterest-bearing Demand 684,022 505,094 296,872 Other Liabilities 30,433 24,435 23,325 Shareholders' Equity 329,075 243,642 230,728 Total Liabilities & Shareholders' Equity$ 3,520,504 $ 2,758,429 $ 2,166,964 Net Interest Income (taxable equivalent basis)$ 109,172 $ 88,840 $ 71,012 Taxable Equivalent Adjustment (604 ) (632 ) (864 ) Net Interest Income$ 108,568 $ 88,208 $ 70,148 Total Yield on Earning Assets 3.74 % 4.25 % 4.83 % Rate on Supporting Liabilities 0.60 % 0.99 % 1.56 % Average Interest Spread 3.15 % 3.26 % 3.27 % Net Interest Margin 3.30 % 3.48 % 3.57 %
(a) Includes tax equivalent adjustments (calculated using statutory rates of 21
percent) of
2019, respectively, resulting from tax-free municipal securities in the
investment portfolio.
(b) Includes tax equivalent adjustments (calculated using statutory rates of 21
percent) of
2019, respectively, resulting from tax-free municipal loans in the
commercial loan portfolio.
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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 Table 1 above are presented on a fully taxable-equivalent basis. Tax-equivalent adjustments were calculated using a statutory corporate tax rate of 21 percent for the years endedDecember 31, 2021 , 2020 and 2019. For purposes of calculating loan yields, average loan balances include nonaccrual loans. Loan fees of$25,474,000 ,$15,795,000 and$2,153,000 are included with loan interest income in Table 1 above for the years endedDecember 31, 2021 , 2020, and 2019, respectively. During the years endedDecember 31, 2021 and 2020, Mid Penn recognized$21,954,000 and$13,137,000 of PPP fees, respectively, which are included in loan fees. Similar fees were not recognized during the year endedDecember 31, 2019 .
TABLE 2: VOLUME ANALYSIS OF CHANGES IN NET INTEREST INCOME
2021 Compared to 2020 2020 Compared to 2019
(Dollars in thousands on a Increase (Decrease) Increase (Decrease)
Taxable Equivalent Basis) Due to Change In: Due to Change In:
Volume Rate Net Volume Rate Net
INTEREST INCOME:
Interest Bearing Balances $ 134 $ (160 ) $ (26 ) $ (31 ) $ (30 ) $ (61 )
Investment Securities :
Taxable 270 (537 ) (267 ) (843 ) (75 ) (918 )
Tax-Exempt 205 (61 ) 144 (1,152 ) (162 ) (1,314 )
Total Securities 475 (598 ) (123 ) (1,995 ) (237 ) (2,232 )
Federal Funds Sold 1,589 (1,277 ) 312 1,383 (2,108 ) (725 )
Loans and Leases, Net 13,501 1,710 15,211 29,975 (14,502 ) 15,473
Restricted Investment Bank
Stocks 44 (59 ) (15 ) 42 (106 ) (64 )
Total Interest Income 15,743 (384 ) 15,359 29,374 (16,983 ) 12,391
INTEREST EXPENSE:
Interest Bearing Deposits:
Interest Bearing Demand 955 (2,048 ) (1,093 ) 1,283 (2,191 ) (908 )
Money Market 1,591 (2,506 ) (915 ) 2,693 (5,976 ) (3,283 )
Savings 60 (169 ) (109 ) (6 ) (289 ) (295 )
Time 148 (3,103 ) (2,955 ) (541 ) (124 ) (665 )
Total Interest Bearing Deposits 2,754 (7,826 ) (5,072 ) 3,429 (8,580 ) (5,151 )
Federal Funds Purchased - - - - - -
Short-term Borrowings 166 2 168 2,546 (2,645 ) (99 )
Long-term Debt 133 (301 ) (168 ) 346 (927 ) (581 )
Subordinated Debt 423 (324 ) 99 674 (280 ) 394
Total Interest Expense 3,476 (8,449 ) (4,973 ) 6,995 (12,432 ) (5,437 )
NET INTEREST INCOME $ 12,267 $ 8,065 $ 20,332 $ 22,379 $ (4,551 ) $ 17,828 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 percent for the
years ended
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For the year endedDecember 31, 2021 , Mid Penn's tax-equivalent net interest margin was 3.30 percent versus 3.48 percent for the year endedDecember 31, 2020 and 3.57 percent for the year endedDecember 31, 2019 . During 2021, taxable equivalent net interest income increased$20,332,000 or 23 percent compared to 2020. During 2020, taxable equivalent net interest income increased$17,828,000 or 25 percent compared to 2019. The primary sources of the increased taxable equivalent net interest income for the 2021 year included (i)$6,452,000 of interest income from core loan growth, (ii) reduced interest expense due to a lower cost of deposits, and (iii) the recognition of$21,954,000 of PPP loan processing fees generated as a result of Mid Penn's participation in the PPP. These PPP fees are recognized into interest income over the term of the respective loan (most have a 24-month maturity), or sooner if the loans are forgiven by theSmall Business Administration or the borrowers otherwise pay down principal prior to a loan's stated maturity. The yield on interest-earning assets decreased to 3.74% in 2021, from 4.25% in 2020 and 4.83% in 2019. Though the average balance of interest-earning assets increased year over year, the yields on interest-earning assets declined due to both (i) the significant average balance of PPP loans, which earn interest at a rate of 1 percent while outstanding, and (ii) the full-year impact to loan yields as a result of market rate cuts initiated by theFederal Open Market Committee ("FOMC") inMarch 2020 in response to the COVID-19 pandemic. Interest expense for 2021 decreased by$4,973,000 or 25 percent when compared to 2020. Interest expense for 2020 decreased by$5,437,000 or 22 percent when compared to 2019. The cost of interest-bearing liabilities decreased to 0.60 percent in 2021 from 0.99 percent in 2020 and 1.56 percent in 2019. The decrease in the cost of interest-bearing liabilities in 2021 was primarily due to the deposit rate decreases made during the year, including the full-year impact of the lower deposit rates executed in response to theMarch 2020 FOMC rate cuts. Further changes to the future mix of the loan, investment, and deposit products in the Bank's portfolios, and the volume of variable rate and fixed rate instruments based upon new loan originations and investment purchases, may significantly change the net interest margin and the yields on earning-assets and the costs of interest-bearing liabilities. In addition, net interest income may be impacted by further interest rate actions of theFederal Reserve or other movements in market rates and the yield curve. Management continues to monitor the net interest margin closely.
Provision for Loan and Lease Losses
The provision for loan and lease losses is the expense necessary to maintain the allowance for loan and lease losses at a level adequate to absorb management's estimate of probable losses inherent in the loan and lease portfolio. Mid Penn's provision for loan and lease losses is based upon management's monthly reviews of the loan portfolio throughout each year. The purpose of the monthly reviews is to assess loan quality, identify impaired loans and leases, analyze delinquencies, ascertain loan and lease growth, evaluate actual and potential charge-offs and recoveries, assess general economic conditions in the markets we serve, and determine appropriate loan loss provisions to maintain an adequate allowance. Mid Penn has maintained the allowance for loan and lease losses in accordance with Mid Penn's portfolio credit risk and potential loss assessment process, which took into consideration the risk characteristics of the loan and lease portfolio, shifting collateral values, and the assessment of other relevant qualitative factors fromDecember 31, 2020 toDecember 31, 2021 . For the year endedDecember 31, 2021 , the provision for loan and lease losses was$2,945,000 , a decrease of 30 percent compared to a provision for loan losses of$4,200,000 for the year endedDecember 31, 2020 . The allowance for loan losses and the related provision reflect Mid Penn's continued application of the incurred loss method for estimating credit losses as Mid Penn is not yet required to adopt the current expected credit loss ("CECL") accounting standard, which must be adopted onJanuary 1, 2023 . The allowance for loan and lease losses as a percentage of total loans was 0.47 percent atDecember 31, 2021 compared to 0.56 percent atDecember 31, 2020 and 0.54 percent atDecember 31, 2019 . The ratios as ofDecember 31, 2021 , were affected by the addition of the Riverview acquired loans, which, in accordance with purchase accounting principles, were recorded at fair value at the time of acquisition with no related allowance for loan losses. For the years endedDecember 31, 2021 andDecember 31, 2020 , Mid Penn had net charge-offs of$1,729,000 and$333,000 , respectively, compared to net recoveries of$272,000 during the same period of 2019. Loans charged off during 2021 were comprised of four commercial real estate, construction, and land development loans totaling$1,066,000 , five commercial and industrial loans for$866,000 , three mortgage loan for$13,000 , four consumer loans to unrelated borrowers totaling$8,000 , and$34,000 of overdrawn deposit account charge-offs. Mid Penn may need to make future adjustments to the allowance and the provision for loan and lease losses if economic conditions or loan credit quality or other relevant qualitative factors differ substantially from the assumptions used in making Mid Penn's evaluation of the level of the allowance for loan losses as compared to the balance of outstanding loans. 36
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A summary of charge-offs and recoveries of loans and leases, as well as net charge-offs by loan category, are presented in Table 3.
TABLE 3: ANALYSIS OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in thousands) Years ended December 31,
2021 2020 2019 2018 2017
Balance, beginning of year $ 13,382 $ 9,515 $ 8,397 $ 7,606 $ 7,183
Loans and leases charged off:
Commercial and industrial 866 45 217 142 25
Commercial real estate 1,044 258 60 64 322
Commercial real estate -
construction 23 7 40 40 -
Residential mortgage 13 4 29 60 102
Home equity - 58 18 185 20
Consumer 42 - 64 37 28Total loans and leases charged off 1,988 372 428
528 497
Recoveries on loans and leases previously charged off: Commercial and industrial 13 3 45 1 26 Commercial real estate 207 1 82 808 553 Commercial real estate - construction 8 2 - - - Residential mortgage 11 3 9 - 4 Home equity - 3 5 1 5 Consumer 19 27 15 9 7 Total loans and leases recovered 258 39 156
819 595
Net charge-offs (recoveries) 1,730 333 272 (291 ) (98 ) Provision for loan and lease losses 2,945 4,200 1,390 500 325 Balance, end of year$ 14,597 $ 13,382 $ 9,515 $ 8,397 $ 7,606
RATIO OF NET CHARGE-OFFS AND RECOVERIES BY LOAN CATEGORY
Years ended December 31,
2021 2020 2019 2018 2017
Commercial and industrial 0.12 % 0.01 % 0.05 % 0.06 % 0.00 %
Commercial real estate 0.07 % 0.03 % 0.00 % -0.11 % -0.05 %
Commercial real estate -
construction 0.00 % 0.00 % 0.02 % 0.04 % 0.00 %
Residential mortgage 0.00 % 0.00 % 0.01 % 0.03 % 0.10 %
Home equity 0.00 % 0.08 % 0.02 % 0.33 % 0.04 %
Consumer 0.26 % -0.36 % 0.54 % 0.39 % 0.61 %
Total ratio of net charge-offs
(recoveries) during the year to
total average loans outstanding,
net of unearned discounts 0.07 % 0.01 % 0.02 % -0.02 % -0.01 %
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TABLE 4: NONINTEREST INCOME
(Dollars in thousands) Years ended December 31,
2021 2020 2019
Income from fiduciary activities $ 2,494 $ 1,694 $ 1,416
Service charges on deposits 991 637 884
Net gain on sales of investment securities 79 467 1,878
Earnings from cash surrender value of life insurance 358 301 314
Mortgage banking income 10,314 9,682 3,771
ATM debit card interchange income 2,688 1,960 1,594
Merchant services income 431 392 413
Net gain on sales of SBA loans 969 442 831
Other income 3,209 2,333 1,520
Total Noninterest Income $ 21,533 $ 17,908 $ 12,621
Noninterest Income
2021 versus 2020
For the year ended
Mortgage banking income was$10,314,000 for the year endedDecember 31, 2021 , an increase of$632,000 or 6 percent, compared to the year endedDecember 31, 2020 . Mortgage interest rates declined as a result of market responses to the pandemic, and remained low in the twelve months sinceDecember 31, 2020 , resulting in significantly increased mortgage loan originations and secondary-market loan sales and gains. Income from fiduciary and wealth management activities was$2,494,000 for the year endedDecember 31, 2021 , an increase of$800,000 or 47 percent, compared to fiduciary income of$1,694,000 for the same period in 2020. These additional revenues were attributed to favorable growth in trust assets under management and increased sales of retail investment products. ATM debit card interchange income was$2,688,000 for the year endedDecember 31, 2021 , an increase of$728,000 or 37 percent compared to interchange income of$1,960,000 for 2020. The increase resulted from increasing card-based transaction usage across our expanding checking account customer base. Service charges on deposits were$991,000 during the year endedDecember 31, 2021 , reflecting an increase of$354,000 or 56 percent when compared to 2020, with this increase being driven primarily by an increase in non-sufficient funds fees and account analysis fees related to the growth in our cash management customer base. Net gains on sales of SBA loans were$969,000 for the year endedDecember 31, 2021 , an increase of$527,000 or 119 percent compared to net gains on sales of SBA loans of$442,000 during 2020. During the first half of 2020, much of the focus of the SBA lending function was on the PPP loan program, resulting in a lower volume of traditional SBA loans being originated in 2020, while the volume of traditional SBA loan originations and sales have generally returned to pre-pandemic levels during the second half of the year endedDecember 31, 2021 . Other income was$3,209,000 for the year endedDecember 31, 2021 , an increase of$876,000 compared to other income of$2,333,000 for the year endedDecember 31, 2020 . The increase in other income was primarily driven by higher volumes of fee-based income, including loan-level swap fees, wire transfer fees, letter of credit fees, and credit card program referrals and royalties.
Net gains on sales of investment securities were
2020 versus 2019
For the year ended
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Mortgage banking income was
ATM debit card interchange income was$1,960,000 for the year endedDecember 31, 2020 , an increase of$366,000 or 23 percent compared to interchange income of$1,594,000 for 2019. The increase resulted from increasing card-based transaction usage across our expanding checking account customer base. Income from fiduciary and wealth management activities was$1,694,000 for the year endedDecember 31, 2020 , an increase of$278,000 or 20 percent, compared to fiduciary income of$1,416,000 for 2019. The increased revenues in 2020 were attributed to growth in trust assets under management and increased sales of retail investment products. Net gains on sales of investment securities were$467,000 for the year endedDecember 31, 2020 , a decrease of$1,411,000 compared to net gains on sales of securities of$1,878,000 for the year endedDecember 31, 2019 . During the fourth quarter of 2019, Mid Penn adopted Accounting Standards Update ("ASU") 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments and, as part of the adoption, Mid Penn reclassified several held-to-maturity debt securities with an aggregate amortized cost of$67,100,000 to the available-for-sale category. Through implementation of planned organic hedging activities as part of Mid Penn's interest rate risk management, all the reclassified securities were subsequently sold, and Mid Penn realized a pre-tax gain on the sales of$1,779,000 in 2019. Investment sales and gains during the twelve months endedDecember 31, 2020 reflect the continued implementation of asset/liability management strategies, which included effectively using some of these gains to offset$165,000 of debt prepayment penalties, recorded within other noninterest expenses, associated with the early redemption of higher-cost FHLB advances. Service charges on deposits were$637,000 during the year endedDecember 31, 2020 , reflecting a decrease of$247,000 or 28 percent when compared to 2019. The decrease is primarily due to less overdraft activity and decreased nonsufficient funds fees charged to deposit customers. Net gains on sales of SBA loans were$442,000 for the year endedDecember 31, 2020 , a decrease of$389,000 or 47 percent compared to net gains on sales of SBA loans of$831,000 during 2019. Much of the decrease is due to the temporary shift of the resources in our SBA lending function to focus on the SBA-administered PPP loan processing, funding, and forgiveness during 2020. Other income was$2,333,000 for the year endedDecember 31, 2020 , an increase of$813,000 compared to other income of$1,520,000 for the year endedDecember 31, 2019 . The increase in other income was primarily driven by higher volumes of fee-based income, including loan-level swap fees, wire transfer fees, letter of credit fees, and credit card program referrals and royalties. 39
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TABLE 5: NONINTEREST EXPENSE
(Dollars in thousands) Years ended December 31,
2021 2020 2019
Salaries and employee benefits $ 41,711 $ 37,758 $ 32,360
Occupancy expense, net 5,527 5,505 5,352
Equipment expense 3,101 2,910 2,647
Software licensing and utilization 6,332 5,286 4,394
FDIC Assessment 1,888 1,680 839
Legal and professional fees 1,979 1,665 1,679
Charitable contributions qualifying for State
tax credits 1,432 1,342 755
Mortgage banking profit-sharing expense 2,571 2,004 - (Gain) loss on sale/write-down of foreclosed assets (25 ) 333 (15 ) Intangible amortization 1,180 1,398
1,430
Merger and acquisition expense 3,067 - - Post-acquisition restructuring expenses 9,880 - - Director fees and benefits expense 1,286 1,109
1,005
ATM debit card processing expense 1,053 819
685
Meals, travel, and lodging expense 968 644
1,036
Pennsylvania Bank Shares tax expense 800 583
777
Marketing and advertising expense 705 542 906 Telephone expense 565 539 609 Insurance 477 368 353 Corporate donations and sponsorships 357 207 401 Investor services 227 200 153 Loan collection costs 262 197 487 OREO expense 34 150 91 Other expenses 5,728 5,338 4,009 Total Noninterest Expense$ 91,105 $ 70,577 $ 59,953 Noninterest Expense 2021 versus 2020 For the year endedDecember 31, 2021 , noninterest expense totaled$91,105,000 , an increase of$20,528,000 or 29 percent, compared to noninterest expense of$70,577,000 for the year endedDecember 31, 2020 . Noninterest expenses incurred as a result of franchise expansion through the Riverview acquisition were the primary sources of the significant increase, with additional non-recurring post acquisition restructuring expenses being incurred in connection with the public announcement onDecember 7, 2021 of the planned closure and reclassification of certain Mid Penn locations to estimated fair value within assets held for sale, which are discussed in more detail below. During the year endedDecember 31, 2021 , merger and acquisition expenses were$3,067,000 and included investment banking fees, merger-related legal expenses, and other professional fees for advisory, valuation, and consulting services associated with the acquisition of Riverview. Similar expenses were not recognized in 2020. Additionally, during the fourth quarter of 2021, Mid Penn recognized certain post-acquisition restructuring costs totaling$9,880,000 . This total is comprised of (i)$7,588,000 of termination fees and severance costs, and (ii)$2,292,000 related to theDecember 7, 2021 announcement of a Retail Network Optimization Plan under which the Bank announced its intention to close sixteen of its retail locations throughout its expanded footprint. The branch closures occurred on or aboutMarch 4, 2022 . As a result of this announcement, and in accordance with GAAP, Mid Penn has reclassified the assets associated with these retail locations to held for sale totaling$3,907,000 as ofDecember 31, 2021 . Mid Penn also recognized other period costs related to the merger of$310,000 . Salaries and employee benefits were$41,711,000 for the year endedDecember 31, 2021 , an increase of$3,953,000 or 10 percent, versus 2020, with the increase primarily attributable to (i) increased mortgage commissions expense commensurate with the significant increases in mortgage loan originations and secondary market sales gains from the mortgage banking group; (ii) increased bonus expense in recognition of our employees and the successes of Mid Penn during the twelve months endedDecember 31, 2021 ; (iii) increased medical expenses year-over-year; and (iv) the one-month impact of the salaries and benefits of employees added through the Riverview merger onNovember 30, 2021 . 40
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Software licensing and utilization costs were$6,332,000 for the year endedDecember 31, 2021 , an increase of$1,046,000 or 20 percent compared to$5,286,000 for the year endedDecember 31, 2020 . This increase reflects the additional costs from both transaction volume-based charges, and licensing fees related to the addition of new staff and locations added sinceDecember 31, 2020 . Mid Penn continues to invest in upgrades to internal systems, networks, storage capabilities, cybersecurity management, and data security mechanisms to enhance data management and security capabilities responsive to both the larger company profile and the increasing complexity of information technology management.FDIC assessment expense was$1,888,000 for the year endedDecember 31, 2021 , an increase of$208,000 or 12 percent compared to$1,680,000 ofFDIC assessment expense recognized during the year endedDecember 31, 2020 . The total base assessment expense increased for 2021 when compared to 2020, primarily due to the significant year-over-year increase in total average assets of the Bank on which the assessment is based. Legal and professional fees were$1,979,000 for the year endedDecember 31, 2021 , an increase of$314,000 or 19 percent compared to$1,665,000 of legal and professional fees recognized during the year endedDecember 31, 2020 , with this increase being attributable to consulting expenses related to strengthening and enhancing Mid Penn's commercial online banking facility, as well as other information technology and cybersecurity management activities.
Mortgage banking profit-sharing expense totaled
The gain on the sale of foreclosed assets was$25,000 during the year endedDecember 31, 2021 compared to a loss on the sale or write-down of foreclosed assets of$333,000 during the year endedDecember 31, 2020 . The 2020 expense is attributable to write-downs taken on two related foreclosed assets totaling$358,000 during the year endedDecember 31, 2020 . These write-downs were partially offset by$25,000 of collective gains on the sale of certain smaller foreclosed real estate properties during 2020.
2020 versus 2019
For the year endedDecember 31, 2020 , noninterest expense totaled$70,577,000 , an increase of$10,624,000 or 18 percent, compared to noninterest expense of$59,953,000 for the year endedDecember 31, 2019 . Salaries and employee benefits were$37,758,000 for the year endedDecember 31, 2020 , an increase of$5,398,000 or 17 percent, versus 2019, with the increase primarily attributable to (i) increased commissions expense, commensurate with the mortgage loan origination and sales success of the mortgage banking group; (ii) increased compensation expense for the substantial time and effort devoted to the PPP loan initiative by many of our business development officers and staff members during 2020; and (iii) the addition of private banking and insurance business development professionals in our new nonbank subsidiaries. Software licensing and utilization costs were$5,286,000 for the year endedDecember 31, 2020 , an increase of$892,000 or 20 percent compared to$4,394,000 for the year endedDecember 31, 2019 . This increase reflects the additional costs from both transaction volume-based charges, and licensing fees related to the addition of new staff and locations added sinceDecember 31, 2019 , as well as costs associated with ensuring secure connectivity for an increased volume of employees working remotely in response to the COVID-19 pandemic restrictions. Additionally, Mid Penn continued to invest in upgrades to internal systems, networks, storage capabilities, cybersecurity management, and data security mechanisms to enhance data management and security capabilities responsive to both the larger company profile and increasing complexity of information technology management.FDIC assessment expense was$1,680,000 for the year endedDecember 31, 2020 , an increase of$841,000 or more than double the$839,000 ofFDIC assessment expense recognized during the year endedDecember 31, 2019 . The lower assessment expense for the year endedDecember 31, 2019 reflected the receipt of$492,000 ofFDIC small bank assessment credits in 2019. Similar credits were not received in 2020. Additionally, the total base assessment expense increased for 2020 when compared to 2019, primarily due to the significant year-over-year increase in total average assets of the Bank on which the assessment is based. Community and charitable contributions qualifying for State tax credits totaled$1,342,000 for the year endedDecember 31, 2020 , an increase of$587,000 compared to similar program contributions of$755,000 for the year endedDecember 31, 2019 . Mid Penn was approved by theCommonwealth of Pennsylvania to contribute an increased tax-credit-qualifying amount to participants withinPennsylvania's Department of Community and Economic Development ("DCED") Educational Improvement Tax Credit Program ("EITC"), and to moderate-to-low income housing projects in theDCED's Neighborhood Assistance Program ("NAP") during the year endedDecember 31, 2020 . These EITC and NAP contributions in 2020 generated tax credits totaling$1,132,000 to be applied to Mid Penn'sPennsylvania bank shares tax liability. These contributions and programs are also key elements of Mid Penn's Community Reinvestment Act compliance activities. 41
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Pennsylvania bank shares tax expense was$583,000 for the year endedDecember 31, 2020 , a decrease of$194,000 or 25 percent compared to$777,000 for the year endedDecember 31, 2019 . The decrease in shares tax expense generally reflects the aforementioned larger dollar volume of EITC and NAP donations made, which qualified for PA shares tax credits. Mortgage banking profit-sharing expense totaled$2,004,000 for payments accrued for or made to third-party principals commensurate with the record-level of earnings success within theSoutheastern Pennsylvania mortgage banking group at Mid Penn for the year endedDecember 31, 2020 . Similar expenses were not recognized during the year endedDecember 31, 2019 as the group did not generate sufficient earnings in 2019 to qualify for profit-sharing to the third-party principals. Marketing and advertising expense was$542,000 for the year endedDecember 31, 2020 , a decrease of$364,000 or 40 percent compared to$906,000 during the same period in 2019. The year of 2019 reflected additional advertising expense and promotional items expense to increase regional recognition and knowledge of Mid Penn'sFirst Priority Bank division and expanded mortgage origination operations inSoutheastern Pennsylvania . Similar expenses were not recognized in 2020. Additionally, as a result of the pandemic, in-person promotional events were significantly reduced in 2020, resulting in less advertising and promotional items expense. The loss on the sale or write-down of foreclosed assets was$333,000 during the year endedDecember 31, 2020 as compared to a gain on the sale of foreclosed assets of$15,000 during the year endedDecember 31, 2019 . The 2020 expense is attributable to write-downs taken on two related foreclosed assets totaling$358,000 during the year endedDecember 31, 2020 . These write-downs were partially offset by$25,000 of collective gains on the sale of certain smaller foreclosed real estate properties during 2020.
Investments
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. Mid Penn's portfolio of held-to-maturity securities, recorded at amortized cost, increased$200,965,000 to$329,257,000 as ofDecember 31, 2021 , as compared to$128,292,000 as ofDecember 31, 2020 . Mid Penn's total available-for-sale securities portfolio increased$57,114,000 from$5,748,000 atDecember 31, 2020 to$62,862,000 atDecember 31, 2021 . Mid Penn initiated a significant volume of purchases during the second half of 2021 in anticipation of pledging requirements as a result of the Riverview merger, as well as for both strategic portfolio and asset liability management objectives. The debt securities in Mid Penn's available-for-sale portfolio are recorded at fair value, which is generally based upon a market price relative to other debt investments of the same type with similar maturity dates. As the interest rate environment and overall market yield curve changes, the fair value of securities changes accordingly. The fair values of securities can also be impacted by changing market supply and demand for certain types of securities. AtDecember 31, 2021 , the unrealized loss on available-for-sale investment securities resulted in a decrease in shareholders' equity of$254,000 (comprised of a gross unrealized loss on securities of$322,000 net of a deferred income tax benefit of$68,000 ). AtDecember 31, 2020 , the unrealized loss on available-for-sale investment securities resulted in a decrease in shareholders' equity of$2,000 (comprised of a gross unrealized loss on securities of$3,000 net of a deferred income tax benefit of$1,000 ). Mid Penn does not have any significant concentrations of non-governmental securities within its investment portfolio. Table 6 provides a summary of our investment securities, and maturity and yield information relating to debt securities is shown in Table 7. The weighted average yield of the investment securities are calculated on a fully taxable-equivalent basis using a statutory corporate tax rate of 21 percent for the year endedDecember 31, 2021 . 42
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TABLE 6: INVESTMENT MATURITY AND YIELD
(Dollars in thousands) After One After Five
One Year Year thru Years thru After Ten
As of December 31, 2021 and Less Five Years Ten Years Years Total
Available for sale securities, at
fair value:
Mortgage-backed U.S. government
agencies $ - $ - $ - $ 49,480 $ 49,480
State and political subdivision
obligations - - 302 3,612 3,914
Corporate debt securities 250 2,967 6,251 - 9,468
$ 250 $ 2,967 $ 6,553 $ 53,092 $ 62,862
Held to maturity securities, at
amortized cost:
U.S. Treasury and U.S. government
agencies $ 3,003 $ 18,425 $ 143,178 $ 12,392 $ 176,998
Mortgage-backed U.S. government
agencies - 2,377 14,245 44,703 61,325
State and political subdivision
obligations 962 31,124 36,583 9,567 78,236
Corporate debt securities - 5,142 8,926 - 14,068
$ 3,965 $ 57,068 $ 202,932 $ 66,662 $ 330,627
After One After Five
Year thru Years
One Year Five thru After Ten
Weighted Average Yields and Less Years Ten Years Years Total
Available for sale securities:
Mortgage-backed U.S. government
agencies - - - 2.04 % 2.04 %
State and political subdivision
obligations - - 2.07 % 2.48 % 2.45 %
Corporate debt securities 1.50 % 2.25 % 3.90 % - 3.32 %
1.50 % 2.25 % 3.82 % 2.07 % 2.26 %
Held to maturity securities:
U.S. Treasury and U.S. government
agencies 1.50 % 1.34 % 1.71 % 2.04 % 1.69 %
Mortgage-backed U.S. government
agencies - 3.03 % 2.84 % 1.95 % 2.20 %
State and political subdivision
obligations 2.89 % 2.49 % 2.27 % 2.36 % 2.38 %
Corporate debt securities - 2.42 % 3.25 % - 2.95 %
1.14 % 2.13 % 1.96 % 2.03 % 1.99 %
Loans
Total loans as of December 31, 2021 were $3,104,396,000 compared to
$2,384,041,000 as of December 31, 2020 , an increase of $720,355,000 since
year-end 2020. This significant increase was driven by the Riverview
acquisition. As of December 31, 2021 , the outstanding balance of Riverview
acquired loans was $811,038,000 , net of purchase accounting adjustments. Total
loans were also significantly impacted by both (i) organic loan growth within
Mid Penn's legacy markets of $191,245,000 equating to 9 percent organic growth
since December 31, 2020 , less (ii) net forgiveness of PPP loans originated by
Mid Penn of $281,928,000 . Organic loan growth occurred primarily within Mid
Penn's commercial real estate and commercial and industrial financing loan
portfolios.
At December 31, 2021 , loans (net of unearned income) represented 71 percent of
earning assets, compared to 85 percent and 86 percent at December 31, 2020 and
2019, respectively.
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 , Lycoming , Montgomery , Northumberland ,
Perry , Schuylkill and Westmoreland . 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 financings.
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Maturity distribution by contractual maturity date and rate sensitivity information related to the loan portfolio is reflected in Table 7.
TABLE 7: LOAN MATURITY AND INTEREST SENSITIVITY
(Dollars in thousands)
One Year One to Five to Over
As of December 31, 2021 and Less Five Years Fifteen Years Fifteen Years Total
Commercial and industrial $ 43,172 $ 240,944 $ 152,900 $ 182,546 $ 619,562
Commercial real estate 54,947 231,206 684,269 697,720 1,668,142
Commercial real estate, construction 86,769 146,429 86,079 53,457 372,734
Residential mortgage 12,064 20,528 116,302 174,329 323,223
Home equity 4,809 15,675 33,351 56,471 110,306
Consumer 1,011 3,041 1,176 5,201 10,429
$ 202,772 $ 657,823 $ 1,074,077 $ 1,169,724 $ 3,104,396
Rate Sensitivity
Predetermined rate
Commercial and industrial $ 38,313 $ 204,275 $ 34,217 $ 10,367 $ 287,172
Commercial real estate 32,121 171,547 78,699 18,849 301,216
Commercial real estate, construction 38,121 72,977 21,153 3,181 135,432
Residential mortgage 10,251 17,658 66,478 74,075 168,462
Home equity 873 6,546 17,832 5,385 30,636
Consumer 446 2,851 1,148 349 4,794
Floating or adjustable rate
Commercial and industrial 4,857 36,670 118,681 172,182 332,390
Commercial real estate 13,167 61,827 608,414 683,518 1,366,926
Commercial real estate, construction 58,324 71,284 62,085 45,609 237,302
Residential mortgage 1,813 2,096 45,148 105,704 154,760
Home equity 4,037 9,904 20,194 45,535 79,671
Consumer 449 188 28 4,970 5,635
$ 202,772 $ 657,823 $ 1,074,077 $ 1,169,724 $ 3,104,396 Credit Quality, Credit Risk, and Allowance for Loan and Lease Losses
Other than as described herein, Mid Penn does not believe there are current
significant credit-related trends, events or uncertainties relating to its loan
portfolio that are reasonably expected to have a material impact on future
results of operations, liquidity, or capital resources. Mid Penn recognizes that
the effects of current and past economic conditions and other unfavorable
business conditions, including the potential impact of the ongoing COVID-19
pandemic, may eventually adversely influence certain borrowers' abilities to
comply with their repayment terms. Mid Penn regularly monitors the financial
strength of its borrowers, including those at higher risk of credit stress from
the pandemic or its economic effects, and does not engage in practices which may
be used to artificially shield certain borrowers from the negative economic or
business cycle effects that may compromise their ability to repay. Mid Penn does
not normally structure construction loans with interest reserve components or
perform commercial real estate or other type of loan workouts whereby an
existing loan was restructured into multiple new loans. Also, Mid Penn does not
extend loans at maturity solely due to the existence of guarantees, without
recognizing the credit as impaired. While the existence of a guarantee may be a
mitigating factor in determining the proper level of allowance once impairment
has been identified, the guarantee does not affect the impairment analysis.
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TABLE 8: NONPERFORMING ASSETS
(Dollars in thousands) December 31,
2021 2020 2019 2018 2017
Nonperforming Assets:
Nonaccrual loans $ 9,547 $ 15,047 $ 11,471 $ 10,749 $ 10,575
Accruing troubled debt restructured
loans 435 463 490 517 544
Total nonperforming loans 9,982 15,510 11,961 11,266 11,119
Foreclosed real estate - 134 196 1,017 189
Total nonperforming assets 9,982 15,644 12,157 12,283 11,308
Accruing loans 90 days or more past
due 515 - - - -
Total risk elements $ 10,497 $ 15,644 $ 12,157 $ 12,283 $ 11,308
Nonperforming loans as a percentage
of total loans outstanding 0.32 % 0.65 % 0.68 % 0.69 % 1.22 %
Nonperforming assets as a
percentage of total loans
outstanding and other real estate 0.32 % 0.66 % 0.69 % 0.76 % 1.24 %
Nonaccrual loans as a percentage of total loans 0.31 % 0.63 % 0.65 %
0.66 % 1.16 %
Ratio of allowance for loan losses to nonperforming loans 146.23 % 86.28 % 79.55 %
74.53 % 68.41 %
Allowance for loan losses as a 0.47 % 0.56 % 0.54 % 0.52 % 0.84 % percentage of total loans and leases
Allowance for loan losses as a 152.90 % 88.93 % 82.95 %
78.12 % 71.92 %
percentage of non-accrual loans
Allowance for loan losses as a 146.23 % 85.54 % 78.27 %
68.36 % 67.26 %
percentage of non-performing assets
Mid Penn assesses a specific allocation for both commercial loans and commercial
real estate loans prior to partially or fully charging off the loan. If a
partial charge off is taken, the remaining balance remains a nonperforming loan
with the original terms and interest rate intact and is not treated as a
restructured credit.
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Mid Penn held no foreclosed real estate as ofDecember 31, 2021 , compared to$134,000 atDecember 31, 2020 , driven by the sale of several smaller foreclosed real estate properties in 2021. Total nonperforming assets were$10,497,000 atDecember 31, 2021 , a decrease compared to nonperforming assets of$15,644,000 atDecember 31, 2020 . The decrease in nonperforming assets was primarily the result of the successful workout of three nonaccrual commercial relationships totaling$10,956,000 occurring during the year endedDecember 31, 2021 , though this decrease was partially offset by acquired impaired loans assumed in the Riverview transaction totaling$3,289,000 as ofDecember 31, 2021 .
One loan relationship, which accounts for
Loan relationship no. 1 - The contractual outstanding principal balance of this loan relationship was$2,278,000 atDecember 31, 2021 and was comprised of two loans acquired in 2018. These loans were transferred from accrual to nonaccrual status during the second quarter of 2020. These loans are collateralized primarily by commercial real estate, and, given that the fair value of the remaining collateral exceeds the outstanding principal balance, no specific allowance allocation has been currently assigned to this relationship. Management expects to recover the remaining outstanding balance through the sale of real estate collateral pledged in support of the loans. Mid Penn's troubled debt restructured loans atDecember 31, 2021 totaled$819,000 , of which$436,000 were accruing loans in compliance with the terms of the modification and$383,000 are included in the balance of total nonaccrual loans. Mid Penn entered into forbearance agreements on all loans currently classified as troubled debt restructured loans, and these agreements have resulted in additional principal repayment. The terms of these forbearance agreements vary and may include reductions in principal payments, reductions in interest rates, and/or repayment of the loan as collateral is sold. Further discussion of troubled debt restructured loans can be found in Note 6, Loans and Allowance for Loan and Lease Losses, within Item 8, Notes to Consolidated Financial Statements. As ofDecember 31, 2021 , there were no defaulted troubled debt restructured loans, as all troubled debt restructured loans were current with respect to their associated forbearance agreements.
The following table provides additional analysis of partially charged off loans:
TABLE 9: PARTIALLY CHARGED OFF LOANS
(Dollars in thousands) December 31, 2021 December 31, 2020 Period ending total loans outstanding (net of unearned income) $ 3,104,396 $ 2,384,041 Allowance for loan and lease losses 14,597 13,382 Total Nonperforming loans 9,982 15,510 Recorded investment in nonperforming and impaired loans with partial charge-offs 107 836 Ratio of nonperforming loans with partial charge-offs to total loans 0.00 % 0.04 % Ratio of nonperforming loans with partial charge-offs to total nonperforming loans 1.07 % 5.39 % Coverage ratio net of nonperforming loans with partial charge-offs 147.82 % 91.20 % Ratio of total allowance to total loans less nonperforming loans with partial charge-offs 0.47 % 0.56 %
Mid Penn has not experienced any additional charge-offs on loans for which a partial charge-off had originally been taken during the periods presented.
Mid Penn considers a commercial loan or commercial real estate loan to be
impaired when it becomes 90 days or more past due and the collection efforts
indicate that receipt of all contractual amounts due is not probable. Impairment
may occur before a 90-day or more period of delinquency when it is probable,
based upon the facts and circumstances, that Mid Penn will be unable to collect
all contractual principal and interest due. This methodology assumes the
borrower cannot or will not continue to make additional payments. At that time,
the loan would likely be considered collateral dependent as the discounted cash
flow ("DCF") method would indicate no operating income is available to add to
the respective loan's collateral position; therefore, most impaired loans are
deemed to be collateral dependent.
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Mid Penn evaluates loans for charge-off on a monthly basis. Policies that govern the recommendation for charge-off are unique to the type of loan being considered. Commercial loans rated as nonaccrual or lower will first have a collateral evaluation completed in accordance with the guidance on impaired loans. Once the collateral evaluation has been completed, a specific allocation of allowance is made based upon the results of the evaluation. The balance remains a nonperforming loan with the original terms and interest rate intact (not restructured). In the event the loan is unsecured, the loan would have been charged-off at the recognition of impairment. Commercial real estate loans rated as impaired will also have an initial collateral evaluation completed in accordance with the guidance on impaired loans. An updated real estate valuation is ordered and the collateral evaluation is modified to reflect any variation in value. A specific allocation of allowance is made for any anticipated collateral shortfall. The balance remains a nonperforming loan with the original terms and interest rate intact (not restructured). The process of charge-off for residential mortgage loans begins upon a loan becoming delinquent for 90 days and not in the process of collection. The existing appraisal is reviewed and a lien search is obtained to determine lien position and any instances of intervening liens. A new appraisal of the property will be ordered if deemed necessary by management and a collateral evaluation is completed. The loan will then be charged down to the value indicated in the evaluation. Consumer loans are recommended for charge-off after reaching delinquency of 90 days and the loan is not in the process of collection. The collateral shortfall of the consumer loan is recommended for charge-off at this point. As noted above, Mid Penn assesses a specific allocation for both commercial loans and commercial real estate loans. The balance remains a nonperforming loan with the original terms and interest rate intact (not restructured). In addition, Mid Penn takes a preemptive step when any commercial loan or commercial real estate loan becomes classified under its internal classification system. A preliminary collateral evaluation in accordance with the guidance on impaired loans is prepared using the existing collateral information in the loan file. This process allows Mid Penn to review both the credit and documentation files to determine the status of the information needed to make a collateral evaluation. This collateral evaluation is preliminary, but allows Mid Penn to determine if any potential collateral shortfalls exist.
Larger groups of small-balance loans, such as residential mortgages and consumer installment loans are collectively evaluated for impairment. Accordingly, individual consumer and residential loans are not separately identified for impairment disclosures unless such loans are the subject of a restructuring agreement.
Mid Penn's loan rating system assumes any loans classified as substandard
nonaccrual to be impaired, and most of these loans are considered collateral
dependent; therefore, most of Mid Penn's impaired loans, whether reporting a
specific allocation or not, are considered collateral dependent.
It is Mid Penn's policy to obtain updated third-party valuations on all impaired
loans collateralized by real estate as soon as practicable following the credit
being classified as substandard non-accrual. Prior to receipt of the updated
real estate valuation Mid Penn will use any existing real estate valuation to
determine any potential allowance issues; however, no allowance recommendation
will be made until such time as Mid Penn is in receipt of the updated
valuation. The Asset Recovery department employs an electronic tracking system
to monitor the receipt of and need for updated appraisals. To date, there have
been no material time lapses noted with the above processes.
In some instances, Mid Penn is not holding real estate as collateral and is
relying on business assets (personal property) for repayment. In these
circumstances, a collateral inspection is performed by Mid Penn personnel to
determine an estimated value. The value is based on net book value, as provided
by the financial statements, and discounted accordingly based on determinations
made by management. Occasionally, Mid Penn will employ an outside service to
provide a fair estimate of value based on auction or private sales. Management
reviews the estimates of these third parties and discounts them accordingly
based on management's judgment, if deemed necessary.
For impaired loans with no valuation allowance required, Mid Penn's practice of
obtaining independent third-party market valuations on the subject property as
soon as practicable following being placed on nonaccrual status sometimes
indicates that the loan to value ratio is sufficient to obviate the need for a
specific allocation, despite significant deterioration in real estate values in
Mid Penn's primary market area. These circumstances are determined on a
case-by-case analysis of the impaired loans.
Mid Penn actively monitors the values of collateral on impaired loans. This
monitoring may require the modification of collateral values over time or
changing circumstances by some factor, either positive or negative, from the
original values. All collateral values will be assessed by management at least
every 12 months for possible revaluation by an independent third party.
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Mid Penn had loans with an aggregate balance of$9,982,000 which were deemed by management to be impaired atDecember 31, 2021 , including$4,875,000 in loans from previous mergers which were acquired with credit deterioration. Of the$5,107,000 of impaired loan relationships excluding the loans acquired with credit deterioration,$308,000 were commercial and industrial relationships,$1,141,000 were commercial real estate relationships,$1,259,000 were residential relationships,$22,000 were commercial real estate - construction relationships, and$2,377,000 were home equity relationships. As ofDecember 31, 2021 , there were specific loan loss reserve allocations of$67,000 against the commercial and industrial relationships and$121,000 against the commercial real estate relationships. Management currently believes that the specific reserves are adequate to cover probable future losses related to these relationships. The allowance for loan losses is a reserve established in the form of a provision expense for loan and lease losses and is reduced by loan charge-offs net of recoveries. In addition to a loan review function that operates independently of the lending function, management monitors the loan portfolio at least monthly to identify changes to the credit risks in the portfolio so that an appropriate allowance is maintained. Based on an evaluation of the loan portfolio, management presents a monthly review of the allowance for loan and lease losses to the Board of Directors, indicating any changes in the allowance since the last review. In making the evaluation, management considers the results of recent regulatory examinations, which typically include a review of the allowance for loan and lease losses as an integral part of the examination process. As part of the examination process, federal or state regulatory agencies may require Mid Penn to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. In establishing the allowance, management evaluates on a quantitative basis individual classified loans and nonaccrual loans, and determines an aggregate reserve for those loans based on that review. In addition, an allowance for the remainder of the loan and lease portfolio is determined based on historical loss experience, adjusted by qualitative factors determined by management, within certain components of the portfolio.
This determination inherently involves a higher degree of subjectivity and considers risk factors that may not have yet manifested themselves in historical loss experience. These factors include:
• changes in international, national, regional, and local economic and
business conditions and developments that affect the collectability of the
portfolio, including the condition of various market segments;
• changes in the volume and severity of past due loans, the volume of
nonaccrual loans, and the volume and severity of adversely classified or
graded loans;
• changes in the value of underlying collateral for collateral-dependent loans;
• changes in the experience, ability, and depth of lending management and
other relevant staff;
• changes in lending policies and procedures, including changes inunderwriting standards and collection, charge-off, and recovery practices
not considered elsewhere in estimating credit losses;
• changes in the quality of the institution's loan review system;
• changes in the nature and volume of the portfolio and in the terms of loans;
• the effect of other external factors such as competition and legal and
regulatory requirements on the level of estimated credit losses in the
institution's existing portfolio; and
• the existence and effect of any concentrations of credit and changes in
the level of such concentrations.
While the allowance for loan and lease losses is maintained at a level believed to be adequate by management to provide for probable losses inherent in the loan and lease portfolio, determination of the allowance is inherently subjective, as it requires estimates and consideration of the above-noted qualitative factors which may be susceptible to significant change. Changes in these estimates may impact the provisions charged to expense in future periods. Management believes, based on information currently available, that the allowance for loan and lease losses of$14,597,000 as ofDecember 31, 2021 is adequate to cover specifically identifiable loan losses, as well as estimated losses inherent in our portfolio for which certain losses are probable but not specifically identifiable. 48
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The allocation of the allowance for loan and lease losses among the major
classifications is shown in Table 10 as of
TABLE 10: ALLOCATION OF THE ALLOWANCE FOR LOAN AND LEASE LOSSES
(Dollars in thousands) December 31,
2021 2020 2019 2018 2017
Amount % Amount % Amount % Amount % Amount %
Commercial and
industrial $ 3,439 23.6 % $ 3,066 22.9 % 6,259 65.8 % 4,703 56.0 % 4,435 58.3 % Commercial real estate, construction
38 0.3 % 134 1.0 % 51 0.5 % 75 0.9 % 178 2.3 % Residential mortgage
459 3.1 % 429 3.2 % 417 4.4 % 453 5.4 % 428 5.6 %
Home equity 560 3.8 % 507 3.8 % 442 4.6 % 528 6.3 % 423 5.6 %
Consumer 2 0.0 % 1 0.0 % 2 0.0 % 7 0.1 % 3 0.0 %
Unallocated 684 4.6 % 590 4.4 % 3 0.0 % 240 2.9 % 344 4.5 %
$ 14,597 100.0 % $ 13,382 100.0 % $ 9,515 100.0 % $ 8,397 100.0 % $ 7,606 100.0 %
The increase in the allowance balance was the result of both organic loan growth
during 2021, and from increases in the values of qualitative factors for both
economic conditions and external factors given the impact of the COVID-19
pandemic impact. Management continues to monitor the portfolio very closely for
pandemic-related stresses. See also the discussion in the Provision for Loan and
Lease Losses section.
The allowance for loan and lease losses at December 31, 2021 was $14,597,000 or
0.47 percent of total loans (less unearned discount), as compared to $13,382,000
or 0.56 percent at December 31, 2020 , and $9,515,000 or 0.54 percent at December
31, 2019 .
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 endedDecember 31, 2021 , total deposits increased by$1,527,436,000 or over 61 percent. Deposits as of year-end 2020 had increased by increased by$562,186,000 or over 29 percent sinceDecember 31, 2019 . Deposit growth during the year endedDecember 31, 2021 was attributable primarily to the balance of deposits assumed through the acquisition of Riverview totaling$1,052,435,000 as ofDecember 31, 2021 , net of purchase accounting adjustments. Organic deposit growth of$475,436,000 or 19 percent sinceDecember 31, 2020 was driven by significant increases in noninterest-bearing, interest-bearing, and money market deposits, primarily due to both expanded cash management and commercial deposit account relationships, and new deposits established as a result of Mid Penn's PPP loan funding activities. Deposit growth from year-end 2019 to year-end 2020 was led by substantial increases in noninterest-bearing balances and money market deposits, primarily due to both new and expanded cash management and commercial deposit account relationships, including those from new customers established as a result of Mid Penn's PPP loan activities. Average balances and average interest rates applicable to the classifications of deposits for the years endedDecember 31, 2021 , 2020, and 2019 are presented in Table 13. Mid Penn had no brokered time deposits as ofDecember 31, 2021 and 2020 compared to$13,326,000 in brokered time deposits atDecember 31, 2019 . The decrease in brokered certificates of deposits during 2020 was the result of brokered certificates of deposit assumed in the First Priority andPhoenix acquisitions which matured and were not replaced.
TABLE 11: DEPOSITS BY MAJOR CLASSIFICATION
(Dollars in thousands) Years Ended December 31,
2021 2020 2019
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Noninterest-bearing demand deposits $ 684,022 0.00 % $ 505,094 0.00 % $ 296,872 0.00 %
Interest-bearing demand deposits 688,595 0.34 538,385 0.64 415,359 1.04
Money market 842,107 0.37 605,552 0.67 443,248 1.66
Savings 218,546 0.11 186,132 0.19 187,927 0.34
Time 451,277 1.24 443,607 1.93 471,241 1.96
$ 2,884,547 0.39 % $ 2,278,770 0.72 % $ 1,814,647 1.19 %
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The maturity distribution of time deposits of
TABLE 12: MATURITY OF TIME DEPOSITS
(Dollars in thousands) December 31,
2021 2020 2019
Three months or less $ 65,345 $ 33,819 $ 31,314
Over three months to twelve months 141,141 116,798 148,449
Over twelve months 112,212 77,344 92,041
$ 318,698 $ 227,961 $ 271,804
TABLE 13: UNINSURED DEPOSITS
Uninsured Time
Deposits
Maturing in 2022 $ 89,373
Maturing in 2023 23,151
Maturing in 2024 5,215
Maturing in 2025 1,240
Maturing in 2026 2,917
Maturing thereafter -
$ 121,895
Mid Penn held no short-term borrowings as of December 31, 2021 . Short-term
borrowings of $125,617,000 at December 31, 2020 consisted entirely of Mid Penn's
utilization of the Federal Reserve's PPPLF. The PPPLF allows banks to pledge PPP
loans as collateral to borrow funds for up to a term of five years (to match the
term of the respective PPP loans) at an interest rate of 0.35 percent. The PPPLF
borrowings were paid off during the year ended December 31, 2021 .
As of December 31, 2021 and 2020, the Bank had long-term debt outstanding in the
amount of $81,270,000 and $75,115,000 , respectively, consisting primarily of
FHLB fixed rate advances as well as a finance lease liability executed in 2019.
Capital Resources
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 18, 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 by$234,388,000 or 92 percent from$255,688,000 as ofDecember 31, 2020 to$490,076,000 as ofDecember 31, 2021 , primarily due to both (i) the issuance of 4,519,776 shares of Mid Penn common stock onNovember 30, 2021 , in connection with the acquisition of Riverview, and, (ii) the completion of theMay 4, 2021 public offering of 2,990,000 shares of common stock at a price of$25.00 per share, with the aggregate gross proceeds of the offering totaling$74,750,000 . The net proceeds of the offering after deducting the underwriting discount and offering expenses were$70,238,000 . The additional shares issued as a result of the Riverview acquisition and the public offering significantly impacted the weighted average number of shares outstanding used for both the fourth quarter of 2021 and year-to-date 2021 earnings per share calculations. Regulatory capital ratios for both Mid Penn and its banking subsidiary exceeded regulatory "well-capitalized" levels at bothDecember 31, 2021 andDecember 31, 2020 . Shareholders' equity increased by$17,814,000 or 7 percent from$237,874,000 as ofDecember 31, 2019 to$255,688,000 as ofDecember 31, 2020 . The increase in shareholders' equity primarily reflects the growth in retained earnings through year-to-date net income, net of dividends paid and declared. Some of the year-over-year increase in shareholders' equity was offset by the initiation of Mid Penn's treasury stock repurchase program, which reflected total common stock buybacks of$1,795,000 as ofDecember 31, 2020 . A total of 92,652 common shares were repurchased at a discount to tangible book value per share, with an average cost of$19.37 per share. Shareholders' equity increased by$14,664,000 or 7 percent from$223,209,000 as ofDecember 31, 2018 to$237,874,000 as ofDecember 31, 2019 . The increase in shareholders' equity during 2019 reflected (i) the growth in retained earnings through year-to-date net income of$17,701,000 net of dividends paid totaling$6,688,000 , (ii) a$316,000 favorable prior period adjustment posted as part of the adoption of the new GAAP leasing standard, and (iii) other comprehensive income from the significant after-tax appreciation in the available-for-sale portfolio, much of which had been realized from securities sales during 2019. 50
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Mid Penn's dividend payout philosophy looks to provide reasonable quarterly cash returns to shareholders while still retaining sufficient earnings to finance future growth and maintain sound capital levels. For additional information, see "Part II, Item 5, "Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Repurchases ofEquity Securities - Dividends". Dividends paid and declared on common shares totaled$0.84 and$0.79 , respectively, for the year endedDecember 31, 2021 . Dividends paid and declared on common shares totaled$0.77 and$0.82 , respectively, for the year endedDecember 31, 2020 . Dividends paid and declared on common shares totaled$0.79 for the year endedDecember 31, 2019 . The dividend payout ratio, which represents the percentage of annual net income returned to shareholders in the form of cash dividends, was 31 percent for 2021 and 25 percent for 2020.
Mid Penn maintained regulatory capital levels, leverage ratios, and risk-based
capital ratios as of
(Dollars in thousands) Capital Adequacy
To Be
Well-Capitalized
Minimum for Under Prompt
Basel III Capital Corrective
Actual Adequacy (a) Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Mid Penn Bancorp, Inc.
As of December 31, 2021
Tier 1 Capital (to Average
Assets) $ 374,368 8.1 % $ 185,764 4.0 % $ N/A N/A
Common Equity Tier 1 Capital (to
Risk Weighted Assets) 365,084 11.7 % 217,579 7.0 % N/A N/A
Tier 1 Capital (to Risk Weighted
Assets) 374,368 12.0 % 264,203 8.5 % N/A N/A
Total Capital (to Risk Weighted
Assets) 452,527 14.6 % 326,369 10.5 % N/A N/A
Mid Penn Bank
As of December 31, 2021
Tier 1 Capital (to Average
Assets) $ 398,773 8.6 % $ 185,721 4.0 % $ 232,151 5.0 %
Common Equity Tier 1 Capital (to
Risk Weighted Assets) 398,773 12.8 % 217,446 7.0 % 201,914 6.5 %
Tier 1 Capital (to Risk Weighted
Assets) 398,773 12.8 % 264,041 8.5 % 248,510 8.0 %
Total Capital (to Risk Weighted
Assets) 413,442 13.3 % 326,169 10.5 % 310,637 10.0 %
Mid Penn Bancorp, Inc.
As of December 31, 2020
Tier 1 Capital (to Average
Assets) $ 188,501 6.8 % $ 111,201 4.0 % $ N/A N/A
Common Equity Tier 1 Capital (to
Risk Weighted Assets) 188,501 9.6 % 137,351 7.0 % N/A N/A
Tier 1 Capital (to Risk Weighted
Assets) 188,501 9.6 % 166,783 8.5 % N/A N/A
Total Capital (to Risk Weighted
Assets) 246,529 12.6 % 206,026 10.5 % N/A N/A
Mid Penn Bank
As of December 31, 2020
Tier 1 Capital (to Average
Assets) $ 218,676 7.9 % $ 111,166 4.0 % $ 138,958 5.0 %
Common Equity Tier 1 Capital (to
Risk Weighted Assets) 218,676 11.1 % 137,288 7.0 % 127,482 6.5 %
Tier 1 Capital (to Risk Weighted
Assets) 218,676 11.1 % 166,707 8.5 % 156,901 8.0 %
Total Capital (to Risk Weighted
Assets) 232,124 11.8 % 205,933 10.5 % 196,126 10.0 %
(a) Minimum amounts and ratios include the full phase in of the capital
conservation buffer of 2.5 percent required by the
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Subordinated Debt and Trust Preferred Securities
Subordinated Debt Assumed
OnNovember 30, 2021 , Mid Penn completed its acquisition of Riverview and assumed$25,000,000 of Subordinated Notes (the "Riverview Notes"). In accordance with purchase accounting principles, the Riverview Notes were assigned a fair value premium of$2,302,000 . The notes are treated as Tier 2 capital for regulatory reporting purposes. The Riverview Notes were entered into by Riverview onOctober 6, 2020 with certain qualified institutional buyers and accredited institutional investors. The Riverview Notes have a maturity date ofOctober 15, 2030 and initially bear interest, payable semi-annually, at a fixed annual rate of 5.75% per annum untilOctober 15, 2025 . Commencing on that date, the interest rate applicable to the outstanding principal amount due will be reset quarterly to an interest rate per annum equal to the then current three-month secured overnight financing rate ("SOFR") plus 563 basis points, payable quarterly until maturity. Mid Penn may redeem the Notes at par, in whole or in part, at its option, anytime beginning onOctober 15, 2025 .
Trust Preferred Securities Assumed
As a result of the merger with Riverview, Mid Penn assumed the subordinated debentures that Riverview had assumed in its acquisition ofCBT Financial Corp. ("CBT") onOctober 1, 2017 (the "CBT 2017 Notes"). In 2003, a trust formed by CBT issued$5,155,000 of floating rate trust preferred securities as part of a pooled offering of such securities. The interest rate prior to Riverview entering into a fixed interest rate swap in 2020 adjusted quarterly to the three-month LIBOR rate plus 2.95%. CBT issued subordinated debentures to the trust in exchange for ownership of all of the common securities of the trust and the proceeds of the offering; the debentures represent the sole asset of the trust. CBT became eligible to redeem the subordinated debentures, in whole but not in part, beginning in 2008 at a price of 100% of face value. The subordinated debentures must be redeemed no later than 2033. Similarly, in 2005, a trust formed by CBT issued$4,124,000 of fixed rate trust preferred securities as part of a pooled offering of such securities (the "CBT 2015 Notes"). CBT issued subordinated debentures to the trust in exchange for ownership of all the common securities of the trust and the proceeds of the offering; the debentures represent the sole asset of the trust. CBT became eligible to redeem the subordinated debentures, in whole but not in part, beginning in 2010 at a price of 100% of face value. Interest payments on the debentures may be deferred at any time at the election of Mid Penn for up to 20 consecutive quarterly periods. Interest on the debentures will accrue during the extension period, and all accrued principal and interest must be paid at the end of the extension period. During an extension period, Mid Penn may not declare or pay any dividends or distributions on, or redeem, purchase, acquire, or make a liquidation payment with respect to any of Mid Penn's capital stock. In accordance with purchase accounting principles, the CBT 2017 Notes and CBT 2015 Notes assumed from Riverview were assigned a fair value premium of$6,000 . The subordinated debentures are treated as Tier 1 capital for regulatory reporting purposes.
Subordinated Debt Issued
OnDecember 22, 2020 , Mid Penn entered into agreements for and sold, at 100% of their principal amount, an aggregate of$12,150,000 of its Subordinated Notes dueDecember 2030 (the "December 2020 Notes") on a private placement basis to accredited investors. TheDecember 2020 Notes are treated as Tier 2 capital for regulatory capital purposes. TheDecember 2020 Notes will bear interest at a rate of 4.5% per year for the first five years and then float at theWall Street Journal's Prime Rate, provided that the interest rate applicable to the outstanding principal balance during the period theDecember 2020 Notes are floating will at no time be less than 4.5%. Interest is payable quarterly in arrears onMarch 31 ,June 30 ,September 30 andDecember 31 of each year, beginning onMarch 31, 2021 . TheDecember 2020 Notes will mature onDecember 31, 2030 and are redeemable, in whole or in part, without premium or penalty, on any interest payment date on or afterDecember 31, 2025 and prior toDecember 31, 2030 , subject to any required regulatory approvals. Additionally, if (A) all or any portion of theDecember 2020 Notes cease to be deemed Tier 2 Capital, (B) interest on theDecember 2020 Notes fails to be deductible forUnited States federal income tax purposes or (C) Mid Penn will be considered an "investment company," Mid Penn may redeem theDecember 2020 Notes, in whole but not in part, by giving 10 days' notice to the holders of theDecember 2020 Notes. In the event of a redemption described in the previous sentence, Mid Penn will redeem theDecember 2020 Notes at 100% of the principal amount of theDecember 2020 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption.
Holders of the
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Subordinated Debt Issued
OnMarch 20, 2020 ,Mid Penn Bancorp, Inc. entered into agreements with accredited investors who purchased$15,000,000 aggregate principal amount of Mid Penn Subordinated Notes due 2030 (the "March 2020 Notes"). As a result of Mid Penn's merger with Riverview onNovember 30, 2021 ,$6,870,000 of theMarch 2020 Note balance was redeemed as Riverview was a holder of theMarch 2020 Notes. The balance ofMarch 2020 Notes outstanding as ofDecember 31, 2021 was$8,130,000 . TheMarch 2020 Notes are treated as Tier 2 capital for regulatory capital purposes. TheMarch 2020 Notes bear interest at a rate of 4.0% per year for the first five years and then float at theWall Street Journal's Prime Rate, provided that the interest rate applicable to the outstanding principal balance during the period theMarch 2020 Notes are floating will at no time be less than 4.25%. Interest is payable semi-annually in arrears onJune 30 andDecember 30 of each year, beginning onJune 30, 2020 , for the first five years after issuance and will be payable quarterly in arrears thereafter onMarch 30 ,June 30 ,September 30 andDecember 30 . TheMarch 2020 Notes will mature onMarch 30, 2030 and are redeemable in whole or in part, without premium or penalty, at any time on or afterMarch 30, 2025 and prior toMarch 30, 2030 . Additionally, if all or any portion of theMarch 2020 Notes cease to be deemed Tier 2 Capital, Mid Penn may redeem, on any interest payment date, all or part of theMarch 2020 Notes. In the event of a redemption described in the previous sentence, Mid Penn will redeem theMarch 2020 Notes at 100% of the principal amount of the 2020 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption. Holders of theMarch 2020 Notes may not accelerate the maturity of theMarch 2020 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar event of the holding company orMid Penn Bank , its principal banking subsidiary. Related parties held$1,700,000 of theMarch 2020 Notes as ofDecember 31, 2021 .
Subordinated Debt Assumed
On
The First Priority Notes agreements were entered into by First Priority onNovember 13, 2015 with five accredited investors pursuant to which First Priority issued subordinated notes totaling$9,500,000 . The First Priority Notes had a maturity date ofNovember 30, 2025 , and bear interest at a fixed rate of 7.00% per annum. The Notes were non-callable for an initial period of five years and included provisions for redemption pricing between 101.5% and 100.5% of the liquidation value if called after five years but prior to the stated maturity date. OnDecember 18, 2020 , Mid Penn redeemed the$9,500,000 of subordinated debt assumed in 2018 in conjunction with Mid Penn's acquisition ofFirst Priority Bank . The First Priority subordinated debt was redeemed promptly following the expiration of the noncallable period and after receiving the required regulatory approval for the redemption. Mid Penn recognized redemption pricing fees of$143,000 in 2020 related to the early redemption, which are included in other noninterest expenses.
Subordinated Debt Issued
On
The 2017 Notes bear interest at a rate of 5.25% per year for the first five years and then float at theWall Street Journal's Prime Rate plus 0.50%, provided that the interest rate applicable to the outstanding principal balance will at no time be less than 5.0%. Interest is payable semi-annually in arrears onJanuary 15 andJuly 15 of each year, beginning onJuly 15, 2018 , for the first five years after issuance and will be payable quarterly in arrears thereafter onJanuary 15 ,April 15 ,July 15 , andOctober 15 . The 2017 Notes will mature onJanuary 1, 2028 and are redeemable in whole or in part, without premium or penalty, at any time on or afterDecember 21, 2022 , and prior toJanuary 1, 2028 . Additionally, Mid Penn may redeem the 2017 Notes in whole at any time, or in part from time to time, upon at least 30 days' notice if: (i) a change or prospective change in law occurs that could prevent Mid Penn from deducting interest payable on the 2017 Notes forU.S. federal income tax purposes; (ii) an event occurs that precludes the 2017 Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) Mid Penn becomes required to register as an investment company under the Investment Company Act of 1940, as amended. In the event of a redemption described in the previous sentence, Mid Penn will redeem the 2017 Notes at 100% of the principal amount of the 2017 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption. 53
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Holders of the 2017 Notes may not accelerate the maturity of the 2017 Notes, except upon the bankruptcy, insolvency, liquidation, receivership or similar event of Mid Penn orMid Penn Bank .
Subordinated Debt Issued
OnDecember 9, 2015 , Mid Penn entered into agreements with investors to purchase$7,500,000 aggregate principal amount of its Subordinated Notes (the "2015 Notes") due 2025. Eighty percent of the balance of the 2015 Notes were treated as Tier 2 capital for regulatory capital purposes as ofDecember 31, 2021 . The 2015 Notes bear interest at a rate of 5.15% per year for the first five years and then float at theWall Street Journal's Prime Rate plus 0.50%, provided that the interest rate applicable to the outstanding principal balance will at no time be less than 4.0%. Interest is paid quarterly in arrears onJanuary 1 ,April 1 ,July 1 andOctober 1 of each year, beginning onJanuary 1, 2016 . The 2015 Notes will mature onDecember 9, 2025 and are redeemable in whole or in part, without premium or penalty, at any time on or afterDecember 9, 2020 , and prior toDecember 9, 2025 . Additionally, Mid Penn may redeem the 2015 Notes in whole at any time, or in part from time to time, upon at least 30 days' notice if: (i) a change or prospective change in law occurs that could prevent Mid Penn from deducting interest payable on the 2015 Notes forU.S. federal income tax purposes; (ii) an event occurs that precludes the 2015 Notes from being recognized as Tier 2 capital for regulatory capital purposes; or (iii) Mid Penn becomes required to register as an investment company under the Investment Company Act of 1940, as amended, in each case at 100% of the principal amount of the 2015 Notes, plus accrued and unpaid interest thereon to but excluding the date of redemption. Holders of the 2015 Notes may not accelerate the maturity of the 2015 Notes, except upon Mid Penn's orMid Penn Bank's bankruptcy, insolvency, liquidation, receivership, or similar event.
Income Taxes
The provision for income taxes was$6,732,000 during the year endedDecember 31, 2021 , an increase of$1,602,000 or 31 percent compared to$5,130,000 for the same period in 2020. The provision for income taxes for the year endedDecember 31, 2021 reflects an effective combined Federal and state tax rate of 19 percent, compared to an effective combined Federal and state tax rate of 16 percent for the year endedDecember 31, 2020 . The full-year 2021 tax provision and effective tax rate reflects (i) the impact of tax-free income earned on municipal investments and loans, (ii) the impact of certain merger-related expenses which are nondeductible for Federal tax purposes, (iii) higher pre-tax income, and (iv) state income taxes that Mid Penn pays to the states ofNew Jersey andMaryland for revenues sourced in those respective states. The provision for income taxes was$5,130,000 during the year endedDecember 31, 2020 , an increase of$1,405,000 or 38 percent compared to$3,725,000 for the same period in 2019. The provision for income taxes for the year endedDecember 31, 2020 reflects an effective combined Federal and state tax rate of 16 percent compared to an effective combined Federal and state tax rate of 17 percent for the year endedDecember 31, 2019 . The full-year 2020 tax provision and effective tax rate reflects (i) the impact of tax-free income earned on municipal investments and loans, (ii) the impact of certain CARES Act provisions allowing for the carryback of federal tax net operating losses (NOLs) to prior periods in which the Federal tax rate was 34 percent totaling$318,000 , (iii) the full-year impact of tax credits recognized related to Mid Penn's investment in a low-income housing project inDauphin County, Pennsylvania totaling$861,000 , and (iv) state income taxes that Mid Penn pays to the states ofNew Jersey andMaryland for revenues sourced in those respective states.
Liquidity
Mid Penn's asset-liability management policy addresses the management of Mid Penn's liquidity position and its ability to raise sufficient funds to meet deposit withdrawals, fund loan growth and meet other operational needs. In addition to its cash and equivalents, Mid Penn utilizes its investments as a source of liquidity, along with deposit growth and increases in borrowings. For additional information, see Deposits and Other Funding Sources, which appears earlier in this discussion. Liquidity from investments is provided primarily through investment calls, sales of available-for-sale securities, prepayments on mortgage-backed securities, and from investments and interest-bearing balances with maturities of one year or less. The Bank can obtain funds from overnight borrowings, short-term borrowings, and long-term borrowings from the FHLB, up to the Bank's maximum borrowing capacity with the FHLB, which was$935,225,000 atDecember 31, 2021 . FHLB borrowings require the Bank to make certain restricted stock purchases in accordance with FHLB requirements. Borrowings with the FHLB are collateralized by certain qualifying loans and investment securities of the Bank. The Bank also has unused lines of credit with other correspondent banks amounting to$35,000,000 atDecember 31, 2021 . 54
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Major sources of cash in 2021 came from the
Major uses of cash in 2021 were
Major sources of cash in 2020 came from the
Major uses of cash in 2020 were$623,153,000 to fund net portfolio loan growth (primarily commercial PPP loans),$356,158,000 to fund mortgage loans originated for sale, and$178,630,000 to fund the purchase of investment securities.
Aggregate Contractual Obligations
Table 14 represents Mid Penn's substantial aggregate contractual obligations to
make future cash payments as of
TABLE 14: AGGREGATE CONTRACTUAL OBLIGATIONS
(Dollars in
thousands) Payments Due by Period
Financial Statements One Year or One to Three Three to Five More than Five
Note Reference Total Less Years Years Years
Operating lease
obligations 8 $ 12,682 $ 2,426 $ 3,905 $ 2,725 $ 3,626
Finance lease
obligation 8 4,677 217 469 518 3,473
Certificates of
deposit 9 634,437 381,438 202,326 44,524 6,149
Long-term debt 11 78,526 70,588 7,609 294 35
Subordinated debt 12 82,075 3,083 6,166 13,048 59,778
$ 812,397 $ 457,752 $ 220,475 $ 61,109 $ 73,061 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 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 Items
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 ofDecember 31, 2021 , commitments to extend credit amounted to$930,660,000 compared to$654,977,000 as ofDecember 31, 2020 . 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$55,609,000 atDecember 31, 2021 , from$39,468,000 atDecember 31, 2020 . 55
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