Business context and reporting period
Mid Penn Bancorp, Inc. (NASDAQ: MPB) is a Pennsylvania-based financial holding company whose principal business is commercial banking through Mid Penn Bank. This Form 10-K covers the fiscal year ended December 31, 2021; the filing also reports fourth-quarter results. Comparisons with 2020 are materially affected by the November 30, 2021 acquisition of Riverview Financial Corporation.
Riverview added approximately $1.273 billion of assets and 23 community banking offices. Mid Penn issued 4.52 million shares as merger consideration. The company also completed a public offering of 2.99 million shares in May 2021, raising $70.2 million net.
Key financial metrics
Amounts below are in millions of dollars unless otherwise stated.
| Metric | 2021 | 2020 |
|---|---|---|
| Net interest income | $108.6 | $88.2 |
| Provision for loan and lease losses | $2.9 | $4.2 |
| Noninterest income | $21.5 | $17.9 |
| Noninterest expense | $91.1 | $70.6 |
| Net income | $29.3 | $26.2 |
| Basic / diluted earnings per share | $2.71 / $2.71 | $3.11 / $3.10 |
| Tax-equivalent net interest margin | 3.30% | 3.48% |
| Return on average assets / equity | 0.83% / 8.91% | 0.95% / 10.76% |
| Net cash provided by operating activities | $65.9 | $14.1 |
- Year-end scale and funding: Assets were $4.689 billion, up 56%; loans were $3.104 billion, up $720.4 million; deposits were $4.002 billion, up 62%. Much of the balance-sheet expansion came from Riverview. Legacy-market organic loan growth was $191.2 million (9%), while organic deposit growth was $475.4 million (19%).
- Cash and debt: Cash and cash equivalents were $913.8 million. Short-term borrowings were zero after repayment of the $125.6 million Paycheck Protection Program Liquidity Facility balance. Long-term debt was $81.3 million and subordinated debt and trust preferred securities were $74.3 million.
- Capital and liquidity: Shareholders’ equity was $490.1 million. Mid Penn Bancorp reported a 12.0% Tier 1 risk-based capital ratio and a 14.6% total capital ratio; the Bank’s corresponding ratios were 12.8% and 13.3%. The Bank was classified as well-capitalized. Available FHLB borrowing capacity was reported as $935.2 million maximum, with $35 million in unused correspondent-bank lines.
- Credit quality: The allowance for loan losses was $14.6 million, or 0.47% of loans, versus $13.4 million, or 0.56%, in 2020. Net charge-offs rose to $1.7 million from $0.3 million. Nonaccrual loans were $9.5 million; the filing reports $9.982 million of nonperforming loans and $10.497 million of total risk elements, the latter including $515,000 of loans at least 90 days past due that were still accruing.
- Dividends: The company paid $0.84 per share and declared $0.79 per share in 2021. The reported dividend payout ratio was 31%.
Material changes versus the prior comparable period
- Net income rose about 12%, but diluted EPS fell from $3.10 to $2.71 as the weighted-average share count increased following the public offering and Riverview stock issuance.
- Net interest income increased 23%, reflecting loan growth, lower deposit funding costs and $21.954 million of PPP processing fees recognized in interest income. The lower asset yields contributed to net interest margin compression despite lower funding costs.
- Noninterest expense increased 29%. It included $3.067 million of Riverview merger costs and $9.880 million of post-acquisition restructuring costs, including branch closure, termination and severance costs.
- Fourth-quarter net income was $0.607 million, compared with $9.011 million in fourth-quarter 2020. Fourth-quarter 2021 included the restructuring and merger-related costs noted above.
- Nonperforming loans declined from $15.510 million to $9.982 million, mainly following workouts of several commercial relationships; acquired impaired loans partially offset the improvement.
Outlook, management commentary, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management said it was not aware of current trends or regulatory recommendations expected to materially affect liquidity, capital resources or operations, while cautioning that actual results may differ from forward-looking statements.
- Management expects higher interest rates to improve modeled one-year net interest income and lower rates to reduce it. The December 31, 2021 model estimated changes of +6.53% and -6.38% for a 100-basis-point increase and decrease, respectively; management cautioned actual results could vary.
- The bank announced a plan to close 16 locations; the closures occurred on or about March 4, 2022. Related assets of $3.907 million were classified as held for sale at year-end.
- PPP loans outstanding, net of deferred fees, were $111.3 million, down from $388.3 million. PPP fees recognized in 2021 were $21.954 million; $3.811 million remained deferred at year-end. The filing notes potential SBA fee clawback and litigation risks, although Mid Penn reported no known PPP loans or fees affected by borrower ineligibility as of year-end.
- Key risks include interest-rate and funding-cost changes, commercial real estate and other business-loan credit exposure, Pennsylvania economic concentration, acquisition integration and goodwill valuation, COVID-19 effects, cybersecurity, and operational transition of acquired systems. Commercial real estate represented 65.7% of the loan portfolio at year-end.
- Auditors issued an unqualified opinion on the financial statements and internal controls. Management and the auditor excluded Riverview from the internal-control assessment; Riverview represented approximately 26% of assets, 24% of liabilities and 2% of 2021 revenue.
Important facts for investors to verify
- How much of earnings and net interest income is sustainable after PPP fee recognition and the $12.947 million of merger and restructuring charges?
- Whether the Riverview integration, branch closures and expected cost savings meet management’s assumptions, and what ongoing expense base results.
- Credit performance of acquired and legacy commercial real estate loans, subsequent charge-offs, and the adequacy of the allowance, particularly given the lower allowance-to-loans ratio.
- Deposit retention and funding costs as acquired and pandemic-era balances mature or reprice, along with liquidity availability and the effect of interest-rate changes.
- How share issuance and any future repurchases affect per-share earnings, tangible book value and capital; confirm the status of the repurchase authorization, which was scheduled to run through March 19, 2022 unless extended.
- Integration of Riverview controls and systems, and any updates to acquired-loan valuations, goodwill or other purchase-accounting estimates.