Mid Penn Bancorp, Inc. — 2017 Form 10-K
Business context and reporting period
Annual report for the year ended December 31, 2017, filed March 13, 2018. Mid Penn is a Pennsylvania bank holding company whose primary business is community banking through Mid Penn Bank. At year-end, it operated 23 full-service branches, primarily in central Pennsylvania, and reported one business segment.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total assets, year-end | $1.170 billion | $1.033 billion |
| Total deposits, year-end | $1.024 billion | $935.4 million |
| Loans, net of unearned interest, year-end | $910.4 million | $813.9 million |
| Net interest income | $37.6 million | $34.8 million |
| Net income available to common shareholders | $7.1 million | $7.8 million |
| Diluted earnings per share | $1.67 | $1.85 |
| Net interest margin, tax-equivalent | 3.68% | 3.82% |
| Return on average assets | 0.64% | 0.78% |
| Return on average equity | 9.48% | 10.71% |
| Allowance for loan losses / loans | 0.84% | 0.88% |
| Shareholders’ equity, year-end | $75.7 million | $70.5 million |
Cash and cash equivalents were $23.5 million at year-end, down from $46.0 million. Operating cash flow was $11.9 million; investing activities used $163.8 million and financing activities provided $129.4 million. The Bank reported $436.8 million of unused FHLB borrowing capacity and $15.0 million of unused correspondent-bank credit lines.
Year-end funding included $34.6 million of short-term borrowings, $12.4 million of long-term debt and $17.3 million of subordinated debt. The subordinated debt balance increased following a $10 million issuance in December 2017. The Bank’s regulatory capital ratios were 10.0% CET1, 10.0% Tier 1 risk-based, 10.9% total risk-based and 7.7% leverage; it was classified as well capitalized.
Material changes versus the prior comparable period
- Assets grew 13%, loans grew about 12% and deposits grew about 9%. Deposit growth included $40.9 million in noninterest-bearing accounts.
- Net interest income increased 8%, but the tax-equivalent net interest margin fell to 3.68% from 3.82%, reflecting lower securities yields and higher funding costs.
- Net income declined 9%, although pretax income increased. The main unusual factor was a $1.169 million noncash write-down of deferred tax assets following the federal corporate tax-rate reduction from 34% to 21%.
- Noninterest expense rose 9% to $31.4 million, including $619,000 of Scottdale-related merger expense and higher staffing and occupancy costs. Noninterest income was $5.7 million versus $5.9 million, partly because 2016 included substantially greater securities-sale gains.
- Nonperforming assets increased to $11.3 million from $5.8 million, mainly after two loan relationships totaling approximately $7.3 million were placed on nonaccrual. Net recoveries were $98,000, compared with $855,000 of net charge-offs in 2016.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said it was not aware of current trends or recommendations expected to materially affect liquidity, capital resources or operations.
- The TCJA is expected to reduce future tax expense, but its enactment caused the 2017 deferred-tax-asset charge. Fourth-quarter net income available to common shareholders was $501,000, including a $2.170 million income-tax provision.
- Mid Penn completed the Scottdale acquisition on January 8, 2018; Scottdale reported $260.7 million of assets and $210.7 million of deposits shortly before closing. The acquisition added five western Pennsylvania offices. Mid Penn also agreed to acquire First Priority Financial Corp.; closing was expected in the third quarter of 2018, subject to approvals and other conditions. The filing estimated approximately $609.9 million of assets and eight branches would be added.
- Credit risk is concentrated in commercial real estate: it represented 51.1% of year-end loans. Commercial, industrial, agricultural, construction and commercial real estate loans together represented approximately 83% of the portfolio. The company warned that deterioration in a small number of larger credits could materially affect results.
- Other stated risks include interest-rate sensitivity, local economic conditions, competition for deposits and loans, cyber and technology risks, regulatory changes, and challenges integrating acquisitions. The company’s model estimated one-year net interest income would rise 7.83% under a 300-basis-point rate increase and fall 11.37% under a 300-basis-point decrease; management cautioned actual results could differ.
- The Board declared $0.77 per share in 2017 dividends, including a $0.10 special dividend payable in January 2018. Future dividends remain subject to Board discretion, earnings, capital and regulatory limits.
The auditor issued an unqualified opinion on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective at December 31, 2017. Management reported no material pending litigation.
Important facts for investors to verify
- How the two large nonaccrual relationships and the broader rise in nonperforming assets resolve, and whether collateral valuations and the $7.6 million loan-loss allowance remain adequate.
- Whether loan and deposit growth can continue without further margin compression or materially higher funding costs.
- The realized earnings benefit from the lower tax rate compared with the one-time deferred-tax write-down.
- Scottdale integration costs, purchase-accounting impacts and performance, as well as First Priority’s regulatory approvals, closing timetable, dilution and integration risks.
- Actual liquidity and capital needs as the company funds growth, acquisitions, dividends and subordinated-debt obligations.