MID PENN BANCORP INC annual report, FY2022

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Mid Penn Bancorp, Inc. — 2022 Form 10-K

Reporting period: Fiscal year ended December 31, 2022; filed March 16, 2023. This is an annual report, not a standalone fourth-quarter filing. Mid Penn is a Pennsylvania-based bank holding company whose results primarily reflect Mid Penn Bank.

Financial performance and condition

  • Earnings: Net income was $54.8 million, up from $29.3 million in 2021. Diluted EPS was $3.44, versus $2.71. Return on average assets was 1.22% (0.83% in 2021); return on average equity was 10.98% (8.91%).
  • Revenue and margin: Net interest income was $147.8 million, up from $108.6 million. Fully taxable-equivalent net interest margin rose to 3.59% from 3.30%. Interest income was $165.6 million; noninterest income was $23.7 million. Provision for loan losses was $4.3 million, noninterest expense $99.8 million, and income tax expense $12.5 million.
  • Balance sheet: Total assets were $4.50 billion, down 4.1% year over year. Loans were $3.51 billion, up 13.2%; deposits were $3.78 billion, down 5.6%. Shareholders’ equity was $512.1 million.
  • Credit quality: Allowance for loan losses was $19.0 million, or 0.54% of loans, versus $14.6 million, or 0.47%, in 2021. The company recorded net loan recoveries of $60,000. Nonperforming assets were $8.6 million, or 0.21% of total assets, compared with $10.0 million, or 0.22%, a year earlier.
  • Cash flow and liquidity: Operating cash flow was $60.0 million; investing cash flow was negative $704.7 million; financing cash flow was negative $208.2 million. Cash and cash equivalents fell to $60.9 million from $913.8 million, largely as funds were deployed into loan growth and securities. Year-end short-term borrowings were $102.6 million, consisting of FHLB overnight borrowings. The Bank reported $1.6 billion of maximum FHLB borrowing capacity and $35 million of unused correspondent-bank lines.
  • Debt and capital: Year-end long-term debt was $4.4 million and subordinated debt and trust preferred securities were $56.9 million. Mid Penn repaid $76.8 million of long-term debt and redeemed $16.8 million of subordinated debt and trust preferred securities during 2022. The Bank was “well-capitalized”; Mid Penn’s total risk-based capital ratio was 13.19%, CET1 ratio 11.18%, and Tier 1 leverage ratio 9.57%.

Material changes versus 2021

  • Results reflect the Riverview acquisition, completed November 30, 2021, which materially affected year-over-year comparability. Loan growth and higher net interest margin supported earnings growth.
  • PPP loan processing fees recognized in interest income declined to $3.8 million from $22.0 million, reflecting loan forgiveness and runoff.
  • Noninterest income rose 9.9%, mainly from Riverview-related growth in wealth management, card interchange, deposit service charges, and other income. Mortgage banking income fell 84.4% to $1.6 million as higher rates slowed originations and sales.
  • Noninterest expense increased 9.6% to $99.8 million, largely due to the acquired business and higher staffing, technology, occupancy, and operating costs. Prior-year merger and restructuring charges were substantially higher: $3.1 million and $9.9 million, respectively, versus $0.3 million and $0.3 million in 2022.
  • Deposits declined as Mid Penn allowed higher-cost time deposits acquired with Riverview to run off. Uninsured deposits increased to approximately $1.6 billion from $1.4 billion.
  • Rising rates drove substantial securities valuation losses. Available-for-sale securities had $24.5 million of gross unrealized losses; the after-tax effect reduced equity by $19.1 million. Held-to-maturity securities had an additional $51.0 million of unrealized losses not reflected at fair value on the balance sheet. Management reported no securities as other-than-temporarily impaired.

Outlook, risks, and unusual items

  • Outlook and transactions: No formal earnings or financial guidance is provided. Management stated it was not aware of current trends or uncertainties expected to materially affect liquidity, capital resources, or operations. The pending Brunswick Bancorp merger was expected to close in the second quarter of 2023; Brunswick shareholders could elect, subject to adjustment and proration, 0.598 Mid Penn shares or $18.00 per Brunswick share. Mid Penn also acquired the assets of Managing Partners, Inc., an insurance agency, on December 30, 2022.
  • Interest-rate and funding risks: Net interest income, securities values, deposit pricing, and loan demand are sensitive to interest-rate changes. Deposit competition and the sizable uninsured deposit balance are relevant funding considerations. The filing reports no direct exposure to Silicon Valley Bank or Signature Bank as of March 13, 2023, but warns that banking-sector stress could affect markets and liquidity and could lead to FDIC special assessments.
  • Credit and concentration risks: Commercial real estate was 58.3% of loans and construction loans another 12.6%; management identifies commercial real estate as the largest loan concentration. About 88% of loans were commercial real estate, commercial and industrial, and agricultural loans. Management’s allowance estimates are subjective and could change with economic conditions.
  • CECL transition: The company adopted the expected-credit-loss standard on January 1, 2023. Before adoption, management estimated the increase in the total credit loss reserve, including unfunded commitments, would be no greater than 200% of the December 31, 2022 reserve; the estimate was subject to refinement. The transition adjustment was to retained earnings, net of tax.
  • Other risks and contingencies: Disclosed risks include acquisition integration, cybersecurity and technology, Pennsylvania economic conditions, SBA/PPP compliance, LIBOR transition, and possible goodwill impairment. Management said ordinary-course litigation was not expected to have a material adverse effect. The auditors issued unqualified opinions on the financial statements and internal controls; the allowance’s qualitative factors were identified as a critical audit matter.

Important facts for investors to verify

  • How 2023 deposit balances, deposit pricing, uninsured deposits, and borrowing needs evolved after the year-end decline in cash and deposits.
  • The realized impact of interest-rate changes on net interest margin and the market value or liquidity of the securities portfolio, including the large HTM unrealized loss.
  • Whether credit quality, commercial real estate exposures, and the CECL allowance developed in line with management’s estimates.
  • Whether Brunswick closed as expected and whether acquisition integration, synergies, costs, and the MPI insurance-agency acquisition met expectations.
  • Whether the pending CECL transition reserve adjustment, FDIC assessments, and any other regulatory or contingent costs materially affected earnings or capital.