Mid Penn Bancorp, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a quarterly filing. Mid Penn is a Pennsylvania community banking and trust company operating through Mid Penn Bank, with 39 retail branches. The 2019 results include a full year of the Scottdale and First Priority businesses acquired in 2018, limiting direct year-over-year comparability.
Financial performance and condition
| Metric | 2019 | 2018 |
|---|---|---|
| Total interest income | $95.3 million | $68.7 million |
| Net interest income | $70.1 million | $55.9 million |
| Noninterest income | $12.6 million | $7.5 million |
| Provision for loan losses | $1.4 million | $0.5 million |
| Noninterest expense | $60.0 million | $50.2 million |
| Net income available to common shareholders | $17.7 million | $10.5 million |
| Diluted earnings per share | $2.09 | $1.48 |
| Net interest margin | 3.57% | 3.67% |
| Return on average assets / equity | 0.82% / 7.67% | 0.63% / 5.98% |
| Total assets at year-end | $2.23 billion | $2.08 billion |
| Loans, net of unearned interest | $1.76 billion | $1.62 billion |
| Total deposits | $1.91 billion | $1.73 billion |
| Shareholders’ equity | $237.9 million | $223.2 million |
- Net income rose about 68%; management attributes the improvement to higher net interest income, increased mortgage banking activity, securities-sale gains, and the absence of 2018 merger costs. The 2018 comparison includes $4.8 million of merger and acquisition expense.
- Net interest margin fell 10 basis points. Higher loan yields and earning-asset growth were offset by rising deposit and wholesale funding costs, including higher-cost funding assumed with First Priority.
- Loans increased 9% year over year, led by commercial real estate, construction and land development growth of $107.3 million, and commercial, industrial and agricultural growth of $52.6 million. Commercial real estate, construction and land development represented 63% of loans.
- Deposits grew 11%. Average interest-bearing deposit costs increased to 1.42% from 0.91%, while total interest-bearing liability costs rose to 1.56% from 1.02%.
- Net cash provided by operating activities was $7.8 million, versus $11.0 million in 2018. Cash and cash equivalents increased to $139.0 million from $40.1 million; financing activities provided $118.1 million, primarily reflecting deposit growth.
- Year-end short-term borrowings were zero, compared with $43.1 million in 2018. Long-term debt was $32.9 million, down from $48.0 million; subordinated debt was $27.1 million. The Bank reported $810.8 million of FHLB borrowing capacity and $35.0 million in unused correspondent-bank credit lines.
- Regulatory capital remained above well-capitalized thresholds: Mid Penn’s total risk-based capital ratio was 11.9%, and the Bank’s was 11.9%. The Bank’s Tier 1 leverage ratio was 8.5%.
Material changes and unusual items
- Mid Penn early adopted ASU 2019-04 and reclassified 113 held-to-maturity securities with $67.1 million aggregate amortized cost to available-for-sale; it sold them in the fourth quarter and recognized a $1.779 million pretax gain. Total securities-sale gains were $1.878 million.
- Mortgage banking income increased to $3.8 million from $0.8 million, supported by expanded mortgage staffing and lower mortgage rates that increased originations and secondary-market sales.
- Noninterest expense rose 20%, reflecting the full-year effects of the 2018 acquisitions, mortgage-banking expansion, additional business-development staffing, and technology and occupancy costs. No merger expense was recorded in 2019.
- Mid Penn repaid $43.1 million of short-term borrowings and prepaid $20 million of FHLB advances, incurring a $93,000 penalty. It also received a $492,000 FDIC assessment credit.
- The allowance for loan and lease losses increased to $9.5 million, or 0.54% of loans, from $8.4 million, or 0.52%. Net charge-offs were $272,000, compared with net recoveries of $291,000 in 2018.
- Nonperforming assets were $12.2 million, or 0.69% of loans and foreclosed real estate, versus $12.3 million, or 0.76%, in 2018. A $7.385 million commercial relationship moved to nonaccrual in Q4; management reported collateral value above the outstanding balance and no specific allowance for that relationship.
- Adoption of the new lease standard added operating and finance lease right-of-use assets and liabilities. The Company recorded a $316,000 opening retained-earnings adjustment; management said the standard did not materially affect income or cash flows.
Outlook, risks and contingencies
- The filing provides no quantified earnings or growth guidance. Management stated it was not aware of current trends, events, uncertainties or regulatory recommendations expected to materially affect liquidity, capital resources or operations.
- Management intends to pursue growth through acquisitions, existing branches and potential new locations in current and adjacent markets, and cited plans to broaden financial products and services. Mid Penn elected financial holding company status in December 2019.
- Key risks include interest-rate and funding-cost changes, competition for deposits, credit deterioration, and geographic concentration in Pennsylvania. Commercial real estate is the largest loan concentration; deterioration in a small number of larger credits could materially affect results.
- Other disclosed risks include acquisition integration and rapid-growth execution, cyber and information-system disruption, LIBOR transition, regulatory changes, and possible increases in subordinated-note rates as fixed-rate periods expire.
- Off-balance-sheet commitments to extend credit totaled $435.6 million, and standby letters of credit totaled $26.6 million. A low-income housing investment commitment totaled $7.579 million; the project was substantially complete and the investment was expected to be fully funded in 2020.
- Management said routine litigation was not expected to have a material adverse effect. The independent auditor issued unqualified opinions on the financial statements and internal controls; management also concluded disclosure controls and internal control over financial reporting were effective.
- Mid Penn was classified as a smaller reporting company and deferred adoption of CECL to January 1, 2023. Management said adoption could increase the allowance, but the amount was not yet clear.
Important facts for investors to verify
- Whether the strong earnings increase persists after excluding the $1.779 million securities gain and considering the lower net interest margin and higher funding costs.
- Credit performance and collateral recovery for the $7.385 million newly nonaccrual commercial relationship, as well as trends in commercial real estate concentration and total nonperforming loans.
- Whether organic loan and deposit growth can continue without further margin compression or increased reliance on higher-cost funding.
- Progress on integrating the 2018 acquisitions, controlling expenses, and realizing expected growth and cost benefits.
- The eventual CECL allowance impact, upcoming subordinated-debt rate resets, and the timing and funding of the low-income housing investment commitment.