Mid Penn Bancorp, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Mid Penn is a Pennsylvania-based financial holding company operating primarily through Mid Penn Bank. The quarter’s results include the Brunswick acquisition, completed May 19, 2023, which added five branches in central New Jersey.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $37.5 million | $39.4 million | $110.0 million | $109.3 million |
| Net income | $9.2 million | $15.5 million | $25.3 million | $39.1 million |
| Diluted EPS | $0.56 | $0.97 | $1.56 | $2.45 |
| Net interest margin | 3.16% | 3.90% | 3.33% | 3.50% |
| Noninterest income | $5.3 million | $6.0 million | $14.9 million | $16.9 million |
| Noninterest expense | $29.9 million | $24.7 million | $91.5 million | $74.4 million |
Q3 net income declined about 40% year over year; nine-month net income declined about 35%. Nine-month net interest income was nearly flat, as higher asset yields and volume were largely offset by higher funding costs. Return on average assets was 0.72% for Q3 and 0.71% for the nine-month period; return on average equity was 6.93% and 6.57%, respectively.
Balance sheet, liquidity and capital
- Total assets were $5.22 billion at September 30, up 16.0% from year-end 2022. Loans were $4.15 billion, up $631.5 million (18.0%); the Brunswick acquisition contributed $324.5 million of acquired loans.
- Deposits were $4.38 billion, up $603.3 million (16.0%). Acquisition-related deposits were $282.6 million. Time deposits grew substantially; noninterest-bearing deposits were $804.8 million, or 18.4% of deposits.
- Uninsured and uncollateralized deposits totaled $1.2 billion, or 27.0% of deposits, versus 20.8% at June 30. Management reported available liquidity, including borrowing capacity, of nearly $1.31 billion, or 110.5% of those deposits.
- Cash and cash equivalents were $118.1 million. Nine-month operating cash flow was $36.4 million; investing activities used $306.5 million, principally reflecting loan growth; financing activities provided $327.4 million, mainly from deposit growth.
- Short-term borrowings were $139.0 million; long-term debt was $59.0 million; subordinated debt was $46.5 million. The Bank had $1.3 billion of unused FHLB borrowing capacity and $35.0 million of unused correspondent-bank lines.
- Shareholders’ equity was $528.7 million. Reported regulatory capital ratios met minimum requirements; the filing states the Bank was “well-capitalized.” Mid Penn’s reported ratios included 8.37% Tier 1 leverage, 9.74% Common Equity Tier 1 and 11.70% total risk-based capital.
Credit quality, securities and significant changes
- The allowance for credit losses on loans was $34.0 million, or 0.82% of loans, compared with $19.0 million, or 0.54%, at December 31, 2022. The increase reflects CECL adoption, acquisition-related provisions and portfolio changes. Nine-month net charge-offs were $294,000.
- Nonperforming assets were $14.4 million, up from $8.6 million at year-end; nonperforming loans were 0.32% of loans. The increase included $3.9 million of nonaccrual loans acquired with Brunswick.
- Investment securities totaled $619.6 million. At quarter-end, AFS securities had $31.7 million of gross unrealized losses; HTM securities had a $60.6 million fair-value discount to amortized cost. Management reported no identified securities credit losses and no HTM securities 30 or more days past due or on nonaccrual.
- Accumulated other comprehensive loss was $21.4 million. The filing notes that the stock continued to trade below book value; management reported no third-quarter goodwill impairment trigger, and its annual impairment test was scheduled for October 31, 2023.
Outlook, commentary and risks
The filing provides no quantified earnings or financial guidance. Management attributed margin pressure to deposit repricing and a shift toward higher-cost time deposits as market rates rose. Mortgage banking and hedging revenues were lower amid reduced mortgage volumes and higher mortgage rates. Acquisition costs, added operating expenses and higher FDIC assessments also weighed on results; Brunswick-related acquisition expenses were $8.5 million for the nine months.
Key risks discussed include interest-rate changes and deposit competition, liquidity and capital requirements, credit deterioration and the judgment-sensitive CECL allowance, securities valuation, potential goodwill impairment, and successful integration of acquisitions. Management said liquidity was stable and above its minimum levels; it also warned actual interest-rate outcomes may differ materially from model estimates. Routine litigation was not expected to have a material adverse effect, and the filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether deposit costs continue to rise, and how uninsured and uncollateralized deposit levels and available liquidity evolve.
- Whether loan growth, nonaccrual loans and the CECL allowance remain consistent with credit performance, particularly in commercial real estate and construction.
- How Brunswick integration affects expenses, FDIC assessments, deposits, capital ratios and earnings.
- Whether net interest margin stabilizes and whether mortgage-related and other fee income recover.
- How the securities portfolio’s unrealized losses, interest-rate sensitivity and goodwill impairment assessment develop.