MID PENN BANCORP INC annual report, FY2018

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Mid Penn Bancorp, Inc. — FY 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018; filed March 18, 2019. Mid Penn is a Pennsylvania community bank holding company operating through Mid Penn Bank. FY 2018 results include the Scottdale acquisition, completed January 8, and First Priority acquisition, completed July 31, materially limiting comparison with 2017.

Financial results and position

  • Profit: Net income was $10.6 million and income available to common shareholders was $10.5 million, versus $7.1 million in 2017. Basic and diluted EPS declined to $1.48 from $1.67, reflecting substantial new shares issued in the acquisitions and acquisition costs. Return on average assets was 0.63% (0.64% in 2017); return on average equity was 5.98% (9.48%).
  • Fourth quarter: Unaudited common net income was $4.6 million and EPS was $0.54, compared with $0.5 million and $0.12 in Q4 2017. The comparison includes acquisition effects.
  • Revenue and margins: Net interest income rose to $55.9 million from $37.6 million; tax-equivalent net interest income was $56.8 million. Net interest margin edged down to 3.67% from 3.68%. Noninterest income was $7.5 million, up 31%; noninterest expense rose 60% to $50.2 million. Interest expense increased 102% to $12.7 million as deposit and borrowing costs rose.
  • Credit costs and asset quality: Provision for loan losses was $0.5 million, versus $0.3 million. Net recoveries were $0.3 million. Nonperforming assets increased to $12.3 million from $11.3 million; nonperforming loans were $11.3 million. The allowance was $8.4 million, or 0.52% of loans, compared with 0.84% a year earlier.
  • Balance sheet: Total assets grew 78% to $2.078 billion; loans were $1.624 billion and deposits $1.726 billion. Shareholders’ equity rose to $223.2 million, principally from acquisition-related share issuance. Commercial real estate, construction and land development loans represented 61.8% of the loan portfolio, up from 51.1%.
  • Debt and capital: Year-end short-term borrowings were $43.1 million, long-term debt $48.0 million, and subordinated debt $27.1 million. The company reported Tier 1 risk-based capital of 10.0% and total capital of 12.3%; the Bank was classified as well-capitalized.
  • Cash flow and liquidity: Operating cash flow was $11.0 million, investing cash flow was positive $21.8 million, and financing cash flow was negative $16.3 million. Cash and cash equivalents ended at $40.1 million. The Bank reported FHLB borrowing capacity of $507.5 million and $15 million of unused correspondent-bank credit lines.

Material changes and unusual items

  • Acquisitions added 13 branches and substantially increased assets, loans, deposits and operating scale. Acquired loans at year-end totaled approximately $543 million; acquired deposits accounted for $596.8 million of deposit growth.
  • Merger and acquisition expense was $4.8 million, versus $0.6 million in 2017. Goodwill increased to $62.8 million, including $58.9 million associated with the 2018 acquisitions; management reported no impairment in its October 2018 qualitative test.
  • Other income included $0.7 million of pension settlement gains from lump-sum payments under the Scottdale plan. The First Priority acquisition also brought $9.5 million of subordinated notes bearing a 7% fixed rate.
  • Available-for-sale securities had a $4.1 million gross unrealized loss, reducing equity by $3.2 million after tax. Management attributed the losses principally to interest-rate movements and reported no other-than-temporary impairment.
  • The 2017 comparison included a $1.2 million one-time deferred-tax-asset write-down following the reduction in the federal corporate tax rate. The effective tax rate, excluding that adjustment, was 17% in 2018 versus 29% in 2017.

Outlook, risks and contingencies

The filing provides no quantitative earnings or revenue guidance. Management describes continued growth through acquisitions, existing branches and potential new offices, while emphasizing integration, cost control and maintaining asset quality. It also reported no known current trends or regulatory recommendations expected to materially affect liquidity, capital resources or operations.

  • Key disclosed risks include rising funding costs and interest-rate sensitivity, commercial real estate and other credit concentration, Pennsylvania economic exposure, acquisition integration and goodwill impairment, competition for deposits, and cybersecurity and technology risks.
  • LIBOR discontinuance after 2021 could affect loans, securities and derivatives that reference LIBOR. Management’s rate scenarios indicated higher modeled net interest income under rate increases and lower income under decreases; actual results may differ.
  • Off-balance-sheet commitments to extend credit were $346.2 million; standby letters of credit were $20.8 million. A $7.6 million low-income housing investment commitment was being funded, with $1.7 million invested by year-end.
  • The FDIC provided a preliminary estimate of a $0.5 million assessment credit, contingent on the insurance fund reserve ratio reaching 1.38%; it was not yet available at year-end. Management said ordinary-course litigation was not expected to have a material adverse effect.
  • Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.

Important facts for investors to verify

  • Whether Scottdale and First Priority integration delivers expected cost savings and revenue growth, and whether goodwill remains recoverable.
  • How the 61.8% commercial real estate/construction concentration and major nonperforming borrower relationships develop, and whether the 0.52% allowance remains adequate.
  • Whether deposit pricing, brokered deposits and wholesale funding costs continue to pressure net interest margin and earnings.
  • The quality and fair value sensitivity of the securities portfolio, and the expected effect of CECL adoption, which management anticipated could increase credit-loss allowances.
  • Dividend capacity and debt servicing, including the Bank’s regulatory limits on upstream dividends and the subordinated notes’ future rate resets.