MID PENN BANCORP INC annual report, FY2023

MID PENN BANCORP, INC. — FY 2023 Form 10-K

Reporting period: Fiscal year ended December 31, 2023; filed March 28, 2024. Mid Penn is a Pennsylvania-based financial holding company whose principal business is community banking. The May 19, 2023 Brunswick Bancorp acquisition expanded its footprint into central New Jersey. Results are not fully comparable with 2022 because Brunswick was included for only part of 2023.

Financial performance and position

Metric	FY 2023 / Dec. 31, 2023	FY 2022 / Dec. 31, 2022
Net income	$37.4 million	$54.8 million
Diluted EPS	$2.29	$3.44
Net interest income	$147.0 million	$147.8 million
FTE net interest margin	3.26%	3.59%
Total assets	$5.29 billion	$4.50 billion
Loans, net of unearned income	$4.25 billion	$3.51 billion
Deposits	$4.35 billion	$3.78 billion
Shareholders’ equity	$542.4 million	$512.1 million
Operating cash flow	$51.9 million	$60.0 million

Net income fell about 31.8%. Higher loan interest income and loan growth were offset by sharply higher funding costs, lower noninterest income, and higher operating expenses.
Interest income rose to $236.3 million from $165.6 million, while interest expense climbed to $89.4 million from $17.8 million. The cost of interest-bearing liabilities increased to 2.55% from 0.58%; Mid Penn cited deposit repricing and a shift toward higher-cost time deposits.
Noninterest income declined 15.4% to $20.0 million, including lower mortgage hedging and other miscellaneous income. Noninterest expense increased 19.2% to $119.0 million, including $5.5 million of merger and acquisition costs and $3.0 million of post-acquisition restructuring costs.
Total assets grew 17.6%; loans grew 21.0%, with $324.5 million of loan growth attributable to Brunswick and $423.6 million described as organic growth. Deposits grew 15.0%; Brunswick contributed approximately $282.6 million of deposits.
Net cash from investing activities was negative $408.5 million, mainly reflecting loan growth; financing activities provided $392.5 million, primarily from deposit growth and borrowings. Cash and cash equivalents ended at $96.8 million, up from $60.9 million.
At year-end, short-term borrowings were $241.5 million, long-term debt was $59.0 million, and subordinated debt was $46.4 million. The company paid off $30.4 million of long-term debt and redeemed $10.0 million of subordinated debt and trust preferred securities during 2023.

Asset quality, liquidity and capital

The allowance for credit losses on loans was $34.2 million, or 0.80% of loans, versus $19.0 million, or 0.54%, at year-end 2022. The year-end balance includes the impact of adopting CECL; adoption increased the allowance by $15.0 million and reduced retained earnings by $11.5 million.
Nonperforming assets were $14.5 million, up from $8.6 million; nonperforming loans were 0.33% of loans. Management attributed part of the increase to $3.9 million of nonaccrual loans acquired with Brunswick. Net loan charge-offs were $332,000.
Commercial real estate represented $2.30 billion, or 54.1%, of loans. Commercial real estate, commercial and industrial, and construction loans together comprised approximately 81% of the portfolio. Non-owner-occupied office exposure was 7.1% of total loans, described as primarily suburban offices.
Uninsured deposits were approximately $1.2 billion, down from $1.6 billion. The Bank had $244.8 million of brokered certificates of deposit. Management reported $1.6 billion of unused FHLB short-term borrowing capacity and $35 million of unused correspondent-bank lines at year-end.
Mid Penn’s regulatory ratios were: Tier 1 leverage 8.32%, CET1 9.78%, Tier 1 risk-based capital 9.78%, and total risk-based capital 11.69%. The Bank was considered well-capitalized and met applicable requirements.
Management’s interest-rate model estimated net interest income would increase 0.6% under a 100-basis-point rise and decrease 0.2% under a 100-basis-point decline. These are modeled estimates, not guidance.

Material changes, outlook and notable items

The Brunswick acquisition was completed for $45.7 million of consideration, including 849,510 shares and $27.6 million net cash. It added five branches and $324.5 million of loans. Mid Penn recorded $12.8 million of goodwill.
In the fourth quarter, management corrected purchase-accounting allocations for Brunswick, including a $2.4 million decrease in goodwill and a $2.0 million increase in other assets. It revised related June and September 2023 balance-sheet disclosures, but stated that it did not consider amendments to the prior 10-Q filings necessary.
Management identified a material weakness in internal controls over business-combination accounting during Q4 2023. It implemented enhanced controls and deemed the weakness remediated as of year-end. Management and the auditor concluded internal control over financial reporting was effective at December 31, 2023; the auditor issued unqualified opinions on the financial statements and controls.
Available-for-sale securities had $22.3 million of gross unrealized losses at year-end; management attributed the losses to interest-rate movements and recorded no securities credit-loss allowance. Held-to-maturity securities had $41.6 million of gross unrealized losses, with estimated fair value below amortized cost; these securities remain carried at amortized cost.
Goodwill was $127.0 million. Following a mid-2023 triggering-event assessment and the annual Q4 test, Mid Penn recorded no impairment. Management noted the stock continued to trade below book value and said it would continue monitoring impairment indicators.
Mid Penn adopted CECL on January 1, 2023. Because prior periods use the former incurred-loss method, credit-loss and allowance comparisons across periods are not directly comparable.
The filing provides no specific earnings, margin, or growth guidance. Management cited deposit competition, volatile interest rates, inflation, CRE concentration and delinquencies, acquisition integration, credit estimates, regulatory costs, and cybersecurity as relevant risks. It reported no material cybersecurity incident in 2023 and no litigation expected to materially affect consolidated financial condition.

Important facts for investors to verify

Whether deposit costs and funding mix stabilize enough to support net interest margin and earnings.
Trends in CRE delinquencies, nonperforming assets, office exposure, and the adequacy of the CECL allowance.
Uninsured and brokered deposit levels, borrowing usage, and liquidity capacity under stress.
Brunswick integration progress, realized cost savings, acquisition-related expenses, and the accuracy of purchase accounting and remediated controls.
The implications of unrealized securities losses, especially the difference between AFS marks reflected in equity and HTM marks carried at amortized cost.
Capital ratios, dividend capacity, and the effect of continued share repurchases; 216,879 shares were repurchased in 2023 at an average $22.31, with $5.3 million remaining under the program at year-end.