Mid Penn Bancorp(MPB) - 2020 Q3 - Quarterly Report

PART 1 – FINANCIAL INFORMATION Item 1 – Financial Statements This section presents unaudited consolidated financial statements, detailing accounting policies and the impact of COVID-19 and the Paycheck Protection Program Consolidated Balance Sheets Consolidated Balance Sheets (in millions) | Metric | September 30, 2020 | December 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $3,052.9 | $2,231.2 | +36.8% | | Net Loans and Leases | $2,509.7 | $1,753.2 | +43.1% | | Total Deposits | $2,456.4 | $1,912.4 | +28.4% | | Short-term borrowings | $203.8 | $0 | N/A | | Total Shareholders' Equity | $248.2 | $237.9 | +4.3% | - The significant increase in assets was primarily driven by growth in net loans and leases, largely due to participation in the Paycheck Protection Program (PPP) This growth was funded by a substantial increase in total deposits and new short-term borrowings[8] Consolidated Statements of Income Consolidated Statements of Income (Q3, in millions, except per share data) | Metric | Q3 2020 | Q3 2019 | YoY Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $21.4 | $17.8 | +20.5% | | Provision for Loan and Lease Losses | $1.1 | $0.6 | +94.7% | | Noninterest Income | $5.3 | $3.0 | +76.6% | | Noninterest Expense | $18.2 | $14.7 | +23.8% | | Net Income | $6.5 | $4.8 | +36.0% | | Diluted EPS | $0.78 | $0.57 | +36.8% | Consolidated Statements of Income (9M, in millions, except per share data) | Metric | 9M 2020 | 9M 2019 | YoY Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $60.4 | $52.8 | +14.3% | | Provision for Loan and Lease Losses | $2.7 | $1.2 | +133.8% | | Noninterest Income | $11.9 | $7.9 | +49.6% | | Noninterest Expense | $49.2 | $43.8 | +12.3% | | Net Income | $17.2 | $13.3 | +29.4% | | Diluted EPS | $2.04 | $1.57 | +29.9% | - The significant increase in noninterest income for both the three and nine-month periods was driven by a surge in mortgage banking income, which rose to $3.1 million in Q3 2020 from $1.1 million in Q3 2019[10] Consolidated Statements of Cash Flows Cash Flow Activity (Nine Months Ended Sep 30, in millions) | Cash Flow Activity (Nine Months Ended Sep 30) | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash (Used In) Provided By Operating Activities | ($1.1) | $7.2 | | Net Cash Used In Investing Activities | ($741.0) | ($25.7) | | Net Cash Provided By Financing Activities | $798.5 | $139.3 | | Net Increase in Cash and Cash Equivalents | $56.3 | $120.8 | - Investing activities saw a significant cash outflow due to a net increase in loans and leases of $760.6 million This was largely funded by financing activities, which included a net increase in deposits of $544.0 million and a net increase in short-term borrowings of $203.8 million[21] Notes to Consolidated Financial Statements These notes detail accounting policies, PPP impact, loan portfolio, credit quality, allowance for loan losses, lease accounting, debt, and COVID-19 implications - As of September 30, 2020, the company had $613.9 million of net PPP loans outstanding, which are 100% guaranteed by the SBA The company received $20.9 million in nonrefundable loan processing fees related to these loans[52][50] - The company is not required to adopt the Current Expected Credit Loss (CECL) accounting standard until January 1, 2023, and continues to use the incurred loss method for its allowance for loan and lease losses[53][135] - In response to the COVID-19 pandemic, the company provided short-term loan modifications under the CARES Act As of September 30, 2020, the principal balance of loans remaining in deferment status was $32.9 million, significantly down from $444.5 million at June 30, 2020[142][247] - In March 2020, the company issued $15.0 million in subordinated notes due 2030, intended to be treated as Tier 2 capital for regulatory purposes[202] Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses significant growth in assets, loans, and deposits, driven by PPP, alongside increased net income, credit quality, liquidity, and capital adequacy Results of Operations Performance Metric (Q3, in millions) | Performance Metric | Q3 2020 | Q3 2019 | | :--- | :--- | :--- | | Net Income | $6.5 | $4.8 | | Diluted EPS | $0.78 | $0.57 | | Return on Average Assets (ROA) | 0.87% | 0.87% | | Return on Average Equity (ROE) | 10.64% | 8.19% | - Taxable-equivalent net interest income increased by 20% to $21.6 million for Q3 2020 compared to Q3 2019 However, the net interest margin decreased from 3.53% to 3.09%, primarily due to the low-yielding PPP loans and general market rate reductions[267][268] - Noninterest income for Q3 2020 increased by 76% year-over-year, driven by a 185% surge in mortgage banking income due to increased origination and sales activity in a low-rate environment[280] - Noninterest expense for Q3 2020 rose 24% year-over-year, primarily due to higher salaries and benefits, which included increased mortgage banking commissions and costs related to organizational growth[288] Financial Condition - Total assets grew by 37% to $3.05 billion as of September 30, 2020, from $2.23 billion at year-end 2019 This was largely driven by $613.9 million in outstanding PPP loans[300] - Total loans increased by 43% to $2.52 billion since year-end 2019 Excluding PPP loans, core loans grew at an annualized rate of over 10%[300][303] - The asset growth was funded by a 38% annualized growth in deposits ($544.0 million increase) and a $246.1 million net increase in borrowings, including $203.8 million from the Federal Reserve's PPPLF[300][302] - Shareholders' equity increased by 4% to $248.2 million from year-end 2019, reflecting retained earnings growth, partially offset by $1.8 million in treasury stock repurchases[359] Credit Quality and Allowance for Loan Losses Credit Quality Metrics (in millions) | Metric | September 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Nonperforming Loans | $13.4 | $12.0 | | Total Nonperforming Assets | $15.1 | $12.2 | | Nonperforming Loans as a % of Total Loans | 0.53% | 0.68% | | Allowance for Loan Losses to Nonperforming Loans | 91.05% | 79.55% | - The allowance for loan losses to total loans was 0.48% at September 30, 2020 Excluding the SBA-guaranteed PPP loans, this ratio was 0.64%[307] - The provision for loan losses for the first nine months of 2020 was $2.7 million, up from $1.2 million in the same period of 2019, reflecting increased qualitative factors related to the potential economic impact of the COVID-19 pandemic[279] Capital Resources Capital Ratios (Mid Penn Bancorp, Inc.) | Capital Ratios (Mid Penn Bancorp, Inc.) | September 30, 2020 | Minimum for Adequacy (w/ buffer) | | :--- | :--- | :--- | | Common Equity Tier 1 Capital Ratio | 9.5% | 7.0% | | Tier 1 Capital Ratio | 9.5% | 8.5% | | Total Capital Ratio | 12.3% | 10.5% | | Tier 1 Leverage Ratio | 6.6% | 4.0% | - Both Mid Penn Bancorp, Inc and Mid Penn Bank met the definition of a "well-capitalized" institution under regulatory frameworks as of September 30, 2020[360][362] Item 3 – Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk, with an asset-sensitive position where net interest income is projected to increase in rising rate environments Interest Rate Sensitivity Analysis | Change in Basis Points | % Change in Net Interest Income | | :--- | :--- | | +300 | +16.10% | | +200 | +10.69% | | +100 | +5.38% | | -100 | -5.32% | | -200 | -11.17% | | -300 | -16.77% | Item 4 – Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - Management concluded that disclosure controls and procedures were effective as of September 30, 2020[370] - No material changes were made to the company's internal control over financial reporting during the nine months ended September 30, 2020[371] PART II – OTHER INFORMATION Item 1 – Legal Proceedings The company is not aware of any material litigation, with pending proceedings considered ordinary routine business matters - There are no pending legal proceedings other than ordinary routine litigation occurring in the normal course of business[373] Item 1A – Risk Factors No material changes to risk factors from the 2019 Form 10-K are reported, beyond those in subsequent SEC filings - No material changes to risk factors from the 2019 Form 10-K are reported[374] Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds This section summarizes the company's treasury stock repurchase program and activity during the third quarter of 2020 Treasury Stock Repurchase Activity | Period | Total Shares Purchased | Average Price Per Share | | :--- | :--- | :--- | | July 2020 | 1,265 | $19.39 | | August 2020 | 2,292 | $19.52 | | September 2020 | 8,572 | $19.33 | - As of September 30, 2020, approximately $13.2 million remained available for repurchase under the publicly announced program[377] Item 6 – Exhibits This section lists exhibits filed with the Form 10-Q, including officer certifications and interactive data files