October 27, 2021 – Millersburg, PA – Mid Penn Bancorp, Inc. (“Mid Penn”) (NASDAQ: MPB), the parent company of Mid Penn Bank (the “Bank”) and MPB Financial Services, LLC, today reported net income to common shareholders (earnings) for the quarter ended September 30, 2021 of $9,787,000 or $0.86 per common share basic and diluted, compared to earnings of $6,547,000 or $0.78 per common share basic and diluted for the quarter ended September 30, 2020. Earnings for the quarter ended September 30, 2021 reflect an increase of over 49 percent compared to earnings for the same period in the prior year.
Earnings for the nine months ended September 30, 2021 were $28,712,000 or $2.85 per common share basic and diluted, compared to earnings of $17,198,000 or $2.04 per common share basic and diluted for the nine months ended September 30, 2020. Earnings for the first nine months of 2021 reflects a 67 percent increase over the same period in 2020. Mid Penn also reported total assets of $3,453,187,000 as of September 30, 2021, reflecting a 15 percent increase compared to total assets of $2,998,948,000 as of December 31, 2020.
Tangible book value per common share, a non-GAAP measure that is regularly reported in the banking industry, favorably increased to $24.75 as of September 30, 2021, compared to $22.39 as of December 31, 2020 and $21.46 as of September 30, 2020. The GAAP measure of book value per share was $30.55 as of September 30, 2021 compared to $30.37 as of December 31, 2020, and $29.49 as of September 30, 2020. Please refer to the section included herein under the heading “Reconciliation of Non-GAAP Measures (Unaudited)” for a discussion of our use of non-GAAP adjusted financial information, which includes tables reconciling GAAP and non-GAAP adjusted financial measures for these and certain other periods ended between September 30, 2020 and September 30, 2021.
“We are delighted to announce Mid Penn’s record quarterly results to our shareholders. This performance was the direct result of strong organic growth across our organizational footprint on both sides of the balance sheet and impressive noninterest income growth. In addition, the results for the nine months ended September 30, 2021 reflect the incredible successes of Mid Penn’s participation in the PPP program, delivering over $1 billion to help businesses and save jobs during the uncertainty of the COVID-19 pandemic,” stated Rory Ritrievi, President and Chief Executive Officer. Ritrievi added, “Mid Penn has succeeded in reporting record results in each of the last four quarters since September 30, 2020, an accomplishment of which we are incredibly proud. This success has positively impacted our tangible book value per share, which has increased by $2.36 per share (or 14 percent annualized) since December 31, 2020.”
“In addition to these operating results, we continue to make progress toward Mid Penn’s pending acquisition of Riverview Financial Corporation. During the third quarter of 2021, all regulatory notifications and applications were filed in a timely manner with the appropriate agencies. It is expected that the merger will be completed in the fourth quarter of 2021 with system conversion anticipated to occur during the first quarter of 2022. This partnership will expand Mid Penn’s presence into several new counties in Pennsylvania while solidifying our customer base in Mid Penn’s current market area. We are excited to partner with Riverview in our development of a statewide presence while also bringing on board many well-respected, talented employees to further our vision of being the best community bank in the state.”
“Given these favorable results, the Board of Directors proudly announces the declaration of a third quarter dividend of $0.20 per common share payable on November 22, 2021 to shareholders of record as of November 10, 2021.”
PPP UPDATE
Mid Penn was a significant participating lender under the Paycheck Protection Program (“PPP”), which was originally created as a result of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act in 2020. The PPP program was reinstated with the Consolidated Appropriations Act of 2021. Included in total assets as of September 30, 2021 are $229,679,000 of PPP loans, net of deferred fees, with this total being comprised of (i) $216,187,000 of PPP 2021 loans, net of deferred fees, originated during the first six months of 2021; and (ii) $13,492,000 of PPP 2020 loans, net of deferred fees, originated during 2020.
FINANCIAL CONDITION
Loans
Total loans as of September 30, 2021 were $2,370,429,000 compared to $2,384,041,000 as of December 31, 2020, a decrease of $13,612,000 or less than 1 percent since year-end 2020. This net decrease in loans was dramatically influenced by the forgiveness of PPP loans which served to offset strong organic loan growth. Core banking loans (a non-GAAP measure calculated as total loans less PPP loans outstanding) totaled $2,140,750,000 as of September 30, 2021, an increase of $145,022,000 or 7 percent since year-end 2020, with this growth occurring primarily within Mid Penn’s commercial real estate and commercial and industrial financing loan portfolios. This increase represents an annualized core banking loan growth rate of 10 percent since December 31, 2020.
Deposits
Total deposits increased $487,301,000 or 20 percent (26 percent annualized), from $2,474,580,000 at December 31, 2020, to $2,961,881,000 at September 30, 2021. Deposit growth was led by substantial increases in noninterest-bearing, interest-bearing, and money market deposits, primarily due to both expanded cash management and commercial deposit account relationships, and new deposits established as a result of Mid Penn’s PPP loan funding activities.
Capital
Shareholders’ equity increased by $93,620,000 or 37 percent from $255,688,000 as of December 31, 2020 to $349,308,000 as of September 30, 2021. As previously announced, Mid Penn completed a public offering of 2,990,000 shares of common stock at a price of $25.00 per share, with the aggregate gross proceeds of the offering totaling $74,750,000. The net proceeds of the offering after deducting the underwriting discount and offering expenses were $70,238,000. The additional shares issued on May 4, 2021 significantly impacted the weighted average number of shares outstanding used for both the third quarter of 2021 and year-to-date 2021 earnings per share calculations. Regulatory capital ratios for both Mid Penn and its banking subsidiary exceeded regulatory “well-capitalized” levels at both September 30, 2021 and December 31, 2020.
OPERATING RESULTS
Net Interest Income and Net Interest Margin
For the three months ended September 30, 2021, net interest income was $26,994,000, an increase of $5,586,000 or 26 percent compared to net interest income of $21,408,000 for the quarter ended September 30, 2020. Through the nine months ended September 30, 2021, net interest income was $79,196,000, an increase of $18,777,000 or 31 percent compared to net interest income of $60,419,000 for the nine months ended September 30, 2020. The year-over-year increase in earnings for the first nine months was primarily the result of Mid Penn’s continued participation in the PPP program, as the nine months ended September 30, 2021 included the recognition of $17,528,000 of PPP loan processing fees, an increase of $12,574,000 compared to $4,954,000 of PPP loan processing fees recognized during the same period in 2020. These PPP fees are recognized as interest income over the term of the respective loan, or sooner if the loans are forgiven by the SBA, or the borrower otherwise pays down principal prior to the loan’s stated maturity. Also contributing to the net interest income increase were the interest and fees from core loan growth since September 30, 2020, as well as the reduced interest expense due to the lower cost of deposits in the first nine months of 2021 when compared to the same period in 2020.
Mid Penn’s tax-equivalent net interest margin for the three months ended September 30, 2021 was 3.26 percent compared to 3.09 percent for the three months ended September 30, 2020. For the nine months ended September 30, 2021, Mid Penn’s tax-equivalent net interest was 3.35 percent versus 3.29 percent during the same period in 2020. The overall increase in net interest margin for both the three and nine months ended September 30, 2021 was driven by a favorable decrease in the cost of funds, driven by deposit rate decreases, many of which resulted from both management-initiated and market rate cuts initiated by the Federal Open Market Committee (“FOMC”) in March 2020 in response to the COVID-19 pandemic. Yields on interest-earning assets remained relatively unchanged when comparing the nine months ended September 30, 2021 to the same period in 2020. The favorable impacts of the recognition of $17,528,000 of PPP fees within interest income, as well as volume-driven increases in interest income due to higher average balances of loans and federal funds sold, were nearly entirely offset by the full impact in 2021 of the reduction in interest rates.
Noninterest Income
Mortgage banking income was $8,382,000 for the nine months ended September 30, 2021, an increase of $2,455,000 or 41 percent, compared to the nine months ended September 30, 2020. Mid Penn significantly increased residential mortgage originations and secondary-market loan sales and gains when comparing the first nine months of 2021 to the same period last year. Mortgage interest rates declined as a result of responses to the pandemic, and remained low in the twelve months since September 30, 2020, resulting in significantly increased mortgage loan production.
Income from fiduciary and wealth management activities was $1,716,000 for the nine months ended September 30, 2021, an increase of $449,000 or 35 percent, compared to fiduciary income of $1,267,000 for the same period in 2020. These additional revenues were attributed to favorable growth in trust assets under management and increased sales of retail investment products.
ATM debit card interchange income was $1,854,000 for the nine months ended September 30, 2021, an increase of $428,000 or 30 percent compared to interchange income of $1,426,000 for the nine months ended September 30, 2020. The increase resulted from increasing card-based transaction usage across our expanding checking account customer base.
Merchant services income was $359,000 for the nine months ended September 30, 2021, an increase of $83,000 or 30 percent compared to merchant services income of $276,000 during the same period in 2020. The increase was primarily attributable to new and expanded cash management relationships, including those from new PPP customers.
Other income was $2,148,000 for the nine months ended September 30, 2021, an increase of $701,000 compared to other income of $1,447,000 for the nine months ended September 30, 2020. The increase in other income was primarily driven by higher volumes of fee-based income, including fees from new loan-level swaps, wire transfer fees, letter of credit fees, and credit card program referrals and royalties.
Noninterest Expense
For the three months ended September 30, 2021, noninterest expense totaled $20,019,000, an increase of $1,845,000 or 10 percent, compared to noninterest expense of $18,174,000 for the same period in 2020. For the nine months ended September 30, 2021, noninterest expense totaled $57,033,000, an increase of $7,875,000 or 16 percent, compared to noninterest expense of $49,158,000 for the nine months ended September 30, 2020.
Salaries and employee benefits were $29,873,000 for the nine months ended September 30, 2021, an increase of $3,327,000 or 13 percent, versus the same period in 2020, with the increase attributable to (i) increased mortgage commissions expense commensurate with the significant increases in mortgage loan originations and secondary market sales gains from the mortgage banking group; (ii) increased bonus expense in recognition of our employees and the successes of Mid Penn through the first nine months of 2021; (iii) increased medical expenses through the first nine months of 2021 when compared to the same period last year; and (iv) the addition of private banking and insurance business development professionals in our new nonbank subsidiaries focused on wealth management and insurance services.
Software licensing and utilization costs were $4,493,000 for the nine months ended September 30, 2021, an increase of $612,000 or 16 percent compared to $3,881,000 for the nine months ended September 30, 2020. Mid Penn continues to invest in upgrades to internal systems, networks, storage capabilities, cybersecurity management, and data security mechanisms to enhance data management and security capabilities responsive to both the larger company profile and the increasing complexity of information technology management. This increase also reflects the additional costs from both transaction volume-based charges, and licensing fees related to the addition of new staff added since September 30, 2020.
FDIC assessment expense was $1,364,000 for the nine months ended September 30, 2021, an increase of $148,000 or 12 percent compared to $1,216,000 for the nine months ended September 30, 2020. The increased FDIC assessment aligns with the year-over-year growth of the average assets of the Bank on which the assessment is based.
Pennsylvania bank shares tax expense was $1,022,000 for the nine months ended September 30, 2021, an increase of $153,000 or 18 percent compared to $869,000 for the nine months ended September 30, 2020. The increase in shares tax expense generally reflects an increase in total shareholder’s equity upon which the tax is based.
Mortgage banking profit-sharing expense totaled $2,005,000 for the nine months ended September 30, 2021 compared to $540,000 for the nine months ended September 30, 2020 and, for both periods, related to payments to third-party principals within the Southeastern Pennsylvania mortgage banking group at Mid Penn. The increase for 2021 reflects the substantial increase in the revenues and profits of the mortgage banking group year over year.
Merger-related expenses totaled $720,000 for the nine months ended September 30, 2021 and consisted of legal and professional fees associated with the due diligence, fairness opinion, and other costs related to the planned Riverview acquisition announced on June 30, 2021.
Legal and professional fees were $1,591,000 for the nine months ended September 30, 2021, an increase of $554,000 or 53 percent compared to $1,037,000 for the nine months ended September 30, 2020, with this increase being attributable to consulting expenses related to strengthening and enhancing Mid Penn’s commercial online banking facility, as well as other information technology and cybersecurity management activities.
Other expenses increased $809,000 from $6,497,000 during the nine months ended September 30, 2020 to $7,306,000 for the same period in 2021 due to organizational growth resulting in increases across several components of other expense, including charitable giving, insurance, postage and courier fees, correspondent service fees, employee relations, travel and business meals, and directors’ fees.
The provision for income taxes was $6,749,000 during the nine months ended September 30, 2021, compared to $3,221,000 of income tax provision recorded for the same period in 2020. The provision for income taxes for the nine months ended September 30, 2021 reflects a combined Federal and State effective tax rate of 19.0 percent compared to 15.8 percent for the nine months ended September 30, 2020. The increase in the effective tax rate reflects (i) higher pre-tax income when compared to the first nine months of 2020, (ii) less tax-exempt interest recognized due to less tax-exempt securities being held in the investment security portfolio when compared to the prior year, and (iii) the impact of certain merger-related expenses incurred in 2021 which are nondeductible for federal tax purposes.
ASSET QUALITY
Excluding PPP loans, which are guaranteed by the SBA, the allowance for loan and lease losses as a percentage of core loans (a non-GAAP measure) was 0.66 percent as of September 30, 2021 compared to 0.67 percent as of December 31, 2020 and 0.64 percent as of September 30, 2020. The allowance for loan and lease losses as a percentage of total loans including PPP loans was 0.60 percent at September 30, 2021, compared to 0.56 percent at December 31, 2020 and 0.48 percent at September 30, 2020. Mid Penn had $229,679,000 and $613,924,000 of PPP loans outstanding, net of deferred fees, as of September 30, 2021 and 2020, respectively. Mid Penn had net loan charge-offs of $1,724,000 and $45,000 for the nine months ended September 30, 2021 and 2020, respectively, with the increase in the first nine months of 2021 related to the workout of three larger nonperforming loans during the first nine months of 2021.
The provision for loan losses was $2,575,000 for the nine months ended September 30, 2021, a decrease of 5 percent compared to the provision for loan losses of $2,700,000 for the nine months ended September 30, 2020. The allowance for loan losses and the related provision reflect Mid Penn’s continued application of the incurred loss method for estimating credit losses as Mid Penn is not yet required to adopt the current expected credit loss (“CECL”) accounting standard.
Total nonperforming assets were $6,792,000 at September 30, 2021, a substantial decrease compared to nonperforming assets of $15,644,000 at December 31, 2020 and $15,082,000 at September 30, 2020. The decrease in nonperforming assets was primarily the result of the successful workout of three nonaccrual commercial relationships totaling $10,956,000 occurring in the nine months ended September 30, 2021.
Given these large workouts, nonperforming assets were 0.32 percent of the total of loans plus other real estate assets as of September 30, 2021, a significant and favorable reduction compared to 0.66 percent at December 31, 2020 and 0.60 percent as of September 30, 2020. Loan loss reserves as a percentage of nonperforming loans increased to 210 percent at September 30, 2021, compared to 86 percent at December 31, 2020 and 91 percent at September 30, 2020. Total foreclosed real estate assets favorably decreased from $134,000 at December 31, 2020 to $11,000 at September 30, 2021.
As of September 30, 2021, the principal balance of loans remaining in a CARES Act qualifying deferment status totaled $3,571,000, or less than 1 percent of the total loan portfolio, a reduction compared to December 31, 2020, when $11,681,000 of loans, representing 1 percent of the total loan portfolio, were in this deferment status. Most borrowers granted a CARES Act deferral have returned to regular payment status. The CARES Act, along with a subsequent joint statement issued by banking agencies, provided that short-term modifications, made in response to the impact of COVID-19 to current and performing borrowers, did not need to be accounted for as troubled debt restructurings. Depending upon the specific needs and circumstances affecting each borrower, the majority of these modifications ranged from deferrals of both principal and interest payments to some borrowers reverting to interest-only payments. The majority of the deferrals were granted for a period of three months, but some as long as nine months, depending upon management’s specific evaluation of each borrower’s circumstances. Interest continued to accrue on loans modified under the CARES Act during the deferral period. Mid Penn had previously provided loan modifications meeting the CARES Act qualifications to over 1,000 borrowers. Mid Penn remains in communication with each of the few borrowers still in deferral status to assess the ongoing credit standing of the borrowers and may make further adjustments to a borrower’s relationship at some future time if warranted for the specific situation.
Asset quality measures did not reflect any new impaired assets or specific reserve allocations related to the financial impact of the COVID-19 pandemic, though Bank management is continuously and closely monitoring and evaluating the impact of the COVID-19 situation on the portfolio. Management believes, based on information currently available, that the allowance for loan and lease losses of $14,233,000 is adequate as of September 30, 2021, to cover probable and estimated loan losses in the portfolio.
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