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Mid Penn Bancorp: A Top 200 Mid-Tier Bank

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About: Mid Penn Bancorp, Inc. (MPB), Includes: PEBO
by: Dividend Diplomats
Dividend Diplomats
Large-cap, dividend investing, dividend growth investing, value
Summary

Mid Penn was awarded a spot in America Banker's top 200 mid-tier ranking, coming in at #101.

Mid Penn, post-acquisition, is firing on all cylinders with significant growth in net income year over year.

Mid Penn has rewarded shareholders with not just a consistently growing dividend, but also via a special dividend each year for the past 5 of 7 years.

Can there really be another community bank in Pennsylvania that is knocking the cover off the ball in 2019 from an earnings standpoint? You betcha and Mid Penn Bancorp (MPB) fits the bill. I am starting to realize that if you want to "Keep it Simple Stupid (KISS)", community banks in the midwest may be the way to go.

Why? The banks in the asset size of $500 million and up to $3-$5 billion don't get involved with complex investments or lending practices, typically. In addition, they are praised by communities with long-term dividend attributes! Mid Penn Bancorp is no different, as they have been around for over 150+ Years!

Furthermore, they like to grow, the right way. MPB grows organically and via acquisitions, given they had 3 acquisitions from 2015 through 2018, with the most recent being First Priority Bank, whom had over $600 million in total assets at the acquisition date. MPB is now over $2.24 billion in total assets and is also making significant improvements in their operations.

From their most recent 3rd quarter earnings release, hold your seat, MPB's interest income is up $25.1 million or 54% through 9 months this year vs. 9 months last year. This primarily has to do with adding over 1/3 from the Priority acquisition that closed last fall, as well as slight growth organically. Similarly, though, from other financial institutions, the increase in interest income was offset by an increase in interest expense (i.e. interest on savings and borrowings) of $8.7 million or 125%; due to (initially) rising rates earlier in the year and fight on deposits that you have heard from me in other articles. We should see a slow tick downward in interest expense, due to the recent 3 federal interest rate cuts.

Similarly, there was an increase in non-interest income of $2.5 million fueled by an increase of $2 million in mortgage banking income. However, that is also offset by an increase in non-interest expense of $7.5 million and primarily in the salaries and benefits line. This ultimately led to an increase in net income of $7.4 million or 125% through 9 months. Talk about growth, yikes! Hard to compare apples to apples, considering how much bigger Mid Penn is now.

How is all of this fueled? It can't happen just by performing, "better", or by having higher interest rates. Well, let's look at the balance sheet. Loans are higher by $141 million or 9.10%, from September of last year. That alone would produce quite a bit of additional interest income. Total deposits have increased by 7.7% or $127 million, which also aided in the increase in interest expense we discussed earlier. Lastly, total borrowings actually went down by $16.1 million from last quarter but is higher by $55 million when comparing against last year. I would say this is probably due to the higher growth in the loans and not enough growth in deposits to fund the top-line growth.

Overall, net income is strong and should be strong going forward. They also will be able to see a full-year post-acquisitions at the end of this year. Therefore, I am very curious on what the full year results will look like. Nothing else unusual going on from a financial perspective. If net income is up over 125%, does the dividend follow-suit? I doubt the dividend has been growing that high, but being a dividend investor, this is information that is necessary to know. Therefore, you know what time it is. It is time to run MPB through the Dividend Diplomat Stock Screener.

Dividend Analysis

Stock Price* Dividend Forward EPS** Dividend Yield Payout Ratio 3-Year Growth Rate 5-Year Growth Rate P/E Ratio
$26.00 $0.72 $2.28 2.77% 31.57% 14.60% 32.70% 11.40

*Based on 11/1/19 close price

**Projected 12 months based on last earnings release

I would want to see a payout ratio below 60, a price-to-earnings (P/E) ratio below 13 (lower due to historically lower P/E ratios in the industry), a yield above 4.00% (i.e., higher than the market and most community-based bank yields) and a dividend growth rate of 6.00% (given strength in desired yield).

1.) Payout Ratio - MPB's forward earnings are looking stronger and stronger, fueled by loan growth. Earnings, when using last quarter end's EPS, are projected out to be $2.28 for the upcoming 12 months. Therefore, the payout ratio stands at 31.57%, when using a dividend per year of $0.27 ($0.18 per quarter). However, they also declare and pay an amazing special dividend. This is not being factored and, therefore, only the common dividend will apply, since a special dividend isn't guaranteed (nor is a common dividend, for that matter). In conclusion, MPB has a solid payout ratio at just over 31% and they show promise to continuing raising their dividend on a go-forward basis, with no reason why their board or management team would not do so.

2.) Price-to-Earnings (P/E) - MPB definitely gets the green light, similar to others analyzed, in the price to earnings (P/E) ratio discussion. They are below 12 and, strangely, most community bank stocks I have researched carry around an 11.00-11.50 P/E ratio. Therefore, they fit the bill and meet expectations here.

3.) Dividend Yield - Ouch. At only a dividend yield of 2.77%, not including special dividends. IF you include the special dividend of $0.10, then the yield gets to 3.15%. This sounds similar to my review of Peoples Bancorp (PEBO), but I am not a huge fan of special dividends. The yield for MPB is fairly small at 2.77% and sadly, this is a nice red light for me, being a dividend investor. How about the dividend growth though?

4.) Dividend Growth Rate - Ah, dividend growth. This is one of the best parts in the analysis when it comes to being a dividend investor. Recently, MPB has shown great signs of dividend growth, much better than those that I have previously evaluated. The most recent dividend increase MPB has had was 20% and their 3-year dividend growth rate stands at approximately 14.6%. Given their payout ratio is low, I believe they could continue this dividend increase growth rate going forward.

However, it is worthy to note, as evidenced by the chart, their dividend was cut during the Great Recession, something very common amongst financial institutions and, in some cases, was mandatory. They then doubled the dividend from $0.05 to $0.10 at the end of 2013. MPB is going on approximately 9 years of dividend increases and there's no question they'll get to 10.

Conclusion

Mid Penn is worthy of a discussion. They were a much smaller bank and now they are approximately $2.3 billion in total assets, thanks to the acquisitions and their desire to be a player in the Pennsylvania footprint. Furthermore, they aren't afraid to go up against the big boys and do what they need to do to be heard.

Mid Penn's financials are solid. They have a declining debt base and it appears that they are managing their loan growth, as they have a very sound 9% growth rate to their loan portfolio. Reason why I say that, is because a fast growing loan portfolio typically can represent loosening credit standards or lowering their risk tolerance aka could lead to charge offs and delinquencies. Further, their regulatory capital or total capital is over 12% and they are considered well capitalized. Therefore, Mid Penn could still do an acquisition or continue the payout of an increasing dividend.

Speaking of dividend, this is where I had a hard pill to swallow. I already voiced my concerns of PEBO during that stock analysis and this analysis of MPB, speaks similar terms but actually is worse. Their dividend yield of 2.77% is just too low for me to look at, as there are dozens if not a hundred+ banks that are yielding far higher, with still upper single to double digit dividend growth rates. The entry yield would be too low for me to invest into MPB and that's where the line is drawn for me, being a dividend investor. You should never chase for yield, but if the industry standard in community banks is between 3.50-4.00%, then one needs to take that into consideration. Do I think an investment in MPB is bad? Absolutely not, I just believe there may be better investments out there.

In conclusion, I will not be initiating a position into Mid Penn Bancorp, as their dividend yield does not meet my desired level and is still too low to consider with the other positives that they have.

Please share your thoughts and feedback on the analysis and conclusion above. I would love to hear from everyone and look forward to the comments. As always, good luck and happy investing!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.