Business context and reporting period
Mid Penn Bancorp, Inc. (NASDAQ: MPB) is a Pennsylvania-based bank holding company. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022. Results versus 2021 are materially affected by the November 2021 Riverview Financial acquisition; the acquired bank’s results are included only from the acquisition date in 2022 comparisons.
Key financial results and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $39.4m | $27.0m | $109.3m | $79.2m |
| Net income | $15.5m | $9.8m | $39.1m | $28.7m |
| Diluted EPS | $0.97 | $0.86 | $2.45 | $2.85 |
| Net interest margin, taxable-equivalent | 3.92% | 3.26% | 3.52% | 3.35% |
- Q3 total noninterest income was $6.0m, up 8.2%; nine-month noninterest income was $16.9m, up 6.7%. Q3 income before taxes was $19.1m versus $12.1m; nine-month income before taxes was $48.0m versus $35.5m.
- Q3 provision for loan and lease losses was $1.6m versus $0.4m; nine-month provision was $3.8m versus $2.6m. The allowance was $18.5m, or 0.56% of loans, at September 30.
- Assets were $4.334bn, down 7.6% from year-end 2021. Loans were $3.322bn, up 7.0%; deposits were $3.730bn, down 6.8%.
- Cash and cash equivalents fell to $94.7m from $913.8m at year-end. Nine-month operating cash flow was $41.6m, investing cash flow was negative $492.5m, and financing cash flow was negative $368.2m. Investing outflows primarily reflected securities purchases and loan growth; financing outflows included deposit reductions and debt repayments.
- Long-term debt was $4.5m versus $81.3m at year-end; subordinated debt and trust preferred securities were $66.4m versus $74.3m. The company redeemed $7.5m of subordinated notes in August. No short-term borrowings were outstanding; the Bank reported $1.2bn of unused FHLB borrowing capacity.
- Shareholders’ equity was $499.1m, up from $490.1m. The Bank’s September 30 regulatory ratios included 13.3% common equity Tier 1 and 13.8% total capital; management said both the company and Bank met applicable well-capitalized standards.
Material changes versus prior comparable periods
- Q3 net income rose 58%, while nine-month net income rose 36%; nine-month diluted EPS declined from $2.85 to $2.45, with the filing attributing the per-share comparison in part to additional shares issued in the 2021 public offering and Riverview merger.
- Q3 taxable-equivalent net interest income increased 45.9%, supported by acquired and organic balance-sheet growth and higher asset yields. The Q3 taxable-equivalent asset yield rose 57 basis points to 4.28%; deposit repricing lag and runoff of higher-cost acquired time deposits helped contain funding costs.
- Mortgage banking income declined sharply as higher interest rates slowed refinancing and purchase-mortgage activity: Q3 income fell to $0.5m from $3.2m, and nine-month income to $1.4m from $8.4m.
- Noninterest expense increased 23.5% in Q3 and 30.4% for the nine-month period, primarily reflecting Riverview-related staffing, occupancy, equipment, technology, processing and other operating costs, as well as growth investments. Nine-month expenses also included $0.3m of post-acquisition restructuring costs and a $0.7m write-off of certain assets and leasehold improvements.
- Available-for-sale securities had $24.9m of gross unrealized losses at September 30; held-to-maturity securities had $55.5m. The nine-month after-tax securities-related other comprehensive loss was $19.4m, contributing to accumulated other comprehensive loss of $19.1m. Management characterized the losses as interest-rate-driven and temporary, and reported no securities impairment charge.
- Nonperforming assets declined to $7.7m (0.23% of loans and foreclosed assets) from $10.0m at year-end. The allowance covered 242% of nonperforming loans. Net recoveries were recorded for the nine-month period.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings, revenue, margin or loan-growth guidance. Management said liquidity remained stable and above its defined minimums, while noting competitive funding pressures, volatile interest rates and uncertainty from inflation.
- Management expects rising rates to increase net interest income under its September 30 model: estimated one-year NII sensitivity was +2.49% for a 100-basis-point increase and +9.74% for a 400-basis-point increase, versus a 0.88% decline for a 100-basis-point decrease. The filing cautions that actual outcomes may differ materially and model assumptions are uncertain.
- Credit risks include economic weakness, inflation, borrower repayment capacity, collateral values, commercial real estate concentrations and continued loan growth, including in newer markets. Management considered the allowance adequate but stated future adjustments may be needed if conditions or credit quality diverge from assumptions.
- Mid Penn planned to adopt CECL on January 1, 2023 and said it expected total credit-loss reserves to increase; the amount was not yet clear and would depend on portfolio composition, credit quality and economic forecasts.
- Other disclosed exposures include potential clawback of SBA PPP processing fees in specified circumstances, $51.7m of standby letters of credit, and committed low-income housing investments totaling $15.2m, including an assumed construction-loan commitment of up to $3.5m. Management did not expect losses on standby letters of credit or a material adverse litigation outcome.
- Forward-looking risks include interest-rate and deposit behavior, economic conditions, acquisition integration and realization of benefits, competition, cybersecurity and third-party technology, regulatory matters, collateral and reserve estimation, and potential goodwill impairment. Management reported no material changes to previously disclosed risk factors and no material weakness in disclosure controls.
Important facts for investors to verify
- How deposit outflows and changing deposit pricing affect liquidity, funding costs and net interest margin after quarter-end.
- Whether loan growth, credit migration, delinquency and nonperforming-asset trends support the allowance, particularly in commercial real estate and acquired portfolios.
- The magnitude and capital impact of the January 2023 CECL adoption adjustment.
- Whether the large unrealized securities losses remain temporary and whether any securities sales or other liquidity needs could affect realized results or capital.
- Whether Riverview integration delivers expected benefits and whether elevated operating costs, mortgage weakness or other income trends persist.
- Subsequent share repurchases and dividends, and changes in regulatory capital, borrowing capacity and commitments.