Mid Penn Bancorp, Inc. — 2021 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Balance-sheet comparisons are to December 31, 2020. Amounts are in U.S. dollars; financial statement amounts below are in millions unless otherwise indicated.
Business context and reporting period
Mid Penn is a Pennsylvania-based bank holding company. Results reflect significant participation in the Paycheck Protection Program (PPP), growth in core lending and deposits, and a May 2021 public equity offering. The proposed Riverview Financial Corporation acquisition remained pending at quarter-end.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $27.0 | $21.4 | $79.2 | $60.4 |
| Provision for loan losses | $0.4 | $1.1 | $2.6 | $2.7 |
| Noninterest income | $5.5 | $5.3 | $15.9 | $11.9 |
| Noninterest expense | $20.0 | $18.2 | $57.0 | $49.2 |
| Net income | $9.8 | $6.5 | $28.7 | $17.2 |
| Diluted earnings per share | $0.86 | $0.78 | $2.85 | $2.04 |
- Tax-equivalent net interest margin was 3.26% in Q3, versus 3.09% a year earlier; for the nine months it was 3.35%, versus 3.29%. The lower cost of deposits helped offset lower earning-asset yields.
- Return on average assets and equity were 1.11% and 11.23% for Q3, respectively, compared with 0.87% and 10.64% a year earlier.
- At September 30, total assets were $3.45 billion, up 15% from year-end; deposits were $2.96 billion, up $487.3 million. Cash and cash equivalents were $754.9 million, including $712.3 million in federal funds sold.
- Total loans were $2.37 billion, down 0.6% from year-end, while core loans excluding PPP and residential mortgage loans held for sale increased 7% to $2.14 billion. Commercial real estate and construction loans together represented 61.4% of total loans.
- Allowance for loan and lease losses was $14.2 million, or 0.60% of loans (0.66% of non-PPP core loans). Nine-month net charge-offs were $1.7 million. Nonperforming assets were $6.8 million, or 0.29% of loans plus foreclosed assets, down from $15.6 million at year-end.
- Long-term debt was $74.9 million, subordinated debt $44.6 million, and short-term borrowings were zero at quarter-end. The bank reported $497.7 million of unused FHLB short-term borrowing capacity and $35 million in unused correspondent-bank lines.
- Operating cash flow for the first nine months was $41.6 million, investing cash outflow was $15.5 million, and financing cash inflow was $425.2 million. The financing inflow included deposit growth and $70.2 million net proceeds from the stock offering.
- Shareholders’ equity rose 37% to $349.3 million, substantially reflecting the May offering of 2.99 million shares. The declared quarterly dividend was $0.20 per share.
Material changes versus comparable periods
- Q3 net income rose 49% year over year; nine-month net income rose 67%. EPS growth was lower than net-income growth in part because the May offering increased weighted-average shares.
- Net interest income increased, supported by core loan growth, lower deposit costs, and PPP fee recognition. PPP processing fees recognized were $6.2 million in Q3 2021 versus $2.6 million in Q3 2020, and $17.5 million for the first nine months versus $5.0 million.
- Nine-month noninterest income rose 34%, led by mortgage banking income, fiduciary and wealth management fees, card interchange, and other fee income. Noninterest expense rose 16%, including higher compensation, mortgage profit-sharing, technology and legal costs, and $0.7 million in merger-related expenses.
- Total deposits increased nearly 20% from year-end, while total loans were slightly lower as PPP forgiveness offset organic lending growth. PPP loans outstanding, net of deferred fees, fell to $229.7 million from $388.3 million at year-end.
- Nonperforming assets declined mainly after workouts of two commercial relationships. Net charge-offs nevertheless increased from $45,000 in the first nine months of 2020 to $1.7 million in 2021.
Outlook, commentary, risks and unusual items
- Management expected the Riverview merger to close in Q4 2021, subject to shareholder and regulatory approvals; system conversion was anticipated in Q1 2022. The filing does not provide earnings guidance.
- Management said it could not estimate the pandemic’s full effect on 2021 results, liquidity, capital or credit quality. It cited potential borrower stress, changing economic conditions, interest-rate movements and market volatility.
- Interest-rate modeling indicated estimated one-year net interest income increases of 11.07%, 22.93% and 35.08% for rate increases of 100, 200 and 300 basis points, respectively; modeled declines were 4.88%, 10.33% and 15.71% for corresponding rate decreases. Management cautioned actual outcomes could differ.
- PPP loans carry a 100% SBA guarantee and no loss allowance was assigned to them. PPP processing fees may be subject to clawback in specified circumstances; Mid Penn reported no known affected outstanding loans as of September 30.
- The company committed to a $10.8 million investment in a low-income housing project, subject to conditions. Standby letters of credit totaled $44.5 million. Management did not expect litigation to have a material adverse effect.
- Mid Penn continued using the incurred-loss allowance method and expects to adopt CECL on January 1, 2023; management said CECL could increase the allowance. Regulatory capital ratios exceeded minimum requirements, and the Bank met the well-capitalized definition.
Most important facts for investors to verify
- Whether the Riverview transaction receives approvals and closes on the anticipated schedule, and whether integration costs or benefits differ from expectations.
- How much of earnings growth depends on PPP fee recognition, mortgage production and other potentially variable income sources.
- Credit performance and collateral values in the commercial real estate and construction portfolios, as well as the adequacy of reserves after higher charge-offs.
- Whether elevated deposits and cash balances persist, and how asset yields and funding costs respond to interest-rate changes.
- The effects of the May share issuance on per-share results, and the potential impact of CECL adoption and the housing-investment commitment on capital and earnings.