Mid Penn Bancorp, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Dollar figures below are in millions unless noted. Comparisons are with the corresponding 2018 periods, except balance-sheet comparisons, which are with December 31, 2018.
Business context and reporting period
Mid Penn is a Pennsylvania-based bank holding company. Results remain affected by the 2018 acquisitions of Scottdale and First Priority, so year-over-year comparisons reflect changes in the company’s scale and are not fully like-for-like. The filing reports no 2019 acquisition.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $24.5 | $19.6 | $71.4 | $46.3 |
| Net interest income | $17.8 | $15.9 | $52.8 | $38.2 |
| Provision for loan losses | $0.6 | $0.1 | $1.2 | $0.2 |
| Noninterest income | $3.0 | $2.2 | $7.9 | $5.4 |
| Noninterest expense | $14.7 | $15.3 | $43.8 | $36.3 |
| Net income | $4.8 | $2.2 | $13.3 | $5.9 |
| Basic and diluted EPS | $0.57 | $0.28 | $1.57 | $0.89 |
- Margins and returns: Tax-equivalent net interest margin was 3.53% in Q3, down from 3.75%; for the nine months it was 3.64%, versus 3.62%. Q3 annualized ROA was 0.87% and ROE 8.19%, compared with 0.46% and 4.34% a year earlier.
- Balance sheet: Total assets were $2,248.9, up 8% from year-end 2018. Loans were $1,710.4, up 5%; deposits were $1,890.1, up 9%. Cash and cash equivalents rose to $160.9 from $40.1.
- Funding and debt: At September 30, short-term borrowings were $12.0, long-term debt $63.0, and subordinated debt $27.1. Deposit growth supported liquidity and the reduction in short-term borrowings.
- Capital: Shareholders’ equity was $234.6, up 5% from year-end. The company reported a 7.7% Tier 1 leverage ratio and 12.1% total risk-based capital ratio; Mid Penn Bank’s ratios were 8.5% and 12.0%, respectively. Both were reported above applicable “well-capitalized” thresholds.
- Cash flows, nine months: Operating activities provided $7.2; investing activities used $25.7; financing activities provided $139.3. Cash increased by $120.8 to $160.9.
Material changes versus prior periods
- Q3 net income rose to $4.8 from $2.2, while nine-month net income increased to $13.3 from $5.9. Net interest income growth reflected acquired First Priority balances and organic loan growth; the nine-month comparison also includes the full-period impact of First Priority.
- Q3 noninterest expense declined 4%, primarily because there were no merger and acquisition costs, compared with $3.0 in Q3 2018. Nine-month expense rose 21%, reflecting acquisition-related staffing, facilities and technology, plus expansion of mortgage banking.
- Mortgage banking income increased to $1.1 in Q3 and $2.6 for the nine months, with management citing lower mortgage rates, higher originations and expanded mortgage staffing.
- Deposit costs rose and quarterly net interest margin contracted. Management attributed pressure to increased deposit pricing and higher average liquid balances awaiting deployment or use to repay wholesale funding.
- Nonperforming loans declined to $5.4 from $11.3 at year-end 2018. The allowance was $9.3, or 0.54% of loans, versus $8.4 and 0.52% at year-end. Nine-month net charge-offs were $0.2, compared with net recoveries of $0.4 in 2018.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said liquidity exceeded its minimum adequacy levels and described core deposits as generally stable, while noting competitive pressures and volatile interest rates.
- Key risks include interest-rate and yield-curve movements, deposit pricing and funding mix, economic conditions, credit quality and collateral values, competition, regulatory and tax changes, cybersecurity and technology risks, and acquisition integration or goodwill impairment.
- Commercial real estate represented 52.2% of loans at September 30, 2019. Management highlighted continued strong commercial loan growth, including in newer markets with less loss history, as a factor in credit-risk estimates. It considered the allowance adequate, but acknowledged the estimate is subjective and may require revision.
- Interest-rate simulations estimated that a 100-basis-point increase would raise one-year net interest income by 2.38%, while a 100-basis-point decrease would reduce it by 2.51%; a 300-basis-point decrease indicated an 8.80% decline. Management said modeled exposures were within board limits, but actual results could differ.
- Q3 included a favorable $0.277 million tax adjustment for certain permanent, nonrecurring tax benefits. The FDIC provided $0.492 million of assessment credits during 2019. These items should be distinguished from recurring operating trends.
- Adoption of lease accounting in 2019 added right-of-use assets and liabilities; management said the adoption did not materially affect income or cash flow statements. The company expected to adopt CECL in 2023 after a small-reporting-company effective-date deferral and said the standard may increase the credit-loss allowance; the amount was not yet estimable.
- The company reported no material litigation, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2019.
Important facts for investors to verify
- How much of earnings growth is attributable to organic performance versus the 2018 acquisitions and changing share count.
- Whether deposit-cost pressure and excess liquidity continue to weigh on net interest margin, and how loan growth is funded.
- Commercial real estate concentration, criticized and nonperforming loan trends, collateral values, and the adequacy of the allowance.
- Whether elevated mortgage banking income and associated staffing costs are sustainable as mortgage rates and origination volumes change.
- The recurring impact of the Q3 tax adjustment and FDIC credits, and the company’s readiness for CECL adoption.