Mid Penn Bancorp, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. Amounts below are in millions unless stated otherwise. Results are not necessarily indicative of full-year performance.
Business context and performance
Mid Penn is a Pennsylvania-based bank holding company. Results compared with Q1 2018 are materially affected by the Scottdale acquisition (January 2018) and First Priority acquisition (July 2018); the 2019 quarter includes First Priority for a full quarter, while Q1 2018 included Scottdale only from January 8.
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior balance |
|---|---|---|
| Net income | $4.08 million | $1.00 million in Q1 2018 |
| Diluted earnings per share | $0.48 | $0.17 in Q1 2018 |
| Net interest income | $17.31 million | $10.88 million in Q1 2018 |
| Taxable-equivalent net interest margin | 3.70% | 3.52% in Q1 2018 |
| Noninterest income | $2.05 million | $1.65 million in Q1 2018 |
| Noninterest expense | $14.30 million | $11.18 million in Q1 2018 |
| Provision for loan and lease losses | $0.13 million | $0.13 million in Q1 2018 |
| Total assets | $2,147.82 million | $2,077.98 million at year-end 2018 |
| Loans and leases | $1,646.69 million | $1,624.07 million at year-end 2018 |
| Deposits | $1,784.18 million | $1,726.03 million at year-end 2018 |
| Cash and cash equivalents | $86.97 million | $40.07 million at year-end 2018 |
Financial condition, liquidity and credit
- Net interest income increased 59% year over year, reflecting acquired and organic earning-asset growth. Management said higher asset yields and growth in noninterest-bearing deposits more than offset rising deposit and borrowing costs; the average cost of interest-bearing liabilities increased to 1.44% from 0.83%.
- Net cash provided by operating activities was $2.78 million. Cash increased $46.90 million during the quarter. Financing activities provided $47.96 million, principally from a $58.15 million increase in deposits, partly offset by lower short-term borrowings and dividends. Investing activities used $3.83 million, including $22.69 million of net loan growth.
- At quarter-end, short-term borrowings were $35.00 million, long-term debt was $51.59 million, and subordinated debt was $27.08 million. The filing reports $47.98 million of long-term debt excluding finance lease obligations; the balance sheet also includes a $3.58 million finance-lease right-of-use asset and $3.60 million finance-lease liability.
- The allowance for loan and lease losses was $8.50 million, or 0.52% of loans, versus 0.52% at year-end and 0.76% a year earlier. Net charge-offs were $0.02 million. Nonperforming loans declined to $7.17 million (0.44% of loans) from $11.27 million at year-end, primarily after a $4.30 million commercial credit workout; nonperforming assets were $7.52 million.
- Commercial real estate was 52.7% of loans, and commercial real estate construction was another 9.8%. Management identified commercial growth in newer markets, where loss history is more limited, and potential economic and collateral-value changes as credit-estimation uncertainties.
- Mid Penn and the Bank exceeded applicable well-capitalized thresholds. At March 31, Mid Penn’s CET1 and total risk-based capital ratios were 9.9% and 12.2%; the Bank’s were 11.0% and 12.1%. The common dividend was $0.25 per share, unchanged from Q1 2018.
Changes, outlook and notable items
- Revenue and earnings rose substantially, but acquisition-driven balance-sheet growth and the differing acquisition timing limit direct year-over-year comparability. Noninterest expense rose 28%, with higher staffing, occupancy, equipment, FDIC assessment, technology and other operating costs; Q1 2018 included $1.69 million of merger and acquisition expense, versus none in Q1 2019.
- Noninterest income increased 24%, led by mortgage banking income, up $0.28 million, and fiduciary income, up $0.12 million. Security-sale gains fell to $0.01 million from $0.10 million.
- Management provided no specific earnings or revenue guidance. It noted that interest-rate changes, deposit pricing and the mix of assets and funding could affect net interest income. Its model indicated estimated one-year net interest income changes of +8.30% under a 300-basis-point rise and -7.36% under a 300-basis-point decline; management cautioned actual results could differ.
- Adoption of lease accounting on January 1, 2019 added operating lease right-of-use assets and liabilities; management said adoption had no material impact on income or cash flows. A $0.105 million impairment charge was recorded on a branch property classified as held for sale; a sale agreement was in place, with settlement expected before September 30, 2019.
- A $7.58 million low-income housing investment commitment was being funded in installments. A preliminary $0.49 million FDIC assessment credit remained contingent on the FDIC reserve ratio reaching 1.38%; it had not reached that level by March 31.
- Management said liquidity exceeded internal minimums and reported no known material liquidity demands beyond competitive pressures and volatile interest rates. The filing identifies risks from economic conditions, interest rates, competition, acquisitions and integration, credit quality, collateral values, regulation, technology and potential goodwill impairment. No material changes to previously disclosed risk factors or material litigation were reported.
Important facts for investors to verify
- How much of earnings growth reflects sustainable organic performance versus acquisition effects, and whether integration costs and expected synergies are tracking management’s assumptions.
- Whether deposit costs and funding mix continue to pressure net interest margin, particularly if market rates or customer deposit behavior change.
- Trends in commercial real estate concentrations, criticized and nonperforming loans, collateral values, and allowance adequacy as the loan portfolio grows.
- Progress on the branch-property sale, the low-income housing investment and tax-credit realization, and whether the contingent FDIC assessment credit becomes available.
- Future CECL implementation impact: management expected possible allowance increases but had not quantified the effect.