MID PENN BANCORP INC quarterly report, Q2 FY2015

Mid Penn Bancorp, Inc. — Q2 2015 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited; amounts below are in thousands of dollars unless stated otherwise. Comparisons are affected by the March 1, 2015 acquisition of Phoenix Bancorp and its subsidiary Miners Bank.

Financial performance

Metric	Q2 2015	Q2 2014	Six months 2015	Six months 2014
Net interest income	$8,486	$6,751	$15,524	$13,023
Provision for loan losses	$300	$275	$600	$822
Noninterest income	$1,093	$774	$2,042	$1,668
Noninterest expense	$6,642	$5,068	$13,282	$9,806
Net income	$2,044	$1,707	$3,007	$3,218
Net income available to common shareholders	$1,952	$1,619	$2,828	$3,043
Basic EPS	$0.46	$0.46	$0.71	$0.87

• Q2 common earnings increased 20.6% year over year, while EPS was unchanged. First-half common earnings declined 7.1%; excluding $784 of merger costs and their tax effect, management said first-half common earnings would have been $3,379, up 11.0% year over year.
• Net interest income rose 25.7% in Q2 and 19.2% for the first half. Taxable-equivalent net interest margin was 4.22% for Q2 and 4.10% for the first half, versus 4.16% and 4.08%, respectively. Management attributed improvement to acquired loans and low-cost deposits, and $452 of income from resolving three acquired legacy loans.
• Noninterest income rose 41.2% in Q2 and 22.4% for the first half, including gains in mortgage banking, ATM interchange, SBA loan sales and other income. Noninterest expense increased 31.1% and 35.5%, respectively, reflecting acquired operations, staffing and expansion costs, and first-half merger expense.
• Annualized return on average assets was 0.91% in Q2 and 0.71% for the first half; return on average equity was 11.21% and 8.89%, respectively.

Financial condition, cash flow and capital

• At June 30, total assets were $899,342, up from $755,657 at year-end 2014. Loans were $705,152, up 23.4%; deposits were $753,925, up 18.2%. These balance-sheet comparisons include Miners balances acquired in March.
• Commercial real estate represented 48.2% of loans; commercial and industrial loans represented 23.1%. Available-for-sale securities totaled $137,198, down from $141,634 at year-end.
• Cash and cash equivalents were $11,381. For the first half, operating cash flow was $4,529, investing cash flow was negative $4,168, and financing cash flow was $1,138. Investing included $24,202 of net loan growth; financing included a $14,403 increase in short-term borrowings. The cash-flow statement reports a $7,235 net deposit decrease during the period, notwithstanding the higher period-end deposit balance after the acquisition.
• Short-term borrowings were $14,981, versus $578 at year-end; long-term debt was $51,421, versus $52,961. Management said borrowings helped support loan growth.
• The allowance for loan and lease losses was $6,851, or 0.97% of loans, versus 1.18% at year-end; management attributed the lower ratio partly to acquired loans being recorded without a carried-over allowance. First-half net charge-offs were $465, compared with $1,009 a year earlier.
• Bank capital ratios at June 30 included Tier 1 leverage of 7.6%, common equity Tier 1 of 10.1%, Tier 1 risk-based capital of 10.1%, and total risk-based capital of 11.1%. The Bank met the regulatory definition of “well-capitalized.” Shareholders’ equity was $73,385, up 24.1% from year-end, including stock issued for the acquisition.

Material changes, outlook and risks

• Phoenix/Miners added $110,707 to loan growth and $123,238 of deposits assumed. Mid Penn issued 723,851 common shares and $1,750 of Series C preferred stock, and paid $2,949 in cash consideration. The acquisition generated $2,902 of goodwill and a $578 core deposit intangible.
• The Series C preferred stock carries a 1% annual dividend through the January 19, 2016 payment date; the stated rate increases to 9% thereafter. Series B preferred shares carry a 7% annual dividend.
• Nonperforming loans were $8,574, or 1.22% of loans, compared with $10,942 and 1.91% at year-end. Nonperforming assets were $9,341. The filing notes two restructured loans totaling $3,409 defaulted within 12 months of restructuring during the first half. Troubled debt restructurings totaled $6,414 at June 30, including $4,476 on nonaccrual status.
• Unrealized losses on available-for-sale securities contributed to an $882 first-half decline in accumulated other comprehensive income. Management attributed securities losses primarily to interest-rate changes and did not consider them other-than-temporary impairments.
• Management said liquidity measurements exceeded its minimum adequacy levels and described core deposits as stable, while noting competitive pressures and volatile interest rates. No earnings or financial guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
• Key disclosed risks include economic conditions and borrowers’ repayment capacity, commercial real estate and other credit exposures, interest-rate changes, competition, regulatory and capital requirements, and the ability to integrate acquisitions and realize expected benefits. Management reported no material change in market risk, no material litigation, and effective disclosure controls.

Investor verification priorities

1. Separate acquired growth from underlying organic loan, deposit and earnings trends; review the acquisition’s ongoing contribution and integration costs.
2. Assess the sustainability of margin and earnings, including the $452 acquired-loan resolution income and other loan-sale or noninterest income.
3. Review commercial real estate concentration, acquired-loan credit marks, TDR defaults, nonperforming assets and allowance coverage as the portfolio grows.
4. Reconcile deposit trends and liquidity needs with the increased short-term borrowings and loan growth.
5. Confirm the preferred-stock dividend step-up terms and monitor securities-related accumulated comprehensive income sensitivity to interest rates.