Mid Penn Bancorp, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022 unless otherwise noted. Mid Penn is a Pennsylvania-based bank holding company. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands where appropriate.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior balance |
|---|---|---|
| Net interest income | $36.0 million | $34.4 million in Q1 2022 |
| Net income | $11.2 million | $11.4 million in Q1 2022 |
| Diluted earnings per share | $0.70 | $0.71 in Q1 2022 |
| FTE net interest margin | 3.49% | 3.21% in Q1 2022 |
| Total assets | $4.58 billion | $4.50 billion at December 31, 2022 |
| Loans, net of unearned interest | $3.61 billion | $3.51 billion at December 31, 2022 |
| Total deposits | $3.88 billion | $3.78 billion at December 31, 2022 |
| Shareholders’ equity | $510.8 million | $512.1 million at December 31, 2022 |
- Interest income rose to $50.2 million from $37.6 million, while interest expense increased to $14.2 million from $3.2 million. The FTE yield on earning assets rose 135 basis points year over year, but the rate on interest-bearing liabilities rose 141 basis points; the average interest spread narrowed to 3.04% from 3.11%.
- Noninterest income declined 24.8% to $4.3 million, mainly reflecting lower mortgage banking and hedging income. Noninterest expense increased 1.3% to $26.1 million, with higher salaries, equipment, legal and merger costs partly offset by lower FDIC assessments and other expenses.
- Provision for loan credit losses was $490,000, versus $500,000 in Q1 2022. Net charge-offs were $113,000, compared with net recoveries of $50,000 in the prior-year quarter.
- Q1 cash flows were $12.9 million provided by operations, $93.6 million used in investing, and $81.9 million provided by financing; cash and cash equivalents increased $1.3 million to $62.2 million.
- The dividend declared was $0.20 per share, unchanged year over year.
Material changes, credit quality and liquidity
- Loans grew $97.2 million, or 2.8%, during the quarter, primarily in commercial and industrial, construction and residential mortgage lending. Non-owner-occupied office CRE was less than 8% of total loans and was described as primarily suburban.
- Deposits increased $99.8 million, or 2.6%, largely because time deposits grew $225.3 million as the bank raised rates to retain and attract customers. Estimated uninsured deposits were 26.1% of deposits, or 18.7% after adjusting for insured or collateralized public funds and contractual deposits.
- Mid Penn adopted CECL on January 1, 2023. Adoption increased the allowance for credit losses by $15.0 million overall, reduced retained earnings by $11.5 million and increased deferred tax assets by $3.1 million. The loan allowance was $31.3 million, or 0.87% of loans, at quarter-end; the adoption-related accounting change limits direct comparison with prior-period allowance figures.
- Nonperforming assets rose to $14.2 million from $8.6 million at year-end; nonperforming loans were 0.39% of loans. Management attributed much of the increase to two relationships: one was paid off in full in April 2023, and the other was reported as collateralized in excess of its outstanding balance based on a current appraisal.
- Available-for-sale securities had $236.6 million fair value and $22.0 million of gross unrealized losses. Held-to-maturity securities had $396.8 million amortized cost and $352.5 million estimated fair value, a $44.3 million difference. Management reported no material expected credit-loss reserve for either portfolio; interest-rate changes remain a market-value risk.
- Liquidity, including borrowing capacity, was reported at nearly $1.36 billion, or 187% of uninsured and uncollateralized deposits and approximately 35% of total deposits. Short-term borrowings were $88.0 million; the bank reported $1.4 billion of unused FHLB borrowing capacity and $35.0 million of unused correspondent-bank overnight lines.
- At March 31, the company’s total risk-based capital ratio was 13.13%, common equity Tier 1 was 10.77%, and Tier 1 leverage was 9.21%. The filing states the bank was “well-capitalized” and both the company and bank met capital adequacy requirements.
Outlook, transactions and risks
- The filing provides no numerical earnings or financial guidance. Management noted competitive deposit pricing, volatile interest rates and uncertainty from inflation; its rate-sensitivity model indicated higher modeled net interest income under rate increases and declines of up to 300 basis points, but a modeled decrease under a 400-basis-point decline. Actual results may differ.
- The Brunswick acquisition had received required regulatory and shareholder approvals on April 25, 2023 and was expected to close in May. Q1 included $224,000 of acquisition-related expense. Separately, Mid Penn redeemed its $10.0 million 2017 subordinated notes on April 17, 2023.
- The filing highlights banking-sector confidence and liquidity concerns, possible deposit outflows, higher deposit costs and the risk that borrowing facilities could become less accessible. Other cited risks include interest-rate and securities-market changes, credit losses and collateral values, economic conditions, regulatory changes, acquisition integration and uncertainty in CECL estimates.
- Management said routine litigation was not expected to have a material adverse effect. Disclosure controls were assessed as effective at March 31, 2023.
Important facts for investors to verify
- Whether deposit growth and liquidity remain resilient, particularly given the reported uninsured-deposit share and competitive deposit pricing.
- How loan performance, nonperforming relationships and the CECL allowance evolve; distinguish CECL adoption effects from subsequent credit deterioration.
- Whether loan yields continue to outpace deposit and borrowing costs, and how that affects net interest margin and earnings.
- How unrealized securities losses, interest-rate movements and funding needs affect capital and liquidity; review the company’s assumptions behind its sensitivity analysis.
- Completion and integration of the Brunswick acquisition, its final costs and any resulting changes to earnings, capital or the balance sheet.