Mid Penn Bancorp, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020. Amounts are in U.S. dollars. The company is a Pennsylvania-based bank holding company operating Mid Penn Bank and nonbank subsidiaries.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior year-end |
|---|---|---|
| Net income | $9.312 million | $3.818 million in Q1 2020 |
| Diluted EPS | $1.10 | $0.45 in Q1 2020 |
| Net interest income | $25.325 million; taxable-equivalent net interest margin 3.46% | $17.665 million and 3.45% in Q1 2020 |
| Provision for loan and lease losses | $1.000 million | $0.550 million in Q1 2020 |
| Noninterest income / expense | $4.712 million / $17.558 million | $2.934 million / $15.581 million in Q1 2020 |
| Annualized return on average assets / equity | 1.19% / 14.58% | 0.68% / 6.43% in Q1 2020 |
| Total assets | $3.382 billion | $2.999 billion at Dec. 31, 2020 |
| Total loans, net of unearned interest | $2.646 billion | $2.384 billion at Dec. 31, 2020 |
| Total deposits | $2.667 billion | $2.475 billion at Dec. 31, 2020 |
| Cash and cash equivalents | $427.4 million | $303.7 million at Dec. 31, 2020 |
| Shareholders’ equity | $264.0 million | $255.7 million at Dec. 31, 2020 |
Cash flow: Operating activities provided $13.3 million, investing activities used $261.9 million, and financing activities provided $372.2 million. Cash and cash equivalents increased $123.6 million during the quarter.
Debt and funding: Short-term borrowings were $307.8 million, entirely PPPLF funding secured by PPP loans, versus $125.6 million at year-end. Long-term debt was $75.0 million and subordinated debt was $44.6 million. The company reported $571.8 million of unused FHLB short-term borrowing capacity and $35 million of unused correspondent-bank overnight lines.
Capital: At March 31, the company reported a 9.7% common equity Tier 1 ratio and a 12.5% total capital ratio; Mid Penn Bank reported 11.2% and 11.9%, respectively. Both were above applicable well-capitalized thresholds. The declared cash dividend was $0.19 per share, versus $0.23 in Q1 2020.
Material changes versus the prior comparable period
- Net income more than doubled, while net interest income rose 43% on a taxable-equivalent basis. Management attributed the increase to loan growth, lower deposit costs, and PPP processing-fee income.
- Q1 2021 interest and fees on loans included $5.047 million of recognized PPP processing fees. Total PPP loans outstanding, net of deferred fees, were $590.0 million, including $335.6 million originated in Q1.
- Mortgage banking income increased to $2.379 million from $1.182 million, reflecting higher mortgage originations and secondary-market sales. Noninterest income also benefited from growth in fiduciary, debit-card, and other fee income.
- Noninterest expense rose 13%, principally due to salaries and benefits, technology costs, FDIC assessments, charitable contributions qualifying for state tax credits, and mortgage profit-sharing.
- Core banking loans, excluding PPP loans and residential mortgages held for sale, increased $60.5 million from year-end. Total deposits increased $192.2 million; noninterest-bearing deposits rose $140.5 million.
- Nonperforming assets declined to $6.8 million from $15.6 million at year-end, mainly following workouts of two commercial relationships. Net charge-offs increased to $791,000 from $51,000 in Q1 2020.
Outlook, risks, contingencies, and unusual items
- Outlook: Management provided no specific earnings or financial guidance and stated it could not estimate the pandemic’s full effect on 2021 results, financial condition, capital, or liquidity. Management said liquidity remained stable and above its minimum adequacy levels.
- COVID-19 and credit: Management continued to monitor pandemic-related borrower and economic risks. CARES Act qualifying deferrals fell to $5.1 million from $11.7 million at year-end, less than 1% of loans. The allowance for loan losses was $13.6 million; management considered it adequate. PPP loans carry a full SBA guarantee and had no loan-loss allowance allocated.
- Interest-rate exposure: The company’s model estimated that a 300-basis-point rate increase would raise one-year net interest income by 22.99%, while a 300-basis-point decrease would reduce it by 15.66%. Management cautioned that actual results may differ from model estimates.
- Subsequent equity offering: In May 2021, after quarter-end, Mid Penn completed an offering of 2.99 million shares at $25 per share, generating $74.75 million gross proceeds and expected net proceeds of approximately $70.2 million. It intended to use proceeds to increase capital, fund growth, and for general corporate purposes, with possible future acquisitions. This increases shares outstanding.
- Repurchases: The board extended the $15 million repurchase program through March 19, 2022; $13.1 million remained available after quarter-end. The program is discretionary and does not obligate the company to repurchase shares.
- Other items: Management reported no material litigation expected to adversely affect financial condition and no material changes to previously disclosed risk factors. The company had received $36.8 million in PPP processing fees; fee clawback or nonpayment is possible in specified circumstances, though management reported no known affected loans as of March 31.
Important facts for investors to verify
- How much Q1 earnings and net interest income depended on PPP fee recognition, and how quickly remaining deferred fees may be recognized as loans are forgiven or repaid.
- Whether core loan growth, deposit growth, and funding mix remain sustainable as PPP balances and related PPPLF borrowings run off.
- Trends in net charge-offs, criticized and nonperforming loans, collateral values, and the adequacy of the incurred-loss allowance, particularly as the company prepares for CECL adoption in 2023.
- The effect of the May 2021 share issuance on per-share earnings, capital ratios, and deployment of the offering proceeds.
- Actual net interest income sensitivity to rate changes compared with management’s model, including changes in deposit pricing and loan yields.