Mid Penn Bancorp, Inc. — Q2 2018 Form 10-Q
Business context and period. This unaudited filing covers the quarter and six months ended June 30, 2018. Mid Penn is a Pennsylvania bank holding company. Results include The Scottdale Bank & Trust Company, acquired January 8, 2018, so comparisons with 2017 are affected by the acquisition. Amounts below are in U.S. dollars; financial statement amounts are shown in millions unless otherwise noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net interest income | $11.414 | $9.410 | $22.292 | $18.585 |
| Noninterest income | $1.559 | $1.362 | $3.206 | $2.798 |
| Noninterest expense | $9.742 | $7.558 | $20.925 | $15.360 |
| Net income | $2.779 | $2.345 | $3.783 | $4.339 |
| Diluted EPS | $0.45 | $0.55 | $0.63 | $1.02 |
- Taxable-equivalent net interest margin was 3.55% in Q2 versus 3.74% a year earlier, and 3.53% for the first half versus 3.78%. Management attributed the decline mainly to higher funding costs; the cost of funds rose to 0.87% in Q2 from 0.68% and to 0.85% for the first half from 0.67%.
- Q2 net income rose 19% year over year, but EPS fell as weighted-average shares increased following the Scottdale stock issuance. First-half net income declined about 13% and EPS declined about 38% year over year.
- For the first half, net interest income increased 20% and noninterest income increased 15%, while noninterest expense rose 36%. The income tax provision fell to $0.665 million from $1.459 million; the effective tax rate was 15.0% versus 25.2%, reflecting the federal statutory rate reduction and a $92,000 one-time tax benefit from amended prior-year returns.
Financial position, cash flow and capital
- At June 30, total assets were $1.416 billion, up 21% from year-end 2017; loans were $1.036 billion, up 13.8%, and deposits were $1.237 billion, up 20.8%. The growth reflects the Scottdale acquisition as well as organic lending and deposit activity.
- Cash and cash equivalents totaled $39.4 million, compared with $23.5 million at year-end. First-half operating cash flow was $4.9 million; cash increased $15.9 million. Investing cash flow was positive $44.6 million, including $65.0 million of net cash received in the Scottdale acquisition and substantial securities sales. Financing cash flow was negative $33.6 million, including repayment of $34.6 million in short-term borrowings.
- Short-term borrowings were zero at June 30, versus $34.6 million at year-end. Long-term debt was $12.2 million and subordinated debt was $17.3 million. Total shareholders’ equity was $141.8 million, up from $75.7 million, largely due to shares issued for Scottdale. The company reported that Mid Penn and the Bank exceeded regulatory well-capitalized thresholds; at June 30, the Bank’s total risk-based capital ratio was 13.7% and its Tier 1 leverage ratio was 9.5%.
- The allowance for loan and lease losses was $8.2 million, or 0.79% of loans, compared with 0.84% at year-end. First-half net recoveries were $458,000; the period included a $777,000 recovery from a commercial real estate workout. Nonperforming assets were $10.1 million, or 0.97% of loans and foreclosed real estate, down from $11.3 million at year-end.
Material changes, outlook and risks
- Scottdale contributed acquired loans, securities and deposits and increased goodwill by $19.2 million and core deposit intangibles by $4.9 million. Mid Penn recorded $1.916 million of first-half merger and acquisition expense, including costs associated with Scottdale and the planned First Priority transaction; acquired-asset amortization also increased expenses.
- On July 31, 2018, after quarter-end, Mid Penn completed its acquisition of First Priority Financial Corp. The transaction involved approximately 2.3 million Mid Penn shares, about $3.9 million in cash for converted options, and preferred stock with a 9% dividend rate. First Priority reported $627.4 million in assets, $522.0 million in loans and $513.6 million in deposits at June 30. Purchase accounting was not complete when the filing was issued.
- A shareholder lawsuit relating to the First Priority merger alleged proxy disclosure and fiduciary-duty issues and challenged the merger consideration. Mid Penn said it believed the claims were without merit and intended to defend them; the company could not reasonably estimate potential losses.
- Management gave no specific earnings or financial guidance. It said liquidity remained above internal minimums and described core deposits as generally stable. The filing identifies interest-rate changes, deposit competition, credit and collateral risk, acquisition integration and synergy execution, litigation, and potential goodwill impairment as important uncertainties. The company’s interest-rate model projected higher one-year net interest income under rising-rate scenarios and lower income under falling rates, subject to model assumptions.
- Management reported no securities considered other-than-temporarily impaired. Available-for-sale securities had $5.5 million of unrealized losses at June 30, which management attributed primarily to interest-rate movements rather than credit deterioration. The filing also notes that adoption of the expected-credit-loss standard could increase the allowance, but the impact was still under evaluation.
Important facts for investors to verify
- Whether Scottdale integration, First Priority integration, and anticipated cost savings and revenue opportunities meet management’s expectations.
- Whether margin pressure continues as funding costs rise, and how deposit pricing and loan yields respond to interest-rate changes.
- Credit quality trends, particularly the two large troubled relationships, commercial real estate exposure, acquired loans, and the adequacy of the allowance.
- The ultimate outcome and cost of the First Priority shareholder litigation, and the completed purchase accounting and post-merger financial impact.
- The effect of higher recurring operating costs, acquisition-related amortization, and expected-credit-loss accounting on future earnings and capital.