Mid Penn Bancorp, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited. Unless noted otherwise, amounts below are in millions of dollars. Comparisons are with the corresponding 2022 period or December 31, 2022 balance-sheet date.
Business context and material developments
Mid Penn is a Pennsylvania-based bank holding company. On May 19, 2023, it completed its acquisition of Brunswick Bancorp, adding five branches in central New Jersey. Consideration was $45.7 million, comprising $27.6 million cash and 849,510 Mid Penn shares valued at $18.1 million. The acquisition added $391.9 million of assets, including $324.5 million of loans, and $282.6 million of deposits. Purchase-accounting valuations remained under review at quarter-end.
Effective January 1, 2023, Mid Penn adopted CECL. Adoption increased the allowance for credit losses by $15.0 million, reduced retained earnings by $11.5 million, and increased deferred tax assets by $3.1 million. Prior-period credit-loss figures use the previous incurred-loss method and are not directly comparable.
Financial performance and condition
| Metric | Q2 2023 / June 30, 2023 | Comparable period / prior date |
|---|---|---|
| Net income | $4.8 million; diluted EPS $0.29 | Q2 2022: $12.3 million; $0.77 |
| Six-month net income | $16.1 million; diluted EPS $1.00 | Six months 2022: $23.6 million; $1.48 |
| Net interest income | Q2: $36.4 million; six months: $72.5 million | Q2 2022: $35.4 million; six months 2022: $69.8 million |
| FTE net interest margin | Q2: 3.29%; six months: 3.39% | Q2 2022: 3.45%; six months 2022: 3.33% |
| Noninterest income | Q2: $5.2 million; six months: $9.5 million | Q2 2022: $5.2 million; six months 2022: $11.0 million |
| Noninterest expense | Q2: $35.5 million; six months: $61.6 million | Q2 2022: $23.9 million; six months 2022: $49.7 million |
| Total assets | $5,088.8 million | December 31, 2022: $4,498.0 million |
| Total loans, before allowance | $4,034.5 million | December 31, 2022: $3,514.1 million |
| Total deposits | $4,286.7 million | December 31, 2022: $3,778.3 million |
| Cash and cash equivalents | $93.9 million | December 31, 2022: $60.9 million |
- Earnings and margins: Q2 net income fell 60.5% year over year, while six-month net income declined 31.9%. Higher loan yields and balance growth lifted net interest income, but rising funding costs pressured the quarterly margin. Interest expense rose to $20.1 million in Q2 from $2.8 million a year earlier; management cited higher deposit pricing, a shift toward time deposits, and short-term borrowings used to fund loan growth.
- Acquisition and expenses: Brunswick-related acquisition costs were approximately $7.9 million in Q2 and $8.2 million in the first half. Q2 also included $3.0 million of post-acquisition restructuring expense. These items were major contributors to higher noninterest expense.
- Revenue mix: First-half noninterest income decreased 13.1%, primarily because mortgage banking and hedging activity declined as interest rates rose. Wealth-management income increased 8.1% for the half year; Q2 other income included a life-insurance death-benefit claim.
- Credit quality: The loan allowance was $32.6 million, or 0.81% of loans, at June 30, versus $19.0 million, or 0.54%, at December 31; adoption of CECL accounts for much of the increase. Six-month net charge-offs were $0.3 million. Nonperforming assets were $16.3 million, or 0.32% of assets, versus $8.6 million at year-end; the increase included $3.9 million of acquired nonaccrual loans. The filing reports $15.5 million of nonaccrual loans and $0.5 million of foreclosed assets.
- Funding, debt, and liquidity: Deposits grew 13.5%, with $282.6 million from Brunswick; growth otherwise reflected increased time deposits, partly offset by lower interest-bearing transaction balances. Short-term borrowings were $112.4 million, long-term debt $59.0 million, and subordinated debt $46.6 million. Mid Penn reported nearly $1.59 billion of current liquidity including borrowing capacity, equal to 178.9% of uninsured and uncollateralized deposits, or about 37.2% of total deposits. Available FHLB borrowing capacity was $1.3 billion, and unused correspondent lines totaled $35 million.
- Cash flow and capital: First-half operating cash flow was $23.9 million; investing activities used $199.9 million, mainly due to loan growth; financing activities provided $209.0 million, primarily from net deposit growth. The Bank was reported well-capitalized. At June 30, Mid Penn’s total risk-based capital ratio was 11.50%, CET1 ratio 9.56%, and Tier 1 leverage ratio 8.27%.
- Securities and interest-rate exposure: Gross unrealized losses on AFS and HTM securities totaled $75.1 million at June 30; the filing said no AFS credit loss was identified and the HTM expected credit-loss estimate was immaterial. Management’s one-year model showed net interest income increasing under rate rises of 100–400 basis points and under declines through 200 basis points, but decreasing under larger declines.
Outlook, risks, contingencies, and unusual items
The filing provides no numerical earnings or margin guidance. Management emphasizes uncertainty around competitive deposit pricing, volatile interest rates, inflation, economic conditions, loan collateral values, liquidity, regulatory changes, and successful integration of acquisitions. Management’s liquidity analysis indicated stability and adequate levels, while noting competitive pressures and rate volatility. Legal matters were described as routine and not expected to have a material adverse effect.
Management performed a goodwill impairment analysis after Mid Penn’s share-price decline amid banking-sector turmoil. The analysis found estimated fair value exceeded carrying value by less than 5%; no impairment was reported. Management noted that cash-flow, discount-rate, and growth assumptions are uncertain and that weaker-than-assumed or prolonged deterioration could lead to impairment. The filing also reports a 2.9% effective tax rate for Q2, reflecting a deferred-tax benefit associated with entering New Jersey, among other tax factors.
The company repurchased 204,379 shares during Q2 at an average $22.41 per share. The repurchase program had $5.5 million remaining at June 30 and was renewed through May 11, 2024. The quarterly dividend declared was $0.20 per share.
Important facts for investors to verify
- Whether Brunswick integration, purchase-accounting adjustments, and restructuring deliver expected earnings benefits and cost savings.
- How deposit pricing, deposit mix, and short-term borrowing needs affect funding costs and net interest margin.
- Whether acquired and existing loan credit quality, nonperforming assets, and CECL allowance levels change materially.
- The extent of interest-rate and liquidity sensitivity, including the market value and funding implications of unrealized securities losses.
- Whether goodwill valuation assumptions remain supportable given the narrow disclosed fair-value cushion.
- Capital ratios, liquidity capacity, and the pace of share repurchases and dividends as the balance sheet expands.