Mid Penn Bancorp, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. The filing was signed August 5, 2022. Mid Penn is a Pennsylvania bank holding company; results include its banking and nonbank subsidiaries. Comparisons with 2021 are materially affected by the November 2021 Riverview acquisition.
Financial performance and condition
Unless noted otherwise, amounts are in millions of dollars. Quarter comparisons are against Q2 2021; six-month comparisons are against the first half of 2021.
| Metric | Q2 2022 | Six months 2022 | Change versus comparable period |
|---|---|---|---|
| Net interest income | $35.4 | $69.8 | Up 31.8% and 33.8%, respectively |
| Net interest margin, taxable-equivalent | 3.45% | 3.33% | Q2: up from 3.34%; six months: down from 3.40% |
| Provision for loan and lease losses | $1.7 | $2.2 | Up from $1.2 and $2.2, respectively |
| Noninterest income | $5.2 | $11.0 | Down 7.5%; up 5.9% |
| Noninterest expense | $23.9 | $49.7 | Up 22.9%; up 34.2% |
| Net income | $12.3 | $23.6 | Up 27.5%; up 24.7%, using financial-statement comparatives |
| Diluted earnings per share | $0.77 | $1.48 | Down from $0.93 and $2.02 |
Net interest income growth reflected the larger balance sheet following Riverview and lower interest expense; the first-half margin nevertheless declined. Lower PPP fee recognition and a lower yield on earning assets partly offset volume growth. EPS fell despite higher net income, in part because shares outstanding increased following the 2021 public offering and Riverview merger.
- Balance sheet at June 30: Assets were $4.31 billion, down 8.1% from year-end 2021; loans and leases were $3.18 billion, up 2.4%; shareholders’ equity was $495.8 million.
- Loans: Core banking loans, excluding PPP balances, were $3.18 billion, up 6.1% from year-end. Commercial real estate was the largest category at $1.83 billion. PPP loans fell to $5.0 million from $111.3 million.
- Deposits and liquidity: Deposits totaled $3.70 billion, down 7.5% from year-end, largely due to certificate-of-deposit maturities and runoff. Cash and cash equivalents were $236.8 million, down from $913.8 million. Management reported unused FHLB borrowing capacity of $1.21 billion and unused correspondent lines of $35 million; no short-term borrowings were outstanding.
- Cash flows, first half: Operating activities provided $19.4 million; investing activities used $311.9 million; financing activities used $384.5 million. The net decline in cash and cash equivalents was $677.0 million.
- Debt and capital: Long-term debt was $4.6 million, down from $81.3 million at year-end, primarily following repayment of FHLB advances. Subordinated debt and trust preferred securities were $74.0 million. Mid Penn and the Bank met regulatory capital requirements; the Bank’s total risk-based capital ratio was 13.3%, above its 10.0% well-capitalized threshold.
- Credit quality: The allowance was $16.9 million, or 0.53% of loans. Nonperforming assets were $8.0 million (0.25% of loans and foreclosed assets), down from $10.0 million at year-end. First-half net recoveries were $54,000.
- Other comprehensive loss: Accumulated other comprehensive loss was $9.8 million, primarily reflecting unrealized securities losses. Available-for-sale securities had $13.2 million of unrealized losses; held-to-maturity securities’ fair value was $33.7 million below amortized cost. Management attributed the declines to interest-rate movements and reported no securities as other-than-temporarily impaired.
Material changes and unusual items
- Riverview’s acquisition expanded the company and affects year-over-year comparability. Management cited acquisition-related growth in loans, deposits, fee activity, staffing, and operating costs.
- Mortgage banking income fell sharply as higher rates slowed refinancing and mortgage originations: $0.3 million in Q2 versus $2.8 million, and $0.8 million for the first half versus $5.2 million. First-half mortgage hedging gains of $1.1 million partially supported other income.
- First-half expenses included $329,000 of post-acquisition restructuring costs and a $664,000 impaired-asset write-off; cash-flow disclosures also report a $705,000 obsolete-asset write-off. Branch closures under the announced network-optimization plan occurred March 4, 2022.
- The company repurchased 103,912 shares in Q2 for $2.96 million. The repurchase program, extended through March 2023, had $10.3 million remaining at June 30.
Outlook, risks, and contingencies
- The filing provides no quantified earnings or revenue guidance. Management said the interim results are not necessarily indicative of full-year results and noted that further Federal Reserve rate changes may affect net interest income.
- Management’s interest-rate model projected one-year net interest income increases of 5.57% under a 100-basis-point rise and 19.63% under a 400-basis-point rise; a 100-basis-point decline projected a 5.96% decrease. Management cautioned that actual results may differ materially from modeled estimates.
- Risks highlighted include economic slowdown and inflation, interest-rate and securities-market volatility, borrower and collateral deterioration, deposit competition and runoff, acquisition integration and realization of expected benefits, cybersecurity and third-party technology, regulation, and the continuing effects of COVID-19.
- Mid Penn expected CECL adoption on January 1, 2023 and said it was probable total credit-loss reserves would increase at adoption; the amount was not yet determined. Management was conducting model implementation and validation work.
- Standby letters of credit were $54.2 million. Management did not anticipate losses from these commitments. Ordinary-course litigation was not expected to have a material adverse effect. The filing reports no material change to previously disclosed risk factors.
Key facts for investors to verify
- Net-income comparative discrepancy: The income statement reports Q2 2021 net income of $9.613 million, while the MD&A overview states $9.313 million. The reported growth rate above uses the financial-statement figure; verify the discrepancy in the filed statements and any subsequent materials.
- Whether deposit runoff continues and how the resulting liquidity position and funding mix evolve as rates change.
- Whether loan growth, particularly commercial real estate growth, is accompanied by deterioration in credit quality, collateral values, or allowance needs.
- The effects of CECL adoption on reserves, earnings, and capital, and the timing and magnitude of any increase.
- Whether acquired Riverview operations deliver expected cost savings and revenue benefits while integration expenses and the elevated expense base are managed.
- The extent to which unrealized securities losses, modeled rate sensitivity, and slower mortgage activity affect future earnings and capital.