Mid Penn Bancorp, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2018. Comparisons with 2017 are materially affected by the January acquisition of Scottdale and the July acquisition of First Priority; acquired results are included from their respective closing dates.
Financial results and condition
Unless noted otherwise, amounts are in millions of dollars. Per-share data are in dollars.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $15.9 | $9.5 | $38.2 | $28.1 |
| Noninterest income | $2.2 | $1.6 | $5.4 | $4.4 |
| Noninterest expense | $15.3 | $8.0 | $36.2 | $23.3 |
| Net income available to common shareholders | $2.1 | $2.2 | $5.9 | $6.6 |
| Basic and diluted EPS | $0.28 | $0.53 | $0.89 | $1.56 |
- Q3 net interest margin was 3.75%, up from 3.64%; nine-month margin was 3.62%, down from 3.73%. Management attributed the year-to-date decline mainly to funding costs rising ahead of asset repricing, with improvement in Q3.
- At September 30, total assets were $2,044.3, loans $1,567.3, deposits $1,762.5, and shareholders’ equity $221.8. At December 31, 2017, those balances were $1,170.4, $910.4, $1,023.6, and $75.7, respectively. Growth primarily reflects the acquisitions.
- Cash and cash equivalents were $62.1 versus $23.5 at year-end 2017. For the first nine months, operating cash flow was $6.3; investing activities provided $78.7, including $72.6 of net cash received from acquisitions; financing activities used $46.4. Cash increased $38.6.
- Period-end borrowings were $46.9 in total: $1.8 short-term, $18.1 long-term, and $27.1 subordinated debt, compared with $64.3 at year-end 2017. Regulatory capital ratios exceeded applicable minimums: the Company’s total risk-based capital ratio was 12.4%, and the Bank’s was 11.7%; both were reported as well-capitalized.
- Nonperforming assets were $12.0, or 0.76% of loans plus foreclosed assets. Nonaccrual loans were $10.4; no accruing loans were more than 90 days past due. The allowance was $8.2, equal to 0.53% of loans and 75.67% of nonperforming loans.
Material changes and unusual items
- Scottdale closed January 8, 2018, for total consideration of $67.0; First Priority closed July 31, 2018, for $79.9. The First Priority transaction included 2.32 million newly issued common shares and replacement preferred stock; Scottdale consideration included 1.88 million common shares. The acquisitions materially increased the scale of the balance sheet and share count.
- Q3 noninterest expense rose 92% year over year, including $3.0 of merger and acquisition expense. Nine-month M&A expense was $5.0. Salaries, occupancy, equipment, software, and intangible amortization also increased with the larger franchise.
- EPS fell more sharply than net income, in part because of acquisition-related share issuance. The company recorded $0.5 of pension settlement gains in other income during the first nine months and a one-time $0.1 income-tax benefit from amended prior-year returns.
- Available-for-sale securities had $6.4 of unrealized losses at September 30; management attributed losses primarily to interest-rate movements and reported no securities as other-than-temporarily impaired. Nine-month other comprehensive loss was $1.7.
- The company issued $3.4 of Series D preferred stock in the First Priority merger, carrying a 9% dividend. On November 5, 2018, the Federal Reserve affirmed the company’s request to redeem it; Mid Penn intended to redeem all shares in Q4 2018.
Outlook, commentary, and risks
The filing provides no specific earnings or financial guidance. Management said liquidity remained stable and above its defined minimums, and reported that modeled interest-rate risk was within Board limits. Its model estimated higher one-year net interest income under rising rates and lower income under falling rates; management cautioned that actual results may differ.
- Key risks include successful integration and retention of First Priority and Scottdale employees, realizing expected synergies and cost savings, acquisition-related costs, goodwill impairment, and pressure on personnel and systems.
- Other stated risks include interest-rate and funding-cost changes, economic conditions and borrower repayment capacity, commercial real estate and loan collateral values, competition, regulation, and the subjectivity of loan-loss and acquisition valuations.
- Management was evaluating the expected-credit-loss standard (CECL), which it said could increase the allowance; the size of any impact was not yet determined. The filing reported no known litigation expected to have a material adverse effect, while noting merger-related demands or litigation could create cost and management distraction.
Important facts for investors to verify
- Whether acquired businesses are integrating as planned and delivering expected revenue growth, cost savings, and synergies.
- How much of reported earnings growth reflects acquisition scale versus underlying organic performance, and how recurring merger and integration costs will be.
- Credit performance of the enlarged loan portfolio, especially commercial real estate and larger nonperforming relationships; assess the allowance in light of acquired loans recorded at fair value without an acquisition-date allowance.
- Deposit pricing and funding costs, net interest margin trends, and sensitivity to changing interest rates.
- Completion and funding of the planned preferred-stock redemption, and subsequent capital and dividend effects.