Mid Penn Bancorp, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited. Amounts below are in millions unless otherwise noted.
Business context and reporting period
Mid Penn is a Pennsylvania bank holding company. Results are substantially affected by its March 1, 2015 acquisition of Phoenix Bancorp and its subsidiary Miners Bank; acquired operations are included from that date, limiting comparability with 2014. Management notes interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $8.189 | $6.544 | $23.713 | $19.567 |
| Provision for loan losses | $0.265 | $0.395 | $0.865 | $1.217 |
| Noninterest income | $1.085 | $0.741 | $3.127 | $2.409 |
| Noninterest expense | $6.569 | $4.929 | $19.851 | $14.735 |
| Net income | $1.894 | $1.595 | $4.901 | $4.813 |
| Net income available to common shareholders | $1.802 | $1.507 | $4.630 | $4.550 |
| Basic EPS | $0.43 | $0.43 | $1.14 | $1.30 |
Q3 common income increased 19.6% year over year, while EPS was unchanged. Nine-month common income rose 1.8%, but EPS fell as the weighted-average share count increased following shares issued for the acquisition. Taxable-equivalent net interest margin was 4.00% for Q3 and 4.06% year to date, versus 3.93% and 4.03%, respectively. Annualized ROA/ROE were 0.79%/9.60% for Q3 and 0.71%/8.79% for nine months.
At September 30, total assets were $915.3, compared with $755.7 at December 31, 2014; loans were $719.1 versus $571.5; deposits were $775.2 versus $637.9; and shareholders’ equity was $75.5 versus $59.1. Allowance for loan losses was $7.0, or 0.97% of loans, versus $6.7 and 1.18% at year-end. Short-term borrowings were $5.7 and long-term debt $51.4, compared with $0.6 and $53.0, respectively.
For the first nine months, operating cash flow was $10.5, investing cash flow was negative $13.6, and financing cash flow was $12.5. Cash and cash equivalents ended at $19.2, up from $9.9 at year-end. The Bank met the regulatory definition of “well-capitalized”: Tier 1 leverage 7.7%, common equity Tier 1 and Tier 1 risk-based ratios 10.1%, and total risk-based capital 11.1%.
Material changes versus comparable periods
- Loan growth of $147.6, or 25.8%, and deposit growth of $137.2, or 21.5%, primarily reflect Phoenix/Miners, alongside organic lending and deposit activity. Phoenix contributed approximately $110.7 of the loan increase.
- Q3 noninterest expense rose 33.3% year over year; nine-month expense rose 34.7%. Higher staffing, occupancy, software and other costs reflect the acquisition and business expansion. Nine-month merger and acquisition expense was $0.784, versus $0.011 a year earlier.
- Noninterest income rose 46.4% in Q3 and 29.8% year to date. Drivers included investment-security sale gains, ATM interchange, SBA loan sales and mortgage banking.
- Net charge-offs were $0.597 for nine months, versus $1.123 in 2014. Nonperforming loans were $7.8, or 1.08% of loans, versus $10.9 and 1.91% at year-end; management cautions that the acquired portfolio increased the denominator and improved reported ratios.
- Management reports nine-month common income of $5.181 excluding merger expense and its tax impact, up 13.9% from 2014 reported common income. This is an adjusted, non-GAAP comparison. The filing’s pro forma acquisition table instead reports nine-month common income of $4.403 for 2015 and $4.812 for 2014, with pro forma assumptions and adjustments.
Outlook, risks and unusual items
- No quantified earnings or financial guidance is provided. Management cites potential sensitivity to interest rates, deposit competition, loan demand and collateral values, economic conditions, regulatory requirements, acquisition integration and the adequacy of loan-loss estimates.
- Credit indicators to monitor include $7.8 of nonperforming loans, $6.3 of troubled debt restructurings, and two large borrower relationships representing $4.5 of the $5.8 in nonaccrual TDRs. Two TDR loans totaling $3.4 defaulted within 12 months of restructuring during the first nine months of 2015.
- Management considered the $0.461 of unrealized investment-security losses primarily interest-rate related and did not recognize them as other-than-temporary impairment. It reported no material change in market risk since year-end.
- Subsequent to quarter-end, Mid Penn agreed to issue $7.5 of subordinated notes due 2025, expected to qualify as Tier 2 capital. The notes bear 5.15% interest for five years, then float at prime plus 0.50%, subject to a 4.00% floor. The company called its Series B preferred shares for redemption on December 9, 2015, and intends to use note proceeds for that redemption; remaining proceeds may support general corporate purposes and, subject to regulatory approval, redemption of Series C SBLF preferred shares. The SBLF preferred dividend rate was scheduled to rise from 1% to 9% after January 19, 2016.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of future earnings and cost growth reflects sustainable post-acquisition operations versus integration costs, acquisition accounting and one-time gains or loan-resolution income.
- Whether credit quality and reserve coverage remain sound as the acquired loan portfolio seasons; review TDR concentrations, defaults, delinquencies and collateral valuations.
- Completion and terms of the $7.5 subordinated-note offering and Series B redemption, any regulatory approval for Series C redemption, and the resulting capital and interest expense.
- Whether loan and deposit growth can be funded without materially increasing funding costs, borrowings or interest-rate risk.