Mid Penn Bancorp, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; balance-sheet comparisons are to December 31, 2014. Dollar amounts below are in millions unless otherwise noted. Results include Phoenix Bancorp from its March 1 acquisition and are not fully comparable with the prior-year quarter.
Financial performance and condition
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior date |
|---|---|---|
| Net interest income | $7.038 | $6.272 in Q1 2014; up 12.2% |
| Net interest margin, taxable-equivalent | 3.97% | 4.00% in Q1 2014 |
| Net income | $0.963 | $1.511 in Q1 2014 |
| Net income available to common shareholders | $0.876; $0.23 basic EPS | $1.424; $0.41 basic EPS |
| Provision for loan losses | $0.300 | $0.547 in Q1 2014 |
| Operating cash flow | $1.787 | $1.735 in Q1 2014 |
| Total assets | $895.149 | $755.657 at December 31, 2014 |
| Loans, net of unearned interest | $695.153 | $571.533 at December 31, 2014 |
| Deposits | $759.046 | $637.922 at December 31, 2014 |
| Cash and cash equivalents | $14.195 | $9.882 at December 31, 2014 |
| Long-term debt / short-term borrowings | $56.480 / $0.621 | $52.961 / $0.578 at December 31, 2014 |
| Shareholders’ equity | $73.083 | $59.130 at December 31, 2014 |
Net income included $0.909 million of Phoenix merger expenses. Management stated that, excluding these charges and their tax effect, common net income would have been $1.503 million, 5.5% above Q1 2014. The reported effective tax rate was 8.1%, versus 19.7%, partly reflecting deductible merger costs and higher tax-exempt income. The filing gives no full-year earnings or revenue guidance.
Material changes and acquisition
- On March 1, Mid Penn completed its acquisition of Phoenix Bancorp and its bank subsidiary, Miners Bank. Consideration was $14.241 million: approximately $11.292 million in Mid Penn shares and $2.949 million in cash. Mid Penn also assumed and reissued $1.750 million of Treasury SBLF preferred stock.
- Phoenix contributed $110.707 million of acquired loans and $123.238 million of deposits. The acquisition was the main driver of the quarter’s balance-sheet growth; the company also cited $34.707 million of net new loan growth from its own business development.
- Noninterest income rose 6.2% to $0.949 million. Noninterest expense was $6.640 million, up $1.902 million, or 40.1%, from $4.738 million, including merger costs and acquired operations. Salaries and benefits also increased.
- Loan growth was concentrated in commercial real estate and commercial and industrial lending. The allowance for loan and lease losses was $6.566 million, or 0.94% of loans, compared with $6.716 million and 1.18% at year-end; the lower ratio partly reflects acquired loans recorded under purchase accounting without a transferred allowance.
- Nonperforming loans were $9.411 million, or 1.35% of loans, compared with $10.942 million, or 1.91%, at year-end. Nonaccrual loans were $7.417 million. Two restructured loans totaling $3.412 million defaulted within 12 months of restructuring, although the filing says restructured loans were current under their forbearance agreements at quarter-end.
- Operating activities provided $1.787 million; investing activities provided $5.069 million, including $8.118 million of net cash received from the acquisition; financing activities used $2.543 million. Cash and cash equivalents increased $4.313 million during the quarter.
Liquidity, capital, outlook and risks
- Management said liquidity exceeded its minimum defined levels, core deposits were stable, and liquidity was monitored daily. Funding sources include deposits, securities maturities and sales, loan payments, correspondent lines and FHLB capacity.
- The Bank reported “well-capitalized” status. At March 31, its Tier 1 leverage ratio was 8.4%, Tier 1 risk-based capital ratio 10.1%, and total risk-based capital ratio 11.1%. Mid Penn elected to exclude most accumulated other comprehensive income from regulatory capital under the applicable community-bank rules.
- Management reported no material change in market risk from year-end and no material changes to previously disclosed risk factors. Key exposures include credit and collateral deterioration, economic conditions, interest-rate movements, deposit competition, regulatory capital and liquidity requirements, and acquisition integration. Commercial real estate and business lending carry particular sensitivity to borrower cash flows and property values.
- The SBLF preferred stock carries a 1% noncumulative dividend through payment dates up to January 1, 2016; the rate then rises to 9%. Management said acquisition accounting could be adjusted for up to one year, with no significant adjustments expected.
- Management stated disclosure controls were effective and reported no material litigation or material changes in internal control over financial reporting. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Reconcile the filing’s stated 43.9% decline in common EPS with the reported $0.41 to $0.23 per-share figures; the 43.9% calculation corresponds to EPS, while common net income declined from $1.424 million to $0.876 million.
- The MD&A describes noninterest expenses as having “decreased” $1.902 million, or 40.1%; the income statement shows they increased from $4.738 million to $6.640 million.
- Assess whether the acquisition-related earnings contribution, merger-cost adjustments and integration benefits are sustainable, and monitor any purchase-price allocation revisions.
- Evaluate asset quality and reserve adequacy using acquired-loan marks, the 0.94% allowance-to-loans ratio, commercial real estate exposure, nonperforming loans and restructured-loan performance together.
- Track funding costs, interest-rate sensitivity and the SBLF preferred dividend increase to 9% after January 1, 2016.