Mid Penn Bancorp, Inc. — Second-Quarter 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020; balance-sheet comparisons are against December 31, 2019. Mid Penn is a Pennsylvania bank holding company. Unless noted otherwise, dollar amounts below are in millions.
Financial results and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $21.35 | $17.77 | $39.01 | $35.08 |
| Provision for loan losses | $1.05 | $0.47 | $1.60 | $0.59 |
| Noninterest income | $3.62 | $2.87 | $6.56 | $4.92 |
| Noninterest expense | $15.40 | $14.80 | $30.98 | $29.10 |
| Net income | $6.83 | $4.40 | $10.65 | $8.48 |
| Diluted earnings per share | $0.81 | $0.52 | $1.26 | $1.00 |
| Tax-equivalent net interest margin | 3.37% | 3.69% | 3.41% | 3.69% |
- Balance sheet at June 30: Total assets were $2,922.4 million, loans and leases $2,445.8 million before allowance, deposits $2,326.3 million, and shareholders’ equity $243.3 million. Total cash and cash equivalents were $143.8 million.
- Cash flows, first half: Operating activities used $1.1 million, investing activities used $674.5 million, and financing activities provided $680.3 million. Cash increased $4.7 million to $143.8 million.
- Credit provision and allowance: The allowance for loan and lease losses was $11.1 million, up from $9.5 million at year-end. The six-month provision was $1.6 million; net charge-offs were $48,000. Allowance equaled 0.45% of reported loans, or 0.60% excluding SBA-guaranteed PPP loans.
- Liquidity and funding: Deposits rose $413.9 million. Short-term borrowings were $203.9 million, all from the Federal Reserve’s PPP Liquidity Facility, and long-term debt was $85.3 million, including finance lease obligations. The Bank reported $815.0 million of unused FHLB short-term borrowing capacity and $35 million of unused correspondent overnight lines.
- Capital: Mid Penn reported a 9.5% common equity Tier 1 ratio and 12.4% total risk-based capital ratio; the Bank reported 10.5% and 11.6%, respectively. The filing states both met “well-capitalized” requirements.
Material changes versus comparable periods
- Quarterly net income increased 55% year over year; first-half net income rose 26%. Growth in net interest income and noninterest income more than offset higher credit provision and operating expenses.
- Loans grew $683.0 million, or 39%, from year-end. This included $588.7 million of PPP loans outstanding, net of deferred fees; excluding PPP loans and mortgage loans held for sale, core banking loans increased to $1,857.1 million.
- Deposits increased $413.9 million, or more than 21%, from year-end; management said none of the growth was attributable to brokered deposits. More than half of the growth was in noninterest-bearing deposits. Wholesale borrowings also increased, including $203.9 million of PPPLF funding.
- Net interest margin declined despite higher net interest income. Management attributed pressure to lower market rates and low-yielding PPP balances; lower deposit costs and $2.4 million of PPP processing-fee income partly offset the decline.
- Noninterest income growth reflected higher mortgage banking income ($2.8 million for the first half, up 86%) and securities-sale gains. Deposit service charges and SBA loan-sale gains declined.
- Noninterest expense increased 6% in the first half, reflecting staffing and business growth, technology and equipment costs, and approximately $138,000 of FHLB prepayment costs.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no quantified earnings or growth guidance. Management said it could not estimate the pandemic’s effects on full-year 2020 results, financial condition, capital or liquidity.
- COVID-19 exposure: As of June 30, Mid Penn had provided qualifying short-term modifications to 1,019 borrowers with $444.9 million in loans outstanding, generally involving three-to-six-month payment deferrals or interest-only periods. Interest continued to accrue. Management cautioned that economic deterioration could impair borrowers’ ability to repay and require further allowance increases.
- PPP: PPP loans carry a 1% rate and are fully SBA-guaranteed; most have two-year terms. Mid Penn received $20.3 million of processing fees, recognized $2.4 million in first-half interest income, and had $18.0 million of deferred fees remaining. The filing notes potential fee clawbacks in specified circumstances.
- Asset quality: Nonperforming loans were $14.3 million, up from $12.0 million at year-end, and nonperforming assets were $16.0 million. Management said the identified nonperforming assets predated the pandemic, but resolution could be affected if it persists. One home-equity relationship contributed to the increase; a commercial property transferred to foreclosed assets was carried at $1.5 million and listed for sale.
- Interest-rate risk: Management’s model showed net interest income increasing 13.32% under a 300-basis-point rise and decreasing 14.46% under a 300-basis-point decline over one year. These are model estimates, not forecasts, and actual results may differ.
- Debt and capital actions: Mid Penn issued $15 million of 4% subordinated notes due 2030, intended to qualify as Tier 2 capital; it also borrowed $70 million from the FHLB due 2022. The company repurchased 80,523 shares for $1.56 million under a program authorizing up to $15 million.
- Management reported no goodwill impairment, no securities considered other-than-temporarily impaired, and no litigation expected to have a material adverse effect. The allowance remains based on the incurred-loss method; CECL adoption is deferred to January 1, 2023.
Important facts for investors to verify
- How quickly PPP balances run off or are forgiven, and the timing and sustainability of deferred fee recognition.
- Performance and credit quality of the $444.9 million modified-loan pool, including whether deferrals lead to renewed payment stress or higher provisions.
- Whether the allowance is adequate as economic conditions evolve, particularly given commercial real estate exposure and the growth in nonperforming loans.
- Whether deposit growth persists and how reliance on PPPLF, FHLB debt and other wholesale funding changes as PPP loans are repaid.
- Whether margin pressure continues from low rates and PPP lending, and how mortgage banking income and securities gains perform after unusually strong first-half results.
- Capital and liquidity levels, share repurchases, and the effect of pandemic-related developments on earnings, asset values and regulatory requirements.