Mid Penn Bancorp, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results; balance-sheet comparisons are to December 31, 2019 unless noted.
Business context and key financial results
Mid Penn is a Pennsylvania-based bank holding company. Its 2020 growth was heavily influenced by Paycheck Protection Program (PPP) lending, deposit inflows and mortgage banking activity.
- Q3 net income: $6.5 million, versus $4.8 million in Q3 2019; diluted EPS was $0.78 versus $0.57.
- Nine-month net income: $17.2 million, versus $13.3 million; diluted EPS was $2.04 versus $1.57.
- Net interest income: $21.4 million for Q3, up from $17.8 million; $60.4 million for nine months, up from $52.8 million.
- Net interest margin: Tax-equivalent margin was 3.09% for Q3 versus 3.53% a year earlier, and 3.29% for nine months versus 3.64%. Lower market rates and low-yield PPP balances pressured asset yields; lower deposit costs and PPP fees partly offset the pressure.
- Noninterest income and expense: Q3 noninterest income was $5.3 million, up 76%; nine-month income was $11.9 million, up 50%. Mortgage banking income drove much of the increase. Noninterest expense rose 24% to $18.2 million in Q3 and 12% to $49.2 million for nine months, reflecting growth, mortgage commissions, staffing, technology and other costs.
- Credit provision: $1.1 million in Q3 and $2.7 million for nine months, compared with $0.6 million and $1.2 million, respectively, in 2019. Management cited increased economic-risk qualitative factors related to COVID-19.
- Cash flow: Nine-month operating cash flow was negative $1.1 million, versus positive $7.2 million in 2019. Investing cash outflow was $741.0 million, largely reflecting loan growth; financing cash inflow was $798.5 million. Cash and cash equivalents ended at $195.4 million.
Financial position, funding and asset quality
- Assets: $3.05 billion, up 37% from year-end 2019. Loans and leases were $2.52 billion, up 43%; deposits were $2.46 billion, up $544.0 million, or about 28%. Management said deposit growth did not come from brokered deposits.
- PPP: Net PPP loans outstanding were $613.9 million at September 30, including $629.9 million gross loans less $15.9 million deferred fees. The company recognized $2.6 million of PPP processing fees in Q3 and $5.0 million year to date.
- Debt and liquidity: Short-term borrowings were $203.8 million, entirely Federal Reserve PPPLF funding at 0.35%, collateralized by PPP loans. Long-term debt was $75.2 million and subordinated debt $42.0 million. The filing reported $471.0 million of unused FHLB short-term borrowing capacity, subject to conditions. Management said liquidity exceeded internal minimums.
- Credit quality: Nonperforming loans were $13.4 million, versus $12.0 million at year-end 2019 and $5.4 million a year earlier; nonperforming loans were 0.53% of loans. The allowance was $12.2 million, or 0.48% of total loans (0.64% excluding SBA-guaranteed PPP loans). Net charge-offs were $45,000 for nine months.
- COVID-19 deferrals: Loans still in qualifying deferral status fell to $32.9 million at September 30 from $444.5 million at June 30; the October 26 balance was $11.8 million. Management said most borrowers had resumed regular payments.
- Capital: Shareholders’ equity was $248.2 million. Mid Penn Bank’s common equity Tier 1 ratio was 10.5% and total capital ratio 11.7%; both Mid Penn and the Bank exceeded applicable well-capitalized thresholds.
Changes, outlook, risks and unusual items
- Growth in loans, deposits and total assets partly reflects PPP participation; excluding PPP and mortgage loans held for sale, core loans grew at an annualized rate of over 10% from year-end.
- Mortgage banking income increased substantially amid lower mortgage rates and higher originations and secondary-market sales. Service charges declined, while SBA loan-sale gains decreased as resources shifted to PPP activity.
- Mid Penn issued $15 million of 4% subordinated notes due 2030, intended to qualify as Tier 2 capital. It also prepaid $22.5 million of higher-cost FHLB advances and recorded $165,000 of year-to-date prepayment penalties; securities gains partly offset these costs.
- The company repurchased 92,652 shares for approximately $1.8 million under a $15 million authorization. Quarterly dividends were $0.18 per share.
- Management stated it could not estimate COVID-19’s full effects on 2020 results, financial condition, capital or liquidity. Risks include borrower repayment stress, collateral-value changes, interest-rate movements and uncertainty in economic conditions. The allowance remains based on the incurred-loss method; CECL adoption is deferred to January 1, 2023.
- PPP processing fees may be subject to clawback in specified circumstances; management reported no known affected PPP loans as of September 30. Management reported no material expected litigation impact and no material changes to previously disclosed risk factors. No specific earnings guidance was provided.
Important facts for investors to verify
- Whether PPP balances and deferred fee recognition materially affect the sustainability and comparability of net interest income and reported loan growth.
- Trends in nonperforming loans, especially the $2.35 million home-equity relationship and the $7.35 million loan relationship described by management, and the adequacy of collateral and reserves.
- Borrower performance after COVID-19 deferrals, including developments after the October 26 deferral balance reported in the filing.
- Ongoing net interest margin sensitivity to low rates, deposit pricing and the large PPP portfolio; management’s model showed net interest income declining under rate-decrease scenarios.
- Use of borrowing facilities, capital levels, share repurchases and the effect of continued operating-cost growth on future earnings.