Mid Penn Bancorp, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018; balance-sheet comparisons are against December 31, 2017 unless stated otherwise. Mid Penn completed its acquisition of The Scottdale Bank & Trust Company on January 8, 2018. The acquisition materially affects period-to-period comparisons; Scottdale’s separate revenue and earnings contribution was not practicable to determine.
Financial and operating performance
- Earnings: Net income was $1.004 million, down from $1.994 million in Q1 2017. Diluted EPS was $0.17 versus $0.47. Annualized ROA was 0.30% and ROE was 2.78%, compared with 0.77% and 11.33%, respectively.
- Revenue and margins: Net interest income increased 19% to $10.878 million; taxable-equivalent net interest income was $11.083 million, up 17%. Net interest margin declined to 3.52% from 3.82%, reflecting higher funding costs and lower loan yield. Noninterest income rose 15% to $1.647 million.
- Expenses and taxes: Noninterest expense rose 43% to $11.183 million, including $1.694 million of merger and acquisition costs, versus $0.210 million a year earlier. The income-tax provision fell to $0.213 million from $0.690 million; the effective rate was 17.5% versus 25.7%, largely reflecting the federal statutory rate reduction.
- Cash flow: Operating activities provided $2.883 million, compared with $3.195 million. Investing activities provided $89.579 million, including $65.025 million net cash from the Scottdale acquisition and substantial securities-sale proceeds. Financing activities used $56.801 million, including repayment of $34.611 million in short-term borrowings. Cash and cash equivalents ended at $59.175 million.
- Balance sheet and liquidity: Total assets were $1.391 billion, up 19% from year-end, and total loans were $1.007 billion, up $96.7 million. Deposits were $1.212 billion. Management said liquidity exceeded its minimum levels and identified core deposits, securities, loan collections and available borrowing facilities as funding sources.
- Debt and capital: At quarter-end, short-term borrowings were zero; long-term debt was $12.297 million and subordinated debt was $17.335 million. Shareholders’ equity was $139.124 million, up from $75.703 million, principally due to shares issued for Scottdale. The company reported regulatory capital ratios above minimum requirements; bank total risk-based capital was 13.9% and common equity Tier 1 was 13.1%.
- Credit quality: Allowance for loan and lease losses was $7.666 million, or 0.76% of loans, versus 0.84% at year-end. Nonperforming assets were $13.615 million, up from $11.308 million; nonperforming loans were 1.28% of loans. Net charge-offs were $65,000, compared with net recoveries of $312,000 in Q1 2017.
Material changes, outlook and risks
- Scottdale added loans, securities, deposits, branches and goodwill; Mid Penn issued 1,878,827 shares and paid $2.792 million cash. Recorded goodwill from the acquisition was $18.610 million. Integration and acquisition-related costs weighed on reported earnings.
- Mid Penn agreed to acquire First Priority Financial Corp.; completion was expected in Q3 2018, subject to customary regulatory and shareholder approvals. The proposed transaction would expand the company’s southeastern Pennsylvania footprint; pro forma assets were expected to exceed $2 billion.
- No specific earnings or financial guidance was provided. Management noted that interest-rate movements affect funding costs, loan demand and yields, collateral values and securities values. Its model estimated higher net interest income under rising-rate scenarios and lower income under falling rates, subject to modeling assumptions.
- Key risks include economic and borrower conditions, commercial real estate and other credit exposure, interest-rate and funding competition, acquisition integration and execution, potential goodwill impairment, regulatory requirements, and uncertainty in allowance estimates. Management said the allowance was adequate, but noted strong commercial loan growth and limited loss history in newer markets as uncertainties.
- Available-for-sale securities had $5.100 million of unrealized losses at March 31, 2018; management attributed these primarily to interest-rate changes rather than credit deterioration and reported no other-than-temporary impairment. Other comprehensive loss for the quarter was $1.867 million, largely reflecting securities valuation losses.
Important facts for investors to verify
- How much of future revenue, expenses and loan growth reflects Scottdale versus Mid Penn’s legacy business, and whether integration savings offset ongoing costs.
- Progress, approvals, consideration and integration plans for the proposed First Priority merger.
- Trends in nonperforming assets, the two large troubled loan relationships, collateral recoveries and allowance coverage.
- Deposit pricing and funding costs, net interest margin, and sensitivity to further rate changes.
- Whether securities valuation losses, goodwill and acquired intangible valuations change materially in subsequent reporting periods.