MID PENN BANCORP INC quarterly report, Q2 FY2017

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Mid Penn Bancorp, Inc. — Q2 2017 Form 10-Q

Business context and period: Regional bank holding company reporting unaudited results for the quarter and six months ended June 30, 2017. Comparisons are with Q2 and first-half 2016, or December 31, 2016 for balance-sheet items. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless noted.

Financial performance and position

  • Profit: Q2 net income was $2.345 million, up 16% from $2.022 million; diluted EPS was $0.55 versus $0.48. First-half net income was $4.339 million, up 13% from $3.827 million; EPS was $1.02 versus $0.91.
  • Net interest: Q2 GAAP net interest income was $9.410 million versus $8.533 million; first-half was $18.585 million versus $16.948 million. On a taxable-equivalent basis, first-half net interest income grew 8% to $19.118 million. Tax-equivalent net interest margin declined to 3.74% from 3.85% in Q2 and to 3.78% from 3.90% for the first half.
  • Other revenue and expenses: Q2 noninterest income was $1.362 million, down 3%; first-half was $2.798 million, up 6%. Q2 noninterest expense rose 9% to $7.558 million; first-half expense rose 10% to $15.360 million. Higher staffing, benefits, facilities, FDIC assessments, and operating costs contributed. First-half merger expense was $224,000.
  • Credit provision and returns: Loan-loss provision was $100,000 in Q2 versus $395,000 and $225,000 in the first half versus $735,000. Annualized first-half ROA was 0.82% versus 0.80%; ROE was 12.05% versus 10.75%.
  • Assets and loans: Total assets were $1.112 billion, up 8% from year-end. Loans and leases were $862.3 million, up $48.4 million, or 6%; commercial real estate represented 55.9% of loans. The allowance was $7.713 million, or 0.89% of loans, versus 0.88% at year-end.
  • Credit quality: Nonperforming loans were $5.775 million, or 0.67% of loans, versus $5.535 million and 0.68% at year-end. Nonaccrual loans were $5.218 million. First-half net recoveries were $305,000; the allowance covered 133.56% of nonperforming loans.
  • Funding, liquidity, and debt: Deposits were $987.5 million, up $52.1 million from year-end. Cash and cash equivalents were $29.2 million, down from $46.0 million. Short-term borrowings were $21.5 million, compared with none at year-end; long-term debt was $13.5 million and subordinated debt was $7.4 million. Management said liquidity exceeded its minimum adequacy levels. First-half operating cash flow was $4.5 million, versus $18.8 million in 2016; investing used $93.7 million and financing provided $72.4 million.
  • Capital: Shareholders’ equity was $75.6 million, up 7% from year-end. The company and bank met the filing’s well-capitalized criteria. At June 30, the bank’s total risk-based capital ratio was 10.4% and leverage ratio was 7.4%.

Material changes and management commentary

  • Loan growth, particularly in commercial lending, and deposit growth supported higher net interest income. However, management attributed lower net interest margin mainly to the lower-yielding investment portfolio.
  • In the first half, Mid Penn established a $71.1 million held-to-maturity portfolio, primarily lower-risk U.S. Treasury and agency mortgage-backed securities, to support public-deposit collateral requirements.
  • First-half results included $279,000 of interest income from the successful workout of a commercial real estate relationship that had been partially charged off in 2010, plus $318,000 of recovered principal. Management said this drove much of the net recoveries; it is not evidence of a recurring earnings source.
  • Q2 fiduciary income and SBA loan-sale gains increased year over year, while securities-sale gains were substantially lower than in 2016. First-half fiduciary income rose 62%, service charges rose 21%, and SBA loan-sale gains rose 66%.

Outlook, risks, and contingencies

  • Guidance: The filing provides no quantified earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results.
  • Scottdale merger: A March 2017 agreement provides for The Scottdale Bank and Trust Company to merge into Mid Penn Bank, subject to shareholder, regulatory, and other customary approvals. Scottdale shareholders may elect cash, Mid Penn stock, or a combination, subject to agreement terms and limits. Completion and integration remain uncertain.
  • Credit and market risks: Management highlights commercial and commercial real estate concentration, continued loan growth in newer markets with less loss history, borrower and collateral uncertainty, and sensitivity of earnings and funding to interest rates, deposit mix, and competition. The allowance is based on estimates and could require future adjustment.
  • Other contingencies and plans: Standby letters of credit outstanding were $23.6 million; management did not anticipate losses. The company had commitments to acquire a Harrisburg building and adjacent lots and Halifax land totaling approximately $3.1 million; Harrisburg settlement occurred in July 2017. Management expected related 2017 costs not to be material. No material litigation or material change in previously disclosed risk factors was reported.
  • Accounting outlook: Mid Penn expects the future CECL credit-loss standard may increase its allowance; the size depends on portfolio quality, composition, and economic conditions at adoption. The company early adopted callable-debt premium amortization guidance, with no material impact.

Important facts for investors to verify

  1. Progress, approvals, final consideration mix, financing, and integration plans for the Scottdale merger.
  2. Whether commercial real estate and other commercial loan growth continues, and how nonaccruals, criticized loans, collateral values, and the allowance develop.
  3. Whether the margin decline persists as the lower-yield investment portfolio and deposit funding costs affect net interest income.
  4. How much earnings depended on the unusual loan workout and recoveries, and whether expense growth from expansion and staffing is translating into durable revenue.
  5. Liquidity and funding trends, including cash balances, short-term borrowings, deposit growth, and planned property spending.