Mid Penn Bancorp, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Balance-sheet comparisons are with December 31, 2015; income and cash-flow comparisons are with the corresponding 2015 periods. Amounts are in U.S. dollars unless stated otherwise.
Business context and financial performance
Mid Penn is a Pennsylvania-based bank holding company. Comparisons with 2015 are affected by the March 2015 Phoenix Bancorp acquisition: 2016 includes a full six months of Phoenix operations, versus four months in the first half of 2015.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $8.533m | $8.486m | $16.948m | $15.524m |
| Provision for loan losses | $395,000 | $300,000 | $735,000 | $600,000 |
| Noninterest income | $1.398m | $1.093m | $2.630m | $2.042m |
| Noninterest expense | $6.921m | $6.642m | $13.903m | $13.282m |
| Net income | $2.022m | $2.044m | $3.827m | $3.007m |
| Net income available to common shareholders | $2.022m | $1.952m | $3.827m | $2.828m |
| Basic earnings per common share | $0.48 | $0.46 | $0.91 | $0.71 |
Taxable-equivalent net interest margin was 3.85% for Q2 2016 versus 4.22% a year earlier, and 3.90% for the first half versus 4.10%. Management attributed the earlier-period margin benefit partly to $452,000 of income from the resolution of three acquired legacy loans, as well as higher yields on securities that matured or were called. Annualized return on average assets/equity was 0.82%/11.28% in Q2 2016 and 0.80%/10.75% for the first half.
Financial position, cash flow, and credit
- At June 30, 2016, total assets were $1.013bn, up 8.7% from year-end 2015. Deposits rose $116.4m to $893.4m; net loans and leases increased $29.2m to $762.2m; and available-for-sale securities increased $31.6m to $167.3m.
- Cash and cash equivalents were $41.0m, up from $13.3m at year-end. First-half operating cash flow was $18.8m (versus $4.5m), investing cash flow was negative $64.4m (versus negative $4.2m), and financing cash flow was positive $73.3m (versus positive $1.1m). Financing included deposit growth and repayment of borrowings; operating cash flow included $11.3m of net security-premium amortization.
- Short-term borrowings declined to zero from $31.6m. Long-term debt was $30.2m, down from $40.3m; subordinated debt was $7.4m. Total shareholders’ equity was $74.5m, compared with $70.1m at year-end.
- Gross loans were $769.2m, up 4.1% from year-end, led by commercial real estate lending. Commercial real estate represented 53.4% of loans. The allowance was $6.9m, or 0.90% of loans, versus $6.2m, or 0.83%, at year-end.
- Nonperforming loans were $4.9m, or 0.64% of loans, versus $4.9m, or 0.66%, at year-end and $8.6m, or 1.22%, a year earlier. First-half net recoveries were $9,000, compared with net charge-offs of $465,000 in 2015. Management considered the allowance adequate, while noting that estimates are subjective and may change.
- The Bank reported regulatory capital ratios of 10.1% common equity Tier 1, 10.1% Tier 1 risk-based, 11.1% total risk-based, and 7.6% Tier 1 leverage. Management stated the Bank met the “well-capitalized” definition.
Changes, outlook, and risks
- First-half common earnings increased 35% year over year; the comparison also reflects $762,000 of Phoenix-related merger expense in the first half of 2015. Q2 net income was slightly lower year over year, although common earnings per share rose.
- Noninterest income growth included higher mortgage banking and SBA loan-sale income, plus $213,000 of securities gains. Management said the securities gains followed portfolio repositioning, including sales of longer-term, rate-sensitive securities. The first-half increase in other income also included an $86,000 gain on insurance-policy sales.
- Noninterest expense rose 4.7% in the first half, with higher salaries, occupancy, equipment, Pennsylvania Bank Shares tax, and foreclosed-asset losses. Mid Penn liquidated its immaterial insurance subsidiary effective March 1, 2016, citing inconsistent profitability and limited growth.
- No earnings guidance or quantified forward outlook is provided. Management said liquidity measurements were stable and above its minimum adequacy levels, with no known material liquidity changes expected. It identified competitive pressures and volatile interest rates as ongoing considerations.
- Key risks include economic conditions and borrower repayment capacity; commercial real estate concentration and collateral values; interest-rate effects on margins, deposits, loan demand, and securities; regulatory and tax changes; competition; and acquisition integration and execution. Management reported no material change in market risk or previously disclosed risk factors, no known material litigation, and effective disclosure controls.
- Management reported no securities considered other-than-temporarily impaired. Unrealized securities gains increased accumulated other comprehensive income; the portfolio’s fair value is therefore exposed to market-rate movements.
Important facts for investors to verify
- Whether loan growth, particularly in commercial real estate, is matched by stable credit quality, collateral values, and allowance coverage.
- Whether the lower net interest margin persists and how future rate changes affect funding costs and asset yields.
- How much earnings growth is recurring versus driven by securities sales, SBA and mortgage activity, the insurance-policy gain, and the absence of prior-year merger costs.
- Whether deposit growth remains durable and supports liquidity after the substantial first-half investment purchases and debt repayments.
- The potential effects of new accounting standards, including expected-credit-loss requirements; management said it was evaluating their impact.