Mid Penn Bancorp, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts below are in millions unless stated otherwise. Comparisons are with the corresponding 2020 period, except balance-sheet comparisons, which are with December 31, 2020.
Business context and financial performance
Mid Penn is a Pennsylvania-based bank holding company. Results reflect loan and deposit growth, Paycheck Protection Program (PPP) activity, mortgage banking, and a May 2021 public stock offering.
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net interest income | $26.9 | $21.3 | $52.2 | $39.0 |
| Noninterest income | $5.7 | $3.6 | $10.4 | $6.6 |
| Net income | $9.6 | $6.8 | $18.9 | $10.7 |
| Diluted EPS | $0.93 | $0.81 | $2.02 | $1.26 |
| Provision for loan losses | $1.2 | $1.1 | $2.2 | $1.6 |
| Noninterest expense | $19.5 | $15.4 | $37.0 | $31.0 |
Reported net interest margin, on a taxable-equivalent basis, was 3.34% for Q2 2021 versus 3.37% in Q2 2020, and 3.40% for the first half versus 3.41%. Return on average assets and equity were 1.12% and 12.36% for Q2, and 1.15% and 13.36% for the first half. The filing reports that first-half effective tax rate was 19.1%, compared with 18.0%.
Financial position, cash flow, and capital
- Total assets were $3,461.8, up $462.8 (15%) from year-end. Deposits rose $307.5 (12%) to $2,782.1; noninterest-bearing deposits increased $155.8.
- Total loans were $2,495.2, up $111.2 from year-end. Management reported non-PPP core banking loan growth of $107.6, or 11% annualized. PPP loans outstanding, net of deferred fees, were $391.8.
- Cash and cash equivalents were $636.3, including $599.3 in federal funds sold, versus $303.7 at year-end. First-half cash flows were $28.0 from operating activities, $(140.0) from investing activities, and $444.6 from financing activities; cash increased $332.6.
- Shareholders’ equity was $341.6, up $85.9, primarily reflecting $70.2 of net proceeds from the May follow-on offering and retained earnings. The offering issued 2.99 million shares at $25 per share.
- At June 30, Mid Penn’s total risk-based capital ratio was 15.8% and the Bank’s was 13.4%; the Bank’s common equity Tier 1 ratio was 12.7%. Both were reported above well-capitalized thresholds.
- Debt included $196.9 of short-term borrowings, entirely PPPLF funding at 0.35%, $74.9 of long-term debt, and $44.6 of subordinated debt. The filing cites $591.0 of unused FHLB borrowing capacity and $35.0 of unused correspondent-bank lines.
Changes versus comparable periods
- Q2 net income increased 41%; first-half net income increased 78%. First-half net interest income rose 34% on a taxable-equivalent basis, supported by PPP fee recognition, loan growth, and lower deposit costs.
- PPP processing fees recognized in interest income were $6.2 in Q2 2021 versus $2.7 in Q2 2020, and $11.3 in the first half versus $2.4. The filing says $14.5 remained deferred at June 30.
- First-half noninterest income rose 58%, including mortgage banking income of $5.2, up 85%. Noninterest expense rose 20%; key increases included compensation, mortgage profit-sharing, technology, FDIC assessment, and $0.5 of merger-related expenses.
- Nonperforming assets fell to $8.7 from $15.6 at year-end, following workouts of two commercial relationships. Nonperforming loans were 0.35% of loans, versus 0.65% at year-end. First-half net charge-offs were $0.8, compared with $0.05 in 2020.
Outlook, risks, and unusual items
- No specific earnings or financial guidance is provided. Management stated it could not estimate COVID-19’s effects on 2021 results, financial condition, capital, or liquidity. It warned that pandemic-related economic effects could increase credit risk and affect liquidity, capital, and securities values.
- Mid Penn agreed on June 30 to acquire Riverview Financial Corporation in an all-stock merger. Riverview shareholders are to receive 0.4833 Mid Penn shares per share. Closing was expected in Q4 2021, subject to regulatory and shareholder approvals. Integration costs, execution, approval, retention, and potential delay or termination are identified risks.
- PPP loans are SBA-guaranteed, but processing fees may be subject to clawback in specified circumstances. The company reported no known outstanding PPP loans for which fees had been clawed back or borrowers determined ineligible. Deferred fees remain subject to amortization over the relevant loan terms.
- Other disclosed exposures include $44.2 of standby letters of credit and a conditional $10.8 commitment to invest in a low-income housing partnership. Management did not expect material losses from the letters of credit; ordinary-course litigation was not expected to materially affect financial condition.
- The allowance for loan losses was $14.7 (0.59% of total loans; 0.70% of non-PPP core loans). Management considered it adequate, while noting uncertainty around pandemic effects, commercial loan growth, collateral values, and the inherent subjectivity of loss estimates. CECL adoption is scheduled for January 1, 2023; management said it could increase the allowance, but the amount was not yet clear.
- Interest-rate modeling indicated higher rates would increase projected one-year net interest income and lower rates would reduce it; actual outcomes may differ. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much reported earnings growth is repeatable after PPP fee recognition and elevated mortgage banking activity?
- Whether core loan growth, credit quality, charge-offs, and allowance coverage remain consistent with management’s assumptions, especially as PPP balances are forgiven or repaid.
- Whether deposit growth and excess cash persist, and how funding costs and net interest margin respond to changing rates and customer deposit behavior.
- Progress, approvals, costs, and integration risks for the Riverview merger, including the expected timing and any conditions imposed by regulators.
- Potential PPP fee clawbacks, the low-income housing investment commitment, and changes in pandemic-related borrower risk or liquidity needs.