Mid Penn Bancorp, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are against December 31, 2019 unless otherwise noted. Mid Penn is a Pennsylvania bank holding company. Amounts below are in U.S. dollars; financial statement amounts are converted to millions where indicated.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net interest income | $17.665 million | $17.306 million |
| Provision for loan losses | $0.550 million | $0.125 million |
| Noninterest income | $2.934 million | $2.049 million |
| Noninterest expense | $15.581 million | $14.303 million |
| Net income | $3.818 million | $4.077 million |
| Diluted EPS | $0.45 | $0.48 |
| Cash dividends per share | $0.23 | $0.25 |
- Net income declined about 6%; annualized return on average assets was 0.68% versus 0.79%, and return on average equity was 6.43% versus 7.35%.
- Tax-equivalent net interest margin fell to 3.45% from 3.70%. Management cited lower asset yields following March Federal Reserve rate cuts; deposit costs also declined, but did not fully offset lower asset yields.
- Mortgage banking income rose to $1.182 million from $0.437 million, reflecting lower mortgage rates, increased originations and sales, and a full quarter of production from the Southeastern Pennsylvania team. Gains on investment securities were $0.132 million versus $0.007 million.
- Operating cash flow was negative $0.902 million, compared with positive $2.776 million. Investing cash flow was negative $61.825 million, principally reflecting securities purchases and loan growth; financing cash flow was positive $64.455 million, primarily from deposit growth and subordinated debt issuance. Cash and cash equivalents increased $1.728 million to $140.758 million.
Financial position, liquidity and capital
- Total assets were $2.300 billion, up $68.6 million from year-end. Loans were $1.798 billion, up $35.4 million; deposits were $1.973 billion, up $60.9 million, with more than half of deposit growth in noninterest-bearing accounts. Management reported that first-quarter deposit growth was not attributable to brokered deposits.
- Cash and cash equivalents were $140.8 million. Management said liquidity exceeded its minimum adequacy levels; the filing does not provide a single quantified liquidity coverage measure.
- Long-term debt declined to $23.4 million from $32.9 million, while subordinated debt increased to $42.1 million from $27.1 million. Mid Penn issued $15 million of 2030 subordinated notes in March, intended to qualify as Tier 2 capital, and prepaid $9.5 million of FHLB advances, incurring a $63,000 penalty.
- Shareholders’ equity was $239.5 million. At March 31, the company reported a 9.6% common equity Tier 1 ratio and 12.5% total capital ratio; Mid Penn Bank reported 10.5% and 11.6%, respectively. Both were described as above regulatory minimums and well-capitalized.
Credit quality and notable changes
- The allowance for loan and lease losses rose to $10.014 million from $9.515 million; allowance to loans was 0.56%. The provision increased to $550,000 from $125,000, primarily reflecting higher qualitative reserves, particularly for commercial real estate. Net charge-offs were $51,000.
- Nonperforming loans were $11.154 million, or 0.62% of loans, down from $11.961 million and 0.68% at year-end, but above 0.44% a year earlier. Foreclosed assets increased to $1.718 million from $196,000, largely after a loan relationship was transferred to foreclosed real estate.
- As of March 31, 482 borrowers with $220.576 million of loans had received qualifying COVID-related modifications. Most involved three-to-six-month principal and interest deferrals or interest-only payments; interest continued to accrue. The filing reports further modifications after quarter-end.
- Noninterest expense increased 9%, reflecting staffing and business growth, higher software, equipment and Pennsylvania bank shares tax costs, and the one-time FHLB prepayment penalty. The effective federal tax rate was 14.5%, versus 17.3%, partly due to low-income housing tax credits.
Outlook, risks and unusual items
- Management said the pandemic’s effects on financial condition, liquidity, capital and full-year results could not be estimated. It warned of possible credit deterioration, collateral-value declines, deposit withdrawals, customer line-of-credit draws, market volatility and prolonged low rates. No earnings guidance was provided.
- Through May 7, 2020, Mid Penn had received PPP approval for 3,552 business loans totaling $598.463 million and disbursed $587.543 million to 3,282 borrowers. It expected approximately $19.893 million in processing fees; these post-quarter amounts were not Q1 operating results. PPP lending carries risks including borrower eligibility, SBA guarantee disputes and litigation over application processing.
- Management reported no COVID-related impairment of goodwill, core deposit intangibles or state and municipal debt securities as of March 31, while noting that assessments may change as conditions evolve. The pension plan’s asset-value decline reduced accumulated other comprehensive income by approximately $535,000, net of tax.
- A $15 million share repurchase program was authorized through March 19, 2021; no shares had been repurchased by March 31. Management reported no material litigation or material changes to previously disclosed risk factors beyond COVID-19 and PPP risks.
Important facts for investors to verify
- Whether COVID-era loan modifications convert into delinquencies, nonaccrual loans, charge-offs or higher allowance needs; monitor commercial real estate exposures and the large nonperforming relationship discussed in the filing.
- Actual PPP loan disbursements, forgiveness, fee recognition and whether SBA guarantees remain effective; distinguish post-quarter activity from Q1 results.
- Whether deposit growth is sustained and how funding costs, loan yields and net interest margin respond to the lower-rate environment.
- How planned capital deployment—including the authorized buyback, dividends and subordinated debt costs—affects capital and liquidity as pandemic-related uncertainty continues.