Mid Penn Bancorp, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Balance-sheet comparisons are with December 31, 2018; income and cash-flow comparisons are with the corresponding 2018 periods. Amounts below are in millions unless otherwise stated. The company is a Pennsylvania bank holding company. Comparability is affected by the July 2018 First Priority acquisition and, for 2018 comparisons, the January 2018 Scottdale acquisition.
Financial performance and condition
- Q2 earnings: Net income was $4.40 million, up from $2.78 million; diluted EPS was $0.52 versus $0.45. For the first half, net income was $8.48 million versus $3.78 million and EPS was $1.00 versus $0.63. Higher average share counts, primarily from First Priority shares issued in 2018, affect per-share comparisons.
- Interest income and margins: Q2 net interest income was $17.77 million versus $11.41 million; first-half net interest income was $35.08 million versus $22.29 million. Tax-equivalent net interest margin increased to 3.69% from 3.55% for Q2 and to 3.69% from 3.53% for the first half. Management attributed growth mainly to acquired and organically grown loans and higher asset yields; rising deposit and borrowing costs partly offset it.
- Other income and expenses: Q2 noninterest income was $2.87 million, up 50%; first-half noninterest income was $4.92 million, up 38%. Mortgage banking income rose substantially, to $1.08 million for Q2 and $1.51 million for the half, amid lower mortgage rates, greater originations and sales, and expanded mortgage staffing. Noninterest expense rose 47% in Q2 and 37% in the first half, reflecting the larger franchise, staffing, facilities, technology, and FDIC costs. No merger and acquisition expense was recorded in the first half of 2019, compared with $1.92 million in the first half of 2018.
- Profitability: Annualized return on average assets was 0.83% for Q2 and 0.81% for the first half; return on average equity was 7.71% and 7.54%, respectively. First-half effective tax rate was 17.8%, versus 15.0% in 2018.
- Loans and credit: Loans were $1.688 billion, up $64.1 million, or 4%, from year-end. Commercial real estate was 52.3% of loans; commercial real estate construction was 10.3%. The allowance was $8.77 million, or 0.52% of loans, versus $8.40 million at year-end. First-half provision was $590,000 versus $125,000; net charge-offs were $216,000 versus net recoveries of $458,000 in 2018. Nonperforming assets fell to $7.06 million from $12.28 million at year-end, primarily after repayment/workout of a $4.30 million commercial relationship. Nonperforming loans were 0.39% of loans.
- Balance sheet and liquidity: Total assets were $2.136 billion, up 3% from year-end. Deposits were $1.778 billion, up $52.4 million; cash and cash equivalents were $48.1 million. Available-for-sale securities were $83.4 million and held-to-maturity securities were $160.2 million. Management said liquidity remained above its minimum adequacy levels and identified core deposits, security proceeds, loan repayments, and borrowing facilities as liquidity sources.
- Cash flow: For the first half, operating activities provided $122,000, versus $4.92 million in 2018; investing activities used $24.21 million, versus providing $44.59 million; financing activities provided $32.17 million, versus using $33.61 million. Cash increased $8.08 million to $48.15 million. Major cash uses included mortgage loans originated for sale and portfolio loan growth; bank operating cash flow should be considered alongside lending and deposit flows.
- Debt and capital: At June 30, short-term borrowings were $13.0 million, long-term debt $65.0 million, and subordinated debt $27.1 million. Long-term debt increased from $48.0 million at year-end, while short-term borrowings declined from $43.1 million. Shareholders’ equity was $231.3 million, up 4%. Company and bank regulatory capital ratios exceeded applicable well-capitalized thresholds; the company’s total risk-based capital ratio was 12.0%, and the bank’s was 11.9%.
Material changes, outlook, and risks
- First Priority’s acquisition enlarged the loan, deposit, and operating base, increasing interest income as well as staffing, occupancy, technology, and other operating costs. Accordingly, reported year-over-year growth is not solely organic.
- Management provided no specific earnings or growth guidance. It noted that results for interim periods are not necessarily indicative of full-year results.
- Interest-rate sensitivity modeling estimated one-year net interest income would rise 9.08% in a +300 basis-point scenario and fall 7.75% in a −300 basis-point scenario. Management cautioned that actual results may differ and that modeled scenarios were within board policy limits.
- Key risks cited include economic conditions and borrower repayment capacity; commercial real estate and commercial lending exposures; changing rates and funding costs; competition; regulatory and tax changes; acquisition integration and execution; cybersecurity and technology; and potential impairment of goodwill or other intangible assets. Management said it believed the allowance was adequate, while noting the estimate is inherently judgmental and may require future adjustment.
- Management was evaluating the expected-credit-loss standard (CECL), which it said could increase the allowance. A proposed delay for smaller reporting companies was pending at the filing date; the company described January 1, 2020 as its then-planned adoption date if no delay applied.
- Unusual items and commitments: The company recorded a $163,000 impairment charge on a branch property classified as held for sale and had an agreement to sell it by September 30, 2019. It had funded $4.36 million of a $7.58 million low-income housing investment commitment. A preliminary $492,000 FDIC assessment credit was conditional on the Deposit Insurance Fund reaching a specified reserve ratio and was not yet available at June 30.
- The filing reports no litigation expected to have a material adverse effect and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective; no material changes in internal control were reported.
Important facts for investors to verify
- How much of earnings and loan growth reflects First Priority versus organic performance, and whether acquisition-related revenue gains are keeping pace with added operating costs.
- Whether deposit pricing and other funding costs continue to rise faster than loan and asset yields, and how that affects net interest margin.
- Trends in commercial real estate concentrations, criticized or impaired loans, nonperforming assets, charge-offs, and the adequacy of the allowance.
- The timing and financial impact of CECL adoption, including any change to the allowance and retained earnings.
- Progress on the branch-property sale, remaining housing-investment commitment, and any eventual recognition of the conditional FDIC assessment credit.
- Capital and liquidity levels, debt costs and maturities, and actual results relative to management’s interest-rate sensitivity scenarios.