Mid Penn Bancorp, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Financial amounts are in dollars unless stated otherwise; statements are unaudited. Mid Penn is a Pennsylvania-based bank holding company. Comparisons below are to Q3 or the first nine months of 2016, or to December 31, 2016 for balance-sheet figures.
Financial performance and condition
- Profit: Q3 net income was $2.249 million, or $0.53 per share, versus $1.901 million, or $0.45 per share. Nine-month net income was $6.588 million, or $1.56 per share, versus $5.728 million, or $1.35 per share.
- Revenue and net interest: Q3 net interest income was $9.516 million, up 9%; nine-month net interest income was $28.101 million, up 9%. Noninterest income was $1.564 million for Q3, up 10%, and $4.362 million for nine months, up 8%. Nine-month total interest income was $32.588 million and interest expense was $4.487 million.
- Margins and returns: Taxable-equivalent net interest margin was 3.64% for Q3 versus 3.71%; nine-month margin was 3.73% versus 3.83%. Management attributed the lower margin mainly to lower investment-portfolio yields. Q3 annualized ROA was 0.81% and ROE 11.75%, compared with 0.73% and 10.12%; nine-month ROA was 0.81% and ROE 11.94%, compared with 0.77% and 10.54%.
- Expenses and taxes: Noninterest expense rose 11% to $7.960 million in Q3 and 11% to $23.320 million for nine months. Nine-month increases included salaries and benefits (+$1.238 million), occupancy (+$330,000), and FDIC assessments (+$151,000). Merger and acquisition expense was $467,000 for nine months, including $243,000 in Q3. The nine-month effective tax rate increased to 26.1% from 22.2%.
- Balance sheet and funding: Total assets were $1.153 billion, up 12% from year-end 2016. Loans were $877.386 million, up $63.462 million (8%); deposits were $1.027 billion, up $91.302 million (10%). Cash and cash equivalents were $56.184 million. Shareholders’ equity was $77.391 million, up 10%.
- Debt and liquidity: At quarter-end, short-term borrowings were $20.0 million, long-term debt $13.409 million, and subordinated debt $7.421 million. Nine-month operating cash flow was $9.472 million, investing cash outflow $108.841 million, and financing cash inflow $109.580 million; cash increased $10.211 million. Management said liquidity exceeded its minimum adequacy levels and described core deposits as generally stable.
- Credit quality: The allowance for loan and lease losses was $7.502 million, or 0.86% of loans, versus 0.88% at year-end. Nine-month provision expense was $225,000 versus $1.320 million; net recoveries were $94,000. Nonperforming loans rose to $8.490 million, or 0.97% of loans, from $5.535 million, or 0.68%, at year-end. Allowance coverage of nonperforming loans fell to 88.36% from 129.78%.
- Capital: Mid Penn reported a 6.8% Tier 1 leverage ratio and 10.7% total risk-based capital ratio; the Bank reported 7.4% and 10.6%, respectively. Both were reported above applicable well-capitalized thresholds.
Material changes and management commentary
- Loan growth, particularly commercial lending, and lower-cost deposit funding supported higher net interest income. However, the nine-month net interest margin declined, partly because the investment portfolio yield fell to 2.35% from 2.93%. Mid Penn established an $82.625 million held-to-maturity portfolio in Q1, primarily lower-yielding government and agency securities, to support public-fund deposit pledging needs.
- Noninterest income benefited from stronger fiduciary activity and SBA loan-sale gains. Nine-month SBA loan-sale gains were $703,000, up 99%; fiduciary income increased 76% to $613,000. Securities-sale gains decreased to $42,000 from $413,000, as 2016 included portfolio repositioning gains.
- Nonperforming assets increased mainly because a commercial relationship of approximately $4.5 million was placed on nonaccrual in Q3; it had a $150,000 specific allowance. Troubled debt restructured loans totaled $6.868 million, compared with $3.515 million at year-end. Management considered the allowance adequate but noted that estimates depend on economic conditions, collateral values, portfolio growth, and other judgments.
- Mid Penn’s March 2017 merger agreement with The Scottdale Bank and Trust Company remained pending. Completion required shareholder and regulatory approvals and other customary conditions; shareholder meetings were scheduled for November 17, 2017. Consideration was structured primarily in Mid Penn shares, with specified cash elections and exchange-ratio limits.
- Management identified interest-rate changes, competition, economic conditions, credit quality, regulatory and tax changes, acquisition execution and integration, and technology as risks. It gave no numerical earnings or financial guidance. Management reported no material change in market risk, no material change in internal controls, and no litigation expected to materially affect the company.
Important facts for investors to verify
- Whether the Scottdale merger received shareholder and regulatory approvals and the final consideration, closing timing, and integration costs.
- Developments in the approximately $4.5 million newly nonaccrual commercial relationship, nonperforming loans, restructured loans, and allowance coverage.
- Whether loan and deposit growth can continue without further margin compression or materially higher funding costs.
- The persistence of higher operating expenses, including staffing, new branches, FDIC assessments, and merger-related costs.
- The effect of securities portfolio repositioning and interest-rate changes on net interest income, liquidity, and capital.
- Potential allowance changes under the expected-credit-loss standard; management said adoption could increase the allowance, but the amount was not yet determined.