Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
MPB > SEC Filings for MPB > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for MID PENN BANCORP INC

Form 10-Q for MID PENN BANCORP INC


14-Nov-2012

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is Management's Discussion of Consolidated Financial Condition as of September 30, 2012, compared to year-end 2011, and the Results of Operations for the three and nine months ended September 30, 2012, compared to the same period in 2011.

This discussion should be read in conjunction with the financial tables, statistics, and the audited financial statements and notes thereto included in Mid Penn's Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for interim periods are not necessarily indicative of operating results expected for the full year.

Certain of the matters discussed in this document and in documents incorporated by reference herein, including matters discussed under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," may constitute forward-looking statements for purposes of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, and as such may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Mid Penn to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. The words "expect", "anticipates", "intend", "plan", "believe", "estimate", and similar expressions are intended to identify such forward-looking statements.

Mid Penn's actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:

The effects of economic deterioration on current customers, specifically the effect of the economy on loan customers' ability to repay loans;

Governmental monetary and fiscal policies, as well as legislative and regulatory changes, including the effects of the Dodd-Frank Wall Street Reform and Consumer Protection Act;

The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Financial Accounting Standards Board and other accounting standard setters;

The risks of changes in interest rates on the level and composition of deposits, loan demand, and the values of loan collateral, securities and interest rate protection agreements, as well as interest rate risks;

The effects of competition from other commercial banks, thrifts, mortgage banking firms, consumer finance companies, credit unions, securities brokerage firms, insurance companies, money market and other mutual funds and other financial institutions operating in Mid Penn's market area and elsewhere, including institutions operating locally, regionally, nationally and internationally, together with such competitors offering banking products and services by mail, telephone, computer and the internet;

The costs and effects of litigation and of unexpected or adverse outcomes in such litigation;

Technological changes;

Acquisitions and integration of acquired businesses;

The failure of assumptions underlying the establishment of reserves for loan and lease losses and estimations of values of collateral and various financial assets and liabilities;

Acts of war or terrorism;

Volatilities in the securities markets; and

Deteriorating economic conditions.

Mid Penn undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this report. Readers should carefully review the risk factors described in the documents that we periodically file with the SEC, including Mid Penn's Annual Report on Form 10-K for the year ended December 31, 2011.

Critical Accounting Estimates

Mid Penn's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and conform to general practices within the banking industry. Application of these principles involves significant judgments and estimates by management that have a material impact on the carrying value of certain assets and liabilities. The judgments and estimates that we used are based on historical experiences and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and estimates that we have made, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of assets and liabilities and the results of our operations.

Management of Mid Penn considers the accounting judgments relating to the allowance for loan and lease losses, the evaluation of Mid Penn's investment securities for other-than-temporary impairment, and the assessment of goodwill for impairment to be the accounting areas that require the most subjective and complex judgments.

The allowance for loan and lease losses represents management's estimate of probable incurred credit losses inherent in the loan and lease portfolio. Determining the amount of the allowance for loan and lease losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan and lease portfolio also represents the largest asset type on the consolidated balance sheet. Throughout the remainder of this report, the terms "loan" or "loans" refers to both loans and leases.


Table of Contents
MID PENN BANCORP, INC. Management's Discussion and Analysis

Valuations for the investment portfolio are determined using quoted market prices, where available. If quoted market prices are not available, investment valuation is based on pricing models, quotes for similar investment securities, and observable yield curves and spreads. In addition to valuation, management must assess whether there are any declines in value below the carrying value of the investments that should be considered other than temporary or otherwise require an adjustment in carrying value and recognition of the loss in the consolidated statement of operations.

Accounting Standards Codification (ASC) Topic 350, Intangibles-Goodwill and Other, requires that goodwill is not amortized to expense, but rather that it be tested for impairment at least annually. Impairment write-downs are charged to results of operations in the period in which the impairment is determined. Mid Penn did not identify any impairment on its outstanding goodwill from its most recent testing, which was performed as of December 31, 2011. If certain events occur which might indicate goodwill has been impaired, the goodwill is tested when such events occur.

Results of Operations

Overview

Net income available to common shareholders was $1,138,000, $0.33 per common share, for the quarter ended September 30, 2012, as compared to net income available to common shareholders of $1,004,000, or $0.29 per common share, for the quarter ended September 30, 2011, a 13.3% increase. During the nine months ended September 30, 2012, net income available to common shareholders was $3,375,000, or $0.97 per common share, versus $2,806,000, or $0.81 per common share for the same period in 2011, a 20.3% increase.

Net interest income increased $151,000, or 2.7%, to $5,770,000 for the quarter ended September 30, 2012 from $5,619,000 during the quarter ended September 30, 2011. Through the first nine months of 2012, net interest income increased $1,278,000, or 7.9%, to $17,470,000 from $16,192,000 during the same period in 2011. This increase has been spurred by a moderating cost of funds and increasing levels of average earning assets.

The provision for loan and lease losses in the third quarter of 2012 was $150,000, compared to $405,000 in the third quarter of 2011. During the nine months ended September 30, 2012, the provision for loan and lease losses was $675,000 compared to $1,155,000 for the nine months ended September 30, 2011.

Net income as a percent of average assets (return on average assets or "ROA") and shareholders' equity (return on average equity or "ROE") were as follows on an annualized basis:

                                    Three Months Ended September 30,                 Nine Months Ended September 30,
                                     2012                      2011                   2012                      2011
Return on average assets                  0.72 %                    0.64 %                 0.71 %                    0.63 %
Return on average equity                  8.91 %                    8.69 %                 9.08 %                    8.53 %

Total assets increased $8,121,000 to $723,504,000 at September 30, 2012, from $715,383,000 at December 31, 2011. This increase is mainly attributable to an increase in available for sale investment securities in response to a recent influx of public and non-profit entity deposits. Those deposits are a result of Mid Penn's decision to expand its Cash Management offerings and attract a larger share of public and non-profit deposit dollars. In spite of this recent success, total deposits have decreased $4,031,000 from $634,055,000 at December 31, 2011 to $630,024,000 at September 30, 2012. Loan growth during the first nine months of 2012 was weak, increasing $494,000 from $482,717,000 at December 31, 2011 to $483,211,000 at September 30, 2012. Other liabilities increased $8,676,000 from $4,111,000 at December 31, 2011. This increase was the result of $9,369,000 in pending purchases of available for sale investment securities included on the balance sheet but not yet reaching their settlement date. In order to continue improving net interest margin within the current environment, Mid Penn has chosen to manage the balance sheet in such a way that loan and deposit growth in 2012 remain closely matched, and because of this strategy, asset growth has moderated in the first nine months of 2012.

Deposit growth has diminished, as noted above, during the first nine months of 2012. This allowed for a closer match between funding sources and funding uses, as well as reduced the balance of overnight funding, which has been advantageous from a net interest margin perspective. Numerous deposit repricing opportunities remain throughout 2012, which will continue to help improve cost of funds as well as overall net interest margin despite continued downward pressure on asset yields.

Net Interest Income/Funding Sources

Net interest income, Mid Penn's primary source of revenue, is the amount by which interest income on loans and investments exceeds interest incurred on deposits and borrowings. The amount of net interest income is affected by changes in interest rates and changes in the volume and mix of interest-sensitive assets and liabilities. Net interest income and corresponding yields are presented in the analysis below on a taxable-equivalent basis. Income from tax-exempt assets, primarily loans to or securities issued by state and local governments, is adjusted by an amount equivalent to the federal income taxes which would have been paid if the income received on these assets was taxable at the statutory rate of 34%.


Table of Contents
MID PENN BANCORP, INC. Management's Discussion and Analysis

For the three months ended September 30, 2012, Mid Penn's taxable-equivalent net interest margin increased to 3.60%, from 3.48%, as compared to the three months ended September 30, 2011, driven primarily by a reduction in cost of supporting liabilities. Net interest income, on a taxable-equivalent basis, in the three months ended September 30, 2012, decreased to $6,078,000 from $5,878,000 during the same three months of 2011, related to the increasing level of investment securities relative to loans in the composition of interest earning assets and the lack of significant growth in average earning assets, which increased 0.3% from the three months ended September 30, 2011 to the three months ended September 30, 2012.

For the nine months ended September 30, 2012, Mid Penn's taxable-equivalent net interest margin increased to 3.65%, from 3.50%, as compared to the nine months ended September 30, 2011, driven primarily by a reduction in cost of supporting liabilities. Net interest income, on a taxable-equivalent basis, in the first nine months of 2012, increased to $18,386,000 from $16,969,000 in the first nine months of 2011, related to the changing composition of interest bearing liabilities and the growth in average earning assets, which increased 3.9% from September 30, 2011 to September 30, 2012.

Although the effective interest rate impact on earning assets and funding sources can be reasonably estimated at current interest rate levels, the options selected by customers, and the future mix of the loan, investment, and deposit products in the Bank's portfolios, may significantly change the estimates used in the simulation models. In addition, our net interest income may be impacted by further interest rate actions of the Federal Reserve Bank.

Provision for Loan Losses

The provision for loan and lease losses is the expense necessary to maintain the allowance for loan and lease losses at a level adequate to absorb management's estimate of probable losses in the loan and lease portfolio. Mid Penn's provision for loan and lease losses is based upon management's monthly review of the loan portfolio. The purpose of the review is to assess loan quality, identify impaired loans and leases, analyze delinquencies, ascertain loan and lease growth, evaluate potential charge-offs and recoveries, and assess general economic conditions in the markets we serve.

During the first nine months of 2012, Mid Penn continued to experience a challenging economic and operating environment both on a national and local level. Given the current economic pressures that impact some borrowers, Mid Penn has contributed to the allowance for loan and lease losses in accordance with Mid Penn's assessment process, which took into consideration the decrease in collateral values from December 31, 2011 to September 30, 2012. Mid Penn's provision for loan and lease losses was $150,000 for the three months ended September 30, 2012, as compared to $405,000 for the three months ended September 30, 2011. During the nine months ended September 30, 2012, the provision for loan and lease losses was $675,000, as compared to $1,155,000 for the nine months ended September 30, 2011. For further discussion of factors affecting the provision for loan and lease losses please see Credit Quality, Credit Risk, and Allowance for Loan and Lease Losses in the Financial Condition section of this Management's Discussion and Analysis.

Noninterest Income

Noninterest income increased $293,000, or 38.4%, during the third quarter of
2012 versus the third quarter of 2011. During the nine months ended
September 30, 2012, noninterest income increased $499,000, or 22.4%, versus the
same period in 2011. The following components of noninterest income showed
significant changes:



(Dollars in Thousands)                                        Three Months Ended September 30,
                                                2012           2011           $ Variance          % Variance
Income from fiduciary activities               $   128        $   157        $        (29 )             -18.5 %
Net gain on sales of investment securities         241             -                  241                  NA
Mortgage banking income                            184            102                  82                80.4 %




(Dollars in Thousands)                                       Nine Months Ended September 30,
                                                2012           2011        $ Variance          % Variance
Income from fiduciary activities               $   429        $  367       $        62                16.9 %
Service charges on deposits                        418           539              (121 )             -22.4 %
Net gain on sales of investment securities         267            -                267                  NA
Mortgage banking income                            443           305               138                45.2 %
Other income                                       983           822               161                19.6 %

Income from fiduciary activities decreased during the three months and increased during the nine months ended September 30, 2012 versus the same periods in 2011. These variances were the result of fluctuations in sales of third party mutual funds during 2012 versus 2011. Service


Table of Contents
MID PENN BANCORP, INC. Management's Discussion and Analysis

charges on deposits, primarily fees from insufficient funds, have decreased during the nine months ended September 30, 2012. During this period of economic downturn, customers seem to have become more conscientious about their account balances and avoiding unnecessary charges related to insufficient funds. In addition to this behavioral change, Mid Penn was negatively impacted by recent regulatory changes governing overdraft charges on electronic transactions, which has resulted in a reduction in NSF revenue.

Mid Penn recognized investment security gains in the three and nine months ended September 30, 2012 as a result of efforts to position the portfolio to provide improved earnings and cash flow in support of future loan growth. Mortgage banking income has been robust during the three and nine months ended September 30, 2012. The reduction in both 15 and 30 year mortgage rates has incentivized qualified borrowers to refinance their present mortgages. Purchase activity has increased but is still weak versus pre-recession levels in spite of low financing rates and reduced home prices.

Other income increased due to the sale of Mid Penn's Derry Street administrative location and increased revenue from merchant service revenue.

Noninterest Expenses

Noninterest expenses increased $548,000 or 12.1% during the third quarter of
2012, versus the same period in 2011. During the nine months ended September 30,
2012, noninterest expenses increased $1,525,000, or 11.5%, versus the same
period in 2011. The changes were primarily a result of the following components
of noninterest expense:



  (Dollars in Thousands)                       Three Months Ended September 30,
                                     2012          2011        $ Variance       % Variance
  Salaries and employee benefits   $   2,671      $ 2,390     $        281            -11.8 %
  FDIC Assessment                        301          225               76            -33.8 %
  Legal and professional fees            186           87               99           -113.8 %
  Other expenses                         623          526               97            -18.4 %




(Dollars in Thousands)                                    Nine Months Ended September 30,
                                               2012         2011          $ Variance        % Variance
Salaries and employee benefits               $  7,886      $ 6,992       $        894             -12.8 %
FDIC Assessment                                   904          756                148             -19.6 %
Legal and professional fees                       431          315                116             -36.8 %
Loss (gain) on sale/write-down of
foreclosed assets                                 102          (32 )              134            -418.8 %
Other expenses                                  1,768        1,534                234             -15.3 %

Salaries and employee benefits increased during the three and nine months ended September 30, 2012, primarily due to the increase in actual medical claims experienced from Mid Penn's self-funded medical insurance plan. Also contributing to the increase was the hiring of experienced team members to add depth to the sales and support areas and bolster compliance functions of Mid Penn. FDIC assessments have increased during the three and nine months ended September 30, 2012 due to the growth in the asset base used in the computation. Legal and professional fees have increased during the three and nine months ended September 30, 2012. This increase is comprised primarily of fees associated with an examination and assessment of Mid Penn's technology infrastructure as well as legal costs associated with a thorough exploration and examination of options and alternatives for exiting the Treasury's Capital Purchase Program and capital enhancement and augmentation associated therewith. A negative variance during the nine months ended September 30, 2012 was the loss
(gain) on sale/write-down of foreclosed assets. Real estate values for these distressed properties have declined, though their liquidation has been able to proceed in a more orderly manner. Other expenses increased during the three and nine months ended September 30, 2012, primarily due to a general increase in overall cost of services utilized.

Income Taxes

The provision for income taxes was $329,000 for the three months ended September 30, 2012, as compared to the provision for income taxes of $312,000 in the same period last year. The effective tax rate for the three months ended September 30, 2012, was 20.6% compared to 21.6% for the three months ended September 30, 2011. The provision for income taxes for the nine months ended September 30, 2012 was $994,000, as compared to $831,000 during the same period in 2011. The effective tax rate for the nine months ended September 30, 2012 was 20.9% compared to 20.7% for the nine months ended September 30, 2011. Generally, our effective tax rate is below the statutory rate due to earnings on tax-exempt loans, investments, and bank-owned life insurance, as well as the impact of tax credits. The realization of deferred tax assets is dependent on future earnings. We currently anticipate that future earnings will be adequate to fully utilize deferred tax assets.


Table of Contents
MID PENN BANCORP, INC. Management's Discussion and Analysis

Financial Condition

Loans

During the first nine months of 2012, Mid Penn experienced a slight increase in loans outstanding and has actually decreased slightly since September 30, 2011. Commercial real estate showed modest increases as requests from creditworthy borrowers have begun to increase. Balances in the other components of the loan portfolio have eroded through contractual payments and the refinancing of real estate secured debt by borrowers with equity in their properties. While loan demand has shown modest improvement, Mid Penn experienced weaker than normal loan demand during the first nine months of 2012 despite a desire to sensibly lend to support creditworthy existing and new customers in our marketplace.

(Dollars in thousands)                             September 30, 2012             December 31, 2011
                                                  Amount            %            Amount           %
Commercial real estate, construction and
land development                                $   252,129         52.2 %     $  249,204         51.6 %
Commercial, industrial and agricultural              77,508         16.0 %         78,655         16.3 %
Real estate - residential                           146,408         30.3 %        146,847         30.4 %
Consumer                                              7,166          1.5 %          8,011          1.7 %

                                                $   483,211        100.0 %     $  482,717        100.0 %

Most of Mid Penn's lending activities are with customers located within the trading area of Dauphin County, lower Northumberland County, western Schuylkill County and eastern Cumberland County, Pennsylvania. This region currently, and historically, has lower unemployment than the U.S. as a whole. This is due in part to a diversified manufacturing and services base and the presence of state government offices which help shield the local area from national trends. At September 30, 2012, the unadjusted unemployment rate for the Harrisburg/Carlisle area was 7.5% versus the seasonally adjusted national unemployment rate of 7.8%.

Credit Quality, Credit Risk, and Allowance for Loan and Lease Losses

During the first nine months of 2012, Mid Penn had net charge-offs of $1,008,000 compared to net charge-offs of $1,407,000 during the same period of 2011. Loans charged off during the first nine months of 2012 were comprised of 12 commercial real estate loans totaling $456,000. Five of these loans totaling $168,000 were to two borrowers with the remaining loans to unrelated borrowers. In addition, there were charge-offs for nine commercial loans to unrelated borrowers totaling $428,000, six residential real estate loans to unrelated borrowers totaling $174,000, one construction loan totaling $5,000, and three consumer loans to unrelated borrowers totaling $12,000. Mid Penn may need to make future adjustments to the allowance and the provision for loan and lease losses if economic conditions or loan credit quality differs substantially from the assumptions used in making Mid Penn's evaluation of the level of the allowance for loan losses as compared to the balance of outstanding loans.

Changes in the allowance for loan and lease losses for the nine months ended September 30, 2012 and 2011 are summarized as follows:

Analysis of the Allowance for Loan and Lease Losses:

(Dollars in thousands)                               Nine Months Ended        Nine Months Ended
                                                    September 30, 2012       September 30, 2011

Average total loans outstanding (net of unearned
income)                                             $           484,418      $           474,040
Period ending total loans outstanding (net of
unearned income)                                    $           483,211      $           484,366

Balance, beginning of period                        $             6,772      $             7,061

Loans charged off during period                                  (1,075 )                 (1,484 )
Recoveries of loans previously charged off                           67                       77

Net chargeoffs                                                   (1,008 )                 (1,407 )


Provision for loan and lease losses                                 675                    1,155

Balance, end of period                              $             6,439      $             6,809


Ratio of net loans charged off to average loans
outstanding (annualized)                                           0.28 %                   0.40 %
Ratio of allowance for loan losses to net loans
at end of period                                                   1.33 %                   1.41 %


Table of Contents
MID PENN BANCORP, INC. Management's Discussion and Analysis

Other than as described herein, we do not believe there are any trends, events or uncertainties that are reasonably expected to have a material impact on future results of operations, liquidity, or capital resources. Further, based on known information, we believe that the effects of current and past economic conditions and other unfavorable business conditions may influence certain . . .

  Add MPB to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for MPB - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.