Mid Penn Bancorp Q1: Healthy Deposit Base, But Asset Quality In Question (NASDAQ:MPB)

This is an uncertain time for the banking sector. The regional bank space is specifically the most impacted subsector. We have been covering a number of regional banks in recent weeks to see if the well-publicized contagion is contained to just a few banks, or if there is something deeper. While shares of many bank stocks have been in selloff mode for about three months, some banks are performing just fine. Smaller community-oriented regional banks are especially vulnerable to a run on the banks.

However, most of our coverage suggests contagion is contained, for now. The damage appears limited, but more failures could arise in this rate environment. While the higher interest rate environment was previously boosting net interest margins, those margins have largely hit their peak as cost of funds is increasing. Banks have had to pay up handsomely for deposits.

Today we continue our regional bank coverage today with Mid Penn Bancorp, Inc. (NASDAQ:MPB), another traditional, simple community banking system. As the name implies, they operated financial centers located in 17 counties across Pennsylvania. The company just reported Q1 earnings, and the results were weaker than expected, missing expectations on both the top and bottom lines. However, we see no signs of broader concern for the bank’s immediate overall health.

While it was a miss, MPB stock has been crushed coming into the report. This comes as the company is engaged with acquiring Brunswick Bancorp (OTCPK:BRBW). The dividend has been raised a few times in the last few years and the stock is trading at a 10%+ discount-to-tangible book value.

Mid Penn Bancorp’s Q1 headline misses

Despite the Mid Penn Bancorp, Inc. headline numbers, there was robust loan activity and deposit growth. There was a lot of pressure on the return metrics as margins peaked. Revenues were down from last year, to $40.4 million, and missed expectations slightly by $3.4 million. The return on average assets and return on average equity came in at 1.01% and 8.91%, respectively. This is a sizable decrease from the sequential quarter of 41 basis points and 342 basis points, respectively. This, in part, could explain a discount-to-book, but this discount is large. Q1 earnings per share of $0.71.

In terms of valuation, it’s attractive here at $21.80 per share and is now about 10% below tangible book value of $24.52 at the end of Q1. That is a potential opportunity, but there is risk priced in due to their lending to commercial real estate. Non-owner occupied office commercial real estate exposure represents over 7% of total loan balances but is primarily limited to suburban offices.

The panic may be overdone. The CEO had great commentary:

“As our shareholders analyze our first quarter performance, they will find that we grew our loans at an 11.2% (annualized) pace and our deposits at a 10.7% (annualized) pace. Those growth rates would be considered exceptional in any quarter. However, with the failures of Silicon Valley Bank of California, Signature Bank of New York, and the near collapse and continued uncertainty surrounding First Republic Bank of San Francisco—as well as inconsistent rhetoric out of Washington as to which depositors would be covered and who would pay the tab for that coverage—the banking industry was turned upside down almost overnight. The contagion of those three troubled institutions affected just about every other bank in the country in the quality of operating performance and the performance of each company’s stock in the market. That was no different for Mid Penn.”

So as we see, there was loan and deposit growth, but the panic has crushed bank stock performance and led to volatility in the sector.

Loans and deposits grew

Loan growth was 11.2% on an annualized basis in Q1 from Q4 2022. Total average deposits were $3.8 billion for Q1, an increase of $55.7 million compared to total average deposits in Q4 2022. So the Q1 drama for deposits did not lead to a run on the bank here. That is important to note. Of course, the average cost of deposits was 1.29%, up 53 basis points from the sequential quarter as the bank had to increase deposit rates to retain existing customers and attract new deposit customers. With that said, margins peaked. Net interest margin was 3.49% compared to 3.80% to Q4, impacting return metrics as noted above.

Asset quality deteriorates

It was strong news for Mid Penn Bancorp, Inc. to see increased deposits and loans, though we do note accumulated other comprehensive losses were 4.5% of tangible equity. Something to keep an eye on.

That said, Mid Penn Bancorp, Inc. asset quality has fallen, and that is also a risk here. The ratio of nonperforming assets to total assets rose to 0.31% from 0.21% in Q4. Further, the nonperforming loans to total loans ratio fell to 0.38% from 0.25% in Q4. The allowance for credit losses on loans compared to total loans ballooned to 0.87% from 0.54%. Perhaps not surprisingly, the efficiency of the bank was the worst it has been in many quarters, rising to 63.16% from 54.59% in the linked quarter.

Final thoughts

The market has made a big run since March, but regional banks have sat out. Mid Penn Bancorp, Inc. has been insulated from a run on deposits, and is growing loans. That is positive. However margins have peaked and asset quality has dipped. There is a notable amount of exposure to commercial real estate. While there is a discount-to-tangible book, there is a lot of risk here.

On top of that, recessionary forces are building and, despite Mid Penn Bancorp, Inc. being cheap here, we have some concern. We take a neutral rating on this community bank, and think there are better smaller banks to consider based on our prior coverage.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.