Business Context and Reporting Period
Meridian Corporation and subsidiaries, a Pennsylvania-based bank holding company operating Banking, Mortgage Banking, and Wealth Management segments, filed an unaudited Form 10-Q for the three months ended March 31, 2022. The common stock trades on Nasdaq under MRBK. Results are not necessarily indicative of full-year 2022 performance.
Key Financial Metrics
| Metric | Q1 2022 | Comparable period or date |
|---|---|---|
| Net interest income | $16.0 million | $15.1 million in Q1 2021 |
| Net interest margin | 3.89% | 3.72% in Q1 2021 |
| Net income | $5.5 million | $10.2 million in Q1 2021 |
| Basic/diluted EPS | $0.92/$0.88 | $1.70/$1.65 in Q1 2021 |
| Return on average assets/equity | 1.28%/13.86% | 2.43%/30.06% in Q1 2021 |
| Total assets | $1.832 billion | $1.713 billion at December 31, 2021 |
| Portfolio loans and leases | $1.430 billion | $1.386 billion at December 31, 2021 |
| Total deposits | $1.565 billion | $1.446 billion at December 31, 2021 |
| Cash and cash equivalents | $68.9 million | $23.5 million at December 31, 2021 |
| Allowance for loan and lease losses | $18.8 million | 1.31% of loans held for investment |
| Stockholders’ equity | $157.7 million | $165.4 million at December 31, 2021 |
Revenue, Profitability, Cash Flow, Debt, and Liquidity
- Total interest income was $18.0 million, up 2.9% year over year, while interest expense declined 17.2% to $1.9 million. Net interest income increased 6.1% on a tax-equivalent basis.
- Non-interest income was $13.1 million, down from $27.0 million, primarily because mortgage banking activity weakened. Mortgage banking income was $7.1 million versus $24.1 million in Q1 2021.
- Non-interest expense was $21.4 million, down 24.2%, led by a $6.8 million reduction in salaries and employee benefits, largely reflecting lower variable compensation in Mortgage Banking.
- Provision for loan losses was $615 thousand, compared with $599 thousand. Net charge-offs were $547 thousand, or 0.04% of average loans, and were primarily related to small-ticket equipment leases.
- Operating cash flow was $6.5 million, compared with $62.8 million in Q1 2021. Investing cash flow was negative $67.2 million, principally reflecting a $59.8 million net increase in loans. Financing cash flow was $106.2 million, driven by a $118.4 million increase in deposits.
- Short-term borrowings were $36.1 million and subordinated debentures were $40.5 million. Total borrowings decreased $5.2 million during the quarter, and PPPLF borrowings were reduced to zero.
- Management reported available liquidity of $331.9 million, including cash, investments, federal funds sold, mortgage loans held for sale, and other eligible assets. FHLB borrowing capacity was $524.3 million, with $36.1 million borrowed; additional federal funds, CDARS, and brokered CD capacity was available.
- The Corporation’s Tier 1 leverage ratio was 9.10%, Tier 1 risk-based capital ratio was 10.09%, and total risk-based capital ratio was 13.91%. Management stated that capital remained above the applicable 8% Community Bank Leverage Ratio requirement.
Material Changes Versus Prior Comparable Period
- Net income decreased 45.6% and diluted EPS decreased to $0.88 from $1.65, despite higher net interest income and lower operating expenses.
- Mortgage loan originations declined 55.3% to $323.8 million, reflecting rising interest rates and limited housing inventory. The Mortgage Banking segment reported a pretax loss of $1.6 million versus pretax income of $5.8 million.
- SBA loan sale revenue increased to $2.5 million from $1.2 million; $25.2 million of SBA 7(a) loans were sold versus $13.0 million in Q1 2021.
- Wealth management income increased to $1.3 million from $1.1 million, supported by higher assets under management and favorable market conditions.
- Excluding PPP loans, portfolio loans grew $84.1 million, or 6.5%, from year-end 2021. PPP balances decreased $38.6 million, or 43.7%.
- Deposits increased $118.4 million, or 8.2%, from year-end 2021, including a $127.0 million increase in certificates of deposit.
- Accumulated other comprehensive income declined by $6.4 million because of unrealized investment-security losses associated primarily with higher market interest rates. Separately, $27.7 million of municipal securities were transferred from available-for-sale to held-to-maturity at fair value with no gain or loss recognized.
- The company declared dividends of $7.3 million during the quarter, including a $1.00 special dividend and a $0.20 quarterly dividend. A further $0.20 quarterly dividend was declared on April 28, 2022.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No formal financial guidance was provided. Management expects operating results to remain sensitive to mortgage volumes, interest rates, deposit pricing, loan growth, credit performance, and economic conditions.
- Management characterized overall asset quality as strong, but nonperforming loans were $22.8 million, or 1.51% of total loans and leases. A specific reserve of $2.3 million related to a nonperforming commercial loan relationship, including a $13.8 million advertising-industry relationship.
- Commercial and industrial loans classified as substandard increased to $45.8 million from $42.9 million at year-end 2021. Total troubled debt restructurings were $3.4 million, of which $3.0 million were performing under modified terms.
- The company identified risks from COVID-19 and related government responses, changing economic conditions, regulatory and legal matters, competition, technology, interest-rate volatility, and potential limitations on SBA funding of PPP loan guarantees.
- Mortgage servicing rights and SBA servicing assets are subject to valuation assumptions, including prepayment speeds and discount rates. Rising rates and reduced refinancing activity affected these assumptions and may affect future fair values.
- Meridian adopted lease accounting guidance effective January 1, 2022, recognizing approximately $10.5 million of right-of-use assets and $10.3 million of lease liabilities.
- The company expects to adopt the CECL credit-loss standard on January 1, 2023. Management had not yet determined the financial statement impact.
- Off-balance-sheet exposure included $475.2 million of commitments to extend credit and $23.2 million of letters of credit. The company repurchased four residential mortgage loans totaling $906 thousand during the quarter.
- Management’s interest-rate simulation indicated that the balance sheet was liability-sensitive for near-term net interest income: a 100-basis-point increase was projected to modestly reduce next-12-month net interest income, while larger increases were projected to be favorable. These simulations are hypothetical.
- Management reported effective disclosure controls and procedures and no material change in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Confirm the sustainability of commercial loan growth and monitor concentrations in commercial real estate, construction, commercial and industrial loans, and leases.
- Track the advertising-industry nonperforming relationship, substandard commercial and industrial loans, charge-offs, and reserve adequacy.
- Assess whether declining mortgage originations and mortgage banking losses persist as interest rates and housing inventory change.
- Review the effect of unrealized securities losses, the securities transfer to held-to-maturity, and future interest-rate movements on tangible capital.
- Evaluate deposit mix and pricing, particularly the rapid growth in certificates of deposit and the company’s liability-sensitive interest-rate profile.
- Monitor the January 1, 2023 CECL implementation and its potential effect on retained earnings, allowance levels, capital ratios, and provisioning.
- Verify the availability and collateral requirements of FHLB, Federal Reserve, correspondent-bank, CDARS, and brokered-CD funding sources.