Meridian Corporation 10-Q Summary
Business Context and Reporting Period
Meridian Corporation, a Pennsylvania-based bank holding company listed on Nasdaq under MRBK, reported unaudited results for the three and six months ended June 30, 2020. Its principal segments are Banking, Mortgage Banking and Wealth Management. The filing was signed August 10, 2020, with 6,095,030 common shares outstanding as of that date.
Financial Performance and Condition
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Net interest income | $11.6 million | $8.9 million | $21.3 million | $17.4 million |
| Provision for loan losses | $1.6 million | $14 thousand | $3.2 million | $233 thousand |
| Non-interest income | $20.7 million | $7.9 million | $31.0 million | $14.4 million |
| Non-interest expense | $23.2 million | $14.2 million | $38.4 million | $26.4 million |
| Net income | $5.7 million | $2.0 million | $8.2 million | $4.0 million |
| Diluted EPS | $0.94 | $0.31 | $1.32 | $0.63 |
| Net interest margin | 3.27% | 3.72% | 3.37% | 3.69% |
| ROE | 19.16% | 7.14% | 13.70% | 7.22% |
| ROA | 1.56% | 0.81% | 1.26% | 0.82% |
- Mortgage banking income was $18.8 million in Q2 and $26.7 million for the first six months, compared with $6.3 million and $11.2 million, respectively, in the prior-year periods.
- Total assets increased 37.3% from December 31, 2019 to $1.579 billion. Portfolio loans and leases increased 30.9% to $1.271 billion, including $259.9 million of Paycheck Protection Program loans.
- Total deposits increased 37.1% to $1.167 billion. Cash and cash equivalents were $46.7 million, compared with $39.4 million at year-end 2019.
- The allowance for loan and lease losses increased to $12.7 million from $9.5 million. The allowance equaled 1.01% of loans held for investment excluding loans at fair value and 1.27% excluding PPP loans.
- Nonperforming loans and leases increased to $7.4 million, or 0.54% of portfolio loans, from $3.2 million, or 0.32%, at December 31, 2019. Nonperforming assets were 0.47% of total assets.
- Stockholders’ equity was $125.5 million, up from $120.7 million, while the tangible common equity ratio declined to 7.68% from 10.12% as assets expanded.
Cash Flow, Debt and Liquidity
- For the six months ended June 30, 2020, operating cash flow was negative $79.4 million, primarily reflecting mortgage loans originated for sale and loan growth. Investing cash flow was negative $328.6 million, including a $295.7 million net increase in loans. Financing cash flow was positive $415.3 million, driven principally by a $315.5 million deposit increase and $142.3 million of long-term debt proceeds.
- Short-term borrowings were $87.0 million, long-term debt was $145.4 million and subordinated debentures were $40.8 million at June 30, 2020.
- The company had $136.2 million of PPPLF borrowings secured by PPP loans, $10.0 million borrowed from the Federal Reserve discount window and $86.3 million borrowed from the FHLB.
- Primary liquidity was reported at $291.9 million, including cash, investments, federal funds sold, mortgage loans held for sale and other liquid assets. FHLB borrowing capacity was $513.4 million, with $39 million of unsecured federal funds lines also available.
- Regulatory capital ratios remained above “well capitalized” thresholds. The Corporation reported a 14.91% total risk-based capital ratio, 10.24% common equity tier 1 ratio and 8.70% Tier 1 leverage ratio.
Material Changes Versus Prior Comparable Period
- Net income more than doubled year over year in both the quarter and first six months, primarily due to mortgage banking growth, higher loan balances and lower funding costs.
- Mortgage originations increased 299.6% in Q2 to $535.9 million and 237.8% for the first six months to $790.5 million. Refinances represented 64% and 63% of originations, respectively.
- Net interest margin contracted 45 basis points in Q2 and 32 basis points for the first six months, reflecting lower asset yields despite lower deposit and borrowing costs.
- Non-interest expense rose 63.2% in Q2 and 45.9% for the first six months, primarily from mortgage commissions, loan production costs and the expansion into Maryland, including nearly 70 hires.
- Credit-loss provisioning increased materially due to COVID-19 economic uncertainty and loan growth, although net charge-offs remained minimal.
- Risk-based capital ratios declined from year-end levels because of growth in risk-weighted assets and PPPLF-funded PPP lending.
Guidance, Outlook, Risks and Unusual Items
- The filing provides no formal earnings or revenue guidance. Management stated that results for the six months are not necessarily indicative of full-year 2020 results.
- COVID-19 created material uncertainty regarding borrower repayment capacity, asset quality, collateral values, liquidity, operating continuity and future provisions. Management may need to increase the allowance and loan-loss provision if conditions worsen.
- Meridian provided COVID-related payment relief on approximately $144.1 million of loans covering 193 borrowers. These modifications were generally excluded from troubled debt restructurings under applicable relief provisions.
- The company originated nearly $260 million of PPP loans for 928 clients. Forgiveness eligibility, SBA funding and guaranty requirements remain uncertain and expose Meridian to credit, compliance, litigation and reputational risks.
- Mortgage banking results benefited from unusually strong refinancing activity and favorable market conditions. These conditions may not persist, while hedging activity generated net losses of $3.3 million in Q2 and $4.7 million for the first six months.
- Management identified exposure to retail, hospitality, residential speculative construction and advertising/marketing industries totaling $118.6 million, or 11.71% of the loan portfolio; $43.7 million of that exposure had COVID-19 relief.
- The company repurchased one previously sold loan for $154 thousand during the quarter. Goodwill and intangible assets were not impaired through June 30, 2020.
- Subsequent to quarter-end, the board declared a cash dividend of $0.125 per share payable August 24, 2020.
Investor Verification Checklist
- Verify the sustainability of mortgage originations, refinancing volumes, mortgage banking income and associated personnel and production costs.
- Monitor PPP forgiveness outcomes, SBA guaranty support, deferred fees and any related regulatory, litigation or compliance exposure.
- Track COVID-19 payment deferrals, nonperforming loans, criticized assets, charge-offs and future allowance increases.
- Assess the effect of prolonged low interest rates on net interest margin, deposit pricing, liquidity and capital ratios.
- Reconcile liquidity sources and maturities, including PPPLF, Federal Reserve and FHLB borrowings, pledged collateral and available borrowing capacity.
- Review the effect of asset growth on tangible common equity and regulatory capital, which declined as a percentage of assets despite higher nominal equity.