Business Context and Reporting Period
Meridian Corporation, a Pennsylvania bank holding company for Meridian Bank, filed an unaudited Form 10-Q for the quarter ended March 31, 2020. Its principal segments are Banking, Mortgage Banking, and Wealth Management. The filing was signed May 11, 2020, with 6,094,341 common shares outstanding as of that date.
Key Financial Metrics
| Metric | Q1 2020 | Comparable period or prior date |
|---|---|---|
| Net interest income | $9.7 million | $8.5 million, Q1 2019 |
| Non-interest income | $10.4 million | $6.4 million, Q1 2019 |
| Provision for loan losses | $1.6 million | $0.2 million, Q1 2019 |
| Non-interest expense | $15.2 million | $12.1 million, Q1 2019 |
| Income before taxes | $3.3 million | $2.6 million, Q1 2019 |
| Net income | $2.5 million | $2.0 million, Q1 2019 |
| Diluted EPS | $0.39 | $0.31, Q1 2019 |
| Net interest margin | 3.49% | 3.67%, Q1 2019 |
| Annualized ROA / ROE | 0.87% / 8.40% | 0.83% / 7.32%, Q1 2019 |
| Total assets | $1.30 billion | $1.15 billion, December 31, 2019 |
| Portfolio loans and leases | $1.02 billion | $964.7 million, December 31, 2019 |
| Total deposits | $993.8 million | $851.2 million, December 31, 2019 |
| Cash and cash equivalents | $37.5 million | $39.4 million, December 31, 2019 |
| Stockholders’ equity | $118.0 million | $120.7 million, December 31, 2019 |
Cash flow from operating activities was negative $62.7 million, compared with positive $14.8 million in Q1 2019, primarily reflecting mortgage loans originated for sale and mortgage banking activity. Investing cash flow was negative $84.0 million, including a $56.2 million increase in loans and $30.0 million of available-for-sale securities purchases. Financing cash flow was positive $144.8 million, driven mainly by a $142.6 million increase in deposits.
Debt at March 31, 2020 included $129.7 million of short-term borrowings, $5.0 million of long-term debt, and $40.9 million of subordinated debentures. Primary liquidity was reported at $278.8 million. FHLB borrowing capacity was $525.7 million, with $124.5 million borrowed; the Corporation also had $39 million of unsecured federal funds lines and other CD-based funding availability.
Material Changes Versus Prior Comparable Period
- Net income increased 25.4% to $2.5 million, while diluted EPS increased to $0.39 from $0.31.
- Net interest income increased 14.0%, mainly from growth in average earning assets, although the net interest margin declined 18 basis points because asset yields fell faster than funding costs.
- Non-interest income increased 60.6%, led by mortgage banking income, which increased 61.0% to $7.9 million. Refinance activity represented 61% of first-quarter mortgage originations, compared with 12% in Q1 2019.
- Non-interest expense increased 25.4%, primarily from higher salaries, mortgage-related loan expenses, professional fees, and expanded staffing, including nearly 70 Maryland mortgage employees.
- The allowance for loan and lease losses increased to $11.1 million from $9.5 million, and the provision increased substantially due largely to qualitative reserves for COVID-19-related economic uncertainty.
- Non-performing loans and leases increased to $6.6 million, or 0.58% of portfolio loans and leases, from $3.2 million, or 0.32%, at December 31, 2019.
- Total assets increased 13.3% from year-end, while deposits increased 16.8%. Mortgage loans held for sale increased 219.0% from December 31, 2019 to $107.5 million.
- Equity decreased $2.7 million, principally because of $5.7 million of share repurchases. The Corporation repurchased 316,625 shares at an average price of $18.18, completing the 2019 repurchase authorization.
Outlook, Commentary, Risks and Unusual Items
- Management provided no formal earnings or revenue guidance. It expects additional COVID-19-related borrower deferral and modification requests during the second quarter of 2020.
- As of May 1, 2020, the Bank had approved 866 Paycheck Protection Program applications totaling more than $270 million. PPP loans carry a 1% contractual rate, generally a two-year maturity, and a six-month payment deferral; forgiveness timing and resulting yield recognition remain uncertain.
- As of May 1, 2020, the Corporation had executed 230 COVID-19 loan modifications covering $150.9 million of outstanding balances. These short-term deferrals generally were not classified as troubled debt restructurings under applicable guidance.
- Commercial loans to retail, hospitality, and residential speculative construction totaled $119.8 million, or 11.83% of the loan portfolio; $43.8 million had COVID-19 relief as of May 1, 2020.
- COVID-19 may cause higher delinquencies, problem assets, foreclosures, collateral declines, credit-loss provisions, liquidity pressure, cybersecurity exposure, vendor disruption, and lower net interest margins. Management stated that the pandemic could materially affect significant estimates and future results.
- Capital ratios remained above regulatory levels described as “well capitalized”; the Bank reported total risk-based capital of 14.84%, common equity Tier 1 capital of 13.66%, and Tier 1 leverage of 13.22% at March 31, 2020.
- The filing reports a $1.0 million final payment in February 2020 to settle a former mortgage-employee wage litigation matter; the related $990 thousand reserve had been recorded at December 31, 2019.
- The filing states that no goodwill impairment existed through March 31, 2020, but a prolonged COVID-19-related decline in the stock price could trigger future impairment testing.
Most Important Facts to Verify
- Assess the credit impact of the $150.9 million of COVID-19 payment deferrals and the concentration of relief among hospitality, retail, and residential construction borrowers.
- Monitor whether non-performing assets, loan-loss provisions, and the allowance ratio increase as economic conditions develop.
- Evaluate the sustainability of mortgage banking income and fair-value gains, including the effect of refinancing volume, hedging losses, staffing growth, and mortgage servicing-rights assumptions.
- Confirm liquidity capacity and funding availability if deposits decline or PPP-related funding needs increase.
- Reconcile the filing’s inconsistent tangible common equity disclosures: the MD&A table lists 11.74%, while the accompanying reconciliation calculates 8.73% at March 31, 2020.
- Track the effect of share repurchases and rapid asset growth on regulatory capital ratios.
- Review the eventual adoption impact of CECL, which the Corporation expected to implement January 1, 2023 and had not yet quantified.