Meridian Corp quarterly report, Q2 FY2022

Business Context and Reporting Period

Meridian Corporation, a Pennsylvania-based bank holding company listed on Nasdaq under MRBK, filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. Its principal segments are Banking, Mortgage Banking, and Wealth Management. The company had 6,017,247 common shares outstanding as of August 5, 2022.

Financial Performance and Condition

Metric	Three Months Ended June 30, 2022	Six Months Ended June 30, 2022	Comparable 2021 Period
Net interest income	$17.6 million	$33.6 million	$15.4 million and $30.5 million
Provision for loan losses	$0.6 million	$1.2 million	$0.1 million and $0.7 million
Non-interest income	$10.4 million	$23.5 million	$21.7 million and $48.8 million
Non-interest expense	$19.7 million	$41.1 million	$26.2 million and $54.5 million
Net income	$5.9 million	$11.5 million	$8.3 million and $18.4 million
Diluted EPS	$0.96	$1.84	$1.33 and $2.98
Net interest margin	4.07%	3.98%	3.70% and 3.71%

Second-quarter annualized ROE was 15.03% and ROA was 1.31%; six-month ROE was 14.61% and ROA was 1.30%. Pre-tax, pre-provision income was $8.2 million for the quarter and $16.0 million for the six months.

Total assets were $1.85 billion at June 30, 2022, up 8.1% from December 31, 2021.
Portfolio loans, excluding PPP loans, increased 15.4% from year-end to approximately $1.5 billion. Total loans and leases were $1.57 billion, including $21.9 million of PPP loans and $58.9 million of mortgage loans held for sale.
Total deposits were $1.57 billion, up 8.4% from year-end. Certificate of deposit balances increased substantially and helped fund loan growth.
Cash and cash equivalents were $37.1 million. Management reported available liquidity of $286.6 million, including cash, investments, mortgage loans held for sale, and other funding sources.
Short-term borrowings were $59.1 million; subordinated debentures were $40.6 million. The company reported no long-term debt and had an FHLB borrowing capacity of $484.1 million.
Stockholders’ equity was $156.1 million, compared with $165.4 million at year-end. Tangible common equity to tangible assets was 8.22%, and Tier 1 risk-based capital was 9.79%.
Operating cash flow was $35.7 million for the six months, while investing activities used $150.2 million, primarily from a $136.1 million net increase in loans. Financing activities provided $128.2 million, principally from deposit growth and borrowings. Ending cash increased to $37.1 million from $23.5 million.

Material Changes Versus Prior Comparable Period

Net income declined 28.1% in the second quarter and 37.7% for the six-month period, primarily because of lower mortgage banking revenue.
Mortgage banking income fell 64.3% in the quarter and 67.8% year to date. Mortgage originations declined 46.1% in the quarter to $332.4 million and 51.1% year to date to $656.1 million, reflecting higher interest rates and limited housing inventory.
Net interest income increased 13.9% in the quarter and 10.0% year to date. Management attributed the improvement to higher asset yields, loan growth, and redeployment of PPP repayments into higher-yielding commercial loans.
Non-interest expense decreased 24.9% in the quarter and 24.5% year to date, largely because of lower mortgage-related compensation and reduced incentive compensation. Technology and advertising spending increased.
The provision for loan losses increased because of loan growth and credit trends. The allowance was $18.8 million, or 1.24% of loans held for investment; the adjusted ratio excluding fair-value and PPP loans was 1.27%.
Non-performing loans were $23.0 million, broadly unchanged from year-end, while non-performing assets to total assets improved to 1.24% from 1.34%.
Accumulated other comprehensive income declined by $9.9 million because of unrealized investment-security losses as interest rates increased. The company transferred $27.7 million of municipal securities from available-for-sale to held-to-maturity during the first quarter.
The company repurchased 97,385 shares during the second quarter for $3.0 million and had approximately 487,463 shares remaining authorized for repurchase under its $20 million plan.

Guidance, Outlook, Risks, and Unusual Items

The filing does not provide formal earnings or revenue guidance. Management expects continued sensitivity to interest rates, loan and deposit growth, mortgage origination volumes, and funding costs. Its interest-rate simulation indicated that the balance sheet was asset-sensitive at June 30, 2022, with a modeled modest positive effect on one-year net interest income from a 100-basis-point rate increase; management cautioned that these scenarios are hypothetical.

Key risks include inflation, a potential recession, changing economic and securities-market conditions, higher interest rates, competitive pressures, regulatory and legislative changes, COVID-19 effects, and the risk that the SBA may not fund some PPP loan guarantees.
Mortgage banking results remain exposed to rising rates, lower refinancing activity, housing inventory constraints, pipeline valuations, hedging results, and servicing-right assumptions.
The company reported $488.6 million of commitments to extend credit and $22.9 million of standby letters of credit. Mortgage loan repurchase obligations may arise from breaches of representations and warranties; the company repurchased six loans totaling $1.5 million during the first six months.
The company adopted lease accounting guidance in 2022 and recognized approximately $10.0 million of right-of-use assets and $9.8 million of lease liabilities.
CECL adoption is scheduled for January 1, 2023. Management had not determined the financial statement impact as of the filing date.
Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing states there were no material changes to previously disclosed risk factors and no material legal proceedings identified in the supplied text.

Important Facts for Investors to Verify

Whether commercial and residential loan growth can offset continued contraction in mortgage banking and PPP-related activity.
The sustainability of the 4.07% quarterly net interest margin as deposit costs and borrowing rates rise.
Credit quality trends, including commercial and industrial substandard loans, non-performing loans, lease charge-offs, and the adequacy of the allowance before CECL adoption.
The effect of unrealized securities losses and further interest-rate changes on tangible common equity and regulatory capital.
The final impact and implementation method of CECL on January 1, 2023.
Liquidity availability, deposit mix, reliance on certificates of deposit and short-term borrowings, and collateral requirements under FHLB and other facilities.
Mortgage servicing-right and SBA servicing-asset valuations, particularly the sensitivity to prepayment speeds and discount rates.