Meridian Corporation 2019 Form 10-K Summary
Business context and reporting period
Meridian Corporation is a Pennsylvania bank holding company operating through Meridian Bank, a full-service commercial bank serving southeastern Pennsylvania, New Jersey and Delaware. Principal businesses are commercial banking, mortgage banking and wealth management. This filing covers the fiscal year ended December 31, 2019; the filing was signed March 30, 2020.
Meridian qualified as an emerging growth company and used scaled reporting accommodations, including the extended transition period for certain accounting standards.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total assets | $1.150 billion | $997.5 million | +15.3% |
| Total deposits | $851.2 million | $752.1 million | +13.2% |
| Loans and leases | $1.000 billion | $877.5 million | +14.0% |
| Net interest income | $36.3 million | $32.7 million | +11.3% |
| Noninterest income | $33.1 million | $32.4 million | +2.3% |
| Net income | $10.5 million | $8.2 million | +28.4% |
| Diluted EPS | $1.63 | $1.27 | +28.3% |
| Net interest margin | 3.65% | 3.80% | Down 15 bps |
| Return on average assets | 1.01% | 0.90% | Up 11 bps |
| Return on average equity | 9.09% | 7.77% | Up 132 bps |
| Efficiency ratio | 79.24% | 81.44% | Improved |
Net interest income after the provision for loan losses was $35.4 million. The provision for loan losses declined to $901 thousand from $1.6 million, while net recoveries were $559 thousand compared with net charge-offs of $233 thousand in 2018.
Mortgage banking income was $26.2 million, broadly unchanged year over year. Wealth management income declined to $3.6 million from $3.9 million. SBA loan income contributed $1.4 million in 2019, with no comparable SBA loan sales in 2018. Noninterest expense increased 3.9% to $55.0 million, partly due to professional fees, litigation costs, regulatory matters and higher FDIC insurance and state assessments.
Cash flow, liquidity and capital
- Cash and cash equivalents were $39.4 million at year-end, compared with $24.0 million in 2018.
- Operating cash flow was $21.6 million, compared with $11.0 million in 2018.
- Investing activities used $143.1 million, primarily because net loan growth used $135.2 million.
- Financing activities provided $136.9 million, including $99.0 million of deposit growth and $40.0 million of subordinated debt issuance.
- Primary liquidity was $161.5 million, compared with $136.6 million in 2018. Available credit through correspondent banks, the FHLB and the Federal Reserve was approximately $8.5 million.
- FHLB borrowing capacity was $507.3 million; FHLB borrowings were $126.8 million and FHLB-issued letters of credit totaled $102.8 million.
- Debt at December 31, 2019 consisted of $123.7 million of short-term borrowings, $3.1 million of long-term debt and $41.0 million of subordinated debentures.
- Unfunded loan commitments were $327.8 million, including $72.9 million of mortgage loan commitments. Letters of credit totaled $9.8 million.
- The Bank was well capitalized. Its total risk-based capital ratio was 16.09%, common equity Tier 1 ratio was 14.98%, Tier 1 risk-based ratio was 14.98% and Tier 1 leverage ratio was 14.08%.
Material changes versus the prior comparable period
- Loan growth was concentrated in commercial portfolios. Construction loans increased to $172.0 million from $116.9 million, commercial mortgage loans increased to $362.6 million from $325.4 million, and commercial and industrial loans increased to $273.3 million from $254.1 million.
- Small business loans increased substantially to $21.6 million from $5.8 million.
- Deposit growth funded much of the balance-sheet expansion, although the average cost of deposits increased to 1.97% from 1.54%.
- Funding costs rose faster than asset yields, reducing the net interest margin despite higher average loan balances and loan yields.
- Nonperforming loans declined to $3.2 million, or 0.34% of loans held for investment, from $3.9 million, or 0.48%. The allowance increased to $9.5 million, covering 294.12% of nonperforming loans versus 204.85%.
- Subordinated debentures increased materially following the December 2019 issuance of $40.0 million of fixed-to-floating mandatory convertible subordinated debentures.
- The company adopted ASC 606 and related accounting updates on December 31, 2019 without a material reported impact. CECL adoption is planned for January 1, 2023, and management had not estimated its effect.
Guidance, outlook, risks and unusual items
No formal quantitative earnings or revenue guidance is provided. Management emphasizes organic growth, loan and deposit expansion, disciplined credit underwriting, technology investment and potential opportunistic acquisitions.
The filing identifies significant sensitivity to interest rates, funding costs, real estate values, commercial real estate and construction lending, borrower credit quality, mortgage secondary-market conditions, deposit competition, liquidity and regulatory capital. The interest-rate simulation indicated that a 200-basis-point decline could reduce one-year net interest income by approximately 2.3%, while a 200-basis-point increase was estimated to increase it by approximately 0.6%; these are hypothetical model outputs, not forecasts.
COVID-19 emerged after year-end and had already caused significant market disruption by the filing date. Management stated that the duration and financial impact were uncertain and could materially affect borrowers, collateral values, credit-loss estimates, interest margins, liquidity and operations. The filing also highlights cybersecurity, third-party technology, regulatory compliance, litigation and mortgage repurchase risks.
Meridian recorded a $990 thousand litigation reserve related to a wage-and-hour class action; final settlement payment of approximately $1.0 million was made on February 29, 2020. The company also disclosed a Maryland mortgage licensing issue involving approximately $474 thousand of consumer reimbursements and a $12 thousand fine, with comparative financial statements revised for an immaterial prior-period error.
The company reported no cash dividends and stated that it had no plans to pay them. In March 2020, it repurchased 314,825 shares at an average price of $18.17, completing the 2019 repurchase authorization.
Disclosure controls and procedures were deemed ineffective because the Form 10-K was filed late due to a misinterpretation of the company's filing status. Management stated that steps had been taken to remediate the deficiency. Management nevertheless concluded that internal control over financial reporting was effective; no external auditor attestation was required.
Most important facts for investors to verify
- Whether COVID-19 materially changes credit losses, deferrals, nonperforming assets, collateral values and the eventual CECL allowance.
- The sustainability of loan and deposit growth and the effect of higher deposit and wholesale funding costs on net interest margin.
- Exposure to commercial real estate and construction lending, which represented a substantial portion of the loan portfolio.
- Mortgage banking volume, gain-on-sale margins, servicing-right valuations and potential repurchase or indemnification claims.
- Liquidity availability after considering $327.8 million of unfunded commitments, deposit maturities and pledged collateral.
- The impact of the $40.0 million subordinated debt issuance, related interest expense and mandatory conversion provisions.
- Remediation of ineffective disclosure controls and the status of any additional regulatory, litigation or compliance matters.
- The company's decision to retain earnings rather than pay dividends and the effect of future share repurchases on capital and per-share value.