Meridian Corporation: Q1 2021 Form 10-Q Summary
Business context and reporting period
Meridian Corporation is a Pennsylvania-based bank holding company whose principal businesses are commercial and retail banking, mortgage banking, and wealth management. This unaudited quarterly report covers the three months ended March 31, 2021, compared primarily with the three months ended March 31, 2020 and, for balance-sheet items, December 31, 2020.
Key financial metrics
| Metric | Q1 2021 | Comparable period or prior period |
|---|---|---|
| Total revenue | $44.5 million | $23.0 million, Q1 2020 |
| Net interest income | $15.1 million | $9.7 million, Q1 2020 |
| Non-interest income | $27.0 million | $9.2 million, Q1 2020 |
| Provision for loan losses | $0.6 million | $1.6 million, Q1 2020 |
| Non-interest expense | $28.3 million | $14.1 million, Q1 2020 |
| Net income | $10.2 million | $2.5 million, Q1 2020 |
| Diluted earnings per share | $1.65 | $0.39, Q1 2020 |
| Net interest margin | 3.72% | 3.49%, Q1 2020 |
| Return on average equity | 30.06% | 8.40%, Q1 2020 |
| Return on average assets | 2.43% | 0.87%, Q1 2020 |
| Total assets | $1.744 billion | $1.720 billion, Dec. 31, 2020 |
| Loans, net of allowance | $1.336 billion | $1.267 billion, Dec. 31, 2020 |
| Total deposits | $1.384 billion | $1.241 billion, Dec. 31, 2020 |
| Cash and cash equivalents | $31.0 million | $36.7 million, Dec. 31, 2020 |
| Stockholders’ equity | $143.5 million | $141.6 million, Dec. 31, 2020 |
Net cash provided by operating activities was $62.8 million in Q1 2021 versus $62.7 million of cash used in Q1 2020. Investing activities used $81.0 million, principally from a $70.9 million net increase in loans and purchases of investment securities. Financing activities provided $12.5 million, including $142.3 million of deposit growth, partly offset by debt reductions and $6.9 million of dividends paid.
Material changes versus prior comparable periods
- Profitability: Net income increased $7.7 million, or 304.2%, year over year. Pre-tax, pre-provision income increased to $13.9 million from $4.8 million.
- Mortgage banking: Mortgage banking income rose to $24.1 million from $6.8 million. Mortgage originations were approximately $724.7 million, up 184.6%, supported by Maryland expansion and refinancing activity.
- Net interest income: Increased 56.4% as average earning assets grew substantially, including a $212.0 million increase in average PPP loans, while funding costs declined.
- Expenses: Non-interest expense more than doubled, primarily because salaries and employee benefits increased $12.3 million, largely in the mortgage division.
- Credit provisions: The loan-loss provision declined $953 thousand year over year. The allowance increased to $18.4 million from $17.8 million at year-end 2020.
- Loans and deposits: Loans net of allowance rose 5.5% from year-end, while deposits increased 11.5%. PPP loans increased to $230.8 million from $203.5 million.
- Borrowings: Short-term borrowings declined to $26.4 million from $106.9 million, and long-term debt declined to $122.9 million from $165.5 million, primarily reflecting lower PPPLF advances.
- Capital returns: The company paid a regular dividend of $0.125 per share and a special dividend of $1.00 per share during the quarter, totaling $6.9 million.
- Accumulated other comprehensive income: Declined to $0.6 million from $2.6 million because of unrealized losses on available-for-sale securities as interest rates changed.
Guidance, outlook, commentary, and risks
- Management did not provide quantitative earnings or revenue guidance in the filing.
- Management expects COVID-19 and the resulting economic environment to continue affecting future operating results, although the magnitude cannot be estimated.
- The allowance for loan losses includes estimated probable pandemic-related losses. Further economic deterioration could require additional provisions.
- Active COVID-19-related loan modifications totaled $28.8 million, or 2.6% of the applicable loan portfolio, at March 31, 2021. Management stated that approximately $137.8 million of previously modified loans had returned to original payment terms.
- Non-performing assets increased to $8.6 million, or 0.49% of assets, from $7.9 million, or 0.46%, at year-end. The filing reports no other real estate owned.
- PPP-related risks include the possibility that the Small Business Administration may not fund some or all PPP loan guaranties. PPP loans totaled $230.8 million and were not included in the allowance calculation because of SBA guarantees.
- Mortgage and derivative results are sensitive to interest rates, loan production, refinancing activity, hedging results, fair-value movements, prepayment speeds, and the ability to sell originated loans.
- Management describes the balance sheet as asset sensitive. Its model estimates that a 100-basis-point increase in rates would increase one-year net interest income by 1.06%, while a 100-basis-point decline would reduce it by 1.56%; these are hypothetical simulations, not forecasts.
- Primary liquidity was $341.6 million at March 31, 2021, compared with $408.8 million at year-end. Management stated that available funding sources were adequate, including FHLB capacity of $546.7 million, unsecured federal funds lines of $39 million, and additional CD-based funding programs.
- Off-balance-sheet commitments included $445.5 million of commitments to extend credit and $8.7 million of letters of credit. Loan repurchase obligations may arise from breaches of representations and warranties; no loans were repurchased in Q1 2021.
- The company elected extended transition treatment for new accounting standards as an emerging growth company. CECL adoption is expected on January 1, 2023, but the filing states that the financial impact cannot yet be estimated.
- The company authorized a stock repurchase plan of up to $6 million after quarter-end. A regular dividend of $0.125 per share was declared for payment in May 2021.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether mortgage origination and refinancing volumes, which drove the quarter’s exceptional earnings, remain sustainable as interest rates and demand change.
- The effect of elevated mortgage-related compensation and other operating costs on future operating leverage.
- Future credit performance of commercial real estate, commercial and industrial, hospitality-related, small-business, lease, and COVID-19-modified loans.
- The adequacy of the $18.4 million allowance and the potential effect of eventual CECL adoption in 2023.
- PPP loan forgiveness timing, SBA guarantee funding, and the effect of PPP runoff on loan balances, interest income, and PPPLF borrowings.
- Liquidity after the decline in cash and primary liquidity, including reliance on deposits, FHLB capacity, pledged collateral, and other borrowing programs.
- Interest-rate sensitivity, mortgage servicing-right valuations, derivative fair values, and hedging gains or losses.
- Capital ratios after the special dividend and any stock repurchases; the reported corporate Tier 1 leverage ratio was 8.86%, and the tangible common equity ratio was 7.99%.