Meridian Corporation — 2021 Q3 Form 10-Q Summary
Business context and reporting period
Meridian Corporation is a Pennsylvania-based bank holding company with Banking, Mortgage Banking and Wealth Management segments. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared primarily with the corresponding 2020 periods; balance-sheet comparisons are generally against December 31, 2020.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $40.4 million | $44.9 million | $124.2 million | $101.7 million |
| Net interest income | $16.3 million | $12.7 million | $46.8 million | $34.0 million |
| Provision for loan losses | $0.6 million | $4.0 million | $1.3 million | $7.1 million |
| Non-interest income | $22.1 million | $29.1 million | $70.9 million | $57.0 million |
| Non-interest expense | $25.5 million | $25.8 million | $80.0 million | $61.2 million |
| Net income | $9.4 million | $9.2 million | $27.9 million | $17.4 million |
| Diluted EPS | $1.52 | $1.51 | $4.49 | $2.82 |
| Net interest margin | 3.83% | 3.26% | 3.75% | 3.33% |
| ROE | 24.07% | 29.30% | 25.43% | 18.85% |
| ROA | 2.15% | 2.29% | 2.17% | 1.65% |
Net income represented approximately 23.4% of Q3 revenue and 22.4% of nine-month revenue. Pre-tax, pre-provision income was $12.9 million in Q3 and $37.7 million for the nine-month period, compared with $15.9 million and $29.8 million, respectively, in the prior-year periods.
- Total assets were $1.76 billion at September 30, 2021, up $42.2 million, or 2.5%, from year-end 2020.
- Loans held for investment, net of allowance, were $1.36 billion, up $92.7 million, or 7.3%, from December 31, 2020. Portfolio growth included commercial real estate, small business loans and leases.
- Total loans and leases were $1.50 billion, including $118.0 million of mortgage loans held for sale. PPP loans declined to $118.6 million from $203.5 million.
- Total deposits were $1.44 billion, up $197.7 million, or 15.9%, from year-end 2020. Non-interest-bearing deposits increased 30.4% to $265.8 million.
- Cash and cash equivalents were $63.1 million, compared with $36.7 million at December 31, 2020. Management reported primary liquidity of $323.0 million.
- Short-term borrowings were $22.3 million and long-term debt was $78.4 million, down from $106.9 million and $165.5 million, respectively, at year-end 2020. Subordinated debentures were $40.8 million.
- Stockholders’ equity was $158.4 million, compared with $141.6 million at year-end 2020. Tangible common equity was 8.76% of tangible assets, and Tier 1 capital to risk-weighted assets was 10.64%.
- The allowance for loan and lease losses was $19.0 million, or 1.38% of loans held for investment and 1.52% excluding fair-valued and PPP loans.
Cash flow and capital allocation
For the nine months ended September 30, 2021, operating activities provided $126.4 million, compared with $161.6 million used in the prior-year period. Investing activities used $115.9 million, primarily reflecting an $82.7 million increase in loans, $52.5 million of securities purchases and a $10.0 million purchase of bank-owned life insurance. Financing activities provided $15.9 million, primarily from deposit growth, partly offset by debt repayments.
Meridian paid $8.5 million of dividends during the first nine months, including a $1.00 special dividend, and repurchased 78,491 shares in Q3 for $2.2 million at an average price of $27.41. Approximately $3.8 million remained available under the $6 million repurchase authorization at September 30, 2021.
Material changes versus prior comparable periods
- Q3 net income increased 2.5%, while nine-month net income increased 59.8% year over year.
- Net interest income increased 27.9% in Q3 and 37.7% for the nine-month period, supported by loan growth, higher loan yields and lower funding costs.
- Q3 non-interest income declined 23.9%, primarily because mortgage banking revenue and mortgage pipeline fair-value gains declined. Nine-month non-interest income increased 24.5% due to stronger mortgage production, SBA loan sales, wealth management and other fee income.
- Mortgage originations were $522.9 million in Q3, down 26.2% year over year, but $1.9 billion for the first nine months, up 24.4%. Refinances represented 50% of nine-month originations versus 59% in the prior year.
- SBA 7(a) loan sales increased to $25.0 million in Q3 from $9.5 million and to $22.1 million for the nine-month period, contributing to higher SBA income.
- The provision for loan losses declined 84.9% in Q3 and 81.9% for the nine-month period as economic and credit indicators improved from the pandemic-affected 2020 period.
- Non-interest expense declined 1.4% in Q3 but increased 30.8% for the nine-month period, mainly due to mortgage commissions, higher staffing, expansion into Maryland, technology investments and other growth-related costs.
- Non-performing assets increased to $9.2 million, or 0.52% of assets, from $7.9 million, or 0.46%, at December 31, 2020. Total TDRs declined to $2.8 million from $3.6 million.
Guidance, outlook, risks and unusual items
The filing does not provide specific quantitative earnings or revenue guidance. Management stated that the balance sheet was asset-sensitive over the longer term, although short-term repricing was liability-sensitive because deposit growth exceeded loan growth. Its model estimated that a 100-basis-point increase in rates would increase one-year net interest income by 0.43%, while a 100-basis-point decline would reduce it by 0.68%; management cautioned that these simulations are hypothetical.
- COVID-19 remains a material uncertainty. The allowance includes estimated pandemic-related losses, and management stated that further deterioration could require additional provisions.
- COVID-19-related loan modifications totaled $24.9 million at September 30, 2021, down from $26.9 million at year-end 2020. Management classified these loans as performing under applicable relief provisions.
- Management identified credit-loss estimation, fair-value measurements, servicing assets and other valuation assumptions as areas involving significant judgment.
- Mortgage banking results remain exposed to origination volumes, refinancing activity, interest rates, pipeline fair values, hedging results and prepayment speeds. Q3 included a $3.4 million net fair-value loss on derivatives and loans held for sale, compared with a $6.0 million net gain in Q3 2020.
- Servicing assets increased to $11.9 million, including $10.1 million of mortgage servicing rights and $1.8 million of SBA servicing assets; their valuations depend on prepayment and discount-rate assumptions.
- Off-balance-sheet commitments to extend credit were $505.0 million and standby letters of credit were $17.7 million at September 30, 2021. Mortgage loan repurchase obligations arise from breaches of representations and warranties; four loans totaling $561 thousand were repurchased during the first nine months.
- The filing states that there were no material changes to previously disclosed risk factors, no defaults upon senior securities and no material changes in internal control over financial reporting.
- Meridian expects to adopt lease accounting changes beginning January 1, 2022 and expects CECL adoption on January 1, 2023; the financial impact of CECL had not yet been estimated.
Important facts for investors to verify
- Whether mortgage production and gain-on-sale income remain resilient as refinancing activity declines and interest rates change.
- Whether non-performing assets, COVID-19 modifications and commercial loan credit grades continue to trend favorably.
- The adequacy of the $19.0 million allowance, particularly after adoption of CECL in 2023.
- The sustainability of deposit growth and the reduction in PPPLF and other borrowings.
- The valuation sensitivity of mortgage and SBA servicing assets, derivatives and mortgage loans held for sale.
- The company’s ability to maintain capital ratios while funding loan growth, paying dividends and repurchasing shares.
- The effect of future accounting adoption, regulatory developments and any changes to PPP guaranty funding or related obligations.