Meridian Corporation — Form 10-Q Summary
Business Context and Reporting Period
Meridian Corporation is a Pennsylvania bank holding company whose principal businesses are commercial and retail banking, mortgage banking, and wealth management. The unaudited filing covers the three and nine months ended September 30, 2019, with comparisons to the corresponding 2018 periods and balance-sheet comparisons to December 31, 2018.
Financial Performance and Condition
| Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Net income | $3.3 million | $2.7 million | $7.3 million | $5.8 million |
| Diluted EPS | $0.52 | $0.42 | $1.14 | $0.90 |
| Net interest income | $9.3 million | $8.4 million | $26.7 million | $24.2 million |
| Non-interest income | $9.8 million | $9.2 million | $24.2 million | $24.9 million |
| Non-interest expense | $14.2 million | $13.8 million | $40.5 million | $40.4 million |
| Provision for loan losses | $0.7 million | $0.3 million | $0.9 million | $1.3 million |
| Net interest margin | 3.61% | 3.72% | 3.67% | 3.83% |
| ROA | 1.24% | 1.16% | 0.97% | 0.87% |
| ROE | 11.29% | 10.16% | 8.65% | 7.47% |
Net income increased 21.6% in the quarter and 26.7% year to date. Net interest income increased as loan balances and earning-asset yields grew, but the net interest margin contracted because funding costs rose faster than asset yields. Mortgage banking income declined 4.4% in the quarter and 6.2% year to date, while SBA loan income and securities gains provided new or nonrecurring offsets.
| Balance-sheet metric | September 30, 2019 | December 31, 2018 | Change |
|---|---|---|---|
| Total assets | $1.127 billion | $997.5 million | +13.0% |
| Portfolio loans, net of allowance | $926.5 million | $830.1 million | +11.6% |
| Total loans and leases | $986.4 million | $877.5 million | +12.4% |
| Total deposits | $858.5 million | $752.1 million | +14.1% |
| Borrowings and debt | $140.8 million | $129.8 million | +8.5% |
| Stockholders’ equity | $117.8 million | $109.6 million | +7.5% |
| Cash and cash equivalents | $40.5 million | $24.0 million | +69.2% |
For the first nine months, operating cash flow was $4.4 million, investing cash flow was negative $105.2 million, primarily from net loan growth, and financing cash flow was $117.3 million, primarily from increased deposits and short-term borrowings. Cash and cash equivalents increased $16.6 million.
At September 30, 2019, short-term borrowings were $128.5 million, long-term debt was $3.1 million, and subordinated debentures were $9.2 million. Management reported primary liquidity of approximately $148.5 million, available Federal Reserve credit of approximately $9.6 million, $39 million of unsecured federal funds lines, and additional CDARS and brokered-CD funding capacity. The filing states that liquidity resources were adequate for expected funding needs.
Capital ratios exceeded regulatory “well capitalized” thresholds: total risk-based capital was 13.11%, common equity tier 1 capital was 11.25%, tier 1 risk-based capital was 11.25%, and tier 1 leverage was 10.69%. Tangible common equity to tangible assets was 10.06%.
Material Changes Versus Prior Period
- Loan growth was the principal driver of asset expansion, with commercial mortgage, construction, commercial and industrial, and SBA lending contributing to growth.
- Deposit growth, particularly money market and savings accounts, funded much of the loan expansion; certificates of deposit also increased.
- Net interest income rose, but margin declined 11 basis points in the quarter and 16 basis points year to date because deposit and borrowing costs increased.
- Mortgage banking income declined despite higher loan-sale margins because origination volume was lower.
- SBA income increased to $1.2 million year to date, including gains on SBA loan sales; there was no comparable SBA income in 2018.
- Wealth management income declined $298 thousand year to date.
- Nonperforming loans remained approximately $3.9 million, while the allowance increased to $9.3 million from $8.1 million. The allowance ratio improved to 1.01% of loans held for investment, excluding loans at fair value, from 0.97%.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal financial guidance. Management expects continued focus on relationship-based deposits, loan growth, liquidity, and interest-rate risk management. Interest-rate simulations indicated modestly positive projected net-interest-income sensitivity to rising rates, although the balance sheet was liability-sensitive in the short term under the gap analysis.
- Internal controls: Disclosure controls and procedures were not effective as of September 30, 2019. Management identified a material weakness in internal control over financial reporting related to state mortgage-licensing compliance, mortgage-system controls, loan-transfer accounting, interest and fee recognition, and mortgage repurchase reserves. Remediation was underway but the weakness was not yet considered remediated.
- Maryland licensing matter: Meridian agreed to reimburse consumers approximately $474 thousand and pay a $12 thousand fine. The filing reports a $486 thousand total pretax impact, including prior-period corrections of $407 thousand, or $315 thousand net of tax.
- Litigation: Meridian agreed in principle to settle a former mortgage-employee wage-and-hour lawsuit for $990 thousand. The amount was reserved at September 30, 2019, subject to final court approval.
- Credit risk: The loan portfolio is concentrated in commercial real estate, construction, commercial and industrial, and mortgage lending. Nonperforming assets were $4.1 million, including $120 thousand of other real estate owned. Total troubled debt restructurings were $4.0 million.
- Off-balance-sheet exposure: Commitments to extend credit totaled $327.8 million and standby letters of credit totaled $9.8 million.
- Accounting changes: Meridian expected to adopt several accounting standards, including revenue, financial instruments, and credit-loss guidance. The filing states that CECL implementation work was underway and that the expected impact had not yet been quantified.
Investor Verification Checklist
- Verify remediation and subsequent auditor or management conclusions regarding the material weakness in mortgage-licensing and related financial-reporting controls.
- Assess the sustainability of loan and deposit growth, including commercial real estate and construction concentrations.
- Monitor funding costs, deposit mix, liquidity availability, and the effect of changing interest rates on net interest margin.
- Separate recurring earnings from SBA loan-sale gains, investment-security gains, litigation-related items, and the Maryland licensing matter.
- Confirm final court approval and cash settlement of the $990 thousand wage-and-hour litigation matter.
- Review the eventual adoption impact of CECL and other pending accounting standards on retained earnings, reserves, and capital ratios.