Meridian Corporation Form 10-Q Summary
Business context and reporting period
Meridian Corporation (NASDAQ: MRBK) 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, 2022, compared with the same periods in 2021, and balance-sheet changes from December 31, 2021.
Financial condition and operating results
| Metric | Three months ended September 30, 2022 | Three months ended September 30, 2021 | Nine months ended September 30, 2022 | Nine months ended September 30, 2021 |
|---|---|---|---|---|
| Net interest income | $18.0 million | $16.3 million | $51.6 million | $46.8 million |
| Net interest margin | 4.01% | 3.83% | 3.99% | 3.75% |
| Non-interest income | $10.2 million | $22.1 million | $33.7 million | $70.9 million |
| Non-interest expense | $20.3 million | $25.5 million | $61.4 million | $80.0 million |
| Net income | $5.8 million | $9.4 million | $17.3 million | $27.9 million |
| Diluted earnings per share | $0.96 | $1.52 | $2.80 | $4.49 |
| Return on average assets | 1.23% | 2.15% | 1.28% | 2.17% |
| Return on average equity | 14.59% | 24.07% | 14.49% | 25.43% |
At September 30, 2022, total assets were $1.92 billion, up 12.2% from December 31, 2021. Portfolio loans excluding PPP loans increased 23.1% to approximately $1.60 billion. Total deposits increased 15.7% to $1.67 billion, driven primarily by time deposits. Cash and cash equivalents were $32.9 million, compared with $23.5 million at year-end 2021.
Stockholders’ equity declined to $151.2 million from $165.4 million, primarily reflecting $13.7 million of accumulated other comprehensive losses from securities and $9.2 million of share repurchases, partly offset by net income. Book value per share was $25.86 and tangible book value per share was $25.16.
Nine-month operating cash flow was $63.7 million, compared with $126.4 million in the prior-year period. Investing activities used $246.6 million, primarily from a $226.0 million increase in loans. Financing activities provided $190.8 million, primarily from deposit growth. Cash and cash equivalents increased by $7.9 million during the period.
Material changes versus the prior comparable periods
- Third-quarter net income decreased 38.6%; nine-month net income decreased 38.0%.
- Mortgage banking income declined 60.9% in the quarter and 65.7% year to date, reflecting lower mortgage originations in a rising-rate environment and limited housing inventory.
- SBA loan income declined 63.2% in the quarter and 27.2% year to date.
- Net interest income increased as loan balances and yields rose; net interest margin expanded 18 basis points in the quarter and 24 basis points year to date.
- Non-interest expense declined 20.5% in the quarter and 23.2% year to date, principally because of lower mortgage-segment compensation.
- Mortgage loans held for sale decreased 58.2% from year-end to $33.8 million, while PPP loans declined 90.2% to $8.8 million.
- During the first quarter, $27.7 million of municipal securities were transferred from available-for-sale to held-to-maturity.
- The company repurchased 295,234 shares for $9.2 million during the first nine months and returned approximately $19.0 million to shareholders through dividends and repurchases.
Guidance, outlook, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects continued effects from interest-rate movements, loan growth, deposit pricing, mortgage activity, and broader economic conditions. Management states that the balance sheet was asset-sensitive at September 30, 2022; its simulations indicated modestly higher net interest income under hypothetical rising-rate scenarios, although actual results may differ materially.
- Credit quality: nonperforming assets were $23.1 million, or 1.20% of total assets. The allowance for loan and lease losses was $19.0 million, equal to 1.18% of loans held for investment.
- Commercial lending, including commercial real estate, construction, commercial and industrial loans, and leases, represents a significant concentration and carries higher inherent credit risk than residential and consumer lending.
- Commercial and industrial loans classified as substandard totaled $43.1 million. The filing identifies a $13.5 million advertising-industry relationship that became nonperforming in late 2021.
- Available liquidity was approximately $264.7 million. FHLB borrowing capacity was approximately $529.2 million, with $23.4 million borrowed and $74.8 million of letters of credit outstanding. The company also reported $39 million of unsecured federal-funds lines and additional CD funding capacity.
- Unfunded commitments to extend credit totaled $505.9 million, and letters of credit totaled $21.5 million.
- Capital ratios declined with balance-sheet growth but remained above stated well-capitalized minimums. The corporation’s Tier 1 leverage ratio was 8.54%, common equity Tier 1 ratio was 9.28%, and total risk-based capital ratio was 12.80%.
- CECL adoption under ASU 2016-13 is scheduled for January 1, 2023. Management expects a one-time increase to the allowance for credit losses, but the filing does not provide a clear quantified estimate.
- Investment securities had significant unrealized losses caused primarily by higher market interest rates. Management concluded the losses were temporary and that it was not more likely than not that the securities would need to be sold before recovery.
- The Board declared a $0.20 quarterly dividend payable November 21, 2022.
- The filing reports no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of September 30, 2022.
Most important facts for investors to verify
- Whether loan growth and higher net interest margins can offset continued weakness in mortgage banking and SBA-related income.
- The size and timing of the CECL adoption adjustment effective January 1, 2023.
- Commercial real estate, construction, commercial and industrial, and lease credit performance, including the identified substandard relationships.
- Deposit pricing and mix, particularly the growth in higher-cost time deposits and its effect on future net interest margin.
- The realizability of accumulated other comprehensive losses and the sensitivity of securities and servicing assets to further interest-rate changes.
- Liquidity availability, collateral requirements, and funding capacity if deposit outflows or loan commitments increase.
- The sustainability of dividends and share repurchases given lower equity ratios and continued balance-sheet growth.