Meridian Corporation — Form 10-Q Summary
Business context and reporting period
Meridian Corporation, a Pennsylvania-based bank holding company, filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2021. Its principal segments are Banking, Mortgage Banking, and Wealth Management. Meridian is a smaller reporting company and emerging growth company, and reported 6,168,623 common shares outstanding as of August 13, 2021.
Key financial metrics
| Metric | Three months ended June 30, 2021 | Six months ended June 30, 2021 |
|---|---|---|
| Total revenue | $39.2 million | $83.7 million |
| Net interest income | $15.4 million | $30.5 million |
| Provision for loan losses | $0.1 million | $0.7 million |
| Non-interest income | $21.7 million | $48.8 million |
| Non-interest expense | $26.2 million | $54.5 million |
| Net income | $8.3 million | $18.4 million |
| Diluted earnings per share | $1.33 | $2.98 |
| Net interest margin | 3.70% | 3.71% |
| Return on average equity | 22.61% | 26.19% |
| Return on average assets | 1.92% | 2.17% |
- Total assets were $1.709 billion at June 30, 2021, compared with $1.720 billion at December 31, 2020.
- Loans held for investment, net of allowance, were $1.345 billion; the allowance for loan and lease losses was $18.4 million.
- Total deposits were $1.413 billion, including $261.8 million of non-interest-bearing deposits.
- Cash and cash equivalents were $26.9 million. Primary liquidity was $315.3 million, compared with $408.8 million at year-end 2020.
- Short-term borrowings were $33.5 million, long-term debt was $48.6 million, and subordinated debentures were $40.7 million.
- Stockholders’ equity was $152.9 million, with a tangible common equity ratio of 8.71% and tangible book value of $24.06 per common share.
- Operating cash flow was $105.7 million for the first six months of 2021; investing activities used $89.9 million and financing activities used $25.6 million. Cash declined by $9.8 million to $26.9 million.
Material changes versus comparable periods
- Second-quarter net income increased 44.5% from $5.7 million in 2020; six-month net income increased from $8.2 million to $18.4 million.
- Net interest income increased 32.9% in the second quarter and 43.6% for the first six months, primarily from loan growth, higher average earning assets, and lower funding costs.
- Non-interest income increased 16.3% in the second quarter and 74.8% for the first six months. Mortgage banking income rose to $19.5 million in the quarter and $43.6 million year-to-date.
- Mortgage originations totaled approximately $615.2 million in the second quarter and $1.3 billion for the first six months, supported by expansion into Maryland and favorable mortgage market conditions.
- SBA income increased 133.5% in the quarter and 131.8% year-to-date; wealth management income increased 36.3% and 22.7%, respectively.
- Non-interest expense rose 23.5% in the quarter and 54.3% year-to-date, driven principally by salaries, mortgage commissions, expansion-related costs, and higher variable loan-origination expenses.
- The loan-loss provision declined from $1.6 million to $96 thousand in the quarter and from $3.2 million to $695 thousand year-to-date, reflecting improved economic and credit indicators.
- Loans held for investment, net of allowance, increased 6.1% from year-end. Commercial mortgage loans, small business loans, and leases were the principal growth areas, while PPP loans declined 6.9%.
- Deposits increased 13.9% from year-end, while short-term borrowings and long-term debt declined substantially, mainly because PPP-related funding was repaid.
- Stockholders’ equity increased from $141.6 million to $152.9 million after $18.4 million of year-to-date earnings and $7.7 million of dividends, including a $1.00 special dividend.
Guidance, outlook, risks, contingencies, and unusual items
- The filing provides no formal earnings or revenue guidance. Management stated that operating results for the quarter are not necessarily indicative of full-year results.
- COVID-19 remains a material uncertainty. The allowance includes probable pandemic-related losses, and management warned that further deterioration could require additional provisions.
- COVID-19-related loan modifications totaled $29.0 million at June 30, 2021, compared with $144.1 million at June 30, 2020. These loans were classified as performing under applicable relief provisions.
- Non-performing assets were $8.2 million, or 0.48% of total assets. Total troubled debt restructurings were $2.7 million, of which $2.5 million were performing under modified terms.
- Management identified credit-loss estimation, fair-value measurements, servicing assets, and other valuation assumptions as areas subject to significant judgment. The planned adoption of CECL is January 1, 2023, and the filing states that its financial impact cannot yet be estimated.
- Mortgage servicing rights and SBA servicing assets increased materially to $10.3 million in aggregate. Their valuations depend on assumptions regarding prepayment speeds, discount rates, and future servicing income.
- Interest-rate simulations indicate that Meridian was asset sensitive and could benefit from rising rates, while declining rates could reduce net interest income and economic value of equity. Management cautioned that these simulations are hypothetical.
- Off-balance-sheet commitments to extend credit were $461.2 million and standby letters of credit were $17.0 million. Mortgage loan repurchase obligations may arise from breaches of representations and warranties; three loans totaling $446 thousand were repurchased during the first half of 2021.
- The company authorized a $6 million stock repurchase program; no shares were repurchased during the quarter, but 13,755 shares were repurchased between July 1 and August 13, 2021.
- The filing reports no material changes to previously disclosed risk factors, no defaults upon senior securities, and effective disclosure controls as of June 30, 2021.
Important facts for investors to verify
- Whether mortgage banking, SBA loan sales, and fair-value or hedging gains remain sustainable as market rates, refinancing activity, and origination volumes change.
- The quality and concentration of commercial real estate, commercial and industrial, small business, lease, PPP, and COVID-19-modified loans.
- Whether the lower loan-loss provision adequately reflects future pandemic-related losses and the transition to CECL.
- The durability of deposit growth and the company’s liquidity after the reduction in PPP-related borrowings and total cash balances.
- The sensitivity of mortgage servicing rights and other fair-value assets to interest rates, prepayments, and valuation assumptions.
- The effect of higher personnel and mortgage production expenses on operating leverage if loan originations decline.
- Future capital allocation, including quarterly dividends, the special dividend, and the authorized share repurchase program.