Meridian Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020; filed November 9, 2020. Meridian is a Pennsylvania-based bank holding company with Banking, Mortgage Banking, and Wealth Management segments. Financial statements are unaudited and presented in accordance with U.S. GAAP.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net interest income | $12.7 million | $9.3 million | $34.0 million | $26.7 million |
| Provision for loan losses | $4.0 million | $0.7 million | $7.1 million | $0.9 million |
| Non-interest income | $29.1 million | $9.2 million | $57.0 million | $22.7 million |
| Non-interest expense | $25.8 million | $13.5 million | $61.2 million | $39.0 million |
| Net income | $9.2 million | $3.3 million | $17.4 million | $7.3 million |
| Diluted EPS | $1.51 | $0.52 | $2.82 | $1.14 |
| Net interest margin | 3.26% | 3.61% | 3.33% | 3.67% |
| ROA | 2.29% | 1.24% | 1.65% | 0.97% |
| ROE | 29.30% | 11.29% | 18.85% | 8.65% |
Mortgage banking was the principal earnings driver. Mortgage banking income was $21.8 million in Q3 and $45.4 million for the first nine months, compared with $7.3 million and $17.6 million, respectively, in the prior-year periods. Mortgage originations were $707.7 million in Q3 and approximately $1.5 billion for the first nine months, supported by refinancing activity and expansion into Maryland.
Total assets increased 52.9% from December 31, 2019 to $1.76 billion. Portfolio loans and leases increased 35.5% to $1.31 billion, including $259.7 million of PPP loans. Mortgage loans held for sale increased to $225.2 million from $33.7 million at year-end 2019. Deposits increased 42.0% to $1.21 billion.
Cash and cash equivalents were $75.9 million at September 30, 2020, compared with $39.4 million at December 31, 2019. Net cash used in operating activities was $161.6 million, and net cash used in investing activities was $379.0 million, largely reflecting loan growth and mortgage origination activity. Financing activities provided $577.1 million.
The allowance for loan and lease losses increased to $16.6 million from $9.5 million at year-end 2019. Nonperforming assets were $7.9 million, or 0.45% of total assets, compared with $3.4 million, or 0.29%, at December 31, 2019. The allowance ratio was 1.27% of loans held for investment and 1.59% excluding PPP and fair-valued loans.
Short-term borrowings were $104.2 million, long-term debt was $250.1 million, and subordinated debentures were $40.8 million. Long-term debt primarily comprised $235.9 million of PPPLF advances secured by PPP loans. Primary liquidity was $425.7 million, and management stated that available resources were adequate for short- and long-term funding needs.
Capital remained above regulatory “well-capitalized” thresholds. Corporation ratios included 14.71% total risk-based capital, 9.97% common equity tier 1 capital, 9.97% tier 1 risk-based capital, and 8.77% tier 1 leverage. The tangible common equity ratio was 7.26%, down from 10.12% at December 31, 2019.
Material changes versus prior periods
- Q3 net income increased 178% and nine-month net income increased 137%, driven primarily by mortgage banking growth and lower funding costs.
- Net interest income increased 37.1% in Q3 and 27.4% for the first nine months, although net interest margin declined 35 basis points and 34 basis points, respectively, due to lower asset yields.
- The loan-loss provision increased substantially because of COVID-19-related economic uncertainty and a $1.5 million specific reserve on an impaired commercial loan.
- Non-interest expense increased 90.7% in Q3 and 56.9% for the first nine months, primarily from mortgage commissions, staffing, loan production costs, and Maryland expansion.
- Loan growth, PPP funding, mortgage loans held for sale, and deposits materially expanded the balance sheet, while capital ratios declined because risk-weighted assets grew faster than equity.
- Mortgage servicing rights increased to $2.6 million from $0.4 million at year-end 2019; SBA servicing rights increased to $0.8 million from $0.3 million.
- The Board declared a quarterly dividend of $0.125 per share, payable November 23, 2020.
Outlook, risks, contingencies, and unusual items
Management did not provide quantitative earnings guidance. The filing states that results may be materially affected by the duration and severity of COVID-19, economic conditions, interest rates, borrower performance, and government relief programs.
- Meridian had provided COVID-19-related payment relief or other modifications on $154.1 million of loans as of September 30, 2020; $19.1 million remained actively modified. As of October 26, 2020, active deferrals included $4.4 million of commercial loans, $14.2 million of construction loans, and $0.6 million of residential loans.
- PPP loans totaled $259.7 million across 928 clients. Forgiveness timing and eligibility remain uncertain, affecting the expected recognition of deferred fees and interest income.
- The company warned that the SBA could deny or reduce PPP guarantees, seek recovery of losses, or subject Meridian to regulatory scrutiny, compliance costs, litigation, and reputational damage.
- COVID-19 could increase delinquencies, nonperforming assets, charge-offs, allowance requirements, collateral losses, liquidity needs, and impairment risk for goodwill and intangible assets.
- Low interest rates may pressure asset yields, net interest margin, and profitability. Management’s simulation indicated that a 200-basis-point decline in rates could reduce projected one-year net interest income by 14.19%, although the filing cautions that simulations are not forecasts.
- Off-balance-sheet commitments to extend credit totaled $377.9 million, and standby letters of credit totaled $7.1 million. Meridian repurchased one previously sold loan for $154 thousand during the nine months.
- No goodwill impairment was identified through September 30, 2020. The company expects to adopt lease accounting guidance effective January 1, 2021 and has not yet estimated the impact of CECL, scheduled for adoption in 2023.
Important facts for investors to verify
- Whether mortgage origination and refinancing volumes remain elevated and whether the expanded mortgage platform can sustain profitability after rate or volume normalization.
- The ultimate forgiveness, fee recognition, and SBA guarantee status of the $259.7 million PPP portfolio and related $235.9 million PPPLF borrowing.
- Trends in active COVID-19 deferrals, nonperforming loans, criticized assets, charge-offs, and future loan-loss provisions.
- Whether the 3.26% quarterly net interest margin stabilizes or continues to contract as loan yields remain pressured.
- The effect of rapid asset growth and PPPLF funding on capital ratios, liquidity, and regulatory requirements.
- The sustainability of unusually strong fair-value gains, mortgage banking income, and derivative-related results.
- Potential PPP-related litigation, regulatory actions, guarantee disputes, and loan repurchase obligations.