Meridian Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited consolidated results cover the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Meridian operates through Banking, Mortgage Banking, and Wealth Management segments. On August 24, 2018, Meridian Corporation acquired Meridian Bank in a common-control merger and reorganization; prior periods were retrospectively combined as if the structure had existed since inception. The filing identifies the company as a smaller reporting company and emerging growth company.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Change |
|---|
| Net interest income | $8.4 million | $7.3 million | +14.1% |
| Non-interest income | $9.2 million | $10.5 million | -12.3% |
| Non-interest expense | $13.8 million | $15.0 million | -8.4% |
| Net income for common stockholders | $2.7 million | $1.1 million | +145.9% |
| Diluted EPS | $0.42 | $0.30 | +40.0% |
| Net interest margin | 3.72% | 3.91% | -19 bps |
| Annualized ROA / ROE | 1.16% / 10.16% | 0.70% / 7.77% | Improved |
| Metric | Nine months 2018 | Nine months 2017 | Change |
|---|
| Net interest income | $24.2 million | $21.1 million | +14.7% |
| Non-interest income | $24.9 million | $27.5 million | -9.6% |
| Non-interest expense | $40.4 million | $43.1 million | -6.3% |
| Net income for common stockholders | $5.8 million | $1.9 million | +208.9% |
| Diluted EPS | $0.90 | $0.51 | +76.5% |
| Net interest margin | 3.83% | 3.94% | -11 bps |
| Annualized ROA / ROE | 0.87% / 7.47% | 0.49% / 5.24% | Improved |
Financial condition, liquidity, and capital
- Total assets were $959.8 million at September 30, 2018, up 12.1% from December 31, 2017.
- Portfolio loans, excluding mortgage loans held for sale, were $806.8 million, up 16.1%. Total loans and leases were $842.5 million.
- Total deposits were $781.9 million, up 24.7%, while cash and cash equivalents declined to $25.8 million from $35.5 million.
- Short-term borrowings declined to $43.8 million from $99.8 million. Long-term debt was $6.4 million and subordinated debentures were $9.3 million.
- Primary liquidity was reported at $133.9 million. Available borrowing capacity included approximately $432.8 million from the FHLB, $10.7 million through the Federal Reserve, $39 million of unsecured federal funds lines, and additional CD funding capacity.
- Stockholders’ equity was $107.0 million, or 11.15% of assets. Tier 1 leverage, common equity Tier 1, and total risk-based capital ratios were 11.02%, 12.03%, and 14.03%, respectively; management stated that the company remained above “well-capitalized” regulatory thresholds.
- Tangible common equity ratio was 10.67%, down from 11.27% at year-end 2017, while tangible book value per share increased to $15.91 from $15.00.
- Nine-month operating cash flow was $9.7 million, compared with $16.5 million in 2017. Investing cash use was $111.8 million, primarily reflecting a $107.1 million increase in loans. Financing cash flow was $92.4 million, principally from deposit growth.
Material changes and management commentary
- Net interest income benefited from loan growth and higher asset yields, but the net interest margin contracted as funding costs rose faster than asset yields.
- Mortgage banking income declined to $8.3 million in the quarter and $20.4 million year to date, primarily due to lower margins and origination volume. Mortgage margin declined 50 basis points in the quarter and 26 basis points year to date.
- Wealth management income was approximately flat in the quarter but increased to $3.0 million year to date from $1.9 million.
- Lower salaries, employee benefits, and variable loan expenses reduced non-interest expense, reflecting reduced mortgage personnel and activity.
- The effective tax rate declined to 22.1% in the quarter and 22.3% year to date, largely because of the reduction in the federal statutory tax rate under the Tax Cuts and Jobs Act.
- Nonperforming loans and leases declined to $2.9 million, or 0.36% of portfolio loans, from $3.2 million, or 0.45%, at year-end. The allowance was $7.7 million, or 0.96% of portfolio loans, versus $6.7 million at year-end.
- Net charge-offs were $29 thousand in the quarter and $256 thousand year to date, compared with $520 thousand and $511 thousand, respectively, in the prior-year periods.
- Other real estate owned declined to zero from $437 thousand after the properties were sold, generating a $57 thousand gain.
- Total troubled debt restructurings increased to $4.0 million from $2.6 million, including $3.5 million in compliance with modified terms.
Guidance, outlook, risks, contingencies, and unusual items
- The filing provides no quantitative earnings or revenue guidance. Management states that current operating results are not necessarily indicative of full-year or future results.
- Management describes the balance sheet as slightly asset sensitive in interest-rate simulations; a 100-basis-point rate increase was estimated to improve annualized 12-month net interest income by $93 thousand, while a 100-basis-point decrease was estimated to reduce it by $237 thousand.
- Key risks include rising funding costs, mortgage production and margin volatility, commercial real estate and commercial loan concentrations, credit losses, interest-rate changes, liquidity requirements, regulatory developments, and litigation.
- A wage-and-hour class and collective action brought by former mortgage-banking employees remains pending. Meridian recorded a $200 thousand reserve, but stated that actual losses could differ.
- Professional fees included $230 thousand related to formation of the holding company. Other expenses included a $177 thousand fair-value reduction of a contingent asset and the $200 thousand litigation reserve.
- Available-for-sale securities had $1.1 million of unrealized losses at September 30, 2018. Management considered the losses temporary and stated it did not intend, and was not likely required, to sell the securities before recovery.
- The company elected the extended transition period available to emerging growth companies and was evaluating several new accounting standards, including current expected credit losses, revenue recognition, leases, and financial instruments.
- Management concluded that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Investor verification checklist
- Verify the effect of the August 24, 2018 holding-company reorganization and the retrospective presentation of prior periods.
- Assess whether loan growth, deposit growth, and available liquidity can be sustained without materially increasing funding costs or credit risk.
- Monitor the declining net interest margin and sensitivity to further increases in deposit and wholesale funding rates.
- Review mortgage banking volumes, gain-on-sale margins, hedging results, and the effect of interest rates on this significant non-interest revenue stream.
- Evaluate commercial mortgage, construction, and commercial and industrial loan concentrations, criticized loans, TDRs, and allowance adequacy.
- Follow the pending wage-and-hour litigation and determine whether the $200 thousand reserve remains sufficient.
- Reconcile reported capital ratios with applicable regulatory requirements and the effect of continued balance-sheet growth.
- Confirm the filing’s registrant and signature references, which identify the reporting entity as Meridian Corporation in the filing but show “Meridian Bank” in the signature block.
