Meridian Earnings 2019-09-30

MRBK 10Q Quarterly Report

Balance Sheet	Income Statement	Cash Flow

Comparables ($MM TTM)
Ticker	M Cap	Assets	Liab	Rev	G Profit	Net Inc	EBITDA	EV	G Margin	EV/EBITDA	ROA
PME	190	362	207	84	32	17	20	312	38%	15.9	5%
AIQ	146	654	663	524	226	18	109	666	43%	6.1	3%
SRET	135	701	419	119	15	20	42	509	12%	12.1	3%
MRBK	115	1,056	942	0	0	9	30	85		2.8	1%
ASG	112	0	1	0	0	-1	-1	112	71%	-81.5	-2,619%
NEWT	102	203	120	38	19	3	7	98	50%	14.4	1%
AQB	61	37	7	0	0	-12	-11	56	14%	-5.2	-32%
ARCT	54	44	38	4	0	-7	-7	32	0%	-4.8	-15%
CACG	37	30	9	0	0	-0	-0	37		-96.2	-1%
USAU	22	9	0	0	0	-8	-7	18		-2.5	-86%

10-Q 1 mrbk-20190930x10q.htm 10-Q mrbk_Current_Folio_10Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-55983

(Exact name of registrant as specified in its charter)

Pennsylvania	32-0116054
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

9 Old Lincoln Highway, Malvern, Pennsylvania 19355

(Address of principal executive offices) (Zip Code)

(484) 568‑5000

(Registrant’s telephone number, including area code)


Title of class	Trading Symbol	Name of exchange on which registered
Common Stock, $1 par value	MRBK	The NASDAQ Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒Yes ☐No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐

Non-accelerated filer ☐	Smaller reporting company ☒

Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 13, 2019 there were 6,405,600 outstanding shares of the issuer’s common stock, par value $1.00 per share.

Table of Contents

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

Item 1 Financial Statements (Unaudited)	3

Consolidated Balance Sheets – September 30, 2019 and December 31, 2018	3

Consolidated Statements of Income – Three and Nine Months Ended September 30, 2019 and 2018	4

Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2019 and 2018	5

Consolidated Statements of Stockholders’ Equity – Three and Nine Months Ended September 30, 2019 and 2018	6

Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2019 and 2018	7

Notes to Consolidated Financial Statements (Unaudited)	8

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3 Quantitative and Qualitative Disclosures about Market Risk	54

Item 4 Controls and Procedures	55

PART II OTHER INFORMATION

Item 1 Legal Proceedings	57

Item 1A Risk Factors	57

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 3 Defaults Upon Senior Securities	57

Item 4 Mine Safety Disclosures	57

Item 5 Other Information	57

Item 6 Exhibits	57

Signatures	59

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30,		December 31,
(dollars in thousands, except per share data)	2019		2018
Cash and due from banks	$	40,267	23,159
Federal funds sold		265	793
Cash and cash equivalents		40,532	23,952
Securities available-for-sale (amortized cost of $52,496 and $50,942 as of September 30, 2019 and December 31, 2018)		52,757	50,428
Securities held-to-maturity (fair value of $9,028 and $12,655 as of September 30, 2019 and December 31, 2018)		8,814	12,741
Mortgage loans held for sale (amortized cost of $48,339 and $37,337 as of September 30, 2019 and December 31, 2018)		48,615	37,695
Loans, net of fees and costs (includes $11,278 and $11,422 of loans at fair value, amortized cost of $10,934 and $11,466 as of September 30, 2019 and December 31, 2018)		935,858	838,106
Allowance for loan and lease losses		(9,312)	(8,053)
Loans, net of the allowance for loan and lease losses		926,546	830,053
Restricted investment in bank stock		8,237	7,002
Bank premises and equipment, net		8,929	9,638
Bank owned life insurance		11,787	11,569
Accrued interest receivable		3,155	2,889
Other real estate owned		120	—
Deferred income taxes (Footnote 1)		1,803	1,728
Goodwill and intangible assets		4,841	5,046
Other assets		10,801	4,739
Total assets	$	1,126,937	997,480

Liabilities:
Deposits:
Noninterest bearing	$	129,302	126,150
Interest-bearing		729,159	625,980
Total deposits		858,461	752,130
Short-term borrowings		128,465	114,300
Long-term debt		3,123	6,238
Subordinated debentures		9,176	9,239
Accrued interest payable		669	305
Other liabilities (Footnote 1)		9,271	5,716
Total liabilities		1,009,165	887,928

Stockholders’ equity:
Common stock, $1 par value. Authorized 10,000,000 shares; issued and outstanding 6,407,685 and 6,406,795 as of September 30, 2019 and December 31, 2018		6,408	6,407
Surplus		80,192	79,919
Retained earnings (Footnote 1)		30,961	23,616
Accumulated other comprehensive loss		211	(390)
Total stockholders’ equity		117,772	109,552
Total liabilities and stockholders’ equity	$	1,126,937	997,480

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three months ended			Nine months ended
	September 30,			September 30,
(dollars in thousands, except per share data)	2019		2018	2019	2018
Interest income:
Loans, including fees	$	13,152	11,218	37,686	31,217
Securities:
Taxable		336	213	892	549
Tax-exempt		64	112	273	336
Cash and cash equivalents		38	30	136	75
Total interest income		13,590	11,573	38,987	32,177
Interest expense:
Deposits		3,633	2,485	10,584	6,171
Borrowings		683	710	1,731	1,790
Total interest expense		4,316	3,195	12,315	7,961
Net interest income		9,274	8,378	26,672	24,216
Provision for loan losses		705	291	938	1,258
Net interest income after provision for loan losses		8,569	8,087	25,734	22,958
Non-interest income:
Mortgage banking income		7,910	8,274	19,139	20,407
Wealth management income		922	930	2,698	2,996
SBA loan income		645	—	1,160	—
Earnings on investment in life insurance		74	74	218	225
Net change in the fair value of derivative instruments		—	70	(16)	59
Net change in the fair value of loans held-for-sale		54	(300)	(82)	(241)
Net change in the fair value of loans held-for-investment		(24)	(103)	390	(289)
Gain on sale of investment securities available-for-sale		74	—	212	—
Service charges		28	27	82	87
Other		131	195	387	1,647
Total non-interest income		9,814	9,167	24,188	24,891
Non-interest expenses:
Salaries and employee benefits		9,319	8,901	25,789	26,719
Occupancy and equipment		946	920	2,845	2,870
Loan expenses		758	769	1,877	1,962
Professional fees		820	714	2,000	1,670
Advertising and promotion		574	590	1,769	1,802
Data processing		343	334	990	924
Information technology		334	268	919	836
Communications		155	197	510	683
Other		903	1,060	3,813	2,923
Total non-interest expenses		14,152	13,753	40,512	40,389
Income before income taxes		4,231	3,501	9,410	7,460
Income tax expense		914	774	2,065	1,661
Net income	$	3,317	2,727	7,345	5,799

Basic earnings per common share	$	0.52	0.43	1.15	0.91

Diluted earnings per common share	$	0.52	0.42	1.14	0.90

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three months ended			Nine months ended
	September 30,			September 30,
(dollars in thousands)	2019		2018	2019	2018
Net income:	$	3,317	2,727	7,345	5,799

Other comprehensive income:
Net change in unrealized gains (losses) on investment securities available for sale:
Net unrealized gains (losses) arising during the period, net of tax (benefit) expense of $17, ($57), $219, and ($155), respectively		64	(171)	767	(510)
Less: reclassification adjustment for net (gains) on sales realized in net income, net of tax (expense) benefit of ($16), $0, ($47), and $0, respectively		(58)	—	(166)	—
Unrealized investment gains (losses), net of tax expense (benefit) of $1, ($57), $172, and ($155), respectively		6	(171)	601	(510)
Total other comprehensive income (loss)		6	(171)	601	(510)
Total comprehensive income	$	3,323	2,556	7,946	5,289

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


					Accumulated
					Other
		Common		Retained	Comprehensive
(dollars in thousands)		Stock	Surplus	Earnings	Income (Loss)	Total
Balance, January 1, 2018 (Footnote 1)	$	6,392	79,501	15,453	(298)	101,048
Comprehensive income:
Net income				1,270		1,270
Change in unrealized gains on securities available-for-sale, net of tax					(276)	(276)
Total comprehensive income						994
Compensation expense related to stock option grants			3			3
Balance, March 31, 2018	$	6,392	79,504	16,723	(574)	102,045
Comprehensive income:
Net income				1,802		1,802
Change in unrealized gains on securities available-for-sale, net of tax					(63)	(63)
Total comprehensive income						1,739
Share-based awards and exercises		9				9
Compensation expense related to stock option grants			272			272
Balance, June 30, 2018	$	6,401	79,776	18,525	(637)	104,065
Comprehensive income:
Net income				2,727		2,727
Change in unrealized gains on securities available-for-sale, net of tax					(171)	(171)
Total comprehensive income						2,556
Share-based awards and exercises		6				6
Compensation expense related to stock option grants			76			76
Balance, September 30, 2018	$	6,407	79,852	21,252	(808)	106,703


					Accumulated
					Other
		Common		Retained	Comprehensive
(dollars in thousands)		Stock	Surplus	Earnings	Income (Loss)	Total
Balance, January 1, 2019	$	6,407	79,919	23,616	(390)	109,552
Comprehensive income:
Net income				2,006		2,006
Change in unrealized gains on securities available-for-sale, net of tax					373	373
Total comprehensive income						2,379
Compensation expense related to stock option grants			61			61
Balance, March 31, 2019	$	6,407	79,980	25,622	(17)	111,992
Comprehensive income:
Net income				2,022		2,022
Change in unrealized gains on securities available-for-sale, net of tax					222	222
Total comprehensive income						2,244
Compensation expense related to stock option grants			143			143
Balance, June 30, 2019	$	6,407	80,123	27,644	205	114,379
Comprehensive income:
Net income				3,317		3,317
Change in unrealized gains on securities available-for-sale, net of tax					6	6
Total comprehensive income						3,323
Share-based awards and exercises		1	7			8
Compensation expense related to stock option grants			62			62
Balance, September 30, 2019	$	6,408	80,192	30,961	211	117,772

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine months ended
	September 30,
(dollars in thousands)	2019		2018
Net income	$	7,345	5,799
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of investment securities		(212)	—
Depreciation and amortization		1,559	1,088
Loss on disposal of premises and equipment		14	—
Provision for loan losses		938	1,258
Compensation expense for stock options		266	351
Net change in fair value of loans held for sale		82	241
Net change in fair value of derivative instruments		16	(59)
Net change in fair value of contingent assets		—	177
Gain on sale of OREO		—	(57)
SBA loan income		(1,160)	—
Proceeds from sale of loans		432,831	513,259
Loans originated for sale		(421,092)	(492,113)
Mortgage banking income		(19,139)	(20,407)
Increase in accrued interest receivable		(266)	(377)
Decrease (increase) in other assets		91	(110)
Earnings from investment in life insurance		(218)	(225)
Deferred income tax (benefit) (Footnote 1)		(249)	(465)
Increase in accrued interest payable		364	137
Increase in other liabilities (Footnote 1)		3,249	1,184
Net cash provided by operating activities		4,419	9,681
Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities, repayments and calls		11,090	4,080
Sales		19,366	—
Purchases		(29,027)	(12,768)
Proceeds from sale of OREO		—	494
Settlement of forward contracts		(85)	(21)
(Increase) decrease in restricted stock		(1,235)	2,233
Net increase in loans		(104,640)	(107,068)
Purchases of premises and equipment		(634)	(1,499)
Proceeds from settlement of loans		—	2,766
Net cash used in investing activities		(105,165)	(111,783)
Cash flows from financing activities:
Net increase in deposits		106,331	154,818
Increase (decrease) in short term borrowings		14,165	(57,795)
Repayment of long term debt (FHLB advances)		(2,702)	—
Repayment of long term debt (Acquisition note)		(413)	(619)
Repayment of long term debt (Subordinated debt)		(63)	(4,000)
Share based awards and exercises		8	15
Net cash provided by financing activities		117,326	92,419
Net change in cash and cash equivalents		16,580	(9,683)
Cash and cash equivalents at beginning of period		23,952	35,506
Cash and cash equivalents at end of period	$	40,532	25,823
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	11,951	7,392
Income taxes		1,539	1,565
Supplemental disclosure of cash flow information:
Transfers from loans and leases to real estate owned		120	—
Transfers from loans held for sale to loans held for investment		3,602	—
Net loans sold, not settled		(5,580)	4,490

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(1) Basis of Presentation

Meridian Corporation (the “Corporation”) was incorporated on June 8, 2009, by and at the direction of the board of directors of Meridian Bank (the “Bank”) for the sole purpose of acquiring the Bank and serving as the Bank’s parent bank holding company. On August 24, 2018, the Corporation acquired the Bank in a merger and reorganization effected under Pennsylvania law and in accordance with the terms of a Plan of Merger and Reorganization dated April 26, 2018 (the “Agreement”). Pursuant to the Agreement, on August 24, 2018 at 5:00 p.m. all of the outstanding shares of the Bank’s $1.00 par value common stock formerly held by its shareholders was converted into and exchanged for one newly issued share of the Corporation’s par value common stock, and the Bank became a subsidiary of the Corporation. Because the Bank and the Corporation were entities under common control, this exchange of shares between entities under common control resulted in the retrospective combination of the Bank and the Corporation for all periods presented as if the combination had been in effect since inception of common control. As the Corporation had no assets, liabilities, revenues, expenses or operations prior to August 24, 2018, the historical financial statements of the Bank are the historical financial statements of the combined entity.

The Corporation’s unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and the results of operations for the interim periods presented have been included.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Amounts subject to significant estimates are items such as the allowance for loan losses and lending related commitments, the fair value of financial instruments, other-than-temporary impairments of investment securities, and the valuations of goodwill and intangible assets.

These unaudited consolidated financial statements should be read in conjunction with the Corporation’s filings with the Securities and Exchange Commission (including our Annual Report on Form 10-K for the year ended December 31, 2018) and, for periods prior to the completion of the holding company reorganization, the Bank’s filings with the FDIC, including the Bank’s annual report on Form 10-K for the year ended December 31, 2017, and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in Form 10-K and Form 10-Q filings, if any. Certain prior period amounts have been reclassified to conform with current period presentation. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results for the year ended December 31, 2019 or for any other period.

During the quarter-ended March 31, 2019, the Corporation identified and corrected an immaterial error related to Maryland state licensing requirements for mortgage loan originations by our Mortgage division. As the result of our mortgage operations not being fully compliant with Maryland licensing law, we agreed to reimburse consumers approximately $474 thousand in interest and certain fees on loans originated, in addition to paying a fine of $12 thousand to resolve the matter. The Corporation has revised its comparative consolidated financial statements in the amount of $407 thousand, or $315 thousand net of tax, for periods prior to January 1, 2018 related to interest and fees on loans. The error correction impacted beginning retained earnings, deferred tax assets and other liabilities as of January 1, 2018, as shown below.

Table of Contents

The following table summarizes the impacts of the correction on the consolidated balance sheet as of January 1, 2018:



(dollars in thousands, except per share data)		Reported	Corrections	Revised
Deferred income taxes	$	1,312	92	1,404
Other liabilities		5,426	407	5,833
Retained earnings		15,768	(315)	15,453

The following table summarizes the impacts of the correction on the consolidated balance sheet as of December 31, 2018:


(dollars in thousands, except per share data)		Reported	Corrections	Revised
Deferred income taxes	$	1,636	92	1,728
Other liabilities		5,309	407	5,716
Retained earnings		23,931	(315)	23,616

The following table summarizes the impacts of the corrections to our capital ratios as of December 31, 2018:


	December 31, 2018 - as reported
							To be well capitalized under
				For capital adequacy			prompt corrective action
	Actual			purposes *			provisions
(dollars in thousands):	Amount		Ratio	Amount		Ratio	Amount		Ratio
Total capital (to risk-weighted assets)	$	122,577	13.70%	$	71,577	8.00%	$	89,472	10.00%
Common equity tier 1 capital (to risk-weighted assets)		105,196	11.76%		40,262	4.50%		58,157	6.50%
Tier 1 capital (to risk-weighted assets)		105,196	11.76%		53,683	6.00%		71,577	8.00%
Tier 1 capital (to average assets)		105,196	11.20%		37,578	4.00%		46,972	5.00%


	December 31, 2018 - as revised
							To be well capitalized under
				For capital adequacy			prompt corrective action
	Actual			purposes *			provisions
(dollars in thousands):	Amount		Ratio	Amount		Ratio	Amount		Ratio
Total capital (to risk-weighted assets)	$	122,262	13.66%	$	88,362	9.88%	$	89,481	10.00%
Common equity tier 1 capital (to risk-weighted assets)		104,881	11.72%		57,044	6.38%		58,163	6.50%
Tier 1 capital (to risk-weighted assets)		104,881	11.72%		70,466	7.88%		71,585	8.00%
Tier 1 capital (to average assets)		104,881	11.16%		37,581	4.00%		46,977	5.00%

*Includes capital conservation buffer of 2.50% for 2019 and 1.875% for 2018.

Table of Contents

(2) Earnings per Common Share

Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per common share takes into account the potential dilution computed pursuant to the treasury stock method that could occur if stock options were exercised and converted into common stock. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be anti-dilutive.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands, except per share data)	2019		2018		2019		2018
Numerator:
Net income available to common stockholders	$	3,317		2,727	$	7,345		5,799
Denominator for basic earnings per share - weighted average shares outstanding		6,407		6,402		6,407		6,395
Effect of dilutive common shares		30		28		29		31
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		6,437		6,430		6,436		6,426
Basic earnings per share	$	0.52		0.43	$	1.15		0.91
Diluted earnings per share	$	0.52		0.42	$	1.14		0.90
Antidilutive shares excluded from computation of average dilutive earnings per share		199		116		199		116

(3) Goodwill and Other Intangibles

The Corporation’s goodwill and intangible assets related to the acquisition of HJ Wealth in April 2017 are detailed below:


	Balance			Balance	Amortization
	December 31,		Amortization	September 30,	Period
(dollars in thousands)	2018		Expense	2019	(in years)
Goodwill - Wealth	$	899	—	899	Indefinite
Total Goodwill		899	—	899

Closing Price ($)	Shares Out (MM)	Market Cap ($MM)
$0.00	6	$115

10-Q	2019-11-13	Quarter: 2019-09-30
10-Q	2019-08-14	Quarter: 2019-06-30
10-Q	2019-05-29	Quarter: 2019-03-31
10-K	2019-04-01	Annual: 2018-12-31

8-K	2019-12-18	Enter Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K	2019-10-24	Earnings, Exhibits
8-K	2019-07-29	Earnings, Exhibits
8-K	2019-05-29	Other Events
8-K	2019-05-23	Shareholder Vote, Exhibits
8-K	2019-05-23	Earnings, Regulation FD, Exhibits
8-K	2019-05-17	Earnings, Regulation FD, Exhibits
8-K	2019-04-11	Officers, Regulation FD, Exhibits
8-K	2019-03-07	Other Events, Exhibits
8-K	2019-01-25	Earnings, Exhibits

EX-31.1	mrbk-20190930ex311c0ec8c.htm
EX-31.2	mrbk-20190930ex31284d79c.htm
EX-32	mrbk-20190930xex32.htm