Meridian (MRBK) - 2020 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION This section provides the unaudited consolidated financial statements and management's discussion and analysis of Meridian Corporation's financial condition and results of operations Item 1. Financial Statements (Unaudited) This section presents Meridian Corporation's unaudited consolidated financial statements, notes, and the impact of COVID-19 Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity at specific points in time Consolidated Balance Sheet (June 30, 2020 vs. December 31, 2019) | (dollars in thousands) | June 30, 2020 | December 31, 2019 | | :--------------------- | :------------ | :---------------- | | Cash and cash equivalents | $46,741 | $39,371 | | Securities available-for-sale | $97,100 | $58,856 | | Loans, net of fees and costs | $1,262,968 | $964,710 | | Allowance for loan and lease losses | $(12,706) | $(9,513) | | Total assets | $1,579,083 | $1,150,019 | | Total deposits | $1,166,697 | $851,168 | | Short-term borrowings | $87,044 | $123,676 | | Long-term debt | $145,447 | $3,123 | | Total liabilities | $1,453,565 | $1,029,324 | | Total stockholders' equity | $125,518 | $120,695 | Consolidated Statements of Income This section outlines the company's financial performance, including revenues, expenses, and net income over specific periods Consolidated Statements of Income (Three Months Ended June 30) | (dollars in thousands) | June 30, 2020 | June 30, 2019 | | :--------------------- | :------------ | :------------ | | Interest income | $15,055 | $13,073 | | Interest expense | $3,458 | $4,151 |\ | Net interest income | $11,597 | $8,922 | | Provision for loan losses | $1,631 | $14 | | Non-interest income | $20,686 | $7,928 | | Non-interest expenses | $23,249 | $14,244 | | Net income | $5,713 | $2,022 | | Basic earnings per common share | $0.94 | $0.32 | | Diluted earnings per common share | $0.94 | $0.31 | Consolidated Statements of Income (Six Months Ended June 30) | (dollars in thousands) | June 30, 2020 | June 30, 2019 | | :--------------------- | :------------ | :------------ |\ | Interest income | $28,849 | $25,397 | | Interest expense | $7,586 | $7,999 | | Net interest income | $21,263 | $17,398 | | Provision for loan losses | $3,183 | $233 | | Non-interest income | $31,041 | $14,375 | | Non-interest expenses | $38,447 | $26,360 | | Net income | $8,229 | $4,028 | | Basic earnings per common share | $1.33 | $0.63 | | Diluted earnings per common share | $1.32 | $0.63 | Consolidated Statements of Comprehensive Income This section reports net income and other comprehensive income components, reflecting all changes in equity from non-owner sources Consolidated Statements of Comprehensive Income (Three & Six Months Ended June 30) | (dollars in thousands) | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :--------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income | $5,713 | $2,022 | $8,229 | $4,028 | | Unrealized investment gains, net of tax | $1,713 | $222 | $2,142 | $595 | | Total comprehensive income | $7,426 | $2,244 | $10,371 | $4,623 | Consolidated Statements of Stockholders' Equity This section details changes in the company's equity accounts, including common stock, retained earnings, and other comprehensive income Consolidated Statements of Stockholders' Equity (June 30, 2020 vs. January 1, 2020) | (dollars in thousands) | Common Stock | Surplus | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | | :--------------------- | :----------- | :------ | :------------- | :---------------- | :-------------------------------------------- | :---- | | Balance, January 1, 2020 | $6,408 | $80,255 | $(62) | $34,097 | $(3) | $120,695 | | Net income | | | | $8,229 | | $8,229 | | Change in unrealized gains on securities available-for-sale, net of tax | | | | | $2,142 | $2,142 | | Share-based award exercises | $6 | $26 | | | | $32 | | Net purchase of treasury stock | | $63 | $(5,766) | | | $(5,703) | | Compensation expense related to stock option grants | | $123 | | | | $123 | | Balance, June 30, 2020 | $6,414 | $80,467 | $(5,828) | $42,326 | $2,139 | $125,518 | Consolidated Statements of Cash Flows This section summarizes cash inflows and outflows from operating, investing, and financing activities over specific periods Consolidated Statements of Cash Flows (Six Months Ended June 30) | (dollars in thousands) | June 30, 2020 | June 30, 2019 | | :--------------------- | :------------ | :------------ | | Net income | $8,229 | $4,028 | | Net cash (used) provided by operating activities | $(79,352) | $6,460 | | Net cash used in investing activities | $(328,622) | $(51,692) | | Net cash provided by financing activities | $415,344 | $51,910 | | Net change in cash and cash equivalents | $7,370 | $6,678 | | Cash and cash equivalents at end of period | $46,741 | $30,630 | Notes to Consolidated Financial Statements This section provides additional information and explanations to supplement the consolidated financial statements (1) Basis of Presentation & Impact of COVID-19 This section details the financial statement preparation basis and the significant impact of the COVID-19 pandemic on operations - The unaudited consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information, relying on management's estimates and assumptions for items like allowance for loan losses and fair value of financial instruments[17][18] - The COVID-19 pandemic has significantly impacted the U.S. economy and the Corporation's operating areas, potentially affecting customer's ability to repay, increasing loan loss provisions, and possibly leading to goodwill/intangible asset impairment[20][21][22][23] - The financial statements are prepared in accordance with U.S. GAAP for interim financial information and include management's estimates and assumptions, which could differ from actual results[17][18] - The COVID-19 pandemic has adversely impacted industries where the Corporation's customers operate, potentially affecting their ability to fulfill financial obligations and leading to increased allowance for loan losses[20][21][22] Consolidated Balance Sheet Highlights (June 30, 2020 vs. December 31, 2019) | Metric (dollars in thousands) | June 30, 2020 | December 31, 2019 | Change | % Change | | :---------------------------- | :------------ | :---------------- | :----- | :------- | | Total assets | $1,579,083 | $1,150,019 | $429,064 | 37.31% | | Total liabilities | $1,453,565 | $1,029,324 | $424,241 | 41.22% | | Total stockholders' equity | $125,518 | $120,695 | $4,823 | 4.00% | | Loans, net of ALLL | $1,250,262 | $955,197 | $295,065 | 30.89% | | Total deposits | $1,166,697 | $851,168 | $315,529 | 37.07% | Consolidated Statements of Income Highlights (Three & Six Months Ended June 30, 2020 vs. 2019) | Metric (dollars in thousands) | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | % Change (3M) | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | % Change (6M) | | :---------------------------- | :--------------------------- | :--------------------------- | :------------ | :--------------------------- | :--------------------------- | :------------ | | Total interest income | $15,055 | $13,073 | 15.16% | $28,849 | $25,397 | 13.59% | | Total interest expense | $3,458 | $4,151 | -16.70% | $7,586 | $7,999 | -5.16% | | Net interest income | $11,597 | $8,922 | 30.00% | $21,263 | $17,398 | 22.21% | | Provision for loan losses | $1,631 | $14 | 11550.00% | $3,183 | $233 | 1265.24% | | Total non-interest income | $20,686 | $7,928 | 160.94% | $31,041 | $14,375 | 115.94% | | Total non-interest expenses | $23,249 | $14,244 | 63.22% | $38,447 | $26,360 | 45.85% | | Net income | $5,713 | $2,022 | 182.54% | $8,229 | $4,028 | 104.30% | | Basic EPS | $0.94 | $0.32 | 193.75% | $1.33 | $0.63 | 111.11% | | Diluted EPS | $0.94 | $0.31 | 203.23% | $1.32 | $0.63 | 109.52% | (2) Earnings per Common Share This section details basic and diluted earnings per common share, which increased for the three and six months ended June 30, 2020 Earnings Per Common Share (Three & Six Months Ended June 30) | Metric (dollars in thousands, except per share data) | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :------------------------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net income available to common stockholders | $5,713 | $2,022 | $8,229 | $4,028 | | Basic earnings per share | $0.94 | $0.32 | $1.33 | $0.63 | | Diluted earnings per share | $0.94 | $0.31 | $1.32 | $0.63 | (3) Goodwill and Other Intangibles Goodwill and intangible assets remained stable with no impairment, with amortization recorded for customer relationships and non-competition agreements Goodwill and Intangible Assets (June 30, 2020 vs. December 31, 2019) | (dollars in thousands) | Balance December 31, 2019 | Amortization Expense | Balance June 30, 2020 | Amortization Period (in years) | | :--------------------- | :------------------------ | :------------------- | :-------------------- | :----------------------------- | | Goodwill - Wealth | $899 | — | $899 | Indefinite | | Intangible assets - trade name | $266 | — | $266 | Indefinite | | Intangible assets - customer relationships | $3,523 | $(103) | $3,420 | 20 | | Intangible assets - non competition agreements | $85 | $(34) | $51 | 4 | | Total Intangible Assets | $3,874 | $(137) | $3,737 | | - No impairment of goodwill and other intangible assets was determined for the period from January 1, 2020, through June 30, 2020[28] (4) Securities The securities portfolio increased in fair value and amortized cost, with temporary unrealized losses and no other-than-temporary impairment Securities Portfolio (June 30, 2020 vs. December 31, 2019) | (dollars in thousands) | June 30, 2020 Amortized Cost | June 30, 2020 Fair Value | December 31, 2019 Amortized Cost | December 31, 2019 Fair Value | | :--------------------- | :--------------------------- | :----------------------- | :------------------------------- | :--------------------------- | | Securities available-for-sale | $94,371 | $97,100 | $58,874 | $58,856 | | Securities held-to-maturity | $6,578 | $6,926 | $8,780 | $9,003 | | Total Securities | $100,949 | $104,026 | $67,654 | $67,859 | - At June 30, 2020, the Corporation's investment portfolio was in a net unrealized gain position, and unrealized losses on specific securities were considered temporary, primarily due to changes in market interest rates[29] Proceeds and Gains/Losses from Sale of Available-for-Sale Securities | Period | Proceeds (in millions) | Gross Gain (in thousands) | Gross Loss (in thousands) | | :--------------------- | :--------------------- | :------------------------ | :------------------------ | | 3 & 6 Months Ended June 30, 2020 | $18.2 | $257 | $202 | | 3 & 6 Months Ended June 30, 2019 | $16.7 | $181 | $42 | (5) Loans Receivable The loan portfolio grew significantly, driven by mortgage loans and PPP loans, with varying delinquency rates across categories Loans and Leases Outstanding (June 30, 2020 vs. December 31, 2019) | (dollars in thousands) | June 30, 2020 | December 31, 2019 | | :--------------------- | :------------ | :---------------- | | Mortgage loans held for sale | $117,691 | $33,704 | | Real estate loans | $698,557 | $669,882 | | Commercial and industrial | $277,608 | $273,301 | | Paycheck Protection Program loans | $259,947 | — | | Total portfolio loans and leases | $1,270,831 | $966,499 | | Total loans and leases | $1,388,522 | $1,000,203 | Age Analysis of Past Due Loans and Leases (June 30, 2020) | (dollars in thousands) | 30-89 days past due | Nonaccrual loans and leases | Total loans and leases | Delinquency percentage | | :--------------------- | :------------------ | :-------------------------- | :--------------------- | :--------------------- | | Commercial mortgage | — | $695 | $421,629 | 0.16% | | Home equity lines and loans | $488 | $744 | $73,410 | 1.68% | | Residential mortgage | $774 | $5,178 | $54,934 | 10.83% | | Commercial and industrial | — | $821 | $277,608 | 0.30% | | Leases | $14 | — | $3,352 | 0.42% | | Total | $1,276 | $7,438 | $1,270,831 | 0.69% | (6) Allowance for Loan Losses The ALLL significantly increased due to COVID-19 economic uncertainty and loan growth, with details on non-performing loans, TDRs, and COVID-19 modifications Roll-Forward of Allowance by Portfolio Segment This section tracks changes in the allowance for loan losses across different loan portfolio segments Allowance Allocated by Portfolio Segment This section details the allocation of the allowance for loan losses across various loan portfolio segments Loans and Leases by Credit Ratings This section categorizes loans and leases based on their internal credit quality ratings Carrying Value of Loans and Leases by Credit Quality (June 30, 2020) | (dollars in thousands) | Pass | Special mention | Substandard | Doubtful | Total | | :--------------------- | :---------- | :-------------- | :---------- | :------- | :---------- | | Commercial mortgage | $407,157 | $11,481 | $2,991 | — | $421,629 | | Home equity lines and loans | $72,178 | — | $1,232 | — | $73,410 | | Construction | $147,378 | $1,206 | — | — | $148,584 | | Commercial and industrial | $248,003 | $17,260 | $12,345 | — | $277,608 | | Small business loans | $29,279 | — | $1,540 | — | $30,819 | | Paycheck Protection Program loans | $259,947 | — | — | — | $259,947 | | Total | $1,163,942 | $29,947 | $18,108 | — | $1,211,997 | Impaired Loans This section provides details on loans identified as impaired and their associated allowance for losses Troubled Debt Restructuring This section outlines the status and volume of loans that have undergone troubled debt restructurings COVID-19 Loan Modification Programs This section describes the loan modification programs implemented in response to the COVID-19 pandemic - The Allowance for Loan Losses is established through provisions for loan losses charged against income, maintained at a level considered adequate for probable and estimable losses, and is subject to management's subjective estimates[38] Allowance for Loan Losses Roll-Forward (Six Months Ended June 30, 2020) | (dollars in thousands) | Balance, December 31, 2019 | Charge-offs | Recoveries | Provision | Balance, June 30, 2020 | | :--------------------- | :------------------------- | :---------- | :--------- | :-------- | :--------------------- | | Commercial mortgage | $3,426 | — | — | $1,851 | $5,277 | | Home Equity lines and loans | $342 | $(13) | $4 | $339 | $672 | | Residential mortgage | $179 | — | $4 | $163 | $346 | | Construction | $2,362 | — | — | $(343) | $2,019 | | Commercial and industrial | $2,684 | $(9) | $32 | $899 | $3,606 | | Small business loans | $509 | — | — | $238 | $747 | | Consumer | $6 | $(10) | $2 | $6 | $4 | | Leases | $5 | — | — | $30 | $35 | | Total | $9,513 | $(32) | $42 | $3,183 | $12,706 | Impaired Loans (June 30, 2020 vs. December 31, 2019) | (dollars in thousands) | June 30, 2020 Recorded Investment | June 30, 2020 Principal Balance | June 30, 2020 Related Allowance | December 31, 2019 Recorded Investment | December 31, 2019 Principal Balance | December 31, 2019 Related Allowance | | :--------------------- | :-------------------------------- | :------------------------------ | :------------------------------ | :------------------------------------ | :---------------------------------- | :---------------------------------- | | Impaired loans with related allowance | $800 | $806 | $39 | $2,080 | $2,080 | $136 | | Impaired loans without related allowance | $9,295 | $9,407 | — | $5,227 | $5,310 | — | | Grand Total | $10,095 | $10,213 | $39 | $7,307 | $7,390 | $136 | Troubled Debt Restructurings (TDRs) (June 30, 2020 vs. December 31, 2019) | (dollars in thousands) | June 30, 2020 | December 31, 2019 | | :--------------------- | :------------ | :---------------- | | TDRs included in nonperforming loans and leases | $250 | $319 | | TDRs in compliance with modified terms | $3,477 | $3,599 | | Total TDRs | $3,727 | $3,918 | - The Corporation provided $144.1 million in COVID-19 related loan modifications to 193 customers as of June 30, 2020, which were not classified as troubled debt restructurings due to CARES Act guidelines[57][58] (7) Short-Term Borrowings and Long-Term Debt Short-term borrowings decreased, long-term debt increased due to PPPLF advances, and the company maintains substantial FHLB and Federal Reserve borrowing capacity Short-Term Borrowings (June 30, 2020 vs. December 31, 2019) | (dollars in thousands) | June 30, 2020 | December 31, 2019 | | :--------------------- | :------------ | :---------------- | | Open Repo Plus Weekly | $21,625 | $102,320 | | Federal Reserve Discount Window | $10,000 | — | | Total | $87,044 | $123,676 | Long-Term Debt (June 30, 2020 vs. December 31, 2019) | (dollars in thousands) | June 30, 2020 | December 31, 2019 | | :--------------------- | :------------ | :---------------- | | PPPLF Advance | $136,155 | — | | Mid-term Repo-fixed | $9,292 | $3,123 | | Total | $145,447 | $3,123 | - The Corporation pledged $136.2 million of PPP loans to the FRB of Philadelphia to borrow $136.2 million of funds at a rate of 0.35% under the PPPLF program[62] - Maximum borrowing capacity with the FHLB was $513.4 million as of June 30, 2020, with $86.3 million borrowed and $135 million in letters of credit issued[64][244] (8) Servicing Assets Servicing assets, including MSRs and SBA loan servicing rights, increased significantly due to mortgage originations and refinance activity, evaluated quarterly for impairment Residential Mortgage Loans Servicing This section details the Corporation's residential mortgage loan servicing activities and related income - The Corporation serviced $172.4 million of residential mortgage loans as of June 30, 2020, a significant increase from $60.3 million at December 31, 2019[67] Residential Mortgage Servicing Fee Income (Three & Six Months Ended June 30) | (dollars in thousands) | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :--------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Servicing fee income | $67.0 | $18.2 | $107.0 | $32.3 | SBA Loans Servicing This section outlines the Corporation's SBA loan servicing activities and associated fee income - The Corporation serviced $35.2 million of SBA loans as of June 30, 2020, up from $18.0 million at December 31, 2019[72] SBA Loan Servicing Fee Income (Three & Six Months Ended June 30) | (dollars in thousands) | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :--------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Servicing fee income | $30.4 | — | $52.1 | — | - The Corporation sells residential mortgage loans and the guaranteed portion of SBA loans, retaining servicing rights and recognizing capitalized servicing assets when contractual servicing fees are expected to be more than adequate compensation[65][66] Residential Mortgage Servicing Rights (MSRs) Balance (Six Months Ended June 30) | (dollars in thousands) | June 30, 2020 | June 30, 2019 | | :--------------------- | :------------ | :------------ | | Balance at beginning of the period | $446 | $232 | | Servicing rights capitalized | $1,136 | $91 | | Amortization of servicing rights | $(83) | $(22) | | Change in valuation allowance | $(205) | $(65) | | Balance at end of the period | $1,294 | $236 | SBA Loan Servicing Asset Balance (Six Months Ended June 30) | (dollars in thousands) | June 30, 2020 | June 30, 2019 | | :--------------------- | :------------ | :------------ | | Balance at beginning of the period | $337 | — | | Servicing rights capitalized | $342 | $133 | | Amortization of servicing rights | $(47) | — | | Balance at end of the period | $632 | $133 | (9) Fair Value Measurements and Disclosures) This section outlines fair value measurement practices, categorizing financial instruments by input observability, detailing valuation methodologies and providing fair value tables Valuation Methodologies This section describes the methods and assumptions used to determine the fair value of financial instruments Fair Value Hierarchy This section categorizes financial instruments based on the observability of inputs used in their fair value measurements Fair Value of Financial Instruments This section presents the fair value of various financial assets and liabilities across different hierarchy levels - Fair value measurements are categorized into three levels based on the observability of inputs: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs requiring significant judgment)[83][84][85] - Mortgage loans held-for-sale and mortgage loans held-for-investment are valued using secondary market prices and observable market data (Level 2)[88][89] - Interest rate lock commitments are classified as Level 3 due to significant unobservable assumptions related to the likelihood of loan closure[90][91] Fair Value of Financial Assets and Liabilities (June 30, 2020) | (dollars in thousands) | Total | Level 1 | Level 2 | Level 3 | | :--------------------- | :--------- | :------ | :--------- | :--------- | | Assets | | | | | | Securities available for sale | $97,100 | — | $97,100 | — | | Mortgage loans held-for-sale | $117,691 | — | $117,691 | — | | Interest rate lock commitments | $4,595 | — | — | $4,595 | | Total Assets | $231,124 | — | $226,529 | $4,595 | | Liabilities | | | | | | Interest rate lock commitments | $183 | — | — | $183 | | Forward commitments | $786 | — | $786 | — | | Total Liabilities | $2,199 | — | $2,016 | $183 | (10) Derivative Financial Instruments The Corporation uses derivatives like interest rate locks, forward commitments, and swaps to manage interest rate risk, with fair value changes recognized in earnings - The Corporation uses derivatives to manage interest rate exposures from its loan portfolio, including interest rate locks for residential mortgage loans and forward commitments for hedging, as well as customer interest rate swaps[114][115][116] Notional Amounts and Fair Values of Derivative Financial Instruments (June 30, 2020) | (dollars in thousands) | Notional Amount | Fair Value | | :--------------------- | :-------------- | :--------- | | Interest Rate Lock Commitments | $358,727 | $4,412 | | Forward Commitments | $147,000 | $(786) | | Customer Derivatives - Interest Rate Swaps | $12,574 | $(125) | | Total derivative financial instruments | $518,301 | $3,501 | Net Fair Value Gains (Losses) on Derivative Financial Instruments (Three & Six Months Ended June 30) | (dollars in thousands) | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :--------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Interest Rate Lock Commitments | $724 | $16 | $4,065 | $34 | | Forward Commitments | $1,638 | $(31) | $(672) | $(23) | | Customer Derivatives - Interest Rate Swaps | $2 | $(17) | $(75) | $(27) | | Net fair value gains (losses) | $2,364 | $(32) | $3,318 | $(16) | (11) Segments The Corporation operates through Banking, Wealth Management, and Mortgage Banking segments, with Mortgage Banking showing significant income growth and Banking as the largest pre-tax profit contributor - The Corporation's operating segments are Banking (commercial and retail banking), Meridian Wealth (wealth management services), and Meridian's mortgage banking segment (residential mortgage originations and sales)[121][122][123] Segment Income Before Income Taxes (Three Months Ended June 30) | (Dollars in thousands) | Bank | Wealth | Mortgage | Total | | :--------------------- | :-------- | :----- | :------- | :-------- | | June 30, 2020 | $3,277 | $77 | $4,049 | $7,403 | | June 30, 2019 | $2,701 | $88 | $(197) | $2,592 | Segment Income Before Income Taxes (Six Months Ended June 30) | (Dollars in thousands) | Bank | Wealth | Mortgage | Total | | :--------------------- | :-------- | :----- | :------- | :-------- | | June 30, 2020 | $5,328 | $309 | $5,037 | $10,674 | | June 30, 2019 | $5,147 | $124 | $(91) | $5,180 | - The Mortgage Banking Segment recorded significant income before tax of $4.0 million and $5.0 million for the three and six months ended June 30, 2020, respectively, compared to operating losses in the prior year, driven by higher origination volume[248] (12) Stockholders' Equity (Dividends) The Board of Directors declared a cash dividend of $0.125 per common share, payable on August 24, 2020 - A cash dividend of $0.125 per common share was declared on July 23, 2020, payable on August 24, 2020, to shareholders of record as of August 10, 2020[127] (13) Recent Accounting Pronouncements As an 'emerging growth company,' Meridian Corporation elected an extended transition period for new accounting standards, detailing adoption status and impact of various ASUs - As an 'emerging growth company,' Meridian Corporation has elected the extended transition period for complying with new or revised accounting standards[128] - The adoption of ASU 2017-01 (Business Combinations), ASU 2018-07 (Nonemployee Share-Based Payment Accounting), and ASU 2018-13 (Fair Value Measurement Disclosure Framework) did not have a material impact on the consolidated financial statements[129][131][132] - The effective date for ASU 2016-13 (Measurement of Credit Losses on Financial Instruments, CECL) for the Corporation is January 1, 2023, and the impact is currently being evaluated[133] - The Corporation will adopt ASU 2016-02 (Leases) and ASU 2018-11 (Leases transition method) as of January 1, 2021, and is evaluating their effects[135][137] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Meridian Corporation's financial performance and condition, highlighting COVID-19 and PPP impact on operations, loan growth, net interest income, asset quality, ratios, capital, liquidity, and segment performance Cautionary Statement Regarding Forward-Looking Statements This section warns readers about forward-looking statements, highlighting inherent risks and uncertainties - The report contains forward-looking statements subject to risks and uncertainties, including the impact of COVID-19, government responses, and the risk that the SBA may not fund some or all PPP loan guaranties[146] Recent Developments This section provides an overview of significant recent events and their potential impact on the Corporation - The Federal Reserve significantly reduced interest rates in response to COVID-19, which is expected to adversely affect net interest income and profitability[149] - The Corporation provided nearly $260 million in PPP loans to 928 clients, supporting approximately 16,660 employees, and offered loan payment holidays and rate adjustments to commercial, construction, and residential loan customers[151][152][153] - The PPP Flexibility Act extended the loan forgiveness covered period to 24 weeks or December 31, 2020, and lowered the payroll cost requirement to 60%[160] - Under the CARES Act Section 1112, the SBA will pay principal and interest for six months on existing SBA 7(a) loans, with the Bank having 96 eligible loans totaling $67.6 million[161] Critical Accounting Policies, Judgments and Estimates This section identifies key accounting policies requiring significant management judgment and estimation - Management identifies the provision and allowance for loan losses as a critical accounting policy due to inherent estimates, assumptions, and judgments, which may be susceptible to significant revisions[162] Executive Overview This section provides a high-level summary of the Corporation's financial performance and condition highlights Executive Overview - Key Financial Highlights (Three Months Ended June 30, 2020 vs. 2019) | Metric | 2020 | 2019 | Change | % Change | | :---------------------- | :------------ | :------------ | :------------ | :------------ | | Net income | $5.7 million | $2.0 million | $3.7 million | 185.0% | | Diluted EPS | $0.94 | $0.31 | $0.63 | 203.2% | | Net interest income | $11.6 million | $8.9 million | $2.7 million | 30.3% | | Provision for loan losses | $1.6 million | $14 thousand | $1.6 million | 11328.6% | | Non-interest income | $20.7 million | $7.9 million | $12.8 million | 162.0% | | Mortgage banking income | $18.8 million | $6.3 million | $12.4 million | 196.8% | | Non-interest expense | $23.2 million | $14.2 million | $9.0 million | 63.4% | Executive Overview - Key Financial Highlights (Six Months Ended June 30, 2020 vs. 2019) | Metric | 2020 | 2019 | Change | % Change | | :---------------------- | :------------ | :------------ | :------------ | :------------ | | Net income | $8.2 million | $4.0 million | $4.2 million | 105.0% | | Diluted EPS | $1.32 | $0.63 | $0.69 | 109.5% | | Net interest income | $21.3 million | $17.4 million | $3.9 million | 22.4% | | Provision for loan losses | $3.2 million | $233 thousand | $3.0 million | 1288.8% | | Non-interest income | $31.0 million | $14.4 million | $16.7 million | 116.0% | | Mortgage banking income | $26.7 million | $11.2 million | $15.4 million | 137.5% | | Non-interest expense | $38.5 million | $26.4 million | $12.1 million | 45.8% | Executive Overview - Changes in Financial Condition (June 30, 2020 vs. December 31, 2019) | Metric | June 30, 2020 | Dec 31, 2019 | Change | % Change | | :---------------------- | :------------ | :------------ | :------------ | :------------ | | Total assets | $1.6 billion | $1.2 billion | $429.1 million | 37.3% | | Stockholders' equity | $125.5 million | $120.7 million | $4.8 million | 4.0% | | Total portfolio loans and leases | $1.3 billion | $964.7 million | $298.3 million | 30.9% | | Total non-performing loans and leases | $7.4 million | $3.2 million | $4.2 million | 131.3% | | Allowance for loan losses | $12.7 million | $9.5 million | $3.2 million | 33.7% | | Total deposits | $1.2 billion | $851.2 million | $315.5 million | 37.1% | Key Performance Ratios This section presents essential financial ratios used to evaluate the Corporation's operational and financial health Key Performance Ratios (Three & Six Months Ended June 30) | Ratio | 3 Months Ended June 30, 2020 | 3 Months Ended June 30, 2019 | 6 Months Ended June 30, 2020 | 6 Months Ended June 30, 2019 | | :------------------------ | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Annualized return on average equity | 19.16% | 7.14% | 13.70% | 7.22% | | Annualized return on average assets | 1.56% | 0.81% | 1.26% | 0.82% | | Net interest margin (tax effected yield) | 3.27% | 3.72% | 3.37% | 3.69% | | Basic earnings per share | $0.94 | $0.32 | $1.33 | $0.63 | | Diluted earnings per share | $0.94 | $0.31 | $1.32 | $0.63 | Key Period-End Balances and Ratios (June 30, 2020 vs. December 31, 2019) | Metric | June 30, 2020 | December 31, 2019 | | :------------------------ | :------------ | :---------------- | | Book value per common share | $20.60 | $18.84 | | Tangible book value per common share | $19.84 | $18.09 | | Allowance as a percentage of loans and leases held for investment (excl. loans at fair value) | 1.01% | 1.00% | | Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) | 1.27% | 1.00% | | Tier I capital to risk weighted assets | 10.24% | 11.21% | | Tangible common equity ratio | 7.68% | 10.12% | | Loans held for investment | $1,262,968 | $964,710 | | Total assets | $1,579,083 | $1,150,019 | | Stockholders' equity | $125,518 | $120,695 | Non-GAAP Financial Measures This section explains the use and reconciliation of non-GAAP financial measures for additional insights - Non-GAAP measures like tangible common equity ratio and allowance for loan losses to total loans (excluding fair valued and PPP loans) are used to assess capital strength and loan quality, providing additional insights beyond GAAP measures[172][173][175] Components of Net Income This section breaks down the various components contributing to the Corporation's net income - Net income is comprised of net interest income, provision for loan and lease losses, non-interest income, non-interest expense, and income taxes[180] Net Interest Income Net interest income increased due to significant growth in average interest-earning assets, especially PPP loans, despite declining yields, while interest expense decreased from lower rates - Net interest income increased by $2.7 million (30.2%) for the three months and $3.9 million (22.2%) for the six months ended June 30, 2020, compared to the same periods in 2019[183][184] - The increase in net interest income was primarily due to a $465.8 million increase in average interest-earning assets for the three months and $320.9 million for the six months, led by PPP loan growth[178][179] - Net interest margin decreased by 45 basis points to 3.27% for the three months and 32 basis points to 3.37% for the six months, reflecting declining interest rates on loan portfolios offset by lower rates on deposits and borrowings[183][184] Net Interest Income Rate/Volume Analysis (Three Months Ended June 30, 2020 vs. 2019) | (dollars in thousands) | Rate Change | Volume Change | Total Change | | :--------------------- | :---------- | :------------ | :----------- | | Total interest income | $(12,678) | $14,689 | $2,011 | | Total interest expense | $(6,489) | $5,796 | $(693) | | Interest differential | $(6,189) | $8,893 | $2,704 | - Interest rate simulations suggest the Corporation's balance sheet is asset sensitive, with a modest positive impact from rising rates on net interest income over the next 12 months[199][201] Provision for Loan and Lease Losses The provision for loan and lease losses significantly increased due to qualitative provisioning for COVID-19 economic uncertainty and overall loan growth - Provision for loan and lease losses increased by $1.6 million for the three months and $3.0 million for the six months ended June 30, 2020, compared to the same periods in 2019[212][213] - The increase was mainly attributed to qualitative provisioning for economic uncertainty resulting from the COVID-19 pandemic and to cover loan growth during the period[212][214] Asset Quality and Analysis of Credit Risk Asset quality remained strong, though non-performing assets and the allowance for loan losses increased; credit risk is managed through diligent underwriting and proactive loan review - Total non-performing assets increased to $7.4 million (0.47% of total assets) as of June 30, 2020, from $3.4 million (0.29%) at December 31, 2019[215][220] - The allowance for loan losses was $12.7 million, representing 1.01% of portfolio loans held for investment (1.27% excluding PPP loans) as of June 30, 2020, up from 1.00% at December 31, 2019[215][220] - The Corporation had $3.7 million in troubled debt restructurings (TDRs) as of June 30, 2020, with $3.5 million in compliance with modified terms[217] Non-Interest Income Non-interest income grew substantially, driven by increased mortgage banking income from expansion and refinance activity, with SBA loan income rising and wealth management income slightly decreasing - Total non-interest income increased by $12.8 million (160.9%) to $20.7 million for the three months and $16.7 million (116.0%) to $31.0 million for the six months ended June 30, 2020[221][225] - Mortgage banking income surged by $12.4 million (196.8%) for the three months and $15.4 million (137.5%) for the six months, driven by increased loan originations ($535.9 million for Q2, $790.5 million for H1) due to Maryland expansion and refinance activity (64% of Q2 originations)[221][225] - SBA loan income increased by $143 thousand (27.8%) for the three months and $712 thousand for the six months, while wealth management revenue decreased by $59 thousand (6.5%) for the three months due to unfavorable market conditions[224][226] Non-Interest Expense Non-interest expense significantly increased due to higher salaries, employee benefits, and loan expenses from mortgage division expansion and increased originations, while other expenses decreased due to litigation settlement - Total non-interest expense increased by $9.0 million (63.2%) to $23.2 million for the three months and $12.1 million (45.9%) to $38.4 million for the six months ended June 30, 2020[227][230] - Salaries and employee benefits increased by $7.5 million (85.3%) for the three months and $9.6 million (58.4%) for the six months, largely attributable to the mortgage division's expansion into Maryland and increased full-time equivalent employees[227][230] - Loan expenses rose by $1.7 million (248.4%) for the three months and $2.3 million (199.4%) for the six months, reflecting higher mortgage loan originations[228][231] - Other expenses decreased by $463 thousand (28.0%) for the three months and $455 thousand (15.7%) for the six months due to the settlement of a litigation reserve from the prior year[228][231] Income Taxes Income tax expense increased for both periods ended June 30, 2020, aligning with higher earnings, while effective tax rates remained stable - Income tax expense increased to $1.7 million for the three months and $2.5 million for the six months ended June 30, 2020, due to higher earnings[232][233] - The effective tax rate was 22.8% for the second quarter of 2020 and 22.9% for the first six months of 2020[232][233] Balance Sheet Analysis Total assets grew significantly, driven by strong loan expansion including PPP and commercial real estate, with deposits also increasing substantially across all categories - Total assets increased by $429.1 million (37.3%) to $1.6 billion as of June 30, 2020, from December 31, 2019, primarily due to strong loan growth[234] - Total loans, excluding mortgage loans held-for-sale, grew by $298.3 million (30.9%) to $1.3 billion, largely attributable to $260 million in PPP loans and growth in commercial real estate, commercial, and small business loan categories[235] - Deposits increased by $315.5 million (37.1%) to $1.2 billion, with significant growth in non-interest bearing, interest-bearing checking, and money market/savings accounts, driven by PPP loan customers and new business relationships[236][237] Capital Capital ratios remained above 'well capitalized' minimums, despite a decrease in risk-weighted asset ratios due to significant loan growth in higher risk-weighted commercial segments - Consolidated stockholders' equity was $125.5 million, or 7.95% of total assets, as of June 30, 2020[239] Capital Ratios (June 30, 2020) | Capital Ratio (Corporation) | Actual Ratio | | :-------------------------- | :----------- | | Total capital (to risk-weighted assets) | 14.91% | | Common equity tier 1 capital (to risk-weighted assets) | 10.24% | | Tier 1 capital (to risk-weighted assets) | 10.24% | | Tier 1 capital (to average assets) | 8.70% | - Capital ratios to risk-weighted assets decreased from December 31, 2019, primarily due to an increase in risk-weighted assets from growth in commercial mortgage, construction, and commercial and industrial loan segments[242] Liquidity Meridian maintains strong liquidity from a stable deposit base, cash, investments, and substantial borrowing arrangements with banks, FHLB, and Federal Reserve, with primary liquidity increasing significantly - Primary liquidity totaled $291.9 million at June 30, 2020, an increase from $195.2 million at December 31, 2019[243] - The Corporation has a maximum borrowing capacity of $513.4 million with the FHLB and $39 million in unsecured federal funds lines of credit, in addition to CDARS and brokered CD funding options[244] Discussion of Segments The Banking Segment remained the largest pre-tax profit contributor, while Mortgage Banking significantly improved to substantial income from increased originations, and Wealth Management also saw income growth - The Banking Segment contributed 44.3% and 49.9% of the Corporation's pre-tax profit for the three and six months ended June 30, 2020, respectively[246] - The Mortgage Banking Segment recorded income before tax of $4.0 million and $5.0 million for the three and six months ended June 30, 2020, respectively, a significant improvement from operating losses in the prior year[248] - The Wealth Management Segment recorded income before tax of $77 thousand and $309 thousand for the three and six months ended June 30, 2020, respectively[247] Off Balance Sheet Risk Off-balance sheet risk from commitments to extend credit and standby letters of credit increased, with credit risk similar to loans and fair values generally at market levels - Total commitments to extend credit were $360.1 million at June 30, 2020, up from $327.8 million at December 31, 2019[250] - Standby letters of credit amounted to $8.7 million at June 30, 2020, compared to $9.8 million at December 31, 2019[251] - The Corporation repurchased one loan for $154 thousand during the three and six months ended June 30, 2020, due to breaches of representations and warranties in loan sale agreements[253] - Net income for the three months ended June 30, 2020, increased by $3.7 million (182.5%) to $5.7 million, and for the six months, it increased by $4.2 million (104.3%) to $8.2 million, compared to the same periods in 2019[169] - Total assets grew by $429.1 million (37.3%) to $1.6 billion as of June 30, 2020, primarily driven by strong loan growth, including $260 million in PPP loans[169][234][235] - Non-interest income surged by $12.8 million (160.9%) for the three months and $16.7 million (116.0%) for the six months ended June 30, 2020, largely due to a significant increase in mortgage banking income[169] - The provision for loan losses increased substantially to $1.6 million for the three months and $3.2 million for the six months ended June 30, 2020, mainly due to qualitative provisioning for economic uncertainty from the COVID-19 pandemic and loan growth[169][212][214] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section refers to detailed market risk disclosures, including interest rate summary, sensitivity, and gap analysis, found in Management's Discussion and Analysis - Quantitative and qualitative disclosures about market risks are discussed in the 'Management's Discussion and Analysis of Results of Operations' section, specifically under 'Interest Rate Summary,' 'Interest Rate Sensitivity,' and 'Gap Analysis'[254] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were effective as of June 30, 2020, with no material changes in internal control over financial reporting identified - The Corporation's disclosure controls and procedures were evaluated and deemed effective as of June 30, 2020, ensuring complete and accurate reporting within SEC timeframes[255] - No material changes in internal control over financial reporting were identified during the quarter ended June 30, 2020[256] PART II OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal Proceedings This section reports no material updates or additions to legal proceedings from the previously disclosed information in the Annual Report on Form 10-K Item 1A. Risk Factors This section updates risk factors, emphasizing COVID-19's adverse economic impact and new risks from PPP participation, including credit losses, litigation, and compliance Economic Impact of COVID-19 This section details the broad economic consequences of the COVID-19 pandemic on the Corporation PPP Participation Risks This section outlines the specific risks associated with the Corporation's participation in the Paycheck Protection Program - The COVID-19 pandemic has caused significant economic dislocation, leading to reduced interest rates, potential increases in loan delinquencies, declines in collateral value, and increased cybersecurity risks due to remote work and online banking[259][260][267] - Meridian's participation in the PPP exposes it to credit losses if borrowers fail to qualify for loan forgiveness, as well as litigation and compliance risks due to ambiguities in program rules and potential regulatory scrutiny[263][264][265][266] - The unanticipated loss or unavailability of key employees due to the COVID-19 outbreak could harm the Corporation's ability to operate or execute its business strategy[270] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities or use of proceeds Item 3. Defaults Upon Senior Securities This section reports no defaults upon senior securities Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to the Corporation Item 5. Other Information This section reports no other information Item 6. Exhibits This section lists exhibits filed or incorporated by reference, including organizational documents, certifications, and XBRL data - The exhibit index includes the Plan of Merger and Reorganization, Articles of Incorporation, Bylaws, Rule 13a-14(a)/15d-14(a) Certifications, Section 1350 Certifications, and various XBRL documents[279] Signatures The report is signed by Christopher J. Annas, President and CEO, and Denise Lindsay, EVP and CFO, on behalf of Meridian Corporation - The report is signed by Christopher J. Annas, President and Chief Executive Officer, and Denise Lindsay, Executive Vice President and Chief Financial Officer, on August 10, 2020[282]