MRBK - Meridian Corporation Offers Attractive Prospects Despite Volatile Results

2023-12-11 09:37:51 ET

Summary

• Meridian Corporation is a small regional bank with potential for growth and it offers banking services and wealth management solutions.
• The bank has shown mixed financial performance, with net interest income growing but non-interest income declining.
• Despite weaknesses, Meridian has seen growth in assets, deposits, and book value, making it a solid investment opportunity.

Rarely will you come across the ‘perfect’ investment opportunity. Most investments that you make in your life will, instead, involve trade-offs. As an example, smaller companies tend to be riskier than larger ones. But at the same time, they can also be overlooked and offer additional upside that you wouldn't expect from larger prospects. A good example of this in the banking sector is Meridian Corporation ( MRBK ), a small regional bank with a market capitalization of $144.5 million as of this writing. At present, shares are trading on the cheap relative to both earnings and book value. Recent financial performance has shown signs of weakness. But uninsured deposit exposure is under control and the value of deposits at the institution continues to expand. All things considered, this leads me to rate the business a very solid ‘buy’ at this point in time.

A small bank with big potential

According to the management team at Meridian, the firm operates as a bank holding company with operations spread between Pennsylvania, New Jersey, Delaware, Maryland, and Florida. In all, the institution has six different bank branches. It also has 11 mortgage offices and its own corporate headquarters. From these locations, it provides a wide array of banking services that involve the acceptance of deposits, and the issuance of loans such as small business loans, commercial real estate loans, and more. It also engages in mortgage banking activities, with most of its emphasis in this area on one to four family dwellings.

Management claims that the bank handles its own origination, processing, underwriting, closing, and post-closing functions, which is not all that typical when you are talking about such a small institution. Often, the firm in question will be partnered up with some larger, niche business. The other major line of business that the institution is involved in is what it calls wealth management and advisory services. Through its Meridian Wealth subsidiary, it operates an RIA that provides customers with wealth management services and products so that they can achieve their own financial objectives in the long run.

Meridian has had some mixed results in recent years. Net interest income has grown nicely from $40.7 million in 2020 to $67.6 million in 2022. A growth in the size of the institution, combined with higher interest rates, was instrumental in pushing this up. But there has been some weakness for the bank. Non-interest income has been slashed by more than half, from $86.9 million to $41.7 million. That decline has been driven almost entirely by a plunge in mortgage banking income that management attributed to reduced mortgage loan originations because of rising interest rates and a reduction in housing inventory. Because of this, net profits for the business have bounced around quite a bit. It popped from $26.4 million in 2020 to $35.6 million in 2021. But then, in 2022, profits declined to $21.8 million. As you can see in the chart above, we have seen some weakness continue into the current fiscal year , with non-interest income doing the most to bring profits down from $17.3 million in the first nine months of last year to $12.7 million the same time this year.

The increase that the company has experienced in net interest income has only been made possible by a growth in the assets on the firm's books. The value of loans, for instance, grew from $1.28 billion in 2020 to $1.74 billion in 2022. That growth has continued into the current fiscal year, hitting $1.89 billion in the third quarter of 2023. When it comes to loans, one thing that investors seem to be worried about is exposure to office properties. The good news for investors is that only about 3% of the loans, by value, involve non-owner-occupied office spaces. The largest chunk, about 21.8%, includes real estate investment properties that do include that 3% figure. Construction loans come in second place at 19.1%, followed by the 13.1% attributable to residential mortgages. Over that same window of time, the value of securities has decreased some, dropping from $360.3 million in 2020 to $183.5 million today. Cash has actually increased, but at $59.8 million, it is well below the $108.5 million it temporarily spiked to in the first quarter of this year.

An increase in the value of the assets of the bank has only been made possible by growth in deposits. Back in 2020, Meridian had only $1.24 billion worth of deposits. By the end of last year, this value had grown to $1.71 billion. Despite declines in deposits at many institutions earlier this year during the banking crisis, our prospect held firm and actually increased deposits in each of the past three fiscal quarters. By the end of the third quarter, they had grown to $1.81 billion, marking a fresh all-time high for the institution. Add on top of this the fact that only 23% of the bank's deposits are classified as uninsured, which is well below the 30% threshold I look for, and the picture does look bullish to me.

Debt at the institution has remained under control for the most part. We did see an increase from $162.4 million at the end of 2022 to $274.2 million by the end of the first quarter of this year. But since then, debt has pulled back some, totaling only $228.1 million as of the end of the most recent quarter. On top of this, since the end of last year, the institution has seen its book value per share and tangible book value per share climb quarter after quarter. This brings us to the topic of valuation. At present, shares of the bank or trading at 94.5% of book value and 96.9% of tangible book value. The institution is trading at 6.6 times earnings and at 9 times earnings if we annualize results experienced so far for 2023. Both of these are well below the 10.4 average that the industry seems to be trading at. So that does indicate some upside potential.

Takeaway

Based on all the data provided, I would argue that Meridian is a fairly solid institution. Financial performance has been clouded by weakness in the mortgage origination market. But if we ignore that, the rest of the picture looks really positive. This year has been particularly difficult, but even so, management has done well to grow deposits, loans, and book value. So given these factors, I have no problem rating the institution a solid ‘buy’ at this time.

For further details see: