MRBK - Meridian Corporation: Softening Key Metrics Explain Share Decline

2023-05-03 16:45:04 ET

Summary

• We continue our extensive coverage of regional banks looking for signs of a run on deposits and decreased loan demand.
• Smaller regional banks seem to be holding up well, though commercial loan risk is noted.
• Meridian Corporation Q1 earnings were quite strong, as loan demand remains robust, but net interest margins have peaked.
• A review of asset quality metrics suggests the bank is navigating the current climate well.

Shares of bank stocks have been in selloff mode for about three months, and rightfully so with the uncertainty after several banks went under. Few banks have seen strong gains, and the ones doing best seem to be banking majors. Regional banks have been a big question mark. We have been covering the earnings of regional banks to get a sense of whether the sector is indeed buckling, or if it is bank-specific. Stocks have buckled, but so far the companies we have looked at have seen deposits and loans hold up.

Today, we turn to Meridian Corporation (MRBK), which just reported its Q1 earnings . We want to look at Meridian as it has a commercial focus, and commercial loans and assets have been considered to be a possible risk on bank balance sheets. For those who may be unfamiliar, this is a bank serving Pennsylvania, New Jersey, Delaware and Maryland. Overall, we rate Meridian Corporation a hold, but let's look at the performance metrics.

Mixed performance

Meridian Corporation's performance metrics were mixed in the quarter. The bank reported top line that narrowed 16% to $24.3 million versus last year, missing consensus estimates by $1.5 million. The decrease in revenues comes despite more loans being issued, both on the commercial side and on the residential and HELOC side. Net interest income was strong, but net interest margin has peaked, and it hit 3.61%.

Overall, Meridian reported net income of $4.0 million for the quarter. On a per share basis, this was $0.34 this quarter, and was a beat by $0.02 versus estimates.

Loans and deposits grew at Meridian

Despite the pressure on the sector, Meridian Corporation portfolio loan growth was $80.8 million, or 4.7% quarter-over-quarter. Commercial mortgage loans increased $51.7 million, or 9.1% from Q4 2022, while residential real estate loans held in portfolio increased $17.0 million, or 7.7%, and SBA loans increased $12.4 million, or 9.1%. Lease financings increased $12.1 million, or 8.7% from Q4. There were some construction loan demand decline, as these fell 1.7% from Q4. Despite the high rate environment, loan demand remained strong in Q1.

Total deposits were also strong, and were a big highlight of the quarter for Meridian Corporation considering a run on deposits had been feared. We have been looking for signs of a run on bank deposits, as there has been fear of bank contagion in the media, and there is stiff competition for deposits. That said, total deposits grew. Total deposits increased $57.9 million, up 3.4% from the start of the quarter. No run on deposits here. This was a nice gain in deposits.

Net interest margin

The cost of deposits is rising and, as mentioned, margins have peaked. The cost of funds was up 76 basis points from Q4 2022. Meridian Corporation cost of funds rose to 2.83%. Yield on loans/interest bearing assets rose to 6.31%, but net interest margin narrowed from 3.93% to 3.61% this quarter.

So, while Meridian's new loans are issued at higher rates, the impact of these higher yields was offset by the higher costs of funds. We predict margins will remain around 3.35%-3.5% in coming quarters. This is still a strong margin for Meridian. We see both the cost of funds and the yield on the loan portfolio continuing to stay elevated in 2023.

Meridian's return metrics

Meridian, like a number of other banks, as a result of lower margins, saw their return on average assets and return on average equity decline from Q4. Keep in mind that these are critical measures of a bank's operational efficiency. In Q1, the return on average assets fell to 0.78% from 0.92% in Q4, and is down from 1.28% last year. The return on average equity fell from 11.91% in Q4 2022 to 10.65% in Q1, and is significantly down from 13.86% a year ago. Despite the return metrics, the efficiency ratio improved to 73.16% vs. 75.61% in Q4, and improved slightly from 73.56% a year ago.

Meridian's asset quality mixed

There was an increase in the Meridian Corporation provision for loan losses of $1.4 million, compared to $0.75 million in Q4. Nonperforming assets were flat Q1. They were 1.11% in Q1, identical to Q4. The allowance for credit losses, however, increased to 1.12% of all loans from 1.08% of all loans. Net charge-offs were up to 0.08% of loans versus at 0.05% of loans in Q4. Overall, it is hard to argue that the situation has weakened here.

Final thoughts

While this is just a quick earnings review of the key metrics, it is an exercise we are performing across a number of banks. The reason we are doing this is to better understand if there are more signs of bank contagion. For the most part, we saw a much weaker Q1 than Q4. The results here suggest that a run on deposits did not materialize in this smaller regional bank, but Meridian Corporation asset quality is declining, provisions for losses are rising, and margins have peaked. Overall, we are neutral on Meridian Corporation bank, and think that it is managing the situation well by growing loans strategically and attracting new deposits.

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