Meridian Corporation 2023 Q3 Form 10-Q Summary
Business context and reporting period
Meridian Corporation is a regional community bank serving southeastern Pennsylvania, Delaware, Maryland and contiguous markets. Its principal segments are Banking, Mortgage Banking and Wealth Management. This unaudited Form 10-Q covers the three and nine months ended September 30, 2023, with comparisons to the corresponding 2022 periods and December 31, 2022 balance-sheet amounts. The company completed a two-for-one stock split in March 2023; reported share and per-share data reflect the split.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net interest income | $17.2 million | $18.0 million | $52.0 million | $51.6 million |
| Provision for credit losses | $0.1 million | $0.5 million | $2.2 million | $1.7 million |
| Non-interest income | $8.1 million | $10.2 million | $23.8 million | $33.7 million |
| Non-interest expense | $20.0 million | $20.3 million | $57.4 million | $61.4 million |
| Net income | $4.0 million | $5.8 million | $12.7 million | $17.3 million |
| Diluted EPS | $0.35 | $0.48 | $1.11 | $1.40 |
| Net interest margin | 3.29% | 4.01% | 3.40% | 3.99% |
| Return on average assets | 0.73% | 1.23% | 0.79% | 1.28% |
| Return on average equity | 10.17% | 14.59% | 10.96% | 14.49% |
At September 30, 2023, total assets were $2.231 billion, up 8.2% from December 31, 2022. Portfolio loans and leases increased 8.5% to $1.883 billion, led by commercial mortgage, home equity and residential mortgage growth. Total deposits increased 5.6% to $1.809 billion, while non-interest-bearing deposits declined 18.9% to $244.7 million. Stockholders’ equity was $155.1 million, compared with $153.3 million at year-end 2022.
Cash and cash equivalents were $59.8 million at September 30, 2023, compared with $38.4 million at December 31, 2022. For the first nine months, operating activities provided $11.0 million, investing activities used $143.0 million, and financing activities provided $153.4 million, producing a $21.4 million increase in cash.
Total borrowings were $178.0 million, including $150.3 million of short-term borrowings and $27.6 million of long-term borrowings. Subordinated debentures totaled $50.1 million, including $9.7 million of new 8.00% subordinated debt issued in September 2023. Management reported approximately $1.0 billion of available liquidity from the FHLB, Federal Reserve, correspondent banks, CDARS and brokered CD arrangements. The company had $33.0 million outstanding under the Federal Reserve Bank Term Funding Program.
Material changes versus prior periods
- Q3 net income decreased 30.9%, and nine-month net income decreased 26.6%, primarily because of lower non-interest income.
- Mortgage banking income declined 34.2% in Q3 and 38.5% for the nine-month period. Mortgage originations fell to $187.1 million in Q3 and $531.4 million for the first nine months, reflecting higher interest rates and limited housing inventory.
- Net interest income declined modestly in Q3 despite higher loan yields and loan growth. Deposit and borrowing costs increased faster than asset yields, reducing the net interest margin by 72 basis points in Q3 and 59 basis points for the nine-month period.
- Nine-month net interest income increased slightly because loan growth and higher loan yields offset substantially higher funding costs.
- Non-interest expense declined 1.2% in Q3 and 6.5% for the nine-month period, mainly due to lower mortgage-related compensation, partially offset by higher technology, professional, FDIC insurance and other costs.
- The company adopted CECL on January 1, 2023. The adoption increased the loan allowance by $1.6 million, increased the unfunded commitment reserve by $1.3 million and reduced after-tax retained earnings by $2.2 million.
- Nonperforming loans increased to $29.1 million from $21.2 million at year-end 2022; nonperforming assets increased to $30.8 million, or 1.38% of assets, from $22.9 million, or 1.11%.
- Net charge-offs were $0.9 million in Q3, and nine-month net charge-offs were 0.18% of average loans versus 0.10% in the prior-year period. The allowance for credit losses was $19.7 million, or 1.04% of loans held for investment.
- Meridian returned $4.2 million through dividends during the first nine months and repurchased $4.3 million of common stock, representing 312,447 shares.
Outlook, commentary, risks and unusual items
Management did not provide specific quantitative earnings or revenue guidance. Management stated that available liquidity and funding sources are adequate for short- and long-term requirements and that the company intends to continue supporting organic growth. The September subordinated debt issuance was intended for general corporate purposes, including supporting Meridian Bank and organic growth.
Management expects continued sensitivity to deposit pricing, borrowing costs, interest-rate movements, loan growth, credit losses and mortgage-market conditions. Interest-rate simulations indicated that a 100-basis-point increase or decrease could reduce projected one-year net interest income by 0.29% and 1.33%, respectively, versus a flat-rate scenario. Economic value of equity was projected to decline under both rising and falling rate scenarios.
Principal risks include commercial-loan credit exposure, rising nonperforming loans and charge-offs, liquidity pressure or deposit outflows, unrealized securities losses, higher funding costs, mortgage-market weakness, housing-market inventory constraints, regulatory changes, cybersecurity and technology risks, and changes in economic conditions. The company reported no legal proceedings and no material changes to internal controls other than controls implemented for CECL. The filing text does not provide a clear full-year financial forecast.
Important facts for investors to verify
- Whether deposit pricing and borrowing costs continue to compress net interest margin and earnings.
- Trends in nonperforming loans, commercial-loan classifications, lease charge-offs and the adequacy of the CECL allowance.
- The stability and composition of deposits, including the 22.2% brokered-deposit share and 23% uninsured-deposit level.
- Actual availability and collateral requirements for the approximately $1.0 billion of stated liquidity sources, including FHLB and Federal Reserve facilities.
- The sustainability of mortgage banking and SBA loan income under higher interest rates and constrained housing inventory.
- The impact of the $9.7 million subordinated-debt issuance, ongoing share repurchases and quarterly dividends on capital ratios and funding costs.
- The effect of unrealized securities losses, interest-rate hedges and fair-value assumptions on capital and comprehensive income.