Meridian Corporation 2023 Q2 Form 10-Q Summary
Business context and reporting period
Meridian Corporation is a regional community bank headquartered in Malvern, Pennsylvania, with commercial and retail banking, mortgage banking, and wealth management operations. This unaudited Form 10-Q covers the three and six months ended June 30, 2023, with comparisons to the corresponding 2022 periods. The company reported 11,177,751 shares outstanding as of August 4, 2023.
Financial condition and key metrics
| Metric | Three months ended June 30, 2023 | Six months ended June 30, 2023 |
|---|---|---|
| Net interest income | $17.1 million | $34.8 million |
| Provision for credit losses | $0.7 million | $2.1 million |
| Non-interest income | $9.1 million | $15.8 million |
| Non-interest expense | $19.6 million | $37.4 million |
| Net income | $4.6 million | $8.7 million |
| Diluted earnings per share | $0.41 | $0.75 |
| Net interest margin | 3.33% | 3.46% |
| Return on average assets | 0.86% | 0.82% |
| Return on average equity | 12.08% | 11.37% |
- Total assets were $2.21 billion at June 30, 2023, up 7.0% from December 31, 2022.
- Loans and other finance receivables, net of the allowance, were $1.84 billion; portfolio loans and leases increased 7.1% to $1.86 billion.
- Total deposits were $1.78 billion, up 4.1% from year-end. Non-interest-bearing deposits declined 10.8%, while time deposits increased 31.1%.
- Cash and cash equivalents were $46.9 million. Management reported total balance-sheet liquidity of $276.8 million and approximately $853.3 million of available liquidity from various borrowing and deposit sources.
- Borrowings were $194.6 million, including $33.0 million outstanding under the Federal Reserve Bank Term Funding Program. Subordinated debentures were $40.3 million.
- Stockholders’ equity was $154.0 million. The tangible common equity-to-tangible assets ratio was 6.81%, compared with 7.25% at December 31, 2022.
- The allowance for credit losses was $20.2 million, or 1.09% of loans held for investment; nonperforming loans were $27.4 million and nonperforming assets were $29.1 million, or 1.32% of total assets.
- Operating cash flow was negative $11.5 million for the first six months, while investing activities used $115.6 million and financing activities provided $135.6 million. Cash increased $8.5 million during the period.
Material changes versus prior comparable periods
- Second-quarter net income declined 21.8% to $4.6 million from $5.9 million, while six-month net income declined 24.5% to $8.7 million from $11.5 million.
- Net interest income decreased 2.6% in the second quarter, despite higher loan balances, because deposit and borrowing costs rose faster than asset yields. Six-month net interest income increased 3.5% due primarily to loan growth and higher loan yields.
- Net interest margin declined from 4.07% to 3.33% in the second quarter and from 3.98% to 3.46% for the six-month period.
- Second-quarter non-interest income decreased 12.3%, principally because mortgage banking income fell $1.9 million and prior-year hedging gains did not recur. Six-month non-interest income decreased 32.9%, including a $5.7 million decline in mortgage banking income and a $4.5 million reduction in hedging gains.
- Mortgage banking activity remained pressured by higher interest rates and limited housing inventory. The mortgage segment generated a pretax loss of $1.0 million in the quarter and $3.1 million year to date.
- Non-interest expense decreased 0.5% in the second quarter and 9.1% for the six-month period, primarily due to lower mortgage-related compensation, partly offset by higher data-processing, software, cybersecurity, and FDIC insurance costs.
- Nonperforming loans increased $6.1 million from year-end, and the nonperforming-assets ratio rose from 1.11% to 1.32%. Six-month net charge-offs were 0.13% of average loans, compared with 0.08% in the prior-year period.
- Meridian adopted the CECL methodology on January 1, 2023. The adoption produced a $2.2 million after-tax reduction to retained earnings, including higher expected-loss reserves for loans and unfunded commitments.
- The company repurchased 312,447 shares for $4.3 million during the first six months. The $20 million repurchase authorization expired April 22, 2023 after approximately $19.6 million of cumulative purchases.
Guidance, outlook, commentary, and risks
The filing does not provide formal quantitative earnings or revenue guidance. Management expects liquidity resources to be adequate for short- and long-term funding requirements and described its interest-rate exposure as manageable and within policy limits. The balance sheet was characterized as liability-sensitive: a simulated 100-basis-point increase in rates was projected to reduce one-year net interest income by 0.44%, while a 100-basis-point decrease was projected to reduce it by 1.14%.
- Key risks include further deposit repricing, higher funding costs, margin compression, loan defaults and charge-offs, declining real estate values, and changes in economic conditions or interest rates.
- Mortgage banking results remain vulnerable to weak secondary mortgage markets, lower loan demand, limited housing inventory, and elevated rates.
- Deposits included 23% uninsured balances at June 30, 2023. Business deposits represented 58% of total deposits, municipal deposits 8%, and brokered deposits 23%.
- The loan portfolio is concentrated in commercial lending and in southeastern Pennsylvania, Delaware, Maryland, and contiguous markets. Management noted that commercial loans generally carry greater individual loss risk than residential or consumer loans.
- Other risks include cybersecurity, fraud, operational disruptions, regulatory and accounting changes, FDIC assessment increases, competition, reputational risk, and changes in CECL assumptions.
- Off-balance-sheet commitments to extend credit were $513.4 million, and standby letters of credit totaled $10.6 million. The company reported no mortgage loan repurchases during the three or six months ended June 30, 2023.
- Management stated that disclosure controls were effective as of June 30, 2023. No legal proceedings were reported.
Important facts for investors to verify
- Whether deposit costs continue to rise faster than loan and investment yields, further reducing net interest margin.
- Trends in nonperforming loans, commercial and small-business credit quality, equipment-lease charge-offs, and the adequacy of the $20.2 million CECL allowance.
- The composition and stability of deposits, particularly uninsured, brokered, municipal, and time deposits, and the continued use and cost of BTFP and FHLB borrowings.
- Mortgage origination volumes, gain-on-sale margins, servicing-asset valuations, and the sustainability of mortgage banking profitability.
- The effect of the $2.2 million CECL transition adjustment and subsequent credit-loss provisioning on regulatory capital.
- Liquidity availability, collateral requirements, securities’ unrealized losses, and the sensitivity of earnings and economic value of equity to interest-rate changes.