Meridian Corporation — Form 10-Q Summary
Business context and reporting period
Meridian Corporation is a regional community bank operating primarily in 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 months ended March 31, 2023, compared with the three months ended March 31, 2022, and balance-sheet changes from December 31, 2022.
The company completed a two-for-one stock split in March 2023; all share and per-share amounts in the filing reflect the split.
Key financial metrics
| Metric | Q1 2023 | Comparable period or date |
|---|---|---|
| Total assets | $2.230 billion | $2.062 billion at Dec. 31, 2022 |
| Loans and other finance receivables, net of fees and costs | $1.818 billion | $1.744 billion at Dec. 31, 2022 |
| Total deposits | $1.770 billion | $1.712 billion at Dec. 31, 2022 |
| Borrowings | $233.9 million | $122.1 million at Dec. 31, 2022 |
| Stockholders’ equity | $153.0 million | $153.3 million at Dec. 31, 2022 |
| Net interest income | $17.7 million | $16.0 million in Q1 2022 |
| Provision for credit losses | $1.4 million | $0.6 million in Q1 2022 |
| Non-interest income | $6.6 million | $13.1 million in Q1 2022 |
| Non-interest expense | $17.8 million | $21.4 million in Q1 2022 |
| Net income | $4.0 million | $5.5 million in Q1 2022 |
| Diluted earnings per share | $0.34 | $0.44 in Q1 2022 |
| Net interest margin | 3.61% | 3.89% in Q1 2022 |
| Return on average assets | 0.78% | 1.28% in Q1 2022 |
| Return on average equity | 10.65% | 13.86% in Q1 2022 |
Cash flow, liquidity and capital
- Cash and cash equivalents increased to $108.5 million from $38.4 million at December 31, 2022.
- Operating activities used $11.4 million of cash, investing activities used $84.2 million, and financing activities provided $165.7 million. The net increase in cash was $70.1 million.
- Reported total balance-sheet liquidity was $317.8 million, compared with $264.4 million at year-end 2022. Management reported access to approximately $817.9 million of liquidity from borrowing capacity and other funding sources.
- Borrowings included $221.5 million of short-term borrowings, including $33.0 million under the Federal Reserve Bank Term Funding Program, and $12.4 million of long-term borrowings. FHLB borrowing capacity was $558.2 million.
- Deposits increased 3.4%, but non-interest-bearing deposits declined 13.0% and money-market and savings deposits declined 7.1%; time deposits increased 27.1%. Brokered deposits were $409.3 million, or 23.1% of total deposits.
- Uninsured deposits represented 23% of total deposits. Management stated that 64% of business accounts and 73% of consumer accounts were fully FDIC insured; municipal deposits were collateralized and brokered deposits were fully FDIC insured.
- The corporation’s Tier 1 leverage ratio was 7.65%, common equity Tier 1 risk-based capital ratio was 8.44%, and total risk-based capital ratio was 11.63% at March 31, 2023. The Bank’s community bank leverage ratio was 9.32%.
Material changes versus prior comparable periods
- Net income declined 27.4% year over year, primarily because non-interest income fell $6.5 million. Mortgage banking income decreased $3.8 million, SBA loan income decreased $1.8 million, and the prior-year $2.8 million hedging gain did not recur.
- Net interest income increased $1.6 million, but the net interest margin declined to 3.61% as deposit and borrowing costs repriced faster than earning assets.
- Interest expense increased to $13.3 million from $1.9 million, reflecting higher rates and increased deposit and borrowing balances.
- Non-interest expense decreased $3.6 million, principally because mortgage-related salaries and incentive compensation declined.
- Portfolio loans increased $80.8 million, or 4.7%, from year-end 2022, led by commercial mortgage, residential mortgage, small-business and lease-financing growth. Mortgage loans held for sale increased 60.5% to $35.7 million.
- Nonperforming loans increased to $23.1 million from $21.2 million, while nonperforming assets increased to $24.8 million from $22.9 million. The nonperforming-assets-to-total-assets ratio remained 1.11%.
- Net charge-offs were $1.5 million, nearly all from small-ticket equipment leases, compared with the prior-year quarter’s lower net charge-off level. The allowance for credit losses rose to $20.4 million, or 1.12% of loans and leases held for investment.
- Effective January 1, 2023, Meridian adopted CECL, increasing the allowance for credit losses by $1.6 million, the reserve for unfunded commitments by $1.3 million and reducing retained earnings by $2.2 million after tax.
- Meridian repurchased 184,598 shares for $2.7 million and paid or accrued $1.4 million of dividends during the quarter. The $20 million repurchase plan expired April 22, 2023 after $19.6 million of total repurchases.
Guidance, outlook, management commentary and risks
The filing does not provide formal earnings or revenue guidance. Management stated that liquidity resources were adequate for short- and long-term funding needs and that interest-rate exposure was contained and within policy limits. Interest-rate simulations indicated that the balance sheet was asset-sensitive: a 100-basis-point increase was modeled to increase one-year net interest income by 0.76%, while a 100-basis-point decrease was modeled to reduce it by 1.80%. These simulations are hypothetical and are not forecasts.
- Management expects continued pressure from elevated deposit and borrowing costs, rising interest rates, lower mortgage originations and limited housing inventory.
- Mortgage Banking generated a $2.1 million pretax loss in Q1 2023, compared with $1.6 million of pretax income in Q1 2022.
- Key risks include deposit outflows, the 23% uninsured-deposit level, dependence on wholesale and brokered funding, liquidity stress, unrealized securities losses, interest-rate volatility, credit deterioration, real-estate values, regulatory changes and higher FDIC assessments.
- The available-for-sale securities portfolio had $11.8 million of unrealized losses and the held-to-maturity portfolio had $3.5 million of unrealized losses at March 31, 2023. Management stated that the losses primarily reflected interest-rate changes and that it did not intend or expect to need to sell the securities before recovery.
- Off-balance-sheet commitments included $498.9 million of commitments to extend credit and $14.6 million of standby letters of credit. No loans were repurchased during Q1 2023 under loan-sale representations and warranties.
- The company identified recent financial-services turmoil as a material risk to its stock price, liquidity, capital, funding capacity and results of operations. Disclosure controls were reported effective as of March 31, 2023.
Important facts for investors to verify
- Whether deposit composition and funding costs continue to pressure the 3.61% net interest margin.
- Trends in uninsured, brokered, municipal and other business deposits, including potential liquidity outflows.
- Growth in nonperforming loans, charge-offs and the adequacy of the $20.4 million CECL allowance.
- Exposure to commercial real estate, commercial and industrial loans, construction loans and equipment leases.
- Whether mortgage banking and SBA loan production recover or remain below prior-year levels.
- Liquidity availability and collateral capacity after the $33.0 million BTFP borrowing and other wholesale funding.
- Unrealized securities losses, accumulated other comprehensive loss and the potential capital impact of any required securities sales.
- Future regulatory changes, FDIC assessments and the effect of the expired share-repurchase plan on capital deployment.