Meridian (MRBK) - 2023 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Meridian Corporation's unaudited consolidated financial statements reflect a rise in total assets to $2.21 billion by June 30, 2023, primarily due to loan growth, alongside a decrease in Q2 2023 net income to $4.6 million influenced by increased interest expenses and the adoption of CECL Consolidated Balance Sheets Total assets increased to $2.21 billion by June 30, 2023, from $2.06 billion at year-end 2022, primarily due to a $114.7 million rise in net loans, funded by increases in deposits and borrowings, with total stockholders' equity remaining stable at $154.0 million | (dollars in thousands) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $2,206,877 | $2,062,228 | | Loans, net | $1,839,597 | $1,724,854 | | Cash and cash equivalents | $46,866 | $38,391 | | Total Liabilities | $2,052,915 | $1,908,948 | | Total deposits | $1,782,605 | $1,712,479 | | Borrowings | $194,636 | $122,082 | | Total Stockholders' Equity | $153,962 | $153,280 | Consolidated Statements of Income Net income for Q2 2023 decreased by 21.8% to $4.6 million ($0.41 per diluted share), and by 24.5% to $8.7 million for the six-month period, primarily due to increased interest expense and lower non-interest income | (dollars in thousands) | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $17,098 | $17,551 | $34,775 | $33,586 | | Provision for credit losses | $705 | $602 | $2,104 | $1,217 | | Non-interest income | $9,124 | $10,403 | $15,762 | $23,505 | | Non-interest expense | $19,615 | $19,706 | $37,404 | $41,139 | | Net income | $4,645 | $5,938 | $8,666 | $11,473 | | Diluted EPS | $0.41 | $0.48 | $0.75 | $0.92 | Consolidated Statements of Comprehensive Income (Loss) Total comprehensive income for Q2 2023 increased to $3.7 million from $2.5 million in Q2 2022, despite lower net income, as other comprehensive loss narrowed to ($0.95 million) due to smaller unrealized losses on investment securities | (dollars in thousands) | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income | $4,645 | $5,938 | $8,666 | $11,473 | | Total other comprehensive income (loss) | $(952) | $(3,459) | $718 | $(9,858) | | Total comprehensive income (loss) | $3,693 | $2,479 | $9,384 | $1,615 | Consolidated Statements of Stockholders' Equity Stockholders' equity slightly increased to $154.0 million by June 30, 2023, influenced by $8.7 million in net income, offset by $2.8 million in dividends, $4.3 million in treasury stock purchases, and a $2.2 million CECL adoption adjustment to retained earnings - A one-time adjustment of ($2.2 million), net of tax, was made to retained earnings on January 1, 2023, to reflect the initial application of the CECL accounting standard (ASU No. 2016-13)[20] - During the first six months of 2023, the company paid dividends totaling $2.8 million ($0.25 per share) and repurchased 312,447 shares of treasury stock for $4.3 million[20] Consolidated Statements of Cash Flows Cash and cash equivalents increased by $8.5 million for the six months ended June 30, 2023, as $11.5 million net cash outflow from operating activities and $115.6 million from investing activities were offset by $135.6 million net cash inflow from financing activities | (dollars in thousands) | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(11,545) | $35,679 | | Net cash used in investing activities | $(115,553) | $(150,217) | | Net cash provided by financing activities | $135,573 | $128,151 | | Net change in cash and cash equivalents | $8,475 | $13,613 | Notes to Consolidated Financial Statements (Unaudited) The notes detail significant accounting policies, including the $2.2 million after-tax reduction to retained earnings from the CECL adoption, and provide breakdowns of the securities portfolio, loan composition, and segment performance, noting an increase in nonaccrual loans to $27.4 million and a pre-tax loss in the Mortgage segment - The Corporation adopted ASU 2016-13 (CECL) on January 1, 2023, replacing the incurred loss model with an expected loss methodology, resulting in a one-time decrease to retained earnings of $2.2 million, net of tax[37][66][68] - The securities portfolio had a fair value of $126.7 million for available-for-sale and an amortized cost of $36.5 million for held-to-maturity, with the overall portfolio in a net unrealized loss position primarily due to changes in market interest rates[76][79] - Total nonaccrual loans increased to $27.4 million as of June 30, 2023, from $21.2 million at December 31, 2022[87][89] - The allowance for credit losses (ACL) stood at $20.2 million as of June 30, 2023, with the provision for credit losses for the six months ended June 30, 2023, being $2.1 million[96][99] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management highlights a 7.0% growth in total assets driven by loan growth, despite a 24.5% decline in net income for the first six months of 2023 due to net interest margin compression and reduced mortgage banking income, while maintaining strong liquidity and capital ratios exceeding 'well-capitalized' minimums - Total assets increased by 7.0% to $2.2 billion since December 31, 2022, while portfolio loans grew by 9.2% on an annualized basis[186] - Net income for the first six months of 2023 decreased by 24.5% year-over-year, driven by a decline in non-interest income and net interest margin compression[188] - The company addresses banking sector concerns by highlighting its diversified deposit base, with uninsured deposits at 23% of total deposits, and access to approximately $853.3 million in liquidity from various sources[183][185] - Net interest margin for Q2 2023 decreased to 3.33% from 4.07% in Q2 2022, as the cost of deposits and borrowings repriced upward faster than interest-earning assets[187] Results of Operations Q2 2023 saw net interest income decrease slightly to $17.1 million due to margin compression, while non-interest income fell 12.3% to $9.1 million, primarily from a $1.9 million drop in mortgage banking income, and non-interest expense remained flat at $19.6 million | Metric | Q2 2023 | Q2 2022 | Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $17.1M | $17.6M | -2.6% | | Provision for Credit Losses | $0.7M | $0.6M | +17.1% | | Non-Interest Income | $9.1M | $10.4M | -12.3% | | Non-Interest Expense | $19.6M | $19.7M | -0.5% | | Net Income | $4.6M | $5.9M | -21.8% | - The decrease in non-interest income was primarily driven by a 27.3% decline in mortgage banking income, partially offset by a 304.3% increase in SBA loan income[213][214] Balance Sheet Analysis Total assets grew by $144.6 million (7.0%) to $2.2 billion since year-end 2022, driven by a $122.5 million (7.1%) increase in portfolio loans, while total deposits rose by $70.1 million (4.1%) with a notable shift to higher-yielding time deposits - Portfolio loan growth was 14.1% on an annualized basis, led by increases in commercial real estate ($82.8 million) and residential real estate ($26.0 million)[223] - There was a notable shift in deposit composition: noninterest-bearing deposits decreased by $32.6 million, while time deposits increased by $153.6 million, reflecting customer preference for higher interest rates[224] Capital and Liquidity The Corporation remains well-capitalized with all regulatory ratios exceeding minimums, maintaining strong liquidity with $276.8 million in balance sheet liquidity and access to an additional $853.3 million from various borrowing facilities | Capital Ratio (Bank) | June 30, 2023 | Well-capitalized minimum | | :--- | :--- | :--- | | Tier 1 leverage ratio | 9.22% | 5.00% | | Common tier 1 risk-based capital ratio | 10.35% | 6.50% | | Total risk-based capital ratio | 11.43% | 10.00% | - The company has access to approximately $853.3 million in liquidity from various sources, including the FHLB, correspondent banks, and the Federal Reserve[230] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's interest rate risk model indicates a liability-sensitive balance sheet, projecting a 0.44% decrease in net interest income from a 100 basis point rate increase and a 1.14% decrease from a 100 basis point rate decrease, which management deems manageable | Changes in Market Interest Rates (over 12 months) | Impact on Net Interest Income (June 30, 2023) | | :--- | :--- | | +300 basis points | (1.92)% | | +200 basis points | (1.14)% | | +100 basis points | (0.44)% | | -100 basis points | (1.14)% | | -200 basis points | (2.29)% | Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls were effective as of June 30, 2023, with internal controls over financial reporting modified to accommodate the CECL accounting standard, focusing on model governance, assumptions, and data - The CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective as of June 30, 2023[252] - Changes were made to internal controls over financial reporting to accommodate the adoption of CECL, focusing on model creation, governance, assumptions, and data[253] PART II OTHER INFORMATION Item 1. Legal Proceedings The company reported no legal proceedings during the period - None[255] Item 1A. Risk Factors The company updated its risk factors, highlighting the adverse impact on mortgage banking income due to secondary market weakness, driven by higher interest rates, housing inventory shortages, and inflation, which have reduced origination volumes - A key risk factor is the potential for continued adverse effects on mortgage banking income due to volatility in the residential mortgage market[256] - Factors negatively impacting the mortgage segment include changes in interest rates, lack of housing inventory, inflation, and reduced demand from third-party investors[256][257] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2023, the Corporation repurchased 127,849 shares at an average price of $12.21 per share, with the $20 million stock repurchase plan expiring on April 22, 2023, after $19.6 million in total buybacks | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 1 to April 30, 2023 | 127,849 | $12.21 | - The company's $20 million stock repurchase plan expired on April 22, 2023, after a total of $19.6 million worth of stock was repurchased[258] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amended articles of incorporation, officer certifications, and XBRL interactive data files