Meridian (MRBK) - 2023 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited consolidated financial statements for the period ended September 30, 2023, show an increase in total assets to $2.23 billion from $2.06 billion at year-end 2022, driven by loan growth, with net income for Q3 2023 decreasing to $4.0 million from $5.8 million in the prior-year quarter due to lower non-interest income and net interest margin compression, and the adoption of CECL on January 1, 2023, resulting in a $2.2 million decrease to retained earnings Consolidated Balance Sheets This section presents the consolidated financial position, highlighting changes in assets, liabilities, and equity between September 30, 2023, and December 31, 2022 | Metric | September 30, 2023 ($ millions) | December 31, 2022 ($ millions) | Change | | :--- | :--- | :--- | :--- | | Total Assets | $2,230.97 | $2,062.23 | +8.2% | | Loans, net | $1,865.95 | $1,724.85 | +8.2% | | Total Deposits | $1,808.65 | $1,712.48 | +5.6% | | Total Liabilities | $2,075.86 | $1,908.95 | +8.7% | | Total Stockholders' Equity | $155.11 | $153.28 | +1.2% | - Cash and cash equivalents increased significantly to $59.8 million from $38.4 million at the end of 2022[12] - Non-interest bearing deposits decreased to $244.7 million from $301.7 million, while interest-bearing deposits grew to $1.56 billion from $1.41 billion[12] Consolidated Statements of Income This section details the company's financial performance, showing revenues, expenses, and net income for the third quarter and nine months ended September 30, 2023 and 2022 | Metric | Q3 2023 ($ thousands) | Q3 2022 ($ thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $17,224 | $18,026 | -4.4% | | Total Non-interest Income | $8,086 | $10,224 | -20.9% | | Net Income | $4,005 | $5,798 | -30.9% | | Diluted EPS | $0.35 | $0.48 | -27.1% | | Metric | Nine Months Ended Sep 30, 2023 ($ thousands) | Nine Months Ended Sep 30, 2022 ($ thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $52,001 | $51,610 | +0.8% | | Total Non-interest Income | $23,848 | $33,728 | -29.3% | | Net Income | $12,673 | $17,268 | -26.6% | | Diluted EPS | $1.11 | $1.40 | -20.7% | - Interest expense saw a substantial increase, rising to $18.2 million in Q3 2023 from $4.9 million in Q3 2022, reflecting the higher interest rate environment[14] Consolidated Statements of Cash Flows This section outlines the sources and uses of cash from operating, investing, and financing activities for the nine months ended September 30, 2023 and 2022 | Cash Flow Activity (Nine Months Ended Sep 30) | 2023 ($ thousands) | 2022 ($ thousands) | | :--- | :--- | :--- | | Net Cash from Operating Activities | $10,988 | $63,655 | | Net Cash used in Investing Activities | ($143,034) | ($246,561) | | Net Cash from Financing Activities | $153,414 | $190,787 | | Net Change in Cash and Cash Equivalents | $21,368 | $7,881 | - The decrease in cash from operating activities was primarily due to lower mortgage banking income and changes in loans originated for sale[22] - Financing activities in 2023 were driven by a net increase in deposits of $96.2 million and an increase in borrowings, partially offset by treasury stock purchases and dividends paid[22] Notes to Consolidated Financial Statements This section provides detailed explanations of significant accounting policies, estimates, and financial statement line items - On January 1, 2023, the Corporation adopted ASU 2016-13 (CECL), which replaced the incurred loss model with an expected loss methodology, resulting in a one-time, after-tax decrease to retained earnings of $2.2 million[32][61][62] - A two-for-one stock split in the form of a stock dividend was approved on February 28, 2023, and paid on March 20, 2023, with all share and per-share amounts adjusted to reflect this split[30] - As of September 30, 2023, the investment portfolio had gross unrealized losses of $15.9 million in available-for-sale securities and $5.6 million in held-to-maturity securities, primarily attributed to changes in market interest rates[71][72] - Total nonaccrual loans increased to $29.1 million as of September 30, 2023, from $21.2 million at December 31, 2022[80][82] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights a challenging operating environment, with net income declining to $4.0 million in Q3 2023 from $5.8 million in Q3 2022, driven by a 20.9% drop in non-interest income from reduced mortgage banking activity and net interest margin compression to 3.29% from 4.01% due to rapidly rising funding costs, while total assets grew 8.2% to $2.2 billion since year-end 2022, fueled by an 8.5% increase in portfolio loans, maintaining a strong liquidity position and well-capitalized regulatory ratios, and recently raising $9.7 million in subordinated debt to support growth | Key Performance Ratios | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Return on average assets (annualized) | 0.73% | 1.23% | | Return on average equity (annualized) | 10.17% | 14.59% | | Net interest margin (tax effected) | 3.29% | 4.01% | | Diluted EPS | $0.35 | $0.48 | - The decrease in Q3 2023 net income was primarily driven by a decline in non-interest income (down $2.1 million) and a decrease in net interest income (down $0.8 million), partially offset by lower operating expenses[185][189] - The company's uninsured deposit level was 23% of the total deposit base as of September 30, 2023, with management believing its liquidity sources, including access to approximately $1.0 billion from the FHLB and other facilities, are sufficient to meet funding requirements[181][182] Net Interest Income This section analyzes the components of net interest income, including interest income from assets and interest expense on liabilities, and the resulting net interest margin - For Q3 2023, net interest income decreased by $0.81 million compared to Q3 2022, driven by rate changes as the increase in the cost of interest-bearing liabilities outpaced the increase in yields on interest-earning assets[200] - The net interest margin compressed to 3.29% in Q3 2023 from 4.01% in Q3 2022, primarily due to the rapid rise in funding costs, particularly on time deposits and borrowings[193][199] Provision for Credit Losses and Asset Quality This section discusses the provision for credit losses and key asset quality metrics, including non-performing assets and net charge-offs - The provision for credit losses decreased by $0.44 million in Q3 2023 compared to Q3 2022, partly due to a decline in unfunded loan exposure and favorable changes in baseline loss rates and economic factors[204] - Non-performing assets to total assets ratio increased to 1.38% at September 30, 2023, up from 1.11% at year-end 2022, with total non-performing loans rising to $29.1 million from $21.2 million[205] - Net charge-offs were 0.18% of total average loans for the first nine months of 2023, up from 0.10% in the prior year period, with a large portion of charge-offs coming from small ticket equipment leases[206] Non-Interest Income This section analyzes the various sources of non-interest income, including mortgage banking income and hedging activities - Total non-interest income for Q3 2023 decreased by $2.1 million (20.9%) year-over-year, primarily due to a $2.5 million (34.2%) decline in mortgage banking income caused by lower mortgage origination volumes in the rising rate environment and a lack of housing inventory[211] - For the nine months ended September 30, 2023, mortgage banking income fell by $8.2 million (38.5%) and net gains on hedging activity decreased by $4.9 million (98.4%) compared to the same period in 2022[213] Non-Interest Expense This section details the company's operating expenses, including salaries and employee benefits, and their changes over the period - Total non-interest expense decreased by $0.24 million (1.2%) in Q3 2023 compared to Q3 2022, mainly due to a $0.94 million reduction in salaries and employee benefits in the mortgage segment[215] - For the nine months ended September 30, 2023, non-interest expense decreased by $4.0 million (6.5%), driven by a $6.0 million decline in salaries and benefits, primarily in the mortgage segment[218] Balance Sheet and Capital This section reviews the key changes in the balance sheet composition and the company's capital adequacy ratios - Total portfolio loans grew by $147.8 million (8.5%) since year-end 2022, led by a $130.7 million increase in commercial real estate loans[222] - Total deposits increased by $96.2 million (5.6%), with a shift from noninterest-bearing and interest-bearing demand accounts into higher-yielding money market and time deposits[223] - In September 2023, the Corporation raised $9.7 million in subordinated debt at an 8.00% rate to improve Tier 2 capital and support organic growth[225] | Capital Ratios (Corporation) | September 30, 2023 | December 31, 2022 | Well-capitalized minimum | | :--- | :--- | :--- | :--- | | Tier 1 leverage ratio | 7.52% | 8.13% | N/A | | Common tier 1 risk-based capital | 8.43% | 8.77% | 6.50% | | Total risk-based capital ratio | 11.96% | 12.05% | 10.00% | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's market risk analysis indicates an asset-sensitive balance sheet as of September 30, 2023, with a simulation model projecting that net interest income would fluctuate between a decrease of 1.33% and 0.29% in a +/-100 basis point interest rate environment over the next 12 months, and the economic value of equity (EVE) simulation suggesting a negative effect from either an increase or decrease in rates, with a 100 basis point rise potentially decreasing EVE by 2%, which management views as manageable and within policy guidelines | Change in Market Interest Rates (over 12 months) | Impact on Net Interest Income (as of Sep 30, 2023) | | :--- | :--- | | +300 bps | -1.25% | | +100 bps | -0.29% | | -100 bps | -1.33% | | -200 bps | -2.63% | | Change in Market Interest Rates (instantaneous) | Impact on Economic Value of Equity (as of Sep 30, 2023) | | :--- | :--- | | +300 bps | -10% | | +100 bps | -2% | | -100 bps | 0% | | -200 bps | -5% | Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of September 30, 2023, with new and modified internal controls over financial reporting designed in relation to the adoption of the CECL accounting standard on January 1, 2023, particularly concerning model governance, assumptions, and data, and no other material changes to internal controls reported during the quarter - The CEO and CFO concluded that the Corporation's disclosure controls and procedures were effective as of September 30, 2023[253] - Following the adoption of CECL on January 1, 2023, the Corporation implemented new and modified controls over financial reporting related to model design, governance, assumptions, and loan-level data[255] PART II OTHER INFORMATION Item 1A. Risk Factors The company highlights material updates to its risk factors, focusing on adverse developments in the financial services industry that could affect operations, stock price, and regulatory costs, and weakness in the secondary mortgage market driven by higher interest rates and low housing inventory, which has significantly reduced mortgage origination volumes and non-interest income, a trend that may continue - Adverse developments in the financial services industry, including recent bank failures and liquidity concerns, are cited as a material risk that could impact operations, stock price volatility, and lead to increased regulatory costs like special FDIC assessments[258] - Weakness in the secondary residential mortgage market, characterized by higher interest rates and a lack of housing inventory, has adversely affected mortgage banking income and is expected to be a continuing risk[259][260] Other Items (Items 1, 2, 3, 4, 5, 6) This section confirms that there are no legal proceedings, unregistered sales of equity securities, or defaults upon senior securities to report for the period, with disclosures regarding mine safety not applicable, and no other material information required to be reported, concluding with a list of exhibits filed, including certifications by the principal executive and financial officers - The company reports no legal proceedings for the period[257] - There were no unregistered sales of equity securities or defaults upon senior securities[261][262]