Meridian (MRBK) - 2023 Q4 - Annual Report

Part I Business Meridian Corporation operates as a bank holding company through its subsidiary Meridian Bank, focusing on Commercial Banking, Mortgage Banking, and Wealth Management - The Corporation operates through three principal business lines: Commercial Banking (including commercial and industrial lending, CRE, SBA lending), Mortgage Banking (originating and selling residential mortgages), and Wealth Management and Advisory Services[22][24][27] - The primary market area is the five-county Philadelphia metropolitan area, with a secondary market in the five-county Baltimore metropolitan area, both characterized by stable economies and high household incomes[29][31] - The company and its subsidiaries are subject to extensive regulation by multiple agencies, including the FDIC, the Pennsylvania Department of Banking and Securities (PDBS), the Federal Reserve Bank (FRB), and the SEC[46][47] Human Capital Overview as of December 31, 2023 | Metric | Value | | :--- | :--- | | Total Employees | 324 | | Women in Workforce | 56% | | Women in Officer Roles | 32% | | 2023 Hires | 83 | | 2023 Turnover Rate | Approx 3% | Risk Factors The company faces material risks from economic conditions, cybersecurity threats, interest rate fluctuations, and significant credit risk from its commercial real estate loan concentration - The business is sensitive to general economic conditions, and a downturn could lead to deteriorating credit quality, increased delinquencies, and a higher provision for loan losses[108][112] - Liquidity risk is inherent, as the inability to access funding sources could negatively impact operations, and dividend payments from its subsidiary bank are subject to regulatory limits[115][118] - The company faces significant cybersecurity risks, including fraudulent activity and data breaches, and is dependent on third-party information technology systems[125][126][131] - A significant portion of the loan portfolio is secured by real estate, with 38.6% in Commercial Real Estate (CRE) loans and 12.9% in construction and development loans as of year-end 2023[168][169] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[178] Cybersecurity Cybersecurity risk is managed through a cross-departmental approach with oversight from the Board of Directors and is based on the NIST Cybersecurity Framework - Cybersecurity governance involves the Board of Directors, Audit Committee, and an IT Steering Committee, ensuring high-level oversight[179][182] - The company's enterprise-wide information security program is designed to be consistent with the National Institute of Standards and Technology (NIST) Cybersecurity Framework[179] - Cybersecurity practices include annual employee training, management-level simulations, third-party penetration tests, and a formal process for evaluating third-party service provider risks[180][181] Properties The company is headquartered in Malvern, Pennsylvania, and operates numerous branches and offices, the majority of which are leased - The company operates from its headquarters in Malvern, PA, with six full-service branches and 18 other offices, most of which are leased, with a total net book value of $10.8 million at December 31, 2023[184] Legal Proceedings The company reports no material legal proceedings - None[185] Mine Safety Disclosures This section is not applicable to the company's operations - Not applicable[186] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under "MRBK," with a history of quarterly dividends and a recently expired stock repurchase plan - The company's common stock is traded on the NASDAQ Global Select Market under the symbol "MRBK" with approximately 1,602 registered shareholders as of March 11, 2024[188] - A stock repurchase plan expired on April 22, 2023, under which the company repurchased a total of $19.6 million of its common stock[189] Cash Dividends Paid Per Share (Adjusted for Stock Split) | Date Declared | Quarterly Dividend | Special Dividend | | :--- | :--- | :--- | | 2022 | | | | Jan 27, 2022 | — | $0.50 | | Apr 28, 2022 | $0.10 | — | | Jul 28, 2022 | $0.10 | — | | Oct 27, 2022 | $0.10 | — | | 2023 | | | | Jan 26, 2023 | $0.125 | — | | Apr 27, 2023 | $0.125 | — | | Jul 27, 2023 | $0.125 | — | | Oct 26, 2023 | $0.125 | — | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, asset and loan growth was offset by a significant decline in net income due to lower mortgage banking revenue and a compressed net interest margin Executive Overview The company experienced asset and loan growth in 2023, but profitability declined significantly due to lower mortgage banking income and a higher provision for credit losses Key Financial Highlights (2023 vs 2022) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Assets | $2.2B | $2.1B | 8.9% | | Portfolio Loans | $1.9B | $1.7B | 8.8% | | Net Income | $13.2M | $21.8M | (39.3)% | Key Performance Ratios (2023 vs 2022) | Ratio | 2023 | 2022 | | :--- | :--- | :--- | | Return on average assets | 0.61% | 1.18% | | Return on average equity | 8.53% | 13.87% | | Net interest margin (tax effected) | 3.35% | 3.98% | | Diluted earnings per share | $1.16 | $1.79 | Results of Operations Net interest income decreased slightly in 2023 as rising fund costs outpaced asset yield increases, while a sharp drop in mortgage banking income drove non-interest income lower - Net interest margin decreased by 63 basis points to 3.35% in 2023, as the rising cost of funds outpaced the increase in yield on earning assets[212] - The provision for credit losses increased by $4.3 million to $6.8 million in 2023, driven by the adoption of CECL, specific reserves on non-accrual loans, and loan growth[213] - Total non-interest income decreased by $9.8 million (23.4%), largely driven by an $8.8 million (34.7%) decline in mortgage banking income[215] - Total non-interest expense decreased by $4.3 million (5.3%), mainly due to a $7.0 million (12.9%) reduction in salaries and employee benefits in the mortgage segment[218] Balance Sheet Analysis Total assets and loans grew in 2023, but asset quality deteriorated, and the deposit mix shifted from non-interest-bearing accounts to higher-cost time deposits - Non-performing assets to total assets increased to 1.58% as of December 31, 2023, from 1.11% a year earlier, with total non-performing loans rising to $33.8 million[240] - Net charge-offs for 2023 were $5.6 million, or 0.30% of total average loans, compared to $2.4 million, or 0.15%, in 2022[241] - Total deposits grew 6.5% to $1.8 billion, with a mix shift as non-interest bearing deposits fell 20.7% while time deposits grew 38.9%[251] Loan Portfolio Composition (in thousands) | Loan Category | Dec 31, 2023 | Dec 31, 2022 | % Change | | :--- | :--- | :--- | :--- | | Commercial mortgage | $737,863 | $565,400 | 30.5% | | Construction | $246,440 | $271,955 | (9.4)% | | Commercial and industrial | $302,891 | $341,378 | (11.3)% | | Residential mortgage | $260,604 | $221,837 | 17.5% | | Leases, net | $121,632 | $138,986 | (12.5)% | | Total portfolio loans | $1,888,448 | $1,735,598 | 8.8% | Liquidity and Capital Resources The company maintains a solid liquidity position and is considered "well capitalized" for regulatory purposes, comfortably exceeding minimum capital requirements - Total available liquidity was $273.4 million at December 31, 2023, derived from cash, investments, and salable loans[261] - The company has access to approximately $987 million in liquidity from various sources, including a maximum borrowing capacity of $626.8 million with the FHLB[197][262] - The Bank is categorized as "well capitalized" and has adopted the Community Bank Leverage Ratio (CBLR) framework, with a CBLR of 9.46% as of December 31, 2023[264][266][503] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with simulations indicating a narrowly asset-sensitive balance sheet and manageable exposure within policy guidelines Net Interest Income Sensitivity Analysis (12-Month Rate Ramp) | Change in Market Interest Rates | % Change in NII (Dec 31, 2023) | | :--- | :--- | | +300 basis points | 0.01% | | +200 basis points | 0.19% | | +100 basis points | 0.15% | | -100 basis points | (1.37)% | | -200 basis points | (2.28)% | Economic Value of Equity (EVE) Sensitivity Analysis (Instantaneous Shock) | Change in Market Interest Rates | % Change in EVE (Dec 31, 2023) | | :--- | :--- | | +300 basis points | (7)% | | +200 basis points | (3)% | | +100 basis points | —% | | -100 basis points | (3)% | | -200 basis points | (13)% | Financial Statements and Supplementary Data This section contains the consolidated financial statements, which received an unqualified opinion from the independent auditor and reflect the adoption of the CECL accounting standard - The independent auditor, Crowe LLP, issued an unqualified opinion, stating that the financial statements are fairly presented and that internal controls were effective[282] - Effective January 1, 2023, the company adopted the ASC 326 (CECL) accounting standard for credit losses, which was identified as a critical audit matter[283][291] Consolidated Financial Summary (in thousands) | Metric | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Balance Sheet | | | | Total Assets | $2,246,193 | $2,062,228 | | Loans, net | $1,873,699 | $1,724,854 | | Total Deposits | $1,823,462 | $1,712,479 | | Total Stockholders' Equity | $158,022 | $153,280 | | Income Statement | | | | Net Interest Income | $68,942 | $70,128 | | Provision for Credit Losses | $6,815 | $2,488 | | Net Income | $13,243 | $21,829 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[557] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of year-end 2023 - Management concluded that the Corporation's disclosure controls and procedures were effective as of December 31, 2023[558] - Based on an assessment against the COSO framework, management concluded that the Corporation's system of internal control over financial reporting was effective as of December 31, 2023[564] - No material changes in internal control over financial reporting occurred during the fourth quarter of 2023[566] Other Information The company reports no other information for this item - None[567] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2024 proxy statement - Required information is incorporated by reference from the 2024 Proxy Statement[569] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2024 proxy statement - Required information is incorporated by reference from the 2024 Proxy Statement[570] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2024 proxy statement - Required information is incorporated by reference from the 2024 Proxy Statement[571] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2024 proxy statement - Required information is incorporated by reference from the 2024 Proxy Statement[571] Principal Accounting Fees and Services Information regarding accounting fees and services is incorporated by reference from the 2024 proxy statement - Required information is incorporated by reference from the 2024 Proxy Statement[572] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and exhibits filed with the Form 10-K - The consolidated financial statements are set forth in Item 8 of the report[574] - A list of exhibits filed with the report is provided, including governance documents, material contracts, and certifications[575] Form 10-K Summary No Form 10-K summary is provided - None[576]