Meridian (MRBK) - 2023 Q1 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements Unaudited Q1 2023 financials show total assets grew to $2.23 billion, but net income declined to $4.0 million, primarily from lower non-interest income Consolidated Balance Sheets The balance sheet highlights significant growth in total assets and borrowings, alongside an increase in cash and loans Consolidated Balance Sheet Highlights (as of March 31, 2023 vs. December 31, 2022) | Account | March 31, 2023 ($ thousands) | December 31, 2022 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $2,229,783 | $2,062,228 | +8.1% | | Cash and cash equivalents | $108,503 | $38,391 | +182.6% | | Loans, net | $1,797,747 | $1,724,854 | +4.2% | | Total Deposits | $1,770,413 | $1,712,479 | +3.4% | | Borrowings | $233,883 | $122,082 | +91.6% | | Total Stockholders' Equity | $153,049 | $153,280 | -0.2% | Consolidated Statements of Income The income statement reveals a decrease in net income despite growth in net interest income, primarily due to a sharp decline in non-interest income Consolidated Income Statement Summary (Three Months Ended March 31) | Metric | 2023 ($ thousands) | 2022 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Net Interest Income | $17,677 | $16,035 | +10.2% | | Provision for credit losses | $1,399 | $615 | +127.5% | | Non-interest Income | $6,638 | $13,102 | -49.3% | | Non-interest Expense | $17,789 | $21,433 | -17.0% | | Net Income | $4,021 | $5,535 | -27.4% | | Diluted EPS | $0.34 | $0.44 | -22.7% | - The significant decrease in net income was primarily driven by a sharp decline in non-interest income, with mortgage banking income falling from $7.1 million to $3.3 million and SBA loan income decreasing from $2.5 million to $713 thousand year-over-year[14] Consolidated Statements of Comprehensive Income (Loss) Total comprehensive income significantly improved in Q1 2023, driven by positive changes in unrealized gains on available-for-sale securities - Total comprehensive income was $5.7 million for Q1 2023, a significant improvement from a comprehensive loss of $0.9 million in Q1 2022, driven by a positive net change in unrealized gains on available-for-sale securities[16] Consolidated Statements of Stockholders' Equity Stockholders' equity was impacted by the CECL accounting standard adoption, resulting in a $2.2 million after-tax reduction to retained earnings - On January 1, 2023, the company recorded a $2.2 million after-tax decrease to retained earnings upon the adoption of the CECL accounting standard (ASU 2016-13)[19] - During Q1 2023, the company paid dividends of $1.4 million ($0.125 per share) and repurchased $2.7 million of treasury stock (184,598 shares)[19] Consolidated Statements of Cash Flows Cash and cash equivalents increased by $70.1 million, primarily funded by net cash from financing activities, including deposits and borrowings - Cash and cash equivalents increased by $70.1 million during the three months ended March 31, 2023, primarily funded by net cash from financing activities of $165.7 million, which included a $57.9 million net increase in deposits and a $111.8 million net increase in borrowings, while net cash used in operating and investing activities was $11.4 million and $84.2 million, respectively[23] Notes to Consolidated Financial Statements (Unaudited) Notes detail the two-for-one stock split, the impact of CECL adoption, investment portfolio unrealized losses, and an increase in nonaccrual loans - On February 28, 2023, the Corporation approved a two-for-one stock split in the form of a stock dividend, effective March 20, 2023, with all share and per-share amounts adjusted to reflect this split[30] Impact of CECL Adoption on January 1, 2023 | Item | Pre-adoption ($ thousands) | Adoption Impact ($ thousands) | As Reported ($ thousands) | | :--- | :--- | :--- | :--- | | Total ACL on loans and leases | $18,828 | $1,596 | $20,424 | | Reserve for unfunded commitments | $173 | $1,256 | $1,429 | - As of March 31, 2023, the investment portfolio had a total fair value of $176.0 million with a net unrealized loss of $15.2 million, primarily attributed to changes in market interest rates, with no securities deemed other-than-temporarily impaired[75] - Total nonaccrual loans increased to $23.1 million as of March 31, 2023, from $21.2 million at year-end 2022, with the delinquency rate for total loans at 1.77%[87][88] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 results, highlighting a 27.4% net income decrease driven by lower non-interest income, despite net interest income growth and loan expansion Executive Overview The executive overview highlights an 8.1% growth in total assets and a 27.4% decrease in net income for Q1 2023, alongside a compressed net interest margin - Total assets grew 8.1% to $2.2 billion since December 31, 2022, with portfolio loans increasing 4.7% (18.6% annualized)[177] - Net income for Q1 2023 was $4.0 million ($0.34 per diluted share), a 27.4% decrease from Q1 2022, primarily due to a 49.3% drop in non-interest income, and net interest margin decreased to 3.61% from 3.89% in Q1 2022[178] - The company adopted the CECL standard on January 1, 2023, resulting in a $1.6 million increase to the allowance for credit losses and a $2.2 million after-tax reduction to retained earnings[177] Bank Sector Concerns The company addresses bank sector concerns by detailing its diversified deposit base, with 23% uninsured deposits, and access to $817.9 million in liquidity - The deposit base is comprised of 57% business deposits, 11% consumer, 9% municipal, and 23% brokered deposits[173] - As of March 31, 2023, the level of uninsured deposits for the entire deposit base was 23%, with municipal deposits 100% collateralized and brokered deposits 100% FDIC insured[173] - The company has access to approximately $817.9 million in liquidity from various sources, including the FHLB and the Federal Reserve's Bank Term Funding Program (BTFP), having secured $33 million in borrowings from the BTFP in Q1 2023[175] Results of Operations Results of operations show increased net interest income offset by higher provision for credit losses and a significant decline in non-interest income - Net interest income increased by $1.7 million year-over-year, as a $13.0 million increase in interest income (driven by loan growth and higher rates) was partially offset by an $11.3 million increase in interest expense due to higher funding costs[186][187][188] - The provision for credit losses increased by $784 thousand year-over-year to cover loan growth and a $906 thousand increase in net charge-offs[189] - Non-interest income decreased by $6.5 million (49.3%), primarily due to a $3.8 million drop in mortgage banking income and a $1.8 million decrease in SBA loan income[196][197] - Non-interest expense decreased by $3.6 million (17.0%), largely due to a $4.2 million reduction in salaries and employee benefits in the mortgage segment, reflecting lower origination volumes[199] Balance Sheet, Liquidity and Capital The balance sheet analysis indicates strong portfolio loan growth, increased deposits with a compositional shift, and the Bank maintaining a well-capitalized status - Portfolio loans grew by $80.8 million (4.7%) in Q1 2023, an annualized rate of 18.6%, driven by commercial real estate, residential mortgages, small business loans, and lease financings[202] - Total deposits increased by $57.9 million (3.4%), with a shift in composition as noninterest-bearing and money market deposits decreased while time deposits grew by $133.9 million, including an increase in brokered deposits[203] - The Bank remains well-capitalized, with a Tier 1 leverage ratio of 9.32% as of March 31, 2023, well above the 5.00% minimum requirement[206] - Tangible book value per share (a non-GAAP measure) increased to $13.33 as of March 31, 2023, from $13.01 as of December 31, 2022[205][221] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's market risk analysis indicates an asset-sensitive balance sheet, with rising interest rates projected to positively impact net interest income and economic value of equity Net Interest Income Sensitivity Analysis (Projected Change over 12 months) | Rate Shock Scenario | March 31, 2023 (%) | March 31, 2022 (%) | | :--- | :--- | :--- | | +300 bps | 1.58% | 0.93% | | +200 bps | 1.21% | 0.44% | | +100 bps | 0.76% | -0.10% | | -100 bps | -1.80% | -0.15% | | -200 bps | -3.19% | -1.29% | - The economic value of equity (EVE) simulation shows a positive effect from rising interest rates and a negative effect from falling rates, indicating an asset-sensitive position[228] Item 4. Controls and Procedures Management concluded that disclosure controls were effective as of March 31, 2023, with new internal controls implemented for CECL adoption - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2023[231] - New and modified internal controls over financial reporting were implemented to accommodate the adoption of CECL, covering model governance, assumptions, and data[232] PART II OTHER INFORMATION Item 1. Legal Proceedings The company reported no legal proceedings - There are no legal proceedings to report[234] Item 1A. Risk Factors New risk factors address potential adverse effects from financial industry turmoil and the impact of rising interest rates on the securities portfolio's unrealized losses - A new risk factor was added concerning recent turmoil in the financial services industry, which could lead to deposit withdrawals, increased regulatory scrutiny, and higher FDIC insurance costs[235][236] - Another new risk factor highlights that rising interest rates have created significant unrealized losses in the Corporation's securities portfolio, where a forced sale to meet liquidity needs could result in realized losses, impairing capital and profitability[238] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 184,598 shares of common stock for approximately $2.9 million during Q1 2023, under a plan that expired in April 2023 Share Repurchases for Q1 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 2023 | 29,142 | $15.67 | | Feb 2023 | 45,194 | $15.24 | | Mar 2023 | 110,262 | $15.99 | | Total | 184,598 | $15.63 | Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and XBRL data files