MRBK - Meridian Corporation Reports First Quarter 2023 Results and Announces a Quarterly Dividend of $0.125 per Common Share

MALVERN, Pa., May 02, 2023 (GLOBE NEWSWIRE) -- Meridian Corporation (Nasdaq: MRBK) today reported:

• Net income of $4.0 million and diluted earnings per share of $0.34 for the first quarter ended March 31, 2023.
• Return on average assets and return on average equity for the first quarter of 2023 were 0.78% and 10.65%, respectively.
• Net interest margin was 3.61% for the first quarter of 2023.
• Total assets at March 31, 2023 were $2.2 billion, compared to $2.1 billion at December 31, 2022 and $1.8 billion at March 31, 2022.
• First quarter commercial loan growth was $61.3 million, or 16.9% annualized; residential and home equity loans increased by $19.6 million.
• First quarter deposit growth was $57.9 million, or 13.6% annualized.
• Upon adoption ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326) (“CECL”) effective January 1, 2023, we recorded an increase to our allowance for credit losses of $1.6 million and an adjustment to the reserve for unfunded commitments of $1.3 million. The after-tax retained earnings impact of this adoption was $2.2 million.
• The Company repurchased 184,598 shares of its common stock at an average price of $15.63 per share during the first quarter.
• Performed a two-for-one stock split in the form of a 100% stock dividend on outstanding shares of common stock. After the close of business on March 20, 2023, shareholders of record on March 14, 2023, received one additional share of Corporation stock for each share then held. All share and per share amounts have been adjusted to reflect the stock split.
• On April 27, 2023, the Board of Directors declared a quarterly cash dividend of $0.125 per common share, payable May 22, 2023 to shareholders of record as of May 15, 2023.

Christopher J. Annas, Chairman and CEO commented “Meridian’s first quarter revenue of $37.6 million generated earnings of $4.0 million, or $0.34 per diluted share. The bank segment had strong performance with loan growth of 4.3% for the quarter while achieving net interest margin of 3.61%. The margin was down from the prior quarter as we could no longer delay raising deposit rates. The first quarter banking market turmoil with SVB and others alerted most customers on deposit insurance and we offered insured sweep accounts as needed. Our deposit base is diversified with generally larger average balances due to our commercial orientation. During this period deposit outflows were monitored closely, while capital remains strong."

"Annual loan growth of 15%, which we’ve done over the past few years, is achievable. There continues to be a lack of homes for sale in our region, and builders are selling everything out of construction loans very quickly. We have very little office or warehouse exposure, preferring to do generally smaller development or multi-family projects. We are winning our share of commercial/industrial and SBA opportunities and have not seen any measurable deterioration in credits. Some banks in the region are pulling back or tightening underwriting which will create further opportunities. As always, we remain diligent in our lending."

"The mortgage segment has slowed considerably, and we have made cuts and adjustments as necessary. It’s always been a seasonable business with first quarter being the worst, but we see volume improvement as rates stabilize and inventory improves and we forecast a profitable year. The historical lack of homes for sale doesn’t get fixed quickly, and we see no slowdown in residential construction until demand is satisfied. Recruiting new loan officers from less stable firms has also helped improve volume."

Mr. Annas added, "We have always preferred diversification of risk and earnings, over pursuing cyclical niches that look so promising for profitability. We will continue to pursue being the best bank in our markets, delivering the standard bank products in an efficient and responsive manner."

Select Condensed Financial Information

Curr ent Expected Credit Losses ("CECL")

The Corporation adopted ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“CECL”) effective January 1, 2023. Upon adoption, the reserve for credit losses on loans and leases increased by $1.6 million, and the reserve for unfunded commitments increased by $1.3 million. This resulted in an after-tax retained earnings adjustment of $2.2 million. During the quarter ended March 31, 2023 the Corporation recorded a provision for credit losses of $1.4 million. $1.5 million of the provision was made to cover net charge-offs mainly on small ticket equipment leases, while the first quarter CECL related charges were $55 thousand, including a provision for credit losses on loans and leases of $18 thousand, and a reduction to the reserve for unfunded commitments of $73 thousand.

Income Statement - First Quarter 2023 Compared to Fourth Quarter 2022

Net income was $4.0 million, down $536 thousand from $4.6 million for the fourth quarter. Net interest income decreased $841 thousand, or 4.5%, on a tax equivalent basis due to fewer days in the quarter and a lower interest margin. Additionally, non-interest income decreased $1.4 million or 17.0%. Partially offsetting these lower levels of income, non-interest expense decreased $2.3 million, or 11.3%. Detailed explanations of the major categories of income and expense follow below.

Net Interest income

The rate/volume analysis table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the periods indicated and allocated by rate and volume. Changes in interest income and/or expense attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of the change in each category.

Interest income increased $3.2 million on a tax equivalent basis, quarter over quarter, due to a higher yield on earning assets, in addition to a higher level of average earning assets, partially offset by there being two less days in the current quarter compared to the fourth quarter. The yield on earnings assets rose 43 basis points during the period, while average earning assets increased by $117.5 million.

The yield on total loans increased 44 basis points and the yield on cash and investments increased 6 basis points in total, reflecting the impact in rates caused by the Federal Reserve’s monetary policy. Nearly $700 million in loans repriced during the quarter with an average increase of 69 basis points. Average total loans, excluding residential loans for sale, increased $109.1 million, most notably in commercial real estate and construction, commercial loans and leases and small business loans, which increased $47.9 million on average, combined. Home equity loans and residential real estate loans held in portfolio increased $44.8 million on average, combined. Residential loans for sale and PPP loans decreased $4.3 million, and $5.8 million on average, respectively.

Total interest expense increased $4.0 million, quarter over quarter, due primarily to market interest rate rises, and increases in both deposit and borrowing balances, partially offset by there being two less days in the current quarter. Interest expense on deposits increased $3.2 million as total average deposits increased $77.2 million. with the cost of interest-bearing deposits increased 82 basis points to 3.17%. Total cost of deposits increased 72 basis points, taking into account that average non-interest deposits decreased $16.3 million. Interest expense on borrowings increased $793 thousand as total average short-term borrowings increased $63.5 million and the cost increased 25 basis points.

Net interest margin decreased 32 basis points to 3.61% for the first quarter from 3.93% for fourth the quarter, as wholesale funding and borrowing sources repriced quicker than the increase in rates on loans, in addition to the impact of interest recoveries and certain fees of $253 thousand recorded in the prior quarter, not repeated in the current quarter.

The provision for credit losses increased $653 thousand to $1.4 million for the first quarter. While the first quarter provision shows the impact of CECL reserving as well as accounting for loan growth, the largest portion of the provision relates to covering $1.5 million in charge-offs on small ticket equipment leases.

Non-interest income

The following table presents the components of non-interest income for the periods indicated:

Total non-interest income decreased $1.4 million, or 17.0%, quarter over quarter due to seasonality as well as the continued impact from the rising rate environment. Mortgage banking income was adversely impacted by shifting mortgage rates above 6%, somewhat stabilized high home prices and a tight supply of homes available for sale. Affordable housing continues to be an issue for potential homebuyers which resulted in a decline in loan originations of $58.6 million over the prior quarter. Gain on sale margins increased 41 bps over the prior quarter due to more favorable investor pricing, however overall mortgage banking income decreased $686 thousand. The fair value of loans held for sale, derivatives instruments and net gain on hedging activity decreased $827 thousand in total.

SBA loan income increased $191 thousand, or 36.6%, over the prior quarter despite a lower volume of SBA loans that were sold into the secondary market in the first quarter. $10.9 million of loans were sold in the quarter-ending March 31, 2023 at a gross margin of 7.7%, compared to $17.2 million in loans sold in the quarter-ending December 31, 2022 at a gross margin of 5.0%. Also contributing to the increase in SBA income was a decline in impairment on SBA servicing assets.

Wealth management income increased $135 thousand, or 12.7%, for the quarter-ended March 31, 2023 over the prior quarter due to an increase in the number of individual account customers, combined with the effect of market conditions on assets under management. Other non-interest income decreased $249 thousand, or 17.4%, over the prior quarter due largely to swap fee income recorded in the prior quarter that was not repeated in the current quarter.

Non-interest expense

The following table presents the components of non-interest expense for the periods indicated:

Salaries and employee benefits decreased $1.7 million overall, with bank and wealth segments combined having decreased $1.7 million, and the mortgage segment decreased $83 thousand. Bank and wealth segments salaries and employee benefits were down from the prior quarter as incentive compensation was highest in the fourth quarter of the year, combined with a decline in stock based compensation expense.

Professional fees decreased $153 thousand as legal expense incurred in the prior quarter related to non-performing loans and other real estate owned was not repeated in the current quarter. In addition, there were non-recurring technology related consulting costs incurred during the prior quarter that were not repeated during the current quarter. Advertising and promotion expense decreased $135 thousand from the prior quarter as business development and promotional costs were higher at year end. Other non-interest expense decreased $246 thousand over the prior quarter due largely to $161 thousand in other real estate owned expense recorded in the fourth quarter, combined with a decline in travel and employee related expenses from the prior period.

Balance Sheet - March 31, 2023 Compared to December 31, 2022

As of March 31, 2023, total assets increased $167.6 million, or 8.1%, to $2.2 billion from $2.1 billion at December 31, 2022. This growth in assets was due to an even mix of growth in cash and investment balances as well as loan portfolio growth, funded by a mix of deposits and borrowings.

Interest-bearing cash increased $72.9 million, or 269.2%, to $100.0 million as of March 31, 2023 from December 31, 2022 and investments increased $6.7 million, or 3.8%.

Portfolio loan growth was $80.8 million, or 4.7% quarter-over-quarter. Commercial mortgage loans increased $51.7 million, or 9.1%, residential real estate loans held in portfolio increased $17.0 million, or 7.7%, SBA loans increased $12.4 million, or 9.1%, and lease financings increased $12.1 million, or 8.7% from December 31, 2022. Partially offsetting the growth in portfolio loans, PPP loans decreased $8.4 million, or 95.4%, as they continue to be forgiven by the SBA, commercial loans decreased $10.3 million, or 3.0%, and construction loans decreased $4.6 million, or 1.7%,

Total deposits increased $57.9 million, or 3.4%, quarter over quarter, due to a $97.0 million increase in interest-bearing deposits, offset by a decrease of $39.1 million in non-interest bearing deposits. Noninterest-bearing deposits and money market accounts decreased $39.1 million, and $49.7 million, respectively, during the period, with notable withdrawals of $19.9 million from 4 separate business customers due to their respective business sales. In addition, municipal deposits were reduced by $20.2 million and replaced by brokered deposits due to more favorable wholesale rates. Two loan relationships with $11.2 million in deposits combined, left Meridian as a result of credit requirements over our comfort level. Time deposits grew $133.9 million, or 27.1%, from retail and wholesale efforts as customers opt for higher term interest rates.

Consolidated stockholders’ equity of the Corporation decreased by $231 thousand from December 31, 2022, to $153.0 million as of March 31, 2023. Changes to equity for the current quarter included net income of $4.0 million, and an improvement of $1.7 million in other comprehensive loss related to investment securities, partially offset by the $2.2 million Day 1 impact of adopting the CECL standard as of January 1, 2023, dividends paid of $1.4 million, and share repurchases of $2.7 million. Based on capital ratio levels at March 31, 2023, we remain above the Community Bank Leverage Ratio requirement of 9%.

The following table presents capital ratios at the dates indicated:

Asset Quality Summary

The ratio of non-performing loans to total loans increased to 1.25% as of March 31, 2023, from 1.20% at December 31, 2022. Non-performing assets to total assets was unchanged at 1.11% as of March 31, 2023 and December 31, 2022. There was $1.7 million in other real estate owned included in non-performing assets, the result of taking possession of a well collateralized residential real estate property in the prior quarter. Total non-performing loans of $23.1 million as of March 31, 2023, increased $1.9 million from $21.2 million as December 31, 2022 due to a $1.5 million commercial loan relationship that was reclassified to non-performing as of March 31, 2023.

Meridian realized net charge-offs of 0.08% of total average loans for the quarter ended March 31, 2023, increased from the quarter ended December 31, 2022 level of 0.05%. Net charge-offs for the quarter ended March 31, 2023 were $1.5 million, comprised of $1.5 million in charge-offs, with $44 thousand in recoveries for the quarter. Nearly all of the charge-offs for the quarter ended March 31, 2023 were from small ticket equipment leases. The ratio of allowance for credit losses to total loans held for investment, excluding loans at fair value and PPP loans (a non-GAAP measure, see reconciliation in the Appendix), was 1.13% as of March 31, 2023 compared to 1.09% as of December 31, 2022. As noted above, the Corporation adopted the CECL accounting standard as of January 1, 2023, which was a leading factor in the increase in this ratio. As of March 31, 2023 there were specific reserves of $2.5 million against non-performing loans, an increase from $2.2 million as of December 31, 2022 due to an increase in the reserve for one commercial loan and one SBA loan.

Bank Sector Concerns

Meridian is a regional community bank with loans and deposits that are well diversified in size, type, location and industry. We manage this diversification carefully, while avoiding concentrations in business lines. Meridian’s model continues to build on our strong and stable financial position, which serves our regional customers and communities with the banking products and services needed to help build their prosperity.

As a commercial bank, the majority of Meridian's deposit base is comprised of business deposits (57%), with consumer deposits amounting to 11% at March 31, 2023. Municipal deposits (9%) and brokered deposits (23%) provide growth funding. Historically, business deposits lag loan fundings. A typical business relationship maintains operating accounts, investment accounts or sweep accounts and business owners may also have personal savings or wealth accounts. Deposit balances in business accounts have a tendency to be higher on average than consumer accounts. At March 31, 2023, 64% of business accounts and 73% of consumer accounts were fully insured by the FDIC. The municipal deposits are 100% collateralized and brokered deposits are 100% FDIC insured. The level of uninsured deposits for the entire deposit base was 23% at March 31, 2023.

Total balance sheet liquidity, which is derived from cash and investments, as well as saleable commercial loans and residential mortgage loans held for sale, was $317.8 million at March 31, 2023, up from $264.4 million at December 31, 2022. Meridian maintains a high-quality investment bond portfolio comprised of U.S Treasuries, government agencies, government agency mortgage-backed securities, and general obligation municipal securities with an average duration of 4 years. Meridian’s investment portfolio represented 8.1% of total assets at March 31, 2023, compared to 8.5% at December 31, 2022. Total cash at March 31, 2023 was $109 million compared to $38 million at December 31, 2022 and $69 million at March 31, 2022.

Meridian also maintains borrowing arrangements with various correspondent banks to meet short-term liquidity needs and has access to approximately $817.9 million in liquidity from numerous sources, including its borrowing capacity with the FHLB and other financial institutions, as well as funding through the CDARS program or through brokered CD arrangements. In addition, the Bank is eligible to receive funds under the new Bank Term Funding Program ("BTFP") announced by the Federal Reserve. At March 31, 2023 Meridian elected to secure $33 million in borrowings from the Federal Reserve under the BTFP due to the favorable rate. Management believes that the above sources of liquidity provide Meridian with the necessary resources to meet its short-term and long-term funding requirements.

About Meridian Corporation

Meridian Bank, the wholly owned subsidiary of Meridian Corporation, is an innovative community bank serving Pennsylvania, New Jersey, Delaware and Maryland. Through more than 20 offices, including banking branches and mortgage locations, Meridian offers a full suite of financial products and services. Meridian specializes in business and industrial lending, retail and commercial real estate lending, electronic payments, and wealth management solutions through Meridian Wealth Partners. Meridian also offers a broad menu of high-yield depository products supported by robust online and mobile access. For additional information, visit our website at www.meridianbanker.com. Member FDIC.

“Safe Harbor” Statement

In addition to historical information, this press release may contain “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to Meridian Corporation’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Meridian Corporation’s control). Numerous competitive, economic, regulatory, legal and technological factors, risks and uncertainties that could cause actual results to differ materially include, without limitation, the impact of the COVID-19 pandemic and government responses thereto; on the U.S. economy, including the markets in which we operate; actions that we and our customers take in response to these factors and the effects such actions have on our operations, products, services and customer relationships; and the risk that the Small Business Administration may not fund some or all Paycheck Protection Program (PPP) loan guaranties; increased competitive pressures; changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and the effects of inflation, a potential recession, among others, could cause Meridian Corporation’s financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in such forward-looking statements. Meridian Corporation cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Meridian Corporation’s filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2022 and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Meridian Corporation does not undertake to update any forward-looking statement whether written or oral, that may be made from time to time by Meridian Corporation or by or on behalf of Meridian Bank.

Meridian believes that non-GAAP measures are meaningful because they reflect adjustments commonly made by management, investors, regulators and analysts. The non-GAAP disclosure have limitations as an analytical tool, should not be viewed as a substitute for performance and financial condition measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of Meridian’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.