MERIDIAN CORPORATION The following discussion is intended to assist in understanding the financial condition and results of operations of Meridian as of and for the year endedDecember 31, 2022 . The information contained in this section should be read together with theDecember 31, 2022 audited Consolidated Financial Statements and the accompanying Notes included in Item 8. Financial Statements And Supplementary Data of this Form 10-K. This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2021 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found 25 -------------------------------------------------------------------------------- in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the Corporation's Form 10-K for the fiscal year endedDecember 31, 2021 .
Recent Market Conditions
Our financial condition and performance, as well as the ability of our borrowers to repay their loans, the value of collateral securing those loans, and demand for loans and other products and services that we offer, are all highly dependent on the business environment in the primary markets in which we operate and inthe United States as a whole.
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. Total balance sheet liquidity, which is derived from cash and investments, as well as salable commercial loans and residential mortgage loans held for sale, was$264.4 million atDecember 31, 2022 . Meridian maintains a high-quality investment bond portfolio comprised ofU.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 8.5% of total assets atDecember 31, 2022 . Meridian also maintains borrowing arrangements with various correspondent banks to meet short-term liquidity needs and has access to approximately$850 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 announced by theFederal Reserve . Management believes that the above sources of liquidity provide Meridian with the necessary resources to meet its short-term and long-term funding requirements.
COVID-19 Concerns
As discussed further in Part I, Item 1, during the first quarter of 2020, an outbreak of COVID-19 spread around the world, includingthe United States . COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity and other economic activities had a destabilizing effect on financial markets and economic activity. TheU.S. economy has since strengthened despite the spread of COVID-19 variants, with higher inflation and housing values beginning in 2021. Also, the ongoing global supply chain issues and the military conflict betweenRussia andUkraine contributed to higher inflation in 2022. In response, theFederal Reserve began normalizing monetary policy with its decision in late 2021 to taper its quantitative easing and raising the federal funds rate beginning inMarch 2022 . Inflation remains elevated in 2022, reflecting supply and demand imbalances related to COVID-19 and its variants, higher food and energy prices from the military conflict betweenRussia andUkraine , and broader price pressures. TheFederal Reserve has raised interest rates significantly throughout 2022 and in the early part of 2023 in attempts to bring the inflation to its long run target rate of two percent. Future rate hikes are expected during the remainder of 2023, as theFederal Reserve has indicated ongoing interest rate increases in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to two percent over time. Significant uncertainties as to future economic conditions continue to exist, including higher inflation, global supply chain issues, and higher oil and commodity prices exacerbated by the military conflict betweenRussia andUkraine . We have taken deliberate actions in response, including maintaining higher reserves for credit losses on loans and leases and off-balance sheet credit exposures and strong capital ratios. As our commercial loan portfolio has a high percentage of variable rate loans, we are well positioned to take advantage of this in a rising rate environment. We are also focused on growing our non-interest bearing and lower-cost interest-bearing deposits to position the Bank for higher interest rates. We also continue to monitor closely the impact of COVID-19 and its variants, macroeconomic uncertainties, as well as any effects that may result from the federal government's responses including future rate hikes; however, the extent to which these factors will impact our operations and financial results in 2023 is highly uncertain.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgements are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified the provision and allowance for loan and lease losses as the accounting policy that, due to the estimates, assumptions and judgements inherent in that policy, is critical in understanding our financial statements. Management has presented the application of this policy to the audit committee of our board of directors. While we were an emerging growth company (up toDecember 31, 2022 ), the JOBS Act permitted us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included in this Annual Report, as well as any financial statements that were filed prior to this Annual Report, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period. The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. Additional information about these policies can be found in the "Summary of Significant Accounting Policies" in footnote 1 of the Corporation's Consolidated Financial Statements as of and for the years endedDecember 31, 2022 and 2021. 26 --------------------------------------------------------------------------------
Provision and allowance for loan and lease losses
The provision for loan and lease losses reflects the amount required to maintain
the allowance for loan and lease losses ("Allowance") at an appropriate level
based upon management's evaluation of the adequacy of general and specific loss
reserves, using an incurred loss model.
The Allowance is maintained at a level that management believes is appropriate
to provide for incurred loan and lease losses as of the date of the Consolidated
Balance Sheet and we have established methodologies for the determination of its
adequacy. The methodologies are set forth in a formal policy and take into
consideration the need for an overall general allowance as well as specific
allowances that are determined on an individual loan basis for impaired loans.
The Allowance is increased by charging provisions for losses against our income
and decreased by charge-offs, net of recoveries.
The evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes available. While
management uses available information to recognize losses on loans and leases,
changes in economic or other conditions may necessitate revision of the estimate
in future periods.
The Allowance is maintained at a level sufficient to provide for probable losses
based upon an ongoing review of the loan and lease portfolios by portfolio
category, which includes consideration of actual loss experience, peer loss
experience, changes in the size and risk profile of the portfolio,
identification of individual problem loan and lease situations which may affect
a borrower's ability to repay, and evaluation of prevailing economic conditions.
Beginning on January 1, 2023 , the Corporation adopted an expected credit loss
model retrospectively, at the beginning of the period of adoption, through a
cumulative-effect adjustment to retained earnings at January 1, 2023 . The
Corporation has largely completed its assessment of related processes, internal
controls, and data sources and has developed, documented, and validated a
discounted cash flows model utilizing a third-party software provider. While the
Corporation continues to analyze and evaluate the impact of the adoption of this
guidance on the Corporation's financial statements, it is anticipated that the
reserve for credit losses will increase by 10% to 20% and stockholders' equity
will decrease by 1% to 3%. The Corporation anticipates that the Corporation and
the Bank will continue to be well capitalized after the negative impact
resulting from the adoption of CECL. See the section entitled "Recent Accounting
Pronouncements" in footnote (1) Summary of Significant Accounting Policies.
Executive Overview
The following items highlight the Corporation's changes in its financial condition as ofDecember 31, 2022 compared toDecember 31, 2021 and the results of operations for the year endedDecember 31, 2022 compared to the same periods in 2021. More detailed information related to these highlights can be found in the sections that follow.
Changes in Financial Condition
•Total assets increased$348.8 million , or 20.4%, to$2.1 billion as ofDecember 31, 2022 . •Portfolio loans, excluding PPP loans, increased$435.4 million , or 33.6%, to$1.73 billion as ofDecember 31, 2022 , •PPP loans decreased to just$4.6 million as ofDecember 31, 2022 which is a decrease of$83.7 million , or 94.8%, sinceDecember 31, 2021 .
Results of Operations
•Consolidated net income decreased$13.8 million , or 38.7%, driven by a lower level of non-interest revenue from mortgage banking activity. •The return on average assets and return on average equity was 1.18% and 13.87%, respectively, for the year endedDecember 31, 2022 , compared to 2.06% and 23.74%, respectively, for the year endedDecember 31, 2021 . •Provision for loan losses increased$1.4 million , or 132.5%, due to loan growth, partially offset by decreases in specific reserves on non-performing loans. 27
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Key Performance Ratios
The following table presents key financial performance ratios for
the periods indicated: Year Ended December 31,
2022 2021
Return on average assets 1.18 % 2.06 %
Return on average equity 13.87 % 23.74 %
Net interest margin (tax effected yield) 3.98 % 3.77 %
Basic earnings per share $ 1.85 $ 2.96
Diluted earnings per share $ 1.79 $ 2.87
The following table presents certain key period-end balances and ratios at the
dates indicated:
December 31, December 31,
(dollars in thousands, except per share amounts) 2022 2021
Book value per common share $ 13.37 $ 13.54
Tangible book value per common share (1) $
13.01
1.35 %
Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1)
1.09 % 1.46 %
Tier I capital to risk weighted assets 8.8 % 10.8 %
Tangible common equity to tangible assets ratio (1) 8.1 % 9.4 %
Loans and other finance receivables, net of fees and costs
$ 2,062,228 $ 1,713,443 Total stockholders' equity$ 153,280 $ 165,360
(1) Non-GAAP financial measure. See "Non-GAAP Financial Measures" below for Non-GAAP to GAAP reconciliation.
Components of Net Income
Net income is comprised of five major elements:
•Net Interest Income, or the difference between the interest income earned on loans, leases and investments and the interest expense paid on deposits and borrowed funds;
•Provision For Loan and Lease Losses, or the amount added to the Allowance to provide for estimated inherent losses on portfolio loans and leases;
•Non-interest Income, which is made up primarily of mortgage banking income, wealth management income, SBA loan sale income, fair value adjustments, gains and losses from the sale of loans, gains and losses from the sale of investment securities available for sale and other fees from loan and deposit services;
•Non-interest Expense, which consists primarily of salaries and employee benefits, occupancy, professional fees, advertising & promotion, data processing, information technology, loan expenses, and other operating expenses; and
•Income Taxes, which include state and federal jurisdictions.
28
--------------------------------------------------------------------------------NET INTEREST INCOME
Net interest income is an integral source of the Corporation's income. The tables below present a summary for the year endedDecember 31, 2022 and 2021, of the Corporation's average balances and yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities. The net interest margin is the net interest income as a percentage of average interest-earning assets. The net interest spread is the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The difference between the net interest margin and the net interest spread is the result of net free funding sources such as non-interest bearing deposits and stockholders' equity.
Analyses of Interest Rates and Interest Differential
The tables below present the major asset and liability categories on an average daily balance basis for the periods presented, along with interest income, interest expense and key rates and yields on a tax equivalent basis.
For the Year Ended December 31,
2022 2021
Interest Interest
Income/ Income/
(dollars in thousands) Average Balance Expense Yields/ Rates Average Balance Expense Yields/ Rates
Assets:
Due from banks $ 21,045 $ 279 1.33 % $ 30,844 $ 41 0.13 %
Federal funds sold 1,160 7 0.60 17,823 7 0.04
Investment securities - taxable (1) 106,246 2,420 2.28 83,720 1,463 1.75
Investment securities - tax exempt (1) 63,425 1,691 2.67 64,440 1,464 2.27
Loans held for sale 44,238 1,872 4.23 125,444 3,540 3.76
Loans held for investment (1) 1,535,943 82,764 5.39 1,358,282 65,292 4.81
Total loans 1,580,181 84,636 5.36 1,483,726 68,832 4.64
Total interest-earning assets 1,772,057 89,033 5.02 % 1,680,553 71,807 4.27 %
Noninterest earning assets 76,983 48,015
Total assets $ 1,849,040 $ 1,728,568
Liabilities and stockholders' equity:
Interest-bearing demand deposits
1.08 % $ 257,950 $ 880 0.34 %
Money market and savings deposits 703,561 7,854 1.12 630,977 3,346 0.53
Time deposits 354,822 4,972 1.40 245,923 1,268 0.52
Total deposits 1,295,937 15,396 1.19 1,134,850 5,494 0.48
Borrowings 27,637 830 3.00 119,721 534 0.45
Subordinated debentures 40,560 2,366 5.83 40,724 2,383 5.85
Total interest-bearing liabilities 1,364,134 18,592 1.36 1,295,295 8,411 0.65
Noninterest-bearing deposits 296,563 258,298
Other noninterest-bearing liabilities 30,929 25,100
Total liabilities 1,691,626 1,578,693
Total stockholders' equity 157,414 149,875
Total stockholders' equity and
liabilities $ 1,849,040 $ 1,728,568
Net interest income and spread (1) $ 70,441 3.66 $ 63,396 3.62
Net interest margin (1) 3.98 % 3.77 %
(1)Yields and net interest income are reflected on a tax-equivalent basis.
29
--------------------------------------------------------------------------------Rate/Volume Analysis
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 year endedDecember 31, 2022 as compared to the same periods in 2021, 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. 2022 Compared to 2021 (dollars in thousands) Rate Volume Total Interest income: Due from banks$ 255 $ (17) $ 238 Federal funds sold 12 (12) - Investment securities - taxable (1) 507 450 957 Investment securities - tax exempt (1) 250 (23) 227 Loans held for sale 1,270 (2,938) (1,668) Loans held for investment (1) 8,395 9,077 17,472 Total loans 9,665 6,139 15,804 Total interest income$ 10,689 6,537 17,226
Interest expense:
Interest-bearing demand deposits
4,083 425 4,508
Time deposits 2,945 759 3,704
Total deposits 8,793 1,109 9,902
Borrowings 985 (689) 296
Subordinated debentures (7) (10) (17)
Total interest expense 9,771 410 10,181
Interest differential $ 918 $ 6,127 $ 7,045 (1)Yields and net interest income are reflected on a tax-equivalent basis.
Interest income increased$17.2 million on a tax equivalent basis, year over year, due to a higher yield on earning assets, which went up 75 basis points, in addition to a higher level of average earning assets, which increased by$91.5 million . Included in interest income was approximately$280 thousand of one-time fees and interest recapture from the quarter endedDecember 31, 2022 . The average yield on loans held for investment increased 58 basis points and the yield on cash and investments increased 46 basis points in total, reflecting the impact in rates caused by theFederal Reserve's monetary policy. Average total loans held for investment, excluding PPP loans and residential loans for sale, increased$315.7 million , most notably in commercial real estate and construction, commercial loans and leases and small business loans, which increased$190.8 million on average, combined. Home equity loans and residential real estate loans held in portfolio increased$44.6 million on average, combined. Residential loans for sale and PPP loans decreased$81.2 million , and$138.0 million on average, respectively. Interest expense increased$10.2 million , year over year, due primarily to market interest rate rises, as well as an increase of$161.1 million in average interest bearing deposits. Interest expense on deposits increased$9.9 million with the cost of interest-bearing deposits increasing 71 basis points to 1.19%. Total cost of deposits increased 58 basis points reflecting an increase of$38.3 million in average non-interest bearing deposits. Interest expense on borrowings increased$296 thousand as the cost increased 255 basis points, and total average short-term borrowings decreased$92.1 million . Net interest margin increased 21 basis points to 3.98% for the year endedDecember 31, 2022 from 3.77% for the year endedDecember 31, 2021 , as the increase in yield on earnings assets was higher than the increase of costs of funds, helped also by the$38.3 million increase in average non-interest bearing deposits. Excluding the impact from PPP, net interest margin increased 20 basis points to 3.92% from 3.72%. A reconciliation of this non-GAAP measure is included in the Appendix.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan losses was$2.5 million for the year endedDecember 31, 2022 , compared to an$1.1 million provision for the year endedDecember 31, 2021 . The increase in the provision period over period is the result of provisioning for loan growth and charge-offs, offset partially by an improvement in specific reserves and the trend in economic qualitative factors in the allowance for loan losses calculation. 30 --------------------------------------------------------------------------------
NON-INTEREST INCOME
The following table presents the components of non-interest income for the
periods indicated:
Year Ended December 31,
(Dollars in thousands) 2022 2021 $ Change % Change
Mortgage banking income $ 25,325 $ 75,932 $ (50,607) (66.6) %
Wealth management income 4,733 4,801 (68) (1.4) %
SBA loan income 4,467 6,898 (2,431) (35.2) %
Earnings on investment in life insurance 553 365 188 51.5 %
Net change in the fair value of derivative
instruments (703) (4,338) 3,635 (83.8) %
Net change in the fair value of loans
held-for-sale (844) (3,311) 2,467 (74.5) %
Net change in the fair value of loans
held-for-investment (2,408) (189) (2,219) 1174.1 %
Net gain on hedging activity 5,439 2,961 2,478 83.7 %
Net gain on sale of investment securities
available-for-sale - 435 (435) (100.0) %
Service charges 125 129 (4) (3.1) %
Other 5,037 4,305 732 17.0 %
Total non-interest income $ 41,724 $ 87,988 $ (46,264) (52.6) %
Total non-interest income decreased $46.3 million as a result of lower mortgage
banking revenue, and to a lesser degree, lower SBA loan sale income. Mortgage
banking income was down $50.6 million , due primarily to lower levels of mortgage
loan originations as rising interest rates and lack of housing inventory has had
a negative impact on mortgage banking activity. Partially offsetting the impact
of the decline in mortgage banking income were net changes in the fair value of
derivative instruments and loans held-for-sale, along with an improvement in net
gains on hedging activity increased $8.6 million , combined, year over year.
SBA loan sale income decreased $2.4 million , or 35.2%, over the prior year,
despite an increase of $8.8 million , 13.0%, in the volume of loans sold in 2022
compared to 2021. The upward movement in interest rates during 2022 had a
negative impact on gross margins on the SBA loan sales, which declined to 7.4%
for all sales in 2022, compared to 11.4% in 2021. Also contributing to the
decline in income was increased amortization of $340 thousand and increased
impairment of $211 thousand on SBA servicing assets.
The net change in the fair value of loans held-for-investment decreased to a
loss of $2.4 million for the year ended December 31, 2022 , compared to a loss of
$189 thousand for the comparable prior year, due to the negative impact the
rising interest rate environment had on the fair value of the loans in portfolio
that are held at fair value. Other non-interest income was up $732 thousand due
to increases in title fee income, swap fee income, FHLB stock dividend income
and broker fee income.
NON-INTEREST EXPENSE
The following table presents the components of non-interest income for the
periods indicated:
Year Ended December 31,
(Dollars in thousands) 2022 2021 $ Change % Change
Salaries and employee benefits $ 54,378 $ 78,866 $ (24,488) (31.1) %
Occupancy and equipment 4,837 4,545 292 6.4 %
Professional fees 3,635 3,558 77 2.2 %
Advertising and promotion 4,336 3,714 622 16.7 %
Data processing and software 5,451 4,382 1,069 24.4 %
Pennsylvania bank shares tax 793 609 184 30.2 %
Other 8,014 8,053 (39) (0.5) %
Total non-interest expense $ 81,444 $ 103,727 $ (22,283) (21.5) %
Total non-interest expense decreased $22.3 million due largely to a decrease in
salaries and employee benefits expense at the mortgage segment, which recognized
decreased fixed and variable compensation. Partially offsetting this decrease
was an increase for the bank and wealth segments salaries & benefits, due to an
increase in FTEs and a higher level of stock-based compensation expense.
Advertising and promotion expense increased as the result of a renewed and
focused priority placed on business development and community outreach efforts.
Data processing and software expense increased as Meridian continued with our
strategy to invest in technology that focuses on improving back-office
efficiencies through automation and workflow processes.
31
--------------------------------------------------------------------------------INCOME TAX EXPENSE
The following table presents income tax expense and related metrics for the
periods indicated:
Year Ended December 31,
(Dollars in thousands) 2022 2021 Change % Change
Income before income taxes $ 27,920 $ 46,302 $ (18,382) (39.7) %
Income tax expense $ 6,091 $ 10,717 $ (4,626) (43.2) %
Effective tax rate 21.81 % 23.14 % (1.33) % (5.7) %
The effective tax rate decreased as a result of higher levels of non-taxable
revenue (BOLI and tax free interest), as well as lower level of state tax
expense. Both income tax expense and the effective tax rate (as it related to
state tax expense) decreased due primarily to the decrease in income before
income taxes.
Balance Sheet Summary
Assets
As of December 31, 2022 , total assets were $2.1 billion which increased $348.8
million , or 20.4%, from December 31, 2021 . This growth in assets over the prior
period was due primarily to loan portfolio growth, as detailed in the following
section.
Loans
Our loan portfolio is the largest category of our interest-earning assets. As of
December 31, 2022 and 2021, our total loans and leases amounted to $1.8 billion ,
and $1.5 billion , respectively. Our loan portfolio is comprised of loans
originated to be held in portfolio, as well as residential mortgage loans
originated for sale. Meridian engages in the origination of residential
mortgages, most typically for 1-4 family dwellings, with the intention of the
Corporation to principally sell substantially all of these loans in the
secondary market to qualified investors. Our loans held in portfolio are
originated by our commercial and consumer loan divisions. We have a strong
credit culture that promotes diversity of lending products with a focus on
commercial businesses. We have no particular credit concentration. Our
commercial loans have been proactively managed in an effort to achieve a
balanced portfolio with no unusual exposure to one industry.
The following table presents our loan and lease portfolio at the dates
indicated:
December 31, December 31,
(Dollars in thousands) 2022 2021 $ Change % Change
Mortgage loans held for sale $ 22,243 $ 80,882 $ (58,639) (72.5) %
Real estate loans:
Commercial mortgage 565,400 516,928 48,472 9.4 %
Home equity lines and loans 59,399 52,299 7,100 13.6 %
Residential mortgage 221,837 68,175 153,662 225.4 %
Construction 271,955 160,905 111,050 69.0 %
Total real estate loans 1,118,591 798,307 320,284 40.1 %
Commercial and industrial 341,378 384,562 (43,184) (11.2) %
Small business loans 136,155 114,158 21,997 19.3 %
Consumer 488 419 69 16.5 %
Leases, net 138,986 88,242 50,744 57.5 %
Total portfolio loans and leases
$ 349,910 25.3 % Total loans and leases$ 1,757,841 $ 1,466,570 $ 291,271 19.9 %
Portfolio loans increased grew
32-------------------------------------------------------------------------------- The following table shows the amounts of loans outstanding as ofDecember 31, 2022 which, based on remaining scheduled repayments of principal, are due in the periods indicated: (dollars in thousands) 12 months or Less 1 - 5 years 5 - 15 years After 15 years Total Mortgage loans held for sale $ - $ - $ -$ 22,243 $ 22,243 Commercial mortgage 23,091 138,037 398,077 6,195
565,400
Home equity lines and loans 725 3,533 50,272 4,869 59,399
Residential mortgage 3,291 730 1,802 216,014 221,837
Construction 120,064 62,178 89,713 - 271,955
Commercial and industrial 26,002 135,355 62,629 117,392 341,378
Small business loans 237 4,672 79,483 51,763 136,155
Consumer 3 208 136 141 488
Leases, net 129 123,034 15,823 - 138,986
Total $ 173,542 $ 467,747 $ 697,935 $ 418,617 $ 1,757,841
The amounts have been classified according to sensitivity to changes in interest
rates for amounts due after one year, as of December 31, 2022 . Variance rate
loans are those loans with floating or adjustable interest rates.
(dollars in thousands) Fixed Rate Variable Rate Total
Mortgage loans held for sale$ 22,243 $ - $ 22,243 Commercial mortgage 94,119 471,281
565,400
Home equity lines and loans 5,928 53,471 59,399
Residential mortgage 199,472 22,365 221,837
Construction 46,854 225,101 271,955
Commercial and industrial 68,722 272,656 341,378
Small business loans 202 135,953 136,155
Consumer 353 135 488
Leases, net 138,986 - 138,986
Total $ 576,879 $ 1,180,962 $ 1,757,841
Commercial real estate loans. Our commercial real estate loans are secured by
real estate that is both owner-occupied and investor owned. Owner-occupied
commercial real estate loans generally involve less risk than an investment
property and are distinctly reported from non-owner occupied commercial real
estate loans for measuring loan concentrations for regulatory purposes. Our
owner-occupied commercial real estate loans are originated and managed within
our commercial loan department and comprised 34.4% of our total commercial real
estate loan portfolio at December 31, 2022 . The remaining commercial real estate
loans are managed by our commercial real estate department which offer the
following commercial real estate products:
•Permanent - Investor Real Estate Loans
•Purchase and refinance loan opportunities for a number of product types, including single-family rentals, multi-family residential as well as tenanted income producing properties in a variety of real estate types, including office, retail, industrial, and flex space
•Construction Loans
•Residential construction loans to finance new construction and renovation of single and 1-4 family homes located within our market area
•Commercial construction loans for investment properties, generally with semi-permanent attributes
•Construction loans for new, expanded or renovated operations for our owner occupied business clients
•Land Development Loans
•Meridian considers a limited number of strictly land development oriented loans based upon the risk, merit of the future project and strength of the borrower/guarantor relationship
Our commercial real estate loans increased by$48.5 million , or 9.4%, to$565.4 million atDecember 31, 2022 from$516.9 million atDecember 31, 2021 . Our total commercial real estate loan portfolio represented 32.2% and 35.2% of our total loan portfolio atDecember 31, 2022 and 2021, respectively. Construction loans increased$111.1 million , or 69.0%, to$272.0 million atDecember 31, 2022 from$160.9 million atDecember 31, 2021 . Construction loans represented 15.5% of our total loan portfolio at bothDecember 31, 2022 and 2021. 33 --------------------------------------------------------------------------------
Commercial and Industrial Loans
We provide a variety of variable and fixed rate commercial business loans and lines of credit. These loans and lines of credit are made to small and medium-sized manufacturers and wholesale, retail and service-related businesses. Additionally, we lend to companies in the technology, healthcare, real estate and financial service industries. Commercial business loans generally include lines of credit and term loans with a maturity of five years or less. The primary source of repayment for commercial business loans is generally operating cash flows of the business and may also include collateralization of inventory, accounts receivable, equipment and/or personal guarantees. Our commercial and industrial loans decreased$43.2 million , or 11.2%, to$341.4 million atDecember 31, 2022 from$384.6 million atDecember 31, 2021 , as PPP loans declined$85.5 million , or 94.8% during the year as nearly all such loans were forgiven byDecember 31, 2022 . Commercial and industrial loans overall represented 19.4% and 26.2% of our total loan portfolio atDecember 31, 2022 and 2021, respectively. Small Business Loans We provide financing to small businesses in various industries that include guarantees under theSmall Business Administration's (SBA's) loan programs. Our small business loans increased by$22.0 million , or 19.3%, to$136.2 million atDecember 31, 2022 from$114.2 million atDecember 31, 2021 . During 2022 we sold$75.9 million in SBA loans, an increase of$8.8 million , or 13.0%, from$67.2 million in SBA loans sold in 2021. The small business loans portfolio represented 7.7% and 7.8% of our total loan portfolio atDecember 31, 2022 and 2021, respectively. Consumer and Personal Loans Our consumer-lending department principally originates residential mortgage and home equity based products for our clients and prospects. These loans typically fund completely at closing. Additional products include smaller dollar personal loans and our student loan refinance product, designed to provide additional flexibility in repayment terms desired in the marketplace. Home equity lines and loans increased$7.1 million , or 13.6%, to$59.4 million atDecember 31, 2022 from$57.6 million atDecember 31, 2021 , while residential mortgage loans increased by$153.7 million , or 225.4%, to$221.8 million atDecember 31, 2022 from$68.2 million atDecember 31, 2021 . Overall the total consumer loan portfolio represented 16.0% and 8.2% of our total loan portfolio atDecember 31, 2022 and 2021, respectively. Leases, net Meridian Equipment Finance specializes in small ticket equipment leases for small and mid-sized businesses nationally and through a broad range of industries. The Bank's credit risk generally results from the potential default of borrowers which may be driven by customer specific or broader industry related conditions. Leases increased$50.7 million , or 57.5%, to$139.0 million atDecember 31, 2022 from$88.2 million atDecember 31, 2021 .
Investments
Our securities portfolio is used to make various term investments, maintain a source of liquidity and serve as collateral for certain types of deposits and borrowings. We manage our investment portfolio according to written investment policies approved by our board of directors. Investments in our securities portfolio may change over time based on our funding needs and interest rate risk management objectives. Our liquidity levels take into account anticipated future cash flows and other available sources of funds and are maintained at levels that we believe are appropriate to provide the necessary flexibility to meet our anticipated funding requirements. As ofDecember 31, 2022 our available-for-sale investment portfolio had a fair value of$135.3 million , with an effective tax equivalent yield of 2.83% and an estimated duration of approximately 4 years. The largest category of this investment portfolio, or 28.7%, consists of municipal securities, along with 25.9% inU.S. agency securities, and 21.8% inU.S. Treasury securities. The remainder of our available-for-sale securities portfolio is invested in other securities. We regularly evaluate the composition of our investment portfolio as the interest rate yield curve changes and may sell investment securities from time to time to adjust our exposure to interest rates or to provide liquidity to meet loan demand. Not included in the tables below are equity investments that had fair values of$2.1 million and$2.4 million , as ofDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 we also had a held-to-maturity investment portfolio with amortized cost of$37.5 million . During the year endedDecember 31, 2022 ,$27.7 million of municipal securities, previously classified as available-for-sale on the balance sheet, were transferred to the held-to-maturity portfolio at fair value. After transfer,$1.3 million of unrealized losses remain in accumulated other comprehensive income. No gain or loss was recognized as a result of the transfer.
The following table presents the amortized cost and fair value of securities at the dates indicated:
December 31, 2022
# of Securities in
Gross unrealized Gross unrealized unrealized loss
(dollars in thousands) Amortized cost gains losses Fair value position
Securities available-for-sale:
U.S. asset backed securities $ 15,581 $ 14 $ (314) $ 15,281 12
U.S. government agency MBS 12,272 5 (538) 11,739 12
U.S. government agency CMO 25,520 40 (2,242) 23,318 29
State and municipal securities 44,700 - (5,862) 38,838 34
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December 31, 2022
# of Securities in
Gross unrealized Gross unrealized unrealized loss
(dollars in thousands) Amortized cost gains losses Fair value position
U.S. Treasuries 32,980 - (3,457) 29,523 25
Non-U.S. government agency CMO 9,722 - (633) 9,089 11
Corporate bonds 8,201 - (643) 7,558 12
Total securities available-for-sale $ 148,976 $ 59 $ (13,689) $ 135,346 135
Gross # of Securities in
Gross unrecognized unrecognized unrecognized loss
Amortized cost gains losses Fair value position
Securities held-to-maturity:
State and municipal securities $ 37,479 $ - $ (4,394) $ 33,085 25
December 31, 2021
# of Securities in
Gross unrealized Gross unrealized unrealized loss
(dollars in thousands) Amortized cost gains losses Fair value position
Securities available-for-sale: U.S. asset backed securities$ 16,850 $ 55 $ (68)$ 16,837 10 U.S. government agency MBS 9,749 124 (60) 9,813 3 U.S. government agency CMO 22,276 358 (253) 22,381 10 State and municipal securities 72,099 1,379 (496) 72,982 12 U.S. Treasuries 29,973 1 (246) 29,728 21 Non-U.S. government agency CMO 990 - (15) 975 1 Corporate bonds 6,450 154 (18) 6,586 5 Total securities available-for-sale$ 158,387 $ 2,071 $ (1,156) $ 159,302 62 Gross Gross # of Securities in unrecognized unrecognized unrecognized loss Amortized cost gains losses Fair value position Securities held-to-maturity: State and municipal securities $ 6,372 $ 219 $ -$ 6,591 - Asset Quality Summary Meridian's credit culture is strong and asset quality remains a primary focus of management. The ratio of non-performing assets to total assets declined to 1.11% as ofDecember 31, 2022 , from 1.34% as ofDecember 31, 2021 . There was$1.7 million in other real estate property included in non-performing assets as ofDecember 31, 2022 related to a well security residential property, and$0 as ofDecember 31, 2021 . Total non-performing loans were$21.2 million and$23.0 million as ofDecember 31, 2022 andDecember 31, 2021 , respectively. The decline in non-performing loans over the period was due to a$2.7 million payoff of a non-performing loan and principal payments on another non-performing loan relationship of over$3 million , both partially offset by an increase in SBA loans considered non-performing. Meridian realized net charge-offs of$2.4 million , or 0.15%, of total average loans for the year endedDecember 31, 2022 , compared to net charge-offs of$79 thousand , or 0.01%, of total average loans for the year endedDecember 31, 2021 . Nearly all of the charge-offs for the year endedDecember 31, 2022 were from equipment leases, while recoveries were split between commercial loans, equipment leases, and home equity loans. The ratio of allowance for loan 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 1.09% as ofDecember 31, 2022 compared to 1.46% as ofDecember 31, 2021 . PPP loans are excluded from calculation of this ratio as they are guaranteed by the SBA and therefore we have not provided for in the allowance for loan losses. A reconciliation of this non-GAAP measure is included in the Non-GAAP Financial Measures section on page 36. As ofDecember 31, 2022 , the Corporation had$3.8 million of TDRs, of which$3.6 million were in compliance with the modified terms and excluded from non-performing loans and leases. As ofDecember 31, 2021 , the Corporation had$3.8 million of TDRs, of which$3.4 million were in compliance with the modified terms, and were excluded from non-performing loans and leases. 35 -------------------------------------------------------------------------------- As ofDecember 31, 2022 , the Corporation had a recorded investment of$24.2 million of impaired loans and leases which included$3.8 million of TDRs, while as ofDecember 31, 2021 impaired loans totaled$25.8 million , which included$3.8 million of TDRs. The decrease in impaired loans was largely due to payments received in the fourth quarter of 2022 on one commercial loan relationship that became a non-performing loan relationship late in 2021. This loan had a specific reserve of$1.4 million of asDecember 31, 2021 , which decreased to$776 thousand as ofDecember 31, 2022 . Impaired loans and leases are those for which it is probable that the Corporation will not be able to collect all scheduled principal and interest in accordance with the original terms of the loans and leases. Refer to footnote 6 for more information regarding the Corporation's impaired loans and leases. The Corporation continues to be diligent in its credit underwriting process and proactive with its loan review process, including the engagement of the services of an independent outside loan review firm, which helps identify developing credit issues. Proactive steps that are taken include the procurement of additional collateral (preferably outside the current loan structure) whenever possible and frequent contact with the borrower. The Corporation believes that timely identification of credit issues and appropriate actions early in the process serve to mitigate overall risk of loss.
The following table presents nonperforming assets and related ratios for the periods indicated:
December 31, December 31,
(dollars in thousands) 2022 2021
Non-performing assets:
Nonaccrual loans:
Real estate loans:
Commercial mortgage $ 140 $ -
Home equity lines and loans 1,097 911
Residential mortgage 2,085 2,398
Total real estate loans 3,322 3,309
Commercial and industrial 12,547 18,801
Small business loans 4,465 666
Leases 902 212
Total nonaccrual loans 21,236 22,988
Other real estate owned 1,703 -
Total non-performing assets $ 22,939 $ 22,988
Troubled debt restructurings:
TDRs included in non-performing loans $ 207 $ 361
TDRs in compliance with modified terms 3,573 3,446
Total TDRs $ 3,780 $ 3,807
Asset quality ratios:
Non-performing assets to total assets 1.11 % 1.34 %
Non-performing loans to:
Total loans and leases 1.20 % 1.57 %
Total loans held-for-investment 1.22 % 1.66 %
Total loans held-for-investment (excluding loans at fair value and
PPP loans) (1) 1.23 % 1.80 %
Allowance for loan losses to:
Total loans and leases 1.07 % 1.28 %
Total loans held-for-investment 1.08 % 1.35 %
Total loans held-for-investment (excluding loans at fair value and
PPP loans) (1) 1.09 % 1.46 %
Non-performing loans 88.66 % 81.60 %
Total loans and leases $ 1,765,925 $ 1,467,339
Total loans and leases held-for-investment $
1,743,682
$ 1,724,601 $ 1,280,654 Allowance for loan and lease losses$ 18,828 $ 18,758 (1) The allowance for loan losses to total loans held-for-investment (excluding loans at fair value and PPP loans) ratio is a non-GAAP financial measure. See "Non-GAAP Financial Measures" for a reconciliation of this measure to its most comparable GAAP measure. 36
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Allowance for Loan and Lease Losses
The following is a summary of the allocation of the allowance for loan and lease losses by loan category for the periods presented.
December 31, % of Loan Type December 31, % of Loan Type
(dollars in thousands) 2022 to Total Loans 2021 to Total Loans
Commercial mortgage $ 4,095 33% $ 4,950 37%
Home equity lines and loans 188 3% 224 4%
Residential mortgage 948 13% 283 5%
Construction 3,075 16% 2,042 12%
Commercial and industrial 4,012 19% 6,533 28%
Small business loans 4,909 8% 3,737 8%
Consumer 3 -% 3 -%
Leases 1,598 8% 986 6%
Total $ 18,828 100% $ 18,758 100%
The following table provides information on (charge-offs) and recoveries by loan
category:
December 31, 2022 December 31, 2021
Home equity lines and loans $ 31 $ 1
Residential mortgage 2 5
Commercial and industrial 97 41
Consumer 4 4
Leases (2,552) (130)
Total Net Charge-offs $ (2,418) $ (79)
Deposits
The following table presents the major categories of deposits at the dates
indicated:
December 31, December 31,
(Dollars in thousands) 2022 2021 $ Change % Change
Noninterest-bearing deposits $ 301,727 $ 274,528 $ 27,199 9.9 %
Interest-bearing deposits:
Interest-bearing demand deposits 219,838 268,248 (48,410) (18.0) %
Money market and savings deposits 697,564 697,628 (64) - %
Time deposits 493,350 206,009 287,341 139.5 %
Total interest-bearing deposits 1,410,752 1,171,885 238,867 20.4 %
Total deposits $ 1,712,479 $ 1,446,413 $ 266,066 18.4 %
Total deposits were $1.7 billion as of December 31, 2022 , up $266.1 million , or
18.4%, from December 31, 2021 . Non-interest bearing deposits increased $27.2
million , or 9.9%, from December 31, 2021 . Interest-bearing demand deposits
decreased $48.4 million , or 18.0%, from December 31, 2021 , while money market
accounts/savings accounts did not change materially from December 31, 2021 .
Certificates of deposits increased $287.3 million , or 139.5%, from December 31,
2021 , as lower levels of core deposits, combined with continued loan growth year
over year, led to the need to obtain more wholesale funding.
Time deposits of
Year Ended
December 31, 2022
Amount %
3 months or less $ 183,758 46.6%
Over 3 months through 6 months 76,683 19.4%
Over 6 months through 12 months 64,923 16.5%
Over 12 months 68,921 17.5%
Total $ 394,285 100.0%
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Equity
Consolidated stockholders' equity of the Corporation was$153.3 million , or 7.4% of total assets as ofDecember 31, 2022 as compared to$165.4 million , or 9.7% of total assets as ofDecember 31, 2021 . The change in stockholders' equity is the result of year-to-date comprehensive loss of$12.2 million , dividends paid of$10.9 million and common stock repurchases of$13.0 million during 2022, partially offset by$1.0 million in stock-based compensation and stock options exercised. OnFebruary 28, 2023 , the Corporation approved and declared a two-for-one stock split in the form of a 100% stock dividend, payableMarch 20, 2023 , to shareholders of record as ofMarch 14, 2023 . Under the terms of the stock split, the Corporation's shareholders will receive a dividend of one share for every share held on the record date. The dividend will be paid in authorized but unissued shares of common stock of the Corporation. The par value of the Corporation's stock was not affected by the split and remained at$1.00 per share. All share and per share amounts reported in the consolidated financial statements have been adjusted to reflect the two-for-one stock split effectiveFebruary 28, 2023 . Non-GAAP Financial Measures Meridian believes that non-GAAP measures are meaningful because they reflect adjustments commonly made by management, investors, regulators and analysts to evaluate performance trends and the adequacy of common equity. This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for performance and financial condition measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of Meridian's results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. The table below provides the non-GAAP reconciliation for our tangible common equity ratio and tangible book value per common share. All per share amounts have been adjusted to reflect the two-for-one stock split effectiveFebruary 28, 2023 . December 31, December 31, (dollars in thousands) 2022 2021 Total stockholders' equity (GAAP)$ 153,280 $ 165,360 Less: Goodwill and intangible assets 4,074
4,278
Tangible common equity (non-GAAP) 149,206
161,082
Total assets (GAAP) 2,062,228
1,713,443
Less:Goodwill and intangible assets 4,074
4,278
Tangible assets (non-GAAP)$ 2,058,154
Stockholders' equity to total assets (GAAP) 7.43 % 9.65 % Tangible common equity to tangible assets (non-GAAP) 7.25 % 9.42 % Shares outstanding 11,466 12,216 Book value per share (GAAP)$ 13.37 $ 13.54 Tangible book value per share (non-GAAP)$ 13.01
The following is a reconciliation of the allowance for loan losses to total
loans held for investment ratio at
December 31, December 31,
(dollars in thousands) 2022 2021
Allowance for loan and lease losses (GAAP) $
18,828
Loans, net of fees and costs (GAAP) 1,743,682 1,386,457 Less: PPP loans (4,579) (88,245) Less: Loans fair valued (14,502) (17,558)
Loans, net of fees and costs, excluding PPP and fair valued loans (non-GAAP)
$
1,724,601
Allowance for loan and leases losses to loans, net of fees and costs (GAAP)
1.08 % 1.35 %
Allowance for loan and leases losses to loans, net of fees and costs, excluding PPP and fair valued loans (non-GAAP)
1.09 % 1.46 %
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Liquidity and Capital Resources
Management maintains liquidity to meet depositors' needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Meridian's foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization or that can be used as collateral to secure funding. In addition, as part of its liquidity management, Meridian maintains a segment of commercial loan assets that are comprised of SNCs, which have a national market and can be sold in a timely manner. Meridian's available liquidity, which totaled$264.4 million atDecember 31, 2022 , compared to$262.9 million atDecember 31, 2021 , includes investments, SNCs, Federal funds sold, mortgages held-for-sale and cash and cash equivalents, less the amount of securities required to be pledged for certain liabilities. Meridian also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios. In addition, Meridian maintains borrowing arrangements with various correspondent banks, the FHLB and the FRB to meet short-term liquidity needs. Through its relationship at the FRB, Meridian had available credit of approximately$8.8 million atDecember 31, 2022 . AtDecember 31, 2022 , Meridian had no borrowings from theFederal Reserve . As a member of the FHLB, we are eligible to borrow up to a specific credit limit, which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As ofDecember 31, 2022 , Meridian's maximum borrowing capacity with the FHLB was$561.7 million . AtDecember 31, 2022 , Meridian had borrowed$122.1 million and the FHLB had issued letters of credit, on Meridian's behalf, totaling$49 million against its available credit lines. AtDecember 31, 2022 , Meridian also had available$39.0 million of unsecured federal funds lines of credit with other financial institutions as well as$237.6 million of available short or long term funding through the CDARS program and$241.0 million of available short or long term funding through brokered CD arrangements. Management believes that Meridian has adequate resources to meet its short-term and long-term funding requirements. AtDecember 31, 2022 , Meridian had$525.2 million in unfunded loan commitments. Management anticipates these commitments will be funded by means of normal cash flows. Certificates of deposit greater than or equal to$250 thousand scheduled to mature in one year or less fromDecember 31, 2022 totaled$325.4 million . Management believes that the majority of such deposits will be reinvested with Meridian and that certificates that are not renewed will be funded by a reduction in cash and cash equivalents or by pay-downs and maturities of loans and investments. AtDecember 31, 2022 , Meridian had a reserve for unfunded loan commitments of$173 thousand . Meridian meets the definition of "well capitalized" for regulatory purposes onDecember 31, 2022 . Our capital category is determined for the purposes of applying the bank regulators' "prompt corrective action" regulations and for determining levels of deposit insurance assessments and may not constitute an accurate representation of Meridian's overall financial condition or prospects. Under federal banking laws and regulations, Meridian is required to maintain minimum capital as determined by certain regulatory ratios. Capital adequacy for regulatory purposes, and the capital category assigned to an institution by its regulators, may be determinative of an institution's overall financial condition. Under the final capital rules that became effective as ofJanuary 1, 2019 , a capital conservation buffer is fully phased in at 2.5%. Community banks have long raised concerns with bank regulators about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In response,Congress provided an "off-ramp" for institutions, like us, with total consolidated assets of less than$10 billion . Section 201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single CBLR of between 8 and 10%. The Bank adopted this framework in 2020. Under the final rule, a community banking organization is eligible to elect the new framework if it has: less than$10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. This requirement was 8% in 2021 as the bank regulatory agencies temporarily lowered the CBLR as a result of the COVID-19 pandemic. The Bank's CBLR was 9.95% and 11.51% as ofDecember 31, 2022 and 2021, respectively, but reports all ratios for comparative purposes. The following table summarizes data and ratios pertaining to our capital structure. Corporation Bank December 31, December 31, December 31, December 31, 2022 2021 2022 2021 Well-capitalized minimum Tier 1 leverage ratio 8.13 % 9.39 % 9.95 % 11.51 % 5.00 % Common tier 1 risk-based capital ratio 8.77 % 10.83 % 10.73 % 13.27 % 6.50 % Tier 1 risk-based capital ratio 8.77 % 10.83 % 10.73 % 13.27 % 8.00 % Total risk-based capital ratio 12.05 % 14.81 % 11.87 % 14.63 % 10.00 % 39
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