UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑Q10-Q
(Mark one)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018March 31, 2019
Or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-55983
(Exact name of registrant as specified in its charter)
Pennsylvania | 32-0116054 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) |
|
9 Old Lincoln Highway, Malvern, Pennsylvania 19355
(Address of principal executive offices) (Zip Code)
(484) 568‑5000
(Registrant’s telephone number, including area code)
Title of class | Trading Symbol | Name of exchange on which registered |
Common Stock, $1 par value | MRBK | The NASDAQ Stock Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒Yes ☐No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ |
|
|
Non-accelerated filer ☐ | Smaller reporting company ☒ |
|
|
Emerging growth company ☒ |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 14, 2018May 28, 2019 there were 6,406,7956,406,996 outstanding shares of the issuer’s common stock, par value $1.00 per share.
MERIDIAN CORPORATION AND SUBSIDIARIES
(Unaudited)
|
|
|
|
|
| |||||
|
| (Unaudited) |
|
|
|
|
|
|
| |
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||
(dollars in thousands, except per share data) |
| 2018 |
| 2017 |
| 2019 |
| 2018 | ||
Cash and due from banks |
| $ | 25,118 |
| 24,893 |
| $ | 38,940 |
| 23,159 |
Federal funds sold |
|
| 705 |
| 10,613 |
|
| — |
| 793 |
Cash and cash equivalents |
|
| 25,823 |
| 35,506 |
|
| 38,940 |
| 23,952 |
Securities available-for-sale (amortized cost of $48,730 and $40,393 as of September 30, 2018 and December 31, 2017) |
|
| 47,678 |
| 40,006 | |||||
Securities held-to-maturity (fair value of $12,572 and $12,869 as of September 30, 2018 and December 31, 2017) |
|
| 12,771 |
| 12,861 | |||||
Mortgage loans held for sale (amortized cost of $33,934 and $34,673 as of September 30, 2018 and December 31, 2017) |
|
| 34,044 |
| 35,024 | |||||
Loans, net of fees and costs (includes $11,188 and $9,972 of loans at fair value, amortized cost of $11,308 and $9,788 as of September 30, 2018 and December 31, 2017) |
|
| 806,788 |
| 694,637 | |||||
Allowance for loan losses |
|
| (7,711) |
| (6,709) | |||||
Loans, net of the allowance for loan losses |
|
| 799,077 |
| 687,928 | |||||
Securities available-for-sale (amortized cost of $50,472 and $50,942 as of March 31, 2019 and December 31, 2018) |
|
| 50,440 |
| 50,428 | |||||
Securities held-to-maturity (fair value of $12,814 and $12,655 as of March 31, 2019 and December 31, 2018) |
|
| 12,712 |
| 12,741 | |||||
Mortgage loans held for sale (amortized cost of $29,163 and $37,337 as of March 31, 2019 and December 31, 2018) |
|
| 29,612 |
| 37,695 | |||||
Loans, net of fees and costs (includes $12,751 and $11,422 of loans at fair value, amortized cost of $12,472 and $11,466 as of March 31, 2019 and December 31, 2018) |
|
| 862,372 |
| 838,106 | |||||
Allowance for loan and lease losses |
|
| (8,376) |
| (8,053) | |||||
Loans, net of the allowance for loan and lease losses |
|
| 853,996 |
| 830,053 | |||||
Restricted investment in bank stock |
|
| 4,581 |
| 6,814 |
|
| 6,179 |
| 7,002 |
Bank premises and equipment, net |
|
| 9,947 |
| 9,741 |
|
| 9,276 |
| 9,638 |
Bank owned life insurance |
|
| 11,494 |
| 11,269 |
|
| 11,641 |
| 11,569 |
Accrued interest receivable |
|
| 2,913 |
| 2,536 |
|
| 3,001 |
| 2,889 |
Other real estate owned |
|
| — |
| 437 |
|
| 120 |
| — |
Deferred income taxes |
|
| 1,932 |
| 1,312 | |||||
Deferred income taxes (Footnote 1) |
|
| 1,569 |
| 1,728 | |||||
Goodwill and intangible assets |
|
| 5,114 |
| 5,495 |
|
| 4,978 |
| 5,046 |
Other assets |
|
| 4,455 |
| 7,106 |
|
| 5,050 |
| 4,739 |
Total assets |
| $ | 959,829 |
| 856,035 |
| $ | 1,027,514 |
| 997,480 |
|
|
|
|
|
| |||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
Noninterest bearing |
| $ | 124,855 |
| 100,454 |
| $ | 115,464 |
| 126,150 |
Interest-bearing |
|
| 657,072 |
| 526,655 |
|
| 695,249 |
| 625,980 |
Total deposits |
|
| 781,927 |
| 627,109 |
|
| 810,713 |
| 752,130 |
Short-term borrowings |
|
| 43,755 |
| 99,750 |
|
| 82,233 |
| 114,300 |
Long-term debt |
|
| 6,444 |
| 8,863 |
|
| 6,031 |
| 6,238 |
Subordinated debentures |
|
| 9,308 |
| 13,308 |
|
| 9,239 |
| 9,239 |
Accrued interest payable |
|
| 353 |
| 216 |
|
| 434 |
| 305 |
Other liabilities |
|
| 11,024 |
| 5,426 | |||||
Other liabilities (Footnote 1) |
|
| 6,872 |
| 5,716 | |||||
Total liabilities |
|
| 852,811 |
| 754,672 |
|
| 915,522 |
| 887,928 |
|
|
|
|
|
| |||||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
|
Common stock, $1 par value. Authorized 10,000,000 shares; issued and outstanding 6,406,795 and 6,392,287 as of September 30, 2018 and December 31, 2017 |
|
| 6,407 |
| 6,392 | |||||
Common stock, $1 par value. Authorized 10,000,000 shares; issued and outstanding 6,406,996 and 6,406,795 as of March 31, 2019 and December 31, 2018 |
|
| 6,407 |
| 6,407 | |||||
Surplus |
|
| 79,852 |
| 79,501 |
|
| 79,980 |
| 79,919 |
Retained earnings |
|
| 21,567 |
| 15,768 | |||||
Retained earnings (Footnote 1) |
|
| 25,622 |
| 23,616 | |||||
Accumulated other comprehensive loss |
|
| (808) |
| (298) |
|
| (17) |
| (390) |
Total stockholders’ equity |
|
| 107,018 |
| 101,363 |
|
| 111,992 |
| 109,552 |
Total liabilities and stockholders’ equity |
| $ | 959,829 |
| 856,035 |
| $ | 1,027,514 |
| 997,480 |
See accompanying notes to the unaudited consolidated financial statements.
3
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended |
| Three months ended | ||||||||
|
| September 30, |
| September 30, |
| March 31, | ||||||||
(dollars in thousands, except per share data) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2019 |
| 2018 | ||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees |
| $ | 11,218 |
| 8,924 |
| 31,217 |
| 25,148 |
| $ | 11,887 |
| 9,493 |
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 213 |
| 143 |
| 549 |
| 366 |
|
| 278 |
| 168 |
Tax-exempt |
|
| 112 |
| 110 |
| 336 |
| 343 |
|
| 109 |
| 112 |
Cash and cash equivalents |
|
| 30 |
| 14 |
| 75 |
| 55 |
|
| 50 |
| 23 |
Total interest income |
|
| 11,573 |
| 9,191 |
| 32,177 |
| 25,912 |
|
| 12,324 |
| 9,796 |
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
| 2,485 |
| 1,207 |
| 6,171 |
| 3,079 |
|
| 3,236 |
| 1,659 |
Borrowings |
|
| 710 |
| 643 |
| 1,790 |
| 1,728 |
|
| 611 |
| 445 |
Total interest expense |
|
| 3,195 |
| 1,850 |
| 7,961 |
| 4,807 |
|
| 3,847 |
| 2,104 |
Net interest income |
|
| 8,378 |
| 7,341 |
| 24,216 |
| 21,105 |
|
| 8,477 |
| 7,692 |
Provision for loan losses |
|
| 291 |
| 665 |
| 1,258 |
| 1,445 |
|
| 219 |
| 554 |
Net interest income after provision for loan losses |
|
| 8,087 |
| 6,676 |
| 22,958 |
| 19,660 |
|
| 8,258 |
| 7,138 |
Non-interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income |
|
| 8,274 |
| 9,904 |
| 20,407 |
| 25,089 |
|
| 4,908 |
| 4,821 |
Wealth management income |
|
| 930 |
| 934 |
| 2,996 |
| 1,905 |
|
| 864 |
| 1,078 |
Earnings on investment in life insurance |
|
| 74 |
| 83 |
| 225 |
| 194 |
|
| 72 |
| 78 |
Net change in the fair value of derivative instruments |
|
| 70 |
| (503) |
| 59 |
| (115) |
|
| 16 |
| 207 |
Net change in the fair value of loans held-for-sale |
|
| (300) |
| (115) |
| (241) |
| 102 |
|
| 90 |
| (3) |
Net change in the fair value of loans held-for-investment |
|
| (103) |
| 71 |
| (289) |
| 113 |
|
| 324 |
| (171) |
Gain on sale of investment securities available-for-sale |
|
| — |
| — |
| — |
| 4 | |||||
Service charges |
|
| 27 |
| 22 |
| 87 |
| 62 |
|
| 27 |
| 32 |
Other |
|
| 195 |
| 54 |
| 1,647 |
| 168 |
|
| 146 |
| 1,014 |
Total non-interest income |
|
| 9,167 |
| 10,450 |
| 24,891 |
| 27,522 |
|
| 6,447 |
| 7,056 |
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
| 8,901 |
| 10,330 |
| 26,719 |
| 29,753 |
|
| 7,727 |
| 8,436 |
Occupancy and equipment |
|
| 920 |
| 992 |
| 2,870 |
| 2,818 |
|
| 963 |
| 960 |
Loan expenses |
|
| 769 |
| 1,000 |
| 1,962 |
| 3,008 |
|
| 468 |
| 532 |
Professional fees |
|
| 714 |
| 481 |
| 1,670 |
| 1,384 |
|
| 472 |
| 479 |
Advertising and promotion |
|
| 590 |
| 597 |
| 1,802 |
| 1,537 |
|
| 465 |
| 581 |
Data processing |
|
| 334 |
| 337 |
| 924 |
| 871 |
|
| 324 |
| 288 |
FDIC assessment |
|
| 179 |
| 183 |
| 358 |
| 479 | |||||
Information technology |
|
| 266 |
| 325 | |||||||||
Communications |
|
| 192 |
| 246 | |||||||||
Other |
|
| 1,346 |
| 1,092 |
| 4,084 |
| 3,207 |
|
| 1,240 |
| 715 |
Total non-interest expenses |
|
| 13,753 |
| 15,012 |
| 40,389 |
| 43,057 |
|
| 12,117 |
| 12,562 |
Income before income taxes |
|
| 3,501 |
| 2,114 |
| 7,460 |
| 4,125 |
|
| 2,588 |
| 1,632 |
Income tax expense |
|
| 774 |
| 716 |
| 1,661 |
| 1,381 |
|
| 582 |
| 362 |
Net income |
|
| 2,727 |
| 1,398 |
| 5,799 |
| 2,744 |
| $ | 2,006 |
| 1,270 |
Dividends on preferred stock |
|
| — |
| (289) |
| — |
| (867) | |||||
Net income for common stockholders |
| $ | 2,727 |
| 1,109 |
| 5,799 |
| 1,877 | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share |
| $ | 0.43 |
| 0.30 |
| 0.91 |
| 0.51 |
| $ | 0.31 |
| 0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
| $ | 0.42 |
| 0.30 |
| 0.90 |
| 0.51 |
| $ | 0.31 |
| 0.20 |
See accompanying notes to the unaudited consolidated financial statements.
4
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended |
| Three months ended |
| ||||||||
|
| September 30, |
| September 30, |
| March 31, |
| ||||||||
(dollars in thousands) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| ||
Net income: |
| $ | 2,727 |
| 1,398 |
| 5,799 |
| 2,744 |
| $ | 2,006 |
| 1,270 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains on investment securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (losses) gains arising during the period, net of tax (benefit) expense of ($57), ($19), ($155) and $147, respectively |
|
| (166) |
| (31) |
| (510) |
| 277 | ||||||
Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $0, $0, $0, and $1, respectively |
|
| — |
| — |
| — |
| (3) | ||||||
Unrealized investment gains (losses), net of tax expense (benefit) of ($57), ($19), ($155) and $148, respectively |
|
| (166) |
| (31) |
| (510) |
| 274 | ||||||
Net unrealized (losses) gains arising during the period, net of tax (benefit) expense of $108 and ($87), respectively |
|
| 373 |
| (276) |
| |||||||||
Less: reclassification adjustment for net gains on sales realized in net income, net of tax (benefit) expense of $0 and $0, respectively |
|
| — |
| — |
| |||||||||
Unrealized investment gains (losses), net of tax expense (benefit) of $108 and ($87), respectively |
|
| 373 |
| (276) |
| |||||||||
Total other comprehensive income |
|
| (166) |
| (31) |
| (510) |
| 274 |
|
| 373 |
| (276) |
|
Total comprehensive income |
| $ | 2,561 |
| 1,367 |
| 5,289 |
| 3,018 |
| $ | 2,379 |
| 994 |
|
See accompanying notes to the unaudited consolidated financial statements.
5
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| For the Nine Months Ended September 30, 2018 |
|
|
|
|
|
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
| Other |
|
|
|
| Common |
|
|
| Retained |
| Comprehensive |
|
|
| Common |
|
|
| Retained |
| Comprehensive |
|
| |
(dollars in thousands) |
| Stock |
| Surplus |
| Earnings |
| Income (Loss) |
| Total |
| Stock |
| Surplus |
| Earnings |
| Income (Loss) |
| Total | |
Balance, December 31, 2017 |
| $ | 6,392 |
| 79,501 |
| 15,768 |
| (298) |
| 101,363 | ||||||||||
Balance, January 1, 2018 (Footnote 1) | $ | 6,392 |
| 79,501 |
| 15,453 |
| (298) |
| 101,048 | |||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income |
|
|
|
|
|
| 5,799 |
|
|
| 5,799 |
|
|
|
|
| 1,270 |
|
|
| 1,270 |
Change in unrealized gains on securities available-for-sale, net of tax |
|
|
|
|
|
|
|
| (510) |
| (510) |
|
|
|
|
|
|
| (276) |
| (276) |
Total comprehensive income |
|
|
|
|
|
|
|
|
|
| 5,289 |
|
|
|
|
|
|
|
|
| 994 |
Share-based awards and exercises |
| 15 |
|
|
|
|
|
|
| 15 | |||||||||||
Compensation expense related to stock option grants |
|
|
|
| 351 |
|
|
|
|
| 351 |
|
|
| 3 |
|
|
|
|
| 3 |
Balance, September 30, 2018 |
| $ | 6,407 |
| 79,852 |
| 21,567 |
| (808) |
| 107,018 | ||||||||||
Balance, March 31, 2018 | $ | 6,392 |
| 79,504 |
| 16,723 |
| (574) |
| 102,045 | |||||||||||
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Balance, January 1, 2019 | $ | 6,407 |
| 79,919 |
| 23,616 |
| (390) |
| 109,552 | |||||||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
| |||||||||||
Net income |
|
|
|
|
| 2,006 |
|
|
| 2,006 | |||||||||||
Change in unrealized gains on securities available-for-sale, net of tax |
|
|
|
|
|
|
| 373 |
| 373 | |||||||||||
Total comprehensive income |
|
|
|
|
|
|
|
|
| 2,379 | |||||||||||
Compensation expense related to stock option grants |
|
|
| 61 |
|
|
|
|
| 61 | |||||||||||
Balance, March 31, 2019 | $ | 6,407 |
| 79,980 |
| 25,622 |
| (17) |
| 111,992 |
See accompanying notes to the unaudited consolidated financial statements.
6
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended |
| Three months ended | ||||||
|
| September 30, |
| March 31, | ||||||
(dollars in thousands) |
| 2018 |
| 2017 |
| 2019 |
| 2018 | ||
Net income |
| $ | 5,799 |
| 2,744 |
| $ | 2,006 |
| 1,270 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
Gain on sale of investment securities |
|
| — |
| 4 | |||||
Depreciation and amortization |
|
| 1,088 |
| 1,673 |
|
| 291 |
| 285 |
Provision for credit losses |
|
| 1,258 |
| 1,445 | |||||
Provision for loan losses |
|
| 219 |
| 554 | |||||
Compensation expense for stock options |
|
| 351 |
| 110 |
|
| 61 |
| 3 |
Net change in fair value of loans held for sale |
|
| 241 |
| (102) |
|
| (90) |
| 3 |
Net change in fair value of derivative instruments |
|
| (59) |
| 115 |
|
| (16) |
| (207) |
Net change in fair value of contingent assets |
|
| 177 |
| — | |||||
Gain on sale of OREO |
|
| (57) |
| — | |||||
Proceeds from sale of loans |
|
| 513,259 |
| 556,777 |
|
| 112,948 |
| 136,321 |
Loans originated for sale |
|
| (492,113) |
| (524,363) |
|
| (96,265) |
| (127,337) |
Mortgage banking income |
|
| (20,407) |
| (25,089) |
|
| (4,908) |
| (4,821) |
(Increase) decrease in accrued interest receivable |
|
| (377) |
| 79 | |||||
Increase in accrued interest receivable |
|
| (112) |
| 172 | |||||
Increase in other assets |
|
| (110) |
| (202) |
|
| (161) |
| (1,177) |
Earnings from investment in life insurance |
|
| (225) |
| (194) |
|
| (72) |
| (78) |
Deferred income tax (benefit) expense |
|
| (465) |
| 279 | |||||
Deferred income tax benefit (Footnote 1) |
|
| 45 |
| (40) | |||||
Increase in accrued interest payable |
|
| 137 |
| 185 |
|
| 129 |
| 130 |
Increase in other liabilities |
|
| 1,184 |
| 3,020 | |||||
Increase in other liabilities (Footnote 1) |
|
| 1,064 |
| 367 | |||||
Net cash provided by operating activities |
|
| 9,681 |
| 16,481 |
|
| 15,139 |
| 5,445 |
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
Activity in available-for-sale securities: |
|
|
|
|
|
|
|
|
|
|
Maturities, repayments and calls |
|
| 4,080 |
| 2,928 |
|
| 2,390 |
| 1,006 |
Purchases |
|
| (12,768) |
| (7,178) |
|
| (1,944) |
| — |
Activity in held-to-maturity securities: |
|
|
|
|
| |||||
Maturities, repayments and calls |
|
| — |
| 1,045 | |||||
Proceeds from sale of OREO |
|
| 494 |
| — |
|
| — |
| 10 |
Settlement of forward contracts |
|
| (21) |
| (845) |
|
| (36) |
| (6) |
Acquisition of wealth management company |
|
| — |
| (3,225) |
|
| — |
| — |
Decrease in restricted stock |
|
| 2,233 |
| 563 |
|
| 823 |
| 982 |
Net increase in loans |
|
| (107,068) |
| (72,613) |
|
| (27,607) |
| (45,576) |
Purchases of premises and equipment |
|
| (1,499) |
| (1,628) |
|
| (86) |
| (1,116) |
Proceeds from settlment of loans |
|
| 2,766 |
| — | |||||
Purchase of bank owned life insurance |
|
| — |
| (5,999) | |||||
Proceeds from settlement of loans |
|
| — |
| 2,766 | |||||
Net cash used in investing activities |
|
| (111,783) |
| (86,952) |
|
| (26,460) |
| (41,934) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
Net increase in deposits |
|
| 154,818 |
| 90,546 |
|
| 58,583 |
| 52,194 |
Decrease in short term borrowings |
|
| (57,795) |
| (28,358) |
|
| (32,068) |
| (22,040) |
Repayment of long term debt (Acquisition note) |
|
| (619) |
| (206) |
|
| (206) |
| (207) |
Principal repayment of long term debt (subordinated debt) |
|
| (4,000) |
| — | |||||
Share based awards and exercises |
|
| 15 |
| 10 | |||||
Dividends paid on preferred stock |
|
| — |
| (866) | |||||
Repayment of long term debt (Subordinated debt) |
|
| — |
| (4,000) | |||||
Net cash provided by financing activities |
|
| 92,419 |
| 61,126 |
|
| 26,309 |
| 25,947 |
Net change in cash and cash equivalents |
|
| (9,683) |
| (9,345) |
|
| 14,988 |
| (10,542) |
Cash and cash equivalents at beginning of period |
|
| 35,506 |
| 18,872 |
|
| 23,952 |
| 35,506 |
Cash and cash equivalents at end of period |
| $ | 25,823 |
| 9,527 |
| $ | 38,940 |
| 24,964 |
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
|
|
Interest |
| $ | 7,392 |
| 4,622 |
| $ | 3,718 |
| 1,974 |
Income taxes |
|
| 1,565 |
| 1,487 |
|
| 2,735 |
| — |
Supplemental non-cash disclosure: |
|
|
|
|
| |||||
Net loan assets purchased, not settled |
|
| 4,490 |
| — | |||||
Acquisition note payable |
|
| — |
| 2,475 | |||||
Supplemental disclosure of cash flow information: |
|
|
|
|
| |||||
Transfers from loans and leases to real estate owned |
|
| 120 |
| — | |||||
Transfers from loans held for sale to loans held for investment |
|
| 3,602 |
| — |
See accompanying notes to the unaudited consolidated financial statements.
7
MERIDIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) Basis of Presentation
Meridian Corporation (the “Corporation”) was incorporated on June 8, 2009, by and at the direction of the board of directors of Meridian Bank (the “Bank”) for the sole purpose of acquiring the Bank and serving as the Bank’s parent bank holding company. On August 24, 2018, the Corporation acquired the Bank in a merger and reorganization effected under Pennsylvania law and in accordance with the terms of a Plan of Merger and Reorganization dated April 26, 2018 (the “Agreement”). Pursuant to the Agreement, on August 24, 2018 at 5:00 p.m. eachall of the 6,402,385 outstanding shares of the Bank’s $1.00 par value common stock formerly held by its shareholders was converted into and exchanged for one newly issued share of the Corporation’s par value common stock, and the Bank became a subsidiary of the Corporation. Because the Bank and the Corporation were entities under common control, this exchange of shares between entities under common control resulted in the retrospective combination of the Bank and the Corporation for all periods presented as if the combination had been in effect since inception of common control. As the Corporation had no assets, liabilities, revenues, expenses or operations prior to August 24, 2018, the historical financial statements of the Bank are the historical financial statements of the combined entity. The Corporation is subject to supervision and examination by, and the regulations and reporting requirements of, the Board of Governors of the Federal Reserve System.
The Corporation’s unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and the results of operations for the interim periods presented have been included.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptibleAmounts subject to significant change in the near term relate to the determination ofestimates are items such as the allowance for loan losses.losses and lending related commitments, the fair value of financial instruments, other-than-temporary impairments of investment securities, and the valuations of goodwill and intangible assets.
These unaudited consolidated financial statements should be read in conjunction with the Corporation’s filings with the Securities and Exchange Commission (including our Annual Report on Form 10-K for the year ended December 31, 2018) and, for periods prior to the completion of the holding company reorganization, the Bank’s filings with the FDIC, including the Bank’s most recent annual report on Form 10-K (the “2017 Annual Report”) for the year ended December 31, 2017, and subsequently filed quarterly reports on Form 10-Q.10-Q and current reports on Form 8-K that update or provide information in addition to the information included in Form 10-K and Form 10-Q filings, if any. Certain prior period amounts have been reclassified to conform with current period presentation. Operating results for the three and nine months ended September 30, 2018March 31, 2019 are not necessarily indicative of the results for the year ended December 31, 20182019 or for any other period.
During the quarter, the Corporation identified and corrected an immaterial error related to Maryland state licensing requirements for mortgage loan originations by our Mortgage division. As the result of our mortgage operations not being fully compliant with Maryland licensing law, we have agreed to reimburse consumers approximately $474 thousand in interest and fees on loans originated, in addition to paying a fine of $12 thousand to resolve the matter. The Corporation has revised its comparative consolidated financial statements in the amount of $407 thousand, $315 thousand net of tax, for periods prior to January 1, 2018 related to interest and fees on loans. The error correction impacted beginning retained earnings, deferred tax assets and other liabilities as of January 1, 2018, as shown below.
8
The following table summarizes the impacts of the correction on the consolidated balance sheet as of January 1, 2018:
|
|
|
|
|
|
|
|
|
|
|
| ||||
(dollars in thousands, except per share data) |
|
| Reported |
| Corrections |
| Revised |
Deferred income taxes |
| $ | 1,312 |
| 92 |
| 1,404 |
Other liabilities |
|
| 5,426 |
| 407 |
| 5,833 |
Retained earnings |
|
| 15,768 |
| (315) |
| 15,453 |
The following table summarizes the impacts of the correction on the consolidated balance sheet as of December 31, 2018:
|
|
|
|
|
|
|
|
(dollars in thousands, except per share data) |
|
| Reported |
| Corrections |
| Revised |
Deferred income taxes |
| $ | 1,636 |
| 92 |
| 1,728 |
Other liabilities |
|
| 5,309 |
| 407 |
| 5,716 |
Retained earnings |
|
| 23,931 |
| (315) |
| 23,616 |
The following table summarizes the impacts of the corrections to our capital ratios as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 - as presented | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| To be well capitalized under | |||
|
|
|
|
|
|
| For capital adequacy |
| prompt corrective action | ||||||
|
| Actual |
| purposes * |
| provisions | |||||||||
(dollars in thousands): |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio | |||
Total capital (to risk-weighted assets) |
| $ | 122,577 |
| 13.70% |
| $ | 71,577 |
| 8.00% |
| $ | 89,472 |
| 10.00% |
Common equity tier 1 capital (to risk-weighted assets) |
|
| 105,196 |
| 11.76% |
|
| 40,262 |
| 4.50% |
|
| 58,157 |
| 6.50% |
Tier 1 capital (to risk-weighted assets) |
|
| 105,196 |
| 11.76% |
|
| 53,683 |
| 6.00% |
|
| 71,577 |
| 8.00% |
Tier 1 capital (to average assets) |
|
| 105,196 |
| 11.20% |
|
| 37,578 |
| 4.00% |
|
| 46,972 |
| 5.00% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 - as revised |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| To be well capitalized under |
| |||
|
|
|
|
|
|
| For capital adequacy |
| prompt corrective action |
| ||||||
|
| Actual |
| purposes * |
| provisions |
| |||||||||
(dollars in thousands): |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| |||
Total capital (to risk-weighted assets) |
| $ | 122,262 |
| 13.66% |
| $ | 71,585 |
| 8.00% |
| $ | 89,481 |
| 10.00% |
|
Common equity tier 1 capital (to risk-weighted assets) |
|
| 104,881 |
| 11.72% |
|
| 40,266 |
| 4.50% |
|
| 58,163 |
| 6.50% |
|
Tier 1 capital (to risk-weighted assets) |
|
| 104,881 |
| 11.72% |
|
| 53,689 |
| 6.00% |
|
| 71,585 |
| 8.00% |
|
Tier 1 capital (to average assets) |
|
| 104,881 |
| 11.16% |
|
| 37,581 |
| 4.00% |
|
| 46,977 |
| 5.00% |
|
9
(2) Earnings per Common Share
Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per common share takes into account the potential dilution computed pursuant to the treasury stock method that could occur if stock options were exercised and converted into common stock. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be anti-dilutive.
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended | |||||||||||
|
| September 30, |
| September 30, |
| March 31, | |||||||||||
(dollars in thousands, except per share data) |
| 2018 |
| 2017 |
| 2018 |
|
| 2017 |
| 2019 |
| 2018 | ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
| $ | 2,727 |
|
| 1,109 |
| 5,799 |
|
| 1,877 |
| $ | 2,006 |
|
| 1,270 |
Denominator for basic earnings per share - weighted average shares outstanding |
|
| 6,402 |
|
| 3,686 |
| 6,395 |
|
| 3,686 |
|
| 6,407 |
|
| 6,392 |
Effect of dilutive common shares |
|
| 28 |
|
| 27 |
| 31 |
|
| 26 |
|
| 29 |
|
| 34 |
Denominator for diluted earnings per share - adjusted weighted average shares outstanding |
|
| 6,430 |
|
| 3,713 |
| 6,426 |
|
| 3,712 |
|
| 6,436 |
|
| 6,426 |
Basic earnings per share |
| $ | 0.43 |
|
| 0.30 |
| 0.91 |
|
| 0.51 |
| $ | 0.31 |
|
| 0.20 |
Diluted earnings per share |
| $ | 0.42 |
|
| 0.30 |
| 0.90 |
|
| 0.51 |
| $ | 0.31 |
|
| 0.20 |
Antidilutive shares excluded from computation of average dilutive earnings per share |
|
| 116 |
|
| 50 |
| 116 |
|
| 50 |
|
| 126 |
|
| 47 |
(3) Goodwill and Other Intangibles
The Corporation’s goodwill and intangible assets related to the acquisition of HJ Wealth in April 2017 are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance |
|
|
|
|
| Balance |
| Amortization |
| Balance |
|
|
| Balance |
| Amortization | ||
|
| December 31, |
| Accumulated |
| Fair Value |
| September 30, |
| Period |
| December 31, |
| Amortization |
| March 31, |
| Period | ||
(dollars in thousands) |
| 2017 |
| Amortization |
| Adjustment |
| 2018 |
| (in years) |
| 2018 |
| Expense |
| 2019 |
| (in years) | ||
Goodwill - Wealth |
| $ | 899 |
| — |
| — |
| 899 |
| Indefinite |
| $ | 899 |
| — |
| 899 |
| Indefinite |
Total Goodwill |
|
| 899 |
| — |
| — |
| 899 |
|
|
|
| 899 |
| — |
| 899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets - trade name |
|
| 266 |
| — |
| — |
| 266 |
| Indefinite |
|
| 266 |
| — |
| 266 |
| Indefinite |
Intangible assets - customer relationships |
|
| 3,930 |
| (152) |
| — |
| 3,778 |
| 20 |
|
| 3,727 |
| (51) |
| 3,676 |
| 20 |
Intangible assets - non competition agreements |
|
| 223 |
| (52) |
| — |
| 171 |
| 4 |
|
| 154 |
| (17) |
| 137 |
| 4 |
Contingent asset |
|
| 177 |
|
|
| (177) |
| — |
| N/A | |||||||||
Total Intangible Assets |
|
| 4,596 |
| (204) |
| (177) |
| 4,215 |
|
|
|
| 4,147 |
| (68) |
| 4,079 |
|
|
Total |
| $ | 5,495 |
| (204) |
| (177) |
| 5,114 |
|
|
| $ | 5,046 |
| (68) |
| 4,978 |
|
|
We recognizedAccumulated amortization expense on intangible assets of $68was $545 thousand and $204$273 thousand respectively, during the threeas of March 31, 2019 and nine month periods ended September 30, 2018. The contingent asset was being marked to fair value on a quarterly basis for 18 months after the closing date. As of September 30, 2018, the fair value of the contingent asset was marked to a fair value of $0 as it was determined during the current quarter that it no longer had value.respectively.
The Corporation performed its annual review of goodwill and identifiable intangible assets in accordance with ASC 350, “Intangibles - Goodwill and Other” as of December 31, 2017.2018. For the period from January 1, 20182019 through September 30, 2018,March 31, 2019, the Corporation determined there were no events that would necessitate impairment testing of goodwill and other intangible assets.
910
The amortized cost and fair value of securities as of September 30, 2018March 31, 2019 and December 31, 20172018 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2018 |
| March 31, 2019 | ||||||||||||||
|
|
|
|
| Gross |
| Gross |
|
|
|
|
|
| Gross |
| Gross |
|
|
|
| Amortized |
| unrealized |
| unrealized |
| Fair |
| Amortized |
| unrealized |
| unrealized |
| Fair | ||
(dollars in thousands) |
| cost |
| gains |
| losses |
| value |
| cost |
| gains |
| losses |
| value | ||
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency mortgage-backed securities |
| $ | 24,625 |
| 21 |
| (431) |
| 24,215 |
| $ | 23,005 |
| 69 |
| (156) |
| 22,918 |
U.S. government agency collateralized mortgage obligations |
|
| 13,159 |
| — |
| (271) |
| 12,888 |
|
| 15,419 |
| 100 |
| (114) |
| 15,405 |
State and municipal securities |
|
| 9,946 |
| — |
| (341) |
| 9,605 |
|
| 11,048 |
| 104 |
| (27) |
| 11,125 |
Investments in mutual funds and other equity securities |
|
| 1,000 |
| — |
| (30) |
| 970 | |||||||||
Investments in mutual funds |
|
| 1,000 |
| — |
| (8) |
| 992 | |||||||||
Total securities available-for-sale |
| $ | 48,730 |
| 21 |
| (1,073) |
| 47,678 |
| $ | 50,472 |
| 273 |
| (305) |
| 50,440 |
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries |
| $ | 1,987 |
| — |
| (18) |
| 1,969 |
| $ | 1,994 |
| — |
| (7) |
| 1,987 |
State and municipal securities |
|
| 10,784 |
| 15 |
| (196) |
| 10,603 |
|
| 10,718 |
| 113 |
| (4) |
| 10,827 |
Total securities held-to-maturity |
| $ | 12,771 |
| 15 |
| (214) |
| 12,572 |
| $ | 12,712 |
| 113 |
| (11) |
| 12,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 |
| December 31, 2018 | ||||||||||||||
|
|
|
|
| Gross |
| Gross |
|
|
|
|
|
| Gross |
| Gross |
|
|
|
| Amortized |
| unrealized |
| unrealized |
| Fair |
| Amortized |
| unrealized |
| unrealized |
| Fair | ||
(dollars in thousands) |
| cost |
| gains |
| losses |
| value |
| cost |
| gains |
| losses |
| value | ||
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency mortgage-backed securities |
| $ | 21,439 |
| 19 |
| (190) |
| 21,268 |
| $ | 24,092 |
| 45 |
| (271) |
| 23,866 |
U.S. government agency collateralized mortgage obligations |
|
| 7,875 |
| 2 |
| (99) |
| 7,778 |
|
| 14,754 |
| 52 |
| (142) |
| 14,664 |
State and municipal securities |
|
| 10,079 |
| 14 |
| (134) |
| 9,959 |
|
| 11,096 |
| 22 |
| (199) |
| 10,919 |
Investments in mutual funds and other equity securities |
|
| 1,000 |
| 1 |
| — |
| 1,001 | |||||||||
Investments in mutual funds |
|
| 1,000 |
| — |
| (21) |
| 979 | |||||||||
Total securities available-for-sale |
| $ | 40,393 |
| 36 |
| (423) |
| 40,006 |
| $ | 50,942 |
| 119 |
| (633) |
| 50,428 |
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries |
| $ | 1,978 |
| — |
| (8) |
| 1,970 |
| $ | 1,991 |
| — |
| (13) |
| 1,978 |
State and municipal securities |
|
| 10,883 |
| 86 |
| (70) |
| 10,899 |
|
| 10,750 |
| 17 |
| (90) |
| 10,677 |
Total securities held-to-maturity |
| $ | 12,861 |
| 86 |
| (78) |
| 12,869 |
| $ | 12,741 |
| 17 |
| (103) |
| 12,655 |
At September 30, 2018,March 31, 2019, the Corporation had twenty-sixtwenty U.S. government sponsored agency mortgage‑backed securities, seventeenten U.S. government sponsored agency collateralized mortgage obligations, twenty-ninetwelve state and municipal securities, one mutual fund, and two U.S. treasuries in unrealized loss positions. At December 31, 2017,2018, the Corporation had nineteentwenty-four U.S. government sponsored agency mortgage‑backed securities, eighttwelve U.S. government sponsored agency collateralized mortgage obligations, twenty-twotwenty-six state and municipal securities, and one mutual fund, and two U.S. treasurites in unrealized loss positions. At September 30, 2018,March 31, 2019, the temporary impairment is primarily the result of changes in market interest rates subsequent to purchase and the Corporation does not intend to sell these securities prior to recovery and it is more likely than not that the Corporation will not be required to sell these securities prior to recovery to satisfy liquidity needs, and therefore, no securities are deemed to be other‑than‑temporarily impaired.
1011
The following table shows the Corporation’s investment gross unrealized losses and fair value aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position at September 30, 2018March 31, 2019 and December 31, 2017:2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2018 |
| March 31, 2019 | ||||||||||||||||||||||
|
| Less than 12 Months |
| 12 Months or more |
| Total |
| Less than 12 Months |
| 12 Months or more |
| Total | ||||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||
(dollars in thousands) |
| value |
| losses |
| value |
| losses |
| value |
| losses |
| value |
| losses |
| value |
| losses |
| value |
| losses | ||
Securities |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
U.S. government agency mortgage-backed securities |
| $ | 11,483 |
| (128) |
| 9,702 |
| (303) |
| 21,185 |
| (431) |
| $ | — |
| — |
| 12,625 |
| (156) |
| 12,625 |
| (156) |
U.S. government agency collateralized mortgage obligations |
|
| 8,627 |
| (102) |
| 4,261 |
| (169) |
| 12,888 |
| (271) |
|
| 1,258 |
| (10) |
| 5,614 |
| (104) |
| 6,872 |
| (114) |
State and municipal securities |
|
| 5,019 |
| (112) |
| 4,587 |
| (229) |
| 9,606 |
| (341) |
|
| — |
| — |
| 5,420 |
| (27) |
| 5,420 |
| (27) |
Investments in mutual funds and other equity securities |
|
| 970 |
| (30) |
| — |
| — |
| 970 |
| (30) | |||||||||||||
Investments in mutual funds |
|
| — |
| — |
| 992 |
| (8) |
| 992 |
| (8) | |||||||||||||
Total securities available-for-sale |
| $ | 26,099 |
| (372) |
| 18,550 |
| (701) |
| 44,649 |
| (1,073) |
| $ | 1,258 |
| (10) |
| 24,651 |
| (295) |
| 25,909 |
| (305) |
Securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries |
| $ | 1,950 |
| (18) |
| — |
| — |
| 1,950 |
| (18) |
| $ | — |
| — |
| 1,987 |
| (7) |
| 1,987 |
| (7) |
State and municipal securities |
|
| 6,537 |
| (98) |
| 2,211 |
| (98) |
| 8,748 |
| (196) |
|
| — |
| — |
| 1,098 |
| (4) |
| 1,098 |
| (4) |
Total securities held-to-maturity |
| $ | 8,487 |
| (116) |
| 2,211 |
| (98) |
| 10,698 |
| (214) |
| $ | — |
| — |
| 3,085 |
| (11) |
| 3,085 |
| (11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 |
| December 31, 2018 | ||||||||||||||||||||||
|
| Less than 12 Months |
| 12 Months or more |
| Total |
| Less than 12 Months |
| 12 Months or more |
| Total | ||||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||
(dollars in thousands) |
| value |
| losses |
| value |
| losses |
| value |
| losses |
| value |
| losses |
| value |
| losses |
| value |
| losses | ||
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency mortgage-backed securities |
| $ | 9,788 |
| (28) |
| 7,854 |
| (162) |
| 17,642 |
| (190) |
| $ | 2,354 |
| (6) |
| 15,223 |
| (265) |
| 17,577 |
| (271) |
U.S. government agency collateralized mortgage obligations |
|
| 6,732 |
| (81) |
| 860 |
| (18) |
| 7,592 |
| (99) |
|
| 2,636 |
| (14) |
| 5,620 |
| (128) |
| 8,256 |
| (142) |
State and municipal securities |
|
| 6,147 |
| (57) |
| 2,818 |
| (77) |
| 8,965 |
| (134) |
|
| 957 |
| (11) |
| 8,746 |
| (188) |
| 9,703 |
| (199) |
Investments in mutual funds |
|
| 980 |
| (21) |
| — |
| — |
| 980 |
| (21) | |||||||||||||
Total securities available-for-sale |
| $ | 22,667 |
| (166) |
| 11,532 |
| (257) |
| 34,199 |
| (423) |
| $ | 6,927 |
| (52) |
| 29,589 |
| (581) |
| 36,516 |
| (633) |
Securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries |
| $ | 1,962 |
| (8) |
| — |
| — |
| 1,962 |
| (8) |
| $ | — |
| — |
| 1,978 |
| (13) |
| 1,978 |
| (13) |
State and municipal securities |
|
| 4,851 |
| (70) |
| — |
| — |
| 4,851 |
| (70) |
|
| 1,545 |
| (5) |
| 4,783 |
| (85) |
| 6,328 |
| (90) |
Total securities held-to-maturity |
| $ | 6,813 |
| (78) |
| — |
| — |
| 6,813 |
| (78) |
| $ | 1,545 |
| (5) |
| 6,761 |
| (98) |
| 8,306 |
| (103) |
The amortized cost and carrying value of securities at September 30,March 31, 2019 and December 31, 2018 are shown below by contractual maturities. Actual maturities may differ from contractual maturities as issuers may have the right to call or repay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2018 |
| December 31, 2017 |
| March 31, 2019 |
| December 31, 2018 | ||||||||||||||||||||||||||||
|
| Available-for-sale |
| Held-to-maturity |
| Available-for-sale |
| Held-to-maturity |
| Available-for-sale |
| Held-to-maturity |
| Available-for-sale |
| Held-to-maturity | ||||||||||||||||||||
|
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair | ||||
(dollars in thousands) |
| cost |
| value |
| cost |
| value |
| cost |
| value |
| cost |
| value |
| cost |
| value |
| cost |
| value |
| cost |
| value |
| cost |
| value | ||||
Investment securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
Due in one year or less |
| $ | 1,706 |
| 1,671 |
| 994 |
| 985 |
| $ | — |
| — |
| — |
| — |
| $ | 900 |
| 899 |
| 1,994 |
| 1,987 |
| $ | 906 |
| 902 |
| 1,991 |
| 1,978 |
Due after one year through five years |
|
| 8,229 |
| 8,070 |
| 3,746 |
| 3,702 |
|
| 5,630 |
| 5,587 |
| 3,803 |
| 3,791 |
|
| 1,725 |
| 1,720 |
| 3,748 |
| 3,774 |
|
| 1,236 |
| 1,226 |
| 3,154 |
| 3,148 |
Due after five years through ten years |
|
| 6,593 |
| 6,322 |
| 8,031 |
| 7,885 |
|
| 6,298 |
| 6,228 |
| 7,180 |
| 7,156 |
|
| 5,891 |
| 5,933 |
| 6,970 |
| 7,053 |
|
| 6,411 |
| 6,290 |
| 7,596 |
| 7,529 |
Due after ten years |
|
| 32,202 |
| 31,615 |
| — |
| — |
|
| 28,465 |
| 28,191 |
| 1,878 |
| 1,922 |
|
| 2,532 |
| 2,573 |
| — |
| — |
|
| 2,543 |
| 2,501 |
| — |
| — |
Subtotal |
|
| 11,048 |
| 11,125 |
| 12,712 |
| 12,814 |
|
| 11,096 |
| 10,919 |
| 12,741 |
| 12,655 | ||||||||||||||||||
Mortgage-related securities |
|
| 38,424 |
| 38,323 |
| — |
| — |
|
| 38,846 |
| 38,530 |
| — |
| — | ||||||||||||||||||
Mutual funds with no stated maturity |
|
| 1,000 |
| 992 |
| — |
| — |
|
| 1,000 |
| 979 |
| — |
| — | ||||||||||||||||||
Total |
| $ | 48,730 |
| 47,678 |
| 12,771 |
| 12,572 |
| $ | 40,393 |
| 40,006 |
| 12,861 |
| 12,869 |
| $ | 50,472 |
| 50,440 |
| 12,712 |
| 12,814 |
| $ | 50,942 |
| 50,428 |
| 12,741 |
| 12,655 |
1112
Loans and leases outstanding at September 30, 2018March 31, 2019 and December 31, 20172018 are detailed by category as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||
(dollars in thousands) |
| 2018 |
| 2017 |
| 2019 |
| 2018 | ||
Mortgage loans held for sale |
| $ | 34,044 |
| 35,024 |
| $ | 29,612 |
| 37,695 |
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
Commercial mortgage |
|
| 316,671 |
| 263,141 |
|
| 325,843 |
| 325,393 |
Home equity lines and loans |
|
| 82,773 |
| 84,039 |
|
| 81,939 |
| 82,286 |
Residential mortgage |
|
| 50,363 |
| 32,375 |
|
| 57,604 |
| 53,360 |
Construction |
|
| 104,518 |
| 104,970 |
|
| 127,663 |
| 116,906 |
Total real estate loans |
|
| 554,325 |
| 484,525 |
|
| 593,049 |
| 577,945 |
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
| 252,960 |
| 209,996 |
|
| 269,028 |
| 259,806 |
Consumer |
|
| 783 |
| 1,022 |
|
| 751 |
| 701 |
Leases, net |
|
| 364 |
| 762 |
|
| 1,159 |
| 1,335 |
Total portfolio loans and leases |
|
| 808,432 |
| 696,305 |
|
| 863,987 |
| 839,787 |
Total loans and leases |
| $ | 842,476 |
| 731,329 |
| $ | 893,599 |
| 877,482 |
|
|
|
|
|
|
|
|
|
|
|
Loans with predetermined rates |
| $ | 249,683 |
| 202,317 |
| $ | 266,947 |
| 264,376 |
Loans with adjustable or floating rates |
|
| 592,793 |
| 529,012 |
|
| 626,652 |
| 613,106 |
Total loans and leases |
| $ | 842,476 |
| 731,329 |
| $ | 893,599 |
| 877,482 |
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan origination (fees) costs |
| $ | (1,644) |
| (1,668) |
| $ | (1,615) |
| (1,681) |
(1) | Includes $12,751 and $11,422 of loans at fair value as of March 31, 2019 and December 31, 2018, respectively. |
Components of the net investment in leases at September 30, 2018March 31, 2019 and December 31, 20172018 are detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||
(dollars in thousands) |
| 2018 |
| 2017 |
| 2019 |
| 2018 | ||
Minimum lease payments receivable |
| $ | 376 |
| 793 |
| $ | 1,228 |
| 1,420 |
Unearned lease income |
|
| (12) |
| (31) |
|
| (69) |
| (85) |
Total |
| $ | 364 |
| 762 |
| $ | 1,159 |
| 1,335 |
1213
Age Analysis of Past Due Loans and Leases
The following tables present an aging of the Corporation’s loan and lease portfolio as of September 30, 2018March 31, 2019 and December 31, 2017,2018, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
| 90+ days |
|
|
|
|
| Accruing |
| Nonaccrual |
|
|
|
|
|
September 30, 2018 |
| 30-89 days |
| past due and |
| Total past |
|
|
| Loans and |
| loans and |
| Total loans |
| Delinquency |
| |
(dollars in thousands) |
| past due |
| still accruing |
| due |
| Current |
| leases |
| leases |
| and leases |
| percentage |
| |
Commercial mortgage |
| $ | 1,155 |
| — |
| 1,155 |
| 315,022 |
| 316,177 |
| 494 |
| 316,671 |
| 0.52 | % |
Home equity lines and loans |
|
| 216 |
| — |
| 216 |
| 82,472 |
| 82,688 |
| 85 |
| 82,773 |
| 0.36 |
|
Residential mortgage |
|
| — |
| — |
| — |
| 48,212 |
| 48,212 |
| 2,151 |
| 50,363 |
| 4.27 |
|
Construction |
|
| 315 |
| — |
| 315 |
| 104,203 |
| 104,518 |
| — |
| 104,518 |
| 0.30 |
|
Commercial and industrial |
|
| — |
| — |
| — |
| 252,768 |
| 252,768 |
| 192 |
| 252,960 |
| 0.08 |
|
Consumer |
|
| — |
| — |
| — |
| 783 |
| 783 |
| — |
| 783 |
| — |
|
Leases |
|
| 123 |
| — |
| 123 |
| 241 |
| 364 |
| — |
| 364 |
| 33.79 |
|
Total |
| $ | 1,809 |
| — |
| 1,809 |
| 803,701 |
| 805,510 |
| 2,922 |
| 808,432 |
| 0.59 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
| 90+ days |
|
|
|
|
| Accruing |
| Nonaccrual |
|
|
|
|
|
|
|
|
| 90+ days |
|
|
|
|
| Accruing |
| Nonaccrual |
|
|
|
|
|
December 31, 2017 |
| 30-89 days |
| past due and |
| Total past |
|
|
| Loans and |
| loans and |
| Total loans |
| Delinquency |
| |||||||||||||||||||
March 31, 2019 |
| 30-89 days |
| past due and |
| Total past |
|
|
| Loans and |
| loans and |
| Total loans |
| Delinquency |
| |||||||||||||||||||
(dollars in thousands) |
| past due |
| still accruing |
| due |
| Current |
| leases |
| leases |
| and leases |
| percentage |
|
| past due |
| still accruing |
| due |
| Current |
| leases |
| leases |
| and leases |
| percentage |
| ||
Commercial mortgage |
| $ | — |
| — |
| — |
| 262,727 |
| 262,727 |
| 414 |
| 263,141 |
| 0.16 | % |
| $ | — |
| — |
| — |
| 324,620 |
| 324,620 |
| 1,223 |
| 325,843 |
| 0.38 | % |
Home equity lines and loans |
|
| 142 |
| — |
| 142 |
| 83,760 |
| 83,902 |
| 137 |
| 84,039 |
| 0.33 |
|
|
| 596 |
| — |
| 596 |
| 81,262 |
| 81,858 |
| 81 |
| 81,939 |
| 0.83 |
|
Residential mortgage |
|
| 734 |
| — |
| 734 |
| 30,557 |
| 31,291 |
| 1,084 |
| 32,375 |
| 5.62 |
|
|
| — |
| — |
| — |
| 55,575 |
| 55,575 |
| 2,029 |
| 57,604 |
| 3.52 |
|
Construction |
|
| — |
| — |
| — |
| 104,785 |
| 104,785 |
| 185 |
| 104,970 |
| 0.18 |
|
|
| 253 |
| — |
| 253 |
| 127,383 |
| 127,636 |
| 27 |
| 127,663 |
| 0.22 |
|
Commercial and industrial |
|
| — |
| — |
| — |
| 208,670 |
| 208,670 |
| 1,326 |
| 209,996 |
| 0.63 |
|
|
| 186 |
| — |
| 186 |
| 268,371 |
| 268,557 |
| 471 |
| 269,028 |
| 0.24 |
|
Consumer |
|
| — |
| — |
| — |
| 1,022 |
| 1,022 |
| — |
| 1,022 |
| — |
|
|
| — |
| — |
| — |
| 751 |
| 751 |
| — |
| 751 |
| — |
|
Leases |
|
| 87 |
| 11 |
| 98 |
| 664 |
| 762 |
| — |
| 762 |
| 12.86 |
|
|
| 11 |
| — |
| 11 |
| 1,148 |
| 1,159 |
| — |
| 1,159 |
| 0.95 |
|
Total |
| $ | 963 |
| 11 |
| 974 |
| 692,185 |
| 693,159 |
| 3,146 |
| 696,305 |
| 0.59 | % |
| $ | 1,046 |
| — |
| 1,046 |
| 859,110 |
| 860,156 |
| 3,831 |
| 863,987 |
| 0.56 | % |
(1) Includes $12,751 of loans at fair value as of March 31, 2019 ($11,581 of current, $0 of 30-89 days past due and $1,170 of nonaccrual).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
|
|
|
|
| 90+ days |
|
|
|
|
| Accruing |
| Nonaccrual |
|
|
|
|
|
December 31, 2018 |
| 30-89 days |
| past due and |
| Total past |
|
|
| Loans and |
| loans and |
| Total loans |
| Delinquency |
| |
(dollars in thousands) |
| past due |
| still accruing |
| due |
| Current |
| leases |
| leases |
| and leases |
| percentage |
| |
Commercial mortgage |
| $ | — |
| — |
| — |
| 324,169 |
| 324,169 |
| 1,224 |
| 325,393 |
| 0.38 | % |
Home equity lines and loans |
|
| 348 |
| — |
| 348 |
| 81,855 |
| 82,203 |
| 83 |
| 82,286 |
| 0.52 |
|
Residential mortgage (1) |
|
| 195 |
| — |
| 195 |
| 51,018 |
| 51,213 |
| 2,147 |
| 53,360 |
| 4.39 |
|
Construction |
|
| — |
| — |
| — |
| 116,906 |
| 116,906 |
| — |
| 116,906 |
| — |
|
Commercial and industrial |
|
| 217 |
| — |
| 217 |
| 259,112 |
| 259,329 |
| 477 |
| 259,806 |
| 0.27 |
|
Consumer |
|
| — |
| — |
| — |
| 701 |
| 701 |
| — |
| 701 |
| — |
|
Leases |
|
| 49 |
| — |
| 49 |
| 1,286 |
| 1,335 |
| — |
| 1,335 |
| 3.67 |
|
Total |
| $ | 809 |
| — |
| 809 |
| 835,047 |
| 835,856 |
| 3,931 |
| 839,787 |
| 0.56 | % |
(1) Includes $11,422 of loans at fair value as of December 31, 2018 ($10,098 of current, $187 of 30-89 days past due and $1,137 of nonaccrual).
(6) Allowance for Loan Losses (the “Allowance”)
The Allowance is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the Allowance, and subsequent recoveries, if any, are credited to the Allowance.
The Allowance is maintained at a level considered adequate to provide for losses that are probable and estimable. Management’s periodic evaluation of the adequacy of the Allowance is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is subjective as it requires material estimates that may be susceptible to significant revisions as more information becomes available.
1314
Roll-Forward of Allowance for Loan and Lease Losses by Portfolio Segment
The following tables detail the roll‑forward of the Corporation’s Allowance, by portfolio segment, for the three and nine month periods ended September 30,March 31, 2019 and 2018, and 2017, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, |
|
|
|
|
|
|
| Balance, |
| Balance, |
|
|
|
|
|
|
| Balance, | ||
(dollars in thousands) |
| June 30, 2018 |
| Charge-offs |
| Recoveries |
| Provision |
| September 30, 2018 |
| December 31, 2018 |
| Charge-offs |
| Recoveries |
| Provision |
| March 31, 2019 | ||
Commercial mortgage |
| $ | 3,011 |
| — |
| 2 |
| 140 |
| 3,153 |
| $ | 3,209 |
| — |
| 3 |
| (49) |
| 3,163 |
Home Equity lines and loans |
|
| 269 |
| — |
| 10 |
| 37 |
| 316 |
|
| 323 |
| — |
| 3 |
| 15 |
| 341 |
Residential mortgage |
|
| 166 |
| — |
| — |
| 14 |
| 180 |
|
| 191 |
| — |
| — |
| 21 |
| 212 |
Construction |
|
| 1,438 |
| — |
| — |
| 59 |
| 1,497 |
|
| 1,627 |
| — |
| — |
| 175 |
| 1,802 |
Commercial and industrial |
|
| 2,559 |
| (50) |
| 8 |
| 41 |
| 2,558 |
|
| 2,690 |
| — |
| 97 |
| 59 |
| 2,846 |
Consumer |
|
| 3 |
| — |
| 1 |
| — |
| 4 |
|
| 3 |
| — |
| 1 |
| — |
| 4 |
Leases |
|
| 3 |
| — |
| — |
| — |
| 3 |
|
| 10 |
| — |
| — |
| (2) |
| 8 |
Unallocated |
|
| — |
| — |
| — |
| — |
| — | |||||||||||
Total |
| $ | 7,449 |
| (50) |
| 21 |
| 291 |
| 7,711 |
| $ | 8,053 |
| — |
| 104 |
| 219 |
| 8,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, |
|
|
|
|
|
|
| Balance, | |
(dollars in thousands) |
| December 31, 2017 |
| Charge-offs |
| Recoveries |
| Provision |
| September 30, 2018 | |
Commercial mortgage |
| $ | 2,434 |
| — |
| 6 |
| 713 |
| 3,153 |
Home Equity lines and loans |
|
| 280 |
| (137) |
| 14 |
| 159 |
| 316 |
Residential mortgage |
|
| 82 |
| — |
| 61 |
| 37 |
| 180 |
Construction |
|
| 1,689 |
| — |
| — |
| (192) |
| 1,497 |
Commercial and industrial |
|
| 2,214 |
| (244) |
| 41 |
| 547 |
| 2,558 |
Consumer |
|
| 5 |
| — |
| 3 |
| (4) |
| 4 |
Leases |
|
| 5 |
| — |
| — |
| (2) |
| 3 |
Unallocated |
|
| — |
| — |
| — |
| — |
| — |
Total |
| $ | 6,709 |
| (381) |
| 125 |
| 1,258 |
| 7,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, |
|
|
|
|
|
|
| Balance, | |
(dollars in thousands) |
| June 30, 2017 |
| Charge-offs |
| Recoveries |
| Provision |
| September 30, 2017 | |
Commercial mortgage |
| $ | 2,423 |
| (52) |
| — |
| 9 |
| 2,380 |
Home Equity lines and loans |
|
| 228 |
| — |
| 52 |
| (58) |
| 222 |
Residential mortgage |
|
| 79 |
| — |
| — |
| (2) |
| 77 |
Construction |
|
| 1,388 |
| — |
| — |
| 93 |
| 1,481 |
Commercial and industrial |
|
| 2,086 |
| (528) |
| 7 |
| 626 |
| 2,191 |
Consumer |
|
| 2 |
| — |
| 1 |
| (2) |
| 1 |
Leases |
|
| 8 |
| — |
| — |
| (1) |
| 7 |
Unallocated |
|
| — |
| — |
| — |
| — |
| — |
Total |
| $ | 6,214 |
| (580) |
| 60 |
| 665 |
| 6,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, |
|
|
|
|
|
|
| Balance, |
| Balance, |
|
|
|
|
|
|
| Balance, | ||
(dollars in thousands) |
| December 31, 2016 |
| Charge-offs |
| Recoveries |
| Provision |
| September 30, 2017 |
| December 31, 2017 |
| Charge-offs |
| Recoveries |
| Provision |
| March 31, 2018 | ||
Commercial mortgage |
| $ | 2,038 |
| (83) |
| 16 |
| 409 |
| 2,380 |
| $ | 2,434 |
| — |
| 2 |
| 130 |
| 2,566 |
Home Equity lines and loans |
|
| 460 |
| (42) |
| 46 |
| (242) |
| 222 |
|
| 280 |
| (66) |
| 2 |
| 46 |
| 262 |
Residential mortgage |
|
| 85 |
| — |
| 2 |
| (10) |
| 77 |
|
| 82 |
| — |
| — |
| 45 |
| 127 |
Construction |
|
| 690 |
| — |
| — |
| 791 |
| 1,481 |
|
| 1,689 |
| — |
| — |
| 172 |
| 1,861 |
Commercial and industrial |
|
| 1,973 |
| (647) |
| 193 |
| 672 |
| 2,191 |
|
| 2,214 |
| (80) |
| 16 |
| 165 |
| 2,315 |
Consumer |
|
| 2 |
| — |
| 4 |
| (5) |
| 1 |
|
| 5 |
| — |
| 1 |
| (3) |
| 3 |
Leases |
|
| 5 |
| — |
| — |
| 2 |
| 7 |
|
| 5 |
| — |
| — |
| (1) |
| 4 |
Unallocated |
|
| 172 |
| — |
| — |
| (172) |
| — | |||||||||||
Total |
| $ | 5,425 |
| (772) |
| 261 |
| 1,445 |
| 6,359 |
| $ | 6,709 |
| (146) |
| 21 |
| 554 |
| 7,138 |
1415
Allowance for Loan and Lease Losses Allocated by Portfolio Segment
The following tables detail the allocation of the allowance for loan and lease losses and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of September 30, 2018March 31, 2019 and December 31, 2017.2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allowance on loans and leases |
| Carrying value of loans and leases |
|
| Allowance on loans and leases |
| Carrying value of loans and leases |
| ||||||||||||||||||||
|
| Individually |
| Collectively |
|
|
| Individually |
| Collectively |
|
|
|
| Individually |
| Collectively |
|
|
| Individually |
| Collectively |
|
|
| ||||
September 30, 2018 |
| evaluated |
| evaluated |
|
|
| evaluated |
| evaluated |
|
|
| |||||||||||||||||
March 31, 2019 |
| evaluated |
| evaluated |
|
|
| evaluated |
| evaluated |
|
|
| |||||||||||||||||
(dollars in thousands) |
| for impairment |
| for impairment |
| Total |
| for impairment |
| for impairment |
| Total |
|
| for impairment |
| for impairment |
| Total |
| for impairment |
| for impairment |
| Total |
| ||||
Commercial mortgage |
| $ | — |
| 3,153 |
| 3,153 |
| $ | 1,703 |
| 314,968 |
| 316,671 |
|
| $ | — |
| 3,163 |
| 3,163 |
| $ | 1,921 |
| 323,922 |
| 325,843 |
|
Home Equity lines and loans |
|
| — |
| 316 |
| 316 |
|
| 85 |
| 82,688 |
| 82,773 |
|
|
| — |
| 341 |
| 341 |
|
| 81 |
| 81,858 |
| 81,939 |
|
Residential mortgage |
|
| — |
| 180 |
| 180 |
|
| 249 |
| 38,926 |
| 39,175 |
|
|
| — |
| 212 |
| 212 |
|
| 857 |
| 43,996 |
| 44,853 |
|
Construction |
|
| — |
| 1,497 |
| 1,497 |
|
| 1,296 |
| 103,222 |
| 104,518 |
|
|
| — |
| 1,802 |
| 1,802 |
|
| 1,294 |
| 126,369 |
| 127,663 |
|
Commercial and industrial |
|
| 7 |
| 2,551 |
| 2,558 |
|
| 3,143 |
| 249,817 |
| 252,960 |
|
|
| 133 |
| 2,713 |
| 2,846 |
|
| 1,448 |
| 267,580 |
| 269,028 |
|
Consumer |
|
| — |
| 4 |
| 4 |
|
| — |
| 783 |
| 783 |
|
|
| — |
| 4 |
| 4 |
|
| — |
| 751 |
| 751 |
|
Leases |
|
| — |
| 3 |
| 3 |
|
| — |
| 364 |
| 364 |
|
|
| — |
| 8 |
| 8 |
|
| — |
| 1,159 |
| 1,159 |
|
Unallocated |
|
| — |
| — |
| — |
|
| — |
| — |
| — |
| |||||||||||||||
Total |
| $ | 7 |
| 7,704 |
| 7,711 |
| $ | 6,476 |
| 790,768 |
| 797,244 | (1) |
| $ | 133 |
| 8,243 |
| 8,376 |
| $ | 5,601 |
| 845,635 |
| 851,236 | (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allowance on loans and leases |
| Carrying value of loans and leases |
|
| Allowance on loans and leases |
| Carrying value of loans and leases |
| ||||||||||||||||||||
|
| Individually |
| Collectively |
|
|
| Individually |
| Collectively |
|
|
|
| Individually |
| Collectively |
|
|
| Individually |
| Collectively |
|
|
| ||||
December 31, 2017 |
| evaluated |
| evaluated |
|
|
| evaluated |
| evaluated |
|
|
| |||||||||||||||||
December 31, 2018 |
| evaluated |
| evaluated |
|
|
| evaluated |
| evaluated |
|
|
| |||||||||||||||||
(dollars in thousands) |
| for impairment |
| for impairment |
| Total |
| for impairment |
| for impairment |
| Total |
|
| for impairment |
| for impairment |
| Total |
| for impairment |
| for impairment |
| Total |
| ||||
Commercial mortgage |
| $ | — |
| 2,434 |
| 2,434 |
| $ | 1,533 |
| 261,607 |
| 263,140 |
|
| $ | — |
| 3,209 |
| 3,209 |
| $ | 1,929 |
| 323,464 |
| 325,393 |
|
Home Equity lines and loans |
|
| — |
| 280 |
| 280 |
|
| 137 |
| 83,902 |
| 84,039 |
|
|
| — |
| 323 |
| 323 |
|
| 83 |
| 82,203 |
| 82,286 |
|
Residential mortgage |
|
| — |
| 82 |
| 82 |
|
| 249 |
| 22,155 |
| 22,404 |
|
|
| — |
| 191 |
| 191 |
|
| 969 |
| 40,969 |
| 41,938 |
|
Construction |
|
| — |
| 1,689 |
| 1,689 |
|
| 260 |
| 104,710 |
| 104,970 |
|
|
| — |
| 1,627 |
| 1,627 |
|
| 1,281 |
| 115,625 |
| 116,906 |
|
Commercial and industrial |
|
| 1 |
| 2,213 |
| 2,214 |
|
| 2,506 |
| 207,490 |
| 209,996 |
|
|
| 103 |
| 2,587 |
| 2,690 |
|
| 1,537 |
| 258,269 |
| 259,806 |
|
Consumer |
|
| — |
| 5 |
| 5 |
|
| — |
| 1,022 |
| 1,022 |
|
|
| — |
| 3 |
| 3 |
|
| — |
| 701 |
| 701 |
|
Leases |
|
| — |
| 5 |
| 5 |
|
| — |
| 762 |
| 762 |
|
|
| — |
| 10 |
| 10 |
|
| — |
| 1,335 |
| 1,335 |
|
Unallocated |
|
| — |
| — |
| — |
|
| — |
| — |
| — |
| |||||||||||||||
Total |
| $ | 1 |
| 6,708 |
| 6,709 |
| $ | 4,685 |
| 681,648 |
| 686,333 | (1) |
| $ | 103 |
| 7,950 |
| 8,053 |
| $ | 5,799 |
| 822,566 |
| 828,365 | (1) |
(1) | Excludes deferred fees and loans carried at fair value. |
Loans and Leases by Credit Ratings
As part of the process of determining the Allowance to the different segments of the loan and lease portfolio, management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by management. The results of these reviews are reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:
· | Pass - Loans considered to be satisfactory with no indications of deterioration. |
· | Special mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. |
· | Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. |
15
· | Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of |
16
currently existing factors, conditions, and values, highly questionable and improbable. Loan balances classified as doubtful have been reduced by partial charge-offs and are carried at their net realizable values. |
The following tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to allocate the allowance for loan and lease losses as of September 30, 2018March 31, 2019 and December 31, 2017:2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 |
|
|
|
| Special |
|
|
|
|
|
| |||||||||||
March 31, 2019 |
|
|
|
| Special |
|
|
|
|
|
| |||||||||||
(dollars in thousands) |
| Pass |
| mention |
| Substandard |
| Doubtful |
| Total |
| Pass |
| mention |
| Substandard |
| Doubtful |
| Total | ||
Commercial mortgage |
| $ | 311,857 |
| 4,539 |
| 275 |
| — |
| 316,671 |
| $ | 320,616 |
| 3,347 |
| 1,880 |
| — |
| 325,843 |
Home equity lines and loans |
|
| 82,606 |
| — |
| 167 |
| — |
| 82,773 |
|
| 81,776 |
| — |
| 163 |
| — |
| 81,939 |
Construction |
|
| 102,361 |
| 2,157 |
| — |
| — |
| 104,518 |
|
| 125,000 |
| 2,663 |
| — |
| — |
| 127,663 |
Commercial and industrial |
|
| 234,055 |
| 16,016 |
| 2,859 |
| 30 |
| 252,960 |
|
| 244,843 |
| 11,951 |
| 12,204 |
| 30 |
| 269,028 |
Total |
| $ | 730,879 |
| 22,712 |
| 3,301 |
| 30 |
| 756,922 |
| $ | 772,235 |
| 17,961 |
| 14,247 |
| 30 |
| 804,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017 |
|
|
|
| Special |
|
|
|
|
|
| |||||||||||
December 31, 2018 |
|
|
|
| Special |
|
|
|
|
|
| |||||||||||
(dollars in thousands) |
| Pass |
| mention |
| Substandard |
| Doubtful |
| Total |
| Pass |
| mention |
| Substandard |
| Doubtful |
| Total | ||
Commercial mortgage |
| $ | 258,337 |
| 3,917 |
| 887 |
| — |
| 263,141 |
| $ | 320,130 |
| 3,713 |
| 1,550 |
| — |
| 325,393 |
Home equity lines and loans |
|
| 83,902 |
| — |
| 137 |
| — |
| 84,039 |
|
| 82,121 |
| — |
| 165 |
| — |
| 82,286 |
Construction |
|
| 103,118 |
| 1,852 |
| — |
| — |
| 104,970 |
|
| 114,249 |
| 2,657 |
| — |
| — |
| 116,906 |
Commercial and industrial |
|
| 194,784 |
| 13,997 |
| 448 |
| 767 |
| 209,996 |
|
| 239,181 |
| 12,620 |
| 7,975 |
| 30 |
| 259,806 |
Total |
| $ | 640,141 |
| 19,766 |
| 1,472 |
| 767 |
| 662,146 |
| $ | 755,681 |
| 18,990 |
| 9,690 |
| 30 |
| 784,391 |
In addition to credit quality indicators as shown in the above tables, allowance allocations for residential mortgages, consumer loans and leases are also applied based on their performance status as of September 30, 2018March 31, 2019 and December 31, 2017.2018. No troubled debt restructurings performing according to modified terms are included in performing residential mortgages below as of September 30, 2018March 31, 2019 and December 31, 2017.2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2018 |
| December 31, 2017 |
| March 31, 2019 |
| December 31, 2018 | ||||||||||||||||||||
(dollars in thousands) |
| Performing |
| Nonperforming |
| Total |
| Performing |
| Nonperforming |
| Total |
| Performing |
| Nonperforming |
| Total |
| Performing |
| Nonperforming |
| Total | ||||
Residential mortgage |
| $ | 38,926 |
| 249 |
| 39,175 |
| $ | 22,154 |
| 249 |
| 22,403 |
| $ | 43,996 |
| 857 |
| 44,853 |
| $ | 40,969 |
| 969 |
| 41,938 |
Consumer |
|
| 783 |
| — |
| 783 |
|
| 1,022 |
| — |
| 1,022 |
|
| 751 |
| — |
| 751 |
|
| 701 |
| — |
| 701 |
Leases |
|
| 364 |
| — |
| 364 |
|
| 762 |
| — |
| 762 |
|
| 1,159 |
| — |
| 1,159 |
|
| 1,335 |
| — |
| 1,335 |
Total |
| $ | 40,073 |
| 249 |
| 40,322 |
| $ | 23,938 |
| 249 |
| 24,187 |
| $ | 45,906 |
| 857 |
| 46,763 |
| $ | 43,005 |
| 969 |
| 43,974 |
There were sevensix nonperforming residential mortgage loans at September 30, 2018March 31, 2019 and four at December 31, 20172018 with a combined outstanding principal balance of $1.9$1.2 million and $826 thousand,$1.9 million, respectively, which were carried at fair value and not included in the table above.
1617
Impaired Loans
The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related allowance for loan and lease losses and interest income recognized for the periods.
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| At September 30, 2018 |
| At December 31, 2017 |
| At March 31, 2019 |
| At December 31, 2018 | ||||||||||||||||||||||||||
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| Average |
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| Average |
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| Average |
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| Average | ||
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| Recorded |
| Principal |
| Related |
| recorded |
| Recorded |
| Principal |
| Related |
| recorded |
| Recorded |
| Principal |
| Related |
| recorded |
| Recorded |
| Principal |
| Related |
| recorded | ||
(dollars in thousands) |
| investment |
| balance |
| allowance |
| investment |
| investment |
| balance |
| allowance |
| investment |
| investment |
| balance |
| allowance |
| investment |
| investment |
| balance |
| allowance |
| investment | ||
Impaired loans with related allowance: |
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Commercial mortgage |
| $ | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| $ | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
Commercial and industrial |
|
| 479 |
| 479 |
| 7 |
| 476 |
| 124 |
| 491 |
| 1 |
| 173 |
|
| 671 |
| 674 |
| 133 |
| 673 |
| 676 |
| 679 |
| 103 |
| 680 |
Home equity lines and loans |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
Residential mortgage |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
Construction |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
Total |
|
| 479 |
| 479 |
| 7 |
| 476 |
| 124 |
| 491 |
| 1 |
| 173 |
|
| 671 |
| 674 |
| 133 |
| 673 |
| 676 |
| 679 |
| 103 |
| 680 |
Impaired loans without related allowance: |
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Commercial mortgage |
| $ | 1,703 |
| 2,136 |
| — |
| 1,698 |
| 1,534 |
| 2,025 |
| — |
| 1,537 |
| $ | 1,921 |
| 2,371 |
| — |
| 1,926 |
| 1,929 |
| 2,379 |
| — |
| 1,982 |
Commercial and industrial |
|
| 2,664 |
| 2,746 |
| — |
| 2,748 |
| 1,907 |
| 3,180 |
| — |
| 2,945 |
|
| 777 |
| 863 |
| — |
| 797 |
| 861 |
| 945 |
| — |
| 885 |
Home equity lines and loans |
|
| 85 |
| 89 |
| — |
| 86 |
| 137 |
| 137 |
| — |
| 137 |
|
| 81 |
| 89 |
| — |
| 82 |
| 83 |
| 89 |
| — |
| 84 |
Residential mortgage |
|
| 249 |
| 258 |
| — |
| 254 |
| 249 |
| 249 |
| — |
| 249 |
|
| 857 |
| 857 |
| — |
| 857 |
| 969 |
| 978 |
| — |
| 978 |
Construction |
|
| 1,296 |
| 1,296 |
| — |
| 1,401 |
| 260 |
| 260 |
| — |
| 267 |
|
| 1,294 |
| 1,294 |
| — |
| 1,287 |
| 1,281 |
| 1,281 |
| — |
| 1,293 |
Total |
|
| 5,997 |
| 6,525 |
| — |
| 6,187 |
| 4,087 |
| 5,851 |
| — |
| 5,135 |
|
| 4,930 |
| 5,474 |
| — |
| 4,949 |
| 5,123 |
| 5,672 |
| — |
| 5,222 |
Grand Total |
| $ | 6,476 |
| 7,004 |
| 7 |
| 6,663 |
| 4,211 |
| 6,342 |
| 1 |
| 5,308 |
| $ | 5,601 |
| 6,148 |
| 133 |
| 5,622 |
| 5,799 |
| 6,351 |
| 103 |
| 5,902 |
Interest income recognized on performing impaired loans amounted to $93$49 thousand and $63$52 thousand for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, and $218 thousand and $213 thousand for the nine months ended September 30, 2018 and 2017, respectively.
Troubled Debt Restructuring
The restructuring of a loan is considered a “troubled debt restructuring” (“TDR”) if both of the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the creditor has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan, and (e) for leases, a reduced lease payment. A less common concession granted is the forgiveness of a portion of the principal.
The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower were a concession not granted. The determination of whether a concession has been granted is subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.
1718
The balance of TDRs at September 30, 2018March 31, 2019 and December 31, 20172018 are as follows:
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| September 30, |
| December 31, |
| March 31, |
| December 31, | ||
(dollars in thousands) |
| 2018 |
| 2017 |
| 2019 |
| 2018 | ||
TDRs included in nonperforming loans and leases |
| $ | 554 |
| 741 |
| $ | 1,213 |
| 1,219 |
TDRs in compliance with modified terms |
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| 3,463 |
| 1,900 |
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| 2,940 |
| 3,047 |
Total TDRs |
| $ | 4,017 |
| 2,641 |
| $ | 4,153 |
| 4,266 |
The following tables present information regardingThere were no loan and lease modifications granted during the three and nine months ended September 30,March 31, 2019 and 2018 that were categorized as TDRs:
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| For the Three Months Ended September 30, 2018 | |||||||||
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| Pre-Modification |
| Post-Modification |
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| Outstanding |
| Outstanding |
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| Number of |
| Recorded |
| Recorded |
| Related | |||
(dollar in thousands) |
| Contracts |
| Investment |
| Investment |
| Allowance | |||
Real Estate: |
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Land and Construction |
| 1 |
| $ | 796 |
| $ | 796 |
| $ | — |
Total |
| 1 |
| $ | 796 |
| $ | 796 |
| $ | — |
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| For the Nine Months Ended September 30, 2018 | |||||||||
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| Pre-Modification |
| Post-Modification |
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| Outstanding |
| Outstanding |
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| Number of |
| Recorded |
| Recorded |
| Related | |||
(dollar in thousands) |
| Contracts |
| Investment |
| Investment |
| Allowance | |||
Real Estate: |
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Land and Construction |
| 2 |
| $ | 2,410 |
| $ | 2,410 |
| $ | — |
Commercial and industrial |
| 1 |
|
| 120 |
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| 120 |
|
| — |
Total |
| 3 |
| $ | 2,530 |
| $ | 2,530 |
| $ | — |
TDRs. No loan and lease modifications granted during the three and nine months ended September 30,March 31, 2019 and 2018 subsequently defaulted during the same time period.
The following table presents information regarding loan and lease modifications granted during the nine months ended September 30, 2017 that were categorized as TDRs:
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| For the Nine Months Ended September 30, 2017 | |||||||||
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| Pre-Modification |
| Post-Modification |
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| Outstanding |
| Outstanding |
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| Number of |
| Recorded |
| Recorded |
| Related | |||
(dollar in thousands) |
| Contracts |
| Investment |
| Investment |
| Allowance | |||
Real Estate: |
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Commercial and industrial |
| 1 |
| $ | 165 |
| $ | 165 |
| $ | — |
Total |
| 1 |
| $ | 165 |
| $ | 165 |
| $ | — |
No loan and lease modifications granted during the nine months ended September 30, 2017 subsequently defaulted during the same time period. There were no loan and lease modifications made for the three months ended September 30, 2017.
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The following tables present information regarding the types of loan and lease modifications made for the three and nine months ended September 30, 2018 and 2017:
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| For the Nine Months Ended |
| For the Nine Months Ended | ||||
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| September 30, 2018 |
| September 30, 2017 | ||||
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| Interest Rate |
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| Interest Rate |
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| Loan Term |
| Change and Loan |
| Loan Term |
| Change and Loan |
|
| Extension |
| Term Extension |
| Extension |
| Term Extension |
Land and Construction |
| 2 |
| — |
| — |
| — |
Commercial and industrial |
| — |
| 1 |
| — |
| 1 |
Total |
| 2 |
| 1 |
| — |
| 1 |
(7) Short-Term Borrowings and Long‑Term Debt
The Corporation’s short‑term borrowings generally consist of federal funds purchased and short‑term borrowings extended under agreements with the Federal Home Loan Bank of Pittsburgh (“FHLB”). The Corporation has two unsecured Federal Funds borrowing facilities with correspondent banks: one of $24,000,000$24 million and one of $15,000,000.$15 million. Federal funds purchased generally represent one-day borrowings. The Corporation had Federal funds purchased of $0$549 thousand and $0 at September 30, 2018March 31, 2019 and December 31, 2017,2018, respectively. The Corporation also has a facility with the Federal Reserve discount window of $10,667,121.$10.2 million. This facility is fully secured by investment securities and loans. There were no borrowings under this facility at September 30, 2018March 31, 2019 or at December 31, 20172018.
Short‑term borrowings as of September 30, 2018March 31, 2019 consisted of short‑term advances from the FHLB of Pittsburgh in the amount of $40,755,700$79.9 million with interest at 2.10%2.70%, $1,800,000and $1.8 million with an original term of 4 years with interest at 1.70% and $1,200,000 with an original term of 2 years and interest at 0.97%.
Short‑term borrowings as of December 31, 20172018 consisted of short-term advances from the FHLB of Pittsburgh in the amount of $93,750,000$112.5 million with interest at 1.54%2.62%, $2,500,000 with an original term of 5 years and interest at 1.92%, $1,200,000 with an original term of 2 years and interest at 0.97%, $1,000,000$1.8 million with an original term of 4 years and interest at 1.68% and $1,300,000 with an original term of 4 years and interest at 1.55%1.70%.
Long‑term debt at September 30, 2018March 31, 2019 and December 31, 20172018 consisted of the following fixed rate notes with the FHLB and the acquisition purchase note issued in connection with HJ Wealth:
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| Balance as of |
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| Balance as of | ||||||
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| Maturity |
| Interest |
| September 30, |
| December 31, |
| Maturity |
| Interest |
| March 31, |
| December 31, | ||
(dollars in thousands) |
| date |
| rate |
| 2018 |
| 2017 |
| date |
| rate |
| 2019 |
| 2018 | ||
Mid-term Repo-fixed |
| 06/26/19 |
| 1.70 | % |
| — |
| 1,800 |
| 08/10/20 |
| 2.76 | % |
| 5,000 |
| 5,000 |
Mid-term Repo-fixed |
| 08/10/20 |
| 2.76 | % |
| 5,000 |
| 5,000 | |||||||||
Acquisition Purchase Note |
| 04/01/20 |
| 3.00 | % |
| 1,444 |
| 2,063 |
| 04/01/20 |
| 3.00 | % |
| 1,031 |
| 1,238 |
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| $ | 6,444 |
| 8,863 | |||||||||
Total |
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| $ | 6,031 |
| 6,238 |
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The FHLB of Pittsburgh has also issued $88,100,000$112.1 million of letters of credit to the Corporation for the benefit of the Corporation’s public deposit funds and loan customers. These letters of credit expire by December 31, 2018.June 14, 2019. The Corporation has a maximum borrowing capacity with the FHLB of $432,816,917$454.6 million as of September 30, 2018March 31, 2019 and $380,159,142$437.2 million as of December 31, 2017.2018. All advances and letters of credit from the FHLB are secured by qualifying assetsa blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation.
Corporation’s borrowing agreement with the FHLB.
(8) Fair Value Measurements and Disclosures
The Corporation uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are
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not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation techniques or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
In accordance with this guidance, the Corporation groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 – Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
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For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2018March 31, 2019 and December 31, 20172018 are as follows:
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| September 30, 2018 |
| March 31, 2019 | ||||||||||||||
(dollars in thousands) |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||
Securities available for sale: |
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U.S. government agency mortgage-backed securities |
| $ | 24,215 |
| — |
| 24,215 |
| — |
| $ | 22,918 |
| — |
| 22,918 |
| — |
U.S. government agency collateralized mortgage obligations |
|
| 12,888 |
| — |
| 12,888 |
| — |
|
| 15,405 |
| — |
| 15,405 |
| — |
State and municipal securities |
|
| 9,605 |
| — |
| 9,605 |
| — |
|
| 11,125 |
| — |
| 11,125 |
| — |
Investments in mutual funds and other equity securities |
|
| 970 |
| — |
| 970 |
| — |
|
| 992 |
| — |
| 992 |
| — |
Mortgage loans held-for-sale |
|
| 34,044 |
| — |
| 34,044 |
| — |
|
| 29,612 |
| — |
| 29,612 |
| — |
Mortgage loans held-for-investment |
|
| 11,188 |
| — |
| 11,188 |
| — |
|
| 12,751 |
| — |
| 12,751 |
| — |
Interest rate lock commitments |
|
| 200 |
| — |
| — |
| 200 |
|
| 330 |
| — |
| — |
| 330 |
Customer derivatives - Interest rate swaps |
|
| 229 |
| — |
| 229 |
| — | |||||||||
Total |
| $ | 93,110 |
| — |
| 92,910 |
| 200 |
| $ | 93,362 |
| — |
| 93,032 |
| 330 |
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|
| December 31, 2017 |
| December 31, 2018 | ||||||||||||||
(dollars in thousands) |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||
Securities available for sale: |
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U.S. government agency mortgage-backed securities |
| $ | 21,268 |
| — |
| 21,268 |
| — |
| $ | 23,866 |
| — |
| 23,866 |
| — |
U.S. government agency collateralized mortgage obligations |
|
| 7,778 |
| — |
| 7,778 |
| — |
|
| 14,664 |
| — |
| 14,664 |
| — |
State and municipal securities |
|
| 9,959 |
| — |
| 9,959 |
| — |
|
| 10,919 |
| — |
| 10,919 |
| — |
Investments in mutual funds and other equity securities |
|
| 1,001 |
| — |
| 1,001 |
| — |
|
| 979 |
| — |
| 979 |
| — |
Mortgage loans held-for-sale |
|
| 35,024 |
| — |
| 35,024 |
| — |
|
| 37,695 |
| — |
| 37,695 |
| — |
Mortgage loans held-for-investment |
|
| 9,972 |
| — |
| 9,972 |
| — |
|
| 11,422 |
| — |
| 11,422 |
| — |
Interest rate lock commitments |
|
| 310 |
| — |
| — |
| 310 |
|
| 310 |
| — |
| — |
| 310 |
Customer derivatives - Interest rate swaps |
|
| 141 |
| — |
| 141 |
| — | |||||||||
Total |
| $ | 85,312 |
| — |
| 85,002 |
| 310 |
| $ | 99,996 |
| — |
| 99,686 |
| 310 |
For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2018March 31, 2019 and December 31, 20172018 are as follows:
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| September 30, 2018 |
| March 31, 2019 | ||||||||||||||
(dollars in thousands) |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||
Impaired loans |
| $ | 6,476 |
| — |
| — |
| 6,476 |
| $ | 5,468 |
| — |
| — |
| 5,468 |
Other real estate owned |
|
| — |
| — |
| — |
| — |
|
| 120 |
| — |
| — |
| 120 |
Total |
| $ | 6,476 |
| — |
| — |
| 6,476 |
| $ | 5,588 |
| — |
| — |
| 5,588 |
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| December 31, 2017 |
| December 31, 2018 | ||||||||||||||
(dollars in thousands) |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||
Impaired loans |
| $ | 4,685 |
| — |
| — |
| 4,685 |
| $ | 5,799 |
| — |
| — |
| 5,799 |
Other real estate owned |
|
| 437 |
| — |
| — |
| 437 |
|
| — |
| — |
| — |
| — |
Total |
| $ | 5,122 |
| — |
| — |
| 5,122 |
| $ | 5,799 |
| — |
| — |
| 5,799 |
(1) | Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices or appraised value of the property. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement. Appraised values may be discounted based on management’s expertise, historical knowledge, changes in market conditions from the time of valuation and/or estimated costs to sell. |
(2) | Impaired loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third‑party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. |
21
Below is management’s estimate of the fair value of all financial instruments, whether carried at cost or fair value on the Corporation’s balance sheet. The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair value of the Corporation’s financial instruments:
(a) Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and short‑term instruments approximate those assets’ fair values.
(b) Securities
The fair value of securities available‑for‑sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.
(c) Mortgage Loans Held for Sale
The fair value of mortgage loans held for sale is based on secondary market prices.
(d) Loans Receivable
The fair value of loans receivable is estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate‑risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value below is not reflective of an exit price.
(e) Mortgage Loans Held for Investment
The fair value of mortgage loans held for investment is based on the price secondary markets are currently offering for similar loans using observable market data.
(f) Impaired Loans
Impaired loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third‑party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
(g) Restricted Investment in Bank Stock
The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.
(h) Accrued Interest Receivable and Payable
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
22
(i) Deposit Liabilities
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed‑rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
(j) Short‑Term Borrowings
The carrying amounts of short‑term borrowings approximate their fair values.
(k) Long‑Term Debt
Fair values of FHLB advances and the acquisition purchase note payable are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.
(l) Subordinated Debt
Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity.
(m) Off‑Balance Sheet Financial Instruments
Off-balance sheet instruments are primarily comprised of loan commitments, which are generally priced at market at the time of funding. Fees on commitments to extend credit and stand-by letters of credit are deemed to be immaterial and these instruments are expected to be settled at face value or expire unused. It is impractical to assign any fair value to these instruments and as a result they are not included in the table below. Fair values assigned to the notional value of interest rate lock commitments and forward sale contracts are based on market quotes.
(n) Derivative Financial Instruments
The fairfair value of forward commitments and interest rate swaps is based on market pricing and therefore are considered Level 2. Derivatives classified as Level 3 consist of interest rate lock commitments is based on investor quotes which consider pull-through rates, while therelated to mortgage loan commitments. The determination of fair value of forward commitmentsincludes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is based ona significant unobservable assumption. A significant increase or decrease in the external market pricing. price would result in a significantly higher or lower fair value measurement.
23
The estimated fair values of the Corporation’s financial instruments at September 30, 2018March 31, 2019 and December 31, 20172018 are as follows:
|
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|
|
| September 30, 2018 |
| December 31, 2017 |
|
|
| March 31, 2019 |
| December 31, 2018 | ||||||||||
|
| Fair Value |
| Carrying |
|
|
| Carrying |
|
|
| Fair Value |
| Carrying |
|
|
| Carrying |
|
| ||
(dollars in thousands) |
| Hierarchy Level |
| amount |
| Fair value |
| amount |
| Fair value |
| Hierarchy Level |
| amount |
| Fair value |
| amount |
| Fair value | ||
Financial assets: |
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|
|
Cash and cash equivalents |
| Level 1 |
| $ | 25,823 |
| 25,823 |
| 35,506 |
| 35,506 |
| Level 1 |
| $ | 38,940 |
| 38,940 |
| 23,952 |
| 23,952 |
Securities available-for-sale |
| Level 2 |
|
| 47,678 |
| 47,678 |
| 40,006 |
| 40,006 |
| Level 2 |
|
| 50,440 |
| 50,440 |
| 50,428 |
| 50,428 |
Securities held-to-maturity |
| Level 2 |
|
| 12,771 |
| 12,572 |
| 12,861 |
| 12,869 |
| Level 2 |
|
| 12,712 |
| 12,814 |
| 12,741 |
| 12,655 |
Mortgage loans held-for-sale |
| Level 2 |
|
| 34,044 |
| 34,044 |
| 35,024 |
| 35,024 |
| Level 2 |
|
| 29,612 |
| 29,612 |
| 37,695 |
| 37,695 |
Loans receivable, net |
| Level 3 |
|
| 787,889 |
| 780,958 |
| 677,956 |
| 669,852 |
| Level 3 |
|
| 841,245 |
| 849,409 |
| 818,631 |
| 820,512 |
Mortgage loans held-for-investment |
| Level 2 |
|
| 11,188 |
| 11,188 |
| 9,972 |
| 9,972 |
| Level 2 |
|
| 12,751 |
| 12,751 |
| 11,422 |
| 11,422 |
Interest rate lock commitments |
| Level 3 |
|
| 200 |
| 200 |
| 310 |
| 310 |
| Level 3 |
|
| 330 |
| 330 |
| 310 |
| 310 |
Forward commitments |
| Level 2 |
|
| 93 |
| 93 |
| — |
| — | |||||||||||
Restricted investment in bank stock |
| Level 3 |
|
| 4,581 |
| 4,581 |
| 6,814 |
| 6,814 |
| Level 3 |
|
| 6,179 |
| 6,179 |
| 7,002 |
| 7,002 |
Accrued interest receivable |
| Level 3 |
|
| 2,913 |
| 2,913 |
| 2,536 |
| 2,536 |
| Level 3 |
|
| 3,001 |
| 3,001 |
| 2,889 |
| 2,889 |
Customer derivatives - Interest rate swaps |
| Level 2 |
|
| 229 |
| 229 |
| 141 |
| 141 | |||||||||||
Financial liabilities: |
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Deposits |
| Level 2 |
|
| 781,927 |
| 775,300 |
| 627,109 |
| 626,635 |
| Level 2 |
|
| 810,713 |
| 817,200 |
| 752,130 |
| 744,300 |
Short-term borrowings |
| Level 2 |
|
| 43,755 |
| 43,755 |
| 99,750 |
| 99,750 |
| Level 2 |
|
| 82,233 |
| 82,233 |
| 114,300 |
| 114,300 |
Long-term debt |
| Level 2 |
|
| 6,444 |
| 6,458 |
| 8,863 |
| 8,865 |
| Level 2 |
|
| 6,031 |
| 6,034 |
| 6,238 |
| 6,240 |
Subordinated debentures |
| Level 2 |
|
| 9,308 |
| 9,241 |
| 13,308 |
| 12,883 |
| Level 2 |
|
| 9,239 |
| 9,396 |
| 9,239 |
| 9,396 |
Accrued interest payable |
| Level 2 |
|
| 353 |
| 353 |
| 216 |
| 216 |
| Level 2 |
|
| 434 |
| 434 |
| 305 |
| 305 |
Interest rate lock commitments |
| Level 3 |
|
| 41 |
| 41 |
| 40 |
| 40 | |||||||||||
Forward commitments |
| Level 2 |
|
| — |
| — |
| 75 |
| 75 |
| Level 2 |
|
| 170 |
| 170 |
| 176 |
| 176 |
Customer derivatives - Interest rate swaps |
| Level 2 |
|
| 260 |
| 260 |
| 161 |
| 161 | |||||||||||
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| Notional |
|
|
| Notional |
|
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|
|
| Notional |
|
|
| Notional |
|
| ||
Off-balance sheet financial instruments: |
|
|
| amount |
| Fair value |
| amount |
| Fair value |
|
|
| amount |
| Fair value |
| amount |
| Fair value | ||
Commitments to extend credit |
| Level 2 |
| $ | 258,719 |
| 200 |
| 220,180 |
| 310 |
| Level 2 |
| $ | 289,692 |
| 330 |
| 290,614 |
| 310 |
Letters of credit |
| Level 2 |
|
| 2,529 |
| — |
| 1,809 |
| — |
| Level 2 |
|
| 6,354 |
| — |
| 5,158 |
| — |
The following table includes a rollforward of interest rate lock commitments for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the three month peiods ended March 31, 2019 and 2018.
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| Three Months Ended March 31, | |||
|
| 2019 |
| 2018 | |
Balance at beginning of the period |
| $ | 310 |
| 344 |
(Decrease) increase in value |
|
| 19 |
| 242 |
Balance at end of the period |
| $ | 329 |
| 586 |
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| Significant |
|
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|
|
Valuation Techniques for Level 3 interest rate lock |
| Fair Value |
|
|
| Unobservable |
| Range of |
| Weighted |
| |
commitments as of March 31, 2019 |
| Level 3 |
| Valuation Technique |
| Input |
| Inputs |
| Average |
| |
Interest rate lock commitments |
| $ | 329 |
| Market comparable pricing |
| Pull through |
| 1 - 99 | % | 89.27 | % |
Losses of $19 thousand and $242 thousand due to changes in the fair value of interest rate lock commitments which are classified as Level 3 assets and liabilities for the three months ended March 31, 2019 and 2018, respectively, are recorded in non-interest income as net change in the fair value of derivative instruments in the Corporation’s consolidated statements of income.
24
(9) Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Corporation is exposed to certain risk arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Corporation enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Corporation’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation’s known or expected cash receipts and its known or expected cash payments principally related to the Corporation’s loan portfolio.
Mortgage Banking Derivatives
In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans or interest rate locks at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Interest rate lock commitments and forward commitments are recorded within other assets/liabilities on the consolidated balance sheets, with changes in fair values during the period recorded within net change in the fair value of derivative instruments on the unaudited consolidated statements of income.
Customer Derivatives – Interest Rate Swaps
Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain customers to swap a fixed rate product for a variable rate product, or vice versa. The Corporation executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies. Those interest rate derivatives are simultaneously hedged by offsetting derivatives that the Corporation executes with a third party, such that the Corporation minimizes its net interest rate risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
2425
The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
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| September 30, 2018 |
| December 31, 2017 |
|
|
| March 31, 2019 |
| December 31, 2018 | ||||||||||
(dollars in thousands) | Notional |
| Asset |
| Notional |
| Asset |
| Balance Sheet Line Item |
| Notional |
| Asset |
| Notional |
| Asset | ||
Interest Rate Lock Commitments |
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Positive fair values | $ | 32,445 |
| 284 |
| 38,574 |
| 344 |
| Other assets |
| $ | 29,072 |
| 330 |
| 27,188 |
| 310 |
Negative fair values |
| 9,603 |
| (84) |
| 7,201 |
| (34) |
| Other liabilities |
|
| 5,131 |
| (41) |
| 6,218 |
| (40) |
Net interest rate lock commitments |
| 42,048 |
| 200 |
| 45,775 |
| 310 |
|
|
|
| 34,203 |
| 289 |
| 33,406 |
| 270 |
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Forward Commitments |
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
Positive fair values |
| 25,000 |
| 107 |
| 6,500 |
| 5 |
| Other assets |
|
| 2,000 |
| 2 |
| — |
| — |
Negative fair values |
| 8,500 |
| (14) |
| 32,250 |
| (80) |
| Other liabilities |
|
| 31,500 |
| (170) |
| 26,500 |
| (176) |
Net forward commitments |
| 33,500 |
| 93 |
| 38,750 |
| (75) |
|
|
|
| 33,500 |
| (168) |
| 26,500 |
| (176) |
|
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|
|
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|
|
|
|
|
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|
|
Customer Derivatives - Interest Rate Swaps |
|
|
|
|
|
|
|
|
|
| |||||||||
Positive fair values | Other assets |
|
| 3,330 |
| 229 |
| 3,330 |
| 141 | |||||||||
Negative fair values | Other liabilities |
|
| 3,330 |
| (260) |
| 3,330 |
| (161) | |||||||||
Net customer derivatives - interest rate swaps |
|
|
| 6,660 |
| (31) |
| 6,660 |
| (20) | |||||||||
Net derivative fair value asset | $ | 75,548 |
| 293 |
| 84,525 |
| 235 |
|
|
| $ | 74,363 |
| 90 |
| 66,566 |
| 74 |
Interest rate lock commitments are considered Level 3 in the fair value hierarchy, while the forward commitments and interest rate swaps are considered Level 2 in the fair value hierarchy.
The following table presents a summary of the fair value gains and losses on derivative financial instruments:
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| |
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
|
| Three Months Ended March 31, | |||||||
(dollars in thousands) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
|
| 2019 |
| 2018 | |
Interest Rate Lock Commitments |
| $ | (224) |
| (423) |
| (110) |
| (162) |
| $ | 19 |
| 252 |
Forward Commitments |
|
| 294 |
| (80) |
| 169 |
| 47 |
|
| 8 |
| (45) |
Customer Derivatives - Interest Rate Swaps |
|
| (11) |
| — | |||||||||
Net fair value gains (losses) on derivative financial instrument |
| $ | 70 |
| (503) |
| 59 |
| (115) |
| $ | 16 |
| 207 |
Realized gains/(losses) on derivatives were ($170 thousand)275) thousand and $278$700 thousand for the three months ended September 30,March 31, 2019 and 2018, and 2017, respectively, and $534 thousand and $845 thousand for the nine months ended September 30, 2018 and 2017, respectively, and are included in other non-interest income in the unaudited consolidated statements of income.
ASC Topic 280 – Segment Reporting identifies operating segments as components of an enterprise which are evaluated regularly by the Corporation’s Chief Operating Decision Maker, our Chief Executive Officer, in deciding how to allocate resources and assess performance. The Corporation has applied the aggregation criterion set forth in this codification to the results of its operations.
Our Banking segment consists of commercial and retail banking. The Banking segment generates interest income from its lending (including leasing) and investing activities and is dependent on the gathering of lower cost deposits from its branch network or borrowed funds from other sources for funding its loans, resulting in the generation of net interest income. The Banking segment also derives revenues from other sources including gains on the sale of available for sale investment securities, gains on the sale of residential mortgage loans, service charges on deposit accounts, cash sweep fees, overdraft fees, BOLI income.
2526
Meridian Wealth, a registered investment advisor and wholly-owned subsidiary of the Corporation, provides a comprehensive array of wealth management services and products and the trusted guidance to help its clients and our banking customers prepare for the future. The unit generates non-interest income through advisory fees.
Meridian’s mortgage banking segment (“Mortgage”) consists of one central loan production facility and several retail and profit sharing loan production offices located throughout the Delaware Valley. The Mortgage segment originates 1 – 4 family residential mortgages and sells all of its production, including servicing to third party investors. The unit generates net interest income on the loans it originates and earns fee income (primarily gain on sales) at the time of the sale.
The table below summarizes income and expenses, directly attributable to each business line, which has been included in the statement of operations.
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|
|
| Three Months Ended September 30, 2018 |
| Three Months Ended September 30, 2017 | ||||||||||||||
(dollars in thousands) |
| Bank |
| Wealth |
| Mortgage |
| Total |
| Bank |
| Wealth |
| Mortgage |
| Total | ||
Net interest income |
| $ | 8,107 |
| 71 |
| 200 |
| 8,378 |
| $ | 7,190 |
| 31 |
| 120 |
| 7,341 |
Provision for loan losses |
|
| (291) |
| — |
| — |
| (291) |
|
| (665) |
| — |
| — |
| (665) |
Net interest income after provision |
|
| 7,816 |
| 71 |
| 200 |
| 8,087 |
|
| 6,525 |
| 31 |
| 120 |
| 6,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income |
|
| 105 |
| — |
| 8,169 |
| 8,274 |
|
| 67 |
| — |
| 9,837 |
| 9,904 |
Wealth management income |
|
| 59 |
| 871 |
| — |
| 930 |
|
| 18 |
| 916 |
| — |
| 934 |
Net change in fair values |
|
| — |
| — |
| (333) |
| (333) |
|
| — |
| — |
| (547) |
| (547) |
Other |
|
| 363 |
| — |
| (67) |
| 296 |
|
| 353 |
| — |
| (194) |
| 159 |
Total non-interest income |
|
| 527 |
| 871 |
| 7,769 |
| 9,167 |
|
| 438 |
| 916 |
| 9,096 |
| 10,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
| 3,264 |
| 445 |
| 5,192 |
| 8,901 |
|
| 3,237 |
| 411 |
| 6,682 |
| 10,330 |
Occupancy and equipment |
|
| 521 |
| 29 |
| 370 |
| 920 |
|
| 575 |
| 26 |
| 391 |
| 992 |
Professional fees |
|
| 590 |
| 9 |
| 115 |
| 714 |
|
| 394 |
| 5 |
| 82 |
| 481 |
Advertising and promotion |
|
| 301 |
| 111 |
| 178 |
| 590 |
|
| 254 |
| 126 |
| 217 |
| 597 |
Other |
|
| 1,259 |
| 314 |
| 1,055 |
| 2,628 |
|
| 1,238 |
| 198 |
| 1,176 |
| 2,612 |
Total non-interest expense |
|
| 5,935 |
| 908 |
| 6,910 |
| 13,753 |
|
| 5,698 |
| 766 |
| 8,548 |
| 15,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Margin |
| $ | 2,408 |
| 34 |
| 1,059 |
| 3,501 |
| $ | 1,265 |
| 181 |
| 668 |
| 2,114 |
26
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|
|
| Nine Months Ended September 30, 2018 |
| Nine Months Ended September 30, 2017 |
| Three Months Ended March 31, 2019 |
| Three Months Ended March 31, 2018 | ||||||||||||||||||||||||||||
(dollars in thousands) |
| Bank |
| Wealth |
| Mortgage |
| Total |
| Bank |
| Wealth |
| Mortgage |
| Total |
| Bank |
| Wealth |
| Mortgage |
| Total |
| Bank |
| Wealth |
| Mortgage |
| Total | ||||
Net interest income |
| $ | 23,597 |
| 217 |
| 402 |
| 24,216 |
| $ | 20,733 |
| 70 |
| 302 |
| 21,105 |
| $ | 8,381 |
| 38 |
| 58 |
| 8,477 |
| $ | 7,527 |
| 84 |
| 81 |
| 7,692 |
Provision for loan losses |
|
| (1,258) |
| — |
| — |
| (1,258) |
|
| (1,445) |
| — |
| — |
| (1,445) |
|
| (219) |
| — |
| — |
| (219) |
|
| (554) |
| — |
| — |
| (554) |
Net interest income after provision |
|
| 22,339 |
| 217 |
| 402 |
| 22,958 |
|
| 19,288 |
| 70 |
| 302 |
| 19,660 |
|
| 8,162 |
| 38 |
| 58 |
| 8,258 |
|
| 6,973 |
| 84 |
| 81 |
| 7,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income |
|
| 148 |
| — |
| 20,259 |
| 20,407 |
|
| 67 |
| — |
| 25,022 |
| 25,089 |
|
| 39 |
| — |
| 4,869 |
| 4,908 |
|
| 30 |
| — |
| 4,791 |
| 4,821 |
Wealth management income |
|
| 149 |
| 2,847 |
| — |
| 2,996 |
|
| 233 |
| 1,672 |
| — |
| 1,905 |
|
| 46 |
| 818 |
| — |
| 864 |
|
| 29 |
| 1,049 |
| — |
| 1,078 |
Net change in fair values |
|
| — |
| — |
| (471) |
| (471) |
|
| — |
| — |
| 100 |
| 100 |
|
| — |
| — |
| 430 |
| 430 |
|
| — |
| — |
| 33 |
| 33 |
Other |
|
| 1,136 |
| — |
| 823 |
| 1,959 |
|
| 995 |
| — |
| (567) |
| 428 |
|
| 378 |
| — |
| (133) |
| 245 |
|
| 313 |
| — |
| 811 |
| 1,124 |
Total non-interest income |
|
| 1,433 |
| 2,847 |
| 20,611 |
| 24,891 |
|
| 1,295 |
| 1,672 |
| 24,555 |
| 27,522 |
|
| 463 |
| 818 |
| 5,166 |
| 6,447 |
|
| 372 |
| 1,049 |
| 5,635 |
| 7,056 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
| 10,390 |
| 1,373 |
| 14,956 |
| 26,719 |
|
| 9,874 |
| 856 |
| 19,023 |
| 29,753 |
|
| 3,673 |
| 566 |
| 3,488 |
| 7,727 |
|
| 3,492 |
| 489 |
| 4,455 |
| 8,436 |
Occupancy and equipment |
|
| 1,599 |
| 99 |
| 1,172 |
| 2,870 |
|
| 1,666 |
| 52 |
| 1,100 |
| 2,818 |
|
| 523 |
| 30 |
| 410 |
| 963 |
|
| 534 |
| 33 |
| 393 |
| 960 |
Professional feees |
|
| 1,325 |
| 20 |
| 325 |
| 1,670 |
|
| 943 |
| 125 |
| 316 |
| 1,384 | ||||||||||||||||||
Professional fees |
|
| 315 |
| 1 |
| 156 |
| 472 |
|
| 431 |
| 8 |
| 40 |
| 479 | ||||||||||||||||||
Advertising and promotion |
|
| 917 |
| 319 |
| 566 |
| 1,802 |
|
| 746 |
| 205 |
| 586 |
| 1,537 |
|
| 256 |
| 76 |
| 133 |
| 465 |
|
| 254 |
| 98 |
| 229 |
| 581 |
Other |
|
| 3,827 |
| 613 |
| 2,888 |
| 7,328 |
|
| 3,766 |
| 303 |
| 3,496 |
| 7,565 |
|
| 1,296 |
| 147 |
| 1,047 |
| 2,490 |
|
| 1,225 |
| 142 |
| 739 |
| 2,106 |
Total non-interest expense |
|
| 18,058 |
| 2,424 |
| 19,907 |
| 40,389 |
|
| 16,995 |
| 1,541 |
| 24,521 |
| 43,057 |
|
| 6,063 |
| 820 |
| 5,234 |
| 12,117 |
|
| 5,936 |
| 770 |
| 5,856 |
| 12,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Margin |
| $ | 5,714 |
| 640 |
| 1,106 |
| 7,460 |
| $ | 3,588 |
| 201 |
| 336 |
| 4,125 |
| $ | 2,562 |
| 36 |
| (10) |
| 2,588 |
| $ | 1,409 |
| 363 |
| (140) |
| 1,632 |
(11) Recent Litigation
On November 21, 2017, three former employees of the mortgage-banking division of the Bank filed suit in the United States District Court for the Eastern District of Pennsylvania, Juan Jordan et al. v. Meridian Bank, Thomas Campbell and Christopher Annas, against the Bank purporting to be a class and collective action seeking unpaid and overtime wages under the Fair Labor Standards Act of 1938, the New Jersey Wage and Hour Law, and the Pennsylvania Minimum Wage Act of 1968 on behalf of similarly situated plaintiffs. In February 2018, the Bank answered the complaint and presented affirmative defenses. In March 2018, plaintiffs’ counsel and the Bank agreed to move forward with non-binding mediation. Although the Bank believes it has strong and meritorious defenses, given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, success on the merits, the Bank has recorded a $200$325 thousand reserve, $125 thousand of which was added in the quarter ended March 31, 2019, as a reasonable estimate for possible losses that may result from this action. This estimate may change from time to time, and actual losses could vary.
27
(12) Recent Accounting Pronouncements
As an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), Meridian Corporation is permitted an extended transition period for complying with new or revised accounting standards affecting public companies. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1,070,000,000 or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of our initial offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the end of the fiscal year in which the market value of our equity securities that are held by non-affiliates exceeds $700 million as of June 30 of that year. We have elected to take advantage of this extended transition period, which means that the financial statements included herein, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. If we do so, we will prominently disclose this decision in the first periodic report following our decision, and such decision is irrevocable. As a filer under the JOBS Act, we will implement new accounting standards subject to the effective dates required for non-public entities.
27
FASB Accounting Standards Update (“ASU”) No.ASU 2014‑09 (Topic 606), “Revenue from Contracts with Customers”
Issued in May 2014, ASU 2014‑09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015‑14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This amendment defers the effective date of ASU 2014‑09 by one year. In March 2016, the FASB issued ASU 2016‑ 08”, “Principal versus Agent Considerations (Reporting Gross versus Net),” which amends the principal versus agent guidance and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. In addition, the FASB issued ASU Nos. 2016‑20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” and 2016‑12, “Narrow-Scope Improvements and Practical Expedients”, both of which provide additional clarification of certain provisions in Topic 606. These Accounting Standards Codification (“ASC”) updates are effective for public companies for annual reporting periods beginning after December 15, 2017, but early adoption is permitted. Early adoption is permitted only as of annual reporting periods after December 15, 2016. The standard permits the use of either the ‘retrospective’ or ‘retrospectively with the cumulative effect’ transition method. For non-public companies, the ASC updates are effective for annual reporting periods beginning after December 15, 2018, and interim periods beginning after December 15, 2019. The Corporation’s revenue is the sum of net interest income and non-interest income. The scope of the guidance excludes nearly all net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. The Corporation performed a review and determined that the majority of non-interest income revenue streams are within the scope of the new standard. Non-interest income streams that are out of scope of the new standard include BOLI, sales of investment securities, mortgage banking activities, and certain items within service charges and other income. Management is reviewing contracts related to service charges on deposits, investment advisory commissions and fee income, and certain items within other service charges and other income, however our preliminary evaluation of revenue streams that are in the scope of this ASU suggests that adoption of this guidance is not expected to have a material impact on our consolidated statement of income. The Corporation expects to adopt this ASU 2014-09 for the fiscal year endingas of December 31, 2019 and is evaluating all revenue streams, accounting policies, practices and reportinghas not yet determined the impact to identify and understand any impact on the Corporation’sour Consolidated Financial Statements and related disclosures.Statements.
FASB ASU 2017‑042017-05 (Topic 350)610), “Intangibles – Goodwill“Clarifying the Scope of Asset Derecognition Guidance and Others”Accounting for Partial Sales of Nonfinancial Assets”
Issued in JanuaryFebruary 2017, ASU 2017‑04 simplifies how an entity is required2017-05 provides clarification of the scope of ASC 610-20. Specifically, the new guidance clarifies that ASC 610-20 applies to test goodwill for impairment by eliminating Step 2 fromnonfinancial assets which do not meet the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair valuedefinition of a reporting unit’s goodwill withbusiness or not-for-profit activity. Further, the carrying amountnew guidance clarifies that a financial asset is within the scope of ASC 610-20 if it meets the definition of an in-substance nonfinancial asset which is defined as a financial asset promised to a counterparty in a contract where substantially all of the assets promised are nonfinancial. Finally, the new guidance
28
clarifies that goodwill. ASU 2017‑04 is effective for public companies for annual periods beginning after December 15, 2019 including interim periods within those periods. ASU 2017‑04 is effective for non-public companies for annual periods beginning after December 15, 2021 including interim periods within those periods.each distinct nonfinancial asset and insubstance nonfinancial asset should be derecognized when the counterparty obtains control of it. The Corporation is evaluatingplans to adopt this ASU at the effect thatsame time we adopt ASU 2017‑04 will have on its consolidated financial statements and related disclosures.2014-09.
FASB ASU 2017‑01 (Topic 805), “Business Combinations”
Issued in January 2017, ASU 2017‑01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. ASU 2017‑01 is effective for public companies for annual periods beginning after December 15, 2017 including interim periods within those periods, while for non-public companies the ASU is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Corporation is evaluatingexpects to adopt this ASU as of December 31, 2019 and does not anticipate the effect thatadoption of this ASU 2017‑01 willto have a material impact on its consolidated financial statements and related disclosures.
FASB ASU 2016‑15 (Topic 320), “Classification of Certain Cash Receipts and Cash Payments”
Issued in August 2016, ASU 2016‑15 provides guidance on eight specific cash flow issues and their disclosure in the consolidated statements of cash flows. The issues addressed include debt prepayment, settlement of zero-coupon debt, contingent consideration in business combinations, proceeds from settlement of insurance claims, proceeds from settlement of BOLI, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the Predominance principle. ASU 2016‑15 is effective for public companies for the annual and interim periods in fiscal years beginning after December 15, 2017, with early adoption permitted. For non-public companies ASU 2016‑15 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Corporation
28
is evaluating the impact of this guidanceDecember 31, 2019 and does not anticipate the adoption of this ASU to have a material impact on its consolidated financial statements.statements and related disclosures.
FASB ASU 2016‑13 (Topic 326), “Measurement of Credit Losses on Financial Instruments”
Issued in June 2016, ASU 2016‑13 significantly changes how companies measure and recognize credit impairment for many financial assets. The newThis ASU requires businesses and other organizations to measure the current expected credit losses (“CECL”) on financial assets, such as loans, net investments in leases, certain debt securities, bond insurance and other receivables. The amendments affect entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. Current GAAP requires an incurred loss model will require companies to immediately recognize an estimate ofmethodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The amendments in this ASU replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonableness and supportable information to occur overinform credit loss estimates. An entity should apply the remaining lifeamendments through a cumulative-effect adjustment to retained earnings as of the financial assets that are in the scopebeginning of the standard. The ASU also makes targeted amendments tofirst reporting period in which the currentguidance is effective (modified retrospective approach). Acquired credit impaired loans for which the guidance in Accounting Standards Codification (ASC) Topic 310-30 has been previously applied should prospectively apply the guidance in this ASU. A prospective transition approach is required for debt securities for which an other-than-temporary impairment model for available-for-sale debt securities.has been recognized before the effective date. ASU 2016‑13 is effective for public companies for the annual and interim periods in fiscal years beginning after December 15, 2018,2019, with early adoption permitted. For non-public companies the ASU is effective for fiscal years and interim periods beginning after December 15, 2020, and interim periods within2021, or January 1, 2022 for the fiscal years beginning after December 31, 2021.Corporation. The Corporation has assembled a cross-functional team from Finance, Credit, and IT that is evaluatingleading the effect that ASU 2016‑13 will haveimplementation efforts to evaluate the impact of this guidance on itsthe Corporation's consolidated financial statements and related disclosures.disclosures, internal systems, accounting policies, processes and related internal controls.
29
FASB ASU 2016‑02 (Topic 842), “Leases��“Leases”
Issued in February 2016, ASU 2016‑02 revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ASU 2016‑02 is effective for public companies for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. For non-public companies the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within the fiscal years beginning after December 31, 2020. In July 2018 ASU 2018-11 was issued which creates a new, optional transition method for implementing ASU 2016-02 and a lessor practical expedient for separating lease and non-lease components and has the same effective date as ASU 2016-02. Under the optional transition method of ASU 2018-11, the Corporation may initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Corporation is evaluating the effects that ASU 2016‑02 and ASU 2018-11 will have on its consolidated financial statements and related disclosures.
FASB ASU 2016‑01 (Subtopic 825‑10), “Financial Instruments – Overall, Recognition and Measurement of Financial Assets and Financial Liabilities”
Issued in January 2016, ASU 2016‑01 provides that equity investments will be measured at fair value with changes in fair value recognized in net income. When fair value is not readily determinable, an entity may elect to measure the equity investment at cost, minus impairment, plus or minus any change in the investment’s observable price. For financial liabilities that are measured at fair value, the amendment requires an entity to present separately, in other comprehensive income, any change in fair value resulting from a change in instrument-specific credit risk. For public companies, ASU 2016‑01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For non-public companies the ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within the fiscal years beginning after December 31, 2019. Early adoption is permitted. Entities may apply this guidance on a prospective or retrospective basis. ASU 2018‑03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825‑10) clarifies certain aspects of ASU 2016‑01 and has the same effective dates for non-public companies. The Corporation is evaluating the effects that ASU 2016‑01 and ASU 2018‑03 will have on its consolidated financial statements and related disclosures.disclosures upon our adoption as of December 31, 2019.
FASB ASU 2017‑08 (Subtopic 310‑20), “Nonrefundable Fees and Other Costs (Subtopic 310‑20): Premium Amortization on Purchased Callable Debt Securities”
Issued in March 2017, ASU 2017‑08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendment requires the premium to be amortized to the earliest call date. The amendment does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this update are effective for fiscal years, and
29
interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. For non-public companies the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within the fiscal years beginning after December 31, 2020. The Corporation is evaluating the effect that ASU 2017‑08 will have on its consolidated financial statements and related disclosures.
FASB ASU 2017‑12 (Subtopic 815), “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”
Issued in August 2017, ASU 2017‑12 better aligns hedge accounting with an organization’s risk management activities in the financial statements. In addition, the ASU simplifies the application of hedge accounting guidance in areas where practice issues exist. Specifically, the proposed ASU eases the requirements for effectiveness testing, hedge documentation and application of the shortcut and the critical terms match methods. Entities would be permitted to designate contractually specified components as the hedged risk in a cash flow hedge involving the purchase or sale of nonfinancial assets or variable rate financial instruments. In addition, entities would no longer
30
separately measure and report hedge ineffectiveness. Also, entities, may choose refined measurement techniques to determine the changes in fair value of the hedged item in fair value hedges of benchmark interest rate risk. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020. Early application is permitted in any interim period after issuance of the ASU for existing hedging relationships on the date of adoption and the effect of adoption should be reflected as of the beginning of the fiscal year of adoption (that is, the initial application date). The Corporation has evaluated ASU 2017‑12, and has determined it has no current hedging strategies for which it plans to implement the ASU but we will consider the impact of the ASU on future hedging strategies that may arise.
FASB ASU 2018-16 (Subtopic 815), “Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes”
In October 2018 ASU 2018-16 was issued. The new guidance applies to all entities that elect to apply hedge accounting to benchmark interest rate hedges under Topic 815. It permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes in addition to the existing applicable rates. The guidance is required to be adopted concurrently with ASU 2017-12, on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after adoption.The Corporation does not anticipate the adoption of this ASU to have a material impact on its consolidated financial statements and related disclosures.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10‑Q and the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 20172018 (the “2017“2018 10‑K”) included in Meridian Bank’sCorporation’s Annual Report on Form 10‑K filed with the Federal Deposit Insurance CorporationSecurities and Exchange Commission (the “FDIC”“SEC”).
Cautionary Statement Regarding Forward-Looking Statements
Meridian Corporation (the “Corporation”) may from time to time make written or oral “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, 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, 2018) and, for periods prior to the completion of the holding company reorganization, Meridian Bank’s filings with the FDIC, including Meridian Bank’s most recent annual reportAnnual Report on Form 10-K for the year ended December 31, 2017, 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
30
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.
31
Critical Accounting Policies, Judgments 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 several accounting policies that, due to the estimates, assumptions and judgements inherent in those policies, are critical in understanding our financial statements.
These policies include (i) determining the provision and allowance for loan and lease losses, and (ii) the determination of fair value for financial instruments. Management has presented the application of these policies to the audit committee of our board of directors.
These critical accounting policies, along with other significant accounting policies, are presented in in NoteFootnote 1 of the Corporation’s Consolidated Financial Statements as of and for the years ended December 31, 20172018 and 20162017 included in the 2017Annual Report on Form 10‑K.
Recent Acquisitions
As disclosed previously, Meridian Bank acquired HJ Wealth Management, LLC in April 2017.
Executive Overview
The following items highlight the Corporation’s results of operations for the three and nine months ended September 30, 2018,March 31, 2019, as compared to the same periodsperiod in 2017,2018, and the changes in its financial condition as of September 30, 2018March 31, 2019 as compared to December 31, 2017.2018. More detailed information related to these highlights can be found in the sections that follow.
Three Month Results of Operations
· | Net income |
· | Return on average equity (“ROE”) and return on average assets (“ROA”) for the three months ended |
· | Net interest income increased |
· | Provision for loan and lease losses (the “Provision”) of |
· | Non-interest income of |
· | Mortgage banking income increased $87 thousand, or 1.8%, to $4.9 million for the three months ended March 31, 2019, as compared to $4.8 million for the same period in 2018. |
· | Non-interest expense of $12.1 million for the three months ended March 31, 2019 decreased $500 thousand, or 3.5%, from $12.6 million for the same period in 2018. |
Changes in Financial Condition
· | Total assets of $1.03 billion as of March 31, 2019 increased $30 million, or 3.0%, from $997.5 million as of December 31, 2018. |
3132
· |
|
|
|
Nine Month Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Financial Condition
|
|
|
|
· | Total portfolio loans and leases, excluding mortgage loans held for sale, as of |
· | Total non-performing loans and leases of |
· | The |
· | Total deposits of |
32
Key Performance Ratios
Key financial performance ratios for the three and nine months ended SeptemberMarch 31, 2019 30,and 2018 and 2017 are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
|
| Three Months Ended |
| ||||||||||||
|
| September 30, |
| September 30, |
|
| March 31, |
| ||||||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
|
| 2019 |
| 2018 |
| ||||||
Annualized return on average equity |
|
| 10.16 | % |
| 7.77 | % |
| 7.47 | % |
| 5.24 | % |
|
| 7.32 | % |
| 5.08 | % |
Annualized return on average assets |
|
| 1.16 | % |
| 0.70 | % |
| 0.87 | % |
| 0.49 | % |
|
| 0.83 | % |
| 0.61 | % |
Net interest margin (tax effected yield) |
|
| 3.72 | % |
| 3.91 | % |
| 3.83 | % |
| 3.94 | % |
|
| 3.67 | % |
| 3.91 | % |
Basic earnings per share |
| $ | 0.43 |
| $ | 0.30 |
| $ | 0.91 |
| $ | 0.51 |
|
| $ | 0.31 |
| $ | 0.20 |
|
Diluted earnings per share |
| $ | 0.42 |
| $ | 0.30 |
| $ | 0.90 |
| $ | 0.51 |
|
| $ | 0.31 |
| $ | 0.20 |
|
The following table presents certain key period-end balances and ratios as of SeptemberMarch 31, 2019 30, 2018 and December 31, 2017:2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
|
| March 31, |
| December 31, |
| ||||
(dollars in thousands, except per share amounts) |
| 2018 |
| 2017 |
|
| 2019 |
| 2018 |
| ||||
Book value per common share |
| $ | 16.70 |
| $ | 15.86 |
|
| $ | 17.48 |
| $ | 17.10 |
|
Tangible book value per common share |
| $ | 15.91 |
| $ | 15.00 |
|
| $ | 16.70 |
| $ | 16.31 |
|
Allowance as a percentage of loans and leases held for investment |
|
| 0.96 | % |
| 0.96 | % |
|
| 0.97 | % |
| 0.96 | % |
Tier I capital to risk weighted assets |
|
| 12.03 | % |
| 12.86 | % |
|
| 11.71 | % |
| 11.72 | % |
Tangible common equity ratio (1) |
|
| 10.67 | % |
| 11.27 | % |
|
| 10.47 | % |
| 10.53 | % |
Loans held for investment |
| $ | 806,788 |
| $ | 694,637 |
|
| $ | 862,372 |
| $ | 875,801 |
|
Total assets |
| $ | 959,829 |
| $ | 856,035 |
|
| $ | 1,027,514 |
| $ | 997,480 |
|
Stockholders' equity |
| $ | 107,018 |
| $ | 101,363 |
|
| $ | 111,992 |
| $ | 109,552 |
|
| (1) Tangible common equity ratio is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below for a reconciliation of this measure to its most comparable GAAP measure. |
Non-GAAP Financial Measures
Included in this Quarterly Report on Form 10‑Q is a financial performance measure not recognized by GAAP, “tangible common equity”. Our management used the measure of the tangible common equity ratio to assess our capital strength. We believe that this non-GAAP financial measure is useful to investors because, by removing the impact of our goodwill and other intangible assets, it allows investors to more easily assess our capital adequacy. This non-GAAP financial measure should not be considered a substitute for any regulatory capital ratios and may not be comparable to other similarly
33
titled measures used by other companies. The table below provides the non-GAAP reconciliation for our tangible common equity ratio:
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| March 31, |
| December 31, |
(dollars in thousands) |
| 2018 |
| 2017 |
| 2019 |
| 2018 |
Tangbile common equity ratio: |
|
|
|
|
|
|
|
|
Total stockholders' equity |
| 107,018 |
| 101,363 |
| 111,992 |
| 109,552 |
Less: |
|
|
|
|
|
|
|
|
Goodwill |
| 899 |
| 899 |
| 899 |
| 899 |
Intangible assets |
| 4,215 |
| 4,596 |
| 4,079 |
| 4,147 |
Tangible common equity |
| 101,904 |
| 95,868 |
| 107,014 |
| 104,506 |
Total assets |
| 959,829 |
| 856,035 |
| 1,027,514 |
| 997,480 |
Less: |
|
|
|
|
|
|
|
|
Goodwill |
| 899 |
| 899 |
| 899 |
| 899 |
Intangible assets |
| 4,215 |
| 4,596 |
| 4,079 |
| 4,147 |
Tangible assets |
| 954,715 |
| 850,540 |
| 1,022,536 |
| 992,434 |
Tangible common equity ratio |
| 10.67% |
| 11.27% |
| 10.47% |
| 10.53% |
33
The following sections discuss, in detail, the Corporation’s results of operations for the three and nine months ended SeptemberMach 31, 2019 30, 2018,, as compared to the same periods in 2017,2018, and the changes in its financial condition as of SeptemberMarch 31, 2019 30, 2018 as compared to December 31, 2017.2018.
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, 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, loan expenses, professional fees and other operating expenses; and |
· | Income Taxes, which include state and federal jurisdictions. |
NET INTEREST INCOME
Net interest income is an integral source of the Corporation’s revenue. The tables below present a summary, for the three and nine months ended September 30,March 31, 2019 and 2018, and 2017, 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 results of net free funding sources such as noninterest deposits and stockholders’ equity.
Total interest income for the three months ending September 30, 2018March 31, 2019 was $11.6$12.3 million, which represented a $2.4$2.5 million, or 25.9%25.8%, increase compared with the three months ending September 30, 2017.March 31, 2018. The increase in income was attributable to a $147.1
34
$138.8 million increase in average interest earning assets, year over year, helped by an increase of 2338 basis points in yield on earning assets, to 5.12%5.33% from 4.89%4.95%, for same period in 2017.2018. The commercial loan portfolio yield, in particular, rose 3161 basis points over the same period in 2017.2018. Total interest expense rose $1.3$1.7 million or 72.7%82.8% to $3.2$3.8 million for the third quarter of 2018,three months ending March 31, 2019, compared with $1.9$2.1 million for the third quarter of 2017.three months ending March 31, 2018. The increase was primarily due to an increase in average interest bearing deposits of $114.4$108.1 million, year over year, as well as an overall increase of 6075 basis points in the cost of interest-bearing funds reflective of the overall increase in market rates.
Net interest income increased $1.1 million,$800 thousand, or 14.1%10.2%, to $8.4$8.5 million for the three months ended September 30, 2018,March 31, 2019, compared to $7.3$7.7 million for the three months ended September 30, 2017.March 31, 2018. The net-interest margin, although strong, decreased 1924 basis points for the third quarter of 2018three months ending March 31, 2019 at 3.72%3.67%, compared with 3.91% for the third quarter of 2017.three month ending March 31, 2018. The decrease in net interest margin reflects the pressure from the rising cost of funds, which has outpaced the favorable trend in yield on interest earning assets during the quarter. The strength in the Corporation’s net-interest margin in the face of rising cost of funds reflects the size and asset quality of the loan portfolio, as well as the $20.8$9.9 million or 20.5% increase in average non-interest bearing deposits period over period.
Total interest income for the nine months ending September 30, 2018 was $32.3 million, which represented a $6.2 million, or 24.2%, increase compared with the nine months ending September 30, 2017. The increase in income was attributable to a $126.6 million increase in average interest earning assets, year over year, helped by an increase of 24 basis points in
34
yield on earning assets, to 5.07% from 4.83%, for same period in 2017. The commercial loan portfolio and home equity loan portfolio yields, in particular, rose 36 and 46 basis points, respectively. Total interest expense rose $3.2 million or 65.6% to $8.0 million for the first nine months of 2018, compared with $4.8 million for the first nine months of 2017. The year-over-year increase was primarily due to an increase in average interest bearing deposits of $114.6 million, year over year, as well as an overall increase of 49 basis points in the cost of interest-bearing funds reflective of the overall increase in market rates.
Net interest income increased $3.1 million, or 14.7%, to $24.3 million for the nine months ended September 30, 2018, compared to $21.2 million for the nine months ended September 30, 2017. The net-interest margin, although strong, decreased 11 basis points for the first nine months of 2018 at 3.83%, compared with 3.94% for the first nine months of 2017. The strength in the Corporation’s net-interest margin reflects the size and asset quality of the loan portfolio, as well as the $13.6 million or 13.8%16.3% increase in average non-interest bearing deposits period over period.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2018 |
| 2017 | ||||||||||||
|
|
|
| Interest |
|
|
|
|
| Interest |
|
| ||||
For the Three Months Ended September 30, |
| Average |
| Income/ |
| Yields/ |
| Average |
| Income/ |
| Yields/ | ||||
(dollars in thousands) |
| Balance |
| Expense |
| rates |
| Balance |
| Expense |
| rates | ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from banks |
| $ | 5,872 |
|
| 28 |
| 1.89% |
| $ | 3,642 |
|
| 11 |
| 1.20% |
Federal funds sold |
|
| 477 |
|
| 2 |
| 1.87% |
|
| 945 |
|
| 3 |
| 1.26% |
Investment securities(1) |
|
| 57,574 |
|
| 350 |
| 2.41% |
|
| 50,774 |
|
| 292 |
| 2.28% |
Loans held for sale |
|
| 39,847 |
|
| 462 |
| 4.64% |
|
| 33,816 |
|
| 333 |
| 3.91% |
Loans held for investment(1) |
|
| 791,914 |
|
| 10,758 |
| 5.36% |
|
| 659,430 |
|
| 8,596 |
| 5.17% |
Total loans |
|
| 831,761 |
|
| 11,220 |
| 5.33% |
|
| 693,246 |
|
| 8,929 |
| 5.11% |
Total interst-earning assets |
|
| 895,684 |
|
| 11,600 |
| 5.12% |
|
| 748,607 |
|
| 9,235 |
| 4.89% |
Noninterest earning assets |
|
| 40,645 |
|
|
|
|
|
|
| 40,051 |
|
|
|
|
|
Total assets |
| $ | 936,329 |
|
|
|
|
|
| $ | 788,658 |
|
|
|
|
|
Liabilities and stockholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
| $ | 104,857 |
|
| 351 |
| 1.33% |
| $ | 83,165 |
|
| 135 |
| 0.64% |
Money market and savings deposits |
|
| 238,086 |
|
| 919 |
| 1.53% |
|
| 214,956 |
|
| 499 |
| 0.92% |
Time deposits |
|
| 257,250 |
|
| 1,215 |
| 1.87% |
|
| 187,642 |
|
| 573 |
| 1.21% |
Total deposits |
|
| 600,193 |
|
| 2,485 |
| 1.64% |
|
| 485,763 |
|
| 1,207 |
| 0.99% |
Short-term borrowings |
|
| 85,026 |
|
| 491 |
| 2.29% |
|
| 95,669 |
|
| 326 |
| 1.35% |
Long-term borrowings |
|
| 6,650 |
|
| 48 |
| 2.86% |
|
| 12,388 |
|
| 74 |
| 2.37% |
Total Borrowings |
|
| 91,676 |
|
| 539 |
| 2.33% |
|
| 108,057 |
|
| 400 |
| 1.47% |
Subordinated Debentures |
|
| 9,308 |
|
| 171 |
| 7.30% |
|
| 13,376 |
|
| 244 |
| 7.24% |
Total interest-bearing liabilities |
|
| 701,177 |
|
| 3,195 |
| 1.81% |
|
| 607,196 |
|
| 1,851 |
| 1.21% |
Noninterest-bearing deposits |
|
| 122,454 |
|
|
|
|
|
|
| 101,611 |
|
|
|
|
|
Other noninterest-bearing liabilities |
|
| 6,193 |
|
|
|
|
|
|
| 8,472 |
|
|
|
|
|
Total liabilities |
| $ | 829,824 |
|
|
|
|
|
| $ | 717,279 |
|
|
|
|
|
Total stockholders' equity |
|
| 106,505 |
|
|
|
|
|
|
| 71,379 |
|
|
|
|
|
Total stockholders' equity and liabilities |
| $ | 936,329 |
|
|
|
|
|
| $ | 788,658 |
|
|
|
|
|
Net interest income |
|
|
|
| $ | 8,405 |
|
|
|
|
|
| $ | 7,384 |
|
|
Net interest spread |
|
|
|
|
|
|
| 3.31% |
|
|
|
|
|
|
| 3.68% |
Net interest margin |
|
|
|
|
|
|
| 3.72% |
|
|
|
|
|
|
| 3.91% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2019 |
| 2018 | ||||||||||||
|
|
|
| Interest |
|
|
|
|
| Interest |
|
| ||||
For the Three Months Ended March 31, |
| Average |
| Income/ |
| Yields/ |
| Average |
| Income/ |
| Yields/ | ||||
(dollars in thousands) |
| Balance |
| Expense |
| rates |
| Balance |
| Expense |
| rates | ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from banks |
| $ | 7,293 |
|
| 44 |
| 2.44% |
| $ | 5,174 |
|
| 18 |
| 1.49% |
Federal funds sold |
|
| 933 |
|
| 6 |
| 2.49% |
|
| 885 |
|
| 5 |
| 2.06% |
Investment securities(1) |
|
| 63,466 |
|
| 411 |
| 2.63% |
|
| 52,136 |
|
| 304 |
| 2.36% |
Loans held for sale |
|
| 18,080 |
|
| 213 |
| 4.72% |
|
| 24,319 |
|
| 240 |
| 3.95% |
Loans held for investment(1) |
|
| 849,237 |
|
| 11,676 |
| 5.54% |
|
| 717,731 |
|
| 9,254 |
| 5.20% |
Total loans |
|
| 867,317 |
|
| 11,889 |
| 5.56% |
|
| 742,050 |
|
| 9,494 |
| 5.16% |
Total interest-earning assets |
|
| 939,009 |
|
| 12,350 |
| 5.33% |
|
| 800,245 |
|
| 9,821 |
| 4.95% |
Noninterest earning assets |
|
| 38,196 |
|
|
|
|
|
|
| 38,606 |
|
|
|
|
|
Total assets |
| $ | 977,205 |
|
|
|
|
|
| $ | 838,851 |
|
|
|
|
|
Liabilities and stockholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
| $ | 113,211 |
|
| 448 |
| 1.60% |
| $ | 93,353 |
|
| 183 |
| 0.80% |
Money market and savings deposits |
|
| 264,889 |
|
| 1,135 |
| 1.74% |
|
| 221,070 |
|
| 567 |
| 1.04% |
Time deposits |
|
| 287,758 |
|
| 1,653 |
| 2.33% |
|
| 243,317 |
|
| 909 |
| 1.52% |
Total deposits |
|
| 665,858 |
|
| 3,236 |
| 1.97% |
|
| 557,740 |
|
| 1,659 |
| 1.21% |
Short-term borrowings |
|
| 54,259 |
|
| 355 |
| 2.66% |
|
| 46,617 |
|
| 210 |
| 1.83% |
Long-term borrowings |
|
| 7,831 |
|
| 89 |
| 4.58% |
|
| 8,663 |
|
| 56 |
| 2.62% |
Total Borrowings |
|
| 62,090 |
|
| 444 |
| 2.90% |
|
| 55,280 |
|
| 266 |
| 1.95% |
Subordinated Debentures |
|
| 9,239 |
|
| 168 |
| 7.35% |
|
| 9,974 |
|
| 179 |
| 7.28% |
Total interest-bearing liabilities |
|
| 737,187 |
|
| 3,848 |
| 2.12% |
|
| 622,994 |
|
| 2,104 |
| 1.37% |
Noninterest-bearing deposits |
|
| 122,729 |
|
|
|
|
|
|
| 108,367 |
|
|
|
|
|
Other noninterest-bearing liabilities |
|
| 6,092 |
|
|
|
|
|
|
| 5,859 |
|
|
|
|
|
Total liabilities |
| $ | 866,008 |
|
|
|
|
|
| $ | 737,220 |
|
|
|
|
|
Total stockholders' equity |
|
| 111,197 |
|
|
|
|
|
|
| 101,631 |
|
|
|
|
|
Total stockholders' equity and liabilities |
| $ | 977,205 |
|
|
|
|
|
| $ | 838,851 |
|
|
|
|
|
Net interest income |
|
|
|
| $ | 8,502 |
|
|
|
|
|
| $ | 7,717 |
|
|
Net interest spread |
|
|
|
|
|
|
| 3.22% |
|
|
|
|
|
|
| 3.58% |
Net interest margin |
|
|
|
|
|
|
| 3.67% |
|
|
|
|
|
|
| 3.91% |
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2018 |
| 2017 | ||||||||||||
|
|
|
| Interest |
|
|
|
|
| Interest |
|
| ||||
For the Nine Months Ended September 30, |
| Average |
| Income/ |
| Yields/ |
| Average |
| Income/ |
| Yields/ | ||||
(dollars in thousands) |
| Balance |
| Expense |
| rates |
| Balance |
| Expense |
| rates | ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from banks |
| $ | 5,175 |
|
| 64 |
| 1.66% |
| $ | 6,765 |
|
| 49 |
| 0.97% |
Federal funds sold |
|
| 784 |
|
| 11 |
| 1.89% |
|
| 836 |
|
| 6 |
| 0.96% |
Investment securities(1) |
|
| 54,144 |
|
| 958 |
| 2.37% |
|
| 49,526 |
|
| 828 |
| 2.24% |
Loans held for sale |
|
| 31,074 |
|
| 1,017 |
| 4.36% |
|
| 28,419 |
|
| 833 |
| 3.92% |
Loans held for investment(1) |
|
| 755,925 |
|
| 30,209 |
| 5.28% |
|
| 634,951 |
|
| 24,329 |
| 5.12% |
Total loans |
|
| 786,999 |
|
| 31,226 |
| 5.28% |
|
| 663,370 |
|
| 25,162 |
| 5.07% |
Total interst-earning assets |
|
| 847,102 |
|
| 32,259 |
| 5.07% |
|
| 720,497 |
|
| 26,045 |
| 4.83% |
Noninterest earning assets |
|
| 41,393 |
|
|
|
|
|
|
| 34,340 |
|
|
|
|
|
Total assets |
| $ | 888,495 |
|
|
|
|
|
| $ | 754,837 |
|
|
|
|
|
Liabilities and stockholders' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
| $ | 103,623 |
|
| 851 |
| 1.10% |
| $ | 76,618 |
|
| 304 |
| 0.53% |
Money market and savings deposits |
|
| 228,107 |
|
| 2,212 |
| 1.30% |
|
| 210,593 |
|
| 1,356 |
| 0.86% |
Time deposits |
|
| 247,244 |
|
| 3,109 |
| 1.68% |
|
| 177,215 |
|
| 1,418 |
| 1.07% |
Total deposits |
|
| 578,974 |
|
| 6,172 |
| 1.43% |
|
| 464,426 |
|
| 3,078 |
| 0.89% |
Short-term borrowings |
|
| 70,959 |
|
| 1,123 |
| 2.12% |
|
| 88,711 |
|
| 788 |
| 1.19% |
Long-term borrowings |
|
| 6,720 |
|
| 142 |
| 2.83% |
|
| 12,650 |
|
| 215 |
| 2.27% |
Total Borrowings |
|
| 77,679 |
|
| 1,265 |
| 2.18% |
|
| 101,361 |
|
| 1,003 |
| 1.32% |
Subordinated Debentures |
|
| 9,527 |
|
| 525 |
| 7.37% |
|
| 13,376 |
|
| 725 |
| 7.25% |
Total interest-bearing liabilities |
|
| 666,180 |
|
| 7,962 |
| 1.60% |
|
| 579,163 |
|
| 4,806 |
| 1.11% |
Noninterest-bearing deposits |
|
| 112,616 |
|
|
|
|
|
|
| 99,001 |
|
|
|
|
|
Other noninterest-bearing liabilities |
|
| 5,895 |
|
|
|
|
|
|
| 6,731 |
|
|
|
|
|
Total liabilities |
| $ | 784,691 |
|
|
|
|
|
| $ | 684,895 |
|
|
|
|
|
Total stockholders' equity |
|
| 103,804 |
|
|
|
|
|
|
| 69,942 |
|
|
|
|
|
Total stockholders' equity and liabilities |
| $ | 888,495 |
|
|
|
|
|
| $ | 754,837 |
|
|
|
|
|
Net interest income |
|
|
|
| $ | 24,297 |
|
|
|
|
|
| $ | 21,239 |
|
|
Net interest spread |
|
|
|
|
|
|
| 3.47% |
|
|
|
|
|
|
| 3.72% |
Net interest margin |
|
|
|
|
|
|
| 3.83% |
|
|
|
|
|
|
| 3.94% |
(1) | Yields and net interest income are reflected on a tax-equivalent basis. |
Rate/Volume Analysis (tax-equivalent basis)
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 three and nine months ended September 30, 2018March 31, 2019 as compared to the same periodsperiod in 2017,2018, allocated by rate and
36
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
| 2018 Compared to 2017 |
|
|
|
|
|
|
| ||||||||||||
|
| Three Months Ended |
| Nine Months Ended |
| 2019 Compared to 2018 | |||||||||||||||
|
| September 30, |
| September 30, |
| Change in interest due to: | |||||||||||||||
(dollars in thousands) |
| Rate |
| Volume |
| Total |
| Rate |
| Volume |
| Total |
| Rate |
| Volume |
| Total | |||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from banks |
| $ | 8 |
| 9 |
| 17 |
| $ | 35 |
| (20) |
| 15 |
| $ | 16 |
| 10 |
| 26 |
Federal funds sold |
|
| 5 |
| (6) |
| (1) |
|
| 6 |
| (1) |
| 5 |
|
| 1 |
| - |
| 1 |
Investment securities(1) |
|
| 17 |
| 41 |
| 58 |
|
| 49 |
| 81 |
| 130 |
|
| 37 |
| 70 |
| 107 |
Loans held for sale |
|
| 66 |
| 63 |
| 129 |
|
| 101 |
| 83 |
| 184 |
|
| 202 |
| (229) |
| (27) |
Loans held for investment(1) |
|
| 341 |
| 1,821 |
| 2,162 |
|
| 819 |
| 5,061 |
| 5,880 |
|
| 644 |
| 1,778 |
| 2,422 |
Total loans |
|
| 407 |
| 1,884 |
| 2,291 |
|
| 920 |
| 5,144 |
| 6,064 |
|
| 846 |
| 1,549 |
| 2,395 |
Total interest income |
| $ | 437 |
| 1,928 |
| 2,365 |
| $ | 1,008 |
| 5,206 |
| 6,214 |
| $ | 900 |
| 1,629 |
| 2,529 |
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking |
| $ | 174 |
| 42 |
| 216 |
| $ | 412 |
| 135 |
| 547 |
| $ | 219 |
| 46 |
| 265 |
Money market and savings deposits |
|
| 361 |
| 59 |
| 420 |
|
| 735 |
| 121 |
| 856 |
|
| 438 |
| 130 |
| 568 |
Time deposits |
|
| 383 |
| 259 |
| 642 |
|
| 999 |
| 692 |
| 1,691 |
|
| 554 |
| 190 |
| 744 |
Total interest-bearing deposits |
|
| 918 |
| 360 |
| 1,278 |
|
| 2,146 |
| 948 |
| 3,094 |
|
| 1,211 |
| 366 |
| 1,577 |
Short-term borrowings |
|
| 390 |
| (225) |
| 165 |
|
| 603 |
| (268) |
| 335 |
|
| 108 |
| 37 |
| 145 |
Long-term borrowings |
|
| 76 |
| (102) |
| (26) |
|
| 67 |
| (140) |
| (73) |
|
| 67 |
| (34) |
| 33 |
Total borrowings |
|
| 466 |
| (327) |
| 139 |
|
| 670 |
| (408) |
| 262 |
|
| 175 |
| 3 |
| 178 |
Subordinated debentures |
|
| 14 |
| (87) |
| (73) |
|
| 19 |
| (219) |
| (200) |
|
| 10 |
| (21) |
| (11) |
Total interest expense |
|
| 1,398 |
| (54) |
| 1,344 |
|
| 2,836 |
| 320 |
| 3,156 |
|
| 1,396 |
| 348 |
| 1,744 |
Interest differential |
| $ | (961) |
| 1,982 |
| 1,021 |
| $ | (1,828) |
| 4,886 |
| 3,058 |
| $ | (496) |
| 1,281 |
| 785 |
(1)Yields and net interest income are reflected on a tax-equivalent basis.
For the three months ended September 30, 2018March 31, 2019 as compared to the same period in 2017,2018, the favorable change in net interest income due to volume changes was driven largely from growth in the loan portfolio, which increased $138.5$125.3 million on average over the three month periods. This increase contributed $1.9$1.6 million to interest income. Total investment securities, cash and cash equivalents were relatively flat, period over period. On the funding side, interest checking and money market accounts together rose $42.3$43.8 million on average, reducing net interest income by $94$130 thousand. Time deposits increased $72.1$44.4 million on average, causing an increase to interest expense of $259$190 thousand. Lower levels of borrowings, down $16.4Borrowings increased $6.8 million on average affectedaffecting net interest income $327only $3 thousand favorably,negatively, and lower levels of subordinated debt contributed $87$21 thousand to the net interest income over the three month periods compared.
For the three months ended September 30, 2018March 31, 2019 as compared to the same period in 2017,2018, the unfavorable change in net interest income due to rate changes was driven largely from the increase in cost of funds, particularly from wholesale funding such as borrowings and time deposits, which rose 8695 and 6581 basis points, respectively. Core deposits, such as interest checking and money market accounts rose 6980 and 6370 basis points, respectively. These unfavorable rate changes were partially offset by favorable rate changes in interest earning assets. Overall, the increase in interest income from volume changes contributed $2.0$1.6 million and out-paced the unfavorable rate changes to improve net interest income by $1.0 million.$800 thousand.
For the nine months ended September 30, 2018 as comparedSimulations of net interest income. We use a simulation model on a quarterly basis to the same periodmeasure and evaluate potential changes in 2017, the favorable change inour net interest income due to volume changes was driven largelyresulting from growth in the loan portfolio, which increased $123.6 million on average over the nine month periods. This increase contributed $5.1 million tovarious hypothetical interest income. Cash and cash equivalents were relatively flat, period over period, while investment securities average balances increased $4.6 million period over period. On the funding side, interest checking and money market accounts together rose $44.5 million on average, reducing net interest income by $256 thousand. Time deposits increased $70.0 million on average, causing an increase to interest expense of $692 thousand. Lower levels of borrowings, down $23.7 million on average affected net interest income $408 rate scenarios. Our model incorporates
3736
thousand favorably,various assumptions that management believes to be reasonable, but which may have a significant impact on results such as:
· | The timing of changes in interest rates; |
· | Shifts or rotations in the yield curve; |
· | Repricing characteristics for market rate sensitive instruments on the balance sheet; |
· | Differing sensitivities of financial instruments due to differing underlying rate indices; |
· | Varying timing of loan prepayments for different interest rate scenarios; |
· | The effect of interest rate floors, periodic loan caps and lifetime loan caps; |
· | Overall growth rates and product mix of interest-earning assets and interest-bearing liabilities. |
Because of the limitations inherent in any approach used to measure interest rate risk, simulated results are not intended to be used as a forecast of the actual effect of a change in market interest rates on our results, but rather as a means to better plan and lower levels of subordinated debt contributed $219 thousandexecute appropriate Asset / Liability Management (“ALM”) strategies.
Potential changes to theour net interest income over the nine month periods compared.
For the nine months ended September 30, 2018 as compared to the same period in 2017, the unfavorable change in net interest income due to rate changes was driven largely from the increase in cost of funds, particularly from wholesale funding such as borrowings and time deposits, which rose 86 and 61 basis points, respectively. Core deposits, such as interest checking and money market accounts rose 57 and 44 basis points, respectively. These unfavorable rate changes were partially offset by favorable rate changes in interest earning assets. Overall, the increase in interest income from volume changes contributed $4.9 million to interest income and out-paced the unfavorable rate changes to improve net interest income by $3.1 million.
Interest Rate Sensitivity
The Corporation actively manages itsbetween a flat interest rate sensitivity position. The objectives ofscenario and hypothetical rising and declining interest rate risk managementscenarios, measured over a one-year period as of March 31, 2019 and 2018 are to control exposure of net interest income to risks associated with interest rate movements and to achieve sustainable growthpresented in net interest income. The Corporation’s Asset Liability Committee (“ALCO”), using policies and procedures approved by the Corporation’s Board of Directors, is responsible for the management of the Corporation’s interest rate sensitivity position. The Corporation manages interest rate sensitivity by changing the mix, pricing and re-pricing characteristics of its assets and liabilities, through the management of its investment portfolio, its offerings of loan and selected deposit terms and through wholesale funding. Wholesale funding consists of multiple sources including borrowings from the FHLB, the Federal Reserve Bank of Philadelphia’s discount window and certificates of deposit from institutional brokers, including the Certificate of Deposit Account Registry Service (“CDARS”), and listing services.
The Corporation uses several tools to measure its interest rate risk including interest rate sensitivity analysis, or gap analysis, market value of portfolio equity analysis, interest rate simulations under various rate scenarios and tax-equivalent net interest margin trend reports. The results of these reports are compared to limits established by the Corporation’s ALCO policies and appropriate adjustments are made if the results are outside the established limits.
The following table demonstrates the annualized result of an interest rate simulation.table. The simulation assumes rate shifts occur upward and downward on the yield curve in even increments over the first twelve months (ramp). This simulation assumes that there is no growth in interest-earning assets or interest-bearing liabilities over the next twelve months. The changes to net interest income shown below are in compliance with the Corporation’s policy guidelines., followed by rates held constant thereafter.
Summary of Interest Rate SimulationRamp
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change in Net Interest |
| Change in Net Interest |
| ||||||
|
| Income Over the Twelve |
| Income Over the Twelve |
| ||||||
|
| Months Beginning After |
| Months Beginning After |
| ||||||
|
| September 30, 2018 |
| December 31, 2017 |
| ||||||
(dollars in thousands) |
| Amount |
| Percentage |
| Amount |
| Percentage |
| ||
+300 basis points |
| $ | 206 |
| 0.65 | % | $ | 1,561 |
| 5.29 | % |
+200 basis points |
| $ | 157 |
| 0.50 | % | $ | 1,035 |
| 3.50 | % |
+100 basis points |
| $ | 93 |
| 0.29 | % | $ | 518 |
| 1.75 | % |
-100 basis points |
| $ | (237) |
| (0.75) | % | $ | (601) |
| (2.04) | % |
|
|
|
|
|
|
|
| Estimated increase |
| ||
|
| (decrease) in Net Interest |
| ||
|
| Income |
| ||
|
| For the year ending |
| ||
|
| March 31, |
| ||
Changes in Market Interest Rates |
| 2019 |
| 2018 |
|
+300 basis points over next 12 months |
| (1.2) | % | 0.3 | % |
+200 basis points over next 12 months |
| (0.7) | % | 0.2 | % |
+100 basis points over next 12 months |
| (0.3) | % | 0.1 | % |
No Change |
|
|
|
|
|
-100 basis points over next 12 months |
| (0.2) | % | (0.1) | % |
The above interest rate simulation suggests that the Corporation’s balance sheet is slightlyin a liability sensitive position as of March 31, 2019 and was in an asset sensitive position as of September 30, 2018 and DecemberMarch 31, 2017. The2018. In its current position, the table indicates that a 100, 200 or 300 basis point increase in interest rates would have a modestly positive impact from rising rates on net interest income over the next 12 months. The simulated exposure to a change in interest rates is contained, manageable and well within policy guidelines. The results continue to drive our funding strategy of increasing relationship-based accounts (core deposits) and utilizing term deposits to fund short to medium duration assets.
Simulation of economic value of equity. To quantify the amount of capital required to absorb potential losses in value of our interest-earning assets and interest-bearing liabilities resulting from adverse market movements, we calculate economic value of equity on a quarterly basis. We define economic value of equity as the net present value of our balance sheet’s cash flow, and we calculate economic value of equity by discounting anticipated principal and interest cash flows under the prevailing and hypothetical interest rate environments. Potential changes to our economic value of equity between a flat rate scenario and hypothetical rising and declining rate scenarios, measured as of December 31, 2017 and 2018, are presented in the following table. The projections assume shifts ramp upward and downward of the yield curve of 100, 200 and 300 basis points occurring immediately. We would note that in a downward parallel shift of the yield curve, interest rates at the short-end of the yield curve are not modeled to decline any further than to 0%.
3837
|
| Estimated increase (decrease) in Net |
| ||
|
| Economic Value at March 31, |
| ||
Changes in Market Interest Rates |
| 2019 |
| 2018 |
|
+300 basis points |
| (8.4) | % | 0.3 | % |
+200 basis points |
| (5.4) | % | 0.2 | % |
+100 basis points |
| (2.5) | % | 0.1 | % |
No Change |
|
|
|
|
|
-100 basis points |
| 1.4 | % | (0.1) | % |
Gap Analysis
Management measures and evaluates the potential effects of interest rate movements on earnings through an interest rate sensitivity “gap” analysis. Given the size and turnover rate of the originated mortgage loans held for sale, these loans are treated as having a maturity of 12 months or less. Interest rate sensitivity reflects the potential effect on net interest income when there is movement in interest rates. An institution is considered to be asset sensitive, or having a positive gap, when the amount of its interest-earning assets repricing within a given period exceeds the amount of its interest-bearing liabilities also repricing within that time period. Conversely, an institution is considered to be liability sensitive, or having a negative gap, when the amount of its interest-bearing liabilities repricing within a given period exceeds the amount of its interest-earning assets also within that time period. During a period of rising interest rates, a negative gap would tend to decrease net interest income, while a positive gap would tend to increase net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to decrease net interest income.
The following tables present the interest rate gap analysis of our assets and liabilities as of September 30, 2018March 31, 2019 and December 31, 2017.2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
| Greater |
|
| |||||||||||
|
|
|
|
|
|
|
|
| Than |
|
| |||||||||||
|
|
|
|
|
|
|
| 5 years and |
|
| ||||||||||||
As of March 31, 2019 |
| 12 Months |
|
|
|
|
| Not Rate |
|
| ||||||||||||
(dollars in thousands) |
| 12 Months |
| 1-2 Years |
| 2-5 Years |
| Greater Than 5 |
| Total |
| or Less |
| 1-2 Years |
| 2-5 Years |
| Sensitive |
| Total | ||
Cash and investments |
| $ | 40,738 |
| 5,754 |
| 12,255 |
| 27,525 |
| 86,272 |
| $ | 56,391 |
| 4,366 |
| 14,583 |
| 26,752 |
| 102,092 |
Loans, net (1) |
|
| 450,571 |
| 90,119 |
| 242,404 |
| 50,027 |
| 833,121 |
|
| 490,022 |
| 112,752 |
| 242,447 |
| 38,387 |
| 883,608 |
Other Assets |
|
| — |
| — |
| — |
| 40,436 |
| 40,436 |
|
| — |
| — |
| — |
| 41,814 |
| 41,814 |
Total Assets |
|
| 491,309 |
| 95,873 |
| 254,659 |
| 117,988 |
| 959,829 |
| $ | 546,413 |
| 117,118 |
| 257,030 |
| 106,953 |
| 1,027,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Noninterest-bearing deposits |
|
| 16,566 |
| 9,080 |
| 16,852 |
| 82,057 |
| 124,555 |
|
| 16,897 |
| 8,203 |
| 14,379 |
| 75,985 |
| 115,464 |
Interest-bearing deposits |
|
| 379,611 |
| — |
| — |
| — |
| 379,611 |
|
| 398,944 |
| — |
| — |
| — |
| 398,944 |
Time deposits |
|
| 255,720 |
| 10,330 |
| 11,411 |
| — |
| 277,461 |
|
| 271,267 |
| 12,923 |
| 12,116 |
| — |
| 296,306 |
FHLB advances |
|
| 43,755 |
| 5,000 |
| — |
| — |
| 48,755 |
|
| 81,683 |
| 5,000 |
| — |
| — |
| 86,683 |
Other Liabilities |
|
| 1,444 |
| — |
| — |
| 20,985 |
| 22,429 |
|
| 619 |
| 206 |
| 344 |
| 16,957 |
| 18,126 |
Total stockholders' equity |
|
| — |
| — |
| — |
| 107,018 |
| 107,018 |
|
| — |
| — |
| — |
| 111,991 |
| 111,991 |
Total liabilities and stockholders' equity |
| $ | 697,096 |
| 24,410 |
| 28,263 |
| 210,060 |
| 959,829 |
| $ | 769,410 |
| 26,332 |
| 26,839 |
| 204,933 |
| 1,027,514 |
Repricing gap-positive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Negative) Positive |
| $ | (205,787) |
| 71,463 |
| 226,396 |
| (92,072) |
| — |
| $ | (222,997) |
| 90,786 |
| 230,191 |
| (97,980) |
| — |
Cumulative repricing gap: Dollar amount |
| $ | (205,787) |
| (134,324) |
| 92,072 |
| — |
|
|
| $ | (222,997) |
| (132,211) |
| 97,980 |
| — |
|
|
Percent of total assets |
|
| (21.44)% |
| (13.99)% |
| 9.59% |
| — |
|
|
|
| (21.7)% |
| (12.9)% |
| 9.5% |
| — |
|
|
(1) | Loans include portfolio loans and loans held for sale |
3938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
| Greater |
|
| |||||||||||
|
|
|
|
|
|
|
|
| Than |
|
| |||||||||||
|
|
|
|
|
|
|
|
| 5 years and |
|
| |||||||||||
As of December 31, 2018 |
|
|
|
|
|
|
| Not Rate |
|
| ||||||||||||
(dollars in thousands) |
| 12 Months |
| 1-2 Years |
| 2-5 Years |
| Greater Than 5 |
| Total |
| 12 Months |
| 1-2 Years |
| 2-5 Years |
| Sensitive |
| Total | ||
Cash and investments |
| $ | 26,648 |
| 7,475 |
| 8,523 |
| 52,542 |
| 95,188 |
| $ | 51,092 |
| 4,268 |
| 12,183 |
| 19,578 |
| 87,121 |
Loans, net (1) |
|
| 420,500 |
| 75,629 |
| 202,736 |
| 30,794 |
| 729,659 |
|
| 476,250 |
| 104,422 |
| 246,523 |
| 48,606 |
| 875,801 |
Other Assets |
|
| — |
| — |
| — |
| 31,188 |
| 31,188 | |||||||||||
Other Assets (Footnote 1) |
|
| — |
| — |
| — |
| 34,558 |
| 34,558 | |||||||||||
Total Assets |
|
| 447,148 |
| 83,104 |
| 211,259 |
| 114,524 |
| 856,035 |
|
| 527,342 |
| 108,690 |
| 258,706 |
| 102,742 |
| 997,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
| 11,414 |
| 10,116 |
| 23,960 |
| 54,964 |
| 100,454 |
|
| 17,943 |
| 9,013 |
| 15,852 |
| 83,342 |
| 126,150 |
Interest-bearing deposits |
|
| 253,664 |
| 27,291 |
| 27,292 |
| — |
| 308,247 |
|
| 347,264 |
| — |
| — |
| — |
| 347,264 |
Time deposits |
|
| 159,808 |
| 52,830 |
| 5,770 |
| — |
| 218,408 |
|
| 253,090 |
| 13,426 |
| 12,200 |
| — |
| 278,716 |
FHLB advances |
|
| 99,750 |
| 1,800 |
| 7,063 |
| 13,308 |
| 121,921 |
|
| 114,300 |
| 5,000 |
| — |
| — |
| 119,300 |
Other Liabilities |
|
| — |
| — |
| — |
| 5,642 |
| 5,642 | |||||||||||
Total stockholders' equity |
|
| — |
| — |
| — |
| 101,363 |
| 101,363 | |||||||||||
Other Liabilities (Footnote 1) |
|
| 825 |
| 412 |
| 344 |
| 14,917 |
| 16,498 | |||||||||||
Total stockholders' equity (Footnote 1) |
|
| — |
| — |
| — |
| 109,552 |
| 109,552 | |||||||||||
Total liabilities and stockholders' equity |
| $ | 524,636 |
| 92,037 |
| 64,085 |
| 175,277 |
| 856,035 |
| $ | 733,422 |
| 27,851 |
| 28,396 |
| 207,811 |
| 997,480 |
Repricing gap-positive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Negative) Positive |
|
| (77,488) |
| (8,933) |
| 147,174 |
| (60,753) |
| — |
|
| (206,080) |
| 80,839 |
| 230,310 |
| (105,069) |
| — |
Cumulative repricing gap: Dollar amount |
| $ | (77,488) |
| (86,421) |
| 60,753 |
| — |
|
|
| $ | (206,080) |
| (125,241) |
| 105,069 |
| — |
|
|
Percent of total assets |
|
| (9.05)% |
| (10.10)% |
| 6.88% |
| — |
|
|
|
| (20.7) | % | (12.6) | % | 10.5 | % | — |
|
|
(1) | Loans include portfolio loans and loans held for sale |
Under the repricing gap analysis for both periods, we are liability-sensitive in the short-term mainly due to recent loan growth which has out-paced our core deposit growth. In addition, customer preference has been for short-term or liquid deposits. We generally manage our interest rate risk profile close to neutral, using a strategy that is focused on increasing our concentration of relationship-based transaction accounts through efforts of our business developers and new branches. The gap results presented could vary substantially if different assumptions are used or if actual experience differs from the assumptions used in the preparation of the gap analysis. Furthermore, the gap analysis provides a static view of interest rate risk exposure at a specific point in time and offers only an approximate estimate of the relative sensitivity of our interest-earning assets and interest-bearing liabilities to changes in market interest rates. In addition, the impact of certain optionality is embedded in our balance sheet such as contractual caps and floors, and trends in asset and liability growth. Accordingly, we combine the use of gap analysis with the use of an earnings simulation model that provides a dynamic assessment of interest rate sensitivity.
PROVISION FOR LOAN AND LEASE LOSSES
For the three months ended September 30, 2018,March 31, 2019, the Corporation recorded a Provision of $291$219 thousand which was a $374$335 thousand decrease from the same period in 2017. Net charge-offs for2018. For the three months ended September 30, 2018March 31, 2019 there were $29net recoveries of $104 thousand as compared to $520net charge-offs of $124 thousand for the same period in 2017.
For the nine months ended September 30, 2018, the Corporation recorded a Provision of $1.3 million which was a $187 thousand decrease from the same period in 2017. Net charge-offs for the nine months ended September 30, 2018 were $256 thousand as compared to $511 thousand of net charge-offs for the same period in 2017.2018.
The decreased provision over both the three and nine month periods was the result of strong asset quality and the lower level of net charge-offs.
40
Asset Quality and Analysis of Credit Risk
Asset quality remains strong as of September 30, 2018, evidenced byMarch 31, 2019, as total nonperforming loans and leases having decreased by $300 thousand,were unchanged from December 31, 2018 to $2.9March 31, 2019 at $3.9 million, representing 0.36%or 0.44% of loans and leases held-for-investment as of September 30, 2018,March 31, 2019, compared to $3.2 million, or 0.45% of loans and leases held-for-investment,0.47% as of December 31, 2017. 2018.
The decreaseratio of the Allowance to nonperformingtotal loans resultedheld for investment, excluding loans at fair value, was 0.99% as of March 31, 2019, an improvement from the pay-downs in the commercial and industrial portfolio as well as in the commercial construction portfolio.
The Allowance represented 0.96% of loans and leases held-for-investment,0.97% as of September 30, 2018 and December 31, 2017.2018. The Allowance to non-performing loans increased from 212.51%204.85% as of December 31, 2017 to 263.89%2018 218.64% as of September 30, 2018.March 31, 2019.
As
39
The Corporation did not havehad one property in OREO as compared to $437 thousand as of DecemberMarch 31, 2017. The balance2019 in the amount of $120 thousand. There were no properties in OREO as of December 31, 2017 was comprised of one foreclosure, which consisted of two properties. These properties were sold in the quarter ended September 30, 2018 and the Corporation recorded a gain on sale of $57 thousand which is recorded in non-interest income. All OREO properties are recorded at the lower of cost or fair value less cost to sell.2018.
As of September 30, 2018,March 31, 2019, the Corporation had $4.0$4.2 million of troubled debt restructurings (“TDRs”), of which $3.5$3.0 million were in compliance with the modified terms and excluded from non-performing loans and leases. As of December 31, 2017,2018, the Corporation had $2.6$4.3 million of TDRs, of which $1.9$3.1 million were in compliance with the modified terms, and were excluded from non-performing loans and leases. As of September 30, 2018,March 31, 2019, the Corporation had a recorded investment of $6.5$65.6 million of impaired loans and leases which included $4.0$4.2 million of TDRs.
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.
Nonperforming Assets and Related Ratios
|
|
|
|
|
|
|
|
| As of | ||||
|
| March 31, |
| December 31, | ||
(dollars in thousands) |
| 2019 |
| 2018 | ||
Non-performing assets: |
|
|
|
|
|
|
Nonaccrual loans: |
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
Commercial mortgage |
| $ | 1,223 |
| $ | 1,224 |
Home equity lines and loans |
|
| 81 |
|
| 83 |
Residential mortgage |
|
| 2,029 |
|
| 2,147 |
Commercial construction |
|
| 27 |
|
| — |
Total real estate loans |
| $ | 3,360 |
| $ | 3,454 |
Commercial and industrial |
|
| 471 |
|
| 477 |
Total nonaccrual loans |
| $ | 3,831 |
| $ | 3,931 |
Loans 90 days or more past due and accruing |
|
| — |
|
| — |
Other real estate owned |
|
| 120 |
|
| — |
Total non-performing loans |
| $ | 3,831 |
| $ | 3,931 |
Total non-performing assets |
| $ | 3,951 |
| $ | 3,931 |
|
|
|
|
|
|
|
Troubled debt restructurings: |
|
|
|
|
|
|
TDRs included in non-performing loans |
|
| 1,213 |
|
| 1,219 |
TDRs in compliance with modified terms |
|
| 2,941 |
|
| 3,047 |
Total TDRs |
| $ | 4,154 |
| $ | 4,266 |
|
|
|
|
|
|
|
Asset quality ratios: |
|
|
|
|
|
|
Non-performing assets to total assets |
|
| 0.38% |
|
| 0.39% |
Non-performing loans to: |
|
|
|
|
|
|
Total loans |
|
| 0.43% |
|
| 0.45% |
Total loans held-for-investment (excluding loans at fair value) |
|
| 0.45% |
|
| 0.48% |
Allowance for loan losses to: |
|
|
|
|
|
|
Total loans |
|
| 0.94% |
|
| 0.92% |
Total loans held-for-investment (excluding loans at fair value) |
|
| 0.99% |
|
| 0.97% |
Non-performing loans |
|
| 218.64% |
|
| 204.85% |
|
|
|
|
|
|
|
Total loans and leases |
| $ | 891,984 |
| $ | 875,801 |
Total loans and leases held-for-investment (excluding loans at fair value) |
| $ | 849,621 |
| $ | 826,684 |
Allowance for loan and lease losses |
| $ | 8,376 |
| $ | 8,053 |
4140
Nonperforming Assets and Related Ratios
|
|
|
|
|
|
|
|
| As of | ||||
|
| September 30, |
| December 31, | ||
(dollars in thousands) |
| 2018 |
| 2017 | ||
Non-performing assets: |
|
|
|
|
|
|
Nonaccrual loans: |
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
Commercial mortgage |
| $ | 494 |
| $ | 414 |
Home equity lines and loans |
|
| 85 |
|
| 137 |
Residential mortgage |
|
| 2,151 |
|
| 1,084 |
Commercial construction |
|
| — |
|
| 185 |
Total real estate loans |
| $ | 2,730 |
| $ | 1,820 |
Commercial and industrial |
|
| 192 |
|
| 1,326 |
Total nonaccrual loans |
| $ | 2,922 |
| $ | 3,146 |
Loans 90 days or more past due and accruing |
|
| — |
|
| 11 |
Other real estate owned |
|
| — |
|
| 437 |
Total non-performing loans |
| $ | 2,922 |
|
| 3,157 |
Total non-performing assets |
| $ | 2,922 |
|
| 3,594 |
|
|
|
|
|
|
|
Troubled debt restructurings: |
|
|
|
|
|
|
TDRs included in non-performing loans |
|
| 554 |
|
| 741 |
TDRs in compliance with modified terms |
|
| 3,463 |
|
| 1,900 |
Total TDRs |
| $ | 4,017 |
| $ | 2,641 |
|
|
|
|
|
|
|
Asset quality ratios: |
|
|
|
|
|
|
Non-performing assets to total assets |
|
| 0.30% |
|
| 0.42% |
Non-performing loans to: |
|
|
|
|
|
|
Total loans |
|
| 0.35% |
|
| 0.43% |
Total loans held-for-investment |
|
| 0.36% |
|
| 0.45% |
Allowance for loan losses to: |
|
|
|
|
|
|
Total loans |
|
| 0.92% |
|
| 0.92% |
Total loans held-for-investment |
|
| 0.96% |
|
| 0.96% |
Non-performing loans |
|
| 263.89% |
|
| 212.51% |
|
|
|
|
|
|
|
Total loans and leases |
| $ | 840,832 |
| $ | 729,661 |
Total loans and leases held-for-investment |
| $ | 806,788 |
| $ | 694,637 |
Allowance for loan and lease losses |
| $ | 7,711 |
| $ | 6,709 |
NON-INTEREST INCOME
Three Months Ended September 30, 2018March 31, 2019 Compared to the Same Period in 20172018
Total non-interest income for the three months ended September 30, 2018March 31, 2019 was $9.2$6.4 million, down $1.3 million,$609 thousand, or 12.3%8.6%, from the comparable period in 2017. The2018. This overall decrease in non-interest income came primarily from our mortgage division. Mortgage banking revenue decreased over the period due primarily to lower margins, which decreased 50 basis points for the three month period. The decline inWhile mortgage banking revenue was offset slightly by a $214increased $87 thousand increaseand the net change in fair value adjustmentsof mortgage related to mortgage banking to ($333)financial instruments increased $397 thousand from ($547) thousand for the same period in 2017. Wealth management revenue was relatively flat for the three months ended September 30, 2018 compared to three months ended September 30, 2017.
42
Nine Months Ended September 30, 2018 Compared to the Same Period in 2017
Total non-interest income for the nine months ended September 30, 2018 was $24.9 million, down $2.6 million, or 9.6%, from the same period in 2017. The overall decrease in non-interest income came primarily from our mortgage division. Mortgage banking revenue decreased over the period due primarily to lower margins, which decreased 26 basis points for the nine month period. The decline in mortgage banking revenue was offset slightly by hedging gains and fair value adjustments period over period. Realizedyear-over-year, realized gains on derivatives related to mortgage banking, included in other non-interest income, increased $1.3 milliondecreased $974 thousand for the ninethree months ended September 30, 2018March 31, 2019 to $534a loss of $275 thousand, compared to a lossgain of ($798)$699 thousand for the same period in 2017. The increase in realized gains was offset somewhat by a $572 thousand decline in fair value adjustments related to mortgage banking to ($472) thousand from $100 thousand for the same period in 2017.2018. Wealth management revenue was up $1.1 milliondecreased $214 thousand year-over-year. Revenue for the ninethree months ended September 30,March 31, 2019 was largely based on the market values of assets under management at the end of 2018, comparedwhich were temporary depressed due to year-end declines in the same period in 2017.
stock market.
NON-INTEREST EXPENSE
Three Months Ended September 30, 2018March 31, 2019 Compared to the Same Period in 20172018
Total non-interest expense was $13.8$12.1 million for the three months ended September 30, 2018,March 31, 2019, down $1.3 million,$445 thousand, or 8.4%3.5%, from $15.0$12.6 million for the three months ended September 30, 2017.March 31, 2018. The decrease is mainly attributable to a reduction in salaries and employee benefits expense which decreased $1.4 millionof $709 thousand or 13.8%8.4%, as full-time equivalent employees, particularly in the mortgage division were reduced. In addition, variable loan expenses decreased $231by $64 thousand or 23.1%12%, reflecting the lower level of mortgage originations.originations year-over-year. Occupancy and equipment data processing and advertising and promotion expensesexpense as well as professional fees were relatively flat for the comparable third quarters. Professionalthree month period, while advertising and consultingpromotion expense was down $116 thousand year-over-year due to changes in the timing of certain marketing campaigns. Data processing expenses were up modestly due to the increased transaction volume. Other expenses were up over the comparable three month period due to a a charge of $125 thousand to the reserve for the three months ended September 30, 2018 included $230open litigation, which increased the litigation reserve to $325 thousand in costs related to the formation of the holding company. Other expenses increased $454 thousand or 41.6%, related to a one-time fair market value adjustment of $177 thousand to contingent assets, as well asoverall, and higher levels of other employee-related expenses, shares tax expense, and other expense.
Nine Months Ended September 30, 2018 Compared to the Same Period in 2017
Total non-interest expense was $40.4 million for the nine months ended September 30, 2018, down $2.7 million, or 6.2%, from the same period in the 2017. The decrease is mainly attributable to a reduction in salaries and employee benefits expense, which decreased $3.0 million or 10.2%, as full-time equivalent employees, particularly in the mortgage division were reduced. In addition, variable loan expenses decreased $1.0 million or 34.8%, reflecting the lower level of mortgage originations. Occupancy and equipment, data processing and advertising and promotion expenses increased $52 thousand, $53 thousand, and $265 thousand, respectively, for the year-to-date period due largely to new business locations. Professional and consulting expense included $230 thousand in costs related to the formation of the holding company. Other expenses were up $877 thousand or 27.4% compared to the prior year period. The increase year-over-year related to amortization of intangible assets of $68 thousand, a one-time fair market value adjustment of $177 thousand to contingent assets, a $200 thousand reserve established for the open litigation as well as higher levelsother expenses. Additionally, $79 thousand of other employee-related expenses, shares tax expense up by $45was incurred for the current period impact of the Maryland mortgage licensing issue. The impact of the Maryland licensing issue totaled $486 thousand, however $407 thousand ($315 thousand net of tax) pertained to prior periods and $192 thousand, respectively.
was adjusted through retained earnings as of January 1, 2018 as it was considered the correction of an immaterial error.
INCOME TAXES
Income tax expense for the three months ended September 30, 2018March 31, 2019 was $774$582 thousand, as compared to $716$362 thousand for the same period in 2017, despite the $1.3 million2018. The increase in pre-tax income tax expense was entirely attributable to the significant increase in earnings, period over this period. Our effective tax rate was 22.1% for the third quarter of 2018 and 33.9% for the third quarter of 2017. The effective tax rate decreased primarily due to the reduction in the Federal statutory tax rate to 21% in 2018 from 34% in 2017, due to the enactment of the Tax Cuts and Jobs Act, which was effective January 1, 2018.
Income tax expense for the nine months ended September 30, 2018 was $1.7 million, as compared to $1.4 million for the same period in 2017, despite the $3.4 million increase in pre-tax income over this period. Our effective tax rate was 22.3%
43
22.5% for the first nine monthsquarter of 2018 compared to 35.1%2019 and 22.2% for the first nine monthsquarter of 2017. As noted above, the effective tax rate decreased primarily due to the reduction in the Federal statutory tax rate to 21% in 2018 from 34% in 2017, due to the enactment of the Tax Cuts and Jobs Act, which was effective January 1, 2018.
BALANCE SHEET ANALYSIS
As of September 30, 2018,March 31, 2019, total assets were $959.8 million$1.03 billion compared with $856.0$997.5 million as of December 31, 2017.2018. Total assets increased $103.8$30 million, or 12.1%3.0%, on a year-to-date basis primarily due to strong loan growth, partially offset by lower levels of cash.growth.
Total loans, excluding mortgage loans held for sale, grew $112.2$24.3 million, or 16.1%2.9%, to $806.8$862.4 million as of September 30, 2018,March 31, 2019, from $694.6$838.1 million as of December 31, 2017.2018. The increase in loans is attributable to several commercial categories as we continue to grow our presence in the Philadelphia market area. Commercial loans increased $46.5$8.5 million, or 22.2%3.4%, during the first ninethree months of the year. Commercial real estate and commercial construction loans combined increased $52.9$11.3 million, or 14.4%2.6%, during the first ninethree months of the year. Residential loans held in portfolio increased $18.0$4.2 million, or 55.2%7.9%, during the first ninethree months as certain loan products or terms were targeted to hold in portfolio.portfolio, prior to origination. Residential mortgage loans held for sale decreased $980 thousand,$8.1 million, or 2.8%21.5%, to $34.0$29.6 million as of September 30, 2018March 31, 2019 from December 31, 2017.2018.
41
Deposits were $781.9$810.7 million as of September 30, 2018,March 31, 2019, up $154.8$58.6 million, or 24.7%7.8%, from December 31, 2017.2018. Non-interest bearing deposits increased $24.4decreased $10.7 million, or 24.3%8.5%, from December 31, 2017. New business relationships fueled the increases.2018. Money market accounts/savings accounts increased $49.9$53.8 million, or 22.0%23.1%, since December 31, 20172018, while interest-bearing checking accounts increased $21.5decreased $2.1 million, or 26.2%1.9%, during the year. Certificates of deposit increased $59.1$17.6 million, or 27.0%6.3%, during the past ninethree months, partially paying off borrowings as a result of wholesale funds management in the rising rate environment.
Capital
Consolidated stockholder’sstockholders’ equity of the Corporation was $107.0$112.0 million, or 11.15%10.9% of total assets as of September 30, 2018,March 31, 2019, as compared to $101.4$109.6 million, or 11.84%10.98% of total assets as of December 31, 2017.2018. At September 30, 2018,March 31, 2019, the Tier 1 leverage ratio was 11.02%11.01%, the Tier 1 risk-based capital and common equity ratios were 12.03%11.71%, and total risk-based capital was 14.03%13.65%. At December 31, 2017,2018, the Tier 1 leverage ratio was 12.37%11.16%, the Tier 1 risk-based capital and common equity ratios were 12.86%11.72%, and total risk-based capital was 15.53%13.66%. Tangible book value per share was $15.91$16.70 as of September 30, 2018,March 31, 2019, compared with $15.00$16.36 as of December 31, 2017.2018. Refer to Footnote 1 for discussion of an immaterial error correction that impacted beginning retained earnings as of January 1, 2018.
The following table presents the Corporation’s capital ratios and the minimum capital requirements to be considered “well capitalized” by regulators as of September 30, 2018March 31, 2019 and December 31, 2017:2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2018 |
| March 31, 2019 |
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| To be well capitalized under |
|
|
|
|
|
|
|
|
|
|
| To be well capitalized under |
| ||||||
|
|
|
|
|
|
| For capital adequacy |
| prompt corrective action |
|
|
|
|
|
| For capital adequacy |
| prompt corrective action |
| ||||||||||||
|
| Actual |
| purposes * |
| provisions |
| Actual |
| purposes * |
| provisions |
| ||||||||||||||||||
(dollars in thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| ||||||
Total capital (to risk-weighted assets) |
| $ | 119,825 |
| 14.03% |
| $ | 68,312 |
| 8.00% |
| $ | 85,389 |
| 10.00% |
| $ | 124,745 |
| 13.65% |
| $ | 73,132 |
| 8.00% |
| $ | 91,415 |
| 10.00% |
|
Common equity tier 1 capital (to risk-weighted assets) |
|
| 102,688 |
| 12.03% |
|
| 38,425 |
| 4.50% |
|
| 55,503 |
| 6.50% |
|
| 107,024 |
| 11.71% |
|
| 41,137 |
| 4.50% |
|
| 59,419 |
| 6.50% |
|
Tier 1 capital (to risk-weighted assets) |
|
| 102,688 |
| 12.03% |
|
| 51,234 |
| 6.00% |
|
| 68,312 |
| 8.00% |
|
| 107,024 |
| 11.71% |
|
| 54,849 |
| 6.00% |
|
| 73,132 |
| 8.00% |
|
Tier 1 capital (to average assets) |
|
| 102,688 |
| 11.02% |
|
| 37,260 |
| 4.00% |
|
| 46,575 |
| 5.00% |
|
| 107,024 |
| 11.01% |
|
| 38,889 |
| 4.00% |
|
| 48,611 |
| 5.00% |
|
44
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 |
| December 31, 2018 - as revised |
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| To be well capitalized under |
|
|
|
|
|
|
|
|
|
|
| To be well capitalized under |
| ||||||
|
|
|
|
|
|
| For capital adequacy |
| prompt corrective action |
|
|
|
|
|
| For capital adequacy |
| prompt corrective action |
| ||||||||||||
|
| Actual |
| purposes * |
| provisions |
| Actual |
| purposes * |
| provisions |
| ||||||||||||||||||
(dollars in thousands): |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio |
| ||||||
Total capital (to risk-weighted assets) |
| $ | 117,239 |
| 15.53% |
| $ | 60,376 |
| 8.00% |
| $ | 75,469 |
| 10.00% |
| $ | 122,262 |
| 13.66% |
| $ | 71,585 |
| 8.00% |
| $ | 89,481 |
| 10.00% |
|
Common equity tier 1 capital (to risk-weighted assets) |
|
| 101,661 |
| 12.86% |
|
| 33,961 |
| 4.50% |
|
| 49,055 |
| 6.50% |
|
| 104,881 |
| 11.72% |
|
| 40,266 |
| 4.50% |
|
| 58,163 |
| 6.50% |
|
Tier 1 capital (to risk-weighted assets) |
|
| 97,084 |
| 12.86% |
|
| 45,282 |
| 6.00% |
|
| 60,376 |
| 8.00% |
|
| 104,881 |
| 11.72% |
|
| 53,689 |
| 6.00% |
|
| 71,585 |
| 8.00% |
|
Tier 1 capital (to average assets) |
|
| 97,084 |
| 12.37% |
|
| 31,582 |
| 4.00% |
|
| 39,478 |
| 5.00% |
|
| 104,881 |
| 11.16% |
|
| 37,581 |
| 4.00% |
|
| 46,977 |
| 5.00% |
|
*Excludes capital conservation buffer of 1.25% for 2017 and 1.875% for 2018.
The capital ratios for the Corporation, as of September 30, 2018,March 31, 2019, as shown in the above tables, indicate levels above the regulatory minimum to be considered “well capitalized.” The capital ratios to risk-weighted assets have all decreased from their December 31, 20172018 levels largely as a result of the increase in risk-weighted assets, much of which was in the commercial mortgage, construction, and commercial and industrial segments of the loan portfolio, which are typically risk-weighted at 100%.
Liquidity
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
42
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 shared national credits (“SNCs”),SNCs, which have a national market and can be sold in a timely manner. Meridian’s primary liquidity, which totaled $133.9$156.4 million at September 30, 2018,March 31, 2019, compared to $125.9$131.5 million at DecemberMarch 31, 2017,2018, includes investments, SNCs,shared national credit portfolio (“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 Federal Home Loan Bank of Pittsburgh (“FHLB”)FHLB and the Federal Reserve Bank of Philadelphia (Federal Reserve) to meet short-term liquidity needs. Through its relationship at the Federal Reserve, Meridian had available credit of approximately $10.7$10.2 million at September 30, 2018.March 31, 2019. 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 of September 30, 2018,March 31, 2019, Meridian’s maximum borrowing capacity with the FHLB was $432.8$454.6 million. At September 30, 2018,March 31, 2019, Meridian had borrowed $137.1$86.7 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $88.1$112.1 million against its available credit lines. At September 30, 2018,March 31, 2019, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as $95.9$102.4 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $124.7$73.18 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.
Discussion of Segments
As of September 30, 2018,March 31, 2019, the Corporation has three principal segments as defined by FASB ASC 280, “Segment Reporting.” The segments are Banking, Mortgage Banking and Wealth Management (see Note 10 in the accompanying Notes to Unaudited Consolidated Financial Statements).
The Banking Segment recorded net income before tax (“operating margin”) of $2.4 million and $5.7$2.6 million for the three and nine months ended September 30, 2018, respectively,March 31, 2019, as compared to operating margin of $1.3 million and and $3.6$1.4 million for the same respective periodsperiod in 2017.2018. Non-interest expense for both the three months and nine months ended September 30, 2018 includes $230 thousand in professional and consulting expense incurred related to the formation of the holding company.March 31, 2019. The Banking Segment provided 68.8% and 76.6%99.0% of the Bank’s pre-tax profit for the three and
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nine month periods ended September 30, 2018, respectively,March 31, 2019, as compared to 59.8% and 87.0%86.3% for the same respective periodsperiod in 2017.2018.
The Wealth Management Segment recorded operating margin of $34 thousand and $640$36 thousand for the three and nine months ended September 30, 2018, respectively,March 31, 2019, as compared to operating margin of $181 thousand and $201$363 thousand for the same respective periodsperiod in 2017. Non-interest expense for both the three months and nine months ended September 30, 2018 includes the impact of the one-time fair market value adjustment of $177 thousand to contingent assets. Prior to our wealth management expansion due to the acquisition in April of 2017, revenue and expenses for wealth management services were immaterial and were included in the Banking Segment.2018.
The Mortgage Banking Segment recorded operating marginloss of $1.1 million$10 thousand for the three and nine months ended September 30, 2018,March 31, 2019, as compared to operating marginsloss of $668 thousand and $335$140 thousand for the same respective periodsperiod in 2017.2018. Mortgage Banking income and expenses decreased due to lower margins and origination volume.
Off Balance Sheet Risk
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at September 30, 2018March 31, 2019 were $261.2$289.7 million, as compared to $220.2$290.6 million at December 31, 2017.2018.
Standby letters of credit are conditional commitments issued by the Corporation to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Corporation’s obligation under standby letters of credit at September 30, 2018March 31, 2019 amounted to $2.5$6.4 million, as compared to $1.8$5.2 million at December 31, 2017.2018.
Estimated fair values of the Corporation’s off-balance sheet instruments are based on fees and rates currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties’ credit
43
standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and the estimated fair value of off-balance sheet instruments.
In certain circumstances the Corporation may be required to repurchase loans from investors under the terms of loan sale agreements. Generally, these circumstances include the breach of representations and warranties made to investors regarding borrower default or early payment, as well as a violation of the applicable federal, state, or local lending laws. The Corporation agrees to repurchase loans if the representations and warranties made with respect to such loans are breached, and such breach has a material adverse effect on the loans. The Corporation was not required to repurchase any loans sold, based on the obligations described above, for the three months ended March 31, 2019 or 2018.
Recent Litigation
See “Part II, Item 1. Legal Proceedings” below for information regarding a lawsuit filed in November 2017 against the Corporation.
Regulatory Update
The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”), which was designed to ease certain restrictions imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, was enacted into law on May 24, 2018. Most of the changes made by the Act can be grouped into five general areas: mortgage lending; certain regulatory relief for “community” banks; enhanced consumer protections in specific areas, including subjecting credit reporting agencies to additional requirements; certain regulatory relief for large financial institutions, including increasing the threshold at which institutions are classified a systemically important financial institutions (from $50 billion to $250 billion) and therefore subject to stricter oversight, and revising the rules for larger institution stress testing; and certain changes to federal securities regulations designed to promote capital formation. Some of the key provisions of the Act as it relates to community banks and bank holding companies include, but are not limited to: (i) designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal
46
banking agencies to establish a community bank leverage ratio of tangible equity to average consolidate assets not less than 8% or more than 10% and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; and (vi) clarifying definitions pertaining to high volatility commercial real estate loans (HVCRE), which require higher capital allocations, so that only loans with increased risk are subject to higher risk weightings. The Corporation continues to analyze the changes implemented by the Act and further rulemaking from federal banking regulators, but, at this time, does not believe that such changes will materially impact the Corporation’s business, operations, or financial results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
See the discussion of quantitative and qualitative disclosures about market risks in “Management’s Discussion and Analysis of Results of Operations – Interest Rate Summary,” “– Interest Rate Sensitivity,” and “Gap Analysis” in this Quarterly Report on Form 10‑Q.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management,Our management, with the participation of the Corporation’s Presidentour CEO and Chief Executive Officer and its Chief Financial Officer,CFO, has evaluated the effectiveness of the design and operation of the Corporation’sour disclosure controls and procedures (asas defined in Rule l3a-l5 (e) promulgatedRules 13a- 15(e) and 15d- 15(e) under the Exchange Act)Act, as of September 30, 2018.the end of the period covered by this Quarterly Report on Form 10-Q. Based on thissuch evaluation, the Corporation’s Presidentour CEO and Chief Executive Officer and Chief Financial OfficerCFO have concluded that the Corporation’sas of March 31, 2019, we did not maintain effective disclosure controls and procedures are effective asbecause of September 30, 2018 to ensure that the information required to be disclosed by the Corporationmaterial weakness in the reports that the Corporation files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.
Changes in Internal Control Over Financial Reporting
There was no change in the Corporation’s internal control over financial reporting identified duringdescribed below. In light of this material weakness, management completed additional
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procedures and analysis to validate the quarter ended September 30, 2018accuracy and completeness of the reported financial results. In addition, management engaged the Audit Committee directly, in detail, to discuss the procedures and analysis performed to ensure the reliability of the Corporation’s financial reporting. Notwithstanding this material weakness, based on additional analyses and other procedures performed, management concluded that has materially affected,the financial statements included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial position, results of operations, capital position, and cash flows for the periods presented, in conformity with GAAP.
A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or is reasonably likely to materially affect, the Corporation’scombination of deficiencies, in internal control over financial reporting.reporting such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis. These deficiencies in controls could result in a misstatement of any account balance or disclosure that in turn, would result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected.
In the first quarter of 2019, the Corporation identified that residential mortgage loans have been originated without a required license in a neighboring state since 2012. We concluded that our risk assessment process was not sufficient, and therefore ineffective, to ensure controls were designed and implemented to respond to the risks related to periodically reviewing our compliance with state licensing laws and reflecting that compliance within our mortgage origination system. As a result, we noted there was insufficient monitoring of the Corporation’s compliance with mortgage licensing laws. This led to the identification of control deficiencies over the Corporation’s recognition of interest and fee income, the analysis of the accounting for loan transfers, specifically the impact of the recourse obligation resulting from a breach in representations and warranties, as well as the controls over the Corporation’s determination of the mortgage repurchase reserve. The aggregation of these control deficiencies created a reasonable possibility that a material misstatement to our consolidated financial statements would not be prevented or detected on a timely basis and therefore we concluded that, the aggregation of these deficiencies represents a material weakness in our internal control over financial reporting as of March 31, 2019. This material weakness also existed at December 31, 2018.
This material weakness resulted in an immaterial error correction that impacted beginning retained earnings, deferred tax assets and other liabilities as of January 1, 2018, as described further in footnote 1, relating to interest and fee income on mortgage loan originations made before January 1, 2018 to which we were not entitled due to the violation of state licensing law. The total pre-tax impact of this issue was $486 thousand, with $407 thousand of this relating to prior periods. These amounts include a penalty and amounts to be paid to certain mortgage loan customers.
Remediation Status of Reported Material Weakness
The Corporation is currently working to remediate the material weakness described above, including assessing the need for additional remediation steps and implementing additional measures to remediate the underlying causes that gave rise to the material weakness. The Corporation is committed to maintaining a strong internal control environment and to ensure that a proper, consistent tone is communicated throughout the organization, including the expectation that previously existing deficiencies will be remediated through implementation of processes and controls to ensure strict compliance with GAAP.
To address the material weakness, noted above, the Corporation has taken the following measures: management discontinued the origination of mortgage loan originations into this state until the matter is satisfactorily resolved with the licensing authority, and restricted access within the mortgage loan origination system to prevent further origination activity in that state.
The Corporation also performed an analysis of the mortgage licensing laws in other states where we lend to ensure that we were in compliance with other relevant licensing laws. We plan to implement a control that is supported by a third-party to help ensure the Corporation is aware of and compliant with state licensing requirements and is apprised of any changes in a timely manner. We also plan through internal audit and compliances reviews to develop a monitoring program to further ensure compliance with licensing laws. Lastly the Corporation will not originate loans in this particular state until it is compliant with licensing laws.
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On November 21, 2017, three former employees of the mortgage-banking division of the Bank filed suit in the United States District Court for the Eastern District of Pennsylvania, Juan Jordan et al. v. Meridian Bank, Thomas Campbell and Christopher Annas, against the Bank purporting to be a class and collective action seeking unpaid and overtime wages under the Fair Labor Standards Act of 1938, the New Jersey Wage and Hour Law, and the Pennsylvania Minimum Wage Act of 1968 on behalf of similarly situated plaintiffs. In February 2018, the Bank answered the complaint and presented affirmative defenses. In March 2018, plaintiffs’ counsel and the Bank agreed to move forward with non-binding mediation. Although the Bank believes it has strong and meritorious defenses, given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, success on the merits, the Bank has recorded a $200$325 thousand reserve, $125 thousand of which was added in the quarter ended March 31, 2019, as a reasonable estimate for possible losses that may result from this action. This estimate may change from time to time, and actual losses could vary.
Not applicable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
On August 24, 2018, Meridian Corporation (the “Corporation”), acquired the Bank in a merger and reorganization effected under Pennsylvania law and in accordance with the terms of a Plan of Merger and Reorganization dated April 26, 2018 (the “Agreement”). Pursuant to the Agreement, on August 24, 2018 at 5:00 p.m. eachall of the 6,402,385 outstanding shares of the Bank’s $1.00 par value common stock formerly held by its shareholders was converted into and exchanged for one newly issued share of the Corporation’s par value common stock, and the Bank became a subsidiary of the Corporation.
The exhibits filed or incorporated by reference as part of this report are listed in the Exhibit Index, which appears at page 49.
47.
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Exhibit |
| Description |
2.1 |
| |
3.1 |
| |
3.2 |
| |
31.1 |
| Rule 13a‑14(a)/ 15d‑14(a) Certification of the Principal Executive Officer, filed herewith. |
31.2 |
| Rule 13a‑14(a)/ 15d‑14(a) Certification of the Principal Financial Officer, filed herewith. |
32 |
| Section 1350 Certifications, filed herewith. |
101.INS |
| XBRL Instance Document |
101.SCH |
| XBRL Taxonomy Extension Schema Document |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
|
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|
|
|
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: |
| Meridian | |
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| |
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| By: | /s/ Christopher J. Annas |
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| Christopher J. Annas |
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| President and Chief Executive Officer |
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| (Principal Executive Officer) |
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| By: | /s/ Denise Lindsay |
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| Denise Lindsay |
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| Executive Vice President and Chief Financial Officer |
|
|
| (Principal Financial and Accounting Officer) |
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