UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM 10‑Q
(Mark one)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
2020
Or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐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 |
|
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) | |
9 Old Lincoln Highway, Malvern, Pennsylvania19355
(Address of principal executive offices) (Zip Code)
(484) 568‑5000(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‑212b-2 of the Exchange Act.
Large | Accelerated |
| |
Non-accelerated | Smaller |
| |
Emerging | |
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‑212b-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, 20188, 2020 there were 6,406,7956,132,403 outstanding shares of the issuer’s common stock, par value $1.00 per share.
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| | | | | |
| | September 30, | | December 31, | |
(dollars in thousands, except per share data) |
| 2020 |
| 2019 | |
Cash and due from banks | | $ | 74,941 | | 19,106 |
Federal funds sold | | | 928 | | 20,265 |
Cash and cash equivalents | | | 75,869 | | 39,371 |
Securities available-for-sale (amortized cost of $101,471 and $58,874 as of September 30, 2020 and December 31, 2019) | | | 103,358 | | 58,856 |
Securities held-to-maturity (fair value of $6,916 and $9,003 as of September 30, 2020 and December 31, 2019) | | | 6,544 | | 8,780 |
Equity investments | | | 1,034 | | 1,009 |
Mortgage loans held for sale (amortized cost of $220,381 and $33,363 as of September 30, 2020 and December 31, 2019), at fair value | | | 225,150 | | 33,704 |
Loans, net of fees and costs (includes $11,366 and $10,546 of loans at fair value, amortized cost of $10,849 and $10,186 as of September 30, 2020 and December 31, 2019) | | | 1,306,846 | | 964,710 |
Allowance for loan and lease losses | | | (16,573) | | (9,513) |
Loans, net of the allowance for loan and lease losses | | | 1,290,273 | | 955,197 |
Restricted investment in bank stock | | | 7,650 | | 8,072 |
Bank premises and equipment, net | | | 8,065 | | 8,636 |
Bank owned life insurance | | | 12,069 | | 11,859 |
Accrued interest receivable | | | 4,666 | | 3,148 |
Other real estate owned | | | — | | 120 |
Deferred income taxes | | | 398 | | 2,115 |
Goodwill | | | 899 | | 899 |
Intangible assets | | | 3,668 | | 3,874 |
Other assets | | | 19,005 | | 14,379 |
Total assets | | $ | 1,758,648 | | 1,150,019 |
Liabilities: | | | | | |
Deposits: | | | | | |
Noninterest bearing | | $ | 193,851 | | 139,450 |
Interest bearing | | | 1,015,173 | | 711,718 |
Total deposits | | | 1,209,024 | | 851,168 |
Short-term borrowings | | | 104,239 | | 123,676 |
Long-term debt | | | 250,131 | | 3,123 |
Subordinated debentures | | | 40,814 | | 40,962 |
Accrued interest payable | | | 2,258 | | 1,088 |
Other liabilities | | | 20,350 | | 9,307 |
Total liabilities | | | 1,626,816 | | 1,029,324 |
Stockholders’ equity: | | | | | |
Common stock, $1 par value. Authorized 10,000,000 shares; issued 6,450,353 and 6,407,685 as of September 30, 2020 and December 31, 2019 | | | 6,450 | | 6,408 |
Surplus | | | 80,981 | | 80,255 |
Treasury stock - 320,000 and 3,375 shares at September 30, 2020 and December 31, 2019, respectively | | | (5,828) | | (62) |
Unearned common stock held by employee stock ownership plan | | | (2,000) | | — |
Retained earnings | | | 50,775 | | 34,097 |
Accumulated other comprehensive income (loss) | | | 1,454 | | (3) |
Total stockholders’ equity | | | 131,832 | | 120,695 |
Total liabilities and stockholders’ equity | | $ | 1,758,648 | | 1,150,019 |
Seeaccompanying notes to the unaudited consolidated financial statements.
3
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| | | | | | | | |
| Three months ended | | Nine months ended | |||||
| September 30, | | September 30, | |||||
(dollars in thousands, except per share data) | 2020 |
| 2019 |
| 2020 |
| 2019 | |
Interest income: | | | | | | | | |
Loans, including fees | $ | 15,321 | | 13,152 | | 43,048 | | 37,686 |
Securities: | | | | | | | | |
Taxable | | 251 | | 336 | | 920 | | 892 |
Tax-exempt | | 305 | | 64 | | 698 | | 273 |
Cash and cash equivalents | | 3 | | 38 | | 63 | | 136 |
Total interest income | | 15,880 | | 13,590 | | 44,729 | | 38,987 |
Interest expense: | | | | | | | | |
Deposits | | 2,235 | | 3,633 | | 8,064 | | 10,584 |
Borrowings | | 930 | | 683 | | 2,687 | | 1,731 |
Total interest expense | | 3,165 | | 4,316 | | 10,751 | | 12,315 |
Net interest income | | 12,715 | | 9,274 | | 33,978 | | 26,672 |
Provision for loan losses | | 3,956 | | 705 | | 7,139 | | 938 |
Net interest income after provision for loan losses | | 8,759 | | 8,569 | | 26,839 | | 25,734 |
Non-interest income: | | | | | | | | |
Mortgage banking income | | 21,812 | | 7,315 | | 45,395 | | 17,617 |
Wealth management income | | 951 | | 922 | | 2,825 | | 2,698 |
SBA loan income | | 641 | | 635 | | 1,821 | | 1,150 |
Earnings on investment in life insurance | | 70 | | 74 | | 210 | | 218 |
Net change in the fair value of derivative instruments | | 3,028 | | — | | 6,346 | | (16) |
Net change in the fair value of loans held-for-sale | | 2,932 | | 54 | | 4,424 | | (82) |
Net change in the fair value of loans held-for-investment | | 93 | | (24) | | 174 | | 390 |
Net loss on hedging activity | | (2,637) | | (300) | | (7,363) | | (792) |
Net gain on sale of investment securities available-for-sale | | 1,290 | | 74 | | 1,345 | | 212 |
Service charges | | 28 | | 28 | | 77 | | 82 |
Other | | 852 | | 431 | | 1,718 | | 1,179 |
Total non-interest income | | 29,060 | | 9,209 | | 56,972 | | 22,656 |
Non-interest expenses: | | | | | | | | |
Salaries and employee benefits | | 20,447 | | 9,319 | | 46,529 | | 25,789 |
Occupancy and equipment | | 1,108 | | 946 | | 3,159 | | 2,845 |
Loan expenses | | 492 | | 192 | | 1,100 | | 472 |
Professional fees | | 681 | | 820 | | 2,118 | | 2,000 |
Advertising and promotion | | 781 | | 574 | | 1,996 | | 1,769 |
Data processing | | 460 | | 343 | | 1,260 | | 990 |
Information technology | | 394 | | 334 | | 1,100 | | 919 |
Pennsylvania bank shares tax | | 254 | | 169 | | 734 | | 495 |
Other | | 1,217 | | 850 | | 3,156 | | 3,701 |
Total non-interest expenses | | 25,834 | | 13,547 | | 61,152 | | 38,980 |
Income before income taxes | | 11,985 | | 4,231 | | 22,659 | | 9,410 |
Income tax expense | | 2,773 | | 914 | | 5,218 | | 2,065 |
Net income | $ | 9,212 | | 3,317 | | 17,441 | | 7,345 |
Basic earnings per common share | $ | 1.51 | | 0.52 | | 2.83 | | 1.15 |
Diluted earnings per common share | $ | 1.51 | | 0.52 | | 2.82 | | 1.14 |
See accompanying notes to the unaudited consolidated financial statements.
|
|
|
|
|
|
|
| (Unaudited) |
|
| |
|
| September 30, |
| December 31, | |
(dollars in thousands, except per share data) |
| 2018 |
| 2017 | |
Cash and due from banks |
| $ | 25,118 |
| 24,893 |
Federal funds sold |
|
| 705 |
| 10,613 |
Cash and cash equivalents |
|
| 25,823 |
| 35,506 |
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 |
Restricted investment in bank stock |
|
| 4,581 |
| 6,814 |
Bank premises and equipment, net |
|
| 9,947 |
| 9,741 |
Bank owned life insurance |
|
| 11,494 |
| 11,269 |
Accrued interest receivable |
|
| 2,913 |
| 2,536 |
Other real estate owned |
|
| — |
| 437 |
Deferred income taxes |
|
| 1,932 |
| 1,312 |
Goodwill and intangible assets |
|
| 5,114 |
| 5,495 |
Other assets |
|
| 4,455 |
| 7,106 |
Total assets |
| $ | 959,829 |
| 856,035 |
Liabilities: |
|
|
|
|
|
Deposits: |
|
|
|
|
|
Noninterest bearing |
| $ | 124,855 |
| 100,454 |
Interest-bearing |
|
| 657,072 |
| 526,655 |
Total deposits |
|
| 781,927 |
| 627,109 |
Short-term borrowings |
|
| 43,755 |
| 99,750 |
Long-term debt |
|
| 6,444 |
| 8,863 |
Subordinated debentures |
|
| 9,308 |
| 13,308 |
Accrued interest payable |
|
| 353 |
| 216 |
Other liabilities |
|
| 11,024 |
| 5,426 |
Total liabilities |
|
| 852,811 |
| 754,672 |
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 |
Surplus |
|
| 79,852 |
| 79,501 |
Retained earnings |
|
| 21,567 |
| 15,768 |
Accumulated other comprehensive loss |
|
| (808) |
| (298) |
Total stockholders’ equity |
|
| 107,018 |
| 101,363 |
Total liabilities and stockholders’ equity |
| $ | 959,829 |
| 856,035 |
4
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | | | | | | | | |
| | | Three months ended | | Nine months ended | ||||
| | | September 30, | | September 30, | ||||
(dollars in thousands) |
| | 2020 |
| 2019 | | 2020 |
| 2019 |
Net income: | | $ | 9,212 | | 3,317 | | 17,441 | | 7,345 |
| | | | | | | | | |
Other comprehensive income: | | | | | | | | | |
Net change in unrealized gains on investment securities available for sale: | | | | | | | | | |
Net unrealized gains arising during the period, net of tax expense of $144, $19, $761 and $220, respectively | | | 304 | | 64 | | 2,489 | | 767 |
Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of ($301), ($16), ($313), and ($46), respectively | | | (989) | | (58) | | (1,032) | | (166) |
Unrealized investment (losses) gains, net of tax (benefit) expense of $(157), $3, $448, and $174, respectively | | | (685) | | 6 | | 1,457 | | 601 |
Total other comprehensive (loss) income | | | (685) | | 6 | | 1,457 | | 601 |
Total comprehensive income | | $ | 8,527 | | 3,323 | | 18,898 | | 7,946 |
See accompanying notes to the unaudited consolidated financial statements.
35
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOMESTOCKHOLDERS’ EQUITY
(Unaudited)
| | | | | | | | | | | | | | |
| | | | | | | | Unearned | | | | Accumulated | | |
| | | | | | | | Common | | | | Other | | |
| | Common | | | | Treasury | | Stock - | | Retained | | Comprehensive | | |
(dollars in thousands) |
| Stock |
| Surplus |
| Stock | | ESOP | | Earnings |
| Income (Loss) |
| Total |
Balance, January 1, 2020 | $ | 6,408 | | 80,255 | | (62) | | — | | 34,097 | | (3) | | 120,695 |
Comprehensive income: | | | | | | | | | | | | | | |
Net income | | | | | | | | | | 2,516 | | | | 2,516 |
Change in unrealized gains on securities available-for-sale, net of tax | | | | | | | | | | | | 429 | | 429 |
Total comprehensive income | | | | | | | | | | | | | | 2,945 |
Common stock issued through share-based awards and exercises | | 6 | | 26 | | | | | | | | | | 32 |
Net purchase of treasury stock through publicly announced plans | | | | 63 | | (5,766) | | | | | | | | (5,703) |
Stock based compensation | | | | 64 | | | | | | | | | | 64 |
Balance, March 31, 2020 | $ | 6,414 | | 80,408 | | (5,828) | | — | | 36,613 | | 426 | | 118,033 |
Comprehensive income: | | | | | | | | | | | | | | |
Net income | | | | | | | | | | 5,713 | | | | 5,713 |
Change in unrealized gains on securities available-for-sale, net of tax | | | | | | | | | | | | 1,713 | | 1,713 |
Total comprehensive income | | | | | | | | | | | | | | 7,426 |
Stock based compensation | | | | 59 | | | | | | | | | | 59 |
Balance, June 30, 2020 | $ | 6,414 | | 80,467 | | (5,828) | | — | | 42,326 | | 2,139 | | 125,518 |
Comprehensive income: | | | | | | | | | | | | | | |
Net income | | | | | | | | | | 9,212 | | | | 9,212 |
Change in unrealized gains on securities available-for-sale, net of tax | | | | | | | | | | | | (685) | | (685) |
Total comprehensive income | | | | | | | | | | | | | | 8,527 |
Dividends paid or accrued, $0.125 per share | | | | | | | | | | (763) | | | | (763) |
Shares purchased for ESOP plan (133,601) | | | | | | | | (2,000) | | | | | | (2,000) |
Common stock issued through share-based awards and exercises | | 36 | | 337 | | | | | | | | | | 373 |
Stock based compensation | | | | 177 | | | | | | | | | | 177 |
Balance, September 30, 2020 | $ | 6,450 | | 80,981 | | (5,828) | | (2,000) | | 50,775 | | 1,454 | | 131,832 |
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended | |||||
|
| September 30, |
| September 30, | |||||
(dollars in thousands, except per share data) |
| 2018 |
| 2017 |
| 2018 |
| 2017 | |
Interest income: |
|
|
|
|
|
|
|
|
|
Loans, including fees |
| $ | 11,218 |
| 8,924 |
| 31,217 |
| 25,148 |
Securities: |
|
|
|
|
|
|
|
|
|
Taxable |
|
| 213 |
| 143 |
| 549 |
| 366 |
Tax-exempt |
|
| 112 |
| 110 |
| 336 |
| 343 |
Cash and cash equivalents |
|
| 30 |
| 14 |
| 75 |
| 55 |
Total interest income |
|
| 11,573 |
| 9,191 |
| 32,177 |
| 25,912 |
Interest expense: |
|
|
|
|
|
|
|
|
|
Deposits |
|
| 2,485 |
| 1,207 |
| 6,171 |
| 3,079 |
Borrowings |
|
| 710 |
| 643 |
| 1,790 |
| 1,728 |
Total interest expense |
|
| 3,195 |
| 1,850 |
| 7,961 |
| 4,807 |
Net interest income |
|
| 8,378 |
| 7,341 |
| 24,216 |
| 21,105 |
Provision for loan losses |
|
| 291 |
| 665 |
| 1,258 |
| 1,445 |
Net interest income after provision for loan losses |
|
| 8,087 |
| 6,676 |
| 22,958 |
| 19,660 |
Non-interest income: |
|
|
|
|
|
|
|
|
|
Mortgage banking income |
|
| 8,274 |
| 9,904 |
| 20,407 |
| 25,089 |
Wealth management income |
|
| 930 |
| 934 |
| 2,996 |
| 1,905 |
Earnings on investment in life insurance |
|
| 74 |
| 83 |
| 225 |
| 194 |
Net change in the fair value of derivative instruments |
|
| 70 |
| (503) |
| 59 |
| (115) |
Net change in the fair value of loans held-for-sale |
|
| (300) |
| (115) |
| (241) |
| 102 |
Net change in the fair value of loans held-for-investment |
|
| (103) |
| 71 |
| (289) |
| 113 |
Gain on sale of investment securities available-for-sale |
|
| — |
| — |
| — |
| 4 |
Service charges |
|
| 27 |
| 22 |
| 87 |
| 62 |
Other |
|
| 195 |
| 54 |
| 1,647 |
| 168 |
Total non-interest income |
|
| 9,167 |
| 10,450 |
| 24,891 |
| 27,522 |
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
| 8,901 |
| 10,330 |
| 26,719 |
| 29,753 |
Occupancy and equipment |
|
| 920 |
| 992 |
| 2,870 |
| 2,818 |
Loan expenses |
|
| 769 |
| 1,000 |
| 1,962 |
| 3,008 |
Professional fees |
|
| 714 |
| 481 |
| 1,670 |
| 1,384 |
Advertising and promotion |
|
| 590 |
| 597 |
| 1,802 |
| 1,537 |
Data processing |
|
| 334 |
| 337 |
| 924 |
| 871 |
FDIC assessment |
|
| 179 |
| 183 |
| 358 |
| 479 |
Other |
|
| 1,346 |
| 1,092 |
| 4,084 |
| 3,207 |
Total non-interest expenses |
|
| 13,753 |
| 15,012 |
| 40,389 |
| 43,057 |
Income before income taxes |
|
| 3,501 |
| 2,114 |
| 7,460 |
| 4,125 |
Income tax expense |
|
| 774 |
| 716 |
| 1,661 |
| 1,381 |
Net income |
|
| 2,727 |
| 1,398 |
| 5,799 |
| 2,744 |
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 |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share |
| $ | 0.42 |
| 0.30 |
| 0.90 |
| 0.51 |
6
| | | | | | | | | | | | | | |
| | | | | | | | Unearned | | | | Accumulated | | |
| | | | | | | | Common | | | | Other | | |
| | Common | | | | Treasury | | Stock - | | Retained | | Comprehensive | | |
(dollars in thousands) |
| Stock |
| Surplus |
| Stock |
| ESOP | | Earnings |
| Income (Loss) |
| Total |
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 |
Stock based compensation | | | | 61 | | | | | | | | | | 61 |
Balance, March 31, 2019 | $ | 6,407 | | 79,980 | | — | | — | | 25,622 | | (17) | | 111,992 |
Comprehensive income: | | | | | | | | | | | | | | |
Net income | | | | | | | | | | 2,022 | | | | 2,022 |
Change in unrealized gains on securities available-for-sale, net of tax | | | | | | | | | | | | 222 | | 222 |
Total comprehensive income | | | | | | | | | | | | | | 2,244 |
Stock based compensation | | | | 143 | | | | | | | | | | 143 |
Balance, June 30, 2019 | $ | 6,407 | | 80,123 | | — | | — | | 27,644 | | 205 | | 114,379 |
Comprehensive income: | | | | | | | | | | | | | | |
Net income | | | | | | | | | | 3,317 | | | | 3,317 |
Change in unrealized gains on securities available-for-sale, net of tax | | | | | | | | | | | | 6 | | 6 |
Total comprehensive income | | | | | | | | | | | | | | 3,323 |
Common stock issued through share-based awards and exercises | | 1 | | 7 | | | | | | | | | | 8 |
Stock based compensation | | | | 62 | | | | | | | | | | 62 |
Balance, September 30, 2019 | $ | 6,408 | | 80,192 | | — | | — | | 30,961 | | 211 | | 117,772 |
See accompanying notes to the unaudited consolidated financial statements.
47
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMECASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
| Three months ended |
| Nine months ended | |||||
|
| September 30, |
| September 30, | |||||
(dollars in thousands) |
| 2018 |
| 2017 |
| 2018 |
| 2017 | |
Net income: |
| $ | 2,727 |
| 1,398 |
| 5,799 |
| 2,744 |
|
|
|
|
|
|
|
|
|
|
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 |
Total other comprehensive income |
|
| (166) |
| (31) |
| (510) |
| 274 |
Total comprehensive income |
| $ | 2,561 |
| 1,367 |
| 5,289 |
| 3,018 |
| | | | | |
| | Nine months ended | |||
| | September 30, | |||
(dollars in thousands) |
| 2020 |
| 2019 | |
Net income | | $ | 17,441 | | 7,345 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Gain on sale of investment securities | | | (1,345) | | (212) |
Depreciation and amortization | | | (992) | | 1,581 |
Loss on disposal of premises and equipment | | | — | | 14 |
Net amortization of investment premiums and discounts | | | 238 | | (22) |
Provision for loan losses | | | 7,139 | | 938 |
Amortization of issuance costs on subordinated debt | | | 83 | | — |
Compensation expense for stock options | | | 300 | | 266 |
Net change in fair value of loans held for investment | | | (174) | | (390) |
Net change in fair value of loans held for sale | | | (4,424) | | 82 |
Net change in fair value of derivative instruments | | | (6,346) | | 16 |
Gain on sale of OREO | | | (6) | | — |
SBA loan income | | | (1,821) | | (1,150) |
Proceeds from sale of loans | | | 1,356,637 | | 432,831 |
Loans originated for sale | | | (1,498,264) | | (421,092) |
Mortgage banking income | | | (45,395) | | (19,139) |
Increase in accrued interest receivable | | | (1,518) | | (266) |
Increase in other assets | | | 5,511 | | 91 |
Earnings from investment in life insurance | | | (210) | | (218) |
Deferred income tax | | | 1,274 | | (249) |
Increase in accrued interest payable | | | 1,170 | | 364 |
Increase in other liabilities | | | 9,054 | | 3,629 |
Net cash (used) provided by operating activities | | | (161,648) | | 4,419 |
Cash flows from investing activities: | | | | | |
Activity in available-for-sale securities: | | | | | |
Maturities, repayments and calls | | | 6,319 | | 11,090 |
Sales | | | 44,592 | | 19,366 |
Purchases | | | (92,476) | | (29,027) |
Activity in held-to-maturity securities: | | | | | |
Maturities, repayments and calls | | | 2,140 | | — |
Proceeds from sale of OREO | | | 126 | | — |
Settlement of forward contracts | | | — | | (85) |
Decrease in restricted stock | | | 422 | | (1,235) |
Net increase in loans | | | (339,459) | | (104,640) |
Purchases of premises and equipment | | | (651) | | (634) |
Net cash used in investing activities | | | (378,987) | | (105,165) |
Cash flows from financing activities: | | | | | |
Net increase in deposits | | | 357,856 | | 106,331 |
Increase (decrease) in short term borrowings | | | (31,928) | | 14,165 |
Decrease in short term borrowings with original maturity > 90 days | | | 12,902 | | — |
Repayment of acquisition note payable | | | (413) | | (413) |
Repayment of long term debt (Subordinated debt) | | | — | | (63) |
Proceeds from long term debt | | | 247,008 | | (2,702) |
Issuance costs on subordinated debt | | | (231) | | — |
Net purchase of treasury stock through publicly announced plans | | | (5,703) | | — |
Dividends paid | | | (763) | | — |
Purchase of common shares for ESOP | | | (2,000) | | — |
Share based awards and exercises | | | 405 | | 8 |
Net cash provided by financing activities | | | 577,133 | | 117,326 |
Net change in cash and cash equivalents | | | 36,498 | | 16,580 |
Cash and cash equivalents at beginning of period | | | 39,371 | | 23,952 |
Cash and cash equivalents at end of period | | $ | 75,869 | | 40,532 |
Supplemental disclosure of cash flow information: | | | | | |
Cash paid during the period for: | | | | | |
Interest | | $ | 9,581 | | 11,951 |
Income taxes | | | 2,490 | | 1,539 |
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 |
Net loans sold, not settled | | | (1,657) | | (5,580) |
Seeaccompanying notes to the unaudited consolidated financial statements.
58
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Nine Months Ended September 30, 2018 | |||||||||
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
|
| Common |
|
|
| Retained |
| Comprehensive |
|
| |
(dollars in thousands) |
| Stock |
| Surplus |
| Earnings |
| Income (Loss) |
| Total | |
Balance, December 31, 2017 |
| $ | 6,392 |
| 79,501 |
| 15,768 |
| (298) |
| 101,363 |
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
| 5,799 |
|
|
| 5,799 |
Change in unrealized gains on securities available-for-sale, net of tax |
|
|
|
|
|
|
|
| (510) |
| (510) |
Total comprehensive income |
|
|
|
|
|
|
|
|
|
| 5,289 |
Share-based awards and exercises |
|
| 15 |
|
|
|
|
|
|
| 15 |
Compensation expense related to stock option grants |
|
|
|
| 351 |
|
|
|
|
| 351 |
Balance, September 30, 2018 |
| $ | 6,407 |
| 79,852 |
| 21,567 |
| (808) |
| 107,018 |
See accompanying notes to the unaudited consolidated financial statements.
6
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
| Nine months ended | |||
|
| September 30, | |||
(dollars in thousands) |
| 2018 |
| 2017 | |
Net income |
| $ | 5,799 |
| 2,744 |
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 |
Provision for credit losses |
|
| 1,258 |
| 1,445 |
Compensation expense for stock options |
|
| 351 |
| 110 |
Net change in fair value of loans held for sale |
|
| 241 |
| (102) |
Net change in fair value of derivative instruments |
|
| (59) |
| 115 |
Net change in fair value of contingent assets |
|
| 177 |
| — |
Gain on sale of OREO |
|
| (57) |
| — |
Proceeds from sale of loans |
|
| 513,259 |
| 556,777 |
Loans originated for sale |
|
| (492,113) |
| (524,363) |
Mortgage banking income |
|
| (20,407) |
| (25,089) |
(Increase) decrease in accrued interest receivable |
|
| (377) |
| 79 |
Increase in other assets |
|
| (110) |
| (202) |
Earnings from investment in life insurance |
|
| (225) |
| (194) |
Deferred income tax (benefit) expense |
|
| (465) |
| 279 |
Increase in accrued interest payable |
|
| 137 |
| 185 |
Increase in other liabilities |
|
| 1,184 |
| 3,020 |
Net cash provided by operating activities |
|
| 9,681 |
| 16,481 |
Cash flows from investing activities: |
|
|
|
|
|
Activity in available-for-sale securities: |
|
|
|
|
|
Maturities, repayments and calls |
|
| 4,080 |
| 2,928 |
Purchases |
|
| (12,768) |
| (7,178) |
Activity in held-to-maturity securities: |
|
|
|
|
|
Maturities, repayments and calls |
|
| — |
| 1,045 |
Proceeds from sale of OREO |
|
| 494 |
| — |
Settlement of forward contracts |
|
| (21) |
| (845) |
Acquisition of wealth management company |
|
| — |
| (3,225) |
Decrease in restricted stock |
|
| 2,233 |
| 563 |
Net increase in loans |
|
| (107,068) |
| (72,613) |
Purchases of premises and equipment |
|
| (1,499) |
| (1,628) |
Proceeds from settlment of loans |
|
| 2,766 |
| — |
Purchase of bank owned life insurance |
|
| — |
| (5,999) |
Net cash used in investing activities |
|
| (111,783) |
| (86,952) |
Cash flows from financing activities: |
|
|
|
|
|
Net increase in deposits |
|
| 154,818 |
| 90,546 |
Decrease in short term borrowings |
|
| (57,795) |
| (28,358) |
Repayment of long term debt (Acquisition note) |
|
| (619) |
| (206) |
Principal repayment of long term debt (subordinated debt) |
|
| (4,000) |
| — |
Share based awards and exercises |
|
| 15 |
| 10 |
Dividends paid on preferred stock |
|
| — |
| (866) |
Net cash provided by financing activities |
|
| 92,419 |
| 61,126 |
Net change in cash and cash equivalents |
|
| (9,683) |
| (9,345) |
Cash and cash equivalents at beginning of period |
|
| 35,506 |
| 18,872 |
Cash and cash equivalents at end of period |
| $ | 25,823 |
| 9,527 |
Supplemental disclosure of cash flow information: |
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
Interest |
| $ | 7,392 |
| 4,622 |
Income taxes |
|
| 1,565 |
| 1,487 |
Supplemental non-cash disclosure: |
|
|
|
|
|
Net loan assets purchased, not settled |
|
| 4,490 |
| — |
Acquisition note payable |
|
| — |
| 2,475 |
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. each 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, and servicing assets.
These unaudited consolidated financial statements should be read in conjunction with the Corporation’s filings with the Securities and Exchange Commission 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(including our Annual Report on Form 10-K (the “2017 Annual Report”) for the year ended December 31, 2017,2019) 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. Reclassifications had no effect on net income or stockholders’ equity. Operating results for the three and nine months ended September 30, 20182020 are not necessarily indicative of the results for the year endedending December 31, 20182020 or for any other period.
Impact of COVID-19
COVID-19 has adversely impacted a broad range of industries in which the Corporation’s customers operate and could impair their ability to fulfill their financial obligations to the Corporation. The continued spread of COVID-19 throughout the U.S. has caused significant disruption in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Corporation operates.
Although the Corporation’s current estimates contemplate current conditions and how we expect them to change in the future, due to the prolonged impact that the COVID-19 has had on financial markets and the economy both locally and nationally, it is reasonably possible that this could materially affect these significant estimates and the Corporation’s results of operations and financial condition.
The Corporation has continued to work with customers directly affected by COVID-19 since it was declared a pandemic, to provide short-term assistance in accordance with regulatory guidelines. While the Corporation has factored the ongoing impacts of COVID-19 into the allowance for loan and lease losses calculation as of September 30, 2020, should economic conditions continue to worsen, the Corporation could experience further increases in its required allowance for loan and lease losses and record additional provision for loan loss expense. It is possible that the Corporation’s asset quality measures could worsen at future measurement periods due to the continuing effects of COVID-19 may have on borrowers.
COVID-19 could cause a further and sustained decline in the Corporation’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform goodwill and intangible asset impairment tests and result in an impairment charge being recorded for that period. In the event that the Corporation concludes that all or a portion of its goodwill or intangible assets are impaired, a
9
non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security, ( the “CARES Act”) was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included the Paycheck Protection Program (the “PPP”), a $349 billion program designed to aid small and medium sized businesses through federally guaranteed loans distributed through banks. The Paycheck Protection Program and Health Care Enhancement Act (the “PPP/HCEA Act”) was signed into law on April 24, 2020. The PPP/HCEA Act authorized an additional $310 billion of funding under the CARES Act for PPP loans among other provisions. On July 4, 2020, legislation was passed to extend the application period for the PPP program through August 8, 2020. These loans are intended to cover eight weeks of payroll and other permitted expenses to help those businesses remain viable.
(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. The difference between common shares issued and basic weighted average common shares outstanding, for purposes of calculating basic earnings per share, is a result of subtracting unallocated employee stock ownership plan (“ESOP”) shares. 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.
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
(dollars in thousands, except per share data) |
| 2020 |
| 2019 | | 2020 |
| 2019 | ||||
Numerator: | | | | | | | | | | | | |
Net income available to common stockholders | | $ | 9,212 | | | 3,317 | | $ | 17,441 | | | 7,345 |
Denominator for basic earnings per share - weighted average shares outstanding | | | 6,099 | | | 6,407 | | | 6,172 | | | 6,407 |
Effect of dilutive common shares | | | 11 | | | 30 | | | 21 | | | 29 |
Denominator for diluted earnings per share - adjusted weighted average shares outstanding | | | 6,110 | | | 6,437 | | | 6,193 | | | 6,436 |
Basic earnings per share | | $ | 1.51 | | | 0.52 | | $ | 2.83 | | | 1.15 |
Diluted earnings per share | | $ | 1.51 | | | 0.52 | | $ | 2.82 | | | 1.14 |
Antidilutive shares excluded from computation of average dilutive earnings per share | | | 265 | | | 199 | | | 192 | | | 199 |
8
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | |||||||
|
| September 30, |
| September 30, | |||||||
(dollars in thousands, except per share data) |
| 2018 |
| 2017 |
| 2018 |
|
| 2017 | ||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders |
| $ | 2,727 |
|
| 1,109 |
| 5,799 |
|
| 1,877 |
Denominator for basic earnings per share - weighted average shares outstanding |
|
| 6,402 |
|
| 3,686 |
| 6,395 |
|
| 3,686 |
Effect of dilutive common shares |
|
| 28 |
|
| 27 |
| 31 |
|
| 26 |
Denominator for diluted earnings per share - adjusted weighted average shares outstanding |
|
| 6,430 |
|
| 3,713 |
| 6,426 |
|
| 3,712 |
Basic earnings per share |
| $ | 0.43 |
|
| 0.30 |
| 0.91 |
|
| 0.51 |
Diluted earnings per share |
| $ | 0.42 |
|
| 0.30 |
| 0.90 |
|
| 0.51 |
Antidilutive shares excluded from computation of average dilutive earnings per share |
|
| 116 |
|
| 50 |
| 116 |
|
| 50 |
(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 | |
| | December 31, | | Amortization | | September 30, | | Period | |
(dollars in thousands) |
| 2019 |
| Expense |
| 2020 |
| (in years) | |
Goodwill - Wealth | | $ | 899 | | — | | 899 | | Indefinite |
Total Goodwill | | | 899 | | — | | 899 | | |
| | | | | | | | | |
Intangible assets - trade name | | | 266 | | — | | 266 | | Indefinite |
Intangible assets - customer relationships | | | 3,523 | | (154) | | 3,369 | | 20 |
Intangible assets - non competition agreements | | | 85 | | (52) | | 33 | | 4 |
Total Intangible Assets | | | 3,874 | | (206) | | 3,668 | | |
Total | | $ | 4,773 | | (206) | | 4,567 | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance |
|
|
|
|
| Balance |
| Amortization | |
|
| December 31, |
| Accumulated |
| Fair Value |
| September 30, |
| Period | |
(dollars in thousands) |
| 2017 |
| Amortization |
| Adjustment |
| 2018 |
| (in years) | |
Goodwill - Wealth |
| $ | 899 |
| — |
| — |
| 899 |
| Indefinite |
Total Goodwill |
|
| 899 |
| — |
| — |
| 899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets - trade name |
|
| 266 |
| — |
| — |
| 266 |
| Indefinite |
Intangible assets - customer relationships |
|
| 3,930 |
| (152) |
| — |
| 3,778 |
| 20 |
Intangible assets - non competition agreements |
|
| 223 |
| (52) |
| — |
| 171 |
| 4 |
Contingent asset |
|
| 177 |
|
|
| (177) |
| — |
| N/A |
Total Intangible Assets |
|
| 4,596 |
| (204) |
| (177) |
| 4,215 |
|
|
Total |
| $ | 5,495 |
| (204) |
| (177) |
| 5,114 |
|
|
10
We recognizedAccumulated amortization expense on intangible assets of $68was $956 thousand and $204$750 thousand respectively, during the three 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. Asas 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.2020 and December 31, 2019, respectively.
The Corporation performed its annual reviewperforms an evaluation annually, or more frequently if a triggering event occurs, of whether any impairment of the goodwill and identifiableother intangible assets had occurred in accordance with ASC 350, “Intangibles - Goodwill and Other” as of December 31, 2017.. For the period from January 1, 20182020 through September 30, 2018,2020, the Corporation determined there were no events that would necessitate0 impairment testing of goodwill and other intangible assets.existed.
9
The amortized cost and fair value of securities as of September 30, 20182020 and December 31, 20172019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2018 | |||||||
|
|
|
|
| Gross |
| Gross |
|
|
|
| Amortized |
| unrealized |
| unrealized |
| Fair | |
(dollars in thousands) |
| cost |
| gains |
| losses |
| value | |
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
U.S. government agency mortgage-backed securities |
| $ | 24,625 |
| 21 |
| (431) |
| 24,215 |
U.S. government agency collateralized mortgage obligations |
|
| 13,159 |
| — |
| (271) |
| 12,888 |
State and municipal securities |
|
| 9,946 |
| — |
| (341) |
| 9,605 |
Investments in mutual funds and other equity securities |
|
| 1,000 |
| — |
| (30) |
| 970 |
Total securities available-for-sale |
| $ | 48,730 |
| 21 |
| (1,073) |
| 47,678 |
Securities held to maturity: |
|
|
|
|
|
|
|
|
|
U.S. Treasuries |
| $ | 1,987 |
| — |
| (18) |
| 1,969 |
State and municipal securities |
|
| 10,784 |
| 15 |
| (196) |
| 10,603 |
Total securities held-to-maturity |
| $ | 12,771 |
| 15 |
| (214) |
| 12,572 |
|
|
|
|
|
|
|
|
|
| |||||||||
|
| December 31, 2017 | ||||||||||||||||
|
|
|
|
| Gross |
| Gross |
|
| |||||||||
|
| Amortized |
| unrealized |
| unrealized |
| Fair | ||||||||||
| | | | | | | | | | |||||||||
| | September 30, 2020 | ||||||||||||||||
| | | | | Gross | | Gross | | | |||||||||
| | Amortized | | unrealized | | unrealized | | Fair | ||||||||||
(dollars in thousands) |
| cost |
| gains |
| losses |
| value |
| cost |
| gains |
| losses |
| value | ||
Securities available-for-sale: |
|
|
|
|
|
|
|
|
| | | | | | | | | |
U.S. asset backed securities | | $ | 24,705 | | 211 | | (172) | | 24,744 | |||||||||
U.S. government agency mortgage-backed securities |
| $ | 21,439 |
| 19 |
| (190) |
| 21,268 | | | 3,919 | | 192 | | — | | 4,111 |
U.S. government agency collateralized mortgage obligations |
|
| 7,875 |
| 2 |
| (99) |
| 7,778 | | | 21,375 | | 1,108 | | — | | 22,483 |
State and municipal securities |
|
| 10,079 |
| 14 |
| (134) |
| 9,959 | | | 48,789 | | 805 | | (255) | | 49,339 |
Investments in mutual funds and other equity securities |
|
| 1,000 |
| 1 |
| — |
| 1,001 | |||||||||
Corporate bonds | | | 2,683 | | 3 | | (5) | | 2,681 | |||||||||
Total securities available-for-sale |
| $ | 40,393 |
| 36 |
| (423) |
| 40,006 | | $ | 101,471 | | 2,319 | | (432) | | 103,358 |
Securities held to maturity: |
|
|
|
|
|
|
|
|
| | | | | | | | | |
U.S. Treasuries |
| $ | 1,978 |
| — |
| (8) |
| 1,970 | |||||||||
State and municipal securities |
|
| 10,883 |
| 86 |
| (70) |
| 10,899 | | | 6,544 | | 372 | | — | | 6,916 |
Total securities held-to-maturity |
| $ | 12,861 |
| 86 |
| (78) |
| 12,869 | | $ | 6,544 | | 372 | | — | | 6,916 |
| | | | | | | | | |
| | December 31, 2019 | |||||||
| | | | | Gross | | Gross | | |
| | Amortized | | unrealized | | unrealized | | Fair | |
(dollars in thousands) |
| cost |
| gains |
| losses |
| value | |
Securities available-for-sale: | | | | | | | | | |
U.S. asset backed securities | | $ | 11,967 | | — | | (101) | | 11,866 |
U.S. government agency mortgage-backed securities | | | 5,457 | | 66 | | (26) | | 5,497 |
U.S. government agency collateralized mortgage obligations | | | 35,096 | | 300 | | (173) | | 35,223 |
State and municipal securities | | | 6,354 | | — | | (84) | | 6,270 |
Total securities available-for-sale | | $ | 58,874 | | 366 | | (384) | | 58,856 |
Securities held to maturity: | | | | | | | | | |
State and municipal securities | | | 8,780 | | 223 | | — | | 9,003 |
Total securities held-to-maturity | | $ | 8,780 | | 223 | | — | | 9,003 |
At September 30, 2018,2020, the Corporation had twenty-six U.S. government sponsored agency mortgage‑backed securities, seventeen1 U.S. government sponsored agency collateralized mortgage obligations, twenty-nine state14 U.S. asset backed securities, 15 State and municipal securities, one mutual fund, and two U.S. treasuries2 Corporate bonds in unrealized loss positions. At December 31, 2017,2019, the Corporation had nineteen9 U.S. governmentasset backed securities, 1 U.S. Government sponsored agency mortgage‑backed securities, eightmortgage-backed security, 15 U.S. governmentGovernment sponsored agency collateralized mortgage obligations, twenty-two stateand 6 State and municipal securities and one mutual fund in unrealized loss positions. AtAlthough the Corporation’s investment portfolio overall is in a net unrealized gain position at September 30, 2018,2020, the temporary impairment in the above noted securities 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, no0 securities are deemed to be other‑than‑temporarilyother-than-temporarily impaired.
1011
At September 30, 2020 and December 31, 2019, 0 held to maturity securities held by the Corporation were in an unrealized loss position.
Proceeds from the sale of available for sale investment securities totaled $26.4 million and $44.6 million for the three and nine months ended September 30, 2020, respectively, resulting in a gross gain on sale of $1.3 million thousand and 0 gross loss on sale for the three months ended September 30, 2020, and a gross gain on sale of $1.5 million and a gross loss on sale of $202 thousand for the nine months ended September 30, 2020. Proceeds from the sale of available for sale investment securities totaled $2.7 million and $19.4 million for the three and nine months ended September 30, 2019, respectively, resulting in a gross gain on sale of $74 thousand and 0 gross losses for the three months ended September 30, 2019, and gross gain on sale of $254 thousand and a gross loss on sale of $42 thousand for the nine months ended September 30, 2019.
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, 20182020 and December 31, 2017:2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2018 | |||||||||||
|
| Less than 12 Months |
| 12 Months or more |
| Total | |||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | |
(dollars in thousands) |
| value |
| losses |
| value |
| losses |
| value |
| losses | |
Securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government agency mortgage-backed securities |
| $ | 11,483 |
| (128) |
| 9,702 |
| (303) |
| 21,185 |
| (431) |
U.S. government agency collateralized mortgage obligations |
|
| 8,627 |
| (102) |
| 4,261 |
| (169) |
| 12,888 |
| (271) |
State and municipal securities |
|
| 5,019 |
| (112) |
| 4,587 |
| (229) |
| 9,606 |
| (341) |
Investments in mutual funds and other equity securities |
|
| 970 |
| (30) |
| — |
| — |
| 970 |
| (30) |
Total securities available-for-sale |
| $ | 26,099 |
| (372) |
| 18,550 |
| (701) |
| 44,649 |
| (1,073) |
Securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries |
| $ | 1,950 |
| (18) |
| — |
| — |
| 1,950 |
| (18) |
State and municipal securities |
|
| 6,537 |
| (98) |
| 2,211 |
| (98) |
| 8,748 |
| (196) |
Total securities held-to-maturity |
| $ | 8,487 |
| (116) |
| 2,211 |
| (98) |
| 10,698 |
| (214) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| December 31, 2017 | ||||||||||||||||||||||||
|
| Less than 12 Months |
| 12 Months or more |
| Total | ||||||||||||||||||||
|
| Fair |
| Unrealized |
| Fair |
| Unrealized |
| Fair |
| Unrealized | ||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | September 30, 2020 | ||||||||||||||||||||||||
| | Less than 12 Months | | 12 Months or more | | Total | ||||||||||||||||||||
| | 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) | |||||||||||||
U.S. government agency collateralized mortgage obligations |
|
| 6,732 |
| (81) |
| 860 |
| (18) |
| 7,592 |
| (99) | |||||||||||||
U.S. asset backed securities | | $ | 10,704 | | (66) | | 8,085 | | (106) | | 18,789 | | (172) | |||||||||||||
State and municipal securities |
|
| 6,147 |
| (57) |
| 2,818 |
| (77) |
| 8,965 |
| (134) | | | 27,950 | | (255) | | — | | — | | 27,950 | | (255) |
Corporate bonds | | | 1,245 | | (5) | | — | | — | | 1,245 | | (5) | |||||||||||||
Total securities available-for-sale |
| $ | 22,667 |
| (166) |
| 11,532 |
| (257) |
| 34,199 |
| (423) | | $ | 39,899 | | (326) | | 8,085 | | (106) | | 47,984 | | (432) |
Securities held-to-maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
U.S. Treasuries |
| $ | 1,962 |
| (8) |
| — |
| — |
| 1,962 |
| (8) | |||||||||||||
State and municipal securities |
|
| 4,851 |
| (70) |
| — |
| — |
| 4,851 |
| (70) | |||||||||||||
Total securities held-to-maturity |
| $ | 6,813 |
| (78) |
| — |
| — |
| 6,813 |
| (78) |
| | | | | | | | | | | | | |
| | December 31, 2019 | |||||||||||
| | Less than 12 Months | | 12 Months or more | | Total | |||||||
| | Fair | | Unrealized | | Fair | | Unrealized | | Fair | | Unrealized | |
(dollars in thousands) |
| value |
| losses |
| value |
| losses |
| value |
| losses | |
Securities available-for-sale: | | | | | | | | | | | | | |
U.S. asset backed securities | | $ | 11,866 | | (101) | | — | | — | | 11,866 | | (101) |
U.S. government agency mortgage-backed securities | | | — | | — | | 1,636 | | (26) | | 1,636 | | (26) |
U.S. government agency collateralized mortgage obligations | | | 16,283 | | (116) | | 3,108 | | (57) | | 19,391 | | (173) |
State and municipal securities | | | 6,270 | | (84) | | — | | — | | 6,270 | | (84) |
Total securities available-for-sale | | $ | 34,419 | | (301) | | 4,744 | | (83) | | 39,163 | | (384) |
The amortized cost and carrying value of securities at September 30, 20182020 and December 31, 2019 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 | ||||||||||||||
|
| Available-for-sale |
| Held-to-maturity |
| Available-for-sale |
| Held-to-maturity | ||||||||||
|
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair |
| Amortized |
| Fair | ||
(dollars in thousands) |
| cost |
| value |
| cost |
| value |
| cost |
| value |
| cost |
| value | ||
Due in one year or less |
| $ | 1,706 |
| 1,671 |
| 994 |
| 985 |
| $ | — |
| — |
| — |
| — |
Due after one year through five years |
|
| 8,229 |
| 8,070 |
| 3,746 |
| 3,702 |
|
| 5,630 |
| 5,587 |
| 3,803 |
| 3,791 |
Due after five years through ten years |
|
| 6,593 |
| 6,322 |
| 8,031 |
| 7,885 |
|
| 6,298 |
| 6,228 |
| 7,180 |
| 7,156 |
Due after ten years |
|
| 32,202 |
| 31,615 |
| — |
| — |
|
| 28,465 |
| 28,191 |
| 1,878 |
| 1,922 |
Total |
| $ | 48,730 |
| 47,678 |
| 12,771 |
| 12,572 |
| $ | 40,393 |
| 40,006 |
| 12,861 |
| 12,869 |
| | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | ||||||||||||||
| | Available-for-sale | | Held-to-maturity | | Available-for-sale | | Held-to-maturity | ||||||||||
| | Amortized | | Fair | | Amortized | | Fair | | Amortized | | Fair | | Amortized | | Fair | ||
(dollars in thousands) |
| cost |
| value |
| cost |
| value |
| cost |
| value |
| cost |
| value | ||
Investment securities: | | | | | | | | | | | | | | | | | | |
Due in one year or less | | $ | — | | — | | — | | — | | $ | — | | — | | — | | — |
Due after one year through five years | | | — | | — | | 3,196 | | 3,318 | | | — | | — | | 4,242 | | 4,311 |
Due after five years through ten years | | | 8,590 | | 8,568 | | 3,348 | | 3,598 | | | 1,329 | | 1,324 | | 4,538 | | 4,692 |
Due after ten years | | | 67,587 | | 68,196 | | — | | — | | | 16,992 | | 16,812 | | — | | — |
Subtotal | | | 76,177 | | 76,764 | | 6,544 | | 6,916 | | | 18,321 | | 18,136 | | 8,780 | | 9,003 |
Mortgage-related securities | | | 25,294 | | 26,594 | | — | | — | | | 40,553 | | 40,720 | | — | | — |
Total | | $ | 101,471 | | 103,358 | | 6,544 | | 6,916 | | $ | 58,874 | | 58,856 | | 8,780 | | 9,003 |
1112
(5) Loans Receivable
Loans and leases outstanding at September 30, 20182020 and December 31, 20172019 are detailed by category as follows:
| | | | | |
| | September 30, | | December 31, | |
(dollars in thousands) |
| 2020 |
| 2019 | |
Mortgage loans held for sale | | $ | 225,150 | | 33,704 |
Real estate loans: | | | | | |
Commercial mortgage | | | 460,952 | | 362,590 |
Home equity lines and loans | | | 71,400 | | 81,583 |
Residential mortgage (1) | | | 55,500 | | 53,665 |
Construction | | | 151,226 | | 172,044 |
Total real estate loans | | | 739,078 | | 669,882 |
| | | | | |
Commercial and industrial | | | 256,452 | | 273,301 |
Small business loans | | | 44,280 | | 21,616 |
Paycheck Protection Program loans | | | 259,723 | | — |
Consumer | | | 582 | | 1,003 |
Leases, net | | | 13,374 | | 697 |
Total portfolio loans and leases | | | 1,313,489 | | 966,499 |
Total loans and leases | | $ | 1,538,639 | | 1,000,203 |
| | | | | |
Loans with predetermined rates | | $ | 720,791 | | 293,114 |
Loans with adjustable or floating rates | | | 817,848 | | 707,089 |
Total loans and leases | | $ | 1,538,639 | | 1,000,203 |
| | | | | |
Net deferred loan origination (fees) costs | | $ | (6,643) | | (1,789) |
(1) | Includes $11,366 and $10,546 of loans at fair value as of September 30, 2020 and December 31, 2019, respectively. |
|
|
|
|
|
|
|
| September 30, |
| December 31, | |
(dollars in thousands) |
| 2018 |
| 2017 | |
Mortgage loans held for sale |
| $ | 34,044 |
| 35,024 |
Real estate loans: |
|
|
|
|
|
Commercial mortgage |
|
| 316,671 |
| 263,141 |
Home equity lines and loans |
|
| 82,773 |
| 84,039 |
Residential mortgage |
|
| 50,363 |
| 32,375 |
Construction |
|
| 104,518 |
| 104,970 |
Total real estate loans |
|
| 554,325 |
| 484,525 |
|
|
|
|
|
|
Commercial and industrial |
|
| 252,960 |
| 209,996 |
Consumer |
|
| 783 |
| 1,022 |
Leases, net |
|
| 364 |
| 762 |
Total portfolio loans and leases |
|
| 808,432 |
| 696,305 |
Total loans and leases |
| $ | 842,476 |
| 731,329 |
|
|
|
|
|
|
Loans with predetermined rates |
| $ | 249,683 |
| 202,317 |
Loans with adjustable or floating rates |
|
| 592,793 |
| 529,012 |
Total loans and leases |
| $ | 842,476 |
| 731,329 |
|
|
|
|
|
|
Net deferred loan origination (fees) costs |
| $ | (1,644) |
| (1,668) |
Components of the net investment in leases at September 30, 20182020 and December 31, 20172019 are detailed as follows:
|
|
|
|
|
|
|
| September 30, |
| December 31, | |
(dollars in thousands) |
| 2018 |
| 2017 | |
Minimum lease payments receivable |
| $ | 376 |
| 793 |
Unearned lease income |
|
| (12) |
| (31) |
Total |
| $ | 364 |
| 762 |
| | | | | |
| | September 30, | | December 31, | |
(dollars in thousands) |
| 2020 |
| 2019 | |
Minimum lease payments receivable | | $ | 16,306 | | 729 |
Unearned lease income | | | (2,932) | | (32) |
Total | | $ | 13,374 | | 697 |
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, 20182020 and December 31, 2017,2019, 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 |
|
|
|
|
|
|
| ||||||||||||||||||
|
|
|
|
| 90+ days |
|
|
|
|
| Accruing |
| Nonaccrual |
|
|
|
|
| ||||||||||||||||||
December 31, 2017 |
| 30-89 days |
| past due and |
| Total past |
|
|
| Loans and |
| loans and |
| Total loans |
| Delinquency |
| |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
| | | | | | | | | | | Total | | | | | | | | ||||||||||||||||||
| | | | 90+ days | | | | | | Accruing | | Nonaccrual | | | | | | |||||||||||||||||||
September 30, 2020 | | 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 | % | | $ | — | | — | | — | | 460,285 | | 460,285 | | 667 | | 460,952 | | 0.14 | % |
Home equity lines and loans |
|
| 142 |
| — |
| 142 |
| 83,760 |
| 83,902 |
| 137 |
| 84,039 |
| 0.33 |
| | | — | | — | | — | | 70,737 | | 70,737 | | 663 | | 71,400 | | 0.93 | |
Residential mortgage |
|
| 734 |
| — |
| 734 |
| 30,557 |
| 31,291 |
| 1,084 |
| 32,375 |
| 5.62 |
| | | 389 | | — | | 389 | | 52,578 | | 52,967 | | 2,533 | | 55,500 | | 5.26 | |
Construction |
|
| — |
| — |
| — |
| 104,785 |
| 104,785 |
| 185 |
| 104,970 |
| 0.18 |
| | | — | | — | | — | | 151,226 | | 151,226 | | — | | 151,226 | | — | |
Commercial and industrial |
|
| — |
| — |
| — |
| 208,670 |
| 208,670 |
| 1,326 |
| 209,996 |
| 0.63 |
| | | — | | — | | — | | 252,403 | | 252,403 | | 4,049 | | 256,452 | | 1.58 | |
Small business loans | | | — | | — | | — | | 44,280 | | 44,280 | | — | | 44,280 | | — | | ||||||||||||||||||
Paycheck Protection Program loans | | | — | | — | | — | | 259,723 | | 259,723 | | — | | 259,723 | | — | | ||||||||||||||||||
Consumer |
|
| — |
| — |
| — |
| 1,022 |
| 1,022 |
| — |
| 1,022 |
| — |
| | | — | | — | | — | | 582 | | 582 | | — | | 582 | | — | |
Leases |
|
| 87 |
| 11 |
| 98 |
| 664 |
| 762 |
| — |
| 762 |
| 12.86 |
| | | 8 | | — | | 8 | | 13,366 | | 13,374 | | — | | 13,374 | | 0.06 | |
Total |
| $ | 963 |
| 11 |
| 974 |
| 692,185 |
| 693,159 |
| 3,146 |
| 696,305 |
| 0.59 | % | | $ | 397 | | — | | 397 | | 1,305,180 | | 1,305,577 | | 7,912 | | 1,313,489 | | 0.63 | % |
(1) Includes $11,366 of loans at fair value as of September 30, 2020 ($10,489 of current and $877 of nonaccrual).
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Total | | | | | | | |
| | | | 90+ days | | | | | | Accruing | | Nonaccrual | | | | | | |
December 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 |
| |
Commercial mortgage | | $ | — | | — | | — | | 361,857 | | 361,857 | | 733 | | 362,590 | | 0.20 | % |
Home equity lines and loans | | | — | | — | | — | | 81,046 | | 81,046 | | 537 | | 81,583 | | 0.66 | |
Residential mortgage (1) | | | 4,675 | | — | | 4,675 | | 47,446 | | 52,121 | | 1,544 | | 53,665 | | 11.59 | |
Construction | | | — | | — | | — | | 172,044 | | 172,044 | | — | | 172,044 | | — | |
Commercial and industrial | | | 206 | | — | | 206 | | 272,674 | | 272,880 | | 421 | | 273,301 | | 0.23 | |
Small business loans | | | — | | — | | — | | 21,616 | | 21,616 | | — | | 21,616 | | — | |
Consumer | | | — | | — | | — | | 1,003 | | 1,003 | | — | | 1,003 | | — | |
Leases | | | 162 | | — | | 162 | | 535 | | 697 | | — | | 697 | | 23.24 | |
Total | | $ | 5,043 | | — | | 5,043 | | 958,221 | | 963,264 | | 3,235 | | 966,499 | | 0.86 | % |
(1) | Includes $10,546 of loans at fair value as of December 31, 2019 ($9,056 of current, $786 of 30-89 days past due and $704 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‑forwardroll-forward of the Corporation’s Allowance, by portfolio segment, for the three and nine month periods ended September 30, 20182020 and 2017,2019, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, |
|
|
|
|
|
|
| Balance, | |
(dollars in thousands) |
| June 30, 2018 |
| Charge-offs |
| Recoveries |
| Provision |
| September 30, 2018 | |
Commercial mortgage |
| $ | 3,011 |
| — |
| 2 |
| 140 |
| 3,153 |
Home Equity lines and loans |
|
| 269 |
| — |
| 10 |
| 37 |
| 316 |
Residential mortgage |
|
| 166 |
| — |
| — |
| 14 |
| 180 |
Construction |
|
| 1,438 |
| — |
| — |
| 59 |
| 1,497 |
Commercial and industrial |
|
| 2,559 |
| (50) |
| 8 |
| 41 |
| 2,558 |
Consumer |
|
| 3 |
| — |
| 1 |
| — |
| 4 |
Leases |
|
| 3 |
| — |
| — |
| — |
| 3 |
Unallocated |
|
| — |
| — |
| — |
| — |
| — |
Total |
| $ | 7,449 |
| (50) |
| 21 |
| 291 |
| 7,711 |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| Balance, |
|
|
|
|
|
|
| Balance, | ||||||||||||
| | | | | | | | | | | | |||||||||||
| | Balance, | | | | | | | | Balance, | ||||||||||||
(dollars in thousands) |
| December 31, 2017 |
| Charge-offs |
| Recoveries |
| Provision |
| September 30, 2018 |
| June 30, 2020 |
| Charge-offs |
| Recoveries |
| Provision |
| September 30, 2020 | ||
Commercial mortgage |
| $ | 2,434 |
| — |
| 6 |
| 713 |
| 3,153 | | $ | 5,277 | | — | | — | | 1,658 | | 6,935 |
Home Equity lines and loans |
|
| 280 |
| (137) |
| 14 |
| 159 |
| 316 | |||||||||||
Home equity lines and loans | | | 672 | | (75) | | 2 | | (82) | | 517 | |||||||||||
Residential mortgage |
|
| 82 |
| — |
| 61 |
| 37 |
| 180 | | | 346 | | — | | 1 | | (13) | | 334 |
Construction |
|
| 1,689 |
| — |
| — |
| (192) |
| 1,497 | | | 2,019 | | — | | — | | 463 | | 2,482 |
Commercial and industrial |
|
| 2,214 |
| (244) |
| 41 |
| 547 |
| 2,558 | | | 3,606 | | (22) | | 4 | | 1,450 | | 5,038 |
Small business loans | | | 747 | | — | | — | | 360 | | 1,107 | |||||||||||
Consumer |
|
| 5 |
| — |
| 3 |
| (4) |
| 4 | | | 4 | | — | | 1 | | (1) | | 4 |
Leases |
|
| 5 |
| — |
| — |
| (2) |
| 3 | | | 35 | | — | | — | | 121 | | 156 |
Unallocated |
|
| — |
| — |
| — |
| — |
| — | |||||||||||
Total |
| $ | 6,709 |
| (381) |
| 125 |
| 1,258 |
| 7,711 | | $ | 12,706 | | (97) | | 8 | | 3,956 | | 16,573 |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| Balance, |
|
|
|
|
|
|
| Balance, | ||||||||||||
| | | | | | | | | | | | |||||||||||
| | Balance, | | | | | | | | Balance, | ||||||||||||
(dollars in thousands) |
| June 30, 2017 |
| Charge-offs |
| Recoveries |
| Provision |
| September 30, 2017 |
| December 31, 2019 |
| Charge-offs |
| Recoveries |
| Provision |
| September 30, 2020 | ||
Commercial mortgage |
| $ | 2,423 |
| (52) |
| — |
| 9 |
| 2,380 | | $ | 3,426 | | — | | — | | 3,509 | | 6,935 |
Home Equity lines and loans |
|
| 228 |
| — |
| 52 |
| (58) |
| 222 | |||||||||||
Home equity lines and loans | | | 342 | | (89) | | 6 | | 258 | | 517 | |||||||||||
Residential mortgage |
|
| 79 |
| — |
| — |
| (2) |
| 77 | | | 179 | | — | | 5 | | 150 | | 334 |
Construction |
|
| 1,388 |
| — |
| — |
| 93 |
| 1,481 | | | 2,362 | | — | | — | | 120 | | 2,482 |
Commercial and industrial |
|
| 2,086 |
| (528) |
| 7 |
| 626 |
| 2,191 | | | 2,684 | | (31) | | 37 | | 2,348 | | 5,038 |
Small business loans | | | 509 | | — | | — | | 598 | | 1,107 | |||||||||||
Consumer |
|
| 2 |
| — |
| 1 |
| (2) |
| 1 | | | 6 | | (10) | | 3 | | 5 | | 4 |
Leases |
|
| 8 |
| — |
| — |
| (1) |
| 7 | | | 5 | | — | | — | | 151 | | 156 |
Unallocated |
|
| — |
| — |
| — |
| — |
| — | |||||||||||
Total |
| $ | 6,214 |
| (580) |
| 60 |
| 665 |
| 6,359 | | $ | 9,513 | | (130) | | 51 | | 7,139 | | 16,573 |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| Balance, |
|
|
|
|
|
|
| Balance, | ||||||||||||
| | | | | | | | | | | | |||||||||||
| | Balance, | | | | | | | | Balance, | ||||||||||||
(dollars in thousands) |
| December 31, 2016 |
| Charge-offs |
| Recoveries |
| Provision |
| September 30, 2017 |
| June 30, 2019 |
| Charge-offs |
| Recoveries |
| Provision |
| September 30, 2019 | ||
Commercial mortgage |
| $ | 2,038 |
| (83) |
| 16 |
| 409 |
| 2,380 | | $ | 3,197 | | — | | 1 | | 257 | | 3,455 |
Home Equity lines and loans |
|
| 460 |
| (42) |
| 46 |
| (242) |
| 222 | |||||||||||
Home equity lines and loans | | | 354 | | — | | 2 | | (28) | | 328 | |||||||||||
Residential mortgage |
|
| 85 |
| — |
| 2 |
| (10) |
| 77 | | | 200 | | — | | 2 | | (30) | | 172 |
Construction |
|
| 690 |
| — |
| — |
| 791 |
| 1,481 | | | 2,033 | | — | | — | | 136 | | 2,169 |
Commercial and industrial |
|
| 1,973 |
| (647) |
| 193 |
| 672 |
| 2,191 | | | 2,719 | | (30) | | 6 | | 171 | | 2,866 |
Small business loans | | | 111 | | — | | — | | 198 | | 309 | |||||||||||
Consumer |
|
| 2 |
| — |
| 4 |
| (5) |
| 1 | | | 4 | | — | | 1 | | 1 | | 6 |
Leases |
|
| 5 |
| — |
| — |
| 2 |
| 7 | | | 7 | | — | | — | | — | | 7 |
Unallocated |
|
| 172 |
| — |
| — |
| (172) |
| — | |||||||||||
Total |
| $ | 5,425 |
| (772) |
| 261 |
| 1,445 |
| 6,359 | | $ | 8,625 | | (30) | | 12 | | 705 | | 9,312 |
| | | | | | | | | | | |
| | Balance, | | | | | | | | Balance, | |
(dollars in thousands) |
| December 31, 2018 |
| Charge-offs |
| Recoveries |
| Provision |
| September 30, 2019 | |
Commercial mortgage | | $ | 3,209 | | — | | 6 | | 240 | | 3,455 |
Home equity lines and loans | | | 323 | | — | | 10 | | (5) | | 328 |
Residential mortgage | | | 191 | | — | | 4 | | (23) | | 172 |
Construction | | | 1,627 | | — | | — | | 542 | | 2,169 |
Commercial and industrial | | | 2,612 | | (30) | | 328 | | (44) | | 2,866 |
Small business loans | | | 78 | | — | | — | | 231 | | 309 |
Consumer | | | 3 | | — | | 3 | | — | | 6 |
Leases | | | 10 | | — | | — | | (3) | | 7 |
Total | | $ | 8,053 | | (30) | | 351 | | 938 | | 9,312 |
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, 20182020 and December 31, 2017.2019.
| | | | | | | | | | | | | | | |
| | Allowance on loans and leases | | Carrying value of loans and leases | | ||||||||||
| | Individually | | Collectively | | | | Individually | | Collectively | | | | ||
September 30, 2020 | | evaluated | | evaluated | | | | evaluated | | evaluated | | | | ||
(dollars in thousands) |
| for impairment |
| for impairment |
| Total |
| for impairment |
| for impairment |
| Total | | ||
Commercial mortgage | | $ | — | | 6,935 | | 6,935 | | $ | 2,005 | | 458,947 | | 460,952 | |
Home equity lines and loans | | | 16 | | 501 | | 517 | | | 663 | | 70,737 | | 71,400 | |
Residential mortgage | | | — | | 334 | | 334 | | | 1,648 | | 42,486 | | 44,134 | |
Construction | | | — | | 2,482 | | 2,482 | | | 1,206 | | 150,020 | | 151,226 | |
Commercial and industrial | | | 1,565 | | 3,473 | | 5,038 | | | 4,726 | | 251,726 | | 256,452 | |
Small business loans | | | — | | 1,107 | | 1,107 | | | 199 | | 44,081 | | 44,280 | |
Paycheck Protection Program loans | | | — | | — | | — | | | — | | 259,723 | | 259,723 | |
Consumer | | | — | | 4 | | 4 | | | — | | 582 | | 582 | |
Leases | | | — | | 156 | | 156 | | | — | | 13,374 | | 13,374 | |
Total | | $ | 1,581 | | 14,992 | | 16,573 | | $ | 10,447 | | 1,291,676 | | 1,302,123 | (1) |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | Allowance on loans and leases | | Carrying value of loans and leases | | ||||||||||
| | Individually | | Collectively | | | | Individually | | Collectively | | | | ||
December 31, 2019 | | evaluated | | evaluated | | | | evaluated | | evaluated | | | | ||
(dollars in thousands) |
| for impairment |
| for impairment |
| Total |
| for impairment |
| for impairment |
| Total | | ||
Commercial mortgage | | $ | — | | 3,426 | | 3,426 | | $ | 2,138 | | 360,452 | | 362,590 | |
Home equity lines and loans | | | 46 | | 296 | | 342 | | | 536 | | 81,047 | | 81,583 | |
Residential mortgage | | | — | | 179 | | 179 | | | 854 | | 42,265 | | 43,119 | |
Construction | | | — | | 2,362 | | 2,362 | | | 1,247 | | 170,797 | | 172,044 | |
Commercial and industrial | | | 27 | | 2,657 | | 2,684 | | | 1,288 | | 272,013 | | 273,301 | |
Small business loans | | | 63 | | 446 | | 509 | | | 1,244 | | 20,372 | | 21,616 | |
Consumer | | | — | | 6 | | 6 | | | — | | 1,003 | | 1,003 | |
Leases | | | — | | 5 | | 5 | | | — | | 697 | | 697 | |
Total | | $ | 136 | | 9,377 | | 9,513 | | $ | 7,307 | | 948,646 | | 955,953 | (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allowance on loans and leases |
| Carrying value of loans and leases |
| ||||||||||
|
| Individually |
| Collectively |
|
|
| Individually |
| Collectively |
|
|
| ||
September 30, 2018 |
| evaluated |
| evaluated |
|
|
| evaluated |
| evaluated |
|
|
| ||
(dollars in thousands) |
| for impairment |
| for impairment |
| Total |
| for impairment |
| for impairment |
| Total |
| ||
Commercial mortgage |
| $ | — |
| 3,153 |
| 3,153 |
| $ | 1,703 |
| 314,968 |
| 316,671 |
|
Home Equity lines and loans |
|
| — |
| 316 |
| 316 |
|
| 85 |
| 82,688 |
| 82,773 |
|
Residential mortgage |
|
| — |
| 180 |
| 180 |
|
| 249 |
| 38,926 |
| 39,175 |
|
Construction |
|
| — |
| 1,497 |
| 1,497 |
|
| 1,296 |
| 103,222 |
| 104,518 |
|
Commercial and industrial |
|
| 7 |
| 2,551 |
| 2,558 |
|
| 3,143 |
| 249,817 |
| 252,960 |
|
Consumer |
|
| — |
| 4 |
| 4 |
|
| — |
| 783 |
| 783 |
|
Leases |
|
| — |
| 3 |
| 3 |
|
| — |
| 364 |
| 364 |
|
Unallocated |
|
| — |
| — |
| — |
|
| — |
| — |
| — |
|
Total |
| $ | 7 |
| 7,704 |
| 7,711 |
| $ | 6,476 |
| 790,768 |
| 797,244 | (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Allowance on loans and leases |
| Carrying value of loans and leases |
| ||||||||||
|
| Individually |
| Collectively |
|
|
| Individually |
| Collectively |
|
|
| ||
December 31, 2017 |
| evaluated |
| evaluated |
|
|
| evaluated |
| evaluated |
|
|
| ||
(dollars in thousands) |
| for impairment |
| for impairment |
| Total |
| for impairment |
| for impairment |
| Total |
| ||
Commercial mortgage |
| $ | — |
| 2,434 |
| 2,434 |
| $ | 1,533 |
| 261,607 |
| 263,140 |
|
Home Equity lines and loans |
|
| — |
| 280 |
| 280 |
|
| 137 |
| 83,902 |
| 84,039 |
|
Residential mortgage |
|
| — |
| 82 |
| 82 |
|
| 249 |
| 22,155 |
| 22,404 |
|
Construction |
|
| — |
| 1,689 |
| 1,689 |
|
| 260 |
| 104,710 |
| 104,970 |
|
Commercial and industrial |
|
| 1 |
| 2,213 |
| 2,214 |
|
| 2,506 |
| 207,490 |
| 209,996 |
|
Consumer |
|
| — |
| 5 |
| 5 |
|
| — |
| 1,022 |
| 1,022 |
|
Leases |
|
| — |
| 5 |
| 5 |
|
| — |
| 762 |
| 762 |
|
Unallocated |
|
| — |
| — |
| — |
|
| — |
| — |
| — |
|
Total |
| $ | 1 |
| 6,708 |
| 6,709 |
| $ | 4,685 |
| 681,648 |
| 686,333 | (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, managementManagement 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.Management. The results of these reviews are reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:
| Pass |
| Special mention – Loans classified as special mention have a potential weakness that deserves |
| 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 |
16
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 currently existing |
The following tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to allocatedetermine the allowance for loan and lease losses as of September 30, 20182020 and December 31, 2017:2019:
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018 |
|
|
|
| Special |
|
|
|
|
|
|
(dollars in thousands) |
| Pass |
| mention |
| Substandard |
| Doubtful |
| Total | |
Commercial mortgage |
| $ | 311,857 |
| 4,539 |
| 275 |
| — |
| 316,671 |
Home equity lines and loans |
|
| 82,606 |
| — |
| 167 |
| — |
| 82,773 |
Construction |
|
| 102,361 |
| 2,157 |
| — |
| — |
| 104,518 |
Commercial and industrial |
|
| 234,055 |
| 16,016 |
| 2,859 |
| 30 |
| 252,960 |
Total |
| $ | 730,879 |
| 22,712 |
| 3,301 |
| 30 |
| 756,922 |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
December 31, 2017 |
|
|
|
| Special |
|
|
|
|
|
| |||||||||||
| | | | | | | | | | | | |||||||||||
September 30, 2020 |
| | |
| Special |
| |
| |
| | |||||||||||
(dollars in thousands) |
| Pass |
| mention |
| Substandard |
| Doubtful |
| Total | | Pass | | mention | | Substandard | | Doubtful | | Total | ||
Commercial mortgage |
| $ | 258,337 |
| 3,917 |
| 887 |
| — |
| 263,141 | | $ | 441,090 | | 16,260 | | 3,602 | | — | | 460,952 |
Home equity lines and loans |
|
| 83,902 |
| — |
| 137 |
| — |
| 84,039 | | | 70,251 | | — | | 1,149 | | — | | 71,400 |
Construction |
|
| 103,118 |
| 1,852 |
| — |
| — |
| 104,970 | | | 142,420 | | 8,806 | | — | | — | | 151,226 |
Commercial and industrial |
|
| 194,784 |
| 13,997 |
| 448 |
| 767 |
| 209,996 | | | 220,760 | | 22,950 | | 9,019 | | 3,723 | | 256,452 |
Small business loans | | | 41,548 | | — | | 2,732 | | — | | 44,280 | |||||||||||
Paycheck Protection Program loans | | | 259,723 | | — | | — | | — | | 259,723 | |||||||||||
Total |
| $ | 640,141 |
| 19,766 |
| 1,472 |
| 767 |
| 662,146 | | $ | 1,175,792 | | 48,016 | | 16,502 | | 3,723 | | 1,244,033 |
| | | | | | | | | | | |
December 31, 2019 |
| | |
| Special |
| |
| |
| |
(dollars in thousands) | | Pass | | mention | | Substandard | | Doubtful | | Total | |
Commercial mortgage | | $ | 353,724 | | 5,821 | | 3,045 | | — | | 362,590 |
Home equity lines and loans | | | 81,046 | | — | | 537 | | — | | 81,583 |
Construction | | | 170,823 | | 1,221 | | — | | — | | 172,044 |
Commercial and industrial | | | 251,320 | | 9,648 | | 12,333 | | — | | 273,301 |
Small business loans | | | 20,351 | | — | | 1,265 | | — | | 21,616 |
Total | | $ | 877,264 | | 16,690 | | 17,180 | | — | | 911,134 |
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, 20182020 and December 31, 2017. No2019. NaN troubled debt restructurings performing according to modified terms are included in performing residential mortgages below as of September 30, 20182020 and December 31, 2017.2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2018 |
| December 31, 2017 | ||||||||||
(dollars in thousands) |
| Performing |
| Nonperforming |
| Total |
| Performing |
| Nonperforming |
| Total | ||
Residential mortgage |
| $ | 38,926 |
| 249 |
| 39,175 |
| $ | 22,154 |
| 249 |
| 22,403 |
Consumer |
|
| 783 |
| — |
| 783 |
|
| 1,022 |
| — |
| 1,022 |
Leases |
|
| 364 |
| — |
| 364 |
|
| 762 |
| — |
| 762 |
Total |
| $ | 40,073 |
| 249 |
| 40,322 |
| $ | 23,938 |
| 249 |
| 24,187 |
| | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | ||||||||||
(dollars in thousands) |
| Performing |
| Nonperforming |
| Total |
| Performing |
| Nonperforming |
| Total | ||
Residential mortgage | | $ | 42,486 | | 1,648 | | 44,134 | | $ | 42,265 | | 854 | | 43,119 |
Consumer | | | 582 | | — | | 582 | | | 1,003 | | — | | 1,003 |
Leases | | | 13,374 | | — | | 13,374 | | | 697 | | — | | 697 |
Total | | $ | 56,442 | | 1,648 | | 58,090 | | $ | 43,965 | | 854 | | 44,819 |
There were seven5 nonperforming residential mortgage loans at September 30, 20182020 and four5 nonperforming residential mortgage loans at December 31, 20172019 with a combined outstanding principal balance of $1.9 million$877 thousand and $826$839 thousand, respectively, which were carried at fair value and not included in the table above.
1617
Impaired Loans
The following tables detailtable details the recorded investment and principal balance of impaired loans by portfolio segment, and their related allowance for loan and lease losseslosses.
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | As of September 30, 2020 | | As of December 31, 2019 | |||||||||
| | Recorded | | Principal | | Related | | Recorded | | Principal | | Related | |
(dollars in thousands) |
| investment |
| balance |
| allowance |
| investment |
| balance |
| allowance | |
Impaired loans with related allowance: | | | | | | | | | | | | | |
Commercial and industrial | | | 3,903 | | 3,907 | | 1,565 | | 617 | | 617 | | 27 |
Small business loans | | | — | | — | | — | | 1,002 | | 1,002 | | 63 |
Home equity lines and loans | | | 99 | | 106 | | 16 | | 461 | | 461 | | 46 |
Total | | | 4,002 | | 4,013 | | 1,581 | | 2,080 | | 2,080 | | 136 |
Impaired loans without related allowance: | | | | | | | | | | | | | |
Commercial mortgage | | $ | 2,005 | | 2,035 | | — | | 2,138 | | 2,173 | | — |
Commercial and industrial | | | 823 | | 897 | | — | | 671 | | 718 | | — |
Small business loans | | | 199 | | 199 | | — | | 242 | | 242 | | — |
Home equity lines and loans | | | 564 | | 581 | | — | | 75 | | 75 | | — |
Residential mortgage | | | 1,648 | | 1,648 | | — | | 854 | | 854 | | — |
Construction | | | 1,206 | | 1,206 | | — | | 1,247 | | 1,248 | | — |
Total | | | 6,445 | | 6,566 | | — | | 5,227 | | 5,310 | | — |
Grand Total | | $ | 10,447 | | 10,579 | | 1,581 | | 7,307 | | 7,390 | | 136 |
The following table details the average recorded investment and interest income recognized for the periods.on impaired loans by portfolio segment.
| | | | | | | | | | |
| | | Three Months Ended | | Three Months Ended | | | Nine Months Ended | | Nine Months Ended |
| | | September 30, | | September 30, | | | September 30, | | September 30, |
| | | 2020 | | 2019 | | | 2020 | | 2019 |
| | | Average | | Average | | | Average | | Average |
| | | recorded | | recorded | | | recorded | | recorded |
(dollars in thousands) |
| | investment | | investment | | | investment | | investment |
Impaired loans with related allowance: | | | | | | | | | | |
Commercial and industrial | | $ | 3,907 | | 561 | | $ | 1,766 | | 566 |
Small business loans | | | — | | — | | | — | | — |
Home equity lines and loans | | | 100 | | 255 | | | 103 | | 256 |
Total | | $ | 4,007 | | 816 | | $ | 1,869 | | 822 |
Impaired loans without related allowance: | | | | | | | | | | |
Commercial mortgage | | $ | 2,080 | | 2,220 | | $ | 1,852 | | 2,272 |
Commercial and industrial | | | 874 | | 597 | | | 700 | | 602 |
Small business loans | | | 208 | | 259 | | | 220 | | 262 |
Home equity lines and loans | | | 564 | | - | | | 575 | | - |
Residential mortgage | | | 1,649 | | 857 | | | 1,478 | | 857 |
Construction | | | 1,206 | | 1,270 | | | 1,209 | | 1,286 |
Total | | $ | 6,581 | | 5,203 | | $ | 6,034 | | 5,279 |
Grand Total | | $ | 10,588 | | 6,019 | | $ | 7,903 | | 6,101 |
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| At September 30, 2018 |
| At December 31, 2017 | |||||||||||||
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| Average |
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|
| Average | |
|
| Recorded |
| Principal |
| Related |
| recorded |
| Recorded |
| Principal |
| Related |
| recorded | |
(dollars in thousands) |
| 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 |
Home equity lines and loans |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
Residential mortgage |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
Construction |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
Total |
|
| 479 |
| 479 |
| 7 |
| 476 |
| 124 |
| 491 |
| 1 |
| 173 |
Impaired loans without related allowance: |
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|
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|
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|
|
Commercial mortgage |
| $ | 1,703 |
| 2,136 |
| — |
| 1,698 |
| 1,534 |
| 2,025 |
| — |
| 1,537 |
Commercial and industrial |
|
| 2,664 |
| 2,746 |
| — |
| 2,748 |
| 1,907 |
| 3,180 |
| — |
| 2,945 |
Home equity lines and loans |
|
| 85 |
| 89 |
| — |
| 86 |
| 137 |
| 137 |
| — |
| 137 |
Residential mortgage |
|
| 249 |
| 258 |
| — |
| 254 |
| 249 |
| 249 |
| — |
| 249 |
Construction |
|
| 1,296 |
| 1,296 |
| — |
| 1,401 |
| 260 |
| 260 |
| — |
| 267 |
Total |
|
| 5,997 |
| 6,525 |
| — |
| 6,187 |
| 4,087 |
| 5,851 |
| — |
| 5,135 |
Grand Total |
| $ | 6,476 |
| 7,004 |
| 7 |
| 6,663 |
| 4,211 |
| 6,342 |
| 1 |
| 5,308 |
18
Interest income recognized on performing impaired loans amounted to $93$139 thousand and $63$50 thousand for the three months ended September 30, 20182020 and 2017,2019, respectively, and $218$281 thousand and $213$152 thousand for the nine months ended September 30, 20182020 and 2017,2019, 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.
17
The balance of
TDRs at September 30, 20182020 and December 31, 20172019 are as follows:
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| |||||
|
| September 30, |
| December 31, | ||||||
| | | | | | |||||
| | September 30, | | December 31, | ||||||
(dollars in thousands) |
| 2018 |
| 2017 |
| 2020 |
| 2019 | ||
TDRs included in nonperforming loans and leases |
| $ | 554 |
| 741 | | $ | 246 |
| 319 |
TDRs in compliance with modified terms |
|
| 3,463 |
| 1,900 | |
| 3,428 |
| 3,599 |
Total TDRs |
| $ | 4,017 |
| 2,641 | | $ | 3,674 |
| 3,918 |
The following tables present information regardingThere were 0 loan and lease modification granted during the three months ended September 30, 2020 that was categorized as a TDR as noted in the table below.
| | | | | | | | | | | |
| | For the Nine Months Ended September 30, 2020 | |||||||||
|
| |
| Pre-Modification |
| Post-Modification |
| | | ||
| | | | Outstanding | | Outstanding | | | | ||
| | Number of | | Recorded | | Recorded | | Related | |||
(dollar in thousands) | | Contracts | | Investment | | Investment | | Allowance | |||
Real Estate: | | | | | | | | | | | |
Commercial mortgage | | — | | $ | — | | $ | — | | $ | — |
Land and Construction | | — | | | — | | | — | | | — |
Commercial and industrial | | 1 | | | 58 | | | 58 | | | — |
Total | | 1 | | $ | 58 | | $ | 58 | | $ | — |
There were 0 loan and lease modifications granted during the three and nine months ended September 30, 20182019 that werewas 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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| ||
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|
|
| Outstanding |
| Outstanding |
|
|
| ||
|
| Number of |
| Recorded |
| Recorded |
| Related | |||
(dollar in thousands) |
| Contracts |
| Investment |
| Investment |
| Allowance | |||
Real Estate: |
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|
|
|
|
|
|
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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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| ||
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| Outstanding |
| Outstanding |
|
|
| ||
|
| 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 |
|
| 120 |
|
| — |
Total |
| 3 |
| $ | 2,530 |
| $ | 2,530 |
| $ | — |
NoTDR’s. NaN loan and lease modifications granted during the three and nine months ended September 30, 20182020 and 2019 subsequently defaulted during the same time period.
19
COVID-19 Loan Modifications
The following table presents information regardingdetails the loan and lease modifications granted duringthat the nine months endedCorporation provided to loan customers as of September 30, 20172020.
| | | | | | |
| | September 30, 2020 | ||||
|
| Portfolio | | Total | | Active |
Loan Portfolio | | Balance | | Modifications | | Modifications |
Commercial mortgage | $ | 460,952 | $ | 86,591 | $ | 4,182 |
Commercial and industrial, including leases | | 269,826 | | 24,362 | | 200 |
Construction & land development | | 151,226 | | 36,819 | | 14,196 |
Home equity lines and loans | | 71,400 | | 1,348 | | - |
Residential mortgage | | 44,134 | | 4,800 | | 558 |
Small business loans | | 44,280 | | 144 | | - |
Consumer | | 582 | | - | | — |
Total | $ | 1,042,400 | $ | 154,064 | $ | 19,136 |
These loan modifications were made in accordance with Section 4013 of the CARES Act and the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus. Modifications granted to borrowers under this guidance that are related to COVID-19 are not required to be evaluated as troubled debt restructurings under ASC 310-40. These modified loans are classified as performing and are not considered past due. Loans are to be placed on non-accrual when it becomes apparent that payment of interest or recovery of all principal is questionable, and the COVID-19 related modification is no longer considered short-term or the modification is deemed ineffective. In total $111.0 million of commercial loans covering 146 borrowers and $36.8 million of construction loans for 35 borrowers were categorizedassisted with loan payment holidays of 3 to 6 months or lowered interest rates for certain construction loans. $6.2 million of residential mortgage and home equity loans covering 25 total borrowers were provided with 3 to 6 month payment holidays 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 |
| $ | — |
well. These modifications were not classified as troubled debt restructurings. As of October 26, 2020, $4.4 million of commercial loans had active payment deferrals, along with $14.2 million of construction loans and $558 thousand of residential loans.
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.
18
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 | ||||
|
| September 30, 2018 |
| September 30, 2017 | ||||
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| Interest Rate |
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|
| Interest Rate |
|
| 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‑TermLong-Term Debt
The Corporation’s short‑termshort-term borrowings generally consist of federal funds purchased and short‑termshort-term borrowings extended under agreements with the Federal Home Loan Bank of Pittsburgh (“FHLB”). The Corporation has two2 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 0 Federal fundsFunds purchased of $0 and $0 at September 30, 20182020 and December 31, 2017, respectively.2019. The Corporation also has a facility with the Federal Reserve Bank (“FRB”) of Philadelphia discount window of $10,667,121.$10.6 million. This facility is fully secured by investment securities and loans.securities. There were no$10 million in borrowings under this facility at September 30, 2018 or2020 and NaN at December 31, 20172019.
Short‑term20
Short-term borrowings as ofat September 30, 20182020 and December 31, 2019 consisted of short‑term advances from the FHLB infollowing notes:
| | | | | | | | | |
| | | | | | Balance as of | |||
| | Maturity | | Interest | | September 30, | | December 31, | |
(dollars in thousands) | | date |
| rate |
| 2020 |
| 2019 | |
Open Repo Plus Weekly | | 05/28/2021 | | 0.39 | % | | 56,640 | | 102,320 |
Federal Reserve Discount Window | | 09/30/2020 | | 0.25 | | | 10,000 | | — |
Mid-term Repo-fixed | | 12/09/2020 | | 0.42 | | | 3,752 | | — |
Mid-term Repo-fixed | | 01/13/2021 | | 0.36 | | | 4,605 | | — |
Mid-term Repo-fixed | | 01/27/2021 | | 0.23 | | | 5,465 | | — |
Mid-term Repo-fixed | | 03/09/2021 | | 0.79 | | | 10,417 | | — |
Mid-term Repo-fixed | | 03/22/2021 | | 0.88 | | | 10,238 | | — |
Mid-term Repo-fixed | | 06/28/2021 | | 1.88 | | | 3,122 | | — |
Mid-term Repo-fixed | | 08/10/2020 | | 2.76 | | | — | | 5,000 |
Mid-term Repo-fixed | | 08/10/2020 | | 1.59 | | | — | | 5,144 |
Mid Term Repo Fixed Rate | | 09/11/2020 | | 1.59 | | | — | | 7,676 |
Mid Term Repo Fixed Rate | | 03/27/2020 | | 2.03 | | | — | | 3,123 |
Acquisition Purchase Note | | 04/01/2020 | | 3.00 | | | — | | 413 |
Total | | | | | | $ | 104,239 | | 123,676 |
As part of the amountCARES Act, the FRB of $40,755,700 with interestPhiladelphia offered secured discounted borrowings to banks who originated PPP loans through the Paycheck Protection Program Liquidity Facility or PPPLF program. At September 30, 2020, the Corporation pledged $235.9 million of PPP loans to the FRB of Philadelphia to borrow $235.9 million of funds at 2.10%, $1,800,000 with an original terma rate 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, 2017 consisted of short-term advances from the FHLB in the amount of $93,750,000 with interest at 1.54%, $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 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%0.35%.
Long‑termLong-term debt at September 30, 20182020 and December 31, 20172019 consisted of the following fixed rate notes with the FHLB and the acquisition purchase note issued in connection with HJ Wealth:notes:
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| Balance as of | ||||||||||||
|
| Maturity |
| Interest |
| September 30, |
| December 31, | ||||||||||
| | | | | | | | | | |||||||||
| | | | | | Balance as of | ||||||||||||
| | Maturity | | Interest | | September 30, | | December 31, | ||||||||||
(dollars in thousands) |
| date |
| rate |
| 2018 |
| 2017 |
| date |
| rate |
| 2020 |
| 2019 | ||
PPPLF Advance | | Various | | 0.35 | % | | 235,953 | | — | |||||||||
Mid-term Repo-fixed |
| 06/26/19 |
| 1.70 | % |
| — |
| 1,800 | | 03/21/2022 | | 0.92 | | $ | 1,900 | | — |
Mid-term Repo-fixed |
| 08/10/20 |
| 2.76 | % |
| 5,000 |
| 5,000 | | 06/29/2022 | | 0.32 | | | 7,392 | | 3,123 |
Acquisition Purchase Note |
| 04/01/20 |
| 3.00 | % |
| 1,444 |
| 2,063 | |||||||||
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|
| $ | 6,444 |
| 8,863 | |||||||||
Mid-term Repo-fixed | | 09/12/2022 | | 0.23 | | | 4,886 | | — | |||||||||
Total | | ` | | | | $ | 250,131 | | 3,123 |
19
The FHLB of Pittsburgh has also issued $88,100,000$129 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. throughout 2020.
The Corporation has a maximum borrowing capacity with the FHLB of $432,816,917$615.3 million as of September 30, 20182020 and $380,159,142$507.3 million as of December 31, 2017.2019. 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) Servicing Assets
The Corporation sells certain residential mortgage loans and the guaranteed portion of certain small business loans (“SBA loans”) to third parties and retains servicing rights and receives servicing fees. All such transfers are accounted for as sales. When the Corporation sells a residential mortgage loan, it does not retain any portion of that loan and its continuing involvement in such transfers is limited to certain servicing responsibilities. While the Corporation may retain a portion of certain sold SBA loans, its continuing involvement in the portion of the loan that was sold is limited to certain servicing responsibilities. When the contractual servicing fees on loans sold with
21
servicing retained are expected to be more than adequate compensation to a servicer for performing the servicing, a capitalized servicing asset is recognized. The Corporation accounts for the transfers and servicing of financial assets in accordance with ASC 860, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
Residential Mortgage Loans
The mortgage servicing rights (“MSRs”) are amortized over the period of the estimated future net servicing life of the underlying assets. MSR’s are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the MSR. The Corporation serviced $298.7 million and $60.3 million of residential mortgage loans as of September 30, 2020 and December 31, 2019, respectively. During the three and nine months ended September 30, 2020, the Corporation recognized servicing fee income of $140 thousand and $247 thousand, respectively, compared to $25 thousand and $59 thousand during the three and nine months ended September 30, 2019, respectively.
Changes in the MSR balance are summarized as follows:
| | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||
(dollars in thousands) | | 2020 |
| 2019 | | 2020 |
| 2019 | ||
Balance at beginning of the period | | $ | 1,294 | | 236 | | $ | 446 | | 232 |
Servicing rights capitalized | | | 1,333 | | 107 | | | 2,469 | | 198 |
Amortization of servicing rights | | | (90) | | (17) | | | (173) | | (39) |
Change in valuation allowance | | | 102 | | (12) | | | (103) | | (77) |
Balance at end of the period | | $ | 2,639 | | 314 | | $ | 2,639 | | 314 |
Activity in the valuation allowance for MSR’s was as follows:
| | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||
(dollars in thousands) | | 2020 |
| 2019 | | 2020 |
| 2019 | ||
Valuation allowance, beginning of period | | $ | (303) | | (65) | | $ | (98) | | — |
Impairment | | | — | | (12) | | | (103) | | (77) |
Recovery | | | 102 | | — | | | — | | — |
Valuation allowance, end of period | | $ | (201) | | (77) | | $ | (201) | | (77) |
The Corporation uses assumptions and estimates in determining the fair value of MSRs. These assumptions include prepayment speeds and discount rates. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge. At September 30, 2020, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 12.00% and a discount rate equal to 9.00%. At December 31, 2019, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 13.08% and a discount rate equal to 9.00%.
22
At September 30, 2020 and December 31, 2019, the sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.
| | | | | | |
| | | | | | |
(dollars in thousands) | | September 30, 2020 |
| December 31, 2019 | ||
Fair value of residential mortgage servicing rights | | $ | 2,639 | | $ | 446 |
| | | | | | |
Weighted average life (years) | | | 5.0 | | | 7.8 |
| | | | | | |
Prepayment speed | | | 12.00% | | | 13.08% |
Impact on fair value: | | | | | | |
10% adverse change | | $ | (99) | | $ | (19) |
20% adverse change | | | (192) | | | (37) |
| | | | | | |
Discount rate | | | 9.00% | | | 9.00% |
Impact on fair value: | | | | | | |
10% adverse change | | $ | (98) | | $ | (14) |
20% adverse change | | | (189) | | | (27) |
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.
SBA Loans
SBA loan servicing assets are amortized over the period of the estimated future net servicing life of the underlying assets. SBA loan servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the SBA loan servicing asset. The Corporation serviced $44.8 million and $18.0 million of SBA loans, as of September 30, 2020 and December 31, 2019, respectively. During the three and nine months ended September 30, 2020, the Corporation recognized servicing fee income of $49 thousand and $101 thousand, respectively. During the three and nine months ended September 30, 2019, the Corporation recognized servicing fee income of $8 thousand.
Changes in the SBA loan servicing asset balance are summarized as follows:
| | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||
(dollars in thousands) | | 2020 |
| 2019 | | 2020 |
| 2019 | ||
Balance at beginning of the period | | $ | 632 | | 133 | | $ | 337 | | — |
Servicing rights capitalized | | | 183 | | 198 | | | 524 | | 331 |
Amortization of servicing rights | | | (42) | | (6) | | | (88) | | (6) |
Change in valuation allowance | | | 14 | | (4) | | | 14 | | (4) |
Balance at end of the period | | $ | 787 | | 321 | | $ | 787 | | 321 |
23
Activity in the valuation allowance for SBA loan servicing assets was as follows:
| | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||
(dollars in thousands) | | 2020 |
| 2019 | | 2020 |
| 2019 | ||
Valuation allowance, beginning of period | | $ | (26) | | — | | $ | (26) | | — |
Impairment | | | — | | (4) | | | — | | (4) |
Recovery | | | 14 | | — | | | 14 | | — |
Valuation allowance, end of period | | $ | (12) | | (4) | | $ | (12) | | (4) |
The Corporation uses assumptions and estimates in determining the fair value of SBA loan servicing rights. These assumptions include prepayment speeds, discount rates, and other assumptions. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge. At September 30, 2020, the key assumptions used to determine the fair value of the Corporation’s SBA loan servicing rights included a lifetime constant prepayment rate equal to 12.79%, and a discount rate equal to 6.57%. At December 31, 2019, the key assumptions used to determine the fair value of the Corporation’s SBA loan servicing rights included a lifetime constant prepayment rate equal to 10.77%, and a discount rate equal to 11.28%.
At September 30, 2020 and December 31, 2019, the sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.
| | | | | | | |
| | | | | | | |
(dollars in thousands) | | September 30, 2020 |
| December 31, 2019 | |||
Fair value of SBA loan servicing rights | | $ | 889 | | $ | 337 | |
| | | | | | | |
Weighted average life (years) | | | 3.6 | | | 4.3 | |
| | | | | | | |
Prepayment speed | | | 12.79% | | | 10.77% | |
Impact on fair value: | | | | | | | |
10% adverse change | | $ | (36) | | $ | (12) | |
20% adverse change | | | (69) | | | (23) | |
| | | | | | | |
Discount rate | | | 6.57% | | | 11.28% | |
Impact on fair value: | | | | | | | |
10% adverse change | | $ | (23) | | $ | (9) | |
20% adverse change | | | (46) | | | (18) | |
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the SBA servicing rights is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.
(9) 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.liabilities. 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 not available, fair values are based on
24
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.
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis.
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.
Mortgage Loans Held for Sale
The fair value of loans held for sale is based on secondary market prices.
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.
Derivative Financial Instruments
The fair values of forward commitments and interest rate swaps are based on market pricing and therefore are considered Level 2. Derivatives classified as Level 3 consist of interest rate lock commitments related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment
2025
will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement.
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, 20182020 and December 31, 20172019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2018 | |||||||
(dollars in thousands) |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |
Securities available for sale: |
|
|
|
|
|
|
|
|
|
U.S. government agency mortgage-backed securities |
| $ | 24,215 |
| — |
| 24,215 |
| — |
U.S. government agency collateralized mortgage obligations |
|
| 12,888 |
| — |
| 12,888 |
| — |
State and municipal securities |
|
| 9,605 |
| — |
| 9,605 |
| — |
Investments in mutual funds and other equity securities |
|
| 970 |
| — |
| 970 |
| — |
Mortgage loans held-for-sale |
|
| 34,044 |
| — |
| 34,044 |
| — |
Mortgage loans held-for-investment |
|
| 11,188 |
| — |
| 11,188 |
| — |
Interest rate lock commitments |
|
| 200 |
| — |
| — |
| 200 |
Total |
| $ | 93,110 |
| — |
| 92,910 |
| 200 |
|
|
|
|
|
|
|
|
|
| |||||||||
|
| December 31, 2017 | ||||||||||||||||
| | | | | | | | | | |||||||||
| | September 30, 2020 | ||||||||||||||||
(dollars in thousands) |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||
Assets | | | | | | | | | | |||||||||
Securities available for sale: |
|
|
|
|
|
|
|
|
| | | | | | | | | |
U.S. asset backed securities | | $ | 24,744 | | — | | 24,744 | | — | |||||||||
U.S. government agency mortgage-backed securities |
| $ | 21,268 |
| — |
| 21,268 |
| — | | | 4,111 | | — | | 4,111 | | — |
U.S. government agency collateralized mortgage obligations |
|
| 7,778 |
| — |
| 7,778 |
| — | | | 22,483 | | — | | 22,483 | | — |
State and municipal securities |
|
| 9,959 |
| — |
| 9,959 |
| — | | | 49,339 | | — | | 49,339 | | — |
Investments in mutual funds and other equity securities |
|
| 1,001 |
| — |
| 1,001 |
| — | |||||||||
Mortgage loans held-for-sale |
|
| 35,024 |
| — |
| 35,024 |
| — | |||||||||
Mortgage loans held-for-investment |
|
| 9,972 |
| — |
| 9,972 |
| — | |||||||||
Corporate bonds | | | 2,681 | | — | | 2,681 | | — | |||||||||
Equity investments | | | 1,034 | | — | | 1,034 | | — | |||||||||
Mortgage loans held for sale | | | 225,150 | | — | | 225,150 | | — | |||||||||
Mortgage loans held for investment | | | 11,366 | | — | | 11,366 | | — | |||||||||
Interest rate lock commitments |
|
| 310 |
| — |
| — |
| 310 | | | 7,798 | | — | | — | | 7,798 |
Forward commitments | | | 57 | | — | | 57 | | — | |||||||||
Customer derivatives - interest rate swaps | | | 1,284 | | — | | 1,284 | | — | |||||||||
Total |
| $ | 85,312 |
| — |
| 85,002 |
| 310 | | $ | 350,047 | | — | | 342,249 | | 7,798 |
| | | | | | | | | | |||||||||
Liabilities | | | | | | | | | | |||||||||
Interest rate lock commitments | | | 225 | | — | | — | | 225 | |||||||||
Forward commitments | | | 971 | | — | | 971 | | — | |||||||||
Customer derivatives - interest rate swaps | | | 1,413 | | — | | 1,413 | | — | |||||||||
| | $ | 2,609 | | — | | 2,384 | | 225 |
For financial
| | | | | | | | | |
| | December 31, 2019 | |||||||
(dollars in thousands) |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |
Assets | | | | | | | | | |
Securities available for sale: | | | | | | | | | |
U.S. asset backed securities | | $ | 11,866 | | — | | 11,866 | | — |
U.S. government agency mortgage-backed securities | | | 5,497 | | — | | 5,497 | | — |
U.S. government agency collateralized mortgage obligations | | | 35,223 | | — | | 35,223 | | — |
State and municipal securities | | | 6,270 | | — | | 6,270 | | — |
Investments in mutual funds | | | 1,009 | | — | | 1,009 | | — |
Mortgage loans held for sale | | | 33,704 | | — | | 33,704 | | — |
Mortgage loans held for investment | | | 10,546 | | — | | 10,546 | | — |
Interest rate lock commitments | | | 504 | | — | | — | | 504 |
Forward commitments | | | 6 | | — | | 6 | | — |
Customer derivatives - interest rate swaps | | | 382 | | — | | 382 | | — |
Total | | $ | 105,007 | | — | | 104,503 | | 504 |
| | | | | | | | | |
Liabilities | | | | | | | | | |
Interest rate lock commitments | | | 157 | | — | | — | | 157 |
Forward commitments | | | 119 | | — | | 119 | | — |
Customer derivatives - interest rate swaps | | | 431 | | — | | 431 | | — |
| | $ | 707 | | — | | 550 | | 157 |
26
Financial assets measured at fair value on a nonrecurring basis, are considered Level 3 assets in the fair value measurements by level within thehierarchy. The fair value hierarchy used at September 30, 20182020 and December 31, 20172019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2018 | |||||||
(dollars in thousands) |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |
Impaired loans (2) |
| $ | 6,476 |
| — |
| — |
| 6,476 |
Other real estate owned (1) |
|
| — |
| — |
| — |
| — |
Total |
| $ | 6,476 |
| — |
| — |
| 6,476 |
| | | | | | |
| | September 30, 2020 | | | December 31, 2019 | |
(dollars in thousands) |
| Fair Value |
|
| Fair Value | |
Mortgage servicing rights | | $ | 2,639 | | | 446 |
SBA loan servicing rights | | | 632 | | | 337 |
Impaired loans (1) | | | 2,421 | | | 804 |
Other real estate owned (2) | | | — | | | 120 |
Total | | $ | 5,692 | | | 1,707 |
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 | |||||||
(dollars in thousands) |
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |
Impaired loans (2) |
| $ | 4,685 |
| — |
| — |
| 4,685 |
Other real estate owned (1) |
|
| 437 |
| — |
| — |
| 437 |
Total |
| $ | 5,122 |
| — |
| — |
| 5,122 |
(1) |
|
(2) | 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. |
|
|
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‑termshort-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‑riskrate-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 InvestmentLoan Servicing Rights
The Corporation estimates the fair value of mortgage loans heldservicing rights and SBA loan servicing rights using discounted cash flow models that calculate the present value of estimated future net servicing income. The model uses readily available prepayment speed assumptions for investment is the interest rates of the portfolios serviced. These
27
servicing rights are classified within Level 3 in the fair value hierarchy based upon management’s assessment of the inputs. The Corporation reviews the servicing rights portfolios on the price secondary markets are currently offeringa quarterly basis for similar loans using observable market data.impairment.
(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‑partythird-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‑ratefixed-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‑TermShort-Term Borrowings
The carrying amounts of short‑termshort-term borrowings approximate their fair values.
(k)Long‑TermLong-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‑BalanceOff-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 fair value of interest rate lock commitments is based on investor quotes which consider pull-through rates, while the fair value of forward commitments is based on market pricing.
2328
The estimated fair values of the Corporation’s financial instruments at September 30, 20182020 and December 31, 20172019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2018 |
| December 31, 2017 | |||||
|
| Fair Value |
| Carrying |
|
|
| Carrying |
|
| |
(dollars in thousands) |
| Hierarchy Level |
| amount |
| Fair value |
| amount |
| Fair value | |
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| Level 1 |
| $ | 25,823 |
| 25,823 |
| 35,506 |
| 35,506 |
Securities available-for-sale |
| Level 2 |
|
| 47,678 |
| 47,678 |
| 40,006 |
| 40,006 |
Securities held-to-maturity |
| Level 2 |
|
| 12,771 |
| 12,572 |
| 12,861 |
| 12,869 |
Mortgage loans held-for-sale |
| Level 2 |
|
| 34,044 |
| 34,044 |
| 35,024 |
| 35,024 |
Loans receivable, net |
| Level 3 |
|
| 787,889 |
| 780,958 |
| 677,956 |
| 669,852 |
Mortgage loans held-for-investment |
| Level 2 |
|
| 11,188 |
| 11,188 |
| 9,972 |
| 9,972 |
Interest rate lock commitments |
| Level 3 |
|
| 200 |
| 200 |
| 310 |
| 310 |
Forward commitments |
| Level 2 |
|
| 93 |
| 93 |
| — |
| — |
Restricted investment in bank stock |
| Level 3 |
|
| 4,581 |
| 4,581 |
| 6,814 |
| 6,814 |
Accrued interest receivable |
| Level 3 |
|
| 2,913 |
| 2,913 |
| 2,536 |
| 2,536 |
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| Level 2 |
|
| 781,927 |
| 775,300 |
| 627,109 |
| 626,635 |
Short-term borrowings |
| Level 2 |
|
| 43,755 |
| 43,755 |
| 99,750 |
| 99,750 |
Long-term debt |
| Level 2 |
|
| 6,444 |
| 6,458 |
| 8,863 |
| 8,865 |
Subordinated debentures |
| Level 2 |
|
| 9,308 |
| 9,241 |
| 13,308 |
| 12,883 |
Accrued interest payable |
| Level 2 |
|
| 353 |
| 353 |
| 216 |
| 216 |
Forward commitments |
| Level 2 |
|
| — |
| — |
| 75 |
| 75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Notional |
|
|
| Notional |
|
| |
Off-balance sheet financial instruments: |
|
|
| amount |
| Fair value |
| amount |
| Fair value | |
Commitments to extend credit |
| Level 2 |
| $ | 258,719 |
| 200 |
| 220,180 |
| 310 |
Letters of credit |
| Level 2 |
|
| 2,529 |
| — |
| 1,809 |
| — |
| | | | | | | | | | | |
| | | | September 30, 2020 | | December 31, 2019 | |||||
| | Fair Value | | Carrying | | | | Carrying | | | |
(dollars in thousands) |
| Hierarchy Level |
| amount |
| Fair value |
| amount |
| Fair value | |
Financial assets: | | | | | | | | | | | |
Cash and cash equivalents | | Level 1 | | $ | 75,869 | | 75,869 | | 39,371 | | 39,371 |
Securities available-for-sale | | Level 2 | | | 103,358 | | 103,358 | | 58,856 | | 58,856 |
Securities held-to-maturity | | Level 2 | | | 6,544 | | 6,916 | | 8,780 | | 9,003 |
Equity investments | | Level 2 | | | 1,034 | | 1,034 | | 1,009 | | 1,009 |
Mortgage loans held for sale | | Level 2 | | | 225,150 | | 225,150 | | 33,704 | | 33,704 |
Loans receivable, net of the allowance for loan and lease losses | | Level 3 | | | 1,278,907 | | 1,313,384 | | 944,651 | | 973,057 |
Mortgage loans held for investment | | Level 2 | | | 11,366 | | 11,366 | | 10,546 | | 10,546 |
Interest rate lock commitments | | Level 3 | | | 7,798 | | 7,798 | | 504 | | 504 |
Forward commitments | | Level 2 | | | 57 | | 57 | | 6 | | 6 |
Restricted investment in bank stock | | NA | | | 7,650 | | NA | | 8,072 | | NA |
Accrued interest receivable | | Level 3 | | | 4,666 | | 4,666 | | 3,148 | | 3,148 |
Customer derivatives - interest rate swaps | | Level 2 | | | 1,284 | | 1,284 | | 382 | | 382 |
Financial liabilities: | | | | | | | | | | | |
Deposits | | Level 2 | | | 1,209,024 | | 1,361,900 | | 851,168 | | 880,400 |
Short-term borrowings | | Level 2 | | | 104,239 | | 104,239 | | 123,676 | | 123,678 |
Long-term debt | | Level 2 | | | 250,131 | | 253,804 | | 3,123 | | 3,123 |
Subordinated debentures | | Level 2 | | | 40,814 | | 39,674 | | 40,962 | | 40,962 |
Accrued interest payable | | Level 2 | | | 2,258 | | 2,258 | | 1,088 | | 1,088 |
Interest rate lock commitments | | Level 3 | | | 225 | | 225 | | 157 | | 157 |
Forward commitments | | Level 2 | | | 971 | | 971 | | 119 | | 119 |
Customer derivatives - interest rate swaps | | Level 2 | | | 1,413 | | 1,413 | | 431 | | 431 |
| | | | | | | | | | | |
| | | | Notional | | | | Notional | | | |
Off-balance sheet financial instruments: |
| |
| amount |
| Fair value |
| amount |
| Fair value | |
Commitments to extend credit | | Level 2 | | $ | 377,885 | | 7,798 | | 327,788 | | 504 |
Letters of credit | | Level 2 | | | 7,054 | | — | | 9,750 | | — |
(9)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 and nine month peiods ended September 30, 2020 and 2019.
| | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||
| | 2020 |
| 2019 | | 2020 |
| 2019 | ||
Balance at beginning of the period | | $ | 4,595 | | 375 | | $ | 504 | | 310 |
Increase in value | | | 3,203 | | (92) | | | 7,294 | | (27) |
Balance at end of the period | | $ | 7,798 | | 283 | | $ | 7,798 | | 283 |
The following table details the valuation techniques for Level 3 interest rate lock commitments.
| | | | | | | | | | | | |
| | | | | | | Significant | | | | | |
| | Fair Value | | | | Unobservable | | Range of | | Weighted | | |
|
| Level 3 |
| Valuation Technique |
| Input |
| Inputs |
| Average |
| |
September 30, 2020 | | $ | 7,798 | | Market comparable pricing | | Pull through | | 1 - 99 | % | 85.38 | % |
December 31, 2019 | | | 504 | | Market comparable pricing | | Pull through | | 1 - 99 | | 93.41 | |
29
Net realized gains of $3.2 million and net realized losses of $101 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 September 30, 2020 and 2019, respectively, and net realized gains of $7.2 million and net realized losses $67 thousand for the nine months ended September 30, 2020 and 2019, 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.
(10) 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. InterestThe fair value of 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. The fair value of interest rate derivatives are recorded within other assets/liabilities on the consolidated balance sheets. 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.
2430
The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
|
|
|
|
|
|
|
|
|
| ||||||||||
| September 30, 2018 |
| December 31, 2017 |
| |||||||||||||||
| | | | | | | | | | | |||||||||
| | | September 30, 2020 | | December 31, 2019 | ||||||||||||||
(dollars in thousands) | Notional |
| Asset |
| Notional |
| Asset |
| Balance Sheet Line Item | | Notional |
| Asset |
| Notional |
| Asset | ||
Interest Rate Lock Commitments |
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Positive fair values | $ | 32,445 |
| 284 |
| 38,574 |
| 344 |
| Other assets | | $ | 497,093 | | 7,798 | | 47,660 | | 504 |
Negative fair values |
| 9,603 |
| (84) |
| 7,201 |
| (34) |
| Other liabilities | | | 46,890 | | (225) | | 22,663 | | (157) |
Net interest rate lock commitments |
| 42,048 |
| 200 |
| 45,775 |
| 310 |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||
Total | | | | 543,983 | | 7,573 | | 70,323 | | 347 | |||||||||
| | | | | | | | | | | |||||||||
Forward Commitments |
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Positive fair values |
| 25,000 |
| 107 |
| 6,500 |
| 5 |
| Other assets | | | 75,500 | | 57 | | 4,500 | | 6 |
Negative fair values |
| 8,500 |
| (14) |
| 32,250 |
| (80) |
| Other liabilities | | | 215,500 | | (971) | | 58,250 | | (119) |
Net forward commitments |
| 33,500 |
| 93 |
| 38,750 |
| (75) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||
Net derivative fair value asset | $ | 75,548 |
| 293 |
| 84,525 |
| 235 |
| ||||||||||
Total | | | | 291,000 | | (914) | | 62,750 | | (113) | |||||||||
| | | | | | | | | | | |||||||||
Customer Derivatives - Interest Rate Swaps | | | | | | | | | | | |||||||||
Positive fair values | Other assets | | | 17,906 | | 1,284 | | 3,271 | | 382 | |||||||||
Negative fair values | Other liabilities | | | 17,906 | | (1,413) | | 3,271 | | (431) | |||||||||
Total | | | | 35,812 | | (129) | | 6,542 | | (49) | |||||||||
Total derivative financial instruments | | | $ | 870,795 | | 6,530 | | 139,615 | | 185 |
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:
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||||||||||
| | | | | | | | | | | | |||||||||
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | ||||||||||||||
(dollars in thousands) |
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| 2020 |
| 2019 | | |
| 2020 |
| 2019 | ||
Interest Rate Lock Commitments |
| $ | (224) |
| (423) |
| (110) |
| (162) | | $ | 3,161 | | (102) | | | $ | 7,226 | | (68) |
Forward Commitments |
|
| 294 |
| (80) |
| 169 |
| 47 | | | (129) | | 124 | | | | (801) | | 101 |
Net fair value gains (losses) on derivative financial instrument |
| $ | 70 |
| (503) |
| 59 |
| (115) | |||||||||||
Customer Derivatives - Interest Rate Swaps | | | (4) | | (22) | | | | (79) | | (48) | |||||||||
Net fair value gains (losses) on derivative financial instruments | | $ | 3,028 | | — | | | $ | 6,346 | | (15) |
Realized gains/(losses)Net realized losses on derivatives were ($170 thousand) thousand2.6) million and $278($300) thousand for the three months ended September 30, 20182020 and 2017,2019, respectively, and $534 thousand($7.4) million and $845($792) thousand for the nine months ended September 30, 20182020 and 2017, respectively, and are included in other non-interest income in the unaudited consolidated statements of income.2019, respectively.
(10)(11) Segments
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, SBA income, service charges on deposit accounts, cash sweep fees, overdraft fees, BOLI income, title insurance fees, and other less significant non-interest income.
25
Meridian Wealth Partners (“Wealth”), is a registered investment advisor and wholly-owned subsidiary of the Corporation, providesBank, that provide a comprehensive array of wealth management services and products and the trusted guidance to help
31
its clients and our banking customers prepare for the future. The unit generates non-interest income through advisory fees.
Meridian’s mortgage banking segmentMeridian Mortgage’s (“Mortgage”) consists of one central loan production facility and several retail and profit sharing16 loan production offices located throughout the Delaware Valley.Valley and Maryland. The Mortgage segment originates 1 – 4 family residential mortgages and sells nearly all of its production including servicing to third party investors. The unit generates net interest income on the loans it originates and holds temporarily, then earns fee income (primarily gain on sales) at the time of the sale. The unit also recognizes income from document preparation fees, changes in portfolio pipeline fair values and related net hedging gains.
The table below summarizes income and expenses, directly attributable to each business line, which has been included in the statement of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
| | | | | | | | | | | | | | | | | | |
| | Segment Information | ||||||||||||||||
| | Three Months Ended September 30, 2020 | | Three Months Ended September 30, 2019 | ||||||||||||||
(Dollars in thousands) |
| Bank |
| Wealth |
| Mortgage |
| Total |
| Bank |
| Wealth |
| Mortgage |
| Total | ||
Net interest income | | $ | 12,104 | | (19) | | 630 | | 12,715 | | $ | 9,203 | | 4 | | 67 | | 9,274 |
Provision for loan losses | | | 3,956 | | — | | — | | 3,956 | | | 705 | | — | | — | | 705 |
Net interest income after provision | | | 8,148 | | (19) | | 630 | | 8,759 | | | 8,498 | | 4 | | 67 | | 8,569 |
| | | | | | | | | | | | | | | | | | |
Non-interest Income | | | | | | | | | | | | | | | | | | |
Mortgage banking income | | | 574 | | — | | 21,238 | | 21,812 | | | 74 | | — | | 7,241 | | 7,315 |
Wealth management income | | | — | | 951 | | — | | 951 | | | 31 | | 891 | | — | | 922 |
SBA income | | | 641 | | — | | — | | 641 | | | 635 | | — | | — | | 635 |
Net change in fair values | | | (4) | | — | | 6,057 | | 6,053 | | | (23) | | — | | 53 | | 30 |
Net (loss) on hedging activity | | | — | | — | | (2,637) | | (2,637) | | | — | | — | | (300) | | (300) |
Other | | | 2,045 | | — | | 195 | | 2,240 | | | 534 | | — | | 73 | | 607 |
Non-interest income | | | 3,256 | | 951 | | 24,853 | | 29,060 | | | 1,251 | | 891 | | 7,067 | | 9,209 |
Non-interest expense | | | 8,829 | | 788 | | 16,217 | | 25,834 | | | 6,915 | | 834 | | 5,798 | | 13,547 |
Income before income taxes | | $ | 2,575 | | 144 | | 9,266 | | 11,985 | | $ | 2,834 | | 61 | | 1,336 | | 4,231 |
Total Assets | | $ | 1,525,883 | | 5,399 | | 227,366 | | 1,758,648 | | $ | 1,071,450 | | 5,398 | | 50,089 | | 1,126,937 |
2632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, 2018 |
| Nine Months Ended September 30, 2017 | ||||||||||||||
(dollars in thousands) |
| Bank |
| Wealth |
| Mortgage |
| Total |
| Bank |
| Wealth |
| Mortgage |
| Total | ||
Net interest income |
| $ | 23,597 |
| 217 |
| 402 |
| 24,216 |
| $ | 20,733 |
| 70 |
| 302 |
| 21,105 |
Provision for loan losses |
|
| (1,258) |
| — |
| — |
| (1,258) |
|
| (1,445) |
| — |
| — |
| (1,445) |
Net interest income after provision |
|
| 22,339 |
| 217 |
| 402 |
| 22,958 |
|
| 19,288 |
| 70 |
| 302 |
| 19,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage banking income |
|
| 148 |
| — |
| 20,259 |
| 20,407 |
|
| 67 |
| — |
| 25,022 |
| 25,089 |
Wealth management income |
|
| 149 |
| 2,847 |
| — |
| 2,996 |
|
| 233 |
| 1,672 |
| — |
| 1,905 |
Net change in fair values |
|
| — |
| — |
| (471) |
| (471) |
|
| — |
| — |
| 100 |
| 100 |
Other |
|
| 1,136 |
| — |
| 823 |
| 1,959 |
|
| 995 |
| — |
| (567) |
| 428 |
Total non-interest income |
|
| 1,433 |
| 2,847 |
| 20,611 |
| 24,891 |
|
| 1,295 |
| 1,672 |
| 24,555 |
| 27,522 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest Expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
| 10,390 |
| 1,373 |
| 14,956 |
| 26,719 |
|
| 9,874 |
| 856 |
| 19,023 |
| 29,753 |
Occupancy and equipment |
|
| 1,599 |
| 99 |
| 1,172 |
| 2,870 |
|
| 1,666 |
| 52 |
| 1,100 |
| 2,818 |
Professional feees |
|
| 1,325 |
| 20 |
| 325 |
| 1,670 |
|
| 943 |
| 125 |
| 316 |
| 1,384 |
Advertising and promotion |
|
| 917 |
| 319 |
| 566 |
| 1,802 |
|
| 746 |
| 205 |
| 586 |
| 1,537 |
Other |
|
| 3,827 |
| 613 |
| 2,888 |
| 7,328 |
|
| 3,766 |
| 303 |
| 3,496 |
| 7,565 |
Total non-interest expense |
|
| 18,058 |
| 2,424 |
| 19,907 |
| 40,389 |
|
| 16,995 |
| 1,541 |
| 24,521 |
| 43,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Margin |
| $ | 5,714 |
| 640 |
| 1,106 |
| 7,460 |
| $ | 3,588 |
| 201 |
| 336 |
| 4,125 |
(11) Recent Litigation
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2020 | | Nine Months Ended September 30, 2019 | ||||||||||||||
(Dollars in thousands) |
| Bank |
| Wealth |
| Mortgage |
| Total |
| Bank |
| Wealth |
| Mortgage |
| Total | ||
Net interest income | | $ | 32,725 | | (24) | | 1,277 | | 33,978 | | $ | 26,437 | | 68 | | 167 | | 26,672 |
Provision for loan losses | | | 7,139 | | — | | — | | 7,139 | | | 938 | | — | | — | | 938 |
Net interest income after provision | | | 25,586 | | (24) | | 1,277 | | 26,839 | | | 25,499 | | 68 | | 167 | | 25,734 |
| | | | | | | | | | | | | | | | | | |
Non-interest Income | | | | | | | | | | | | | | | | | | |
Mortgage banking income | | | 973 | | — | | 44,422 | | 45,395 | | | 175 | | — | | 17,442 | | 17,617 |
Wealth management income | | | — | | 2,825 | | — | | 2,825 | | | 110 | | 2,588 | | — | | 2,698 |
SBA income | | | 1,821 | | — | | — | | 1,821 | | | 1,150 | | — | | — | | 1,150 |
Net change in fair values | | | (68) | | — | | 11,012 | | 10,944 | | | (49) | | — | | 341 | | 292 |
Net (loss) on hedging activity | | | — | | — | | (7,363) | | (7,363) | | | — | | — | | (792) | | (792) |
Other | | | 2,931 | | 14 | | 405 | | 3,350 | | | 1,409 | | — | | 282 | | 1,691 |
Non-interest income | | | 5,657 | | 2,839 | | 48,476 | | 56,972 | | | 2,795 | | 2,588 | | 17,273 | | 22,656 |
Non-interest expense | | | 23,341 | | 2,363 | | 35,448 | | 61,152 | | | 20,312 | | 2,268 | | 16,400 | | 38,980 |
Income before income taxes | | $ | 7,902 | | 452 | | 14,305 | | 22,659 | | $ | 7,982 | | 388 | | 1,040 | | 9,410 |
Total Assets | | $ | 1,525,883 | | 5,399 | | 227,366 | | 1,758,648 | | $ | 1,071,450 | | 5,398 | | 50,089 | | 1,126,937 |
(12) Stockholders’ Equity
On November 21, 2017, three former employees ofAugust 31, 2020, the mortgage-banking division ofCorporation announced that the Bank filed suit inMeridian Corporation Employee Stock Ownership Plan Trust (together with the United States District Court forrelated employee stock ownership plan, the Eastern District of Pennsylvania, Juan Jordan et al. v. Meridian Bank, Thomas Campbell and Christopher Annas, against the Bank purporting“ESOP”) had established a $2 million stock purchase authorization with no expiration date. Purchases are authorized 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 thousand reserve as a reasonable estimate for possible losses that may result from this action. This estimate may changemade from time to time in either the open market or through privately negotiated transactions. The Corporation loaned the ESOP $2 million to facilitate the ESOP’s purchase of the shares.During September 2020 the ESOP purchased 133,601 shares of the Corporation’s common stock at an average price of $14.97, using the full $2 million loan. The ESOP loan, which bears an interest rate of 1.17%, is to be repaid in annual installments commencing on December 31, 2020, and actual losses could vary.on the final day of each of the next nine calendar years. As of September 30, 2020 there were 0 shares commited to be released.
(12)
On October 22, 2020, the Corporation’s Board of Directors declared a cash dividend of $0.125 per common share, payable on November 23, 2020 to shareholders of record as of November 9, 2020. During the third quarter of 2020, the Corporation paid or accrued, as applicable, a quarterly dividend of $0.125 per share. This dividend totaled $763 thousand, based on outstanding shares as of August 10, 2020 of 6,098,573.
(13) Recent Accounting Pronouncements
As an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), Meridian Corporationthe Bank 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 initialthis 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.
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FASB Accounting Standards Update (“ASU”) No. 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 expects to adopt ASU 2014-09 for the fiscal year ending December 31, 2019 and is evaluating all revenue streams, accounting policies, practices and reporting to identify and understand any impact on the Corporation’s Consolidated Financial Statements and related disclosures.
FASB ASU 2017‑042017-01 (Topic 350)805), “Intangibles – Goodwill and Others”“Business Combinations”
Issued in January 2017, ASU 2017‑04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of 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. The Corporation is evaluating the effect that ASU 2017‑04 will have on its consolidated financial statements and related disclosures.
FASB ASU 2017‑01 (Topic 805), “Business Combinations”
Issued in January 2017, ASU 2017‑012017-01 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 2017‑012017-01 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 adoption of this standard on January 1, 2019 did not have a material impact on the Corporation’s consolidated financial statements and related disclosures.
FASB ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”
Issued in June 2018, ASU 2018-07: Compensation - Stock Compensation (Topic 718), “Improvements to Nonemployee Share-Based Payment Accounting” expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.
The amendments in this update became effective for us January 1, 2020. The adoption did not have an impact on our consolidated financial statements and related disclosures as the Corporation did not and has not historically granted share based payment awards to nonemployees other than to the Corporation’s Board of Directors, who are treated as employees for share-based payment accounting.
FASB ASU 2018-13, "Fair Value Measurement Disclosure Framework"
Issued in August 2018, ASU 2018-13 modifies, adds and removes certain disclosures aimed to improve the overall usefulness of the disclosure requirements for fair value measurements. ASU 2018-13 was effective for the Corporation on January 1, 2020. Adoption is evaluatingrequired on both a prospective and retrospective basis depending on the effect thatamendment. The adoption of this ASU 2017‑01 willdid not have a material impact on itsour 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
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is evaluating the impact of this guidance and does not anticipate a material impact on its consolidated financial statements.
FASB ASU 2016‑132016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments”
Issued in June 2016, ASU 2016‑132016-13 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 current impairment model for available-for-sale debt securities. ASU 2016‑13guidance is effective (modified retrospective approach). Acquired credit impaired loans for public companieswhich 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 has been recognized before the effective date. In October 2019, the FASB approved a delay for the annual and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. For non-public companiesimplementation of the ASU. Accordingly, as an emerging growth company, the Corporation’s effective date for the implementation of the ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within the fiscal years beginning after December 31, 2021. will be January 1, 2023. The Corporation is evaluatingcurrently determining under which method we
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will adopt this ASU. The Corporation has assembled a cross-functional team from Finance, Credit, and IT that is leading 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. At this time the Corporation cannot yet estimate the impact to the consolidated financial statements.
FASB ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”
Issued in April 2019, ASU 2019-04 clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments (addressed by ASUs 2016-13, 2017-12, and 2016-01, respectively). The amendments to estimating expected credit losses (ASU 2016-13), in particular, how a company considers recoveries and extension options when estimating expected credit losses, are the most relevant to the Corporation. The ASU clarifies that (1) the estimate of expected credit losses should include expected recoveries of financial assets, including recoveries of amounts expected to be written off and those previously written off, and (2) that contractual extension or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. Management will consider the impact of ASU 2019-04 when considering the impact of ASU 2016-13 as discussed above.
FASB ASU 2016‑022016-02 (Topic 842), “Leases��“Leases”
Issued in February 2016, ASU 2016‑022016-02 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 2016‑022016-02 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, 2019,2020, and interim periods within the fiscal years beginning after December 31, 2020.15, 2021. 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 will adopt ASU 2016-2 and ASU 2018-11 as of January 1, 2021 and apply ASC 842 throughout 2021. The Corporation is evaluating the effects that ASU 2016‑022016-02 and ASU 2018-11 will have on its consolidated financial statements and related disclosures.
FASB ASU 2016‑012017-08 (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.
FASB ASU 2017‑08 (Subtopic 310‑20)310-20), “Nonrefundable Fees and Other Costs (Subtopic 310‑20)310-20): Premium Amortization on Purchased Callable Debt Securities”
Issued in March 2017, ASU 2017‑082017-08 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
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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 will adopt ASU 2017-08 as of December 31, 2020 and apply existing guidance throughout 2020. The Corporation is evaluating the effect that ASU 2017‑082017-08 will have on its consolidated financial statements and related disclosures.
FASB ASU 2017‑122017-12 (Subtopic 815), “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”
Issued in August 2017, ASU 2017‑122017-12 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
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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 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 2017‑12,2017-12, and has determined it has no current hedging strategies for which it plans to implementapplicable under the ASU but we will consider the impact of the ASU on future hedging strategies that may arise. The Corporation will adopt ASU 2017-12 as of December 31, 2020 and apply existing guidance throughout 2020.
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.
FASB ASU 2018-15 (Topic 350), "Intangibles - Goodwill and Other - Internal-Use Software"
Issued in August 2018, ASU 2018-15 provides clarity on capitalizing and expensing implementation costs for cloud computing arrangements in a service contract. If an implementation cost is capitalized, the cost should be recognized over the noncancellable term and periodically assessed for impairment. The guidance is effective in annual and interim periods in fiscal years beginning after December 15, 2020 and interim periods within annual periods beginning after December 15, 2021. Adoption should be applied retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Corporation does not expect the adoption of this ASU to have a material impact on our consolidated financial statements and related disclosures.
FASB ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”
Issued in December 2019, ASU 2019-12 adds new guidance to simplify accounting for income taxes, changes the accounting for certain income tax transactions and makes minor improvements to the codification. The guidance is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. Management has not yet determined what the impact of the adoption of this ASU will be on our consolidated financial statements and related disclosures.
FASB ASU 2020-06, “Debt-Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”
This ASU clarifies the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock by removing the cash conversion model and the beneficial conversion feature models.For public business entities that meet the definition of an SEC filer (excluding smaller reporting entities), the amendments are effective for fiscal years beginning after Dec. 15, 2021, and interim periods within. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2023, and interim periods within. Early adoption is permitted, but no earlier than for fiscal years beginning after Dec. 15, 2020.
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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‑Q10-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, 2017 (the “2017 10‑K”)2019 included in Meridian Bank’sCorporation’s Annual Report on Form 10‑K10-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, risks and uncertainties including, without limitation: the impact of the current COVID-19 pandemic and government responses thereto, on the U.S. economy, including the markets in which we operate; actions that we and our customers take in response to these factors and the effects such actions have on our operations, products, services and customer relationships; and the risk that the Small Business Administration may not fund some or all Paycheck Protection Program (PPP) loan guaranties, 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, 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 reportour Annual Report on Form 10-K for the year ended December 31, 2017,2019 and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Meridian
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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.
Recent Developments
Impacts of COVID-19
The ongoing COVID-19 pandemic has caused significant disruption in the local, national and global economies and financial markets. The pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. Continuation and further spread of COVID-19 could cause additional quarantines, shutdowns, reductions in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability.
In response to the anticipated economic effects of COVID-19, the Board of Governors of the Federal Reserve System (the "FRB") has taken a number of actions that have significantly affected the financial markets in the United States, including actions intended to result in substantial decreases in market interest rates. On March 3, 2020, the 10-year Treasury yield fell below 1.00% for the first time, and the FRB reduced the target federal funds range by 50 basis points to 1.00% to 1.25%. On March 15, 2020, the FRB further reduced the target federal funds range by 100 basis points to 0% to 0.25% and announced a $700 billion quantitative easing program in response to the expected economic downturn caused by COVID-19. On March 22, 2020, the FRB announced that it would continue its quantitative easing program in amounts necessary to support the smooth functioning of markets for Treasury securities and agency MBS. We expect that these
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reductions in interest rates, among other actions of the FRB and the Federal government generally, especially if prolonged, could adversely affect our net interest income, margins and profitability.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security, ( the “CARES Act”) was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included the Paycheck Protection Program (the “PPP”), a $349 billion program designed to aid small and medium sized businesses through federally guaranteed loans distributed through banks. The Paycheck Protection Program and Health Care Enhancement Act (the “PPP/HCEA Act”) was signed into law on April 24, 2020. The PPP/HCEA Act authorized an additional $310 billion of funding under the CARES Act for PPP loans among other provisions. On July 4, 2020, legislation was passed to extend the application period for the PPP program through August 8, 2020. These loans are intended to cover eight weeks of payroll and other permitted expenses to help those businesses remain viable.
In response to the pandemic, the Corporation’s management took the following actions:
● | The Corporation formed a pandemic taskforce and a steering group comprised of associates across the multiple lines of business and support functions and has taken several actions to offer various forms of support to our customers, employees, and communities that have experienced impacts resulting from the COVID-19 pandemic. |
Starting in mid-March and continuing today, Meridian implemented limited branch hours and appointment scheduling for our customers. Our technology platform has allowed these functions to be seamless. Meridian continues to prudently manage through the pandemic and has put in place preventative measures including face masks, plexiglass shields, social distancing and enhanced cleaning. Meridian is implementing a gradual, phased-in return-to-office plan that includes a portion of the workforce continuing with flexible, remote work schedules.
● | Meridian is a PPP participating lender, and as of September 30, 2020, Meridian had principal balances of PPP loans of $259.7 million, net of payoffs during the quarter. As of September 30, 2020, Meridian also had net deferred loan origination fees of $5.5 million on PPP loans that are being amortized into interest income over the contractual life of the loan, or until forgiven by the SBA. Meridian’s participation as a PPP lender helped us to assist 928 clients in need of short-term funding. These PPP loans helped our small business clients to support the paychecks of nearly 16,660 employees. Approximately 89% of PPP loans were given to clients in the markets we serve in Pennsylvania, New Jersey and Delaware. |
● | During the pandemic, Meridian also worked with commercial, construction and residential loan customers to provide assistance. In total $111.0 million of commercial loans covering 146 borrowers and $36.8 million of construction loans for 35 borrowers were assisted with loan payment holidays of 3 to 6 months or lowered interest rates for certain construction loans. $6.2 million of residential mortgage and home equity loans covering 25 total borrowers were provided with 3 to 6 month payment holidays as well. As of October 26, 2020, $4.4 million of commercial loans had active payment deferrals, along with $14.2 million of construction loans and $558 thousand of residential loans. |
At the inception of the pandemic, the governor of Pennsylvania ordered all non-essential businesses to close, mandated stay-at-home orders, closed schools and universities and put a moratorium on construction for a period of time. The economic impact was widespread, but certain businesses have been more acutely impacted. Aside from construction lending, Meridian continues to monitor commercial portfolios and identified various industries that have been substantially impacted by these mandates such as retail trade, hospitality, residential spec construction and advertising/marketing. At September 30, 2020, Meridian’s exposure as a percent of the total loan portfolio to these industries was 1.9%, 1.9%, 5.0%, and 1.5%, respectively.
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As of September 30, 2020, commercial loans to borrowers in the retail, hospitality and residential spec construction industries were as follows:
| | | | | | | | | | | |
| | % of Loan Portfolio | | | | COVID-19 Relief | | ||||
| | September 30, 2020 | | | | September 30, 2020 | | ||||
|
| | | % of Loan | | | | Balance with | | % of Industry | |
Industry | | Balance | | Portfolio | | | | Relief | | Balance | |
Retail trade | $ | 23,027 | | 1.9 | % | | $ | — | | — | % |
Hospitality | | 22,916 | | 1.9 | | | | 11,782 | | 51.4 | |
Residential spec construction | | 59,819 | | 5.0 | | | | — | | — | |
Advertising and marketing | | 17,304 | | 1.5 | | | | — | | — | |
Total | $ | 123,066 | | 12.15 | % | | $ | 11,782 | | 9.57 | % |
U.S. Small Business Administration Paycheck Protection Program
The Bank has participated in the SBA’s PPP, which was initiated on April 3, 2020 in order to help small businesses maintain their workforce during the COVID-19 pandemic. The Bank began accepting applications from qualified business customers immediately upon the initiation of the PPP. The Bank is a certified SBA lender and was one of the first local banks to fund loans under the PPP. The PPP/HCEA Act authorizes additional funding under the CARES Act of $310 billion for PPP loans to be issued by financial institutions through the SBA. As noted above, at September 30, 2020 Meridian has assisted 928 clients in need of short-term funding by providing nearly $260 million in PPP loans. The Bank is preparing to assist PPP borrowers in the process to request forgiveness for their loans with the SBA although the SBA’s portal will not be open until mid-August to start accepting borrower applications for forgiveness.
Loans originated under this program include principal and interest which may be forgiven provided the borrower uses the funds in a manner consistent with PPP guidelines. These loans have a contractual maturity of two years, a contractual rate of interest of 1%, and have an automatic nine month payment deferral. The SBA has outlined a fee structure based on loan size, whereby institutions will be paid 5% for loans of not more than $350,000, 3% for loans of more than $350,000 and less than $2 million, and 1% for loans of at least $2 million. These fees, net of the loan-specific costs, will be deferred and recognized as an adjustment to yield over the expected life of the loans. There is significant uncertainty about how borrowers will seek and qualify for forgiveness. As a result, the expected life of these loans and the impact on loan yields to future periods cannot currently be determined with certainty, and estimates will be periodically updated as more information becomes available.
The Federal Reserve Bank (“FRB”) initiated the Paycheck Protection Program Liquidity Facility (“PPPLF”) as a facility to provide liquidity to financial institutions participating and funding loans for the PPP. The non-recourse loans are available to institutions eligible to make PPP loans, with the SBA-guaranteed loans pledged as collateral to the FRB. Financial institutions can also pledge PPP loans to the discount window. Each liquidity option is set at different rates and terms. PPP loans pledged to the PPPLF may be excluded from leverage ratio calculations. At September 30, 2020, the Corporation pledged $235.9 million of PPP loans to the FRB of Philadelphia to borrow $235.9 million of funds at a rate of 0.35%.
The Paycheck Protection Program Flexibility Act
On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (the “PPP Flexibility Act”) was signed into law that amends the CARES Act and eases rules on how and when small businesses can use loans and still be eligible for forgiveness. The PPP Flexibility Act changed many aspects of the PPP, including: (1) extending the covered period for loan forgiveness purposes to the earlier of 24 weeks or December 31, 2020; (2) lowering the amount required to be spent on payroll costs from 75% to 60% of the PPP loan funds; (3) extending the loan maturity period from two to five years; and (4) revising the loan deferral period.
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SBA Loan Subsidy Program
Pursuant to the CARES Act, Section 1112, Congress has determined that all existing borrowers under the SBA Section 7(a) program are adversely affected by COVID-19, and are therefore entitled to a subsidy in the form of relief payments. Specifically, the CARES Act provides that the SBA will pay the principal and interest on any existing and current SBA 7(a) loan for a period of nine months. These principal and interest payments will be made by the SBA directly to the SBA 7(a) lender and will begin with the next payment due, and as such, are separate from any loan modifications made at the direction of the Bank. The Bank is a qualified SBA Section 7(a) lender, and is participating in the Section 1112 program. As of September 30, 2020, the Bank has 52 loans eligible for the program, with an aggregate principal amount of $42.5 million. Payments under the program will not constitute new loans for the Bank, but simply payments of principal and interest on loans that already exist in the Bank’s SBA 7(a) loan portfolio and are current on borrower payments. The Bank received its first tranche of payments under the program on April 29, 2020, and has been receiving subsequent payments from the SBA by the 25th of each month thereafter until the Bank has received nine payments for each loan that qualified for this support by the SBA.
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. While certain valuation assumptions and judgments will change to account for COVID-19 pandemic-related circumstances such as widening credit spreads, the Corporation does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.In particular, management has identified severalthe provision and allowance for loan losses as the accounting policiespolicy that, due to the estimates, assumptions and judgements inherent in those policies, arethat policy, is 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 policiesthis policy to the audit committee of our board of directors.
TheseThis critical accounting policies,policy, 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, 20172019 and 20162018 included in the 2017 10‑K.Annual 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, 2018,2020, as compared to the same periodsperiod in 2017,2019, and the changes in its financial condition as of September 30, 20182020 as compared to December 31, 2017.2019. 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 September 30, |
| Net interest income increased |
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● | Provision for loan and lease losses (the “Provision”) of $4.0 million for the three months ended September 30, 2020 was an increase of $3.3 million from the $705 thousand Provision recorded for the same period in 2019. |
● | Non-interest income of $29.1 million for the three months ended September 30, 2020 was a $19.9 million or 215.6% increase from the same period in 2019. |
● | Mortgage banking net revenue increased $14.5 million, or 198.2%, to $21.8 million for the three months ended September 30, 2020, as compared to $7.3 million for the same period in |
| Non-interest expense of $25.8 million for the three months ended September 30, 2020 increased $12.3 million, or 90.7%, from $13.5 million for the same period in 2019. |
Nine Month Results of Operations
● | Net income for the nine months ended September 30, 2020 was $17.4 million, or $2.82 per diluted share, an increase of $10.1 million as compared to net income of $7.3 million, or $1.14 per diluted share, for the same period in 2019. |
● | Return on average equity (“ROE”) and return on average assets (“ROA”) for the nine months ended September 30, 2020 were 18.85% and 1.65%, respectively. |
● | Net interest income increased $7.3 million, or 27.4%, to $34.0 million for the nine months ended September 30, 2020, as compared to $26.7 million for the same period in 2019. |
● | Provision for loan and lease losses (the “Provision”) of |
| Non-interest income of |
31
|
|
|
|
Nine Month Results of Operations
|
|
|
|
|
|
|
|
| Non-interest |
|
|
|
|
|
Changes in Financial Condition
| Total assets of |
● | Consolidated stockholders’ equity of $131.8 million as of September 30, |
|
|
| Total portfolio loans and leases, excluding mortgage loans held for sale, as of September 30, |
| Total non-performing loans and leases of |
| The |
| Total deposits of |
3241
Key Performance Ratios
Key financial performance ratios for the three and nine months ended September 30, 20182020 and 20172019 are shown in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| September 30, |
| September 30, |
| ||||||||
|
| 2018 |
| 2017 |
| 2018 |
| 2017 |
| ||||
Annualized return on average equity |
|
| 10.16 | % |
| 7.77 | % |
| 7.47 | % |
| 5.24 | % |
Annualized return on average assets |
|
| 1.16 | % |
| 0.70 | % |
| 0.87 | % |
| 0.49 | % |
Net interest margin (tax effected yield) |
|
| 3.72 | % |
| 3.91 | % |
| 3.83 | % |
| 3.94 | % |
Basic earnings per share |
| $ | 0.43 |
| $ | 0.30 |
| $ | 0.91 |
| $ | 0.51 |
|
Diluted earnings per share |
| $ | 0.42 |
| $ | 0.30 |
| $ | 0.90 |
| $ | 0.51 |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | | Nine Months Ended | | ||||||||||
| September 30, | | | September 30, | | ||||||||||
| 2020 |
| | 2019 |
| | 2020 |
| | 2019 |
| ||||
Annualized return on average equity | | 29.30 | % | | | 11.29 | % | | | 18.85 | % | | | 8.65 | % |
Annualized return on average assets | | 2.29 | % | | | 1.24 | % | | | 1.65 | % | | | 0.97 | % |
Net interest margin (tax effected yield) | | 3.26 | % | | | 3.61 | % | | | 3.33 | % | | | 3.67 | % |
Basic earnings per share | $ | 1.51 | | | $ | 0.52 | | | $ | 2.83 | | | $ | 1.15 | |
Diluted earnings per share | $ | 1.51 | | | $ | 0.52 | | | $ | 2.82 | | | $ | 1.14 | |
The following table presents certain key period-end balances and ratios as of September 30, 20182020 and December 31, 2017:2019:
| | | | | | | |
| September 30, | | | December 31, | | ||
(dollars in thousands, except per share amounts) | 2020 |
| | 2019 | | ||
Book value per common share | $ | 21.51 | | | $ | 18.84 | |
Tangible book value per common share (1) | $ | 20.76 | | | $ | 18.09 | |
Allowance as a percentage of loans and leases held for investment | | 1.27 | % | | | 0.98 | % |
Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1) | | 1.59 | % | | | 1.00 | % |
Tier I capital to risk weighted assets | | 9.97 | % | | | 11.21 | % |
Tangible common equity ratio (1) | | 7.26 | % | | | 10.12 | % |
Loans held for investment | $ | 1,306,846 | | | $ | 964,710 | |
Total assets | $ | 1,758,648 | | | $ | 1,150,019 | |
Stockholders' equity | $ | 131,832 | | | $ | 120,695 | |
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
(dollars in thousands, except per share amounts) |
| 2018 |
| 2017 |
| ||
Book value per common share |
| $ | 16.70 |
| $ | 15.86 |
|
Tangible book value per common share |
| $ | 15.91 |
| $ | 15.00 |
|
Allowance as a percentage of loans and leases held for investment |
|
| 0.96 | % |
| 0.96 | % |
Tier I capital to risk weighted assets |
|
| 12.03 | % |
| 12.86 | % |
Tangible common equity ratio (1) |
|
| 10.67 | % |
| 11.27 | % |
Loans held for investment |
| $ | 806,788 |
| $ | 694,637 |
|
Total assets |
| $ | 959,829 |
| $ | 856,035 |
|
Stockholders' equity |
| $ | 107,018 |
| $ | 101,363 |
|
(1) Non-GAAP financial measure. See “Non-GAAP Financial Measures” below for Non-GAAP to GAAP reconciliation. |
|
|
Non-GAAP Financial Measures
IncludedMeridian believes that non-GAAP measures are meaningful because they reflect adjustments commonly made by management, investors, regulators and analysts to evaluate performance trends and the adequacy of common equity. This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for performance and financial condition measures determined in this Quarterly Report on Form 10‑Qaccordance with GAAP, and should not be considered in isolation or as a substitute for analysis of Meridian’s results as reported under GAAP, nor is a financialit necessarily comparable to non-GAAP performance measure not recognizedmeasures that may be presented by GAAP, “tangible common equity”. other companies.
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 titled measures used by other companies.
42
The table below provides the non-GAAP reconciliation for our tangible common equity ratio:ratio for Meridian Corporation:
|
|
|
|
|
|
| September 30, |
| December 31, |
(dollars in thousands) |
| 2018 |
| 2017 |
Tangbile common equity ratio: |
|
|
|
|
Total stockholders' equity |
| 107,018 |
| 101,363 |
Less: |
|
|
|
|
Goodwill |
| 899 |
| 899 |
Intangible assets |
| 4,215 |
| 4,596 |
Tangible common equity |
| 101,904 |
| 95,868 |
Total assets |
| 959,829 |
| 856,035 |
Less: |
|
|
|
|
Goodwill |
| 899 |
| 899 |
Intangible assets |
| 4,215 |
| 4,596 |
Tangible assets |
| 954,715 |
| 850,540 |
Tangible common equity ratio |
| 10.67% |
| 11.27% |
| | | | | |
| | | | | |
(dollars in thousands) | September 30, 2020 |
| December 31, 2019 | ||
Tangible common equity ratio: | | | | | |
Total stockholders' equity | | 131,832 | | | 120,695 |
Less: | | | | | |
Goodwill | | 899 | | | 899 |
Intangible assets | | 3,668 | | | 3,874 |
Tangible common equity | | 127,265 | | | 115,922 |
Total assets | | 1,758,648 | | | 1,150,019 |
Less: | | | | | |
Goodwill | | 899 | | | 899 |
Intangible assets | | 3,668 | | | 3,874 |
Tangible assets | $ | 1,754,081 | | $ | 1,145,246 |
Tangible common equity ratio | | 7.26% | | | 10.12% |
The table below provides the non-GAAP reconciliation for our tangible book value per common share for Meridian Corporation:
| | |
Tangible book value per common share: | | |
| September 30, 2020 | |
Book value per common share | $ | 21.51 |
Less: Impact of goodwill and intangible assets | | (0.75) |
Tangible book value per common share: | $ | 20.76 |
The following is a reconciliation of the allowance for loan losses to total loans held for investment ratio for the three months ended September 30, 2020. This is considered a non-GAAP measure as the calculation excludes the impact of loans held for investment that are fair valued and the impact of PPP loans as these loan types are not included in the allowance for loan losses calculation.
| | |
| | |
| | |
Reconciliation of Allowance for Loan Losses / Total loans held for investment | September 30, 2020 | |
Allowance for loan losses / Total loans held for investment | | 1.27% |
Less: Impact of loans held for investment - fair valued | | 0.00% |
Less: Impact of PPP loans | | 0.32% |
Allowance for loan losses / Total loans held for investment (excl. loans at fair value and PPP loans) | | 1.59% |
3343
The following sections discuss, in detail, the Corporation’s results of operations for the three and nine months ended September 30, 2018,2020, as compared to the same periodsperiod in 2017,2019, and the changes in its financial condition as of September 30, 20182020 as compared to December 31, 2017.2019.
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, 20182020 and 2017,2019, 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, 20182020 was $11.6$15.9 million, which represented a $2.4$2.3 million, or 25.9%16.9%, increase compared with the three months ending September 30, 2017.2019. The increase in income was attributable to a $147.1$538.1 million increase in average interest earning assets, year over year, helpedled by anthe $254.0 million increase in average balances on PPP loans, offset by a decrease of 23122 basis points in yield on earning assets, to 5.12%4.07% from 4.89%5.29%, for same period in 2017.2019. The commercial loan portfolio yield, in particular, rose 31fell 95 basis points over the same period in 2017.2019, the yield on shared national credits fell 207 basis points, and the yield on construction loans decreased 65 basis points over the same period. And while fees and interest on PPP loans contributed $1.5 million to total interest income, the yield on these loans was 2.41%. Total interest expense rose $1.3declined $1.2 million or 72.7%26.7% to $3.2 million for the third quarter of 2018,three months ending September 30, 2020, compared with $1.9$4.3 million for the third quarter of 2017.three months ending September 30, 2019. The increasedecrease was primarily due to an increase in average interest bearing deposits of $114.4 million, year over year, as well as an overall increase of 60a 107 basis pointspoint decline in the cost of interest-bearing funds reflective ofyield on money market and savings accounts from 1.74% to 0.67%, combined with a 100 basis point decline in the overall increase in market rates.yield on time deposits from 2.37% to 1.37% over this period.
Net interest income increased $1.1$3.4 million, or 14.1%37.1%, to $8.4$12.7 million for the three months ended September 30, 2018,2020, compared to $7.3$9.3 million for the three months ended September 30, 2017.2019. The net-interest margin although strong, decreased 1935 basis points for the third quarter of 2018three months ending September 30, 2020 at 3.72%3.26%, compared with 3.91%3.61% for the third quarter of 2017.three month ending September 30, 2019. The decrease in net interest margin reflects declining interest rates earned on the pressure fromloan portfolios overall, out-pacing the rising cost of funds, which has outpaceddeclines in the favorable trend in yieldinterest rates on interest earning assetsdeposits and borrowings 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 million or 20.5% increase in average non-interest bearing depositsyear-over-year period over period.presented.
Total interest income for the nine months ending September 30, 20182020 was $32.3$44.7 million, which represented a $6.2$5.7 million, or 24.2%14.7%, increase compared with the nine months ending September 30, 2017.2019. The increase in income was attributable
44
to a $126.6$393.8 million increase in average interest earning assets, year over year, helpedled by anthe $144.6 million increase in average balances on PPP loans, offset by a decrease of 2497 basis points in
34
yield on earning assets, to 5.07%4.38% from 4.83%5.35%, for same period in 2017.2019. The commercial loan portfolio and home equity loan portfolio yields,yield, in particular, rose 36 and 46fell 83 basis points respectively.over the same period in 2019, the yield on shared national credits fell 158 basis points, the yield on construction loans fell 85 basis points over the same period in 2019, while the yield on small business loans also decreased 68 basis points over the same period. Total interest expense rose $3.2declined $1.6 million or 65.6%12.7% to $8.0$10.8 million for the first nine months of 2018,ending September 30, 2020, compared with $4.8$12.3 million for the first nine months of 2017.ending September 30, 2019. The year-over-year increasedecrease 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 49a 86 basis pointspoint decline in the cost of interest-bearing funds reflective ofyield on money market and savings accounts from 1.79% to 0.93%, combined with a 70 basis point decline in the overall increase in market rates.yield on time deposits from 2.37% to 1.67% over this period.
Net interest income increased $3.1$7.3 million, or 14.7%27.4%, to $24.3$34.0 million for the nine months ended September 30, 2018,2020, compared to $21.2$26.7 million for the nine months ended September 30, 2017.2019. The net-interest margin although strong, decreased 1134 basis points for the first nine months of 2018ending September 30, 2020 at 3.83%3.33%, compared with 3.94%3.67% for the first nine months of 2017.month ending September 30, 2019. The strengthdecrease in net interest margin reflects declining interest rates earned on the loan portfolios overall, out-pacing the declines in the Corporation’s net-interest margin reflectsinterest rates on deposits and borrowings during the size and asset quality of the loan portfolio, as well as the $13.6 million or 13.8% increase in average non-interest bearing depositsyear-over-year period over period.presented.
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% |
| | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | ||||||||||||
| | | | 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 | | $ | 10,928 | | | 2 | | 0.08% | | $ | 5,074 | | | 35 | | 2.69% |
Federal funds sold | | | 12,655 | | | 2 | | 0.02% | | | 633 | | | 3 | | 2.12% |
Investment securities(1) | | | 109,106 | | | 612 | | 2.27% | | | 63,488 | | | 414 | | 2.59% |
Loans held for sale | | | 150,925 | | | 1,100 | | 2.91% | | | 38,633 | | | 381 | | 3.95% |
Loans held for investment(1) | | | 1,275,046 | | | 14,224 | | 4.41% | | | 912,781 | | | 12,773 | | 5.53% |
Total loans | | | 1,425,971 | | | 15,324 | | 4.28% | | | 951,414 | | | 13,154 | | 5.49% |
Total interest-earning assets | | | 1,558,660 | | | 15,940 | | 4.07% | | | 1,020,609 | | | 13,606 | | 5.29% |
Noninterest earning assets | | | 39,647 | | | | | | | | 38,846 | | | | | |
Total assets | | $ | 1,598,307 | | | | | | | $ | 1,059,455 | | | | | |
Liabilities and stockholders' equity | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 219,853 | | | 392 | | 0.71% | | $ | 86,005 | | | 352 | | 1.63% |
Money market and savings deposits | | | 454,922 | | | 770 | | 0.67% | | | 313,255 | | | 1,374 | | 1.74% |
Time deposits | | | 312,538 | | | 1,073 | | 1.37% | | | 319,208 | | | 1,907 | | 2.37% |
Total deposits | | | 987,313 | | | 2,235 | | 0.90% | | | 718,468 | | | 3,633 | | 2.01% |
Total Borrowings | | | 235,455 | | | 334 | | 0.56% | | | 81,211 | | | 514 | | 2.51% |
Subordinated Debentures | | | 40,802 | | | 596 | | 5.84% | | | 9,176 | | | 169 | | 7.33% |
Total interest-bearing liabilities | | | 1,263,570 | | | 3,165 | | 1.00% | | | 808,855 | | | 4,316 | | 2.12% |
Noninterest-bearing deposits | | | 193,020 | | | | | | | | 126,101 | | | | | |
Other noninterest-bearing liabilities | | | 16,664 | | | | | | | | 7,952 | | | | | |
Total liabilities | | $ | 1,473,254 | | | | | | | $ | 942,908 | | | | | |
Total stockholders' equity | | | 125,053 | | | | | | | | 116,547 | | | | | |
Total stockholders' equity and liabilities | | $ | 1,598,307 | | | | | | | $ | 1,059,455 | | | | | |
Net interest income | | | | | $ | 12,775 | | | | | | | $ | 9,290 | | |
Net interest spread | | | | | | | | 3.07% | | | | | | | | 3.17% |
Net interest margin | | | | | | | | 3.26% | | | | | | | | 3.61% |
45
| | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | ||||||||||||
| | | | 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 | | $ | 7,620 | | | 27 | | 0.47% | | $ | 6,450 | | | 121 | | 2.51% |
Federal funds sold | | | 15,692 | | | 36 | | 0.30% | | | 853 | | | 15 | | 2.27% |
Investment securities(1) | | | 95,563 | | | 1,735 | | 2.45% | | | 63,135 | | | 1,226 | | 2.60% |
Loans held for sale | | | 99,633 | | | 2,301 | | 3.08% | | | 25,782 | | | 813 | | 4.21% |
Loans held for investment(1) | | | 1,150,662 | | | 40,753 | | 4.70% | | | 879,184 | | | 36,880 | | 5.58% |
Total loans | | | 1,250,295 | | | 43,054 | | 4.60% | | | 904,966 | | | 37,693 | | 5.57% |
Total interest-earning assets | | | 1,369,170 | | | 44,852 | | 4.38% | | | 975,404 | | | 39,055 | | 5.35% |
Noninterest earning assets | | | 43,940 | | | | | | | | 37,753 | | | | | |
Total assets | | $ | 1,413,110 | | | | | | | $ | 1,013,157 | | | | | |
Liabilities and stockholders' equity | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 187,987 | | | 1,302 | | 0.92% | | $ | 94,295 | | | 1,122 | | 1.59% |
Money market and savings deposits | | | 392,863 | | | 2,736 | | 0.93% | | | 297,471 | | | 3,977 | | 1.79% |
Time deposits | | | 322,574 | | | 4,026 | | 1.67% | | | 309,434 | | | 5,485 | | 2.37% |
Total deposits | | | 903,424 | | | 8,064 | | 1.19% | | | 701,200 | | | 10,584 | | 2.02% |
Total Borrowings | | | 148,192 | | | 900 | | 0.81% | | | 59,862 | | | 1,223 | | 2.73% |
Subordinated Debentures | | | 41,075 | | | 1,787 | | 5.80% | | | 9,197 | | | 508 | | 7.37% |
Total interest-bearing liabilities | | | 1,092,691 | | | 10,751 | | 1.31% | | | 770,259 | | | 12,315 | | 2.14% |
Noninterest-bearing deposits | | | 184,503 | | | | | | | | 122,101 | | | | | |
Other noninterest-bearing liabilities | | | 12,349 | | | | | | | | 6,997 | | | | | |
Total liabilities | | $ | 1,289,543 | | | | | | | $ | 899,357 | | | | | |
Total stockholders' equity | | | 123,567 | | | | | | | | 113,800 | | | | | |
Total stockholders' equity and liabilities | | $ | 1,413,110 | | | | | | | $ | 1,013,157 | | | | | |
Net interest income | | | | | $ | 34,101 | | | | | | | $ | 26,740 | | |
Net interest spread | | | | | | | | 3.06% | | | | | | | | 3.22% |
Net interest margin | | | | | | | | 3.33% | | | | | | | | 3.67% |
(1) | Yields and net interest income are reflected on a tax-equivalent basis. |
3546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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% |
|
|
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, 20182020 as compared to the same periodsperiod in 2017,2019, 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.
| | | | | | | | | | | | | |
| 2020 Compared to 2019 | ||||||||||||
| Three Months Ended | | Nine Months Ended | ||||||||||
| September 30, | | September 30, | ||||||||||
(dollars in thousands) | Rate |
| Volume |
| Total | | Rate |
| Volume |
| Total | ||
Interest income: | | | | | | | | | | | | | |
Due from banks | $ | (159) | | 126 | | (33) | | $ | (125) | | 31 | | (94) |
Federal funds sold | | (25) | | 24 | | (1) | | | (31) | | 52 | | 21 |
Investment securities(1) | | (314) | | 512 | | 198 | | | (116) | | 625 | | 509 |
Loans held for sale | | (673) | | 1,392 | | 719 | | | (404) | | 1,892 | | 1,488 |
Loans held for investment(1) | | (13,044) | | 14,495 | | 1,451 | | | (8,930) | | 12,803 | | 3,873 |
Total loans | | (13,717) | | 15,887 | | 2,170 | | | (9,334) | | 14,695 | | 5,361 |
Total interest income | $ | (14,215) | | 16,549 | | 2,334 | | $ | (9,606) | | 15,403 | | 5,797 |
Interest expense: | | | | | | | | | | | | | |
Interest-bearing deposits | $ | (1,152) | | 1,192 | | 40 | | $ | (829) | | 1,009 | | 180 |
Money market and savings deposits | | (3,184) | | 2,580 | | (604) | | | (2,788) | | 1,547 | | (1,241) |
Time deposits | | (795) | | (39) | | (834) | | | (1,821) | | 362 | | (1,459) |
Total interest-bearing deposits | | (5,131) | | 3,733 | | (1,398) | | | (5,438) | | 2,918 | | (2,520) |
Total borrowings | | (591) | | 411 | | (180) | | | (852) | | 529 | | (323) |
Subordinated debentures | | (234) | | 661 | | 427 | | | (198) | | 1,477 | | 1,279 |
Total interest expense | | (5,956) | | 4,805 | | (1,151) | | | (6,488) | | 4,924 | | (1,564) |
Interest differential | $ | (8,259) | | 11,744 | | 3,485 | | $ | (3,118) | | 10,479 | | 7,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2018 Compared to 2017 | ||||||||||||
|
| Three Months Ended |
| Nine Months Ended | ||||||||||
|
| September 30, |
| September 30, | ||||||||||
(dollars in thousands) |
| Rate |
| Volume |
| Total |
| Rate |
| Volume |
| Total | ||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from banks |
| $ | 8 |
| 9 |
| 17 |
| $ | 35 |
| (20) |
| 15 |
Federal funds sold |
|
| 5 |
| (6) |
| (1) |
|
| 6 |
| (1) |
| 5 |
Investment securities(1) |
|
| 17 |
| 41 |
| 58 |
|
| 49 |
| 81 |
| 130 |
Loans held for sale |
|
| 66 |
| 63 |
| 129 |
|
| 101 |
| 83 |
| 184 |
Loans held for investment(1) |
|
| 341 |
| 1,821 |
| 2,162 |
|
| 819 |
| 5,061 |
| 5,880 |
Total loans |
|
| 407 |
| 1,884 |
| 2,291 |
|
| 920 |
| 5,144 |
| 6,064 |
Total interest income |
| $ | 437 |
| 1,928 |
| 2,365 |
| $ | 1,008 |
| 5,206 |
| 6,214 |
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking |
| $ | 174 |
| 42 |
| 216 |
| $ | 412 |
| 135 |
| 547 |
Money market and savings deposits |
|
| 361 |
| 59 |
| 420 |
|
| 735 |
| 121 |
| 856 |
Time deposits |
|
| 383 |
| 259 |
| 642 |
|
| 999 |
| 692 |
| 1,691 |
Total interest-bearing deposits |
|
| 918 |
| 360 |
| 1,278 |
|
| 2,146 |
| 948 |
| 3,094 |
Short-term borrowings |
|
| 390 |
| (225) |
| 165 |
|
| 603 |
| (268) |
| 335 |
Long-term borrowings |
|
| 76 |
| (102) |
| (26) |
|
| 67 |
| (140) |
| (73) |
Total borrowings |
|
| 466 |
| (327) |
| 139 |
|
| 670 |
| (408) |
| 262 |
Subordinated debentures |
|
| 14 |
| (87) |
| (73) |
|
| 19 |
| (219) |
| (200) |
Total interest expense |
|
| 1,398 |
| (54) |
| 1,344 |
|
| 2,836 |
| 320 |
| 3,156 |
Interest differential |
| $ | (961) |
| 1,982 |
| 1,021 |
| $ | (1,828) |
| 4,886 |
| 3,058 |
(1)Yields and net interest income are reflected on a tax-equivalent basis.
(1) | Yields and net interest income are reflected on a tax-equivalent basis. |
For the three months ended September 30, 20182020 as compared to the same period in 2017,2019, tax-equivalent interest income increased $2.3 million as volume changes in average earning assets contributed $16.5 million and unfavorable rate changes reduced interest income by $14.2 million. The favorable change in net interest income due to volume changes was driven mostly from growth in the loans held for investment portfolio, which increased $362.3 million on average over the three month periods, while the loans held for sale portfolio also increased $112.3 million on average over this period. Within the loans held for investment portfolio the average balance on PPP loans increased $254.0 million. Offsetting favorable volume changes were unfavorable loan rate changes of 121 basis points reducing interest income by $13.7 million.
On the funding side, interest expense decreased $1.2 million due to larger impact from rate declines than from volume increases. The cost of deposits and borrowings were down across the board, having a $6.0 million positive effect on interest expense. The cost of interest-bearing deposits, money market and savings accounts and time deposits declined 92 basis points, 107 basis points and 100 basis points, respectively, while the cost of borrowings also declined 195 basis points. Interest-bearing deposits, and money market and savings accounts increased $133.8 million, and $141.7 million on average, while time deposits decreased $6.7 million on average, combined with an increase in the average balance on subordinated debentures also increased $31.6 million. These funding average balance changes overall led to a $4.8 million increase in interest expense. Overall, the increase in interest income from volume changes contributed $16.5 million and out-paced the unfavorable rate changes to improve tax-equivalent net interest income by $3.5 million.
47
For the nine months ended September 30, 2020 as compared to the same period in 2019, tax-equivalent interest income increased $5.8 million as volume changes in average earning assets contributed $15.4 million and unfavorable rate changes helped reduce interest income by $9.6 million. The favorable change in net interest income due to volume changes was driven largely from growth in the loanloans held for investment portfolio, which increased $138.5$271.5 million on average over the threenine month periods. Thisperiods, largely due to the $144.6 million increase contributed $1.9 million toin the average balance of PPP loans. Offsetting favorable volume changes were unfavorable loan rate changes of 97 basis points reducing interest income. Total investment securities, cash and cash equivalents were relatively flat, period over period. income by $9.3 million.
On the funding side, interest checkingexpense decreased $1.6 million due to larger impact from rate declines than from volume increases. The cost of deposits and borrowings were down across the board, having a $6.5 million positive effect on interest expense. The cost of interest-bearing deposits, money market and savings accounts together rose $42.3and time deposits declined 67 basis points, 86 basis points and 70 basis points, respectively, while the cost of borrowings also declined 192 basis points. Interest-bearing deposits, money market and savings accounts and time deposits increased $93.7 million, $95.4 million and $13.1 million on average, reducing net interest income by $94 thousand. Time deposits increased $72.1respectively, while the average balance on subordinated debentures also increase $31.9 million. These funding average balance increases led to a $4.9 million on average, causing an increase to interest expense of $259 thousand. Lower levels of borrowings, down $16.4 million on average affected net interest income $327 thousand favorably, and lower levels of subordinated debt contributed $87 thousand to the net interest income over the three month periods compared.
For the three 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 65 basis points, respectively. Core deposits, such as interest checking and money market accounts rose 69 and 63 basis points, respectively. These unfavorable rate changes were partially offset by favorable rate changes in interest earning assets.expense. Overall, the increase in interest income from volume changes contributed $2.0$15.4 million and out-paced the unfavorable rate changes to improve tax-equivalent net interest income by $1.0$7.4 million.
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 dueresulting from various hypothetical interest rate scenarios. Our model incorporates various assumptions that management believes to volumebe 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 execute appropriate Asset / Liability Management (“ALM”) strategies.
Potential changes was driven largely from growth in the loan portfolio, which increased $123.6 million on average over the nine month periods. This increase contributed $5.1 million to 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, reducingour net interest income by $256 thousand. Time deposits increased $70.0 million on average, causing an increase tobetween a flat interest expenserate scenario and hypothetical rising and declining interest rate scenarios, measured over a one-year period as of $692 thousand. Lower levels of borrowings, down $23.7 million on average affected net interest income $408
37
thousand favorably, and lower levels of subordinated debt contributed $219 thousand to the net interest income over the nine month periods compared.
For the nine months ended September 30, 2018 as compared to2020 and 2019 are presented in 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 its interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve sustainable growth 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 |
| ||
| | September 30, |
| ||
Changes in Market Interest Rates |
| 2020 |
| 2019 |
|
+300 basis points over next 12 months |
| 1.98 | % | 0.29 | % |
+200 basis points over next 12 months |
| 0.95 | % | 0.32 | % |
+100 basis points over next 12 months |
| 0.15 | % | 0.23 | % |
No Change |
|
|
|
| |
-100 basis points over next 12 months | | (4.33) | % | 0.68 | % |
-200 basis points over next 12 months | | (14.19) | % | (1.30) | % |
The above interest rate simulation suggests that the Corporation’s balance sheet is slightly asset sensitive as of September 30, 2018 and December 31, 2017. The2020. In its current position, the table indicates that a 100, 200 or 300 basis point increase in interest rates would have a modestly
48
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.
38
| | | | | |
| | | | | |
| | Estimated increase (decrease) in Net | | ||
| | Economic Value at September 30, | | ||
Changes in Market Interest Rates |
| 2020 | | 2019 | |
+300 basis points |
| 129 | % | 27 | % |
+200 basis points |
| 98 | % | 22 | % |
+100 basis points |
| 57 | % | 14 | % |
No Change |
|
|
| |
|
-100 basis points |
| (83) | % | (22) | % |
-200 basis points |
| (213) | % | (42) | % |
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.
49
The following tables present the interest rate gap analysis of our assets and liabilities as of September 30, 20182020 and December 31, 2017.2019.
| | | | | | | | | | | |
| | | | | | | | | Greater | | |
| | | | | | | | | Than | | |
| | | | | | | | 5 years and | | | |
As of September 30, 2020 | | 12 Months | | | | | | Not Rate | | | |
(dollars in thousands) |
| or Less |
| 1-2 Years |
| 2-5 Years |
| Sensitive |
| Total | |
Cash and investments | | $ | 91,261 | | 4,174 | | 17,776 | | 73,594 | | 186,805 |
Loans, net (1) | | | 1,009,802 | | 280,561 | | 212,326 | | 12,734 | | 1,515,423 |
Other Assets | | | — | | — | | — | | 56,420 | | 56,420 |
Total Assets | | $ | 1,101,063 | | 284,735 | | 230,102 | | 142,748 | | 1,758,648 |
| | | | | | | | | | | |
Noninterest-bearing deposits | | | 6,377 | | 6,161 | | 17,894 | | 163,419 | | 193,851 |
Interest-bearing deposits | | | 709,716 | | — | | — | | — | | 709,716 |
Time deposits | | | 252,841 | | 39,437 | | 13,179 | | — | | 305,457 |
FHLB advances | | | 94,239 | | 14,178 | | — | | — | | 108,417 |
Other Liabilities | | | 10,000 | | 235,369 | | 225 | | 63,781 | | 309,375 |
Total stockholders' equity | | | — | | — | | — | | 131,832 | | 131,832 |
Total liabilities and stockholders' equity | | $ | 1,073,173 | | 295,145 | | 31,298 | | 359,032 | | 1,758,648 |
Repricing gap-positive | | | | | | | | | | | |
(Negative) Positive | | $ | 27,890 | | (10,410) | | 198,804 | | (216,284) | | — |
Cumulative repricing gap: Dollar amount | | $ | 27,890 | | 17,480 | | 216,284 | | — | | |
Percent of total assets | | | 1.6% | | 1.0% | | 12.3% | | — | | |
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2018 | |||||||||||
(dollars in thousands) |
| 12 Months |
| 1-2 Years |
| 2-5 Years |
| Greater Than 5 |
| Total | |
Cash and investments |
| $ | 40,738 |
| 5,754 |
| 12,255 |
| 27,525 |
| 86,272 |
Loans, net (1) |
|
| 450,571 |
| 90,119 |
| 242,404 |
| 50,027 |
| 833,121 |
Other Assets |
|
| — |
| — |
| — |
| 40,436 |
| 40,436 |
Total Assets |
|
| 491,309 |
| 95,873 |
| 254,659 |
| 117,988 |
| 959,829 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity: |
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
| 16,566 |
| 9,080 |
| 16,852 |
| 82,057 |
| 124,555 |
Interest-bearing deposits |
|
| 379,611 |
| — |
| — |
| — |
| 379,611 |
Time deposits |
|
| 255,720 |
| 10,330 |
| 11,411 |
| — |
| 277,461 |
FHLB advances |
|
| 43,755 |
| 5,000 |
| — |
| — |
| 48,755 |
Other Liabilities |
|
| 1,444 |
| — |
| — |
| 20,985 |
| 22,429 |
Total stockholders' equity |
|
| — |
| — |
| — |
| 107,018 |
| 107,018 |
Total liabilities and stockholders' equity |
| $ | 697,096 |
| 24,410 |
| 28,263 |
| 210,060 |
| 959,829 |
Repricing gap-positive |
|
|
|
|
|
|
|
|
|
|
|
(Negative) Positive |
| $ | (205,787) |
| 71,463 |
| 226,396 |
| (92,072) |
| — |
Cumulative repricing gap: Dollar amount |
| $ | (205,787) |
| (134,324) |
| 92,072 |
| — |
|
|
Percent of total assets |
|
| (21.44)% |
| (13.99)% |
| 9.59% |
| — |
|
|
(1) |
| Loans include portfolio loans and loans held for sale |
| | | | | | | | | | | |
| | | | | | | | | Greater | | |
| | | | | | | | | Than | | |
| | | | | | | | | 5 years and | | |
As of December 31, 2019 | | | | | | | | Not Rate | | | |
(dollars in thousands) |
| 12 Months |
| 1-2 Years |
| 2-5 Years |
| Sensitive |
| Total | |
Cash and investments | | $ | 66,856 | | 3,064 | | 13,106 | | 24,990 | | 108,016 |
Loans, net (1) | | | 558,813 | | 155,846 | | 232,924 | | 41,318 | | 988,901 |
Other Assets (Footnote 1) | | | — | | — | | — | | 53,102 | | 53,102 |
Total Assets | | | 625,669 | | 158,910 | | 246,030 | | 119,410 | | 1,150,019 |
| | | | | | | | | | | |
Noninterest-bearing deposits | | | 13,271 | | 9,952 | | 21,833 | | 94,394 | | 139,450 |
Interest-bearing deposits | | | 399,888 | | — | | — | | — | | 399,888 |
Time deposits | | | 272,331 | | 16,532 | | 22,967 | | — | | 311,830 |
FHLB advances | | | 123,676 | | 3,123 | | — | | — | | 126,799 |
Other Liabilities (Footnote 1) | | | 39,878 | | — | | 225 | | 11,254 | | 51,357 |
Total stockholders' equity (Footnote 1) | | | — | | — | | — | | 120,695 | | 120,695 |
Total liabilities and stockholders' equity | | $ | 849,044 | | 29,607 | | 45,025 | | 226,343 | | 1,150,019 |
Repricing gap-positive | | | | | | | | | | | |
(Negative) Positive | | | (223,375) | | 129,303 | | 201,005 | | (106,933) | | — |
Cumulative repricing gap: Dollar amount | | $ | (223,375) | | (94,072) | | 106,933 | | — | | |
Percent of total assets | | | (19.4)% | | (8.2)% | | 9.3% | | — | | |
39
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017 | |||||||||||
(dollars in thousands) |
| 12 Months |
| 1-2 Years |
| 2-5 Years |
| Greater Than 5 |
| Total | |
Cash and investments |
| $ | 26,648 |
| 7,475 |
| 8,523 |
| 52,542 |
| 95,188 |
Loans, net (1) |
|
| 420,500 |
| 75,629 |
| 202,736 |
| 30,794 |
| 729,659 |
Other Assets |
|
| — |
| — |
| — |
| 31,188 |
| 31,188 |
Total Assets |
|
| 447,148 |
| 83,104 |
| 211,259 |
| 114,524 |
| 856,035 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity: |
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
| 11,414 |
| 10,116 |
| 23,960 |
| 54,964 |
| 100,454 |
Interest-bearing deposits |
|
| 253,664 |
| 27,291 |
| 27,292 |
| — |
| 308,247 |
Time deposits |
|
| 159,808 |
| 52,830 |
| 5,770 |
| — |
| 218,408 |
FHLB advances |
|
| 99,750 |
| 1,800 |
| 7,063 |
| 13,308 |
| 121,921 |
Other Liabilities |
|
| — |
| — |
| — |
| 5,642 |
| 5,642 |
Total stockholders' equity |
|
| — |
| — |
| — |
| 101,363 |
| 101,363 |
Total liabilities and stockholders' equity |
| $ | 524,636 |
| 92,037 |
| 64,085 |
| 175,277 |
| 856,035 |
Repricing gap-positive |
|
|
|
|
|
|
|
|
|
|
|
(Negative) Positive |
|
| (77,488) |
| (8,933) |
| 147,174 |
| (60,753) |
| — |
Cumulative repricing gap: Dollar amount |
| $ | (77,488) |
| (86,421) |
| 60,753 |
| — |
|
|
Percent of total assets |
|
| (9.05)% |
| (10.10)% |
| 6.88% |
| — |
|
|
(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
50
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, 2018,2020, the Corporation recorded a Provisionprovision for loan and lease losses (“Provision”) of $291 thousand$4.0 million which was a $374 thousand decrease$3.3 million increase from the same period in 2017. Net2019. For the three months ended September 30, 2020 there were net charge-offs of $89 thousand as compared to net charge-offs of $18 thousand for the same period in 2019. The increase in Provision for the three months ended September 30, 2018 were $29 thousand2020 related mainly to qualitative provisioning for economic uncertainty as compared to $520 thousand fora result of the same period in 2017.COVID-10 pandemic, combined with a $1.5 million specific reserve placed on an impaired commercial loan.
For the nine months ended September 30, 2018,2020, the Corporation recorded a Provision of $1.3$7.1 million which was a $187 thousand decrease$6.2 million increase from the same period in 2017. Net2019. For the nine months ended September 30, 2020 there were net charge-offs of $79 thousand as compared to net recoveries of $321 thousand for the same period in 2019. The increase in Provision for the nine months ended September 30, 2018 were $256 thousand2020 related mainly to qualitative provisioning for economic uncertainty as compared to $511 thousanda result of net charge-offs for the same period in 2017.COVID-10 pandemic, combined with a $1.5 million specific reserve placed on an impaired commercial loan.
The decreased provision over bothfor loan and lease losses could increase in future periods based on our belief that the threecredit quality of our loan portfolio could decline and nine month periods wasloan defaults could increase if the resultCOVID-19 pandemic continues for a prolonged period of strong asset quality and the lower level of net charge-offs.
40
time.
Asset Quality and Analysis of Credit Risk
Asset quality remains strong year-over-year despite the pressures that the COVD-19 pandemic has had on businesses and the economy locally and nationally. Meridian realized net charge-offs of 0.01% of total average loans for the quarter ending September 30, 2020, compared with net recoveries of 0.03% for the quarter ended December 31, 2019 and net charge-offs of 0.00% for the quarter ended September 30, 2019. Total non-performing assets, including loans and other real estate property, were $7.9 million as of September 30, 2018, evidenced by total nonperforming loans2020, $3.4 million as of December 31, 2019, and leases having decreased by $300 thousand, to $2.9$4.0 million representing 0.36% of loans and leases held-for-investment as of September 30, 2018,2019. The ratio of non-performing assets to total assets as of September 30, 2020 was 0.45% compared to $3.2 million, or 0.45% of loans and leases held-for-investment,0.30% as of December 31, 2017. The decrease to nonperforming loans resulted from the pay-downs in the commercial2019 and industrial portfolio as well as in the commercial construction portfolio.
The Allowance represented 0.96% of loans and leases held-for-investment,0.36% as of September 30, 2018 and December 31, 2017.2019. The Allowanceratio of allowance for loan losses to non-performingtotal loans, increasedwas 1.27% as of September 30, 2020, up from 212.51%the 0.98% recorded as of December 31, 2017 to 263.89%2019 and 1.00% as of September 30, 2018.2019. The ratio of allowance for loan losses to total loans held for investment, excluding loans at fair value and PPP loans (a non-GAAP measure), was 1.59% as of September 30, 2020, up from the 1.00% recorded as of December 31, 2019 and 1.01% as of September 30, 2019. PPP loans are excluded from calculation of this ratio as they are guaranteed by the SBA and therefore we have not provided for in the allowance for loan losses. For further information on non-GAAP financial measures, see “Non-GAAP Financial Measures” in this Quarterly Report on Form 10-Q.
There were no properties in OREO as of September 30, 2020 and one property in OREO as of December 31, 2019 that was sold in the first quarter of 2020.
As of September 30, 2018, the Corporation did not have OREO, as compared to $437 thousand as of December 31, 2017. The balance of 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.
As of September 30, 2018,2020, the Corporation had $4.0$3.7 million of troubled debt restructurings (“TDRs”), of which $3.5$3.4 million were in compliance with the modified terms and excluded from non-performing loans and leases. As of December 31, 2017,2019, the Corporation had $2.6$3.9 million of TDRs, of which $1.9$3.6 million were in compliance with the modified terms, and were excluded from non-performing loans and leases. As of September 30, 2018,2020, the Corporation had a recorded investment of $6.5$10.5 million of impaired loans and leases which included $4.0$3.7 million of TDRs.
51
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.
41
Nonperforming Assets and Related Ratios
| | | | | | |
| | As of | ||||
| | September 30, | | December 31, | ||
(dollars in thousands) |
| 2020 |
| 2019 | ||
Non-performing assets: | | | | | | |
Nonaccrual loans: | | | | | | |
Real estate loans: | | | | | | |
Commercial mortgage | | $ | 667 | | | 733 |
Shared national commercial credits | | | 464 | | | — |
Home equity lines and loans | | | 663 | | | 537 |
Residential mortgage | | | 2,533 | | | 1,544 |
Total real estate loans | | $ | 4,327 | | | 2,814 |
Commercial and industrial | | | 3,585 | | | 421 |
Total nonaccrual loans | | $ | 7,912 | | | 3,235 |
Other real estate owned | | | — | | | 120 |
Total non-performing loans | | $ | 7,912 | | | 3,235 |
Total non-performing assets | | $ | 7,912 | | | 3,355 |
| | | | | | |
Troubled debt restructurings: | | | | | | |
TDRs included in non-performing loans | | | 246 | | | 319 |
TDRs in compliance with modified terms | | | 3,428 | | | 3,599 |
Total TDRs | | $ | 3,674 | | | 3,918 |
| | | | | | |
Asset quality ratios: | | | | | | |
Non-performing assets to total assets | | | 0.45% | | | 0.29% |
Non-performing loans to: | | | | | | |
Total loans and leases | | | 0.52% | | | 0.32% |
Total loans held-for-investment | | | 0.61% | | | 0.34% |
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1) | | | 0.76% | | | 0.34% |
Allowance for loan losses to: | | | | | | |
Total loans and leases | | | 1.08% | | | 0.95% |
Total loans held-for-investment | | | 1.27% | | | 1.00% |
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1) | | | 1.59% | | | 1.00% |
Non-performing loans | | | 209.46% | | | 294.12% |
| | | | | | |
Total loans and leases | | $ | 1,531,996 | | | 998,414 |
Total loans and leases held-for-investment | | $ | 1,306,846 | | | 964,710 |
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans) | | $ | 1,041,293 | | | 954,164 |
Allowance for loan and lease losses | | $ | 16,573 | | | 9,513 |
|
|
|
|
|
|
|
|
| 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 |
(1) The allowance for loan losses to total loans held-for-investment (excluding loans at fair value and PPP loans) ratio is a non-GAAP financial measure. See “Non-GAAP Financial Measures” above for a reconciliation of this measure to its most comparable GAAP measure. PPP loans have only been excluded from this calculation as of September 30, 2020.
52
NON-INTEREST INCOME
Three Months Ended September 30, 20182020 Compared to the Same Period in 20172019
Total non-interest income for the three months ended September 30, 2018third quarter of 2020 was $9.2$29.1 million, down $1.3up $19.9 million or 12.3%,215.6% from the comparable period in 2017. The2019. This overall decreaseincrease in non-interest income came primarily from our mortgage division. Mortgage banking net revenue decreasedincreased $14.5 million or 198.2% over the periodthird quarter of 2019. The significant increase in 2020 came from increased levels of mortgage loan originations due primarily to lower margins, which decreased 50 basis pointsboth the expansion of the division into Maryland as well as the favorable rate environment for refinance activity. Our mortgage division originated $707.7 million in loans during the third quarter of 2020, an increase of $517.0 million, or 271.1%, from the third quarter of 2019. Refinance activity represented 54% of the total loans originated for the three month period.third quarter of 2020, compared to 46% for the third quarter of 2019. The decline in mortgage banking revenue was offset slightly by a $214 thousand increase in the mortgage pipeline as a result of the expansion and the refinance activity generated significant positive fair value adjustments relatedchanges in derivative instruments and loans held-for-sale. These fair value changes increased non-interest income a combined $6.0 million during the third quarter of 2020 compared to mortgage banking to ($333) thousand from ($547)an increase of $54 thousand for the same periodthird quarter of 2019. These changes were offset by increases in 2017. Wealth management revenue was relatively flatnet hedging losses of $2.3 million for the third quarter of 2020.
Non-interest income from the sales of SBA 7(a) loans increased $23 thousand year-over-year as the number of loans sold for the three months ended September 30, 2018 compared2020 outpaced the number of SBA loans sold in the prior year comparable quarter. Wealth management revenue increased $29 thousand year-over-year due to three months ended September 30, 2017.
42
2019 due to $188 thousand in swap fee income recorded in the third quarter of 2020, combined with an increase of $85 thousand in MLSS fee income as loan closing activity increased quarter over quarter, and an increase of $73 thousand in other mortgage fee income.
Nine Months Ended September 30, 20182020 Compared to the Same Period in 20172019
Total non-interest income for the nine months ended September 30, 20182020 was $24.9$ 57.0 million, down $2.6up $34.3 million or 9.6%151.5%, from the same period in 2017. The overall decreasenine months ended September 30, 2019. This increase in non-interest income came primarily from our mortgage division. Mortgagedivision as mortgage banking net revenue decreasedincreased $27.8 million or 157.7% over the prior year period. The significant increase in the current year period came from increased levels of mortgage loan originations due primarily to lower margins, which decreased 26 basis pointsboth the expansion of the division into Maryland as well as the favorable rate environment for refinance activity. Our mortgage division originated $1.5 billion in loans during the nine months ended September 30, 2020, an increase of $1.1 billion, or 255.8%, from the prior year period. Refinance activity represented 59% of the total residential mortgage loans originated for the nine month period.months ended September 30, 2020, compared to 30% for the nine months ended September 30, 2019. The declineincrease in the mortgage banking revenue was offset slightly by hedging gainspipeline as a result of the expansion and the refinance activity generated significant positive fair value adjustments period over period. Realized gains on derivatives related to mortgage banking, includedchanges in otherderivative instruments and loans held-for-sale. These fair value changes increased non-interest income a combined $10.8 million during the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. These changes were offset by increases in net hedging losses of $6.6 million.
Wealth management revenue increased $127 thousand, or 4.7%, year-over-year due to the more favorable market conditions that existed in the nine months ended September 30, 2020, compared to the prior year comparable period.
Non-interest income from the sales of investments amounted to $1.3 million for the nine months ended September 30, 20182020, an increase of $1.1 million from the prior year period, while income from the sales of SBA 7(a) loans increased $671 thousand, or 58.3%, from the prior year period, to $534 thousand, compared to a loss of ($798) 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. Wealth management revenue$1.8 million. Other fee income was up $1.1 million$539 thousand or 45.7% for the nine months ended September 30, 2018 compared2020, from the nine months ended September 30, 2019 due to $255 thousand in swap fee income recorded in the samecurrent year period, combined with increases of $153 thousand and $201 thousand in 2017.MLSS fee income, and mortgage fee income, respectively, as loan closing activity increased period-over-period
NON-INTEREST EXPENSE
Three Months Ended September 30, 20182020 Compared to the Same Period in 20172019
Total non-interest expense was $13.8 million for the three months ended September 30, 2018, down $1.3third quarter of 2020 was $25.8 million, up $12.3 million or 8.4%90.7%, from $15.0 million for the three months ended September 30, 2017.comparable period in 2019. The decreaseincrease is mainlylargely attributable to a reductionan increase in salaries and employee benefits expense, which decreased $1.4
53
increased $11.1 million or 13.8%119.4%, as full-timefrom the comparable period in 2019. Of this increase, $10.0 million relates to the mortgage division. Full-time equivalent employees, particularly in the mortgage division, were reduced. In addition, variable loanincreased from the prior year comparable quarter as we expanded our mortgage division into Maryland with the hiring of nearly 90 individuals since the first quarter of 2020. The number of full time employees at Meridian, particularly in SBA and lease lending, also increased over this period.
Loan expenses decreased $231increased $300 thousand or 23.1%156.3%, from the comparable period in 2019, reflecting the lower level of mortgage originations. Occupancy and equipment, data processing and advertising and promotion expenses were relatively flat for the comparable third quarters. Professional and consulting expense for the three months ended September 30, 2018 included $230 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 as higher levels of loan originations. Occupancy expense increased $162 thousand or 17.1%, from the third quarter of 2019 as the result of rent expense incurred at loan production locations for our mortgage division expansion into Maryland. Advertising and promotion expense increased $207 thousand, or 36.1%, from the comparable period in 2019. This increase was due to an increase in the number and length of advertising campaigns in addition to an increase in marketing costs for the mortgage division. Data processing costs increased $117 thousand or 34.2%, from the third quarter of 2019 as the result of increased loan processing activity from our mortgage division, combined with processing activity relating to PPP loans. Professional fees decreased $139 thousand or 17.0% due to a decline in legal and consulting expenses. Other expenses were up $367 thousand or 43.2%, as information technology related costs increased $60 thousand, insurance costs increased $226 thousand, combined with an increase of $126 thousand in various other employee-related expenses, shares tax expense, and other expense.
expenses.
Nine Months Ended September 30, 20182020 Compared to the Same Period in 20172019
Total non-interest expense was $40.4 million for the nine months ended September 30, 2018, down $2.72020 was $61.2 million, up $22.2 million or 6.2%56.9%, from the same period in the 2017.nine months ended September 30, 2019. The decreaseincrease is mainlylargely attributable to a reduction inthe variable expenses from loan originations overall, particularly mortgage commissions. Total salaries and employee benefits expense which decreased $3.0was $46.5 million, an increase of $20.7 million or 10.2%80.4%, as full-timecompared to the nine months ended September 30, 2019. Of this increase, $18.9 million relates to the mortgage division. Full-time equivalent employees, particularly in the mortgage division, were reduced. In addition, variable loanincreased year-over-year. As noted above, in the first quarter of 2020, we expanded our mortgage division into Maryland with the hiring of nearly 90 individuals year to date.
Loan expenses decreased $1.0 millionincreased by $628 thousand or 34.8%,133.1% for the nine months ended September 30, 2020, reflecting the lower levelhigher levels of mortgage originations. Occupancycommercial and equipment, data processing and advertising and promotionconsumer loan originations during the current year. Advertising 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 $877by $227 thousand or 27.4%12.8% during the nine months ended September 30, 2020, due mainly to an increase in marketing related costs from the mortgage division. Professional fees increased $118 thousand or 5.9%, compared to the prior year period. Theperiod due to an increase year-over-yearin consulting costs for bank-wide projects, partially offset by a decrease in certain audit 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 levels of other employee-related expenses, shares tax expense, up by $45 thousandfees and $192 thousand, respectively.external legal costs.
INCOME TAXES
Income tax expense for the three months ended September 30, 20182020 was $774 thousand,$2.8 million, as compared to $716$914 thousand for the same period in 2017, despite the $1.3 million2019. The increase in pre-tax income tax expense was attributable to the increase in earnings, period over this period. Our effective tax rate was 22.1%23.1% for the third quarter of 20182020 and 33.9%21.6% 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, 2018.2019.
Income tax expense for the nine months ended September 30, 20182020 was $1.7$5.2 million, as compared to $1.4$2.1 million for the same period in 2017, despite the $3.4 million2019. The increase in pre-tax income tax expense was attributable to the increase in earnings, period over this period. Our effective tax rate was 22.3%
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23.0% for the first nine months of 2018 compared to 35.1%2020 and 22.0% for the first nine months 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, 2018.2019.
BALANCE SHEET ANALYSIS
As of September 30, 2018,2020, total assets were $959.8 million$1.8 billion compared with $856.0$1.2 billion as of December 31, 2019 and $1.1 billion as of September 30, 2019. Total assets increased $608.6 million, or 52.9%, from December 31, 2019 and $631.7 million, or 56.1%, from September 30, 2019, primarily due to strong loan growth.
Total loans, excluding mortgage loans held-for-sale, grew $342.1 million, or 35.5%, to $1.3 billion as of September 30, 2020, from $964.7 million as of December 31, 2017. Total assets increased $103.82019 and $371.0 million or 12.1%, on a year-to-date basis primarily due to strong loan growth, partially offset by lower levels of cash.
Total loans, excluding mortgage loans held for sale, grew $112.2 million, or 16.1%, to $806.839.6% from $935.9 million as of September 30, 2018, from $694.6 million as of December 31, 2017.2019. The increase in loans for both periods is attributable largely to the $260 million in PPP loans granted to borrowers during the nine months ended September 30, 2020. There was also growth in several commercial categories as we continue
54
to grow our presence in the Philadelphia market area. Commercial real estate loans increased $46.5$103.8 million, or 22.2%, during the first nine months of the year. Commercial real estate27.8% from December 31, 2019, and commercial construction loans combined increased $52.9$113.3 million, or 14.4%, during the first nine months of the year. Residential31.2% from September 30, 2019. Commercial loans held in portfolio increased $18.0decreased $14.4 million, or 55.2%7.2%, during the first nine months as certain loan productsfrom December 31, 2019, and $7.6 million, or terms were targeted to hold in portfolio.3.9% from September 30, 2019. Small business loans increased $22.8 million, or 104.4% from December 31, 2019, and $29.9 million, or 203.3% from September 30, 2019. Residential mortgage loans held for sale decreased $980 thousand,increased $191.5 million, or 2.8%568.0%, to $34.0$225.2 million as of September 30, 20182020 from $33.7 million at December 31, 2017.
Deposits were $781.92019 and $176.5 million from $48.6 million as of September 30, 2018,2019. The increase in mortgage originations is primarily the result of the expansion of our mortgage division into Maryland as well as the increase in refinance activity throughout all areas of our mortgage division.
Deposits were $1.2 billion as of September 30, 2020, up $154.8$357.9 million, or 24.7%42.0%, from December 31, 2017.2019, and up $350.6 million, or 40.8%, from September 30, 2019. Non-interest bearing deposits increased $24.4$54.4 million, or 24.3%39.0%, from December 31, 2017. New business relationships fueled the increases.2019 and increased $64.5 million, or 49.9%, from September 30, 2019. Interest-bearing checking accounts increased $124.2 million, or 131.6%, from December 31, 2019, and increased $138.0 million or 171.3% from September 30, 2019. Money market accounts/savings accounts increased $49.9$185.6 million, or 22.0%,60.8% since December 31, 2017 while interest-bearing checking accounts increased $21.52019 and $163.4 million, or 26.2%49.9%, during the year.since September 30, 2019. Increases in core deposits were driven from PPP loan customers as well as new business and municipal relationships. Certificates of deposit increased $59.1decreased $6.4 million, or 27.0%2.0%, during the past nine months, paying off borrowings as a result of wholesale funds management in the rising rate environment. from December 31, 2019 and decreased $15.5 million, or 4.8%, from September 30, 2019.
Capital
Consolidated stockholder’sstockholders’ equity of the Corporation was $107.0$131.8 million, or 11.15%7.50% of total assets as of September 30, 2018,2020, as compared to $101.4$120.7 million, or 11.84%10.50% of total assets as of December 31, 2017.At2019. The change in stockholders’ equity is the result of year-to-date net income of $17.4 million and an increase in unrealized gain on AFS securities of $1.5 million, partially offset by treasury stock purchases of $5.8 million, unearned compensation due to leveraged ESOP of $2 million and dividends paid of $763 thousand. As of September 30, 2018,2020, the Tier 1 leverage ratio was 11.02%,8.77% for the Corporation and 11.53% for the Bank, the Tier 1 risk-based capital and common equity ratios were 12.03%,9.97% for the Corporation and 13.09% for the Bank, and total risk-based capital was 14.03%. At December 31, 2017,14.71% for the Tier 1 leverage ratio was 12.37%,Corporation and 14.75% for the Tier 1 risk-based capital andBank. Quarter-end numbers show a tangible common equity ratios were 12.86%,to tangible assets ratio of 7.26% for the Corporation and total risk-based capital was 15.53%.9.51% for the Bank. A reconciliation of this non-GAAP measure is included in the Appendix. Tangible book value per share was $15.91$20.76 as of September 30, 2018,2020, compared with $15.00$18.09 as of December 31, 2017.2019.
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, 20182020 and December 31, 2017:2019:
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| prompt corrective action | ||||||
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| Actual |
| purposes * |
| provisions | |||||||||
(dollars in thousands) |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio | |||
Total capital (to risk-weighted assets) |
| $ | 119,825 |
| 14.03% |
| $ | 68,312 |
| 8.00% |
| $ | 85,389 |
| 10.00% |
Common equity tier 1 capital (to risk-weighted assets) |
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| 102,688 |
| 12.03% |
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| 38,425 |
| 4.50% |
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| 55,503 |
| 6.50% |
Tier 1 capital (to risk-weighted assets) |
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| 102,688 |
| 12.03% |
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| 51,234 |
| 6.00% |
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| 68,312 |
| 8.00% |
Tier 1 capital (to average assets) |
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| 102,688 |
| 11.02% |
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| 37,260 |
| 4.00% |
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| 46,575 |
| 5.00% |
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| | September 30, 2020 | | |||||||||||||
| | | | | | | | | | | | 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) | | | | | | | | | | | | | | | | |
Corporation | | $ | 185,648 | | 14.71% | | $ | 132,532 | | 10.50% | | $ | 126,221 | | 10.00% | |
Bank | | | 186,210 | | 14.75% | | | 132,532 | | 10.50% | | | 126,221 | | 10.00% | |
Common equity tier 1 capital (to risk-weighted assets) | | |||||||||||||||
Corporation | | | 125,810 | | 9.97% | | | 88,355 | | 7.00% | | | 82,044 | | 6.50% | |
Bank | | | 165,277 | | 13.09% | | | 88,355 | | 7.00% | | | 82,044 | | 6.50% | |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | | |
Corporation | | | 125,810 | | 9.97% | | | 107,288 | | 8.50% | | | 100,977 | | 8.00% | |
Bank | | | 165,277 | | 13.09% | | | 107,288 | | 8.50% | | | 100,977 | | 8.00% | |
Tier 1 capital (to average assets) | | | | | | | | | | | | | | | | |
Corporation | | | 125,810 | | 8.77% | | | 57,351 | | 4.00% | | | 71,689 | | 5.00% | |
Bank | | | 165,277 | | 11.53% | | | 57,351 | | 4.00% | | | 71,689 | | 5.00% | |
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| | December 31, 2019 | |||||||||||||
| | | | | | | | | | | | To be well capitalized under | |||
| | | | | | | For capital adequacy | | prompt corrective action | ||||||
| | Actual | | purposes * | | provisions ** | |||||||||
(dollars in thousands): |
| Amount |
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Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Corporation | | $ | 166,471 | | 16.10% | | $ | 108,576 | | 10.50% | | $ | 103,405 | | 10.00% |
Bank | | | 166,360 | | 16.09% | | | 108,571 | | 10.50% | | | 103,401 | | 10.00% |
Common equity tier 1 capital (to risk-weighted assets) | |||||||||||||||
Corporation | | | 115,934 | | 11.21% | | | 72,384 | | 7.00% | | | 67,214 | | 6.50% |
Bank | | | 154,881 | | 14.98% | | | 72,381 | | 7.00% | | | 67,211 | | 6.50% |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Corporation | | | 115,934 | | 11.21% | | | 87,895 | | 8.50% | | | 82,724 | | 8.00% |
Bank | | | 154,881 | | 14.98% | | | 87,891 | | 8.50% | | | 82,721 | | 8.00% |
Tier 1 capital (to average assets) | | | | | | | | | | | | | | | |
Corporation | | | 115,934 | | 10.55% | | | 43,973 | | 4.00% | | | 54,966 | | 5.00% |
Bank | | | 154,881 | | 14.08% | | | 44,013 | | 4.00% | | | 55,017 | | 5.00% |
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(dollars in thousands): |
| Amount |
| Ratio |
| Amount |
| Ratio |
| Amount |
| Ratio | |||
Total capital (to risk-weighted assets) |
| $ | 117,239 |
| 15.53% |
| $ | 60,376 |
| 8.00% |
| $ | 75,469 |
| 10.00% |
Common equity tier 1 capital (to risk-weighted assets) |
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| 101,661 |
| 12.86% |
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| 33,961 |
| 4.50% |
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| 49,055 |
| 6.50% |
Tier 1 capital (to risk-weighted assets) |
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| 97,084 |
| 12.86% |
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| 45,282 |
| 6.00% |
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| 60,376 |
| 8.00% |
Tier 1 capital (to average assets) |
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| 97,084 |
| 12.37% |
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| 31,582 |
| 4.00% |
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| 39,478 |
| 5.00% |
* | Includes capital conservation buffer of 2.50% for 2020 and 1.250% for 2019. |
** | Prompt corrective action requirements do not apply to Meridian Corporation but are included as informational only. |
*Excludes capital conservation buffer of 1.25% for 2017 and 1.875% for 2018.
The capital ratios for the Corporation, as of September 30, 2018,2020, 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, 20172019 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%. The capital ratios as of September 30, 2020 were impacted by the amount of PPPLF borrowings the Corporation used fund PPP loans.
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 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”), which have a national market and can be sold in a timely manner. Meridian’s primary liquidity, which totaled $133.9$425.7 million at September 30, 2018,2020, compared to $125.9$195.2 million at December 31, 2017,2019, includes investments, SNCs, Federal funds sold, mortgages held-for-sale and cash and cash equivalents, less the amount of securities required to be pledged for certain liabilities. Meridian also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios. In addition, Meridian maintains borrowing arrangements with various correspondent banks, the 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$10.6 million at September 30, 2018.2020. At September 30, 2020, Meridian had borrowed $10 million from the Federal Reserve. As a member of the FHLB, we are eligible to borrow up to a specific credit limit, which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of September 30, 2018,2020, Meridian’s maximum borrowing capacity with the FHLB was $432.8$615.3 million. At September 30, 2018,2020, Meridian had borrowed $137.1$108.4 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $88.1$129 million against its available credit lines. At September 30, 2018,2020, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as $95.9$252.7 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $124.7$89.0 million of available short or long term funding through brokered CD arrangements. Management believes that Meridian has adequate resources to meet its short-term and long-term funding requirements.
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Discussion of Segments
As of September 30, 2018,2020, 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 1011 in the accompanying Notes to Unaudited Consolidated Financial Statements).
The Banking Segment recorded net income before tax (“operating margin”) of $2.4$2.6 million and $5.7$7.9 million for the three and nine months ended September 30, 2018, respectively,2020, as compared to operating marginincome before tax of $1.3$2.8 million and and $3.6$8.0 million for the same respective periods in 2017. 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.2019. The Banking Segment provided 68.8%21.5% and 76.6%34.9% of the Bank’sCorporation’s pre-tax profit for the three and
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nine month periods ended September 30, 2018, respectively,2020, as compared to 59.8%67.0% and 87.0%84.8% for the same respective periods in 2017.2019.
The Wealth Management Segment recorded operating marginincome before tax of $34$144 thousand and $640$453 thousand for the three and nine months ended September 30, 2018, respectively,2020, as compared to operating marginincome before tax of $181$61 thousand and $201$388 thousand for the same respective periods 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.2019.
The Mortgage Banking Segment recorded operating marginincome before tax of $1.1$9.3 million and $14.3 million for the three and nine months ended September 30, 2018,2020, as compared to operating marginsincome before tax of $668 thousand$1.3 million and $335 thousand$1.0 million for the same respective periods in 2017.2019. Mortgage Banking income and expenses decreasedrelated to loan originations and sales increased due to lower margins andhigher 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, 20182020 were $261.2$377.9 million, as compared to $220.2$327.8 million at December 31, 2017.2019.
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, 20182020 amounted to $2.5$7.1 million, as compared to $1.8$9.8 million at December 31, 2017.2019.
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 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.
Recent Litigation
See “Part II, Item 1. Legal Proceedings” below for informationIn 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 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. Mostviolation 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 toapplicable 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%state, 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.local lending laws. The Corporation continuesagrees to analyzerepurchase loans if the changes implemented byrepresentations and warranties made with respect to such loans are breached, and such breach has a material adverse effect on the Actloans. Based on the obligations described above, the Corporation repurchased one loan sold in the amount of $154 thousand for the three and further rulemaking from federal banking regulators, but, at this time, doesnine months ended September 30, 2020, and did not believe that such changes will materially impactrepurchase any loans for the Corporation’s business, operations, or financial results.three and nine months ended September 30, 2019.
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.10-Q.
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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 this evaluation, the Corporation’s PresidentCEO and Chief Executive Officer and Chief Financial OfficerCFO have concluded that the Corporation’s disclosure controls and procedures arewere effective as of September 30, 20182020 to ensure that the information required to be disclosed by the Corporation in the reports that the Corporation files or submits under the Exchange Act is recorded, processed, summarized, and reported completely and accurately within the time periods specified in SEC rules and forms.
Changes inInternal Control Over Financial Reporting
There was no change in the Corporation’s internal control over financial reporting identified during the quarter ended September 30, 20182020 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
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PART II–OTHER INFORMATION
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
On November 21, 2017, three former employeesIn addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material updates and additions to the risk factors previously disclosed in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the Securities and Exchange Commission. Additional risks not presently known to the Corporation, or that are currently deemed immaterial, may also adversely affect business, financial condition or results of operations of the mortgage-banking divisionCorporation. Further, to the extent that any of the Bank filed suitinformation contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause the Corporation’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of it.
The economic impact of the COVID-19 outbreak could adversely affect the Corporation’s financial condition and results of operations.
The COVID-19 pandemic has caused significant economic dislocation in the United States District Courtas many state and local governments ordered non-essential businesses to close and residents to shelter in place at home for a period of time starting at the beginning of the pandemic declaration. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment and the stock market, and in particular bank stocks, have significantly declined in value. In response to the COVID-19 outbreak, the Federal Reserve has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10- and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of COVID-19 has caused the Bank to modify its business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. The Corporation continues to have substantially all employees working remotely and may take further actions that may be required by government authorities or that the Corporation determines are in the best interests of its employees, customers and business partners.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on the Corporation. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated and when and how the economy may be fully reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Corporation could be subject to any of the following risks, any of which could have a material, adverse effect on its business, financial condition, liquidity, and results of operations:
● | demand for the Corporation’s products and services may decline, making it difficult to grow assets and income; |
● | if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; |
● | collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; |
● | due to recent legislation and government action limiting foreclosure of real property and reduced governmental capacity to effect business transactions and property transfers, the Corporation may have more difficulty taking possession of collateral supporting its loans, which may negatively impact its ability to minimize losses, which could adversely impact its financial results; |
● | access to collateral for existing loans and new loan production may be difficult as a result of COVID-19 making it difficult to obtain, on a timely basis, appraisals on the collateral; |
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● | the Corporation’s allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect its net income; |
● | the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to the Corporation; |
● | as the result of the decline in the Federal Reserve Board’s target federal funds rate, the yield on the Corporation’s assets may decline to a greater extent than the decline in its cost of interest-bearing liabilities, reducing its net interest margin and spread and reducing net income; |
● | if legislation is enacted or governmental or regulatory action is enacted limiting the amount of ATM fees or surcharges that the Corporation may receive or on the its ability to charge overdraft or other fees, it could adversely impact the Corporation’s financial results; |
● | the Corporation’s cyber security risks are increased as the result of an increased use of the Corporation’s online banking platform and an increase in the number of employees working remotely; |
● | the Corporation relies on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on it; and |
● | Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs. |
Meridian’s active participation in the PPP, or in other relief programs, may expose us to credit losses as well as litigation and compliance risk.
To support our customers, businesses, and communities, Meridian is an active participant in the PPP. Meridian began accepting applications from qualified borrowers in early April 2020 and as of September 30, 2020 over 928 loan requests have been processed and approved, representing nearly $260 million in funding to new and existing clients through the PPP. Meridian’s participation in the PPP, and participation in any other relief programs now or in the future, including those under the CARES Act, exposes us to certain credit, compliance, and other risks.
Among other regulatory requirements, PPP loans are subject to forbearance of loan payments for a six-month period to the extent that loans are not eligible for forgiveness. If PPP borrowers fail to qualify for loan forgiveness, including by failing to use the funds appropriately in order to qualify for forgiveness under the program, Meridian has a greater risk of holding these loans at unfavorable interest rates. In addition, because of the short time period between the passing of the CARES Act and the implementation of the PPP, there is ambiguity in the laws, rules, and guidance regarding the operation of the PPP, which exposes us to risks relating to noncompliance with the PPP. There is risk that the SBA or another governmental entity could conclude there is a deficiency in the manner in which Meridian originated, funded, or serviced PPP loans, which may or may not be related to the ambiguity in the CARES Act or the rules and guidance promulgated by the SBA and the U.S. Department of the Treasury regarding the operation of the PPP. In the event of such deficiency, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already made payment under the guaranty, seek recovery of any loss related to the deficiency from us.
Since the commencement of the PPP, several other banks have been subject to litigation regarding the process and procedures that such banks followed in accepting and processing applications for the Eastern DistrictPPP. We may be exposed to the risk of Pennsylvania, Juan Jordan et al. v.similar litigation, from both customers and non-customers that contacted Meridian Bank, Thomas Campbellregarding obtaining PPP loans with respect to the processes and Christopher Annas,procedures we used in processing applications for the PPP. If any such litigation is filed against us and is not resolved in a manner favorable to us, it may result in significant financial liability to us or adversely affect our reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs, or reputational damage caused by PPP-related litigation could have a material adverse impact on our reputation, business, financial condition, and results of operations.
In addition, we may be subject to regulatory scrutiny regarding Meridian’s processing of PPP applications or its origination or servicing of PPP loans. While the Bank purporting to be a class and collective action seeking unpaid and overtime wagesSBA has said that in many instances, banks may rely on the certifications of borrowers regarding their eligibility for PPP loans, Meridian does have several obligations under the Fair Labor StandardsPPP, and if the SBA found that Meridian did not meet those obligations, the remedies the SBA may seek against Meridian are unknown but may include not guarantying the PPP loans resulting in credit exposure to borrowers who may be unable to repay their loans. The PPP program may also attract significant interest from federal and state enforcement authorities, oversight agencies, regulators,
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and Congressional committees. State Attorneys General and other federal and state agencies may assert that they are not subject to the provisions of the CARES Act of 1938, the New Jersey Wage and Hour Law, and the Pennsylvania Minimum Wage Act of 1968PPP regulations entitling Meridian to rely on behalf of similarly situated plaintiffs. In February 2018, the Bank answered the complaintborrower certifications, 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 stagetake more aggressive action against us for alleged violations of the case,provisions governing Meridian’s participation in the PPP.
Moreover, the Corporation’s future success and the legal standards that must be met for, among other things, successprofitability substantially depends on the merits,management skills of its executive officers and directors, many of whom have held officer and director positions with the Bank has recorded a $200 thousand reserve as a reasonable estimateCorporation for possible losses thatmany years. The unanticipated loss or unavailability of key employees due to the outbreak could harm its ability to operate or execute its business strategy. The Corporation may result from this action. This estimatenot be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.
To the extent the COVID-19 pandemic continues to adversely affect the economy, and/or adversely affects our business, results of operations or financial condition, it may change from timealso have the effect of increasing the likelihood and/or magnitude of other risks described in the section captioned "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019, including those risks related to time,market, credit, and actual losses could vary.business operations, or risks described in our other filings with the SEC.
Item 1A. Risk Factors.
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.
Item 5. Other Information.
None.
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. each 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 49.62.
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Exhibit | Description | |
2.1 | | |
3.1 | | |
3.2 | | |
31.1 | | Rule |
31.2 | | Rule |
32 | | Section 1350 Certifications, |
101.INS | | XBRL Instance Document – The instance document does not appear in the interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
Exhibit 104 | | Cover Page Interactive Data File – The cover page interative data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| | |
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SIGNATURES
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: | November | Meridian | |
| | | |
| | By: | /s/ Christopher J. Annas |
| | | Christopher J. Annas |
| | | President and Chief Executive Officer |
| | | (Principal Executive Officer) |
| | | |
| | By: | /s/ Denise Lindsay |
| | | Denise Lindsay |
| | | Executive Vice President and Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |
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