Table of Contents

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

Picture 1Graphic

(Exact name of registrant as specified in its charter)

Pennsylvania

32-011605483-1561918

(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. YesNo

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).

YesNo

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 filer Accelerated Filer 

Accelerated filer ☐Filer 

Non-accelerated filer Filer 

Smaller reporting company Reporting Company 

Emerging growth company    Growth Company    

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑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.


Table of Contents

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

Item 1 Financial Statements (Unaudited)

3

Consolidated Balance Sheets – September 30, 20182020 and December 31, 20172019

3

Consolidated Statements of Income – Three and Nine Months Ended September 30, 20182020 and 20172019

4

Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 20182020 and 20172019

5

Consolidated Statements of Stockholders’ Equity – Three and Nine Months Ended September 30, 20182020 and 20172019

6

Consolidated Statements of Cash Flows – Nine Months Ended September 30, 20182020 and 20172019

78

Notes to Consolidated Financial Statements (Unaudited)

89

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations

3037

Item 3 Quantitative and Qualitative Disclosures about Market Risk

4757

Item 4 Controls and Procedures

4758

PART II OTHER INFORMATION

Item 1 Legal Proceedings

4859

Item 1A Risk Factors

4859

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

4861

Item 3 Defaults Upon Senior Securities

4861

Item 4 Mine Safety Disclosures

4861

Item 5 Other Information

4861

Item 6 Exhibits

4861

Signatures

5063


Table of Contents

PART I–FINANCIAL INFORMATION

Item 1. Financial Statements.

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

Table of Contents

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

Table of Contents

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

Table of Contents

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

Table of Contents

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

Table of Contents

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


(4)      Securities

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(1)

 

 

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)

(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 - Loans considered to be satisfactory with no indications of deterioration.

·

Special mention – Loans classified as special mention have a potential weakness that deserves management’sManagement’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

·

Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined

16

weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

15


·

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing factors,facts, conditions, and values, highly questionable and improbable. Loan balances classified as doubtful have been reduced by partial charge-offs and are carried at their net realizable values.

The following tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2018

 

At December 31, 2017

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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:

 

 

 

 

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended September 30, 2018

 

    

 

    

Pre-Modification

    

Post-Modification

    

 

 

 

 

 

 

Outstanding

 

Outstanding

 

 

 

 

 

Number of

 

Recorded

 

Recorded

 

Related

(dollar in thousands)

 

Contracts

 

Investment

 

Investment

 

Allowance

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

Land and Construction

 

 1

 

$

796

 

$

796

 

$

 —

Total

 

 1

 

$

796

 

$

796

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2018

 

    

 

    

Pre-Modification

    

Post-Modification

    

 

 

 

 

 

 

Outstanding

 

Outstanding

 

 

 

 

 

Number of

 

Recorded

 

Recorded

 

Related

(dollar in thousands)

 

Contracts

 

Investment

 

Investment

 

Allowance

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended September 30, 2017

 

    

 

    

Pre-Modification

    

Post-Modification

    

 

 

 

 

 

 

Outstanding

 

Outstanding

 

 

 

 

 

Number of

 

Recorded

 

Recorded

 

Related

(dollar in thousands)

 

Contracts

 

Investment

 

Investment

 

Allowance

Real Estate:

 

 

 

 

 

 

 

 

 

 

 

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:

For the Three Months Ended

For the Three Months Ended

September 30, 2018

September 30, 2017

Interest Rate

Interest Rate

Loan Term

Change and Loan

Loan Term

Change and Loan

Extension

Term Extension

Extension

Term Extension

Land and Construction

 1

 —

 —

 —

Total

 1

 —

 —

 —

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months Ended

 

For the Nine Months Ended

 

 

September 30, 2018

 

September 30, 2017

 

 

 

 

Interest Rate

 

 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

$

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)

(1)

Impaired loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral.  Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.  These assets are included as Level 3 fair values, based upon the lowest level of input is significant to the fair value measurements.
(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.

(2)

Impaired loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third‑party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

21


Below is management’s estimate of the fair value of all financial instruments, whether carried at cost or fair value on the Corporation’s balance sheet. The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair value of the Corporation’s financial instruments:

(a)Cash and Cash Equivalents

The carrying amounts reported in the balance sheet for cash and short‑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
Amount

    

Asset
(Liability)
Fair Value

    

Notional
Amount

    

Asset
(Liability)
Fair Value

    

Balance Sheet Line Item

Notional
Amount

    

Asset
(Liability)
Fair Value

    

Notional
Amount

    

Asset
(Liability)
Fair Value

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.

2733


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 

28


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

34

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

29


interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. For non-public companies the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within the fiscal years beginning after December 31, 2020. The Corporation 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

35

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.

36

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

30


Corporation does not undertake to update any forward-looking statement whether written or oral, that may be made from time to time by Meridian Corporation or by or on behalf of Meridian Bank.

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

37

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.

38

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.

39

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 for common stockholders for the three months ended September 30, 20182020 was $2.7$9.2 million, or $0.42$1.51 per diluted share, an increase of $1.6$5.9 million as compared to net income of $1.1$3.3 million, or $0.52 per diluted share, for the same period in 2017.

2019.

·

Return on average equity (“ROE”) and return on average assets (“ROA”) for the three months ended September 30, 20182020 were 10.16%29.30% and 1.16%2.29%, respectively.

·

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, as compared to $9.3 million for the same period in 2019.

40

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 2017.

2019.

·

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 $291 thousand$7.1 million for the threenine months ended September 30, 20182020 was a decreasean increase of $374 thousand$6.2 million from the $665$938 thousand Provision recorded for the same period in 2017.

2019.

·

Non-interest income of $9.2 million for the three months ended September 30, 2018 was a $1.3 million or 12.3% decrease from the same period in 2017.

31


·

Mortgage banking income decreased $1.6 million, or 16.5%, to $8.3 million for the three months ended September 30, 2018, as compared to $9.9 million for the same period in 2017.

·

Non-interest expense of $13.8 million for the three months ended September 30, 2018 decreased $1.3 million, or 8.4%, from $15.0 million for the same period in 2017.

Nine Month Results of Operations

·

Net income for common stockholders for the nine months ended September 30, 2018 was $5.8 million, or $0.90 per diluted share, an increase of $3.9 million as compared to net income of $1.9 million for the same period in 2017.

·

ROE and ROA for the nine months ended September 30, 2018 were 7.47% and 0.87%, respectively.

·

Net interest income increased $3.1 million, or 14.7%, to $24.2$57.0 million for the nine months ended September 30, 2018, as compared to $21.12020 was a $34.3 million foror 151.5% increase from the same period in 2017.

2019.

·

The Provision of $1.3Mortgage banking net revenue increased $27.8 million, or 157.7%, to $45.4 million for the nine months ended September 30, 2018 was a decrease of $200 thousand from the $1.52020, as compared to $17.6 million Provision recorded for the same period in 2017.

2019.

·

Non-interest incomeexpense of $24.9$61.2 million for the nine months ended September 30, 2018 was a $2.62020 increased $22.2 million, or 9.6% decrease56.9%, from the same period in 2017.

·

Mortgage banking income decreased $4.7 million, or 18.7%, to $20.4 million for the nine months ended September 30, 2018, as compared to $25.1$39.0 million for the same period in 2017.

2019.

·

Non-interest expense of $40.4 million for the nine months ended September 30, 2018 decreased $2.7 million, or 6.3%, from $43.1 million for the same period in 2017.

Changes in Financial Condition

·

Total assets of $959.8$1.8 billion as of September 30, 2020 increased $608.6 million, or 52.9%, from $1.2 billion as of December 31, 2019.

Consolidated stockholders’ equity of $131.8 million as of September 30, 20182020 increased $103.8$11.1 million or 12.1%, from $856.0$120.7 million as of December 31, 2017.

2019.

·

Consolidated stockholders’ equity of $107.0 million as of September 30, 2018 increased $5.6 million from $101.4 million as of December 31, 2017.

·

Total portfolio loans and leases, excluding mortgage loans held for sale, as of September 30, 20182020 were $806.8 million,$1.3 billion, an increase of $112.2$342.1 million, or 16.1%35.5%, from $694.6$964.7 million as of December 31, 2017.

2019.

·

Total non-performing loans and leases of $2.9$7.9 million represented 0.36%0.61% of portfolio loans and leases held for investment as of September 30, 20182020 as compared to $3.2 million, or 0.45%0.34% of portfolio loans and leases, as of December 31, 2017.

2019.

·

The $7.7$16.6 million allowance for loan losses (“Allowance’), as of September 30, 2018,2020, represented 0.96%1.27% of portfolio loans and leases as compared to $6.7 million,held for investment (excluding loans at fair value), or 0.96%1.59% of portfolio loans and leases held for investment (excluding loans at fair value and PPP loans), a non-GAAP measure. This is compared to $9.5 million, or 1.00% of portfolio loans and leases held for investment (excluding loans at fair value), as of December 31, 2017.

2019.  For further information on non-GAAP financial measures, see “Non-GAAP Financial Measures” in this Quarterly Report on Form 10-Q.

·

Total deposits of $781.9 million$1.2 billion as of September 30, 20182020 increased $154.8$357.9 million, or 24.7%42.0%, from $627.1$851.2 million as of December 31, 2017.

2019.

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.

(1)

Tangible common equity ratio is a non-GAAP financial measure. See “Non-GAAP Financial Measures” below for a reconciliation of this measure to its most comparable GAAP measure.

Non-GAAP Financial Measures

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%

(1)

Yields and net interest income are reflected on a tax-equivalent basis.

Rate/Volume Analysis (tax-equivalent basis)

The rate/volume analysis table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three and nine months ended September 30, 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
or Less

    

1-2 Years

    

2-5 Years

    

Greater Than 5
years and Not
Rate Sensitive

    

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)

(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
or Less

    

1-2 Years

    

2-5 Years

    

Greater Than 5
years and Not
Rate Sensitive

    

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)

(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%

43


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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

$

119,825 

 

14.03%

 

$

68,312 

 

8.00%

 

$

85,389 

 

10.00%

Common equity tier 1 capital (to risk-weighted assets)

 

 

102,688 

 

12.03%

 

 

38,425 

 

4.50%

 

 

55,503 

 

6.50%

Tier 1 capital (to risk-weighted assets)

 

 

102,688 

 

12.03%

 

 

51,234 

 

6.00%

 

 

68,312 

 

8.00%

Tier 1 capital (to average assets)

 

 

102,688 

 

11.02%

 

 

37,260 

 

4.00%

 

 

46,575 

 

5.00%

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%

4455


December 31, 2019

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

$

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%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

$

117,239

 

15.53%

 

$

60,376

 

8.00%

 

$

75,469

 

10.00%

Common equity tier 1 capital (to risk-weighted assets)

 

 

101,661

 

12.86%

 

 

33,961

 

4.50%

 

 

49,055

 

6.50%

Tier 1 capital (to risk-weighted assets)

 

 

97,084

 

12.86%

 

 

45,282

 

6.00%

 

 

60,376

 

8.00%

Tier 1 capital (to average assets)

 

 

97,084

 

12.37%

 

 

31,582

 

4.00%

 

 

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.

56

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

45


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.

Item 6. Exhibits.

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 INDEX

Exhibit
Number

Description

2.1

Plan of Merger and Reorganization dated April 26, 2018 by and between Registrant, Bank and Meridian Interim Bank, filed as Exhibit 2.1 to Form 8-K on August 24, 2018 and incorporated herein by reference.

3.1

Articles of Incorporation of Registrant, filed as Exhibit 3.1 to Form 8-K on August 24, 2018 and incorporated herein by reference.

3.2

Bylaws of Registrant, filed as Exhibit 3.2 to Form 8-K on August 24, 2018 and incorporated herein by reference.

31.1

Rule 13a‑14(a)13a-14(a)/ 15d‑14(a)15d-14(a) Certification of the Principal Executive Officer,, filed herewith.

31.2

Rule 13a‑14(a)13a-14(a)/ 15d‑14(a)15d-14(a) Certification of the Principal Financial Officer,, filed herewith.

32

Section 1350 Certifications,, filed herewith.

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

4962


SIGNATURES

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 14, 20189, 2020

Meridian BankCorporation

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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