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Meridian Corp - Quarter Report: 2019 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark one)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to               

 

Commission File Number: 000-55983

 

Picture 1

 

(Exact name of registrant as specified in its charter)

 

Pennsylvania

32-0116054

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

9 Old Lincoln Highway, Malvern, Pennsylvania 19355

(Address of principal executive offices) (Zip Code)

 

(484) 568‑5000

(Registrant’s telephone number, including area code)

 

 

 

 

Title of class

Trading Symbol

Name of exchange on which registered

Common Stock, $1 par value

MRBK

The NASDAQ Stock Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   ☐No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes   ☐No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

Large accelerated filer ☐

Accelerated filer ☐

 

 

Non-accelerated filer ☐ 

Smaller reporting company 

 

 

Emerging growth company    

 

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). ☐ Yes ☒ No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 13, 2019 there were 6,405,600 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, 2019 and December 31, 2018 

3

 

 

Consolidated Statements of Income – Three and Nine Months Ended September 30, 2019 and 2018 

4

 

 

Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2019 and 2018 

5

 

 

Consolidated Statements of Stockholders’ Equity – Three and Nine Months Ended September 30, 2019 and 2018 

6

 

 

Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2019 and 2018 

7

 

 

Notes to Consolidated Financial Statements (Unaudited) 

8

 

 

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

36

 

 

Item 3 Quantitative and Qualitative Disclosures about Market Risk 

54

 

 

Item 4 Controls and Procedures 

55

 

 

PART II OTHER INFORMATION 

 

 

 

Item 1 Legal Proceedings 

57

 

 

Item 1A Risk Factors 

57

 

 

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 

57

 

 

Item 3 Defaults Upon Senior Securities 

57

 

 

Item 4 Mine Safety Disclosures 

57

 

 

Item 5 Other Information 

57

 

 

Item 6 Exhibits 

57

 

 

Signatures 

59

 

 

 

 

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

(dollars in thousands, except per share data)

    

2019

    

2018

Cash and due from banks

 

$

40,267

 

23,159

Federal funds sold

 

 

265

 

793

Cash and cash equivalents

 

 

40,532

 

23,952

Securities available-for-sale (amortized cost of $52,496 and $50,942 as of September 30, 2019 and December 31, 2018)

 

 

52,757

 

50,428

Securities held-to-maturity (fair value of $9,028 and $12,655 as of September 30, 2019 and December 31, 2018)

 

 

8,814

 

12,741

Mortgage loans held for sale (amortized cost of $48,339 and $37,337 as of September 30, 2019 and December 31, 2018)

 

 

48,615

 

37,695

Loans, net of fees and costs (includes $11,278 and $11,422 of loans at fair value, amortized cost of $10,934 and $11,466 as of September 30, 2019 and December 31, 2018)

 

 

935,858

 

838,106

Allowance for loan and lease losses

 

 

(9,312)

 

(8,053)

Loans, net of the allowance for loan and lease losses

 

 

926,546

 

830,053

Restricted investment in bank stock

 

 

8,237

 

7,002

Bank premises and equipment, net

 

 

8,929

 

9,638

Bank owned life insurance

 

 

11,787

 

11,569

Accrued interest receivable

 

 

3,155

 

2,889

Other real estate owned

 

 

120

 

 —

Deferred income taxes (Footnote 1)

 

 

1,803

 

1,728

Goodwill and intangible assets

 

 

4,841

 

5,046

Other assets

 

 

10,801

 

4,739

Total assets

 

$

1,126,937

 

997,480

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest bearing

 

$

129,302

 

126,150

Interest-bearing

 

 

729,159

 

625,980

Total deposits

 

 

858,461

 

752,130

Short-term borrowings

 

 

128,465

 

114,300

Long-term debt

 

 

3,123

 

6,238

Subordinated debentures

 

 

9,176

 

9,239

Accrued interest payable

 

 

669

 

305

Other liabilities (Footnote 1)

 

 

9,271

 

5,716

Total liabilities

 

 

1,009,165

 

887,928

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $1 par value. Authorized 10,000,000 shares; issued and outstanding 6,407,685 and 6,406,795 as of September 30, 2019 and December 31, 2018

 

 

6,408

 

6,407

Surplus

 

 

80,192

 

79,919

Retained earnings (Footnote 1)

 

 

30,961

 

23,616

Accumulated other comprehensive loss

 

 

211

 

(390)

Total stockholders’ equity

 

 

117,772

 

109,552

Total liabilities and stockholders’ equity

 

$

1,126,937

 

997,480

 

See accompanying 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)

    

2019

    

2018

    

2019

    

2018

Interest income:

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

13,152

 

11,218

 

37,686

 

31,217

Securities:

 

 

 

 

 

 

 

 

 

Taxable

 

 

336

 

213

 

892

 

549

Tax-exempt

 

 

64

 

112

 

273

 

336

Cash and cash equivalents

 

 

38

 

30

 

136

 

75

Total interest income

 

 

13,590

 

11,573

 

38,987

 

32,177

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

 

3,633

 

2,485

 

10,584

 

6,171

Borrowings

 

 

683

 

710

 

1,731

 

1,790

Total interest expense

 

 

4,316

 

3,195

 

12,315

 

7,961

Net interest income

 

 

9,274

 

8,378

 

26,672

 

24,216

Provision for loan losses

 

 

705

 

291

 

938

 

1,258

Net interest income after provision for loan losses

 

 

8,569

 

8,087

 

25,734

 

22,958

Non-interest income:

 

 

 

 

 

 

 

 

 

Mortgage banking income

 

 

7,910

 

8,274

 

19,139

 

20,407

Wealth management income

 

 

922

 

930

 

2,698

 

2,996

SBA loan income

 

 

645

 

 —

 

1,160

 

 —

Earnings on investment in life insurance

 

 

74

 

74

 

218

 

225

Net change in the fair value of derivative instruments

 

 

 —

 

70

 

(16)

 

59

Net change in the fair value of loans held-for-sale

 

 

54

 

(300)

 

(82)

 

(241)

Net change in the fair value of loans held-for-investment

 

 

(24)

 

(103)

 

390

 

(289)

Gain on sale of investment securities available-for-sale

 

 

74

 

 —

 

212

 

 —

Service charges

 

 

28

 

27

 

82

 

87

Other

 

 

131

 

195

 

387

 

1,647

Total non-interest income

 

 

9,814

 

9,167

 

24,188

 

24,891

Non-interest expenses:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,319

 

8,901

 

25,789

 

26,719

Occupancy and equipment

 

 

946

 

920

 

2,845

 

2,870

Loan expenses

 

 

758

 

769

 

1,877

 

1,962

Professional fees

 

 

820

 

714

 

2,000

 

1,670

Advertising and promotion

 

 

574

 

590

 

1,769

 

1,802

Data processing

 

 

343

 

334

 

990

 

924

Information technology

 

 

334

 

268

 

919

 

836

Communications

 

 

155

 

197

 

510

 

683

Other

 

 

903

 

1,060

 

3,813

 

2,923

Total non-interest expenses

 

 

14,152

 

13,753

 

40,512

 

40,389

Income before income taxes

 

 

4,231

 

3,501

 

9,410

 

7,460

Income tax expense

 

 

914

 

774

 

2,065

 

1,661

Net income

 

$

3,317

 

2,727

 

7,345

 

5,799

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.52

 

0.43

 

1.15

 

0.91

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.52

 

0.42

 

1.14

 

0.90

 

See accompanying notes to the unaudited consolidated financial statements.

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)

    

2019

    

2018

 

2019

    

2018

Net income:

 

$

3,317

 

2,727

 

7,345

 

5,799

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Net change in unrealized gains (losses) on investment securities available for sale:

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses) arising during the period, net of tax (benefit) expense of $17,  ($57),  $219, and ($155), respectively

 

 

64

 

(171)

 

767

 

(510)

Less: reclassification adjustment for net (gains) on sales realized in net income, net of tax (expense) benefit of ($16),  $0,  ($47), and $0, respectively

 

 

(58)

 

 —

 

(166)

 

 —

Unrealized investment gains (losses), net of tax expense (benefit) of $1,  ($57),  $172, and ($155), respectively

 

 

 6

 

(171)

 

601

 

(510)

Total other comprehensive income (loss)

 

 

 6

 

(171)

 

601

 

(510)

Total comprehensive income

 

$

3,323

 

2,556

 

7,946

 

5,289

 

See accompanying notes to the unaudited consolidated financial statements.

5

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

Common

 

 

 

Retained

 

Comprehensive

 

 

(dollars in thousands)

    

Stock

    

Surplus

    

Earnings

    

Income (Loss)

    

Total

Balance, January 1, 2018 (Footnote 1)

$

6,392

 

79,501

 

15,453

 

(298)

 

101,048

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

1,270

 

 

 

1,270

Change in unrealized gains on securities available-for-sale, net of tax

 

 

 

 

 

 

 

(276)

 

(276)

Total comprehensive income

 

 

 

 

 

 

 

 

 

994

Compensation expense related to stock option grants

 

 

 

 3

 

 

 

 

 

 3

Balance, March 31, 2018

$

6,392

 

79,504

 

16,723

 

(574)

 

102,045

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

1,802

 

 

 

1,802

Change in unrealized gains on securities available-for-sale, net of tax

 

 

 

 

 

 

 

(63)

 

(63)

Total comprehensive income

 

 

 

 

 

 

 

 

 

1,739

Share-based awards and exercises

 

 9

 

 

 

 

 

 

 

 9

Compensation expense related to stock option grants

 

 

 

272

 

 

 

 

 

272

Balance, June 30, 2018

$

6,401

 

79,776

 

18,525

 

(637)

 

104,065

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

2,727

 

 

 

2,727

Change in unrealized gains on securities available-for-sale, net of tax

 

 

 

 

 

 

 

(171)

 

(171)

Total comprehensive income

 

 

 

 

 

 

 

 

 

2,556

Share-based awards and exercises

 

 6

 

 

 

 

 

 

 

 6

Compensation expense related to stock option grants

 

 

 

76

 

 

 

 

 

76

Balance, September 30, 2018

$

6,407

 

79,852

 

21,252

 

(808)

 

106,703

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

Common

 

 

 

Retained

 

Comprehensive

 

 

(dollars in thousands)

    

Stock

    

Surplus

    

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

Compensation expense related to stock option grants

 

 

 

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

Compensation expense related to stock option grants

 

 

 

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

Share-based awards and exercises

 

 1

 

 7

 

 

 

 

 

 8

Compensation expense related to stock option grants

 

 

 

62

 

 

 

 

 

62

Balance, September 30, 2019

$

6,408

 

80,192

 

30,961

 

211

 

117,772

 

See accompanying notes to the unaudited consolidated financial statements.

6

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

Nine months ended

 

 

September 30, 

(dollars in thousands)

    

2019

    

2018

Net income

 

$

7,345

 

5,799

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Gain on sale of investment securities

 

 

(212)

 

 —

Depreciation and amortization

 

 

1,559

 

1,088

Loss on disposal of premises and equipment

 

 

14

 

 —

Provision for loan losses

 

 

938

 

1,258

Compensation expense for stock options

 

 

266

 

351

Net change in fair value of loans held for sale

 

 

82

 

241

Net change in fair value of derivative instruments

 

 

16

 

(59)

Net change in fair value of contingent assets

 

 

 —

 

177

Gain on sale of OREO

 

 

 —

 

(57)

SBA loan income

 

 

(1,160)

 

 —

Proceeds from sale of loans

 

 

432,831

 

513,259

Loans originated for sale

 

 

(421,092)

 

(492,113)

Mortgage banking income

 

 

(19,139)

 

(20,407)

Increase in accrued interest receivable

 

 

(266)

 

(377)

Decrease (increase) in other assets

 

 

91

 

(110)

Earnings from investment in life insurance

 

 

(218)

 

(225)

Deferred income tax (benefit) (Footnote 1)

 

 

(249)

 

(465)

Increase in accrued interest payable

 

 

364

 

137

Increase in other liabilities (Footnote 1)

 

 

3,249

 

1,184

Net cash provided by operating activities

 

 

4,419

 

9,681

Cash flows from investing activities:

 

 

 

 

 

Activity in available-for-sale securities:

 

 

 

 

 

Maturities, repayments and calls

 

 

11,090

 

4,080

Sales

 

 

19,366

 

 —

Purchases

 

 

(29,027)

 

(12,768)

Proceeds from sale of OREO

 

 

 —

 

494

Settlement of forward contracts

 

 

(85)

 

(21)

(Increase) decrease in restricted stock

 

 

(1,235)

 

2,233

Net increase in loans

 

 

(104,640)

 

(107,068)

Purchases of premises and equipment

 

 

(634)

 

(1,499)

Proceeds from settlement of loans

 

 

 —

 

2,766

Net cash used in investing activities

 

 

(105,165)

 

(111,783)

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

 

106,331

 

154,818

Increase (decrease) in short term borrowings

 

 

14,165

 

(57,795)

Repayment of long term debt (FHLB advances)

 

 

(2,702)

 

 —

Repayment of long term debt (Acquisition note)

 

 

(413)

 

(619)

Repayment of long term debt (Subordinated debt)

 

 

(63)

 

(4,000)

Share based awards and exercises

 

 

 8

 

15

Net cash provided by financing activities

 

 

117,326

 

92,419

Net change in cash and cash equivalents 

 

 

16,580

 

(9,683)

Cash and cash equivalents at beginning of period

 

 

23,952

 

35,506

Cash and cash equivalents at end of period

 

$

40,532

 

25,823

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

11,951

 

7,392

Income taxes

 

 

1,539

 

1,565

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

 

 

(5,580)

 

4,490

 

See accompanying notes to the unaudited consolidated financial statements.

7

Table of Contents

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. all of the 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’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. Amounts subject to significant estimates are items such as the allowance for loan losses and lending related commitments, the fair value of financial instruments, other-than-temporary impairments of investment securities, and the valuations of goodwill and intangible assets.

These unaudited consolidated financial statements should be read in conjunction with the Corporation’s filings with the Securities and Exchange Commission (including our Annual Report on Form 10-K for the year ended December 31, 2018) and, for periods prior to the completion of the holding company reorganization, the Bank’s filings with the FDIC, including the Bank’s annual report on Form 10-K for the year ended December 31, 2017, 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 Form 10-K and Form 10-Q filings, if any.   Certain prior period amounts have been reclassified to conform with current period presentation. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results for the year ended December 31, 2019 or for any other period.

During the quarter-ended March 31, 2019, the Corporation identified and corrected an immaterial error related to Maryland state licensing requirements for mortgage loan originations by our Mortgage division. As the result of our mortgage operations not being fully compliant with Maryland licensing law, we agreed to reimburse consumers approximately $474 thousand in interest and certain fees on loans originated, in addition to paying a fine of $12 thousand to resolve the matter. The Corporation has revised its comparative consolidated financial statements in the amount of $407 thousand, or $315 thousand net of tax, for periods prior to January 1, 2018 related to interest and fees on loans. The error correction impacted beginning retained earnings, deferred tax assets and other liabilities as of January 1, 2018, as shown below.

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Table of Contents

The following table summarizes the impacts of the correction on the consolidated balance sheet as of January 1, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands, except per share data)

    

 

Reported

 

Corrections

 

Revised

Deferred income taxes

 

$

1,312

 

92

 

1,404

Other liabilities

 

 

5,426

 

407

 

5,833

Retained earnings

 

 

15,768

 

(315)

 

15,453

 

 

 

 

 

 

 

 

 

 

 

The following table summarizes the impacts of the correction on the consolidated balance sheet as of December 31, 2018:

 

 

 

 

 

 

 

 

(dollars in thousands, except per share data)

    

 

Reported

 

Corrections

 

Revised

Deferred income taxes

 

$

1,636

 

92

 

1,728

Other liabilities

 

 

5,309

 

407

 

5,716

Retained earnings

 

 

23,931

 

(315)

 

23,616

 

The following table summarizes the impacts of the corrections to our capital ratios as of December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018 - as reported

 

 

 

 

 

 

 

 

 

 

 

 

To be well capitalized under

 

 

 

 

 

 

 

For capital adequacy

 

prompt corrective action

 

 

Actual

 

purposes *

 

provisions

(dollars in thousands):

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

Total capital (to risk-weighted assets)

 

$

122,577

 

13.70%

 

$

71,577

 

8.00%

 

$

89,472

 

10.00%

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

 

 

105,196

 

11.76%

 

 

40,262

 

4.50%

 

 

58,157

 

6.50%

Tier 1 capital (to risk-weighted assets)

 

 

105,196

 

11.76%

 

 

53,683

 

6.00%

 

 

71,577

 

8.00%

Tier 1 capital (to average assets)

 

 

105,196

 

11.20%

 

 

37,578

 

4.00%

 

 

46,972

 

5.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018 - as revised

 

 

 

 

 

 

 

 

 

 

 

 

 

To be well capitalized under

 

 

 

 

 

 

 

 

For capital adequacy

 

prompt corrective action

 

 

 

Actual

 

purposes *

 

provisions

 

(dollars in thousands):

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Total capital (to risk-weighted assets)

 

$

122,262

 

13.66%

 

$

88,362

 

9.88%

 

$

89,481

 

10.00%

 

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

 

 

104,881

 

11.72%

 

 

57,044

 

6.38%

 

 

58,163

 

6.50%

 

Tier 1 capital (to risk-weighted assets)

 

 

104,881

 

11.72%

 

 

70,466

 

7.88%

 

 

71,585

 

8.00%

 

Tier 1 capital (to average assets)

 

 

104,881

 

11.16%

 

 

37,581

 

4.00%

 

 

46,977

 

5.00%

 

 

 

 

 

 

 

 


*Includes capital conservation buffer of 2.50% for 2019 and 1.875% for 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Table of Contents

 

(2)      Earnings per Common Share

Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per common share takes into account the potential dilution computed pursuant to the treasury stock method that could occur if stock options were exercised and converted into common stock. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be anti-dilutive.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

(dollars in thousands, except per share data)

    

2019

    

2018

 

2019

    

2018

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common stockholders

 

$

3,317

 

 

2,727

 

$

7,345

 

 

5,799

Denominator for basic earnings per share - weighted average shares outstanding

 

 

6,407

 

 

6,402

 

 

6,407

 

 

6,395

Effect of dilutive common shares

 

 

30

 

 

28

 

 

29

 

 

31

Denominator for diluted earnings per share - adjusted weighted average shares outstanding

 

 

6,437

 

 

6,430

 

 

6,436

 

 

6,426

Basic earnings per share

 

$

0.52

 

 

0.43

 

$

1.15

 

 

0.91

Diluted earnings per share

 

$

0.52

 

 

0.42

 

$

1.14

 

 

0.90

Antidilutive shares excluded from computation of average dilutive earnings per share

 

 

199

 

 

116

 

 

199

 

 

116

 

 

(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)

    

2018

    

Expense

    

2019

    

(in years)

Goodwill - Wealth

 

$

899

 

 —

 

899

 

Indefinite

Total Goodwill

 

 

899

 

 —

 

899

 

 

 

 

 

 

 

 

 

 

 

 

Intangible assets - trade name

 

 

266

 

 —

 

266

 

Indefinite

Intangible assets - customer relationships

 

 

3,727

 

(153)

 

3,574

 

20

Intangible assets - non competition agreements

 

 

154

 

(52)

 

102

 

4

Total Intangible Assets

 

 

4,147

 

(205)

 

3,942

 

 

Total 

 

$

5,046

 

(205)

 

4,841

 

 

 

Accumulated amortization on intangible assets was $682 thousand and $409 thousand as of September 30, 2019 and 2018, respectively.

The Corporation performed its annual review of goodwill and identifiable intangible assets in accordance with ASC 350, “Intangibles - Goodwill and Other” as of December 31, 2018. For the period from January 1, 2019 through September 30, 2019, the Corporation determined there were no events that would necessitate impairment testing of goodwill and other intangible assets.

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Table of Contents

(4)      Securities

The amortized cost and fair value of securities as of September 30, 2019 and December 31, 2018 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

(dollars in thousands)

    

cost

    

gains

    

losses

    

value

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

U.S. asset backed securities

 

$

8,919

 

2

 

(39)

 

8,882

U.S. government agency mortgage-backed securities

 

 

12,843

 

103

 

(46)

 

12,900

U.S. government agency collateralized mortgage obligations

 

 

29,734

 

357

 

(130)

 

29,961

Investments in mutual funds

 

 

1,000

 

14

 

 -

 

1,014

Total securities available-for-sale

 

$

52,496

 

476

 

(215)

 

52,757

Securities held to maturity:

 

 

 

 

 

 

 

 

 

State and municipal securities

 

 

8,814

 

214

 

 —

 

9,028

Total securities held-to-maturity

 

$

8,814

 

214

 

 —

 

9,028

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 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

 

$

24,092

 

45

 

(271)

 

23,866

U.S. government agency collateralized mortgage obligations

 

 

14,754

 

52

 

(142)

 

14,664

State and municipal securities

 

 

11,096

 

22

 

(199)

 

10,919

Investments in mutual funds

 

 

1,000

 

 —

 

(21)

 

979

Total securities available-for-sale

 

$

50,942

 

119

 

(633)

 

50,428

Securities held to maturity:

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

1,991

 

 —

 

(13)

 

1,978

State and municipal securities

 

 

10,750

 

17

 

(90)

 

10,677

Total securities held-to-maturity

 

$

12,741

 

17

 

(103)

 

12,655

 

At September 30, 2019, the Corporation had seven U.S. government sponsored agency mortgage‑backed securities, thirteen U.S. government sponsored agency collateralized mortgage obligations, and five U.S. asset backed securities in unrealized loss positions. At December 31, 2018, the Corporation had twenty-four U.S. government sponsored agency mortgage‑backed securities, twelve U.S. government sponsored agency collateralized mortgage obligations, twenty-six state and municipal securities, one mutual fund, and two U.S. treasuries in unrealized loss positions. Although the Corporation’s investment portfolio overall is in a net unrealized gain position at September 30, 2019, 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, no securities are deemed to be other‑than‑temporarily impaired.

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Table of Contents

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, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 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

 

 

6,842

 

(39)

 

— 

 

 —

 

6,842

 

(39)

U.S. government agency mortgage-backed securities

 

$

1,926

 

(9)

 

3,177

 

(37)

 

5,103

 

(46)

U.S. government agency collateralized mortgage obligations

 

 

12,700

 

(88)

 

2,754

 

(42)

 

15,454

 

(130)

Total securities available-for-sale

 

$

21,468

 

(136)

 

5,931

 

(79)

 

27,399

 

(215)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 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 available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed securities

 

$

2,354

 

(6)

 

15,223

 

(265)

 

17,577

 

(271)

U.S. government agency collateralized mortgage obligations

 

 

2,636

 

(14)

 

5,620

 

(128)

 

8,256

 

(142)

State and municipal securities

 

 

957

 

(11)

 

8,746

 

(188)

 

9,703

 

(199)

Investments in mutual funds

 

 

980

 

(21)

 

 —

 

 —

 

980

 

(21)

Total securities available-for-sale

 

$

6,927

 

(52)

 

29,589

 

(581)

 

36,516

 

(633)

Securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

 —

 

 —

 

1,978

 

(13)

 

1,978

 

(13)

State and municipal securities

 

 

1,545

 

(5)

 

4,783

 

(85)

 

6,328

 

(90)

Total securities held-to-maturity

 

$

1,545

 

(5)

 

6,761

 

(98)

 

8,306

 

(103)

 

The amortized cost and carrying value of securities at September 30, 2019 and December 31, 2018 are shown below by contractual maturities. Actual maturities may differ from contractual maturities as issuers may have the right to call or repay obligations with or without call or prepayment penalties.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

 

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

 

$

 —

 

 —

 

 —

 

 —

 

$

906

 

902

 

1,991

 

1,978

 Due after one year through five years

 

 

 —

 

 —

 

4,258

 

4,316

 

 

1,236

 

1,226

 

3,154

 

3,148

 Due after five years through ten years

 

 

 —

 

 —

 

4,556

 

4,712

 

 

6,411

 

6,290

 

7,596

 

7,529

 Due after ten years

 

 

8,919

 

8,882

 

 —

 

 —

 

 

2,543

 

2,501

 

 —

 

 —

    Subtotal

 

 

8,919

 

8,882

 

8,814

 

9,028

 

 

11,096

 

10,919

 

12,741

 

12,655

Mortgage-related securities

 

 

42,577

 

42,861

 

 —

 

 —

 

 

38,846

 

38,530

 

 —

 

 —

Mutual funds with no stated maturity

 

 

1,000

 

1,014

 

 —

 

 —

 

 

1,000

 

979

 

 —

 

 —

    Total

 

$

52,496

 

52,757

 

8,814

 

9,028

 

$

50,942

 

50,428

 

12,741

 

12,655

  

 

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Table of Contents

(5)      Loans Receivable

Loans and leases outstanding at September 30, 2019 and December 31, 2018 are detailed by category as follows:

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

(dollars in thousands)

    

2019

    

2018

Mortgage loans held for sale

 

$

48,615

 

37,695

Real estate loans:

 

 

 

 

 

Commercial mortgage

 

 

357,418

 

325,393

Home equity lines and loans

 

 

83,412

 

82,286

Residential mortgage (1)

 

 

56,272

 

53,360

Construction

 

 

154,463

 

116,906

Total real estate loans

 

 

651,565

 

577,945

 

 

 

 

 

 

Commercial and industrial

 

 

284,376

 

259,806

Consumer

 

 

984

 

701

Leases, net

 

 

828

 

1,335

Total portfolio loans and leases

 

 

937,753

 

839,787

Total loans and leases

 

$

986,368

 

877,482

 

 

 

 

 

 

Loans with predetermined rates

 

$

294,297

 

264,376

Loans with adjustable or floating rates

 

 

692,071

 

613,106

Total loans and leases

 

$

986,368

 

877,482

 

 

 

 

 

 

Net deferred loan origination (fees) costs

 

$

(1,895)

 

(1,681)

 

(1)

Includes $11,278 and $11,422  of loans at fair value as of September 30, 2019 and December 31, 2018, respectively.

Components of the net investment in leases at September 30, 2019 and December 31, 2018 are detailed as follows:

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

(dollars in thousands)

    

2019

    

2018

Minimum lease payments receivable

 

$

869

 

1,420

Unearned lease income

 

 

(41)

 

(85)

Total

 

$

828

 

1,335

 

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Table of Contents

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, 2019 and December 31, 2018, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

90+ days

 

 

 

 

 

Accruing

 

Nonaccrual

 

 

 

 

 

September 30, 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

 

$

 —

 

 —

 

 —

 

355,869

 

355,869

 

1,549

 

357,418

 

0.43

%

Home equity lines and loans

 

 

592

 

 —

 

592

 

82,563

 

83,155

 

257

 

83,412

 

1.02

 

Residential mortgage (1)

 

 

 —

 

 —

 

 —

 

54,574

 

54,574

 

1,698

 

56,272

 

3.02

 

Construction

 

 

1,519

 

 —

 

1,519

 

152,944

 

154,463

 

 —

 

154,463

 

0.98

 

Commercial and industrial

 

 

394

 

 —

 

394

 

283,556

 

283,950

 

426

 

284,376

 

0.29

 

Consumer

 

 

 —

 

 —

 

 —

 

984

 

984

 

 —

 

984

 

 —

 

Leases

 

 

123

 

 —

 

123

 

705

 

828

 

 —

 

828

 

14.86

 

Total

 

$

2,628

 

 —

 

2,628

 

931,195

 

933,823

 

3,930

 

937,753

 

0.70

%

 

(1) Includes $11,278  of loans at fair value as of September 30, 2019  ($10,437 of current, $0 of 30-89 days past due and $841 of nonaccrual).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

90+ days

 

 

 

 

 

Accruing

 

Nonaccrual

 

 

 

 

 

December 31, 2018

 

30-89 days

 

past due and

 

Total past

 

 

 

Loans and

 

loans and

 

Total loans

 

Delinquency

 

(dollars in thousands)

    

past due

    

still accruing

    

due

    

Current

    

leases

    

leases

    

and leases

    

percentage

 

Commercial mortgage

 

$

 —

 

 —

 

 —

 

324,169

 

324,169

 

1,224

 

325,393

 

0.38

%

Home equity lines and loans

 

 

348

 

 —

 

348

 

81,855

 

82,203

 

83

 

82,286

 

0.52

 

Residential mortgage (1)

 

 

195

 

 —

 

195

 

51,018

 

51,213

 

2,147

 

53,360

 

4.39

 

Construction

 

 

 —

 

 —

 

 —

 

116,906

 

116,906

 

 —

 

116,906

 

 —

 

Commercial and industrial

 

 

217

 

 —

 

217

 

259,112

 

259,329

 

477

 

259,806

 

0.27

 

Consumer

 

 

 —

 

 —

 

 —

 

701

 

701

 

 —

 

701

 

 —

 

Leases

 

 

49

 

 —

 

49

 

1,286

 

1,335

 

 —

 

1,335

 

3.67

 

Total

 

$

809

 

 —

 

809

 

835,047

 

835,856

 

3,931

 

839,787

 

0.56

%

 

(1) Includes $11,422 of loans at fair value as of December 31, 2018  ($10,098 of current, $187 of 30-89 days past due and $1,137 of nonaccrual).

 

(6)      Allowance for Loan Losses (the “Allowance”)

The Allowance is established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the Allowance, and subsequent recoveries, if any, are credited to the Allowance.

The Allowance is maintained at a level considered adequate to provide for losses that are probable and estimable. Management’s periodic evaluation of the adequacy of the Allowance is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is subjective as it requires material estimates that may be susceptible to significant revisions as more information becomes available.

14

Table of Contents

Roll-Forward of Allowance for Loan and Lease Losses by Portfolio Segment

The following tables detail the roll‑forward of the Corporation’s Allowance, by portfolio segment, for the three and nine month periods ended September 30, 2019 and 2018, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance,

 

 

 

 

 

 

 

Balance,

(dollars in thousands)

    

June 30, 2019

    

Charge-offs

    

Recoveries

    

Provision

    

September 30, 2019

Commercial mortgage

 

$

3,197

 

 —

 

 1

 

257

 

3,455

Home Equity lines and loans

 

 

354

 

 —

 

 2

 

(28)

 

328

Residential mortgage

 

 

200

 

 —

 

 2

 

(30)

 

172

Construction

 

 

2,033

 

 —

 

 —

 

136

 

2,169

Commercial and industrial

 

 

2,830

 

(30)

 

 6

 

369

 

3,175

Consumer

 

 

 4

 

 —

 

 1

 

 1

 

 6

Leases

 

 

 7

 

 —

 

 —

 

 —

 

 7

Total

 

$

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

 

 

2,690

 

(30)

 

328

 

187

 

3,175

Consumer

 

 

 3

 

 —

 

 3

 

 —

 

 6

Leases

 

 

10

 

 —

 

 —

 

(3)

 

 7

Total

 

$

8,053

 

(30)

 

351

 

938

 

9,312

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Total

 

$

7,449

 

(50)

 

21

 

291

 

7,711

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance,

 

 

 

 

 

 

 

Balance,

(dollars in thousands)

    

December 31, 2017

    

Charge-offs

    

Recoveries

    

Provision

    

September 30, 2018

Commercial mortgage

 

$

2,434

 

 —

 

 6

 

713

 

3,153

Home Equity lines and loans

 

 

280

 

(137)

 

14

 

159

 

316

Residential mortgage

 

 

82

 

 —

 

61

 

37

 

180

Construction

 

 

1,689

 

 —

 

 —

 

(192)

 

1,497

Commercial and industrial

 

 

2,214

 

(244)

 

41

 

547

 

2,558

Consumer

 

 

 5

 

 —

 

 3

 

(4)

 

 4

Leases

 

 

 5

 

 —

 

 —

 

(2)

 

 3

Total

 

$

6,709

 

(381)

 

125

 

1,258

 

7,711

 

15

Table of Contents

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, 2019 and December 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance on loans and leases

 

Carrying value of loans and leases

 

 

 

Individually

 

Collectively

 

 

 

Individually

 

Collectively

 

 

 

September 30, 2019

 

evaluated

 

evaluated

 

 

 

evaluated

 

evaluated

 

 

 

(dollars in thousands)

    

for impairment

    

for impairment

    

Total

    

for impairment

    

for impairment

    

Total

 

Commercial mortgage

 

$

 —

 

3,455

 

3,455

 

$

2,204

 

355,214

 

357,418

 

Home Equity lines and loans

 

 

 2

 

326

 

328

 

 

255

 

83,157

 

83,412

 

Residential mortgage

 

 

 —

 

172

 

172

 

 

855

 

44,138

 

44,993

 

Construction

 

 

 —

 

2,169

 

2,169

 

 

1,262

 

153,201

 

154,463

 

Commercial and industrial

 

 

124

 

3,051

 

3,175

 

 

1,389

 

282,987

 

284,376

 

Consumer

 

 

 —

 

 6

 

 6

 

 

 —

 

984

 

984

 

Leases

 

 

 —

 

 7

 

 7

 

 

 —

 

828

 

828

 

Total

 

$

126

 

9,186

 

9,312

 

$

5,965

 

920,509

 

926,474

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance on loans and leases

 

Carrying value of loans and leases

 

 

 

Individually

 

Collectively

 

 

 

Individually

 

Collectively

 

 

 

December 31, 2018

 

evaluated

 

evaluated

 

 

 

evaluated

 

evaluated

 

 

 

(dollars in thousands)

    

for impairment

    

for impairment

    

Total

    

for impairment

    

for impairment

    

Total

 

Commercial mortgage

 

$

 —

 

3,209

 

3,209

 

$

1,929

 

323,464

 

325,393

 

Home Equity lines and loans

 

 

 —

 

323

 

323

 

 

83

 

82,203

 

82,286

 

Residential mortgage

 

 

 —

 

191

 

191

 

 

969

 

40,969

 

41,938

 

Construction

 

 

 —

 

1,627

 

1,627

 

 

1,281

 

115,625

 

116,906

 

Commercial and industrial

 

 

103

 

2,587

 

2,690

 

 

1,537

 

258,269

 

259,806

 

Consumer

 

 

 —

 

 3

 

 3

 

 

 —

 

701

 

701

 

Leases

 

 

 —

 

10

 

10

 

 

 —

 

1,335

 

1,335

 

Total

 

$

103

 

7,950

 

8,053

 

$

5,799

 

822,566

 

828,365

(1)


(1)

Excludes deferred fees and loans carried at fair value.

Loans and Leases by Credit Ratings

As part of the process of determining the Allowance to the different segments of the loan and lease portfolio, management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by management. The results of these reviews are reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:

·

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

·

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

·

Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

·

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of

16

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currently existing factors, conditions, and values, highly questionable and improbable. Loan balances classified as doubtful have been reduced by partial charge-offs and are carried at their net realizable values.

The following tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to determine the allowance for loan and lease losses as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

    

 

 

    

Special

    

 

    

 

    

 

(dollars in thousands)

 

Pass

 

mention

 

Substandard

 

Doubtful

 

Total

Commercial mortgage

 

$

350,027

 

3,437

 

3,954

 

 —

 

357,418

Home equity lines and loans

 

 

83,155

 

 —

 

257

 

 —

 

83,412

Construction

 

 

151,663

 

2,774

 

26

 

 —

 

154,463

Commercial and industrial

 

 

262,217

 

8,399

 

13,760

 

 —

 

284,376

Total

 

$

847,062

 

14,610

 

17,997

 

 —

 

879,669

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

    

 

 

    

Special

    

 

    

 

    

 

(dollars in thousands)

 

Pass

 

mention

 

Substandard

 

Doubtful

 

Total

Commercial mortgage

 

$

320,130

 

3,713

 

1,550

 

 —

 

325,393

Home equity lines and loans

 

 

82,121

 

 —

 

165

 

 —

 

82,286

Construction

 

 

114,249

 

2,657

 

 —

 

 —

 

116,906

Commercial and industrial

 

 

239,181

 

12,620

 

7,975

 

30

 

259,806

Total

 

$

755,681

 

18,990

 

9,690

 

30

 

784,391

 

In addition to credit quality indicators as shown in the above tables, allowance allocations for residential mortgages, consumer loans and leases are also applied based on their performance status as of September 30, 2019 and December 31, 2018. No troubled debt restructurings performing according to modified terms are included in performing residential mortgages below as of September 30, 2019 and December 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

(dollars in thousands)

    

Performing

    

Nonperforming

    

Total

    

Performing

    

Nonperforming

    

Total

Residential mortgage

 

$

44,138

 

855

 

44,993

 

$

40,969

 

969

 

41,938

Consumer

 

 

984

 

 —

 

984

 

 

701

 

 —

 

701

Leases

 

 

828

 

 —

 

828

 

 

1,335

 

 —

 

1,335

Total

 

$

45,950

 

855

 

46,805

 

$

43,005

 

969

 

43,974

 

There were six nonperforming residential mortgage loans at September 30, 2019 and December 31, 2018 with a combined outstanding principal balance of $1.2 million and $1.9 million, respectively, which were carried at fair value and not included in the table above.

17

Table of Contents

Impaired Loans

The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related allowance for loan and lease losses and interest income recognized for the periods.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At September 30, 2019

 

At December 31, 2018

 

 

 

 

 

 

 

 

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

 

 

559

 

559

 

124

 

566

 

676

 

679

 

103

 

680

Home equity lines and loans

 

 

255

 

255

 

 2

 

256

 

 —

 

 —

 

 —

 

 —

Residential mortgage

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

Construction

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

Total

 

 

814

 

814

 

126

 

822

 

676

 

679

 

103

 

680

Impaired loans without related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage

 

$

2,204

 

2,713

 

 —

 

2,272

 

1,929

 

2,379

 

 —

 

1,982

Commercial and industrial

 

 

830

 

876

 

 —

 

864

 

861

 

945

 

 —

 

885

Home equity lines and loans

 

 

 —

 

 —

 

 —

 

 —

 

83

 

89

 

 —

 

84

Residential mortgage

 

 

855

 

855

 

 —

 

857

 

969

 

978

 

 —

 

978

Construction

 

 

1,262

 

1,263

 

 —

 

1,286

 

1,281

 

1,281

 

 —

 

1,293

Total

 

 

5,151

 

5,707

 

 —

 

5,279

 

5,123

 

5,672

 

 —

 

5,222

Grand Total

 

$

5,965

 

6,521

 

126

 

6,101

 

5,799

 

6,351

 

103

 

5,902

 

Interest income recognized on performing impaired loans amounted to $50 thousand and $93 thousand for the three months ended September 30, 2019 and 2018, respectively, and $152 thousand and $218 thousand for the nine months ended September 30, 2019 and 2018, 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.

18

Table of Contents

The balance of TDRs at September 30, 2019 and December 31, 2018 are as follows:

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

(dollars in thousands)

    

2019

    

2018

TDRs included in nonperforming loans and leases

 

$  

1,133

  

1,219

TDRs in compliance with modified terms

 

   

2,880

  

3,047

Total TDRs

 

$  

4,013

  

4,266

 

There were no loan and lease modifications granted during the three and nine months ended September 30, 2019 that were categorized as TDRs. 

The following tables present information regarding loan and lease modifications granted during the three and nine months ended September 30, 2018 that were 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

 

$

 —

 

No loan and lease modifications granted during the three and nine months ended September 30, 2019 and 2018 subsequently defaulted during the same time period.

The following table presents information regarding the number of contracts by type of loan and lease modifications granted during the three and nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

September 30, 2018

 

September 30, 2018

 

 

 

 

Interest Rate

 

 

 

Interest Rate

 

 

Loan Term

 

Change and Loan

 

Loan Term

 

Change and Loan

 

 

Extension

 

Term Extension

 

Extension

 

Term Extension

Real Estate:

 

 

 

 

 

 

 

 

 Land and Construction

 

 1

 

 —

 

 2

 

 —

Commercial and industrial

 

 —

 

 —

 

 —

 

 1

Total

 

 1

 

 —

 

 2

 

 1

 

 

 

 

 

19

Table of Contents

 

(7)      Short-Term Borrowings and Long‑Term Debt

The Corporation’s short‑term borrowings generally consist of federal funds purchased and short‑term borrowings extended under agreements with the Federal Home Loan Bank of Pittsburgh (“FHLB”). The Corporation has two unsecured Federal Funds borrowing facilities with correspondent banks: one of $24 million and one of  $15 million. Federal funds purchased generally represent one-day borrowings.  The Corporation had no Federal Funds purchased at September 30, 2019 and December 31, 2018. The Corporation also has a facility with the Federal Reserve discount window of $9.6 million. This facility is fully secured by investment securities and loans. There were no borrowings under this facility at September 30, 2019 or at December 31, 2018.

Short‑term borrowings as of September 30, 2019 consisted of short‑term advances from the FHLB of Pittsburgh in the amount of $119.7 million with interest at 2.08%,  $3.1 million with an original term of 3 years with interest at 2.03%,  $5.0 million with an original term of 7 years with interest at 2.76%, and the note payable related to the acquisition of HJ Wealth of $619 thousand with an original term of 3 years with interest at 3.00%.

Short‑term borrowings as of December 31, 2018 consisted of short-term advances from the FHLB of Pittsburgh in the amount of $112.5 million with interest at 2.62%, and $1.8 million with an original term of 4 years and interest at 1.70%.

Long‑term debt at September 30, 2019 and December 31, 2018 consisted of the following fixed rate notes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of

 

 

Maturity

 

Interest

 

September 30, 

 

December 31, 

(dollars in thousands)

    

date

    

rate

    

2019

    

2018

Mid-term Repo-fixed

 

06/28/21

 

1.88

%  

 

3,123

 

 —

Mid-term Repo-fixed

 

08/10/20

 

2.76

 

 

 —

 

5,000

Acquisition Purchase Note (1)

 

04/01/20

 

3.00

 

 

 —

 

1,238

    Total

 

 

 

 

 

$

3,123

 

6,238

 

(1)

The acquisition purchase note for the Wealth division is classified as short-term borrowing at September 30, 2019.

The FHLB of Pittsburgh has also issued $101.5 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 June 19, 2020. The Corporation has a maximum borrowing capacity with the FHLB of $496.3 million as of September 30, 2019 and $437.2 million as of December 31, 2018. All advances and letters of credit from the FHLB are secured by a blanket lien on non-pledged, mortgage-related loans and securities as part of the 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 Administration (“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 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.

 

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Residential Mortgage Loans

 

The mortgage servicing rights (“MSRs”) are amortized to non-interest expense in proportion to, and 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 $45.1 million and $15.8 million of residential mortgage loans as of September 30, 2019 and 2018, respectively. During the three and nine months ended September 30, 2019, the Corporation recognized servicing fee income of $107 thousand and $198 thousand, respectively, compared to $90 thousand and $152 thousand during the three and nine months ended September 30, 2018, respectively.

 

Changes in the MSR balance are summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

(dollars in thousands)

 

2019

    

2018

 

2019

    

2018

Balance at beginning of the period

 

$

236

 

62

 

$

232

 

 —

Servicing rights capitalized

 

 

107

 

89

 

 

198

 

152

Amortization of servicing rights

 

 

(17)

 

(3)

 

 

(39)

 

(4)

Change in valuation allowance

 

 

(12)

 

 —

 

 

(77)

 

 —

Balance at end of the period

 

$

314

 

148

 

$

314

 

148

 

Activity in the valuation allowance for MSR’s was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

(dollars in thousands)

 

2019

    

2018

 

2019

    

2018

Valuation allowance, beginning of period

 

$

(65)

 

 —

 

$

 —

 

 —

Impairment

 

 

(12)

 

 —

 

 

(77)

 

 —

Recovery

 

 

 —

 

 —

 

 

 —

 

 —

Valuation allowance, end of period

 

$

(77)

 

 —

 

$

(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, 2019, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 16.02% and a discount rate equal to 9.25%.  At September 30, 2018, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 11.78% and a discount rate equal to 9.5%.

 

 

 

 

 

 

 

 

 

 

 

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At September 30, 2019 and September 30, 2018, 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, 2019

    

December 31, 2018

Fair value of residential mortgage servicing rights

 

$

314

 

$

213

 

 

 

 

 

 

 

Weighted average life (years)

 

 

7.4

 

 

3.4

 

 

 

 

 

 

 

Prepayment speed

 

 

16.02%

 

 

11.78%

   Impact on fair value:

 

 

 

 

 

 

        10% adverse change

 

$

(16)

 

$

(9)

        20% adverse change

 

 

(30)

 

 

(17)

 

 

 

 

 

 

 

Discount rate

 

 

9.25%

 

 

9.50%

   Impact on fair value:

 

 

 

 

 

 

        10% adverse change

 

$

(9)

 

$

(8)

        20% adverse change

 

 

(18)

 

 

(15)

 

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 to non-interest expense in proportion to, and 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 $15.4 million of SBA loans, as of September 30, 2019 and no SBA loans, as of September 30, 2018.  During the three and nine months ended September 30, 2019, the Corporation recognized servicing fee income of $8 thousand in both periods.

 

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)

 

2019

    

2018

 

2019

    

2018

Balance at beginning of the period

 

$

133

 

 —

 

$

 —

 

 —

Servicing rights capitalized

 

 

198

 

 —

 

 

331

 

 —

Amortization of servicing rights

 

 

(6)

 

 —

 

 

(6)

 

 —

Change in valuation allowance

 

 

(4)

 

 —

 

 

(4)

 

 —

Balance at end of the period

 

$

321

 

 —

 

$

321

 

 —

 

 

 

 

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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)

 

2019

    

2018

 

2019

    

2018

Valuation allowance, beginning of period

 

$

 —

 

 —

 

$

 —

 

 —

Impairment

 

 

(4)

 

 —

 

 

(4)

 

 —

Recovery

 

 

 —

 

 —

 

 

 —

 

 —

Valuation allowance, end of period

 

$

(4)

 

 —

 

$

(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, 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 10.34%, and a discount rate equal to 8.88%. The Corporation did not service SBA loans at September 30, 2018.

 

At September 30, 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, 2019

Fair value of SBA loan servicing rights

 

$

321

 

 

 

 

Weighted average life (years)

 

 

4.5

 

 

 

 

Prepayment speed

 

 

10.34%

   Impact on fair value:

 

 

 

        10% adverse change

 

$

(11)

        20% adverse change

 

 

(21)

 

 

 

 

Discount rate

 

 

8.88%

   Impact on fair value:

 

 

 

        10% adverse change

 

$

(9)

        20% adverse change

 

 

(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. 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 estimates using present value or other valuation techniques. Those techniques

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are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation techniques or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

In accordance with this guidance, the Corporation groups its financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

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Table of Contents

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, 2019 and December 31, 2018 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

(dollars in thousands)

    

Total

    

Level 1

    

Level 2

    

Level 3

Securities available for sale:

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed securities

 

$

12,900

 

 —

 

12,900

 

 —

U.S. government agency collateralized mortgage obligations

 

 

29,961

 

 —

 

29,961

 

 —

Investments in mutual funds and other equity securities

 

 

9,896

 

 —

 

9,896

 

 —

Mortgage loans held-for-sale

 

 

48,615

 

 —

 

48,615

 

 —

Mortgage loans held-for-investment

 

 

11,278

 

 —

 

11,278

 

 —

Mortgage servicing rights

 

 

314

 

 —

 

 —

 

314

SBA loan servicing rights

 

 

321

 

 —

 

 —

 

321

Interest rate lock commitments

 

 

283

 

 —

 

 —

 

283

Customer derivatives - Interest rate swaps

 

 

500

 

 —

 

500

 

 —

Total

 

$

114,068

 

 —

 

113,150

 

918

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

(dollars in thousands)

    

Total

    

Level 1

    

Level 2

    

Level 3

Securities available for sale:

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed securities

 

$

23,866

 

 —

 

23,866

 

 —

U.S. government agency collateralized mortgage obligations

 

 

14,664

 

 —

 

14,664

 

 —

State and municipal securities

 

 

10,919

 

 —

 

10,919

 

 —

Investments in mutual funds and other equity securities

 

 

979

 

 —

 

979

 

 —

Mortgage loans held-for-sale

 

 

37,695

 

 —

 

37,695

 

 —

Mortgage loans held-for-investment

 

 

11,422

 

 —

 

11,422

 

 —

Mortgage servicing rights

 

 

213

 

 —

 

 —

 

213

Interest rate lock commitments

 

 

310

 

 —

 

 —

 

310

Customer derivatives - Interest rate swaps

 

 

141

 

 —

 

141

 

 —

Total

 

$

100,209

 

 —

 

99,686

 

523

 

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2019 and December 31, 2018 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

(dollars in thousands)

    

Total

    

Level 1

    

Level 2

    

Level 3

Impaired loans (1)

 

$

5,965

 

 —

 

 —

 

5,965

Other real estate owned (2)

 

 

120

 

 —

 

 —

 

120

Total

 

$

6,085

 

 —

 

 —

 

6,085

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

(dollars in thousands)

    

Total

    

Level 1

    

Level 2

    

Level 3

Impaired loans (1)

 

$

5,799

 

 —

 

 —

 

5,799

Other real estate owned (2)

 

 

 —

 

 —

 

 —

 

 —

Total

 

$

5,799

 

 —

 

 —

 

5,799


(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

25

Table of Contents

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.

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

(a)      Cash and Cash Equivalents

The carrying amounts reported in the balance sheet for cash and short‑term instruments approximate those assets’ fair values.

(b)      Securities

The fair value of securities available‑for‑sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

(c)       Mortgage Loans Held for Sale

The fair value of mortgage loans held for sale is based on secondary market prices.

(d)      Loans Receivable

The fair value of loans receivable is estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate‑risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value below is not reflective of an exit price.

(e)      Mortgage Loans Held for Investment

The fair value of mortgage loans held for investment is based on the price secondary markets are currently offering for similar loans using observable market data.

(f)       Servicing Rights

The Corporation determines the fair value of its servicing rights by estimating the amount and timing of future cash flows associated with the servicing rights and discounting the cash flows using market discount rates. The valuation included the application of certain assumptions made by management, including discount rates, prepayment projections, and prevailing assumptions used in the marketplace at the time of the valuation.

 

(g)       Impaired Loans

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

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Table of Contents

(h)      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.

(i)      Accrued Interest Receivable and Payable

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

(j)       Deposit Liabilities

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed‑rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

(k)       Short‑Term Borrowings

The carrying amounts of short‑term borrowings approximate their fair values.

(l)      Long‑Term Debt

Fair values of FHLB advances and the acquisition purchase note payable are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

(m)       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.

(n)     Off‑Balance Sheet Financial Instruments

Off-balance sheet instruments are primarily comprised of loan commitments, which are generally priced at market at the time of funding. Fees on commitments to extend credit and stand-by letters of credit are deemed to be immaterial and these instruments are expected to be settled at face value or expire unused. It is impractical to assign any fair value to these instruments and as a result they are not included in the table below. Fair values assigned to the notional value of interest rate lock commitments and forward sale contracts are based on market quotes.

(o)     Derivative Financial Instruments

The fair value of forward commitments and interest rate swaps is based on market pricing and therefore are considered Level 2.  Derivatives classified as Level 3 consist of interest rate lock commitments related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment 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.

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Table of Contents

The estimated fair values of the Corporation’s financial instruments at September 30, 2019 and December 31, 2018 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

 

 

Fair Value

 

Carrying

 

 

 

Carrying

 

 

(dollars in thousands)

    

Hierarchy Level

    

amount

    

Fair value

    

amount

    

Fair value

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

Level 1

 

$

40,532

 

40,532

 

23,952

 

23,952

Securities available-for-sale

 

Level 2

 

 

52,757

 

52,757

 

50,428

 

50,428

Securities held-to-maturity

 

Level 2

 

 

8,814

 

9,028

 

12,741

 

12,655

Mortgage loans held-for-sale

 

Level 2

 

 

48,615

 

48,615

 

37,695

 

37,695

Loans receivable, net

 

Level 3

 

 

935,858

 

933,285

 

818,631

 

820,512

Mortgage loans held-for-investment

 

Level 2

 

 

11,278

 

11,278

 

11,422

 

11,422

Interest rate lock commitments

 

Level 3

 

 

283

 

283

 

310

 

310

Forward commitments

 

Level 2

 

 

30

 

30

 

 —

 

 —

Restricted investment in bank stock

 

Level 3

 

 

8,237

 

8,237

 

7,002

 

7,002

Mortgage servicing rights

 

Level 3

 

 

314

 

314

 

232

 

213

SBA loan servicing rights

 

Level 3

 

 

321

 

321

 

 —

 

 —

Accrued interest receivable

 

Level 3

 

 

3,155

 

3,155

 

2,889

 

2,889

Customer derivatives - Interest rate swaps

 

Level 2

 

 

500

 

500

 

141

 

141

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

Level 2

 

 

858,461

 

896,000

 

752,130

 

744,300

Short-term borrowings

 

Level 2

 

 

128,466

 

128,467

 

114,300

 

114,300

Long-term debt

 

Level 2

 

 

3,123

 

3,123

 

6,238

 

6,240

Subordinated debentures

 

Level 2

 

 

9,176

 

9,792

 

9,239

 

9,396

Accrued interest payable

 

Level 2

 

 

669

 

669

 

305

 

305

Interest rate lock commitments

 

Level 3

 

 

81

 

81

 

40

 

40

Forward commitments

 

Level 2

 

 

105

 

105

 

176

 

176

Customer derivatives - Interest rate swaps

 

Level 2

 

 

568

 

568

 

161

 

161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

 

Notional

 

 

Off-balance sheet financial instruments:

    

 

    

amount

    

Fair value

    

amount

    

Fair value

  Commitments to extend credit

 

Level 2

 

$

327,788

 

283

 

290,614

 

310

  Letters of credit

 

Level 2

 

 

9,750

 

 —

 

5,158

 

 —

 

The following table includes a rollforward of interest rate lock commitments for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the three and nine month peiods ended September 30, 2019 and 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

2019

    

2018

 

2019

    

2018

Balance at beginning of the period

 

$

375

 

586

 

$

310

 

344

(Decrease) increase in value

 

 

(92)

 

(80)

 

 

(27)

 

162

Balance at end of the period

 

$

283

 

506

 

$

283

 

506

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Valuation Techniques for Level 3 interest rate lock

 

Fair Value

 

 

 

Unobservable

 

Range of

 

Weighted

 

commitments as of September 30, 2019

  

Level 3

  

Valuation Technique

  

Input

  

Inputs

  

Average

  

Interest rate lock commitments

 

283

 

Market comparable pricing

 

Pull through

 

1 - 99

91.70

 

A realized gain of $101 thousand and a realized gain of $138 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, 2019 and 2018, respectively, and realized gains of $67 thousand and $114 thousand for the nine months ended September 30, 2019

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and 2018, respectively, are recorded in non-interest income as net change in the fair value of derivative instruments in the Corporation’s consolidated statements of income.

 

Refer to note 8 – servicing assets for a rollforward of servicing assets 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, 2019 and 2018.

 

 

 

(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 lending function. 

Mortgage Banking Derivatives

In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans or interest rate locks at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Interest rate lock commitments and forward commitments are recorded within other assets/liabilities on the consolidated balance sheets, with changes in fair values during the period recorded within net change in the fair value of derivative instruments on the unaudited consolidated statements of income.

Customer Derivatives – Interest Rate Swaps

Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain customers to swap a fixed rate product for a variable rate product, or vice versa.  The Corporation executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies.  Those interest rate derivatives are simultaneously hedged by offsetting derivatives that the Corporation executes with a third party, such that the Corporation minimizes its net interest rate risk exposure resulting from such transactions.  As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. 

 

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The following table presents a summary of the notional amounts and fair values of derivative financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2019

 

December 31, 2018

(dollars in thousands)

Balance Sheet Line Item

 

Notional
Amount

    

Asset
(Liability)
Fair Value

    

Notional
Amount

    

Asset
(Liability)
Fair Value

Interest Rate Lock Commitments

 

 

 

 

 

 

 

 

 

 

Positive fair values

Other assets

 

$

37,105

 

283

 

27,188

 

310

Negative fair values

Other liabilities

 

 

14,102

 

(81)

 

6,218

 

(40)

Total

 

 

 

51,207

 

202

 

33,406

 

270

 

 

 

 

 

 

 

 

 

 

 

Forward Commitments

 

 

 

 

 

 

 

 

 

 

Positive fair values

Other assets

 

 

11,000

 

30

 

 —

 

 —

Negative fair values

Other liabilities

 

 

41,000

 

(105)

 

26,500

 

(176)

Total

 

 

 

52,000

 

(75)

 

26,500

 

(176)

 

 

 

 

 

 

 

 

 

 

 

Customer Derivatives - Interest Rate Swaps

 

 

 

 

 

 

 

 

 

 

Positive fair values

Other assets

 

 

3,287

 

500

 

3,330

 

141

Negative fair values

Other liabilities

 

 

3,287

 

(568)

 

3,330

 

(161)

Total

 

 

 

6,574

 

(68)

 

6,660

 

(20)

Total derivative financial instruments

 

 

$

109,781

 

59

 

66,566

 

74

 

Interest rate lock commitments are considered Level 3 in the fair value hierarchy, while the forward commitments and interest rate swaps are considered Level 2 in the fair value hierarchy.

The following table presents a summary of the fair value gains and losses on derivative financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

 

 

Nine Months Ended September 30, 

(dollars in thousands)

    

2019

    

2018

 

 

    

2019

    

2018

Interest Rate Lock Commitments

 

$

(102)

 

(224)

 

 

$

(68)

 

(110)

Forward Commitments

 

 

124

 

293

 

 

 

101

 

168

Customer Derivatives - Interest Rate Swaps

 

 

(22)

 

 —

 

 

 

(48)

 

 —

Net fair value gains (losses) on derivative financial instruments

 

$

 —

 

69

 

 

$

(15)

 

58

 

Realized gains/(losses) on derivatives were ($299) thousand and ($170) thousand for the three months ended September 30, 2019 and 2018, respectively, and ($792) and $534 thousand for the nine months ended September 30, 2019 and 2018, respectively, and are included in other non-interest income in the unaudited consolidated statements of income.

 

(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

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available for sale investment securities, gains on the sale of loans, service charges on deposit accounts, cash sweep fees, overdraft fees, BOLI income.

Meridian Wealth Partners (“Wealth”), a registered investment advisor and wholly-owned subsidiary of the Bank, provides a comprehensive array of wealth management services and products and the trusted guidance to help its clients and our banking customers prepare for the future. The unit generates non-interest income through advisory fees.

Meridian’s mortgage banking segment (“Mortgage”) consists of one central loan production facility and several loan production offices located throughout the Delaware Valley. The Mortgage segment originates 1 – 4 family residential mortgages for sale, including servicing to third party investors, or for our loan portfolio. The unit generates net interest income on the loans it originates, earns margin income (primarily gain on sales), as well as other fee income.

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, 2019

 

Three Months Ended September 30, 2018

(dollars in thousands)

    

Bank

    

Wealth

    

Mortgage

    

Total

    

Bank

    

Wealth

    

Mortgage

    

Total

Net interest income

 

$

9,203

 

 4

 

67

 

9,274

 

$

8,107

 

71

 

200

 

8,378

Provision for loan losses

 

 

705

 

 —

 

 —

 

705

 

 

291

 

 —

 

 —

 

291

Net interest income after provision

 

 

8,498

 

 4

 

67

 

8,569

 

 

7,816

 

71

 

200

 

8,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage banking income

 

 

74

 

 —

 

7,836

 

7,910

 

 

105

 

 —

 

8,169

 

8,274

Wealth management income

 

 

31

 

891

 

 —

 

922

 

 

59

 

871

 

 —

 

930

SBA income

 

 

645

 

 —

 

 —

 

645

 

 

 —

 

 —

 

 —

 

 —

Net change in fair values

 

 

(23)

 

 —

 

53

 

30

 

 

 —

 

 —

 

(333)

 

(333)

Other

 

 

534

 

 —

 

(227)

 

307

 

 

363

 

 —

 

(67)

 

296

Total non-interest income

 

 

1,261

 

891

 

7,662

 

9,814

 

 

527

 

871

 

7,769

 

9,167

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,248

 

564

 

4,507

 

9,319

 

 

3,264

 

445

 

5,192

 

8,901

Occupancy and equipment

 

 

530

 

34

 

382

 

946

 

 

521

 

29

 

370

 

920

Professional fees

 

 

410

 

 2

 

408

 

820

 

 

590

 

 9

 

115

 

714

Advertising and promotion

 

 

344

 

94

 

136

 

574

 

 

301

 

111

 

178

 

590

Other

 

 

1,393

 

140

 

960

 

2,493

 

 

1,259

 

314

 

1,055

 

2,628

Total non-interest expense

 

 

6,925

 

834

 

6,393

 

14,152

 

 

5,935

 

908

 

6,910

 

13,753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Margin

 

$

2,834

 

61

 

1,336

 

4,231

 

$

2,408

 

34

 

1,059

 

3,501

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Nine Months Ended September 30, 2019

 

Nine Months Ended September 30, 2018

(dollars in thousands)

    

Bank

    

Wealth

    

Mortgage

    

Total

    

Bank

    

Wealth

    

Mortgage

    

Total

Net interest income

 

$

26,437

 

68

 

167

 

26,672

 

$

23,597

 

217

 

402

 

24,216

Provision for loan losses

 

 

938

 

 —

 

 —

 

938

 

 

1,258

 

 —

 

 —

 

1,258

Net interest income after provision

 

 

25,499

 

68

 

167

 

25,734

 

 

22,339

 

217

 

402

 

22,958

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage banking income

 

 

175

 

 —

 

18,964

 

19,139

 

 

148

 

 —

 

20,259

 

20,407

Wealth management income

 

 

110

 

2,588

 

 —

 

2,698

 

 

149

 

2,847

 

 —

 

2,996

SBA income

 

 

1,160

 

 —

 

 —

 

1,160

 

 

 —

 

 —

 

 —

 

 —

Net change in fair values

 

 

(49)

 

 —

 

341

 

292

 

 

 —

 

 —

 

(471)

 

(471)

Other

 

 

1,409

 

 —

 

(510)

 

899

 

 

1,136

 

 —

 

823

 

1,959

Total non-interest income

 

 

2,805

 

2,588

 

18,795

 

24,188

 

 

1,433

 

2,847

 

20,611

 

24,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

11,988

 

1,681

 

12,120

 

25,789

 

 

10,390

 

1,373

 

14,956

 

26,719

Occupancy and equipment

 

 

1,588

 

93

 

1,164

 

2,845

 

 

1,599

 

99

 

1,172

 

2,870

Professional fees

 

 

1,116

 

11

 

873

 

2,000

 

 

1,325

 

20

 

325

 

1,670

Advertising and promotion

 

 

1,084

 

57

 

628

 

1,769

 

 

917

 

319

 

566

 

1,802

Other

 

 

4,546

 

426

 

3,137

 

8,109

 

 

3,827

 

613

 

2,888

 

7,328

Total non-interest expense

 

 

20,322

 

2,268

 

17,922

 

40,512

 

 

18,058

 

2,424

 

19,907

 

40,389

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Margin

 

$

7,982

 

388

 

1,040

 

9,410

 

$

5,714

 

640

 

1,106

 

7,460

 

 

(12)    Recent Litigation

On November 21, 2017, three former employees of the mortgage-banking division of the Bank filed suit in the United States District Court for the Eastern District of Pennsylvania, Juan Jordan et al. v. Meridian Bank, Thomas Campbell and Christopher Annas, against the Bank purporting to be a class and collective action seeking unpaid and overtime wages under the Fair Labor Standards Act of 1938, the New Jersey Wage and Hour Law, and the Pennsylvania Minimum Wage Act of 1968 on behalf of similarly situated plaintiffs. In September 2019, plaintiffs’ counsel and the Bank agreed to move forward with non-binding mediation.  Although the Bank believes it had strong and meritorious defenses, given the expense and inconvenience of  litigation, on July 24, 2019 through mediation, the Bank reached an agreement in principle with the plaintiffs to settle this litigation for $990 thousand in total. The Bank has a litigation reserve of $990 thousand at September 30, 2019.  The parties have submitted their negotiated settlement agreement to the court, and it awaits final court approval.

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(13)    Recent Accounting Pronouncements

As an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), Meridian Corporation is permitted an extended transition period for complying with new or revised accounting standards affecting public companies. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1,070,000,000 or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of our initial offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the end of the fiscal year in which the market value of our equity securities that are held by non-affiliates exceeds $700 million as of June 30 of that year. We have elected to take advantage of this extended transition period, which means that the financial statements included herein, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. If we do so, we will prominently disclose this decision in the first periodic report following our decision, and such decision is irrevocable. As a filer under the JOBS Act, we will implement new accounting standards subject to the effective dates required for non-public entities.

FASB ASU 2014‑09 (Topic 606), “Revenue from Contracts with Customers”

Issued in May 2014, ASU 2014‑09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015‑14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This amendment defers the effective date of ASU 2014‑09 by one year. In March 2016, the FASB issued ASU 2016‑ 08”, “Principal versus Agent Considerations (Reporting Gross versus Net),” which amends the principal versus agent guidance and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. In addition, the FASB issued ASU Nos. 2016‑20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” and 2016‑12, “Narrow-Scope Improvements and Practical Expedients”, both of which provide additional clarification of certain provisions in Topic 606. These Accounting Standards Codification (“ASC”) updates are effective for public companies for annual reporting periods beginning after December 15, 2017, but early adoption is permitted. Early adoption is permitted only as of annual reporting periods after December 15, 2016. The standard permits the use of either the ‘retrospective’ or ‘retrospectively with the cumulative effect’ transition method. For non-public companies, the ASC updates are effective for annual reporting periods beginning after December 15, 2018, and interim periods beginning after December 15, 2019. The Corporation’s revenue is the sum of net interest income and non-interest income. The scope of the guidance excludes nearly all net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. The Corporation performed a review and determined that the majority of non-interest income revenue streams are within the scope of the new standard. Non-interest income streams that are out of scope of the new standard include BOLI, sales of investment securities, mortgage banking activities, and certain items within service charges and other income.  Management is finalizing a review of contracts related to service charges on deposits, investment advisory commissions and fee income, and certain items within other service charges and other income to make an assessment of the potential impact of this ASU. The Corporation will adopt this ASU as of December 31, 2019.

 

FASB ASU 2017-05 (Topic 610), “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”

 

Issued in February 2017, ASU 2017-05 provides clarification of the scope of ASC 610-20. Specifically, the new guidance clarifies that ASC 610-20 applies to nonfinancial assets which do not meet the definition of a business or not-for-profit activity. Further, the new guidance clarifies that a financial asset is within the scope of ASC 610-20 if it meets the definition of an in-substance nonfinancial asset which is defined as a financial asset promised to a counterparty in a contract where substantially all of the assets promised are nonfinancial. Finally, the new guidance clarifies that each distinct nonfinancial asset and insubstance nonfinancial asset should be derecognized when the

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counterparty obtains control of it. Management is currently assessing the potential impact of ASU. The Corporation will adopt this ASU as of December 31, 2019.

 

FASB ASU 2017‑01 (Topic 805), “Business Combinations”

Issued in January 2017, ASU 2017‑01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. ASU 2017‑01 is effective for public companies for annual periods beginning after December 15, 2017 including interim periods within those periods, while for non-public companies the ASU is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019. The Corporation will adopt this ASU as of December 31, 2019 and does not expect the adoption of this ASU to have a material impact on our 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 will adopt this ASU as of December 31, 2019 and does not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements and related disclosures.

FASB ASU 2016‑13 (Topic 326), “Measurement of Credit Losses on Financial Instruments”

Issued in June 2016, ASU 2016‑13 significantly changes how companies measure and recognize credit impairment for many financial assets. This 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 methodology 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 inform credit loss estimates. An entity should apply the amendments through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (modified retrospective approach). Acquired credit impaired loans for which the guidance in Accounting Standards Codification (ASC) Topic 310-30 has been previously applied should prospectively apply the guidance in this ASU.  A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date. ASU 2016‑13 is effective for public companies for the annual and interim periods in fiscal years beginning after December 15, 2019, with early adoption permitted. For non-public companies the ASU is effective for fiscal years and interim periods beginning after December 15, 2022, or January 1, 2023 for the Corporation.  The Corporation has assembled a cross-functional team from Finance, Credit, and IT that is leading the implementation efforts to evaluate the impact of this guidance on the Corporation's Consolidated Financial Statements and related disclosures, internal systems, accounting policies, processes and related internal controls.

 

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FASB ASU 2016‑02 (Topic 842), “Leases”

Issued in February 2016, ASU 2016‑02 revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ASU 2016‑02 is effective for public companies for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. For non-public companies the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within the fiscal years beginning after December 31, 2020. In July 2018 ASU 2018-11 was issued which creates a new, optional transition method for implementing ASU 2016-02 and a lessor practical expedient for separating lease and non-lease components and has the same effective date as ASU 2016-02.  Under the optional transition method of ASU 2018-11, the Corporation may initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.  The Corporation is evaluating the effects that ASU 2016‑02 and ASU 2018-11 will have on our Consolidated Financial Statements and related disclosures and expects to adopt these ASU’s as of December 31, 2021. 

FASB ASU 2016‑01 (Subtopic 825‑10), “Financial Instruments – Overall, Recognition and Measurement of Financial Assets and Financial Liabilities”

Issued in January 2016, ASU 2016‑01 provides that equity investments will be measured at fair value with changes in fair value recognized in net income. When fair value is not readily determinable, an entity may elect to measure the equity investment at cost, minus impairment, plus or minus any change in the investment’s observable price. For financial liabilities that are measured at fair value, the amendment requires an entity to present separately, in other comprehensive income, any change in fair value resulting from a change in instrument-specific credit risk. For public companies, ASU 2016‑01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For non-public companies the ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within the fiscal years beginning after December 31, 2019. Early adoption is permitted. Entities may apply this guidance on a prospective or retrospective basis. ASU 2018‑03, Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825‑10) clarifies certain aspects of ASU 2016‑01 and has the same effective dates for non-public companies. The Corporation is evaluating the effects that ASU 2016‑01 and ASU 2018‑03 will have on our Consolidated Financial Statements and related disclosures upon our adoption as of December 31, 2019.

FASB ASU 2017‑08 (Subtopic 310‑20), “Nonrefundable Fees and Other Costs (Subtopic 310‑20): Premium Amortization on Purchased Callable Debt Securities”

Issued in March 2017, ASU 2017‑08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendment requires the premium to be amortized to the earliest call date. The amendment does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. For non-public companies the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within the fiscal years beginning after December 31, 2020. The Corporation is evaluating the effect that ASU 2017‑08 will have on our Consolidated Financial Statements and related disclosures upon our adoption as of December 31, 2019.

FASB ASU 2017‑12 (Subtopic 815), “Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities”

Issued in August 2017, ASU 2017‑12 better aligns hedge accounting with an organization’s risk management activities in the financial statements. In addition, the ASU simplifies the application of hedge accounting guidance in areas where practice issues exist. Specifically, the proposed ASU eases the requirements for effectiveness testing,

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hedge documentation and application of the shortcut and the critical terms match methods. Entities would be permitted to designate contractually specified components as the hedged risk in a cash flow hedge involving the purchase or sale of nonfinancial assets or variable rate financial instruments. In addition, entities would no longer separately measure and report hedge ineffectiveness. Also, entities, may choose refined measurement techniques to determine the changes in fair value of the hedged item in fair value hedges of benchmark interest rate risk. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020.  Early application is permitted in any interim period after issuance of the ASU for existing hedging relationships on the date of adoption and the effect of adoption should be reflected as of the beginning of the fiscal year of adoption (that is, the initial application date). The Corporation has evaluated ASU 2017‑12, and has determined it has no current hedging strategies for which it plans to implement the ASU but we will consider the impact of the ASU on future hedging strategies that may arise.

 

FASB ASU 2018-16 (Subtopic 815), “Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes”

 

In October 2018 ASU 2018-16 was issued.  The new guidance applies to all entities that elect to apply hedge accounting to benchmark interest rate hedges under Topic 815. It permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes in addition to the existing applicable rates. The guidance is required to be adopted concurrently with ASU 2017-12, on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after adoption. The Corporation will adopt this ASU as of December 31, 2020 and does not anticipate the adoption of this ASU to have a material impact on our Consolidated Financial Statements and related disclosures.

 

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

You should read the following discussion and analysis in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10‑Q and the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2018  (the “2018 10‑K”) included in Meridian Corporation’s Annual Report on Form 10‑K filed with the Securities and Exchange Commission (the “SEC”).

Cautionary Statement Regarding Forward-Looking Statements 

Meridian Corporation (the “Corporation”) may from time to time make written or oral “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to Meridian Corporation’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Meridian Corporation’s control). Numerous competitive, economic, regulatory, legal and technological factors, among others, could cause Meridian Corporation’s financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in such forward-looking statements.   Meridian Corporation cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Meridian Corporation’s filings with the Securities and Exchange Commission (including our Annual Report on Form 10-K for the year ended December 31, 2018) and, for periods prior to the completion of the holding company reorganization, Meridian Bank’s filings with the FDIC, including Meridian Bank’s Annual Report on Form 10-K for the year ended December 31, 2017, subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Meridian Corporation does not undertake to update any forward-looking

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statement whether written or oral, that may be made from time to time by Meridian Corporation or by or on behalf of Meridian Bank.

Critical Accounting Policies, Judgments and Estimates

Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgements are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified the provision and allowance for loan losses as the accounting policy that, due to the estimates, assumptions and judgements inherent in that policy, is critical in understanding our financial statements.  Management has presented the application of this policy to the audit committee of our board of directors.

This critical accounting policy, along with other significant accounting policies, are presented in in Footnote 1 of the Corporation’s Consolidated Financial Statements as of and for the years ended December 31, 2018 and 2017 included in the Annual Report on Form 10‑K.

Executive Overview

The following items highlight the Corporation’s results of operations for the three and nine months ended September 30, 2019, as compared to the same periods in 2018, and the changes in its financial condition as of September 30, 2019 as compared to December 31, 2018. More detailed information related to these highlights can be found in the sections that follow.

Three Month Results of Operations

·

Net income for the three months ended September 30, 2019 was $3.3 million, or $0.52 per diluted share, an increase of $590 thousand as compared to net income of $2.7 million, or $0.42 per diluted share, for the same period in 2018.

·

Return on average equity (“ROE”) and return on average assets (“ROA”) for the three months ended September 30, 2019 were 11.29% and 1.24%, respectively.

·

Net interest income increased $896 thousand, or 10.7%, to $9.3 million for the three months ended September 30, 2019, as compared to $8.4 million for the same period in 2018.

·

Provision for loan and lease losses (the “Provision”) of $705 thousand for the three months ended September 30, 2019 was an increase of $414 thousand from the $291 thousand Provision recorded for the same period in 2018.

·

Non-interest income of $9.8 million for the three months ended September 30, 2019 was a $647 thousand or 7.1% increase from the same period in 2018.

·

Mortgage banking income decreased $364 thousand, or 4.4%, to $7.9 million for the three months ended September 30, 2019, as compared to $8.3 million for the same period in 2018.

·

Non-interest expense of $14.2 million for the three months ended September 30, 2019 increased $399 thousand, or 2.9%, from $13.8 million for the same period in 2018.

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Nine Month Results of Operations

·

Net income for the nine months ended September 30, 2019 was $7.3 million, or $1.14 per diluted share, an increase of $1.5 million as compared to net income of $5.8 million, or $0.90 per diluted share, for the same period in 2018.

·

ROE and ROA for the nine months ended September 30, 2019 were 8.65% and 0.97%, respectively.

·

Net interest income increased $2.5 million, or 10.1%, to $26.7 million for the nine months ended September 30, 2019, as compared to $24.2 million for the same period in 2018.

·

The Provision of $938 thousand for the nine months ended September 30, 2019 was a decrease of $320 thousand from the $1.3 million Provision recorded for the same period in 2018.

·

Non-interest income of $24.2 million for the nine months ended September 30, 2019 was a $703 thousand or 2.8% decrease from the same period in 2018.

·

Mortgage banking income decreased $1.3 million, or 6.2%, to $19.1 million for the nine months ended September 30, 2019, as compared to $20.4 million for the same period in 2018.

·

Non-interest expense of $40.5 million for the nine months ended September 30, 2019 increased $123 thousand, or 0.3%, from $40.4 million for the same period in 2018.

Changes in Financial Condition

·

Total assets of $1.13  billion as of September 30, 2019 increased $129.5 million, or 13.0%, from $997.5 million as of December 31, 2018.

·

Consolidated stockholders’ equity of $117.8 million as of September 30, 2019 increased $8.2 million from $109.6 million as of December 31, 2018.

·

Total portfolio loans and leases, excluding mortgage loans held for sale, as of September 30, 2019 were $935.9 million, an increase of $97.8 million, or 11.7%, from $838.1 million as of December 31, 2018.

·

Total non-performing loans and leases of $3.9 million represented 0.43% of portfolio loans and leases as of September 30, 2019 as compared to $3.9 million, or 0.45% of portfolio loans and leases, as of December 31, 2018.

·

The $9.3 million allowance for loan losses (“Allowance’), as of September 30, 2019, represented 1.01% of portfolio loans and leases, as compared to $8.1 million, or 0.97% of portfolio loans and leases, as of December 31, 2018.

·

Total deposits of $858.5 million as of September 30, 2019 increased $106.3 million, or 14.1%, from $752.1 million as of December 31, 2018.

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Key Performance Ratios

Key financial performance ratios for the three and nine months ended September 30, 2019 and 2018 are shown in the table below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2019

    

2018

    

2019

    

 

2018

 

Annualized return on average equity

 

 

11.29

%  

 

10.16

%  

 

8.65

%  

 

 

7.47

%

Annualized return on average assets

 

 

1.24

%  

 

1.16

%  

 

0.97

%  

 

 

0.87

%

Net interest margin (tax effected yield)

 

 

3.61

%  

 

3.72

%  

 

3.67

%  

 

 

3.83

%

Basic earnings per share

 

$

0.52

 

$

0.43

 

$

1.15

 

 

$

0.91

 

Diluted earnings per share

 

$

0.52

 

$

0.42

 

$

1.14

 

 

$

0.90

 

 

The following table presents certain key period-end balances and ratios as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

(dollars in thousands, except per share amounts)

    

2019

    

2018

 

Book value per common share

 

$

18.38

 

$

17.10

 

Tangible book value per common share

 

$

17.62

 

$

16.31

 

Allowance as a percentage of loans and leases held for investment

 

 

1.01

%  

 

0.97

%

Tier I capital to risk weighted assets

 

 

11.25

%  

 

11.72

%

Tangible common equity ratio (1)

 

 

10.06

%  

 

10.53

%

Loans held for investment

 

$

935,858

 

$

838,106

 

Total assets

 

$

1,126,937

 

$

997,480

 

Stockholders' equity

 

$

117,772

 

$

109,552

 


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

Non-GAAP Financial Measures

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

Meridian believes adjusted net income, adjusted diluted earnings per common share, adjusted ROAA and adjusted ROAE provide a greater understanding of ongoing operations and enhances comparability of results with prior periods. Because management believes that these adjustments are not incurred as a result of ongoing operations, they are not as helpful a measure of the performance of our underlying business, particularly in light of their unpredictable nature and are difficult to forecast. This supplemental presentation should not be construed as an inference that Meridian’s future results will be unaffected by similar adjustments to these measures determined in accordance with GAAP.

 

 

 

 

 

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Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

(Dollars in thousands, except per share data)

 

2019

 

2018

 

 

2019

 

2018

Net income - consolidated

$

3,317

 

2,727

 

$

7,345

 

5,799

Litigation settlement adjustment, net of tax

 

 —

 

 —

 

 

614

 

156

Holding company formation cost adjustment, net of tax

 

 —

 

179

 

 

 —

 

179

Contingent asset fair value adjustment, net of tax

 

 —

 

138

 

 

 —

 

138

Adjusted net income - consolidated(1)

$

3,317

 

3,044

 

$

7,959

 

6,272

 

 

 

 

 

 

 

 

 

 

Net income per common share, diluted

$

0.52

 

0.42

 

$

1.14

 

0.90

Litigation settlement adjustment, net of tax

 

 —

 

 —

 

 

0.10

 

0.02

Holding company formation cost adjustment, net of tax

 

 —

 

0.03

 

 

 —

 

0.03

Contingent asset fair value adjustment, net of tax

 

 —

 

0.02

 

 

 —

 

0.02

Adjusted diluted earnings per share(1)

 

0.52

 

0.47

 

 

1.24

 

0.97

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2019

 

2018

 

 

2019

 

2018

Return on average assets - consolidated

 

1.24%

 

1.16%

 

 

0.97%

 

0.87%

Adjusted return on average assets - consolidated(1)

 

1.24%

 

1.29%

 

 

1.05%

 

0.94%

Return on average equity - consolidated

 

11.29%

 

10.19%

 

 

8.65%

 

7.49%

Adjusted return on average equity - consolidated(1)

 

11.29%

 

11.34%

 

 

9.38%

 

8.10%

(1)

Adjusted net income, adjusted diluted earnings per common share, adjusted ROAA and adjusted ROAE are non-GAAP measures and remove the tax effect of the charges to earnings for the settlement of outstanding litigation ($176 thousand and $44 thousand for nine months ended September 30, 2019 and 2018, respectively),  of holding company formation costs ($51 thousand for the three and nine months ended September 30, 2018), and the fair value adjustment to contingent assets ($39 thousand for the three and nine months ended September 30, 2018).

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. The table below provides the non-GAAP reconciliation for our tangible common equity ratio:

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

(dollars in thousands)

    

2019

    

2018

Tangible common equity ratio:

 

 

 

 

Total stockholders' equity

 

117,772

 

109,552

Less:

 

 

 

 

Goodwill

 

899

 

899

Intangible assets

 

3,942

 

4,147

Tangible common equity

 

112,931

 

104,506

Total assets

 

1,126,937

 

997,480

Less:

 

 

 

 

Goodwill

 

899

 

899

Intangible assets

 

3,942

 

4,147

Tangible assets

$

1,122,096

 

992,434

Tangible common equity ratio

 

10.06%

 

10.53%

 

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The following sections discuss, in detail, the Corporation’s results of operations for the three and nine months ended September 30, 2019, as compared to the same periods in 2018, and the changes in its financial condition as of September 30, 2019 as compared to December 31, 2018.

Components of Net Income

Net income is comprised of five major elements:

·

Net Interest Income, or the difference between the interest income earned on loans, leases and investments and the interest expense paid on deposits and borrowed funds;

·

Provision For Loan and Lease Losses, or the amount added to the Allowance to provide for estimated inherent losses on portfolio loans and leases;

·

Non-interest Income, which is made up primarily of mortgage banking income, wealth management income, gains and losses from the sale of loans, gains and losses from the sale of investment securities available for sale and other fees from loan and deposit services;

·

Non-interest Expense, which consists primarily of salaries and employee benefits, occupancy, loan expenses, professional fees and other operating expenses; and

·

Income Taxes, which include state and federal jurisdictions.

NET INTEREST INCOME

Net interest income is an integral source of the Corporation’s revenue. The tables below present a summary, for the three and nine months ended September 30, 2019 and 2018, 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, 2019 was $13.6 million, which represented a $2.0 million, or 17.4%, increase compared with the three months ending September 30, 2018.  The increase in income was attributable to a $124.9 million increase in average interest earning assets, year over year, helped by an increase of 17 basis points in yield on earning assets, to 5.29% from 5.12%, for same period in 2018.  The commercial loan portfolio yield, in particular, rose 27 basis points over the same period in 2018, while the yield on construction loans increased 22 basis points over the same period. Total interest expense rose $1.1 million or 35.1% to $4.3 million for the three months ending September 30, 2019, compared with $3.2 million for the three months ending September 30, 2018. The increase was primarily due to an overall increase of 31 basis points in the cost of interest-bearing funds reflective of the overall increase in market rates.

Net interest income increased $900 thousand, or 10.7%, to $9.3 million for the three months ended September 30, 2019, compared to $8.4 million for the three months ended September 30, 2018.  The net-interest margin decreased 11 basis points for the three months ending September 30, 2019 at 3.61%, compared with 3.72% for the three month ending September 30, 2018.  The decrease in net interest margin reflects the pressure from the rising cost of funds, which has outpaced the favorable trend in yield on interest earning assets during the quarter.  The strength in the Corporation’s net-interest margin in the face of rising cost of funds reflects the size and asset quality of the loan portfolio, as well as the $3.6 million or 3.0% increase in average non-interest bearing deposits period over period.

Total interest income for the nine months ending September 30, 2019 was $39.0 million, which represented a $6.8 million, or 21.2%, increase compared with the nine months ending September 30, 2018. The increase in income was attributable to a $128.3 million increase in average interest earning assets, year over year, helped by an increase of 28 basis points in

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yield on earning assets, to 5.35% from 5.07%, for same period in 2018. The commercial loan portfolio yield, in particular, rose 41 basis points over the same period in 2018. Total interest expense rose $4.3 million or 54.7% to $12.3 million for the nine months ending September 30, 2019, compared with $8.0 million for the nine months ending September 30, 2018. The increase was primarily due to an overall increase of 54 basis points in the cost of interest-bearing funds reflective of the overall increase in market rates and an increase in average total interest bearing deposits of $122.2 million.

Net interest income increased $2.5 million, or 10.1%, to $26.7 million for the nine months ended September 30, 2019, compared to $24.2 million for the nine months ended September 30, 2018. The net-interest margin  decreased 16 basis points for the nine months ending September 30, 2019 at 3.67%, compared with 3.83% for the nine month ending September 30, 2018. The decrease in net interest margin reflects the pressure from the rising cost of funds, which has outpaced the favorable trend in yield on interest earning assets during the nine month period.  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.

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

2018

 

 

 

 

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

 

$

5,074

 

 

35

 

2.69%

 

$

5,872

 

 

28

 

1.89%

Federal funds sold

 

 

633

 

 

 3

 

2.12%

 

 

477

 

 

 2

 

1.87%

Investment securities(1)

 

 

63,488

 

 

414

 

2.59%

 

 

57,574

 

 

350

 

2.41%

Loans held for sale

 

 

38,633

 

 

381

 

3.95%

 

 

39,847

 

 

462

 

4.64%

Loans held for investment(1)

 

 

912,781

 

 

12,773

 

5.53%

 

 

791,914

 

 

10,758

 

5.36%

Total loans

 

 

951,414

 

 

13,154

 

5.49%

 

 

831,761

 

 

11,220

 

5.33%

Total interest-earning assets

 

 

1,020,609

 

 

13,606

 

5.29%

 

 

895,684

 

 

11,600

 

5.12%

Noninterest earning assets

 

 

38,846

 

 

 

 

 

 

 

40,645

 

 

 

 

 

Total assets

 

$

1,059,455

 

 

 

 

 

 

$

936,329

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

86,005

 

 

352

 

1.63%

 

$

104,857

 

 

351

 

1.33%

Money market and savings deposits

 

 

313,255

 

 

1,374

 

1.74%

 

 

238,086

 

 

919

 

1.53%

Time deposits

 

 

319,208

 

 

1,907

 

2.37%

 

 

257,250

 

 

1,215

 

1.87%

Total deposits

 

 

718,468

 

 

3,633

 

2.01%

 

 

600,193

 

 

2,485

 

1.64%

Short-term borrowings

 

 

75,249

 

 

458

 

2.42%

 

 

85,026

 

 

491

 

2.29%

Long-term borrowings

 

 

5,962

 

 

56

 

3.72%

 

 

6,650

 

 

48

 

2.86%

Total Borrowings

 

 

81,211

 

 

514

 

2.51%

 

 

91,676

 

 

539

 

2.33%

Subordinated Debentures

 

 

9,176

 

 

169

 

7.33%

 

 

9,308

 

 

171

 

7.30%

Total interest-bearing liabilities

 

 

808,855

 

 

4,316

 

2.12%

 

 

701,177

 

 

3,195

 

1.81%

Noninterest-bearing deposits

 

 

126,101

 

 

 

 

 

 

 

122,454

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

7,952

 

 

 

 

 

 

 

6,193

 

 

 

 

 

Total liabilities

 

$

942,908

 

 

 

 

 

 

$

829,824

 

 

 

 

 

Total stockholders' equity

 

 

116,547

 

 

 

 

 

 

 

106,505

 

 

 

 

 

Total stockholders' equity and liabilities

 

$

1,059,455

 

 

 

 

 

 

$

936,329

 

 

 

 

 

Net interest income

 

 

 

 

$

9,290

 

 

 

 

 

 

$

8,405

 

 

Net interest spread

 

 

 

 

 

 

 

3.17%

 

 

 

 

 

 

 

3.31%

Net interest margin

 

 

 

 

 

 

 

3.61%

 

 

 

 

 

 

 

3.72%

(1)

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

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

2018

 

 

 

 

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

 

$

6,450

 

 

121

 

2.51%

 

$

5,175

 

 

64

 

1.66%

Federal funds sold

 

 

853

 

 

15

 

2.27%

 

 

784

 

 

11

 

1.89%

Investment securities(1)

 

 

63,135

 

 

1,226

 

2.60%

 

 

54,144

 

 

958

 

2.37%

Loans held for sale

 

 

25,782

 

 

813

 

4.21%

 

 

31,074

 

 

1,017

 

4.36%

Loans held for investment(1)

 

 

879,184

 

 

36,880

 

5.58%

 

 

755,925

 

 

30,209

 

5.28%

Total loans

 

 

904,966

 

 

37,693

 

5.57%

 

 

786,999

 

 

31,226

 

5.28%

Total interest-earning assets

 

 

975,404

 

 

39,055

 

5.35%

 

 

847,102

 

 

32,259

 

5.07%

Noninterest earning assets

 

 

37,753

 

 

 

 

 

 

 

41,393

 

 

 

 

 

Total assets

 

$

1,013,157

 

 

 

 

 

 

$

888,495

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

94,295

 

 

1,122

 

1.59%

 

$

103,623

 

 

851

 

1.10%

Money market and savings deposits

 

 

297,471

 

 

3,977

 

1.79%

 

 

228,107

 

 

2,212

 

1.30%

Time deposits

 

 

309,434

 

 

5,485

 

2.37%

 

 

247,244

 

 

3,109

 

1.68%

Total deposits

 

 

701,200

 

 

10,584

 

2.02%

 

 

578,974

 

 

6,172

 

1.43%

Short-term borrowings

 

 

53,865

 

 

1,109

 

2.75%

 

 

70,959

 

 

1,123

 

2.12%

Long-term borrowings

 

 

5,997

 

 

114

 

2.54%

 

 

6,720

 

 

142

 

2.83%

Total Borrowings

 

 

59,862

 

 

1,223

 

2.73%

 

 

77,679

 

 

1,265

 

2.18%

Subordinated Debentures

 

 

9,197

 

 

508

 

7.37%

 

 

9,527

 

 

525

 

7.37%

Total interest-bearing liabilities

 

 

770,259

 

 

12,315

 

2.14%

 

 

666,180

 

 

7,962

 

1.60%

Noninterest-bearing deposits

 

 

122,101

 

 

 

 

 

 

 

112,616

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

6,997

 

 

 

 

 

 

 

5,895

 

 

 

 

 

Total liabilities

 

$

899,357

 

 

 

 

 

 

$

784,691

 

 

 

 

 

Total stockholders' equity

 

 

113,800

 

 

 

 

 

 

 

103,804

 

 

 

 

 

Total stockholders' equity and liabilities

 

$

1,013,157

 

 

 

 

 

 

$

888,495

 

 

 

 

 

Net interest income

 

 

 

 

$

26,740

 

 

 

 

 

 

$

24,297

 

 

Net interest spread

 

 

 

 

 

 

 

3.22%

 

 

 

 

 

 

 

3.47%

Net interest margin

 

 

 

 

 

 

 

3.67%

 

 

 

 

 

 

 

3.83%

 


(1)

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

 

 

 

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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, 2019 as compared to the same period  in 2018, allocated by rate and volume. Changes in interest income and/or expense attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of the change in each category.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019 Compared to 2018

 

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

(dollars in thousands)

Rate

    

Volume

    

Total

 

Rate

    

Volume

    

Total

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Due from banks

$

28

 

(21)

 

 7

 

$

39

 

18

 

57

Federal funds sold

 

 —

 

 1

 

 1

 

 

 3

 

 1

 

 4

Investment securities(1)

 

27

 

37

 

64

 

 

98

 

170

 

268

Loans held for sale

 

(67)

 

(14)

 

(81)

 

 

(35)

 

(169)

 

(204)

Loans held for investment(1)

 

342

 

1,673

 

2,015

 

 

1,725

 

4,946

 

6,671

Total loans

 

275

 

1,659

 

1,934

 

 

1,690

 

4,777

 

6,467

Total interest income

$

330

 

1,676

 

2,006

 

$

1,830

 

4,966

 

6,796

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest checking

$

278

 

(277)

 

 1

 

$

396

 

(125)

 

271

Money market and savings deposits

 

138

 

317

 

455

 

 

975

 

790

 

1,765

Time deposits

 

364

 

328

 

692

 

 

1,474

 

902

 

2,376

Total interest-bearing deposits

 

780

 

368

 

1,148

 

 

2,845

 

1,567

 

4,412

Short-term borrowings

 

134

 

(167)

 

(33)

 

 

393

 

(407)

 

(14)

Long-term borrowings

 

35

 

(27)

 

 8

 

 

(14)

 

(14)

 

(28)

Total borrowings

 

169

 

(194)

 

(25)

 

 

379

 

(421)

 

(42)

Subordinated debentures

 

 4

 

(6)

 

(2)

 

 

 —

 

(17)

 

(17)

Total interest expense

 

953

 

168

 

1,121

 

 

3,224

 

1,129

 

4,353

Interest differential

$

(623)

 

1,508

 

885

 

$

(1,394)

 

3,837

 

2,443


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

For the three months ended September 30, 2019 as compared to the same period in 2018, interest income increased $2.0 million as volume changes in average earning assets contributed $1.7 million and favorable rate changes contributed $330 thousand.  The favorable change in net interest income due to volume changes was driven largely from growth in the loan  portfolio, which increased $119.7 million on average over the three month periods.  Total investment securities helped increase interest income $64 thousand,  while cash and cash equivalents contributed $8 thousand to interest income,  due to rate changes, period over period. In addition to favorable volume changes, favorable loan rate changes of 17 basis points contributed $342 thousand to interest income while investments rate changes of 18 basis points contributed $27 thousand.

On the funding side, interest expense increased $1.1 million due largely to rate changes. Higher rates on cost of funds, particularly from borrowings and time deposits, which rose 18 and 50 basis points, respectively, increased interest expense by $533 thousand.  Core deposits, such as interest checking and money market accounts rose 30 and 21 basis points, respectively, increasing interest expense $416 thousand. In addition, interest checking and money market accounts together rose $56.3 million on average, reducing net interest income by $40 thousand. Time deposits increased $62.0 million on average, causing an increase to interest expense of $328 thousand. These unfavorable changes were partially offset by favorable volume changes, particularly in borrowings. Borrowings decreased $10.5 million on average affecting net interest income $194 thousand positively, and lower levels of subordinated debt contributed $6 thousand to net interest income over the three month periods compared. Overall, the increase in interest income from volume changes contributed $1.5 million and out-paced the unfavorable rate changes to improve net interest income by $885 thousand.

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Table of Contents

For the nine months ended September 30, 2019 as compared to the same period in 2018, interest income increased $6.8 million. The favorable change in net interest income due to volume changes was driven largely from growth in the loan portfolio, which increased $118.0 million on average over the nine month periods. This increase contributed $4.8 million to interest income. Total investment securities contributed $170 thousand to interest income due to volume changes, while cash and cash equivalents contributed another $19 thousand, period over period. In addition, interest income increased $1.8 million due to favorable rate changes in interest earning assets as the yield on loans overall increased 28 basis points.

On the funding side, interest expense increased $4.4 million due largely to unfavorable rate changes. Borrowings and time deposits, which rose 55 and 69 basis points, respectively and core deposits, such as interest checking and money market accounts each rose 49 basis points, contributing to an increase in interest expense of $2.9 million.  Also contributing to higher interest expense, were higher levels of deposit balances. Interest checking and money market accounts together rose $60.0 million on average, reducing net interest income by $665 thousand. Time deposits increased $62.2 million on average, causing an increase to interest expense of $902 thousand. Partially offsetting the effect of higher deposit balances, borrowings decreased $17.8 million on average affecting net interest income $421 thousand positively, and lower levels of subordinated debt contributed $17 thousand to the net interest income over the nine month periods compared. Overall, the increase in interest income from volume changes contributed $3.8 million and out-paced the unfavorable rate changes to improve net interest income by $2.4 million.

Simulations of net interest income. We use a simulation model on a quarterly basis to measure and evaluate potential changes in our net interest income resulting from various hypothetical interest rate scenarios. Our model incorporates various assumptions that management believes to be reasonable, but which may have a significant impact on results such as:

·

The timing of changes in interest rates;

·

Shifts or rotations in the yield curve;

·

Repricing characteristics for market rate sensitive instruments on the balance sheet;

·

Differing sensitivities of financial instruments due to differing underlying rate indices;

·

Varying timing of loan prepayments for different interest rate scenarios;

·

The effect of interest rate floors, periodic loan caps and lifetime loan caps;

·

Overall growth rates and product mix of interest-earning assets and interest-bearing liabilities.

Because of the limitations inherent in any approach used to measure interest rate risk, simulated results are not intended to be used as a forecast of the actual effect of a change in market interest rates on our results, but rather as a means to better plan and execute appropriate Asset / Liability Management (“ALM”) strategies.

Potential changes to our net interest income between a flat interest rate scenario and hypothetical rising and declining interest rate scenarios, measured over a one-year period as of September 30, 2019 and 2018  are presented in the following table. The simulation assumes rate shifts occur upward and downward on the yield curve in even increments over the first twelve months (ramp), followed by rates held constant thereafter.

Rate Ramp

 

 

 

 

 

 

 

 

Estimated increase

 

 

 

(decrease) in Net Interest

 

 

 

Income

 

 

 

For the year ending

 

 

 

September 30, 

 

Changes in Market Interest Rates

    

2019

    

2018

 

+300 basis points over next 12 months

 

0.29

%  

(0.17)

%

+200 basis points over next 12 months

 

0.32

%  

(0.15)

%

+100 basis points over next 12 months

 

0.23

%  

(0.08)

%

No Change

 

  

 

  

 

-100 basis points over next 12 months

 

(0.68)

%

0.07

%

 

The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of September 30, 2019 and was slightly liability sensitive as of September 30, 2018.  In its current position, the table indicates that a 100, 200 or

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300 basis point increase in interest rates would have a modestly positive impact from rising rates on net interest income over the next 12 months. The simulated exposure to a change in interest rates is contained, manageable and well within policy guidelines. The results continue to drive our funding strategy of increasing relationship-based accounts (core deposits) and utilizing term deposits to fund short to medium duration assets.

Simulation of economic value of equity. To quantify the amount of capital required to absorb potential losses in value of our interest-earning assets and interest-bearing liabilities resulting from adverse market movements, we calculate economic value of equity on a quarterly basis. We define economic value of equity as the net present value of our balance sheet’s cash flow, and we calculate economic value of equity by discounting anticipated principal and interest cash flows under the prevailing and hypothetical interest rate environments. Potential changes to our economic value of equity between a flat rate scenario and hypothetical rising and declining rate scenarios, measured as of  September 30, 2019 and 2018, are presented in the following table. The projections assume shifts ramp upward and downward of the yield curve of 100, 200 and 300 basis points occurring immediately. We would note that in a downward parallel shift of the yield curve, interest rates at the short-end of the yield curve are not modeled to decline any further than to 0%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated increase (decrease) in Net

 

 

 

Economic Value at September 30, 

 

Changes in Market Interest Rates

    

2019

 

2018

 

+300 basis points

 

27.00

%  

5.46

%  

+200 basis points

 

22.00

%  

4.85

%  

+100 basis points

 

14.00

%  

3.40

%  

No Change

 

  

 

  

 

-100 basis points

 

(22.00)

%

(6.57)

%

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.

 

 

 

 

 

 

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Table of Contents

The following tables present the interest rate gap analysis of our assets and liabilities as of September 30, 2019 and December 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater 

 

 

 

 

 

 

 

 

 

 

 

Than 

 

 

 

 

 

 

 

 

 

 

5 years and

 

 

As of September 30, 2019

 

12 Months

 

 

 

 

 

 Not Rate 

 

 

(dollars in thousands)

    

or Less

    

1-2 Years

    

2-5 Years

    

Sensitive

    

Total

Cash and investments

 

$

61,341

 

3,683

 

9,387

 

27,692

 

102,103

Loans, net (1)

 

 

554,324

 

145,497

 

236,251

 

39,089

 

975,161

Other Assets

 

 

 —

 

 —

 

 —

 

49,673

 

49,673

Total Assets

 

$

615,665

 

149,180

 

245,638

 

116,454

 

1,126,937

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

15,688

 

9,312

 

16,322

 

87,980

 

129,302

Interest-bearing deposits

 

 

408,231

 

 —

 

 —

 

 —

 

408,231

Time deposits

 

 

295,824

 

21,369

 

3,735

 

 —

 

320,928

FHLB advances

 

 

127,847

 

3,123

 

 —

 

 —

 

130,970

Other Liabilities

 

 

619

 

 —

 

7,381

 

11,735

 

19,735

Total stockholders' equity

 

 

 —

 

 —

 

 —

 

117,772

 

117,772

Total liabilities and stockholders' equity

 

$

848,209

 

33,804

 

27,438

 

217,487

 

1,126,937

Repricing gap-positive

 

 

 

 

 

 

 

 

 

 

 

(Negative) Positive

 

$

(232,544)

 

115,376

 

218,200

 

(101,033)

 

 —

Cumulative repricing gap: Dollar amount

 

$

(232,544)

 

(117,168)

 

101,033

 

 —

 

 

Percent of total assets

 

 

(20.6)%

 

(10.4)%

 

9.0%

 

 —

 

 


(1)

Loans include portfolio loans and loans held for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater

 

 

 

 

 

 

 

 

 

 

 

Than

 

 

 

 

 

 

 

 

 

 

 

 5 years and

 

 

As of December 31, 2018

 

 

 

 

 

 

 

 Not Rate

 

 

(dollars in thousands)

    

12 Months

    

1-2 Years

    

2-5 Years

    

 Sensitive

    

Total

Cash and investments

 

$

51,092

 

4,268

 

12,183

 

19,578

 

87,121

Loans, net (1)

 

 

476,250

 

104,422

 

246,523

 

48,606

 

875,801

Other Assets (Footnote 1)

 

 

 —

 

 —

 

 —

 

34,558

 

34,558

Total Assets

 

 

527,342

 

108,690

 

258,706

 

102,742

 

997,480

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

17,943

 

9,013

 

15,852

 

83,342

 

126,150

Interest-bearing deposits

 

 

347,264

 

 —

 

 —

 

 —

 

347,264

Time deposits

 

 

253,090

 

13,426

 

12,200

 

 —

 

278,716

FHLB advances

 

 

114,300

 

5,000

 

 —

 

 —

 

119,300

Other Liabilities (Footnote 1)

 

 

825

 

412

 

344

 

14,917

 

16,498

Total stockholders' equity (Footnote 1)

 

 

 —

 

 —

 

 —

 

109,552

 

109,552

Total liabilities and stockholders' equity

 

$

733,422

 

27,851

 

28,396

 

207,811

 

997,480

Repricing gap-positive

 

 

 

 

 

 

 

 

 

 

 

(Negative) Positive

 

 

(206,080)

 

80,839

 

230,310

 

(105,069)

 

 —

Cumulative repricing gap: Dollar amount

 

$

(206,080)

 

(125,241)

 

105,069

 

 —

 

 

Percent of total assets

 

 

(20.7)

%  

(12.6)

%  

10.5

%  

 —

 

 


(1)

Loans include portfolio loans and loans held for sale

Under the repricing gap analysis for both periods, we are liability-sensitive in the short-term mainly due to recent loan growth which has out-paced our core deposit growth. In addition, customer preference has been for short-term or liquid deposits. We generally manage our interest rate risk profile close to neutral, using a strategy that is focused on increasing our concentration of relationship-based transaction accounts through efforts of our business developers and new branches. The gap results presented could vary substantially if different assumptions are used or if actual experience differs from the

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Table of Contents

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, 2019, the Corporation recorded a Provision of $705 thousand which was a $414 thousand increase from the same period in 2018. For the three months ended September 30, 2019 there were net charge-offs of $18 thousand as compared to net charge-offs of $29 thousand for the same period in 2018.  

For the nine months ended September 30, 2019, the Corporation recorded a Provision of $938 thousand which was a $320 thousand decrease from the same period in 2018. For the nine months ended September 30, 2019 there were net recoveries of $321 thousand as compared to net charge-offs of $256 thousand for the same period in 2018. The decreased provision over the nine month periods was the result of net recoveries and lower levels of loan growth period over period. 

Asset Quality and Analysis of Credit Risk

Total nonperforming loans and leases remained unchanged at $3.9 million at both September 30, 2019 and December 31, 2018, but dropped to 0.43%  of loans and leases held-for-investment, excluding loans at fair value, as of September 30, 2019, compared to 0.48%  as of December 31, 2018.  Nonaccrual loans at September 30, 2019, included within nonperforming assets, also remained unchanged from December 31, 2018.  As a result of current asset quality and the low level of net charge-offs for the three months ended September 30, 2019, the ratio of the Allowance to total loans held for investment, excluding loans at fair value, improved to 1.01%, from the 0.97% as of December 31, 2018.  The Allowance to non-performing loans increased from 204.85% as of December 31, 2018 to 236.95% as of September 30, 2019.

The Corporation had one property in OREO as of September 30, 2019 in the amount of $120 thousand. There were no properties in OREO as of December 31, 2018.  

As of September 30, 2019, the Corporation had $4.0 million of troubled debt restructurings (“TDRs”), of which $2.9 million were in compliance with the modified terms and excluded from non-performing loans and leases. As of December 31, 2018, the Corporation had $4.3 million of TDRs, of which $3.1 million were in compliance with the modified terms, and were excluded from non-performing loans and leases. As of September 30, 2019, the Corporation  had a recorded investment of $6.0 million of impaired loans and leases which included $4.0 million of TDRs.

The Corporation continues to be diligent in its credit underwriting process and proactive with its loan review process, including the engagement of the services of an independent outside loan review firm, which helps identify developing credit issues. Proactive steps that are taken include the procurement of additional collateral (preferably outside the current loan structure) whenever possible and frequent contact with the borrower. The Corporation believes that timely identification of credit issues and appropriate actions early in the process serve to mitigate overall risk of loss.

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Table of Contents

Nonperforming Assets and Related Ratios

 

 

 

 

 

 

 

 

 

As of

 

 

September 30, 

 

December 31, 

(dollars in thousands)

    

2019

    

2018

Non-performing assets:

 

 

 

 

 

 

Nonaccrual loans:

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

Commercial mortgage

 

$

1,549

 

$

1,224

Home equity lines and loans

 

 

257

 

 

83

Residential mortgage

 

 

1,698

 

 

2,147

Total real estate loans

 

$

3,504

 

$

3,454

Commercial and industrial

 

 

426

 

 

477

Total nonaccrual loans

 

$

3,930

 

$

3,931

Other real estate owned

 

 

120

 

 

 —

Total non-performing loans

 

$

3,930

 

$

3,931

Total non-performing assets

 

$

4,050

 

$

3,931

 

 

 

 

 

 

 

Troubled debt restructurings:

 

 

 

 

 

 

TDRs included in non-performing loans

 

 

1,133

 

 

1,219

TDRs in compliance with modified terms

 

 

2,880

 

 

3,047

Total TDRs

 

$

4,013

 

$

4,266

 

 

 

 

 

 

 

Asset quality ratios:

 

 

 

 

 

 

Non-performing assets to total assets

 

 

0.36%

 

 

0.39%

Non-performing loans to:

 

 

 

 

 

 

Total loans

 

 

0.40%

 

 

0.45%

Total loans held-for-investment (excluding loans at fair value)

 

 

0.43%

 

 

0.48%

Allowance for loan losses to:

 

 

 

 

 

 

Total loans

 

 

0.95%

 

 

0.92%

Total loans held-for-investment (excluding loans at fair value)

 

 

1.01%

 

 

0.97%

Non-performing loans  

 

 

236.95%

 

 

204.85%

 

 

 

 

 

 

 

Total loans and leases

 

$

984,473

 

$

875,801

Total loans and leases held-for-investment

 

$

935,858

 

$

838,106

Total loans and leases held-for-investment (excluding loans at fair value)

 

$

924,580

 

$

826,684

Allowance for loan and lease losses

 

$

9,312

 

$

8,053

 

NON-INTEREST INCOME

Three Months Ended September 30, 2019 Compared to the Same Period in 2018

Total non-interest income for the third quarter of 2019 was $9.8 million, up $647 thousand, or 7.1%, from the comparable period in 2018. The increase in non-interest income for the third quarter of 2019 compared to the third quarter in 2018 was primarily the result of $645 thousand in SBA income recognized on the sales of SBA loans, in addition to gains on sale of investment securities of $74 thousand.  There were no SBA loan sales or sales of securities in the prior year comparable period. Offsetting somewhat these increases in non-interest income, was a decline of $364 thousand in mortgage banking income. 

Mortgage banking revenue, for the three months ended September 30, 2019, was $7.9 million, down $364 thousand, or 4.4%, from the comparable period in 2018. This decline in mortgage banking revenue was due primarily to a decline in mortgage originations year over year, despite an increase in the margin on loan sales of 40 basis points for the three months, year over year.  The net change in fair value of mortgage banking related financial instruments increased $363 thousand for the three months ended September 30, 2019, compared to the same period in 2018.  Additionally, realized losses on

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derivatives related to mortgage banking, included in other non-interest income, increased $129 thousand for the three months ended September 30, 2019 to a loss of $299 thousand, compared to a loss of $170 thousand for the same period in 2018.

Nine Months Ended September 30, 2019 Compared to the Same Period in 2018

Total non-interest income for the nine months ended September 30, 2019 was $24.2 million, down $703 thousand, or 2.8%, from the comparable period in 2018. The overall decrease in non-interest income came primarily from our mortgage division.  Also affecting non-interest income, wealth management revenue was down $298 thousand for the nine months ended September 30, 2019 compared to the same period in 2018.  Fee income reflected market value changes in assets under management, which although up at September 30, 2019 compared to September 30, 2018, were at lower levels in the prior period on which fees were based.  The decrease in non-interest income was  partially offset by $1.2 million in SBA loan income, largely from gains recognized on the sale of SBA loans, as well as $212 thousand in gain on sale of securities. There were no SBA loan sales or sales of securities in the prior year comparable period, as noted above. The new SBA lending team, brought on late in 2018, originated $25.4 million in SBA loans during the first nine months of 2019.

Mortgage banking revenue, for the nine months ended September  30, 2019, was $19.1 million, down $1.3 million or 6.2%, from the comparable period in 2018. The decline in mortgage banking revenue was due primarily to a decline in mortgage originations year over year, despite an increase in the margin on loan sales of 31 basis points for the nine months, due in part to rising interest rates year over year. The net change in fair value of mortgage banking related financial instruments increased $763 thousand for the nine months ended September 30, 2019, compared to the same period in 2018. Additionally, realized gains on derivatives related to mortgage banking, included in other non-interest income, decreased $1.3 million for the nine months ended September 30, 2019 to a loss of $792 thousand, compared to a gain of $534 thousand for the same period in 2018.

 

NON-INTEREST EXPENSE

Three Months Ended September 30, 2019 Compared to the Same Period in 2018

Total non-interest expense was $14.2 million for the three months ended September 30, 2019, up $399 thousand, or 2.9%, from $13.8 million for the three months ended September 30, 2018.  There was a $418 thousand or 4.7% increase in salaries and employee benefits for the third quarter of 2019 compared to the same period in 2018 due to the increase in corporate employees. Occupancy and equipment expense was up $26 thousand or 2.8% for the three month due to increased rental space for Philadelphia offices. In addition, variable loan expenses decreased by $11 thousand over the three month period ended September 30, 2019, reflecting the lower level of mortgage originations year-over-year. Professional fees were up $106 thousand,  or 14.8%, for the three month period ended September 30, 2019.  For the third quarter of 2019, professional fees were up due to accounting and compliance fees related to public reporting requirements and mortgage compliance.  Advertising and promotion expenses were down slightly over the three month period due to the timing and number of promotional events held.  Data processing and information technology expenses were up over the three month period due to increased customer transaction volume.  Communications expense decreased over these same period as the number of office locations declined from the prior year. 

Other non-interest expenses decreased $157 thousand to $903 thousand for the third quarter of 2019, compared to the third quarter a year ago.  The decrease was primarily related to a $199 thousand credit of FDIC insurance related to the Small Bank Assessment Credit. 

 

 

 

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Nine Months Ended September 30, 2019 Compared to the Same Period in 2018

Total non-interest expense was $40.5 million for first nine months of the year, up $123 thousand, or 0.30%, from $40.4 million for the same period in the 2018.  There was a reduction in salaries and employee benefits expense of $930 thousand or 3.5% for the nine months ended September 30, 2019 compared to prior year, as full-time equivalent employees, particularly in the mortgage division declined. Occupancy and equipment expense was relatively flat (down 0.9%) for the nine  month periods. In addition, variable loan expenses decreased by $85 thousand over the nine month period ended September 30, 2019, reflecting the lower level of mortgage originations year-over-year. Professional fees were up $330 thousand, or 19.8%, for the nine month periods ended September 30, 2019.  For the nine month period, the higher professional fee were due largely attributable to legal and accounting fees incurred as part of the Maryland mortgage licensing issue in the first quarter, in addition to legal fees incurred related to the litigation matter discussed below.  Advertising and promotion expenses were down slightly over the nine month period due to the timing and number of promotional events held.  Data processing and information technology expenses were up over the nine month periods due to increased customer transaction volume.  Communications expense decreased over the nine month periods as the number of office locations declined from the prior year. 

In the first nine months of 2019, non-interest expenses increased $890 thousand to $3.8 million when compared to the prior year period. The settlement of the outstanding litigation matter contributed $790 thousand to other non-interest expense for the first nine months of 2019, along with $79 thousand of other expense incurred for the previously disclosed Maryland mortgage licensing issue.  Increase in the PA shares tax assessment due to the growth of the Bank also contributed to higher non-interest expenses during the year-to-date period, from the same period in the prior year.

 

INCOME TAXES

Income tax expense for the three months ended September 30, 2019 was $914 thousand, as compared to $774 thousand for the same period in 2018.  The increase in income tax expense was entirely attributable to the increase in earnings, period over period. Our effective tax rate was 21.6% for the third quarter of 2019 and 22.1% for the third quarter of 2018.    

Income tax expense for the nine months ended September 30, 2019 was $2.1 million, as compared to $1.7 million for the same period in 2018.  The increase in income tax expense was entirely attributable to the increase in earnings, period over period.  Our effective tax rate was 22.0% for the first nine months of 2019 and 22.3% for the first nine months of 2018.    

 

BALANCE SHEET ANALYSIS

As of September 30, 2019, total assets were $1.13 billion compared with $997.5 million as of December 31, 2018. Total assets increased $129.5 million, or 13.0%, on a year-to-date basis primarily due to strong loan growth.

Total loans, excluding mortgage loans held for sale, increased $97.8 million, or 11.7%, from $838.1 million as of December 31, 2018. The increase in loans is attributable to our expanding presence in the Philadelphia market area, which continues to show growth in real estate investments. Commercial loans increased a net $15.7 million, or 6.2%, year-over-year.  Commercial real estate and commercial construction loans combined increased $69.3 million, or 15.7%, year-over-year. SBA loans increased $8.9 million or 155.1%, as a result of the new lending team hired in the fourth quarter of 2018.  Residential loans held in portfolio increased $2.9 million, or 5.4%, year-over-year as certain loan products or terms were targeted to hold in portfolio. Residential mortgage loans held for sale increased $14.6 million, or 42.8%, to $48.6 million as of September 30, 2019 from September 30, 2018 fueled by the recent lower rates.

Deposits were $858.5 million as of September 30, 2019, up $106.3 million, or 14.1%, from December 31, 2018. Non-interest bearing deposits increased $3.2 million, or 2.5%, from December 31, 2018. Money market accounts/savings accounts increased $95.0 million, or 40.8%, since December 31, 2018 due to new or increased business money market

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accounts.  Interest-bearing checking accounts decreased $34.0 million or 29.7% from December 31, 2018.  Municipal checking accounts declined $20.5 million during the first nine months 2019, which accounted for most of the change.  Certificates of deposit increased $42.2 million, or 15.1%, since December 31, 2018.  Borrowings were $131.6 million as of September 30, 2019, up $11.1 million, or 9.2%, from December 31, 2018. These increases, led by short-term borrowings, were used to help fund loan growth, along with the deposit growth noted above.

 

Capital

Consolidated stockholders’ equity of the Corporation was $117.8 million, or 10.45% of total assets as of September 30, 2019, as compared to $109.6 million, or 11.00% of total assets as of December 31, 2018. As of September 30, 2019, the Tier 1 leverage ratio was 10.69%, the Tier 1 risk-based capital and common equity ratios were 11.25%, and total risk-based capital was 13.11%. Quarter-end numbers show a tangible common equity to tangible assets ratio of 10.06%. Tangible book value per share was $17.62 as of September 30, 2019, compared with $16.31 as of December 31, 2018.

The following table presents the Corporation’s capital ratios and the minimum capital requirements to be considered “well capitalized” by regulators as of September 30, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 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)

 

$

131,291 

 

13.11%

 

$

105,174 

 

10.50%

 

$

100,166 

 

10.00%

 

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

 

 

112,734 

 

11.25%

 

 

70,116 

 

7.00%

 

 

65,108 

 

6.50%

 

Tier 1 capital (to risk-weighted assets)

 

 

112,734 

 

11.25%

 

 

85,141 

 

8.50%

 

 

80,133 

 

8.00%

 

Tier 1 capital (to average assets)

 

 

112,734 

 

10.69%

 

 

42,185 

 

4.00%

 

 

52,731 

 

5.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018 - as revised

 

 

 

 

 

 

 

 

 

 

 

 

 

To be well capitalized under

 

 

 

 

 

 

 

 

For capital adequacy

 

prompt corrective action

 

 

 

Actual

 

purposes *

 

provisions

 

(dollars in thousands):

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Total capital (to risk-weighted assets)

 

$

122,262

 

13.66%

 

$

88,362

 

9.88%

 

$

89,481

 

10.00%

 

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

 

 

104,881

 

11.72%

 

 

57,044

 

6.38%

 

 

58,163

 

6.50%

 

Tier 1 capital (to risk-weighted assets)

 

 

104,881

 

11.72%

 

 

70,466

 

7.88%

 

 

71,585

 

8.00%

 

Tier 1 capital (to average assets)

 

 

104,881

 

11.16%

 

 

37,581

 

4.00%

 

 

46,977

 

5.00%

 


*Includes capital conservation buffer of 2.50% for 2019 and 1.875% for 2018.

The capital ratios for the  Corporation, as of September 30, 2019, as shown in the above tables, indicate levels above the regulatory minimum to be considered “well capitalized.” The capital ratios to risk-weighted assets have all decreased from their December 31, 2018 levels largely as a result of the increase in risk-weighted assets, much of which was in the commercial mortgage, construction, and commercial and industrial segments of the loan portfolio, which are typically risk-weighted at 100%.

Liquidity

Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Meridian’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and 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 $148.5 million at

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September 30, 2019, compared to $128 million at September 30, 2018, includes investments, SNCs, Federal funds sold, mortgages held-for-sale and cash and cash equivalents, less the amount of securities required to be pledged for certain liabilities.  Meridian also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios.  In addition, Meridian maintains borrowing arrangements with various correspondent banks, the FHLB and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. Through its relationship at the Federal Reserve, Meridian had available credit of approximately $9.6 million at September 30, 2019. As a member of the FHLB, we are eligible to borrow up to a specific credit limit, which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of September 30, 2019, Meridian’s maximum borrowing capacity with the FHLB was $477.6 million. At September 30, 2019, Meridian had borrowed $83.1 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $79.8 million against its available credit lines. At September 30, 2019, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as $105.6 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $53.9 million of available short or long term funding through brokered CD arrangements. Management believes that Meridian has adequate resources to meet its short-term and long-term funding requirements.

 

Discussion of Segments

As of September 30, 2019, the Corporation has three principal segments as defined by FASB ASC 280, “Segment Reporting.” The segments are Banking, Mortgage Banking and Wealth Management (see Note 11 in the accompanying Notes to Unaudited Consolidated Financial Statements).

The Banking Segment recorded net income before tax (“operating margin”) of $2.8 million and $8.0 million for the three and nine months ended September 30, 2019,  respectively, as compared to operating margin of $5.9 million and $18.1 million for the same respective periods in 2018. The Banking Segment provided 67.0%  and 84.8% of the Corporation’s pre-tax profit for the three and nine month periods ended September 30, 2019, respectively, as compared to 68.8%  and 76.6%  for the same respective periods in 2018.

The Wealth Management Segment recorded operating margin of $61 thousand and $390 thousand for the three and nine months ended September 30, 2019, respectively, as compared to operating margin of $34 thousand and $640 thousand for the same respective periods in 2018.  

The Mortgage Banking Segment recorded operating margin of $1.3 million and $1.0 million for the three and nine months ended September 30, 2019, respectively, as compared to operating margins of $1.1 million for the same respective periods in 2018.  Mortgage Banking income and expenses related to loan originations and sales decreased due to lower origination volume, but certain non-interest expenses increased from the prior year due to Maryland mortgage licensing issue previously disclosed and the settlement of outstanding litigation discussed above.

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,  2019 were $327.8 million, as compared to $290.6 million at December 31, 2018.

Standby letters of credit are conditional commitments issued by the Corporation to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Corporation’s obligation under standby letters of credit at September 30,  2019 amounted to $9.8 million, as compared to $5.2 million at December 31, 2018.

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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.

In certain circumstances the Corporation may be required to repurchase loans from investors under the terms of loan sale agreements. Generally, these circumstances include the breach of representations and warranties made to investors regarding borrower default or early payment, as well as a violation of the applicable federal, state, or local lending laws.  The Corporation agrees to repurchase loans if the representations and warranties made with respect to such loans are breached, and such breach has a material adverse effect on the loans. The Corporation did not repurchase any loans sold, based on the obligations described above, for the three and nine months ended September 30, 2019, and did repurchase 1 loan in the amount of $94 thousand for the three and nine months ended September 30, 2018. 

Regulatory Update

The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”), which was designed to ease certain restrictions imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, was enacted into law on May 24, 2018. Most of the changes made by the Act can be grouped into five general areas:  mortgage lending; certain regulatory relief for “community” banks; enhanced consumer protections in specific areas, including subjecting credit reporting agencies to additional requirements; certain regulatory relief for large financial institutions, including increasing the threshold at which institutions are classified a systemically important financial institutions (from $50 billion to $250 billion) and therefore subject to stricter oversight, and revising the rules for larger institution stress testing; and certain changes to federal securities regulations designed to promote capital formation. Some of the key provisions of the Act as it relates to community banks and bank holding companies include, but are not limited to: (i) designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a community bank leverage ratio of tangible equity to average consolidate assets not less than 8% or more than 10% and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; and (vi) clarifying definitions pertaining to high volatility commercial real estate loans (HVCRE), which require higher capital allocations, so that only loans with increased risk are subject to higher risk weightings. The Corporation continues to analyze the changes implemented by the Act and further rulemaking from federal banking regulators, but, at this time, does not believe that such changes will materially impact the Corporation’s business, operations, or financial results.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

See the discussion of quantitative and qualitative disclosures about market risks in “Management’s Discussion and Analysis of Results of Operations – Interest Rate Summary,” “– Interest Rate Sensitivity,” and “Gap Analysis” in this Quarterly Report on Form 10‑Q.

 

 

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures  

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Corporation’s CEO and CFO have concluded that the Corporation’s disclosure controls and procedures were not effective as of September 30, 2019 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. 

 

As disclosed in Part I, Item 4 of our Quarterly Report on Form 10-Q as of March 31, 2019,  in the first quarter of 2019, the Corporation identified that residential mortgage loans have been originated without a required license in a neighboring state since 2012. We concluded that our risk assessment process was not sufficient, and therefore ineffective, to ensure controls were designed and implemented to respond to the risks related to periodically reviewing our compliance with state licensing laws and reflecting that compliance within our mortgage origination system. As a result, we noted there was insufficient monitoring of the Corporation’s compliance with mortgage licensing laws.  This led to the identification of control deficiencies over the Corporation’s recognition of interest and fee income, the analysis of the accounting for loan transfers, specifically the impact of the recourse obligation resulting from a breach in representations and warranties, as well as the controls over the Corporation’s determination of the mortgage repurchase reserve.  The aggregation of these control deficiencies created a reasonable possibility that a material misstatement to our consolidated financial statements would not be prevented or detected on a timely basis and therefore we concluded that, the aggregation of these deficiencies represents a material weakness in our internal control over financial reporting as of September 30, 2019. This material weakness also existed at June 30, 2019, March 31, 2019 and December 31, 2018.  

 

This material weakness resulted in an immaterial error correction that impacted beginning retained earnings, deferred tax assets and other liabilities as of January 1, 2018, relating to interest and fee income on mortgage loan originations made before January 1, 2018 to which we were not entitled due to the violation of state licensing law. The total pre-tax impact of this issue was $486 thousand, with $407 thousand of this relating to prior periods. These amounts include a penalty and amounts to be paid to certain mortgage loan customers.

 

Notwithstanding this material weakness, based on additional analyses and other procedures performed, management concluded that the financial statements included in the Quarterly Report on Form 10-Q as of September 30, 2019 and March 31, 2019, fairly presented in all material respects our financial position, results of operations, capital position, and cash flows for the periods presented, in conformity with GAAP.

 

Remediation Status of Previously Reported Material Weakness

 

We continue to implement our remediation plan for the previously reported material weakness in internal control over financial reporting, described in Part I, Item 4 of our Quarterly Report on Form 10-Q as of March 31, 2019. We have satisfactorily resolved the licensing requirements with the licensing authority, and have set appropriate access controls within the mortgage loan origination system to prevent licensing issues in the future. We have also implemented a control to help ensure the Corporation maintains ongoing compliance with state licensing requirements in all states that we originate mortgages.  During the third quarter, the Corporation commenced the outsourcing of this licensing compliance control to a third-party that will notify us real-time of licensing change requirements. In addition, the Corporation commenced an internal audit program to review compliance with licensing laws and to help develop a monitoring program to further ensure compliance with licensing laws.

 

We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that control deficiencies contributing to the material weakness are remediated through implementation of processes and controls to ensure strict compliance with GAAP. We will consider the material weakness remediated after the

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applicable controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectively.

 

Changes in Internal Control Over Financial Reporting

Other than the changes related to our remediation efforts described above, we made no changes in internal control over financial reporting during the third quarter of 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II–OTHER INFORMATION

Item 1. Legal Proceedings.

On November 21, 2017, three former employees of the mortgage-banking division of the Bank filed suit in the United States District Court for the Eastern District of Pennsylvania, Juan Jordan et al. v. Meridian Bank, Thomas Campbell and Christopher Annas, against the Bank purporting to be a class and collective action seeking unpaid and overtime wages under the Fair Labor Standards Act of 1938, the New Jersey Wage and Hour Law, and the Pennsylvania Minimum Wage Act of 1968 on behalf of similarly situated plaintiffs. In June 2019, plaintiffs’ counsel and the Bank agreed to move forward with non-binding mediation.  Although the Bank believes it had strong and meritorious defenses, given the expense and inconvenience of  litigation, on July 24, 2019 through mediation, the Bank reached an agreement in principle with the plaintiffs to settle this litigation for $990 thousand in total. The Bank has a litigation reserve of $990 thousand at September 30, 2019.  The parties have submitted their negotiated settlement agreement to the court, and it awaits final court approval.

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.

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 58.

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

31.2

 

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

32

 

Section 1350 Certifications, filed herewith.

101.INS

 

XBRL Instance Document

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

 

 

 

 

 

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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  13, 2019

Meridian Corporation

 

 

 

 

 

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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