Annual Statements Open main menu

Meridian Corp - Quarter Report: 2019 March (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 March 31, 2019

Or

 

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

For the transition period from                to               

 

Commission File Number: 000-55983

 

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 May 28, 2019 there were 6,406,996 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 – March 31, 2019 and December 31, 2018 

3

 

 

Consolidated Statements of Income – Three Months Ended March 31, 2019 and 2018 

4

 

 

Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2019 and 2018 

5

 

 

Consolidated Statements of Stockholders’ Equity – Three Months Ended March 31, 2019 and 2018 

6

 

 

Consolidated Statements of Cash Flows – Three Months Ended March 31, 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 

31

 

 

Item 3 Quantitative and Qualitative Disclosures about Market Risk 

44

 

 

Item 4 Controls and Procedures 

44

 

 

PART II OTHER INFORMATION 

 

 

 

Item 1 Legal Proceedings 

46

 

 

Item 1A Risk Factors 

46

 

 

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 

46

 

 

Item 3 Defaults Upon Senior Securities 

46

 

 

Item 4 Mine Safety Disclosures 

46

 

 

Item 5 Other Information 

46

 

 

Item 6 Exhibits 

46

 

 

Signatures 

48

 

 

 

 

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

(dollars in thousands, except per share data)

    

2019

    

2018

Cash and due from banks

 

$

38,940

 

23,159

Federal funds sold

 

 

 —

 

793

Cash and cash equivalents

 

 

38,940

 

23,952

Securities available-for-sale (amortized cost of $50,472 and $50,942 as of March 31, 2019 and December 31, 2018)

 

 

50,440

 

50,428

Securities held-to-maturity (fair value of $12,814 and $12,655 as of March 31, 2019 and December 31, 2018)

 

 

12,712

 

12,741

Mortgage loans held for sale (amortized cost of $29,163 and $37,337 as of March 31, 2019 and December 31, 2018)

 

 

29,612

 

37,695

Loans, net of fees and costs (includes $12,751 and $11,422 of loans at fair value, amortized cost of $12,472 and $11,466 as of March 31, 2019 and December 31, 2018)

 

 

862,372

 

838,106

Allowance for loan and lease losses

 

 

(8,376)

 

(8,053)

Loans, net of the allowance for loan and lease losses

 

 

853,996

 

830,053

Restricted investment in bank stock

 

 

6,179

 

7,002

Bank premises and equipment, net

 

 

9,276

 

9,638

Bank owned life insurance

 

 

11,641

 

11,569

Accrued interest receivable

 

 

3,001

 

2,889

Other real estate owned

 

 

120

 

 —

Deferred income taxes (Footnote 1)

 

 

1,569

 

1,728

Goodwill and intangible assets

 

 

4,978

 

5,046

Other assets

 

 

5,050

 

4,739

Total assets

 

$

1,027,514

 

997,480

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest bearing

 

$

115,464

 

126,150

Interest-bearing

 

 

695,249

 

625,980

Total deposits

 

 

810,713

 

752,130

Short-term borrowings

 

 

82,233

 

114,300

Long-term debt

 

 

6,031

 

6,238

Subordinated debentures

 

 

9,239

 

9,239

Accrued interest payable

 

 

434

 

305

Other liabilities (Footnote 1)

 

 

6,872

 

5,716

Total liabilities

 

 

915,522

 

887,928

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $1 par value. Authorized 10,000,000 shares; issued and outstanding 6,406,996 and 6,406,795 as of March 31, 2019 and December 31, 2018

 

 

6,407

 

6,407

Surplus

 

 

79,980

 

79,919

Retained earnings (Footnote 1)

 

 

25,622

 

23,616

Accumulated other comprehensive loss

 

 

(17)

 

(390)

Total stockholders’ equity

 

 

111,992

 

109,552

Total liabilities and stockholders’ equity

 

$

1,027,514

 

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

 

 

March 31, 

(dollars in thousands, except per share data)

    

2019

    

2018

Interest income:

 

 

 

 

 

Loans, including fees

 

$

11,887

 

9,493

Securities:

 

 

 

 

 

Taxable

 

 

278

 

168

Tax-exempt

 

 

109

 

112

Cash and cash equivalents

 

 

50

 

23

Total interest income

 

 

12,324

 

9,796

Interest expense:

 

 

 

 

 

Deposits

 

 

3,236

 

1,659

Borrowings

 

 

611

 

445

Total interest expense

 

 

3,847

 

2,104

Net interest income

 

 

8,477

 

7,692

Provision for loan losses

 

 

219

 

554

Net interest income after provision for loan losses

 

 

8,258

 

7,138

Non-interest income:

 

 

 

 

 

Mortgage banking income

 

 

4,908

 

4,821

Wealth management income

 

 

864

 

1,078

Earnings on investment in life insurance

 

 

72

 

78

Net change in the fair value of derivative instruments

 

 

16

 

207

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

 

 

90

 

(3)

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

 

 

324

 

(171)

Service charges

 

 

27

 

32

Other

 

 

146

 

1,014

Total non-interest income

 

 

6,447

 

7,056

Non-interest expenses:

 

 

 

 

 

Salaries and employee benefits

 

 

7,727

 

8,436

Occupancy and equipment

 

 

963

 

960

Loan expenses

 

 

468

 

532

Professional fees

 

 

472

 

479

Advertising and promotion

 

 

465

 

581

Data processing

 

 

324

 

288

Information technology

 

 

266

 

325

Communications

 

 

192

 

246

Other

 

 

1,240

 

715

Total non-interest expenses

 

 

12,117

 

12,562

Income before income taxes

 

 

2,588

 

1,632

Income tax expense

 

 

582

 

362

Net income

 

$

2,006

 

1,270

 

 

 

 

 

 

Basic earnings per common share

 

$

0.31

 

0.20

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.31

 

0.20

 

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

 

 

 

March 31, 

 

(dollars in thousands)

    

2019

    

2018

 

Net income:

 

$

2,006

 

1,270

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

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

 

 

 

 

 

 

Net unrealized (losses) gains arising during the period, net of tax (benefit) expense of $108 and ($87), respectively

 

 

373

 

(276)

 

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

 

 

 —

 

 —

 

Unrealized investment gains (losses), net of tax expense (benefit) of $108 and ($87), respectively

 

 

373

 

(276)

 

Total other comprehensive income

 

 

373

 

(276)

 

Total comprehensive income

 

$

2,379

 

994

 

 

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

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2019

$

6,407

 

79,919

 

23,616

 

(390)

 

109,552

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

2,006

 

 

 

2,006

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

 

 

 

 

 

 

 

373

 

373

Total comprehensive income

 

 

 

 

 

 

 

 

 

2,379

Compensation expense related to stock option grants

 

 

 

61

 

 

 

 

 

61

Balance, March 31, 2019

$

6,407

 

79,980

 

25,622

 

(17)

 

111,992

 

See accompanying notes to the unaudited consolidated financial statements.

6

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

 

 

 

 

 

Three months ended

 

 

March 31, 

(dollars in thousands)

    

2019

    

2018

Net income

 

$

2,006

 

1,270

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

 

 

 

 

 

Depreciation and amortization

 

 

291

 

285

Provision for loan losses

 

 

219

 

554

Compensation expense for stock options

 

 

61

 

 3

Net change in fair value of loans held for sale

 

 

(90)

 

 3

Net change in fair value of derivative instruments

 

 

(16)

 

(207)

Proceeds from sale of loans

 

 

112,948

 

136,321

Loans originated for sale

 

 

(96,265)

 

(127,337)

Mortgage banking income

 

 

(4,908)

 

(4,821)

Increase in accrued interest receivable

 

 

(112)

 

172

Increase in other assets

 

 

(161)

 

(1,177)

Earnings from investment in life insurance

 

 

(72)

 

(78)

Deferred income tax benefit (Footnote 1)

 

 

45

 

(40)

Increase in accrued interest payable

 

 

129

 

130

Increase in other liabilities (Footnote 1)

 

 

1,064

 

367

Net cash provided by operating activities

 

 

15,139

 

5,445

Cash flows from investing activities:

 

 

 

 

 

Activity in available-for-sale securities:

 

 

 

 

 

Maturities, repayments and calls

 

 

2,390

 

1,006

Purchases

 

 

(1,944)

 

 —

Proceeds from sale of OREO

 

 

 —

 

10

Settlement of forward contracts

 

 

(36)

 

(6)

Acquisition of wealth management company

 

 

 —

 

 —

Decrease in restricted stock

 

 

823

 

982

Net increase in loans

 

 

(27,607)

 

(45,576)

Purchases of premises and equipment

 

 

(86)

 

(1,116)

Proceeds from settlement of loans

 

 

 —

 

2,766

Net cash used in investing activities

 

 

(26,460)

 

(41,934)

Cash flows from financing activities:

 

 

 

 

 

Net increase in deposits

 

 

58,583

 

52,194

Decrease in short term borrowings

 

 

(32,068)

 

(22,040)

Repayment of long term debt (Acquisition note)

 

 

(206)

 

(207)

Repayment of long term debt (Subordinated debt)

 

 

 —

 

(4,000)

Net cash provided by financing activities

 

 

26,309

 

25,947

Net change in cash and cash equivalents 

 

 

14,988

 

(10,542)

Cash and cash equivalents at beginning of period

 

 

23,952

 

35,506

Cash and cash equivalents at end of period

 

$

38,940

 

24,964

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

3,718

 

1,974

Income taxes

 

 

2,735

 

 —

Supplemental disclosure of cash flow information:

 

 

 

 

 

Transfers from loans and leases to real estate owned

 

 

120

 

 —

Transfers from loans held for sale to loans held for investment

 

 

3,602

 

 —

 

See accompanying notes to the unaudited consolidated financial statements.

7

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 months ended March 31, 2019 are not necessarily indicative of the results for the year ended December 31, 2019 or for any other period.

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

8

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 presented

 

 

 

 

 

 

 

 

 

 

 

 

To be well capitalized under

 

 

 

 

 

 

 

For capital adequacy

 

prompt corrective action

 

 

Actual

 

purposes *

 

provisions

(dollars in thousands):

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

Total capital (to risk-weighted assets)

 

$

122,577

 

13.70%

 

$

71,577

 

8.00%

 

$

89,472

 

10.00%

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

 

 

105,196

 

11.76%

 

 

40,262

 

4.50%

 

 

58,157

 

6.50%

Tier 1 capital (to risk-weighted assets)

 

 

105,196

 

11.76%

 

 

53,683

 

6.00%

 

 

71,577

 

8.00%

Tier 1 capital (to average assets)

 

 

105,196

 

11.20%

 

 

37,578

 

4.00%

 

 

46,972

 

5.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018 - as revised

 

 

 

 

 

 

 

 

 

 

 

 

 

To be well capitalized under

 

 

 

 

 

 

 

 

For capital adequacy

 

prompt corrective action

 

 

 

Actual

 

purposes *

 

provisions

 

(dollars in thousands):

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Total capital (to risk-weighted assets)

 

$

122,262

 

13.66%

 

$

71,585

 

8.00%

 

$

89,481

 

10.00%

 

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

 

 

104,881

 

11.72%

 

 

40,266

 

4.50%

 

 

58,163

 

6.50%

 

Tier 1 capital (to risk-weighted assets)

 

 

104,881

 

11.72%

 

 

53,689

 

6.00%

 

 

71,585

 

8.00%

 

Tier 1 capital (to average assets)

 

 

104,881

 

11.16%

 

 

37,581

 

4.00%

 

 

46,977

 

5.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

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

 

 

March 31, 

(dollars in thousands, except per share data)

    

2019

    

2018

Numerator:

 

 

 

 

 

 

Net income available to common stockholders

 

$

2,006

 

 

1,270

Denominator for basic earnings per share - weighted average shares outstanding

 

 

6,407

 

 

6,392

Effect of dilutive common shares

 

 

29

 

 

34

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

 

 

6,436

 

 

6,426

Basic earnings per share

 

$

0.31

 

 

0.20

Diluted earnings per share

 

$

0.31

 

 

0.20

Antidilutive shares excluded from computation of average dilutive earnings per share

 

 

126

 

 

47

 

 

(3)      Goodwill and Other Intangibles

The Corporation’s goodwill and intangible assets related to the acquisition of HJ Wealth in April 2017 are detailed below:

 

 

 

 

 

 

 

 

 

 

 

 

Balance

 

 

 

Balance

 

Amortization

 

 

December 31, 

 

Amortization

 

March 31, 

 

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

 

(51)

 

3,676

 

20

Intangible assets - non competition agreements

 

 

154

 

(17)

 

137

 

4

Total Intangible Assets

 

 

4,147

 

(68)

 

4,079

 

 

Total 

 

$

5,046

 

(68)

 

4,978

 

 

 

Accumulated amortization on intangible assets was $545 thousand and $273 thousand as of March 31, 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 March 31, 2019, the Corporation determined there were no events that would necessitate impairment testing of goodwill and other intangible assets.

10

Table of Contents

(4)      Securities

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

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

Gross

 

Gross

 

 

 

 

Amortized

 

unrealized

 

unrealized

 

Fair

(dollars in thousands)

    

cost

    

gains

    

losses

    

value

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed securities

 

$

23,005

 

69

 

(156)

 

22,918

U.S. government agency collateralized mortgage obligations

 

 

15,419

 

100

 

(114)

 

15,405

State and municipal securities

 

 

11,048

 

104

 

(27)

 

11,125

Investments in mutual funds

 

 

1,000

 

 —

 

(8)

 

992

Total securities available-for-sale

 

$

50,472

 

273

 

(305)

 

50,440

Securities held to maturity:

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

1,994

 

 —

 

(7)

 

1,987

State and municipal securities

 

 

10,718

 

113

 

(4)

 

10,827

Total securities held-to-maturity

 

$

12,712

 

113

 

(11)

 

12,814

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2019, the Corporation had twenty U.S. government sponsored agency mortgage‑backed securities, ten U.S. government sponsored agency collateralized mortgage obligations, twelve state and municipal securities, one mutual fund, and two  U.S. treasuries 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. treasurites in unrealized loss positions. At March 31, 2019, the temporary impairment is primarily the result of changes in market interest rates subsequent to purchase and the Corporation does not intend to sell these securities prior to recovery and it is more likely than not that the Corporation will not be required to sell these securities prior to recovery to satisfy liquidity needs, and therefore, no securities are deemed to be other‑than‑temporarily impaired.

11

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 March 31, 2019 and December 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

Less than 12 Months

 

12 Months or more

 

Total

 

 

Fair

 

Unrealized

 

Fair

 

Unrealized

 

Fair

 

Unrealized

(dollars in thousands)

    

value

    

losses

    

value

    

losses

    

value

    

losses

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed securities

 

$

 —

 

 —

 

12,625

 

(156)

 

12,625

 

(156)

U.S. government agency collateralized mortgage obligations

 

 

1,258

 

(10)

 

5,614

 

(104)

 

6,872

 

(114)

State and municipal securities

 

 

 —

 

 —

 

5,420

 

(27)

 

5,420

 

(27)

Investments in mutual funds

 

 

 —

 

 —

 

992

 

(8)

 

992

 

(8)

Total securities available-for-sale

 

$

1,258

 

(10)

 

24,651

 

(295)

 

25,909

 

(305)

Securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasuries

 

$

 —

 

 —

 

1,987

 

(7)

 

1,987

 

(7)

State and municipal securities

 

 

 —

 

 —

 

1,098

 

(4)

 

1,098

 

(4)

Total securities held-to-maturity

 

$

 —

 

 —

 

3,085

 

(11)

 

3,085

 

(11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2019 and December 31, 2018 are shown below by contractual maturities. Actual maturities may differ from contractual maturities as issuers may have the right to call or repay obligations with or without call or prepayment penalties.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 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

 

$

900

 

899

 

1,994

 

1,987

 

$

906

 

902

 

1,991

 

1,978

 Due after one year through five years

 

 

1,725

 

1,720

 

3,748

 

3,774

 

 

1,236

 

1,226

 

3,154

 

3,148

 Due after five years through ten years

 

 

5,891

 

5,933

 

6,970

 

7,053

 

 

6,411

 

6,290

 

7,596

 

7,529

 Due after ten years

 

 

2,532

 

2,573

 

 —

 

 —

 

 

2,543

 

2,501

 

 —

 

 —

    Subtotal

 

 

11,048

 

11,125

 

12,712

 

12,814

 

 

11,096

 

10,919

 

12,741

 

12,655

Mortgage-related securities

 

 

38,424

 

38,323

 

 —

 

 —

 

 

38,846

 

38,530

 

 —

 

 —

Mutual funds with no stated maturity

 

 

1,000

 

992

 

 —

 

 —

 

 

1,000

 

979

 

 —

 

 —

    Total

 

$

50,472

 

50,440

 

12,712

 

12,814

 

$

50,942

 

50,428

 

12,741

 

12,655

  

 

12

Table of Contents

(5)      Loans Receivable

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

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

(dollars in thousands)

    

2019

    

2018

Mortgage loans held for sale

 

$

29,612

 

37,695

Real estate loans:

 

 

 

 

 

Commercial mortgage

 

 

325,843

 

325,393

Home equity lines and loans

 

 

81,939

 

82,286

Residential mortgage (1)

 

 

57,604

 

53,360

Construction

 

 

127,663

 

116,906

Total real estate loans

 

 

593,049

 

577,945

 

 

 

 

 

 

Commercial and industrial

 

 

269,028

 

259,806

Consumer

 

 

751

 

701

Leases, net

 

 

1,159

 

1,335

Total portfolio loans and leases

 

 

863,987

 

839,787

Total loans and leases

 

$

893,599

 

877,482

 

 

 

 

 

 

Loans with predetermined rates

 

$

266,947

 

264,376

Loans with adjustable or floating rates

 

 

626,652

 

613,106

Total loans and leases

 

$

893,599

 

877,482

 

 

 

 

 

 

Net deferred loan origination (fees) costs

 

$

(1,615)

 

(1,681)

 

(1)

Includes $12,751 and $11,422 of loans at fair value as of March 31, 2019 and December 31, 2018, respectively.

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

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

(dollars in thousands)

    

2019

    

2018

Minimum lease payments receivable

 

$

1,228

 

1,420

Unearned lease income

 

 

(69)

 

(85)

Total

 

$

1,159

 

1,335

 

13

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 March 31, 2019 and December 31, 2018, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

90+ days

 

 

 

 

 

Accruing

 

Nonaccrual

 

 

 

 

 

March 31, 2019

 

30-89 days

 

past due and

 

Total past

 

 

 

Loans and

 

loans and

 

Total loans

 

Delinquency

 

(dollars in thousands)

    

past due

    

still accruing

    

due

    

Current

    

leases

    

leases

    

and leases

    

percentage

 

Commercial mortgage

 

$

 —

 

 —

 

 —

 

324,620

 

324,620

 

1,223

 

325,843

 

0.38

%

Home equity lines and loans

 

 

596

 

 —

 

596

 

81,262

 

81,858

 

81

 

81,939

 

0.83

 

Residential mortgage (1)

 

 

 —

 

 —

 

 —

 

55,575

 

55,575

 

2,029

 

57,604

 

3.52

 

Construction

 

 

253

 

 —

 

253

 

127,383

 

127,636

 

27

 

127,663

 

0.22

 

Commercial and industrial

 

 

186

 

 —

 

186

 

268,371

 

268,557

 

471

 

269,028

 

0.24

 

Consumer

 

 

 —

 

 —

 

 —

 

751

 

751

 

 —

 

751

 

 —

 

Leases

 

 

11

 

 —

 

11

 

1,148

 

1,159

 

 —

 

1,159

 

0.95

 

Total

 

$

1,046

 

 —

 

1,046

 

859,110

 

860,156

 

3,831

 

863,987

 

0.56

%

 

(1) Includes $12,751 of loans at fair value as of March 31, 2019 ($11,581 of current, $0 of 30-89 days past due and $1,170 of nonaccrual).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

90+ days

 

 

 

 

 

Accruing

 

Nonaccrual

 

 

 

 

 

December 31, 2018

 

30-89 days

 

past due and

 

Total past

 

 

 

Loans and

 

loans and

 

Total loans

 

Delinquency

 

(dollars in thousands)

    

past due

    

still accruing

    

due

    

Current

    

leases

    

leases

    

and leases

    

percentage

 

Commercial mortgage

 

$

 —

 

 —

 

 —

 

324,169

 

324,169

 

1,224

 

325,393

 

0.38

%

Home equity lines and loans

 

 

348

 

 —

 

348

 

81,855

 

82,203

 

83

 

82,286

 

0.52

 

Residential mortgage (1)

 

 

195

 

 —

 

195

 

51,018

 

51,213

 

2,147

 

53,360

 

4.39

 

Construction

 

 

 —

 

 —

 

 —

 

116,906

 

116,906

 

 —

 

116,906

 

 —

 

Commercial and industrial

 

 

217

 

 —

 

217

 

259,112

 

259,329

 

477

 

259,806

 

0.27

 

Consumer

 

 

 —

 

 —

 

 —

 

701

 

701

 

 —

 

701

 

 —

 

Leases

 

 

49

 

 —

 

49

 

1,286

 

1,335

 

 —

 

1,335

 

3.67

 

Total

 

$

809

 

 —

 

809

 

835,047

 

835,856

 

3,931

 

839,787

 

0.56

%

 

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

 

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

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

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

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 month periods ended March 31, 2019 and 2018, respectively:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance,

 

 

 

 

 

 

 

Balance,

(dollars in thousands)

    

December 31, 2018

    

Charge-offs

    

Recoveries

    

Provision

    

March 31, 2019

Commercial mortgage

 

$

3,209

 

 —

 

 3

 

(49)

 

3,163

Home Equity lines and loans

 

 

323

 

 —

 

 3

 

15

 

341

Residential mortgage

 

 

191

 

 —

 

 —

 

21

 

212

Construction

 

 

1,627

 

 —

 

 —

 

175

 

1,802

Commercial and industrial

 

 

2,690

 

 —

 

97

 

59

 

2,846

Consumer

 

 

 3

 

 —

 

 1

 

 —

 

 4

Leases

 

 

10

 

 —

 

 —

 

(2)

 

 8

Total

 

$

8,053

 

 —

 

104

 

219

 

8,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance,

 

 

 

 

 

 

 

Balance,

(dollars in thousands)

    

December 31, 2017

    

Charge-offs

    

Recoveries

    

Provision

    

March 31, 2018

Commercial mortgage

 

$

2,434

 

 —

 

 2

 

130

 

2,566

Home Equity lines and loans

 

 

280

 

(66)

 

 2

 

46

 

262

Residential mortgage

 

 

82

 

 —

 

 —

 

45

 

127

Construction

 

 

1,689

 

 —

 

 —

 

172

 

1,861

Commercial and industrial

 

 

2,214

 

(80)

 

16

 

165

 

2,315

Consumer

 

 

 5

 

 —

 

 1

 

(3)

 

 3

Leases

 

 

 5

 

 —

 

 —

 

(1)

 

 4

Total

 

$

6,709

 

(146)

 

21

 

554

 

7,138

 

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 March 31, 2019 and December 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance on loans and leases

 

Carrying value of loans and leases

 

 

 

Individually

 

Collectively

 

 

 

Individually

 

Collectively

 

 

 

March 31, 2019

 

evaluated

 

evaluated

 

 

 

evaluated

 

evaluated

 

 

 

(dollars in thousands)

    

for impairment

    

for impairment

    

Total

    

for impairment

    

for impairment

    

Total

 

Commercial mortgage

 

$

 —

 

3,163

 

3,163

 

$

1,921

 

323,922

 

325,843

 

Home Equity lines and loans

 

 

 —

 

341

 

341

 

 

81

 

81,858

 

81,939

 

Residential mortgage

 

 

 —

 

212

 

212

 

 

857

 

43,996

 

44,853

 

Construction

 

 

 —

 

1,802

 

1,802

 

 

1,294

 

126,369

 

127,663

 

Commercial and industrial

 

 

133

 

2,713

 

2,846

 

 

1,448

 

267,580

 

269,028

 

Consumer

 

 

 —

 

 4

 

 4

 

 

 —

 

751

 

751

 

Leases

 

 

 —

 

 8

 

 8

 

 

 —

 

1,159

 

1,159

 

Total

 

$

133

 

8,243

 

8,376

 

$

5,601

 

845,635

 

851,236

(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

Table of Contents

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

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

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

    

 

 

    

Special

    

 

    

 

    

 

(dollars in thousands)

 

Pass

 

mention

 

Substandard

 

Doubtful

 

Total

Commercial mortgage

 

$

320,616

 

3,347

 

1,880

 

 —

 

325,843

Home equity lines and loans

 

 

81,776

 

 —

 

163

 

 —

 

81,939

Construction

 

 

125,000

 

2,663

 

 —

 

 —

 

127,663

Commercial and industrial

 

 

244,843

 

11,951

 

12,204

 

30

 

269,028

Total

 

$

772,235

 

17,961

 

14,247

 

30

 

804,473

 

 

 

 

 

 

 

 

 

 

 

 

 

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 March 31, 2019 and December 31, 2018. No troubled debt restructurings performing according to modified terms are included in performing residential mortgages below as of March 31, 2019 and December 31, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

December 31, 2018

(dollars in thousands)

    

Performing

    

Nonperforming

    

Total

    

Performing

    

Nonperforming

    

Total

Residential mortgage

 

$

43,996

 

857

 

44,853

 

$

40,969

 

969

 

41,938

Consumer

 

 

751

 

 —

 

751

 

 

701

 

 —

 

701

Leases

 

 

1,159

 

 —

 

1,159

 

 

1,335

 

 —

 

1,335

Total

 

$

45,906

 

857

 

46,763

 

$

43,005

 

969

 

43,974

 

There were six nonperforming residential mortgage loans at March 31, 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 March 31, 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

 

 

671

 

674

 

133

 

673

 

676

 

679

 

103

 

680

Home equity lines and loans

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

Residential mortgage

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

Construction

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

Total

 

 

671

 

674

 

133

 

673

 

676

 

679

 

103

 

680

Impaired loans without related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial mortgage

 

$

1,921

 

2,371

 

 —

 

1,926

 

1,929

 

2,379

 

 —

 

1,982

Commercial and industrial

 

 

777

 

863

 

 —

 

797

 

861

 

945

 

 —

 

885

Home equity lines and loans

 

 

81

 

89

 

 —

 

82

 

83

 

89

 

 —

 

84

Residential mortgage

 

 

857

 

857

 

 —

 

857

 

969

 

978

 

 —

 

978

Construction

 

 

1,294

 

1,294

 

 —

 

1,287

 

1,281

 

1,281

 

 —

 

1,293

Total

 

 

4,930

 

5,474

 

 —

 

4,949

 

5,123

 

5,672

 

 —

 

5,222

Grand Total

 

$

5,601

 

6,148

 

133

 

5,622

 

5,799

 

6,351

 

103

 

5,902

 

Interest income recognized on performing impaired loans amounted to $49 thousand and $52 thousand for the three months ended March 31, 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 March 31, 2019 and December 31, 2018 are as follows:

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

(dollars in thousands)

    

2019

    

2018

TDRs included in nonperforming loans and leases

 

$  

1,213

  

1,219

TDRs in compliance with modified terms

 

   

2,940

  

3,047

Total TDRs

 

$  

4,153

  

4,266

 

There were no loan and lease modifications granted during the three months ended March 31, 2019 and 2018 that were categorized as TDRs.    No loan and lease modifications granted during the three months ended March 31, 2019 and 2018 subsequently defaulted during the same time period.

(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 Federal funds purchased of $549 thousand and $0 at March 31, 2019 and December 31, 2018, respectively. The Corporation also has a facility with the Federal Reserve discount window of $10.2  million. This facility is fully secured by investment securities and loans. There were no borrowings under this facility at March 31, 2019 or at December 31, 2018.

Short‑term borrowings as of March 31, 2019 consisted of short‑term advances from the FHLB of Pittsburgh in the amount of $79.9 million with interest at 2.70%,  and $1.8 million with an original term of 4 years with interest at 1.70%.

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 March 31, 2019 and December 31, 2018 consisted of the following fixed rate notes with the FHLB and the acquisition purchase note issued in connection with HJ Wealth:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of

 

 

Maturity

 

Interest

 

March 31, 

 

December 31, 

(dollars in thousands)

    

date

    

rate

    

2019

    

2018

Mid-term Repo-fixed

 

08/10/20

 

2.76

%  

 

5,000

 

5,000

Acquisition Purchase Note

 

04/01/20

 

3.00

%  

 

1,031

 

1,238

    Total

 

 

 

 

 

$

6,031

 

6,238

 

The FHLB of Pittsburgh has also issued $112.1 million of letters of credit to the Corporation for the benefit of the Corporation’s public deposit funds and loan customers. These letters of credit expire by June 14, 2019. The Corporation has a maximum borrowing capacity with the FHLB of $454.6 million as of March 31, 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)      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

19

Table of Contents

not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

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

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

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

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

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

20

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 March 31, 2019 and December 31, 2018 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

(dollars in thousands)

    

Total

    

Level 1

    

Level 2

    

Level 3

Securities available for sale:

 

 

 

 

 

 

 

 

 

U.S. government agency mortgage-backed securities

 

$

22,918

 

 —

 

22,918

 

 —

U.S. government agency collateralized mortgage obligations

 

 

15,405

 

 —

 

15,405

 

 —

State and municipal securities

 

 

11,125

 

 —

 

11,125

 

 —

Investments in mutual funds and other equity securities

 

 

992

 

 —

 

992

 

 —

Mortgage loans held-for-sale

 

 

29,612

 

 —

 

29,612

 

 —

Mortgage loans held-for-investment

 

 

12,751

 

 —

 

12,751

 

 —

Interest rate lock commitments

 

 

330

 

 —

 

 —

 

330

Customer derivatives - Interest rate swaps

 

 

229

 

 —

 

229

 

 —

Total

 

$

93,362

 

 —

 

93,032

 

330

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 —

Interest rate lock commitments

 

 

310

 

 —

 

 —

 

310

Customer derivatives - Interest rate swaps

 

 

141

 

 —

 

141

 

 —

Total

 

$

99,996

 

 —

 

99,686

 

310

 

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

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

(dollars in thousands)

    

Total

    

Level 1

    

Level 2

    

Level 3

Impaired loans (1)

 

$

5,468

 

 —

 

 —

 

5,468

Other real estate owned (2)

 

 

120

 

 —

 

 —

 

120

Total

 

$

5,588

 

 —

 

 —

 

5,588

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices or appraised value of the property. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement. Appraised values may be discounted based on management’s expertise, historical knowledge, changes in market conditions from the time of valuation and/or estimated costs to sell.

(2)

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

21

Table of Contents

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

(a)      Cash and Cash Equivalents

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

(b)      Securities

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

(c)       Mortgage Loans Held for Sale

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

(d)      Loans Receivable

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

(e)      Mortgage Loans Held for Investment

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

(f)       Impaired Loans

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

(g)      Restricted Investment in Bank Stock

The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.

(h)      Accrued Interest Receivable and Payable

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

22

Table of Contents

(i)       Deposit Liabilities

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

(j)       Short‑Term Borrowings

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

(k)      Long‑Term Debt

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

(l)       Subordinated Debt

Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity.

(m)     Off‑Balance Sheet Financial Instruments

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

(n)     Derivative Financial Instruments

The 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.

23

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 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

 

$

38,940

 

38,940

 

23,952

 

23,952

Securities available-for-sale

 

Level 2

 

 

50,440

 

50,440

 

50,428

 

50,428

Securities held-to-maturity

 

Level 2

 

 

12,712

 

12,814

 

12,741

 

12,655

Mortgage loans held-for-sale

 

Level 2

 

 

29,612

 

29,612

 

37,695

 

37,695

Loans receivable, net

 

Level 3

 

 

841,245

 

849,409

 

818,631

 

820,512

Mortgage loans held-for-investment

 

Level 2

 

 

12,751

 

12,751

 

11,422

 

11,422

Interest rate lock commitments

 

Level 3

 

 

330

 

330

 

310

 

310

Restricted investment in bank stock

 

Level 3

 

 

6,179

 

6,179

 

7,002

 

7,002

Accrued interest receivable

 

Level 3

 

 

3,001

 

3,001

 

2,889

 

2,889

Customer derivatives - Interest rate swaps

 

Level 2

 

 

229

 

229

 

141

 

141

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

Level 2

 

 

810,713

 

817,200

 

752,130

 

744,300

Short-term borrowings

 

Level 2

 

 

82,233

 

82,233

 

114,300

 

114,300

Long-term debt

 

Level 2

 

 

6,031

 

6,034

 

6,238

 

6,240

Subordinated debentures

 

Level 2

 

 

9,239

 

9,396

 

9,239

 

9,396

Accrued interest payable

 

Level 2

 

 

434

 

434

 

305

 

305

Interest rate lock commitments

 

Level 3

 

 

41

 

41

 

40

 

40

Forward commitments

 

Level 2

 

 

170

 

170

 

176

 

176

Customer derivatives - Interest rate swaps

 

Level 2

 

 

260

 

260

 

161

 

161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

 

Notional

 

 

Off-balance sheet financial instruments:

    

 

    

amount

    

Fair value

    

amount

    

Fair value

  Commitments to extend credit

 

Level 2

 

$

289,692

 

330

 

290,614

 

310

  Letters of credit

 

Level 2

 

 

6,354

 

 —

 

5,158

 

 —

 

The following table includes a rollforward of interest rate lock commitments for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the three month peiods ended March 31, 2019 and 2018.

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2019

    

2018

Balance at beginning of the period

 

$

310

 

344

(Decrease) increase in value

 

 

19

 

242

Balance at end of the period

 

$

329

 

586

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Valuation Techniques for Level 3 interest rate lock

 

Fair Value

 

 

 

Unobservable

 

Range of

 

Weighted

 

commitments as of March 31, 2019

  

Level 3

  

Valuation Technique

  

Input

  

Inputs

  

Average

  

Interest rate lock commitments

 

329

 

Market comparable pricing

 

Pull through

 

1 - 99

89.27

 

Losses of $19 thousand and $242 thousand due to changes in the fair value of interest rate lock commitments which are classified as Level 3 assets and liabilities for the three months ended March 31, 2019 and 2018, respectively, are recorded in non-interest income as net change in the fair value of derivative instruments in the Corporation’s consolidated statements of income.

 

24

Table of Contents

(9)    Derivative Financial Instruments

Risk Management Objective of Using Derivatives

The Corporation is exposed to certain risk arising from both its business operations and economic conditions.  The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments.  Specifically, the Corporation enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  The Corporation’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation’s known or expected cash receipts and its known or expected cash payments principally related to the Corporation’s loan portfolio. 

Mortgage Banking Derivatives

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

Customer Derivatives – Interest Rate Swaps

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

 

25

Table of Contents

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 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

 

$

29,072

 

330

 

27,188

 

310

Negative fair values

Other liabilities

 

 

5,131

 

(41)

 

6,218

 

(40)

Net interest rate lock commitments

 

 

 

34,203

 

289

 

33,406

 

270

 

 

 

 

 

 

 

 

 

 

 

Forward Commitments

 

 

 

 

 

 

 

 

 

 

Positive fair values

Other assets

 

 

2,000

 

 2

 

 —

 

 —

Negative fair values

Other liabilities

 

 

31,500

 

(170)

 

26,500

 

(176)

Net forward commitments

 

 

 

33,500

 

(168)

 

26,500

 

(176)

 

 

 

 

 

 

 

 

 

 

 

Customer Derivatives - Interest Rate Swaps

 

 

 

 

 

 

 

 

 

 

Positive fair values

Other assets

 

 

3,330

 

229

 

3,330

 

141

Negative fair values

Other liabilities

 

 

3,330

 

(260)

 

3,330

 

(161)

Net customer derivatives - interest rate swaps

 

 

 

6,660

 

(31)

 

6,660

 

(20)

Net derivative fair value asset

 

 

$

74,363

 

90

 

66,566

 

74

 

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

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

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

(dollars in thousands)

    

    

2019

    

2018

Interest Rate Lock Commitments

 

$

19

 

252

Forward Commitments

 

 

 8

 

(45)

Customer Derivatives - Interest Rate Swaps

 

 

(11)

 

 —

Net fair value gains (losses) on derivative financial instrument

 

$

16

 

207

 

Realized gains/(losses) on derivatives were ($275) thousand and $700 thousand for the three months ended March 31, 2019 and 2018, respectively, and are included in other non-interest income in the unaudited consolidated statements of income.

(10)    Segments

ASC Topic 280 – Segment Reporting identifies operating segments as components of an enterprise which are evaluated regularly by the Corporation’s Chief Operating Decision Maker, our Chief Executive Officer, in deciding how to allocate resources and assess performance. The Corporation has applied the aggregation criterion set forth in this codification to the results of its operations.

Our Banking segment consists of commercial and retail banking. The Banking segment generates interest income from its lending (including leasing) and investing activities and is dependent on the gathering of lower cost deposits from its branch network or borrowed funds from other sources for funding its loans, resulting in the generation of net interest income. The Banking segment also derives revenues from other sources including gains on the sale of available for sale investment securities, gains on the sale of residential mortgage loans, service charges on deposit accounts, cash sweep fees, overdraft fees, BOLI income.

26

Table of Contents

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

Meridian’s mortgage banking segment (“Mortgage”) consists of one central loan production facility and several retail and profit sharing loan production offices located throughout the Delaware Valley. The Mortgage segment originates 1 – 4 family residential mortgages and sells all of its production, including servicing to third party investors. The unit generates net interest income on the loans it originates and earns fee income (primarily gain on sales) at the time of the sale.

The table below summarizes income and expenses, directly attributable to each business line, which has been included in the statement of operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

Three Months Ended March 31, 2018

(dollars in thousands)

    

Bank

    

Wealth

    

Mortgage

    

Total

    

Bank

    

Wealth

    

Mortgage

    

Total

Net interest income

 

$

8,381

 

38

 

58

 

8,477

 

$

7,527

 

84

 

81

 

7,692

Provision for loan losses

 

 

(219)

 

 —

 

 —

 

(219)

 

 

(554)

 

 —

 

 —

 

(554)

Net interest income after provision

 

 

8,162

 

38

 

58

 

8,258

 

 

6,973

 

84

 

81

 

7,138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage banking income

 

 

39

 

 —

 

4,869

 

4,908

 

 

30

 

 —

 

4,791

 

4,821

Wealth management income

 

 

46

 

818

 

 —

 

864

 

 

29

 

1,049

 

 —

 

1,078

Net change in fair values

 

 

 —

 

 —

 

430

 

430

 

 

 —

 

 —

 

33

 

33

Other

 

 

378

 

 —

 

(133)

 

245

 

 

313

 

 —

 

811

 

1,124

Total non-interest income

 

 

463

 

818

 

5,166

 

6,447

 

 

372

 

1,049

 

5,635

 

7,056

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,673

 

566

 

3,488

 

7,727

 

 

3,492

 

489

 

4,455

 

8,436

Occupancy and equipment

 

 

523

 

30

 

410

 

963

 

 

534

 

33

 

393

 

960

Professional fees

 

 

315

 

 1

 

156

 

472

 

 

431

 

 8

 

40

 

479

Advertising and promotion

 

 

256

 

76

 

133

 

465

 

 

254

 

98

 

229

 

581

Other

 

 

1,296

 

147

 

1,047

 

2,490

 

 

1,225

 

142

 

739

 

2,106

Total non-interest expense

 

 

6,063

 

820

 

5,234

 

12,117

 

 

5,936

 

770

 

5,856

 

12,562

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Margin

 

$

2,562

 

36

 

(10)

 

2,588

 

$

1,409

 

363

 

(140)

 

1,632

 

 

(11)    Recent Litigation

On November 21, 2017, three former employees of the mortgage-banking division of the Bank filed suit in the United States District Court for the Eastern District of Pennsylvania, Juan Jordan et al. v. Meridian Bank, Thomas Campbell and Christopher Annas, against the Bank purporting to be a class and collective action seeking unpaid and overtime wages under the Fair Labor Standards Act of 1938, the New Jersey Wage and Hour Law, and the Pennsylvania Minimum Wage Act of 1968 on behalf of similarly situated plaintiffs. In February 2018, the Bank answered the complaint and presented affirmative defenses. In March 2018, plaintiffs’ counsel and the Bank agreed to move forward with non-binding mediation. Although the Bank believes it has strong and meritorious defenses, given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, success on the merits, the Bank has recorded a $325 thousand reserve, $125 thousand of which was added in the quarter ended March 31, 2019, as a reasonable estimate for possible losses that may result from this action. This estimate may change from time to time, and actual losses could vary.

27

Table of Contents

(12)    Recent Accounting Pronouncements

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

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 reviewing contracts related to service charges on deposits, investment advisory commissions and fee income, and certain items within other service charges and other income, however our preliminary evaluation of revenue streams that are in the scope of this ASU suggests that adoption of this guidance is not expected to have a material impact on our consolidated statement of income.  The Corporation expects to adopt this ASU as of December 31, 2019 and has not yet determined the impact to our Consolidated Financial Statements.

 

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

28

Table of Contents

clarifies that each distinct nonfinancial asset and insubstance nonfinancial asset should be derecognized when the counterparty obtains control of it. The Corporation plans to adopt this ASU at the same time we adopt ASU 2014-09.

 

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

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

FASB ASU 2016‑15 (Topic 320), “Classification of Certain Cash Receipts and Cash Payments”

Issued in August 2016, ASU 2016‑15 provides guidance on eight specific cash flow issues and their disclosure in the consolidated statements of cash flows. The issues addressed include debt prepayment, settlement of zero-coupon debt, contingent consideration in business combinations, proceeds from settlement of insurance claims, proceeds from settlement of BOLI, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the Predominance principle. ASU 2016‑15 is effective for public companies for the annual and interim periods in fiscal years beginning after December 15, 2017, with early adoption permitted. For non-public companies ASU 2016‑15 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Corporation expects to adopt this ASU as of December 31, 2019 and does not anticipate the adoption of this ASU to have a material impact on its 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, 2021, or January 1, 2022 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.

 

29

Table of Contents

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 its consolidated financial statements and related disclosures.

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

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

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

Issued in August 2017, ASU 2017‑12 better aligns hedge accounting with an organization’s risk management activities in the financial statements. In addition, the ASU simplifies the application of hedge accounting guidance in areas where practice issues exist. Specifically, the proposed ASU eases the requirements for effectiveness testing, hedge documentation and application of the shortcut and the critical terms match methods. Entities would be permitted to designate contractually specified components as the hedged risk in a cash flow hedge involving the purchase or sale of nonfinancial assets or variable rate financial instruments. In addition, entities would no longer

30

Table of Contents

separately measure and report hedge ineffectiveness. Also, entities, may choose refined measurement techniques to determine the changes in fair value of the hedged item in fair value hedges of benchmark interest rate risk. For public business entities, the ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020.  Early application is permitted in any interim period after issuance of the ASU for existing hedging relationships on the date of adoption and the effect of adoption should be reflected as of the beginning of the fiscal year of adoption (that is, the initial application date). The Corporation has evaluated ASU 2017‑12, and has determined it has no current hedging strategies for which it plans to implement the ASU but we will consider the impact of the ASU on future hedging strategies that may arise.

 

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

 

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

 

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

You should read the following discussion and analysis in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10‑Q and the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 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 statement whether written or oral, that may be made from time to time by Meridian Corporation or by or on behalf of Meridian Bank.

31

Table of Contents

Critical Accounting Policies, Judgments and Estimates

Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgements are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified several accounting policies that, due to the estimates, assumptions and judgements inherent in those policies, are critical in understanding our financial statements.

These policies include (i) determining the provision and allowance for loan and lease losses, and (ii) the determination of fair value for financial instruments. Management has presented the application of these policies to the audit committee of our board of directors.

These critical accounting policies, along with other significant accounting policies, are presented in in 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 months ended March 31, 2019, as compared to the same period in 2018, and the changes in its financial condition as of March 31, 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 March 31, 2019 was $2.0 million, or $0.31 per diluted share, an increase of $700 thousand as compared to net income of $1.3 million for the same period in 2018.

·

Return on average equity (“ROE”) and return on average assets (“ROA”) for the three months ended March 31, 2019 were 7.32% and 0.83%, respectively.

·

Net interest income increased $800 thousand, or 10.2%, to $8.5 million for the three months ended March 31, 2019, as compared to $7.7 million for the same period in 2018.

·

Provision for loan and lease losses (the “Provision”) of $219 thousand for the three months ended March 31, 2019 was a decrease of $335 thousand from the $554 thousand Provision recorded for the same period in 2018.

·

Non-interest income of $6.4 million for the three months ended March 31, 2019 was a $609 thousand or 8.6% decrease from the same period in 2018.

·

Mortgage banking income increased $87 thousand, or 1.8%, to $4.9 million for the three months ended March 31, 2019, as compared to $4.8 million for the same period in 2018.

·

Non-interest expense of $12.1 million for the three months ended March 31, 2019 decreased $500 thousand, or 3.5%, from $12.6 million for the same period in 2018.

Changes in Financial Condition

·

Total assets of $1.03  billion as of March 31, 2019 increased $30 million, or 3.0%, from $997.5 million as of December 31, 2018.

32

Table of Contents

·

Consolidated stockholders’ equity of $112.0 million as of March 31, 2019 increased $2.4 million from $109.6 million as of December 31, 2018.

·

Total portfolio loans and leases, excluding mortgage loans held for sale, as of March 31, 2019 were $862.4 million, an increase of $24.3 million, or 2.9%, from $838.1 million as of December 31, 2018.

·

Total non-performing loans and leases of $3.9 million represented 0.44% of portfolio loans and leases as of March 31, 2019 as compared to $3.9 million, or 0.45% of portfolio loans and leases, as of December 31, 2018.

·

The $8.4 million allowance for loan losses (“Allowance’), as of March 31, 2019, represented 0.97% of portfolio loans and leases, as compared to $8.1 million, or 0.96% of portfolio loans and leases, as of December 31, 2018.

·

Total deposits of $810.7 million as of March 31, 2019 increased $58.6 million, or 7.8%, from $752.1 million as of December 31, 2018.

Key Performance Ratios

Key financial performance ratios for the three months ended March 31, 2019 and 2018 are shown in the table below:

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

    

Annualized return on average equity

 

 

7.32

%  

 

5.08

%  

Annualized return on average assets

 

 

0.83

%  

 

0.61

%  

Net interest margin (tax effected yield)

 

 

3.67

%  

 

3.91

%  

Basic earnings per share

 

$

0.31

 

$

0.20

 

Diluted earnings per share

 

$

0.31

 

$

0.20

 

 

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

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(dollars in thousands, except per share amounts)

    

2019

    

2018

 

Book value per common share

 

$

17.48

 

$

17.10

 

Tangible book value per common share

 

$

16.70

 

$

16.31

 

Allowance as a percentage of loans and leases held for investment

 

 

0.97

%  

 

0.96

%

Tier I capital to risk weighted assets

 

 

11.71

%  

 

11.72

%

Tangible common equity ratio (1)

 

 

10.47

%  

 

10.53

%

Loans held for investment

 

$

862,372

 

$

875,801

 

Total assets

 

$

1,027,514

 

$

997,480

 

Stockholders' equity

 

$

111,992

 

$

109,552

 


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

Non-GAAP Financial Measures

Included in this Quarterly Report on Form 10‑Q  is a financial performance measure not recognized by GAAP, “tangible common equity”. Our management used the measure of the tangible common equity ratio to assess our capital strength. We believe that this non-GAAP financial measure is useful to investors because, by removing the impact of our goodwill and other intangible assets, it allows investors to more easily assess our capital adequacy. This non-GAAP financial measure should not be considered a substitute for any regulatory capital ratios and may not be comparable to other similarly

33

Table of Contents

titled measures used by other companies. The table below provides the non-GAAP reconciliation for our tangible common equity ratio:

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

(dollars in thousands)

    

2019

    

2018

Tangbile common equity ratio:

 

 

 

 

Total stockholders' equity

 

111,992

 

109,552

Less:

 

 

 

 

Goodwill

 

899

 

899

Intangible assets

 

4,079

 

4,147

Tangible common equity

 

107,014

 

104,506

Total assets

 

1,027,514

 

997,480

Less:

 

 

 

 

Goodwill

 

899

 

899

Intangible assets

 

4,079

 

4,147

Tangible assets

 

1,022,536

 

992,434

Tangible common equity ratio

 

10.47%

 

10.53%

 

The following sections discuss, in detail, the Corporation’s results of operations for the three months ended Mach 31, 2019, as compared to the same periods in 2018, and the changes in its financial condition as of March 31, 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 months ended March 31, 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 March 31, 2019 was $12.3 million, which represented a $2.5 million, or 25.8%, increase compared with the three months ending March 31, 2018.  The increase in income was attributable to a

34

Table of Contents

$138.8 million increase in average interest earning assets, year over year, helped by an increase of 38 basis points in yield on earning assets, to 5.33% from 4.95%, for same period in 2018. The commercial loan portfolio yield, in particular, rose 61 basis points over the same period in 2018. Total interest expense rose $1.7 million or 82.8% to $3.8 million for the three months ending March 31, 2019, compared with $2.1 million for the three months ending March 31, 2018. The increase was primarily due to an increase in average interest bearing deposits of $108.1 million, year over year, as well as an overall increase of 75 basis points in the cost of interest-bearing funds reflective of the overall increase in market rates.

Net interest income increased $800 thousand, or 10.2%, to $8.5 million for the three months ended March 31, 2019, compared to $7.7 million for the three months ended March 31, 2018. The net-interest margin, although strong, decreased 24 basis points for the three months ending March 31, 2019 at 3.67%, compared with 3.91% for the three month ending March 31, 2018.  The decrease in net interest margin reflects the pressure from the rising cost of funds, which has outpaced the favorable trend in yield on interest earning assets during the quarter.  The strength in the Corporation’s net-interest margin in the face of rising cost of funds reflects the size and asset quality of the loan portfolio, as well as the $9.9 million or 16.3% increase in average non-interest bearing deposits period over period.

Analyses of Interest Rates and Interest Differential

The tables below present the major asset and liability categories on an average daily balance basis for the periods presented, along with interest income, interest expense and key rates and yields on a tax equivalent basis.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

2018

 

 

 

 

Interest

 

 

 

 

 

Interest

 

 

For the Three Months Ended March 31, 

 

Average

 

Income/

 

Yields/

 

Average

 

Income/

 

Yields/

(dollars in thousands)

    

Balance

    

Expense

    

rates

    

Balance

    

Expense

    

rates

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due from banks

 

$

7,293

 

 

44

 

2.44%

 

$

5,174

 

 

18

 

1.49%

Federal funds sold

 

 

933

 

 

 6

 

2.49%

 

 

885

 

 

 5

 

2.06%

Investment securities(1)

 

 

63,466

 

 

411

 

2.63%

 

 

52,136

 

 

304

 

2.36%

Loans held for sale

 

 

18,080

 

 

213

 

4.72%

 

 

24,319

 

 

240

 

3.95%

Loans held for investment(1)

 

 

849,237

 

 

11,676

 

5.54%

 

 

717,731

 

 

9,254

 

5.20%

Total loans

 

 

867,317

 

 

11,889

 

5.56%

 

 

742,050

 

 

9,494

 

5.16%

Total interest-earning assets

 

 

939,009

 

 

12,350

 

5.33%

 

 

800,245

 

 

9,821

 

4.95%

Noninterest earning assets

 

 

38,196

 

 

 

 

 

 

 

38,606

 

 

 

 

 

Total assets

 

$

977,205

 

 

 

 

 

 

$

838,851

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

113,211

 

 

448

 

1.60%

 

$

93,353

 

 

183

 

0.80%

Money market and savings deposits

 

 

264,889

 

 

1,135

 

1.74%

 

 

221,070

 

 

567

 

1.04%

Time deposits

 

 

287,758

 

 

1,653

 

2.33%

 

 

243,317

 

 

909

 

1.52%

Total deposits

 

 

665,858

 

 

3,236

 

1.97%

 

 

557,740

 

 

1,659

 

1.21%

Short-term borrowings

 

 

54,259

 

 

355

 

2.66%

 

 

46,617

 

 

210

 

1.83%

Long-term borrowings

 

 

7,831

 

 

89

 

4.58%

 

 

8,663

 

 

56

 

2.62%

Total Borrowings

 

 

62,090

 

 

444

 

2.90%

 

 

55,280

 

 

266

 

1.95%

Subordinated Debentures

 

 

9,239

 

 

168

 

7.35%

 

 

9,974

 

 

179

 

7.28%

Total interest-bearing liabilities

 

 

737,187

 

 

3,848

 

2.12%

 

 

622,994

 

 

2,104

 

1.37%

Noninterest-bearing deposits

 

 

122,729

 

 

 

 

 

 

 

108,367

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

6,092

 

 

 

 

 

 

 

5,859

 

 

 

 

 

Total liabilities

 

$

866,008

 

 

 

 

 

 

$

737,220

 

 

 

 

 

Total stockholders' equity

 

 

111,197

 

 

 

 

 

 

 

101,631

 

 

 

 

 

Total stockholders' equity and liabilities

 

$

977,205

 

 

 

 

 

 

$

838,851

 

 

 

 

 

Net interest income

 

 

 

 

$

8,502

 

 

 

 

 

 

$

7,717

 

 

Net interest spread

 

 

 

 

 

 

 

3.22%

 

 

 

 

 

 

 

3.58%

Net interest margin

 

 

 

 

 

 

 

3.67%

 

 

 

 

 

 

 

3.91%

35

Table of Contents


(1)

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

Rate/Volume Analysis (tax-equivalent basis)

The rate/volume analysis table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three months ended March 31, 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

 

 

Change in interest due to:

(dollars in thousands)

    

Rate

    

Volume

    

Total

Interest income:

 

 

 

 

 

 

 

Due from banks

 

$

16

 

10

 

26

Federal funds sold

 

 

 1

 

 -

 

 1

Investment securities(1)

 

 

37

 

70

 

107

Loans held for sale

 

 

202

 

(229)

 

(27)

Loans held for investment(1)

 

 

644

 

1,778

 

2,422

Total loans

 

 

846

 

1,549

 

2,395

Total interest income

 

$

900

 

1,629

 

2,529

Interest expense:

 

 

 

 

 

 

 

Interest checking

 

$

219

 

46

 

265

Money market and savings deposits

 

 

438

 

130

 

568

Time deposits

 

 

554

 

190

 

744

Total interest-bearing deposits

 

 

1,211

 

366

 

1,577

Short-term borrowings

 

 

108

 

37

 

145

Long-term borrowings

 

 

67

 

(34)

 

33

Total borrowings

 

 

175

 

 3

 

178

Subordinated debentures

 

 

10

 

(21)

 

(11)

Total interest expense

 

 

1,396

 

348

 

1,744

Interest differential

 

$

(496)

 

1,281

 

785


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

For the three months ended March 31, 2019 as compared to the same period in 2018, the favorable change in net interest income due to volume changes was driven largely from growth in the loan portfolio, which increased $125.3 million on average over the three month periods. This increase contributed $1.6 million to interest income. Total investment securities, cash and cash equivalents were relatively flat, period over period. On the funding side, interest checking and money market accounts together rose $43.8 million on average, reducing net interest income by $130 thousand. Time deposits increased $44.4 million on average, causing an increase to interest expense of $190 thousand. Borrowings increased $6.8 million on average affecting net interest income only $3 thousand negatively, and lower levels of subordinated debt contributed $21 thousand to the net interest income over the three month periods compared.

For the three months ended March 31, 2019 as compared to the same period in 2018, the unfavorable change in net interest income due to rate changes was driven largely from the increase in cost of funds, particularly from wholesale funding such as borrowings and time deposits, which rose 95 and 81 basis points, respectively. Core deposits, such as interest checking and money market accounts rose 80 and 70 basis points, respectively. These unfavorable rate changes were partially offset by favorable rate changes in interest earning assets. Overall, the increase in interest income from volume changes contributed $1.6 million and out-paced the unfavorable rate changes to improve net interest income by $800 thousand.

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

36

Table of Contents

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 March 31, 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

 

 

 

March 31, 

 

Changes in Market Interest Rates

    

2019

    

2018

 

+300 basis points over next 12 months

 

(1.2)

%  

0.3

%

+200 basis points over next 12 months

 

(0.7)

%  

0.2

%

+100 basis points over next 12 months

 

(0.3)

%  

0.1

%

No Change

 

  

 

  

 

-100 basis points over next 12 months

 

(0.2)

%

(0.1)

%

 

The above interest rate simulation suggests that the Corporation’s balance sheet is in a liability sensitive position as of March 31, 2019 and was in an asset sensitive position as of March 31, 2018.  In its current position, the table indicates that a 100, 200 or 300 basis point increase in interest rates would have a modestly positive impact from rising rates on net interest income over the next 12 months. The simulated exposure to a change in interest rates is contained, manageable and well within policy guidelines. The results continue to drive our funding strategy of increasing relationship-based accounts (core deposits) and utilizing term deposits to fund short to medium duration assets.

Simulation of economic value of equity. To quantify the amount of capital required to absorb potential losses in value of our interest-earning assets and interest-bearing liabilities resulting from adverse market movements, we calculate economic value of equity on a quarterly basis. We define economic value of equity as the net present value of our balance sheet’s cash flow, and we calculate economic value of equity by discounting anticipated principal and interest cash flows under the prevailing and hypothetical interest rate environments. Potential changes to our economic value of equity between a flat rate scenario and hypothetical rising and declining rate scenarios, measured as of December 31, 2017 and 2018, are presented in the following table. The projections assume shifts ramp upward and downward of the yield curve of 100, 200 and 300 basis points occurring immediately. We would note that in a downward parallel shift of the yield curve, interest rates at the short-end of the yield curve are not modeled to decline any further than to 0%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37

Table of Contents

 

 

Estimated increase (decrease) in Net

 

 

 

Economic Value at March 31, 

 

Changes in Market Interest Rates

    

2019

 

2018

 

+300 basis points

 

(8.4)

%  

0.3

%  

+200 basis points

 

(5.4)

%  

0.2

%  

+100 basis points

 

(2.5)

%  

0.1

%  

No Change

 

  

 

  

 

-100 basis points

 

1.4

%

(0.1)

%

Gap Analysis

Management measures and evaluates the potential effects of interest rate movements on earnings through an interest rate sensitivity “gap” analysis. Given the size and turnover rate of the originated mortgage loans held for sale, these loans are treated as having a maturity of 12 months or less. Interest rate sensitivity reflects the potential effect on net interest income when there is movement in interest rates. An institution is considered to be asset sensitive, or having a positive gap, when the amount of its interest-earning assets repricing within a given period exceeds the amount of its interest-bearing liabilities also repricing within that time period. Conversely, an institution is considered to be liability sensitive, or having a negative gap, when the amount of its interest-bearing liabilities repricing within a given period exceeds the amount of its interest-earning assets also within that time period. During a period of rising interest rates, a negative gap would tend to decrease net interest income, while a positive gap would tend to increase net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to decrease net interest income.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Greater 

 

 

 

 

 

 

 

 

 

 

 

Than 

 

 

 

 

 

 

 

 

 

 

5 years and

 

 

As of March 31, 2019

 

12 Months

 

 

 

 

 

 Not Rate 

 

 

(dollars in thousands)

    

or Less

    

1-2 Years

    

2-5 Years

    

Sensitive

    

Total

Cash and investments

 

$

56,391

 

4,366

 

14,583

 

26,752

 

102,092

Loans, net (1)

 

 

490,022

 

112,752

 

242,447

 

38,387

 

883,608

Other Assets

 

 

 —

 

 —

 

 —

 

41,814

 

41,814

Total Assets

 

$

546,413

 

117,118

 

257,030

 

106,953

 

1,027,514

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

16,897

 

8,203

 

14,379

 

75,985

 

115,464

Interest-bearing deposits

 

 

398,944

 

 —

 

 —

 

 —

 

398,944

Time deposits

 

 

271,267

 

12,923

 

12,116

 

 —

 

296,306

FHLB advances

 

 

81,683

 

5,000

 

 —

 

 —

 

86,683

Other Liabilities

 

 

619

 

206

 

344

 

16,957

 

18,126

Total stockholders' equity

 

 

 —

 

 —

 

 —

 

111,991

 

111,991

Total liabilities and stockholders' equity

 

$

769,410

 

26,332

 

26,839

 

204,933

 

1,027,514

Repricing gap-positive

 

 

 

 

 

 

 

 

 

 

 

(Negative) Positive

 

$

(222,997)

 

90,786

 

230,191

 

(97,980)

 

 —

Cumulative repricing gap: Dollar amount

 

$

(222,997)

 

(132,211)

 

97,980

 

 —

 

 

Percent of total assets

 

 

(21.7)%

 

(12.9)%

 

9.5%

 

 —

 

 


(1)

Loans include portfolio loans and loans held for sale

38

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity:

 

 

 

 

 

 

 

 

 

 

 

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 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 March 31, 2019, the Corporation recorded a Provision of $219 thousand which was a $335 thousand decrease from the same period in 2018. For the three months ended March 31, 2019 there were net recoveries of $104 thousand as compared to net charge-offs of $124 thousand for the same period in 2018.  

The decreased provision over the three periods was the result of strong asset quality and the lower level of net charge-offs.

Asset Quality and Analysis of Credit Risk

Asset quality remains strong as of March 31, 2019, as total nonperforming loans and leases were unchanged from December 31, 2018 to March 31, 2019 at $3.9 million, or 0.44% of loans and leases held-for-investment as of March 31, 2019, compared to 0.47%  as of December 31, 2018.  

The ratio of the Allowance to total loans held for investment, excluding loans at fair value, was 0.99% as of March 31, 2019, an improvement from the 0.97% as of December 31, 2018.  The Allowance to non-performing loans increased from 204.85% as of December 31, 2018 218.64% as of March 31, 2019.

39

Table of Contents

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

As of March 31, 2019, the Corporation had $4.2 million of troubled debt restructurings (“TDRs”), of which $3.0 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 March 31, 2019, the Corporation  had a recorded investment of $65.6 million of impaired loans and leases which included $4.2 million of TDRs.

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

Nonperforming Assets and Related Ratios

 

 

 

 

 

 

 

 

 

As of

 

 

March 31, 

 

December 31, 

(dollars in thousands)

    

2019

    

2018

Non-performing assets:

 

 

 

 

 

 

Nonaccrual loans:

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

Commercial mortgage

 

$

1,223

 

$

1,224

Home equity lines and loans

 

 

81

 

 

83

Residential mortgage

 

 

2,029

 

 

2,147

Commercial construction

 

 

27

 

 

 —

Total real estate loans

 

$

3,360

 

$

3,454

Commercial and industrial

 

 

471

 

 

477

Total nonaccrual loans

 

$

3,831

 

$

3,931

Loans 90 days or more past due and accruing

 

 

 —

 

 

 —

Other real estate owned

 

 

120

 

 

 —

Total non-performing loans

 

$

3,831

 

$

3,931

Total non-performing assets

 

$

3,951

 

$

3,931

 

 

 

 

 

 

 

Troubled debt restructurings:

 

 

 

 

 

 

TDRs included in non-performing loans

 

 

1,213

 

 

1,219

TDRs in compliance with modified terms

 

 

2,941

 

 

3,047

Total TDRs

 

$

4,154

 

$

4,266

 

 

 

 

 

 

 

Asset quality ratios:

 

 

 

 

 

 

Non-performing assets to total assets

 

 

0.38%

 

 

0.39%

Non-performing loans to:

 

 

 

 

 

 

Total loans

 

 

0.43%

 

 

0.45%

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

 

 

0.45%

 

 

0.48%

Allowance for loan losses to:

 

 

 

 

 

 

Total loans

 

 

0.94%

 

 

0.92%

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

 

 

0.99%

 

 

0.97%

Non-performing loans  

 

 

218.64%

 

 

204.85%

 

 

 

 

 

 

 

Total loans and leases

 

$

891,984

 

$

875,801

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

 

$

849,621

 

$

826,684

Allowance for loan and lease losses

 

$

8,376

 

$

8,053

 

40

Table of Contents

NON-INTEREST INCOME

Three Months Ended March 31, 2019 Compared to the Same Period in 2018

Total non-interest income for the three months ended March 31, 2019 was $6.4 million, down $609 thousand, or 8.6%, from the comparable period in 2018. This overall decrease in non-interest income came primarily from our mortgage division. While mortgage banking revenue increased $87 thousand and the net change in fair value of mortgage related financial instruments increased $397 thousand year-over-year, realized gains on derivatives related to mortgage banking, included in other non-interest income, decreased $974 thousand for the three months ended March 31, 2019 to a loss of $275 thousand, compared to a gain of $699 thousand for the same period in 2018. Wealth management revenue decreased $214 thousand year-over-year.  Revenue for the three months ended March 31, 2019 was largely based on the market values of assets under management at the end of 2018, which were temporary depressed due to year-end declines in the stock market.

NON-INTEREST EXPENSE

Three Months Ended March 31, 2019 Compared to the Same Period in 2018

Total non-interest expense was $12.1 million for the three months ended March 31, 2019, down $445 thousand, or 3.5%, from $12.6 million for the three months ended March 31, 2018. The decrease is mainly attributable to a reduction in salaries and employee benefits expense of $709 thousand or 8.4%, as full-time equivalent employees, particularly in the mortgage division were reduced. In addition, variable loan expenses decreased by $64 thousand or 12%, reflecting the lower level of mortgage originations year-over-year. Occupancy and equipment expense as well as professional fees were relatively flat for the comparable three month period, while advertising and promotion expense was down $116 thousand year-over-year due to changes in the timing of certain marketing campaigns.  Data processing expenses were up modestly due to the increased transaction volume. Other expenses were up over the comparable three month period due to a a charge of $125 thousand to the reserve for the open litigation, which increased the litigation reserve to $325 thousand overall, and higher levels of other employee-related expenses, shares tax expense, as well as other expenses.  Additionally, $79 thousand of other expense was incurred for the current period impact of the Maryland mortgage licensing issue.  The impact of the Maryland licensing issue totaled $486 thousand, however $407 thousand ($315 thousand net of tax) pertained to prior periods and was adjusted through retained earnings as of January 1, 2018 as it was considered the correction of an immaterial error.

INCOME TAXES

Income tax expense for the three months ended March 31, 2019 was $582 thousand, as compared to $362 thousand for the same period in 2018.  The increase in income tax expense was entirely attributable to the significant increase in earnings, period over period.  Our effective tax rate was 22.5% for the first quarter of 2019 and 22.2% for the first quarter of 2018. 

BALANCE SHEET ANALYSIS

As of March 31, 2019, total assets were $1.03 billion compared with $997.5 million as of December 31, 2018. Total assets increased $30 million, or 3.0%, on a year-to-date basis primarily due to strong loan growth.

Total loans, excluding mortgage loans held for sale, grew $24.3 million, or 2.9%, to $862.4 million as of March 31, 2019, from $838.1 million as of December 31, 2018.  The increase in loans is attributable to several commercial categories as we continue to grow our presence in the Philadelphia market area. Commercial loans increased $8.5 million, or 3.4%, during the first three months of the year.  Commercial real estate and commercial construction loans combined increased $11.3 million, or 2.6%, during the first three months of the year. Residential loans held in portfolio increased $4.2 million, or 7.9%, during the first three months as certain loan products or terms were targeted to hold in portfolio, prior to origination. Residential mortgage loans held for sale decreased $8.1 million, or 21.5%, to $29.6 million as of March 31, 2019 from December 31, 2018.

41

Table of Contents

Deposits were $810.7 million as of March 31, 2019, up $58.6 million, or 7.8%, from December 31, 2018.  Non-interest bearing deposits decreased $10.7 million, or 8.5%, from December 31, 2018. Money market accounts/savings accounts increased $53.8 million, or 23.1%, since December 31, 2018, while interest-bearing checking accounts decreased $2.1 million, or 1.9%, during the year. Certificates of deposit increased $17.6 million, or 6.3%, during the past three months, partially paying off borrowings as a result of wholesale funds management in the rising rate environment. 

 

Capital

Consolidated stockholders’ equity of the Corporation was $112.0 million, or 10.9% of total assets as of March 31, 2019, as compared to $109.6 million, or 10.98% of total assets as of December 31, 2018. At March 31, 2019, the Tier 1 leverage ratio was 11.01%, the Tier 1 risk-based capital and common equity ratios were 11.71%, and total risk-based capital was 13.65%. At December 31, 2018, the Tier 1 leverage ratio was 11.16%, the Tier 1 risk-based capital and common equity ratios were 11.72%, and total risk-based capital was 13.66%.    Tangible book value per share was $16.70 as of March 31, 2019, compared with $16.36 as of December 31, 2018.  Refer to Footnote 1 for discussion of an immaterial error correction that impacted beginning retained earnings as of January 1, 2018.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

To be well capitalized under

 

 

 

 

 

 

 

 

For capital adequacy

 

prompt corrective action

 

 

 

Actual

 

purposes *

 

provisions

 

(dollars in thousands)

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Total capital (to risk-weighted assets)

 

$

124,745 

 

13.65%

 

$

73,132 

 

8.00%

 

$

91,415 

 

10.00%

 

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

 

 

107,024 

 

11.71%

 

 

41,137 

 

4.50%

 

 

59,419 

 

6.50%

 

Tier 1 capital (to risk-weighted assets)

 

 

107,024 

 

11.71%

 

 

54,849 

 

6.00%

 

 

73,132 

 

8.00%

 

Tier 1 capital (to average assets)

 

 

107,024 

 

11.01%

 

 

38,889 

 

4.00%

 

 

48,611 

 

5.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018 - as revised

 

 

 

 

 

 

 

 

 

 

 

 

 

To be well capitalized under

 

 

 

 

 

 

 

 

For capital adequacy

 

prompt corrective action

 

 

 

Actual

 

purposes *

 

provisions

 

(dollars in thousands):

    

Amount

    

Ratio

    

Amount

    

Ratio

    

Amount

    

Ratio

 

Total capital (to risk-weighted assets)

 

$

122,262

 

13.66%

 

$

71,585

 

8.00%

 

$

89,481

 

10.00%

 

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

 

 

104,881

 

11.72%

 

 

40,266

 

4.50%

 

 

58,163

 

6.50%

 

Tier 1 capital (to risk-weighted assets)

 

 

104,881

 

11.72%

 

 

53,689

 

6.00%

 

 

71,585

 

8.00%

 

Tier 1 capital (to average assets)

 

 

104,881

 

11.16%

 

 

37,581

 

4.00%

 

 

46,977

 

5.00%

 


*Excludes capital conservation buffer of 1.25% for 2017 and 1.875% for 2018.

The capital ratios for the  Corporation, as of March 31, 2019, as shown in the above tables, indicate levels above the regulatory minimum to be considered “well capitalized.” The capital ratios to risk-weighted assets have all decreased from their December 31, 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

42

Table of Contents

amortization or that can be used as collateral to secure funding. In addition, as part of its liquidity management, Meridian maintains a segment of commercial loan assets that are comprised of SNCs, which have a national market and can be sold in a timely manner. Meridian’s primary liquidity, which totaled $156.4 million at March 31, 2019, compared to $131.5 million at March 31, 2018, includes investments, shared national credit portfolio (“SNCs”), Federal funds sold, mortgages held-for-sale and cash and cash equivalents, less the amount of securities required to be pledged for certain liabilities.  Meridian also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios.  In addition, Meridian maintains borrowing arrangements with various correspondent banks, the 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 $10.2 million at March 31, 2019. As a member of the FHLB, we are eligible to borrow up to a specific credit limit, which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of March 31, 2019, Meridian’s maximum borrowing capacity with the FHLB was $454.6 million. At March 31, 2019, Meridian had borrowed $86.7 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $112.1 million against its available credit lines. At March 31, 2019, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as $102.4 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $73.18 million of available short or long term funding through brokered CD arrangements. Management believes that Meridian has adequate resources to meet its short-term and long-term funding requirements.

Discussion of Segments

As of March 31, 2019, the Corporation has three principal segments as defined by FASB ASC 280, “Segment Reporting.” The segments are Banking, Mortgage Banking and Wealth Management (see Note 10 in the accompanying Notes to Unaudited Consolidated Financial Statements).

The Banking Segment recorded net income before tax (“operating margin”) of $2.6 million for the three months ended March 31, 2019, as compared to operating margin of $1.4 million for the same respective period in 2018.  Non-interest expense for the three months ended March 31, 2019.  The Banking Segment provided 99.0% of the Bank’s pre-tax profit for the three month periods ended March 31, 2019, as compared to 86.3% for the same respective period in 2018.

The Wealth Management Segment recorded operating margin of $36 thousand for the three months ended March 31, 2019, as compared to operating margin of $363 thousand for the same respective period in 2018.  

The Mortgage Banking Segment recorded operating loss of $10 thousand for the three months ended March 31, 2019, as compared to operating loss of $140 thousand for the same respective period in 2018.  Mortgage Banking income and expenses decreased due to lower margins and origination volume.  

Off Balance Sheet Risk

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at March 31,  2019 were $289.7 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 March 31,  2019 amounted to $6.4 million, as compared to $5.2 million at December 31, 2018.

Estimated fair values of the Corporation’s off-balance sheet instruments are based on fees and rates currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties’ credit

43

Table of Contents

standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and the estimated fair value of off-balance sheet instruments.

In certain circumstances the Corporation may be required to repurchase loans from investors under the terms of loan sale agreements. Generally, these circumstances include the breach of representations and warranties made to investors regarding borrower default or early payment, as well as a violation of the applicable federal, state, or local lending laws.  The Corporation agrees to repurchase loans if the representations and warranties made with respect to such loans are breached, and such breach has a material adverse effect on the loans. The Corporation was not required to repurchase any loans sold, based on the obligations described above, for the three months ended March 31, 2019 or 2018. 

Recent Litigation

See “Part II, Item 1. Legal Proceedings” below for information regarding a lawsuit filed in November 2017 against the Corporation.

Regulatory Update

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures  

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 such evaluation, our CEO and CFO have concluded that as of March 31, 2019, we did not maintain effective disclosure controls and procedures because of the material weakness in internal control over financial reporting described below. In light of this material weakness, management completed additional

44

Table of Contents

procedures and analysis to validate the accuracy and completeness of the reported financial results. In addition, management engaged the Audit Committee directly, in detail, to discuss the procedures and analysis performed to ensure the reliability of the Corporation’s financial reporting. Notwithstanding this material weakness, based on additional analyses and other procedures performed, management concluded that the financial statements included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial position, results of operations, capital position, and cash flows for the periods presented, in conformity with GAAP.

 

A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis.    These deficiencies in controls could result in a misstatement of any account balance or disclosure that in turn, would result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected.

 

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

 

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

 

Remediation Status of Reported Material Weakness

 

The Corporation is currently working to remediate the material weakness described above, including assessing the need for additional remediation steps and implementing additional measures to remediate the underlying causes that gave rise to the material weakness. The Corporation is committed to maintaining a strong internal control environment and to ensure that a proper, consistent tone is communicated throughout the organization, including the expectation that previously existing deficiencies will be remediated through implementation of processes and controls to ensure strict compliance with GAAP.

 

To address the material weakness, noted above, the Corporation has taken the following measures:  management discontinued the origination of mortgage loan originations into this state until the matter is satisfactorily resolved with the licensing authority, and restricted access within the mortgage loan origination system  to prevent further origination activity in that state. 

 

The Corporation also performed an analysis of the mortgage licensing laws in other states where we lend to ensure that we were in compliance with other relevant licensing laws. We plan to implement a control that is supported by a third-party to help ensure the Corporation is aware of and compliant with state licensing requirements and is apprised of any changes in a timely manner. We also plan through internal audit and compliances reviews to develop a monitoring program to further ensure compliance with licensing laws. Lastly the Corporation will not originate loans in this particular state until it is compliant with licensing laws.

45

Table of Contents

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 February 2018, the Bank answered the complaint and presented affirmative defenses. In March 2018, plaintiffs’ counsel and the Bank agreed to move forward with non-binding mediation. Although the Bank believes it has strong and meritorious defenses, given the uncertainty of litigation, the preliminary stage of the case, and the legal standards that must be met for, among other things, success on the merits, the Bank has a $325 thousand reserve, $125 thousand of which was added in the quarter ended March 31, 2019, as a reasonable estimate for possible losses that may result from this action. This estimate may change from time to time, and actual losses could vary.

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.

On August 24, 2018, Meridian Corporation (the “Corporation”), acquired the Bank in a merger and reorganization effected under Pennsylvania law and in accordance with the terms of a Plan of Merger and Reorganization dated April 26, 2018 (the “Agreement”).  Pursuant to the Agreement, on August 24, 2018 at 5:00 p.m. 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.

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 47.

46

Table of Contents

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

 

 

 

 

 

 

 

 

47

Table of Contents

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:

May 28, 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)

 

48