UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended JuneSeptember 30, 2022
Or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number: 000-55983
(Exact name of registrant as specified in its charter)
| | | | | |
Pennsylvania | 83-1561918 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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.
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| 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 August 5,November 2, 2022 there were 6,017,2475,800,526 outstanding shares of the issuer’s common stock, par value $1.00 per share.
TABLE OF CONTENTS
Glossary of Acronyms, Abbreviations, and Terms
The acronyms, abbreviations, and terms listed below are used in various sections of this report. As used throughout this report, the terms "Meridian", “we”, “our”, or “us” refer to Meridian Corporation and its consolidated subsidiaries, unless the context otherwise requires.
| | | | | |
Acronym | Description |
| |
ALLL | Allowance for loan and lease losses |
AOCI | Accumulated other comprehensive (loss) income |
ASC | Accounting Standards Codification |
ASU | Accounting Standards Update |
BOLI | Bank owned life insurance |
CECL | Current expected credit losses |
CET1 | Common equity tier 1 |
CMO | Collateralized mortgage obligation |
ESOP | Employee Stock Ownership Plan |
FASB | Financial Accounting Standards Board |
FHLB | Federal Home Loan Bank of Pittsburgh |
FRB | Board of Governors of the Federal Reserve System |
FTE | Fully taxable equivalent |
GAAP | U.S. generally accepted accounting principles |
JOBS Act | Jumpstart Our Business Startups Act of 2012 |
LIBOR | London Inter-bank Offering Rate |
MBS | Mortgage-backed securities |
MSLP | Main Street Lending Programs |
MSR | Mortgage servicing rights |
| |
PPP | Paycheck Protection Program |
ROU | Right-of-use |
SBA | Small Business Administration |
SEC | Securities and Exchange Commission |
SERP | Supplemental Executive Retirement Plan |
TDR | Troubled debt restructuring |
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| (dollars in thousands, except per share data) | (dollars in thousands, except per share data) | June 30, 2022 | | December 31, 2021 | (dollars in thousands, except per share data) | September 30, 2022 | | December 31, 2021 |
Assets: | | Assets: | | | |
Cash and due from banks | Cash and due from banks | $ | 37,093 | | | $ | 23,480 | | Cash and due from banks | $ | 12,114 | | | $ | 3,966 | |
Interest-bearing deposits at other banks | | Interest-bearing deposits at other banks | 20,774 | | | 19,514 | |
| Cash and cash equivalents | Cash and cash equivalents | 37,093 | | | 23,480 | | Cash and cash equivalents | 32,888 | | | 23,480 | |
Securities available-for-sale (amortized cost of $139,833 and $158,387 as of June 30, 2022 and December 31, 2021) | 129,288 | | | 159,302 | | |
Securities held-to-maturity (fair value of $33,497 and $6,591 as of June 30, 2022 and December 31, 2021) | 37,111 | | | 6,372 | | |
Securities available-for-sale, at fair value (amortized cost of $143,581 and $158,387, respectively) | | Securities available-for-sale, at fair value (amortized cost of $143,581 and $158,387, respectively) | 127,999 | | | 159,302 | |
Securities held-to-maturity, at amortized cost (fair value of $32,323 and $6,591, respectively) | | Securities held-to-maturity, at amortized cost (fair value of $32,323 and $6,591, respectively) | 37,922 | | | 6,372 | |
Equity investments | Equity investments | 2,153 | | | 2,354 | | Equity investments | 2,092 | | | 2,354 | |
Mortgage loans held for sale (amortized cost of $58,914 and $80,002 as of June 30, 2022 and December 31, 2021), at fair value | 58,938 | | | 80,882 | | |
Loans, net of fees and costs (includes $16,212 and $17,558 of loans at fair value, amortized cost of $17,611 and $17,106 as of June 30, 2022 and December 31, 2021) | 1,518,893 | | | 1,386,457 | | |
Mortgage loans held for sale | | Mortgage loans held for sale | 33,800 | | | 80,882 | |
Loans, net of fees and costs | | Loans, net of fees and costs | 1,610,349 | | | 1,386,457 | |
Allowance for loan and lease losses | Allowance for loan and lease losses | (18,805) | | | (18,758) | | Allowance for loan and lease losses | (18,974) | | | (18,758) | |
Loans, net of the allowance for loan and lease losses | Loans, net of the allowance for loan and lease losses | 1,500,088 | | | 1,367,699 | | Loans, net of the allowance for loan and lease losses | 1,591,375 | | | 1,367,699 | |
Restricted investment in bank stock | Restricted investment in bank stock | 4,719 | | | 5,117 | | Restricted investment in bank stock | 5,217 | | | 5,117 | |
Bank premises and equipment, net | Bank premises and equipment, net | 12,185 | | | 11,806 | | Bank premises and equipment, net | 12,835 | | | 11,806 | |
Bank owned life insurance | Bank owned life insurance | 22,778 | | | 22,503 | | Bank owned life insurance | 22,916 | | | 22,503 | |
Accrued interest receivable | Accrued interest receivable | 5,108 | | | 5,009 | | Accrued interest receivable | 6,008 | | | 5,009 | |
Deferred income taxes | Deferred income taxes | 4,467 | | | 1,413 | | Deferred income taxes | 5,722 | | | 1,413 | |
Servicing assets | Servicing assets | 12,860 | | | 12,765 | | Servicing assets | 12,807 | | | 12,765 | |
Goodwill | Goodwill | 899 | | | 899 | | Goodwill | 899 | | | 899 | |
Intangible assets | Intangible assets | 3,277 | | | 3,379 | | Intangible assets | 3,226 | | | 3,379 | |
Other assets | Other assets | 22,055 | | | 10,463 | | Other assets | 26,218 | | | 10,463 | |
Total assets | Total assets | $ | 1,853,019 | | | $ | 1,713,443 | | Total assets | $ | 1,921,924 | | | $ | 1,713,443 | |
| Liabilities: | Liabilities: | | | | Liabilities: | | | |
Deposits: | Deposits: | | Deposits: | |
Non-interest bearing | Non-interest bearing | $ | 291,925 | | | $ | 274,528 | | Non-interest bearing | $ | 290,169 | | | $ | 274,528 | |
Interest bearing | Interest bearing | 1,276,089 | | | 1,171,885 | | Interest bearing | 1,383,384 | | | 1,171,885 | |
Total deposits | Total deposits | 1,568,014 | | | 1,446,413 | | Total deposits | 1,673,553 | | | 1,446,413 | |
Short-term borrowings | Short-term borrowings | 59,136 | | | 41,344 | | Short-term borrowings | 23,458 | | | 41,344 | |
| Subordinated debentures | Subordinated debentures | 40,567 | | | 40,508 | | Subordinated debentures | 40,597 | | | 40,508 | |
Accrued interest payable | Accrued interest payable | 146 | | | 31 | | Accrued interest payable | 1,154 | | | 31 | |
Other liabilities | Other liabilities | 29,069 | | | 19,787 | | Other liabilities | 32,001 | | | 19,787 | |
Total liabilities | Total liabilities | 1,696,932 | | | 1,548,083 | | Total liabilities | 1,770,763 | | | 1,548,083 | |
| Stockholders’ equity: | Stockholders’ equity: | | | | Stockholders’ equity: | | | |
Common stock, $1 par value. Authorized 25,000,000 shares as of June 30, 2022 and December 31, 2021; issued 6,560,956 and 6,534,587 as of June 30, 2022 and December 31, 2021 | 6,561 | | | 6,535 | | |
Common stock, $1 par value per share. 25,000,000 shares authorized; 6,566,356 and 6,534,587 shares issued and outstanding, respectively | | Common stock, $1 par value per share. 25,000,000 shares authorized; 6,566,356 and 6,534,587 shares issued and outstanding, respectively | 6,566 | | | 6,535 | |
Surplus | Surplus | 84,359 | | | 83,663 | | Surplus | 84,848 | | | 83,663 | |
Treasury stock - 524,078 and 426,693 shares at June 30, 2022 and December 31, 2021 | (11,896) | | | (8,860) | | |
Treasury stock, 721,927 and 426,693 shares, respectively, at cost | | Treasury stock, 721,927 and 426,693 shares, respectively, at cost | (18,033) | | | (8,860) | |
Unearned common stock held by employee stock ownership plan | Unearned common stock held by employee stock ownership plan | (1,602) | | | (1,602) | | Unearned common stock held by employee stock ownership plan | (1,602) | | | (1,602) | |
Retained earnings | Retained earnings | 87,815 | | | 84,916 | | Retained earnings | 92,405 | | | 84,916 | |
Accumulated other comprehensive (loss) income | Accumulated other comprehensive (loss) income | (9,150) | | | 708 | | Accumulated other comprehensive (loss) income | (13,023) | | | 708 | |
Total stockholders’ equity | Total stockholders’ equity | 156,087 | | | 165,360 | | Total stockholders’ equity | 151,161 | | | 165,360 | |
Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 1,853,019 | | | $ | 1,713,443 | | Total liabilities and stockholders’ equity | $ | 1,921,924 | | | $ | 1,713,443 | |
See accompanying notes to the unaudited consolidated financial statements.
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| | | Three months ended June 30, | | Six months ended June 30, | | | Three months ended September 30, | | Nine months ended September 30, |
(dollars in thousands, except per share data) | (dollars in thousands, except per share data) | 2022 | | 2021 | | 2022 | | 2021 | | (dollars in thousands, except per share data) | 2022 | | 2021 | | 2022 | | 2021 |
Interest income: | Interest income: | | | | | | | | | Interest income: | | | | | | | |
Loans, including fees | Loans, including fees | $ | 19,120 | | | $ | 16,839 | | | $ | 36,339 | | | $ | 33,662 | | | Loans, including fees | $ | 21,848 | | | $ | 17,626 | | | $ | 58,187 | | | $ | 51,287 | |
Securities: | | | |
Taxable | 436 | | | 280 | | | 772 | | | 553 | | | |
Tax-exempt | 429 | | | 393 | | | 825 | | | 746 | | | |
Securities - taxable | | Securities - taxable | 648 | | | 357 | | | 1,599 | | | 1,076 | |
Securities - tax-exempt | | Securities - tax-exempt | 369 | | | 306 | | | 1,015 | | | 886 | |
Cash and cash equivalents | Cash and cash equivalents | 52 | | | 5 | | | 65 | | | 8 | | | Cash and cash equivalents | 93 | | | 17 | | | 157 | | | 25 | |
Total interest income | Total interest income | 20,037 | | | 17,517 | | | 38,001 | | | 34,969 | | | Total interest income | 22,958 | | | 18,306 | | | 60,958 | | | 53,274 | |
Interest expense: | Interest expense: | | | | | | | | | Interest expense: | | | | | | | |
Deposits | Deposits | 1,818 | | | 1,368 | | | 3,107 | | | 2,934 | | | Deposits | 4,075 | | | 1,327 | | | 7,182 | | | 4,261 | |
Borrowings | Borrowings | 668 | | | 737 | | | 1,308 | | | 1,502 | | | Borrowings | 857 | | | 722 | | | 2,166 | | | 2,224 | |
Total interest expense | Total interest expense | 2,486 | | | 2,105 | | | 4,415 | | | 4,436 | | | Total interest expense | 4,932 | | | 2,049 | | | 9,348 | | | 6,485 | |
Net interest income | Net interest income | 17,551 | | | 15,412 | | | 33,586 | | | 30,533 | | | Net interest income | 18,026 | | | 16,257 | | | 51,610 | | | 46,789 | |
Provision for loan losses | Provision for loan losses | 602 | | | 96 | | | 1,217 | | | 695 | | | Provision for loan losses | 526 | | | 597 | | | 1,743 | | | 1,292 | |
Net interest income after provision for loan losses | Net interest income after provision for loan losses | 16,949 | | | 15,316 | | | 32,369 | | | 29,838 | | | Net interest income after provision for loan losses | 17,500 | | | 15,660 | | | 49,867 | | | 45,497 | |
Non-interest income: | Non-interest income: | | | | | | | | | Non-interest income: | | | | | | | |
Mortgage banking income | Mortgage banking income | 6,942 | | | 19,467 | | | 14,038 | | | 43,567 | | | Mortgage banking income | 7,329 | | | 18,726 | | | 21,367 | | | 62,293 | |
Wealth management income | Wealth management income | 1,254 | | | 1,163 | | | 2,558 | | | 2,299 | | | Wealth management income | 1,114 | | | 1,232 | | | 3,672 | | | 3,531 | |
SBA loan income | SBA loan income | 437 | | | 1,490 | | | 2,957 | | | 2,735 | | | SBA loan income | 989 | | | 2,688 | | | 3,946 | | | 5,423 | |
Earnings on investment in life insurance | Earnings on investment in life insurance | 137 | | | 65 | | | 275 | | | 131 | | | Earnings on investment in life insurance | 138 | | | 93 | | | 413 | | | 224 | |
Net change in the fair value of derivative instruments | Net change in the fair value of derivative instruments | (674) | | | (2,148) | | | (840) | | | (3,092) | | | Net change in the fair value of derivative instruments | 127 | | | (339) | | | (713) | | | (3,431) | |
Net change in the fair value of loans held-for-sale | Net change in the fair value of loans held-for-sale | 268 | | | 1,235 | | | (856) | | | (2,632) | | | Net change in the fair value of loans held-for-sale | (237) | | | (532) | | | (1,094) | | | (3,164) | |
Net change in the fair value of loans held-for-investment | Net change in the fair value of loans held-for-investment | (835) | | | 41 | | | (1,613) | | | (61) | | | Net change in the fair value of loans held-for-investment | (886) | | | 37 | | | (2,499) | | | (24) | |
Net gain on hedging activity | 1,715 | | | (674) | | | 4,542 | | | 3,587 | | | |
Net gain (loss) on hedging activity | | Net gain (loss) on hedging activity | 399 | | | (1,189) | | | 4,941 | | | 2,397 | |
Net gain on sale of investment securities available-for-sale | Net gain on sale of investment securities available-for-sale | — | | | — | | | — | | | 48 | | | Net gain on sale of investment securities available-for-sale | — | | | 314 | | | — | | | 362 | |
Service charges | Service charges | 31 | | | 33 | | | 58 | | | 65 | | | Service charges | 32 | | | 35 | | | 90 | | | 99 | |
Other | Other | 1,128 | | | 1,060 | | | 2,386 | | | 2,133 | | | Other | 1,219 | | | 1,057 | | | 3,605 | | | 3,192 | |
Total non-interest income | Total non-interest income | 10,403 | | | 21,732 | | | 23,505 | | | 48,780 | | | Total non-interest income | 10,224 | | | 22,122 | | | 33,728 | | | 70,902 | |
Non-interest expenses: | | | | | | | | | |
Non-interest expense: | | Non-interest expense: | | | | | | | |
Salaries and employee benefits | Salaries and employee benefits | 12,926 | | | 20,213 | | | 28,224 | | | 42,352 | | | Salaries and employee benefits | 13,360 | | | 19,472 | | | 41,585 | | | 61,824 | |
Occupancy and equipment | Occupancy and equipment | 1,176 | | | 1,175 | | | 2,428 | | | 2,326 | | | Occupancy and equipment | 1,191 | | | 1,133 | | | 3,619 | | | 3,460 | |
Professional fees | Professional fees | 913 | | | 816 | | | 1,761 | | | 1,756 | | | Professional fees | 899 | | | 873 | | | 2,659 | | | 2,629 | |
Advertising and promotion | Advertising and promotion | 1,189 | | | 921 | | | 2,175 | | | 1,707 | | | Advertising and promotion | 1,165 | | | 1,089 | | | 3,340 | | | 2,795 | |
Data processing | Data processing | 580 | | | 520 | | | 1,059 | | | 1,136 | | | Data processing | 574 | | | 530 | | | 1,633 | | | 1,666 | |
Information technology | Information technology | 728 | | | 464 | | | 1,438 | | | 889 | | | Information technology | 868 | | | 476 | | | 2,306 | | | 1,365 | |
Pennsylvania bank shares tax | Pennsylvania bank shares tax | 212 | | | 163 | | | 411 | | | 326 | | | Pennsylvania bank shares tax | 202 | | | 152 | | | 612 | | | 478 | |
Other | Other | 1,982 | | | 1,974 | | | 3,643 | | | 4,018 | | | Other | 2,002 | | | 1,756 | | | 5,646 | | | 5,773 | |
Total non-interest expenses | 19,706 | | | 26,246 | | | 41,139 | | | 54,510 | | | |
Total non-interest expense | | Total non-interest expense | 20,261 | | | 25,481 | | | 61,400 | | | 79,990 | |
Income before income taxes | Income before income taxes | 7,646 | | | 10,802 | | | 14,735 | | | 24,108 | | | Income before income taxes | 7,463 | | | 12,301 | | | 22,195 | | | 36,409 | |
Income tax expense | Income tax expense | 1,708 | | | 2,544 | | | 3,262 | | | 5,680 | | | Income tax expense | 1,665 | | | 2,863 | | | 4,927 | | | 8,543 | |
Net income | Net income | $ | 5,938 | | | $ | 8,258 | | | $ | 11,473 | | | $ | 18,428 | | | Net income | $ | 5,798 | | | $ | 9,438 | | | $ | 17,268 | | | $ | 27,866 | |
Basic earnings per common share | Basic earnings per common share | $ | 0.99 | | | $ | 1.37 | | | $ | 1.91 | | | $ | 3.06 | | | Basic earnings per common share | $ | 0.99 | | | $ | 1.56 | | | $ | 2.90 | | | $ | 4.62 | |
Diluted earnings per common share | Diluted earnings per common share | 0.96 | | | 1.33 | | | 1.84 | | | 2.98 | | | Diluted earnings per common share | $ | 0.96 | | | $ | 1.52 | | | $ | 2.80 | | | $ | 4.49 | |
Basic weighted average shares outstanding | | Basic weighted average shares outstanding | 5,868 | | | 6,045 | | | 5,964 | | | 6,033 | |
Diluted weighted average shares outstanding | | Diluted weighted average shares outstanding | 6,060 | | | 6,231 | | | 6,172 | | | 6,201 | |
See accompanying notes to the unaudited consolidated financial statements.
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, | | |
(dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Net income: | $ | 5,938 | | | $ | 8,258 | | | $ | 11,473 | | | $ | 18,428 | | | | | |
| | | | | | | | | | | |
Other comprehensive income: | | | | | | | | | | | |
Net change in unrealized gains on investment securities available for sale: | | | | | | | | | | | |
Net unrealized losses arising during the period, net of tax effect of $(1,025), $429, $(2,651), and $(163), respectively | (3,481) | | | 1,414 | | | (8,850) | | | (469) | | | | | |
Less: reclassification adjustment for net gains realized in net income, net of tax effect of $0, $0, $(3), and $12, respectively | — | | | — | | | (9) | | | (36) | | | | | |
Reclassification adjustment for securities transferred from available-for-sale to held-to-maturity, net of tax effect of $7, $0, $(301), and $0, respectively | 22 | | | — | | | (999) | | | 0 | | | | |
Unrealized investment losses, net of tax effect of $1,018, $429, $(2,955), and $175, respectively | (3,459) | | | 1,414 | | | (9,858) | | | (505) | | | | | |
Total other comprehensive (loss) income | (3,459) | | | 1,414 | | | (9,858) | | | (505) | | | | | |
Total comprehensive income | $ | 2,479 | | | $ | 9,672 | | | $ | 1,615 | | | $ | 17,923 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Net income: | $ | 5,798 | | | $ | 9,438 | | | $ | 17,268 | | | $ | 27,866 | |
| | | | | | | |
Net change in unrealized gains on investment securities available for sale: |
Change in fair value of investment securities available for sale, net of tax of $(1,129), $(312), $(3,694), and $(475), respectively | (3,910) | | | (1,021) | | | (12,760) | | | (1,490) | |
Reclassification adjustment for net gains (losses) realized in net income, net of tax effect of $0, $(71), $(1), and $(83), respectively | — | | | (243) | | | (9) | | | (279) | |
Reclassification adjustment for securities transferred from available-for-sale to held-to-maturity, net of tax effect of $8, $0, $(293), and $0, respectively | 37 | | | — | | | (962) | | | — | |
Unrealized investment losses, net of tax effect of $(1,121), $(383), $(3,989), and $(558), respectively | (3,873) | | | (1,264) | | | (13,731) | | | (1,769) | |
Other comprehensive loss | (3,873) | | | (1,264) | | | (13,731) | | | (1,769) | |
| | | | | | | |
Comprehensive income | $ | 1,925 | | | $ | 8,174 | | | $ | 3,537 | | | $ | 26,097 | |
See accompanying notes to the unaudited consolidated financial statements.
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Common Stock | | Surplus | | Treasury Stock | | Unearned Common Stock ESOP | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total |
Balance, January 1, 2021 | $ | 6,456 | | | $ | 81,196 | | | $ | (5,828) | | | $ | (1,768) | | | $ | 59,010 | | | $ | 2,556 | | | $ | 141,622 | |
Comprehensive income: | | | | | | | | | | | | | |
Net income | | | | | | | | | 10,170 | | | | | 10,170 | |
Net change in unrealized investment losses, net of tax | | | | | | | | | | | (1,919) | | | (1,919) | |
Total comprehensive income | | | | | | | | | | | | | 8,251 | |
Dividends declared, $1.125 per share | | | | | | | | | (6,931) | | | | | (6,931) | |
Common stock issued through share-based awards and exercises | 32 | | | 302 | | | | | | | | | | | 334 | |
Stock based compensation | | | 229 | | | | | | | | | | | 229 | |
Balance, March 31, 2021 | 6,488 | | | 81,727 | | | (5,828) | | | (1,768) | | | 62,249 | | | 637 | | | 143,505 | |
Comprehensive income: | | | | | | | | | | | | | |
Net income | | | | | | | | | 8,258 | | | | | 8,258 | |
Net change in unrealized investment gains, net of tax | | | | | | | | | | | 1,414 | | | 1,414 | |
Total comprehensive income | | | | | | | | | | | | | 9,672 | |
Dividends paid or accrued, $0.125 per share | | | | | | | | | (768) | | | | | (768) | |
Common stock issued through share-based awards and exercises | 5 | | | 52 | | | | | | | | | | | 57 | |
Stock based compensation | | | 419 | | | | | | | | | | | 419 | |
Balance, June 30, 2021 | $ | 6,493 | | | $ | 82,198 | | | $ | (5,828) | | | $ | (1,768) | | | $ | 69,739 | | | $ | 2,051 | | | $ | 152,885 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands, except per share data) | Common Stock | | Surplus | | Treasury Stock | | Unearned ESOP | | Retained Earnings | | AOCI | | Total |
Balance at June 30, 2022 | $ | 6,561 | | | $ | 84,359 | | | $ | (11,896) | | | $ | (1,602) | | | $ | 87,815 | | | $ | (9,150) | | | $ | 156,087 | |
Net income | — | | | — | | | — | | | — | | | 5,798 | | | — | | | 5,798 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (3,873) | | | (3,873) | |
Dividends paid or accrued, $0.20 per share | — | | | — | | | — | | | — | | | (1,208) | | | — | | | (1,208) | |
Net purchase of treasury stock through publicly announced plans (197,849 shares) | — | | | — | | | (6,137) | | | — | | | — | | | — | | | (6,137) | |
Common stock issued through share-based awards and exercises | 5 | | | 112 | | | — | | | — | | | — | | | — | | | 117 | |
Stock based compensation expense | — | | | 377 | | | — | | | — | | | — | | | — | | | 377 | |
Balance at September 30, 2022 | $ | 6,566 | | | $ | 84,848 | | | $ | (18,033) | | | $ | (1,602) | | | $ | 92,405 | | | $ | (13,023) | | | $ | 151,161 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands, except per share data) | Common Stock | | Surplus | | Treasury Stock | | Unearned ESOP | | Retained Earnings | | AOCI | | Total |
Balance at December 31, 2021 | $ | 6,535 | | | $ | 83,663 | | | $ | (8,860) | | | $ | (1,602) | | | $ | 84,916 | | | $ | 708 | | | $ | 165,360 | |
Net income | — | | | — | | | — | | | — | | | 17,268 | | | — | | | 17,268 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (13,731) | | | (13,731) | |
Dividends paid or accrued, $1.60 per share | — | | | — | | | — | | | — | | | (9,779) | | | — | | | (9,779) | |
Net purchase of treasury stock through publicly announced plans (295,234 shares) | — | | | — | | | (9,173) | | | — | | | — | | | — | | | (9,173) | |
Common stock issued through share-based awards and exercises | 31 | | | 454 | | | — | | | — | | | — | | | — | | | 485 | |
Stock based compensation expense | — | | | 731 | | | — | | | — | | | — | | | — | | | 731 | |
Balance at September 30, 2022 | $ | 6,566 | | | $ | 84,848 | | | $ | (18,033) | | | $ | (1,602) | | | $ | 92,405 | | | $ | (13,023) | | | $ | 151,161 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands, except per share data) | Common Stock | | Surplus | | Treasury Stock | | Unearned ESOP | | Retained Earnings | | AOCI | | Total |
Balance at June 30, 2021 | $ | 6,493 | | | $ | 82,198 | | | $ | (5,828) | | | $ | (1,768) | | | $ | 69,739 | | | $ | 2,051 | | | $ | 152,885 | |
Net income | — | | | — | | | — | | | — | | | 9,438 | | | — | | | 9,438 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (1,264) | | | (1,264) | |
Dividends paid or accrued, $0.125 per share | — | | | — | | | — | | | — | | | (769) | | | — | | | (769) | |
Net purchase of treasury stock through publicly announced plans (78,491 shares) | — | | | — | | | (2,197) | | | — | | | — | | | — | | | (2,197) | |
Common stock issued through share-based awards and exercises | 13 | | | 167 | | | — | | | — | | | — | | | — | | | 180 | |
Stock based compensation expense | — | | | 143 | | | — | | | — | | | — | | | — | | | 143 | |
Balance at September 30, 2021 | $ | 6,506 | | | $ | 82,508 | | | $ | (8,025) | | | $ | (1,768) | | | $ | 78,408 | | | $ | 787 | | | $ | 158,416 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands, except per share data) | Common Stock | | Surplus | | Treasury Stock | | Unearned ESOP | | Retained Earnings | | AOCI | | Total |
Balance at December 31, 2020 | $ | 6,456 | | | $ | 81,196 | | | $ | (5,828) | | | $ | (1,768) | | | $ | 59,010 | | | $ | 2,556 | | | $ | 141,622 | |
Net income | — | | | — | | | — | | | — | | | 27,866 | | | — | | | 27,866 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (1,769) | | | (1,769) | |
Dividends declared, $1.375 per share | — | | | — | | | — | | | — | | | (8,468) | | | — | | | (8,468) | |
Net purchase of treasury stock through publicly announced plans (78,491 shares) | — | | | — | | | (2,197) | | | — | | | — | | | — | | | (2,197) | |
Common stock issued through share-based awards and exercises | 50 | | | 521 | | | — | | | — | | | — | | | — | | | 571 | |
Stock based compensation expense | — | | | 791 | | | — | | | — | | | — | | | — | | | 791 | |
Balance at September 30, 2021 | $ | 6,506 | | | $ | 82,508 | | | $ | (8,025) | | | $ | (1,768) | | | $ | 78,408 | | | $ | 787 | | | $ | 158,416 | |
See accompanying notes to the unaudited consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Common Stock | | Surplus | | Treasury Stock | | Unearned Common Stock ESOP | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Total |
Balance, January 1, 2022 | $ | 6,535 | | | $ | 83,663 | | | $ | (8,860) | | | $ | (1,602) | | | $ | 84,916 | | | $ | 708 | | | $ | 165,360 | |
Comprehensive income: | | | | | | | | | | | | | |
Net income | | | | | | | | | 5,535 | | | | | 5,535 | |
Net change in unrealized investment losses, net of tax | | | | | | | | | | | (6,399) | | | (6,399) | |
Total comprehensive loss | | | | | | | | | | | | | (864) | |
Dividends paid or accrued, $1.20 per share | | | | | | | | | (7,347) | | | | | (7,347) | |
Common stock issued through share-based awards and exercises | 21 | | | 254 | | | | | | | | | | | 275 | |
Stock based compensation | | | 260 | | | | | | | | | | | 260 | |
Balance, March 31, 2022 | 6,556 | | | 84,177 | | | (8,860) | | | (1,602) | | | 83,104 | | | (5,691) | | | 157,684 | |
Comprehensive income: | | | | | | | | | | | | | |
Net income | | | | | | | | | 5,938 | | | | | 5,938 | |
Net change in unrealized investment losses, net of tax | | | | | | | | | | | (3,459) | | | (3,459) | |
Total comprehensive income | | | | | | | | | | | | | 2,479 | |
Dividends paid or accrued, $0.20 per share | | | | | | | | | (1,227) | | | | | (1,227) | |
Net purchase of treasury stock through publicly announced plans (97,385) | | | | | (3,036) | | | | | | | | | (3,036) | |
Common stock issued through share-based awards and exercises | 5 | | | 88 | | | | | | | | | | | 93 | |
Stock based compensation | | | 94 | | | | | | | | | | | 94 | |
Balance, June 30, 2022 | $ | 6,561 | | | $ | 84,359 | | | $ | (11,896) | | | $ | (1,602) | | | $ | 87,815 | | | $ | (9,150) | | | $ | 156,087 | |
MERIDIAN CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | |
| Nine months ended September 30, |
(dollars in thousands) | 2022 | | 2021 |
Net income | $ | 17,268 | | | $ | 27,866 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Gain on sale of investment securities | — | | | (362) | |
Net amortization of investment premiums and discounts and change in fair value of equity securities | 668 | | | 991 | |
Depreciation and amortization, net | (1,343) | | | (4,677) | |
Provision for loan losses | 1,743 | | | 1,292 | |
Amortization of issuance costs on subordinated debt | 89 | | | 88 | |
Stock based compensation | 731 | | | 791 | |
Net change in fair value of derivative instruments | 713 | | | 3,431 | |
Net change in fair value of loans held for sale | 1,094 | | | 3,164 | |
Net change in fair value of loans held for investment | 2,499 | | | 24 | |
Amortization and net impairment of servicing rights | 1,753 | | | 707 | |
SBA loan income | (3,946) | | | (5,423) | |
Proceeds from sale of loans | 863,056 | | | 2,027,443 | |
Loans originated for sale | (794,541) | | | (1,864,132) | |
Mortgage banking income | (21,367) | | | (62,293) | |
(Increase) decrease in accrued interest receivable | (999) | | | 402 | |
Increase in other assets | (1,675) | | | (2,648) | |
Earnings from investment in life insurance | (413) | | | (224) | |
Decrease in deferred income tax | (219) | | | (817) | |
Increase (decrease) in accrued interest payable | 1,123 | | | (490) | |
(Decrease) increase in other liabilities | (2,579) | | | 1,299 | |
Net cash provided by operating activities | 63,655 | | | 126,432 | |
| | | |
Cash flows from investing activities: | | | |
Activity in available-for-sale securities: | | | |
Maturities, repayments and calls | 8,662 | | | 6,173 | |
Sales | — | | | 20,855 | |
Purchases | (22,176) | | | (52,468) | |
Activity in held-to-maturity securities: | | | |
Maturities, repayments and calls | 540 | | | — | |
Purchases | (5,500) | | | — | |
Increase (decrease) in restricted stock | (100) | | | 3,699 | |
Net increase in loans | (225,967) | | | (82,711) | |
Purchases of premises and equipment | (2,020) | | | (1,496) | |
Purchase of bank owned life insurance | — | | | (10,000) | |
Net cash used in investing activities | (246,561) | | | (115,948) | |
| | | |
Cash flows from financing activities: | | | |
Net increase in deposits | 227,140 | | | 197,712 | |
Decrease in short-term borrowings | — | | | (3,187) | |
Decrease in short-term borrowings with original maturity > 90 days | (17,886) | | | (81,397) | |
Repayment of long-term debt, net | — | | | (87,141) | |
| | | |
| | | |
Net purchase of treasury stock | (9,173) | | | (2,197) | |
Dividends paid | (9,779) | | | (8,468) | |
Share based awards and exercises | 485 | | | 571 | |
Net cash provided by financing activities | 190,787 | | | 15,893 | |
| | | |
Net change in cash and cash equivalents | 7,881 | | | 26,377 | |
Cash and cash equivalents at beginning of period | 23,480 | | | 36,744 | |
Cash and cash equivalents at end of period | $ | 31,361 | | | $ | 63,121 | |
| | | |
Supplemental disclosure of cash flow information: | | | |
Cash paid during the period for: | | | |
Interest | $ | 8,225 | | | $ | 6,976 | |
Income taxes | 5,365 | | | 11,354 | |
| | | |
| | | |
Transfers from loans held for sale to loans held for investment | 2,955 | | | 7,116 | |
| | | |
| | | |
Transfer of securities from AFS to HTM | 23,655 | | | — | |
Lease liabilities arising from obtaining right-of-use assets | 10,995 | | | — | |
See accompanying notes to the unaudited consolidated financial statements.
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | | | | | | | | | | |
| Six months ended June 30, |
(dollars in thousands) | 2022 | | 2021 |
Net income | $ | 11,473 | | | $ | 18,428 | |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | |
Gain on sale of investment securities | — | | | (48) | |
Net amortization of investment premiums and discounts and change in fair value of equity securities | 239 | | | 664 | |
Depreciation and amortization, net | 749 | | | (2,822) | |
Provision for loan losses | 1,217 | | | 695 | |
Amortization of issuance costs on subordinated debt | 59 | | | 59 | |
Stock based compensation | 354 | | | 648 | |
Net change in fair value of derivative instruments | 840 | | | 3,092 | |
Net change in fair value of loans held for sale | 856 | | | 2,632 | |
Net change in fair value of loans held for investment | 1,613 | | | 61 | |
Amortization and net impairment of servicing rights | 1,327 | | | 364 | |
SBA loan income | (2,957) | | | (2,735) | |
Proceeds from sale of loans | 656,565 | | | 1,472,628 | |
Loans originated for sale | (620,013) | | | (1,339,916) | |
Mortgage banking income | (14,038) | | | (43,567) | |
Increase in accrued interest receivable | (99) | | | (37) | |
Decrease (increase) in other assets | 1,571 | | | (494) | |
Earnings from investment in life insurance | (275) | | | (131) | |
Decrease in deferred income tax | (153) | | | (810) | |
Increase (decrease) in accrued interest payable | 115 | | | (1,034) | |
Increase (decrease) in other liabilities | (3,764) | | | (1,994) | |
Net cash provided by operating activities | 35,679 | | | 105,683 | |
Cash flows from investing activities: | | | |
Activity in available-for-sale securities: | | | |
Maturities, repayments and calls | 6,327 | | | 4,421 | |
Sales | — | | | 13,639 | |
Purchases | (15,707) | | | (37,620) | |
Activity in held-to-maturity securities: | | | |
Maturities, repayments and calls | 362 | | | — | |
Purchases | (4,500) | | | — | |
Decrease in restricted stock | 398 | | | 2,504 | |
Net increase in loans | (136,069) | | | (71,761) | |
Purchases of premises and equipment | (1,028) | | | (1,093) | |
Net cash used in investing activities | (150,217) | | | (89,910) | |
Cash flows from financing activities: | | | |
Net increase in deposits | 121,601 | | | 171,945 | |
Decrease in short-term borrowings | — | | | (5,465) | |
Increase (decrease) in short-term borrowings with original maturity > 90 days | 17,792 | | | (67,855) | |
Repayment of long-term debt, net | — | | | (116,932) | |
| | | |
| | | |
Net purchase of treasury stock | (3,036) | | | — | |
Dividends paid | (8,574) | | | (7,699) | |
Share based awards and exercises | 368 | | | 391 | |
Net cash provided by (used in) financing activities | 128,151 | | | (25,615) | |
Net change in cash and cash equivalents | 13,613 | | | (9,842) | |
Cash and cash equivalents at beginning of period | 23,480 | | | 36,744 | |
Cash and cash equivalents at end of period | $ | 37,093 | | | $ | 26,902 | |
Supplemental disclosure of cash flow information: | | | |
Cash paid during the period for: | | | |
Interest | 4,301 | | | 5,471 | |
Income taxes | 3,265 | | | 8,009 | |
| | | |
Supplemental disclosure of cash flow information: | | | |
Transfers from loans held for sale to loans held for investment | 2,848 | | | 4,193 | |
Net loans sold, not settled | (962) | | | (4,432) | |
Investment security purchases, not settled | — | | | (1,188) | |
Transfer of securities from AFS to HTM | 23,652 | | | — | |
Lease liabilities arising from obtaining right-of-use assets | 10,995 | | | — | |
See accompanying notes to the unaudited consolidated financial statements.
MERIDIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis of Presentation
The Corporation’s unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”)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 principlesGAAP 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, and servicing 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, 2021) 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. Reclassifications had no effect on net income or stockholders’ equity. Operating results for the three and sixnine months ended JuneSeptember 30, 2022 are not necessarily indicative of the results for the year ending December 31, 2022 or for any other period.
(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 reduced by unearned ESOP Plan shares and treasury shares. Diluted earnings per common share takes into account the potential dilution computed pursuant to the treasury stock method that could occur if stock options were exercised and converted into common stock and if restricted stock awards were vested, and SERP plan liabilities were satisfied with common shares. 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 June 30, | | Six Months Ended June 30, | | | Three months ended September 30, | | Nine months ended September 30, |
(dollars in thousands, except per share data) | (dollars in thousands, except per share data) | 2022 | | 2021 | | 2022 | | 2021 | | (dollars in thousands, except per share data) | 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | | | |
Numerator for earnings per share: | | Numerator for earnings per share: | | | | | | | |
Net income available to common stockholders | Net income available to common stockholders | $ | 5,938 | | | 8,258 | | | 11,473 | | | 18,428 | | | Net income available to common stockholders | $ | 5,798 | | | $ | 9,438 | | | $ | 17,268 | | | $ | 27,866 | |
Denominator for basic earnings per share | | | |
| Denominators for earnings per share: | | Denominators for earnings per share: | |
Weighted average shares outstanding | Weighted average shares outstanding | 6,101 | | | 6,147 | | | 6,115 | | | 6,135 | | | Weighted average shares outstanding | 5,968 | | | 6,157 | | | 6,038 | | | 6,148 | |
Average unearned ESOP shares | Average unearned ESOP shares | (102) | | | (115) | | | (104) | | | (117) | | | Average unearned ESOP shares | (100) | | | (112) | | | (74) | | | (115) | |
Basic weighted averages shares outstanding | Basic weighted averages shares outstanding | 5,999 | | | 6,032 | | | 6,011 | | | 6,018 | | | Basic weighted averages shares outstanding | 5,868 | | | 6,045 | | | 5,964 | | | 6,033 | |
Dilutive effects of assumed exercises of stock options | Dilutive effects of assumed exercises of stock options | 128 | | | 171 | | | 149 | | | 159 | | | Dilutive effects of assumed exercises of stock options | 116 | | | 125 | | | 137 | | | 113 | |
Dilutive effects of SERP shares | Dilutive effects of SERP shares | 72 | | | — | | | 69 | | | — | | | Dilutive effects of SERP shares | 75 | | | 61 | | | 71 | | | 55 | |
Denominator for diluted earnings per share - adjusted weighted average shares outstanding | 6,199 | | | 6,203 | | | 6,229 | | | 6,177 | | | |
Diluted weighted averages shares outstanding | | Diluted weighted averages shares outstanding | 6,060 | | | 6,231 | | | 6,172 | | | 6,201 | |
| Basic earnings per share | Basic earnings per share | $ | 0.99 | | | 1.37 | | | 1.91 | | | 3.06 | | | Basic earnings per share | $ | 0.99 | | | $ | 1.56 | | | $ | 2.90 | | | $ | 4.62 | |
Diluted earnings per share | Diluted earnings per share | $ | 0.96 | | | 1.33 | | | 1.84 | | | 2.98 | | | Diluted earnings per share | $ | 0.96 | | | $ | 1.52 | | | $ | 2.80 | | | $ | 4.49 | |
Antidilutive shares excluded from computation of average dilutive earnings per share | Antidilutive shares excluded from computation of average dilutive earnings per share | 136 | | | 140 | | | 21 | | | 140 | | | Antidilutive shares excluded from computation of average dilutive earnings per share | 237 | | | 140 | | | 236 | | | 140 | |
(3) Securities
The following table presents the amortized cost and fair value of securities as of June 30, 2022 and December 31, 2021 are as follows:at the dates indicated:
| | | June 30, 2022 | | September 30, 2022 |
(dollars in thousands) | (dollars in thousands) | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value | | # of Securities in unrealized loss position | (dollars in thousands) | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value | | # of Securities in unrealized loss position |
Securities available-for-sale: | Securities available-for-sale: | | | | | | | | | | Securities available-for-sale: | | | | | | | | | |
U.S. asset backed securities | U.S. asset backed securities | $ | 14,046 | | | 10 | | | (316) | | | 13,740 | | | 12 | | U.S. asset backed securities | $ | 15,763 | | | $ | 21 | | | $ | (311) | | | $ | 15,473 | | | 14 | |
U.S. government agency mortgage-backed securities | 10,110 | | | — | | | (470) | | | 9,640 | | | 10 | | |
U.S. government agency collateralized mortgage obligations | 21,875 | | | 7 | | | (1,276) | | | 20,606 | | | 26 | | |
U.S. government agency MBS | | U.S. government agency MBS | 12,079 | | | — | | | (735) | | | 11,344 | | | 13 | |
U.S. government agency CMO | | U.S. government agency CMO | 21,248 | | | — | | | (2,079) | | | 19,169 | | | 28 | |
State and municipal securities | State and municipal securities | 45,070 | | | — | | | (5,354) | | | 39,716 | | | 34 | | State and municipal securities | 44,885 | | | — | | | (7,646) | | | 37,239 | | | 34 | |
U.S. Treasuries | U.S. Treasuries | 32,979 | | | — | | | (2,555) | | | 30,424 | | | 25 | | U.S. Treasuries | 32,980 | | | — | | | (3,699) | | | 29,281 | | | 25 | |
Non-U.S. government agency collateralized mortgage obligations | 9,303 | | | — | | | (332) | | | 8,971 | | | 9 | | |
Non-U.S. government agency CMO | | Non-U.S. government agency CMO | 9,426 | | | — | | | (599) | | | 8,827 | | | 11 | |
Corporate bonds | Corporate bonds | 6,450 | | | — | | | (259) | | | 6,191 | | | 11 | | Corporate bonds | 7,200 | | | — | | | (534) | | | 6,666 | | | 12 | |
Total securities available-for-sale | Total securities available-for-sale | $ | 139,833 | | | 17 | | | (10,562) | | | 129,288 | | | 127 | | Total securities available-for-sale | $ | 143,581 | | | $ | 21 | | | $ | (15,603) | | | $ | 127,999 | | | 137 | |
| | June 30, 2022 | |
| | Amortized cost | | Gross unrecognized gains | | Gross unrecognized losses | | Fair value | | # of Securities in unrecognized loss position | | | | | | | | | | |
Securities held-to-maturity: | Securities held-to-maturity: | | | | | | | | | | Securities held-to-maturity: | |
State and municipal securities | State and municipal securities | 37,111 | | | 7 | | | (3,621) | | | 33,497 | | | 21 | | State and municipal securities | $ | 37,922 | | | $ | — | | | $ | (5,599) | | | $ | 32,323 | | | 27 | |
Total securities held-to-maturity | Total securities held-to-maturity | $ | 37,111 | | | 7 | | | (3,621) | | | 33,497 | | | 21 | | Total securities held-to-maturity | $ | 37,922 | | | $ | — | | | $ | (5,599) | | | $ | 32,323 | | | — | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
(dollars in thousands) | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value | | # of Securities in unrealized loss position |
Securities available-for-sale: | | | | | | | | | |
U.S. asset backed securities | $ | 16,850 | | | 55 | | | (68) | | | 16,837 | | | 10 | |
U.S. government agency mortgage-backed securities | 9,749 | | | 124 | | | (60) | | | 9,813 | | | 3 | |
U.S. government agency collateralized mortgage obligations | 22,276 | | | 358 | | | (253) | | | 22,381 | | | 10 | |
State and municipal securities | 72,099 | | | 1,379 | | | (496) | | | 72,982 | | | 12 | |
U.S. Treasuries | 29,973 | | | 1 | | | (246) | | | 29,728 | | | 21 | |
Non-U.S. government agency collateralized mortgage obligations | 990 | | | — | | | (15) | | | 975 | | | 1 | |
Corporate bonds | 6,450 | | | 154 | | | (18) | | | 6,586 | | | 5 | |
Total securities available-for-sale | $ | 158,387 | | | 2,071 | | | (1,156) | | | 159,302 | | | 62 | |
Securities held-to-maturity: | | | | | | | | | |
State and municipal securities | 6,372 | | | 219 | | | — | | | 6,591 | | | — | |
Total securities held-to-maturity | $ | 6,372 | | | 219 | | | — | | | 6,591 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
(dollars in thousands) | Amortized cost | | Gross unrealized gains | | Gross unrealized losses | | Fair value | | # of Securities in unrealized loss position |
Securities available-for-sale: | | | | | | | | | |
U.S. asset backed securities | $ | 16,850 | | | $ | 55 | | | $ | (68) | | | $ | 16,837 | | | 10 | |
U.S. government agency MBS | 9,749 | | | 124 | | | (60) | | | 9,813 | | | 3 | |
U.S. government agency CMO | 22,276 | | | 358 | | | (253) | | | 22,381 | | | 10 | |
State and municipal securities | 72,099 | | | 1,379 | | | (496) | | | 72,982 | | | 12 | |
U.S. Treasuries | 29,973 | | | 1 | | | (246) | | | 29,728 | | | 21 | |
Non-U.S. government agency CMO | 990 | | | — | | | (15) | | | 975 | | | 1 | |
Corporate bonds | 6,450 | | | 154 | | | (18) | | | 6,586 | | | 5 | |
Total securities available-for-sale | $ | 158,387 | | | $ | 2,071 | | | $ | (1,156) | | | $ | 159,302 | | | 62 | |
| | | | | | | | | |
Securities held-to-maturity: | | | | | | | | | |
State and municipal securities | $ | 6,372 | | | $ | 219 | | | $ | — | | | $ | 6,591 | | | — | |
Total securities held-to-maturity | $ | 6,372 | | | $ | 219 | | | $ | — | | | $ | 6,591 | | | — | |
| | | | | | | | | |
Although the Corporation’s investment portfolio overall is in a net unrealized loss position at JuneSeptember 30, 2022, the temporary impairment in the above noted securities is primarily the result of changes in market interest rates subsequent to purchase 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.
During the quarter-ended March 31, 2022, $27.7 million of municipal securities, previously classified as available-for-sale on the balance sheet, were transferred to the held-to-maturity portfolio at fair value. After transfer, $1.3 million of unrealized losses remain in accumulated other comprehensive income. No gain or loss was recognized as a result of the transfer.
As of JuneSeptember 30, 2022 and December 31, 2021, securities having a fair value of $81.9$76.5 million and $92.2 million, respectively, were specifically pledged as collateral for public funds, the FRB discount window program, FHLB borrowings and other purposes. The FHLB has a blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation’s borrowing agreement with the FHLB.
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 June 30, 2022 and December 31, 2021:the dates indicated:
| | | June 30, 2022 | | September 30, 2022 |
| | Less than 12 Months | | 12 Months or more | | Total | | Less than 12 Months | | 12 Months or more | | Total |
(dollars in thousands) | (dollars in thousands) | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | (dollars in thousands) | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | | Fair value | | Unrealized losses |
Securities available-for-sale: | Securities available-for-sale: | | | | | | | | | | | | Securities available-for-sale: | | | | | | | | | | | |
U.S. asset backed securities | U.S. asset backed securities | $ | 10,771 | | | (295) | | | 747 | | | (21) | | | 11,518 | | | (316) | | U.S. asset backed securities | $ | 10,122 | | | $ | (129) | | | $ | 3,254 | | | $ | (182) | | | $ | 13,376 | | | $ | (311) | |
U.S. government agency mortgage-backed securities | 9,610 | | | (470) | | | — | | | — | | | 9,610 | | | (470) | | |
U.S. government agency collateralized mortgage obligations | 15,599 | | | (828) | | | 3,897 | | | (448) | | | 19,496 | | | (1,276) | | |
U.S. government agency MBS | | U.S. government agency MBS | 9,795 | | | (638) | | | 1,549 | | | (97) | | | 11,344 | | | (735) | |
U.S. government agency CMO | | U.S. government agency CMO | 10,526 | | | (850) | | | 8,617 | | | (1,229) | | | 19,143 | | | (2,079) | |
State and municipal securities | State and municipal securities | 38,130 | | | (5,092) | | | 1,585 | | | (262) | | | 39,715 | | | (5,354) | | State and municipal securities | 34,801 | | | (7,077) | | | 2,438 | | | (569) | | | 37,239 | | | (7,646) | |
U.S. Treasuries | U.S. Treasuries | 30,424 | | | (2,555) | | | — | | | — | | | 30,424 | | | (2,555) | | U.S. Treasuries | 15,468 | | | (1,443) | | | 13,813 | | | (2,256) | | | 29,281 | | | (3,699) | |
Non-U.S. government agency collateralized mortgage obligations | 8,007 | | | (332) | | | — | | | — | | | 8,007 | | | (332) | | |
Non-U.S. government agency CMO | | Non-U.S. government agency CMO | 8,112 | | | (470) | | | 715 | | | (129) | | | 8,827 | | | (599) | |
Corporate bonds | Corporate bonds | 6,191 | | | (259) | | | — | | | — | | | 6,191 | | | (259) | | Corporate bonds | 5,565 | | | (384) | | | 1,101 | | | (150) | | | 6,666 | | | (534) | |
Total securities available-for-sale | Total securities available-for-sale | $ | 118,732 | | | (9,831) | | | 6,229 | | | (731) | | | 124,961 | | | (10,562) | | Total securities available-for-sale | $ | 94,389 | | | $ | (10,991) | | | $ | 31,487 | | | $ | (4,612) | | | $ | 125,876 | | | $ | (15,603) | |
| | June 30, 2022 | |
| Less than 12 Months | | 12 Months or more | | Total | |
| | Fair value | | Unrecognized losses | | Fair value | | Unrecognized losses | | Fair value | | Unrecognized losses | | | | | | | | | | | | |
Securities held-to-maturity: | Securities held-to-maturity: | | | | | | | | | | | | Securities held-to-maturity: | |
State and municipal securities | State and municipal securities | — | | | — | | | 24,955 | | | (3,621) | | | 24,955 | | | (3,621) | | State and municipal securities | $ | — | | | $ | — | | | $ | 24,955 | | | $ | (5,599) | | | $ | 24,955 | | | $ | (5,599) | |
Total securities held-to-maturity | Total securities held-to-maturity | $ | — | | | — | | | 24,955 | | | (3,621) | | | 24,955 | | | (3,621) | | Total securities held-to-maturity | $ | — | | | $ | — | | | $ | 24,955 | | | $ | (5,599) | | | $ | 24,955 | | | $ | (5,599) | |
|
| | | December 31, 2021 | | December 31, 2021 |
| | Less than 12 Months | | 12 Months or more | | Total | | Less than 12 Months | | 12 Months or more | | Total |
(dollars in thousands) | (dollars in thousands) | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | (dollars in thousands) | Fair value | | Unrealized losses | | Fair value | | Unrealized losses | | Fair value | | Unrealized losses |
Securities available-for-sale: | Securities available-for-sale: | | | | | | | | | | | | Securities available-for-sale: | | | | | | | | | | | |
U.S. asset backed securities | U.S. asset backed securities | $ | 12,330 | | | (68) | | | — | | | — | | | 12,330 | | | (68) | | U.S. asset backed securities | $ | 12,330 | | | $ | (68) | | | $ | — | | | $ | — | | | $ | 12,330 | | | $ | (68) | |
U.S. government agency mortgage-backed securities | 3,852 | | | (60) | | | — | | | — | | | 3,852 | | | (60) | | |
U.S. government agency collateralized mortgage obligations | 8,836 | | | (187) | | | 1,657 | | | (66) | | | 10,493 | | | (253) | | |
U.S. government agency MBS | | U.S. government agency MBS | 3,852 | | | (60) | | | — | | | — | | | 3,852 | | | (60) | |
U.S. government agency CMO | | U.S. government agency CMO | 8,836 | | | (187) | | | 1,657 | | | (66) | | | 10,493 | | | (253) | |
State and municipal securities | State and municipal securities | 14,994 | | | (427) | | | 2,019 | | | (69) | | | 17,013 | | | (496) | | State and municipal securities | 14,994 | | | (427) | | | 2,019 | | | (69) | | | 17,013 | | | (496) | |
U.S. Treasuries | U.S. Treasuries | 28,750 | | | (246) | | | — | | | — | | | 28,750 | | | (246) | | U.S. Treasuries | 28,750 | | | (246) | | | — | | | — | | | 28,750 | | | (246) | |
Non-U.S. government agency collateralized mortgage obligations | 975 | | | (15) | | | — | | | — | | | 975 | | | (15) | | |
Non-U.S. government agency CMO | | Non-U.S. government agency CMO | 975 | | | (15) | | | — | | | — | | | 975 | | | (15) | |
Corporate bonds | Corporate bonds | 2,232 | | | (18) | | | — | | | — | | | 2,232 | | | (18) | | Corporate bonds | 2,232 | | | (18) | | | — | | | — | | | 2,232 | | | (18) | |
Total securities available-for-sale | Total securities available-for-sale | $ | 71,969 | | | (1,021) | | | 3,676 | | | (135) | | | 75,645 | | | (1,156) | | Total securities available-for-sale | $ | 71,969 | | | $ | (1,021) | | | $ | 3,676 | | | $ | (135) | | | $ | 75,645 | | | $ | (1,156) | |
The amortized cost and carrying value of securities at June 30, 2022 and December 31, 2021 are shown below by contractual maturities.maturities at the dates indicated. 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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Available-for-sale | | Held-to-maturity | | Available-for-sale | | Held-to-maturity |
(dollars in thousands) | Amortized cost | | Fair value | | Amortized cost | | Fair value | | Amortized cost | | Fair value | | Amortized cost | | Fair value |
Investment securities: | | | | | | | | | | | | | | | |
Due in one year or less | $ | — | | | — | | | — | | | — | | | $ | — | | | — | | | 763 | | | 769 | |
Due after one year through five years | 17,889 | | | 16,823 | | | 3,768 | | | 3,760 | | | 12,934 | | | 12,885 | | | 2,354 | | | 2,397 | |
Due after five years through ten years | 27,543 | | | 25,337 | | | 4,090 | | | 3,885 | | | 30,890 | | | 30,798 | | | 3,255 | | | 3,425 | |
Due after ten years | 53,113 | | | 47,911 | | | 29,253 | | | 25,852 | | | 81,548 | | | 82,450 | | | — | | | — | |
Subtotal | 98,545 | | | 90,071 | | | 37,111 | | | 33,497 | | | 125,372 | | | 126,133 | | | 6,372 | | | 6,591 | |
Mortgage-related securities | 41,288 | | | 39,217 | | | — | | | — | | | 33,015 | | | 33,169 | | | — | | | — | |
Total | $ | 139,833 | | | 129,288 | | | 37,111 | | | 33,497 | | | $ | 158,387 | | | 159,302 | | | 6,372 | | | 6,591 | |
There were 0 sales of available for sale investment securities for the three and six months ended June 30, 2022. Proceeds from the sale of available for sale investment securities totaled $0 for the three months ended June 30, 2021 and $13.6 million for the six months ended June 30, 2021, resulting in a gross gain on sale of $248 thousand and a gross loss on sale of $200 thousand for the period. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
| Available-for-sale | | Held-to-maturity | | Available-for-sale | | Held-to-maturity |
(dollars in thousands) | Amortized cost | | Fair value | | Amortized cost | | Fair value | | Amortized cost | | Fair value | | Amortized cost | | Fair value |
Due in one year or less | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 763 | | | $ | 769 | |
Due after one year through five years | 17,892 | | | 16,326 | | | 4,665 | | | 4,588 | | | 12,934 | | | 12,885 | | | 2,354 | | | 2,397 | |
Due after five years through ten years | 27,386 | | | 24,111 | | | 3,003 | | | 2,643 | | | 30,890 | | | 30,798 | | | 3,255 | | | 3,425 | |
Due after ten years | 55,550 | | | 48,222 | | | 30,254 | | | 25,092 | | | 81,548 | | | 82,450 | | | — | | | — | |
Subtotal | 100,828 | | | 88,659 | | | 37,922 | | | 32,323 | | | 125,372 | | | 126,133 | | | 6,372 | | | 6,591 | |
Mortgage-related securities | 42,753 | | | 39,340 | | | — | | | — | | | 33,015 | | | 33,169 | | | — | | | — | |
Total | $ | 143,581 | | | $ | 127,999 | | | $ | 37,922 | | | $ | 32,323 | | | $ | 158,387 | | | $ | 159,302 | | | $ | 6,372 | | | $ | 6,591 | |
(4) Loans Receivable
Loans and leases outstanding at June 30, 2022 and December 31, 2021 are detailed by category as follows:
| | | | | | | | | | | |
(dollars in thousands) | June 30, 2022 | | December 31, 2021 |
Mortgage loans held for sale | $ | 58,938 | | | 80,882 | |
Real estate loans: | | | |
Commercial mortgage | 548,267 | | | 516,928 | |
Home equity lines and loans | 56,613 | | | 52,299 | |
Residential mortgage (1) | 112,549 | | | 68,175 | |
Construction | 201,163 | | | 160,905 | |
Total real estate loans | 918,592 | | | 798,307 | |
| | | |
Commercial and industrial | 335,759 | | | 293,771 | |
Small business loans | 120,920 | | | 114,158 | |
Paycheck Protection Program loans ("PPP") | 21,867 | | | 90,194 | |
Main Street Lending Program Loans ("MSLP") | 597 | | | 597 | |
Consumer | 446 | | | 419 | |
Leases, net | 115,872 | | | 88,242 | |
Total portfolio loans and leases | 1,514,053 | | | 1,385,688 | |
Total loans and leases | $ | 1,572,991 | | | 1,466,570 | |
| | | |
Loans with predetermined rates | $ | 473,637 | | | 488,220 | |
Loans with adjustable or floating rates | 1,099,354 | | | 978,350 | |
Total loans and leases | $ | 1,572,991 | | | 1,466,570 | |
| | | |
Net deferred loan origination costs | $ | 4,840 | | | 769 | |
(1) Includes $16,212 and $17,558 of loans at fair value as of June 30, 2022 and December 31, 2021, respectively.
Components of the net investment in leases at June 30, 2022 and December 31, 2021 are detailed as follows:
| | | | | | | | | | | |
(dollars in thousands) | June 30, 2022 | | December 31, 2021 |
Minimum lease payments receivable | $ | 137,340 | | | 105,608 | |
Unearned lease income | (21,468) | | | (17,366) | |
Total | $ | 115,872 | | | 88,242 | |
Age AnalysisThe following table presents the gross gain and (loss) on sale of investment securities available for sale on the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Gross gain on sale of available for sale investments | $ | — | | | $ | 314 | | | $ | — | | | $ | 562 | |
Gross loss on sale of available for sale investments | — | | | — | | | — | | | 200 | |
(4) Loans
The following table presents loans detailed by category at the dates indicated:
| | | | | | | | | | | |
(dollars in thousands) | September 30, 2022 | | December 31, 2021 |
Real estate loans: | | | |
Commercial mortgage | $ | 545,736 | | | $ | 516,928 | |
Home equity lines and loans | 57,648 | | | 52,299 | |
Residential mortgage | 153,513 | | | 68,175 | |
Construction | 244,435 | | | 160,905 | |
Total real estate loans | 1,001,332 | | | 798,307 | |
Commercial and industrial | 329,451 | | | 293,771 | |
Small business loans | 133,904 | | | 114,158 | |
PPP loans | 8,837 | | | 90,194 | |
MSLP loans | 597 | | | 597 | |
Consumer | 497 | | | 419 | |
Leases, net | 129,574 | | | 88,242 | |
Total loans | $ | 1,604,192 | | | $ | 1,385,688 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Balances included in loans, net of fees and costs: | | | |
Residential mortgage real estate loans accounted under fair value option, at fair value | $ | 14,702 | | | $ | 17,558 | |
Residential mortgage real estate loans accounted under fair value option, at amortized cost | 17,217 | | | 17,106 | |
Unearned lease income included in leases, net | (23,940) | | | (17,366) | |
Unamortized net deferred loan origination costs | 6,157 | | | 769 | |
Fair Value Option for Residential Mortgage Real Estate Loans
Residential mortgage real estate loans that were originated by the Corporation and intended for sale in the secondary market to permanent investors, but were either repurchased or unsalable due to defect, and that the Corporation has the ability and intent to hold for the foreseeable future or until maturity or payoff are carried at fair value pursuant to the Corporation's election of the fair value option for these loans. The remaining loans, net of fees and costs are stated at their outstanding unpaid principal balances, net of deferred fees or costs, since the original intent for these loans was to hold them until payoff or maturity.
Nonaccrual and Past Due Loans, Net of Fees and LeasesCosts
The following tables present an aging of the Corporation’s loan and lease portfolio asloans at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
(dollars in thousands) | 30-89 days past due | | 90+ days past due and still accruing | | Total past due | | Current | | Total Accruing Loans and leases | | Nonaccrual loans and leases | | Total loans | | % Delinquent |
Commercial mortgage | $ | 684 | | | $ | — | | | $ | 684 | | | $ | 543,208 | | | $ | 543,892 | | | $ | 1,844 | | | $ | 545,736 | | | 0.46 | % |
Home equity lines and loans | 189 | | | — | | | 189 | | | 56,581 | | | 56,770 | | | 878 | | | 57,648 | | | 1.85 | |
Residential mortgage (1) | 819 | | | — | | | 819 | | | 150,679 | | | 151,498 | | | 2,015 | | | 153,513 | | | 1.85 | |
Construction | — | | | — | | | — | | | 244,435 | | | 244,435 | | | — | | | 244,435 | | | — | |
Commercial and industrial | 887 | | | — | | | 887 | | | 312,220 | | | 313,107 | | | 16,344 | | | 329,451 | | | 5.23 | |
Small business loans | 1,803 | | | — | | | 1,803 | | | 130,700 | | | 132,503 | | | 1,401 | | | 133,904 | | | 2.39 | |
PPP | — | | | — | | | — | | | 8,837 | | | 8,837 | | | — | | | 8,837 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
June 30, 2022 | | 30-89 days past due | | 90+ days past due and still accruing | | Total past due | | Current | | Total Accruing Loans and leases | | Nonaccrual loans and leases | | Total loans portfolio and leases | | Delinquency percentage |
(dollars in thousands) | | | | | | | | |
Commercial mortgage | | $ | — | | | — | | | — | | | 548,267 | | | 548,267 | | | — | | | 548,267 | | | — | % |
Home equity lines and loans | | 1 | | | — | | | 1 | | | 55,574 | | | 55,575 | | | 1,038 | | | 56,613 | | | 1.84 | |
Residential mortgage (1) | | — | | | — | | | — | | | 110,497 | | | 110,497 | | | 2,052 | | | 112,549 | | | 1.82 | |
Construction | | — | | | — | | | — | | | 201,163 | | | 201,163 | | | — | | | 201,163 | | | — | |
Commercial and industrial | | — | | | — | | | — | | | 317,361 | | | 317,361 | | | 18,398 | | | 335,759 | | | 5.48 | |
Small business loans | | — | | | — | | | — | | | 119,519 | | | 119,519 | | | 1,401 | | | 120,920 | | | 1.16 | |
Paycheck Protection Program loans | | — | | | — | | | — | | | 21,867 | | | 21,867 | | | — | | | 21,867 | | | — | |
Main Street Lending Program loans | | — | | | — | | | — | | | 597 | | | 597 | | | — | | | 597 | | | — | |
Consumer | | — | | | — | | | — | | | 446 | | | 446 | | | — | | | 446 | | | — | |
Leases, net | | 948 | | | — | | | 948 | | | 114,829 | | | 115,777�� | | | 95 | | | 115,872 | | | 0.90 | |
Total | | $ | 949 | | | — | | | 949 | | | 1,490,120 | | | 1,491,069 | | | 22,984 | | | 1,514,053 | | | 1.58 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
(dollars in thousands) | 30-89 days past due | | 90+ days past due and still accruing | | Total past due | | Current | | Total Accruing Loans and leases | | Nonaccrual loans and leases | | Total loans | | % Delinquent |
MSLP | — | | | — | | | — | | | 597 | | | 597 | | | — | | | 597 | | | — | |
Consumer | — | | | — | | | — | | | 497 | | | 497 | | | — | | | 497 | | | — | |
Leases, net | 1,378 | | | — | | | 1,378 | | | 127,690 | | | 129,068 | | | 506 | | | 129,574 | | | 1.45 | % |
Total | $ | 5,760 | | | $ | — | | | $ | 5,760 | | | $ | 1,575,444 | | | $ | 1,581,204 | | | $ | 22,988 | | | $ | 1,604,192 | | | 1.79 | % |
(1)Includes $16,212$14,702 of loans at fair value as of June 30, 2022 ($15,636which $14,151 are current and $576$551 are nonaccrual).nonaccrual.
| December 31, 2021 | | 30-89 days past due | | 90+ days past due and still accruing | | Total past due | | Current | | Total Accruing Loans and leases | | Nonaccrual loans and leases | | Total loans portfolio and leases | | Delinquency percentage | |
| | | December 31, 2021 |
(dollars in thousands) | (dollars in thousands) | | 30-89 days past due | | 90+ days past due and still accruing | | Total past due | | Current | | Total Accruing Loans and leases | | Nonaccrual loans and leases | | Total loans portfolio and leases | | Delinquency percentage | (dollars in thousands) | 30-89 days past due | | 90+ days past due and still accruing | | Total past due | | Current | | Total Accruing Loans and leases | | Nonaccrual loans and leases | | Total loans | | % Delinquent |
Commercial mortgage | Commercial mortgage | | Commercial mortgage | $ | — | | | $ | — | | | $ | — | | | $ | 516,928 | | | $ | 516,928 | | | $ | — | | | $ | 516,928 | | | — | % |
Home equity lines and loans | Home equity lines and loans | | 103 | | | — | | | 103 | | | 51,285 | | | 51,388 | | | 911 | | | 52,299 | | | 1.94 | | Home equity lines and loans | 103 | | | — | | | 103 | | | 51,285 | | | 51,388 | | | 911 | | | 52,299 | | | 1.94 | |
Residential mortgage (1) | Residential mortgage (1) | | 600 | | | — | | | 600 | | | 65,177 | | | 65,777 | | | 2,398 | | | 68,175 | | | 4.40 | | Residential mortgage (1) | 600 | | | — | | | 600 | | | 65,177 | | | 65,777 | | | 2,398 | | | 68,175 | | | 4.40 | |
Construction | Construction | | — | | | — | | | — | | | 160,905 | | | 160,905 | | | — | | | 160,905 | | | — | | Construction | — | | | — | | | — | | | 160,905 | | | 160,905 | | | — | | | 160,905 | | | — | |
Commercial and industrial | Commercial and industrial | | — | | | — | | | — | | | 274,970 | | | 274,970 | | | 18,801 | | | 293,771 | | | 6.40 | | Commercial and industrial | — | | | — | | | — | | | 274,970 | | | 274,970 | | | 18,801 | | | 293,771 | | | 6.40 | |
Small business loans | Small business loans | | — | | | — | | | — | | | 113,492 | | | 113,492 | | | 666 | | | 114,158 | | | 0.58 | | Small business loans | — | | | — | | | — | | | 113,492 | | | 113,492 | | | 666 | | | 114,158 | | | 0.58 | |
Paycheck Protection Program loans | | — | | | — | | | — | | | 90,194 | | | 90,194 | | | — | | | 90,194 | | | — | | |
Main Street Lending Program loans | | — | | | — | | | — | | | 597 | | | 597 | | | — | | | 597 | | | — | | |
PPP | | PPP | — | | | — | | | — | | | 90,194 | | | 90,194 | | | — | | | 90,194 | | | — | |
MSLP | | MSLP | — | | | — | | | — | | | 597 | | | 597 | | | — | | | 597 | | | — | |
Consumer | Consumer | | — | | | — | | | — | | | 419 | | | 419 | | | — | | | 419 | | | — | | Consumer | — | | | — | | | — | | | 419 | | | 419 | | | — | | | 419 | | | — | |
Leases, net | Leases, net | | 390 | | | — | | | 390 | | | 87,640 | | | 88,030 | | | 212 | | | 88,242 | | | 0.68 | | Leases, net | 390 | | | — | | | 390 | | | 87,640 | | | 88,030 | | | 212 | | | 88,242 | | | 0.68 | % |
Total | Total | | $ | 1,093 | | | — | | | 1,093 | | | 1,361,607 | | | 1,362,700 | | | 22,988 | | | 1,385,688 | | | 1.74 | % | Total | $ | 1,093 | | | $ | — | | | $ | 1,093 | | | $ | 1,361,607 | | | $ | 1,362,700 | | | $ | 22,988 | | | $ | 1,385,688 | | | 1.74 | % |
(1)Includes $17,558 of loans at fair value as of December 31, 2021 ($16,768which $16,768 are current, $189 are 30-89 days past due and $601 are nonaccrual).nonaccrual.
Foreclosed and Repossessed Assets
At September 30, 2022, there were no consumer mortgage loans secured by residential real estate properties (included in loans, net of fees and costs on the Consolidated Balance Sheets) for which formal foreclosure proceedings were in process.
Risks and Uncertainties
We have no particular credit concentration. Our commercial loans have been proactively managed in an effort to achieve a balanced portfolio with no unusual exposure to one industry. Additionally, most of our lending activity occurs within our primary market areas which are concentrated in southeastern Pennsylvania, Delaware, and Maryland as well as other contiguous markets and represents a geographic concentration. Additionally, our loan portfolio is concentrated in commercial loans. Commercial loans are generally viewed as having more inherent risk of default than residential real estate loans or other consumer loans. Also, the commercial loan balance per borrower is typically larger than that for residential real estate loans and consumer loans, implying higher potential losses on an individual loan basis.
(5) Allowance for Loan and Lease Losses (the “Allowance”)
The Allowance is evaluated on at least a quarterly basis, as losses are estimated to be probable and incurred.The provision for loan and lease losses increase or decrease the ALLL, if deemed necessary.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.
Roll-Forward of Allowance by Portfolio Segment
The following tables detail the roll-forward of the Corporation’s Allowance, by portfolio segment, for the three and six month periods ended June 30, 2022 and 2021, respectively:indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
(dollars in thousands) | Beginning Balance | | Charge-offs | | Recoveries | | Provision (Credit) | | Ending Balance |
Commercial mortgage | $ | 4,327 | | | $ | — | | | $ | — | | | $ | (238) | | | $ | 4,089 | |
Home equity lines and loans | 240 | | | (12) | | | 34 | | | (25) | | | 237 | |
Residential mortgage | 489 | | | — | | | — | | | 217 | | | 706 | |
Construction | 2,481 | | | — | | | — | | | 378 | | | 2,859 | |
Commercial and industrial | 6,287 | | | — | | | 39 | | | (657) | | | 5,669 | |
Small business loans | 3,681 | | | — | | | — | | | 319 | | | 4,000 | |
Consumer | 3 | | | — | | | 1 | | | (1) | | | 3 | |
Leases | 1,297 | | | (419) | | | — | | | 533 | | | 1,411 | |
Total | $ | 18,805 | | | $ | (431) | | | $ | 74 | | | $ | 526 | | | $ | 18,974 | |
| | | | | | | | | |
| Nine Months Ended September 30, 2022 |
(dollars in thousands) | Beginning Balance | | Charge-offs | | Recoveries | | Provision (Credit) | | Ending Balance |
Commercial mortgage | $ | 4,950 | | | $ | — | | | $ | — | | | $ | (861) | | | $ | 4,089 | |
Home equity lines and loans | 224 | | | (12) | | | 42 | | | (17) | | | 237 | |
Residential mortgage | 283 | | | — | | | 2 | | | 421 | | | 706 | |
Construction | 2,042 | | | — | | | — | | | 817 | | | 2,859 | |
Commercial and industrial | 6,533 | | | — | | | 58 | | | (922) | | | 5,669 | |
Small business loans | 3,737 | | | — | | | — | | | 263 | | | 4,000 | |
Consumer | 3 | | | — | | | 3 | | | (3) | | | 3 | |
Leases | 986 | | | (1,682) | | | 62 | | | 2,045 | | | 1,411 | |
Total | $ | 18,758 | | | $ | (1,694) | | | $ | 167 | | | $ | 1,743 | | | $ | 18,974 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Balance, March 31, 2022 | | Charge-offs | | Recoveries | | Provision (Credit) | | Balance, June 30, 2022 |
Commercial mortgage | $ | 4,150 | | | — | | | — | | | 177 | | | 4,327 | |
Home equity lines and loans | 208 | | | — | | | 2 | | | 30 | | | 240 | |
Residential mortgage | 357 | | | — | | | — | | | 132 | | | 489 | |
Construction | 2,257 | | | — | | | — | | | 224 | | | 2,481 | |
Commercial and industrial | 7,369 | | | — | | | 9 | | | (1,091) | | | 6,287 | |
Small business loans | 3,372 | | | — | | | — | | | 309 | | | 3,681 | |
Consumer | 3 | | | — | | | 1 | | | (1) | | | 3 | |
Leases | 1,110 | | | (696) | | | 61 | | | 822 | | | 1,297 | |
Total | $ | 18,826 | | | (696) | | | 73 | | | 602 | | | 18,805 | |
| | | | | | | | | |
(dollars in thousands) | Balance, December 31, 2021 | | Charge-offs | | Recoveries | | Provision (Credit) | | Balance, June 30, 2022 |
Commercial mortgage | $ | 4,950 | | | — | | | — | | | (623) | | | 4,327 | |
Home equity lines and loans | 224 | | | — | | | 8 | | | 8 | | | 240 | |
Residential mortgage | 283 | | | — | | | 2 | | | 204 | | | 489 | |
Construction | 2,042 | | | — | | | — | | | 439 | | | 2,481 | |
Commercial and industrial | 6,533 | | | — | | | 20 | | | (266) | | | 6,287 | |
Small business loans | 3,737 | | | — | | | — | | | (56) | | | 3,681 | |
Consumer | 3 | | | — | | | 2 | | | (2) | | | 3 | |
Leases | 986 | | | (1,263) | | | 61 | | | 1,513 | | | 1,297 | |
Total | $ | 18,758 | | | (1,263) | | | 93 | | | 1,217 | | | 18,805 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2021 |
(dollars in thousands) | Beginning Balance | | Charge-offs | | Recoveries | | Provision (Credit) | | Ending Balance |
Commercial mortgage | $ | 7,146 | | | $ | — | | | $ | — | | | $ | (604) | | | $ | 6,542 | |
Home equity lines and loans | 281 | | | — | | | 1 | | | (9) | | | 273 | |
Residential mortgage | 324 | | | — | | | 1 | | | (49) | | | 276 | |
Construction | 2,241 | | | — | | | — | | | 44 | | | 2,285 | |
Commercial and industrial | 5,360 | | | — | | | 15 | | | 239 | | | 5,614 | |
Small business loans | 2,235 | | | — | | | — | | | 864 | | | 3,099 | |
Consumer | 4 | | | — | | | 1 | | | (2) | | | 3 | |
Leases | 770 | | | — | | | — | | | 114 | | | 884 | |
Total | $ | 18,361 | | | $ | — | | | $ | 18 | | | $ | 597 | | | $ | 18,976 | |
| | | | | | | | | |
| Nine Months Ended September 30, 2021 |
(dollars in thousands) | Beginning Balance | | Charge-offs | | Recoveries | | Provision (Credit) | | Ending Balance |
Commercial mortgage | $ | 7,451 | | | $ | — | | | $ | — | | | $ | (909) | | | $ | 6,542 | |
Home equity lines and loans | 434 | | | — | | | 5 | | | (166) | | | 273 | |
Residential mortgage | 385 | | | — | | | 5 | | | (114) | | | 276 | |
Construction | 2,421 | | | — | | | — | | | (136) | | | 2,285 | |
Commercial and industrial | 5,431 | | | — | | | 33 | | | 150 | | | 5,614 | |
Small business loans | 1,259 | | | — | | | — | | | 1,840 | | | 3,099 | |
Consumer | 4 | | | — | | | 3 | | | (4) | | | 3 | |
Leases | 382 | | | (129) | | | — | | | 631 | | | 884 | |
Total | $ | 17,767 | | | $ | (129) | | | $ | 46 | | | $ | 1,292 | | | $ | 18,976 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Balance, March 31, 2021 | | Charge-offs | | Recoveries | | Provision (Credit) | | June 30, 2021 |
Commercial mortgage | $ | 7,655 | | | — | | | — | | | (509) | | | 7,146 | |
Home equity lines and loans | 310 | | | — | | | 2 | | | (31) | | | 281 | |
Residential mortgage | 314 | | | — | | | 2 | | | 8 | | | 324 | |
Construction | 2,311 | | | — | | | — | | | (70) | | | 2,241 | |
Commercial and industrial | 5,286 | | | — | | | 13 | | | 61 | | | 5,360 | |
Small business loans | 1,920 | | | — | | | — | | | 315 | | | 2,235 | |
Consumer | 4 | | | — | | | 1 | | | (1) | | | 4 | |
Leases | 576 | | | (129) | | | — | | | 323 | | | 770 | |
Total | $ | 18,376 | | | (129) | | | 18 | | | 96 | | | 18,361 | |
| | | | | | | | | |
(dollars in thousands) | Balance, December 31, 2020 | | Charge-offs | | Recoveries | | Provision (Credit) | | Balance, June 30, 2021 |
Commercial mortgage | $ | 7,451 | | | — | | | — | | | (305) | | | 7,146 | |
Home equity lines and loans | 434 | | | — | | | 4 | | | (157) | | | 281 | |
Residential mortgage | 385 | | | — | | | 4 | | | (65) | | | 324 | |
Construction | 2,421 | | | — | | | — | | | (180) | | | 2,241 | |
Commercial and industrial | 5,431 | | | — | | | 18 | | | (89) | | | 5,360 | |
Small business loans | 1,259 | | | — | | | — | | | 976 | | | 2,235 | |
Consumer | 4 | | | — | | | 2 | | | (2) | | | 4 | |
Leases | 382 | | | (129) | | | — | | | 517 | | | 770 | |
Total | $ | 17,767 | | | (129) | | | 28 | | | 695 | | | 18,361 | |
Allowance 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 June 30, 2022 and December 31, 2021.at the dates indicated:
| | | Allowance on loans and leases | | Carrying value of loans and leases | | | September 30, 2022 |
June 30, 2022 | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total | | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total | | |
| | | Allowance on loans and leases | | Carrying value of loans and leases |
(dollars in thousands) | (dollars in thousands) | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total | | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total | | (dollars in thousands) | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total | | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total |
Commercial mortgage | Commercial mortgage | | | Commercial mortgage | $ | — | | | $ | 4,089 | | | $ | 4,089 | | | $ | 4,196 | | | $ | 541,540 | | | $ | 545,736 | |
Home equity lines and loans | Home equity lines and loans | — | | | 240 | | | 240 | | | 1,038 | | | 55,575 | | | 56,613 | | | Home equity lines and loans | — | | | 237 | | | 237 | | | 878 | | | 56,770 | | | 57,648 | |
Residential mortgage | Residential mortgage | — | | | 489 | | | 489 | | | 1,476 | | | 94,861 | | | 96,337 | | | Residential mortgage | — | | | 706 | | | 706 | | | 1,464 | | | 137,347 | | | 138,811 | |
Construction | Construction | — | | | 2,481 | | | 2,481 | | | 1,206 | | | 199,957 | | | 201,163 | | | Construction | — | | | 2,859 | | | 2,859 | | | 1,206 | | | 243,229 | | | 244,435 | |
Commercial and industrial | Commercial and industrial | 2,440 | | | 3,847 | | | 6,287 | | | 16,553 | | | 319,206 | | | 335,759 | | | Commercial and industrial | 2,193 | | | 3,476 | | | 5,669 | | | 16,358 | | | 313,093 | | | 329,451 | |
Small business loans | Small business loans | 376 | | | 3,305 | | | 3,681 | | | 1,495 | | | 119,425 | | | 120,920 | | | Small business loans | 376 | | | 3,624 | | | 4,000 | | | 1,479 | | | 132,425 | | | 133,904 | |
Paycheck Protection Program loans | — | | | — | | | — | | | — | | | 21,867 | | | 21,867 | | (2) | |
Main Street Lending Program | — | | | — | | | — | | | — | | | 597 | | | 597 | | (2) | |
PPP (2) | | PPP (2) | — | | | — | | | — | | | — | | | 8,837 | | | 8,837 | |
MSLP (2) | | MSLP (2) | — | | | — | | | — | | | — | | | 597 | | | 597 | |
Consumer | Consumer | — | | | 3 | | | 3 | | | — | | | 446 | | | 446 | | | Consumer | — | | | 3 | | | 3 | | | — | | | 497 | | | 497 | |
Leases, net | Leases, net | — | | | 1,297 | | | 1,297 | | | 95 | | | 115,777 | | | 115,872 | | | Leases, net | — | | | 1,411 | | | 1,411 | | | 506 | | | 129,068 | | | 129,574 | |
Total(1) | Total(1) | $ | 2,816 | | | 15,989 | | | 18,805 | | | 26,086 | | | 1,471,755 | | | 1,497,841 | | (1) | Total(1) | $ | 2,569 | | | $ | 16,405 | | | $ | 18,974 | | | $ | 26,087 | | | $ | 1,563,403 | | | $ | 1,589,490 | |
| | | Allowance on loans and leases | | Carrying value of loans and leases | | | December 31, 2021 |
December 31, 2021 | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total | | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total | | |
| | | Allowance on loans and leases | | Carrying value of loans and leases |
(dollars in thousands) | (dollars in thousands) | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total | | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total | | (dollars in thousands) | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total | | Individually evaluated for impairment | | Collectively evaluated for impairment | | Total |
Commercial mortgage | Commercial mortgage | | | Commercial mortgage | $ | — | | | $ | 4,950 | | | $ | 4,950 | | | $ | 3,556 | | | $ | 513,372 | | | $ | 516,928 | |
Home equity lines and loans | Home equity lines and loans | — | | | 224 | | | 224 | | | 905 | | | 51,394 | | | 52,299 | | | Home equity lines and loans | — | | | 224 | | | 224 | | | 905 | | | 51,394 | | | 52,299 | |
Residential mortgage | Residential mortgage | — | | | 283 | | | 283 | | | 1,797 | | | 48,820 | | | 50,617 | | | Residential mortgage | — | | | 283 | | | 283 | | | 1,797 | | | 48,820 | | | 50,617 | |
Construction | Construction | — | | | 2,042 | | | 2,042 | | | 1,206 | | | 159,699 | | | 160,905 | | | Construction | — | | | 2,042 | | | 2,042 | | | 1,206 | | | 159,699 | | | 160,905 | |
Commercial and industrial | Commercial and industrial | 2,900 | | | 3,633 | | | 6,533 | | | 17,361 | | | 276,410 | | | 293,771 | | | Commercial and industrial | 2,900 | | | 3,633 | | | 6,533 | | | 17,361 | | | 276,410 | | | 293,771 | |
Small business loans | Small business loans | 376 | | | 3,361 | | | 3,737 | | | 792 | | | 113,366 | | | 114,158 | | | Small business loans | 376 | | | 3,361 | | | 3,737 | | | 792 | | | 113,366 | | | 114,158 | |
Paycheck Protection Program loans | — | | | — | | | — | | | — | | | 90,194 | | | 90,194 | | (2) | |
Main Street Lending Program | — | | | — | | | — | | | — | | | 597 | | | 597 | | (2) | |
PPP (2) | | PPP (2) | — | | | — | | | — | | | — | | | 90,194 | | | 90,194 | |
MSLP (2) | | MSLP (2) | — | | | — | | | — | | | — | | | 597 | | | 597 | |
Consumer | Consumer | — | | | 3 | | | 3 | | | — | | | 419 | | | 419 | | | Consumer | — | | | 3 | | | 3 | | | — | | | 419 | | | 419 | |
Leases, net | Leases, net | — | | | 986 | | | 986 | | | 212 | | | 88,030 | | | 88,242 | | | Leases, net | — | | | 986 | | | 986 | | | 212 | | | 88,030 | | | 88,242 | |
Total(1) | Total(1) | $ | 3,276 | | | 15,482 | | | 18,758 | | | 25,829 | | | 1,342,301 | | | 1,368,130 | | (1) | Total(1) | $ | 3,276 | | | $ | 15,482 | | | $ | 18,758 | | | $ | 25,829 | | | $ | 1,342,301 | | | $ | 1,368,130 | |
(1)Excludes deferred fees and loans carried at fair value.
(2)PPP and MSLP loans are not reserved against as they are 100% guaranteed.
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 currently existing facts, conditions, and values, highly questionable and improbable. Loan balances classified as doubtful have been reduced by partial charge-offs and are carried at their net realizable values.
The following tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to determine the allowance for loan and lease losses as of June 30, 2022 and December 31, 2021:at the dates indicated:
| June 30, 2022 | Pass | | Special mention | | Substandard | | Doubtful | | Total | |
| | | September 30, 2022 |
(dollars in thousands) | (dollars in thousands) | Pass | | Special mention | | Substandard | | Doubtful | | Total | (dollars in thousands) | Pass | | Special Mention | | Substandard | | Doubtful | | Total |
Commercial mortgage | Commercial mortgage | | Commercial mortgage | $ | 511,993 | | | $ | 28,382 | | | $ | 5,361 | | | $ | — | | | $ | 545,736 | |
Home equity lines and loans | Home equity lines and loans | 55,107 | | | — | | | 1,506 | | | — | | | 56,613 | | Home equity lines and loans | 56,290 | | | — | | | 1,358 | | | — | | | 57,648 | |
Construction | Construction | 192,163 | | | 9,000 | | | — | | | — | | | 201,163 | | Construction | 235,464 | | | 8,971 | | | — | | | — | | | 244,435 | |
Commercial and industrial | Commercial and industrial | 279,864 | | | 11,488 | | | 44,407 | | | — | | | 335,759 | | Commercial and industrial | 280,929 | | | 5,414 | | | 43,108 | | | — | | | 329,451 | |
Small business loans | Small business loans | 119,519 | | | — | | | 1,401 | | | — | | | 120,920 | | Small business loans | 132,503 | | | — | | | 1,401 | | | — | | | 133,904 | |
Paycheck Protection Program loans | 21,867 | | | — | | | — | | | — | | | 21,867 | | |
Main Street Lending Program loans | 597 | | | — | | | — | | | — | | | 597 | | |
PPP | | PPP | 8,837 | | | — | | | — | | | — | | | 8,837 | |
MSLP | | MSLP | 597 | | | — | | | — | | | — | | | 597 | |
Total | Total | $ | 1,183,368 | | | 49,094 | | | 52,724 | | | — | | | 1,285,186 | | Total | $ | 1,226,613 | | | $ | 42,767 | | | $ | 51,228 | | | $ | — | | | $ | 1,320,608 | |
Commercial and industrial loans classified as substandard totaled $44.4$43.1 million as of JuneSeptember 30, 2022, an increase of $1.5 million,$238 thousand, from $42.9 million as of December 31, 2021. The majority of this amount is comprised of 1916 different loan relationships with no specific industry concentration and a $13.8$13.5 million commercial loan relationship in the advertising industry that became a non-performing loan relationship late in 2021.
| December 31, 2021 | Pass | | Special mention | | Substandard | | Doubtful | | Total | |
| | | December 31, 2021 |
(dollars in thousands) | (dollars in thousands) | Pass | | Special mention | | Substandard | | Doubtful | | Total | (dollars in thousands) | Pass | | Special mention | | Substandard | | Doubtful | | Total |
Commercial mortgage | Commercial mortgage | | Commercial mortgage | $ | 481,551 | | | $ | 29,452 | | | $ | 5,925 | | | $ | — | | | $ | 516,928 | |
Home equity lines and loans | Home equity lines and loans | 50,908 | | | — | | | 1,391 | | | — | | | 52,299 | | Home equity lines and loans | 50,908 | | | — | | | 1,391 | | | — | | | 52,299 | |
Construction | Construction | 151,608 | | | 9,297 | | | — | | | — | | | 160,905 | | Construction | 151,608 | | | 9,297 | | | — | | | — | | | 160,905 | |
Commercial and industrial | Commercial and industrial | 236,298 | | | 14,603 | | | 42,870 | | | — | | | 293,771 | | Commercial and industrial | 236,298 | | | 14,603 | | | 42,870 | | | — | | | 293,771 | |
Small business loans | Small business loans | 112,096 | | | — | | | 2,062 | | | — | | | 114,158 | | Small business loans | 112,096 | | | — | | | 2,062 | | | — | | | 114,158 | |
Paycheck Protection Program loans | 90,194 | | | — | | | — | | | — | | | 90,194 | | |
Main Street Lending Program loans | 597 | | | — | | | — | | | — | | | 597 | | |
PPP | | PPP | 90,194 | | | — | | | — | | | — | | | 90,194 | |
MSLP | | MSLP | 597 | | | — | | | — | | | — | | | 597 | |
Total | Total | $ | 1,123,252 | | | 53,352 | | | 52,248 | | | — | | | 1,228,852 | | Total | $ | 1,123,252 | | | $ | 53,352 | | | $ | 52,248 | | | $ | — | | | $ | 1,228,852 | |
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 June 30, 2022 and December 31, 2021.at the dates indicated:
| | | June 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
(dollars in thousands) | (dollars in thousands) | Performing | | Nonperforming | | Total | | Performing | | Nonperforming | | Total | (dollars in thousands) | Performing | | Non- performing | | Total | | Performing | | Non- performing | | Total |
Residential mortgage (1) | Residential mortgage (1) | $ | 94,285 | | | 2,052 | | | 96,337 | | | $ | 48,820 | | | 1,797 | | | 50,617 | | Residential mortgage (1) | $ | 151,498 | | | $ | 2,015 | | | $ | 153,513 | | | $ | 48,820 | | | $ | 1,797 | | | $ | 50,617 | |
Consumer | Consumer | 446 | | | — | | | 446 | | | 419 | | | — | | | 419 | | Consumer | 497 | | | — | | | 497 | | | 419 | | | — | | | 419 | |
Leases, net | Leases, net | 115,777 | | | 95 | | | 115,872 | | | 88,030 | | | 212 | | | 88,242 | | Leases, net | 129,068 | | | 506 | | | 129,574 | | | 88,030 | | | 212 | | | 88,242 | |
Total | Total | $ | 210,508 | | | 2,147 | | | 212,655 | | | $ | 137,269 | | | 2,009 | | | 139,278 | | Total | $ | 281,063 | | | $ | 2,521 | | | $ | 283,584 | | | $ | 137,269 | | | $ | 2,009 | | | $ | 139,278 | |
(1) There were 4four nonperforming residential mortgage loans at JuneSeptember 30, 2022 and 4four nonperforming residential mortgage loans at December 31, 2021 with a combined outstanding principal balance of $576$551 thousand and $601 thousand, respectively, which were carried at fair value and not included in the table above. This decrease was largely due to a residential mortgage loan that was nonperforming at December 31, 2021, which subsequently paid off before JuneSeptember 30, 2022.
No troubled debt restructurings performing according to modified terms are included in performing residential mortgages below as of June 30, 2022 and December 31, 2021.
Impaired Loans
The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related Allowance and interest income recognized forat the periods.dates indicated.
| | | As of June 30, 2022 | | As of December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
(dollars in thousands) | (dollars in thousands) | Recorded investment | | Principal balance | | Related allowance | | Recorded investment | | Principal balance | | Related allowance | (dollars in thousands) | Recorded investment | | Principal balance | | Related allowance | | Recorded investment | | Principal balance | | Related allowance |
Impaired loans with related allowance: | Impaired loans with related allowance: | | | | | | | | | | | | Impaired loans with related allowance: |
Commercial and industrial | Commercial and industrial | $ | 16,281 | | | 16,582 | | | 2,440 | | | 17,147 | | | 17,310 | | | 2,900 | | Commercial and industrial | $ | 16,095 | | | $ | 16,552 | | | $ | 2,193 | | | $ | 17,147 | | | $ | 17,310 | | | $ | 2,900 | |
Small business loans | Small business loans | 666 | | | 666 | | | 376 | | | 666 | | | 666 | | | 376 | | Small business loans | 666 | | | 666 | | | 376 | | | 666 | | | 666 | | | 376 | |
Home equity lines and loans | — | | | — | | | — | | | — | | | — | | | — | | |
Residential mortgage | — | | | — | | | — | | | — | | | — | | | — | | |
| Total | Total | $ | 16,947 | | | 17,248 | | | 2,816 | | | 17,813 | | | 17,976 | | | 3,276 | | Total | $ | 16,761 | | | $ | 17,218 | | | $ | 2,569 | | | $ | 17,813 | | | $ | 17,976 | | | $ | 3,276 | |
Impaired loans without related allowance: | Impaired loans without related allowance: | | | | | | | | | | | | Impaired loans without related allowance: |
Commercial mortgage | Commercial mortgage | $ | 4,223 | | | 4,233 | | | — | | | 3,556 | | | 3,559 | | | — | | Commercial mortgage | $ | 4,196 | | | $ | 4,206 | | | $ | — | | | $ | 3,556 | | | $ | 3,559 | | | $ | — | |
Commercial and industrial | Commercial and industrial | 272 | | | 334 | | | — | | | 214 | | | 269 | | | — | | Commercial and industrial | 263 | | | 329 | | | — | | | 214 | | | 269 | | | — | |
Small business loans | Small business loans | 829 | | | 829 | | | — | | | 126 | | | 126 | | | — | | Small business loans | 813 | | | 813 | | | — | | | 126 | | | 126 | | | — | |
Home equity lines and loans | Home equity lines and loans | 1,038 | | | 1,074 | | | — | | | 905 | | | 935 | | | — | | Home equity lines and loans | 878 | | | 878 | | | — | | | 905 | | | 935 | | | — | |
Residential mortgage | Residential mortgage | 1,476 | | | 1,476 | | | — | | | 1,797 | | | 1,797 | | | — | | Residential mortgage | 1,464 | | | 1,464 | | | — | | | 1,797 | | | 1,797 | | | — | |
Construction | Construction | 1,206 | | | 1,206 | | | — | | | 1,206 | | | 1,206 | | | — | | Construction | 1,206 | | | 1,206 | | | — | | | 1,206 | | | 1,206 | | | — | |
Leases | Leases | 95 | | | 95 | | | — | | | 212 | | | 212 | | | — | | Leases | 506 | | | 506 | | | — | | | 212 | | | 212 | | | — | |
Total | Total | 9,139 | | | 9,247 | | | — | | | 8,016 | | | 8,104 | | | — | | Total | $ | 9,326 | | | $ | 9,402 | | | $ | — | | | $ | 8,016 | | | $ | 8,104 | | | $ | — | |
Grand Total | Grand Total | $ | 26,086 | | | 26,495 | | | 2,816 | | | 25,829 | | | 26,080 | | | 3,276 | | Grand Total | $ | 26,087 | | | $ | 26,620 | | | $ | 2,569 | | | $ | 25,829 | | | $ | 26,080 | | | $ | 3,276 | |
The following table details the average recorded investment and interest income recognized on impaired loans by portfolio segment.
| | | Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2021 | | | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 |
(dollars in thousands) | (dollars in thousands) | Average Recorded Investment | | Interest Income Recognized | | Average recorded investment | | Interest income recognized | | (dollars in thousands) | Average Recorded Investment | | Interest Income Recognized | | Average recorded investment | | Interest income recognized |
Impaired loans with related allowance: | Impaired loans with related allowance: | | | | | | | | | Impaired loans with related allowance: | | | | | | | |
Commercial and industrial | Commercial and industrial | $ | 16,412 | | | — | | | 3,309 | | | 5 | | | Commercial and industrial | $ | 16,195 | | | $ | — | | | $ | 3,242 | | | $ | 5 | |
Small business loans | Small business loans | 666 | | | — | | | 917 | | | — | | | Small business loans | 666 | | | — | | | 916 | | | — | |
Home equity lines and loans | Home equity lines and loans | — | | | — | | | 93 | | | — | | | Home equity lines and loans | — | | | — | | | 89 | | | — | |
Residential mortgage | Residential mortgage | — | | | — | | | 686 | | | — | | | Residential mortgage | — | | | — | | | 169 | | | — | |
Total | Total | $ | 17,078 | | | — | | | 5,005 | | | 5 | | | Total | $ | 16,861 | | | $ | — | | | $ | 4,416 | | | $ | 5 | |
Impaired loans without related allowance: | Impaired loans without related allowance: | | | | | | | | | Impaired loans without related allowance: | | | | | | | |
Commercial mortgage | Commercial mortgage | $ | 4,241 | | | 29 | | | 726 | | | 8 | | | Commercial mortgage | $ | 4,212 | | | $ | 29 | | | $ | 2,573 | | | $ | 8 | |
Commercial and industrial | Commercial and industrial | 293 | | | — | | | 969 | | | — | | | Commercial and industrial | 286 | | | — | | | 473 | | | 19 | |
Small business loans | Small business loans | 835 | | | 2 | | | 161 | | | 4 | | | Small business loans | 819 | | | 2 | | | 147 | | | 3 | |
Home equity lines and loans | Home equity lines and loans | 1,040 | | | 23 | | | 824 | | | — | | | Home equity lines and loans | 878 | | | 15 | | | 823 | | | — | |
Residential mortgage | Residential mortgage | 1,480 | | | 166 | | | 1,125 | | | 3 | | | Residential mortgage | 1,468 | | | 22 | | | 1,636 | | | 6 | |
Construction | Construction | 1,206 | | | 16 | | | 1,206 | | | 14 | | | Construction | 1,206 | | | 20 | | | 1,206 | | | 17 | |
Leases | Leases | 102 | | | — | | | 39 | | | — | | | Leases | 500 | | | — | | | — | | | — | |
Total | Total | $ | 9,197 | | | 236 | | | 5,050 | | | 29 | | | Total | $ | 9,369 | | | $ | 88 | | | $ | 6,858 | | | $ | 53 | |
Grand Total | Grand Total | $ | 26,275 | | | 236 | | | 10,055 | | | 34 | | | Grand Total | $ | 26,230 | | | $ | 88 | | | $ | 11,274 | | | $ | 58 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
(dollars in thousands) | Average recorded investment | | Interest income recognized | | Average recorded investment | | Interest income recognized |
Impaired loans with related allowance: | | | | | | | |
Commercial and industrial | $ | 16,363 | | | $ | — | | | $ | 3,306 | | | $ | 15 | |
Small business loans | 666 | | | — | | | 917 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2021 | | |
(dollars in thousands) | Average recorded investment | | Interest income recognized | | Average recorded investment | | Interest income recognized | | | | |
Impaired loans with related allowance: | | | | | | | | | | | |
Commercial and industrial | $ | 16,449 | | | — | | | 3,339 | | | 10 | | | | | |
Small business loans | 666 | | | — | | | 917 | | | — | | | | | |
Home equity lines and loans | — | | | — | | | 94 | | | — | | | | | |
Residential mortgage | — | | | — | | | 687 | | | — | | | | | |
Total | 17,115 | | | — | | | 5,037 | | | 10 | | | | | |
Impaired loans without related allowance: | | | | | | | | | | | |
Commercial mortgage | 4,279 | | | 48 | | | 730 | | | 16 | | | | | |
Commercial and industrial | 297 | | | — | | | 1,002 | | | — | | | | | |
Small business loans | 844 | | | 5 | | | 169 | | | 8 | | | | | |
Home equity lines and loans | 1,044 | | | 23 | | | 824 | | | — | | | | | |
Residential mortgage | 1,483 | | | 168 | | | 1,126 | | | 3 | | | | | |
Construction | 1,206 | | | 31 | | | 1,206 | | | 29 | | | | | |
Leases | 103 | | | — | | | 80 | | | — | | | | | |
Total | 9,256 | | | 275 | | | 5,137 | | | 56 | | | | | |
Grand Total | $ | 26,371 | | | 275 | | | 10,174 | | | 66 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
(dollars in thousands) | Average recorded investment | | Interest income recognized | | Average recorded investment | | Interest income recognized |
Impaired loans with related allowance: | | | | | | | |
Home equity lines and loans | — | | | — | | | 92 | | | — | |
Residential mortgage | — | | | — | | | 170 | | | — | |
Total | $ | 17,029 | | | $ | — | | | $ | 4,485 | | | $ | 15 | |
Impaired loans without related allowance: | | | | | | | |
Commercial mortgage | 4,257 | | | 77 | | | 2,584 | | | 24 | |
Commercial and industrial | 293 | | | — | | | 485 | | | 19 | |
Small business loans | 835 | | | 7 | | | 161 | | | 11 | |
Home equity lines and loans | 878 | | | 39 | | | 824 | | | — | |
Residential mortgage | 1,478 | | | 190 | | | 1,640 | | | 9 | |
Construction | 1,206 | | | 51 | | | 1,206 | | | 47 | |
Leases | 510 | | | — | | | 53 | | | — | |
Total | $ | 9,457 | | | $ | 364 | | | $ | 6,953 | | | $ | 110 | |
Grand Total | $ | 26,486 | | | $ | 364 | | | $ | 11,438 | | | $ | 125 | |
Troubled Debt Restructuring
The restructuring of a loan is considered a 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 very 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.
The balance offollowing table presents information about TDRs at Junethe dates indicated:
| | | | | | | | | | | |
(dollars in thousands) | September 30, 2022 | | December 31, 2021 |
TDRs included in nonperforming loans and leases | $ | 193 | | | $ | 361 | |
TDRs in compliance with modified terms | 3,637 | | | 3,446 | |
Total TDRs | $ | 3,830 | | | $ | 3,807 | |
There were no new loan modifications granted during the three months ended September 30, 2022 and December 31, 2021 are as follows:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
(dollars in thousands) | |
TDRs included in nonperforming loans and leases | $ | 197 | | | 361 | |
TDRs in compliance with modified terms | 3,679 | | | 3,446 | |
Total TDRs | $ | 3,876 | | | 3,807 | |
There was 1 new loan modification for $700 thousand granted during the three and six months ended June 30, 2022 foron a commercial mortgage andfor $684 thousand for the nine months ended September 30, 2022, while there were no loan or lease modifications granted during the three and sixnine months JuneSeptember 30, 2021 that were categorizedclassified as a TDR, and there were no subsequent defaults during the same time periods.
(6) 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”).FHLB or other correspondent banks. The Corporation has 2two 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 $0 in Federal funds purchased at JuneSeptember 30, 2022 and December 31, 2021. The Corporation also has a facility with the Federal Reserve Bank discount window of $11.5$9.2 million. This facility is fully secured by investment securities. There were no borrowings under this at June 30, 2022 or at December 31, 2021.
Short-term borrowings at JuneSeptember 30, 2022 and December 31, 2021 consisted2021.
The following table presents short-term borrowings at the following notes:dates indicated:
| | | Balance as of | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | (dollars in thousands) | Maturity date | | Interest rate | | June 30, 2022 | | December 31, 2021 | (dollars in thousands) | Maturity date | | Interest rate | | September 30, 2022 | | December 31, 2021 |
Open Repo Plus Weekly | Open Repo Plus Weekly | 6/5/2023 | | 1.75 | % | | 54,250 | | | 36,458 | | Open Repo Plus Weekly | 6/5/2023 | | 3.11 | % | | $ | 23,458 | | | $ | 36,458 | |
Mid-term Repo-fixed | Mid-term Repo-fixed | 9/12/2022 | | 0.23 | | | 4,886 | | | 4,886 | | Mid-term Repo-fixed | 9/12/2022 | | 0.23 | | | — | | | 4,886 | |
Total | Total | | $ | 59,136 | | | 41,344 | | Total | | $ | 23,458 | | | $ | 41,344 | |
The Corporation had no long-term debt as of JuneSeptember 30, 2022 or December 31, 2021.
The FHLB of Pittsburgh has also issued $56.1$74.8 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 throughout the remainder of 2022.
The Corporation has a maximum borrowing capacity with the FHLB of $484.1$529.0 million as of JuneSeptember 30, 2022 and $505.4 million as of December 31, 2021. 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.
(7) Servicing Assets
The Corporation sells certain residential mortgage loans and the guaranteed portion of certain SBA loans to third parties and retains servicing rights and receives servicing fees. All such transfers are accounted for as sales. When the Corporation sells a residential mortgage loan, it does not retain any portion of that loan and its continuing involvement in such transfers is limited to certain servicing responsibilities. While the Corporation may retain a portion of certain sold SBA loans, its continuing involvement in the portion of the loan that was sold is limited to certain servicing responsibilities. When the contractual servicing fees on loans sold with servicing retained are expected to be more than adequate compensation to a servicer for performing the servicing, a capitalized servicing asset is recognized. The Corporation accounts for the transfers and servicing of financial assets in accordance with ASC 860, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
Residential Mortgage Loans
The mortgage servicing rights (“MSRs”) arerelated MSR asset is amortized over the period of the estimated future net servicing life of the underlying assets. MSRs are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the MSR. The Corporation serviced $1.0 billion of residential mortgage loans as of JuneSeptember 30, 2022 and December 31, 2021. During the three and sixnine months ended JuneSeptember 30, 2022, the Corporation recognized servicing fee income of $653$643 thousand and $1.3$1.9 million compared to $481$562 thousand and $842 thousand,$1.4 million, during the three and sixnine months ended JuneSeptember 30, 2021, respectively.
Changes in the MSR balance are summarized as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three months ended September 30, | | Nine months ended September 30, |
(dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | (dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Balance at beginning of the period | Balance at beginning of the period | | $ | 10,888 | | | 7,118 | | | $ | 10,756 | | | 4,647 | | | Balance at beginning of the period | $ | 10,610 | | | $ | 8,942 | | | $ | 10,756 | | | $ | 4,647 | |
Servicing rights capitalized | Servicing rights capitalized | | 51 | | | 2,154 | | | 583 | | | 4,496 | | | Servicing rights capitalized | 65 | | | 1,360 | | | 648 | | | 5,856 | |
Amortization of servicing rights | Amortization of servicing rights | | (332) | | | (271) | | | (736) | | | (470) | | | Amortization of servicing rights | (356) | | | (316) | | | (1,092) | | | (786) | |
Change in valuation allowance | Change in valuation allowance | | 3 | | | (59) | | | 7 | | | 269 | | | Change in valuation allowance | (4) | | | 111 | | | 3 | | | 380 | |
Balance at end of the period | Balance at end of the period | | $ | 10,610 | | | 8,942 | | | $ | 10,610 | | | 8,942 | | | Balance at end of the period | $ | 10,315 | | | $ | 10,097 | | | $ | 10,315 | | | $ | 10,097 | |
Activity in the valuation allowance for MSRs was as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three months ended September 30, | | Nine months ended September 30, |
(dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | (dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Valuation allowance, beginning of period | Valuation allowance, beginning of period | | $ | (4) | | | (107) | | | $ | (8) | | | (435) | | | Valuation allowance, beginning of period | $ | (1) | | | $ | (166) | | | $ | (8) | | | $ | (435) | |
Impairment | Impairment | | — | | | (59) | | | — | | | — | | | Impairment | (4) | | | — | | | (4) | | | — | |
Recovery | Recovery | | 3 | | | — | | | 7 | | | 269 | | | Recovery | — | | | 111 | | | 7 | | | 380 | |
Valuation allowance, end of period | Valuation allowance, end of period | | $ | (1) | | | (166) | | | $ | (1) | | | (166) | | | Valuation allowance, end of period | $ | (5) | | | $ | (55) | | | $ | (5) | | | $ | (55) | |
The Corporation uses assumptions and estimates in determining the fair value of MSRs. These assumptions include prepayment speeds and discount rates. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge. At JuneSeptember 30, 2022, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 7.13%7.11% and a discount rate equal to 9.00%9.50%. At December 31, 2021, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 7.23% and a discount rate equal to 9.00%. Due in part to market volatility as interest rates increased, the prepayment speed assumption has decreased from December 31, 2021 to JuneSeptember 30, 2022. As interest rates have started to increase and the number of mortgage refinancings have started to decline, model inputs have been adjusted to align the MSRs fair value with market conditions. The discount rate assumption is unchanged over this period as the underlying credit quality
At June 30, 2022 and December 31, 2021, theThe sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.
| | | | | | | | | | | | | | |
(dollars in thousands) | | June 30, 2022 | | December 31, 2021 |
Fair value of residential mortgage servicing rights | | $ | 12,270 | | | $ | 11,241 | |
| | | | |
Weighted average life (months) | | 16 | | 11 |
| | | | |
Prepayment speed | | 7.13 | % | | 7.23 | % |
Impact on fair value: | | | | |
10% adverse change | | $ | (445) | | | $ | (376) | |
20% adverse change | | (862) | | | (731) | |
| | | | |
Discount rate | | 9.00 | % | | 9.00 | % |
Impact on fair value: | | | | |
10% adverse change | | $ | (490) | | | $ | (436) | |
20% adverse change | | (945) | | | (840) | |
| | | | | | | | | | | |
(dollars in thousands) | September 30, 2022 | | December 31, 2021 |
Fair value of residential mortgage servicing rights | $ | 12,132 | | | $ | 11,241 | |
| | | |
Weighted average life (months) | 19 | | 11 |
| | | |
Prepayment speed | 7.11 | % | | 7.23 | % |
Impact on fair value: | | | |
10% adverse change | $ | (524) | | | $ | (376) | |
20% adverse change | (1,010) | | | (731) | |
| | | |
Discount rate | 9.50 | % | | 9.00 | % |
Impact on fair value: | | | |
10% adverse change | $ | (426) | | | $ | (436) | |
20% adverse change | (824) | | | (840) | |
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a articular assumption on the fair value of the MSRs is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.
SBA Loans
SBA loan servicing assets are amortized over the period of the estimated future net servicing life of the underlying assets. SBA loan servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the SBA loan servicing asset. The Corporation serviced $143.2$156.3 million and $115.1 million of SBA loans, as of JuneSeptember 30, 2022 and December 31, 2021, respectively.
Changes in the SBA loan servicing asset balance are summarized as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three months ended September 30, | | Nine months ended September 30, |
(dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | (dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Balance at beginning of the period | Balance at beginning of the period | | $ | 2,508 | | | 1,160 | | | $ | 2,009 | | | 970 | | | Balance at beginning of the period | $ | 2,250 | | | $ | 1,385 | | | $ | 2,009 | | | $ | 970 | |
Servicing rights capitalized | Servicing rights capitalized | | 247 | | | 304 | | | 840 | | | 578 | | | Servicing rights capitalized | 306 | | | 588 | | | 1,146 | | | 1,166 | |
Amortization of servicing rights | Amortization of servicing rights | | (225) | | | (87) | | | (350) | | | (154) | | | Amortization of servicing rights | (173) | | | (112) | | | (523) | | | (266) | |
Change in valuation allowance | Change in valuation allowance | | (280) | | | 8 | | | (249) | | | (9) | | | Change in valuation allowance | 109 | | | (26) | | | (140) | | | (35) | |
Balance at end of the period | Balance at end of the period | | $ | 2,250 | | | 1,385 | | | $ | 2,250 | | | 1,385 | | | Balance at end of the period | $ | 2,492 | | | $ | 1,835 | | | $ | 2,492 | | | $ | 1,835 | |
Activity in the valuation allowance for SBA loan servicing assets was as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three months ended September 30, | | Nine months ended September 30, |
(dollars in thousands) | (dollars in thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | (dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Valuation allowance, beginning of period | Valuation allowance, beginning of period | | $ | (65) | | | (56) | | | $ | (96) | | | (39) | | | Valuation allowance, beginning of period | $ | (345) | | | $ | (48) | | | $ | (96) | | | $ | (39) | |
Impairment | Impairment | | (280) | | | — | | | (249) | | | (9) | | | Impairment | — | | | (26) | | | (280) | | | (35) | |
Recovery | Recovery | | — | | | 8 | | | — | | | — | | | Recovery | 109 | | | — | | | 140 | | | — | |
Valuation allowance, end of period | Valuation allowance, end of period | | $ | (345) | | | (48) | | | $ | (345) | | | (48) | | | Valuation allowance, end of period | $ | (236) | | | $ | (74) | | | $ | (236) | | | $ | (74) | |
The Corporation uses assumptions and estimates in determining the fair value of SBA loan servicing rights. These assumptions include prepayment speeds, discount rates, and other assumptions. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge. At JuneSeptember 30, 2022, the key assumptions used to determine the fair value of the Corporation’s SBA loan servicing rights included a lifetime constant prepayment rate equal to 13.00%,12.88% and a discount rate equal to 12.38%12.24%. At December 31, 2021, the key assumptions used to determine the fair value of the Corporation’s SBA
loan servicing rights included a lifetime constant prepayment rate equal to 12.38%, and a discount rate equal to 9.01%. The change in valuation allowance due to impairment, noted in the tables above, was largely due to the increased prepayment speed experienced in the current year periods and the rising interest rate environment.
At June 30, 2022 and December 31, 2021, theThe sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.
| (dollars in thousands) | (dollars in thousands) | | June 30, 2022 | | December 31, 2021 | (dollars in thousands) | September 30, 2022 | | December 31, 2021 |
Fair value of SBA loan servicing rights | Fair value of SBA loan servicing rights | | $ | 2,295 | | | $ | 2,107 | | Fair value of SBA loan servicing rights | $ | 2,578 | | | $ | 2,107 | |
| Weighted average life (years) | Weighted average life (years) | | 3.8 | | 3.8 | Weighted average life (years) | 3.8 | | 3.8 |
| Prepayment speed | Prepayment speed | | 13.00 | % | | 12.38 | % | Prepayment speed | 12.88 | % | | 12.38 | % |
Impact on fair value: | Impact on fair value: | | Impact on fair value: | |
10% adverse change | 10% adverse change | | $ | (74) | | | $ | (69) | | 10% adverse change | $ | (83) | | | $ | (69) | |
20% adverse change | 20% adverse change | | (137) | | | (132) | | 20% adverse change | (160) | | | (132) | |
| Discount rate | Discount rate | | 12.38 | % | | 9.01 | % | Discount rate | 12.24 | % | | 9.01 | % |
Impact on fair value: | Impact on fair value: | | Impact on fair value: | |
10% adverse change | 10% adverse change | | $ | (59) | | | $ | (54) | | 10% adverse change | $ | (61) | | | $ | (54) | |
20% adverse change | 20% adverse change | | (108) | | | (106) | | 20% adverse change | (120) | | | (106) | |
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the SBA servicing rights is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.
(8) Fair Value Measurements and Disclosures
The Corporation uses fair value measurements to record fair value adjustments to certain assets and liabilities. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on 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 measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 – Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments
whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis.
Securities
The fair value of securities available-for-sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.
Mortgage Loans Held for Sale
The fair value of loans held for sale is based on secondary market prices.
Mortgage Loans Held for Investment
The fair value of mortgage loans held for investment is based on the price secondary markets are currently offering for similar loans using observable market data.
Derivative Financial Instruments
The fair values of forward commitments and interest rate swaps are based on market pricing and therefore are considered Level 2. Derivatives classified as Level 3 consist of interest rate lock commitments related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement.
For financial assets measured at fair value on a recurring basis the fair value measurements by level within the fair value hierarchy used at June 30, 2022 and December 31, 2021 are as followsthe dates indicated:
| | | June 30, 2022 | | September 30, 2022 |
(dollars in thousands) | (dollars in thousands) | Total | | Level 1 | | Level 2 | | Level 3 | (dollars in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
Assets | Assets | | | | | | | | Assets | | | | | | | |
Securities available for sale: | Securities available for sale: | | Securities available for sale: | |
U.S. asset backed securities | U.S. asset backed securities | $ | 13,740 | | | — | | | 13,740 | | | — | | U.S. asset backed securities | $ | 15,473 | | | $ | — | | | $ | 15,473 | | | $ | — | |
U.S. government agency mortgage-backed securities | 9,640 | | | — | | | 9,640 | | | — | | |
U.S. government agency collateralized mortgage obligations | 20,606 | | | — | | | 20,606 | | | — | | |
U.S. government agency MBS | | U.S. government agency MBS | 11,344 | | | — | | | 11,344 | | | — | |
U.S. government agency CMO | | U.S. government agency CMO | 19,169 | | | — | | | 19,169 | | | — | |
State and municipal securities | State and municipal securities | 39,716 | | | — | | | 39,716 | | | — | | State and municipal securities | 37,239 | | | — | | | 37,239 | | | — | |
U.S. Treasuries | U.S. Treasuries | 30,424 | | | 30,424 | | | — | | | — | | U.S. Treasuries | 29,281 | | | 29,281 | | | — | | | — | |
Non-U.S. government agency collateralized mortgage obligations | 8,971 | | | — | | | 8,971 | | | 0 | |
Non-U.S. government agency CMO | | Non-U.S. government agency CMO | 8,827 | | | — | | | 8,827 | | |
Corporate bonds | Corporate bonds | 6,191 | | | — | | | 6,191 | | | — | | Corporate bonds | 6,666 | | | — | | | 6,666 | | | — | |
Equity investments | Equity investments | 2,153 | | | — | | | 2,153 | | | — | | Equity investments | 2,092 | | | — | | | 2,092 | | | — | |
Mortgage loans held for sale | Mortgage loans held for sale | 58,938 | | | — | | | 58,938 | | | — | | Mortgage loans held for sale | 33,800 | | | — | | | 33,800 | | | — | |
Mortgage loans held for investment | Mortgage loans held for investment | 16,212 | | | — | | | 16,212 | | | — | | Mortgage loans held for investment | 14,702 | | | — | | | 14,702 | | | — | |
Interest rate lock commitments | Interest rate lock commitments | 374 | | | — | | | — | | | 374 | | Interest rate lock commitments | 137 | | | — | | | — | | | 137 | |
Forward commitments | Forward commitments | 67 | | | — | | | 67 | | | — | | Forward commitments | 475 | | | — | | | 475 | | | — | |
Customer derivatives - interest rate swaps | Customer derivatives - interest rate swaps | 2,893 | | | — | | | 2,893 | | | — | | Customer derivatives - interest rate swaps | 4,572 | | | — | | | 4,572 | | | — | |
Total | Total | $ | 209,925 | | | 30,424 | | | 179,127 | | | 374 | | Total | $ | 183,777 | | | $ | 29,281 | | | $ | 154,359 | | | $ | 137 | |
| Liabilities | Liabilities | | Liabilities | |
Interest rate lock commitments | Interest rate lock commitments | 430 | | | — | | | — | | | 430 | | Interest rate lock commitments | $ | 598 | | | $ | — | | | $ | — | | | $ | 598 | |
Forward commitments | Forward commitments | 77 | | | — | | | 77 | | | — | | Forward commitments | — | | | — | | | — | | | — | |
Customer derivatives - interest rate swaps | Customer derivatives - interest rate swaps | 2,847 | | | — | | | 2,847 | | | — | | Customer derivatives - interest rate swaps | 4,479 | | | — | | | 4,479 | | | — | |
Total | Total | $ | 3,354 | | | — | | | 2,924 | | | 430 | | Total | $ | 5,077 | | | $ | — | | | $ | 4,479 | | | $ | 598 | |
| | | December 31, 2021 | | December 31, 2021 |
(dollars in thousands) | (dollars in thousands) | Total | | Level 1 | | Level 2 | | Level 3 | (dollars in thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
Assets | Assets | | | | | | | | Assets | | | | | | | |
Securities available for sale: | Securities available for sale: | | Securities available for sale: | |
U.S. asset backed securities | U.S. asset backed securities | $ | 16,837 | | | — | | | 16,837 | | | — | | U.S. asset backed securities | $ | 16,837 | | | $ | — | | | $ | 16,837 | | | $ | — | |
U.S. government agency mortgage-backed securities | 9,813 | | | — | | | 9,813 | | | — | | |
U.S. government agency collateralized mortgage obligations | 22,381 | | | — | | | 22,381 | | | — | | |
U.S. government agency MBS | | U.S. government agency MBS | 9,813 | | | — | | | 9,813 | | | — | |
U.S. government agency CMO | | U.S. government agency CMO | 22,381 | | | — | | | 22,381 | | | — | |
State and municipal securities | State and municipal securities | 72,982 | | | — | | | 72,982 | | | — | | State and municipal securities | 72,982 | | | — | | | 72,982 | | | — | |
U.S. Treasuries | U.S. Treasuries | 29,728 | | | 29,728 | | | — | | | — | | U.S. Treasuries | 29,728 | | | 29,728 | | | — | | | — | |
Non-U.S. government agency collateralized mortgage obligations | 975 | | | — | | | 975 | | | — | | |
Non-U.S. government agency CMO | | Non-U.S. government agency CMO | 975 | | | — | | | 975 | | | — | |
Corporate bonds | Corporate bonds | 6,586 | | | — | | | 6,586 | | | — | | Corporate bonds | 6,586 | | | — | | | 6,586 | | | — | |
Equity investments | Equity investments | 2,354 | | | — | | | 2,354 | | | — | | Equity investments | 2,354 | | | — | | | 2,354 | | | — | |
Mortgage loans held for sale | Mortgage loans held for sale | 80,882 | | | — | | | 80,882 | | | — | | Mortgage loans held for sale | 80,882 | | | — | | | 80,882 | | | — | |
Mortgage loans held for investment | Mortgage loans held for investment | 17,558 | | | — | | | 17,558 | | | — | | Mortgage loans held for investment | 17,558 | | | — | | | 17,558 | | | — | |
Interest rate lock commitments | Interest rate lock commitments | 1,122 | | | — | | | — | | | 1,122 | | Interest rate lock commitments | 1,122 | | | — | | | — | | | 1,122 | |
Forward commitments | Forward commitments | 65 | | | — | | | 65 | | | — | | Forward commitments | 65 | | | — | | | 65 | | | — | |
Customer derivatives - interest rate swaps | Customer derivatives - interest rate swaps | 961 | | | — | | | 961 | | | — | | Customer derivatives - interest rate swaps | 961 | | | — | | | 961 | | | — | |
Total | Total | $ | 262,244 | | | 29,728 | | | 231,394 | | | 1,122 | | Total | $ | 262,244 | | | $ | 29,728 | | | $ | 231,394 | | | $ | 1,122 | |
| Liabilities | Liabilities | | Liabilities | |
Interest rate lock commitments | Interest rate lock commitments | 203 | | | — | | | — | | | 203 | | Interest rate lock commitments | $ | 203 | | | $ | — | | | $ | — | | | $ | 203 | |
Forward commitments | Forward commitments | 106 | | | — | | | 106 | | | — | | Forward commitments | 106 | | | — | | | 106 | | | — | |
Customer derivatives - interest rate swaps | Customer derivatives - interest rate swaps | 1,018 | | | — | | | 1,018 | | | — | | Customer derivatives - interest rate swaps | 1,018 | | | — | | | 1,018 | | | — | |
Total | Total | $ | 1,327 | | | — | | | 1,124 | | | 203 | | Total | $ | 1,327 | | | $ | — | | | $ | 1,124 | | | $ | 203 | |
AssetsThe following table presents assets measured at fair value on a nonrecurring basis at June 30, 2022 and December 31, 2021 are as follows:the dates indicated:
| | | June 30, 2022 | | December 31, 2021 | | | | | | | | | | |
(dollars in thousands) | (dollars in thousands) | Fair Value | | Fair Value | (dollars in thousands) | September 30, 2022 | | December 31, 2021 |
Mortgage servicing rights | Mortgage servicing rights | $ | 10,610 | | | 10,756 | | Mortgage servicing rights | $ | 10,315 | | | $ | 10,756 | |
SBA loan servicing rights | SBA loan servicing rights | 2,250 | | | 2,009 | | SBA loan servicing rights | 2,492 | | | 2,009 | |
Impaired loans (1) | Impaired loans (1) | | Impaired loans (1) | |
Commercial and industrial | Commercial and industrial | 823 | | 1,837 | Commercial and industrial | 820 | | 1,837 |
Small business loans | Small business loans | — | | 290 | Small business loans | — | | 290 |
Total | Total | $ | 13,683 | | | 14,892 | | Total | $ | 13,627 | | | $ | 14,892 | |
(1)Impaired loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Refer to the following page for further qualitative discussion around impaired loans.
The following table details the valuation techniques for Level 3 impaired loans.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Fair Value | | Valuation | | | | | | Range of |
(dollars in thousands) | Level 3 | | Technique | | Significant Unobservable Input | | Range of Inputs |
JuneSeptember 30, 2022 | $ | 823820 | | | Appraisal of collateral | | Management adjustments on appraisals for property type and recent activity | | 2%-15% discount |
December 31, 2021 | $ | 2,127 | | | Appraisal of collateral | | Management adjustments on appraisals for property type and recent activity | | 2%-15% discount |
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:
Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.
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 reflective of an exit price.
Servicing Assets
The Corporation estimates the fair value of mortgage servicing rights and SBA loan servicing rights using discounted cash flow models that calculate the present value of estimated future net servicing income. The model uses readily available prepayment speed assumptions for the interest rates of the portfolios serviced. These servicing rights are classified within Level 3 in the fair value hierarchy based upon management’s assessment of the inputs. The Corporation reviews the servicing rights portfolios on a quarterly basis for impairment.
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. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the Allowance policy.
Accrued Interest Receivable and Payable
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
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.
Short-Term Borrowings
The carrying amounts of short-term borrowings approximate their fair values.
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.
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.
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.
The following table presents the estimated fair values of the Corporation’s financial instruments at June 30, 2022 and December 31, 2021 are as follows:the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2022 | | December 31, 2021 |
(dollars in thousands) | Fair Value Hierarchy Level | | Carrying amount | | Fair value | | Carrying amount | | Fair value |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | Level 1 | | $ | 37,093 | | | 37,093 | | | 23,480 | | | 23,480 | |
Securities available-for-sale (1) | Level 2 | | 129,288 | | | 129,288 | | | 159,302 | | | 159,302 | |
Securities held-to-maturity | Level 2 | | 37,111 | | | 33,497 | | | 6,372 | | | 6,591 | |
Equity investments | Level 2 | | 2,153 | | | 2,153 | | | 2,354 | | | 2,354 | |
Mortgage loans held for sale | Level 2 | | 58,938 | | | 58,938 | | | 80,882 | | | 80,882 | |
Loans receivable, net of the allowance for loan and lease losses | Level 3 | | 1,502,681 | | | 1,456,650 | | | 1,368,899 | | | 1,370,885 | |
Mortgage loans held for investment | Level 2 | | 16,212 | | | 16,212 | | | 17,558 | | | 17,558 | |
Interest rate lock commitments | Level 3 | | 374 | | | 374 | | | 1,122 | | | 1,122 | |
Forward commitments | Level 2 | | 67 | | | 67 | | | 65 | | | 65 | |
Restricted investment in bank stock | NA | | 4,719 | | | NA | | 5,117 | | | NA |
Accrued interest receivable | Level 3 | | 5,108 | | | 5,108 | | | 5,009 | | | 5,009 | |
Customer derivatives - interest rate swaps | Level 2 | | 2,893 | | | 2,893 | | | 961 | | | 961 | |
Financial liabilities: | | | | | | | | | |
Deposits | Level 2 | | 1,568,014 | | | 1,484,100 | | | 1,446,413 | | | 1,549,100 | |
Short-term borrowings | Level 2 | | 59,136 | | | 59,136 | | | 41,344 | | | 41,344 | |
Subordinated debentures | Level 2 | | 40,567 | | | 38,054 | | | 40,508 | | | 40,803 | |
Accrued interest payable | Level 2 | | 146 | | | 146 | | | 31 | | | 31 | |
Interest rate lock commitments | Level 3 | | 430 | | | 430 | | | 203 | | | 203 | |
Forward commitments | Level 2 | | 77 | | | 77 | | | 106 | | | 106 | |
Customer derivatives - interest rate swaps | Level 2 | | 2,847 | | | 2,847 | | | 1,018 | | | 1,018 | |
| | | | | | | | | |
| | | Notional | | | | Notional | | |
Off-balance sheet financial instruments: | | | amount | | Fair value | | amount | | Fair value |
Commitments to extend credit | Level 2 | | $ | 488,561 | | | — | | | 486,632 | | | 0 |
Letters of credit | Level 2 | | 22,880 | | | — | | | 25,986 | | | 0 |
(1) U.S. Treasury securities available-for-sale are classified as Level 1. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2022 | | December 31, 2021 |
(dollars in thousands) | Fair Value Hierarchy Level | | Carrying amount | | Fair value | | Carrying amount | | Fair value |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | Level 1 | | $ | 32,888 | | | $ | 32,888 | | | $ | 23,480 | | | $ | 23,480 | |
Securities available-for-sale | Level 1 / 2 | | 127,999 | | | 127,999 | | | 159,302 | | | 159,302 | |
Securities held-to-maturity | Level 2 | | 37,922 | | | 32,323 | | | 6,372 | | | 6,591 | |
Equity investments | Level 2 | | 2,092 | | | 2,092 | | | 2,354 | | | 2,354 | |
Mortgage loans held for sale | Level 2 | | 33,800 | | | 33,800 | | | 80,882 | | | 80,882 | |
Loans receivable, net of the allowance for loan and lease losses | Level 3 | | 1,595,647 | | | 1,535,398 | | | 1,368,899 | | | 1,370,885 | |
Mortgage loans held for investment | Level 2 | | 14,702 | | | 14,702 | | | 17,558 | | | 17,558 | |
Interest rate lock commitments | Level 3 | | 137 | | | 137 | | | 1,122 | | | 1,122 | |
Forward commitments | Level 2 | | 475 | | | 475 | | | 65 | | | 65 | |
Restricted investment in bank stock | NA | | 5,217 | | | NA | | 5,117 | | | NA |
Accrued interest receivable | Level 3 | | 6,008 | | | 6,008 | | | 5,009 | | | 5,009 | |
Customer derivatives - interest rate swaps | Level 2 | | 4,572 | | | 4,572 | | | 961 | | | 961 | |
Financial liabilities: | | | | | | | | | |
Deposits | Level 2 | | 1,673,553 | | | 1,526,400 | | | 1,446,413 | | | 1,549,100 | |
Short-term borrowings | Level 2 | | 23,458 | | | 23,458 | | | 41,344 | | | 41,344 | |
Subordinated debentures | Level 2 | | 40,597 | | | 40,285 | | | 40,508 | | | 40,803 | |
Accrued interest payable | Level 2 | | 1,154 | | | 1,154 | | | 31 | | | 31 | |
Interest rate lock commitments | Level 3 | | 598 | | | 598 | | | 203 | | | 203 | |
Forward commitments | Level 2 | | — | | | — | | | 106 | | | 106 | |
Customer derivatives - interest rate swaps | Level 2 | | 4,479 | | | 4,479 | | | 1,018 | | | 1,018 | |
| | | | | | | | | |
| | | Notional | | | | Notional | | |
Off-balance sheet financial instruments: | | | amount | | Fair value | | amount | | Fair value |
Commitments to extend credit | Level 2 | | $ | 505,860 | | | $ | — | | | $ | 486,632 | | | $ | — | |
Letters of credit | Level 2 | | 21,462 | | | — | | | 25,986 | | | — | |
The following table includes a rollforward of interest rate lock commitments for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the three and six month periods ended June 30, 2022 and 2021.indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Balance at beginning of the period | $ | 587 | | | 4,595 | | | 1,122 | | | 6,932 | | | | | |
Decrease in value | (213) | | | (1,928) | | | (748) | | | (4,265) | | | | | |
Balance at end of the period | $ | 374 | | | 2,667 | | | 374 | | | 2,667 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
(dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Balance at beginning of the period | $ | 374 | | | $ | 2,667 | | | $ | 1,122 | | | $ | 6,932 | |
Decrease in value | (237) | | | (955) | | | (985) | | | (5,220) | |
Balance at end of the period | $ | 137 | | | $ | 1,712 | | | $ | 137 | | | $ | 1,712 | |
The following table details the valuation techniques for Level 3 interest rate lock commitments.
| | Fair Value Level 3 | | Valuation Technique | | Significant Unobservable Input | | Range of Inputs | | Weighted Average | |
June 30, 2022 | | $ | 374 | | | Market comparable pricing | | Pull through | | 1 - 99 | | 88.93% | |
(dollars in thousands) | | (dollars in thousands) | Fair Value | | Valuation Technique | | Significant Unobservable Input | | Range of Inputs | | Weighted Average |
September 30, 2022 | | September 30, 2022 | $ | 137 | | | Market comparable pricing | | Pull through | | 1 - 99% | | 96.93% |
December 31, 2021 | December 31, 2021 | | 1,122 | | | Market comparable pricing | | Pull through | | 1 - 99 | | 87.66 | December 31, 2021 | 1,122 | | | Market comparable pricing | | Pull through | | 1 - 99 | | 87.66 |
Net realized gains and losses due to changes in the fair value
(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 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.
The following table presents a summary of the notional amounts and fair values of derivative financial instruments:instruments at the dates indicated:
| | | June 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 |
(dollars in thousands) | (dollars in thousands) | Balance Sheet Line Item | | Notional Amount | | Asset (Liability) Fair Value | | Notional Amount | | Asset (Liability) Fair Value | (dollars in thousands) | Balance Sheet Line Item | | Notional Amount | | Asset (Liability) Fair Value | | Notional Amount | | Asset (Liability) Fair Value |
Interest Rate Lock Commitments | Interest Rate Lock Commitments | | | | | | | | | | Interest Rate Lock Commitments |
Positive fair values | Positive fair values | Other assets | | $ | 50,159 | | | 374 | | | 108,653 | | | 1,122 | | Positive fair values | Other assets | | $ | 23,037 | | | $ | 137 | | | $ | 108,653 | | | $ | 1,122 | |
Negative fair values | Negative fair values | Other liabilities | | 55,319 | | | (430) | | | 35,264 | | | (203) | | Negative fair values | Other liabilities | | 45,063 | | | (598) | | | 35,264 | | | (203) | |
Total | Total | | 105,478 | | | (56) | | | 143,917 | | | 919 | | Total | | 68,100 | | | (461) | | | 143,917 | | | 919 | |
| Forward Commitments | Forward Commitments | | Forward Commitments |
Positive fair values | Positive fair values | Other assets | | 14,500 | | | 67 | | | 30,500 | | | 65 | | Positive fair values | Other assets | | 12,000 | | | 475 | | | 30,500 | | | 65 | |
Negative fair values | Negative fair values | Other liabilities | | 12,500 | | | (77) | | | 45,500 | | | (106) | | Negative fair values | Other liabilities | | — | | | — | | | 45,500 | | | (106) | |
Total | Total | | 27,000 | | | (10) | | | 76,000 | | | (41) | | Total | | 12,000 | | | 475 | | | 76,000 | | | (41) | |
| Customer Derivatives - Interest Rate Swaps | Customer Derivatives - Interest Rate Swaps | | Customer Derivatives - Interest Rate Swaps |
Positive fair values | Positive fair values | Other assets | | 41,742 | | | 2,893 | | | 35,447 | | | 961 | | Positive fair values | Other assets | | 41,352 | | | 4,572 | | | 35,447 | | | 961 | |
Negative fair values | Negative fair values | Other liabilities | | 41,742 | | | (2,847) | | | 35,447 | | | (1,018) | | Negative fair values | Other liabilities | | 41,352 | | | (4,479) | | | 35,447 | | | (1,018) | |
Total | Total | | 83,484 | | | 46 | | | 70,894 | | | (57) | | Total | | 82,704 | | | 93 | | | 70,894 | | | (57) | |
Total derivative financial instruments | Total derivative financial instruments | | $ | 215,962 | | | (20) | | | 290,811 | | | 821 | | Total derivative financial instruments | | $ | 162,804 | | | $ | 107 | | | $ | 290,811 | | | $ | 821 | |
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(losses) on derivative financial instruments:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three months ended September 30, | | Nine months ended September 30, |
(dollars in thousands) | (dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 | | (dollars in thousands) | 2022 | | 2021 | | 2022 | | 2021 |
Interest Rate Lock Commitments | Interest Rate Lock Commitments | $ | 165 | | | 13 | | | (975) | | | (4,424) | | | Interest Rate Lock Commitments | $ | (405) | | | $ | (1,056) | | | $ | (1,380) | | | $ | (5,480) | |
Forward Commitments | Forward Commitments | (909) | | | (2,102) | | | 31 | | | 1,294 | | | Forward Commitments | 485 | | | 703 | | | 516 | | | 1,997 | |
Customer Derivatives - Interest Rate Swaps | Customer Derivatives - Interest Rate Swaps | 70 | | | (59) | | | 104 | | | 38 | | | Customer Derivatives - Interest Rate Swaps | 47 | | | 14 | | | 151 | | | 52 | |
Net fair value (losses) gains on derivative financial instruments | Net fair value (losses) gains on derivative financial instruments | $ | (674) | | | (2,148) | | | (840) | | | (3,092) | | | Net fair value (losses) gains on derivative financial instruments | $ | 127 | | | $ | (339) | | | $ | (713) | | | $ | (3,431) | |
Net realized gains on derivative hedging activities were $1.7 million and $4.5 million for the three and six months ended June 30, 2022, respectively, and net realized losses on derivatives were $674 thousand and net realized gains were $3.6 million for the three and six months ended June 30, 2021. Net realized gains losses on derivative hedging activities are included in non-interest income in the 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 (“Bank”) 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, service charges on deposit accounts, cash sweep fees, overdraft fees, BOLI income, title insurance fees, and other less significant non-interest income.
Meridian Wealth (“Wealth”), a registered investment advisor and wholly-owned subsidiary of the Bank, provides a comprehensive array of wealth management services and products and the trusted guidance to help its clients and our banking customers prepare for the future. The unit generates non-interest income through advisory fees.
Meridian’s mortgage banking segment (“Mortgage”) consists of 2213 loan production offices throughout suburban Philadelphia and Maryland. The Mortgage segment originates 1 – 4 family residential mortgages and sells nearly all of its production to third party investors. The unit generates net interest income on the loans it originates and holds temporarily, then earns fee income (primarily gain on sales) at the time of the sale.The unit also recognizes income from document preparation fees, changes in portfolio pipeline fair values and related net hedging gains (losses).
The table below summarizes income and expenses, directly attributable to each business line, which hashave been included in the statement of operations. Total assets for each segment is also provided.
| | | Segment Information | | Segment Information |
| | Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2021 | | Three Months Ended September 30, 2022 | | Three Months Ended September 30, 2021 |
(Dollars in thousands) | (Dollars in thousands) | | Bank | | Wealth | | Mortgage | | Total | | Bank | | Wealth | | Mortgage | | Total | (Dollars in thousands) | Bank | | Wealth | | Mortgage | | Total | | Bank | | Wealth | | Mortgage | | Total |
Net interest income | Net interest income | | $ | 16,923 | | | 317 | | | 311 | | | 17,551 | | | $ | 14,824 | | | 2 | | | 586 | | | 15,412 | | Net interest income | $ | 17,664 | | | $ | 218 | | | $ | 144 | | | $ | 18,026 | | | $ | 15,777 | | | $ | 2 | | | $ | 478 | | | $ | 16,257 | |
Provision for loan losses | Provision for loan losses | | 602 | | | — | | | — | | | 602 | | | 96 | | | — | | | — | | | 96 | | Provision for loan losses | 526 | | | — | | | — | | | 526 | | | 597 | | | — | | | — | | | 597 | |
Net interest income after provision | Net interest income after provision | | 16,321 | | | 317 | | | 311 | | | 16,949 | | | 14,728 | | | 2 | | | 586 | | | 15,316 | | Net interest income after provision | 17,138 | | | 218 | | | 144 | | | 17,500 | | | 15,180 | | | 2 | | | 478 | | | 15,660 | |
| Non-interest Income | Non-interest Income | | Non-interest Income | |
Mortgage banking income | Mortgage banking income | | 125 | | | — | | | 6,817 | | | 6,942 | | | 408 | | | — | | | 19,059 | | | 19,467 | | Mortgage banking income | 72 | | | — | | | 7,257 | | | 7,329 | | | 215 | | | — | | | 18,511 | | | 18,726 | |
Wealth management income | Wealth management income | | — | | | 1,254 | | | — | | | 1,254 | | | — | | | 1,163 | | | — | | | 1,163 | | Wealth management income | — | | | 1,114 | | | — | | | 1,114 | | | — | | | 1,232 | | | — | | | 1,232 | |
SBA income | | 437 | | | — | | | — | | | 437 | | | 1,490 | | | — | | | — | | | 1,490 | | |
SBA loan income | | SBA loan income | 989 | | | — | | | — | | | 989 | | | 2,688 | | | — | | | — | | | 2,688 | |
Net change in fair values | Net change in fair values | | 71 | | | — | | | (1,312) | | | (1,241) | | | (59) | | | — | | | (813) | | | (872) | | Net change in fair values | 47 | | | — | | | (1,043) | | | (996) | | | 13 | | | — | | | (847) | | | (834) | |
Net gain on hedging activity | Net gain on hedging activity | | — | | | — | | | 1,715 | | | 1,715 | | | — | | | — | | | (674) | | | (674) | | Net gain on hedging activity | — | | | — | | | 399 | | | 399 | | | — | | | — | | | (1,189) | | | (1,189) | |
Other | Other | | 526 | | | — | | | 770 | | | 1,296 | | | 563 | | | — | | | 595 | | | 1,158 | | Other | 622 | | | — | | | 767 | | | 1,389 | | | 836 | | | — | | | 663 | | | 1,499 | |
Non-interest income | Non-interest income | | 1,159 | | | 1,254 | | | 7,990 | | | 10,403 | | | 2,402 | | | 1,163 | | | 18,167 | | | 21,732 | | Non-interest income | 1,730 | | | 1,114 | | | 7,380 | | | 10,224 | | | 3,752 | | | 1,232 | | | 17,138 | | | 22,122 | |
Non-interest expense | Non-interest expense | | 10,624 | | | 822 | | | 8,260 | | | 19,706 | | | 9,415 | | | 789 | | | 16,042 | | | 26,246 | | Non-interest expense | 11,354 | | | 780 | | | 8,127 | | | 20,261 | | | 10,633 | | | 802 | | | 14,046 | | | 25,481 | |
Income before income taxes | | $ | 6,856 | | | 749 | | | 41 | | | 7,646 | | | 7,715 | | | 376 | | | 2,711 | | | 10,802 | | |
Income (loss) before income taxes | | Income (loss) before income taxes | $ | 7,514 | | | $ | 552 | | | $ | (603) | | | $ | 7,463 | | | $ | 8,299 | | | $ | 432 | | | $ | 3,570 | | | $ | 12,301 | |
| Total Assets | Total Assets | | $ | 1,759,129 | | | 7,432 | | | 86,458 | | | 1,853,019 | | | $ | 1,560,040 | | | 5,946 | | | 143,024 | | | 1,709,010 | | Total Assets | $ | 1,858,770 | | | $ | 7,927 | | | $ | 55,227 | | | $ | 1,921,924 | | | $ | 1,625,468 | | | $ | 6,396 | | | $ | 130,581 | | | $ | 1,762,445 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Segment Information |
| | Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2021 |
(Dollars in thousands) | | Bank | | Wealth | | Mortgage | | Total | | Bank | | Wealth | | Mortgage | | Total |
Net interest income | | $ | 32,533 | | | 411 | | | 642 | | | 33,586 | | | 29,324 | | | (11) | | | 1,220 | | | 30,533 | |
Provision for loan losses | | 1,217 | | | — | | | — | | | 1,217 | | | 695 | | | — | | | — | | | 695 | |
Net interest income after provision | | 31,316 | | | 411 | | | 642 | | | 32,369 | | | 28,629 | | | (11) | | | 1,220 | | | 29,838 | |
| | | | | | | | | | | | | | | | |
Non-interest Income | | | | | | | | | | | | | | | | |
Mortgage banking income | | 322 | | | — | | | 13,716 | | | 14,038 | | | 676 | | | — | | | 42,891 | | | 43,567 | |
Wealth management income | | — | | | 2,558 | | | — | | | 2,558 | | | — | | | 2,299 | | | — | | | 2,299 | |
SBA income | | 2,957 | | | — | | | — | | | 2,957 | | | 2,735 | | | — | | | — | | | 2,735 | |
Net change in fair values | | 103 | | | — | | | (3,412) | | | (3,309) | | | 39 | | | — | | | (5,824) | | | (5,785) | |
Net gain on hedging activity | | — | | | — | | | 4,542 | | | 4,542 | | | — | | | — | | | 3,587 | | | 3,587 | |
Other | | 1,153 | | | — | | | 1,566 | | | 2,719 | | | 1,274 | | | — | | | 1,103 | | | 2,377 | |
Non-interest income | | 4,535 | | | 2,558 | | | 16,412 | | | 23,505 | | | 4,724 | | | 2,299 | | | 41,757 | | | 48,780 | |
Non-interest expense | | 20,833 | | | 1,700 | | | 18,606 | | | 41,139 | | | 18,348 | | | 1,684 | | | 34,478 | | | 54,510 | |
Income (loss) before income taxes | | $ | 15,018 | | | 1,269 | | | (1,552) | | | 14,735 | | | 15,005 | | | 604 | | | 8,499 | | | 24,108 | |
| | | | | | | | | | | | | | | | |
Total Assets | | $ | 1,759,129 | | | 7,432 | | | 86,458 | | | 1,853,019 | | | 1,560,040 | | | 5,946 | | | 143,024 | | | 1,709,010 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment Information |
| Nine Months Ended September 30, 2022 | | Nine Months Ended September 30, 2021 |
(Dollars in thousands) | Bank | | Wealth | | Mortgage | | Total | | Bank | | Wealth | | Mortgage | | Total |
Net interest income | $ | 50,197 | | | $ | 628 | | | $ | 785 | | | $ | 51,610 | | | $ | 45,340 | | | $ | (249) | | | $ | 1,698 | | | $ | 46,789 | |
Provision for loan losses | 1,743 | | | — | | | — | | | 1,743 | | | 1,292 | | | — | | | — | | | 1,292 | |
Net interest income after provision | 48,454 | | | 628 | | | 785 | | | 49,867 | | | 44,048 | | | (249) | | | 1,698 | | | 45,497 | |
| | | | | | | | | | | | | | | |
Non-interest Income | | | | | | | | | | | | | | | |
Mortgage banking income | 394 | | | — | | | 20,973 | | | 21,367 | | | 892 | | | — | | | 61,401 | | | 62,293 | |
Wealth management income | — | | | 3,672 | | | — | | | 3,672 | | | — | | | 3,531 | | | — | | | 3,531 | |
SBA loan income | 3,946 | | | — | | | — | | | 3,946 | | | 5,423 | | | — | | | — | | | 5,423 | |
Net change in fair values | 151 | | | — | | | (4,457) | | | (4,306) | | | 52 | | | — | | | (6,671) | | | (6,619) | |
Net gain on hedging activity | — | | | — | | | 4,941 | | | 4,941 | | | — | | | — | | | 2,397 | | | 2,397 | |
Other | 1,776 | | | (1) | | | 2,333 | | | 4,108 | | | 2,110 | | | — | | | 1,767 | | | 3,877 | |
Non-interest income | 6,267 | | | 3,671 | | | 23,790 | | | 33,728 | | | 8,477 | | | 3,531 | | | 58,894 | | | 70,902 | |
Non-interest expense | 32,186 | | | 2,480 | | | 26,734 | | | 61,400 | | | 28,981 | | | 2,486 | | | 48,523 | | | 79,990 | |
Income (loss) before income taxes | $ | 22,535 | | | $ | 1,819 | | | $ | (2,159) | | | $ | 22,195 | | | $ | 23,544 | | | $ | 796 | | | $ | 12,069 | | | $ | 36,409 | |
| | | | | | | | | | | | | | | |
Total Assets | $ | 1,858,770 | | | $ | 7,927 | | | $ | 55,227 | | | $ | 1,921,924 | | | $ | 1,625,468 | | | $ | 6,396 | | | $ | 130,581 | | | $ | 1,762,445 | |
(11) Leases
On January 1, 2022, the Corporation adopted ASU 2016-02 (Topic 842), “Leases”, as further explained in Note 12, Recent Accounting Pronouncements.
The Corporation’s operating leases consist of various retail branch locations and loan production offices. As of JuneSeptember 30, 2022, the Corporation’s leases have remaining lease terms ranging from 8 months to 13 years, including extension options that the Corporation is reasonably certain will be exercised.
The Corporation’s leases include fixed rental payments, and certain of our leases also include variable rental payments where lease payments may increase at pre-determined dates based on the change in the consumer price index. The Corporation’s lease agreements include gross leases as well as leases in which we make separate payments to the lessor for items such as the property taxes assessed on the property or a portion of the common area maintenance associated with the property. We have elected the practical expedient not to separate lease and non-lease components for all of our building leases. The Corporation also elected to not recognize right of use (ROU)ROU assets and lease liabilities for short-term leases.
As of JuneSeptember 30, 2022 the Corporation’s ROU assets and related lease liabilities were $10.0$9.5 million and $9.8$9.4 million, respectively. These amounts are included within other assets and other liabilities, respectively.
The components of lease expense were as follows:
| (dollars in thousands) | (dollars in thousands) | | Three Months Ended June 30, 2022 | | Six Months Ended June 30, 2022 | (dollars in thousands) | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
Operating lease expense | Operating lease expense | | $ | 585 | | | $ | 1,171 | | Operating lease expense | $ | 585 | | | $ | 1,742 | |
Short term lease expense | Short term lease expense | | 1 | | | 2 | | Short term lease expense | 1 | | | 3 | |
Variable lease expense | Variable lease expense | | — | | | — | | Variable lease expense | — | | | — | |
Total lease expense | Total lease expense | | $ | 586 | | | $ | 1,173 | | Total lease expense | $ | 586 | | | $ | 1,745 | |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | |
(dollars in thousands) | | JuneNine Months Ended September 30, 2022 |
Cash paid for amounts included in the measurement of lease liabilities | |
Operating cash flows from operating leases | $ | 563 | |
ROU asset obtained in exchange for lease liabilities | $ | 10,995 | |
Maturities of operating lease liabilities under FASB ASC 842 "Leases"were as of June 30, 2022 are as follows:follows for the period indicated:
| (dollars in thousands) | (dollars in thousands) | | June 30, 2022 | (dollars in thousands) | September 30, 2022 |
2022 | 2022 | | $ | 1,102 | | 2022 | $ | 559 | |
2023 | 2023 | | 1,892 | | 2023 | 1,919 | |
2024 | 2024 | | 1,746 | | 2024 | 1,746 | |
2025 | 2025 | | 1,456 | | 2025 | 1,456 | |
2026 | 2026 | | 1,436 | | 2026 | 1,436 | |
Thereafter | Thereafter | | 3,134 | | Thereafter | 3,134 | |
| 10,766 | | |
Total | | Total | $ | 10,250 | |
Less: Present value discount | Less: Present value discount | | (948) | | Less: Present value discount | (887) | |
Total operating lease liabilities | Total operating lease liabilities | | $ | 9,818 | | Total operating lease liabilities | $ | 9,363 | |
As of JuneSeptember 30, 2022, the weighted-average remaining lease term, including extension options that the Corporation is reasonably certain will be exercised for all operating leases is 6.636.33 years.
Because we generally do not have access to the rate implicit in the lease, we utilize our incremental borrowing rate as the discount rate. The weighted average discount rate associated with operating leases as of JuneSeptember 30, 2022 is 2.58%2.61%.
As of JuneSeptember 30, 2022, the Corporation had not entered into any material leases that have not yet commenced.
(12) Recent Accounting Pronouncements
As an “emerging growth company” under the Jumpstart Our Business StartupsJOBS Act, of 2012 (“JOBS Act”), the BankCorporation is permitted an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included herein, as well as financial statements that we file up to the date we lose this designation (December 31, 2022) will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period. As a filer under the JOBS Act, we will implement new accounting standards subject to the effective dates required for non-public entities.entities
Pronouncements Adopted Pronouncements in 2022:
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 are required to recognize a lease ROU liability and a right-of-useROU 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. In June 2020, the FASB approved a delay for the implementation of the ASU. Accordingly, the amendments in this update are effective for the Corporation for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. On January 1, 2022 the Corporation recognized a right-of-use asset and a lease obligation liability on the consolidated statement of financial condition. The adoption of the ASU was on a prospective basis and therefore comparative prior periods are still presented under ASC 840. Refer to footnote 1211 - leases, for further details.
Pronouncements Not Yet Effective as of JuneSeptember 30, 2022:
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)ASC Topic 310-30 has been previously applied should prospectively apply the guidance in this ASU. A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date. In October 2019, the FASB approved a delay for the implementation of the ASU. Accordingly, as an emerging growth company, the Corporation’s effective date for the implementation of the ASU will be January 1, 2023. Management is currently determiningThe Corporation expects to recognize a one-time cumulative-effect adjustment to the allowance for credit losses as of the date of adoption. While the Corporation anticipates the allowance for credit losses will increase under which method we will adopt this ASU. Management has assembled a cross-functional team from Finance, Credit, and IT that is leading the implementation efforts to evaluatecurrent model assumptions, it expects the impact of this guidance onadopting ASU 2016-13 will be influenced by the Corporation's consolidated financial statementscomposition, characteristics and related disclosures, internal systems, accounting policies, processesquality of its loan and related internal controls. At this time an estimate of the impact to the Corporation's consolidated financial statements cannot be determined.
investment securities portfolios, as well as general economic conditions and
forecasts at the date of adoption. Management is currently running parallel tests under different methods and using various assumptions to determine the best approach for when we adopt this ASU, and has engaged a third party vendor to perform a model validation prior to adoption.
FASB ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”
Issued in April 2019, ASU 2019-04 clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments (addressed by ASUs 2016-13, 2017-12, and 2016-01, respectively). The amendments to estimating expected credit losses (ASU 2016-13), in particular, how a company considers recoveries and extension options when estimating expected credit losses, are the most relevant to the Corporation. The ASU clarifies that (1) the estimate of expected credit losses should include expected recoveries of financial assets, including recoveries of amounts expected to be written off and those previously written off, and (2) that contractual extension or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. Management will consideris considering the impact of ASU 2019-04 whenwhile considering the impact of ASU 2016-13 as discussed above.
FASB ASU 2020-04 (Topic 848), “Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”
Issued in March 2020, ASU 2020-04 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The Corporation does not have a significant concentration of loans, derivative contracts, borrowings or other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The guidance under ASC-848 will be available for a limited time, generally through December 31, 2022. The Corporation expects to adopt the LIBOR transition relief allowed under this standard.
FASB ASU 2020-06, “Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”
This ASU clarifies the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock by removing the cash conversion model and the beneficial conversion feature models. For public business entities that meet the definition of an SEC filer (excluding smaller reporting entities), the amendments are effective for fiscal years beginning after Dec. 15, 2021, and interim periods within. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2023, and interim periods within. Early adoption is permitted, but no earlier than for fiscal years beginning after Dec. 15, 2020. The Company does not expect this to have a material impact on our consolidated financial statements.
FASB ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures."
In March 2022, the FASB issued ASU No. 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted CECL and enhance the disclosure requirements for modifications of receivables made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current period gross write-offs by year of origination for financing receivables and net investment in leases in the existing vintage disclosures. This ASU is effective for fiscal years beginning after December 15, 2022 or January 1, 2023 for the Corporation, including interim periods within those fiscal years for entities that have adopted CECL. Early adoption is permitted if an entity has adopted CECL. The Corporation is in the process of evaluating the amendments but does not expect the adoption of this ASU will have a material impact on the Corporation's financial statements.
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, 2021 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-
lookingforward-looking statements include statements with respect to Meridian Corporation’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Meridian Corporation’s control). Numerous competitive, economic, regulatory, legal and technological factors, risks and uncertainties that could cause actual results to differ materially include, without limitation: the impact of the COVID-19 pandemic and government responses thereto; on the U.S. economy, including the markets in which we operate; actions that we and our customers take in response to these factors and the effects such actions have on our operations, products, services and customer relationships; and the risk that the Small Business Administration may not fund some or all Paycheck Protection Program (PPP)PPP loan guaranties; increased competitive pressures; changes in the interest rate environment; changes in
general economic conditions and conditions within the securities markets; legislative and regulatory changes; geopolitical tensions; and the effects of inflation, a potential recession, 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, 2021 and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Meridian 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.
Critical Accounting Policies and Estimates
Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate.To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information.These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes.These estimates, assumptions and judgements are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements.In particular, management has identified the provision and allowance for loan and lease losses as the accounting policy that, due to the estimates, assumptions and judgements inherent in that policy, is critical in understanding our financial statements. Management has presented the application of this policy to the audit committee of our board of directors.
As an emerging growth company, the JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies.We have elected to take advantage of this extended transition period, which means that the financial statements included in this Annual Report, 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 (expected to end as of December 31, 2022) 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 filed with the SEC following our decision, and such decision is irrevocable.
This critical accounting policy, along with other significant accounting policies are presenteddescribed in detail in Footnote 1the "Critical Accounting Policies" section within Item 7 of our 2021 Annual Form Form 10-K. The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the Corporation’s Consolidated Financial Statements asneed to make estimates about the effect of matters that are inherently uncertain and formay change in future periods. There have been no material changes in these policies during the yearsnine months ended December 31, 2021 and 2020 included in the Annual Report on Form 10-K.September 30, 2022.
Executive Overview
The following items highlight the Corporation’s changes in its financial condition as of JuneSeptember 30, 2022 compared to March 31, 2022 and December 31, 2021 and the results of operations for the three and sixnine months ended JuneSeptember 30, 2022 as compared to the same periods in 2021. More detailed information related to these highlights can be found in the sections that follow.
Changes in Financial Condition - September 30, 2022 Compared to December 31, 2021
•Total assets increased $21.4$208.5 million, or 1.2%12.2%, to $1.9$1.92 billion as of JuneSeptember 30, 2022 compared to March 31, 2022, and increased $139.6 million, or 8.1%, compared to December 31, 2021.2022.
•Portfolio loans, excluding SBA Paycheck Protection Program ("PPP")PPP loans, grew $115.2increased $299.9 million, or 8.3%23.1%, to $1.5$1.60 billion as of JuneSeptember 30, 2022, compared to March 31, 2022, and increased $199.3 million, or 15.4% since December 31,
2021, or 31%which is 30.9% on an annualized basis. PPP loans decreased $66.8 million, or 75.7%, to $11.7 million as of June 30, 2022 compared to March 31, 2022, and decreased $94.2 million, or 81.4%, compared to December 31, 2021.
•Portfolio loan growth since March 31, 2022 was most evident in the commercial real estate/construction portfolio which grew $30.5 million, commercial loans and leases which grew $32.0 million, and residential loans which grew $35.4 million, while compared to December 31, 2021 commercial real estate/construction portfolio which grew $71.5 million, commercial loans and leases which grew $70.7 million, and residential loans which grew $45.8 million.
•Cash and cash equivalents and investmentsMortgage loans held for sale decreased a combined $31.1$47.1 million, or 13.1% since March 31,58.2%, to $33.8 million at September 30, 2022.
•PPP loans decreased to $8.8 million as of September 30, 2022 and increased $14.1which is a decrease of $81.4 million, or 7.4%90.2%, since December 31, 2021.
•During the quarter-ended March 31, 2022, $27.7 million of municipal securities previously classified as available-for-sale on the balance sheet, were transferred to the held-to-maturity portfolio.
•Our combined servicing asset portfolio (which includes both mortgage servicing rights and SBA servicing assets) decreased $536 thousand, or 4%, from March 31, 2022, and increased $95 thousand, or 0.7%, to $12.9 million, from December 31, 2021.
•Total deposits grew $3.2increased $227.1 million or 0.2%, from March 31, 2022, and grew $121.6 million, or 8.4%,15.7% to $1.6$1.67 billion from December 31, 2021. Non-interest bearing deposits grew $546 thousand, or 0.2%, from March 31, 2022, and grew $17.4 million, or 6.3%, to $291.9 million from December 31, 2021.
•Total borrowings increased $23.0 million from March 31, 2022, and $17.8 million from December 31, 2021, as short-term borrowings helped to fund our loan growth.at September 30, 2022.
•The Corporation returned $8.6$19.0 million of capital to Meridian shareholders during the sixnine months ended JuneSeptember 30, 2022 through dividends, including a $1.00 special dividend, and $0.20 quarterly dividends.dividends, and also purchased $9.2 million or 295 thousand shares of treasury stock.
Three Month Results of Operations - JuneSeptember 30, 2022 Compared to the Same Period in 2021
•Consolidated net income for the three months ended June 30, 2022 was $5.9 million, a decrease of $2.3$5.8 million, or 28.1% compared to the three months ended June 30, 2021, was$0.96 per diluted share, down $3.6 million, or 38.6%, driven by a decline in non-interest income, partially offset somewhat by continued strong loan portfolio growth, and expense reduction.
•Pre-tax, pre-provision income for second quarter 2022 was $8.2 million, a decrease of $2.7 million, or 24.3%. led by strong growth in net interest incomemargin and lower operating expenses, offset by decreases in mortgage loan originations.expenses.
•The return on average equity (“ROE”)assets and return on average assets (“ROA”) were 15.03%equity was 1.23% and 1.31%14.59%, respectively, for the secondthird quarter 2022, compared to 22.61%2.15% and 1.92%24.07%, respectively, for the secondthird quarter 2021.
•Net interest margin increased to 4.07%4.01% from 3.70%, after recognizing $286 thousand in one-time loan fees as well as deployment of PPP loan payoffs into higher yielding commercial portfolios.
•Non-interest income decreased $11.3 million or 52.1%, due to:
•Lower level of mortgage banking revenue, which declined $12.5 million, or 64.3%, offset somewhat by an increase in hedging gains of $2.4 million.
•A decrease in SBA loan income of $1.1 million, or 70.7%3.83% due to lower sales volume and margins.
•An increasehigher yield on earning assets in other fee income of $68 thousand, or 6.4%.
•An increase in wealth management revenue of $91 thousand, or 7.8%.
•Changes in fair value related to mortgage banking activities were up $507 thousand over the period.this rising rate environment.
•Provision for loan losses increased $506decreased $71 thousand due to loan growth, partiallyas a result of lower levels of specific reserves and improvements in certain qualitative factors, largely offset by decreases in specific reserves.increased provisioning for loan growth.
•Non-interest expensesincome decreased $6.5$11.9 million, or 24.9%53.8%, asto $10.2 million driven by a result of$11.4 million decrease in mortgage banking income and a lower level of$1.7 million decrease in SBA loan income.
•Non-interest expense decreased $5.2 million, or 20.5%, to $20.3 million due to a $6.1 million decrease in salaries and benefits, due largely to reduced fixed and variable compensation arrangements as well as reduction in full-time equivalent employees in the mortgage segment, combined with a decline in incentive and stock-based compensation for bank and wealth segments.employee benefits.
•On July 28,October 27, 2022, the Board of Directors declared a quarterly cash dividend of $0.20 per common share payable August 22,November 21, 2022 to shareholders of record as of August 15,November 14, 2022.
SixNine Month Results of Operations - JuneSeptember 30, 2022 Compared to the Same Period in 2021
•Consolidated net income for the six months ended June 30, 2022 was $11.5 million, a decrease of $7.0$17.3 million, or 37.7% compared to the six months ended June 30, 2021,$2.80 per diluted share, down $10.6 million, or 38.0%, driven by a lower level of non-interest income from mortgage banking activity.
•Pre-tax, pre-provision income was $16.0 million, a decrease of $8.9 million, or 35.7%, ledactivity, partially offset by continued strong growth in net interest incomemargin and lower operating expenses, offset by decreases in mortgage loan originations.expenses.
��•The return on average equity (“ROE”)assets and return on average assets (“ROA”)equity were 14.61%1.28% and 1.30%14.49%, respectively, for the sixnine months ended JuneSeptember 30, 2022, compared to 26.19%2.17% and 2.17%25.43%, respectively, for the sixnine months ended JuneSeptember 30, 2021.
•Net interest income for the six months ended June 30, 2022margin increased $3.1 million, or 10%, compared to the same period3.99% from 3.75% due to higher yield on earning assets in 2021. This increase helped the net interest margin increase to 3.98% from 3.71%, as excess cash and PPPthis rising rate environment along with $286 thousand in one-time loan payoffs were reinvested in higher yielding commercial portfolios.fees.
•Provision for loan losses increased $522$451 thousand, or 75.1%34.9%, due to loan growth, partially offset by decreases in specific reserves.
•Non-interest income decreased $25.3$37.2 million, or 51.8%52.4%, due to:
•Lower level ofto $33.7 million driven by a $40.9 million decrease in mortgage banking revenue, which declined $29.5income and a $2.5 million or 67.8%,decline in the fair value on loans held-for-investment, partially offset by increasedan increase of $4.8 million in the fair value changes of $4.0derivatives and loans held-for-sale and a $2.5 million and hedging gains of $955 thousand.
•An increase in wealth management revenue of $259 thousand, or 11.3%, duenet gains on hedging activity related to increased AUM and favorable market conditions.
•An increase in SBA loan sale revenue of $222 thousand, or 8.1%.
•An increase in other fee income of $253 thousand, or 11.9%.mortgage banking activity.
•Non-interest expensesexpense decreased $13.4$18.6 million, or 24.5%,23.2% to $61.4 million as athe result of a lower level of$20.2 million decrease in salaries and employee benefits due largelytied to reduced fixed anda decrease in variable compensation arrangements as well as a reduction in full-time equivalent employees in theour mortgage segment, combined with a decline in incentive and stock-based compensation for bank and wealth segments.segment.
Key Performance Ratios
KeyThe following table presents key financial performance ratios for the three and six months ended June 30, 2022 and 2021 are shown in the table below:periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | |
| 2022 | | 2021 | | 2022 | | 2021 | | | | |
Annualized return on average equity | 15.03 | % | % | 22.61 | % | | 14.61 | % | % | 26.19 | % | | | | |
Annualized return on average assets | 1.31 | % | % | 1.92 | % | | 1.30 | % | % | 2.17 | % | | | | |
Net interest margin (tax effected yield) | 4.07 | % | % | 3.70 | % | | 3.98 | % | % | 3.71 | % | | | | |
Basic earnings per share | $ | 0.99 | | | $ | 1.37 | | | $ | 1.91 | | | $ | 3.06 | | | | | |
Diluted earnings per share | $ | 0.96 | | | $ | 1.33 | | | $ | 1.84 | | | $ | 2.98 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Return on average assets, annualized | 1.23 | % | | 2.15 | % | | 1.28 | % | | 2.17 | % |
Return on average equity, annualized | 14.59 | % | | 24.07 | % | | 14.49 | % | | 25.43 | % |
Net interest margin (tax effected yield), annualized | 4.01 | % | | 3.83 | % | | 3.99 | % | | 3.75 | % |
Basic earnings per share | $ | 0.99 | | | $ | 1.56 | | | $ | 2.90 | | | $ | 4.62 | |
Diluted earnings per share | $ | 0.96 | | | $ | 1.52 | | | $ | 2.80 | | | $ | 4.49 | |
The following table presents certain key period-end balances and ratios as of June 30, 2022 and December 31, 2021:at the dates indicated:
| (dollars in thousands, except per share amounts) | (dollars in thousands, except per share amounts) | June 30, 2022 | | December 31, 2021 | (dollars in thousands, except per share amounts) | September 30, 2022 | | December 31, 2021 |
Book value per common share | Book value per common share | $ | 25.85 | | | $ | 27.07 | | Book value per common share | $ | 25.86 | | | $ | 27.07 | |
Tangible book value per common share (1) | Tangible book value per common share (1) | $ | 25.16 | | | $ | 26.37 | | Tangible book value per common share (1) | $ | 25.16 | | | $ | 26.37 | |
Allowance as a percentage of loans and leases held for investment | Allowance as a percentage of loans and leases held for investment | 1.24 | % | | 1.35 | % | Allowance as a percentage of loans and leases held for investment | 1.18 | % | | 1.35 | % |
Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1) | Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1) | 1.27 | % | | 1.46 | % | Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1) | 1.20 | % | | 1.46 | % |
Tier I capital to risk weighted assets | Tier I capital to risk weighted assets | 9.79 | % | | 10.83 | % | Tier I capital to risk weighted assets | 9.28 | % | | 10.83 | % |
Tangible common equity ratio (1) | 8.22 | % | | 9.42 | % | |
Loans held for investment | $ | 1,518,893 | | | $ | 1,386,457 | | |
Tangible common equity to tangible assets ratio (1) | | Tangible common equity to tangible assets ratio (1) | 7.67 | % | | 9.42 | % |
Loans, net of fees and costs | | Loans, net of fees and costs | $ | 1,610,349 | | | $ | 1,386,457 | |
Total assets | Total assets | $ | 1,853,019 | | | $ | 1,713,443 | | Total assets | $ | 1,921,924 | | | $ | 1,713,443 | |
Stockholders' equity | $ | 156,087 | | | $ | 165,360 | | |
Total stockholders’ equity | | Total stockholders’ equity | $ | 151,161 | | | $ | 165,360 | |
(1) Non-GAAP financial measure. See “Non-GAAP Financial Measures” below for Non-GAAP to GAAP reconciliation.
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, SBA loan sale income, fair value adjustments, 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, professional fees, advertising & promotion, data processing, information technology, loan expenses, and other operating expenses; and
•Income Taxes, which include state and federal jurisdictions.
NET INTEREST INCOME
Net interest income is an integral source of the Corporation’s revenue. The tables below present a summary for the three and nine months ended September 30, 2022 and 2021, 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 result of net free funding sources such as non-interest bearing deposits and stockholders’ equity.
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.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | | | | | |
(dollars in thousands) | 2022 | | 2021 | | Change |
Average Balance | | Interest Income/ Expense | | Yields/ Rates | | Average Balance | | Interest Income/ Expense | | Yields/ Rates | | Average Balance | | Interest Income/ Expense | | Yields/ Rates |
Assets: | | | | | | | | | | | | | | | | | |
Due from banks | $ | 15,678 | | | $ | 92 | | | 2.33 | % | | $ | 40,249 | | | $ | 16 | | | 0.16 | % | | $ | (24,571) | | | $ | 76 | | | 2.17 | % |
Federal funds sold | 219 | | | 1 | | | 1.81 | | | 23,013 | | | 1 | | | 0.02 | | | (22,794) | | | — | | | 1.79 | |
Investment securities - taxable (1) | 107,929 | | | 648 | | | 2.38 | | | 79,785 | | | 357 | | | 1.78 | | | 28,144 | | | 291 | | | 0.60 | |
Investment securities - tax exempt (1) | 63,711 | | | 451 | | | 2.81 | | | 67,250 | | | 377 | | | 2.22 | | | (3,539) | | | 74 | | | 0.59 | |
Loans held for sale | 37,857 | | | 479 | | | 5.02 | | | 110,905 | | | 824 | | | 2.97 | | | (73,048) | | | (345) | | | 2.05 | |
Loans held for investment (1) | 1,565,861 | | | 21,371 | | | 5.41 | | | 1,370,439 | | | 16,804 | | | 4.84 | | | 195,422 | | | 4,567 | | | 0.57 | |
Total loans | 1,603,718 | | | 21,850 | | | 5.41 | | | 1,481,344 | | | 17,628 | | | 4.72 | | | 122,374 | | | 4,222 | | | 0.69 | |
Total interest-earning assets | 1,791,255 | | | 23,042 | | | 5.10 | % | | 1,691,641 | | | 18,379 | | | 4.31 | % | | 99,614 | | | 4,663 | | | 0.79 | % |
Noninterest earning assets | 76,939 | | | | | | | 48,207 | | | | | | | 28,732 | | | | | |
Total assets | $ | 1,868,194 | | | | | | | $ | 1,739,848 | | | | | | | $ | 128,346 | | | | | |
Liabilities and stockholders' equity: | | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 221,402 | | | $ | 798 | | | 1.43 | % | | $ | 270,518 | | | $ | 201 | | | 0.29 | % | | $ | (49,116) | | | $ | 597 | | | 1.14 | % |
Money market and savings deposits | 718,744 | | | 2,075 | | | 1.15 | | | 647,093 | | | 853 | | | 0.52 | | | 71,651 | | | 1,222 | | | 0.63 | |
Time deposits | 361,527 | | | 1,202 | | | 1.32 | | | 237,080 | | | 273 | | | 0.46 | | | 124,447 | | | 929 | | | 0.86 | |
Total deposits | 1,301,673 | | | 4,075 | | | 1.24 | | | 1,154,691 | | | 1,327 | | | 0.46 | | | 146,982 | | | 2,748 | | | 0.78 | |
Borrowings | 41,313 | | | 266 | | | 2.55 | | | 111,075 | | | 126 | | | 0.45 | | | (69,762) | | | 140 | | | 2.10 | |
Subordinated debentures | 40,578 | | | 591 | | | 5.78 | | | 40,740 | | | 596 | | | 5.85 | | | (162) | | | (5) | | | (0.07) | |
Total interest-bearing liabilities | 1,383,564 | | | 4,932 | | | 1.41 | | | 1,306,506 | | | 2,049 | | | 0.62 | | | 77,058 | | | 2,883 | | | 0.79 | |
Noninterest-bearing deposits | 295,975 | | | | | | | 254,843 | | | | | | | 41,132 | | | | | |
Other noninterest-bearing liabilities | 31,041 | | | | | | | 22,919 | | | | | | | 8,122 | | | | | |
Total liabilities | 1,710,580 | | | | | | | 1,584,268 | | | | | | | 126,312 | | | | | |
Total stockholders' equity | 157,614 | | | | | | | 155,580 | | | | | | | 2,034 | | | | | |
Total stockholders' equity and liabilities | $ | 1,868,194 | | | | | | | $ | 1,739,848 | | | | | | | $ | 128,346 | | | | | |
Net interest income and spread (1) | | $ | 18,110 | | | 3.69 | | | | | $ | 16,330 | | | 3.69 | | | | | $ | 1,780 | | | — | |
Net interest margin (1) | | | | | 4.01 | % | | | | | | 3.83 | % | | | | | | 0.18 | % |
(1)Yieldsand net interest income are reflected on a tax-equivalent basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | | | | | | |
(dollars in thousands) | 2022 | | 2021 | | Change |
Average Balance | | Interest Income/ Expense | | Yields/ Rates | | Average Balance | | Interest Income/ Expense | | Yields/ Rates | | Average Balance | | Interest Income/ Expense | | Yields/ Rates |
Assets: | | | | | | | | | | | | | | | | | |
Due from banks | $ | 23,612 | | | $ | 153 | | | 0.87 | % | | $ | 24,340 | | | $ | 22 | | | 0.12 | % | | $ | (728) | | | $ | 131 | | | 0.75 | % |
Federal funds sold | 1,440 | | | 4 | | | 0.37 | | | 18,991 | | | 3 | | | 0.02 | | | (17,551) | | | 1 | | | 0.35 | |
Investment securities - taxable (1) | 105,624 | | | 1,599 | | | 2.02 | | | 78,951 | | | 1,076 | | | 1.82 | | | 26,673 | | | 523 | | | 0.20 | |
Investment securities - tax exempt (1) | 63,848 | | | 1,240 | | | 2.60 | | | 64,023 | | | 1,094 | | | 2.28 | | | (175) | | | 146 | | | 0.32 | |
Loans held for sale | 52,495 | | | 1,580 | | | 4.02 | | | 139,101 | | | 2,922 | | | 2.80 | | | (86,606) | | | (1,342) | | | 1.22 | |
Loans held for investment (1) | 1,489,345 | | | 56,614 | | | 5.08 | | | 1,349,780 | | | 48,375 | | | 4.79 | | | 139,565 | | | 8,239 | | | 0.29 | |
Total loans | 1,541,840 | | | 58,194 | | | 5.05 | | | 1,488,881 | | | 51,297 | | | 4.61 | | | 52,959 | | | 6,897 | | | 0.44 | |
Total interest-earning assets | 1,736,364 | | | 61,190 | | | 4.71 | % | | 1,675,186 | | | 53,492 | | | 4.27 | % | | 61,178 | | | 7,698 | | | 0.44 | % |
Noninterest earning assets | 74,313 | | | | | | | 44,388 | | | | | | | 29,925 | | | | | |
Total assets | $ | 1,810,677 | | | | | | | $ | 1,719,574 | | | | | | | $ | 91,103 | | | | | |
Liabilities and stockholders' equity: | | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 242,863 | | | $ | 1,183 | | | 0.65 | % | | $ | 252,074 | | | $ | 739 | | | 0.39 | % | | $ | (9,211) | | | $ | 444 | | | 0.26 | % |
Money market and savings deposits | 702,696 | | | 4,003 | | | 0.76 | | | 609,201 | | | 2,505 | | | 0.55 | | | 93,495 | | | 1,498 | | | 0.21 | |
Time deposits | 319,927 | | | 1,996 | | | 0.83 | | | 258,099 | | | 1,017 | | | 0.53 | | | 61,828 | | | 979 | | | 0.30 | |
Total deposits | 1,265,486 | | | 7,182 | | | 0.76 | | | 1,119,374 | | | 4,261 | | | 0.51 | | | 146,112 | | | 2,921 | | | 0.25 | |
Borrowings | 24,621 | | | 391 | | | 2.12 | | | 139,716 | | | 437 | | | 0.42 | | | (115,095) | | | (46) | | | 1.70 | |
Subordinated debentures | 40,548 | | | 1,775 | | | 5.85 | | | 40,711 | | | 1,787 | | | 5.87 | | | (163) | | | (12) | | | (0.02) | |
Total interest-bearing liabilities | 1,330,655 | | | 9,348 | | | 0.94 | | | 1,299,801 | | | 6,485 | | | 0.67 | | | 30,854 | | | 2,863 | | | 0.27 | |
Noninterest-bearing deposits | 291,261 | | | | | | | 248,355 | | | | | | | 42,906 | | | | | |
Other noninterest-bearing liabilities | 29,452 | | | | | | | 24,928 | | | | | | | 4,524 | | | | | |
Total liabilities | 1,651,368 | | | | | | | 1,573,084 | | | | | | | 78,284 | | | | | |
Total stockholders' equity | 159,309 | | | | | | | 146,490 | | | | | | | 12,819 | | | | | |
Total stockholders' equity and liabilities | $ | 1,810,677 | | | | | | | $ | 1,719,574 | | | | | | | $ | 91,103 | | | | | |
Net interest income and spread (1) | | $ | 51,842 | | | 3.77 | | | | | $ | 47,007 | | | 3.60 | | | | | $ | 4,835 | | | 0.17 | |
Net interest margin (1) | | | | | 3.99 | % | | | | | | 3.75 | % | | | | | | 0.24 | % |
(1)Yieldsand net interest income are reflected on a tax-equivalent basis.
Rate/Volume Analysis
The rate/volume analysis table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three and nine months ended September 30, 2022 as compared to the same periods in 2021, allocated by rate and volume. Changes in interest income and/or expense attributable to both rate and volume have been allocated proportionately based on the relationship of the absolute dollar amount of the change in each category.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 Compared to 2021 |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands) | Rate | | Volume | | Total | | Rate | | Volume | | Total |
Interest income: | | | | | | | | | | | |
Due from banks | $ | 91 | | | $ | (15) | | | $ | 76 | | | $ | 132 | | | $ | (1) | | | $ | 131 | |
Federal funds sold | 2 | | | (2) | | | — | | | 6 | | | (5) | | | 1 | |
Investment securities - taxable (1) | 143 | | | 148 | | | 291 | | | 129 | | | 394 | | | 523 | |
Investment securities - tax exempt (1) | 95 | | | (21) | | | 74 | | | 149 | | | (3) | | | 146 | |
Loans held for sale | 382 | | | (727) | | | (345) | | | 942 | | | (2,284) | | | (1,342) | |
Loans held for investment (1) | 2,020 | | | 2,547 | | | 4,567 | | | 3,046 | | | 5,193 | | | 8,239 | |
Total loans | 2,402 | | | 1,820 | | | 4,222 | | | 3,988 | | | 2,909 | | | 6,897 | |
Total interest income | $ | 2,733 | | | $ | 1,930 | | | $ | 4,663 | | | $ | 4,404 | | | $ | 3,294 | | | $ | 7,698 | |
Interest expense: | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 640 | | | $ | (43) | | | $ | 597 | | | $ | 472 | | | $ | (28) | | | $ | 444 | |
Money market and savings deposits | 1,118 | | | 104 | | | 1,222 | | | 1,071 | | | 427 | | | 1,498 | |
Time deposits | 727 | | | 202 | | | 929 | | | 694 | | | 285 | | | 979 | |
Total deposits | 2,485 | | | 263 | | | 2,748 | | | 2,237 | | | 684 | | | 2,921 | |
Borrowings | 263 | | | (123) | | | 140 | | | 561 | | | (607) | | | (46) | |
Subordinated debentures | (3) | | | (2) | | | (5) | | | (5) | | | (7) | | | (12) | |
Total interest expense | $ | 2,745 | | | $ | 138 | | | $ | 2,883 | | | $ | 2,793 | | | $ | 70 | | | $ | 2,863 | |
Interest differential | $ | (12) | | | $ | 1,792 | | | $ | 1,780 | | | $ | 1,611 | | | $ | 3,224 | | | $ | 4,835 | |
(1)Yields and net interest income are reflected on a tax-equivalent basis.
Three Months Ended September 30, 2022 Compared to the Same Period in 2021
For the three months ended September 30, 2022 as compared to the same period in 2021, tax-equivalent interest income increased $4.7 million as favorable rate and volume changes contributed $2.7 million, and $1.9 million, respectively. The favorable change in rates was driven by increased yield on loans held for sale (up 205 basis points) and loans held for investment (up 57 basis points) that favorably impact interest income by $2.4 million, combined. The loans held for investment average balances increased $195.4 million, leading to a favorable volume impact on interest income of $2.5 million, while the decline in loans held for sale average balances of $73.0 million had an unfavorable impact to interest income of $727 thousand as shown in the table above. Within the loans held for investment portfolio, average balances on commercial loans and leases increased $33.6 million, and $54.0 million, respectively, construction loans were up $65.3 million, and residential real estate loans average balances increased $78.2 million, while the average balance of PPP loans decreased $132.4 million as such loans continue to be forgiven by the SBA.
On the funding side, interest expense increased $2.9 million due to the impact from rate hikes issued by the Fed, which were partially offset by volume declines on borrowings. The cost of deposits were up across the board, causing a $2.5 million increase to interest expense. The cost of interest-bearing demand deposits, money market and savings accounts and time deposits increased 114 basis points, 63 basis points and 86 basis points, respectively, while the cost of borrowings increased 210 basis points. Money market/savings accounts and time deposit average balances increased $71.7 million, and $124.4 million, respectively, while interest-bearing demand deposits decreased $49.1 million on average, and borrowings decreased $69.8 million on average.
Overall, the $1.8 million increase in net interest income was derived by volume changes as the impact from increased average earning assets and the $41.1 million in free funding outpaced the increase in average interest bearing liabilities.
Nine Months Ended September 30, 2022 Compared to the Same Period in 2021
For the nine months ended September 30, 2022 as compared to the same period in 2021, tax-equivalent interest income increased $7.7 million as positive rate changes on average earning assets contributed $4.4 million and favorable volume changes helped to increase interest income by $3.3 million. The favorable change in interest income due to rate changes was driven by growth in the loans held for sale (increase of 122 basis points) and the overall loans held for investment portfolio (increase of 29 basis points). This large
increase in the yield on loans held for sale was the result of interest rates hovering at historical lows throughout much of 2021, but then as the Fed raised interest rates in 2022, the yield benefited from this action. The $3.3 million positive impact that volume changes had to interest income was largely the result of loan average balance increases, which contributed $5.2 million to interest income, offset by a decline in the volume of loans held or sale which had an unfavorable impact of $2.3 million on interest income. The increase in loans held for investment average balances were led by an increases in commercial loans, small business loans and leases of $30 million, $58.1 million, and $56.5 million, respectively, construction loans of $50.8 million, and residential loans held for investment of $47.3 million, offset somewhat by a $152.3 million decline in PPP loan balances as they continue to be forgiven by the SBA.
On the funding side, interest expense increased $2.9 million. The cost of deposits was up, having a $2.9 million negative effect on interest expense. The cost of interest-bearing demand deposits, money market and savings deposits, and time deposits increased 26 basis points, 21 basis points, and 30 basis points, respectively, while the cost of borrowings increased 170 basis points. Money market and savings accounts, and time deposits increased $93.5 million, and $61.8 million on average respectively, while interest bearing demand deposits and borrowings were down $9.2 million and $115.1 million on average, respectively, leading to a $70 thousand increase in interest expense.
Overall, the $4.8 million increase in net interest income was derived by volume changes as the impact from increased average earning assets and the $42.9 million in free funding outpaced the increase in average interest bearing liabilities.
PROVISION FOR LOAN AND LEASE LOSSES
Three Months Ended September 30, 2022 Compared to the Same Period in 2021
The provision for loan losses decreased $71 thousand due to decreases in specific reserves on non-performing loans as the underlying credit quality improved and certain qualitative factors improved as well, partially offset by providing for continued loan growth and charge-offs on small ticket equipment leases.
Nine Months Ended September 30, 2022 Compared to the Same Period in 2021
The provision for loan losses increased $451 thousand to provide for the significant level of loan growth year over year, partially offset by the impact of decreases to specific reserves and qualitative factors noted above.
Asset Quality Summary
Meridian's credit culture is strong and asset quality remains a primary focus of management. The ratio of non-performing assets to total assets declined to 1.20% as of September 30, 2022, from 1.34% as of December 31, 2021. There was no other real estate property included in non-performing assets for either period. Total non-performing loans were $23.1 million and $23.0 million as of September 30, 2022 and December 31, 2021, respectively, however subsequent to September 30, 2022, principal payments of $3.2 million and $307 thousand on a non-performing loan relationship were received.
Meridian realized net charge-offs of 0.10% of total average loans for the year ending September 30, 2022 which is higher than the 0.01% over the same period in 2021. Charge-offs amounted to $431 thousand for the quarter ending September 30, 2022, while recoveries were $74 thousand during this quarter. Nearly all of the charge-offs for the quarter ending September 30, 2022 were from small ticket equipment leases, while recoveries were split between commercial loans and home equity loans. The ratio of allowance for loan losses to total loans held for investment, excluding loans at fair value and PPP loans (a non-GAAP measure, see reconciliation in the Appendix), was 1.20% as of September 30, 2022 and 1.46% as of December 31, 2021. As of September 30, 2022 there were specific reserves of $2.8 million against a non-performing loans, down from $3.2 million as of December 31, 2021 due to improvement in the underlying credit quality for certain loans, as discussed in the above paragraph.
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
The following table presents nonperforming assets and related ratios for the periods indicated:
| | | | | | | | | | | |
(dollars in thousands) | September 30, 2022 | | December 31, 2021 |
Non-performing assets: | | | |
Nonaccrual loans: | | | |
Real estate loans: | | | |
| | | |
Home equity lines and loans | $ | 878 | | | $ | 911 | |
Residential mortgage | 2,097 | | | 2,398 | |
| | | |
Total real estate loans | 2,975 | | | 3,309 | |
Commercial and industrial | 18,202 | | | 18,801 | |
Small business loans | 1,401 | | | 666 | |
Leases | 506 | | | 212 | |
Total nonaccrual loans | 23,084 | | | 22,988 | |
| | | |
Total non-performing assets | $ | 23,084 | | | $ | 22,988 | |
| | | |
Troubled debt restructurings: | | | |
TDRs included in non-performing loans and leases | $ | 193 | | | $ | 361 | |
TDRs in compliance with modified terms | 3,637 | | | 3,446 | |
Total TDRs | $ | 3,830 | | | $ | 3,807 | |
| | | |
Asset quality ratios: | | | |
Non-performing assets to total assets | 1.20 | % | | 1.34 | % |
Non-performing loans to: | | | |
Total loans and leases | 1.40 | % | | 1.57 | % |
Total loans held-for-investment | 1.43 | % | | 1.66 | % |
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1) | 1.45 | % | | 1.80 | % |
Allowance for loan losses to: | | | |
Total loans and leases | 1.15 | % | | 1.28 | % |
Total loans held-for-investment | 1.18 | % | | 1.35 | % |
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1) | 1.20 | % | | 1.46 | % |
Non-performing loans | 82.20 | % | | 81.60 | % |
| | | |
Total loans and leases | $ | 1,644,149 | | | $ | 1,467,339 | |
Total loans and leases held-for-investment | $ | 1,610,349 | | | $ | 1,386,457 | |
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans) | $ | 1,587,037 | | | $ | 1,280,654 | |
Allowance for loan and lease losses | $ | 18,974 | | | $ | 18,758 | |
(1) The allowance for loan losses to total loans held-for-investment (excluding loans at fair value and PPP loans) ratio is a non-GAAP financial measure. See “Non-GAAP Financial Measures” for a reconciliation of this measure to its most comparable GAAP measure.
NON-INTEREST INCOME
Three Months Ended September 30, 2022 Compared to the Same Period in 2021
The following table presents the components of non-interest income for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | | | |
(Dollars in thousands) | September 30, 2022 | | September 30, 2021 | | $ Change | | % Change |
Mortgage banking income | $ | 7,329 | | | $ | 18,726 | | | $ | (11,397) | | | (60.9) | % |
Wealth management income | 1,114 | | | 1,232 | | | (118) | | | (9.6) | % |
SBA loan income | 989 | | | 2,688 | | | (1,699) | | | (63.2) | % |
Earnings on investment in life insurance | 138 | | | 93 | | | 45 | | | 48.4 | % |
Net change in the fair value of derivative instruments | 127 | | | (339) | | | 466 | | | (137.5) | % |
Net change in the fair value of loans held-for-sale | (237) | | | (532) | | | 295 | | | (55.5) | % |
Net change in the fair value of loans held-for-investment | (886) | | | 37 | | | (923) | | | (2494.6) | % |
Net gain on hedging activity | 399 | | | (1,189) | | | 1,588 | | | (133.6) | % |
Net gain on sale of investment securities available-for-sale | — | | | 314 | | | (314) | | | (100.0) | % |
Service charges | 32 | | | 35 | | | (3) | | | (8.6) | % |
Other | 1,219 | | | 1,057 | | | 162 | | | 15.3 | % |
Total non-interest income | $ | 10,224 | | | $ | 22,122 | | | $ | (11,898) | | | (53.8) | % |
Total non-interest income decreased $11.9 million due primarily to lower income from our mortgage segment, which was impacted by lower levels of mortgage loan originations in a rising rate environment and a lack of housing inventory. Partially offsetting the impact of the decline in mortgage banking income were net changes in the fair value of derivative instruments and loans held-for-sale, along with an improvement in net gains on hedging activity which increased $2.3 million, combined.
SBA loan income decreased $1.7 million as a higher volume of SBA loans were sold into the secondary market in the prior year comparable quarter: $20.8 million of loans were sold in the quarter-ending September 30, 2022 compared to $25.0 million in loans sold in the quarter-ending September 30, 2021. Contributing to lower SBA loan income, margins on the SBA loan sales decreased from the prior year due to the upward movement in interest rates, which drove SBA loan prices down.
The net change in the fair value of loans held-for-investment decreased to a loss of $886 thousand for the quarter ended September 30, 2022, compared to a gain of $37 thousand for the comparable prior year quarter, due to the negative impact the rising interest rate environment had on the fair value of the loans in portfolio that are held at fair value. Other non-interest income was up $162 thousand due to increases in title fee income, FHLB stock dividend income and broker fee income.
Nine Months Ended September 30, 2022 Compared to the Same Period in 2021
The following table presents the components of non-interest income for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | | | |
(Dollars in thousands) | September 30, 2022 | | September 30, 2021 | | $ Change | | % Change |
Mortgage banking income | $ | 21,367 | | | $ | 62,293 | | | $ | (40,926) | | | (65.7) | % |
Wealth management income | 3,672 | | | 3,531 | | | 141 | | | 4.0 | % |
SBA loan income | 3,946 | | | 5,423 | | | (1,477) | | | (27.2) | % |
Earnings on investment in life insurance | 413 | | | 224 | | | 189 | | | 84.4 | % |
Net change in the fair value of derivative instruments | (713) | | | (3,431) | | | 2,718 | | | (79.2) | % |
Net change in the fair value of loans held-for-sale | (1,094) | | | (3,164) | | | 2,070 | | | (65.4) | % |
Net change in the fair value of loans held-for-investment | (2,499) | | | (24) | | | (2,475) | | | 10312.5 | % |
Net gain on hedging activity | 4,941 | | | 2,397 | | | 2,544 | | | 106.1 | % |
Net gain on sale of investment securities available-for-sale | — | | | 362 | | | (362) | | | (100.0) | % |
Service charges | 90 | | | 99 | | | (9) | | | (9.1) | % |
Other | 3,605 | | | 3,192 | | | 413 | | | 12.9 | % |
Total non-interest income | $ | 33,728 | | | $ | 70,902 | | | $ | (37,174) | | | (52.4) | % |
Total non-interest income decreased due primarily to lower income from our mortgage segment, which was impacted by lower levels of mortgage loan originations in a rising rate environment and a lack of housing inventory.
NON-INTEREST EXPENSE
Three Months Ended September 30, 2022 Compared to the Same Period in 2021
The following table presents the components of non-interest income for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | | | |
(Dollars in thousands) | September 30, 2022 | | September 30, 2021 | | $ Change | | % Change |
Salaries and employee benefits | $ | 13,360 | | | $ | 19,472 | | | $ | (6,112) | | | (31.4) | % |
Occupancy and equipment | 1,191 | | | 1,133 | | | 58 | | | 5.1 | % |
Professional fees | 899 | | | 873 | | | 26 | | | 3.0 | % |
Advertising and promotion | 1,165 | | | 1,089 | | | 76 | | | 7.0 | % |
Data processing | 574 | | | 530 | | | 44 | | | 8.3 | % |
Information technology | 868 | | | 476 | | | 392 | | | 82.4 | % |
Pennsylvania bank shares tax | 202 | | | 152 | | | 50 | | | 32.9 | % |
Other | 2,002 | | | 1,756 | | | 246 | | | 14.0 | % |
Total non-interest expense | $ | 20,261 | | | $ | 25,481 | | | $ | (5,220) | | | (20.5) | % |
Total non-interest expense decreased largely attributable to a decrease in salaries and employee benefits expense in the mortgage segment, which had reduced fixed and variable based compensation.
Information technology expense increased $392 thousand due to cybersecurity improvements, cloud-based costs and other software upgrades, all as a result of growth. Other non-interest expense increased $246 thousand due to the increased level of client engagement and business development our employees were able to do in the current period versus the prior year due to COVID-19 pandemic restrictions.
Nine Months Ended September 30, 2022 Compared to the Same Period in 2021
The following table presents the components of non-interest income for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | | | |
(Dollars in thousands) | September 30, 2022 | | September 30, 2021 | | $ Change | | % Change |
Salaries and employee benefits | $ | 41,585 | | | $ | 61,824 | | | $ | (20,239) | | | (32.7) | % |
Occupancy and equipment | 3,619 | | | 3,460 | | | 159 | | | 4.6 | % |
Professional fees | 2,659 | | | 2,629 | | | 30 | | | 1.1 | % |
Advertising and promotion | 3,340 | | | 2,795 | | | 545 | | | 19.5 | % |
Data processing | 1,633 | | | 1,666 | | | (33) | | | (2.0) | % |
Information technology | 2,306 | | | 1,365 | | | 941 | | | 68.9 | % |
Pennsylvania bank shares tax | 612 | | | 478 | | | 134 | | | 28.0 | % |
Other | 5,646 | | | 5,773 | | | (127) | | | (2.2) | % |
Total non-interest expense | $ | 61,400 | | | $ | 79,990 | | | $ | (18,590) | | | (23.2) | % |
Total non-interest expense decreased largely attributable to a decrease in salaries and employee benefits expense at the mortgage segment, which recognized decreased and variable compensation. Partially offsetting this decrease was an increase in salaries & benefits expense for the bank and wealth segments due to an increase in FTEs and a higher level of stock-based compensation expense year-over-year.
Advertising and promotion expense increased $545 thousand as the result of a renewed and focused priority placed on business development and community outreach efforts. Information technology expense increased $941 thousand due to cybersecurity improvements, cloud-based costs and other software upgrades, all as a result of growth.
INCOME TAX EXPENSE
Income tax expense for the three months ended September 30, 2022 was $1.7 million, as compared to $2.9 million for the same period in 2021. The decrease in income tax expense was attributable to the decrease in earnings, period over period. Our effective tax rate was 22.3% for the three months ended September 30, 2022 and 23.3% for the three months ended September 30, 2021.
Income tax expense for the nine months ended September 30, 2022 was $4.9 million, as compared to $8.5 million for the same period in 2021. The decrease in income tax expense was attributable to the decrease in earnings, period over period. Our effective tax rate was 22.2% for the nine months ended September 30, 2022 and 23.5% for the nine months ended June 30, 2021.
BALANCE SHEET ANALYSIS
As of September 30, 2022, total assets were $1.92 billion which increased $208.5 million, or 12.2%, from December 31, 2021. This growth in assets over the prior period was due primarily to loan portfolio growth, as detailed in the following table:
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | September 30, 2022 | | December 31, 2021 | | $ Change | | % Change |
Mortgage loans held for sale | $ | 33,800 | | | $ | 80,882 | | | $ | (47,082) | | | (58.2) | % |
Real estate loans: | | | | | | | |
Commercial mortgage | 545,736 | | | 516,928 | | | 28,808 | | | 5.6 | % |
Home equity lines and loans | 57,648 | | | 52,299 | | | 5,349 | | | 10.2 | % |
Residential mortgage (1) | 153,513 | | | 68,175 | | | 85,338 | | | 125.2 | % |
Construction | 244,435 | | | 160,905 | | | 83,530 | | | 51.9 | % |
Total real estate loans | 1,001,332 | | | 798,307 | | | 203,025 | | | 25.4 | % |
| | | | | | | |
Commercial and industrial | 329,451 | | | 293,771 | | | 35,680 | | | 12.1 | % |
Small business loans | 133,904 | | | 114,158 | | | 19,746 | | | 17.3 | % |
Paycheck Protection Program loans | 8,837 | | | 90,194 | | | (81,357) | | | (90.2) | % |
Main Street Lending Program Loans | 597 | | | 597 | | | — | | | — | % |
Consumer | 497 | | | 419 | | | 78 | | | 18.6 | % |
Leases, net | 129,574 | | | 88,242 | | | 41,332 | | | 46.8 | % |
Total portfolio loans and leases | $ | 1,604,192 | | | $ | 1,385,688 | | | $ | 218,504 | | | 15.8 | % |
Total loans and leases | $ | 1,637,992 | | | $ | 1,466,570 | | | $ | 171,422 | | | 11.7 | % |
Portfolio loans increased grew $218.5 million, or 15.8%, to $1.6 billion as of September 30, 2022, from $1.4 billion as of December 31, 2021. Overall portfolio loan growth, excluding PPP loans, was 23.1% since December 31, 2021, or 30.9% on an annualized basis for 2022. Commercial loans increased $35.7 million, or 12.1%, commercial real estate loans increased $28.8 million, or 5.6%, construction loans increased $83.5 million, or 51.9%, residential real estate loans held in portfolio increased $85.3 million, or 125.2%, and lease financings increased $41.3 million, or 46.8% from December 31, 2021. Partially offsetting the growth in portfolio loans was a decrease of $81.4 million, or 90.2%, in PPP loan balances as such loans continue to be paid off by the SBA.
The following table presents the major categories of deposits at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | September 30, 2022 | | December 31, 2021 | | $ Change | | % Change |
Noninterest-bearing deposits | $ | 290,169 | | | $ | 274,528 | | | $ | 15,641 | | | 5.7 | % |
Interest-bearing deposits: | | | | | | | |
Interest-bearing demand deposits | 236,562 | | | 268,248 | | | (31,686) | | | (11.8) | % |
Money market and savings deposits | 709,127 | | | 697,628 | | | 11,499 | | | 1.6 | % |
Time deposits | 437,695 | | | 206,009 | | | 231,686 | | | 112.5 | % |
Total interest-bearing deposits | 1,383,384 | | | 1,171,885 | | | 211,499 | | | 18.0 | % |
Total deposits | $ | 1,673,553 | | | $ | 1,446,413 | | | $ | 227,140 | | | 15.7 | % |
Total deposits increased $227.1 million, or 15.7%, since December 31, 2021. While noninterest-bearing deposits increased $15.6 million over this period, the largest increase was in time deposits, $211.5 million, or 18.0%, largely from retail and wholesale time deposits due to more favorable interest rates.
Capital
Consolidated stockholders’ equity of the Corporation was $151.2 million, or 7.9% of total assets as of September 30, 2022, as compared to $165.4 million, or 9.7% of total assets as of December 31, 2021.
Period end numbers show a tangible common equity to tangible assets ratio (a non-GAAP measure) of 7.7% for the Corporation and 9.6% for the Bank. Tangible book value per share (a non-GAAP measure) was $25.16 as of September 30, 2022, compared with 26.37 as of December 31, 2021. A reconciliation of these non-GAAP measures is below.
The following table presents the Corporation’s capital ratios and the minimum capital requirements to be considered “well capitalized” by regulators at the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporation | | Bank | | Well-capitalized minimum |
| September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 | |
Tier 1 leverage ratio | 8.54 | % | | 9.39 | % | | 10.52 | % | | 11.51 | % | | 5.00 | % |
Common tier 1 risk-based capital ratio | 9.28 | % | | 10.83 | % | | 11.44 | % | | 13.27 | % | | 6.50 | % |
Tier 1 risk-based capital ratio | 9.28 | % | | 10.83 | % | | 11.44 | % | | 13.27 | % | | 8.00 | % |
Total risk-based capital ratio | 12.80 | % | | 14.81 | % | | 12.70 | % | | 14.63 | % | | 10.00 | % |
Under the Community Bank Leverage Ratio framework, a community banking organization that is less than $10 billion in total consolidated assets, and has limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9% can elect to report a single regulatory capital ratio. The Corporation has elected to be measured under this framework for Bank capital adequacy and had ratios of 10.52% and 11.51% at September 30, 2022 and December 31, 2021, respectively. The Corporation is exempt from CBLR. The bank regulatory agencies temporarily lowered the CBLR to 8% as a result of the COVID-19 pandemic.
Liquidity
Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Meridian’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization or that can be used as collateral to secure funding. In addition, as part of its liquidity management, Meridian maintains a segment of commercial loan assets that are comprised of shared national credits (“SNCs”), which have a national market and can be sold in a timely manner. Meridian’s available liquidity, which totaled $264.7 million at September 30, 2022, compared to $263.6 million at December 31, 2021, includes investments, SNCs, Federal funds sold, mortgages held-for-sale and cash and cash equivalents, less the amount of securities required to be pledged for certain liabilities. Meridian also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios.
In addition, Meridian maintains borrowing arrangements with various correspondent banks, the FHLB and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. Through its relationship at the Federal Reserve, Meridian had available credit of approximately $9.2 million at September 30, 2022. At September 30, 2022, Meridian had no borrowings from the Federal Reserve. As a member of the FHLB, we are eligible to borrow up to a specific credit limit, which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of September 30, 2022, Meridian’s maximum borrowing capacity with the FHLB was $529.2 million. At September 30, 2022, Meridian had borrowed $23.4 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $74.8 million against its available credit lines. At September 30, 2022, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as $214.7 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $333.1 million of available short or long term funding through brokered CD arrangements. Management believes that Meridian has adequate resources to meet its short-term and long-term funding requirements.
Discussion of Segments
As of September 30, 2022, 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 income before tax of $7.5 million and $22.5 million for the three and nine months ended September 30, 2022 as compared to income before tax of $8.3 million and $23.5 million for the same periods in 2021. The Banking Segment provided 100.6% and 101.4% of the Corporation’s pre-tax profit for the three and nine month periods ended September 30, 2022, as compared to 69.0% and 65.9% for the same period in 2021.
The Wealth Management Segment recorded income before tax of $552 thousand and $1.8 million for the three and nine months ended September 30, 2022 as compared to income before tax of $432 thousand and $796 thousand for the same periods in 2021. The increase in income in this segment came from an increase in customer based as the number of accounts grew 2.5% and 4.5%, for the three and nine months ended September 30, 2022, respectively.
The Mortgage Banking Segment recorded a loss before tax of $603 thousand and a loss before tax of $2.2 million for the three and nine months ended September 30, 2022 as compared to income before tax of $3.6 million and $12.1 million for the same periods in 2021. Mortgage Banking income and expenses related to loan originations and sales decreased due to lower 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, standby letters of credit, and loan repurchase commitments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at September 30, 2022 were $505.9 million as compared to $486.6 million at December 31, 2021.
Standby letters of credit are conditional commitments issued by the Corporation to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Corporation’s obligation under standby letters of credit at September 30, 2022 amounted to $21.5 million as compared to $26.0 million at December 31, 2021.
Estimated fair values of the Corporation’s off-balance sheet instruments are based on fees and rates currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and the estimated fair value of off-balance sheet instruments.
In certain circumstances the Corporation may be required to repurchase residential mortgage 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. Based on the obligations described above, the Corporation repurchased one loan totaling $126 thousand for the three months ended September 30, 2022 and seven loans totaling $1.6 million for the nine months ended September 30, 2022, and repurchased one loan in the amount of $115 thousand for the three months ended September 30, 2021 and four loans totaling $561 thousand for the nine months ended September 30, 2021.
Non-GAAP Financial MeasuresNET INTEREST INCOME
Meridian believes that non-GAAP measures are meaningful because they reflect adjustments commonly made by management, investors, regulatorsNet interest income is an integral source of the Corporation’s revenue. The tables below present a summary for the three and analysts to evaluate performance trendsnine months ended September 30, 2022 and 2021, of the Corporation’s average balances and yields earned on its interest-earning assets and the adequacy of common equity. This non-GAAP disclosure has limitations as an analytical tool, should not be viewedrates paid on its interest-bearing liabilities. The net interest margin is the net interest income as a substitutepercentage 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 result of net free funding sources such as non-interest bearing deposits and stockholders’ equity.
Analyses of Interest Rates and Interest Differential
The tables below present the major asset and liability categories on an average daily balance basis for performancethe periods presented, along with interest income, interest expense and financial condition measures determinedkey rates and yields on a tax equivalent basis.
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| For the Three Months Ended September 30, | | | | | | |
(dollars in thousands) | 2022 | | 2021 | | Change |
Average Balance | | Interest Income/ Expense | | Yields/ Rates | | Average Balance | | Interest Income/ Expense | | Yields/ Rates | | Average Balance | | Interest Income/ Expense | | Yields/ Rates |
Assets: | | | | | | | | | | | | | | | | | |
Due from banks | $ | 15,678 | | | $ | 92 | | | 2.33 | % | | $ | 40,249 | | | $ | 16 | | | 0.16 | % | | $ | (24,571) | | | $ | 76 | | | 2.17 | % |
Federal funds sold | 219 | | | 1 | | | 1.81 | | | 23,013 | | | 1 | | | 0.02 | | | (22,794) | | | — | | | 1.79 | |
Investment securities - taxable (1) | 107,929 | | | 648 | | | 2.38 | | | 79,785 | | | 357 | | | 1.78 | | | 28,144 | | | 291 | | | 0.60 | |
Investment securities - tax exempt (1) | 63,711 | | | 451 | | | 2.81 | | | 67,250 | | | 377 | | | 2.22 | | | (3,539) | | | 74 | | | 0.59 | |
Loans held for sale | 37,857 | | | 479 | | | 5.02 | | | 110,905 | | | 824 | | | 2.97 | | | (73,048) | | | (345) | | | 2.05 | |
Loans held for investment (1) | 1,565,861 | | | 21,371 | | | 5.41 | | | 1,370,439 | | | 16,804 | | | 4.84 | | | 195,422 | | | 4,567 | | | 0.57 | |
Total loans | 1,603,718 | | | 21,850 | | | 5.41 | | | 1,481,344 | | | 17,628 | | | 4.72 | | | 122,374 | | | 4,222 | | | 0.69 | |
Total interest-earning assets | 1,791,255 | | | 23,042 | | | 5.10 | % | | 1,691,641 | | | 18,379 | | | 4.31 | % | | 99,614 | | | 4,663 | | | 0.79 | % |
Noninterest earning assets | 76,939 | | | | | | | 48,207 | | | | | | | 28,732 | | | | | |
Total assets | $ | 1,868,194 | | | | | | | $ | 1,739,848 | | | | | | | $ | 128,346 | | | | | |
Liabilities and stockholders' equity: | | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 221,402 | | | $ | 798 | | | 1.43 | % | | $ | 270,518 | | | $ | 201 | | | 0.29 | % | | $ | (49,116) | | | $ | 597 | | | 1.14 | % |
Money market and savings deposits | 718,744 | | | 2,075 | | | 1.15 | | | 647,093 | | | 853 | | | 0.52 | | | 71,651 | | | 1,222 | | | 0.63 | |
Time deposits | 361,527 | | | 1,202 | | | 1.32 | | | 237,080 | | | 273 | | | 0.46 | | | 124,447 | | | 929 | | | 0.86 | |
Total deposits | 1,301,673 | | | 4,075 | | | 1.24 | | | 1,154,691 | | | 1,327 | | | 0.46 | | | 146,982 | | | 2,748 | | | 0.78 | |
Borrowings | 41,313 | | | 266 | | | 2.55 | | | 111,075 | | | 126 | | | 0.45 | | | (69,762) | | | 140 | | | 2.10 | |
Subordinated debentures | 40,578 | | | 591 | | | 5.78 | | | 40,740 | | | 596 | | | 5.85 | | | (162) | | | (5) | | | (0.07) | |
Total interest-bearing liabilities | 1,383,564 | | | 4,932 | | | 1.41 | | | 1,306,506 | | | 2,049 | | | 0.62 | | | 77,058 | | | 2,883 | | | 0.79 | |
Noninterest-bearing deposits | 295,975 | | | | | | | 254,843 | | | | | | | 41,132 | | | | | |
Other noninterest-bearing liabilities | 31,041 | | | | | | | 22,919 | | | | | | | 8,122 | | | | | |
Total liabilities | 1,710,580 | | | | | | | 1,584,268 | | | | | | | 126,312 | | | | | |
Total stockholders' equity | 157,614 | | | | | | | 155,580 | | | | | | | 2,034 | | | | | |
Total stockholders' equity and liabilities | $ | 1,868,194 | | | | | | | $ | 1,739,848 | | | | | | | $ | 128,346 | | | | | |
Net interest income and spread (1) | | $ | 18,110 | | | 3.69 | | | | | $ | 16,330 | | | 3.69 | | | | | $ | 1,780 | | | — | |
Net interest margin (1) | | | | | 4.01 | % | | | | | | 3.83 | % | | | | | | 0.18 | % |
(1)Yieldsand net interest income are reflected on a tax-equivalent basis.
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| For the Nine Months Ended September 30, | | | | | | |
(dollars in thousands) | 2022 | | 2021 | | Change |
Average Balance | | Interest Income/ Expense | | Yields/ Rates | | Average Balance | | Interest Income/ Expense | | Yields/ Rates | | Average Balance | | Interest Income/ Expense | | Yields/ Rates |
Assets: | | | | | | | | | | | | | | | | | |
Due from banks | $ | 23,612 | | | $ | 153 | | | 0.87 | % | | $ | 24,340 | | | $ | 22 | | | 0.12 | % | | $ | (728) | | | $ | 131 | | | 0.75 | % |
Federal funds sold | 1,440 | | | 4 | | | 0.37 | | | 18,991 | | | 3 | | | 0.02 | | | (17,551) | | | 1 | | | 0.35 | |
Investment securities - taxable (1) | 105,624 | | | 1,599 | | | 2.02 | | | 78,951 | | | 1,076 | | | 1.82 | | | 26,673 | | | 523 | | | 0.20 | |
Investment securities - tax exempt (1) | 63,848 | | | 1,240 | | | 2.60 | | | 64,023 | | | 1,094 | | | 2.28 | | | (175) | | | 146 | | | 0.32 | |
Loans held for sale | 52,495 | | | 1,580 | | | 4.02 | | | 139,101 | | | 2,922 | | | 2.80 | | | (86,606) | | | (1,342) | | | 1.22 | |
Loans held for investment (1) | 1,489,345 | | | 56,614 | | | 5.08 | | | 1,349,780 | | | 48,375 | | | 4.79 | | | 139,565 | | | 8,239 | | | 0.29 | |
Total loans | 1,541,840 | | | 58,194 | | | 5.05 | | | 1,488,881 | | | 51,297 | | | 4.61 | | | 52,959 | | | 6,897 | | | 0.44 | |
Total interest-earning assets | 1,736,364 | | | 61,190 | | | 4.71 | % | | 1,675,186 | | | 53,492 | | | 4.27 | % | | 61,178 | | | 7,698 | | | 0.44 | % |
Noninterest earning assets | 74,313 | | | | | | | 44,388 | | | | | | | 29,925 | | | | | |
Total assets | $ | 1,810,677 | | | | | | | $ | 1,719,574 | | | | | | | $ | 91,103 | | | | | |
Liabilities and stockholders' equity: | | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 242,863 | | | $ | 1,183 | | | 0.65 | % | | $ | 252,074 | | | $ | 739 | | | 0.39 | % | | $ | (9,211) | | | $ | 444 | | | 0.26 | % |
Money market and savings deposits | 702,696 | | | 4,003 | | | 0.76 | | | 609,201 | | | 2,505 | | | 0.55 | | | 93,495 | | | 1,498 | | | 0.21 | |
Time deposits | 319,927 | | | 1,996 | | | 0.83 | | | 258,099 | | | 1,017 | | | 0.53 | | | 61,828 | | | 979 | | | 0.30 | |
Total deposits | 1,265,486 | | | 7,182 | | | 0.76 | | | 1,119,374 | | | 4,261 | | | 0.51 | | | 146,112 | | | 2,921 | | | 0.25 | |
Borrowings | 24,621 | | | 391 | | | 2.12 | | | 139,716 | | | 437 | | | 0.42 | | | (115,095) | | | (46) | | | 1.70 | |
Subordinated debentures | 40,548 | | | 1,775 | | | 5.85 | | | 40,711 | | | 1,787 | | | 5.87 | | | (163) | | | (12) | | | (0.02) | |
Total interest-bearing liabilities | 1,330,655 | | | 9,348 | | | 0.94 | | | 1,299,801 | | | 6,485 | | | 0.67 | | | 30,854 | | | 2,863 | | | 0.27 | |
Noninterest-bearing deposits | 291,261 | | | | | | | 248,355 | | | | | | | 42,906 | | | | | |
Other noninterest-bearing liabilities | 29,452 | | | | | | | 24,928 | | | | | | | 4,524 | | | | | |
Total liabilities | 1,651,368 | | | | | | | 1,573,084 | | | | | | | 78,284 | | | | | |
Total stockholders' equity | 159,309 | | | | | | | 146,490 | | | | | | | 12,819 | | | | | |
Total stockholders' equity and liabilities | $ | 1,810,677 | | | | | | | $ | 1,719,574 | | | | | | | $ | 91,103 | | | | | |
Net interest income and spread (1) | | $ | 51,842 | | | 3.77 | | | | | $ | 47,007 | | | 3.60 | | | | | $ | 4,835 | | | 0.17 | |
Net interest margin (1) | | | | | 3.99 | % | | | | | | 3.75 | % | | | | | | 0.24 | % |
(1)Yieldsand net interest income are reflected on a tax-equivalent basis.
Rate/Volume Analysis
The rate/volume analysis table below analyzes dollar changes in accordance with GAAP,the components of interest income and should not be consideredinterest expense as they relate to the change in isolation balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three and nine months ended September 30, 2022 as compared to the same periods in 2021, allocated by rate and volume. Changes in interest income and/or as a substitute for analysis of Meridian’s results as reported under GAAP, nor is it necessarily comparableexpense attributable to non-GAAP performance measures that may be presented by other companies.
Our management usedboth rate and volume have been allocated proportionately based on the measurerelationship of the tangible common equity ratioabsolute dollar amount of the change in each category.
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| 2022 Compared to 2021 |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands) | Rate | | Volume | | Total | | Rate | | Volume | | Total |
Interest income: | | | | | | | | | | | |
Due from banks | $ | 91 | | | $ | (15) | | | $ | 76 | | | $ | 132 | | | $ | (1) | | | $ | 131 | |
Federal funds sold | 2 | | | (2) | | | — | | | 6 | | | (5) | | | 1 | |
Investment securities - taxable (1) | 143 | | | 148 | | | 291 | | | 129 | | | 394 | | | 523 | |
Investment securities - tax exempt (1) | 95 | | | (21) | | | 74 | | | 149 | | | (3) | | | 146 | |
Loans held for sale | 382 | | | (727) | | | (345) | | | 942 | | | (2,284) | | | (1,342) | |
Loans held for investment (1) | 2,020 | | | 2,547 | | | 4,567 | | | 3,046 | | | 5,193 | | | 8,239 | |
Total loans | 2,402 | | | 1,820 | | | 4,222 | | | 3,988 | | | 2,909 | | | 6,897 | |
Total interest income | $ | 2,733 | | | $ | 1,930 | | | $ | 4,663 | | | $ | 4,404 | | | $ | 3,294 | | | $ | 7,698 | |
Interest expense: | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 640 | | | $ | (43) | | | $ | 597 | | | $ | 472 | | | $ | (28) | | | $ | 444 | |
Money market and savings deposits | 1,118 | | | 104 | | | 1,222 | | | 1,071 | | | 427 | | | 1,498 | |
Time deposits | 727 | | | 202 | | | 929 | | | 694 | | | 285 | | | 979 | |
Total deposits | 2,485 | | | 263 | | | 2,748 | | | 2,237 | | | 684 | | | 2,921 | |
Borrowings | 263 | | | (123) | | | 140 | | | 561 | | | (607) | | | (46) | |
Subordinated debentures | (3) | | | (2) | | | (5) | | | (5) | | | (7) | | | (12) | |
Total interest expense | $ | 2,745 | | | $ | 138 | | | $ | 2,883 | | | $ | 2,793 | | | $ | 70 | | | $ | 2,863 | |
Interest differential | $ | (12) | | | $ | 1,792 | | | $ | 1,780 | | | $ | 1,611 | | | $ | 3,224 | | | $ | 4,835 | |
(1)Yields and net interest income are reflected on a tax-equivalent basis.
Three Months Ended September 30, 2022 Compared to assess our capital strength. We believethe Same Period in 2021
For the three months ended September 30, 2022 as compared to the same period in 2021, tax-equivalent interest income increased $4.7 million as favorable rate and volume changes contributed $2.7 million, and $1.9 million, respectively. The favorable change in rates was driven by increased yield on loans held for sale (up 205 basis points) and loans held for investment (up 57 basis points) that favorably impact interest income by $2.4 million, combined. The loans held for investment average balances increased $195.4 million, leading to a favorable volume impact on interest income of $2.5 million, while the decline in loans held for sale average balances of $73.0 million had an unfavorable impact to interest income of $727 thousand as shown in the table above. Within the loans held for investment portfolio, average balances on commercial loans and leases increased $33.6 million, and $54.0 million, respectively, construction loans were up $65.3 million, and residential real estate loans average balances increased $78.2 million, while the average balance of PPP loans decreased $132.4 million as such loans continue to be forgiven by the SBA.
On the funding side, interest expense increased $2.9 million due to the impact from rate hikes issued by the Fed, which were partially offset by volume declines on borrowings. The cost of deposits were up across the board, causing a $2.5 million increase to interest expense. The cost of interest-bearing demand deposits, money market and savings accounts and time deposits increased 114 basis points, 63 basis points and 86 basis points, respectively, while the cost of borrowings increased 210 basis points. Money market/savings accounts and time deposit average balances increased $71.7 million, and $124.4 million, respectively, while interest-bearing demand deposits decreased $49.1 million on average, and borrowings decreased $69.8 million on average.
Overall, the $1.8 million increase in net interest income was derived by volume changes as the impact from increased average earning assets and the $41.1 million in free funding outpaced the increase in average interest bearing liabilities.
Nine Months Ended September 30, 2022 Compared to the Same Period in 2021
For the nine months ended September 30, 2022 as compared to the same period in 2021, tax-equivalent interest income increased $7.7 million as positive rate changes on average earning assets contributed $4.4 million and favorable volume changes helped to increase interest income by $3.3 million. The favorable change in interest income due to rate changes was driven by growth in the loans held for sale (increase of 122 basis points) and the overall loans held for investment portfolio (increase of 29 basis points). This large
increase in the yield on loans held for sale was the result of interest rates hovering at historical lows throughout much of 2021, but then as the Fed raised interest rates in 2022, the yield benefited from this non-GAAP financial measure is usefulaction. The $3.3 million positive impact that volume changes had to investors because,interest income was largely the result of loan average balance increases, which contributed $5.2 million to interest income, offset by removinga decline in the volume of loans held or sale which had an unfavorable impact of $2.3 million on interest income. The increase in loans held for investment average balances were led by an increases in commercial loans, small business loans and leases of $30 million, $58.1 million, and $56.5 million, respectively, construction loans of $50.8 million, and residential loans held for investment of $47.3 million, offset somewhat by a $152.3 million decline in PPP loan balances as they continue to be forgiven by the SBA.
On the funding side, interest expense increased $2.9 million. The cost of deposits was up, having a $2.9 million negative effect on interest expense. The cost of interest-bearing demand deposits, money market and savings deposits, and time deposits increased 26 basis points, 21 basis points, and 30 basis points, respectively, while the cost of borrowings increased 170 basis points. Money market and savings accounts, and time deposits increased $93.5 million, and $61.8 million on average respectively, while interest bearing demand deposits and borrowings were down $9.2 million and $115.1 million on average, respectively, leading to a $70 thousand increase in interest expense.
Overall, the $4.8 million increase in net interest income was derived by volume changes as the impact from increased average earning assets and the $42.9 million in free funding outpaced the increase in average interest bearing liabilities.
PROVISION FOR LOAN AND LEASE LOSSES
Three Months Ended September 30, 2022 Compared to the Same Period in 2021
The provision for loan losses decreased $71 thousand due to decreases in specific reserves on non-performing loans as the underlying credit quality improved and certain qualitative factors improved as well, partially offset by providing for continued loan growth and charge-offs on small ticket equipment leases.
Nine Months Ended September 30, 2022 Compared to the Same Period in 2021
The provision for loan losses increased $451 thousand to provide for the significant level of loan growth year over year, partially offset by the impact of our goodwilldecreases to specific reserves and other intangible assets, it allows investors to more easily assess our capital adequacy. This non-GAAP financial measure should not be considered a substitute for any regulatory capital ratios and may not be comparable to other similarly titled measures used by other companies.
The table below provides the non-GAAP reconciliation for our tangible common equity ratio for Meridian Corporation:
| | | | | | | | | | | |
(dollars in thousands) | June 30, 2022 | | December 31, 2021 |
Tangible common equity ratio: | | | |
Total stockholders' equity | 156,087 | | | 165,360 | |
Less: | | | |
Goodwill and intangible assets | (4,176) | | | (4,278) | |
Tangible common equity | 151,911 | | | 161,082 | |
Total assets | 1,853,019 | | | 1,713,443 | |
Less: | | | |
Goodwill and intangible assets | (4,176) | | | (4,278) | |
Tangible assets | $ | 1,848,843 | | | $ | 1,709,165 | |
Tangible common equity ratio | 8.22 | % | | 9.42 | % |
qualitative factors noted above.
Asset Quality Summary
Meridian's credit culture is strong and asset quality remains a primary focus of management. The table below providesratio of non-performing assets to total assets declined to 1.20% as of September 30, 2022, from 1.34% as of December 31, 2021. There was no other real estate property included in non-performing assets for either period. Total non-performing loans were $23.1 million and $23.0 million as of September 30, 2022 and December 31, 2021, respectively, however subsequent to September 30, 2022, principal payments of $3.2 million and $307 thousand on a non-performing loan relationship were received.
Meridian realized net charge-offs of 0.10% of total average loans for the non-GAAP reconciliationyear ending September 30, 2022 which is higher than the 0.01% over the same period in 2021. Charge-offs amounted to $431 thousand for our tangible book value per common share for Meridian Corporation:
| | | | | | | | | | | |
Reconciliation of tangible book value per common share | June 30, 2022 | | December 31, 2021 |
Book value per common share | $ | 25.85 | | | $ | 27.07 | |
Less: Impact of goodwill and intangible assets | 0.69 | | | 0.70 | |
Tangible book value per common share | $ | 25.16 | | | $ | 26.37 | |
The following is a reconciliationthe quarter ending September 30, 2022, while recoveries were $74 thousand during this quarter. Nearly all of the charge-offs for the quarter ending September 30, 2022 were from small ticket equipment leases, while recoveries were split between commercial loans and home equity loans. The ratio of allowance for loan losses to total loans held for investment, ratioexcluding loans at June 30, 2022. This is considered afair value and PPP loans (a non-GAAP measure, see reconciliation in the Appendix), was 1.20% as of September 30, 2022 and 1.46% as of December 31, 2021. As of September 30, 2022 there were specific reserves of $2.8 million against a non-performing loans, down from $3.2 million as of December 31, 2021 due to improvement in the calculation excludesunderlying credit quality for certain loans, as discussed in the impactabove paragraph.
The Corporation continues to be diligent in its credit underwriting process and proactive with its loan review process, including the engagement of loans held for investmentthe services of an independent outside loan review firm, which helps identify developing credit issues. Proactive steps that are fair valuedtaken include the procurement of additional collateral (preferably outside the current loan structure) whenever possible and frequent contact with the impactborrower. The Corporation believes that timely identification of PPP loans as these loan types are not includedcredit issues and appropriate actions early in the process serve to mitigate overall risk of loss.
Nonperforming Assets and Related Ratios
The following table presents nonperforming assets and related ratios for the periods indicated:
| | | | | | | | | | | |
(dollars in thousands) | September 30, 2022 | | December 31, 2021 |
Non-performing assets: | | | |
Nonaccrual loans: | | | |
Real estate loans: | | | |
| | | |
Home equity lines and loans | $ | 878 | | | $ | 911 | |
Residential mortgage | 2,097 | | | 2,398 | |
| | | |
Total real estate loans | 2,975 | | | 3,309 | |
Commercial and industrial | 18,202 | | | 18,801 | |
Small business loans | 1,401 | | | 666 | |
Leases | 506 | | | 212 | |
Total nonaccrual loans | 23,084 | | | 22,988 | |
| | | |
Total non-performing assets | $ | 23,084 | | | $ | 22,988 | |
| | | |
Troubled debt restructurings: | | | |
TDRs included in non-performing loans and leases | $ | 193 | | | $ | 361 | |
TDRs in compliance with modified terms | 3,637 | | | 3,446 | |
Total TDRs | $ | 3,830 | | | $ | 3,807 | |
| | | |
Asset quality ratios: | | | |
Non-performing assets to total assets | 1.20 | % | | 1.34 | % |
Non-performing loans to: | | | |
Total loans and leases | 1.40 | % | | 1.57 | % |
Total loans held-for-investment | 1.43 | % | | 1.66 | % |
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1) | 1.45 | % | | 1.80 | % |
Allowance for loan losses to: | | | |
Total loans and leases | 1.15 | % | | 1.28 | % |
Total loans held-for-investment | 1.18 | % | | 1.35 | % |
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1) | 1.20 | % | | 1.46 | % |
Non-performing loans | 82.20 | % | | 81.60 | % |
| | | |
Total loans and leases | $ | 1,644,149 | | | $ | 1,467,339 | |
Total loans and leases held-for-investment | $ | 1,610,349 | | | $ | 1,386,457 | |
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans) | $ | 1,587,037 | | | $ | 1,280,654 | |
Allowance for loan and lease losses | $ | 18,974 | | | $ | 18,758 | |
(1) The allowance for loan losses calculation.to total loans held-for-investment (excluding loans at fair value and PPP loans) ratio is a non-GAAP financial measure. See “Non-GAAP Financial Measures” for a reconciliation of this measure to its most comparable GAAP measure.
| | | | | | | | | | | |
| 2022 | | 2021 |
Reconciliation of Allowance for Loan Losses / Total loans held for investment | June 30 | | December 31 |
Allowance for loan losses / Total loans held for investment | 1.24 | % | | 1.35 | % |
Less: Impact of loans held for investment - fair valued | 0.01 | % | | 0.02 | % |
Less: Impact of PPP loans | 0.02 | % | | 0.09 | % |
Allowance for loan losses / Total loans held for investment (excl. loans at fair value and PPP loans) | 1.27 | % | | 1.46 | % |
| | | |
NON-INTEREST INCOME
Three Months Ended September 30, 2022 Compared to the Same Period in 2021
The following table presents the components of non-interest income for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | | | |
(Dollars in thousands) | September 30, 2022 | | September 30, 2021 | | $ Change | | % Change |
Mortgage banking income | $ | 7,329 | | | $ | 18,726 | | | $ | (11,397) | | | (60.9) | % |
Wealth management income | 1,114 | | | 1,232 | | | (118) | | | (9.6) | % |
SBA loan income | 989 | | | 2,688 | | | (1,699) | | | (63.2) | % |
Earnings on investment in life insurance | 138 | | | 93 | | | 45 | | | 48.4 | % |
Net change in the fair value of derivative instruments | 127 | | | (339) | | | 466 | | | (137.5) | % |
Net change in the fair value of loans held-for-sale | (237) | | | (532) | | | 295 | | | (55.5) | % |
Net change in the fair value of loans held-for-investment | (886) | | | 37 | | | (923) | | | (2494.6) | % |
Net gain on hedging activity | 399 | | | (1,189) | | | 1,588 | | | (133.6) | % |
Net gain on sale of investment securities available-for-sale | — | | | 314 | | | (314) | | | (100.0) | % |
Service charges | 32 | | | 35 | | | (3) | | | (8.6) | % |
Other | 1,219 | | | 1,057 | | | 162 | | | 15.3 | % |
Total non-interest income | $ | 10,224 | | | $ | 22,122 | | | $ | (11,898) | | | (53.8) | % |
Total non-interest income decreased $11.9 million due primarily to lower income from our mortgage segment, which was impacted by lower levels of mortgage loan originations in a rising rate environment and a lack of housing inventory. Partially offsetting the impact of the decline in mortgage banking income were net changes in the fair value of derivative instruments and loans held-for-sale, along with an improvement in net gains on hedging activity which increased $2.3 million, combined.
SBA loan income decreased $1.7 million as a higher volume of SBA loans were sold into the secondary market in the prior year comparable quarter: $20.8 million of loans were sold in the quarter-ending September 30, 2022 compared to $25.0 million in loans sold in the quarter-ending September 30, 2021. Contributing to lower SBA loan income, margins on the SBA loan sales decreased from the prior year due to the upward movement in interest rates, which drove SBA loan prices down.
The net change in the fair value of loans held-for-investment decreased to a loss of $886 thousand for the quarter ended September 30, 2022, compared to a gain of $37 thousand for the comparable prior year quarter, due to the negative impact the rising interest rate environment had on the fair value of the loans in portfolio that are held at fair value. Other non-interest income was up $162 thousand due to increases in title fee income, FHLB stock dividend income and broker fee income.
Nine Months Ended September 30, 2022 Compared to the Same Period in 2021
The following table presents the components of non-interest income for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | | | |
(Dollars in thousands) | September 30, 2022 | | September 30, 2021 | | $ Change | | % Change |
Mortgage banking income | $ | 21,367 | | | $ | 62,293 | | | $ | (40,926) | | | (65.7) | % |
Wealth management income | 3,672 | | | 3,531 | | | 141 | | | 4.0 | % |
SBA loan income | 3,946 | | | 5,423 | | | (1,477) | | | (27.2) | % |
Earnings on investment in life insurance | 413 | | | 224 | | | 189 | | | 84.4 | % |
Net change in the fair value of derivative instruments | (713) | | | (3,431) | | | 2,718 | | | (79.2) | % |
Net change in the fair value of loans held-for-sale | (1,094) | | | (3,164) | | | 2,070 | | | (65.4) | % |
Net change in the fair value of loans held-for-investment | (2,499) | | | (24) | | | (2,475) | | | 10312.5 | % |
Net gain on hedging activity | 4,941 | | | 2,397 | | | 2,544 | | | 106.1 | % |
Net gain on sale of investment securities available-for-sale | — | | | 362 | | | (362) | | | (100.0) | % |
Service charges | 90 | | | 99 | | | (9) | | | (9.1) | % |
Other | 3,605 | | | 3,192 | | | 413 | | | 12.9 | % |
Total non-interest income | $ | 33,728 | | | $ | 70,902 | | | $ | (37,174) | | | (52.4) | % |
Total non-interest income decreased due primarily to lower income from our mortgage segment, which was impacted by lower levels of mortgage loan originations in a rising rate environment and a lack of housing inventory.
NON-INTEREST EXPENSE
Three Months Ended September 30, 2022 Compared to the Same Period in 2021
The following table presents the components of non-interest income for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | | | |
(Dollars in thousands) | September 30, 2022 | | September 30, 2021 | | $ Change | | % Change |
Salaries and employee benefits | $ | 13,360 | | | $ | 19,472 | | | $ | (6,112) | | | (31.4) | % |
Occupancy and equipment | 1,191 | | | 1,133 | | | 58 | | | 5.1 | % |
Professional fees | 899 | | | 873 | | | 26 | | | 3.0 | % |
Advertising and promotion | 1,165 | | | 1,089 | | | 76 | | | 7.0 | % |
Data processing | 574 | | | 530 | | | 44 | | | 8.3 | % |
Information technology | 868 | | | 476 | | | 392 | | | 82.4 | % |
Pennsylvania bank shares tax | 202 | | | 152 | | | 50 | | | 32.9 | % |
Other | 2,002 | | | 1,756 | | | 246 | | | 14.0 | % |
Total non-interest expense | $ | 20,261 | | | $ | 25,481 | | | $ | (5,220) | | | (20.5) | % |
Total non-interest expense decreased largely attributable to a decrease in salaries and employee benefits expense in the mortgage segment, which had reduced fixed and variable based compensation.
Information technology expense increased $392 thousand due to cybersecurity improvements, cloud-based costs and other software upgrades, all as a result of growth. Other non-interest expense increased $246 thousand due to the increased level of client engagement and business development our employees were able to do in the current period versus the prior year due to COVID-19 pandemic restrictions.
Nine Months Ended September 30, 2022 Compared to the Same Period in 2021
The following table presents the components of non-interest income for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | | | |
(Dollars in thousands) | September 30, 2022 | | September 30, 2021 | | $ Change | | % Change |
Salaries and employee benefits | $ | 41,585 | | | $ | 61,824 | | | $ | (20,239) | | | (32.7) | % |
Occupancy and equipment | 3,619 | | | 3,460 | | | 159 | | | 4.6 | % |
Professional fees | 2,659 | | | 2,629 | | | 30 | | | 1.1 | % |
Advertising and promotion | 3,340 | | | 2,795 | | | 545 | | | 19.5 | % |
Data processing | 1,633 | | | 1,666 | | | (33) | | | (2.0) | % |
Information technology | 2,306 | | | 1,365 | | | 941 | | | 68.9 | % |
Pennsylvania bank shares tax | 612 | | | 478 | | | 134 | | | 28.0 | % |
Other | 5,646 | | | 5,773 | | | (127) | | | (2.2) | % |
Total non-interest expense | $ | 61,400 | | | $ | 79,990 | | | $ | (18,590) | | | (23.2) | % |
Total non-interest expense decreased largely attributable to a decrease in salaries and employee benefits expense at the mortgage segment, which recognized decreased and variable compensation. Partially offsetting this decrease was an increase in salaries & benefits expense for the bank and wealth segments due to an increase in FTEs and a higher level of stock-based compensation expense year-over-year.
Advertising and promotion expense increased $545 thousand as the result of a renewed and focused priority placed on business development and community outreach efforts. Information technology expense increased $941 thousand due to cybersecurity improvements, cloud-based costs and other software upgrades, all as a result of growth.
INCOME TAX EXPENSE
Income tax expense for the three months ended September 30, 2022 was $1.7 million, as compared to $2.9 million for the same period in 2021. The decrease in income tax expense was attributable to the decrease in earnings, period over period. Our effective tax rate was 22.3% for the three months ended September 30, 2022 and 23.3% for the three months ended September 30, 2021.
Income tax expense for the nine months ended September 30, 2022 was $4.9 million, as compared to $8.5 million for the same period in 2021. The decrease in income tax expense was attributable to the decrease in earnings, period over period. Our effective tax rate was 22.2% for the nine months ended September 30, 2022 and 23.5% for the nine months ended June 30, 2021.
BALANCE SHEET ANALYSIS
As of September 30, 2022, total assets were $1.92 billion which increased $208.5 million, or 12.2%, from December 31, 2021. This growth in assets over the prior period was due primarily to loan portfolio growth, as detailed in the following table:
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | September 30, 2022 | | December 31, 2021 | | $ Change | | % Change |
Mortgage loans held for sale | $ | 33,800 | | | $ | 80,882 | | | $ | (47,082) | | | (58.2) | % |
Real estate loans: | | | | | | | |
Commercial mortgage | 545,736 | | | 516,928 | | | 28,808 | | | 5.6 | % |
Home equity lines and loans | 57,648 | | | 52,299 | | | 5,349 | | | 10.2 | % |
Residential mortgage (1) | 153,513 | | | 68,175 | | | 85,338 | | | 125.2 | % |
Construction | 244,435 | | | 160,905 | | | 83,530 | | | 51.9 | % |
Total real estate loans | 1,001,332 | | | 798,307 | | | 203,025 | | | 25.4 | % |
| | | | | | | |
Commercial and industrial | 329,451 | | | 293,771 | | | 35,680 | | | 12.1 | % |
Small business loans | 133,904 | | | 114,158 | | | 19,746 | | | 17.3 | % |
Paycheck Protection Program loans | 8,837 | | | 90,194 | | | (81,357) | | | (90.2) | % |
Main Street Lending Program Loans | 597 | | | 597 | | | — | | | — | % |
Consumer | 497 | | | 419 | | | 78 | | | 18.6 | % |
Leases, net | 129,574 | | | 88,242 | | | 41,332 | | | 46.8 | % |
Total portfolio loans and leases | $ | 1,604,192 | | | $ | 1,385,688 | | | $ | 218,504 | | | 15.8 | % |
Total loans and leases | $ | 1,637,992 | | | $ | 1,466,570 | | | $ | 171,422 | | | 11.7 | % |
Portfolio loans increased grew $218.5 million, or 15.8%, to $1.6 billion as of September 30, 2022, from $1.4 billion as of December 31, 2021. Overall portfolio loan growth, excluding PPP loans, was 23.1% since December 31, 2021, or 30.9% on an annualized basis for 2022. Commercial loans increased $35.7 million, or 12.1%, commercial real estate loans increased $28.8 million, or 5.6%, construction loans increased $83.5 million, or 51.9%, residential real estate loans held in portfolio increased $85.3 million, or 125.2%, and lease financings increased $41.3 million, or 46.8% from December 31, 2021. Partially offsetting the growth in portfolio loans was a decrease of $81.4 million, or 90.2%, in PPP loan balances as such loans continue to be paid off by the SBA.
The following table presents the major categories of deposits at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | September 30, 2022 | | December 31, 2021 | | $ Change | | % Change |
Noninterest-bearing deposits | $ | 290,169 | | | $ | 274,528 | | | $ | 15,641 | | | 5.7 | % |
Interest-bearing deposits: | | | | | | | |
Interest-bearing demand deposits | 236,562 | | | 268,248 | | | (31,686) | | | (11.8) | % |
Money market and savings deposits | 709,127 | | | 697,628 | | | 11,499 | | | 1.6 | % |
Time deposits | 437,695 | | | 206,009 | | | 231,686 | | | 112.5 | % |
Total interest-bearing deposits | 1,383,384 | | | 1,171,885 | | | 211,499 | | | 18.0 | % |
Total deposits | $ | 1,673,553 | | | $ | 1,446,413 | | | $ | 227,140 | | | 15.7 | % |
Total deposits increased $227.1 million, or 15.7%, since December 31, 2021. While noninterest-bearing deposits increased $15.6 million over this period, the largest increase was in time deposits, $211.5 million, or 18.0%, largely from retail and wholesale time deposits due to more favorable interest rates.
Capital
Consolidated stockholders’ equity of the Corporation was $151.2 million, or 7.9% of total assets as of September 30, 2022, as compared to $165.4 million, or 9.7% of total assets as of December 31, 2021.
Period end numbers show a tangible common equity to tangible assets ratio (a non-GAAP measure) of 7.7% for the Corporation and 9.6% for the Bank. Tangible book value per share (a non-GAAP measure) was $25.16 as of September 30, 2022, compared with 26.37 as of December 31, 2021. A reconciliation of these non-GAAP measures is below.
The following table below providespresents the non-GAAP reconciliationCorporation’s capital ratios and the minimum capital requirements to be considered “well capitalized” by regulators at the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporation | | Bank | | Well-capitalized minimum |
| September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 | |
Tier 1 leverage ratio | 8.54 | % | | 9.39 | % | | 10.52 | % | | 11.51 | % | | 5.00 | % |
Common tier 1 risk-based capital ratio | 9.28 | % | | 10.83 | % | | 11.44 | % | | 13.27 | % | | 6.50 | % |
Tier 1 risk-based capital ratio | 9.28 | % | | 10.83 | % | | 11.44 | % | | 13.27 | % | | 8.00 | % |
Total risk-based capital ratio | 12.80 | % | | 14.81 | % | | 12.70 | % | | 14.63 | % | | 10.00 | % |
Under the Community Bank Leverage Ratio framework, a community banking organization that is less than $10 billion in total consolidated assets, and has limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9% can elect to report a single regulatory capital ratio. The Corporation has elected to be measured under this framework for pre-tax, pre-provision income:
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Three Months Ended June 30, | | Six Months Ended June 30, |
Reconciliation of pre-tax, pre-provision income | 2022 | | 2021 | | 2022 | | 2021 |
Income before income tax expense | $ | 7,646 | | | $ | 10,802 | | | 14,735 | | | 24,108 | |
Provision for loan losses | 602 | | | 96 | | | 1,217 | | | 695 | |
Pre-tax, pre-provision income | $ | 8,248 | | | $ | 10,898 | | | 15,952 | | | 24,803 | |
Bank capital adequacy and had ratios of 10.52% and 11.51% at September 30, 2022 and December 31, 2021, respectively. The Corporation is exempt from CBLR. The bank regulatory agencies temporarily lowered the CBLR to 8% as a result of the COVID-19 pandemic.
Liquidity
Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Meridian’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization or that can be used as collateral to secure funding. In addition, as part of its liquidity management, Meridian maintains a segment of commercial loan assets that are comprised of shared national credits (“SNCs”), which have a national market and can be sold in a timely manner. Meridian’s available liquidity, which totaled $264.7 million at September 30, 2022, compared to $263.6 million at December 31, 2021, includes investments, SNCs, Federal funds sold, mortgages held-for-sale and cash and cash equivalents, less the amount of securities required to be pledged for certain liabilities. Meridian also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios.
In addition, Meridian maintains borrowing arrangements with various correspondent banks, the FHLB and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. Through its relationship at the Federal Reserve, Meridian had available credit of approximately $9.2 million at September 30, 2022. At September 30, 2022, Meridian had no borrowings from the Federal Reserve. As a member of the FHLB, we are eligible to borrow up to a specific credit limit, which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of September 30, 2022, Meridian’s maximum borrowing capacity with the FHLB was $529.2 million. At September 30, 2022, Meridian had borrowed $23.4 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $74.8 million against its available credit lines. At September 30, 2022, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as $214.7 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $333.1 million of available short or long term funding through brokered CD arrangements. Management believes that Meridian has adequate resources to meet its short-term and long-term funding requirements.
Discussion of Segments
As of September 30, 2022, the Corporation has three principal segments as defined by FASB ASC 280, “Segment Reporting.” The following sections discuss,segments are Banking, Mortgage Banking and Wealth Management (see Note 10 in detail, the Corporation’s resultsaccompanying Notes to Unaudited Consolidated Financial Statements).
The Banking Segment recorded income before tax of operations$7.5 million and $22.5 million for the three and sixnine months ended JuneSeptember 30, 2022 as compared to income before tax of $8.3 million and $23.5 million for the same periods in 2021,2021. The Banking Segment provided 100.6% and 101.4% of the changes in its financial condition as of JuneCorporation’s pre-tax profit for the three and nine month periods ended September 30, 2022, as compared to December 31,69.0% and 65.9% for the same period in 2021.
ComponentsThe Wealth Management Segment recorded income before tax of Net Income$552 thousand and $1.8 million for the three and nine months ended September 30, 2022 as compared to income before tax of $432 thousand and $796 thousand for the same periods in 2021. The increase in income in this segment came from an increase in customer based as the number of accounts grew 2.5% and 4.5%, for the three and nine months ended September 30, 2022, respectively.
NetThe Mortgage Banking Segment recorded a loss before tax of $603 thousand and a loss before tax of $2.2 million for the three and nine months ended September 30, 2022 as compared to income is comprisedbefore tax of five major elements:
•Net Interest Income, or$3.6 million and $12.1 million for the difference between the interestsame periods in 2021. Mortgage Banking income earned on loans, leases and investmentsexpenses related to loan originations and the interest expense paid on deposits and borrowed funds;
•Provision For Loan and Lease Losses, or the amount addedsales decreased due 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, SBA loan sale income, fair value adjustments, 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, professional fees, advertising & promotion, data processing, information technology, loan expenses, and other operating expenses; and
•Income Taxes, which include state and federal jurisdictions.lower 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, standby letters of credit, and loan repurchase commitments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at September 30, 2022 were $505.9 million as compared to $486.6 million at December 31, 2021.
Standby letters of credit are conditional commitments issued by the Corporation to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Corporation’s obligation under standby letters of credit at September 30, 2022 amounted to $21.5 million as compared to $26.0 million at December 31, 2021.
Estimated fair values of the Corporation’s off-balance sheet instruments are based on fees and rates currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and the estimated fair value of off-balance sheet instruments.
In certain circumstances the Corporation may be required to repurchase residential mortgage 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. Based on the obligations described above, the Corporation repurchased one loan totaling $126 thousand for the three months ended September 30, 2022 and seven loans totaling $1.6 million for the nine months ended September 30, 2022, and repurchased one loan in the amount of $115 thousand for the three months ended September 30, 2021 and four loans totaling $561 thousand for the nine months ended September 30, 2021.
NET INTEREST INCOME
Net interest income is an integral source of the Corporation’s revenue. The tables below present a summary for the three and sixnine months ended JuneSeptember 30, 2022 and 2021, 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 result of net free funding sources such as non-interest bearing deposits and stockholders’ equity.
Three Months Ended June 30, 2022 Compared to the Same Period in 2021
Interest income on a tax-equivalent basis increased $2.5 million, or 14.3%, to $20.1 million for the three months ended June 30, 2022, from $17.6 million for the three months ended June 30, 2021, largely due to increases in the yield on interest earning assets. The yield on loans held for investment increased 32 basis points, while the yield on investment securities also increased 15 basis points, both helped by the Fed's interest rate raises. Overall, the yield on interest-earning assets increased 45 basis points to 4.65% over the period. There was a $57.8 million increase in average interest earning assets, year over year, led by increases of $120.5 million in loans held for investment, a $22.7 million increase in investment securities, and a $8.1 million increase in interest earning cash balances, offset partially by a $80.6 million decrease in the average balance of loans held for sale.
Interest expense was up $381 thousand, or 18.1%, to $2.5 million for the three months ended June 30, 2022. Deposit interest expense was up $450 thousand, or 32.9%, period over period, to $1.8 million, while interest expense on borrowings was down $69 thousand, or 9.4%, to $668 thousand. Total interest-bearing deposit balances increased $141.5 million on average when comparing the three months ended June 30, 2022 to June 30, 2021, while the cost of deposits was up 8 basis points over this same period. The average balance on money market and savings deposits were up $96.3 million, with costs up 7 basis points, while time deposit average balances were up $68.2 million, 13 basis points. Offsetting these average balance increases slightly was a $23.0 million decrease in the average balance of interest-bearing deposits. The average balance of borrowings was down $109.0 million for the three months ended June 30, 2022, compared to June 30, 2021. This decline was largely due to the decline in PPPLF advances used to fund PPP loans as such loans continue to pay off.
Net interest income increased $2.1 million, or 13.9%, to $17.6 million on a tax-equivalent basis for the three months ended June 30, 2022, compared to $15.5 million for the three months ended June 30, 2021. The net interest margin was 4.07% for the second quarter of 2022 compared to 3.70% for the second quarter of 2021. The increase in net interest margin reflects the increased yield on interest earnings assets, that has outpaced the increase in costs paid on deposits and borrowings in a rising rate environment, as well as the recognition of $286 thousand or 6 basis points in one-time loan fees.
Six Months Ended June 30, 2022 Compared to the Same Period in 2021
Interest income increased $3.0 million, or 8.7%, to $38.1 million for six the months ended June 30, 2022, from $35.1 million for the six months ended June 30, 2021, due to increases in average balances and the yields on interest earning assets. There was a $41.6 million increase in average interest earning assets, year over year, led by increases of $111.2 million in loans held for investment, a $27.5 million increase in investment securities, and a $11.4 million increase in interest earning cash balances, offset partially by a $93.5 million decrease in the average balance of loans held for sale. These average balance increases combined with yield increases of 41 basis points on investment securities and 11 basis points on loans held for investment to positively impact interest income. Overall the yield on interest-earning assets increased 25 basis points to 4.50% over the period.
Interest expense was down $21 thousand, or 0.5%, to $4.4 million. Deposit interest expense was up $173 thousand, or 5.9%, period over period, to $3.1 million, while interest expense on borrowings was down $194 thousand, or 12.9%, to $1.3 million. Total interest-bearing deposit balances increased $145.7 million on average when comparing the six months ended June 30, 2022 to June 30, 2021, while the cost of deposits was down 4 basis points over this same period. The average balance of interest-bearing deposits was up $11.1 million, down 14 basis points, while the average balance on money market and savings deposits were up $104.6 million, with no change in the basis points, and the average balance of time deposits was up $30 million, down 2 basis points. The average balance of borrowings was down $138.1 million for the six months ended June 30, 2022, compared to June 30, 2021. This decline was largely due to the decline in PPPLF advances used to fund PPP loans as such loans continue to pay off.
Net interest income increased $3.0 million, or 10.0%, to $33.7 million on a tax-equivalent basis for the six months ended June 30, 2022, compared to $30.7 million for the six months ended June 30, 2021. The net interest margin was 3.98% for the six months ended June 30, 2022 compared to 3.71% for the six months ended June 30, 2021. The increase in net interest margin reflects the increased yield on interest earnings assets, combined with the declining interest rates paid on deposits during the 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.
| For the Three Months Ended June 30, (dollars in thousands) | 2022 | | 2021 | |
Average Balance | | Interest Income/ Expense | | Yields/ Rates | | Average Balance | | Interest Income/ Expense | | Yields/ Rates | |
Assets | | | | | | | | | | | | |
Interest-earning assets | | |
| | | For the Three Months Ended September 30, | |
(dollars in thousands) | | (dollars in thousands) | 2022 | | 2021 | | Change |
| Average Balance | | Interest Income/ Expense | | Yields/ Rates | | Average Balance | | Interest Income/ Expense | | Yields/ Rates | | Average Balance | | Interest Income/ Expense | | Yields/ Rates |
Assets: | | Assets: | | | | | | | | | | | | | | | | | |
Due from banks | Due from banks | $ | 26,909 | | | 49 | | | 0.73 | % | | $ | 18,833 | | | 4 | | | 0.09 | % | Due from banks | $ | 15,678 | | | $ | 92 | | | 2.33 | % | | $ | 40,249 | | | $ | 16 | | | 0.16 | % | | $ | (24,571) | | | $ | 76 | | | 2.17 | % |
Federal funds sold | Federal funds sold | 3,230 | | | 3 | | | 0.35 | % | | 16,110 | | | 1 | | | 0.02 | % | Federal funds sold | 219 | | | 1 | | | 1.81 | | | 23,013 | | | 1 | | | 0.02 | | | (22,794) | | | — | | | 1.79 | |
Investment securities(1) | 168,853 | | | 941 | | | 2.24 | % | | 146,150 | | | 748 | | | 2.09 | % | |
Investment securities - taxable (1) | | Investment securities - taxable (1) | 107,929 | | | 648 | | | 2.38 | | | 79,785 | | | 357 | | | 1.78 | | | 28,144 | | | 291 | | | 0.60 | |
Investment securities - tax exempt (1) | | Investment securities - tax exempt (1) | 63,711 | | | 451 | | | 2.81 | | | 67,250 | | | 377 | | | 2.22 | | | (3,539) | | | 74 | | | 0.59 | |
Loans held for sale | Loans held for sale | 52,859 | | | 565 | | | 4.28 | % | | 133,426 | | | 967 | | | 2.90 | % | Loans held for sale | 37,857 | | | 479 | | | 5.02 | | | 110,905 | | | 824 | | | 2.97 | | | (73,048) | | | (345) | | | 2.05 | |
Loans held for investment(1) | Loans held for investment(1) | 1,484,696 | | | 18,558 | | | 4.98 | % | | 1,364,204 | | | 15,876 | | | 4.66 | % | Loans held for investment (1) | 1,565,861 | | | 21,371 | | | 5.41 | | | 1,370,439 | | | 16,804 | | | 4.84 | | | 195,422 | | | 4,567 | | | 0.57 | |
Total loans | Total loans | 1,537,555 | | | 19,123 | | | 4.99 | % | | 1,497,630 | | | 16,843 | | | 4.51 | % | Total loans | 1,603,718 | | | 21,850 | | | 5.41 | | | 1,481,344 | | | 17,628 | | | 4.72 | | | 122,374 | | | 4,222 | | | 0.69 | |
Total interest-earning assets | Total interest-earning assets | 1,736,547 | | | 20,116 | | | 4.65 | % | | 1,678,723 | | | 17,596 | | | 4.20 | % | Total interest-earning assets | 1,791,255 | | | 23,042 | | | 5.10 | % | | 1,691,641 | | | 18,379 | | | 4.31 | % | | 99,614 | | | 4,663 | | | 0.79 | % |
Noninterest earning assets | Noninterest earning assets | 77,194 | | | 44,700 | | | Noninterest earning assets | 76,939 | | | 48,207 | | | 28,732 | | |
Total assets | Total assets | $ | 1,811,335 | | | $ | 1,723,423 | | | Total assets | $ | 1,868,194 | | | $ | 1,739,848 | | | $ | 128,346 | | |
Liabilities and stockholders' equity | | | | | |
Interest-bearing liabilities | | |
Interest-bearing deposits | $ | 237,856 | | | 248 | | | 0.42 | % | | $ | 260,834 | | | 240 | | | 0.37 | % | |
Liabilities and stockholders' equity: | | Liabilities and stockholders' equity: | | | | | |
Interest-bearing demand deposits | | Interest-bearing demand deposits | $ | 221,402 | | | $ | 798 | | | 1.43 | % | | $ | 270,518 | | | $ | 201 | | | 0.29 | % | | $ | (49,116) | | | $ | 597 | | | 1.14 | % |
Money market and savings deposits | Money market and savings deposits | 698,557 | | | 1,076 | | | 0.62 | % | | 602,272 | | | 823 | | | 0.55 | % | Money market and savings deposits | 718,744 | | | 2,075 | | | 1.15 | | | 647,093 | | | 853 | | | 0.52 | | | 71,651 | | | 1,222 | | | 0.63 | |
Time deposits | Time deposits | 334,391 | | | 494 | | | 0.59 | % | | 266,181 | | | 306 | | | 0.46 | % | Time deposits | 361,527 | | | 1,202 | | | 1.32 | | | 237,080 | | | 273 | | | 0.46 | | | 124,447 | | | 929 | | | 0.86 | |
Total deposits | Total deposits | 1,270,804 | | | 1,818 | | | 0.57 | % | | 1,129,287 | | | 1,369 | | | 0.49 | % | Total deposits | 1,301,673 | | | 4,075 | | | 1.24 | | | 1,154,691 | | | 1,327 | | | 0.46 | | | 146,982 | | | 2,748 | | | 0.78 | |
Borrowings | Borrowings | 16,560 | | | 77 | | | 1.87 | % | | 125,531 | | | 140 | | | 0.45 | % | Borrowings | 41,313 | | | 266 | | | 2.55 | | | 111,075 | | | 126 | | | 0.45 | | | (69,762) | | | 140 | | | 2.10 | |
Subordinated debentures | Subordinated debentures | 40,548 | | | 591 | | | 5.84 | % | | 40,711 | | | 597 | | | 5.87 | % | Subordinated debentures | 40,578 | | | 591 | | | 5.78 | | | 40,740 | | | 596 | | | 5.85 | | | (162) | | | (5) | | | (0.07) | |
Total interest-bearing liabilities | Total interest-bearing liabilities | 1,327,912 | | | 2,486 | | | 0.75 | % | | 1,295,529 | | | 2,106 | | | 0.65 | % | Total interest-bearing liabilities | 1,383,564 | | | 4,932 | | | 1.41 | | | 1,306,506 | | | 2,049 | | | 0.62 | | | 77,058 | | | 2,883 | | | 0.79 | |
Noninterest-bearing deposits | Noninterest-bearing deposits | 296,521 | | | 255,964 | | | Noninterest-bearing deposits | 295,975 | | | 254,843 | | | 41,132 | | |
Other noninterest-bearing liabilities | Other noninterest-bearing liabilities | 31,354 | | | 25,432 | | | Other noninterest-bearing liabilities | 31,041 | | | 22,919 | | | 8,122 | | |
Total liabilities | Total liabilities | $ | 1,652,915 | | | $ | 1,576,925 | | | Total liabilities | 1,710,580 | | | 1,584,268 | | | 126,312 | | |
Total stockholders' equity | Total stockholders' equity | 158,829 | | | 146,497 | | | Total stockholders' equity | 157,614 | | | 155,580 | | | 2,034 | | |
Total stockholders' equity and liabilities | Total stockholders' equity and liabilities | $ | 1,811,335 | | | $ | 1,723,423 | | | Total stockholders' equity and liabilities | $ | 1,868,194 | | | $ | 1,739,848 | | | $ | 128,346 | | |
Net interest income (1) | | | $ | 17,630 | | | | | $ | 15,490 | | | |
Net interest spread (1) | | | | 3.90 | % | | | | 3.55 | % | |
Net interest income and spread (1) | | Net interest income and spread (1) | | $ | 18,110 | | | 3.69 | | | | | $ | 16,330 | | | 3.69 | | | | | $ | 1,780 | | | — | |
Net interest margin (1) | Net interest margin (1) | | 4.07 | % | | 3.70 | % | Net interest margin (1) | | | | 4.01 | % | | | | 3.83 | % | | | | 0.18 | % |
(1)Yieldsand net interest income are reflected on a tax-equivalent basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | | | | | | |
(dollars in thousands) | 2022 | | 2021 | | Change |
Average Balance | | Interest Income/ Expense | | Yields/ Rates | | Average Balance | | Interest Income/ Expense | | Yields/ Rates | | Average Balance | | Interest Income/ Expense | | Yields/ Rates |
Assets: | | | | | | | | | | | | | | | | | |
Due from banks | $ | 23,612 | | | $ | 153 | | | 0.87 | % | | $ | 24,340 | | | $ | 22 | | | 0.12 | % | | $ | (728) | | | $ | 131 | | | 0.75 | % |
Federal funds sold | 1,440 | | | 4 | | | 0.37 | | | 18,991 | | | 3 | | | 0.02 | | | (17,551) | | | 1 | | | 0.35 | |
Investment securities - taxable (1) | 105,624 | | | 1,599 | | | 2.02 | | | 78,951 | | | 1,076 | | | 1.82 | | | 26,673 | | | 523 | | | 0.20 | |
Investment securities - tax exempt (1) | 63,848 | | | 1,240 | | | 2.60 | | | 64,023 | | | 1,094 | | | 2.28 | | | (175) | | | 146 | | | 0.32 | |
Loans held for sale | 52,495 | | | 1,580 | | | 4.02 | | | 139,101 | | | 2,922 | | | 2.80 | | | (86,606) | | | (1,342) | | | 1.22 | |
Loans held for investment (1) | 1,489,345 | | | 56,614 | | | 5.08 | | | 1,349,780 | | | 48,375 | | | 4.79 | | | 139,565 | | | 8,239 | | | 0.29 | |
Total loans | 1,541,840 | | | 58,194 | | | 5.05 | | | 1,488,881 | | | 51,297 | | | 4.61 | | | 52,959 | | | 6,897 | | | 0.44 | |
Total interest-earning assets | 1,736,364 | | | 61,190 | | | 4.71 | % | | 1,675,186 | | | 53,492 | | | 4.27 | % | | 61,178 | | | 7,698 | | | 0.44 | % |
Noninterest earning assets | 74,313 | | | | | | | 44,388 | | | | | | | 29,925 | | | | | |
Total assets | $ | 1,810,677 | | | | | | | $ | 1,719,574 | | | | | | | $ | 91,103 | | | | | |
Liabilities and stockholders' equity: | | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 242,863 | | | $ | 1,183 | | | 0.65 | % | | $ | 252,074 | | | $ | 739 | | | 0.39 | % | | $ | (9,211) | | | $ | 444 | | | 0.26 | % |
Money market and savings deposits | 702,696 | | | 4,003 | | | 0.76 | | | 609,201 | | | 2,505 | | | 0.55 | | | 93,495 | | | 1,498 | | | 0.21 | |
Time deposits | 319,927 | | | 1,996 | | | 0.83 | | | 258,099 | | | 1,017 | | | 0.53 | | | 61,828 | | | 979 | | | 0.30 | |
Total deposits | 1,265,486 | | | 7,182 | | | 0.76 | | | 1,119,374 | | | 4,261 | | | 0.51 | | | 146,112 | | | 2,921 | | | 0.25 | |
Borrowings | 24,621 | | | 391 | | | 2.12 | | | 139,716 | | | 437 | | | 0.42 | | | (115,095) | | | (46) | | | 1.70 | |
Subordinated debentures | 40,548 | | | 1,775 | | | 5.85 | | | 40,711 | | | 1,787 | | | 5.87 | | | (163) | | | (12) | | | (0.02) | |
Total interest-bearing liabilities | 1,330,655 | | | 9,348 | | | 0.94 | | | 1,299,801 | | | 6,485 | | | 0.67 | | | 30,854 | | | 2,863 | | | 0.27 | |
Noninterest-bearing deposits | 291,261 | | | | | | | 248,355 | | | | | | | 42,906 | | | | | |
Other noninterest-bearing liabilities | 29,452 | | | | | | | 24,928 | | | | | | | 4,524 | | | | | |
Total liabilities | 1,651,368 | | | | | | | 1,573,084 | | | | | | | 78,284 | | | | | |
Total stockholders' equity | 159,309 | | | | | | | 146,490 | | | | | | | 12,819 | | | | | |
Total stockholders' equity and liabilities | $ | 1,810,677 | | | | | | | $ | 1,719,574 | | | | | | | $ | 91,103 | | | | | |
Net interest income and spread (1) | | $ | 51,842 | | | 3.77 | | | | | $ | 47,007 | | | 3.60 | | | | | $ | 4,835 | | | 0.17 | |
Net interest margin (1) | | | | | 3.99 | % | | | | | | 3.75 | % | | | | | | 0.24 | % |
(1)Yields and net interest income are reflected on a tax-equivalent basis.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Six Months Ended June 30, (dollars in thousands) | 2022 | | 2021 |
Average Balance | | Interest Income/ Expense | | Yields/ Rates | | Average Balance | | Interest Income/ Expense | | Yields/ Rates |
Assets | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | |
Due from banks | $ | 27,645 | | | 62 | | | 0.45 | % | | $ | 16,254 | | | 6 | | | 0.07 | % |
Federal funds sold | 2,060 | | | 3 | | | 0.29 | % | | 16,946 | | | 2 | | | 0.02 | % |
Investment securities(1) | 168,370 | | | 1,740 | | | 2.08 | % | | 140,910 | | | 1,436 | | | 1.67 | % |
Loans held for sale | 59,936 | | | 1,101 | | | 3.67 | % | | 153,433 | | | 2,098 | | | 2.73 | % |
Loans held for investment(1) | 1,450,454 | | | 35,243 | | | 4.87 | % | | 1,339,277 | | | 31,568 | | | 4.76 | % |
Total loans | 1,510,390 | | | 36,344 | | | 4.85 | % | | 1,492,710 | | | 33,666 | | | 4.55 | % |
Total interest-earning assets | 1,708,465 | | | 38,149 | | | 4.50 | % | | 1,666,820 | | | 35,110 | | | 4.25 | % |
Noninterest earning assets | 71,634 | | | | | | | 42,449 | | | | | |
Total assets | $ | 1,780,099 | | | | | | | $ | 1,709,269 | | | | | |
Liabilities and stockholders' equity | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | |
Interest-bearing deposits | 253,771 | | | 385 | | | 0.31 | % | | 242,699 | | | 538 | | | 0.45 | % |
Money market and savings deposits | 694,539 | | | 1,928 | | | 0.56 | % | | 589,941 | | | 1,652 | | | 0.56 | % |
Time deposits | 298,783 | | | 794 | | | 0.54 | % | | 268,784 | | | 745 | | | 0.56 | % |
Total deposits | 1,247,093 | | | 3,107 | | | 0.50 | % | | 1,101,424 | | | 2,935 | | | 0.54 | % |
Borrowings | 16,136 | | | 126 | | | 1.57 | % | | 154,273 | | | 312 | | | 0.82 | % |
Subordinated debentures | 40,533 | | | 1,183 | | | 5.84 | % | | 40,696 | | | 1,190 | | | 5.85 | % |
Total interest-bearing liabilities | 1,303,762 | | | 4,416 | | | 0.68 | % | | 1,296,393 | | | 4,437 | | | 0.69 | % |
Noninterest-bearing deposits | 284,455 | | | | | | | 245,057 | | | | | |
Other noninterest-bearing liabilities | 33,530 | | | | | | | 25,950 | | | | | |
Total liabilities | $ | 1,621,747 | | | | | | | $ | 1,567,400 | | | | | |
Total stockholders' equity | 157,928 | | | | | | | 141,869 | | | | | |
Total stockholders' equity and liabilities | $ | 1,780,099 | | | | | | | $ | 1,709,269 | | | | | |
Net interest income (1) | | | $ | 33,733 | | | | | | | $ | 30,673 | | | |
Net interest spread (1) | | | | | 3.82 | % | | | | | | 3.56 | % |
Net interest margin (1) | | | | | 3.98 | % | | | | | | 3.71 | % |
Rate/Volume Analysis
The rate/volume analysis table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three and sixnine months ended JuneSeptember 30, 2022 as compared to the same periods in 2021, allocated by rate and volume. Changes in interest income and/or expense attributable to both volumerate and ratevolume have been allocated proportionately based on the relationship of the absolute dollar amount of the change in each category.
| (dollars in thousands) | 2022 Compared to 2021 | |
Three Months Ended June 30, | | Six Months Ended June 30, | |
| | 2022 Compared to 2021 |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
(dollars in thousands) | (dollars in thousands) | Rate | | Volume | | Total | | Rate | | Volume | | Total | (dollars in thousands) | Rate | | Volume | | Total | | Rate | | Volume | | Total |
| | | | | | | | | | | Interest income: | | | | | | | | | | | |
$ | 42 | | | 3 | | | 45 | | | $ | 49 | | | 7 | | | 56 | | Due from banks | $ | 91 | | | $ | (15) | | | $ | 76 | | | $ | 132 | | | $ | (1) | | | $ | 131 | |
Federal funds sold | Federal funds sold | 7 | | | (5) | | | 2 | | | 7 | | | (6) | | | 1 | | Federal funds sold | 2 | | | (2) | | | — | | | 6 | | | (5) | | | 1 | |
Investment securities(1) | 60 | | | 133 | | | 193 | | | 169 | | | 135 | | | 304 | | |
Investment securities - taxable (1) | | Investment securities - taxable (1) | 143 | | | 148 | | | 291 | | | 129 | | | 394 | | | 523 | |
Investment securities - tax exempt (1) | | Investment securities - tax exempt (1) | 95 | | | (21) | | | 74 | | | 149 | | | (3) | | | 146 | |
Loans held for sale | Loans held for sale | 1,882 | | | (2,284) | | | (402) | | | 1,487 | | | (2,484) | | | (997) | | Loans held for sale | 382 | | | (727) | | | (345) | | | 942 | | | (2,284) | | | (1,342) | |
Loans held for investment(1) | Loans held for investment(1) | 1,176 | | | 1,506 | | | 2,682 | | | 800 | | | 2,875 | | | 3,675 | | Loans held for investment (1) | 2,020 | | | 2,547 | | | 4,567 | | | 3,046 | | | 5,193 | | | 8,239 | |
Total loans | Total loans | 3,058 | | | (778) | | | 2,280 | | | 2,287 | | | 391 | | | 2,678 | | Total loans | 2,402 | | | 1,820 | | | 4,222 | | | 3,988 | | | 2,909 | | | 6,897 | |
Total interest income | Total interest income | 3,167 | | | (647) | | | 2,520 | | | $ | 2,512 | | | 527 | | | 3,039 | | Total interest income | $ | 2,733 | | | $ | 1,930 | | | $ | 4,663 | | | $ | 4,404 | | | $ | 3,294 | | | $ | 7,698 | |
Interest expense: | Interest expense: | | | | | | | | | | | | Interest expense: | | | | | | | | | | | |
Interest bearing deposits | $ | 106 | | | (98) | | | 8 | | | $ | (222) | | | 69 | | | (153) | | |
Interest-bearing demand deposits | | Interest-bearing demand deposits | $ | 640 | | | $ | (43) | | | $ | 597 | | | $ | 472 | | | $ | (28) | | | $ | 444 | |
Money market and savings deposits | Money market and savings deposits | 111 | | | 142 | | | 253 | | | (2) | | | 278 | | | 276 | | Money market and savings deposits | 1,118 | | | 104 | | | 1,222 | | | 1,071 | | | 427 | | | 1,498 | |
Time deposits | Time deposits | 100 | | | 88 | | | 188 | | | (79) | | | 128 | | | 49 | | Time deposits | 727 | | | 202 | | | 929 | | | 694 | | | 285 | | | 979 | |
Total interest bearing deposits | 317 | | | 132 | | | 449 | | | (303) | | | 475 | | | 172 | | |
Total borrowings | 719 | | | (782) | | | (63) | | | 1,050 | | | (1,236) | | | (186) | | |
Total deposits | | Total deposits | 2,485 | | | 263 | | | 2,748 | | | 2,237 | | | 684 | | | 2,921 | |
Borrowings | | Borrowings | 263 | | | (123) | | | 140 | | | 561 | | | (607) | | | (46) | |
Subordinated debentures | Subordinated debentures | (3) | | | (3) | | | (6) | | | (3) | | | (4) | | | (7) | | Subordinated debentures | (3) | | | (2) | | | (5) | | | (5) | | | (7) | | | (12) | |
Total interest expense | Total interest expense | 1,033 | | | (653) | | | 380 | | | 744 | | | (765) | | | (21) | | Total interest expense | $ | 2,745 | | | $ | 138 | | | $ | 2,883 | | | $ | 2,793 | | | $ | 70 | | | $ | 2,863 | |
Interest differential | Interest differential | $ | 2,134 | | | 6 | | | 2,140 | | | $ | 1,768 | | | 1,292 | | | 3,060 | | Interest differential | $ | (12) | | | $ | 1,792 | | | $ | 1,780 | | | $ | 1,611 | | | $ | 3,224 | | | $ | 4,835 | |
(1)Yields and net interest income are reflected on a tax-equivalent basis.
Three Months Ended September 30, 2022 Compared to the Same Period in 2021
For the three months ended JuneSeptember 30, 2022 as compared to the same period in 2021, tax-equivalent interest income increased $2.5$4.7 million as favorable rate and volume changes contributed $3.2$2.7 million, while unfavorable volume changes in average earning assets reduced interest income by $647 thousand.and $1.9 million, respectively. The favorable change in rates was driven by increased yield on loans held for sale (up 138205 basis points) and loans held for investment (up 3257 basis points). While the that favorably impact interest income by $2.4 million, combined. The loans held for investment average balances increased $120.5$195.4 million, leading to a favorable volume impact on interest income of $1.5$2.5 million, while the decline in loans held for sale average balances of $80.6$73.0 million had an unfavorable impact to interest income of $2.3 million$727 thousand as shown in the table above. Within the loans held for investment portfolio, average balances on commercial loans and leases were up $171.1increased $33.6 million, and commercial real estate/$54.0 million, respectively, construction loans were up $91.3$65.3 million, and residential real estate loans average balances increased $78.2 million, while the average balance of PPP loans were down $182.5decreased $132.4 million as such loans continue to be forgiven by the SBA.
On the funding side, interest expense increased $380 thousand$2.9 million due to the impact from rate hikes issued by the Fed, which were partially offset by volume declines on borrowings. The cost of deposits were up modestly across the board, causing a $317 thousand$2.5 million increase to interest expense. The cost of interest-bearing demand deposits, money market and savings accounts and time deposits increased 5114 basis points, 763 basis points and 1386 basis points, respectively, while the cost of borrowings increased 142210 basis points. Money market/savings accounts and time deposit average balances increased $96.3$71.7 million, and $68.2$124.4 million, respectively, while interest-bearing demand deposits decreased $23.0$49.1 million on average, and borrowings were down $109.0decreased $69.8 million on average.
Overall, the $2.1$1.8 million increase in net interest income was derived by volume changes as the impact from rate changes wasincreased average earning assets and the main reason for$41.1 million in free funding outpaced the overall increase in tax-equivalent netaverage interest income of $2.1 million.bearing liabilities.
Nine Months Ended September 30, 2022 Compared to the Same Period in 2021 For the sixnine months ended JuneSeptember 30, 2022 as compared to the same period in 2021, tax-equivalent interest income increased $3.0$7.7 million as positive rate changes on average earning assets contributed $2.5$4.4 million and favorable volume changes helped to increase interest income by $527 thousand.$3.3 million. The favorable change in interest income due to rate changes was driven mostly fromby growth in the loans held for sale (increase of 94122 basis points) and the overall loans held for investment portfolio (increase of 1129 basis points). This large
increase in the yield on loans held for sale was the result of interest rates hovering at historical lows throughout much of 2021, but then as the Fed raised interest rates in 2022, the yield benefited from this action. While the overall 11 basis point increase in the yield on loans held for investment was largely driven by a 293 basis point increase in the yield on PPP loans as there was a higher rate of forgiveness of such loans in 2022 vs 2021, offset by declines in the yields on most other categories of loans held for investment. The $527 thousand$3.3 million positive impact that volume changes had to interest income was largely the result of loan average balance increases, which contributed $2.9$5.2 million to interest income, offset by a decline in the volume of loans held or sale which had an unfavorable impact of $2.5$2.3 million on interest income. The increase in loans held for investment average balances were led by an increaseincreases in commercial loans, small business loans and leases of $170.8$30 million, commercial real estate loans/$58.1 million, and $56.5 million, respectively, construction loans of $76.7$50.8 million, and residential loans held for investment of $31.5$47.3 million, offset somewhat by a $162.4$152.3 million decline in PPP loan balances as they continue to be forgiven by the SBA.
On the funding side, interest expense decreased $21 thousand.increased $2.9 million. The cost of deposits was down,up, having a $303 thousand positive$2.9 million negative effect on interest expense. The cost of interest-bearing demand deposits, money market and savings deposits, and time deposits declined 14increased 26 basis points, 21 basis points, and 230 basis points, while the rate on time deposits was relatively unchanged over the period,respectively, while the cost of borrowings decreased 75increased 170 basis points. Interest-bearing deposits, moneyMoney market and savings accounts, and time deposits increased $11.1 million, $104.6$93.5 million, and $30.0$61.8 million on average respectively, while interest bearing demand deposits and borrowings overall were down $138.1$9.2 million and $115.1 million on average, respectively, leading to a $765$70 thousand decreaseincrease in interest expense.
Overall, the $1.8$4.8 million increase in interest income from rate changes, combined with the $1.3 million increase in volume changes, let to an improvement in tax-equivalent net interest income of $3.1 million.
Simulations of net interest income. We use a simulation model on a quarterly basis to measure and evaluate potentialwas derived by volume changes in our net interest income resultingas the impact from various hypothetical interest rate scenarios. Our model incorporates various assumptions that management believes to be reasonable, but which may have a significant impact on results such as:
•The timing of changes in interest rates;
•Shifts or rotations in the yield curve;
•Repricing characteristics for market rate sensitive instruments on the balance sheet;
•Differing sensitivities of financial instruments due to differing underlying rate indices;
•Varying timing of loan prepayments for different interest rate scenarios;
•The effect of interest rate floors, periodic loan caps and lifetime loan caps;
•Overall growth rates and product mix of interest-earningincreased average earning assets and interest-bearingthe $42.9 million in free funding outpaced the increase in average 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 June 30, 2022 and 2021 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 Three Months Ended June 30, |
Changes in Market Interest Rates | | 2022 | | 2021 |
+300 basis points over next 12 months | | 1.42 | % | | 1.49 | % |
+200 basis points over next 12 months | | 1.18 | % | | 0.82 | % |
+100 basis points over next 12 months | | 0.69 | % | | 0.36 | % |
No Change | | | | |
-100 basis points over next 12 months | | (1.67) | % | | (0.70) | % |
-200 basis points over next 12 months | | (3.77) | % | | (2.68) | % |
The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of June 30, 2022. In its current position, the table indicates that a 100 basis point increase in interest rates would have a modestly positive impact from rising rates on net interest income over the next 12 months and a more significant positive impact in a 200 and 300 basis point increase. 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 June 30, 2022 and 2021, are presented in the following table. The projections assume shifts upward and downward in the yield curve of 100, 200 and 300 basis points occurring immediately.
| | | | | | | | | | | | | | |
| | Estimated increase (decrease) in Net Economic Value at June 30, |
Changes in Market Interest Rates | | 2022 | | 2021 |
+300 basis points | | 11 | % | | 61 | % |
+200 basis points | | 9 | % | | 47 | % |
+100 basis points | | 7 | % | | 27 | % |
No Change | | | | |
-100 basis points | | (13) | % | | (40) | % |
-200 basis points | | (35) | % | | (103) | % |
This economic value of equity profile at June 30, 2022 suggests that we would experience a positive effect from an increase in rates, and that the impact would become greater as rates continue to rise due to the duration of our interest-earning assets. Conversely, we would experience a negative effect from a decrease in rates. While an instantaneous shift in interest rates is used in this analysis to provide an estimate of exposure, we believe that a gradual shift in interest rates would have a much more modest impact. Since economic value of equity measures the discounted present value of cash flows over the estimated lives of instruments, the change in economic value of equity does not directly correlate to the degree that earnings would be impacted over a shorter time horizon.
The results of our net interest income and economic value of equity simulation analysis are purely hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from that projected, our net interest income might vary significantly. Non-parallel yield curve shifts or changes in interest rate spreads would also cause our net interest income to be different from that projected. An increasing interest rate environment could reduce projected net interest income if deposits and other short-
term interest-bearing liabilities reprice faster than expected or faster than our interest-earning assets. Actual results could differ from those projected if we grow interest-earning assets and interest-bearing liabilities faster or slower than estimated, or otherwise change its mix of products. Actual results could also differ from those projected if we experience substantially different repayment speeds in our loan portfolio than those assumed in the simulation model. Furthermore, the results do not take into account the impact of changes in loan prepayment rates on loan discount accretion. If prepayment rates were to increase on our loans, we would recognize any remaining loan discounts into interest income. This would result in a current period offset to declining net interest income caused by higher rate loans prepaying. Finally, these simulation results do not contemplate all the actions that we may undertake in response to changes in interest rates, such as changes to our loan, investment, deposit, funding or other strategies.
Finally, these simulation results do not contemplate all the actions that we may undertake in response to changes in interest rates, such as changes to our loan, investment, deposit, funding or other strategies.
Management has and continues to employ strategies to mitigate risk in the Net Interest Income and Economic Value simulations. Strategies include actively lowering deposit and funding rates, adding and maintaining interest rate floors on assets and lengthening liabilities in the low rate environment.
PROVISION FOR LOAN AND LEASE LOSSES
Three Months Ended September 30, 2022 Compared to the Same Period in 2021
The provision for loan losses was $602decreased $71 thousand for the three months ended June 30, 2022, compareddue to a $96 thousand provision for the three months June 30, 2021. The 2022 second quarter provision was the result of new loan growth as well as covering $695 thousand in charge-offs on small ticket equipment leases, partially offset by decreases in specific reserves on non-performing loans as the underlying credit quality improved.improved and certain qualitative factors improved as well, partially offset by providing for continued loan growth and charge-offs on small ticket equipment leases.
Nine Months Ended September 30, 2022 Compared to the Same Period in 2021
The provision for loan losses of $1.2 millionincreased $451 thousand to provide for the six months ended June 30, 2022 increased $522 thousand, or 75.1%, from the $695 thousand provision for loan losses recorded for the six months ended June 30, 2021. While the COVID-19 pandemic was more relevant in the prior year, the current year provision was higher due to reserving for an increased level of non-performing loans over the prior year combined with the significant level of loan growth year over year.year, partially offset by the impact of decreases to specific reserves and qualitative factors noted above.
Asset Quality Summary
AssetMeridian's credit culture is strong and asset quality remains a strongprimary focus of management. Total non-performing loans were $23.0 million as of June 30, 2022, unchanged from $23.0 million as of December 31, 2021. The ratio of non-performing assets to total assets declined to 1.24%1.20% as of JuneSeptember 30, 2022, from 1.34% as of December 31, 2021.
There was no other real estate property included in non-performing assets for either period. Total non-performing loans were $23.1 million and $23.0 million as of September 30, 2022 and December 31, 2021, respectively, however subsequent to September 30, 2022, principal payments of $3.2 million and $307 thousand on a non-performing loan relationship were received.
Meridian realized net charge-offs of 0.03%0.10% of total average loans for the quarteryear ending JuneSeptember 30, 2022 up fromwhich is higher than the quarter ended December 31, 2021 level of 0.00%.0.01% over the same period in 2021. Charge-offs amounted to $696$431 thousand for the quarter ending JuneSeptember 30, 2022, while recoveries were $73$74 thousand during this quarter. Nearly all of the charge-offs for the quarter ending JuneSeptember 30, 2022 were from small ticket equipment leases, aswhile recoveries were the majority of recoveries in the quarter.split between commercial loans and home equity loans. The ratio of allowance for loan losses to total loans held for investment, excluding loans at fair value and PPP loans (a non-GAAP measure, see reconciliation in the Appendix), was 1.27%1.20% as of JuneSeptember 30, 2022 and 1.46% as of December 31, 2021. As of JuneSeptember 30, 2022 there were specific reserves of $2.8 million against a non-performing loans, down from $3.2 million as of December 31, 2021 due to improvement in the underlying credit quality for certain loans.
As of June 30, 2022,loans, as discussed in the Corporation had $3.9 million of troubled debt restructurings (“TDRs”), of which $3.7 million were in compliance with the modified terms and excluded from non-performing loans and leases. As of December 31, 2021, the Corporation had $3.8 million of TDRs, of which $3.4 million were in compliance with the modified terms, and were excluded from non-performing loans and leases. As of June 30, 2022, the Corporation had a recorded investment of $26.1 million of impaired loans and leases which included $3.9 million of TDRs, while as of December 31, 2021, the Corporation had a recorded investment of $25.8 million of impaired loans and leases which included $3.8 million of TDRs.
above paragraph.
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 | |
| June 30, | | December 31, | |
(dollars in thousands) | 2022 | 2021 | |
Non-performing assets: | | | | |
Nonaccrual loans: | | | | |
Real estate loans: | | | | |
| | | | |
Home equity lines and loans | 1,038 | | | 911 | | |
Residential mortgage | 2,052 | | | 2,398 | | |
Total real estate loans | 3,090 | | | 3,309 | | |
Commercial and industrial | 18,398 | | | 18,801 | | |
Small business loans | 1,401 | | | 666 | | |
Leases | 95 | | | 212 | | |
Total nonaccrual loans | $ | 22,984 | | | $ | 22,988 | | |
Total non-performing loans | $ | 22,984 | | | $ | 22,988 | | |
Total non-performing assets | $ | 22,984 | | | $ | 22,988 | | |
| | | | |
Troubled debt restructurings: | | | | |
TDRs included in non-performing loans | 197 | | | 361 | | |
TDRs in compliance with modified terms | 3,679 | | | 3,446 | | |
Total TDRs | $ | 3,876 | | | 3,807 | | |
| | | | |
Asset quality ratios: | | | | |
Non-performing assets to total assets | 1.24 | % | | 1.34 | % | |
Non-performing loans to: | | | | |
Total loans and leases | 1.46 | % | | 1.57 | % | |
Total loans held-for-investment | 1.51 | % | | 1.66 | % | |
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1) | 1.55 | % | | 1.80 | % | |
Allowance for loan losses to: | | | | |
Total loans and leases | 1.19 | % | | 1.28 | % | |
Total loans held-for-investment | 1.24 | % | | 1.35 | % | |
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1) | 1.27 | % | | 1.46 | % | |
Non-performing loans | 81.82 | % | | 81.60 | % | |
| | | | |
Total loans and leases | $ | 1,577,831 | | | 1,467,339 | | |
Total loans and leases held-for-investment | $ | 1,518,893 | | | 1,386,457 | | |
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans) | $ | 1,481,220 | | | 1,280,591 | | |
Allowance for loan and lease losses | $ | 18,805 | | | 18,758 | | |
The following table presents nonperforming assets and related ratios for the periods indicated: | | | | | | | | | | | |
(dollars in thousands) | September 30, 2022 | | December 31, 2021 |
Non-performing assets: | | | |
Nonaccrual loans: | | | |
Real estate loans: | | | |
| | | |
Home equity lines and loans | $ | 878 | | | $ | 911 | |
Residential mortgage | 2,097 | | | 2,398 | |
| | | |
Total real estate loans | 2,975 | | | 3,309 | |
Commercial and industrial | 18,202 | | | 18,801 | |
Small business loans | 1,401 | | | 666 | |
Leases | 506 | | | 212 | |
Total nonaccrual loans | 23,084 | | | 22,988 | |
| | | |
Total non-performing assets | $ | 23,084 | | | $ | 22,988 | |
| | | |
Troubled debt restructurings: | | | |
TDRs included in non-performing loans and leases | $ | 193 | | | $ | 361 | |
TDRs in compliance with modified terms | 3,637 | | | 3,446 | |
Total TDRs | $ | 3,830 | | | $ | 3,807 | |
| | | |
Asset quality ratios: | | | |
Non-performing assets to total assets | 1.20 | % | | 1.34 | % |
Non-performing loans to: | | | |
Total loans and leases | 1.40 | % | | 1.57 | % |
Total loans held-for-investment | 1.43 | % | | 1.66 | % |
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1) | 1.45 | % | | 1.80 | % |
Allowance for loan losses to: | | | |
Total loans and leases | 1.15 | % | | 1.28 | % |
Total loans held-for-investment | 1.18 | % | | 1.35 | % |
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1) | 1.20 | % | | 1.46 | % |
Non-performing loans | 82.20 | % | | 81.60 | % |
| | | |
Total loans and leases | $ | 1,644,149 | | | $ | 1,467,339 | |
Total loans and leases held-for-investment | $ | 1,610,349 | | | $ | 1,386,457 | |
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans) | $ | 1,587,037 | | | $ | 1,280,654 | |
Allowance for loan and lease losses | $ | 18,974 | | | $ | 18,758 | |
(1) The allowance for loan losses to total loans held-for-investment (excluding loans at fair value and PPP loans) ratio is a non-GAAP financial measure. See “Non-GAAP Financial Measures” above for a reconciliation of this measure to its most comparable GAAP measure.
NON-INTEREST INCOME
Three Months Ended JuneSeptember 30, 2022 Compared to the Same Period in 2021
TotalThe following table presents the components of non-interest income for the three months ended June 30, 2022 was $10.4 million, down $11.3 million or 52.1% from the comparable period in 2021. This decrease inperiods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | | | |
(Dollars in thousands) | September 30, 2022 | | September 30, 2021 | | $ Change | | % Change |
Mortgage banking income | $ | 7,329 | | | $ | 18,726 | | | $ | (11,397) | | | (60.9) | % |
Wealth management income | 1,114 | | | 1,232 | | | (118) | | | (9.6) | % |
SBA loan income | 989 | | | 2,688 | | | (1,699) | | | (63.2) | % |
Earnings on investment in life insurance | 138 | | | 93 | | | 45 | | | 48.4 | % |
Net change in the fair value of derivative instruments | 127 | | | (339) | | | 466 | | | (137.5) | % |
Net change in the fair value of loans held-for-sale | (237) | | | (532) | | | 295 | | | (55.5) | % |
Net change in the fair value of loans held-for-investment | (886) | | | 37 | | | (923) | | | (2494.6) | % |
Net gain on hedging activity | 399 | | | (1,189) | | | 1,588 | | | (133.6) | % |
Net gain on sale of investment securities available-for-sale | — | | | 314 | | | (314) | | | (100.0) | % |
Service charges | 32 | | | 35 | | | (3) | | | (8.6) | % |
Other | 1,219 | | | 1,057 | | | 162 | | | 15.3 | % |
Total non-interest income | $ | 10,224 | | | $ | 22,122 | | | $ | (11,898) | | | (53.8) | % |
Total non-interest income camedecreased $11.9 million due primarily to lower income from our mortgage segment. Mortgage banking net revenue decreased $12.5 million or 64.3% over the three months ended June 30, 2021, resulting from decreasedsegment, which was impacted by lower levels of mortgage loan originations asin a rising interest ratesrate environment and a lack of housing inventory has had aninventory. Partially offsetting the impact onof the decline in mortgage banking activity. Our mortgage segment originated $332.4 million in loans during the three months ended June 30, 2022, a decrease of $284.2 million, or 46.1%, from the three months ended June 30, 2021. Theincome were net changes in the fair value of derivative instruments and loans held for saleheld-for-sale, along with an improvement in net gains on hedging activity which increased a combined over the period. Hedging activity led to a net gain increase of $2.4$2.3 million, for the three months ended June 30, 2022.combined.
SBA loan income decreased $1.1$1.7 million as $12.8 million ina higher volume of SBA loans were sold forinto the three months ended Junesecondary market in the prior year comparable quarter: $20.8 million of loans were sold in the quarter-ending September 30, 2022 compared to $13.5$25.0 million in loans sold in the quarter-ending September 30, 2021. Contributing to lower SBA loan income, margins on the SBA loan sales decreased from the prior year due to the upward movement in interest rates, which drove SBA loan prices down.
The net change in the fair value of loans held-for-investment decreased to a loss of $886 thousand for the three monthsquarter ended JuneSeptember 30, 2021. In addition2022, compared to a gain of $37 thousand for the comparable prior year quarter, due to the lower volumenegative impact the rising interest rate environment had on the fair value of SBAthe loans sold in the current period, the margin on sale was lower, and amortization and impairment was up due to early payoffs and market conditions. Wealth management revenue increased $91 thousand year-over-year due to favorable market conditions.portfolio that are held at fair value. Other feenon-interest income was up $68$162 thousand or 6.4% from the three months ended June 30, 2022, to $1.1 million, due to increases in wire fees, title fee income, FHLB stock dividend income and servicingbroker fee income.
SixNine Months Ended JuneSeptember 30, 2022 Compared to the Same Period in 2021
TotalThe following table presents the components of non-interest income for the six months ended June 30, 2022 was $23.5 million, down $25.3 million or 51.8% from the comparable period in 2021. This decrease inperiods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | | | |
(Dollars in thousands) | September 30, 2022 | | September 30, 2021 | | $ Change | | % Change |
Mortgage banking income | $ | 21,367 | | | $ | 62,293 | | | $ | (40,926) | | | (65.7) | % |
Wealth management income | 3,672 | | | 3,531 | | | 141 | | | 4.0 | % |
SBA loan income | 3,946 | | | 5,423 | | | (1,477) | | | (27.2) | % |
Earnings on investment in life insurance | 413 | | | 224 | | | 189 | | | 84.4 | % |
Net change in the fair value of derivative instruments | (713) | | | (3,431) | | | 2,718 | | | (79.2) | % |
Net change in the fair value of loans held-for-sale | (1,094) | | | (3,164) | | | 2,070 | | | (65.4) | % |
Net change in the fair value of loans held-for-investment | (2,499) | | | (24) | | | (2,475) | | | 10312.5 | % |
Net gain on hedging activity | 4,941 | | | 2,397 | | | 2,544 | | | 106.1 | % |
Net gain on sale of investment securities available-for-sale | — | | | 362 | | | (362) | | | (100.0) | % |
Service charges | 90 | | | 99 | | | (9) | | | (9.1) | % |
Other | 3,605 | | | 3,192 | | | 413 | | | 12.9 | % |
Total non-interest income | $ | 33,728 | | | $ | 70,902 | | | $ | (37,174) | | | (52.4) | % |
Total non-interest income camedecreased due primarily to lower income from our mortgage segment. Mortgage banking net revenue decreased $29.5 million or 67.8% over the six months ended June 30, 2021, resulting from decreasedsegment, which was impacted by lower levels of mortgage loan originations asin a rising interest ratesrate environment and a lack of housing inventory has had an impact on mortgage banking activity. Our mortgage segment originated $656.1 million in loans during the six months ended June 30, 2022, a decreaseinventory.
Net revenue from the sales of SBA 7(a) loans increased $222 thousand with $38.0 million in loans sold for the six months ended June 30, 2022 compared to $26.6 million sold for the six months ended June 30, 2021, an increase of 42.9%. While the volume of SBA loans sold period over period was up, the margin on sales was down. Wealth management revenue increased $259 thousand year-over-year due the more favorable market conditions. Other fee income was up $253 thousand or 11.9%, to $2.4 million for the six months ended June 30, 2022, due to increases in wire fees, title fee income, and servicing fee income.
NON-INTEREST EXPENSE
Three Months Ended JuneSeptember 30, 2022 Compared to the Same Period in 2021
The following table presents the components of non-interest income for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | | | |
(Dollars in thousands) | September 30, 2022 | | September 30, 2021 | | $ Change | | % Change |
Salaries and employee benefits | $ | 13,360 | | | $ | 19,472 | | | $ | (6,112) | | | (31.4) | % |
Occupancy and equipment | 1,191 | | | 1,133 | | | 58 | | | 5.1 | % |
Professional fees | 899 | | | 873 | | | 26 | | | 3.0 | % |
Advertising and promotion | 1,165 | | | 1,089 | | | 76 | | | 7.0 | % |
Data processing | 574 | | | 530 | | | 44 | | | 8.3 | % |
Information technology | 868 | | | 476 | | | 392 | | | 82.4 | % |
Pennsylvania bank shares tax | 202 | | | 152 | | | 50 | | | 32.9 | % |
Other | 2,002 | | | 1,756 | | | 246 | | | 14.0 | % |
Total non-interest expense | $ | 20,261 | | | $ | 25,481 | | | $ | (5,220) | | | (20.5) | % |
Total non-interest expense for the three months ended June 30, 2022 was $19.7 million, down $6.5 million or 24.9%, from the comparable period in 2021. The decrease in non-interest expense isdecreased largely attributable to a decrease in salaries and employee benefits expense which decreased $7.3 million or 36.1%, from the comparable period in 2021. This decrease relates to the mortgage segment, which had reduced fixed and variable based compensation.
Advertising and promotion expense increased $268 thousand, or 29.1%, over the comparable period in 2021 as the result of a renewed and focused priority placed on business development and community outreach efforts throughout the Meridian organization. In the second quarter of 2022 the easing of COVID-19 restrictions has provided our team members with much better opportunities to meet with customers and prospective customers as they were accustomed to pre-pandemic.
Information technology expense increased $264$392 thousand or 56.9%,due to $728cybersecurity improvements, cloud-based costs and other software upgrades, all as a result of growth. Other non-interest expense increased $246 thousand fordue to the three months ended June 30, 2022. Meridian continued withincreased level of client engagement and business development our strategyemployees were able to investdo in technology that focuses on improving back-office efficiencies through automation and workflow processes. In addition, with a focus on cloud-based computing, IT has improved the scalability of storage; reducedcurrent period versus the maintenance process; and eliminated the need and cost for further servers.prior year due to COVID-19 pandemic restrictions.
SixNine Months Ended JuneSeptember 30, 2022 Compared to the Same Period in 2021
The following table presents the components of non-interest income for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended | | | | |
(Dollars in thousands) | September 30, 2022 | | September 30, 2021 | | $ Change | | % Change |
Salaries and employee benefits | $ | 41,585 | | | $ | 61,824 | | | $ | (20,239) | | | (32.7) | % |
Occupancy and equipment | 3,619 | | | 3,460 | | | 159 | | | 4.6 | % |
Professional fees | 2,659 | | | 2,629 | | | 30 | | | 1.1 | % |
Advertising and promotion | 3,340 | | | 2,795 | | | 545 | | | 19.5 | % |
Data processing | 1,633 | | | 1,666 | | | (33) | | | (2.0) | % |
Information technology | 2,306 | | | 1,365 | | | 941 | | | 68.9 | % |
Pennsylvania bank shares tax | 612 | | | 478 | | | 134 | | | 28.0 | % |
Other | 5,646 | | | 5,773 | | | (127) | | | (2.2) | % |
Total non-interest expense | $ | 61,400 | | | $ | 79,990 | | | $ | (18,590) | | | (23.2) | % |
Total non-interest expense for the six months ended June 30, 2022 was $41.1 million, down $13.4 million or 24.5%, from the comparable period in 2021. The decrease in non-interest expense isdecreased largely attributable to a decrease in salaries and employee benefits expense which is down $14.1 million or 33.4%, from the comparable period in 2021. Of this decrease, $12.6 million relates toat the mortgage segment, which recognized decreased and variable compensation. OffsettingPartially offsetting this decrease somewhat was an increase of $2,907 thousandin salaries & benefits expense for the bank and wealth segments due to an increase in FTEs and a higher level of stock-based compensation expense.expense year-over-year.
Advertising and promotion expense increased $468$545 thousand or 27.4%, over the comparable period in 2021 as the result of a renewed and focused priority placed on business development and community outreach efforts as noted above.efforts. Information technology expense increased $549$941 thousand or 61.8%,due to $1.4 million for the six months ended June 30, 2022,cybersecurity improvements, cloud-based costs and other software upgrades, all as Meridian continued with our strategy to invest in technology that focuses on improving back-office efficiencies through automation and workflow processes.a result of growth.
INCOME TAXESTAX EXPENSE
Income tax expense for the three months ended JuneSeptember 30, 2022 was $1.7 million, as compared to $2.5$2.9 million for the same period in 2021. The decrease in income tax expense was attributable to the decrease in earnings, period over period. Our effective tax rate was 22.4%22.3% for the three months ended JuneSeptember 30, 2022 and 23.6%23.3% for the three months ended JuneSeptember 30, 2021.
Income tax expense for the sixnine months ended JuneSeptember 30, 2022 was $3.3$4.9 million, as compared to $5.7$8.5 million for the same period in 2021. The decrease in income tax expense was attributable to the decrease in earnings, period over period. Our effective tax rate was 22.1%22.2% for the sixnine months ended September 30, 2022 and 23.5% for the nine months ended June 30, 2022 and 23.6% for the six months ended June 30, 2021.
BALANCE SHEET ANALYSIS
As of JuneSeptember 30, 2022, total assets were $1.9$1.92 billion an increase of $139.6which increased $208.5 million, or 8.1%12.2%, from December 31, 2021. This growth in assets over the prior period was due primarily to loan portfolio growth, as discussed below.detailed in the following table:
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | September 30, 2022 | | December 31, 2021 | | $ Change | | % Change |
Mortgage loans held for sale | $ | 33,800 | | | $ | 80,882 | | | $ | (47,082) | | | (58.2) | % |
Real estate loans: | | | | | | | |
Commercial mortgage | 545,736 | | | 516,928 | | | 28,808 | | | 5.6 | % |
Home equity lines and loans | 57,648 | | | 52,299 | | | 5,349 | | | 10.2 | % |
Residential mortgage (1) | 153,513 | | | 68,175 | | | 85,338 | | | 125.2 | % |
Construction | 244,435 | | | 160,905 | | | 83,530 | | | 51.9 | % |
Total real estate loans | 1,001,332 | | | 798,307 | | | 203,025 | | | 25.4 | % |
| | | | | | | |
Commercial and industrial | 329,451 | | | 293,771 | | | 35,680 | | | 12.1 | % |
Small business loans | 133,904 | | | 114,158 | | | 19,746 | | | 17.3 | % |
Paycheck Protection Program loans | 8,837 | | | 90,194 | | | (81,357) | | | (90.2) | % |
Main Street Lending Program Loans | 597 | | | 597 | | | — | | | — | % |
Consumer | 497 | | | 419 | | | 78 | | | 18.6 | % |
Leases, net | 129,574 | | | 88,242 | | | 41,332 | | | 46.8 | % |
Total portfolio loans and leases | $ | 1,604,192 | | | $ | 1,385,688 | | | $ | 218,504 | | | 15.8 | % |
Total loans and leases | $ | 1,637,992 | | | $ | 1,466,570 | | | $ | 171,422 | | | 11.7 | % |
Portfolio loans increased grew $132.4$218.5 million, or 9.6%15.8%, to $1.5$1.6 billion as of JuneSeptember 30, 2022, from $1.4 billion as of December 31, 2021. Overall portfolio loan growth, excluding PPP loans, was 15.4%23.1% since December 31, 2021, or 31%30.9% on an annualized basis for 2022. Commercial loans increased $41.9$35.7 million, or 14.3%12.1%, commercial real estate loans increased $30.3$28.8 million, or 5.6%, construction loans increased $41.1$83.5 million, or 30.4%51.9%, residential real estate loans held in portfolio increased $45.8$85.3 million, or 66.9%125.2%, and lease financings increased $28.8$41.3 million, or 30.9%46.8% from December 31, 2021. Partially offsetting the growth in portfolio loans was a decrease of $66.8$81.4 million, or 75.7%90.2%, in PPP loan balances as such loans continue to be paid off by the SBA.
Deposits were $1.6 billion asThe following table presents the major categories of June 30, 2022, up $121.6deposits at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | September 30, 2022 | | December 31, 2021 | | $ Change | | % Change |
Noninterest-bearing deposits | $ | 290,169 | | | $ | 274,528 | | | $ | 15,641 | | | 5.7 | % |
Interest-bearing deposits: | | | | | | | |
Interest-bearing demand deposits | 236,562 | | | 268,248 | | | (31,686) | | | (11.8) | % |
Money market and savings deposits | 709,127 | | | 697,628 | | | 11,499 | | | 1.6 | % |
Time deposits | 437,695 | | | 206,009 | | | 231,686 | | | 112.5 | % |
Total interest-bearing deposits | 1,383,384 | | | 1,171,885 | | | 211,499 | | | 18.0 | % |
Total deposits | $ | 1,673,553 | | | $ | 1,446,413 | | | $ | 227,140 | | | 15.7 | % |
Total deposits increased $227.1 million, or 8.4%, from December 31, 2021. Non-interest bearing deposits increased $17.4 million, or 6.3%, from December 31, 2021 due to strong business development efforts. Interest-bearing checking accounts decreased $63.0 million, or 23.5%, while money market accounts/savings accounts combined increased $31.3 million, or 4.5%15.7%, since December 31, 2021. Certificates ofWhile noninterest-bearing deposits increased $135.9$15.6 million over this period, the largest increase was in time deposits, $211.5 million, or 66.0%18.0%, largely from December 31, 2021, as suchretail and wholesale time deposits were utilized as an alternative source of cost-effective wholesale funding.due to more favorable interest rates.
Capital
Consolidated stockholders’ equity of the Corporation was $156.1$151.2 million, or 8.4%7.9% of total assets as of JuneSeptember 30, 2022, as compared to $165.4 million, or 9.7% of total assets as of December 31, 2021. The change in stockholders’ equity is the result of year-to-date net income of $5.9 million, offset by dividends of $7.3 million paid as well as a $9.9 million decline in accumulated other comprehensive income (loss) from the investment security portfolio due to changes in interest rates over this period.
As of June 30, 2022, the Tier 1 leverage ratio was 8.87% for the Corporation and 10.86% for the Bank, the Tier 1 risk-based capital and common equity ratios were 9.79% for the Corporation and 11.98% for the Bank, and total risk-based capital was 13.50% for the Corporation and 13.33% for the Bank. Based on these capital ratio levels, we remain above the Community Bank Leverage Ratio ("CBLR") requirement of 8%. Period end numbers show a tangible common equity to
tangible assets ratio (a non-GAAP measure) of 8.22%7.7% for the Corporation and 10.18%9.6% for the Bank. Tangible book value per share (a non-GAAP measure) was $25.16 as of JuneSeptember 30, 2022, compared with $26.3726.37 as of December 31, 2021. A reconciliation of these non-GAAP measures is included above.below.
The following table presents the Corporation’s capital ratios and the minimum capital requirements to be considered “well capitalized” by regulators as of June 30, 2022 and December 31, 2021:at the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Actual | | To Be Well Capitalized Under CBLR Framework |
(dollars in thousands) | Amount | | Ratio | | Amount | | Ratio |
Tier 1 capital (to average assets) | | | | | | | |
Corporation | $ | 161,066 | | | 8.87 | % | | $ | 163,434 | | | 9.00 | % |
Bank | 197,192 | | 10.86 | % | | 163,432 | | | 9.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Actual | | To Be Well Capitalized Under CBLR Framework |
(dollars in thousands) | Amount | | Ratio | | Amount | | Ratio |
Tier 1 capital (to average assets) | | | | | | | |
Corporation | $ | 160,379 | | | 9.39 | % | | $ | 136,621 | | | 8.00 | % |
Bank | 196,506 | | | 11.51 | % | | 136,620 | | | 8.00 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporation | | Bank | | Well-capitalized minimum |
| September 30, 2022 | | December 31, 2021 | | September 30, 2022 | | December 31, 2021 | |
Tier 1 leverage ratio | 8.54 | % | | 9.39 | % | | 10.52 | % | | 11.51 | % | | 5.00 | % |
Common tier 1 risk-based capital ratio | 9.28 | % | | 10.83 | % | | 11.44 | % | | 13.27 | % | | 6.50 | % |
Tier 1 risk-based capital ratio | 9.28 | % | | 10.83 | % | | 11.44 | % | | 13.27 | % | | 8.00 | % |
Total risk-based capital ratio | 12.80 | % | | 14.81 | % | | 12.70 | % | | 14.63 | % | | 10.00 | % |
Community banks have long raised concerns with bank regulators aboutUnder the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In response, Congress provided an “off-ramp” for institutions, like us, with total consolidated assets of less than $10 billion. Section 201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single "CommunityCommunity Bank Leverage Ratio" (“CBLR”) of between 8 and 10%. Under the final rule,Ratio framework, a community banking organization that is eligible to elect the new framework if it has: less than $10 billion in total consolidated assets, and has limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. can elect to report a single regulatory capital ratio. The Corporation has elected to be measured under this framework for Bank capital adequacy and had ratios of 10.52% and 11.51% at September 30, 2022 and December 31, 2021, respectively. The Corporation is exempt from CBLR. The bank regulatory agencies temporarily lowered the CBLR to 8% as a result of the COVID-19 pandemic.
Liquidity
Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Meridian’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization or that can be used as collateral to secure funding. In addition, as part of its liquidity management, Meridian maintains a segment of commercial loan assets that are comprised of shared national credits (“SNCs”), which have a national market and can be sold in a timely manner. Meridian’s available liquidity, which totaled $286.6$264.7 million at JuneSeptember 30, 2022, compared to $263.6 million at December 31, 2021, includes investments, SNCs, Federal funds sold, mortgages held-for-sale and cash and cash equivalents, less the amount of securities required to be pledged for certain liabilities. Meridian also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios.
In addition, Meridian maintains borrowing arrangements with various correspondent banks, the FHLB and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. Through its relationship at the Federal Reserve, Meridian had available credit of approximately $11.5$9.2 million at JuneSeptember 30, 2022. At JuneSeptember 30, 2022, Meridian had no borrowings from the Federal Reserve. As a member of the FHLB, we are eligible to borrow up to a specific credit limit, which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of JuneSeptember 30, 2022, Meridian’s maximum borrowing capacity with the FHLB was $484.1$529.2 million. At JuneSeptember 30, 2022, Meridian had borrowed $59.1$23.4 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $56.1$74.8 million against its available credit lines. At JuneSeptember 30, 2022, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as $188.4$214.7 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $357.3$333.1 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 JuneSeptember 30, 2022, 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 income before tax of $6.9$7.5 million and $15$22.5 million for the three and sixnine months ended JuneSeptember 30, 2022 as compared to income before tax of $7.7$8.3 million and $15$23.5 million for the same periods in 2021. The Banking Segment provided 89.7%100.6% and 101.9%101.4% of the Corporation’s pre-tax profit for the three and sixnine month periods ended JuneSeptember 30, 2022, as compared to 71.4%69.0% and 62.2%65.9% for the same period in 2021.
The Wealth Management Segment recorded income before tax of $749$552 thousand and $1.3$1.8 million for the three and sixnine months ended JuneSeptember 30, 2022 as compared to income before tax of $376$432 thousand and $604$796 thousand for the same periods in 2021. The increase in income in this segment came from an increase in customer based as the number of accounts grew 2.5% and 4.5%, for the three and sixnine months ended JuneSeptember 30, 2022, respectively.
The Mortgage Banking Segment recorded incomea loss before tax of $41$603 thousand and a loss before tax of 1.6$2.2 million for the three and sixnine months ended JuneSeptember 30, 2022 as compared to income before tax of $2.7$3.6 million and $8.5$12.1 million for the same periods in 2021. Mortgage Banking income and expenses related to loan originations and sales decreased due to lower 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, standby letters of credit, and loan repurchase commitments.
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 JuneSeptember 30, 2022 were $488.6$505.9 million as compared to $486.6 million at December 31, 2021.
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 JuneSeptember 30, 2022 amounted to $22.9$21.5 million as compared to $26.0 million at December 31, 2021.
Estimated fair values of the Corporation’s off-balance sheet instruments are based on fees and rates currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and the estimated fair value of off-balance sheet instruments.
In certain circumstances the Corporation may be required to repurchase residential mortgage 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. Based on the obligations described above, the Corporation repurchased two loansone loan totaling $612$126 thousand for the three months ended JuneSeptember 30, 2022 and sixseven loans totaling $1.5$1.6 million for the sixnine months ended JuneSeptember 30, 2022, and repurchased three loansone loan in the amount of $446$115 thousand for the three and six months ended JuneSeptember 30, 2021 and four loans totaling $561 thousand for the nine months ended September 30, 2021.
Non-GAAP Financial Measures
Meridian believes that non-GAAP measures are meaningful because they reflect adjustments commonly made by management, investors, regulators and analysts to evaluate performance trends and the adequacy of common equity. This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for performance and financial condition measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of Meridian’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.
Our management used the measure of the tangible common equity ratio to assess our capital strength. We believe that this non-GAAP financial measure is useful to investors because, by removing the impact of our goodwill and other intangible assets, it allows investors to more easily assess our capital adequacy. This non-GAAP financial measure should not be considered a substitute for any regulatory capital ratios and may not be comparable to other similarly titled measures used by other companies.
The table below provides the non-GAAP reconciliation for our tangible common equity ratio and tangible book value per common share:
| | | | | | | | | | | |
(dollars in thousands) | September 30, 2022 | | December 31, 2021 |
Total stockholders' equity (GAAP) | $ | 151,161 | | | $ | 165,360 | |
Less: Goodwill and intangible assets | 4,125 | | | 4,278 | |
Tangible common equity (non-GAAP) | 147,036 | | | 161,082 | |
| | | |
Total assets (GAAP) | 1,921,924 | | | 1,713,443 | |
Less: Goodwill and intangible assets | 4,125 | | | 4,278 | |
Tangible assets (non-GAAP) | $ | 1,917,799 | | | $ | 1,709,165 | |
| | | |
Stockholders' equity to total assets (GAAP) | 7.87 | % | | 9.65 | % |
Tangible common equity to tangible assets (non-GAAP) | 7.67 | % | | 9.42 | % |
| | | |
Shares outstanding | 5,844 | | | 6,108 | |
| | | |
Book value per share (GAAP) | $ | 25.86 | | | $ | 27.07 | |
Tangible book value per share (non-GAAP) | $ | 25.16 | | | $ | 26.37 | |
The following is a reconciliation of the allowance for loan losses to total loans held for investment ratio at September 30, 2022. This is considered a non-GAAP measure as the calculation excludes the impact of loans held for investment that are fair valued and the impact of PPP loans as these loan types are not included in the allowance for loan losses calculation.
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Allowance for loan and lease losses | $ | 18,974 | | | $ | 18,758 | |
| | | |
Loans, net of fees and costs (GAAP) | 1,610,349 | | | 1,386,457 | |
Less: PPP loans | (8,610) | | | (88,245) | |
Less: Loans fair valued | (14,702) | | | (17,558) | |
Loans, net of fees and costs, excluding PPP and fair valued loans (non-GAAP) | $ | 1,587,037 | | | $ | 1,280,654 | |
| | | |
Allowance for loan and leases losses to loans, net of fees and costs (GAAP) | 1.18 | % | | 1.35 | % |
Allowance for loan and leases losses to loans, net of fees and costs, excluding PPP and fair valued loans (non-GAAP) | 1.20 | % | | 1.46 | % |
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
SeeSimulations of Net Interest Income
We use a simulation model on a quarterly basis to measure and evaluate potential changes in our net interest income resulting from various hypothetical interest rate scenarios. Our model incorporates various assumptions that management believes to be reasonable, but which may have a significant impact on results such as:
•The timing of changes in interest rates;
•Shifts or rotations in the discussionyield curve;
•Repricing characteristics for market rate sensitive instruments on the balance sheet;
•Differing sensitivities of quantitativefinancial 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 qualitative disclosures aboutlifetime 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 risksinterest rates on our results, but rather as a means to better plan and execute appropriate Asset / Liability Management (“ALM”) strategies.
Potential increase (decrease) 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 the dates indicated, are presented in “Management’s Discussionthe following table which assuming rate shifts occur upward and Analysisdownward on the yield curve in even increments over the first twelve months (ramp) followed by rates held constant thereafter.
| | | | | | | | | | | |
| Nine Months Ended September 30, |
Changes in Market Interest Rates | 2022 | | 2021 |
+300 basis points over next 12 months | 0.13 | % | | 1.75 | % |
+200 basis points over next 12 months | 0.29 | % | | 1.01 | % |
+100 basis points over next 12 months | 0.15 | % | | 0.43 | % |
No Change | | | |
-100 basis points over next 12 months | (1.40) | % | | (0.68) | % |
-200 basis points over next 12 months | (3.19) | % | | (3.03) | % |
The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of ResultsSeptember 30, 2022. In its current position, the table indicates that a 100 basis point increase in interest rates would have a positive impact from rising rates on net interest income over the next 12 months as well as in a 200 and 300 basis point increase. 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 Operations – "Analysesincreasing 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 Differential,” “Rate/Volume Analysis,”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 "Rate Ramp"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 are presented in the following table. The projections assume shifts upward and downward in the yield curve of 100, 200 and 300 basis points occurring immediately.
| | | | | | | | | | | |
Changes in Market Interest Rates | September 30, 2022 | | September 30, 2021 |
+300 basis points | 5 | % | | 62 | % |
+200 basis points | 6 | % | | 47 | % |
+100 basis points | 4 | % | | 28 | % |
No Change | | | |
-100 basis points | (9) | % | | (41) | % |
-200 basis points | (25) | % | | (103) | % |
This economic value of equity profile at September 30, 2022 suggests that we would experience a positive effect from an increase in rates, and that the impact would remain stable as rates continue to rise. Conversely, we would experience a negative effect from a decrease in rates. While an instantaneous shift in interest rates is used in this Quarterly Reportanalysis to provide an estimate of exposure, we believe that a gradual shift in interest rates would have a much more modest impact. Since economic value of equity measures the discounted present value of cash flows over the estimated lives of instruments, the change in economic value of equity does not directly correlate to the degree that earnings would be impacted over a shorter time horizon.
The results of our net interest income and economic value of equity simulation analysis are purely hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from that projected, our net interest income might vary significantly. Non-parallel yield curve shifts or changes in interest rate spreads would also cause our net interest income to be different from that projected. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term interest-bearing liabilities reprice faster than expected or faster than our interest-earning assets. Actual results could differ from those projected if we grow interest-earning assets and interest-bearing liabilities faster or slower than estimated, or otherwise change its mix of products. Actual results could also differ from those projected if we experience substantially different repayment speeds in our loan portfolio than those assumed in the simulation model. Furthermore, the results do not take into account the impact of changes in loan prepayment rates on Form 10-Q.loan discount accretion. If prepayment rates were to increase on our loans, we would recognize any remaining loan discounts into interest income. This would result in a current period offset to declining net interest income caused by higher rate loans prepaying. Finally, these simulation results do not contemplate all the actions that we may undertake in response to changes in interest rates, such as changes to our loan, investment, deposit, funding or other strategies.
Finally, these simulation results do not contemplate all the actions that we may undertake in response to changes in interest rates, such as changes to our loan, investment, deposit, funding or other strategies.
Management has and continues to employ strategies to mitigate risk in the Net Interest Income and Economic Value simulations. Strategies include actively lowering deposit and funding rates, adding and maintaining interest rate floors on assets and lengthening liabilities in the low rate environment.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Corporation’s CEO and CFO have concluded that the Corporation’s disclosure controls and procedures were effective as of JuneSeptember 30, 2022 to ensure that the information required to be disclosed by the Corporation in the reports that the Corporation files or submits under the Exchange Act is recorded, processed, summarized, and reported completely and accurately within the time periods specified in SEC rules and forms.
Changes in Internal Control Over Financial Reporting
There was no change in the Corporation’s internal control over financial reporting identified during the quarter ended JuneSeptember 30, 2022 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
PART II–OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 1A. Risk Factors.
There have been no material changes in the risk factors faced by the Corporation from those disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table presents the shares repurchased by the Corporation during the second quarter of 2022.ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Issuer Purchases of Equity Securities |
| | | | | | | Total Number of | | Maximum Number |
| | | | | | | Shares Purchased | | of Shares that May |
| | | | | | | as Part of Publicly | | Yet Be Purchased |
| | Total Number of | | Average Price Paid | | Announced Plans or | | Under the Plan or |
Period | | Shares Purchased | | Per Share | | Programs (1) | | Programs |
April 1, 2022 to April 30, 2022 | | 19,042 | | | $ | 31.71 | | | 19,042 | | 487,463 |
May 1, 2022 to May 31, 2022 | | 25,664 | | | | 31.48 | | | 25,664 | | 487,463 |
June 1, 2022 to June 30, 2022 | | 52,679 | | | | 30.33 | | | 52,679 | | 487,463 |
Total | | 97,385 | | | $ | 31.14 | | | 97,385 | | 487,463 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Issuer Purchases of Equity Securities |
Period | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Approximate Dollar Value that May Yet Be Purchased Under the Plan or Programs (1)($000's) |
| (Dollars in thousands, except shares and per share amounts) |
July 1 to July 31, 2022 | 16,370 | | $ | 28.74 | | | 16,370 | | |
August 1 to August 31, 2022 | 159,010 | | $ | 30.53 | | | 159,010 | | |
September 1 to September 30, 2022 | 22,469 | | $ | 29.90 | | | 22,469 | | |
Total | 197,849 | | $ | 29.76 | | | | | $5,610 |
(1) On August 30, 2021, the Corporation announced a stock repurchase plan pursuant to which the Corporation may repurchase up to $20 million of the company’s outstanding common stock, par value $1.00 per share. Stock will beis purchased under the plan from time to time in the open market or through privately negotiated transactions, or otherwise, at the discretion of management of the company in accordance with legal requirements.
(2) As of June 30, 2022, the maximum number of shares remaining authorized for repurchase was approximately 487,463, based on funds remaining under the plan of approximately $14.8 million and a share price of $30.30 as of June 30, 2022.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
| | |
The exhibits filed or incorporated by reference as part of this report are listed in the Exhibit Index, which appears at page 57. |
Item 6. Exhibits.
EXHIBIT INDEX
| | | | | | | | |
Exhibit Number
| | Description |
2.1 | | |
3.1 | | |
3.2 | |
|
4.2 | |
|
4.3 | |
|
31.1 | | |
31.2 | | |
32 | | |
101.INS | | XBRL Instance Document – The instance document does not appear in the interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
Exhibit 104 | | Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
| | |
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: | AugustNovember 9, 2022 | 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) |