10-Q 1 mrbk-20230930.htm 10-Q mrbk-20230930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 000-55983
MeridianCorporation.jpg
(Exact name of registrant as specified in its charter)
Pennsylvania83-1561918
(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 classTrading SymbolName of exchange on which registered
Common Stock, $1 par valueMRBKThe NASDAQ Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerAccelerated Filer
Non-accelerated FilerSmaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 3, 2023 there were 11,177,751 outstanding shares of the issuer’s common stock, par value $1.00 per share.


TABLE OF CONTENTS
Consolidated Balance Sheets – September 30, 2023 and December 31, 2022
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2023 and 2022



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.
AcronymDescription
ACHAutomated clearing house
ACLAllowance for credit losses
AFSAvailable-for-sale
ALCOAsset/Liability Committee
ALLLAllowance for loan and lease losses
ALMAsset / liability management
AOCIAccumulated other comprehensive income
ASCAccounting Standards Codification
ASUAccounting Standards Update
BHC ActBank Holding Company Act of 1956
BOLIBank owned life insurance
BSA-AMLBank Secrecy Act - Anti-Money Laundering
BTFPFederal Reserve Bank Term Funding Program
CBCAChange in Bank Control Act
CBLRCommunity Bank Leverage Ratio
CDARSCertificate of Deposit Account Registry Service
CECLCurrent expected credit losses
CET1Common equity tier 1
CFPBConsumer Financial Protection Bureau
CMOCollateralized mortgage obligation
COVID-19Coronavirus Disease 2019
CRECommercial real estate
DIFFDIC’s deposit insurance fund
ECOAEqual Credit Opportunity Act
ESOPEmployee Stock Ownership Plan
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
FFIECFederal Financial Institutions Examination Council
FHAFederal Housing Authority
FHFAFederal Housing Finance Agency
FHLBFederal Home Loan Bank of Pittsburgh
FHLMCFederal Home Loan Mortgage Corporation or Freddie Mac
FICOFinancing Corporation
FNMAFederal National Mortgage Association or Fannie Mae
FRBFederal Reserve Bank of Philadelphia
FTEFully taxable equivalent
GAAPU.S. generally accepted accounting principles
GLB ActGramm-Leach-Bliley Act
GNMAGovernment National Mortgage Association or Ginnie Mae
GSEGovernment-sponsored entities
HTMHeld-to-maturity
ICBAIndependent Community Bankers of America
JOBS ActJumpstart Our Business Startups Act of 2012
LBPLook-back period
LEPLoss emergence period


LGDLoss given default
LIBORLondon Inter-bank Offering Rate
LIHTCLow-income-housing tax credit
MBSMortgage-backed securities
MSLPMain Street Lending Programs
MSRMortgage servicing rights
OFACOffice of Foreign Assets Control
OREOOther real estate owned
PCAOBPublic Company Accounting Oversight Board
PDProbability of default
PDBSPennsylvania Department of Banking and Securities
PPPPaycheck Protection Program
ROURight-of-use
SBASmall Business Administration
SECSecurities and Exchange Commission
SERPSupplemental Executive Retirement Plan
SNCShared national credit
SOFRSecure Overnight Financing Rate
TILATruth in Lending Act
TDRTroubled debt restructuring
USDAU.S. Department of Agriculture
VAU.S. Department of Veteran’s Affairs


MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except share data)September 30,
2023
December 31,
2022
Assets:
Cash and due from banks$13,737 $11,299 
Interest-bearing deposits at other banks46,022 27,092 
Cash and cash equivalents59,759 38,391 
Securities available-for-sale, at fair value (amortized cost of $138,014 and $148,976, respectively)
122,218 135,346 
Securities held-to-maturity, at amortized cost (fair value of $30,665 and $33,085, respectively)
36,232 37,479 
Equity investments2,019 2,086 
Mortgage loans held for sale23,144 22,243 
Loans, net of fees and costs1,885,629 1,743,682 
Allowance for credit losses(19,683)(18,828)
Loans and other finance receivables, net of the allowance for credit losses1,865,946 1,724,854 
Restricted investment in bank stock8,309 6,931 
Bank premises and equipment, net13,310 13,349 
Bank owned life insurance28,641 28,055 
Accrued interest receivable8,984 7,363 
Other real estate owned1,703 1,703 
Deferred income taxes4,993 3,936 
Servicing assets11,835 12,346 
Goodwill899 899 
Intangible assets3,022 3,175 
Other assets39,957 24,072 
Total assets$2,230,971 $2,062,228 
Liabilities:
Deposits:
Non-interest bearing$244,668 $301,727 
Interest bearing1,563,977 1,410,752 
Total deposits1,808,645 1,712,479 
Borrowings177,959 122,082 
Subordinated debentures50,079 40,346 
Accrued interest payable7,814 2,389 
Other liabilities31,360 31,652 
Total liabilities2,075,857 1,908,948 
Stockholders’ equity:
Common stock, $1 par value per share. 25,000,000 shares authorized; 13,180,934 and 13,156,308 shares issued and 11,177,751 and 11,465,572 shares outstanding, respectively
13,181 13,156 
Surplus79,731 79,072 
Treasury stock, 2,003,183 and 1,690,736 shares, respectively, at cost
(26,079)(21,821)
Unearned common stock held by employee stock ownership plan(1,403)(1,403)
Retained earnings102,043 95,815 
Accumulated other comprehensive loss(12,359)(11,539)
Total stockholders’ equity155,114 153,280 
Total liabilities and stockholders’ equity$2,230,971 $2,062,228 
See accompanying notes to the unaudited consolidated financial statements.
3

MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended
September 30,
Nine months ended
September 30,
(dollars in thousands, except per share data)2023202220232022
Interest income:
Loans and other finance receivables, including fees$33,980 $21,848 $95,612 $58,187 
Securities - taxable901 648 2,853 1,599 
Securities - tax-exempt333 369 1,038 1,015 
Cash and cash equivalents245 93 741 157 
Total interest income35,459 22,958 100,244 60,958 
Interest expense:
Deposits15,543 4,075 41,013 7,182 
Borrowings2,692 857 7,230 2,166 
       Total interest expense18,235 4,932 48,243 9,348 
Net interest income17,224 18,026 52,001 51,610 
Provision for credit losses82 526 2,186 1,743 
Net interest income after provision for credit losses17,142 17,500 49,815 49,867 
Non-interest income:
Mortgage banking income4,819 7,329 13,143 21,367 
Wealth management income1,258 1,114 3,689 3,672 
SBA loan income982 989 3,463 3,946 
Earnings on investment in life insurance201 138 585 413 
Net change in the fair value of derivative instruments103 127 217 (713)
Net change in the fair value of loans held-for-sale111 (237)(88)(1,094)
Net change in the fair value of loans held-for-investment(570)(886)(673)(2,499)
Net gain on hedging activity82 399 81 4,941 
Net loss on sale of investment securities available-for-sale(3) (58) 
Other1,103 1,251 3,489 3,695 
Total non-interest income8,086 10,224 23,848 33,728 
Non-interest expense:
Salaries and employee benefits12,420 13,360 35,633 41,585 
Occupancy and equipment1,226 1,191 3,610 3,619 
Professional fees1,104 899 2,930 2,659 
Advertising and promotion848 1,165 2,799 3,340 
Data processing and software1,652 1,442 4,764 3,939 
Other2,768 2,204 7,686 — 6,258 
Total non-interest expense20,018 20,261 57,422 61,400 
        Income before income taxes5,210 7,463 16,241 22,195 
Income tax expense1,205 1,665 3,568 4,927 
        Net income $4,005 $5,798 $12,673 $17,268 
Basic earnings per common share
$0.36 $0.49 $1.14 $1.45 
Diluted earnings per common share
$0.35 $0.48 $1.11 $1.40 
Basic weighted average shares outstanding
11,058 11,736 11,129 11,928 
Diluted weighted average shares outstanding
11,363 12,118 11,449 12,344 
See accompanying notes to the unaudited consolidated financial statements.
4

MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three months ended
September 30,
Nine months ended
September 30,
(dollars in thousands)2023202220232022
Net income:$4,005 $5,798 $12,673 $17,268 
Net change in unrealized gains (losses) on investment securities available for sale:
Change in fair value of investment securities, net of tax of $(575), $(1,129), $(489), and $(3,694), respectively
(2,059)(3,910)(1,757)(12,760)
Reclassification adjustment for net losses (gains) realized in net income, net of tax effect of $1, $0, $13, and $(1), respectively
2  45 (9)
Reclassification adjustment for investment securities transferred to held-to-maturity, net of tax effect of $7, $8, $19, and $(293), respectively
22 37 67 (962)
Unrealized investment losses, net of tax effect of $(566), $(1,121), $(457), and $(3,989), respectively
$(2,035)$(3,873)$(1,645)$(13,731)
Net change in unrealized gains (losses) on interest rate swaps used in cash flow hedges, net of tax effect of $(140), $0, $(233), and $0, respectively
497  825  
Total other comprehensive loss$(1,538)$(3,873)$(820)$(13,731)
Total comprehensive income $2,467 $1,925 $11,853 $3,537 
See accompanying notes to the unaudited consolidated financial statements.
5

MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(dollars in thousands, except per share data)
Common
Stock
SurplusTreasury
Stock
Unearned
ESOP
Retained
Earnings
AOCITotal
Three Months Ended September 30, 2023
Balance at July 1, 2023$13,181 $79,650 $(26,079)$(1,403)$99,434 $(10,821)$153,962 
Net income— — — — 4,005 — 4,005 
Other comprehensive loss— — — — — (1,538)(1,538)
Dividends declared ($0.125 per share)
— — — — (1,396)— (1,396)
Stock based compensation expense— 81 — — — — 81 
Balance at September 30, 2023$13,181 $79,731 $(26,079)$(1,403)$102,043 $(12,359)$155,114 
(dollars in thousands, except per share data)
Common
Stock
SurplusTreasury
Stock
Unearned
ESOP
Retained
Earnings
AOCITotal
Nine Months Ended September 30, 2023
Balance at January 1, 2023$13,156 $79,072 $(21,821)$(1,403)$95,815 $(11,539)$153,280 
Adjustment to initially apply ASU No. 2016-13 for CECL (1), net of tax
(2,228)(2,228)
Net income— — — — 12,673 — 12,673 
Other comprehensive loss— — — — — (820)(820)
Dividends declared ($0.375 per share)
— — — — (4,217)— (4,217)
Net purchase of treasury stock through publicly announced plans (127,849 shares)
— — (4,258)— — — (4,258)
Common stock issued through share-based awards and exercises25 144 — — — — 169 
Stock based compensation expense— 515 — — — — 515 
Balance at September 30, 2023$13,181 $79,731 $(26,079)$(1,403)$102,043 $(12,359)$155,114 
(dollars in thousands, except per share data)
Common
Stock
SurplusTreasury
Stock
Unearned
ESOP
Retained
Earnings
AOCITotal
Three Months Ended September 30, 2022
Balance at July 1, 2022$13,096 $77,824 $(11,896)$(1,602)$87,815 $(9,150)$156,087 
Net income— — — — 5,798 — 5,798 
Other comprehensive loss— — — — — (3,873)(3,873)
Dividends declared ($0.10 per share)
— — — — (1,208)— (1,208)
Net purchase of treasury stock through publicly announced plans (394,838 shares)
— — (6,137)— — — (6,137)
Common stock issued through share-based awards and exercises5 112 — — — — 117 
Stock based compensation expense— 377 — — — — 377 
Balance at September 30, 2022$13,101 $78,313 $(18,033)$(1,602)$92,405 $(13,023)$151,161 
(dollars in thousands, except per share data)
Common
Stock
SurplusTreasury
Stock
Unearned
ESOP
Retained
Earnings
AOCITotal
Nine Months Ended September 30, 2022
Balance at January 1, 2022$13,070 $77,128 $(8,860)$(1,602)$84,916 $708 $165,360 
Net income— — — — 17,268 — 17,268 
Other comprehensive loss— — — — — (13,731)(13,731)
Dividends declared ($0.80 per share)
— — — — (9,779)— (9,779)
Net purchase of treasury stock through publicly announced plans (589,608 shares)
— — (9,173)— — — (9,173)
Common stock issued through share-based awards and exercises31 454 — — — — 485 
Stock based compensation expense— 731 — — — — 731 
Balance at September 30, 2022$13,101 $78,313 $(18,033)$(1,602)$92,405 $(13,023)$151,161 
(1) See Note 1, "Summary of Significant Accounting Policies - Pronouncements Adopted in 2023" for additional information.
See accompanying notes to the unaudited consolidated financial statements.
6

MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
September 30,
(dollars in thousands)20232022
Net income$12,673 $17,268 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Loss on sale of investment securities58  
Net amortization of investment premiums and discounts and change in fair value of equity securities1,225 668 
Depreciation and amortization (accretion), net289 (1,343)
Provision for credit losses2,186 1,743 
Amortization of issuance costs on subordinated debt56 89 
Stock based compensation515 731 
Net change in fair value of derivative instruments(217)713 
Net change in fair value of loans held for sale88 1,094 
Net change in fair value of loans held for investment673 2,499 
Amortization and net impairment of servicing rights1,618 1,753 
SBA loan income(3,463)(3,946)
Proceeds from sale of loans515,573 863,056 
Loans originated for sale(504,880)(794,541)
Mortgage banking income(13,143)(21,367)
Increase in accrued interest receivable(1,621)(999)
Increase in other assets(4,874)(1,675)
Earnings from investment in bank owned life insurance(585)(413)
(Increase) decrease in deferred income tax170 (219)
Increase in accrued interest payable5,425 1,123 
Decrease in other liabilities(778)(2,579)
          Net cash provided by operating activities$10,988 $63,655 
Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities, repayments and calls7,301 8,662 
Sales13,514  
Purchases(12,949)(22,176)
Activity in held-to-maturity securities:
Maturities, repayments and calls1,020 540 
Purchases (5,500)
Increase in restricted stock(1,378)(100)
Net increase in loans(149,462)(225,967)
Purchases of premises and equipment(1,080)(2,020)
          Net cash used in investing activities$(143,034)$(246,561)
Cash flows from financing activities:
Net increase in deposits96,166 227,140 
Increase (decrease) in short-term borrowings37,201 (17,886)
Increase in long-term debt18,676  
Repayment of subordinated debt(54) 
Proceeds from issuance of subordinated debt9,740  
Issuance costs on subordinated debt(9) 
Net purchase of treasury stock(4,258)(9,173)
Dividends paid(4,217)(9,779)
Share based awards and exercises169 485 
          Net cash provided by financing activities$153,414 $190,787 
Net change in cash and cash equivalents21,368 7,881 
Cash and cash equivalents at beginning of period38,391 23,480 
Cash and cash equivalents at end of period$59,759 $31,361 
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest$42,818 $8,225 
Income taxes1,839 5,365 
Transfers from loans held for sale to loans held for investment351 2,955 
Net loans sold, not settled12,820  
Transfer of securities from AFS to HTM 23,655 
See accompanying notes to the unaudited consolidated financial statements.
7

MERIDIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1)    Summary of Significant Accounting Policies

Basis of Presentation
The Corporation’s unaudited consolidated financial statements have been prepared in accordance with U.S. 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. GAAP 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 credit losses, lending related commitments and the related unfunded commitment reserve, the fair value of financial instruments, other-than-temporary impairments of investment securities, and the valuations of goodwill, intangible assets, and servicing assets.
These unaudited consolidated financial statements should be read in conjunction with the Corporation’s filings with the SEC (including our Annual Report on Form 10-K for the year ended December 31, 2022), 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 nine months ended September 30, 2023 are not necessarily indicative of the results for the year ending December 31, 2023 or for any other period.

Stock Split
On February 28, 2023, the Corporation approved and declared a two-for-one stock split in the form of a stock dividend, paid March 20, 2023, to shareholders of record as of March 14, 2023. Under the terms of the stock split, the Corporation’s shareholders received a dividend of one share for every share held on the record date. The dividend was paid in authorized but unissued shares of common stock of the Corporation. The par value of the Corporation's stock was not affected by the split and remained at $1.00 per share. All share and per share amounts reported in the consolidated financial statements have been adjusted to reflect the two-for-one stock split.

Loans
Loans held for investment are recorded at amortized cost, net of ACL. Amortized cost is the amount at which a financial asset is originated or acquired, adjusted for the amortization of premium and discount, net deferred fees or costs, collection of cash, and write-offs. Interest income on loans is recognized using the level yield method. Loan origination fees, commitment fees and direct loan origination costs are deferred and recognized over the life of the related loans using a level yield method over the period to maturity.

Allowance for Credit Losses - Loans and Leases
On January 1, 2023, the Corporation adopted ASU 2016-13, Financial Instruments-Credit Losses ("Topic 326"), which replaced the incurred loss impairment model with an expected loss methodology that is referred to as the CECL methodology. The Corporation now establishes an ACL in accordance with Topic 326. The ACL includes quantitative and qualitative factors that comprise management's current estimate of expected credit losses, including portfolio mix and segmentation, modeling methodology, historical loss experience, relevant available information from internal and external sources relating to reasonable and supportable forecasts about future economic conditions, prepayment speeds, and qualitative adjustment factors.

The Corporation's portfolio segments, established based on similar risk characteristics and loss behaviors, are:

• Commercial mortgage, commercial and industrial, construction, SBA loans, and commercial small business leases (commercial loans), and
• Residential, equity secured lines and loans, and installment loans (retail loans).

Expected credit losses are estimated over the contractual term, adjusted for expected prepayments and recoveries. The contractual term excludes any extensions, renewals and modifications unless the Corporation has reasonable expectations at the reporting date that it will result in a modification, or they are not unconditionally cancellable. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The allowance includes two primary components: (i) an allowance established on loans which share similar risk characteristics collectively evaluated for credit losses (collective basis) and (ii) an allowance established on loans which do not share similar risk characteristics with any loan segment and are individually evaluated for credit losses (individual basis).

Loans that share similar risk characteristics are collectively reviewed for credit loss and are evaluated based on historical loss experience, adjusted for current economic conditions and future economic forecasts. Estimated losses are determined differently for commercial and consumer loans, and each portfolio segment is further segmented by internally assessed risk ratings.

8

Management uses a third-party economic forecast to modify the calculated historical loss rates of the portfolio segments. The Corporation's economic forecast extends out 4 quarters (the forecast period) and reverts to the historical loss rates on a straight-line basis over 1 quarter (the reversion period) as we believe this to be reasonable and supportable in the current environment. The economic forecast and reversion periods will be evaluated periodically by management and updated as appropriate.

The historical loss rates for commercial loans are estimated by determining the PD and expected LGD. The PD is calculated based on the historical rate of migration to an event of credit loss during the look-back period. The historical loss rates for retail loans is calculated based solely on average net loss rates over the same look-back period. The Corporation's current look-back period is 32 quarters which helps to ensure that historical loss rates are adequately considering losses over a full economic cycle.

Loans that do not share similar risk characteristics with any loan segments are evaluated on an individual basis. These loans, which may include borrowers experiencing financial difficulties, are not included in the collective basis evaluation. When it is probable that collection of all principal and interest due according to their contractual terms is not likely, which is assessed based on the credit characteristics of the loan and/or payment status, these loans are individually reviewed and measured for potential credit loss.

The amount of the potential credit loss is measured using one of three methods: (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the fair value of collateral, if the loan is collateral dependent; or (iii) the loan’s observable market price. If the measured fair value of the loan is less than the amortized cost basis of the loan, an allowance for credit loss is recorded.

For collateral dependent loans, the expected credit losses at the individual asset level is the difference between the collateral's fair value (less cost to sell) and the amortized cost.

Qualitative adjustment factors consider various internal and external conditions which are allocated among loan segments and take into consideration:

• Current underwriting policies, staff and portfolio concentrations,
• Risk rating accuracy, credit and administration,
• Internal risk emergence (including internal trends of delinquency, portfolio growth, and collateral value), and
• , Competitive environment, as it could impact loan structure and underwriting.

These factors are based on their relative standing compared to the period in which historical losses are used in quantitative reserve estimates and current directional trends, and reasonable and supportable forecasts. Qualitative factors in the model can add to or subtract from quantitative reserves.

Loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with individual problem loans. In addition, various regulatory agencies periodically review our loan ratings and allowance for credit losses and the Bank’s internal loan review department performs loan reviews.

Accrued interest receivable on loans is excluded from the estimate of credit losses and is included in Accrued interest receivable on the Consolidated Balance Sheets.

For additional detail regarding the allowance for credit losses and the provision for credit losses, see Note 5.

Past Due and Nonaccrual Loans
Past due loans and leases are defined as loans contractually past due 30 - 89 days as to principal or interest payments but which remain in accrual status, or loans delinquent 90 days or more but are considered well secured and in the process of collection.

Nonaccruing loans and leases are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the loan is not well secured and in the process of collection. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal and interest. Loans are returned to accrual status when it is determined that the borrower has the ability to make all principal and interest payments in accordance with the terms of the loan (i.e. a consistent repayment record, generally six consecutive payments, has been demonstrated).

Unless loans are well-secured and collection is imminent, for loans greater than 90 days past due their respective reserves are generally charged off once the loss has been confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off.

Securities
Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date.
Securities classified as available-for-sale are those securities that the Corporation intends to hold for an indefinite period of time but not necessarily to maturity. Securities available-for-sale are carried at fair value. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Corporation’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Unrealized gains and losses are reported as increases or decreases in other comprehensive income. Gains or losses on disposition are based on the net proceeds and cost of the securities sold, adjusted for the amortization of premiums and accretion of discounts, using the specific identification method.
9

Securities classified as held to maturity are those debt securities the Corporation has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for the amortization of premium and accretion of discount, computed on a level yield basis.
Investments in equity securities are recorded in accordance with ASC 321-10, Investments - Equity Securities. Equity securities are carried at fair value, with changes in fair value reported in net income. At September 30, 2023 and December 31, 2022, investments in equity securities consisted of an investment in mutual funds with a fair value of $2.0 million, and $2.1 million, respectively.

The Corporation’s accounting policy specifies that (a) if the Corporation does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired, unless there is a credit loss. When the Corporation does not intend to sell the security, and it is more likely than not, the Corporation will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. The Corporation did not recognize any other-than-temporary impairment charges during the three and nine months ended September 30, 2023 and 2022.

Allowance for Credit Losses - Held-to-Maturity Debt Securities
We follow Accounting Standards Codification (ASC) 326-20, Financial Instruments - Credit Loss - Measured at Amortized Cost, to measure expected credit losses on held-to-maturity debt securities on a collective basis by security investment grade. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

The Corporation classifies the held-to-maturity debt securities into the following major security types: state and municipal securities. These securities are highly rated with a history of no credit losses, and are assigned ratings based on the most recent data from ratings agencies depending on the availability of data for the security. Credit ratings of held-to-maturity debt securities, which are a significant input in calculating the expected credit loss, are reviewed on a quarterly basis.

Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses and is included in Accrued interest receivable on the Consolidated Balance Sheets.

Allowance for Credit Losses - Available-for-Sale Debt Securities
We follow ASC 326-30, Financial Instruments - Credit Loss - Available-for-Sale Debt Securities, which provides guidance related to the recognition of and expanded disclosure requirements for expected credit losses on available-for-sale debt securities. For available-for-sale debt securities in an unrealized loss position, the Corporation first evaluates whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is reduced to fair value and recognized as a reduction to Noninterest income in the Consolidated Statements of Income.

For debt securities available-for-sale which the Corporation does not intend to sell, or it is not likely the security would be required to be sold before recovery, we evaluate whether a decline in fair value has resulted from credit losses or other adverse factors, such as a change in the security's credit rating. In assessing whether a credit loss exists, the Corporation compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance is recorded, limited to the fair value of the security.

Management performs this analysis on a quarterly basis to review the conditions and risks associated with the individual securities. Credit losses on an impaired security shall continue to be measured using the present value of expected future cash flows. Any impairment not recorded through an allowance for credit loss is included in other comprehensive income (loss), net of the tax effect. We are required to use our judgment in determining impairment in certain circumstances. For additional detail regarding debt securities, see Note 3.

Unfunded Lending Commitments
For unfunded lending commitments, the Corporation estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. The estimate includes consideration of the probability of default and utilization rate at default to calculate expected credit losses on commitments expected to be funded over its estimated life of one year, based on historical losses, and qualitative adjustment factors.

The allowance for credit losses for off-balance sheet exposures is included in Other liabilities on the Consolidated Balance Sheets and the provision for credit losses for off-balance sheet exposure is included in the provision for credit losses on the Consolidated Statements of Income for the periods ended September 30, 2023, and in other non-interest expense for periods prior to the adoption of ASU-2016-13 on January 1, 2023. The allowance for credit losses for off-balance sheet exposures was $1.0 million and $173 thousand as of September 30, 2023 and December 31, 2022, respectively.


10



Pronouncements Adopted in 2023
FASB ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments”
The Corporation adopted ASU 2016-13, as amended, on January 1, 2023, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans, net of fees and costs, securities HTM, unfunded lending commitments (including loan commitments on loans held for investment, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842. In addition, ASC 326 made changes to the accounting for securities AFS which now requires credit losses to be presented as an allowance rather than as an other-than-temporary impairment on securities AFS management does not intend to sell or believes that it is more likely than not they will be required to sell.

We applied the modified retrospective method for all financial assets measured at amortized cost and securities AFS. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Corporation recorded a one-time decrease to retained earnings of $2.2 million on January 1, 2023 for the cumulative effect of adopting ASC 326, net of tax. The transition adjustment includes $1.2 million and $974 thousand post-tax impacts for loans, net of fees and costs and unfunded loan commitments, respectively, due to higher expected credit losses compared to the incurred loss methodology primarily driven by longer duration commercial and consumer real estate loans.
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. The Corporation adopted ASU 2019-04 at the same time ASU 2016-13 was adopted.

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. The Corporation adopted ASU 2022-02 at the same time ASU 2016-13 was adopted, as of January 1, 2023. The adoption of this ASU resulted in updated disclosures within our financial statements but otherwise did not have a material impact on the Corporation's financial statements. See Note 5.

Pronouncements Not Yet Effective as of September 30, 2023:
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 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 Corporation does not expect this to have a material impact on our consolidated financial statements.

FASB ASU 2023-02, "Investments Equity Method and Joint Ventures (Topic 323) Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method"
In March 2023, the FASB issued ASU 2023-02, Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method to allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits. If certain conditions are met,
11

a reporting entity may elect to account for its tax equity investments by using the proportional amortization method regardless of the program from which it receives income tax credits, instead of only LIHTC structures. This amendment also eliminates certain LIHTC specific guidance aligning the accounting with other equity investments in tax credit structures. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. We are evaluating the accounting and disclosure requirements of ASU 2023-02 and do not expect them to have a material effect on our consolidated financial statements.

(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
September 30,
Nine months ended
September 30,
(dollars in thousands, except per share data)2023202220232022
Numerator for earnings per share:
Net income available to common stockholders$4,005 $5,798 $12,673 $17,268 
Denominators for earnings per share:
Weighted average shares outstanding11,228 11,936 11,307 12,076 
Average unearned ESOP shares(170)(200)(178)(148)
Basic weighted averages shares outstanding11,058 11,736 11,129 11,928 
Dilutive effects of assumed exercises of stock options119 232 149 274 
Dilutive effects of SERP shares186 150 171 142 
Diluted weighted averages shares outstanding11,363 12,118 11,449 12,344 
Basic earnings per share$0.36 $0.49 $1.14 $1.45 
Diluted earnings per share$0.35 $0.48 $1.11 $1.40 
Antidilutive shares excluded from computation of average dilutive earnings per share490 474 490 472 

(3)    Securities
The following tables presents the amortized cost, allowance for credit losses, and fair value of securities at the dates indicated:
September 30, 2023
(dollars in thousands)Amortized costGross unrealized gainsGross unrealized lossesAllowance for Credit LossesFair value# of Securities in unrealized loss position
Securities available-for-sale:
U.S. asset backed securities$11,580 $98 $(202)$ $11,476 9 
U.S. government agency MBS11,744  (610) 11,134 13 
U.S. government agency CMO22,226  (2,854) 19,372 30 
State and municipal securities40,275  (6,890) 33,385 31 
U.S. Treasuries32,982  (3,453) 29,529 25 
Non-U.S. government agency CMO11,007 1 (788) 10,220 13 
Corporate bonds8,200  (1,098) 7,102 13 
Total securities available-for-sale$138,014 $99 $(15,895)$ $122,218 134 
Securities held to maturity:
State and municipal securities$36,232 $ $(5,567)$ $30,665 24 
Total securities held-to-maturity$36,232 $ $(5,567)$ $30,665 24 
12


December 31, 2022
(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$15,581 $14 $(314)$15,281 12 
U.S. government agency MBS12,272 5 (538)11,739 12 
U.S. government agency CMO25,520 40 (2,242)23,318 29 
State and municipal securities44,700  (5,862)38,838 34 
U.S. Treasuries32,980  (3,457)29,523 25 
Non-U.S. government agency CMO9,722  (633)9,089 11 
Corporate bonds8,201  (643)7,558 12 
Total securities available-for-sale$148,976 $59 $(13,689)$135,346 135 
Securities held-to-maturity:
State and municipal securities$37,479 $ $(4,394)$33,085 25 
Although the Corporation’s investment portfolio overall is in a net unrealized loss position at September 30, 2023, 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.
ACL on Securities AFS and HTM
We use credit ratings quarterly and the most recent financial information of securities' issuers annually to help evaluate the credit quality of our securities AFS and HTM portfolios on a quarterly basis. The securities portfolio consists primarily of U.S. government treasuries and U.S. government agency asset backed securities which have no probability of default. The remaining portfolio consists of highly rated municipal bonds, non-agency CMO, and corporate bonds that have a low probability of default.
For the three and nine months ended September 30, 2023, we had no significant ACL or provision expense and no charge-offs or recoveries on AFS or HTM securities.
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 the dates indicated:
September 30, 2023
Less than 12 Months12 Months or moreTotal
(dollars in thousands)Fair valueUnrealized lossesFair valueUnrealized lossesFair valueUnrealized losses
Securities available-for-sale:
U.S. asset backed securities$1,345 $ $6,489 $(202)$7,834 $(202)
U.S. government agency mortgage-backed securities3,092 (32)8,042 (578)11,134 (610)
U.S. government agency collateralized mortgage obligations2,728 (76)16,644