Meridian Corp [MRBK] Filings

10-Q 1 mrbk-20230331.htm 10-Q mrbk-20230331

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)


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

For the quarterly period ended March 31, 2023


☐			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.

Large Accelerated Filer

☐

Accelerated Filer

☒

Non-accelerated Filer

☐

Smaller Reporting Company

☒

Emerging Growth Company

☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 5, 2023 there were 11,177,751 outstanding shares of the issuer’s common stock, par value $1.00 per share.

Table of Conte n t s

TABLE OF CONTENTS


PART I FINANCIAL INFORMATION

Item 1 Financial Statements (Unaudited)			3

Consolidated Balance Sheets – March 31, 2023 and December 31, 2022			3

Consolidated Statements of Income – Three Months Ended March 31, 2023 and 2022			4

Consolidated Statements of Comprehensive Income (Loss) – Three Months Ended March 31, 2023 and 2022			5

Consolidated Statements of Stockholders’ Equity – Three Months Ended March 31, 2023 and 2022			6

Consolidated Statements of Cash Flows – Three Months Ended March 31, 2023 and 2022			7

Notes to Consolidated Financial Statements (Unaudited)			8

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			33

Item 3 Quantitative and Qualitative Disclosures about Market Risk			44

Item 4 Controls and Procedures			45

PART II OTHER INFORMATION

Item 1 Legal Proceedings			46

Item 1A Risk Factors			46

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			47

Item 3 Defaults Upon Senior Securities			47

Item 4 Mine Safety Disclosures			47

Item 5 Other Information			47

Item 6 Exhibits			48

Signatures			49

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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

ACH			Automated clearing house
ACL			Allowance for credit losses
AFS			Available-for-sale
ALCO			Asset/Liability Committee
ALLL			Allowance for loan and lease losses
ALM			Asset / liability management
AOCI			Accumulated other comprehensive income
ASC			Accounting Standards Codification
ASU			Accounting Standards Update
BHC Act			Bank Holding Company Act of 1956
BOLI			Bank owned life insurance
BSA-AML			Bank Secrecy Act - Anti-Money Laundering
BTFP			Federal Reserve Bank Term Funding Program
CBCA			Change in Bank Control Act
CBLR			Community Bank Leverage Ratio
CDARS			Certificate of Deposit Account Registry Service
CECL			Current expected credit losses
CET1			Common equity tier 1
CFPB			Consumer Financial Protection Bureau
CMO			Collateralized mortgage obligation
COVID-19			Coronavirus Disease 2019
CRE			Commercial real estate
DIF			FDIC’s deposit insurance fund
ECOA			Equal Credit Opportunity Act
ESOP			Employee Stock Ownership Plan
FASB			Financial Accounting Standards Board

FDIC			Federal Deposit Insurance Corporation
FFIEC			Federal Financial Institutions Examination Council
FHA			Federal Housing Authority
FHFA			Federal Housing Finance Agency
FHLB			Federal Home Loan Bank of Pittsburgh
FHLMC			Federal Home Loan Mortgage Corporation or Freddie Mac
FICO			Financing Corporation
FNMA			Federal National Mortgage Association or Fannie Mae
FRB			Federal Reserve Bank of Philadelphia
FTE			Fully taxable equivalent
GAAP			U.S. generally accepted accounting principles
GLB Act			Gramm-Leach-Bliley Act
GNMA			Government National Mortgage Association or Ginnie Mae
GSE			Government-sponsored entities
HTM			Held-to-maturity
ICBA			Independent Community Bankers of America
JOBS Act			Jumpstart Our Business Startups Act of 2012
LBP			Look-back period
LEP			Loss emergence period

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LGD			Loss given default
LIBOR			London Inter-bank Offering Rate
MBS			Mortgage-backed securities
MSLP			Main Street Lending Programs
MSR			Mortgage servicing rights
OFAC			Office of Foreign Assets Control
OREO			Other real estate owned
PCAOB			Public Company Accounting Oversight Board
PD			Probability of default
PDBS			Pennsylvania Department of Banking and Securities
PPP			Paycheck Protection Program
ROU			Right-of-use
SBA			Small Business Administration
SEC			Securities and Exchange Commission
SERP			Supplemental Executive Retirement Plan
SNC			Shared national credit
TILA			Truth in Lending Act
TDR			Troubled debt restructuring
USDA			U.S. Department of Agriculture
VA			U.S. Department of Veteran’s Affairs

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


(dollars in thousands, except share data)	March 31, 2023		December 31, 2022
Assets:
Cash and due from banks	$	8,473	$	11,299
Interest-bearing deposits at other banks	100,030		27,092

Cash and cash equivalents	108,503		38,391
Securities available-for-sale, at fair value (amortized cost of $154,431 and $148,976, respectively)	142,933		135,346
Securities held-to-maturity, at amortized cost (fair value of $33,076 and $33,085, respectively)	36,525		37,479
Equity investments	2,110		2,086
Mortgage loans held for sale	35,701		22,243
Loans, net of fees and costs	1,818,189		1,743,682
Allowance for credit losses	(20,442)		(18,828)
Loans and other finance receivables, net of the allowance for credit losses	1,797,747		1,724,854
Restricted investment in bank stock	10,173		6,931
Bank premises and equipment, net	13,281		13,349
Bank owned life insurance	28,247		28,055
Accrued interest receivable	7,651		7,363
Other real estate owned	1,703		1,703
Deferred income taxes	4,017		3,936
Servicing assets	12,125		12,346
Goodwill	899		899
Intangible assets	3,124		3,175
Other assets	25,044		24,072
Total assets	$	2,229,783	$	2,062,228

Liabilities:
Deposits:
Non-interest bearing	$	262,636	$	301,727
Interest bearing	1,507,777		1,410,752
Total deposits	1,770,413		1,712,479
Borrowings	233,883		122,082

Subordinated debentures	40,319		40,346
Accrued interest payable	3,836		2,389
Other liabilities	28,283		31,652
Total liabilities	2,076,734		1,908,948

Stockholders’ equity:
Common stock, $1 par value per share. 25,000,000 shares authorized; 13,180,184 and 13,156,308 shares issued and 11,177,001 and 11,465,572 shares outstanding, respectively	13,180		13,156
Surplus	79,473		79,072
Treasury stock, 2,003,183 and 1,690,736 shares, respectively, at cost	(24,512)		(21,821)
Unearned common stock held by employee stock ownership plan	(1,403)		(1,403)
Retained earnings	96,180		95,815
Accumulated other comprehensive loss	(9,869)		(11,539)
Total stockholders’ equity	153,049		153,280
Total liabilities and stockholders’ equity	$	2,229,783	$	2,062,228

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three months ended March 31,
(dollars in thousands, except per share data)	2023		2022
Interest income:
Loans and other finance receivables, including fees	$	29,417	$	17,219
Securities - taxable	959		426
Securities - tax-exempt	354		306
Cash and cash equivalents	217		13
Total interest income	30,947		17,964
Interest expense:
Deposits	11,447		1,289
Borrowings	1,823		640
Total interest expense	13,270		1,929
Net interest income	17,677		16,035
Provision for credit losses	1,399		615
Net interest income after provision for credit losses	16,278		15,420
Non-interest income:
Mortgage banking income	3,272		7,096
Wealth management income	1,196		1,304
SBA loan income	713		2,520
Earnings on investment in life insurance	192		138
Net change in the fair value of derivative instruments	(69)		(166)
Net change in the fair value of loans held-for-sale	(1)		(1,124)
Net change in the fair value of loans held-for-investment	117		(778)
Net gain (loss) on hedging activity	—		2,827

Service charges	35		27
Other	1,183		1,258
Total non-interest income	6,638		13,102
Non-interest expense:
Salaries and employee benefits	11,061		15,298
Occupancy and equipment	1,244		1,252
Professional fees	823		848
Advertising and promotion	861		986
Data processing and software	1,432		1,189
Pennsylvania bank shares tax	245		199
Other	2,123		1,661
Total non-interest expense	17,789		21,433
Income before income taxes	5,127		7,089
Income tax expense	1,106		1,554
Net income	$	4,021	$	5,535
Basic earnings per common share	$	0.36	$	0.46
Diluted earnings per common share	$	0.34	$	0.44
Basic weighted average shares outstanding	11,272		12,046
Diluted weighted average shares outstanding	11,656		12,524

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	Three months ended March 31,
(dollars in thousands)	2023		2022
Net income:	$	4,021	$	5,535

Net change in unrealized gains (losses) on investment securities available for sale:
Change in fair value of investment securities available for sale, net of tax of $460, $(1,626), respectively	1,670		(5,369)
Reclassification adjustment for net losses realized in net income, net of tax effect of $0, and $(3), respectively	—		(9)
Reclassification adjustment for securities transferred from available-for-sale to held-to-maturity, net of tax effect of $0, and $308, respectively	—		(1,021)
Unrealized investment gains (losses), net of tax effect of $460, and $(1,937), respectively	1,670		(6,399)
Total other comprehensive income (loss)	1,670		(6,399)
Total comprehensive income (loss)	$	5,691	$	(864)

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


(dollars in thousands, except per share data)	Common Stock		Surplus		Treasury Stock		Unearned ESOP		Retained Earnings		AOCI		Total
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	—		—		—		—		4,021		—		4,021
Other comprehensive income	—		—		—		—		—		1,670		1,670
Dividends paid or accrued, $0.125 per share	—		—		—		—		(1,428)		—		(1,428)
Net purchase of treasury stock through publicly announced plans (184,598 shares)	—		—		(2,691)		—		—		—		(2,691)
Common stock issued through share-based awards and exercises	24		124		—		—		—		—		148
Stock based compensation expense	—		277		—		—		—		—		277
Balance at March 31, 2023	$	13,180	$	79,473	$	(24,512)	$	(1,403)	$	96,180	$	(9,869)	$	153,049


(dollars in thousands, except per share data)	Common Stock		Surplus		Treasury Stock		Unearned ESOP		Retained Earnings		AOCI		Total
Balance at January 1, 2022	$	13,070	$	77,128	$	(8,860)	$	(1,602)	$	84,916	$	708	$	165,360
Net income	—		—		—		—		5,535		—		5,535
Other comprehensive loss	—		—		—		—		—		(6,399)		(6,399)
Dividends paid or accrued, $0.60 per share	—		—		—		—		(7,347)		—		(7,347)

Common stock issued through share-based awards and exercises	21		254		—		—		—		—		275
Stock based compensation expense	—		260		—		—		—		—		260
Balance at March 31, 2022	$	13,091	$	77,642	$	(8,860)	$	(1,602)	$	83,104	$	(5,691)	$	157,684

(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.

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three months ended March 31,
(dollars in thousands)	2023		2022
Net income	$	4,021	$	5,535
Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Net amortization of investment premiums and discounts and change in fair value of equity securities	373		(27)
Depreciation and amortization (accretion), net	(2)		50
Provision for credit losses	1,399		615
Amortization of issuance costs on subordinated debt	27		30
Stock based compensation	277		260
Net change in fair value of derivative instruments	4		166
Net change in fair value of loans held for sale	1		1,124
Net change in fair value of loans held for investment	(117)		778
Amortization and net impairment of servicing rights	435		494
SBA loan income	(713)		(2,520)
Proceeds from sale of loans	136,837		319,610
Loans originated for sale	(147,238)		(313,485)
Mortgage banking income	(3,272)		(7,096)
(Increase) decrease in accrued interest receivable	(288)		161
Decrease (increase) in other assets	(1,542)		(9,962)
Earnings from investment in life insurance	(192)		(138)
(Increase) decrease in deferred income tax	(54)		159
Increase in accrued interest payable	1,447		544
(Decrease) increase in other liabilities	(2,803)		10,156
Net cash (used in) provided by operating activities	(11,400)		6,454

Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities, repayments and calls	2,222		3,843

Purchases	(10,702)		(9,885)
Activity in held-to-maturity securities:
Maturities, repayments and calls	865		390
Purchases	—		(2,500)
(Decrease) increase in restricted stock	(3,242)		787
Net increase in loans	(73,057)		(59,762)
Purchases of premises and equipment	(284)		(77)

Net cash used in investing activities	(84,198)		(67,204)

Cash flows from financing activities:
Net increase in deposits	57,934		118,438

Increase (decrease) in short-term borrowings	108,368		(5,208)
Increase in long-term debt	3,433		—

Repayment of subordinated debt	(54)		—

Net purchase of treasury stock	(2,691)		—
Dividends paid	(1,428)		(7,347)
Share based awards and exercises	148		275
Net cash provided by financing activities	165,710		106,158

Net change in cash and cash equivalents	70,112		45,408
Cash and cash equivalents at beginning of period	38,391		23,480
Cash and cash equivalents at end of period	$	108,503	$	68,888

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	11,823	$	1,386



Transfers from loans held for sale to loans held for investment	—		1,653


Transfer of securities from AFS to HTM	—		23,522

See accompanying notes to the unaudited consolidated financial statements.

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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 months ended March 31, 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, payable March 20, 2023, to shareholders of record as of March 14, 2023. Under the terms of the stock split, the Corporation’s shareholders will receive a dividend of one share for every share held on the record date. The dividend will be 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, we 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. We now establish our ACL in accordance with Topic 326. The ACL includes quantitative and qualitative factors that comprise management's current estimate of expected credit losses, including our 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.

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Management uses a third-party economic forecast to modify the calculated historical loss rates of the portfolio segments. Our 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. Our current look-back period is 32 quarters which allows us 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 we will not collect all principal and interest due according to their contractual terms, 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 our model can add to or subtract from quantitative reserves.

Our 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 are defined as loans contractually past due 30 days or more as to principal or interest payments but which remain in accrual status because they 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 we assess 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.

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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 March 31, 2023 and December 31, 2022, investments in equity securities consisted of an investment in mutual funds with a fair value of $2.1 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 quarters ended March 31, 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. The allowance for credit losses for off-balance sheet exposures was $1.4 million and $173 thousand as of March 31, 2023 and December 31, 2022, respectively.

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,

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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.

The impact of the change from the incurred loss model to the current expected credit loss model is detailed below.


	January 1, 2023
(dollars in thousands)	Pre-adoption		Adoption Impact		As Reported
Assets:
ACL on loans and leases:
Commercial mortgage	$	4,095	$	(526)	$	3,569
Home equity lines and loans	188		439		627
Residential mortgage	948		17		965
Construction	3,075		(1,763)		1,312
Commercial and industrial	4,012		(1,023)		2,989
Small business loans	4,909		1,110		6,019
Consumer	3		(3)		—
Leases, net	1,598		3,345		4,943
Total ACL on loans and leases	$	18,828	$	1,596	$	20,424

Liabilities:
Reserve for unfunded commitments	$	173	$	1,256	$	1,429

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

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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.

Pronouncements Not Yet Effective as of March 31, 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.

(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 March 31,
(dollars in thousands, except per share data)	2023		2022
Numerator for earnings per share:
Net income available to common stockholders	$	4,021	$	5,535

Denominators for earnings per share:
Weighted average shares outstanding	11,456		12,256
Average unearned ESOP shares	(184)		(210)
Basic weighted averages shares outstanding	11,272		12,046
Dilutive effects of assumed exercises of stock options	230		346
Dilutive effects of SERP shares	154		132
Diluted weighted averages shares outstanding	11,656		12,524

Basic earnings per share	$	0.36	$	0.46
Diluted earnings per share	$	0.34	$	0.44
Antidilutive shares excluded from computation of average dilutive earnings per share	463		42

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(3) Securities

The following tables presents the amortized cost, allowance for credit losses, and fair value of securities at the dates indicated:


	March 31, 2023
(dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Allowance for Credit Losses		Fair value		# of Securities in unrealized loss position
Securities available-for-sale:
U.S. asset backed securities	$	17,676	$	166	$	(250)	$	—	$	17,592	14
U.S. government agency MBS	12,192		12		(467)		—		11,737		10
U.S. government agency CMO	27,059		66		(2,003)		—		25,122		30
State and municipal securities	44,514		11		(4,732)		—		39,793		32
U.S. Treasuries	32,981		—		(2,917)		—		30,064		25
Non-U.S. government agency CMO	11,808		7		(706)		—		11,109		12
Corporate bonds	8,201		—		(685)		—		7,516		12
Total securities available-for-sale	$	154,431	$	262	$	(11,760)	$	—	$	142,933	135

Securities held-to-maturity:
State and municipal securities	$	36,525	$	11	$	(3,460)	$	—	$	33,076	22
Total securities held-to-maturity	$	36,525	$	11	$	(3,460)	$	—	$	33,076	22


	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 MBS	12,272		5		(538)		11,739		12
U.S. government agency CMO	25,520		40		(2,242)		23,318		29
State and municipal securities	44,700		—		(5,862)