What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-03-29 compared with 2020-03-30 · 526 added, 501 removed, 1032 unchanged (50% of the section changed)

4 unchanged sentences

Consolidated Statements of Comprehensive Income

Consolidated Statements of Stockholders’

Consolidated Statements of Stockholders’ Equity

Consolidated Statements of Cash Flows

1 unchanged sentence

Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors of Meridian Corporation

Malvern, Pennsylvania

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Meridian Corporation (the "Company") as of December 31, 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ Crowe LLP

We have served as the Company’s auditor since 2020.

Washington, D.C.

March 29, 2021

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

1 unchanged sentence

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Meridian Corporation and subsidiaries (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, stockholders’

equity, and cash flows for the years then ended, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with U.S.

We have audited the accompanying consolidated balance sheet of Meridian Corporation and subsidiaries (the Company) as of December 31, 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with U.S.

generally accepted accounting principles.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audits provide a reasonable basis for our opinion.

We have served as the Company’s auditor since 2011.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

We have served as the Company’s auditor from 2011 to 2020.

Philadelphia, Pennsylvania

9 unchanged sentences

Equity investments

Mortgage loans held for sale (amortized cost of $33,363 and $37,337 as of December 31, 2019 and December 31, 2018)

Mortgage loans held for sale (amortized cost of $ 225,007 and $ 33,363 as of December 31, 2020 and December 31, 2019), at fair value

Loans, net of fees and costs (includes $ 12,182 and $ 10,546 of loans at fair value, amortized cost of $ 11,514 and $ 10,186 as of December 31, 2020 and December 31, 2019)

6 unchanged sentences

Other real estate owned

Deferred income taxes (Footnote 1)

Goodwill and intangible assets

Noninterest bearing

Deferred income taxes

Intangible assets

Non-interest bearing

Interest bearing

4 unchanged sentences

Accrued interest payable

Other liabilities (Footnote 1)

Other liabilities

Total liabilities

Stockholders’

Stockholders’ equity:

Common stock, $ 1 par value.

Authorized 10,000,000 shares;

issued and outstanding 6,407,685 and 6,406,795 as of December 31, 2019 and December 31, 2018

Treasury Stock

Retained earnings (Footnote 1)

Accumulated other comprehensive loss

Total stockholders’

Total liabilities and stockholders’

issued 6,455,566 and 6,407,685 as of December 31, 2020 and December 31, 2019

Treasury stock - 320,000 and 3,375 shares at December 31, 2020 and December 31, 2019, respectively

Unearned common stock held by employee stock ownership plan

Retained earnings

Accumulated other comprehensive income (loss)

Total stockholders’ equity

Total liabilities and stockholders’ equity

The accompanying notes are an integral part of these consolidated financial statements .

19 unchanged sentences

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

Net loss on hedging activity

Net gain on sale of investment securities available-for-sale

4 unchanged sentences

Occupancy and equipment

Loan expenses

Professional fees

2 unchanged sentences

Information technology

Communications

Pennsylvania bank shares tax

Total non-interest expenses

8 unchanged sentences

Other comprehensive income:

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

Net unrealized gains (losses) arising during the period, net of tax (benefit) expense of $154, and ($37), respectively

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

Net unrealized gains arising during the period, net of tax expense of $ 1,121 , and $ 154 , respectively

reclassification adjustment for net gains on sales realized in net income, net of tax expense of ($ 320 ), and ($ 38 ), respectively

Unrealized investment gains (losses), net of tax expense (benefit) of $116, and ($37), respectively

Total other comprehensive income (loss)

Unrealized investment gains, net of tax expense of $ 801 , and $ 116 , respectively

Total other comprehensive income

Total comprehensive income

5 unchanged sentences

Income (Loss)

Balance, January 1, 2018 (Footnote 1)

Balance, January 1, 2019

Comprehensive income:

2 unchanged sentences

Share-based awards and exercises

Net purchase of treasury stock through publicly announced plans

Compensation expense related to stock option grants

3 unchanged sentences

Total comprehensive income

Share-based awards and exercises

Dividends paid or accrued, $ 0.250 per share

Shares purchased for ESOP plan ( 133,601 )

Net purchase of treasury stock through publicly announced plans ( 316,625 )

Compensation expense related to stock option grants

Common stock issued through share-based awards and exercises ( 47,881 )

ESOP shares committed to be released ( 13,328 )

Stock based compensation

Balance, December 31, 2020

3 unchanged sentences

(dollars in thousands)

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

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Gain on sale of investment securities

1 unchanged sentence

Loss on disposal of premises and equipment

Net amortization of investment premiums and discounts

Provision for loan losses

Compensation expense for stock options

Amortization of issuance costs on subordinated debt

Share-based compensation

Net change in fair value of loans held for sale

Net change in fair value of derivative instruments

Net change in fair value of contingent assets

Gain on sale of OREO

Amortization and net impairment of servicing rights

SBA loan income

1 unchanged sentence

Loans originated for sale

( 2,356,821 )

Mortgage banking income

Increase in accrued interest receivable

Increase in other assets

(Decrease) increase in other assets

Earnings from investment in life insurance

Deferred income tax (benefit) (Footnote 1)

Deferred income tax

Increase in accrued interest payable

Increase (decrease) in other liabilities (Footnote 1)

Net cash provided by operating activities

Increase in other liabilities

Net cash (used in) provided by operating activities

Cash flows from investing activities:

1 unchanged sentence

Maturities, repayments and calls

Activity in held-to-maturity securities:

Maturities, repayments and calls

Proceeds from sale of OREO

3 unchanged sentences

Purchases of premises and equipment

Proceeds from settlement of loans

Net cash used in investing activities

1 unchanged sentence

Net increase in deposits

Increase (decrease) in short term borrowings

Repayment of long term debt (FHLB advances)

Repayment of long term debt (Acquisition note)

(Decrease) increase in short-term borrowings

Decrease in short-term borrowings with original maturity > 90 days

Repayment of acquisition note payable

Repayment of long-term debt (subordinated debt)

Proceeds from issuance of long term debt (Subordinated debt)

Debt issuance costs on Subordinated debt

Proceeds from long-term debt, net

Issuance costs on subordinated debt

Net purchase of treasury stock through publicly announced plans

Dividends paid

Purchase of common shares for ESOP

Share based awards and exercises

13 unchanged sentences

(a) Nature of Operations

Meridian Corporation (the “Corporation”) was incorporated on June 8, 2009, by and at the direction of the board of directors of Meridian Bank (the “Bank”) for the sole purpose of acquiring the Bank and serving as the Bank’s parent bank holding company.

On August 24, 2018, the Corporation acquired the Bank in a merger and reorganization effected under Pennsylvania law and in accordance with the terms of a Plan of Merger and Reorganization dated April 26, 2018 (the “Agreement”).

Pursuant to the Agreement, on August 24, 2018 at 5:00 p.m.

all of the outstanding shares of the Bank’s $1.00 par value common stock formerly held by its shareholders was converted into and exchanged for one newly issued share of the Corporation’s par value common stock, and the Bank became a subsidiary of the Corporation.

Because the Bank and the Corporation were entities under common control, this exchange of shares between entities under common control resulted in the retrospective combination of the Bank and the Corporation for all periods presented as if the combination had been in effect since inception of common control.

As the Corporation had no assets, liabilities, revenues, expenses or operations prior to August 24, 2018, the historical financial statements of the Bank are the historical financial statements of the combined entity.

Meridian Corporation (“Meridian” or the “Corporation”) is a bank holding company engaged in banking activities through its wholly-owned subsidiary, Meridian Bank (the “Bank”), a full-service, state-chartered commercial bank with offices in the Delaware Valley tri-state market, which includes Pennsylvania, New Jersey and Delaware, and Maryland.

We have a financial services business model with significant noninterest income streams from mortgage lending, small business (“SBA”) lending and wealth management services.

We provide services to small and middle market businesses, professionals and retail customers throughout our market area.

We have a modern, progressive, consultative approach to creating innovative solutions for our customers.

We are technology driven, with a culture that incorporates significant use of customer preferred alternative deliver y channel s, such as mobile banking, remote deposit capture and bank-to-bank ACH.

Our ‘Meridian everywhere’ philosophy of community presence, along with our strategic business footprint, allows us to provide the high degree of service, convenience and products our customers need to achieve their financial objectives.

We provide this service through three principal business line distribution channels, described further below.

The Corporation operates in a highly competitive market area that includes local, national and regional banks as competitors along with savings banks, credit unions, insurance companies, trust companies and registered investment advisors.

The Corporation and its subsidiaries are regulated by many regulatory agencies including the Securities and Exchange Commission (“SEC”), Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve and the Pennsylvania Department of Banking.

The Bank was incorporated on March 16, 2004 under the laws of the Commonwealth of Pennsylvania and is a Pennsylvania state-chartered bank.

The Bank commenced operations on July 8, 2004 and is a full-service bank providing personal and business lending and deposit services through 6 full-service banking offices in Pennsylvania and 9 mortgage loan production offices throughout the Delaware Valley.

The Bank commenced operations on July 8, 2004 and is a full-service bank providing personal and business lending and deposit services through 6 full-service banking offices in Pennsylvania, 9 mortgage loan production offices throughout the Delaware Valley, and 7 mortgage loan production offices in Maryland.

The Bank and Corporation are headquartered in Malvern, Pennsylvania, located in the western suburbs of Philadelphia and serves southeastern Pennsylvania and the rest of the Delaware Valley.

1 unchanged sentence

The accounting policies of the Corporation conform to U.S.

generally accepted accounting principles (“GAAP”).

The consolidated financial statements include accounts of the Corporation and its wholly owned subsidiary, the Bank, and the wholly owned subsidiaries of the Bank:

Meridian Land Settlement Services LLC;

APEX Realty LLC;

Meridian Wealth Partners LLC;

and Meridian Land Settlement Services LLC.

and Meridian Equipment Finance LLC.

All significant intercompany balances and transactions have been eliminated in consolidation.

Certain prior year amounts have been reclassified to conform to the current year’s presentation.

Reclassifications had no effect on prior year net income or total stockholders’ equity.

The preparation of financial statements in conformity with U.S.

1 unchanged sentence

Actual results could differ from those estimates.

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

Although our current estimates contemplate current conditions and how we expect them to change in the future, due to the impact that the COVID-19 pandemic has had on financial markets and the economy both locally and nationally, it is reasonably possible that this could materially affect these significant estimates and our results of operations and financial condition.

The World Health Organization has declared the outbreak to constitute a “Public Health Emergency of International Concern.”

The COVID-19 outbreak is disrupting supply chains and affecting production and sales across a range of industries.

The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers, employees

and vendors all of which are uncertain and cannot be predicted.

At this point, the extent to which COVID-19 may impact our financial condition or results of operations is uncertain.

Certain prior year amounts have been reclassified to conform to the current year’s presentation.

Although our current estimates contemplate current conditions and how we expect them to change in the future, due to the continuing impact that the COVID-19 pandemic has had on financial markets and the economy both locally and nationally, it is reasonably possible that this could continue to materially affect these significant estimates and our results of operations and financial condition.

During the quarter-ended March 31, 2019, the Corporation identified and corrected an immaterial error related to Maryland state licensing requirements for mortgage loan originations by our Mortgage division.

As the result of our mortgage operations not being fully compliant with Maryland licensing law, we agreed to reimburse consumers approximately $474 thousand in interest and certain fees on loans originated, in addition to paying a fine of $12 thousand to resolve the matter.

The Corporation has revised its comparative consolidated financial statements in the amount of $407 thousand, or $315 thousand net of tax, for periods prior to January 1, 2018 related to interest and fees on loans.

The error correction impacted beginning retained earnings, deferred tax assets and other liabilities as of January 1, 2018, as shown below.

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

(dollars in thousands, except per share data)

Deferred income taxes

Other liabilities

Retained earnings

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

(dollars in thousands, except per share data)

Deferred income taxes

Other liabilities

Retained earnings

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

December 31, 2018 - as reported

To be well capitalized under

For capital adequacy

prompt corrective action

(dollars in thousands):

Total capital (to risk-weighted assets)

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

Tier 1 capital (to risk-weighted assets)

Tier 1 capital (to average assets)

December 31, 2018 - as revised

To be well capitalized under

For capital adequacy

prompt corrective action

(dollars in thousands):

Total capital (to risk-weighted assets)

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

Tier 1 capital (to risk-weighted assets)

Tier 1 capital (to average assets)

* Does not include capital conservation buffer of 1.250% for 2019 and 1.875% for 2018

As the result of our mortgage operations not being fully compliant with Maryland licensing law, we agreed to reimburse

consumers approximately $ 474 thousand in interest and certain fees on loans originated, in addition to paying a fine of $ 12 thousand to resolve the matter.

Most of the Corporation’s activities are with customers located within the tri-state area of Pennsylvania, Delaware and New Jersey.

Most of the Corporation’s activities are with customers located in the Delaware Valley tri-state market and Maryland.

Note 4 discusses the types of securities that the Corporation invests in.

Note 5 discusses types of lending that the Corporation engages in.

Although the Corporation has a diversified loan portfolio, its debtors’

ability to honor their contracts is influenced by the region’s economy.

Although the Corporation has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy.

The Corporation does not have any significant concentrations to any one industry or customer, however there is significant concentration of commercial real estate-backed loans, amounting to 38 % and 37 % of total loans held for investment, as of December 31, 2020 and December 31, 2019, respectively.

2 unchanged sentences

Generally, federal funds are purchased or sold for one day periods.

Cash balances required to meet regulatory reserve requirements of the Federal Reserve Board amounted to $1.1 million at December 31, 2019.

The Federal Reserve Board removed cash minimum reserve requirements in March 2020.

Net cash flows are reported for customer loan and deposit transactions, interest bearing depsoits in other financial institutions, and the federal funds purchased and repurchased agreements.

(e) Securities

2 unchanged sentences

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.

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.

Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings.

Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.

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.

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.

1 unchanged sentence

Investments in equity securities are recorded in accordance with ASC 321-10, Investments - Equity Securities.

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.

Equity securities are carried at fair value, with changes in fair value reported in net income.

At December 31, 2020 and 2019, investments in equity securities consisted of an investment in mutual funds with a fair value of $ 1 million.

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.

3 unchanged sentences

Interest income is accrued on the unpaid principal balance.

Loan origination fees, net of

certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans.

Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans.

The Corporation generally amortizes these amounts over the contractual life of the loan.

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, are held for the foreseeable future or until maturity or payoff, but are carried at fair value.

The accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing.

1 unchanged sentence

When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and charged against current year income.

Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal.

Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

(g) Allowance for Loan and Lease Losses

The allowance for loan and lease losses (“ALLL”

or “Allowance”) is established through provisions for loan losses charged against income.

The allowance for loan and lease losses (“Allowance”) is a valuation for probable incurred credit losses established through provisions for loan losses charged against income.

Loans deemed to be uncollectible are charged against the Allowance, and subsequent recoveries, if any, are credited to the Allowance.

1 unchanged sentence

Charge-offs for retail consumer loans are generally made for any balance not adequately secured after 120 cumulative days past due.

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.

The Allowance is maintained at a level considered adequate to provide for probable incurred credit losses.

This evaluation is subjective as it requires material estimates that may be susceptible to significant revisions as more information becomes available.

In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s Allowance and may require the Corporation to recognize additions to the Allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management.

The Allowance consists of general and specific components.

1 unchanged sentence

The specific component relates to loans that are classified as doubtful, substandard, and are on non-accrual and have been deemed impaired.

Loan classifications are determined based on various assessments such as the borrower’s overall financial condition, payment history, repayment sources, guarantors and value of collateral.

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.

Loan classifications are determined based on various assessments such as the borrower’s overall financial condition, payment history, repayment sources, guarantors and value of collateral.

We apply historical loss rates to pools of loans with similar risk characteristics.

Loss rates are calculated by historical charge-offs that have occurred within each pool of loans over the loss emergence period (“LEP”).

The LEP is an estimate of the average amount of time from when an event happens that causes the borrower to be unable to pay on a loan until the loss is confirmed through a loan charge-off.

Another key assumption is the look-back period (“LBP”), which represents the historical data period utilized to calculate loss rates.

We used 10 years for our LBP for all portfolio segments which encompasses our loss experience during the Financial Crisis, and our more recent improved loss experience.

After consideration of the historic loss calculations, management applies qualitative adjustments so that the Allowance is reflective of the inherent losses that exist in the loan portfolio at the balance sheet date.

Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio, changes in lending management, results of internal loan reviews, asset quality trends, collateral values, concentrations of credit risk and other external factors.

The evaluation of the various components of the Allowance requires considerable judgment in order to estimate inherent loss exposures.

Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and payment shortfalls on a case‑by‑case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.

For commercial and construction loans, impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral adjusted for cost to sell, if the loan is collateral dependent.

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.

Large groups of smaller balance homogeneous residential mortgage and consumer loans are collectively evaluated for impairment.

Accordingly, the Corporation does not separately identify individual loans of this nature for impairment disclosures, unless such loans become impaired or are troubled and the subject of a restructuring agreement.

Loans whose terms are modified are classified as troubled debt restructurings if the Corporation grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty.

Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date.

No portion of the Allowance is restricted to any individual loan or groups of loans, and the entire Allowance is available to absorb any and all loan losses.

Loans whose terms are modified are classified as TDR’s if the Corporation grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty.

Concessions granted under a TDR generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date.

TDR’s are considered impaired loans

No portion of the Allowance is restricted to any individual loan or groups of loans, and the entire Allowance is available to absorb any and all loan and lease losses.

(h) Mortgage Banking Activities and Mortgage Loans Held for Sale

The Corporation’s mortgage banking division operates 9 offices in the tri-state area of Pennsylvania, Delaware and New Jersey.

The Corporation’s mortgage banking division operates 9 offices in the tri-state area of Pennsylvania, Delaware and New Jersey and another 7 offices in Maryland.

The mortgage banking division originates conventional mortgages, FHA, VA, USDA, and other state insured mortgages.

The loans are generally sold to various investors in the secondary market.

Mortgage loans originated by the Corporation and intended for sale in the secondary market to permanent investors are carried at fair value and are classified as mortgage loans held for sale on the balance sheet.

Gains and losses on loan sales are recorded in mortgage banking income.

Mortgage loans originated by the Corporation and intended for sale in the secondary market to permanent investors are classified as mortgage loans held for sale on the balance sheet as the Corporation has elected to measure loans held for sale at fair value.

Fair value is based on outstanding investor commitments or, in the absence of such commitments, on current investor yield requirements based on third party models.

Gains and losses on sales of these loans, as well as loan origination costs, are recorded as a component of noninterest income in the Consolidated Statements of Income.

The Corporation’s current practice is to sell residential mortgage loans and retain the servicing rights, as discussed further below.

Interest on loans held for sale is credited to income based on the principal amounts outstanding.

The Corporation enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (interest rate lock commitments).

8 unchanged sentences

(i) Loan Servicing Rights

The Corporation sells substantially all of the residential mortgage loans we originate to third parties;

The Corporation sells substantially all of the residential mortgage loans originated for sale in the secondary market;

however, the Corporation may retain the servicing rights related to some of these loans.

A fee, usually based on a percentage of the outstanding principal balance of the loan, is received in return for these services.

Mortgage servicing rights (“MSRs") are recognized when a loan’s servicing rights are retained upon sale of a loan.

The Corporation also sells the guaranteed portion of certain Small Business Administration (“SBA”) loans to third parties and retains servicing rights and receives servicing fees.

Mortgage servicing rights (“MSRs") are recognized when a loan’s servicing rights are retained upon sale of a loan.

When mortgage loans are sold with servicing retained, MSR’s are initially recorded at fair value with the income effect recorded in non-interest income.

The Corporation also sells the guaranteed portion of certain Small Business Administration (“SBA”) loans to third parties and retains servicing rights and receives servicing fees.

All such transfers are accounted for as sales.

10 unchanged sentences

Revenues, such as rental income, and holding expenses are included in other income and other expenses, respectively.

The Corporation had $120 and $0 thousand of OREO at December 31, 2019 and 2018, respectively.

The Corporation had $ 0 thousand of OREO at December 31, 2020 and $ 120 thousand for 2019.

(k) Restricted Investment in Bank Stock

1 unchanged sentence

Federal law requires a member institution of the FHLB to hold stock according to a predetermined formula.

As of December 31, 2019, and 2018, the Corporation had an investment of $8.0 million and $6.9 million, respectively, related to the FHLB stock.

Also included in restricted stock is Atlantic Central Bankers Bank (primary correspondent bank) stock in the amount of $50 thousand as of December 31, 2019 and 2018.

As of December 31, 2020, and 2019, the Corporation had an investment of $ 7.9 million and $ 8.1 million,

respectively, related to the FHLB stock.

Also included in restricted stock is secondary stock from a correspondent bank in the amount of $ 50 thousand as of December 31, 2020 and 2019.

All restricted stock is carried at cost.

Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value.

The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

Management believes no impairment charge is necessary related to the FHLB restricted stock as of December 31, 2019 or 2018.

The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) significance of the decline in net assets of the banks as compared to the capital stock amount and the length of time this situation has persisted, (2) commitments by the banks to make payments required by law or regulation and the level of such payments in relation to the operating performance of the banks, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the banks.

Management believes no impairment charge is necessary related to these bank restricted stocks as of December 31, 2020 or 2019.

(l ) Transfers of Financial Assets

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Bank premises and equipment are stated at cost less accumulated depreciation.

Land is carried at cost.

Buildings and related components are depreciated using the straight-line method with useful lives ranging from 12 to 20 years .

Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years and 3 to 5 years for computer software and hardware, respectively.

Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter.

The costs of maintenance and repairs are expensed as incurred;

while major replacements, improvements and additions are capitalized.

Depreciation expense is computed on the straight‑line method over the estimated useful lives of the related assets or, for leasehold improvements, over the effective life of the related lease if less than the estimated useful life.

(n) Advertising Costs

(n) Bank-Owned Life Insurance

The Corporation invests in bank owned life insurance (“BOLI”) as a source of funding for employee benefit expenses.

BOLI involves the purchasing of life insurance by the Corporation on a chosen group of employees.

The Corporation is the owner and beneficiary of the policies.

This life insurance investment is carried at the cash surrender value of the underlying policies.

Earnings from the increase in cash surrender value of the policies are included in non-interest income on the consolidated statements of income.

(o) Advertising Costs

The Corporation follows the policy of charging the costs of advertising to expense as incurred.

(o) Employee Benefit Plans

(p) Employee Benefit Plans

The Corporation has a 401(k) Plan (the Plan) and an Employee Stock Ownership Plan (ESOP).

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The Corporation may make a discretionary matching contribution to the Plan and the ESOP.

Full vesting in the Corporation’s contribution to the Plan and ESOP is over a three‑year period.

The Corporation’s contribution to the Plan and ESOP was $ 636 thousand and $ 325 thousand, respectively for the year ended December 31, 2019 and $ 577 thousand and $33 2 thousand, respectively for the year ended December 31, 2018.

During the year ended December 31, 2019, no shares were purchased by the ESOP, while for the year ended December 31, 2018, 4,462 shares were purchased by the ESOP at an average market value of $17.50.

Shares in the ESOP that are committed to be released to employees are treated as outstanding shares in the Corporation’s computation of earnings per share.

Full vesting in the Corporation’s contribution to the Plan and ESOP is over a three-year period.

The Corporation recorded expense for the Plan and ESOP of $ 1.1 million and $ 1.2 million, respectively for the year ended December 31, 2020 and

$ 636 thousand and $ 325 thousand, respectively for the year ended December 31, 2019.

The expense recorded by the Corporation for the ESOP for the year ended December 31, 2020 included a $ 600 thousand one-time contribution approved by the Board of Directors.

During the year ended December 31, 2020, 161,576 shares were purchased by the ESOP at an average market value of $ 15.06 , while no shares were purchased by the ESOP for 2019.

Shares in the ESOP that are committed to be released to employees are treated as outstanding shares in the Corporation’s computation of earnings per share.

On August 31, 2020 the Corporation established a $ 2 million stock purchase authorization with the ESOP.

By the end of 2020 the ESOP had fully utilized the $ 2 million loan to purchase 133,280 Corporation common shares and as of December 31, 2020, 13,328 of these common shares were released to the ESOP and such shares are included in the number of shares purchased in 2020 for the ESOP noted above, leaving 119,952 unallocated shares.

There were 225,687 shares in the ESOP as of December 31, 2020.

Shares in the ESOP would be impacted by any stock dividends and stock splits in the same manner as all other outstanding common shares of the Corporation.

(p) Income Taxes

(q) Income Taxes

Deferred income taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating losses and deferred tax liabilities are recognized for taxable temporary differences.

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The Corporation follows accounting guidance related to accounting for uncertainty in income taxes.

Under the “more likely than not”

threshold guidelines, the Corporation believes no significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-recognition of an existing tax benefit.

Under the “more likely than not” threshold guidelines, the Corporation believes no significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-recognition of an existing tax benefit.

As of December 31, 2020, and 2019, the Corporation had no material unrecognized tax benefits or accrued interest and penalties.

The Corporation’s policy is to account for interest as a component of interest expense and penalties as a component of other expense.

The Corporation is no longer subject to examination by federal, state and local taxing authorities for years before January 1, 2017.

(q ) Stock Compensation Plans

(r ) Stock Compensation Plans

Stock compensation accounting guidance requires that the compensation cost relating to share-based payment transactions be recognized in financial statements.

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The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options and restricted share plans.

The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’

service period, generally defined as the vesting period.

The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period.

For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

A Black‑Scholes model is used to estimate the fair value of stock options, while the market price of the Corporation’s common stock at the date of grant is used for restricted stock awards.

(r) Comprehensive Income

A Black-Scholes model is used to estimate the fair value of stock options, while the market price of the Corporation’s common stock at the date of grant is used for restricted stock awards.

(s) Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income.

Although certain changes in assets and liabilities, such as unrealized gains and losses on available‑for‑sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

Although certain changes in assets and liabilities, such as unrealized gains and losses on

available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

The components of other comprehensive income (loss) for the years ended December 31, 2020 and 2019 consist of unrealized holding gains and (losses) arising during the year on available-for-sale securities.

(s ) Off‑Balance Sheet Financial Instruments

(t ) Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Corporation has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit.

Such financial instruments are recorded in the balance sheet when they are funded.

(t) Derivative Financial Instruments

(u) Derivative Financial Instruments

The Corporation recognizes all derivative financial instruments related to its mortgage banking activities on its balance sheet at fair value.

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The Corporation enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement.

The interest rate swaps are recognized on the Corporation’s balance sheet at fair value.

Under these agreements, the Corporation originates variable-rate loans with customers in addition to interest rate swap agreements, which serve to effectively swap the customers’

variable-rate loans into fixed-rate loans.

The interest rate swaps are recognized on the Corporation’s balance sheet at fair value.

Under these agreements, the Corporation originates variable-rate loans with customers in addition to interest rate swap agreements, which serve to effectively swap the customers’ variable-rate loans into fixed-rate loans.

The Corporation then enters into corresponding swap agreements with swap dealer counterparties to economically hedge its exposure on the variable and fixed components of the customer agreements.

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however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by ASC 820.

(u) 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.

(v) 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 stock.

Diluted earnings per common share takes into account the potential dilution that would occur if in the-money stock options were exercised and converted into shares of common stock and restricted stock awards and performance-based stock awards were vested.

Proceeds assumed to have been received on options exercises are assumed to be used to purchase shares of the Corporation’s common stock at the average market price during the period, as required by the treasury stock method of accounting.

The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive.

(v) Revenue Recognition

(w) Revenue Recognition

The Corporation recognizes all sources of income on the accrual method, with the exception of nonaccrual loans and leases.

The Corporation earns wealth management fee income from investment advisory services provided to individual and 401k customers.

Fees that are determined based on the market value of the assets held in their accounts are generally billed quarterly, in arrears, based on the market value of assets at the end of the previous billing period.

Fees that are determined based on the market value of the assets held in their accounts are generally billed quarterly, in advance, based on the market value of assets at the end of the previous billing period.

Other related services that are based on a fixed fee schedule are recognized when the services are rendered.

Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e.

Fees that are transaction based, including trade execution services, are recognized at the point in time that the

transaction is executed, i.e.

the trade date.

Included in other assets on the balance sheet is a receivable for wealth management fees that have been earned but not yet collected.

(x) Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.

Management does not believe there now are such matters that will have a material effect on the financial statements.

(y) Operating Segments

While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis.

The Corporation has identified three segments:

a banking segment, a wealth management segment and a mortgage banking segment, as more fully disclosed in the Segment note to the consolidated financial statements.

(z) Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in the Fair Value Measurements and Disclosures note to the consolidated financial statements.

Fair value estimates involve uncertainties and matters of significant judgment.

Changes in assumptions or in market conditions could significantly affect the estimates.

Earnings per Common Share

Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period.

Diluted earnings per common share takes into account the potential dilution computed pursuant to the treasury stock method that could occur if stock options were exercised and converted into common stock.

The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be anti-dilutive.

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Net income available to common stockholders

Denominator for basic earnings per share - weighted average shares outstanding

Denominator for basic earnings per share

Weighted average shares outstanding

Average unearned ESOP shares

Basic weighted averages shares outstanding

Effect of dilutive common shares

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Goodwill and Other Intangibles

The Corporation’s goodwill and intangible assets are detailed below:

(dollars in thousands)

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Total Intangible Assets

Accumulated amortization on intangible assets was $750 thousand and $477 thousand as of December 31, 2019 and 2018, respectively.

Accumulated amortization of intangible assets was $ 1 million and $ 750 thousand as of December 31, 2020 and 2019, respectively.

In accordance with ASC Topic 350, the Corporation performed a qualitative assessment of goodwill and identifiable intangible assets as of December 31, 2020 and determined it was more likely than not that the fair value of the Corporation, including the wealth reporting unit where the goodwill and identifiable intangible assets are held, was more than its carrying amount.

At December 31, 2020, the schedule of future intangible asset amortization is as follows (in thousands):

(4) Securities

The amortized cost and approximate fair value of securities as of December 31, 2020 and 2019 are as follows:

December 31, 2020

# of Securities

in unrealized

(dollars in thousands)

loss position

Securities available-for-sale:

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State and municipal securities

Corporate bonds

Total securities available-for-sale

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December 31, 2019

# of Securities

in unrealized

(dollars in thousands)

loss position

Securities available-for-sale:

asset backed securities

government agency mortgage-backed securities

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State and municipal securities

Investments in mutual funds

Total securities available-for-sale

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Total securities held-to-maturity

At December 31, 2019, the Corporation had an investment in mutual funds with a fair value of $1 million.

At December 31, 2019, the Corporation had nine U.S.

asset backed securities, one U.S.

Government sponsored agency mortgage‑backed security, fifteen U.S.

Government sponsored agency collateralized mortgage obligations, and six State and municipal securities in unrealized loss positions.

At December 31, 2018, the Corporation had two U.S.

Treasuries, twenty-four U.S.

Government sponsored agency mortgage-backed securities, twelve U.S.

Government sponsored agency collateralized mortgage obligations, twenty-six State and municipal securities, and one mutual fund in realized loss positions.

December 31, 2019, the temporary impairment is primarily the result of changes in market interest rates subsequent to purchase and the Corporation did not intend to sell these securities prior to recovery and it is more likely than not that the Corporation will not be required to sell these securities prior to recovery to satisfy liquidity needs, and therefore, no securities are deemed to be other‑than‑temporarily impaired.

Although the Corporation’s investment portfolio overall is in a net unrealized gain position at December 31, 2020, the temporary impairment in the above noted securities is primarily the result of changes in market interest rates subsequent to purchase and the Corporation does not intend to sell these securities prior to recovery and it is more likely than not that the Corporation will not be required to sell these securities prior to recovery to satisfy liquidity needs, and therefore, no securities are deemed to be other-than-temporarily impaired.

As of December 31, 2020 and 2019, securities having a fair value of $ 55.9 million and $ 19.5 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 December 31, 2019 and 2018:

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.

December 31, 2020

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asset backed securities

government agency mortgage-backed securities

government agency collateralized mortgage obligations

State and municipal securities

Corporate bonds

Total securities available-for-sale

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Securities available-for-sale:

asset backed securities

government agency mortgage-backed securities

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State and municipal securities

Investments in mutual funds

Total securities available-for-sale

Securities held-to-maturity:

State and municipal securities

Total securities held-to-maturity

The amortized cost and carrying value of securities at December 31, 2020 and 2019 are shown below by contractual maturities.

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Mortgage-related securities

Mutual funds with no stated maturity

Proceeds from the sale of available for sale investment securities totaled $24.6 million for the year ended December 31, 2019.

Net gain on sale of available for sale securities totaled $165 thousand for the year ended December 31, 2019.

There were no sales of available for sale securities for the year ended December 31, 2019.

Proceeds from the sale of available for sale investment securities totaled $ 45.9 million for the year ended December 31, 2020, resulting in a gross gain on sale of $ 1.5 million and a gross loss on sale of $ 196 thousand for the year ended December 31, 2020.

Proceeds from the sale of available for sale investment securities totaled $ 24.6 million for the year ended December 31, 2019, resulting in a gross gain on sale of $ 264 thousand and a gross loss on sale of $ 99 thousand for the year ended December 31, 2019.

Loans Receivable

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Small business loans

Paycheck Protection Program loans ("PPP")

Main Street Lending Program Loans ("MSLP")

Total portfolio loans and leases

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Age Analysis of Past Due Loans and Leases

The following table presents an aging of the Corporation’s loan and lease portfolio as of December 31, 2019 and 2018, respectively:

The following table presents an aging of the Corporation’s loan and lease portfolio as of December 31, 2020 and 2019, respectively:

December 31, 2020

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Small business loans

Paycheck Protection Program loans

Main Street Lending Program loans

(1) Includes $ 12,182 of loans at fair value as of December 31, 2020 ($ 10,314 of current, $ 958 of 30-89 days past due and $ 910 of nonaccrual).

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The Allowance is maintained at a level considered adequate to provide for losses that are probable and estimable.

This evaluation is subjective as it requires material estimates that may be susceptible to significant revisions as more information becomes available.

Roll-Forward of the Allowance by Portfolio Segment

The following tables detail the roll‑forward of the Corporation’s Allowance, by portfolio segment, as of December 31, 2019 and 2018, respectively:

The following tables detail the roll-forward of the Corporation’s Allowance, by portfolio segment, as of December 31, 2020 and 2019, respectively:

(dollars in thousands)

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Small business loans

Paycheck Protection Program loans

Main Street Lending Program

(1) Excludes deferred fees and loans carried at fair value.

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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.

● 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.

● 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.

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Small business loans

Paycheck Protection Program loans

Main Street Lending Program loans

December 31, 2019

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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 December 31, 2020 and 2019, respectively.

No troubled debt restructurings performing according to modified terms are included in performing residential mortgages below for the twelve months ended December 31, 2019 and 2018, respectively.

December 31, 2020

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Residential mortgage

There were five nonperforming residential mortgage loans at December 31, 2019 and six at December 31, 2018 with a combined outstanding principal balance of $839 thousand and $1.9 million, respectively, which were carried at fair value and not included in the table above.

There were five nonperforming residential mortgage loans at December 31, 2020 and five at December 31, 2019 with a combined outstanding principal balance of $ 910 thousand and $ 839 thousand, respectively, which were carried at fair value and not included in the table above.

No TDR’s performing according to modified terms are included in performing residential mortgages above for the twelve months ended December 31, 2020 and 2019, respectively.

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 for the periods.

At December 31, 2019

At December 31, 2018

As of December 31, 2020

As of December 31, 2019

(dollars in thousands)

Impaired loans with related allowance:

Commercial mortgage

Commercial and industrial

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Interest income recognized on performing impaired loans amounted to $ 328 thousand and $ 206 thousand for the twelve months ended December 31, 2020 and 2019, respectively.

Troubled Debt Restructuring

The restructuring of a loan is considered a “troubled debt restructuring”

if both of the following conditions are met:

Troubled Debt Restructuring (“TDR’s”)

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.

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TDRs in compliance with modified terms

There were no loan and lease modifications granted during the year ended December 31, 2019 that were categorized as TDRs.

The following table presents information regarding loan and lease modifications granted during the year ended December 31, 2018 that were categorized as TDRs:

For the Year Ended December 31, 2018

Pre-Modification

Post-Modification

(dollar in thousands)

Commercial mortgage

Land and Construction

Commercial and industrial

Small business loans

There were no loan and lease modifications granted during the years ended December 31, 2020 and 2019 that were categorized as TDRs.

No loan and lease modifications granted during the twelve months ended December 31, 2020 and 2019 subsequently defaulted during the same time period.

The following table presents information regarding the number of contracts by type of loan and lease modifications made for the twelve months ended December 31, 2018:

For the Year Ended

COVID-19 Loan Modifications

The following table details the loan modifications excluding TDR’s that the Corporation provided to loan customers as of December 31, 2020.

December 31, 2020

Interest Rate

Change and Loan

Term Extension

Loan Portfolio

Modifications

Commercial mortgage

Land and Construction

Commercial and industrial

Commercial and industrial, including leases

Construction & land development

Home equity lines and loans

Residential mortgage

Small business loans

In accordance with Section 4013 of the CARES Act, loan deferrals granted to customers that resulted from the impact of COVID-19 and who were not past due at the time of deferral were not considered trouble debt restructurings under ASC 310-40 as of December 31, 2020.

This provision was extended to January 1, 2022 under the Consolidated Appropriations Act, 2021.

Management continues to monitor these deferrals and has adequately considered these credits in the December 31, 2020 allowance for loan losses balance.

These modified loans are classified as performing and are not considered past due.

Loans are to be placed on non-accrual when it becomes apparent that payment of interest or recovery of all principal is questionable, and the COVID-19 related modification is no longer considered short-term or the modification is deemed ineffective.

Bank Premises and Equipment

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(dollars in thousands)

Demand, noninterest bearing

Demand, non-interest bearing

Demand, interest bearing

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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 Federal Home Loan Bank of Pittsburgh.

The Corporation’s short-term borrowings generally consist of federal funds purchased and short-term borrowings extended under agreements with Federal Home Loan Bank of Pittsburgh.

The Corporation has two Federal Funds borrowing facilities with correspondent banks:

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Federal funds purchased generally represent one-day borrowings.

The Corporation had no Federal funds purchased at December 31, 2019 or December 31, 2018, respectively.

The Corporation had $ 0 in Federal Funds purchased at December 31, 2020 and 2019, respectively.

The Corporation also has a facility with the Federal Reserve discount window of $ 15.3 million that is fully secured by investment securities and loans.

There were no borrowings under this facility at December 31, 2019.

Short‑term borrowings as of December 31, 2019 consisted of short‑term advances from FHLB of Pittsburgh in the amounts of $102.3 million with interest at 1.81%, $7.7 million with interest of 1.59%, $5.1 million with interest at 1.59%, $5.0

million with interest at 2.76%, $3.1 million with interest of 2.03%, as well as the acquisition note for the Wealth division that had a balance of $413 thousand as of December 31, 2019.

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

Long‑term debt at December 31, 2019 consisted of the following fixed rate notes with the FHLB of Pittsburgh:

There were $ 10 million in borrowings under this facility at December 31, 2020.

Short-term borrowings at December 31, 2020 and December 31, 2019 consisted of the following notes:

Balance as of

(dollars in thousands)

Open Repo Plus Weekly

Federal Reserve Discount Window

Mid-term Repo-fixed

Acquisition Purchase Note

The acquisition purchase note for the Wealth division is classified as short-term borrowing at December 31, 2019.

The FHLB of Pittsburgh had issued $102.8 million of letters of credit to the Corporation for the benefit of the Corporation’s public deposit funds and loan customers.

As part of the CARES Act, the FRB of Philadelphia offered secured discounted borrowings to banks who originated PPP loans through the Paycheck Protection Program Liquidity Facility or PPPLF program.

At December 31, 2020, the Corporation pledged $ 153.3 million of PPP loans to the FRB of Philadelphia to borrow $ 153.3 million of funds at a rate of 0.35 %.

Long-term debt at December 31, 2020 and December 31, 2019 consisted of the following fixed rate notes with the FHLB of Pittsburgh:

Balance as of

(dollars in thousands)

PPPLF Advance

Mid-term Repo-fixed

The FHLB of Pittsburgh had issued $ 143.0 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 2021.

The Corporation has a maximum borrowing capacity with the FHLB of Pittsburgh of $ 638.9 million and $ 507.3 million as of December 31, 2020 and 2019, respectively.

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.

Subordinated Debentures

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The 2008 Debentures have a maturity date of December 18, 2023 and interest on the 2008 Debentures is paid quarterly at 6 %.

The 2008 Debentures are convertible into 1 share of the Bank’s common stock for every $15 in principal amount of the 2008 Debentures automatically on such date, if any, as accumulated losses of the Bank first exceed the sum of the retained earnings and capital surplus accounts of the Bank.

The 2008 Debentures are convertible into 1 share of the Corporation’s common stock for every $15 in principal amount of the 2008 Debentures automatically on such date, if any, as accumulated losses of the Bank first exceed the sum of the retained earnings and capital surplus accounts of the Bank.

The 2008 Debentures began to repay principal in eight equal installments which commenced in December of 2016.

As of December 31, 2019, $ 225 thousand of the 2008 Debentures remained outstanding, after pay downs of $119 thousand during 2019.

As of December 31, 2020, $ 169 thousand of the 2008 Debentures remained outstanding, after pay downs of $ 56 thousand during 2020 and $ 119 thousand during 2019.

In December 2011, the Bank issued $ 1.4 million of mandatory convertible unsecured subordinated debentures (2011 Debentures).

The 2011 Debentures have a maturity date of December 31, 2026 and interest on the 2011 Debentures is paid quarterly at 6 %.

The 2011 Debentures are convertible into 1 share of the Bank’s common stock for every $17 in principal amount of the 2011 Debentures automatically on such date, if any, as accumulated losses of the Bank first exceed the sum of the retained earnings and capital surplus accounts of the Bank.

The 2011 Debentures are convertible into 1 share of the Corporation’s common stock for every $17 in principal amount of the 2011 Debentures automatically on such date, if any, as accumulated losses of the Bank first exceed the sum of the retained earnings and capital surplus accounts of the Bank.

The 2011 Debentures began to repay principal in eight equal installments which commenced in December of 2019.

As of December 31, 2019, $ 809 thousand of the 2011 Debentures remained outstanding, after pay downs of $116 thousand during 2019.

As of December 31, 2020, $ 693 thousand of the 2011 Debentures remained outstanding, after pay downs of $ 116 thousand each during 2020 and 2019.

In April 2013, the Bank issued $ 1.4 million of mandatory convertible unsecured subordinated debentures (2013 Debentures).

The 2013 Debentures have a maturity date of December 31, 2028 and interest on the 2013 Debentures is paid quarterly at 6.5 %.

The 2013 Debentures are convertible into 1 share of the Bank’s common stock for every $22 in principal amount of the 2013 Debentures automatically on such date, if any, as accumulated losses of the Bank first exceed the sum of the retained earnings and capital surplus accounts of the Bank.

As of December 31, 2019, $ 870 thousand of the 2013 Debentures remained outstanding, after pay downs of $0 thousand during 2019.

The 2013 Debentures are convertible into 1 share of the Corporation’s common stock for every $22 in principal amount of the 2013 Debentures automatically on such date, if any, as accumulated losses of the Bank first exceed the sum of the retained earnings and capital surplus accounts of the Bank.

As of December 31, 2020 and 2019, $ 870 thousand of the 2013 Debentures remained outstanding, after no pay downs during 2020 or 2019.

In June, August and September 2014, the Bank issued $ 3 million, $ 100 thousand, and $ 7 million of non-convertible unsecured subordinated debentures (2014 Debentures).

The 2014 Debentures have maturity dates of June 30, 2024,

June 30, 2024 and September 30, 2024, respectively.

The 2014 Debentures have maturity dates of June 30, 2024, June 30, 2024 and September 30, 2024, respectively.

Interest on all three tranches of the 2014 Debentures is paid quarterly at 7.25 %.

As of December 31, 2019, the Coporation redeem ed the remaining $7.1 million of 2014 Debentures.

Upon formation of the bank holding company as described in detail in footnote 1, the Corporation assumed the 2008, 2011, 2013 and 2014 Debentures that were originally issued by the Bank.

In December 2019, The Corporation issued $40 million of fixed-to-floating rate mandatory convertible unsecured subordinated debentures (2019 Debentures).

During 2019, the Corporation redeemed the remaining $ 7.1 million of 2014 Debentures and therefore there was $ 0 outstanding as of December 31, 2020 and 2019.

Upon formation of the bank holding company, the Corporation assumed the 2008, 2011, 2013 and 2014 Debentures that were originally issued by the Bank.

During December 2019, the Corporation issued $ 40 million of fixed-to-floating rate non-convertible unsecured subordinated debentures (2019 Debentures).

The 2019 Debentures have a maturity date of December 30, 2029 and interest on the 2019 Debentures is paid semiannually at 5.375 %.

The debt issuance costs are included as a direct deduction from the debt liability and these costs are amortized to interest expense using the effective yield method.

The 2008, 2011, and 2013 Debentures are includable as Tier 2 capital for determining the Bank’s compliance with regulatory capital requirements (see footnote 19).

During 2020 the Corporation made interest payments of $ 2.2 million on the 2019 Debentures.

The 2008, 2011, and 2013 Debentures are includable as Tier 2 capital for determining the Bank’s compliance with regulatory capital requirements (see footnote 19).

The 2019 Debentures are included as Tier 2 capital for the Corporation and as Tier 1 capital for the Bank.

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MSRs are amortized to non-interest expense in proportion to, and over the period of, the estimated future net servicing life of the underlying assets.

MSR’s are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost.

Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the MSR.

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Balance at end of the period

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

Year Ended December 31,

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The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge.

At December 31, 2019, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 13.08% and a discount rate equal to 9.00%.

At December 31, 2018, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 11.78% and a discount rate equal to 9.5%.

At December 31, 2020, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 9.39 % and a discount rate equal to 9.00 %.

At December 31, 2019, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 13.08 % and a discount rate equal to 9.00 %.

At December 31, 2020 and 2019, the sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% unfavorable changes in key economic assumptions are included in the following table.

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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 $18.0 million of SBA loans, as of December 31, 2019 and no SBA loans, as of December 31, 2018.

During the year ended December 31, 2019, the Corporation recognized servicing fee income of $25 thousand.

The Corporation serviced $ 55.9 million of SBA loans, as of December 31, 2020 and $ 18.0 million as of December 31, 2019.

Changes in the SBA loan servicing asset balance are summarized as follows:

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The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge.

At December 31, 2019, the key assumptions used to determine the fair value of the Corporation’s SBA loan servicing rights included a lifetime constant prepayment rate equal to 10.77%, and a discount rate equal to 11.28%.

The Corporation did not service SBA loans at December 31, 2018.

At December 31, 2019, the sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% unfavorable changes in key economic assumptions are included in the following table.

At December 31, 2020, 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 12.73 %, and a discount rate equal to 8.33 %.

At December 31, 2020 and 2019, the sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% unfavorable changes in key economic assumptions are included in the following table.

(dollars in thousands)

December 31, 2020

December 31, 2019

Fair value of SBA loan servicing rights

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Lease Commitments

The Corporation leases seventeen branch spaces from third parties under operating lease agreements expiring at different periods through February 2030.

The Corporation leases twenty-two offices from third parties under operating lease agreements expiring at different periods through March 2031.

Under all current agreements, the Corporation is responsible for its portion of real estate taxes, utilities, insurance, and repairs and maintenance.

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The shares granted under the 2004 Plan to officers and other employees are incentive stock options, and are subject to the limitations under Section 422 of the Internal Revenue Code.

The Meridian Bank 2016 Equity Incentive Plan (2016 Plan) was amended on May 24, 2018 to authorize the Board of Directors to grant up to an aggregate of 686,900 awards, as adjusted for the 2016 5% stock dividend.

A total of 128,450 options have been granted under the 2016 Plan through December 31, 2019.

The Meridian Bank 2016 Equity Incentive Plan (2016 Plan) was amended on May 24, 2019 to authorize the Board of Directors to grant up to an aggregate of 686,900 stock awards that can take different forms, as adjusted for the 2016 5 % stock dividend.

A total of 296,100 stock options and 33,208 shares of restricted stock have been granted under the 2016 Plan through December 31, 2020.

As of December 31, 2020 there were 355,992 stock awards remaining to be issued.

Options granted under the 2016 Plan to directors are nonqualified options, while options granted to officers and other employees are incentive stock options, and are subject to the limitations under Section 422 of the Internal Revenue Code.

Stock Options

Stock-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as an expense over the vesting period.

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The assumptions necessary for the calculation of the fair value are expected life of options, annual volatility of stock price, risk-free interest rate and annual dividend yield.

All awards granted under the 2016 Plan to date have a term that does not exceed ten years and vest 25% upon grant and become fully exercisable after three years of service from the grant date.

The following table provides information about options outstanding as of December 31, 2019 and 2018:

Stock option awards granted under the 2016 Plan have a term that does not exceed ten years and vest according to each award’s specific vesting schedule.

Currently, all option awards granted to date vest 25 % upon grant and become fully exercisable after three years of service from the grant date.

The following table provides information about stock options outstanding as of December 31, 2020 and 2019:

Outstanding at December 31, 2018

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The weighted average remaining contractual life of the outstanding stock options at December 31, 2020 is 7.1 years.

The range of exercise prices is $9.88 to $19.00.

The aggregate intrinsic value of options outstanding and exercisable was $240 thousand as of December 31, 2019.

At December 31, 2020 the range of exercise prices is $ 10.36 to $ 20.89 .

The aggregate intrinsic value of options outstanding and exercisable was $ 1.7 million and $ 1.3 million, respectively, as of December 31, 2020.

The fair value of each option granted in 2020 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

dividend yield of 0.0%, risk‑free interest rate of between 1.95% and 2.61%, expected life of 5.75 years, and expected volatility of between 22.44% and 22.48% based on an average of the Corporation’s share price since going public and the expected volatility of similar public financial institutions in the Corporation’s market area for the period before the Corporation went public.

dividend yield of 0.0 %, risk-free interest rate of between 0.47 % and 1.68 %, expected life of 5.75 years, and expected volatility of between 21.81 % and 39.65 % based on an average of the Corporation’s share price since going public and the expected volatility of similar public financial institutions in the Corporation’s market area for the period before the Corporation went public.

The weighted average fair value of options granted in 2020 was $ 4.47 to $ 5.87 per share.

The fair value of each option granted in 2019 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

dividend yield of 0.0%, risk‑free interest rate of between 2.84% and 3.06%, expected life of 5.75 years, and expected volatility of 19.68% and 26.11% based on an average of the Corporation’s share price since going public and the expected volatility of similar public financial institutions in the Corporation’s market area.

dividend yield of 0.0 %, risk-free interest rate of between 1.95 % and 2.61 %, expected life of 5.75 years, and expected volatility of 22.44 % and 22.48 % based on an average of the Corporation’s share price since going public and the expected volatility of similar public financial institutions in the Corporation’s market area.

The weighted average fair value of options granted in 2019 was $ 4.84 to $ 5.30 per share.

Total stock compensation cost for the twelve months ended December 31, 2020 and December 31, 2019 was $ 451 thousand and $ 272 thousand, respectively.

During the twelve months ended December 31, 2019, the Corporation received $128 thousand from the exercise of stock options.

There were no tax benefits recognized related to stock compensation cost for the twelve months ended December 31, 2019.

In accordance with ASU 2016-09 –

Compensation –

Stock Compensation (ASU 2016-09), forfeitures are recognized as they occur instead of applying an estimated forfeiture rate to each grant.

For purposes of the determination of stock-based compensation expense for the year ended December 31, 2019, we did not recognize any forfeitures of shares of stock options that were granted to officers and other employees.

During the twelve months ended December 31, 2020 and December 31, 2019, the Corporation received $ 200 thousand and $ 128 thousand from the exercise of stock options, respectively.

There were no tax benefits recognized related to stock compensation cost for the twelve months ended December 31, 2020 and 2019.

In accordance with ASU 2016-09 – Compensation – Stock Compensation (ASU 2016-09), forfeitures are recognized as they occur instead of applying an estimated forfeiture rate to each grant.

For purposes of the determination of stock-based compensation expense for the year ended December 31, 2020, we recognized the forfeiture of 25,631 of shares of stock options that were previously granted to officers and other employees.

As of December 31, 2020, there was $ 401 thousand of unrecognized compensation cost related to nonvested stock options.

This cost will be recognized over a weighted average period of 1.33 years.

(14) Income Taxes

Restricted Stock

The restricted stock granted under the 2016 Plan vest according to each award’s specific vesting schedule.

All awards granted in 2020 vest 50 % one year from the grant date and the remaining 50 % on the second anniversary of the grant date.

The grant date fair value of the restricted stock is based on the closing price on the date prior to the grant.

Outstanding at December 31, 2019

Outstanding at December 31, 2020

Nonvested at December 31, 2020

Compensation expense for restricted stock is measured based on the market price of the stock on the day prior to the grant date and is recognized on a straight-line basis over the vesting period.

For the year ended December 31, 2020, the Corporation recognized $ 80 thousand of expense related to the restricted stock.

As of December 31, 2020, there was $ 385 thousand in unrecognized compensation costs related to restricted stock.

This cost will be recognized over a weighted average period of 0.62 years.

The components of the federal and state income tax expense for the years ended December 31, 2020 and 2019 are as follows:

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Hedge instrument fair-value adjustment

Unrealized gain on available for sale securities

Prepaid expenses

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The effective tax rates for the twelve-month periods ended December 31, 2020 and 2019 were 23.4 % and 22.4 % respectively.

The increase in rate from 22.1% to 22.4% between 2018 and 2019 was directly related to a decrease in the impact of tax exempt interest.

The increase in rate from 22.4 % to 23.4 % between 2019 and 2020 was primarily related to the increase in state income tax expense as Meridian’s mortgage division expanded into Maryland in 2020.

Under ASC 740, Income Taxes, the effect of income tax law changes on deferred taxes should be recognized as a component of income tax expense related to continuing operations in the period in which the law is enacted.

This requirement applies not only to items initially recognized in continuing operations, but also to items initially recognized in other comprehensive income.

During 2019 and 2018 we did not recognize income tax expense related to tax reform.

The CARES Act, enacted in March 2020 grants potential tax relief to businesses, including corporate tax provisions that:

temporarily allow for the carryback of certain net operating losses, increase interest expense deduction limitations, and allow accelerated depreciation deductions on certain fixed asset improvements.

The tax relief under the CARES Act had no material impact to the Corporation’s Consolidated Financial Statements.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

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As of December 31, 2020, the Corporation had an investment in low income housing tax credits of $ 1.3 million on which it recognized tax credits of $ 161 thousand, amortization of $ 180 thousand and tax benefits from losses of $ 26 thousand during the year ended December 31, 2020.

As of December 31, 2019, the Corporation had an investment in low income housing tax credits of $ 1.5 million on which it recognized tax credits of $ 224 thousand, amortization of $ 245 thousand and tax benefits from losses of $ 33 thousand during the year ended December 31, 2019.

(15) Revenue from Contracts with Customers

All of the Corporation’s revenue from contracts with customers in the scope of FASB ASU 2014-09 (Topic 606), “Revenue for Contracts with Customers”

(ASC 606) is recognized within noninterest income.

The following table presents the Corporation’s noninterest income by revenue stream and reportable segment for the year ended December 31, 2019 (in accordance with ASC 606), and for the year ended December 31, 2018 (in accordance with ASC 605 –

Revenue Recognition) as the Corporation adopted ASC 606 as of December 31, 2019.

All of the Corporation’s revenue from contracts with customers in the scope of FASB ASU 2014-09 (Topic 606), “Revenue for Contracts with Customers” (ASC 606) is recognized within noninterest income.

The following table presents the Corporation’s noninterest income by revenue stream and reportable segment for the year ended December 31, 2020 (in accordance with ASC 606), and for the year ended December 31, 2019 (in accordance with ASC 605 – Revenue Recognition) as the Corporation adopted ASC 606 as of December 31, 2020.

Items for the year ended December 31, 2020 outside the scope of ASC 606 are noted as such.

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Net change in fair values (1)

Net gain (loss) on hedging activity (1)

Earnings on investment in life insurance (1)

Gain on sale of securities (1)

Net gain on sale of securities (1)

Dividends on FHLB stock (1)

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(1) Not within the scope of ASC 606.

Other operating non-interest income includes wire transfer fees, ATM/debit card commissions, and title fee income totaling $621 thousand and $530 thousand for the years ended December 31, 2019 and 2018, respectively, which are in the scope of ASC 606.

A description of the Corporation’s primary revenue streams accounted for under ASC 606 follows:

(2) Within other non-interest income is $ 925 thousand and $ 621 thousand for the years ended December 31, 2020 and 2019, respectively, which are in the scope of ASC 606.

These amounts include wire transfer fees, ATM/debit card commissions, and title fee income.

A description of the Corporation’s primary revenue streams accounted for under ASC 606 follows:

Wealth Management Income:

The Corporation earns wealth management fee income from investment advisory services provided to individual and 401k customers.

Fees that are determined based on the market value of the assets held in their

accounts are generally billed quarterly, in arrears, based on the market value of assets at the end of the previous billing period.

Other related services that are based on a fixed fee schedule are recognized when the services are rendered.

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The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services.

Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer’s request.

Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation.

Overdraft fees are recognized at the point in time that the overdraft occurs.

Service charges on deposits are withdrawn from the customer’s account balance.

Gains/Losses on Sales of OREO:

The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.

There were no such sales of OREO for the years ended December 31, 2019 or 2018.

There was a sale of $ 120 thousand

in OREO for the year ended December 31, 2020, resulting in a gain on sale of $ 6 thousand.

There were no such sales of OREO for the year ended December 31, 2019.

(16) Transactions with Executive Officers, Directors and Principal Stockholders

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Loans receivable from related parties totaled $ 3.3 million and $ 3.7 million at December 31, 2020 and 2019, respectively.

Advances and repayments during 2019 totaled $8.7 million and $8.5 million respectively.

Advances, repayments, and the effect of changes in composition of related parties during 2020 totaled $ 4.9 million, $ 3.8 million, and $ 1.5 million, respectively.

Advances and repayments during 2019 totaled $ 8.7 million and $ 8.5 million respectively.

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Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments.

The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

A summary of the Corporation’s financial instrument commitments at December 31, 2019 and 2018 is as follows:

A summary of the Corporation’s financial instrument commitments at December 31, 2020 and 2019 is as follows:

(dollars in thousands)

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Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.

The Corporation evaluates each customer’s credit worthiness on a case‑by‑case basis.

The amount of collateral obtained, if deemed necessary by the Corporation upon

extension of credit, is based on management’s credit evaluation.

The Corporation evaluates each customer’s credit worthiness on a case-by-case basis.

The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation.

Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.

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The current amount of the liability as of December 31, 2020 and 2019 for guarantees under standby letters of credit issues is not material.

Included in commitments to grant loans are mortgage loan commitments of $72.9 million and $33.4 million in 2019 and 2018, respectively, which included interest rate lock commitments.

Not included in commitments to grant loans in the table above are mortgage loan commitments of $ 428.8 million and $ 72.9 million in 2020 and 2019, respectively, which included interest rate lock commitments.

These rate lock commitments represent an agreement to extend credit to a mortgage loan applicant whereby the interest rate on the loan is set prior to funding.

The loan commitment binds the Corporation to lend funds to a potential borrower at the specified rate, regardless of whether interest rates change between the commitment date and the loan funding date.

The Corporation’s loan commitments generally range between 30 and 90 days;

The loan commitment binds the Corporation to lend funds to a potential borrower at the specified rate, regardless

of whether interest rates change between the commitment date and the loan funding date.

The Corporation’s loan commitments generally range between 30 and 90 days ;

however, the borrower is not obligated to obtain the loans.

As such, these commitments are subject to interest rate risk and related price risk during the period from interest rate lock commitment through the loan funding date or expiration date.

The Corporation economically hedges its mandatory sales channel using the forward sale of mortgage-backed securities, in addition to best-efforts forward sale commitments to substantially eliminate these risks.

At December 31, 2019 and 2018, the Corporation had a notional amount of $62.8 million and $26.5 million, respectively.

To manage this risk, the Corporation either locks the rate with the investor purchasing the loan on a “best efforts” basis or economically hedges this risk for loans sold to investors on its mandatory sales channel using the forward sale of mortgage-backed securities, in addition to best-efforts forward sale commitments to substantially eliminate these risks.

At December 31, 2020 and 2019, the Corporation had a notional amount of $ 230.1 million and $ 62.8 million, respectively, related to commitments on the mandatory channel.

At December 31, 2020 and 2019, the Corporation had best efforts forward sale commitments to sell loans amounting to $ 198.7 million and $ 18.6 million, respectively.

The Corporation is only obligated to settle the forward sale commitment if the loan closes in accordance with the terms of the interest rate lock commitment.

The Corporation’s forward sale commitments generally expire within 90 days.

The Corporation’s forward sale commitments generally expire within 90 days .

Loans sold under FHA or investor programs are subject to repurchase or indemnification if they fail to meet the origination criteria of those programs.

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At December 31, 2020 there were no indemnification or repurchase requests pending.

Although repurchases and losses have been infrequent, repurchase reserves of $71 thousand and $68 thousand were recorded as of December 31, 2019 and 2018.

There were no such repurchases for the year ended December 31, 2019.

Although repurchases and losses have historically been infrequent, a repurchase reserve of $ 2.7 million was recorded in 2020 due to the significant increase in loan originations.

$ 71 thousand was recorded as of December 31, 2019.

There was one loan repurchased for the year ended December 31, 2020 with an unpaid principle balance of $ 153 thousand.

(18) Recent Litigation

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Meridian Bank, Thomas Campbell and Christopher Annas , against the Bank purporting to be a class and collective action seeking unpaid and overtime wages under the Fair Labor Standards Act of 1938, the New Jersey Wage and Hour Law, and the Pennsylvania Minimum Wage Act of 1968 on behalf of similarly situated plaintiffs.

In September 2019, plaintiffs’

counsel and the Bank agreed to move forward with non-binding mediation.

In September 2019, plaintiffs’ counsel and the Bank agreed to move forward with non-binding mediation.

Although the Bank believes it had strong and meritorious defenses, given the expense and inconvenience of litigation, on July 24, 2019 through mediation, the Bank reached an agreement in principle with the plaintiffs to settle this litigation for $ 990 thousand in total.

The Bank had a litigation reserve of $ 990 thousand at December 31, 2019.

The parties submitted a negotiated settlement agreement to the court, and received final court

approval on December 19, 2019.

On February 29, 2020 the Bank made a payment, which included additional minor expenses, of $1.0 million in final settlement of this matter.

The parties submitted a negotiated settlement agreement to the court, and received final court approval on December 19, 2019.

On February 29, 2020 the Bank made a payment of $ 1.0 million in final settlement of this matter, which included additional minor expenses.

(19) Regulatory Matters

The Bank and the Corporation are subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and the Corporation must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.

The Bank’s and the Corporation’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk‑weightings and other factors.

The Bank’s and the Corporation’s

capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Corporation to maintain minimum amounts and ratios (set forth below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets.

Management believes, as of December 31, 2020, that the Bank and the Corporation meets all capital adequacy requirements to which it is subject.

As of December 31, 2019, the Federal Deposit Insurance Corporation categorized the Bank and the Corporation as well capitalized under the regulatory framework for prompt corrective action.

There are no conditions or events since that notification that management believes have changed the Bank’s and the Corporation’s category.

Community banks have long raised concerns with bank regulators about 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 "Community Bank Leverage Ratio"

(“CBLR”) of between 8 and 10%.

Under the final rule, a community banking organization is eligible to elect the new framework if it has:

less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%.The bank regulatory agencies temporarily lowered the CBLR to 8% as a result of the COVID-19 pandemic.

During the first quarter of 2020, the Bank adopted the community bank leverage ratio framework as its primary regulatory capital ratio, but reports all ratios for comparative purposes.

As of December 31, 2020, the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Bank is subject to certain restrictions on the amount of dividends that it may declare and pay to the Corporation due to regulatory considerations.

The Pennsylvania Banking Code provides that cash dividends may be declared and paid only out of accumulated net earnings.

The Banks’s and the Corporation’s actual capital amounts and ratios at December 31, 2019 and 2018 are presented below.

The Corporation was not subject to these regulatory capital requirements as of December 31, 2018 and therefore the presentation below is for Bank only as of December 31, 2018.

The Corporation’s and the Banks’s actual and required capital amounts and ratios under the CBLR rules at December 31, 2020 and the Basel III rules at December 31, 2019 are presented below.

December 31, 2020

To be well capitalized under

For capital adequacy

prompt corrective action

To Be Well Capitalized

Under CBLR Framework

(dollars in thousands)

Total capital (to risk-weighted assets)

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

Tier 1 capital (to risk-weighted assets)

Tier 1 capital (to average assets)

December 31, 2018 - as revised

December 31, 2019

To be well capitalized under

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Tier 1 capital (to average assets)

* Does not include capital conservation buffer of 1.250% for 2019 and 1.875% for 201 8

* Prompt corrective action requirements do not apply to Meridian Corporation but are included as information only

(20) Fair Value Measurements and Disclosures

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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.

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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.

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;

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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.

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.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2020 and 2019 are as follows:

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State and municipal securities

Investments in mutual funds

Corporate bonds

Equity investments

Mortgage loans held for sale

Mortgage loans held for investment

Mortgage servicing rights

SBA loan servicing rights

Interest rate lock commitments

Forward commitments

Customer derivatives - interest rate swaps

Interest rate lock commitments

Forward commitments

Customer derivatives - interest rate swaps

December 31, 2019

1 unchanged sentence

Securities available for sale:

asset backed securities

government agency mortgage-backed securities

1 unchanged sentence

State and municipal securities

Investments in mutual funds and other equity securities

Investments in mutual funds

Mortgage loans held for sale

Mortgage loans held for investment

Mortgage servicing rights

Interest rate lock commitments

Forward commitments

Customer derivatives - interest rate swaps

Interest rate lock commitments

Forward commitments

Customer derivatives - interest rate swaps

Assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2020 and 2019 are as follows:

December 31, 2020

(dollars in thousands)

Impaired loans (1)

Other real estate owned (2)

December 31, 2019

(dollars in thousands)

Mortgage servicing rights

SBA loan servicing rights

Impaired loans (1)

Other real estate owned (2)

Impaired loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral.

(1) Impaired loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral.

Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.

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These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value measurement.

Appraised values may be discounted based on management’s expertise, historical knowledge, changes in market conditions from the time of valuation and/or estimated costs to sell.

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:

Appraised values may be discounted based on management’s expertise, historical knowledge, changes in market conditions from the time of valuation and/or estimated costs to sell.

Below is management’s estimate of the fair value of all financial instruments, whether carried at cost or fair value on the Corporation’s balance sheet.

The following methods and assumptions were used to estimate the fair value of the Corporation’s financial instruments:

(a) Cash and Cash Equivalents

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

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

(b) Securities

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

relationship to other benchmark quoted prices.

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.

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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.

(g) Impaired Loans

Impaired loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral.

Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds.

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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.

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

The estimated fair values of the Corporation’s financial instruments at December 31, 2020 and 2019 are as follows:

December 31, 2020

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Mortgage loans held for sale

Loans receivable, net

Loans receivable, net of the allowance for loan and lease losses

Mortgage loans held for investment

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Restricted investment in bank stock

Mortgage servicing rights

SBA loan servicing rights

Accrued interest receivable

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Balance at beginning of the period

(Decrease) increase in value

Increase in value

Balance at end of the period

Valuation Techniques for Level 3 interest rate lock

commitments as of December 31, 2019

The following table details the valuation techniques for Level 3 interest rate lock commitments.

Valuation Technique

Interest rate lock commitments

December 31, 2020

Market comparable pricing

Losses of $78 thousand and gains of $40 thousand due to changes in the fair value of interest rate lock commitments which are classified as Level 3 assets and liabilities for the twelve months ended December 31, 2019 and 2018, respectively, are recorded in non-interest income as net change in the fair value of derivative instruments in the Corporation’s consolidated statements of income.

December 31, 2019

Market comparable pricing

Net realized gains of $ 6.5 million and $ 78 thousand due to changes in the fair value of interest rate lock commitments which are classified as Level 3 assets and liabilities for the twelve months ended December 31, 2020 and 2019, respectively, are recorded in non-interest income as net change in the fair value of derivative instruments in the Corporation’s consolidated statements of income.

(21) Derivative Financial Instruments

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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

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The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured.

Interest rate lock commitments and forward commitments are recorded within other assets/liabilities on the consolidated balance sheets, with changes in fair values during the period recorded within net change in the fair value of derivative instruments on the unaudited consolidated statements of income.

Customer Derivatives –

Interest Rate Swaps

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.

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Net fair value gains (losses) on derivative financial instruments

Realized gains/(losses) on derivatives were $(816) thousand and $627 thousand for the year ended December 31, 2019 and 2018, respectively, and are included in other non-interest income in the consolidated statements of income.

Net realized losses on derivatives were $( 9.4 ) million and $( 816 ) thousand for the year ended December 31, 2020 and 2019, respectively, and are included in other non-interest income in the consolidated statements of income.

(22) 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.

ASC Topic 280 – Segment Reporting identifies operating segments as components of an enterprise which are evaluated regularly by the Corporation’s Chief Operating Decision Maker, our Chief Executive Officer, in deciding how to allocate resources and assess performance.

The Corporation has applied the aggregation criterion set forth in this codification to the results of its operations.

Our Banking segment consists of commercial and retail banking.

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, gains on the sale of residential mortgage loans, service charges on deposit accounts, cash sweep fees, overdraft fees, BOLI income, title insurance fees, and other less significant non-interest income.

Meridian 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 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 one central loan production facility and several retail and profit sharing loan production offices located throughout the Delaware Valley.

The Mortgage segment originates 1 –

4 family residential mortgages and sells nearly all of its production to third party investors.

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.

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 has been included in the statement of operations.

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Net change in fair values

Net (loss) on hedging activity

Non-interest income

Non-interest expense

Salaries and employee benefits

Occupancy and equipment

Professional fees

Advertising and promotion

Non-interest expense

Operating Margin

Income before income taxes

(23) Recent Accounting Pronouncements

As an “emerging growth company”

under the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), the Bank is permitted an extended transition period for complying with new or revised accounting standards affecting public companies.

We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1,070,000,000 or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of this offering, (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the end of the fiscal year in which the market value of our equity securities that are held by non-affiliates exceeds $700 million as of June 30 of that year.

As an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), the Bank is permitted an extended transition period for complying with new or revised accounting standards affecting public companies.

the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the end of the fiscal year in which the market value of our equity securities that are held by non-affiliates exceeds $700 million as of June 30 of that year.

We have elected to take advantage of this extended transition period, which means that the financial statements included herein, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.

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Adopted Pronouncements in 2020:

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

The Corporation adopted ASU 2014-09 and all subsequent amendments to the ASU (collectively, “ASC 606”), which (i) creates a single framework for recognizing revenue from contracts with customers that fall within its scope and (ii) revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO.

The majority of the Corporation’s revenues come from interest income and other sources, including loans, leases, investment securities and derivatives, that are outside the scope of ASC 606.

The Corporation’s services that fall within the scope of ASC 606 are presented within noninterest income and are recognized as revenue as the Corporation satisfies its obligation to the customer.

Services within the scope of ASC 606 include wealth management fee income, service charges on deposits, and the net gain on sale of OREO.

Refer to Note 15, “Revenue from Contracts with Customers,”

in the accompanying notes to the consolidated financial statements for further discussion on the Corporation’s accounting policies for revenue sources within the scope of ASC 606.

The Corporation adopted ASC 606 on December 31, 2019 using the modified retrospective method.

The adoption of this ASU did not have a material impact to our consolidated financial statements and required the Corporation to make the revenue disclosures as detailed in note 15.

FASB ASU 2017-05 (Topic 610), “

Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”

Issued in February 2017, ASU 2017-05 provides clarification of the scope of ASC 610-20.

Specifically, the new guidance clarifies that ASC 610-20 applies to nonfinancial assets which do not meet the definition of a business or not-for-profit activity.

Further, the new guidance clarifies that a financial asset is within the scope of ASC 610-20 if it meets the definition of an in-substance nonfinancial asset which is defined as a financial asset promised to a counterparty in a contract where substantially all of the assets promised are nonfinancial.

Finally, the new guidance clarifies that each distinct nonfinancial asset and insubstance nonfinancial asset should be derecognized when the counterparty obtains control of it.

The Corporation adopted this ASU on December 31, 2019 at the same time we adopted ASU 2014-09.

The adoption of this ASU did not have a material impact to our consolidated financial statements or disclosures.

FASB ASU 2016‑15 (Topic 230), “Classification of Certain Cash Receipts and Cash Payments”

Issued in August 2016, ASU 2016‑15 provides guidance on eight specific cash flow issues and their disclosure in the consolidated statements of cash flows.

The issues addressed include debt prepayment, settlement of zero-coupon debt, contingent consideration in business combinations, proceeds from settlement of insurance claims, proceeds from settlement of BOLI, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the Predominance principle.

ASU 2016‑15 is effective for public companies for the annual and interim periods in fiscal years beginning after December 15, 2017, with early adoption permitted.

For non-public companies ASU 2016‑15 is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019.

The Corporation adopted ASU 2016-15 on December 31, 2019.

Upon the adoption of this ASU the Corporation recorded $98 thousand from the prepayment of subordinated debt as a financing activity in the consolidated statement of cash flows for the year ended December 31, 2019 instead of as an operating activity.

FASB ASU 2016‑01 (Subtopic 825‑10), “Financial Instruments –

Overall, Recognition and Measurement of Financial Assets and Financial Liabilities”

The Corporation adopted ASU 2016-01 which requires that equity investments be measured at fair value with changes in fair value recognized in net income.

The Corporation’s equity investments with a readily determinable fair value are currently included within equity securities and are measured at fair value with changes in fair value recognized in net income.

In connection with the adoption of this ASU, the Corporation elected the practicability exception to fair value measurement for investments in equity securities without a readily determinable fair value (other than our Federal Home Loan Bank (“FHLB”) and Atlantic Central Bankers Bank stock, which are outside of the scope of this ASU).

Under the practicability exception, the investments are measured at cost, less impairment, plus or minus observable price changes (in orderly transactions) of an identical or similar investment of the same issuer.

The adoption of this ASU did not have a

material impact on our consolidated financial statements and related disclosures.

Additionally, upon adoption of this ASU we continued to disclose the fair value of loans using an “exit price”.

Pronouncements Not Effective as of December 31, 2019:

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

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

Issued in January 2017, ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.

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ASU 2017-01 is effective for public companies for annual periods beginning after December 15, 2017 including interim periods within those periods, while for non-public companies the ASU is effective for annual periods beginning after December 15, 2018, and interim periods within annual periods beginning after December 15, 2019.

The adoption of this standard on January 1, 2020 did not have a material impact on the Corporation’s consolidated financial statements and related disclosures.

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

The adoption of this standard on January 1, 2020 did not have a material impact on the Corporation’s consolidated financial statements and related disclosures.

FASB ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”

Issued in June 2018, ASU 2018-07:

Compensation - Stock Compensation (Topic 718), “ Improvements to Nonemployee Share-Based Payment Accounting ” expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.

An entity should apply the requirements of Topic 718 to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period).

The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards.

The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers.

The amendments in this update became effective for us January 1, 2020.

The adoption did not have an impact on our consolidated financial statements and related disclosures as the Corporation did not and has not historically granted share based payment awards to nonemployees other than to the Corporation’s Board of Directors, who are treated as employees for share-based payment accounting.

FASB ASU 2018-13, "Fair Value Measurement Disclosure Framework"

Issued in August 2018, ASU 2018-13 modifies, adds and removes certain disclosures aimed to improve the overall usefulness of the disclosure requirements for fair value measurements.

ASU 2018-13 was effective for the Corporation on January 1, 2020.

Adoption is required on both a prospective and retrospective basis depending on the amendment.

The adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures.

FASB ASU 2017-08 (Subtopic 310-20), “Nonrefundable Fees and Other Costs (Subtopic 310-20):

Premium Amortization on Purchased Callable Debt Securities”

Issued in March 2017, ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium.

Specifically, the amendment requires the premium to be amortized to the earliest call date.

The amendment does not require an accounting change for securities held at a discount;

the discount continues to be amortized to maturity.

For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

Early adoption is permitted, including adoption in an interim period.

For non-public companies the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within the fiscal years beginning after December 31, 2020.

The adoption of ASU 2017-08 as of December 31, 2020 did not have a material impact on our consolidated financial statements and related disclosures as all debt securities are currently carried at par value with capitalized issuance costs.

FASB ASU 2017-12 (Subtopic 815), “Derivatives and Hedging:

Targeted Improvements to Accounting for Hedging Activities”

Issued in August 2017, ASU 2017-12 better aligns hedge accounting with an organization’s risk management activities in the financial statements.

In addition, the ASU simplifies the application of hedge accounting guidance in areas where practice issues exist.

Specifically, the proposed ASU eases the requirements for effectiveness testing, hedge documentation and application of the shortcut and the critical terms match methods.

Entities would be permitted to designate contractually specified components as the hedged risk in a cash flow hedge involving the purchase or sale of nonfinancial assets or variable rate financial instruments.

In addition, entities would no longer separately measure and report hedge ineffectiveness.

Also, entities, may choose refined measurement techniques to determine the changes in fair value of the hedged item in fair value hedges of benchmark interest rate risk.

For public business entities, the ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020.

Early application is permitted in any interim period after issuance of the ASU for existing hedging relationships on the date of adoption and the effect of adoption should be reflected as of the beginning of the fiscal year of adoption (that is, the initial application date).

The Corporation has evaluated ASU 2017-12, and has determined it has no current hedging strategies applicable under the ASU but we will consider the impact of the ASU on future hedging strategies that may arise.

The adoption of ASU 2017-12 as of December 31, 2020 did not have a material impact on our consolidated financial statements and related disclosures.

Pronouncements Not Effective as of December 31, 2020:

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.

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A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date.

ASU 2016‑13 is effective for public companies for the annual and interim periods in fiscal years beginning after December 15, 2019, with early adoption permitted.

For non-public companies the ASU is effective for fiscal years and interim periods beginning after December 15, 2022, or January 1, 2023 for the Corporation.

The Corporation will adopt ASU 2016-13 on January 1, 2023 and is currently determining under which method.

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.

The Corporation is currently determining under which method we

will adopt this ASU.

The Corporation has assembled a cross-functional team from Finance, Credit, and IT that is leading the implementation efforts to evaluate the impact of this guidance on the Corporation's consolidated financial statements and related disclosures, internal systems, accounting policies, processes and related internal controls.

At this time the Corporation cannot yet estimate the impact to the consolidated financial statements.

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).

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Management will consider the impact of ASU 2019-04 when considering the impact of ASU 2016-13 as discussed above.

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

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

Issued in February 2016, ASU 2016-02 revises the accounting related to lessee accounting.

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The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.

ASU 2016‑02 is effective for public companies for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted.

For non-public companies the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within the fiscal years beginning after December 31, 2020.

In July 2018 ASU 2018-11 was issued which creates a new, optional transition method for implementing ASU 2016-02 and a lessor practical expedient for separating lease and non-lease components and has the same effective date as ASU 2016-02.

Under the optional transition method of ASU 2018-11, the Corporation may initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

The Corporation will adopt ASU 2016-12 and ASU 2018-11 as of December 31, 2020 and apply ASC 840 throughout 2020.

The Corporation is evaluating the effects that ASU 2016‑02 and ASU 2018-11 will have on its consolidated financial statements and related disclosures.

FASB ASU 2017‑08 (Subtopic 310‑20), “Nonrefundable Fees and Other Costs (Subtopic 310‑20):

Premium Amortization on Purchased Callable Debt Securities”

Issued in March 2017, ASU 2017‑08 shortens the amortization period for certain callable debt securities held at a premium.

Specifically, the amendment requires the premium to be amortized to the earliest call date.

The amendment does not require an accounting change for securities held at a discount;

the discount continues to be amortized to maturity.

For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

Early adoption is permitted, including adoption in an interim period.

For non-public companies the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within the fiscal years beginning after December 31, 2020.

The Corporation will adopt ASU 2017-08 as of December 31, 2020 and apply existing guidance throughout 2020.

The Corporation is evaluating the effect that ASU 2017‑08 will have on its consolidated financial statements and related disclosures.

FASB ASU 2017‑12 (Subtopic 815), “Derivatives and Hedging:

Targeted Improvements to Accounting for Hedging Activities”

Issued in August 2017, ASU 2017‑12 better aligns hedge accounting with an organization’s risk management activities in the financial statements.

In addition, the ASU simplifies the application of hedge accounting guidance in areas where practice issues exist.

Specifically, the proposed ASU eases the requirements for effectiveness testing, hedge documentation and application of the shortcut and the critical terms match methods.

In addition, entities would no longer separately measure and report hedge ineffectiveness.

Also, entities, may choose refined measurement techniques to determine the changes in fair value of the hedged item in fair value hedges of benchmark interest rate risk.

For public business entities, the ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years.

For all other entities, the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods beginning after December 15, 2020.

The Corporation has evaluated ASU 2017‑12, and has determined it has no current hedging strategies for which it plans to implement the ASU but we will consider the impact of the ASU on future hedging strategies that may arise.

The Corporation will adopt ASU 2017-12 as of December 31, 2020 and apply existing guidance throughout 2020.

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

In October 2018 ASU 2018-16 was issued.

The new guidance applies to all entities that elect to apply hedge accounting to benchmark interest rate hedges under Topic 815.

It permits the use of the OIS rate based on SOFR as a U.S.

interest rate for hedge accounting purposes in addition to the existing applicable rates.

The guidance is required to be adopted concurrently with ASU 2017-12, on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after adoption.

The Corporation does not anticipate the adoption of this ASU to have a material impact on its consolidated financial statements and related disclosures.

FASB ASU 2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”

Issued in June 2018, ASU 2018-07:

Compensation - Stock Compensation (Topic 718), “

Improvements to Nonemployee Share-Based Payment Accounting ”

expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.

The amendments in this update become effective for us January 1, 2020.

The adoption will not have an impact on our consolidated financial statements and related disclosures as the Corporation has not historically granted share based payment awards to nonemployees other than to the Corporation’s Board of Directors, who are treated as employees for share-based payment accounting.

FASB ASU 2018-13, "Fair Value Measurement Disclosure Framework"

Issued in August 2018, ASU 2018-13 modifies, adds and removes certain disclosures aimed to improve the overall usefulness of the disclosure requirements for fair value measurements.

ASU 2018-13 is effective for the Corporation on January 1, 2020.

Adoption is required on both a prospective and retrospective basis depending on the amendment.

Management does not expect the adoption of this ASU to have a material impact on our consolidated financial statements and related disclosures.

FASB ASU 2018-15 (Topic 350), "Intangibles - Goodwill and Other - Internal-Use Software"

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.

Under ASU 2016-02, the Corporation will recognize a right-of-use asset and a lease obligation liability on the consolidated statement of financial condition, which will increase the Corporation’s assets and liabilities.

The Corporation is evaluating other potential impacts of ASU 2016-02 on its consolidated financial statements.

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 2018-15 (Topic 350), "Intangibles - Goodwill and Other - Internal-Use Software"

Issued in August 2018, ASU 2018-15 provides clarity on capitalizing and expensing implementation costs for cloud computing arrangements in a service contract.

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Adoption should be applied retrospectively or prospectively to all implementation costs incurred after the date of adoption.

The Corporation does not expect the adoption of this ASU to have a material impact on our consolidated financial statements and related disclosures as we currently do not have any such cloud computing arrangements.

FASB ASU 2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes”

The Corporation does not expect the adoption of this ASU to have a material impact on our consolidated financial statements and related disclosures.

FASB ASU 2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes”

Issued in December 2019, ASU 2019-12 adds new guidance to simplify accounting for income taxes, changes the accounting for certain income tax transactions and makes minor improvements to the codification.

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Management has not yet determined what the impact of the adoption of this ASU will be on our consolidated financial statements and related disclosures.

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.

(24) Parent Company Financial Statements

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Cash and due from banks

Cash and cash equivalents

Investments in subsidiaries

1 unchanged sentence

Accrued interest payable

Other liabilities

Total liabilities

Stockholders’

Stockholders’ equity:

Common stock, $ 1 par value.

Authorized 10,000,000 shares;

issued and outstanding 6,406,795 and 6,392,287 as of December 31, 2019 and December 31, 2018

Treasury Stock

issued 6,455,566 and 6,407,685 as of December 31, 2020 and December 31, 2019

Treasury Stock- 320,000 and 3,375 shares at December 31, 2020 and December 31, 2019, respectively

Unearned common stock held by employee stock ownership plan

Retained earnings

Accumulated other comprehensive loss

Total stockholders’

Total liabilities and stockholders’

Total stockholders’ equity

Total liabilities and stockholders’ equity

Condensed Statements of Income

(dollars in thousands, except per share data)

Dividends from subsidiaries

Dividends from Bank

Net interest and other income

Total operating income

Interest expense

Income before equity in undistributed income of subsidiaries

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Income before income taxes

Income tax (benefit) expense

Income tax expense

Total other comprehensive income

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(dollars in thousands)

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

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Equity in undistributed income of subsidiaries

Increase in accrued interest payable

Decrease (increase) in other assets

Net cash used in operating activities

Share-based compensation

(Decrease) increase in accrued interest payable

Increase in other assets

Increase in other liabilities

Net cash provided by (used in) operating activities

Cash flows from investing activities:

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Cash flows from financing activities:

Issuance of long term subordinated debt

Notes repaid (received) for common stock

Net activity from subordinated debt

Net purchase of treasury stock through publicly announced plans

Dividends paid

Purchase of common shares for ESOP

Share based awards and exercises

Net cash provided by financing activities

Net cash (used in) provided by financing activities

Net change in cash and cash equivalents

2 unchanged sentences

(25) Subsequent Events

On March 7, 2019 the Corporation announced a stock repurchase plan (the “2019 Stock Repurchase Plan”) pursuant to which the Corporation may repurchase up to 5% of its common stock.

In March 2020 the Corporation repurchased 314,825 of its own outstanding common shares at an average price of $18.17 per common share.

These purchases completed the share repurchases authorized by the 2019 Stock Repurchase Plan.

Special Dividend

On February 16, 2021, the Corporation’s Board of Directors declared a special dividend of $ 1.00 per share on its Common Stock, payable on March 15, 2021 to shareholders of record as of March 1, 2021.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data