10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended September 30, 2019

Or

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

For the transition period from to

Commission File Number: 000-55983

(Exact name of registrant as specified in its charter)

Pennsylvania	32-0116054
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)

9 Old Lincoln Highway, Malvern, Pennsylvania 19355

(Address of principal executive offices) (Zip Code)

(484) 568‑5000

(Registrant’s telephone number, including area code)

Title of class	Trading Symbol	Name of exchange on which registered
Common Stock, $1 par value	MRBK	The NASDAQ Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒Yes☐No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒Yes☐No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☒
Emerging growth company    ☒

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 13, 2019 there were 6,405,600 outstanding shares of the issuer’s common stock, par value $1.00 per share.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)	3
Consolidated Balance Sheets – September 30, 2019 and December 31, 2018	3
Consolidated Statements of Income – Three and Nine Months Ended September 30, 2019 and 2018	4
Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2019 and 2018	5
Consolidated Statements of Stockholders’ Equity – Three and Nine Months Ended September 30, 2019 and 2018	6
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2019 and 2018	7
Notes to Consolidated Financial Statements (Unaudited)	8
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3 Quantitative and Qualitative Disclosures about Market Risk	54
Item 4 Controls and Procedures	55
PART II OTHER INFORMATION
Item 1 Legal Proceedings	57
Item 1A Risk Factors	57
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3 Defaults Upon Senior Securities	57
Item 4 Mine Safety Disclosures	57
Item 5 Other Information	57
Item 6 Exhibits	57
Signatures	59

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,
(dollars in thousands, except per share data)	2019		2018
Cash and due from banks	$	40,267	23,159
Federal funds sold		265	793
Cash and cash equivalents		40,532	23,952
Securities available-for-sale (amortized cost of $52,496 and $50,942 as of September 30, 2019 and December 31, 2018)		52,757	50,428
Securities held-to-maturity (fair value of $9,028 and $12,655 as of September 30, 2019 and December 31, 2018)		8,814	12,741
Mortgage loans held for sale (amortized cost of $48,339 and $37,337 as of September 30, 2019 and December 31, 2018)		48,615	37,695
Loans, net of fees and costs (includes $11,278 and $11,422 of loans at fair value, amortized cost of $10,934 and $11,466 as of September 30, 2019 and December 31, 2018)		935,858	838,106
Allowance for loan and lease losses		(9,312)	(8,053)
Loans, net of the allowance for loan and lease losses		926,546	830,053
Restricted investment in bank stock		8,237	7,002
Bank premises and equipment, net		8,929	9,638
Bank owned life insurance		11,787	11,569
Accrued interest receivable		3,155	2,889
Other real estate owned		120	—
Deferred income taxes (Footnote 1)		1,803	1,728
Goodwill and intangible assets		4,841	5,046
Other assets		10,801	4,739
Total assets	$	1,126,937	997,480
Liabilities:
Deposits:
Noninterest bearing	$	129,302	126,150
Interest-bearing		729,159	625,980
Total deposits		858,461	752,130
Short-term borrowings		128,465	114,300
Long-term debt		3,123	6,238
Subordinated debentures		9,176	9,239
Accrued interest payable		669	305
Other liabilities (Footnote 1)		9,271	5,716
Total liabilities		1,009,165	887,928
Stockholders’ equity:
Common stock, $1 par value. Authorized 10,000,000 shares; issued and outstanding 6,407,685 and 6,406,795 as of September 30, 2019 and December 31, 2018		6,408	6,407
Surplus		80,192	79,919
Retained earnings (Footnote 1)		30,961	23,616
Accumulated other comprehensive loss		211	(390)
Total stockholders’ equity		117,772	109,552
Total liabilities and stockholders’ equity	$	1,126,937	997,480

See accompanying notes to the unaudited consolidated financial statements.

3

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended			Nine months ended
	September 30,			September 30,
(dollars in thousands, except per share data)	2019		2018	2019	2018
Interest income:
Loans, including fees	$	13,152	11,218	37,686	31,217
Securities:
Taxable		336	213	892	549
Tax-exempt		64	112	273	336
Cash and cash equivalents		38	30	136	75
Total interest income		13,590	11,573	38,987	32,177
Interest expense:
Deposits		3,633	2,485	10,584	6,171
Borrowings		683	710	1,731	1,790
Total interest expense		4,316	3,195	12,315	7,961
Net interest income		9,274	8,378	26,672	24,216
Provision for loan losses		705	291	938	1,258
Net interest income after provision for loan losses		8,569	8,087	25,734	22,958
Non-interest income:
Mortgage banking income		7,910	8,274	19,139	20,407
Wealth management income		922	930	2,698	2,996
SBA loan income		645	—	1,160	—
Earnings on investment in life insurance		74	74	218	225
Net change in the fair value of derivative instruments		—	70	(16)	59
Net change in the fair value of loans held-for-sale		54	(300)	(82)	(241)
Net change in the fair value of loans held-for-investment		(24)	(103)	390	(289)
Gain on sale of investment securities available-for-sale		74	—	212	—
Service charges		28	27	82	87
Other		131	195	387	1,647
Total non-interest income		9,814	9,167	24,188	24,891
Non-interest expenses:
Salaries and employee benefits		9,319	8,901	25,789	26,719
Occupancy and equipment		946	920	2,845	2,870
Loan expenses		758	769	1,877	1,962
Professional fees		820	714	2,000	1,670
Advertising and promotion		574	590	1,769	1,802
Data processing		343	334	990	924
Information technology		334	268	919	836
Communications		155	197	510	683
Other		903	1,060	3,813	2,923
Total non-interest expenses		14,152	13,753	40,512	40,389
Income before income taxes		4,231	3,501	9,410	7,460
Income tax expense		914	774	2,065	1,661
Net income	$	3,317	2,727	7,345	5,799
Basic earnings per common share	$	0.52	0.43	1.15	0.91
Diluted earnings per common share	$	0.52	0.42	1.14	0.90

See accompanying notes to the unaudited consolidated financial statements.

4

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three months ended			Nine months ended
	September 30,			September 30,
(dollars in thousands)	2019		2018	2019	2018
Net income:	$	3,317	2,727	7,345	5,799
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 $17,  ($57),  $219, and ($155), respectively		64	(171)	767	(510)
Less: reclassification adjustment for net (gains) on sales realized in net income, net of tax (expense) benefit of ($16),  $0,  ($47), and $0, respectively		(58)	—	(166)	—
Unrealized investment gains (losses), net of tax expense (benefit) of $1,  ($57),  $172, and ($155), respectively		6	(171)	601	(510)
Total other comprehensive income (loss)		6	(171)	601	(510)
Total comprehensive income	$	3,323	2,556	7,946	5,289

See accompanying notes to the unaudited consolidated financial statements.

5

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

					Accumulated
					Other
		Common		Retained	Comprehensive
(dollars in thousands)		Stock	Surplus	Earnings	Income (Loss)	Total
Balance, January 1, 2018 (Footnote 1)	$	6,392	79,501	15,453	(298)	101,048
Comprehensive income:
Net income				1,270		1,270
Change in unrealized gains on securities available-for-sale, net of tax					(276)	(276)
Total comprehensive income						994
Compensation expense related to stock option grants			3			3
Balance, March 31, 2018	$	6,392	79,504	16,723	(574)	102,045
Comprehensive income:
Net income				1,802		1,802
Change in unrealized gains on securities available-for-sale, net of tax					(63)	(63)
Total comprehensive income						1,739
Share-based awards and exercises		9				9
Compensation expense related to stock option grants			272			272
Balance, June 30, 2018	$	6,401	79,776	18,525	(637)	104,065
Comprehensive income:
Net income				2,727		2,727
Change in unrealized gains on securities available-for-sale, net of tax					(171)	(171)
Total comprehensive income						2,556
Share-based awards and exercises		6				6
Compensation expense related to stock option grants			76			76
Balance, September 30, 2018	$	6,407	79,852	21,252	(808)	106,703

					Accumulated
					Other
		Common		Retained	Comprehensive
(dollars in thousands)		Stock	Surplus	Earnings	Income (Loss)	Total
Balance, January 1, 2019	$	6,407	79,919	23,616	(390)	109,552
Comprehensive income:
Net income				2,006		2,006
Change in unrealized gains on securities available-for-sale, net of tax					373	373
Total comprehensive income						2,379
Compensation expense related to stock option grants			61			61
Balance, March 31, 2019	$	6,407	79,980	25,622	(17)	111,992
Comprehensive income:
Net income				2,022		2,022
Change in unrealized gains on securities available-for-sale, net of tax					222	222
Total comprehensive income						2,244
Compensation expense related to stock option grants			143			143
Balance, June 30, 2019	$	6,407	80,123	27,644	205	114,379
Comprehensive income:
Net income				3,317		3,317
Change in unrealized gains on securities available-for-sale, net of tax					6	6
Total comprehensive income						3,323
Share-based awards and exercises		1	7			8
Compensation expense related to stock option grants			62			62
Balance, September 30, 2019	$	6,408	80,192	30,961	211	117,772

See accompanying notes to the unaudited consolidated financial statements.

6

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended
	September 30,
(dollars in thousands)	2019		2018
Net income	$	7,345	5,799
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of investment securities		(212)	—
Depreciation and amortization		1,559	1,088
Loss on disposal of premises and equipment		14	—
Provision for loan losses		938	1,258
Compensation expense for stock options		266	351
Net change in fair value of loans held for sale		82	241
Net change in fair value of derivative instruments		16	(59)
Net change in fair value of contingent assets		—	177
Gain on sale of OREO		—	(57)
SBA loan income		(1,160)	—
Proceeds from sale of loans		432,831	513,259
Loans originated for sale		(421,092)	(492,113)
Mortgage banking income		(19,139)	(20,407)
Increase in accrued interest receivable		(266)	(377)
Decrease (increase) in other assets		91	(110)
Earnings from investment in life insurance		(218)	(225)
Deferred income tax (benefit) (Footnote 1)		(249)	(465)
Increase in accrued interest payable		364	137
Increase in other liabilities (Footnote 1)		3,249	1,184
Net cash provided by operating activities		4,419	9,681
Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities, repayments and calls		11,090	4,080
Sales		19,366	—
Purchases		(29,027)	(12,768)
Proceeds from sale of OREO		—	494
Settlement of forward contracts		(85)	(21)
(Increase) decrease in restricted stock		(1,235)	2,233
Net increase in loans		(104,640)	(107,068)
Purchases of premises and equipment		(634)	(1,499)
Proceeds from settlement of loans		—	2,766
Net cash used in investing activities		(105,165)	(111,783)
Cash flows from financing activities:
Net increase in deposits		106,331	154,818
Increase (decrease) in short term borrowings		14,165	(57,795)
Repayment of long term debt (FHLB advances)		(2,702)	—
Repayment of long term debt (Acquisition note)		(413)	(619)
Repayment of long term debt (Subordinated debt)		(63)	(4,000)
Share based awards and exercises		8	15
Net cash provided by financing activities		117,326	92,419
Net change in cash and cash equivalents		16,580	(9,683)
Cash and cash equivalents at beginning of period		23,952	35,506
Cash and cash equivalents at end of period	$	40,532	25,823
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	11,951	7,392
Income taxes		1,539	1,565
Supplemental disclosure of cash flow information:
Transfers from loans and leases to real estate owned		120	—
Transfers from loans held for sale to loans held for investment		3,602	—
Net loans sold, not settled		(5,580)	4,490

See accompanying notes to the unaudited consolidated financial statements.

7

MERIDIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(1)      Basis of Presentation

Meridian Corporation (the “Corporation”)  was incorporated on June 8, 2009, by and at the direction of the board of directors of Meridian Bank (the “Bank”) for the sole purpose of acquiring the Bank and serving as the Bank’s parent bank holding company.  On August 24, 2018, the Corporation acquired the Bank in a merger and reorganization effected under Pennsylvania law and in accordance with the terms of a Plan of Merger and Reorganization dated April 26, 2018 (the “Agreement”).  Pursuant to the Agreement, on August 24, 2018 at 5:00 p.m. all of the outstanding shares of the Bank’s $1.00 par value common stock formerly held by its shareholders was converted into and exchanged for one newly issued share of the Corporation’s par value common stock, and the Bank became a subsidiary of the Corporation. Because the Bank and the Corporation were entities under common control, this exchange of shares between entities under common control resulted in the retrospective combination of the Bank and the Corporation for all periods presented as if the combination had been in effect since inception of common control.  As the Corporation had no assets, liabilities, revenues, expenses or operations prior to August 24, 2018, the historical financial statements of the Bank are the historical financial statements of the combined entity. 

The Corporation’s unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and the results of operations for the interim periods presented have been included.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Amounts subject to significant estimates are items such as the allowance for loan losses and lending related commitments, the fair value of financial instruments, other-than-temporary impairments of investment securities, and the valuations of goodwill and intangible assets.

These unaudited consolidated financial statements should be read in conjunction with the Corporation’s filings with the Securities and Exchange Commission (including our Annual Report on Form 10-K for the year ended December 31, 2018) and, for periods prior to the completion of the holding company reorganization, the Bank’s filings with the FDIC, including the Bank’s annual report on Form 10-K for the year ended December 31, 2017, and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in Form 10-K and Form 10-Q filings, if any.   Certain prior period amounts have been reclassified to conform with current period presentation. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results for the year ended December 31, 2019 or for any other period.

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.

8

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

(dollars in thousands, except per share data)		Reported	Corrections	Revised
Deferred income taxes	$	1,312	92	1,404
Other liabilities		5,426	407	5,833
Retained earnings		15,768	(315)	15,453

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

(dollars in thousands, except per share data)		Reported	Corrections	Revised
Deferred income taxes	$	1,636	92	1,728
Other liabilities		5,309	407	5,716
Retained earnings		23,931	(315)	23,616

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

	December 31, 2018 - as reported
							To be well capitalized under
				For capital adequacy			prompt corrective action
	Actual			purposes *			provisions
(dollars in thousands):	Amount		Ratio	Amount		Ratio	Amount		Ratio
Total capital (to risk-weighted assets)	$	122,577	13.70%	$	71,577	8.00%	$	89,472	10.00%
Common equity tier 1 capital (to risk-weighted assets)		105,196	11.76%		40,262	4.50%		58,157	6.50%
Tier 1 capital (to risk-weighted assets)		105,196	11.76%		53,683	6.00%		71,577	8.00%
Tier 1 capital (to average assets)		105,196	11.20%		37,578	4.00%		46,972	5.00%

	December 31, 2018 - as revised
							To be well capitalized under
				For capital adequacy			prompt corrective action
	Actual			purposes *			provisions
(dollars in thousands):	Amount		Ratio	Amount		Ratio	Amount		Ratio
Total capital (to risk-weighted assets)	$	122,262	13.66%	$	88,362	9.88%	$	89,481	10.00%
Common equity tier 1 capital (to risk-weighted assets)		104,881	11.72%		57,044	6.38%		58,163	6.50%
Tier 1 capital (to risk-weighted assets)		104,881	11.72%		70,466	7.88%		71,585	8.00%
Tier 1 capital (to average assets)		104,881	11.16%		37,581	4.00%		46,977	5.00%

*Includes capital conservation buffer of 2.50% for 2019 and 1.875% for 2018.

9

(2)      Earnings per Common Share

Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per common share takes into account the potential dilution computed pursuant to the treasury stock method that could occur if stock options were exercised and converted into common stock. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be anti-dilutive.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands, except per share data)	2019		2018		2019		2018
Numerator:
Net income available to common stockholders	$	3,317		2,727	$	7,345		5,799
Denominator for basic earnings per share - weighted average shares outstanding		6,407		6,402		6,407		6,395
Effect of dilutive common shares		30		28		29		31
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		6,437		6,430		6,436		6,426
Basic earnings per share	$	0.52		0.43	$	1.15		0.91
Diluted earnings per share	$	0.52		0.42	$	1.14		0.90
Antidilutive shares excluded from computation of average dilutive earnings per share		199		116		199		116

(3)      Goodwill and Other Intangibles

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

	Balance			Balance	Amortization
	December 31,		Amortization	September 30,	Period
(dollars in thousands)	2018		Expense	2019	(in years)
Goodwill - Wealth	$	899	—	899	Indefinite
Total Goodwill		899	—	899
Intangible assets - trade name		266	—	266	Indefinite
Intangible assets - customer relationships		3,727	(153)	3,574	20
Intangible assets - non competition agreements		154	(52)	102	4
Total Intangible Assets		4,147	(205)	3,942
Total	$	5,046	(205)	4,841

Accumulated amortization on intangible assets was $682 thousand and $409 thousand as of September 30, 2019 and 2018, respectively.

The Corporation performed its annual review of goodwill and identifiable intangible assets in accordance with ASC 350, “Intangibles - Goodwill and Other” as of December 31, 2018. For the period from January 1, 2019 through September 30, 2019, the Corporation determined there were no events that would necessitate impairment testing of goodwill and other intangible assets.

10

(4)      Securities

The amortized cost and fair value of securities as of September 30, 2019 and December 31, 2018 are as follows:

	September 30, 2019
			Gross	Gross
	Amortized		unrealized	unrealized	Fair
(dollars in thousands)	cost		gains	losses	value
Securities available-for-sale:
U.S. asset backed securities	$	8,919	2	(39)	8,882
U.S. government agency mortgage-backed securities		12,843	103	(46)	12,900
U.S. government agency collateralized mortgage obligations		29,734	357	(130)	29,961
Investments in mutual funds		1,000	14	-	1,014
Total securities available-for-sale	$	52,496	476	(215)	52,757
Securities held to maturity:
State and municipal securities		8,814	214	—	9,028
Total securities held-to-maturity	$	8,814	214	—	9,028

	December 31, 2018
			Gross	Gross
	Amortized		unrealized	unrealized	Fair
(dollars in thousands)	cost		gains	losses	value
Securities available-for-sale:
U.S. government agency mortgage-backed securities	$	24,092	45	(271)	23,866
U.S. government agency collateralized mortgage obligations		14,754	52	(142)	14,664
State and municipal securities		11,096	22	(199)	10,919
Investments in mutual funds		1,000	—	(21)	979
Total securities available-for-sale	$	50,942	119	(633)	50,428
Securities held to maturity:
U.S. Treasuries	$	1,991	—	(13)	1,978
State and municipal securities		10,750	17	(90)	10,677
Total securities held-to-maturity	$	12,741	17	(103)	12,655

At September 30, 2019, the Corporation had seven U.S. government sponsored agency mortgage‑backed securities, thirteen U.S. government sponsored agency collateralized mortgage obligations, and five U.S. asset backed securities in unrealized loss positions. At December 31, 2018, the Corporation had twenty-four U.S. government sponsored agency mortgage‑backed securities, twelve U.S. government sponsored agency collateralized mortgage obligations, twenty-six state and municipal securities, one mutual fund, and two U.S. treasuries in unrealized loss positions. Although the Corporation’s investment portfolio overall is in a net unrealized gain position at September 30, 2019, 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.

11

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 September 30, 2019 and December 31, 2018:

	September 30, 2019
	Less than 12 Months			12 Months or more		Total
	Fair		Unrealized	Fair	Unrealized	Fair	Unrealized
(dollars in thousands)	value		losses	value	losses	value	losses
Securities available-for-sale:
U.S. asset backed securities		6,842	(39)	—	—	6,842	(39)
U.S. government agency mortgage-backed securities	$	1,926	(9)	3,177	(37)	5,103	(46)
U.S. government agency collateralized mortgage obligations		12,700	(88)	2,754	(42)	15,454	(130)
Total securities available-for-sale	$	21,468	(136)	5,931	(79)	27,399	(215)

	December 31, 2018
	Less than 12 Months			12 Months or more		Total
	Fair		Unrealized	Fair	Unrealized	Fair	Unrealized
(dollars in thousands)	value		losses	value	losses	value	losses
Securities available-for-sale:
U.S. government agency mortgage-backed securities	$	2,354	(6)	15,223	(265)	17,577	(271)
U.S. government agency collateralized mortgage obligations		2,636	(14)	5,620	(128)	8,256	(142)
State and municipal securities		957	(11)	8,746	(188)	9,703	(199)
Investments in mutual funds		980	(21)	—	—	980	(21)
Total securities available-for-sale	$	6,927	(52)	29,589	(581)	36,516	(633)
Securities held-to-maturity:
U.S. Treasuries	$	—	—	1,978	(13)	1,978	(13)
State and municipal securities		1,545	(5)	4,783	(85)	6,328	(90)
Total securities held-to-maturity	$	1,545	(5)	6,761	(98)	8,306	(103)

The amortized cost and carrying value of securities at September 30, 2019 and December 31, 2018 are shown below by contractual maturities. Actual maturities may differ from contractual maturities as issuers may have the right to call or repay obligations with or without call or prepayment penalties.

	September 30, 2019					December 31, 2018
	Available-for-sale			Held-to-maturity		Available-for-sale			Held-to-maturity
	Amortized		Fair	Amortized	Fair	Amortized		Fair	Amortized	Fair
(dollars in thousands)	cost		value	cost	value	cost		value	cost	value
Investment securities:
Due in one year or less	$	—	—	—	—	$	906	902	1,991	1,978
Due after one year through five years		—	—	4,258	4,316		1,236	1,226	3,154	3,148
Due after five years through ten years		—	—	4,556	4,712		6,411	6,290	7,596	7,529
Due after ten years		8,919	8,882	—	—		2,543	2,501	—	—
Subtotal		8,919	8,882	8,814	9,028		11,096	10,919	12,741	12,655
Mortgage-related securities		42,577	42,861	—	—		38,846	38,530	—	—
Mutual funds with no stated maturity		1,000	1,014	—	—		1,000	979	—	—
Total	$	52,496	52,757	8,814	9,028	$	50,942	50,428	12,741	12,655

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(5)      Loans Receivable

Loans and leases outstanding at September 30, 2019 and December 31, 2018 are detailed by category as follows:

	September 30,		December 31,
(dollars in thousands)	2019		2018
Mortgage loans held for sale	$	48,615	37,695
Real estate loans:
Commercial mortgage		357,418	325,393
Home equity lines and loans		83,412	82,286
Residential mortgage (1)		56,272	53,360
Construction		154,463	116,906
Total real estate loans		651,565	577,945
Commercial and industrial		284,376	259,806
Consumer		984	701
Leases, net		828	1,335
Total portfolio loans and leases		937,753	839,787
Total loans and leases	$	986,368	877,482
Loans with predetermined rates	$	294,297	264,376
Loans with adjustable or floating rates		692,071	613,106
Total loans and leases	$	986,368	877,482
Net deferred loan origination (fees) costs	$	(1,895)	(1,681)

(1) Includes $11,278 and $11,422  of loans at fair value as of September 30, 2019 and December 31, 2018, respectively.

Components of the net investment in leases at September 30, 2019 and December 31, 2018 are detailed as follows:

	September 30,		December 31,
(dollars in thousands)	2019		2018
Minimum lease payments receivable	$	869	1,420
Unearned lease income		(41)	(85)
Total	$	828	1,335

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Age Analysis of Past Due Loans and Leases

The following tables present an aging of the Corporation’s loan and lease portfolio as of September 30, 2019 and December 31, 2018, respectively:

						Total
			90+ days			Accruing	Nonaccrual
September 30, 2019	30-89 days		past due and	Total past		Loans and	loans and	Total loans	Delinquency
(dollars in thousands)	past due		still accruing	due	Current	leases	leases	and leases	percentage
Commercial mortgage	$	—	—	—	355,869	355,869	1,549	357,418	0.43	%
Home equity lines and loans		592	—	592	82,563	83,155	257	83,412	1.02
Residential mortgage (1)		—	—	—	54,574	54,574	1,698	56,272	3.02
Construction		1,519	—	1,519	152,944	154,463	—	154,463	0.98
Commercial and industrial		394	—	394	283,556	283,950	426	284,376	0.29
Consumer		—	—	—	984	984	—	984	—
Leases		123	—	123	705	828	—	828	14.86
Total	$	2,628	—	2,628	931,195	933,823	3,930	937,753	0.70	%

(1) Includes $11,278  of loans at fair value as of September 30, 2019  ($10,437 of current, $0 of 30-89 days past due and $841 of nonaccrual).

						Total
			90+ days			Accruing	Nonaccrual
December 31, 2018	30-89 days		past due and	Total past		Loans and	loans and	Total loans	Delinquency
(dollars in thousands)	past due		still accruing	due	Current	leases	leases	and leases	percentage
Commercial mortgage	$	—	—	—	324,169	324,169	1,224	325,393	0.38	%
Home equity lines and loans		348	—	348	81,855	82,203	83	82,286	0.52
Residential mortgage (1)		195	—	195	51,018	51,213	2,147	53,360	4.39
Construction		—	—	—	116,906	116,906	—	116,906	—
Commercial and industrial		217	—	217	259,112	259,329	477	259,806	0.27
Consumer		—	—	—	701	701	—	701	—
Leases		49	—	49	1,286	1,335	—	1,335	3.67
Total	$	809	—	809	835,047	835,856	3,931	839,787	0.56	%

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

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

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

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

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Roll-Forward of Allowance for Loan and Lease Losses by Portfolio Segment

The following tables detail the roll‑forward of the Corporation’s Allowance, by portfolio segment, for the three and nine month periods ended September 30, 2019 and 2018, respectively:

	Balance,					Balance,
(dollars in thousands)	June 30, 2019		Charge-offs	Recoveries	Provision	September 30, 2019
Commercial mortgage	$	3,197	—	1	257	3,455
Home Equity lines and loans		354	—	2	(28)	328
Residential mortgage		200	—	2	(30)	172
Construction		2,033	—	—	136	2,169
Commercial and industrial		2,830	(30)	6	369	3,175
Consumer		4	—	1	1	6
Leases		7	—	—	—	7
Total	$	8,625	(30)	12	705	9,312

	Balance,					Balance,
(dollars in thousands)	December 31, 2018		Charge-offs	Recoveries	Provision	September 30, 2019
Commercial mortgage	$	3,209	—	6	240	3,455
Home Equity lines and loans		323	—	10	(5)	328
Residential mortgage		191	—	4	(23)	172
Construction		1,627	—	—	542	2,169
Commercial and industrial		2,690	(30)	328	187	3,175
Consumer		3	—	3	—	6
Leases		10	—	—	(3)	7
Total	$	8,053	(30)	351	938	9,312

	Balance,					Balance,
(dollars in thousands)	June 30, 2018		Charge-offs	Recoveries	Provision	September 30, 2018
Commercial mortgage	$	3,011	—	2	140	3,153
Home Equity lines and loans		269	—	10	37	316
Residential mortgage		166	—	—	14	180
Construction		1,438	—	—	59	1,497
Commercial and industrial		2,559	(50)	8	41	2,558
Consumer		3	—	1	—	4
Leases		3	—	—	—	3
Total	$	7,449	(50)	21	291	7,711

	Balance,					Balance,
(dollars in thousands)	December 31, 2017		Charge-offs	Recoveries	Provision	September 30, 2018
Commercial mortgage	$	2,434	—	6	713	3,153
Home Equity lines and loans		280	(137)	14	159	316
Residential mortgage		82	—	61	37	180
Construction		1,689	—	—	(192)	1,497
Commercial and industrial		2,214	(244)	41	547	2,558
Consumer		5	—	3	(4)	4
Leases		5	—	—	(2)	3
Total	$	6,709	(381)	125	1,258	7,711

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Allowance for Loan and Lease Losses Allocated by Portfolio Segment

The following tables detail the allocation of the allowance for loan and lease losses and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of September 30, 2019 and December 31, 2018.

	Allowance on loans and leases				Carrying value of loans and leases
	Individually		Collectively		Individually		Collectively
September 30, 2019	evaluated		evaluated		evaluated		evaluated
(dollars in thousands)	for impairment		for impairment	Total	for impairment		for impairment	Total
Commercial mortgage	$	—	3,455	3,455	$	2,204	355,214	357,418
Home Equity lines and loans		2	326	328		255	83,157	83,412
Residential mortgage		—	172	172		855	44,138	44,993
Construction		—	2,169	2,169		1,262	153,201	154,463
Commercial and industrial		124	3,051	3,175		1,389	282,987	284,376
Consumer		—	6	6		—	984	984
Leases		—	7	7		—	828	828
Total	$	126	9,186	9,312	$	5,965	920,509	926,474	(1)

	Allowance on loans and leases				Carrying value of loans and leases
	Individually		Collectively		Individually		Collectively
December 31, 2018	evaluated		evaluated		evaluated		evaluated
(dollars in thousands)	for impairment		for impairment	Total	for impairment		for impairment	Total
Commercial mortgage	$	—	3,209	3,209	$	1,929	323,464	325,393
Home Equity lines and loans		—	323	323		83	82,203	82,286
Residential mortgage		—	191	191		969	40,969	41,938
Construction		—	1,627	1,627		1,281	115,625	116,906
Commercial and industrial		103	2,587	2,690		1,537	258,269	259,806
Consumer		—	3	3		—	701	701
Leases		—	10	10		—	1,335	1,335
Total	$	103	7,950	8,053	$	5,799	822,566	828,365	(1)

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

Loans and Leases by Credit Ratings

As part of the process of determining the Allowance to the different segments of the loan and lease portfolio, management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by management. The results of these reviews are reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:

· Pass - Loans considered to be satisfactory with no indications of deterioration.

· Special mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

· Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

· Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of

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

The following tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to determine the allowance for loan and lease losses as of September 30, 2019 and December 31, 2018:

September 30, 2019			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	350,027	3,437	3,954	—	357,418
Home equity lines and loans		83,155	—	257	—	83,412
Construction		151,663	2,774	26	—	154,463
Commercial and industrial		262,217	8,399	13,760	—	284,376
Total	$	847,062	14,610	17,997	—	879,669

December 31, 2018			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	320,130	3,713	1,550	—	325,393
Home equity lines and loans		82,121	—	165	—	82,286
Construction		114,249	2,657	—	—	116,906
Commercial and industrial		239,181	12,620	7,975	30	259,806
Total	$	755,681	18,990	9,690	30	784,391

In addition to credit quality indicators as shown in the above tables, allowance allocations for residential mortgages, consumer loans and leases are also applied based on their performance status as of September 30, 2019 and December 31, 2018. No troubled debt restructurings performing according to modified terms are included in performing residential mortgages below as of September 30, 2019 and December 31, 2018.

	September 30, 2019				December 31, 2018
(dollars in thousands)	Performing		Nonperforming	Total	Performing		Nonperforming	Total
Residential mortgage	$	44,138	855	44,993	$	40,969	969	41,938
Consumer		984	—	984		701	—	701
Leases		828	—	828		1,335	—	1,335
Total	$	45,950	855	46,805	$	43,005	969	43,974

There were six nonperforming residential mortgage loans at September 30, 2019 and December 31, 2018 with a combined outstanding principal balance of $1.2 million and $1.9 million, respectively, which were carried at fair value and not included in the table above.

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Impaired Loans

The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related allowance for loan and lease losses and interest income recognized for the periods.

	At September 30, 2019					At December 31, 2018
					Average				Average
	Recorded		Principal	Related	recorded	Recorded	Principal	Related	recorded
(dollars in thousands)	investment		balance	allowance	investment	investment	balance	allowance	investment
Impaired loans with related allowance:
Commercial mortgage	$	—	—	—	—	—	—	—	—
Commercial and industrial		559	559	124	566	676	679	103	680
Home equity lines and loans		255	255	2	256	—	—	—	—
Residential mortgage		—	—	—	—	—	—	—	—
Construction		—	—	—	—	—	—	—	—
Total		814	814	126	822	676	679	103	680
Impaired loans without related allowance:
Commercial mortgage	$	2,204	2,713	—	2,272	1,929	2,379	—	1,982
Commercial and industrial		830	876	—	864	861	945	—	885
Home equity lines and loans		—	—	—	—	83	89	—	84
Residential mortgage		855	855	—	857	969	978	—	978
Construction		1,262	1,263	—	1,286	1,281	1,281	—	1,293
Total		5,151	5,707	—	5,279	5,123	5,672	—	5,222
Grand Total	$	5,965	6,521	126	6,101	5,799	6,351	103	5,902

Interest income recognized on performing impaired loans amounted to $50 thousand and $93 thousand for the three months ended September 30, 2019 and 2018, respectively, and $152 thousand and $218 thousand for the nine months ended September 30, 2019 and 2018, respectively.

Troubled Debt Restructuring

The restructuring of a loan is considered a “troubled debt restructuring” (“TDR”) if both of the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the creditor has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan, and (e) for leases, a reduced lease payment. A less common concession granted is the forgiveness of a portion of the principal.

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower were a concession not granted. The determination of whether a concession has been granted is subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

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The balance of TDRs at September 30, 2019 and December 31, 2018 are as follows:

	September 30,		December 31,
(dollars in thousands)	2019		2018
TDRs included in nonperforming loans and leases	$	1,133	1,219
TDRs in compliance with modified terms		2,880	3,047
Total TDRs	$	4,013	4,266

There were no loan and lease modifications granted during the three and nine months ended September 30, 2019 that were categorized as TDRs. 

The following tables present information regarding loan and lease modifications granted during the three and nine months ended September 30, 2018 that were categorized as TDRs:

	For the Three Months Ended September 30, 2018
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded		Related
(dollar in thousands)	Contracts	Investment		Investment		Allowance
Real Estate:
Land and Construction	1		796		796		—
Total	1	$	796	$	796	$	—
	For the Nine Months Ended September 30, 2018
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded		Related
(dollar in thousands)	Contracts	Investment		Investment		Allowance
Real Estate:
Land and Construction	2		2,410		2,410		—
Commercial and industrial	1		120		120		—
Total	3	$	2,530	$	2,530	$	—

No loan and lease modifications granted during the three and nine months ended September 30, 2019 and 2018 subsequently defaulted during the same time period.

The following table presents information regarding the number of contracts by type of loan and lease modifications granted during the three and nine months ended September 30, 2018:

	For the Three Months Ended		For the Nine Months Ended
	September 30, 2018		September 30, 2018
		Interest Rate		Interest Rate
	Loan Term	Change and Loan	Loan Term	Change and Loan
	Extension	Term Extension	Extension	Term Extension
Real Estate:
Land and Construction	1	—	2	—
Commercial and industrial	—	—	—	1
Total	1	—	2	1

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(7)      Short-Term Borrowings and Long‑Term Debt

The Corporation’s short‑term borrowings generally consist of federal funds purchased and short‑term borrowings extended under agreements with the Federal Home Loan Bank of Pittsburgh (“FHLB”). The Corporation has two unsecured Federal Funds borrowing facilities with correspondent banks: one of $24 million and one of  $15 million. Federal funds purchased generally represent one-day borrowings.  The Corporation had no Federal Funds purchased at September 30, 2019 and December 31, 2018. The Corporation also has a facility with the Federal Reserve discount window of $9.6 million. This facility is fully secured by investment securities and loans. There were no borrowings under this facility at September 30, 2019 or at December 31, 2018.

Short‑term borrowings as of September 30, 2019 consisted of short‑term advances from the FHLB of Pittsburgh in the amount of $119.7 million with interest at 2.08%,  $3.1 million with an original term of 3 years with interest at 2.03%,  $5.0 million with an original term of 7 years with interest at 2.76%, and the note payable related to the acquisition of HJ Wealth of $619 thousand with an original term of 3 years with interest at 3.00%.

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

Long‑term debt at September 30, 2019 and December 31, 2018 consisted of the following fixed rate notes:

				Balance as of
	Maturity	Interest		September 30,		December 31,
(dollars in thousands)	date	rate		2019		2018
Mid-term Repo-fixed	06/28/21	1.88	%		3,123	—
Mid-term Repo-fixed	08/10/20	2.76			—	5,000
Acquisition Purchase Note (1)	04/01/20	3.00			—	1,238
Total				$	3,123	6,238

(1) The acquisition purchase note for the Wealth division is classified as short-term borrowing at September 30, 2019.

The FHLB of Pittsburgh has also issued $101.5 million of letters of credit to the Corporation for the benefit of the Corporation’s public deposit funds and loan customers. These letters of credit expire by June 19, 2020. The Corporation has a maximum borrowing capacity with the FHLB of $496.3 million as of September 30, 2019 and $437.2 million as of December 31, 2018. All advances and letters of credit from the FHLB are secured by a blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation’s borrowing agreement with the FHLB.

(8)      Servicing Assets

The Corporation sells certain residential mortgage loans and 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. When the Corporation sells a residential mortgage loan, it does not retain any portion of that loan and its continuing involvement in such transfers is limited to certain servicing responsibilities. While the Corporation may retain a portion of certain sold SBA loans, its continuing involvement in the portion of the loan that was sold is limited to certain servicing responsibilities. When the contractual servicing fees on loans sold with servicing retained are expected to be more than adequate compensation to a servicer for performing the servicing, a capitalized servicing asset is recognized. The Corporation accounts for the transfers and servicing of financial assets in accordance with ASC 860, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.

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Residential Mortgage Loans

The mortgage servicing rights (“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.  The Corporation serviced $45.1 million and $15.8 million of residential mortgage loans as of September 30, 2019 and 2018, respectively. During the three and nine months ended September 30, 2019, the Corporation recognized servicing fee income of $107 thousand and $198 thousand, respectively, compared to $90 thousand and $152 thousand during the three and nine months ended September 30, 2018, respectively.

Changes in the MSR balance are summarized as follows:

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2019		2018	2019		2018
Balance at beginning of the period	$	236	62	$	232	—
Servicing rights capitalized		107	89		198	152
Amortization of servicing rights		(17)	(3)		(39)	(4)
Change in valuation allowance		(12)	—		(77)	—
Balance at end of the period	$	314	148	$	314	148

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

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2019		2018	2019		2018
Valuation allowance, beginning of period	$	(65)	—	$	—	—
Impairment		(12)	—		(77)	—
Recovery		—	—		—	—
Valuation allowance, end of period	$	(77)	—	$	(77)	—

The Corporation uses assumptions and estimates in determining the fair value of MSRs. These assumptions include prepayment speeds and discount rates. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge. At September 30, 2019, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 16.02% and a discount rate equal to 9.25%.  At September 30, 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%.

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At September 30, 2019 and September 30, 2018, the sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.

(dollars in thousands)	September 30, 2019		December 31, 2018
Fair value of residential mortgage servicing rights	$	314	$	213
Weighted average life (years)		7.4		3.4
Prepayment speed		16.02%		11.78%
Impact on fair value:
10% adverse change	$	(16)	$	(9)
20% adverse change		(30)		(17)
Discount rate		9.25%		9.50%
Impact on fair value:
10% adverse change	$	(9)	$	(8)
20% adverse change		(18)		(15)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.

SBA Loans

SBA loan servicing assets are amortized to non-interest expense in proportion to, and over the period of, the estimated future net servicing life of the underlying assets.  SBA loan servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost.  Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the SBA loan servicing asset.  The Corporation serviced $15.4 million of SBA loans, as of September 30, 2019 and no SBA loans, as of September 30, 2018.  During the three and nine months ended September 30, 2019, the Corporation recognized servicing fee income of $8 thousand in both periods.

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

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2019		2018	2019		2018
Balance at beginning of the period	$	133	—	$	—	—
Servicing rights capitalized		198	—		331	—
Amortization of servicing rights		(6)	—		(6)	—
Change in valuation allowance		(4)	—		(4)	—
Balance at end of the period	$	321	—	$	321	—

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Activity in the valuation allowance for SBA loan servicing assets was as follows:

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2019		2018	2019		2018
Valuation allowance, beginning of period	$	—	—	$	—	—
Impairment		(4)	—		(4)	—
Recovery		—	—		—	—
Valuation allowance, end of period	$	(4)	—	$	(4)	—

The Corporation uses assumptions and estimates in determining the fair value of SBA loan servicing rights. These assumptions include prepayment speeds, discount rates, and other assumptions. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge. At September 30, 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 10.34%, and a discount rate equal to 8.88%. The Corporation did not service SBA loans at September 30, 2018.

At September 30, 2019, the sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.

(dollars in thousands)	September 30, 2019
Fair value of SBA loan servicing rights	$	321
Weighted average life (years)		4.5
Prepayment speed		10.34%
Impact on fair value:
10% adverse change	$	(11)
20% adverse change		(21)
Discount rate		8.88%
Impact on fair value:
10% adverse change	$	(9)
20% adverse change		(18)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the SBA servicing rights is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.

(9)      Fair Value Measurements and Disclosures

The Corporation uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques

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are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

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

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

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

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

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

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For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2019 and December 31, 2018 are as follows:

	September 30, 2019
(dollars in thousands)	Total		Level 1	Level 2	Level 3
Securities available for sale:
U.S. government agency mortgage-backed securities	$	12,900	—	12,900	—
U.S. government agency collateralized mortgage obligations		29,961	—	29,961	—
Investments in mutual funds and other equity securities		9,896	—	9,896	—
Mortgage loans held-for-sale		48,615	—	48,615	—
Mortgage loans held-for-investment		11,278	—	11,278	—
Mortgage servicing rights		314	—	—	314
SBA loan servicing rights		321	—	—	321
Interest rate lock commitments		283	—	—	283
Customer derivatives - Interest rate swaps		500	—	500	—
Total	$	114,068	—	113,150	918

	December 31, 2018
(dollars in thousands)	Total		Level 1	Level 2	Level 3
Securities available for sale:
U.S. government agency mortgage-backed securities	$	23,866	—	23,866	—
U.S. government agency collateralized mortgage obligations		14,664	—	14,664	—
State and municipal securities		10,919	—	10,919	—
Investments in mutual funds and other equity securities		979	—	979	—
Mortgage loans held-for-sale		37,695	—	37,695	—
Mortgage loans held-for-investment		11,422	—	11,422	—
Mortgage servicing rights		213	—	—	213
Interest rate lock commitments		310	—	—	310
Customer derivatives - Interest rate swaps		141	—	141	—
Total	$	100,209	—	99,686	523

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2019 and December 31, 2018 are as follows:

	September 30, 2019
(dollars in thousands)	Total		Level 1	Level 2	Level 3
Impaired loans (1)	$	5,965	—	—	5,965
Other real estate owned (2)		120	—	—	120
Total	$	6,085	—	—	6,085

	December 31, 2018
(dollars in thousands)	Total		Level 1	Level 2	Level 3
Impaired loans (1)	$	5,799	—	—	5,799
Other real estate owned (2)		—	—	—	—
Total	$	5,799	—	—	5,799

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

(2) Real estate properties acquired through, or in lieu of, foreclosure are to be sold and are carried at fair value less estimated cost to sell. Fair value is based upon independent market prices or appraised value of the property. These assets are included in Level 3 fair value based upon the lowest level of input that is significant to the fair value

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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:

(a)Cash and Cash Equivalents

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

(b)Securities

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

(c)Mortgage Loans Held for Sale

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

(d)Loans Receivable

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

(e)Mortgage Loans Held for Investment

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

(f)Servicing Rights

The Corporation determines the fair value of its servicing rights by estimating the amount and timing of future cash flows associated with the servicing rights and discounting the cash flows using market discount rates. The valuation included the application of certain assumptions made by management, including discount rates, prepayment projections, and prevailing assumptions used in the marketplace at the time of the valuation.

(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. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

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(h)Restricted Investment in Bank Stock

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

(i)Accrued Interest Receivable and Payable

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

(j)Deposit Liabilities

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

(k)Short‑Term Borrowings

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

(l)Long‑Term Debt

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

(m)Subordinated Debt

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

(n)Off‑Balance Sheet Financial Instruments

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

(o)Derivative Financial Instruments

The fair value of forward commitments and interest rate swaps is based on market pricing and therefore are considered Level 2.  Derivatives classified as Level 3 consist of interest rate lock commitments related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement.

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The estimated fair values of the Corporation’s financial instruments at September 30, 2019 and December 31, 2018 are as follows:

		September 30, 2019			December 31, 2018
	Fair Value	Carrying			Carrying
(dollars in thousands)	Hierarchy Level	amount		Fair value	amount	Fair value
Financial assets:
Cash and cash equivalents	Level 1	$	40,532	40,532	23,952	23,952
Securities available-for-sale	Level 2		52,757	52,757	50,428	50,428
Securities held-to-maturity	Level 2		8,814	9,028	12,741	12,655
Mortgage loans held-for-sale	Level 2		48,615	48,615	37,695	37,695
Loans receivable, net	Level 3		935,858	933,285	818,631	820,512
Mortgage loans held-for-investment	Level 2		11,278	11,278	11,422	11,422
Interest rate lock commitments	Level 3		283	283	310	310
Forward commitments	Level 2		30	30	—	—
Restricted investment in bank stock	Level 3		8,237	8,237	7,002	7,002
Mortgage servicing rights	Level 3		314	314	232	213
SBA loan servicing rights	Level 3		321	321	—	—
Accrued interest receivable	Level 3		3,155	3,155	2,889	2,889
Customer derivatives - Interest rate swaps	Level 2		500	500	141	141
Financial liabilities:
Deposits	Level 2		858,461	896,000	752,130	744,300
Short-term borrowings	Level 2		128,466	128,467	114,300	114,300
Long-term debt	Level 2		3,123	3,123	6,238	6,240
Subordinated debentures	Level 2		9,176	9,792	9,239	9,396
Accrued interest payable	Level 2		669	669	305	305
Interest rate lock commitments	Level 3		81	81	40	40
Forward commitments	Level 2		105	105	176	176
Customer derivatives - Interest rate swaps	Level 2		568	568	161	161
		Notional			Notional
Off-balance sheet financial instruments:		amount		Fair value	amount	Fair value
Commitments to extend credit	Level 2	$	327,788	283	290,614	310
Letters of credit	Level 2		9,750	—	5,158	—

The following table includes a rollforward of interest rate lock commitments for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the three and nine month peiods ended September 30, 2019 and 2018.

	Three Months Ended September 30,			Nine Months Ended September 30,
	2019		2018	2019		2018
Balance at beginning of the period	$	375	586	$	310	344
(Decrease) increase in value		(92)	(80)		(27)	162
Balance at end of the period	$	283	506	$	283	506

				Significant
Valuation Techniques for Level 3 interest rate lock	Fair Value			Unobservable	Range of		Weighted
commitments as of September 30, 2019	Level 3		Valuation Technique	Input	Inputs		Average
Interest rate lock commitments	$	283	Market comparable pricing	Pull through	1 - 99	%	91.70	%

A realized gain of $101 thousand and a realized gain of $138 thousand due to changes in the fair value of interest rate lock commitments which are classified as Level 3 assets and liabilities for the three months ended September 30, 2019 and 2018, respectively, and realized gains of $67 thousand and $114 thousand for the nine months ended September 30, 2019

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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.

Refer to note 8 – servicing assets for a rollforward of servicing assets for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the three and nine month peiods ended September 30, 2019 and 2018.

(10)    Derivative Financial Instruments

Risk Management Objective of Using Derivatives

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

Mortgage Banking Derivatives

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

Customer Derivatives – Interest Rate Swaps

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

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

		September 30, 2019			December 31, 2018
(dollars in thousands)	Balance Sheet Line Item	Notional Amount		Asset (Liability) Fair Value	Notional Amount	Asset (Liability) Fair Value
Interest Rate Lock Commitments
Positive fair values	Other assets	$	37,105	283	27,188	310
Negative fair values	Other liabilities		14,102	(81)	6,218	(40)
Total			51,207	202	33,406	270
Forward Commitments
Positive fair values	Other assets		11,000	30	—	—
Negative fair values	Other liabilities		41,000	(105)	26,500	(176)
Total			52,000	(75)	26,500	(176)
Customer Derivatives - Interest Rate Swaps
Positive fair values	Other assets		3,287	500	3,330	141
Negative fair values	Other liabilities		3,287	(568)	3,330	(161)
Total			6,574	(68)	6,660	(20)
Total derivative financial instruments		$	109,781	59	66,566	74

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

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2019		2018		2019	2018
Interest Rate Lock Commitments	$	(102)	(224)	$	(68)	(110)
Forward Commitments		124	293		101	168
Customer Derivatives - Interest Rate Swaps		(22)	—		(48)	—
Net fair value gains (losses) on derivative financial instruments	$	—	69	$	(15)	58

Realized gains/(losses) on derivatives were ($299) thousand and ($170) thousand for the three months ended September 30, 2019 and 2018, respectively, and ($792) and $534 thousand for the nine months ended September 30, 2019 and 2018, respectively, and are included in other non-interest income in the unaudited consolidated statements of income.

(11)    Segments

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

Our Banking segment consists of commercial and retail banking. The Banking segment generates interest income from its lending (including leasing) and investing activities and is dependent on the gathering of lower cost deposits from its branch network or borrowed funds from other sources for funding its loans, resulting in the generation of net interest income. The Banking segment also derives revenues from other sources including gains on the sale of

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available for sale investment securities, gains on the sale of loans, service charges on deposit accounts, cash sweep fees, overdraft fees, BOLI income.

Meridian Wealth Partners (“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 loan production offices located throughout the Delaware Valley. The Mortgage segment originates 1 – 4 family residential mortgages for sale, including servicing to third party investors, or for our loan portfolio. The unit generates net interest income on the loans it originates, earns margin income (primarily gain on sales), as well as other fee income.

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

	Three Months Ended September 30, 2019					Three Months Ended September 30, 2018
(dollars in thousands)	Bank		Wealth	Mortgage	Total	Bank		Wealth	Mortgage	Total
Net interest income	$	9,203	4	67	9,274	$	8,107	71	200	8,378
Provision for loan losses		705	—	—	705		291	—	—	291
Net interest income after provision		8,498	4	67	8,569		7,816	71	200	8,087
Non-interest Income
Mortgage banking income		74	—	7,836	7,910		105	—	8,169	8,274
Wealth management income		31	891	—	922		59	871	—	930
SBA income		645	—	—	645		—	—	—	—
Net change in fair values		(23)	—	53	30		—	—	(333)	(333)
Other		534	—	(227)	307		363	—	(67)	296
Total non-interest income		1,261	891	7,662	9,814		527	871	7,769	9,167
Non-interest Expense
Salaries and employee benefits		4,248	564	4,507	9,319		3,264	445	5,192	8,901
Occupancy and equipment		530	34	382	946		521	29	370	920
Professional fees		410	2	408	820		590	9	115	714
Advertising and promotion		344	94	136	574		301	111	178	590
Other		1,393	140	960	2,493		1,259	314	1,055	2,628
Total non-interest expense		6,925	834	6,393	14,152		5,935	908	6,910	13,753
Operating Margin	$	2,834	61	1,336	4,231	$	2,408	34	1,059	3,501

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	Nine Months Ended September 30, 2019					Nine Months Ended September 30, 2018
(dollars in thousands)	Bank		Wealth	Mortgage	Total	Bank		Wealth	Mortgage	Total
Net interest income	$	26,437	68	167	26,672	$	23,597	217	402	24,216
Provision for loan losses		938	—	—	938		1,258	—	—	1,258
Net interest income after provision		25,499	68	167	25,734		22,339	217	402	22,958
Non-interest Income
Mortgage banking income		175	—	18,964	19,139		148	—	20,259	20,407
Wealth management income		110	2,588	—	2,698		149	2,847	—	2,996
SBA income		1,160	—	—	1,160		—	—	—	—
Net change in fair values		(49)	—	341	292		—	—	(471)	(471)
Other		1,409	—	(510)	899		1,136	—	823	1,959
Total non-interest income		2,805	2,588	18,795	24,188		1,433	2,847	20,611	24,891
Non-interest Expense
Salaries and employee benefits		11,988	1,681	12,120	25,789		10,390	1,373	14,956	26,719
Occupancy and equipment		1,588	93	1,164	2,845		1,599	99	1,172	2,870
Professional fees		1,116	11	873	2,000		1,325	20	325	1,670
Advertising and promotion		1,084	57	628	1,769		917	319	566	1,802
Other		4,546	426	3,137	8,109		3,827	613	2,888	7,328
Total non-interest expense		20,322	2,268	17,922	40,512		18,058	2,424	19,907	40,389
Operating Margin	$	7,982	388	1,040	9,410	$	5,714	640	1,106	7,460

(12)    Recent Litigation

On November 21, 2017, three former employees of the mortgage-banking division of the Bank filed suit in the United States District Court for the Eastern District of Pennsylvania, Juan Jordan et al. v. Meridian Bank, Thomas Campbell and Christopher Annas, against the Bank purporting to be a class and collective action seeking unpaid and overtime wages under the Fair Labor Standards Act of 1938, the New Jersey Wage and Hour Law, and the Pennsylvania Minimum Wage Act of 1968 on behalf of similarly situated plaintiffs. In 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 has a litigation reserve of $990 thousand at September 30, 2019.  The parties have submitted their negotiated settlement agreement to the court, and it awaits final court approval.

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(13)    Recent Accounting Pronouncements

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

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

Issued in May 2014, ASU 2014‑09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015‑14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This amendment defers the effective date of ASU 2014‑09 by one year. In March 2016, the FASB issued ASU 2016‑ 08”, “Principal versus Agent Considerations (Reporting Gross versus Net),” which amends the principal versus agent guidance and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. In addition, the FASB issued ASU Nos. 2016‑20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” and 2016‑12, “Narrow-Scope Improvements and Practical Expedients”, both of which provide additional clarification of certain provisions in Topic 606. These Accounting Standards Codification (“ASC”) updates are effective for public companies for annual reporting periods beginning after December 15, 2017, but early adoption is permitted. Early adoption is permitted only as of annual reporting periods after December 15, 2016. The standard permits the use of either the ‘retrospective’ or ‘retrospectively with the cumulative effect’ transition method. For non-public companies, the ASC updates are effective for annual reporting periods beginning after December 15, 2018, and interim periods beginning after December 15, 2019. The Corporation’s revenue is the sum of net interest income and non-interest income. The scope of the guidance excludes nearly all net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. The Corporation performed a review and determined that the majority of non-interest income revenue streams are within the scope of the new standard. Non-interest income streams that are out of scope of the new standard include BOLI, sales of investment securities, mortgage banking activities, and certain items within service charges and other income.  Management is finalizing a review of contracts related to service charges on deposits, investment advisory commissions and fee income, and certain items within other service charges and other income to make an assessment of the potential impact of this ASU. The Corporation will adopt this ASU as of December 31, 2019.

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

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counterparty obtains control of it. Management is currently assessing the potential impact of ASU. The Corporation will adopt this ASU as of December 31, 2019.

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

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

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

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

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

Issued in June 2016, ASU 2016‑13 significantly changes how companies measure and recognize credit impairment for many financial assets. This ASU requires businesses and other organizations to measure the current expected credit losses (“CECL”) on financial assets, such as loans, net investments in leases, certain debt securities, bond insurance and other receivables.  The amendments affect entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. Current GAAP requires an incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The amendments in this ASU replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonableness and supportable information to inform credit loss estimates. An entity should apply the amendments through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (modified retrospective approach). Acquired credit impaired loans for which the guidance in Accounting Standards Codification (ASC) Topic 310-30 has been previously applied should prospectively apply the guidance in this ASU.  A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date. ASU 2016‑13 is effective for public companies for the annual and interim periods in fiscal years beginning after December 15, 2019, with early adoption permitted. For non-public companies the ASU is effective for fiscal years and interim periods beginning after December 15, 2022, or January 1, 2023 for the Corporation.  The Corporation has assembled a cross-functional team from Finance, Credit, and IT that is leading the implementation efforts to evaluate the impact of this guidance on the Corporation's Consolidated Financial Statements and related disclosures, internal systems, accounting policies, processes and related internal controls.

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

Issued in February 2016, ASU 2016‑02 revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ASU 2016‑02 is effective for public companies for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. For non-public companies the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within the fiscal years beginning after December 31, 2020. In July 2018 ASU 2018-11 was issued which creates a new, optional transition method for implementing ASU 2016-02 and a lessor practical expedient for separating lease and non-lease components and has the same effective date as ASU 2016-02.  Under the optional transition method of ASU 2018-11, the Corporation may initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.  The Corporation is evaluating the effects that ASU 2016‑02 and ASU 2018-11 will have on our Consolidated Financial Statements and related disclosures and expects to adopt these ASU’s as of December 31, 2021. 

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

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

FASB ASU 2017‑08 (Subtopic 310‑20), “Nonrefundable Fees and Other Costs (Subtopic 310‑20): Premium Amortization on Purchased Callable Debt Securities”

Issued in March 2017, ASU 2017‑08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendment requires the premium to be amortized to the earliest call date. The amendment does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. For non-public companies the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within the fiscal years beginning after December 31, 2020. The Corporation is evaluating the effect that ASU 2017‑08 will have on our Consolidated Financial Statements and related disclosures upon our adoption as of December 31, 2019.

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,

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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 for which it plans to implement the ASU but we will consider the impact of the ASU on future hedging strategies that may arise.

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

In October 2018 ASU 2018-16 was issued.  The new guidance applies to all entities that elect to apply hedge accounting to benchmark interest rate hedges under Topic 815. It permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes in addition to the existing applicable rates. The guidance is required to be adopted concurrently with ASU 2017-12, on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after adoption.The Corporation will adopt this ASU as of December 31, 2020 and does not anticipate the adoption of this ASU to have a material impact on our Consolidated Financial Statements and related disclosures.

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

You should read the following discussion and analysis in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10‑Q and the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2018  (the “2018 10‑K”) included in Meridian Corporation’s Annual Report on Form 10‑K filed with the Securities and Exchange Commission (the “SEC”).

Cautionary Statement Regarding Forward-Looking Statements 

Meridian Corporation (the “Corporation”) may from time to time make written or oral “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to Meridian Corporation’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Meridian Corporation’s control). Numerous competitive, economic, regulatory, legal and technological factors, among others, could cause Meridian Corporation’s financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in such forward-looking statements.   Meridian Corporation cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Meridian Corporation’s filings with the Securities and Exchange Commission (including our Annual Report on Form 10-K for the year ended December 31, 2018) and, for periods prior to the completion of the holding company reorganization, Meridian Bank’s filings with the FDIC, including Meridian Bank’s Annual Report on Form 10-K for the year ended December 31, 2017, subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Meridian Corporation does not undertake to update any forward-looking

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statement whether written or oral, that may be made from time to time by Meridian Corporation or by or on behalf of Meridian Bank.

Critical Accounting Policies, Judgments and Estimates

Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgements are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified the provision and allowance for loan losses as the accounting policy that, due to the estimates, assumptions and judgements inherent in that policy, is critical in understanding our financial statements.  Management has presented the application of this policy to the audit committee of our board of directors.

This critical accounting policy, along with other significant accounting policies, are presented in in Footnote 1 of the Corporation’s Consolidated Financial Statements as of and for the years ended December 31, 2018 and 2017 included in the Annual Report on Form 10‑K.

Executive Overview

The following items highlight the Corporation’s results of operations for the three and nine months ended September 30, 2019, as compared to the same periods in 2018, and the changes in its financial condition as of September 30, 2019 as compared to December 31, 2018. More detailed information related to these highlights can be found in the sections that follow.

Three Month Results of Operations

· Net income for the three months ended September 30, 2019 was $3.3 million, or $0.52 per diluted share, an increase of $590 thousand as compared to net income of $2.7 million, or $0.42 per diluted share, for the same period in 2018.

· Return on average equity (“ROE”) and return on average assets (“ROA”) for the three months ended September 30, 2019 were 11.29% and 1.24%, respectively.

· Net interest income increased $896 thousand, or 10.7%, to $9.3 million for the three months ended September 30, 2019, as compared to $8.4 million for the same period in 2018.

· Provision for loan and lease losses (the “Provision”) of $705 thousand for the three months ended September 30, 2019 was an increase of $414 thousand from the $291 thousand Provision recorded for the same period in 2018.

· Non-interest income of $9.8 million for the three months ended September 30, 2019 was a $647 thousand or 7.1% increase from the same period in 2018.

· Mortgage banking income decreased $364 thousand, or 4.4%, to $7.9 million for the three months ended September 30, 2019, as compared to $8.3 million for the same period in 2018.

· Non-interest expense of $14.2 million for the three months ended September 30, 2019 increased $399 thousand, or 2.9%, from $13.8 million for the same period in 2018.

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Nine Month Results of Operations

· Net income for the nine months ended September 30, 2019 was $7.3 million, or $1.14 per diluted share, an increase of $1.5 million as compared to net income of $5.8 million, or $0.90 per diluted share, for the same period in 2018.

· ROE and ROA for the nine months ended September 30, 2019 were 8.65% and 0.97%, respectively.

· Net interest income increased $2.5 million, or 10.1%, to $26.7 million for the nine months ended September 30, 2019, as compared to $24.2 million for the same period in 2018.

· The Provision of $938 thousand for the nine months ended September 30, 2019 was a decrease of $320 thousand from the $1.3 million Provision recorded for the same period in 2018.

· Non-interest income of $24.2 million for the nine months ended September 30, 2019 was a $703 thousand or 2.8% decrease from the same period in 2018.

· Mortgage banking income decreased $1.3 million, or 6.2%, to $19.1 million for the nine months ended September 30, 2019, as compared to $20.4 million for the same period in 2018.

· Non-interest expense of $40.5 million for the nine months ended September 30, 2019 increased $123 thousand, or 0.3%, from $40.4 million for the same period in 2018.

Changes in Financial Condition

· Total assets of $1.13  billion as of September 30, 2019 increased $129.5 million, or 13.0%, from $997.5 million as of December 31, 2018.

· Consolidated stockholders’ equity of $117.8 million as of September 30, 2019 increased $8.2 million from $109.6 million as of December 31, 2018.

· Total portfolio loans and leases, excluding mortgage loans held for sale, as of September 30, 2019 were $935.9 million, an increase of $97.8 million, or 11.7%, from $838.1 million as of December 31, 2018.

· Total non-performing loans and leases of $3.9 million represented 0.43% of portfolio loans and leases as of September 30, 2019 as compared to $3.9 million, or 0.45% of portfolio loans and leases, as of December 31, 2018.

· The $9.3 million allowance for loan losses (“Allowance’), as of September 30, 2019, represented 1.01% of portfolio loans and leases, as compared to $8.1 million, or 0.97% of portfolio loans and leases, as of December 31, 2018.

· Total deposits of $858.5 million as of September 30, 2019 increased $106.3 million, or 14.1%, from $752.1 million as of December 31, 2018.

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Key Performance Ratios

Key financial performance ratios for the three and nine months ended September 30, 2019 and 2018 are shown in the table below:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Annualized return on average equity		11.29	%		10.16	%		8.65	%		7.47	%
Annualized return on average assets		1.24	%		1.16	%		0.97	%		0.87	%
Net interest margin (tax effected yield)		3.61	%		3.72	%		3.67	%		3.83	%
Basic earnings per share	$	0.52		$	0.43		$	1.15		$	0.91
Diluted earnings per share	$	0.52		$	0.42		$	1.14		$	0.90

The following table presents certain key period-end balances and ratios as of September 30, 2019 and December 31, 2018:

	September 30,			December 31,
(dollars in thousands, except per share amounts)	2019			2018
Book value per common share	$	18.38		$	17.10
Tangible book value per common share	$	17.62		$	16.31
Allowance as a percentage of loans and leases held for investment		1.01	%		0.97	%
Tier I capital to risk weighted assets		11.25	%		11.72	%
Tangible common equity ratio (1)		10.06	%		10.53	%
Loans held for investment	$	935,858		$	838,106
Total assets	$	1,126,937		$	997,480
Stockholders' equity	$	117,772		$	109,552

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

Non-GAAP Financial Measures

Meridian believes that non-GAAP measures are meaningful because they reflect adjustments commonly made by management, investors, regulators and analysts to evaluate performance trends and the adequacy of common equity. This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for performance and financial condition measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of Meridian’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Meridian believes adjusted net income, adjusted diluted earnings per common share, adjusted ROAA and adjusted ROAE provide a greater understanding of ongoing operations and enhances comparability of results with prior periods. Because management believes that these adjustments are not incurred as a result of ongoing operations, they are not as helpful a measure of the performance of our underlying business, particularly in light of their unpredictable nature and are difficult to forecast. This supplemental presentation should not be construed as an inference that Meridian’s future results will be unaffected by similar adjustments to these measures determined in accordance with GAAP.

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		Three Months Ended			Nine Months Ended
		September 30,			September 30,
(Dollars in thousands, except per share data)		2019	2018		2019	2018
Net income - consolidated	$	3,317	2,727	$	7,345	5,799
Litigation settlement adjustment, net of tax		—	—		614	156
Holding company formation cost adjustment, net of tax		—	179		—	179
Contingent asset fair value adjustment, net of tax		—	138		—	138
Adjusted net income - consolidated(1)	$	3,317	3,044	$	7,959	6,272
Net income per common share, diluted	$	0.52	0.42	$	1.14	0.90
Litigation settlement adjustment, net of tax		—	—		0.10	0.02
Holding company formation cost adjustment, net of tax		—	0.03		—	0.03
Contingent asset fair value adjustment, net of tax		—	0.02		—	0.02
Adjusted diluted earnings per share(1)		0.52	0.47		1.24	0.97
		Three Months Ended			Nine Months Ended
		September 30,			September 30,
		2019	2018		2019	2018
Return on average assets - consolidated		1.24%	1.16%		0.97%	0.87%
Adjusted return on average assets - consolidated(1)		1.24%	1.29%		1.05%	0.94%
Return on average equity - consolidated		11.29%	10.19%		8.65%	7.49%
Adjusted return on average equity - consolidated(1)		11.29%	11.34%		9.38%	8.10%

(1) Adjusted net income, adjusted diluted earnings per common share, adjusted ROAA and adjusted ROAE are non-GAAP measures and remove the tax effect of the charges to earnings for the settlement of outstanding litigation ($176 thousand and $44 thousand for nine months ended September 30, 2019 and 2018, respectively),  of holding company formation costs ($51 thousand for the three and nine months ended September 30, 2018), and the fair value adjustment to contingent assets ($39 thousand for the three and nine months ended September 30, 2018).

Our management used the measure of the tangible common equity ratio to assess our capital strength. We believe that this non-GAAP financial measure is useful to investors because, by removing the impact of our goodwill and other intangible assets, it allows investors to more easily assess our capital adequacy. This non-GAAP financial measure should not be considered a substitute for any regulatory capital ratios and may not be comparable to other similarly titled measures used by other companies. The table below provides the non-GAAP reconciliation for our tangible common equity ratio:

		September 30,	December 31,
(dollars in thousands)		2019	2018
Tangible common equity ratio:
Total stockholders' equity		117,772	109,552
Less:
Goodwill		899	899
Intangible assets		3,942	4,147
Tangible common equity		112,931	104,506
Total assets		1,126,937	997,480
Less:
Goodwill		899	899
Intangible assets		3,942	4,147
Tangible assets	$	1,122,096	992,434
Tangible common equity ratio		10.06%	10.53%

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The following sections discuss, in detail, the Corporation’s results of operations for the three and nine months ended September 30, 2019, as compared to the same periods in 2018, and the changes in its financial condition as of September 30, 2019 as compared to December 31, 2018.

Components of Net Income

Net income is comprised of five major elements:

· Net Interest Income, or the difference between the interest income earned on loans, leases and investments and the interest expense paid on deposits and borrowed funds;

· Provision For Loan and Lease Losses, or the amount added to the Allowance to provide for estimated inherent losses on portfolio loans and leases;

· Non-interest Income, which is made up primarily of mortgage banking income, wealth management income, gains and losses from the sale of loans, gains and losses from the sale of investment securities available for sale and other fees from loan and deposit services;

· Non-interest Expense, which consists primarily of salaries and employee benefits, occupancy, loan expenses, professional fees and other operating expenses; and

· Income Taxes, which include state and federal jurisdictions.

NET INTEREST INCOME

Net interest income is an integral source of the Corporation’s revenue. The tables below present a summary, for the three and nine months ended September 30, 2019 and 2018, of the Corporation’s average balances and yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities. The net interest margin is the net interest income as a percentage of average interest-earning assets. The net interest spread is the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The difference between the net interest margin and the net interest spread is the results of net free funding sources such as noninterest deposits and stockholders’ equity.

Total interest income for the three months ending September 30, 2019 was $13.6 million, which represented a $2.0 million, or 17.4%, increase compared with the three months ending September 30, 2018.  The increase in income was attributable to a $124.9 million increase in average interest earning assets, year over year, helped by an increase of 17 basis points in yield on earning assets, to 5.29% from 5.12%, for same period in 2018.  The commercial loan portfolio yield, in particular, rose 27 basis points over the same period in 2018, while the yield on construction loans increased 22 basis points over the same period. Total interest expense rose $1.1 million or 35.1% to $4.3 million for the three months ending September 30, 2019, compared with $3.2 million for the three months ending September 30, 2018. The increase was primarily due to an overall increase of 31 basis points in the cost of interest-bearing funds reflective of the overall increase in market rates.

Net interest income increased $900 thousand, or 10.7%, to $9.3 million for the three months ended September 30, 2019, compared to $8.4 million for the three months ended September 30, 2018.  The net-interest margin decreased 11 basis points for the three months ending September 30, 2019 at 3.61%, compared with 3.72% for the three month ending September 30, 2018.  The decrease in net interest margin reflects the pressure from the rising cost of funds, which has outpaced the favorable trend in yield on interest earning assets during the quarter.  The strength in the Corporation’s net-interest margin in the face of rising cost of funds reflects the size and asset quality of the loan portfolio, as well as the $3.6 million or 3.0% increase in average non-interest bearing deposits period over period.

Total interest income for the nine months ending September 30, 2019 was $39.0 million, which represented a $6.8 million, or 21.2%, increase compared with the nine months ending September 30, 2018. The increase in income was attributable to a $128.3 million increase in average interest earning assets, year over year, helped by an increase of 28 basis points in

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yield on earning assets, to 5.35% from 5.07%, for same period in 2018. The commercial loan portfolio yield, in particular, rose 41 basis points over the same period in 2018. Total interest expense rose $4.3 million or 54.7% to $12.3 million for the nine months ending September 30, 2019, compared with $8.0 million for the nine months ending September 30, 2018. The increase was primarily due to an overall increase of 54 basis points in the cost of interest-bearing funds reflective of the overall increase in market rates and an increase in average total interest bearing deposits of $122.2 million.

Net interest income increased $2.5 million, or 10.1%, to $26.7 million for the nine months ended September 30, 2019, compared to $24.2 million for the nine months ended September 30, 2018. The net-interest margin  decreased 16 basis points for the nine months ending September 30, 2019 at 3.67%, compared with 3.83% for the nine month ending September 30, 2018. The decrease in net interest margin reflects the pressure from the rising cost of funds, which has outpaced the favorable trend in yield on interest earning assets during the nine month period.  The strength in the Corporation’s net-interest margin in the face of rising cost of funds reflects the size and asset quality of the loan portfolio.

Analyses of Interest Rates and Interest Differential

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

	2019					2018
			Interest					Interest
For the Three Months Ended September 30,	Average		Income/		Yields/	Average		Income/		Yields/
(dollars in thousands)	Balance		Expense		rates	Balance		Expense		rates
Assets
Interest-earning assets
Due from banks	$	5,074		35	2.69%	$	5,872		28	1.89%
Federal funds sold		633		3	2.12%		477		2	1.87%
Investment securities(1)		63,488		414	2.59%		57,574		350	2.41%
Loans held for sale		38,633		381	3.95%		39,847		462	4.64%
Loans held for investment(1)		912,781		12,773	5.53%		791,914		10,758	5.36%
Total loans		951,414		13,154	5.49%		831,761		11,220	5.33%
Total interest-earning assets		1,020,609		13,606	5.29%		895,684		11,600	5.12%
Noninterest earning assets		38,846					40,645
Total assets	$	1,059,455				$	936,329
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits	$	86,005		352	1.63%	$	104,857		351	1.33%
Money market and savings deposits		313,255		1,374	1.74%		238,086		919	1.53%
Time deposits		319,208		1,907	2.37%		257,250		1,215	1.87%
Total deposits		718,468		3,633	2.01%		600,193		2,485	1.64%
Short-term borrowings		75,249		458	2.42%		85,026		491	2.29%
Long-term borrowings		5,962		56	3.72%		6,650		48	2.86%
Total Borrowings		81,211		514	2.51%		91,676		539	2.33%
Subordinated Debentures		9,176		169	7.33%		9,308		171	7.30%
Total interest-bearing liabilities		808,855		4,316	2.12%		701,177		3,195	1.81%
Noninterest-bearing deposits		126,101					122,454
Other noninterest-bearing liabilities		7,952					6,193
Total liabilities	$	942,908				$	829,824
Total stockholders' equity		116,547					106,505
Total stockholders' equity and liabilities	$	1,059,455				$	936,329
Net interest income			$	9,290				$	8,405
Net interest spread					3.17%					3.31%
Net interest margin					3.61%					3.72%

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

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	2019					2018
			Interest					Interest
For the Nine Months Ended September 30,	Average		Income/		Yields/	Average		Income/		Yields/
(dollars in thousands)	Balance		Expense		rates	Balance		Expense		rates
Assets
Interest-earning assets
Due from banks	$	6,450		121	2.51%	$	5,175		64	1.66%
Federal funds sold		853		15	2.27%		784		11	1.89%
Investment securities(1)		63,135		1,226	2.60%		54,144		958	2.37%
Loans held for sale		25,782		813	4.21%		31,074		1,017	4.36%
Loans held for investment(1)		879,184		36,880	5.58%		755,925		30,209	5.28%
Total loans		904,966		37,693	5.57%		786,999		31,226	5.28%
Total interest-earning assets		975,404		39,055	5.35%		847,102		32,259	5.07%
Noninterest earning assets		37,753					41,393
Total assets	$	1,013,157				$	888,495
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits	$	94,295		1,122	1.59%	$	103,623		851	1.10%
Money market and savings deposits		297,471		3,977	1.79%		228,107		2,212	1.30%
Time deposits		309,434		5,485	2.37%		247,244		3,109	1.68%
Total deposits		701,200		10,584	2.02%		578,974		6,172	1.43%
Short-term borrowings		53,865		1,109	2.75%		70,959		1,123	2.12%
Long-term borrowings		5,997		114	2.54%		6,720		142	2.83%
Total Borrowings		59,862		1,223	2.73%		77,679		1,265	2.18%
Subordinated Debentures		9,197		508	7.37%		9,527		525	7.37%
Total interest-bearing liabilities		770,259		12,315	2.14%		666,180		7,962	1.60%
Noninterest-bearing deposits		122,101					112,616
Other noninterest-bearing liabilities		6,997					5,895
Total liabilities	$	899,357				$	784,691
Total stockholders' equity		113,800					103,804
Total stockholders' equity and liabilities	$	1,013,157				$	888,495
Net interest income			$	26,740				$	24,297
Net interest spread					3.22%					3.47%
Net interest margin					3.67%					3.83%

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

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Rate/Volume Analysis (tax-equivalent basis)

The rate/volume analysis table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three and nine months ended September 30, 2019 as compared to the same period  in 2018, allocated by rate and volume. Changes in interest income and/or expense attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of the change in each category.

	2019 Compared to 2018
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	Rate		Volume	Total	Rate		Volume	Total
Interest income:
Due from banks	$	28	(21)	7	$	39	18	57
Federal funds sold		—	1	1		3	1	4
Investment securities(1)		27	37	64		98	170	268
Loans held for sale		(67)	(14)	(81)		(35)	(169)	(204)
Loans held for investment(1)		342	1,673	2,015		1,725	4,946	6,671
Total loans		275	1,659	1,934		1,690	4,777	6,467
Total interest income	$	330	1,676	2,006	$	1,830	4,966	6,796
Interest expense:
Interest checking	$	278	(277)	1	$	396	(125)	271
Money market and savings deposits		138	317	455		975	790	1,765
Time deposits		364	328	692		1,474	902	2,376
Total interest-bearing deposits		780	368	1,148		2,845	1,567	4,412
Short-term borrowings		134	(167)	(33)		393	(407)	(14)
Long-term borrowings		35	(27)	8		(14)	(14)	(28)
Total borrowings		169	(194)	(25)		379	(421)	(42)
Subordinated debentures		4	(6)	(2)		—	(17)	(17)
Total interest expense		953	168	1,121		3,224	1,129	4,353
Interest differential	$	(623)	1,508	885	$	(1,394)	3,837	2,443

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

For the three months ended September 30, 2019 as compared to the same period in 2018, interest income increased $2.0 million as volume changes in average earning assets contributed $1.7 million and favorable rate changes contributed $330 thousand.  The favorable change in net interest income due to volume changes was driven largely from growth in the loan  portfolio, which increased $119.7 million on average over the three month periods.  Total investment securities helped increase interest income $64 thousand,  while cash and cash equivalents contributed $8 thousand to interest income,  due to rate changes, period over period. In addition to favorable volume changes, favorable loan rate changes of 17 basis points contributed $342 thousand to interest income while investments rate changes of 18 basis points contributed $27 thousand.

On the funding side, interest expense increased $1.1 million due largely to rate changes. Higher rates on cost of funds, particularly from borrowings and time deposits, which rose 18 and 50 basis points, respectively, increased interest expense by $533 thousand.  Core deposits, such as interest checking and money market accounts rose 30 and 21 basis points, respectively, increasing interest expense $416 thousand. In addition, interest checking and money market accounts together rose $56.3 million on average, reducing net interest income by $40 thousand. Time deposits increased $62.0 million on average, causing an increase to interest expense of $328 thousand. These unfavorable changes were partially offset by favorable volume changes, particularly in borrowings. Borrowings decreased $10.5 million on average affecting net interest income $194 thousand positively, and lower levels of subordinated debt contributed $6 thousand to net interest income over the three month periods compared. Overall, the increase in interest income from volume changes contributed $1.5 million and out-paced the unfavorable rate changes to improve net interest income by $885 thousand.

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For the nine months ended September 30, 2019 as compared to the same period in 2018, interest income increased $6.8 million. The favorable change in net interest income due to volume changes was driven largely from growth in the loan portfolio, which increased $118.0 million on average over the nine month periods. This increase contributed $4.8 million to interest income. Total investment securities contributed $170 thousand to interest income due to volume changes, while cash and cash equivalents contributed another $19 thousand, period over period. In addition, interest income increased $1.8 million due to favorable rate changes in interest earning assets as the yield on loans overall increased 28 basis points.

On the funding side, interest expense increased $4.4 million due largely to unfavorable rate changes. Borrowings and time deposits, which rose 55 and 69 basis points, respectively and core deposits, such as interest checking and money market accounts each rose 49 basis points, contributing to an increase in interest expense of $2.9 million.  Also contributing to higher interest expense, were higher levels of deposit balances. Interest checking and money market accounts together rose $60.0 million on average, reducing net interest income by $665 thousand. Time deposits increased $62.2 million on average, causing an increase to interest expense of $902 thousand. Partially offsetting the effect of higher deposit balances, borrowings decreased $17.8 million on average affecting net interest income $421 thousand positively, and lower levels of subordinated debt contributed $17 thousand to the net interest income over the nine month periods compared. Overall, the increase in interest income from volume changes contributed $3.8 million and out-paced the unfavorable rate changes to improve net interest income by $2.4 million.

Simulations of net interest income. We use a simulation model on a quarterly basis to measure and evaluate potential changes in our net interest income resulting from various hypothetical interest rate scenarios. Our model incorporates various assumptions that management believes to be reasonable, but which may have a significant impact on results such as:

· The timing of changes in interest rates;

· Shifts or rotations in the yield curve;

· Repricing characteristics for market rate sensitive instruments on the balance sheet;

· Differing sensitivities of financial instruments due to differing underlying rate indices;

· Varying timing of loan prepayments for different interest rate scenarios;

· The effect of interest rate floors, periodic loan caps and lifetime loan caps;

· Overall growth rates and product mix of interest-earning assets and interest-bearing liabilities.

Because of the limitations inherent in any approach used to measure interest rate risk, simulated results are not intended to be used as a forecast of the actual effect of a change in market interest rates on our results, but rather as a means to better plan and execute appropriate Asset / Liability Management (“ALM”) strategies.

Potential changes to our net interest income between a flat interest rate scenario and hypothetical rising and declining interest rate scenarios, measured over a one-year period as of September 30, 2019 and 2018  are presented in the following table. The simulation assumes rate shifts occur upward and downward on the yield curve in even increments over the first twelve months (ramp), followed by rates held constant thereafter.

Rate Ramp

	Estimated increase
	(decrease) in Net Interest
	Income
	For the year ending
	September 30,
Changes in Market Interest Rates	2019		2018
+300 basis points over next 12 months	0.29	%	(0.17)	%
+200 basis points over next 12 months	0.32	%	(0.15)	%
+100 basis points over next 12 months	0.23	%	(0.08)	%
No Change
-100 basis points over next 12 months	(0.68)	%	0.07	%

The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of September 30, 2019 and was slightly liability sensitive as of September 30, 2018.  In its current position, the table indicates that a 100, 200 or

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300 basis point increase in interest rates would have a modestly positive impact from rising rates on net interest income over the next 12 months. The simulated exposure to a change in interest rates is contained, manageable and well within policy guidelines. The results continue to drive our funding strategy of increasing relationship-based accounts (core deposits) and utilizing term deposits to fund short to medium duration assets.

Simulation of economic value of equity. To quantify the amount of capital required to absorb potential losses in value of our interest-earning assets and interest-bearing liabilities resulting from adverse market movements, we calculate economic value of equity on a quarterly basis. We define economic value of equity as the net present value of our balance sheet’s cash flow, and we calculate economic value of equity by discounting anticipated principal and interest cash flows under the prevailing and hypothetical interest rate environments. Potential changes to our economic value of equity between a flat rate scenario and hypothetical rising and declining rate scenarios, measured as of  September 30, 2019 and 2018, are presented in the following table. The projections assume shifts ramp upward and downward of the yield curve of 100, 200 and 300 basis points occurring immediately. We would note that in a downward parallel shift of the yield curve, interest rates at the short-end of the yield curve are not modeled to decline any further than to 0%.

	Estimated increase (decrease) in Net
	Economic Value at September 30,
Changes in Market Interest Rates	2019		2018
+300 basis points	27.00	%	5.46	%
+200 basis points	22.00	%	4.85	%
+100 basis points	14.00	%	3.40	%
No Change
-100 basis points	(22.00)	%	(6.57)	%

Gap Analysis

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

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The following tables present the interest rate gap analysis of our assets and liabilities as of September 30, 2019 and December 31, 2018.

					Greater
					Than
					5 years and
As of September 30, 2019	12 Months				Not Rate
(dollars in thousands)	or Less		1-2 Years	2-5 Years	Sensitive	Total
Cash and investments	$	61,341	3,683	9,387	27,692	102,103
Loans, net (1)		554,324	145,497	236,251	39,089	975,161
Other Assets		—	—	—	49,673	49,673
Total Assets	$	615,665	149,180	245,638	116,454	1,126,937
Noninterest-bearing deposits		15,688	9,312	16,322	87,980	129,302
Interest-bearing deposits		408,231	—	—	—	408,231
Time deposits		295,824	21,369	3,735	—	320,928
FHLB advances		127,847	3,123	—	—	130,970
Other Liabilities		619	—	7,381	11,735	19,735
Total stockholders' equity		—	—	—	117,772	117,772
Total liabilities and stockholders' equity	$	848,209	33,804	27,438	217,487	1,126,937
Repricing gap-positive
(Negative) Positive	$	(232,544)	115,376	218,200	(101,033)	—
Cumulative repricing gap: Dollar amount	$	(232,544)	(117,168)	101,033	—
Percent of total assets		(20.6)%	(10.4)%	9.0%	—

(1) Loans include portfolio loans and loans held for sale

								Greater
								Than
								5 years and
As of December 31, 2018								Not Rate
(dollars in thousands)	12 Months			1-2 Years		2-5 Years		Sensitive	Total
Cash and investments	$	51,092		4,268		12,183		19,578	87,121
Loans, net (1)		476,250		104,422		246,523		48,606	875,801
Other Assets (Footnote 1)		—		—		—		34,558	34,558
Total Assets		527,342		108,690		258,706		102,742	997,480
Noninterest-bearing deposits		17,943		9,013		15,852		83,342	126,150
Interest-bearing deposits		347,264		—		—		—	347,264
Time deposits		253,090		13,426		12,200		—	278,716
FHLB advances		114,300		5,000		—		—	119,300
Other Liabilities (Footnote 1)		825		412		344		14,917	16,498
Total stockholders' equity (Footnote 1)		—		—		—		109,552	109,552
Total liabilities and stockholders' equity	$	733,422		27,851		28,396		207,811	997,480
Repricing gap-positive
(Negative) Positive		(206,080)		80,839		230,310		(105,069)	—
Cumulative repricing gap: Dollar amount	$	(206,080)		(125,241)		105,069		—
Percent of total assets		(20.7)	%	(12.6)	%	10.5	%	—

(1) Loans include portfolio loans and loans held for sale

Under the repricing gap analysis for both periods, we are liability-sensitive in the short-term mainly due to recent loan growth which has out-paced our core deposit growth. In addition, customer preference has been for short-term or liquid deposits. We generally manage our interest rate risk profile close to neutral, using a strategy that is focused on increasing our concentration of relationship-based transaction accounts through efforts of our business developers and new branches. The gap results presented could vary substantially if different assumptions are used or if actual experience differs from the

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assumptions used in the preparation of the gap analysis. Furthermore, the gap analysis provides a static view of interest rate risk exposure at a specific point in time and offers only an approximate estimate of the relative sensitivity of our interest-earning assets and interest-bearing liabilities to changes in market interest rates. In addition, the impact of certain optionality is embedded in our balance sheet such as contractual caps and floors, and trends in asset and liability growth. Accordingly, we combine the use of gap analysis with the use of an earnings simulation model that provides a dynamic assessment of interest rate sensitivity.

PROVISION FOR LOAN AND LEASE LOSSES

For the three months ended September 30, 2019, the Corporation recorded a Provision of $705 thousand which was a $414 thousand increase from the same period in 2018. For the three months ended September 30, 2019 there were net charge-offs of $18 thousand as compared to net charge-offs of $29 thousand for the same period in 2018.  

For the nine months ended September 30, 2019, the Corporation recorded a Provision of $938 thousand which was a $320 thousand decrease from the same period in 2018. For the nine months ended September 30, 2019 there were net recoveries of $321 thousand as compared to net charge-offs of $256 thousand for the same period in 2018. The decreased provision over the nine month periods was the result of net recoveries and lower levels of loan growth period over period. 

Asset Quality and Analysis of Credit Risk

Total nonperforming loans and leases remained unchanged at $3.9 million at both September 30, 2019 and December 31, 2018, but dropped to 0.43%  of loans and leases held-for-investment, excluding loans at fair value, as of September 30, 2019, compared to 0.48%  as of December 31, 2018.  Nonaccrual loans at September 30, 2019, included within nonperforming assets, also remained unchanged from December 31, 2018.  As a result of current asset quality and the low level of net charge-offs for the three months ended September 30, 2019, the ratio of the Allowance to total loans held for investment, excluding loans at fair value, improved to 1.01%, from the 0.97% as of December 31, 2018.  The Allowance to non-performing loans increased from 204.85% as of December 31, 2018 to 236.95% as of September 30, 2019.

The Corporation had one property in OREO as of September 30, 2019 in the amount of $120 thousand. There were no properties in OREO as of December 31, 2018.  

As of September 30, 2019, the Corporation had $4.0 million of troubled debt restructurings (“TDRs”), of which $2.9 million were in compliance with the modified terms and excluded from non-performing loans and leases. As of December 31, 2018, the Corporation had $4.3 million of TDRs, of which $3.1 million were in compliance with the modified terms, and were excluded from non-performing loans and leases. As of September 30, 2019, the Corporation  had a recorded investment of $6.0 million of impaired loans and leases which included $4.0 million of TDRs.

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

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Nonperforming Assets and Related Ratios

	As of
	September 30,		December 31,
(dollars in thousands)	2019		2018
Non-performing assets:
Nonaccrual loans:
Real estate loans:
Commercial mortgage	$	1,549	$	1,224
Home equity lines and loans		257		83
Residential mortgage		1,698		2,147
Total real estate loans	$	3,504	$	3,454
Commercial and industrial		426		477
Total nonaccrual loans	$	3,930	$	3,931
Other real estate owned		120		—
Total non-performing loans	$	3,930	$	3,931
Total non-performing assets	$	4,050	$	3,931
Troubled debt restructurings:
TDRs included in non-performing loans		1,133		1,219
TDRs in compliance with modified terms		2,880		3,047
Total TDRs	$	4,013	$	4,266
Asset quality ratios:
Non-performing assets to total assets		0.36%		0.39%
Non-performing loans to:
Total loans		0.40%		0.45%
Total loans held-for-investment (excluding loans at fair value)		0.43%		0.48%
Allowance for loan losses to:
Total loans		0.95%		0.92%
Total loans held-for-investment (excluding loans at fair value)		1.01%		0.97%
Non-performing loans		236.95%		204.85%
Total loans and leases	$	984,473	$	875,801
Total loans and leases held-for-investment	$	935,858	$	838,106
Total loans and leases held-for-investment (excluding loans at fair value)	$	924,580	$	826,684
Allowance for loan and lease losses	$	9,312	$	8,053

NON-INTEREST INCOME

Three Months Ended September 30, 2019 Compared to the Same Period in 2018

Total non-interest income for the third quarter of 2019 was $9.8 million, up $647 thousand, or 7.1%, from the comparable period in 2018. The increase in non-interest income for the third quarter of 2019 compared to the third quarter in 2018 was primarily the result of $645 thousand in SBA income recognized on the sales of SBA loans, in addition to gains on sale of investment securities of $74 thousand.  There were no SBA loan sales or sales of securities in the prior year comparable period. Offsetting somewhat these increases in non-interest income, was a decline of $364 thousand in mortgage banking income. 

Mortgage banking revenue, for the three months ended September 30, 2019, was $7.9 million, down $364 thousand, or 4.4%, from the comparable period in 2018. This decline in mortgage banking revenue was due primarily to a decline in mortgage originations year over year, despite an increase in the margin on loan sales of 40 basis points for the three months, year over year.  The net change in fair value of mortgage banking related financial instruments increased $363 thousand for the three months ended September 30, 2019, compared to the same period in 2018.  Additionally, realized losses on

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derivatives related to mortgage banking, included in other non-interest income, increased $129 thousand for the three months ended September 30, 2019 to a loss of $299 thousand, compared to a loss of $170 thousand for the same period in 2018.

Nine Months Ended September 30, 2019 Compared to the Same Period in 2018

Total non-interest income for the nine months ended September 30, 2019 was $24.2 million, down $703 thousand, or 2.8%, from the comparable period in 2018. The overall decrease in non-interest income came primarily from our mortgage division.  Also affecting non-interest income, wealth management revenue was down $298 thousand for the nine months ended September 30, 2019 compared to the same period in 2018.  Fee income reflected market value changes in assets under management, which although up at September 30, 2019 compared to September 30, 2018, were at lower levels in the prior period on which fees were based.  The decrease in non-interest income was  partially offset by $1.2 million in SBA loan income, largely from gains recognized on the sale of SBA loans, as well as $212 thousand in gain on sale of securities. There were no SBA loan sales or sales of securities in the prior year comparable period, as noted above. The new SBA lending team, brought on late in 2018, originated $25.4 million in SBA loans during the first nine months of 2019.

Mortgage banking revenue, for the nine months ended September  30, 2019, was $19.1 million, down $1.3 million or 6.2%, from the comparable period in 2018. The decline in mortgage banking revenue was due primarily to a decline in mortgage originations year over year, despite an increase in the margin on loan sales of 31 basis points for the nine months, due in part to rising interest rates year over year. The net change in fair value of mortgage banking related financial instruments increased $763 thousand for the nine months ended September 30, 2019, compared to the same period in 2018. Additionally, realized gains on derivatives related to mortgage banking, included in other non-interest income, decreased $1.3 million for the nine months ended September 30, 2019 to a loss of $792 thousand, compared to a gain of $534 thousand for the same period in 2018.

NON-INTEREST EXPENSE

Three Months Ended September 30, 2019 Compared to the Same Period in 2018

Total non-interest expense was $14.2 million for the three months ended September 30, 2019, up $399 thousand, or 2.9%, from $13.8 million for the three months ended September 30, 2018.  There was a $418 thousand or 4.7% increase in salaries and employee benefits for the third quarter of 2019 compared to the same period in 2018 due to the increase in corporate employees. Occupancy and equipment expense was up $26 thousand or 2.8% for the three month due to increased rental space for Philadelphia offices. In addition, variable loan expenses decreased by $11 thousand over the three month period ended September 30, 2019, reflecting the lower level of mortgage originations year-over-year. Professional fees were up $106 thousand,  or 14.8%, for the three month period ended September 30, 2019.  For the third quarter of 2019, professional fees were up due to accounting and compliance fees related to public reporting requirements and mortgage compliance.  Advertising and promotion expenses were down slightly over the three month period due to the timing and number of promotional events held.  Data processing and information technology expenses were up over the three month period due to increased customer transaction volume.  Communications expense decreased over these same period as the number of office locations declined from the prior year. 

Other non-interest expenses decreased $157 thousand to $903 thousand for the third quarter of 2019, compared to the third quarter a year ago.  The decrease was primarily related to a $199 thousand credit of FDIC insurance related to the Small Bank Assessment Credit. 

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Nine Months Ended September 30, 2019 Compared to the Same Period in 2018

Total non-interest expense was $40.5 million for first nine months of the year, up $123 thousand, or 0.30%, from $40.4 million for the same period in the 2018.  There was a reduction in salaries and employee benefits expense of $930 thousand or 3.5% for the nine months ended September 30, 2019 compared to prior year, as full-time equivalent employees, particularly in the mortgage division declined. Occupancy and equipment expense was relatively flat (down 0.9%) for the nine  month periods. In addition, variable loan expenses decreased by $85 thousand over the nine month period ended September 30, 2019, reflecting the lower level of mortgage originations year-over-year. Professional fees were up $330 thousand, or 19.8%, for the nine month periods ended September 30, 2019.  For the nine month period, the higher professional fee were due largely attributable to legal and accounting fees incurred as part of the Maryland mortgage licensing issue in the first quarter, in addition to legal fees incurred related to the litigation matter discussed below.  Advertising and promotion expenses were down slightly over the nine month period due to the timing and number of promotional events held.  Data processing and information technology expenses were up over the nine month periods due to increased customer transaction volume.  Communications expense decreased over the nine month periods as the number of office locations declined from the prior year. 

In the first nine months of 2019, non-interest expenses increased $890 thousand to $3.8 million when compared to the prior year period. The settlement of the outstanding litigation matter contributed $790 thousand to other non-interest expense for the first nine months of 2019, along with $79 thousand of other expense incurred for the previously disclosed Maryland mortgage licensing issue.  Increase in the PA shares tax assessment due to the growth of the Bank also contributed to higher non-interest expenses during the year-to-date period, from the same period in the prior year.

INCOME TAXES

Income tax expense for the three months ended September 30, 2019 was $914 thousand, as compared to $774 thousand for the same period in 2018.  The increase in income tax expense was entirely attributable to the increase in earnings, period over period. Our effective tax rate was 21.6% for the third quarter of 2019 and 22.1% for the third quarter of 2018.    

Income tax expense for the nine months ended September 30, 2019 was $2.1 million, as compared to $1.7 million for the same period in 2018.  The increase in income tax expense was entirely attributable to the increase in earnings, period over period.  Our effective tax rate was 22.0% for the first nine months of 2019 and 22.3% for the first nine months of 2018.    

BALANCE SHEET ANALYSIS

As of September 30, 2019, total assets were $1.13 billion compared with $997.5 million as of December 31, 2018. Total assets increased $129.5 million, or 13.0%, on a year-to-date basis primarily due to strong loan growth.

Total loans, excluding mortgage loans held for sale, increased $97.8 million, or 11.7%, from $838.1 million as of December 31, 2018. The increase in loans is attributable to our expanding presence in the Philadelphia market area, which continues to show growth in real estate investments. Commercial loans increased a net $15.7 million, or 6.2%, year-over-year.  Commercial real estate and commercial construction loans combined increased $69.3 million, or 15.7%, year-over-year. SBA loans increased $8.9 million or 155.1%, as a result of the new lending team hired in the fourth quarter of 2018.  Residential loans held in portfolio increased $2.9 million, or 5.4%, year-over-year as certain loan products or terms were targeted to hold in portfolio. Residential mortgage loans held for sale increased $14.6 million, or 42.8%, to $48.6 million as of September 30, 2019 from September 30, 2018 fueled by the recent lower rates.

Deposits were $858.5 million as of September 30, 2019, up $106.3 million, or 14.1%, from December 31, 2018. Non-interest bearing deposits increased $3.2 million, or 2.5%, from December 31, 2018. Money market accounts/savings accounts increased $95.0 million, or 40.8%, since December 31, 2018 due to new or increased business money market

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accounts.  Interest-bearing checking accounts decreased $34.0 million or 29.7% from December 31, 2018.  Municipal checking accounts declined $20.5 million during the first nine months 2019, which accounted for most of the change.  Certificates of deposit increased $42.2 million, or 15.1%, since December 31, 2018.  Borrowings were $131.6 million as of September 30, 2019, up $11.1 million, or 9.2%, from December 31, 2018. These increases, led by short-term borrowings, were used to help fund loan growth, along with the deposit growth noted above.

Capital

Consolidated stockholders’ equity of the Corporation was $117.8 million, or 10.45% of total assets as of September 30, 2019, as compared to $109.6 million, or 11.00% of total assets as of December 31, 2018. As of September 30, 2019, the Tier 1 leverage ratio was 10.69%, the Tier 1 risk-based capital and common equity ratios were 11.25%, and total risk-based capital was 13.11%. Quarter-end numbers show a tangible common equity to tangible assets ratio of 10.06%. Tangible book value per share was $17.62 as of September 30, 2019, compared with $16.31 as of December 31, 2018.

The following table presents the Corporation’s capital ratios and the minimum capital requirements to be considered “well capitalized” by regulators as of September 30, 2019 and December 31, 2018:

	September 30, 2019
							To be well capitalized under
				For capital adequacy			prompt corrective action
	Actual			purposes *			provisions
(dollars in thousands)	Amount		Ratio	Amount		Ratio	Amount		Ratio
Total capital (to risk-weighted assets)	$	131,291	13.11%	$	105,174	10.50%	$	100,166	10.00%
Common equity tier 1 capital (to risk-weighted assets)		112,734	11.25%		70,116	7.00%		65,108	6.50%
Tier 1 capital (to risk-weighted assets)		112,734	11.25%		85,141	8.50%		80,133	8.00%
Tier 1 capital (to average assets)		112,734	10.69%		42,185	4.00%		52,731	5.00%

	December 31, 2018 - as revised
							To be well capitalized under
				For capital adequacy			prompt corrective action
	Actual			purposes *			provisions
(dollars in thousands):	Amount		Ratio	Amount		Ratio	Amount		Ratio
Total capital (to risk-weighted assets)	$	122,262	13.66%	$	88,362	9.88%	$	89,481	10.00%
Common equity tier 1 capital (to risk-weighted assets)		104,881	11.72%		57,044	6.38%		58,163	6.50%
Tier 1 capital (to risk-weighted assets)		104,881	11.72%		70,466	7.88%		71,585	8.00%
Tier 1 capital (to average assets)		104,881	11.16%		37,581	4.00%		46,977	5.00%

*Includes capital conservation buffer of 2.50% for 2019 and 1.875% for 2018.

The capital ratios for the  Corporation, as of September 30, 2019, as shown in the above tables, indicate levels above the regulatory minimum to be considered “well capitalized.” The capital ratios to risk-weighted assets have all decreased from their December 31, 2018 levels largely as a result of the increase in risk-weighted assets, much of which was in the commercial mortgage, construction, and commercial and industrial segments of the loan portfolio, which are typically risk-weighted at 100%.

Liquidity

Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Meridian’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization or that can be used as collateral to secure funding. In addition, as part of its liquidity management, Meridian maintains a segment of commercial loan assets that are comprised of shared national credits (“SNCs”), which have a national market and can be sold in a timely manner. Meridian’s primary liquidity, which totaled $148.5 million at

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September 30, 2019, compared to $128 million at September 30, 2018, includes investments, SNCs, Federal funds sold, mortgages held-for-sale and cash and cash equivalents, less the amount of securities required to be pledged for certain liabilities.  Meridian also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios.  In addition, Meridian maintains borrowing arrangements with various correspondent banks, the FHLB and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. Through its relationship at the Federal Reserve, Meridian had available credit of approximately $9.6 million at September 30, 2019. As a member of the FHLB, we are eligible to borrow up to a specific credit limit, which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of September 30, 2019, Meridian’s maximum borrowing capacity with the FHLB was $477.6 million. At September 30, 2019, Meridian had borrowed $83.1 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $79.8 million against its available credit lines. At September 30, 2019, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as $105.6 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $53.9 million of available short or long term funding through brokered CD arrangements. Management believes that Meridian has adequate resources to meet its short-term and long-term funding requirements.

Discussion of Segments

As of September 30, 2019, the Corporation has three principal segments as defined by FASB ASC 280, “Segment Reporting.” The segments are Banking, Mortgage Banking and Wealth Management (see Note 11 in the accompanying Notes to Unaudited Consolidated Financial Statements).

The Banking Segment recorded net income before tax (“operating margin”) of $2.8 million and $8.0 million for the three and nine months ended September 30, 2019,  respectively, as compared to operating margin of $5.9 million and $18.1 million for the same respective periods in 2018. The Banking Segment provided 67.0%  and 84.8% of the Corporation’s pre-tax profit for the three and nine month periods ended September 30, 2019, respectively, as compared to 68.8%  and 76.6%  for the same respective periods in 2018.

The Wealth Management Segment recorded operating margin of $61 thousand and $390 thousand for the three and nine months ended September 30, 2019, respectively, as compared to operating margin of $34 thousand and $640 thousand for the same respective periods in 2018.  

The Mortgage Banking Segment recorded operating margin of $1.3 million and $1.0 million for the three and nine months ended September 30, 2019, respectively, as compared to operating margins of $1.1 million for the same respective periods in 2018.  Mortgage Banking income and expenses related to loan originations and sales decreased due to lower origination volume, but certain non-interest expenses increased from the prior year due to Maryland mortgage licensing issue previously disclosed and the settlement of outstanding litigation discussed above.

Off Balance Sheet Risk

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

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at September 30,  2019 were $327.8 million, as compared to $290.6 million at December 31, 2018.

Standby letters of credit are conditional commitments issued by the Corporation to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Corporation’s obligation under standby letters of credit at September 30,  2019 amounted to $9.8 million, as compared to $5.2 million at December 31, 2018.

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Estimated fair values of the Corporation’s off-balance sheet instruments are based on fees and rates currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and the estimated fair value of off-balance sheet instruments.

In certain circumstances the Corporation may be required to repurchase loans from investors under the terms of loan sale agreements. Generally, these circumstances include the breach of representations and warranties made to investors regarding borrower default or early payment, as well as a violation of the applicable federal, state, or local lending laws.  The Corporation agrees to repurchase loans if the representations and warranties made with respect to such loans are breached, and such breach has a material adverse effect on the loans. The Corporation did not repurchase any loans sold, based on the obligations described above, for the three and nine months ended September 30, 2019, and did repurchase 1 loan in the amount of $94 thousand for the three and nine months ended September 30, 2018.

Regulatory Update

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

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Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures  

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Corporation’s CEO and CFO have concluded that the Corporation’s disclosure controls and procedures were not effective as of September 30, 2019 to ensure that the information required to be disclosed by the Corporation in the reports that the Corporation files or submits under the Exchange Act is recorded, processed, summarized, and reported completely and accurately within the time periods specified in SEC rules and forms. 

As disclosed in Part I, Item 4 of our Quarterly Report on Form 10-Q as of March 31, 2019,  in the first quarter of 2019, the Corporation identified that residential mortgage loans have been originated without a required license in a neighboring state since 2012. We concluded that our risk assessment process was not sufficient, and therefore ineffective, to ensure controls were designed and implemented to respond to the risks related to periodically reviewing our compliance with state licensing laws and reflecting that compliance within our mortgage origination system. As a result, we noted there was insufficient monitoring of the Corporation’s compliance with mortgage licensing laws.  This led to the identification of control deficiencies over the Corporation’s recognition of interest and fee income, the analysis of the accounting for loan transfers, specifically the impact of the recourse obligation resulting from a breach in representations and warranties, as well as the controls over the Corporation’s determination of the mortgage repurchase reserve.  The aggregation of these control deficiencies created a reasonable possibility that a material misstatement to our consolidated financial statements would not be prevented or detected on a timely basis and therefore we concluded that, the aggregation of these deficiencies represents a material weakness in our internal control over financial reporting as of September 30, 2019. This material weakness also existed at June 30, 2019, March 31, 2019 and December 31, 2018.  

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

Notwithstanding this material weakness, based on additional analyses and other procedures performed, management concluded that the financial statements included in the Quarterly Report on Form 10-Q as of September 30, 2019 and March 31, 2019, fairly presented in all material respects our financial position, results of operations, capital position, and cash flows for the periods presented, in conformity with GAAP.

Remediation Status of Previously Reported Material Weakness

We continue to implement our remediation plan for the previously reported material weakness in internal control over financial reporting, described in Part I, Item 4 of our Quarterly Report on Form 10-Q as of March 31, 2019. We have satisfactorily resolved the licensing requirements with the licensing authority, and have set appropriate access controls within the mortgage loan origination system to prevent licensing issues in the future. We have also implemented a control to help ensure the Corporation maintains ongoing compliance with state licensing requirements in all states that we originate mortgages.  During the third quarter, the Corporation commenced the outsourcing of this licensing compliance control to a third-party that will notify us real-time of licensing change requirements. In addition, the Corporation commenced an internal audit program to review compliance with licensing laws and to help develop a monitoring program to further ensure compliance with licensing laws.

We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that control deficiencies contributing to the material weakness are remediated through implementation of processes and controls to ensure strict compliance with GAAP. We will consider the material weakness remediated after the

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applicable controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectively.

Changes inInternal Control Over Financial Reporting

Other than the changes related to our remediation efforts described above, we made no changes in internal control over financial reporting during the third quarter of 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II–OTHER INFORMATION

Item 1. Legal Proceedings.

On November 21, 2017, three former employees of the mortgage-banking division of the Bank filed suit in the United States District Court for the Eastern District of Pennsylvania, Juan Jordan et al. v. Meridian Bank, Thomas Campbell and Christopher Annas, against the Bank purporting to be a class and collective action seeking unpaid and overtime wages under the Fair Labor Standards Act of 1938, the New Jersey Wage and Hour Law, and the Pennsylvania Minimum Wage Act of 1968 on behalf of similarly situated plaintiffs. In June 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 has a litigation reserve of $990 thousand at September 30, 2019.  The parties have submitted their negotiated settlement agreement to the court, and it awaits final court approval.

Item 1A. Risk Factors.

Not applicable.

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

None.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

The exhibits filed or incorporated by reference as part of this report are listed in the Exhibit Index, which appears at page 58.

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EXHIBIT INDEX

Exhibit Number	Description
2.1	Plan of Merger and Reorganization dated April 26, 2018 by and between Registrant, Bank and Meridian Interim Bank, filed as Exhibit 2.1 to Form 8-K on August 24, 2018 and incorporated herein by reference.
3.1	Articles of Incorporation of Registrant, filed as Exhibit 3.1 to Form 8-K on August 24, 2018 and incorporated herein by reference.
3.2	Bylaws of Registrant, filed as Exhibit 3.2 to Form 8-K on August 24, 2018 and incorporated herein by reference.
31.1	Rule 13a‑14(a)/ 15d‑14(a) Certification of the Principal Executive Officer, filed herewith.
31.2	Rule 13a‑14(a)/ 15d‑14(a) Certification of the Principal Financial Officer, filed herewith.
32	Section 1350 Certifications, filed herewith.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:	November  13, 2019	Meridian Corporation
		By:	/s/ Christopher J. Annas
			Christopher J. Annas
			President and Chief Executive Officer
			(Principal Executive Officer)
		By:	/s/ Denise Lindsay
			Denise Lindsay
			Executive Vice President and Chief Financial Officer
			(Principal Financial and Accounting Officer)

59

EX-31.1

Exhibit 31.1

RULE 13a -14(a) CERTIFICATION
OF THE PRINCIPAL EXECUTIVE OFFICER

I, Christopher J. Annas, certify that:

1.           I have reviewed this quarterly report on Form 10-Q of Meridian Corporation;

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.           The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)          Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)          Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)          Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)          Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.           The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)         All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)        Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:   November 13, 2019	/s/ Christopher J. Annas
	Christopher J. Annas
	President and Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

RULE 13a-14(a) CERTIFICATION
OF THE PRINCIPAL FINANCIAL OFFICER

I, Denise Lindsay, certify that:

1.           I have reviewed this quarterly report on Form 10-Q of Meridian Corporation;

2.           Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.           Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.           The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)          Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)          Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)          Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)          Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;

5.           The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)          All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)          Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:   November 13, 2019	/s/ Denise Lindsay
	Denise Lindsay
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Meridian Corporation on Form 10-Q for the period ended September 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

2.  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Meridian Corporation.

	/s/ Christopher J. Annas
	Christopher J. Annas
	President and Chief Executive Officer
	(Principal Executive Officer)
	/s/ Denise Lindsay
	Denise Lindsay
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)
Date:    November 13, 2019

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Short-Term Borrowings and Long-Term Debt (Tables)

9 Months Ended

Sep. 30, 2019

Short-Term Borrowings and Long-Term Debt

Schedule of long term debt

				Balance as of
	Maturity	Interest		September 30,		December 31,
(dollars in thousands)	date	rate		2019		2018
Mid-term Repo-fixed	06/28/21	1.88	%		3,123	—
Mid-term Repo-fixed	08/10/20	2.76			—	5,000
Acquisition Purchase Note (1)	04/01/20	3.00			—	1,238
Total				$	3,123	6,238

(1) The acquisition purchase note for the Wealth division is classified as short-term borrowing at September 30, 2019.

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Recent Litigation

9 Months Ended

Sep. 30, 2019

Recent Litigation

Recent Litigation

(12)    Recent Litigation

On November 21, 2017, three former employees of the mortgage-banking division of the Bank filed suit in the United States District Court for the Eastern District of Pennsylvania, Juan Jordan et al. v. Meridian Bank, Thomas Campbell and Christopher Annas, against the Bank purporting to be a class and collective action seeking unpaid and overtime wages under the Fair Labor Standards Act of 1938, the New Jersey Wage and Hour Law, and the Pennsylvania Minimum Wage Act of 1968 on behalf of similarly situated plaintiffs. In 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 has a litigation reserve of $990 thousand at September 30, 2019.  The parties have submitted their negotiated settlement agreement to the court, and it awaits final court approval.

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Goodwill and Other Intangibles (Tables)

9 Months Ended

Sep. 30, 2019

Goodwill and Other Intangibles

Schedule of goodwill and intangibles assets related to acquisition

	Balance			Balance	Amortization
	December 31,		Amortization	September 30,	Period
(dollars in thousands)	2018		Expense	2019	(in years)
Goodwill - Wealth	$	899	—	899	Indefinite
Total Goodwill		899	—	899
Intangible assets - trade name		266	—	266	Indefinite
Intangible assets - customer relationships		3,727	(153)	3,574	20
Intangible assets - non competition agreements		154	(52)	102	4
Total Intangible Assets		4,147	(205)	3,942
Total	$	5,046	(205)	4,841

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Allowance for Loan Losses (the "Allowance") - Allowance allocated by portfolio segment (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jun. 30, 2019	Dec. 31, 2018	Sep. 30, 2018	Jun. 30, 2018	Dec. 31, 2017
Impaired Loans
Allowance on loans and leases individually evaluated for impairment	$ 126		$ 103
Allowance on loans and leases collectively evaluated for impairment	9,186		7,950
Total	9,312	$ 8,625	8,053	$ 7,711	$ 7,449	$ 6,709
Carrying value of loans and leases individually evaluated for impairment	5,965		5,799
Carrying value of loans and leases collectively evaluated for impairment	920,509		822,566
Total	926,474		828,365
Commercial mortgage
Impaired Loans
Allowance on loans and leases collectively evaluated for impairment	3,455		3,209
Total	3,455	3,197	3,209	3,153	3,011	2,434
Carrying value of loans and leases individually evaluated for impairment	2,204		1,929
Carrying value of loans and leases collectively evaluated for impairment	355,214		323,464
Total	357,418		325,393
Home equity lines and loans
Impaired Loans
Allowance on loans and leases individually evaluated for impairment	2
Allowance on loans and leases collectively evaluated for impairment	326		323
Total	328	354	323	316	269	280
Carrying value of loans and leases individually evaluated for impairment	255		83
Carrying value of loans and leases collectively evaluated for impairment	83,157		82,203
Total	83,412		82,286
Residential mortgage
Impaired Loans
Allowance on loans and leases collectively evaluated for impairment	172		191
Total	172	200	191	180	166	82
Carrying value of loans and leases individually evaluated for impairment	855		969
Carrying value of loans and leases collectively evaluated for impairment	44,138		40,969
Total	44,993		41,938
Construction
Impaired Loans
Allowance on loans and leases collectively evaluated for impairment	2,169		1,627
Total	2,169	2,033	1,627	1,497	1,438	1,689
Carrying value of loans and leases individually evaluated for impairment	1,262		1,281
Carrying value of loans and leases collectively evaluated for impairment	153,201		115,625
Total	154,463		116,906
Commercial and industrial
Impaired Loans
Allowance on loans and leases individually evaluated for impairment	124		103
Allowance on loans and leases collectively evaluated for impairment	3,051		2,587
Total	3,175	2,830	2,690	2,558	2,559	2,214
Carrying value of loans and leases individually evaluated for impairment	1,389		1,537
Carrying value of loans and leases collectively evaluated for impairment	282,987		258,269
Total	284,376		259,806
Consumer
Impaired Loans
Allowance on loans and leases collectively evaluated for impairment	6		3
Total	6	4	3	4	3	5
Carrying value of loans and leases collectively evaluated for impairment	984		701
Total	984		701
Leases, net
Impaired Loans
Allowance on loans and leases collectively evaluated for impairment	7		10
Total	7	$ 7	10	$ 3	$ 3	$ 5
Carrying value of loans and leases collectively evaluated for impairment	828		1,335
Total	$ 828		$ 1,335

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Loans Receivable - Loans and leases outstanding by rate type (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Loans Receivable
Loans with predetermined rates	$ 294,297	$ 264,376
Loans with adjustable or floating rates	692,071	613,106
Total loans and leases	986,368	877,482
Net deferred loan origination (fees) costs	$ (1,895)	$ (1,681)

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Allowance for Loan Losses (the "Allowance") - Troubled debt restructuring (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Allowance for Loan Losses (the Allowance)
TDRs included in nonperforming loans and leases	$ 1,133	$ 1,219
TDRs in compliance with modified terms	2,880	3,047
Total TDRs	$ 4,013	$ 4,266

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Fair Value Measurements and Disclosures - Fair value on a recurring basis (Details) - Interest rate lock commitments - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Fair Value, Assets Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Balance at beginning of the period	$ 375	$ 586	$ 310	$ 344
(Decrease) increase in value	(92)	(80)	(27)	162
Balance at end of the period	$ 283	$ 506	$ 283	$ 506

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Segment (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) loanfacility	Sep. 30, 2018 USD ($)
Segments
Number of central loan production facilities | loanfacility			1
Net-interest Income:
Net interest income	$ 9,274	$ 8,378	$ 26,672	$ 24,216
Provision for loan losses	705	291	938	1,258
Net interest income after provision	8,569	8,087	25,734	22,958
Non-Interest Income:
Mortgage banking income	7,910	8,274	19,139	20,407
Wealth management income	922	930	2,698	2,996
SBA Income	645		1,160
Net change in fair values	30	(333)	292	(471)
Other	307	296	899	1,959
Total non-interest income	9,814	9,167	24,188	24,891
Non-interest Expenses:
Salaries and employee benefits	9,319	8,901	25,789	26,719
Occupancy and equipment	946	920	2,845	2,870
Professional fees	820	714	2,000	1,670
Advertising and promotion	574	590	1,769	1,802
Other	2,493	2,628	8,109	7,328
Total non-interest expenses	14,152	13,753	40,512	40,389
Operating Margin	4,231	3,501	9,410	7,460
Bank
Net-interest Income:
Net interest income	9,203	8,107	26,437	23,597
Provision for loan losses	705	291	938	1,258
Net interest income after provision	8,498	7,816	25,499	22,339
Non-Interest Income:
Mortgage banking income	74	105	175	148
Wealth management income	31	59	110	149
SBA Income	645		1,160
Net change in fair values	(23)		(49)
Other	534	363	1,409	1,136
Total non-interest income	1,261	527	2,805	1,433
Non-interest Expenses:
Salaries and employee benefits	4,248	3,264	11,988	10,390
Occupancy and equipment	530	521	1,588	1,599
Professional fees	410	590	1,116	1,325
Advertising and promotion	344	301	1,084	917
Other	1,393	1,259	4,546	3,827
Total non-interest expenses	6,925	5,935	20,322	18,058
Operating Margin	2,834	2,408	7,982	5,714
Wealth
Net-interest Income:
Net interest income	4	71	68	217
Net interest income after provision	4	71	68	217
Non-Interest Income:
Wealth management income	891	871	2,588	2,847
Total non-interest income	891	871	2,588	2,847
Non-interest Expenses:
Salaries and employee benefits	564	445	1,681	1,373
Occupancy and equipment	34	29	93	99
Professional fees	2	9	11	20
Advertising and promotion	94	111	57	319
Other	140	314	426	613
Total non-interest expenses	834	908	2,268	2,424
Operating Margin	61	34	388	640
Mortgage
Net-interest Income:
Net interest income	67	200	167	402
Net interest income after provision	67	200	167	402
Non-Interest Income:
Mortgage banking income	7,836	8,169	18,964	20,259
Net change in fair values	53	(333)	341	(471)
Other	(227)	(67)	(510)	823
Total non-interest income	7,662	7,769	18,795	20,611
Non-interest Expenses:
Salaries and employee benefits	4,507	5,192	12,120	14,956
Occupancy and equipment	382	370	1,164	1,172
Professional fees	408	115	873	325
Advertising and promotion	136	178	628	566
Other	960	1,055	3,137	2,888
Total non-interest expenses	6,393	6,910	17,922	19,907
Operating Margin	$ 1,336	$ 1,059	$ 1,040	$ 1,106

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Fair Value Measurements and Disclosures - Financial assets measured at fair value on a recurring basis (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Fair Value Measurements and Disclosures
Securities available for sale	$ 52,757	$ 50,428
Mortgage loans held-for-investment	11,278	11,422
State and municipal securities
Fair Value Measurements and Disclosures
Securities available for sale	8,882	10,919
Investments in mutual funds and other equity securities
Fair Value Measurements and Disclosures
Securities available for sale	1,014	979
Interest rate lock commitments
Fair Value Measurements and Disclosures
Derivative assets, Fair value	283
Recurring
Fair Value Measurements and Disclosures
Mortgage loans held-for-sale	48,615	37,695
Mortgage loans held-for-investment	11,278	11,422
Mortgage servicing rights	314	213
SBA loan servicing rights	321
Total	114,068	100,209
Recurring | U.S. government agency mortgage-backed securities
Fair Value Measurements and Disclosures
Securities available for sale	12,900	23,866
Recurring | U.S. government agency collateralized mortgage obligations
Fair Value Measurements and Disclosures
Securities available for sale	29,961	14,664
Recurring | State and municipal securities
Fair Value Measurements and Disclosures
Securities available for sale		10,919
Recurring | Investments in mutual funds and other equity securities
Fair Value Measurements and Disclosures
Securities available for sale	9,896	979
Recurring | Interest rate lock commitments
Fair Value Measurements and Disclosures
Derivative assets, Fair value	283	310
Recurring | Customer derivatives - Interest rate swaps
Fair Value Measurements and Disclosures
Derivative assets, Fair value	500	141
Recurring | Level 2
Fair Value Measurements and Disclosures
Mortgage loans held-for-sale	48,615	37,695
Mortgage loans held-for-investment	11,278	11,422
Total	113,150	99,686
Recurring | Level 2 | U.S. government agency mortgage-backed securities
Fair Value Measurements and Disclosures
Securities available for sale	12,900	23,866
Recurring | Level 2 | U.S. government agency collateralized mortgage obligations
Fair Value Measurements and Disclosures
Securities available for sale	29,961	14,664
Recurring | Level 2 | State and municipal securities
Fair Value Measurements and Disclosures
Securities available for sale		10,919
Recurring | Level 2 | Investments in mutual funds and other equity securities
Fair Value Measurements and Disclosures
Securities available for sale	9,896	979
Recurring | Level 2 | Customer derivatives - Interest rate swaps
Fair Value Measurements and Disclosures
Derivative assets, Fair value	500	141
Recurring | Level 3
Fair Value Measurements and Disclosures
Mortgage servicing rights	314	213
SBA loan servicing rights	321
Total	918	523
Recurring | Level 3 | Interest rate lock commitments
Fair Value Measurements and Disclosures
Derivative assets, Fair value	$ 283	$ 310

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Allowance for Loan Losses (the "Allowance") - Loan and lease modifications granted categorized as TDRs (Details) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($) contract	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($) contract
Loan and lease modifications
Number of Contracts | contract		1		3
Pre-Modification Outstanding Recorded Investment	$ 0	$ 796	$ 0	$ 2,530
Post-Modification Outstanding Recorded Investment		796		2,530
Loan and lease modifications granted	0	796	0	2,530
Loan and lease modifications granted and subsequently defaulted	$ 0	$ 0	$ 0	$ 0
Land and Construction
Loan and lease modifications
Number of Contracts | contract		1		2
Pre-Modification Outstanding Recorded Investment		$ 796		$ 2,410
Post-Modification Outstanding Recorded Investment		796		2,410
Loan and lease modifications granted		$ 796		$ 2,410
Commercial and industrial
Loan and lease modifications
Number of Contracts | contract				1
Pre-Modification Outstanding Recorded Investment				$ 120
Post-Modification Outstanding Recorded Investment				120
Loan and lease modifications granted				$ 120

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Servicing Assets - Residential Mortgage Loans (Details) - Mortgage Servicing Rights - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Servicing Assets at Fair Value [Line Items]
Loans serviced	$ 45,100	$ 15,800	$ 45,100	$ 15,800
Servicing fee income	107,000	198,000	90,000	152,000
Servicing Asset at Amortized Cost, Balance [Roll Forward]
Balance at beginning of the period	236	62	232
Servicing rights capitalized	107	89	198	152
Amortization of servicing rights	(17)	(3)	(39)	(4)
Change in valuation allowance	(12)		(77)
Balance at end of the period	314	$ 148	314	$ 148
Valuation Allowance for Impairment of Recognized Servicing Assets [Roll Forward]
Valuation allowance, beginning of period	65
Impairment	(12)		(77)
Valuation allowance, end of the period	$ 77		$ 77

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
CONSOLIDATED STATEMENTS OF CASH FLOWS
Net income	$ 7,345	$ 5,799
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of investment securities	(212)
Depreciation and amortization	1,559	1,088
Loss on disposal of premises and equipment	14
Provision for loan losses	938	1,258
Compensation expense for stock options	266	351
Net change in fair value of loans held for sale	82	241
Net change in fair value of derivative instruments	16	(59)
Net change in fair value of contingent assets		177
Gain on sale of OREO		(57)
SBA income	(1,160)
Proceeds from sale of loans	432,831	513,259
Loans originated for sale	(421,092)	(492,113)
Mortgage banking income	(19,139)	(20,407)
Increase in accrued interest receivable	(266)	(377)
Decrease (increase) in other assets	91	(110)
Earnings from investment in life insurance	(218)	(225)
Deferred income tax (benefit) (Footnote 1)	(249)	(465)
Increase in accrued interest payable	364	137
Increase in other liabilities (Footnote 1)	3,249	1,184
Net cash provided (used) by operating activities	4,419	9,681
Activity in available-for-sale securities:
Maturities, repayments and calls	11,090	4,080
Sales	19,366
Purchases	(29,027)	(12,768)
Proceeds from sale of OREO		494
Settlement of forward contracts	(85)	(21)
(Increase) Decrease in restricted stock	(1,235)	2,233
Net increase in loans	(104,640)	(107,068)
Purchases of premises and equipment	(634)	(1,499)
Proceeds from settlement of loans		2,766
Net cash used in investing activities	(105,165)	(111,783)
Cash flows from financing activities:
Net increase in deposits	106,331	154,818
Increase (Decrease) in short term borrowings	14,165	(57,795)
Repayments of long term debt (FHLB advances)	(2,702)
Repayment of long term debt (Acquisition note)	(413)	(619)
Repayment of long term debt (Subordinated debt)	(63)	(4,000)
Share based awards and exercises	8	15
Net cash provided by financing activities	117,326	92,419
Net change in cash and cash equivalents	16,580	(9,683)
Cash and cash equivalents at beginning of period	23,952	35,506
Cash and cash equivalents at end of period	40,532	25,823
Supplemental disclosure of cash flow information:
Interest	11,951	7,392
Income taxes	1,539	1,565
Supplemental disclosure of cash flow information:
Transfers from loans and leases to real estate owned	120
Transfers from loans held for sale to loans held for investment	3,602
Net loans sold, not settled	$ (5,580)	$ 4,490

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CONSOLIDATED STATEMENTS OF INCOME - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Interest income:
Loans, including fees	$ 13,152	$ 11,218	$ 37,686	$ 31,217
Securities:
Taxable	336	213	892	549
Tax-exempt	64	112	273	336
Cash and cash equivalents	38	30	136	75
Total interest income	13,590	11,573	38,987	32,177
Interest expense:
Deposits	3,633	2,485	10,584	6,171
Borrowings	683	710	1,731	1,790
Total interest expense	4,316	3,195	12,315	7,961
Net interest income	9,274	8,378	26,672	24,216
Provision for loan losses	705	291	938	1,258
Net interest income after provision for loan losses	8,569	8,087	25,734	22,958
Non-interest income:
Mortgage banking income	7,910	8,274	19,139	20,407
Wealth management income	922	930	2,698	2,996
SBA loan income	645		1,160
Earnings on investment in life insurance	74	74	218	225
Net change in the fair value of derivative instruments		70	(16)	59
Net change in the fair value of loans held-for-sale	54	(300)	(82)	(241)
Net change in the fair value of loans held-for-investment	(24)	(103)	390	(289)
Gain on sale of investment securities available-for-sale	74		212
Service charges	28	27	82	87
Other	131	195	387	1,647
Total non-interest income	9,814	9,167	24,188	24,891
Non-interest expenses:
Salaries and employee benefits	9,319	8,901	25,789	26,719
Occupancy and equipment	946	920	2,845	2,870
Loan expenses	758	769	1,877	1,962
Professional fees	820	714	2,000	1,670
Advertising and promotion	574	590	1,769	1,802
Data processing	343	334	990	924
Information technology	334	268	919	836
Communications	155	197	510	683
Other	903	1,060	3,813	2,923
Total non-interest expenses	14,152	13,753	40,512	40,389
Income before income taxes	4,231	3,501	9,410	7,460
Income tax expense	914	774	2,065	1,661
Net income	$ 3,317	$ 2,727	$ 7,345	$ 5,799
Basic earnings per common share	$ 0.52	$ 0.43	$ 1.15	$ 0.91
Diluted earnings per common share	$ 0.52	$ 0.42	$ 1.14	$ 0.90

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Securities

9 Months Ended

Sep. 30, 2019

Securities

Securities

(4)      Securities

The amortized cost and fair value of securities as of September 30, 2019 and December 31, 2018 are as follows:

	September 30, 2019
			Gross	Gross
	Amortized		unrealized	unrealized	Fair
(dollars in thousands)	cost		gains	losses	value
Securities available-for-sale:
U.S. asset backed securities	$	8,919	2	(39)	8,882
U.S. government agency mortgage-backed securities		12,843	103	(46)	12,900
U.S. government agency collateralized mortgage obligations		29,734	357	(130)	29,961
Investments in mutual funds		1,000	14	-	1,014
Total securities available-for-sale	$	52,496	476	(215)	52,757
Securities held to maturity:
State and municipal securities		8,814	214	—	9,028
Total securities held-to-maturity	$	8,814	214	—	9,028

	December 31, 2018
			Gross	Gross
	Amortized		unrealized	unrealized	Fair
(dollars in thousands)	cost		gains	losses	value
Securities available-for-sale:
U.S. government agency mortgage-backed securities	$	24,092	45	(271)	23,866
U.S. government agency collateralized mortgage obligations		14,754	52	(142)	14,664
State and municipal securities		11,096	22	(199)	10,919
Investments in mutual funds		1,000	—	(21)	979
Total securities available-for-sale	$	50,942	119	(633)	50,428
Securities held to maturity:
U.S. Treasuries	$	1,991	—	(13)	1,978
State and municipal securities		10,750	17	(90)	10,677
Total securities held-to-maturity	$	12,741	17	(103)	12,655

At September 30, 2019, the Corporation had seven U.S. government sponsored agency mortgage‑backed securities, thirteen U.S. government sponsored agency collateralized mortgage obligations, and five U.S. asset backed securities in unrealized loss positions. At December 31, 2018, the Corporation had twenty-four U.S. government sponsored agency mortgage‑backed securities, twelve U.S. government sponsored agency collateralized mortgage obligations, twenty-six state and municipal securities, one mutual fund, and two U.S. treasuries in unrealized loss positions. Although the Corporation’s investment portfolio overall is in a net unrealized gain position at September 30, 2019, 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.

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 September 30, 2019 and December 31, 2018:

	September 30, 2019
	Less than 12 Months			12 Months or more		Total
	Fair		Unrealized	Fair	Unrealized	Fair	Unrealized
(dollars in thousands)	value		losses	value	losses	value	losses
Securities available-for-sale:
U.S. asset backed securities		6,842	(39)	—	—	6,842	(39)
U.S. government agency mortgage-backed securities	$	1,926	(9)	3,177	(37)	5,103	(46)
U.S. government agency collateralized mortgage obligations		12,700	(88)	2,754	(42)	15,454	(130)
Total securities available-for-sale	$	21,468	(136)	5,931	(79)	27,399	(215)

	December 31, 2018
	Less than 12 Months			12 Months or more		Total
	Fair		Unrealized	Fair	Unrealized	Fair	Unrealized
(dollars in thousands)	value		losses	value	losses	value	losses
Securities available-for-sale:
U.S. government agency mortgage-backed securities	$	2,354	(6)	15,223	(265)	17,577	(271)
U.S. government agency collateralized mortgage obligations		2,636	(14)	5,620	(128)	8,256	(142)
State and municipal securities		957	(11)	8,746	(188)	9,703	(199)
Investments in mutual funds		980	(21)	—	—	980	(21)
Total securities available-for-sale	$	6,927	(52)	29,589	(581)	36,516	(633)
Securities held-to-maturity:
U.S. Treasuries	$	—	—	1,978	(13)	1,978	(13)
State and municipal securities		1,545	(5)	4,783	(85)	6,328	(90)
Total securities held-to-maturity	$	1,545	(5)	6,761	(98)	8,306	(103)

The amortized cost and carrying value of securities at September 30, 2019 and December 31, 2018 are shown below by contractual maturities. Actual maturities may differ from contractual maturities as issuers may have the right to call or repay obligations with or without call or prepayment penalties.

	September 30, 2019					December 31, 2018
	Available-for-sale			Held-to-maturity		Available-for-sale			Held-to-maturity
	Amortized		Fair	Amortized	Fair	Amortized		Fair	Amortized	Fair
(dollars in thousands)	cost		value	cost	value	cost		value	cost	value
Investment securities:
Due in one year or less	$	—	—	—	—	$	906	902	1,991	1,978
Due after one year through five years		—	—	4,258	4,316		1,236	1,226	3,154	3,148
Due after five years through ten years		—	—	4,556	4,712		6,411	6,290	7,596	7,529
Due after ten years		8,919	8,882	—	—		2,543	2,501	—	—
Subtotal		8,919	8,882	8,814	9,028		11,096	10,919	12,741	12,655
Mortgage-related securities		42,577	42,861	—	—		38,846	38,530	—	—
Mutual funds with no stated maturity		1,000	1,014	—	—		1,000	979	—	—
Total	$	52,496	52,757	8,814	9,028	$	50,942	50,428	12,741	12,655

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Servicing Assets

9 Months Ended

Sep. 30, 2019

Servicing Assets

Servicing Assets

(8)      Servicing Assets

The Corporation sells certain residential mortgage loans and 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. When the Corporation sells a residential mortgage loan, it does not retain any portion of that loan and its continuing involvement in such transfers is limited to certain servicing responsibilities. While the Corporation may retain a portion of certain sold SBA loans, its continuing involvement in the portion of the loan that was sold is limited to certain servicing responsibilities. When the contractual servicing fees on loans sold with servicing retained are expected to be more than adequate compensation to a servicer for performing the servicing, a capitalized servicing asset is recognized. The Corporation accounts for the transfers and servicing of financial assets in accordance with ASC 860, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.

Residential Mortgage Loans

The mortgage servicing rights (“MSRs”) 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.  The Corporation serviced $45.1 million and $15.8 million of residential mortgage loans as of September 30, 2019 and 2018, respectively. During the three and nine months ended September 30, 2019, the Corporation recognized servicing fee income of $107 thousand and $198 thousand, respectively, compared to $90 thousand and $152 thousand during the three and nine months ended September 30, 2018, respectively.

Changes in the MSR balance are summarized as follows:

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2019		2018	2019		2018
Balance at beginning of the period	$	236	62	$	232	—
Servicing rights capitalized		107	89		198	152
Amortization of servicing rights		(17)	(3)		(39)	(4)
Change in valuation allowance		(12)	—		(77)	—
Balance at end of the period	$	314	148	$	314	148

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

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2019		2018	2019		2018
Valuation allowance, beginning of period	$	(65)	—	$	—	—
Impairment		(12)	—		(77)	—
Recovery		—	—		—	—
Valuation allowance, end of period	$	(77)	—	$	(77)	—

The Corporation uses assumptions and estimates in determining the fair value of MSRs. These assumptions include prepayment speeds and discount rates. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge. At September 30, 2019, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 16.02% and a discount rate equal to 9.25%.  At September 30, 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 September 30, 2019 and September 30, 2018, the sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.

(dollars in thousands)	September 30, 2019		December 31, 2018
Fair value of residential mortgage servicing rights	$	314	$	213
Weighted average life (years)		7.4		3.4
Prepayment speed		16.02%		11.78%
Impact on fair value:
10% adverse change	$	(16)	$	(9)
20% adverse change		(30)		(17)
Discount rate		9.25%		9.50%
Impact on fair value:
10% adverse change	$	(9)	$	(8)
20% adverse change		(18)		(15)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.

SBA Loans

SBA loan servicing assets are amortized to non-interest expense in proportion to, and over the period of, the estimated future net servicing life of the underlying assets.  SBA loan servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost.  Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the SBA loan servicing asset.  The Corporation serviced $15.4 million of SBA loans, as of September 30, 2019 and no SBA loans, as of September 30, 2018.  During the three and nine months ended September 30, 2019, the Corporation recognized servicing fee income of $8 thousand in both periods.

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

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2019		2018	2019		2018
Balance at beginning of the period	$	133	—	$	—	—
Servicing rights capitalized		198	—		331	—
Amortization of servicing rights		(6)	—		(6)	—
Change in valuation allowance		(4)	—		(4)	—
Balance at end of the period	$	321	—	$	321	—

Activity in the valuation allowance for SBA loan servicing assets was as follows:

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2019		2018	2019		2018
Valuation allowance, beginning of period	$	—	—	$	—	—
Impairment		(4)	—		(4)	—
Recovery		—	—		—	—
Valuation allowance, end of period	$	(4)	—	$	(4)	—

The Corporation uses assumptions and estimates in determining the fair value of SBA loan servicing rights. These assumptions include prepayment speeds, discount rates, and other assumptions. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge. At September 30, 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 10.34%, and a discount rate equal to 8.88%. The Corporation did not service SBA loans at September 30, 2018.

At September 30, 2019, the sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.

(dollars in thousands)	September 30, 2019
Fair value of SBA loan servicing rights	$	321
Weighted average life (years)		4.5
Prepayment speed		10.34%
Impact on fair value:
10% adverse change	$	(11)
20% adverse change		(21)
Discount rate		8.88%
Impact on fair value:
10% adverse change	$	(9)
20% adverse change		(18)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the SBA servicing rights is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.

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Earnings per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Numerator:
Net income	$ 3,317	$ 2,022	$ 2,006	$ 2,727	$ 1,802	$ 1,270	$ 7,345	$ 5,799
Denominator for basic earnings per share - weighted average shares outstanding	6,407			6,402			6,407	6,395
Effect of dilutive common shares	30			28			29	31
Denominator for diluted earnings per share - adjusted weighted average shares outstanding	6,437			6,430			6,436	6,426
Basic earnings per share (in dollars per share)	$ 0.52			$ 0.43			$ 1.15	$ 0.91
Diluted earnings per share (in dollars per share)	$ 0.52			$ 0.42			$ 1.14	$ 0.90
Antidilutive shares excluded from computation of average dilutive earnings per share	199			116			199	116

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Derivative Financial Instruments (Tables)

9 Months Ended

Sep. 30, 2019

Derivative Financial Instruments

Summary of the notional amounts and fair values of derivative financial instruments

		September 30, 2019			December 31, 2018
(dollars in thousands)	Balance Sheet Line Item	Notional Amount		Asset (Liability) Fair Value	Notional Amount	Asset (Liability) Fair Value
Interest Rate Lock Commitments
Positive fair values	Other assets	$	37,105	283	27,188	310
Negative fair values	Other liabilities		14,102	(81)	6,218	(40)
Total			51,207	202	33,406	270
Forward Commitments
Positive fair values	Other assets		11,000	30	—	—
Negative fair values	Other liabilities		41,000	(105)	26,500	(176)
Total			52,000	(75)	26,500	(176)
Customer Derivatives - Interest Rate Swaps
Positive fair values	Other assets		3,287	500	3,330	141
Negative fair values	Other liabilities		3,287	(568)	3,330	(161)
Total			6,574	(68)	6,660	(20)
Total derivative financial instruments		$	109,781	59	66,566	74

Summary of the fair value gains and losses on derivative financial instruments

	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2019		2018		2019	2018
Interest Rate Lock Commitments	$	(102)	(224)	$	(68)	(110)
Forward Commitments		124	293		101	168
Customer Derivatives - Interest Rate Swaps		(22)	—		(48)	—
Net fair value gains (losses) on derivative financial instruments	$	—	69	$	(15)	58

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Securities - Contractual Maturities (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Contractual Maturities, Available-for-sale, Amortized Cost
Amortized Cost	$ 52,496	$ 50,942
Contractual Maturities, Available-for-sale, Fair Value
Fair Value	52,757	50,428
Contractual Maturities, Held-to-maturity, Amortized Cost
Amortized Cost	8,814	12,741
Contractual Maturities, Held-to-maturity, Fair Value
Fair Value	9,028	12,655
State and municipal securities
Contractual Maturities, Available-for-sale, Amortized Cost
Due in one year or less		906
Due after one year through five years		1,236
Due after five years through ten years		6,411
Due after ten years	8,919	2,543
Amortized Cost	8,919	11,096
Contractual Maturities, Available-for-sale, Fair Value
Due in one year or less		902
Due after one year through five years		1,226
Due after five years through ten year		6,290
Due after ten years	8,882	2,501
Fair Value	8,882	10,919
Contractual Maturities, Held-to-maturity, Amortized Cost
Due in one year or less		1,991
Due after one year through five years	4,258	3,154
Due after five years through ten years	4,556	7,596
Amortized Cost	8,814	10,750
Contractual Maturities, Held-to-maturity, Fair Value
Due in one year or less		1,978
Due after one year through five years	4,316	3,148
Due after five years through ten years	4,712	7,529
Fair Value	9,028	10,677
Mortgage-related securities
Contractual Maturities, Available-for-sale, Amortized Cost
Amortized Cost	42,577	38,846
Contractual Maturities, Available-for-sale, Fair Value
Fair Value	42,861	38,530
Investments in mutual funds and other equity securities
Contractual Maturities, Available-for-sale, Amortized Cost
Amortized Cost	1,000	1,000
Contractual Maturities, Available-for-sale, Fair Value
Fair Value	$ 1,014	$ 979

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Allowance for Loan and Lease Losses (the "Allowance") - Loan and lease modifications made by type (Details) - contract	3 Months Ended	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2018
Loan and lease modifications
Number of Contracts	1	3
Loan Term Extension
Loan and lease modifications
Number of Contracts	1	2
Interest Rate Change and Loan Term Extension
Loan and lease modifications
Number of Contracts		1
Land and Construction
Loan and lease modifications
Number of Contracts	1	2
Land and Construction | Loan Term Extension
Loan and lease modifications
Number of Contracts	1	2
Commercial and industrial
Loan and lease modifications
Number of Contracts		1
Commercial and industrial | Interest Rate Change and Loan Term Extension
Loan and lease modifications
Number of Contracts		1

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Servicing Assets - MSR Sensitivity Analysis (Details) - Mortgage Servicing Rights - USD ($) $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Sensitivity Analysis of Fair Value of Interests Continued to be Held by Transferor, Servicing Assets or Liabilities, Impact of Adverse Change in Assumption [Line Items]
Fair value of residential mortgage servicing rights	$ 314	$ 213
Weighted average life (years)	7 years 4 months 24 days	3 years 4 months 24 days
Prepayment speed	16.02%	11.78%
Impact on fair value of a 10% adverse change in prepayment speed	$ (16)	$ (9)
Impact on fair value of a 20% adverse change in prepayment speed	$ (30)	$ (17)
Discount rate	9.25%	9.50%
Impact on fair value of a 10% adverse change in the discount rate	$ (9)	$ (8)
Impact on fair value of a 20% adverse change in the discount rate	$ (18)	$ (15)

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Fair Value Measurements and Disclosures - Financial assets measured at fair value on non-recurring basis (Details) - Nonrecurring - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Financial assets measured at fair value on a nonrecurring basis
Impaired loans	$ 5,965	$ 5,799
Other real estate owned	120
Total	6,085	5,799
Level 3
Financial assets measured at fair value on a nonrecurring basis
Impaired loans	5,965	5,799
Other real estate owned	120
Total	$ 6,085	$ 5,799

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income:	$ 3,317	$ 2,727	$ 7,345	$ 5,799
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 $17, ($57), $219, and ($155), respectively	64	(171)	767	(510)
Less: reclassification adjustment for net (gains) on sales realized in net income, net of tax (expense) benefit of ($16), $0, ($47), and $0, respectively	(58)		(166)
Unrealized investment gains (losses), net of tax expense (benefit) of $1, ($57), $172, and ($155), respectively	6	(171)	601	(510)
Total other comprehensive income (loss)	6	(171)	601	(510)
Total comprehensive income	$ 3,323	$ 2,556	$ 7,946	$ 5,289

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Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2019	Nov. 13, 2019
Document And Entity Information Abstract
Document Type	10-Q
Document Period End Date	Sep. 30, 2019
Entity Registrant Name	Meridian Corp
Entity Current Reporting Status	Yes
Entity Filer Category	Non-accelerated Filer
Entity Small Business	true
Entity Emerging Growth Company	true
Entity Shell Company	false
Entity Ex Transition Period	false
Entity Common Stock, Shares Outstanding		6,405,600
Entity Central Index Key	0001750735
Current Fiscal Year End Date	--12-31
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Amendment Flag	false

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Basis of Presentation

9 Months Ended

Sep. 30, 2019

Basis of Presentation

Basis of Presentation

MERIDIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(1)      Basis of Presentation

Meridian Corporation (the “Corporation”)  was incorporated on June 8, 2009, by and at the direction of the board of directors of Meridian Bank (the “Bank”) for the sole purpose of acquiring the Bank and serving as the Bank’s parent bank holding company.  On August 24, 2018, the Corporation acquired the Bank in a merger and reorganization effected under Pennsylvania law and in accordance with the terms of a Plan of Merger and Reorganization dated April 26, 2018 (the “Agreement”).  Pursuant to the Agreement, on August 24, 2018 at 5:00 p.m. all of the outstanding shares of the Bank’s $1.00 par value common stock formerly held by its shareholders was converted into and exchanged for one newly issued share of the Corporation’s par value common stock, and the Bank became a subsidiary of the Corporation. Because the Bank and the Corporation were entities under common control, this exchange of shares between entities under common control resulted in the retrospective combination of the Bank and the Corporation for all periods presented as if the combination had been in effect since inception of common control.  As the Corporation had no assets, liabilities, revenues, expenses or operations prior to August 24, 2018, the historical financial statements of the Bank are the historical financial statements of the combined entity. 

The Corporation’s unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and the results of operations for the interim periods presented have been included.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Amounts subject to significant estimates are items such as the allowance for loan losses and lending related commitments, the fair value of financial instruments, other-than-temporary impairments of investment securities, and the valuations of goodwill and intangible assets.

These unaudited consolidated financial statements should be read in conjunction with the Corporation’s filings with the Securities and Exchange Commission (including our Annual Report on Form 10-K for the year ended December 31, 2018) and, for periods prior to the completion of the holding company reorganization, the Bank’s filings with the FDIC, including the Bank’s annual report on Form 10-K for the year ended December 31, 2017, and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in Form 10-K and Form 10-Q filings, if any.   Certain prior period amounts have been reclassified to conform with current period presentation. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results for the year ended December 31, 2019 or for any other period.

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)		Reported	Corrections	Revised
Deferred income taxes	$	1,312	92	1,404
Other liabilities		5,426	407	5,833
Retained earnings		15,768	(315)	15,453

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

(dollars in thousands, except per share data)		Reported	Corrections	Revised
Deferred income taxes	$	1,636	92	1,728
Other liabilities		5,309	407	5,716
Retained earnings		23,931	(315)	23,616

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

	December 31, 2018 - as reported
							To be well capitalized under
				For capital adequacy			prompt corrective action
	Actual			purposes *			provisions
(dollars in thousands):	Amount		Ratio	Amount		Ratio	Amount		Ratio
Total capital (to risk-weighted assets)	$	122,577	13.70%	$	71,577	8.00%	$	89,472	10.00%
Common equity tier 1 capital (to risk-weighted assets)		105,196	11.76%		40,262	4.50%		58,157	6.50%
Tier 1 capital (to risk-weighted assets)		105,196	11.76%		53,683	6.00%		71,577	8.00%
Tier 1 capital (to average assets)		105,196	11.20%		37,578	4.00%		46,972	5.00%

	December 31, 2018 - as revised
							To be well capitalized under
				For capital adequacy			prompt corrective action
	Actual			purposes *			provisions
(dollars in thousands):	Amount		Ratio	Amount		Ratio	Amount		Ratio
Total capital (to risk-weighted assets)	$	122,262	13.66%	$	88,362	9.88%	$	89,481	10.00%
Common equity tier 1 capital (to risk-weighted assets)		104,881	11.72%		57,044	6.38%		58,163	6.50%
Tier 1 capital (to risk-weighted assets)		104,881	11.72%		70,466	7.88%		71,585	8.00%
Tier 1 capital (to average assets)		104,881	11.16%		37,581	4.00%		46,977	5.00%

*Includes capital conservation buffer of 2.50% for 2019 and 1.875% for 2018.

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Loans Receivable

9 Months Ended

Sep. 30, 2019

Loans Receivable

Loans Receivable

(5)      Loans Receivable

Loans and leases outstanding at September 30, 2019 and December 31, 2018 are detailed by category as follows:

	September 30,		December 31,
(dollars in thousands)	2019		2018
Mortgage loans held for sale	$	48,615	37,695
Real estate loans:
Commercial mortgage		357,418	325,393
Home equity lines and loans		83,412	82,286
Residential mortgage (1)		56,272	53,360
Construction		154,463	116,906
Total real estate loans		651,565	577,945
Commercial and industrial		284,376	259,806
Consumer		984	701
Leases, net		828	1,335
Total portfolio loans and leases		937,753	839,787
Total loans and leases	$	986,368	877,482
Loans with predetermined rates	$	294,297	264,376
Loans with adjustable or floating rates		692,071	613,106
Total loans and leases	$	986,368	877,482
Net deferred loan origination (fees) costs	$	(1,895)	(1,681)

(1) Includes $11,278 and $11,422  of loans at fair value as of September 30, 2019 and December 31, 2018, respectively.

Components of the net investment in leases at September 30, 2019 and December 31, 2018 are detailed as follows:

	September 30,		December 31,
(dollars in thousands)	2019		2018
Minimum lease payments receivable	$	869	1,420
Unearned lease income		(41)	(85)
Total	$	828	1,335

Age Analysis of Past Due Loans and Leases

The following tables present an aging of the Corporation’s loan and lease portfolio as of September 30, 2019 and December 31, 2018, respectively:

						Total
			90+ days			Accruing	Nonaccrual
September 30, 2019	30-89 days		past due and	Total past		Loans and	loans and	Total loans	Delinquency
(dollars in thousands)	past due		still accruing	due	Current	leases	leases	and leases	percentage
Commercial mortgage	$	—	—	—	355,869	355,869	1,549	357,418	0.43	%
Home equity lines and loans		592	—	592	82,563	83,155	257	83,412	1.02
Residential mortgage (1)		—	—	—	54,574	54,574	1,698	56,272	3.02
Construction		1,519	—	1,519	152,944	154,463	—	154,463	0.98
Commercial and industrial		394	—	394	283,556	283,950	426	284,376	0.29
Consumer		—	—	—	984	984	—	984	—
Leases		123	—	123	705	828	—	828	14.86
Total	$	2,628	—	2,628	931,195	933,823	3,930	937,753	0.70	%

(1) Includes $11,278  of loans at fair value as of September 30, 2019  ($10,437 of current, $0 of 30-89 days past due and $841 of nonaccrual).

						Total
			90+ days			Accruing	Nonaccrual
December 31, 2018	30-89 days		past due and	Total past		Loans and	loans and	Total loans	Delinquency
(dollars in thousands)	past due		still accruing	due	Current	leases	leases	and leases	percentage
Commercial mortgage	$	—	—	—	324,169	324,169	1,224	325,393	0.38	%
Home equity lines and loans		348	—	348	81,855	82,203	83	82,286	0.52
Residential mortgage (1)		195	—	195	51,018	51,213	2,147	53,360	4.39
Construction		—	—	—	116,906	116,906	—	116,906	—
Commercial and industrial		217	—	217	259,112	259,329	477	259,806	0.27
Consumer		—	—	—	701	701	—	701	—
Leases		49	—	49	1,286	1,335	—	1,335	3.67
Total	$	809	—	809	835,047	835,856	3,931	839,787	0.56	%

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

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Fair Value Measurements and Disclosures

9 Months Ended

Sep. 30, 2019

Fair Value Measurements and Disclosures

Fair Value Measurements and Disclosures

(9)      Fair Value Measurements and Disclosures

The Corporation uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

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

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

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

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

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

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2019 and December 31, 2018 are as follows:

	September 30, 2019
(dollars in thousands)	Total		Level 1	Level 2	Level 3
Securities available for sale:
U.S. government agency mortgage-backed securities	$	12,900	—	12,900	—
U.S. government agency collateralized mortgage obligations		29,961	—	29,961	—
Investments in mutual funds and other equity securities		9,896	—	9,896	—
Mortgage loans held-for-sale		48,615	—	48,615	—
Mortgage loans held-for-investment		11,278	—	11,278	—
Mortgage servicing rights		314	—	—	314
SBA loan servicing rights		321	—	—	321
Interest rate lock commitments		283	—	—	283
Customer derivatives - Interest rate swaps		500	—	500	—
Total	$	114,068	—	113,150	918

	December 31, 2018
(dollars in thousands)	Total		Level 1	Level 2	Level 3
Securities available for sale:
U.S. government agency mortgage-backed securities	$	23,866	—	23,866	—
U.S. government agency collateralized mortgage obligations		14,664	—	14,664	—
State and municipal securities		10,919	—	10,919	—
Investments in mutual funds and other equity securities		979	—	979	—
Mortgage loans held-for-sale		37,695	—	37,695	—
Mortgage loans held-for-investment		11,422	—	11,422	—
Mortgage servicing rights		213	—	—	213
Interest rate lock commitments		310	—	—	310
Customer derivatives - Interest rate swaps		141	—	141	—
Total	$	100,209	—	99,686	523

For financial assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2019 and December 31, 2018 are as follows:

	September 30, 2019
(dollars in thousands)	Total		Level 1	Level 2	Level 3
Impaired loans (1)	$	5,965	—	—	5,965
Other real estate owned (2)		120	—	—	120
Total	$	6,085	—	—	6,085

	December 31, 2018
(dollars in thousands)	Total		Level 1	Level 2	Level 3
Impaired loans (1)	$	5,799	—	—	5,799
Other real estate owned (2)		—	—	—	—
Total	$	5,799	—	—	5,799

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

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

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

(a)Cash and Cash Equivalents

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

(b)Securities

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

(c)Mortgage Loans Held for Sale

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

(d)Loans Receivable

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

(e)Mortgage Loans Held for Investment

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

(f)Servicing Rights

The Corporation determines the fair value of its servicing rights by estimating the amount and timing of future cash flows associated with the servicing rights and discounting the cash flows using market discount rates. The valuation included the application of certain assumptions made by management, including discount rates, prepayment projections, and prevailing assumptions used in the marketplace at the time of the valuation.

(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. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

(h)Restricted Investment in Bank Stock

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

(i)Accrued Interest Receivable and Payable

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

(j)Deposit Liabilities

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

(k)Short‑Term Borrowings

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

(l)Long‑Term Debt

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

(m)Subordinated Debt

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

(n)Off‑Balance Sheet Financial Instruments

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

(o)Derivative Financial Instruments

The fair value of forward commitments and interest rate swaps is based on market pricing and therefore are considered Level 2.  Derivatives classified as Level 3 consist of interest rate lock commitments related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement.

The estimated fair values of the Corporation’s financial instruments at September 30, 2019 and December 31, 2018 are as follows:

		September 30, 2019			December 31, 2018
	Fair Value	Carrying			Carrying
(dollars in thousands)	Hierarchy Level	amount		Fair value	amount	Fair value
Financial assets:
Cash and cash equivalents	Level 1	$	40,532	40,532	23,952	23,952
Securities available-for-sale	Level 2		52,757	52,757	50,428	50,428
Securities held-to-maturity	Level 2		8,814	9,028	12,741	12,655
Mortgage loans held-for-sale	Level 2		48,615	48,615	37,695	37,695
Loans receivable, net	Level 3		935,858	933,285	818,631	820,512
Mortgage loans held-for-investment	Level 2		11,278	11,278	11,422	11,422
Interest rate lock commitments	Level 3		283	283	310	310
Forward commitments	Level 2		30	30	—	—
Restricted investment in bank stock	Level 3		8,237	8,237	7,002	7,002
Mortgage servicing rights	Level 3		314	314	232	213
SBA loan servicing rights	Level 3		321	321	—	—
Accrued interest receivable	Level 3		3,155	3,155	2,889	2,889
Customer derivatives - Interest rate swaps	Level 2		500	500	141	141
Financial liabilities:
Deposits	Level 2		858,461	896,000	752,130	744,300
Short-term borrowings	Level 2		128,466	128,467	114,300	114,300
Long-term debt	Level 2		3,123	3,123	6,238	6,240
Subordinated debentures	Level 2		9,176	9,792	9,239	9,396
Accrued interest payable	Level 2		669	669	305	305
Interest rate lock commitments	Level 3		81	81	40	40
Forward commitments	Level 2		105	105	176	176
Customer derivatives - Interest rate swaps	Level 2		568	568	161	161
		Notional			Notional
Off-balance sheet financial instruments:		amount		Fair value	amount	Fair value
Commitments to extend credit	Level 2	$	327,788	283	290,614	310
Letters of credit	Level 2		9,750	—	5,158	—

The following table includes a rollforward of interest rate lock commitments for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the three and nine month peiods ended September 30, 2019 and 2018.

	Three Months Ended September 30,			Nine Months Ended September 30,
	2019		2018	2019		2018
Balance at beginning of the period	$	375	586	$	310	344
(Decrease) increase in value		(92)	(80)		(27)	162
Balance at end of the period	$	283	506	$	283	506

				Significant
Valuation Techniques for Level 3 interest rate lock	Fair Value			Unobservable	Range of		Weighted
commitments as of September 30, 2019	Level 3		Valuation Technique	Input	Inputs		Average
Interest rate lock commitments	$	283	Market comparable pricing	Pull through	1 - 99	%	91.70	%

A realized gain of $101 thousand and a realized gain of $138 thousand due to changes in the fair value of interest rate lock commitments which are classified as Level 3 assets and liabilities for the three months ended September 30, 2019 and 2018, respectively, and realized gains of $67 thousand and $114 thousand for the nine months ended September 30, 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.

Refer to note 8 – servicing assets for a rollforward of servicing assets for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the three and nine month peiods ended September 30, 2019 and 2018.

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Securities - Continuous Unrealized Loss Position (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, Less than 12 Months	$ 21,468	$ 6,927
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, 12 Months or Longer	5,931	29,589
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, Total	27,399	36,516
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, Less than 12 Months	(136)	(52)
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, 12 Months or Longer	(79)	(581)
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, Total	(215)	(633)
Held-to-maturity securities, Continuous Unrealized Loss Position, Fair Value
Held-to-maturity securities, Continuous Unrealized Loss Position, Fair Value, Less than 12 Months		1,545
Held-to-maturity securities, Continuous Unrealized Loss Position, Fair Value, 12 Months or Longer		6,761
Held-to-maturity securities, Continuous Unrealized Loss Position, Fair Value, Total		8,306
Debt securities, Held-to-maturity securities, Continuous unrealized loss position, accumulated loss
Debt Securities, Held-to-maturity, Continuous Unrealized Loss Position, Less than 12 Months, Accumulated Loss		(5)
Held-to-maturity securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, 12 Months or Longer		(98)
Held-to-maturity securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, Total		(103)
U.S. asset backed securities
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, Less than 12 Months	6,842
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, Total	6,842
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, Less than 12 Months	(39)
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, Total	(39)
U.S. government agency mortgage-backed securities
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, Less than 12 Months	1,926	2,354
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, 12 Months or Longer	3,177	15,223
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, Total	5,103	17,577
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, Less than 12 Months	(9)	(6)
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, 12 Months or Longer	(37)	(265)
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, Total	(46)	(271)
U.S. government agency collateralized mortgage obligations
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, Less than 12 Months	12,700	2,636
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, 12 Months or Longer	2,754	5,620
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, Total	15,454	8,256
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, Less than 12 Months	(88)	(14)
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, 12 Months or Longer	(42)	(128)
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, Total	$ (130)	(142)
State and municipal securities
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, Less than 12 Months		957
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, 12 Months or Longer		8,746
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, Total		9,703
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, Less than 12 Months		(11)
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, 12 Months or Longer		(188)
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, Total		(199)
Held-to-maturity securities, Continuous Unrealized Loss Position, Fair Value
Held-to-maturity securities, Continuous Unrealized Loss Position, Fair Value, Less than 12 Months		1,545
Held-to-maturity securities, Continuous Unrealized Loss Position, Fair Value, 12 Months or Longer		4,783
Held-to-maturity securities, Continuous Unrealized Loss Position, Fair Value, Total		6,328
Debt securities, Held-to-maturity securities, Continuous unrealized loss position, accumulated loss
Debt Securities, Held-to-maturity, Continuous Unrealized Loss Position, Less than 12 Months, Accumulated Loss		(5)
Held-to-maturity securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, 12 Months or Longer		(85)
Held-to-maturity securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, Total		(90)
Investments in mutual funds
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, Less than 12 Months		980
Available-for-sale securities, Continuous Unrealized Loss Position, Fair Value, Total		980
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, Less than 12 Months		(21)
Available-for-sale securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, Total		(21)
U.S. Treasuries
Held-to-maturity securities, Continuous Unrealized Loss Position, Fair Value
Held-to-maturity securities, Continuous Unrealized Loss Position, Fair Value, 12 Months or Longer		1,978
Held-to-maturity securities, Continuous Unrealized Loss Position, Fair Value, Total		1,978
Debt securities, Held-to-maturity securities, Continuous unrealized loss position, accumulated loss
Held-to-maturity securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, 12 Months or Longer		(13)
Held-to-maturity securities, Continuous Unrealized Loss Position, Gross Unrealized Losses, Total		$ (13)

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Basis of Presentation - Impact of Correction (Details) - USD ($) $ in Thousands		9 Months Ended	12 Months Ended
	Jan. 01, 2018	Sep. 30, 2019	Dec. 31, 2018
Error Corrections and Prior Period Adjustments Restatement [Line Items]
Mortgage interest and fees to be reimbursed	$ 474
Mortgage loan origination licensing error fine to Maryland	12
Deferred income taxes	1,404	$ 1,803	$ 1,728
Other liabilities	5,833	9,271	5,716
Retained earnings	15,453	$ 30,961	23,616
Total capital (to risk-weighted assets)
Actual, Amount			122,262
For capital adequacy purpose, Amount			88,362
To be well capitalized under prompt corrective action provisions, Amount			$ 89,481
Actual, Ratio			13.66%
For capital adequacy purpose, Ratio			9.88%
To be well capitalized under prompt corrective action provisions, Ratio			10.00%
Common equity tier 1 capital (to risk-weighted assets)
Actual, Amount			$ 104,881
For capital adequacy purpose, Amount			57,044
To be well capitalized under prompt corrective action provisions, Amount			$ 58,163
Actual, Ratio			11.72%
For capital adequacy purpose, Ratio			6.38%
To be well capitalized under prompt corrective action provisions, Ratio			6.50%
Tier 1 capital (to risk-weighted assets)
Actual, Amount			$ 104,881
For capital adequacy purpose, Amount			70,466
To be well capitalized under prompt corrective action provisions, Amount			$ 71,585
Actual, Ratio			11.72%
For capital adequacy purpose, Ratio			7.88%
To be well capitalized under prompt corrective action provisions, Ratio			8.00%
Tier 1 capital (to average assets)
Actual, Amount			$ 104,881
For capital adequacy purpose, Amount			37,581
To be well capitalized under prompt corrective action provisions, Amount			$ 46,977
Actual, Ratio			11.16%
For capital adequacy purpose, Ratio			4.00%
To be well capitalized under prompt corrective action provisions, Ratio			5.00%
Capital conservation buffer (as a percent)		2.50%	1.875%
Revision State Licensing Mortgage Loan Originations | Reported
Error Corrections and Prior Period Adjustments Restatement [Line Items]
Deferred income taxes	1,312		$ 1,636
Other liabilities	5,426		5,309
Retained earnings	15,768		23,931
Total capital (to risk-weighted assets)
Actual, Amount			122,577
For capital adequacy purpose, Amount			71,577
To be well capitalized under prompt corrective action provisions, Amount			$ 89,472
Actual, Ratio			13.70%
For capital adequacy purpose, Ratio			8.00%
To be well capitalized under prompt corrective action provisions, Ratio			10.00%
Common equity tier 1 capital (to risk-weighted assets)
Actual, Amount			$ 105,196
For capital adequacy purpose, Amount			40,262
To be well capitalized under prompt corrective action provisions, Amount			$ 58,157
Actual, Ratio			11.76%
For capital adequacy purpose, Ratio			4.50%
To be well capitalized under prompt corrective action provisions, Ratio			6.50%
Tier 1 capital (to risk-weighted assets)
Actual, Amount			$ 105,196
For capital adequacy purpose, Amount			53,683
To be well capitalized under prompt corrective action provisions, Amount			$ 71,577
Actual, Ratio			11.76%
For capital adequacy purpose, Ratio			6.00%
To be well capitalized under prompt corrective action provisions, Ratio			8.00%
Tier 1 capital (to average assets)
Actual, Amount			$ 105,196
For capital adequacy purpose, Amount			37,578
To be well capitalized under prompt corrective action provisions, Amount			$ 46,972
Actual, Ratio			11.20%
For capital adequacy purpose, Ratio			4.00%
To be well capitalized under prompt corrective action provisions, Ratio			5.00%
Revision State Licensing Mortgage Loan Originations | Corrections
Error Corrections and Prior Period Adjustments Restatement [Line Items]
Deferred income taxes	92		$ 92
Other liabilities	407		407
Retained earnings	$ (315)		$ (315)

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Fair Value Measurements and Disclosures (Tables)

9 Months Ended

Sep. 30, 2019

Fair Value Measurements and Disclosures

Schedule of financial assets measured at fair value on a recurring basis

	September 30, 2019
(dollars in thousands)	Total		Level 1	Level 2	Level 3
Securities available for sale:
U.S. government agency mortgage-backed securities	$	12,900	—	12,900	—
U.S. government agency collateralized mortgage obligations		29,961	—	29,961	—
Investments in mutual funds and other equity securities		9,896	—	9,896	—
Mortgage loans held-for-sale		48,615	—	48,615	—
Mortgage loans held-for-investment		11,278	—	11,278	—
Mortgage servicing rights		314	—	—	314
SBA loan servicing rights		321	—	—	321
Interest rate lock commitments		283	—	—	283
Customer derivatives - Interest rate swaps		500	—	500	—
Total	$	114,068	—	113,150	918

	December 31, 2018
(dollars in thousands)	Total		Level 1	Level 2	Level 3
Securities available for sale:
U.S. government agency mortgage-backed securities	$	23,866	—	23,866	—
U.S. government agency collateralized mortgage obligations		14,664	—	14,664	—
State and municipal securities		10,919	—	10,919	—
Investments in mutual funds and other equity securities		979	—	979	—
Mortgage loans held-for-sale		37,695	—	37,695	—
Mortgage loans held-for-investment		11,422	—	11,422	—
Mortgage servicing rights		213	—	—	213
Interest rate lock commitments		310	—	—	310
Customer derivatives - Interest rate swaps		141	—	141	—
Total	$	100,209	—	99,686	523

Schedule of financial assets measured at fair value on non-recurring basis

	September 30, 2019
(dollars in thousands)	Total		Level 1	Level 2	Level 3
Impaired loans (1)	$	5,965	—	—	5,965
Other real estate owned (2)		120	—	—	120
Total	$	6,085	—	—	6,085

	December 31, 2018
(dollars in thousands)	Total		Level 1	Level 2	Level 3
Impaired loans (1)	$	5,799	—	—	5,799
Other real estate owned (2)		—	—	—	—
Total	$	5,799	—	—	5,799

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

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

Schedule of estimated fair values of financial instruments

		September 30, 2019			December 31, 2018
	Fair Value	Carrying			Carrying
(dollars in thousands)	Hierarchy Level	amount		Fair value	amount	Fair value
Financial assets:
Cash and cash equivalents	Level 1	$	40,532	40,532	23,952	23,952
Securities available-for-sale	Level 2		52,757	52,757	50,428	50,428
Securities held-to-maturity	Level 2		8,814	9,028	12,741	12,655
Mortgage loans held-for-sale	Level 2		48,615	48,615	37,695	37,695
Loans receivable, net	Level 3		935,858	933,285	818,631	820,512
Mortgage loans held-for-investment	Level 2		11,278	11,278	11,422	11,422
Interest rate lock commitments	Level 3		283	283	310	310
Forward commitments	Level 2		30	30	—	—
Restricted investment in bank stock	Level 3		8,237	8,237	7,002	7,002
Mortgage servicing rights	Level 3		314	314	232	213
SBA loan servicing rights	Level 3		321	321	—	—
Accrued interest receivable	Level 3		3,155	3,155	2,889	2,889
Customer derivatives - Interest rate swaps	Level 2		500	500	141	141
Financial liabilities:
Deposits	Level 2		858,461	896,000	752,130	744,300
Short-term borrowings	Level 2		128,466	128,467	114,300	114,300
Long-term debt	Level 2		3,123	3,123	6,238	6,240
Subordinated debentures	Level 2		9,176	9,792	9,239	9,396
Accrued interest payable	Level 2		669	669	305	305
Interest rate lock commitments	Level 3		81	81	40	40
Forward commitments	Level 2		105	105	176	176
Customer derivatives - Interest rate swaps	Level 2		568	568	161	161
		Notional			Notional
Off-balance sheet financial instruments:		amount		Fair value	amount	Fair value
Commitments to extend credit	Level 2	$	327,788	283	290,614	310
Letters of credit	Level 2		9,750	—	5,158	—

Schedule of level 3 inputs reconciliation

	Three Months Ended September 30,			Nine Months Ended September 30,
	2019		2018	2019		2018
Balance at beginning of the period	$	375	586	$	310	344
(Decrease) increase in value		(92)	(80)		(27)	162
Balance at end of the period	$	283	506	$	283	506

Schedule of measurement inputs

				Significant
Valuation Techniques for Level 3 interest rate lock	Fair Value			Unobservable	Range of		Weighted
commitments as of September 30, 2019	Level 3		Valuation Technique	Input	Inputs		Average
Interest rate lock commitments	$	283	Market comparable pricing	Pull through	1 - 99	%	91.70	%

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Recent Accounting Pronouncements

9 Months Ended

Sep. 30, 2019

Recent Accounting Pronouncements

Recent Accounting Pronouncements

(13)    Recent Accounting Pronouncements

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

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

Issued in May 2014, ASU 2014‑09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015‑14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. This amendment defers the effective date of ASU 2014‑09 by one year. In March 2016, the FASB issued ASU 2016‑ 08”, “Principal versus Agent Considerations (Reporting Gross versus Net),” which amends the principal versus agent guidance and clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. In addition, the FASB issued ASU Nos. 2016‑20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” and 2016‑12, “Narrow-Scope Improvements and Practical Expedients”, both of which provide additional clarification of certain provisions in Topic 606. These Accounting Standards Codification (“ASC”) updates are effective for public companies for annual reporting periods beginning after December 15, 2017, but early adoption is permitted. Early adoption is permitted only as of annual reporting periods after December 15, 2016. The standard permits the use of either the ‘retrospective’ or ‘retrospectively with the cumulative effect’ transition method. For non-public companies, the ASC updates are effective for annual reporting periods beginning after December 15, 2018, and interim periods beginning after December 15, 2019. The Corporation’s revenue is the sum of net interest income and non-interest income. The scope of the guidance excludes nearly all net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. The Corporation performed a review and determined that the majority of non-interest income revenue streams are within the scope of the new standard. Non-interest income streams that are out of scope of the new standard include BOLI, sales of investment securities, mortgage banking activities, and certain items within service charges and other income.  Management is finalizing a review of contracts related to service charges on deposits, investment advisory commissions and fee income, and certain items within other service charges and other income to make an assessment of the potential impact of this ASU. The Corporation will adopt this ASU as of December 31, 2019.

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. Management is currently assessing the potential impact of ASU. The Corporation will adopt this ASU as of December 31, 2019.

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

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

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

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

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

Issued in June 2016, ASU 2016‑13 significantly changes how companies measure and recognize credit impairment for many financial assets. This ASU requires businesses and other organizations to measure the current expected credit losses (“CECL”) on financial assets, such as loans, net investments in leases, certain debt securities, bond insurance and other receivables.  The amendments affect entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. Current GAAP requires an incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The amendments in this ASU replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonableness and supportable information to inform credit loss estimates. An entity should apply the amendments through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (modified retrospective approach). Acquired credit impaired loans for which the guidance in Accounting Standards Codification (ASC) Topic 310-30 has been previously applied should prospectively apply the guidance in this ASU.  A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date. ASU 2016‑13 is effective for public companies for the annual and interim periods in fiscal years beginning after December 15, 2019, with early adoption permitted. For non-public companies the ASU is effective for fiscal years and interim periods beginning after December 15, 2022, or January 1, 2023 for the Corporation.  The Corporation has assembled a cross-functional team from Finance, Credit, and IT that is leading the implementation efforts to evaluate the impact of this guidance on the Corporation's Consolidated Financial Statements and related disclosures, internal systems, accounting policies, processes and related internal controls.

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

Issued in February 2016, ASU 2016‑02 revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. ASU 2016‑02 is effective for public companies for the first interim period within annual periods beginning after December 15, 2018, with early adoption permitted. For non-public companies the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within the fiscal years beginning after December 31, 2020. In July 2018 ASU 2018-11 was issued which creates a new, optional transition method for implementing ASU 2016-02 and a lessor practical expedient for separating lease and non-lease components and has the same effective date as ASU 2016-02.  Under the optional transition method of ASU 2018-11, the Corporation may initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.  The Corporation is evaluating the effects that ASU 2016‑02 and ASU 2018-11 will have on our Consolidated Financial Statements and related disclosures and expects to adopt these ASU’s as of December 31, 2021. 

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

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

FASB ASU 2017‑08 (Subtopic 310‑20), “Nonrefundable Fees and Other Costs (Subtopic 310‑20): Premium Amortization on Purchased Callable Debt Securities”

Issued in March 2017, ASU 2017‑08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendment requires the premium to be amortized to the earliest call date. The amendment does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. For non-public companies the ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within the fiscal years beginning after December 31, 2020. The Corporation is evaluating the effect that ASU 2017‑08 will have on our Consolidated Financial Statements and related disclosures upon our adoption as of December 31, 2019.

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 for which it plans to implement the ASU but we will consider the impact of the ASU on future hedging strategies that may arise.

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

In October 2018 ASU 2018-16 was issued.  The new guidance applies to all entities that elect to apply hedge accounting to benchmark interest rate hedges under Topic 815. It permits the use of the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes in addition to the existing applicable rates. The guidance is required to be adopted concurrently with ASU 2017-12, on a prospective basis for qualifying new or redesignated hedging relationships entered into on or after adoption.The Corporation will adopt this ASU as of December 31, 2020 and does not anticipate the adoption of this ASU to have a material impact on our Consolidated Financial Statements and related disclosures.

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Securities (Tables)

9 Months Ended

Sep. 30, 2019

Securities

Schedule of amortized cost and fair value of securities

	September 30, 2019
			Gross	Gross
	Amortized		unrealized	unrealized	Fair
(dollars in thousands)	cost		gains	losses	value
Securities available-for-sale:
U.S. asset backed securities	$	8,919	2	(39)	8,882
U.S. government agency mortgage-backed securities		12,843	103	(46)	12,900
U.S. government agency collateralized mortgage obligations		29,734	357	(130)	29,961
Investments in mutual funds		1,000	14	-	1,014
Total securities available-for-sale	$	52,496	476	(215)	52,757
Securities held to maturity:
State and municipal securities		8,814	214	—	9,028
Total securities held-to-maturity	$	8,814	214	—	9,028

	December 31, 2018
			Gross	Gross
	Amortized		unrealized	unrealized	Fair
(dollars in thousands)	cost		gains	losses	value
Securities available-for-sale:
U.S. government agency mortgage-backed securities	$	24,092	45	(271)	23,866
U.S. government agency collateralized mortgage obligations		14,754	52	(142)	14,664
State and municipal securities		11,096	22	(199)	10,919
Investments in mutual funds		1,000	—	(21)	979
Total securities available-for-sale	$	50,942	119	(633)	50,428
Securities held to maturity:
U.S. Treasuries	$	1,991	—	(13)	1,978
State and municipal securities		10,750	17	(90)	10,677
Total securities held-to-maturity	$	12,741	17	(103)	12,655

Schedule of investment unrealized loss in continuous unrealized loss position

	September 30, 2019
	Less than 12 Months			12 Months or more		Total
	Fair		Unrealized	Fair	Unrealized	Fair	Unrealized
(dollars in thousands)	value		losses	value	losses	value	losses
Securities available-for-sale:
U.S. asset backed securities		6,842	(39)	—	—	6,842	(39)
U.S. government agency mortgage-backed securities	$	1,926	(9)	3,177	(37)	5,103	(46)
U.S. government agency collateralized mortgage obligations		12,700	(88)	2,754	(42)	15,454	(130)
Total securities available-for-sale	$	21,468	(136)	5,931	(79)	27,399	(215)

	December 31, 2018
	Less than 12 Months			12 Months or more		Total
	Fair		Unrealized	Fair	Unrealized	Fair	Unrealized
(dollars in thousands)	value		losses	value	losses	value	losses
Securities available-for-sale:
U.S. government agency mortgage-backed securities	$	2,354	(6)	15,223	(265)	17,577	(271)
U.S. government agency collateralized mortgage obligations		2,636	(14)	5,620	(128)	8,256	(142)
State and municipal securities		957	(11)	8,746	(188)	9,703	(199)
Investments in mutual funds		980	(21)	—	—	980	(21)
Total securities available-for-sale	$	6,927	(52)	29,589	(581)	36,516	(633)
Securities held-to-maturity:
U.S. Treasuries	$	—	—	1,978	(13)	1,978	(13)
State and municipal securities		1,545	(5)	4,783	(85)	6,328	(90)
Total securities held-to-maturity	$	1,545	(5)	6,761	(98)	8,306	(103)

Schedule of amortized cost and fair value of held-to-maturity securities and available-for-sale securities by contractual maturity

	September 30, 2019					December 31, 2018
	Available-for-sale			Held-to-maturity		Available-for-sale			Held-to-maturity
	Amortized		Fair	Amortized	Fair	Amortized		Fair	Amortized	Fair
(dollars in thousands)	cost		value	cost	value	cost		value	cost	value
Investment securities:
Due in one year or less	$	—	—	—	—	$	906	902	1,991	1,978
Due after one year through five years		—	—	4,258	4,316		1,236	1,226	3,154	3,148
Due after five years through ten years		—	—	4,556	4,712		6,411	6,290	7,596	7,529
Due after ten years		8,919	8,882	—	—		2,543	2,501	—	—
Subtotal		8,919	8,882	8,814	9,028		11,096	10,919	12,741	12,655
Mortgage-related securities		42,577	42,861	—	—		38,846	38,530	—	—
Mutual funds with no stated maturity		1,000	1,014	—	—		1,000	979	—	—
Total	$	52,496	52,757	8,814	9,028	$	50,942	50,428	12,741	12,655

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Servicing Assets (Tables)

9 Months Ended

Sep. 30, 2019

Mortgage Servicing Rights

Servicing Assets at Fair Value [Line Items]

Schedule of servicing assets

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2019		2018	2019		2018
Balance at beginning of the period	$	236	62	$	232	—
Servicing rights capitalized		107	89		198	152
Amortization of servicing rights		(17)	(3)		(39)	(4)
Change in valuation allowance		(12)	—		(77)	—
Balance at end of the period	$	314	148	$	314	148

Schedule of valuation allowance for servicing assets

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2019		2018	2019		2018
Valuation allowance, beginning of period	$	(65)	—	$	—	—
Impairment		(12)	—		(77)	—
Recovery		—	—		—	—
Valuation allowance, end of period	$	(77)	—	$	(77)	—

Schedule of sensitivity of fair value of servicing assets

(dollars in thousands)	September 30, 2019		December 31, 2018
Fair value of residential mortgage servicing rights	$	314	$	213
Weighted average life (years)		7.4		3.4
Prepayment speed		16.02%		11.78%
Impact on fair value:
10% adverse change	$	(16)	$	(9)
20% adverse change		(30)		(17)
Discount rate		9.25%		9.50%
Impact on fair value:
10% adverse change	$	(9)	$	(8)
20% adverse change		(18)		(15)

SBA Loan Servicing Rights

Servicing Assets at Fair Value [Line Items]

Schedule of servicing assets

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2019		2018	2019		2018
Balance at beginning of the period	$	133	—	$	—	—
Servicing rights capitalized		198	—		331	—
Amortization of servicing rights		(6)	—		(6)	—
Change in valuation allowance		(4)	—		(4)	—
Balance at end of the period	$	321	—	$	321	—

Schedule of valuation allowance for servicing assets

	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2019		2018	2019		2018
Valuation allowance, beginning of period	$	—	—	$	—	—
Impairment		(4)	—		(4)	—
Recovery		—	—		—	—
Valuation allowance, end of period	$	(4)	—	$	(4)	—

Schedule of sensitivity of fair value of servicing assets

(dollars in thousands)	September 30, 2019
Fair value of SBA loan servicing rights	$	321
Weighted average life (years)		4.5
Prepayment speed		10.34%
Impact on fair value:
10% adverse change	$	(11)
20% adverse change		(21)
Discount rate		8.88%
Impact on fair value:
10% adverse change	$	(9)
20% adverse change		(18)

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Allowance for Loan Losses (the "Allowance") - Impaired loans (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Impaired loans with related allowance:
Recorded investment	$ 814		$ 814		$ 676
Principal balance	814		814		679
Related allowance	126		126		103
Average recorded investment			822		680
Impaired loans without related allowance:
Recorded investment	5,151		5,151		5,123
Principal balance	5,707		5,707		5,672
Average recorded investment			5,279		5,222
Grand Total
Recorded investment	5,965		5,965		5,799
Principal balance	6,521		6,521		6,351
Average recorded investment			6,101		5,902
Interest income recognized on performing impaired loans	50	$ 93	152	$ 218
Commercial mortgage
Impaired loans without related allowance:
Recorded investment	2,204		2,204		1,929
Principal balance	2,713		2,713		2,379
Average recorded investment			2,272		1,982
Commercial and industrial
Impaired loans with related allowance:
Recorded investment	559		559		676
Principal balance	559		559		679
Related allowance	124		124		103
Average recorded investment			566		680
Impaired loans without related allowance:
Recorded investment	830		830		861
Principal balance	876		876		945
Average recorded investment			864		885
Home equity lines and loans
Impaired loans with related allowance:
Recorded investment	255		255
Principal balance	255		255
Related allowance	2		2
Average recorded investment			256
Impaired loans without related allowance:
Recorded investment					83
Principal balance					89
Average recorded investment					84
Residential mortgage
Impaired loans without related allowance:
Recorded investment	855		855		969
Principal balance	855		855		978
Average recorded investment			857		978
Construction
Impaired loans without related allowance:
Recorded investment	1,262		1,262		1,281
Principal balance	$ 1,263		1,263		1,281
Average recorded investment			$ 1,286		$ 1,293

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Allowance for Loan Losses (the "Allowance") - Roll-forward of allowance by portfolio segment (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Roll-Forward of Allowance for Loan and Lease Losses by Portfolio Segment
Balance at beginning of period	$ 8,625	$ 7,449	$ 8,053	$ 6,709
Charge-offs	(30)	(50)	(30)	(381)
Recoveries	12	21	351	125
Provision	705	291	938	1,258
Balance at end of period	9,312	7,711	9,312	7,711
Commercial mortgage
Roll-Forward of Allowance for Loan and Lease Losses by Portfolio Segment
Balance at beginning of period	3,197	3,011	3,209	2,434
Recoveries	1	2	6	6
Provision	257	140	240	713
Balance at end of period	3,455	3,153	3,455	3,153
Home equity lines and loans
Roll-Forward of Allowance for Loan and Lease Losses by Portfolio Segment
Balance at beginning of period	354	269	323	280
Charge-offs				(137)
Recoveries	2	10	10	14
Provision	(28)	37	(5)	159
Balance at end of period	328	316	328	316
Residential mortgage
Roll-Forward of Allowance for Loan and Lease Losses by Portfolio Segment
Balance at beginning of period	200	166	191	82
Recoveries	2		4	61
Provision	(30)	14	(23)	37
Balance at end of period	172	180	172	180
Construction
Roll-Forward of Allowance for Loan and Lease Losses by Portfolio Segment
Balance at beginning of period	2,033	1,438	1,627	1,689
Provision	136	59	542	(192)
Balance at end of period	2,169	1,497	2,169	1,497
Commercial and industrial
Roll-Forward of Allowance for Loan and Lease Losses by Portfolio Segment
Balance at beginning of period	2,830	2,559	2,690	2,214
Charge-offs	(30)	(50)	(30)	(244)
Recoveries	6	8	328	41
Provision	369	41	187	547
Balance at end of period	3,175	2,558	3,175	2,558
Consumer
Roll-Forward of Allowance for Loan and Lease Losses by Portfolio Segment
Balance at beginning of period	4	3	3	5
Recoveries	1	1	3	3
Provision	1			(4)
Balance at end of period	6	4	6	4
Leases, net
Roll-Forward of Allowance for Loan and Lease Losses by Portfolio Segment
Balance at beginning of period	7	3	10	5
Provision			(3)	(2)
Balance at end of period	$ 7	$ 3	$ 7	$ 3

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Loans Receivable - Loans and leases outstanding by category (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Loans Receivable
Mortgage loans held for sale	$ 48,615	$ 37,695
Total portfolio loans and leases	937,753	839,787
Total loans and leases	986,368	877,482
Net deferred loan origination (fees) costs	(1,895)	(1,681)
Loans at fair value	11,278	11,422
Commercial mortgage
Loans Receivable
Total portfolio loans and leases	357,418	325,393
Home equity lines and loans
Loans Receivable
Total portfolio loans and leases	83,412	82,286
Residential mortgage
Loans Receivable
Total portfolio loans and leases	56,272	53,360
Construction
Loans Receivable
Total portfolio loans and leases	154,463	116,906
Commercial and industrial
Loans Receivable
Total portfolio loans and leases	284,376	259,806
Consumer
Loans Receivable
Total portfolio loans and leases	984	701
Leases, net
Loans Receivable
Total portfolio loans and leases	828	1,335
Real estate loans
Loans Receivable
Total portfolio loans and leases	651,565	577,945
Loans at fair value	11,278	11,422
Real estate loans | Commercial mortgage
Loans Receivable
Total portfolio loans and leases	357,418	325,393
Real estate loans | Home equity lines and loans
Loans Receivable
Total portfolio loans and leases	83,412	82,286
Real estate loans | Residential mortgage
Loans Receivable
Total portfolio loans and leases	56,272	53,360
Loans at fair value	11,278	11,422
Real estate loans | Construction
Loans Receivable
Total portfolio loans and leases	$ 154,463	$ 116,906

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Fair Value Measurements and Disclosures - Valuation Techniques for Level 3 interest rate lock (Details) - Interest rate lock commitments $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($)	Sep. 30, 2018 USD ($)
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Derivative asset	$ 283		$ 283
Valuation technique extensible list	us-gaap:ValuationTechniqueConsensusPricingModelMember		us-gaap:ValuationTechniqueConsensusPricingModelMember
Measurement input extensible list	mrbk:LoanOriginationSucessRateMember		mrbk:LoanOriginationSucessRateMember
Gain in fair value of derivative assets	$ 101	$ 138	$ 67	$ 114
Minimum
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Measurement input	1		1
Maximum
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Measurement input	99		99
Weighted Average
Fair Value Measurement Inputs and Valuation Techniques [Line Items]
Measurement input	91.70		91.70

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Recent Litigation (Details) $ in Thousands	Jul. 24, 2019 USD ($)	Nov. 21, 2017 employee	Sep. 30, 2019 USD ($)
Recent Litigation
Number of employees filed suit | employee		3
Litigation reserve			$ 990
Litigation settlement agreed amount	$ 990

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - USD ($) $ in Thousands	Common stock	Surplus	Retained Earnings	Accumulated Other Comprehensive Income (loss)	Total
Balance beginning of the period (Footnote 1) at Dec. 31, 2017	$ 6,392	$ 79,501	$ 15,453	$ (298)	$ 101,048
Comprehensive income:
Net income			1,270		1,270
Change in unrealized gains on securities available-for-sale, net of tax				(276)	(276)
Total comprehensive income					994
Compensation expense related to stock option grants		3			3
Balance ending of the period at Mar. 31, 2018	6,392	79,504	16,723	(574)	102,045
Balance beginning of the period (Footnote 1) at Dec. 31, 2017	6,392	79,501	15,453	(298)	101,048
Comprehensive income:
Net income					5,799
Change in unrealized gains on securities available-for-sale, net of tax					(510)
Total comprehensive income					5,289
Balance ending of the period at Sep. 30, 2018	6,407	79,852	21,252	(808)	106,703
Balance beginning of the period (Footnote 1) at Mar. 31, 2018	6,392	79,504	16,723	(574)	102,045
Comprehensive income:
Net income			1,802		1,802
Change in unrealized gains on securities available-for-sale, net of tax				(63)	(63)
Total comprehensive income					1,739
Share-based awards and exercises	9				9
Compensation expense related to stock option grants		272			272
Balance ending of the period at Jun. 30, 2018	6,401	79,776	18,525	(637)	104,065
Comprehensive income:
Net income			2,727		2,727
Change in unrealized gains on securities available-for-sale, net of tax				(171)	(171)
Total comprehensive income					2,556
Share-based awards and exercises	6				6
Compensation expense related to stock option grants		76			76
Balance ending of the period at Sep. 30, 2018	6,407	79,852	21,252	(808)	106,703
Balance beginning of the period (Footnote 1) at Dec. 31, 2018	6,407	79,919	23,616	(390)	109,552
Comprehensive income:
Net income			2,006		2,006
Change in unrealized gains on securities available-for-sale, net of tax				373	373
Total comprehensive income					2,379
Compensation expense related to stock option grants		61			61
Balance ending of the period at Mar. 31, 2019	6,407	79,980	25,622	(17)	111,992
Balance beginning of the period (Footnote 1) at Dec. 31, 2018	6,407	79,919	23,616	(390)	109,552
Comprehensive income:
Net income					7,345
Change in unrealized gains on securities available-for-sale, net of tax					601
Total comprehensive income					7,946
Balance ending of the period at Sep. 30, 2019	6,408	80,192	30,961	211	117,772
Balance beginning of the period (Footnote 1) at Mar. 31, 2019	6,407	79,980	25,622	(17)	111,992
Comprehensive income:
Net income			2,022		2,022
Change in unrealized gains on securities available-for-sale, net of tax				222	222
Total comprehensive income					2,244
Compensation expense related to stock option grants		143			143
Balance ending of the period at Jun. 30, 2019	6,407	80,123	27,644	205	114,379
Comprehensive income:
Net income			3,317		3,317
Change in unrealized gains on securities available-for-sale, net of tax				6	6
Total comprehensive income					3,323
Share-based awards and exercises	1	7			8
Compensation expense related to stock option grants		62			62
Balance ending of the period at Sep. 30, 2019	$ 6,408	$ 80,192	$ 30,961	$ 211	$ 117,772

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CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
CONSOLIDATED BALANCE SHEETS
Available-for-sale, Amortized Cost	$ 52,496	$ 50,942
Securities held-to-maturity	9,028	12,655
Mortgage loans held for sale, amortized cost	48,339	37,337
Loans at fair value	11,278	11,422
Loans at amortized cost	$ 10,934	$ 11,466
Common stock, par value	$ 1	$ 1
Common stock, Authorized shares	10,000,000	10,000,000
Common Stock, Shares, Issued	6,407,685	6,406,795
Common Stock, Shares, Outstanding	6,407,685	6,406,795

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Short-Term Borrowings and Long-Term Debt - Long-term debt (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Long Term Debt
Long-term debt	$ 3,123	$ 6,238
Federal Home Loan Bank of Pittsburgh | Mid-term Repo-fixed Maturing On 06/28/2021
Long Term Debt
Fixed interest rate (as a percent)	1.88%	1.88%
Long-term debt	$ 3,123
Federal Home Loan Bank of Pittsburgh | Mid-term Repo-fixed Maturing On 08/10/2020
Long Term Debt
Fixed interest rate (as a percent)		2.76%
Long-term debt		$ 5,000
Federal Home Loan Bank of Pittsburgh | Acquisition Purchase Note
Long Term Debt
Fixed interest rate (as a percent)	3.00%
Long-term debt		1,238
Federal Home Loan Bank of Pittsburgh | Letters of credit
Long Term Debt
Proceeds from long term debt	$ 101,500
Maximum borrowing capacity	$ 496,300	$ 437,200

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Servicing Assets - SBA Sensitivity Analysis (Details) - SBA Loan Servicing Rights $ in Thousands	9 Months Ended
	Sep. 30, 2019 USD ($)
Sensitivity Analysis of Fair Value of Interests Continued to be Held by Transferor, Servicing Assets or Liabilities, Impact of Adverse Change in Assumption [Line Items]
Fair value of SBA loan servicing rights	$ 321
Weighted average life (years)	4 years 6 months
Prepayment speed	10.34%
Impact on fair value of a 10% adverse change in prepayment speed	$ (11)
Impact on fair value of a 20% adverse change in prepayment speed	$ (21)
Discount rate	8.88%
Impact on fair value of a 10% adverse change in the discount rate	$ (9)
Impact on fair value of a 20% adverse change in the discount rate	$ (18)

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Goodwill and Other Intangibles (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018	Sep. 30, 2018
Goodwill and other intangibles rollforward
Accumulated Amortization	$ 682		$ 409
Grand total	4,841	$ 5,046
HJ Wealth
Goodwill and other intangibles rollforward
Goodwill, Beginning Balance	899
Goodwill, Ending Balance	899
Amortization expense	205
Total Intangible Assets	3,942	4,147
Grand total	4,841	$ 5,046
HJ Wealth | Trade name
Goodwill and other intangibles rollforward
Indefinite-lived Intangible Assets (Excluding Goodwill), Beginning Balance	266
Indefinite-lived Intangible Assets (Excluding Goodwill), Ending Balance	266
HJ Wealth | Customer relationships
Goodwill and other intangibles rollforward
Finite-Lived Intangible Assets, Net, Beginning Balance	3,727
Amortization expense	153
Finite-Lived Intangible Assets, Net, Ending Balance	$ 3,574
Amortization Period	20 years
HJ Wealth | Non competition agreements
Goodwill and other intangibles rollforward
Finite-Lived Intangible Assets, Net, Beginning Balance	$ 154
Amortization expense	52
Finite-Lived Intangible Assets, Net, Ending Balance	$ 102
Amortization Period	4 years

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Segment (Tables)

9 Months Ended

Sep. 30, 2019

Segments

Schedule of business segment financial information

	Three Months Ended September 30, 2019					Three Months Ended September 30, 2018
(dollars in thousands)	Bank		Wealth	Mortgage	Total	Bank		Wealth	Mortgage	Total
Net interest income	$	9,203	4	67	9,274	$	8,107	71	200	8,378
Provision for loan losses		705	—	—	705		291	—	—	291
Net interest income after provision		8,498	4	67	8,569		7,816	71	200	8,087
Non-interest Income
Mortgage banking income		74	—	7,836	7,910		105	—	8,169	8,274
Wealth management income		31	891	—	922		59	871	—	930
SBA income		645	—	—	645		—	—	—	—
Net change in fair values		(23)	—	53	30		—	—	(333)	(333)
Other		534	—	(227)	307		363	—	(67)	296
Total non-interest income		1,261	891	7,662	9,814		527	871	7,769	9,167
Non-interest Expense
Salaries and employee benefits		4,248	564	4,507	9,319		3,264	445	5,192	8,901
Occupancy and equipment		530	34	382	946		521	29	370	920
Professional fees		410	2	408	820		590	9	115	714
Advertising and promotion		344	94	136	574		301	111	178	590
Other		1,393	140	960	2,493		1,259	314	1,055	2,628
Total non-interest expense		6,925	834	6,393	14,152		5,935	908	6,910	13,753
Operating Margin	$	2,834	61	1,336	4,231	$	2,408	34	1,059	3,501

	Nine Months Ended September 30, 2019					Nine Months Ended September 30, 2018
(dollars in thousands)	Bank		Wealth	Mortgage	Total	Bank		Wealth	Mortgage	Total
Net interest income	$	26,437	68	167	26,672	$	23,597	217	402	24,216
Provision for loan losses		938	—	—	938		1,258	—	—	1,258
Net interest income after provision		25,499	68	167	25,734		22,339	217	402	22,958
Non-interest Income
Mortgage banking income		175	—	18,964	19,139		148	—	20,259	20,407
Wealth management income		110	2,588	—	2,698		149	2,847	—	2,996
SBA income		1,160	—	—	1,160		—	—	—	—
Net change in fair values		(49)	—	341	292		—	—	(471)	(471)
Other		1,409	—	(510)	899		1,136	—	823	1,959
Total non-interest income		2,805	2,588	18,795	24,188		1,433	2,847	20,611	24,891
Non-interest Expense
Salaries and employee benefits		11,988	1,681	12,120	25,789		10,390	1,373	14,956	26,719
Occupancy and equipment		1,588	93	1,164	2,845		1,599	99	1,172	2,870
Professional fees		1,116	11	873	2,000		1,325	20	325	1,670
Advertising and promotion		1,084	57	628	1,769		917	319	566	1,802
Other		4,546	426	3,137	8,109		3,827	613	2,888	7,328
Total non-interest expense		20,322	2,268	17,922	40,512		18,058	2,424	19,907	40,389
Operating Margin	$	7,982	388	1,040	9,410	$	5,714	640	1,106	7,460

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Segments

9 Months Ended

Sep. 30, 2019

Segments

Segments

(11)    Segments

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

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

Meridian Wealth Partners (“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 loan production offices located throughout the Delaware Valley. The Mortgage segment originates 1 – 4 family residential mortgages for sale, including servicing to third party investors, or for our loan portfolio. The unit generates net interest income on the loans it originates, earns margin income (primarily gain on sales), as well as other fee income.

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

	Three Months Ended September 30, 2019					Three Months Ended September 30, 2018
(dollars in thousands)	Bank		Wealth	Mortgage	Total	Bank		Wealth	Mortgage	Total
Net interest income	$	9,203	4	67	9,274	$	8,107	71	200	8,378
Provision for loan losses		705	—	—	705		291	—	—	291
Net interest income after provision		8,498	4	67	8,569		7,816	71	200	8,087
Non-interest Income
Mortgage banking income		74	—	7,836	7,910		105	—	8,169	8,274
Wealth management income		31	891	—	922		59	871	—	930
SBA income		645	—	—	645		—	—	—	—
Net change in fair values		(23)	—	53	30		—	—	(333)	(333)
Other		534	—	(227)	307		363	—	(67)	296
Total non-interest income		1,261	891	7,662	9,814		527	871	7,769	9,167
Non-interest Expense
Salaries and employee benefits		4,248	564	4,507	9,319		3,264	445	5,192	8,901
Occupancy and equipment		530	34	382	946		521	29	370	920
Professional fees		410	2	408	820		590	9	115	714
Advertising and promotion		344	94	136	574		301	111	178	590
Other		1,393	140	960	2,493		1,259	314	1,055	2,628
Total non-interest expense		6,925	834	6,393	14,152		5,935	908	6,910	13,753
Operating Margin	$	2,834	61	1,336	4,231	$	2,408	34	1,059	3,501

	Nine Months Ended September 30, 2019					Nine Months Ended September 30, 2018
(dollars in thousands)	Bank		Wealth	Mortgage	Total	Bank		Wealth	Mortgage	Total
Net interest income	$	26,437	68	167	26,672	$	23,597	217	402	24,216
Provision for loan losses		938	—	—	938		1,258	—	—	1,258
Net interest income after provision		25,499	68	167	25,734		22,339	217	402	22,958
Non-interest Income
Mortgage banking income		175	—	18,964	19,139		148	—	20,259	20,407
Wealth management income		110	2,588	—	2,698		149	2,847	—	2,996
SBA income		1,160	—	—	1,160		—	—	—	—
Net change in fair values		(49)	—	341	292		—	—	(471)	(471)
Other		1,409	—	(510)	899		1,136	—	823	1,959
Total non-interest income		2,805	2,588	18,795	24,188		1,433	2,847	20,611	24,891
Non-interest Expense
Salaries and employee benefits		11,988	1,681	12,120	25,789		10,390	1,373	14,956	26,719
Occupancy and equipment		1,588	93	1,164	2,845		1,599	99	1,172	2,870
Professional fees		1,116	11	873	2,000		1,325	20	325	1,670
Advertising and promotion		1,084	57	628	1,769		917	319	566	1,802
Other		4,546	426	3,137	8,109		3,827	613	2,888	7,328
Total non-interest expense		20,322	2,268	17,922	40,512		18,058	2,424	19,907	40,389
Operating Margin	$	7,982	388	1,040	9,410	$	5,714	640	1,106	7,460

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Goodwill and Other Intangibles

9 Months Ended

Sep. 30, 2019

Goodwill and Other Intangibles

Goodwill and Other Intangibles

(3)      Goodwill and Other Intangibles

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

	Balance			Balance	Amortization
	December 31,		Amortization	September 30,	Period
(dollars in thousands)	2018		Expense	2019	(in years)
Goodwill - Wealth	$	899	—	899	Indefinite
Total Goodwill		899	—	899
Intangible assets - trade name		266	—	266	Indefinite
Intangible assets - customer relationships		3,727	(153)	3,574	20
Intangible assets - non competition agreements		154	(52)	102	4
Total Intangible Assets		4,147	(205)	3,942
Total	$	5,046	(205)	4,841

Accumulated amortization on intangible assets was $682 thousand and $409 thousand as of September 30, 2019 and 2018, respectively.

The Corporation performed its annual review of goodwill and identifiable intangible assets in accordance with ASC 350, “Intangibles - Goodwill and Other” as of December 31, 2018. For the period from January 1, 2019 through September 30, 2019, the Corporation determined there were no events that would necessitate impairment testing of goodwill and other intangible assets.

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Short-Term Borrowings and Long -Term Debt

9 Months Ended

Sep. 30, 2019

Short-Term Borrowings and Long-Term Debt

Short-Term Borrowings and Long-Term Debt

(7)      Short-Term Borrowings and Long‑Term Debt

The Corporation’s short‑term borrowings generally consist of federal funds purchased and short‑term borrowings extended under agreements with the Federal Home Loan Bank of Pittsburgh (“FHLB”). The Corporation has two unsecured Federal Funds borrowing facilities with correspondent banks: one of $24 million and one of  $15 million. Federal funds purchased generally represent one-day borrowings.  The Corporation had no Federal Funds purchased at September 30, 2019 and December 31, 2018. The Corporation also has a facility with the Federal Reserve discount window of $9.6 million. This facility is fully secured by investment securities and loans. There were no borrowings under this facility at September 30, 2019 or at December 31, 2018.

Short‑term borrowings as of September 30, 2019 consisted of short‑term advances from the FHLB of Pittsburgh in the amount of $119.7 million with interest at 2.08%,  $3.1 million with an original term of 3 years with interest at 2.03%,  $5.0 million with an original term of 7 years with interest at 2.76%, and the note payable related to the acquisition of HJ Wealth of $619 thousand with an original term of 3 years with interest at 3.00%.

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

Long‑term debt at September 30, 2019 and December 31, 2018 consisted of the following fixed rate notes:

				Balance as of
	Maturity	Interest		September 30,		December 31,
(dollars in thousands)	date	rate		2019		2018
Mid-term Repo-fixed	06/28/21	1.88	%		3,123	—
Mid-term Repo-fixed	08/10/20	2.76			—	5,000
Acquisition Purchase Note (1)	04/01/20	3.00			—	1,238
Total				$	3,123	6,238

(1) The acquisition purchase note for the Wealth division is classified as short-term borrowing at September 30, 2019.

The FHLB of Pittsburgh has also issued $101.5 million of letters of credit to the Corporation for the benefit of the Corporation’s public deposit funds and loan customers. These letters of credit expire by June 19, 2020. The Corporation has a maximum borrowing capacity with the FHLB of $496.3 million as of September 30, 2019 and $437.2 million as of December 31, 2018. All advances and letters of credit from the FHLB are secured by a blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation’s borrowing agreement with the FHLB.

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Earnings per Common Share (Tables)

9 Months Ended

Sep. 30, 2019

Earnings per Common Share

Schedule of basic and diluted earnings per common share

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands, except per share data)	2019		2018		2019		2018
Numerator:
Net income available to common stockholders	$	3,317		2,727	$	7,345		5,799
Denominator for basic earnings per share - weighted average shares outstanding		6,407		6,402		6,407		6,395
Effect of dilutive common shares		30		28		29		31
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		6,437		6,430		6,436		6,426
Basic earnings per share	$	0.52		0.43	$	1.15		0.91
Diluted earnings per share	$	0.52		0.42	$	1.14		0.90
Antidilutive shares excluded from computation of average dilutive earnings per share		199		116		199		116

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Allowance for Loan Losses (the "Allowance") (Tables)

9 Months Ended

Sep. 30, 2019

Allowance for Loan Losses (the Allowance)

Roll-forward of allowance for loan and lease losses by portfolio segment

	Balance,					Balance,
(dollars in thousands)	June 30, 2019		Charge-offs	Recoveries	Provision	September 30, 2019
Commercial mortgage	$	3,197	—	1	257	3,455
Home Equity lines and loans		354	—	2	(28)	328
Residential mortgage		200	—	2	(30)	172
Construction		2,033	—	—	136	2,169
Commercial and industrial		2,830	(30)	6	369	3,175
Consumer		4	—	1	1	6
Leases		7	—	—	—	7
Total	$	8,625	(30)	12	705	9,312

	Balance,					Balance,
(dollars in thousands)	December 31, 2018		Charge-offs	Recoveries	Provision	September 30, 2019
Commercial mortgage	$	3,209	—	6	240	3,455
Home Equity lines and loans		323	—	10	(5)	328
Residential mortgage		191	—	4	(23)	172
Construction		1,627	—	—	542	2,169
Commercial and industrial		2,690	(30)	328	187	3,175
Consumer		3	—	3	—	6
Leases		10	—	—	(3)	7
Total	$	8,053	(30)	351	938	9,312

	Balance,					Balance,
(dollars in thousands)	June 30, 2018		Charge-offs	Recoveries	Provision	September 30, 2018
Commercial mortgage	$	3,011	—	2	140	3,153
Home Equity lines and loans		269	—	10	37	316
Residential mortgage		166	—	—	14	180
Construction		1,438	—	—	59	1,497
Commercial and industrial		2,559	(50)	8	41	2,558
Consumer		3	—	1	—	4
Leases		3	—	—	—	3
Total	$	7,449	(50)	21	291	7,711

	Balance,					Balance,
(dollars in thousands)	December 31, 2017		Charge-offs	Recoveries	Provision	September 30, 2018
Commercial mortgage	$	2,434	—	6	713	3,153
Home Equity lines and loans		280	(137)	14	159	316
Residential mortgage		82	—	61	37	180
Construction		1,689	—	—	(192)	1,497
Commercial and industrial		2,214	(244)	41	547	2,558
Consumer		5	—	3	(4)	4
Leases		5	—	—	(2)	3
Total	$	6,709	(381)	125	1,258	7,711

Schedule of allocation of the allowance for loan and lease losses

	Allowance on loans and leases				Carrying value of loans and leases
	Individually		Collectively		Individually		Collectively
September 30, 2019	evaluated		evaluated		evaluated		evaluated
(dollars in thousands)	for impairment		for impairment	Total	for impairment		for impairment	Total
Commercial mortgage	$	—	3,455	3,455	$	2,204	355,214	357,418
Home Equity lines and loans		2	326	328		255	83,157	83,412
Residential mortgage		—	172	172		855	44,138	44,993
Construction		—	2,169	2,169		1,262	153,201	154,463
Commercial and industrial		124	3,051	3,175		1,389	282,987	284,376
Consumer		—	6	6		—	984	984
Leases		—	7	7		—	828	828
Total	$	126	9,186	9,312	$	5,965	920,509	926,474	(1)

	Allowance on loans and leases				Carrying value of loans and leases
	Individually		Collectively		Individually		Collectively
December 31, 2018	evaluated		evaluated		evaluated		evaluated
(dollars in thousands)	for impairment		for impairment	Total	for impairment		for impairment	Total
Commercial mortgage	$	—	3,209	3,209	$	1,929	323,464	325,393
Home Equity lines and loans		—	323	323		83	82,203	82,286
Residential mortgage		—	191	191		969	40,969	41,938
Construction		—	1,627	1,627		1,281	115,625	116,906
Commercial and industrial		103	2,587	2,690		1,537	258,269	259,806
Consumer		—	3	3		—	701	701
Leases		—	10	10		—	1,335	1,335
Total	$	103	7,950	8,053	$	5,799	822,566	828,365	(1)

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

Schedule of carrying value of loans and leases by portfolio segment based on the credit quality indicators

September 30, 2019			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	350,027	3,437	3,954	—	357,418
Home equity lines and loans		83,155	—	257	—	83,412
Construction		151,663	2,774	26	—	154,463
Commercial and industrial		262,217	8,399	13,760	—	284,376
Total	$	847,062	14,610	17,997	—	879,669

December 31, 2018			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	320,130	3,713	1,550	—	325,393
Home equity lines and loans		82,121	—	165	—	82,286
Construction		114,249	2,657	—	—	116,906
Commercial and industrial		239,181	12,620	7,975	30	259,806
Total	$	755,681	18,990	9,690	30	784,391

Schedule of allocations based on the credit quality indicators

	September 30, 2019				December 31, 2018
(dollars in thousands)	Performing		Nonperforming	Total	Performing		Nonperforming	Total
Residential mortgage	$	44,138	855	44,993	$	40,969	969	41,938
Consumer		984	—	984		701	—	701
Leases		828	—	828		1,335	—	1,335
Total	$	45,950	855	46,805	$	43,005	969	43,974

Schedule of recorded investment and principal balance of impaired loans

	At September 30, 2019					At December 31, 2018
					Average				Average
	Recorded		Principal	Related	recorded	Recorded	Principal	Related	recorded
(dollars in thousands)	investment		balance	allowance	investment	investment	balance	allowance	investment
Impaired loans with related allowance:
Commercial mortgage	$	—	—	—	—	—	—	—	—
Commercial and industrial		559	559	124	566	676	679	103	680
Home equity lines and loans		255	255	2	256	—	—	—	—
Residential mortgage		—	—	—	—	—	—	—	—
Construction		—	—	—	—	—	—	—	—
Total		814	814	126	822	676	679	103	680
Impaired loans without related allowance:
Commercial mortgage	$	2,204	2,713	—	2,272	1,929	2,379	—	1,982
Commercial and industrial		830	876	—	864	861	945	—	885
Home equity lines and loans		—	—	—	—	83	89	—	84
Residential mortgage		855	855	—	857	969	978	—	978
Construction		1,262	1,263	—	1,286	1,281	1,281	—	1,293
Total		5,151	5,707	—	5,279	5,123	5,672	—	5,222
Grand Total	$	5,965	6,521	126	6,101	5,799	6,351	103	5,902

Schedule of balances of TDRs

	September 30,		December 31,
(dollars in thousands)	2019		2018
TDRs included in nonperforming loans and leases	$	1,133	1,219
TDRs in compliance with modified terms		2,880	3,047
Total TDRs	$	4,013	4,266

Schedule of loan and lease modifications granted

	For the Three Months Ended September 30, 2018
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded		Related
(dollar in thousands)	Contracts	Investment		Investment		Allowance
Real Estate:
Land and Construction	1		796		796		—
Total	1	$	796	$	796	$	—
	For the Nine Months Ended September 30, 2018
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded		Related
(dollar in thousands)	Contracts	Investment		Investment		Allowance
Real Estate:
Land and Construction	2		2,410		2,410		—
Commercial and industrial	1		120		120		—
Total	3	$	2,530	$	2,530	$	—

Schedule of type of number of contracts by type of loan and lease modifications

	For the Three Months Ended		For the Nine Months Ended
	September 30, 2018		September 30, 2018
		Interest Rate		Interest Rate
	Loan Term	Change and Loan	Loan Term	Change and Loan
	Extension	Term Extension	Extension	Term Extension
Real Estate:
Land and Construction	1	—	2	—
Commercial and industrial	—	—	—	1
Total	1	—	2	1

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Fair Value Measurements and Disclosures - Off-balance sheet financial instruments (Details) - Level 2 - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Carrying amount | Commitments to extend credit
Off-balance sheet financial instruments:
Off-balance sheet financial instruments	$ 327,788	$ 290,614
Carrying amount | Letters of credit
Off-balance sheet financial instruments:
Off-balance sheet financial instruments	9,750	5,158
Fair value | Commitments to extend credit
Off-balance sheet financial instruments:
Off-balance sheet financial instruments	$ 283	$ 310

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Derivative Financial Instruments - Fair value gains and losses on derivative financial instruments (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Summary of the fair value gains and losses on derivative financial instruments
Net fair value gains (losses) on derivative financial instruments		$ 69	$ (15)	$ 58
Realized gains/(losses) on derivatives	$ (299)	(170)	(792)	534
Interest rate lock commitments
Summary of the fair value gains and losses on derivative financial instruments
Net fair value gains (losses) on derivative financial instruments	(102)	(224)	(68)	(110)
Forward Commitments
Summary of the fair value gains and losses on derivative financial instruments
Net fair value gains (losses) on derivative financial instruments	124	$ 293	101	$ 168
Customer derivatives - Interest rate swaps
Summary of the fair value gains and losses on derivative financial instruments
Net fair value gains (losses) on derivative financial instruments	$ (22)		$ (48)

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Allowance for Loan Losses (the "Allowance") - Carrying value based on credit quality indicators (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Evaluated based on credit quality indicators
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	$ 879,669	$ 784,391
Pass
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	847,062	755,681
Special mention
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	14,610	18,990
Substandard
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	17,997	9,690
Doubtful
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases		30
Commercial mortgage | Evaluated based on credit quality indicators
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	357,418	325,393
Commercial mortgage | Pass
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	350,027	320,130
Commercial mortgage | Special mention
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	3,437	3,713
Commercial mortgage | Substandard
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	3,954	1,550
Home equity lines and loans | Evaluated based on credit quality indicators
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	83,412	82,286
Home equity lines and loans | Pass
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	83,155	82,121
Home equity lines and loans | Substandard
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	257	165
Construction | Evaluated based on credit quality indicators
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	154,463	116,906
Construction | Pass
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	151,663	114,249
Construction | Special mention
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	2,774	2,657
Construction | Substandard
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	26
Commercial and industrial | Evaluated based on credit quality indicators
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	284,376	259,806
Commercial and industrial | Pass
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	262,217	239,181
Commercial and industrial | Special mention
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	8,399	12,620
Commercial and industrial | Substandard
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases	$ 13,760	7,975
Commercial and industrial | Doubtful
Loans and Leases by Credit Ratings
Carry value of loans and leases excluding residential mortgage, consumer and leases		$ 30

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Loans Receivable - Components of the net investment in leases (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Loans Receivable
Minimum lease payments receivable	$ 869	$ 1,420
Unearned lease income	(41)	(85)
Total	$ 828	$ 1,335

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Basis of Presentation (Tables)

9 Months Ended

Sep. 30, 2019

Basis of Presentation

Summarized the impacts of the correction

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

(dollars in thousands, except per share data)		Reported	Corrections	Revised
Deferred income taxes	$	1,312	92	1,404
Other liabilities		5,426	407	5,833
Retained earnings		15,768	(315)	15,453

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

(dollars in thousands, except per share data)		Reported	Corrections	Revised
Deferred income taxes	$	1,636	92	1,728
Other liabilities		5,309	407	5,716
Retained earnings		23,931	(315)	23,616

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

	December 31, 2018 - as reported
							To be well capitalized under
				For capital adequacy			prompt corrective action
	Actual			purposes *			provisions
(dollars in thousands):	Amount		Ratio	Amount		Ratio	Amount		Ratio
Total capital (to risk-weighted assets)	$	122,577	13.70%	$	71,577	8.00%	$	89,472	10.00%
Common equity tier 1 capital (to risk-weighted assets)		105,196	11.76%		40,262	4.50%		58,157	6.50%
Tier 1 capital (to risk-weighted assets)		105,196	11.76%		53,683	6.00%		71,577	8.00%
Tier 1 capital (to average assets)		105,196	11.20%		37,578	4.00%		46,972	5.00%

	December 31, 2018 - as revised
							To be well capitalized under
				For capital adequacy			prompt corrective action
	Actual			purposes *			provisions
(dollars in thousands):	Amount		Ratio	Amount		Ratio	Amount		Ratio
Total capital (to risk-weighted assets)	$	122,262	13.66%	$	88,362	9.88%	$	89,481	10.00%
Common equity tier 1 capital (to risk-weighted assets)		104,881	11.72%		57,044	6.38%		58,163	6.50%
Tier 1 capital (to risk-weighted assets)		104,881	11.72%		70,466	7.88%		71,585	8.00%
Tier 1 capital (to average assets)		104,881	11.16%		37,581	4.00%		46,977	5.00%

*Includes capital conservation buffer of 2.50% for 2019 and 1.875% for 2018.

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Loans Receivable (Tables)

9 Months Ended

Sep. 30, 2019

Loans Receivable

Summary of loans and leases outstanding

	September 30,		December 31,
(dollars in thousands)	2019		2018
Mortgage loans held for sale	$	48,615	37,695
Real estate loans:
Commercial mortgage		357,418	325,393
Home equity lines and loans		83,412	82,286
Residential mortgage (1)		56,272	53,360
Construction		154,463	116,906
Total real estate loans		651,565	577,945
Commercial and industrial		284,376	259,806
Consumer		984	701
Leases, net		828	1,335
Total portfolio loans and leases		937,753	839,787
Total loans and leases	$	986,368	877,482
Loans with predetermined rates	$	294,297	264,376
Loans with adjustable or floating rates		692,071	613,106
Total loans and leases	$	986,368	877,482
Net deferred loan origination (fees) costs	$	(1,895)	(1,681)

(1) Includes $11,278 and $11,422  of loans at fair value as of September 30, 2019 and December 31, 2018, respectively.

Schedule of components of the net investment in leases

	September 30,		December 31,
(dollars in thousands)	2019		2018
Minimum lease payments receivable	$	869	1,420
Unearned lease income		(41)	(85)
Total	$	828	1,335

Schedule of age analysis of past due loans and leases

						Total
			90+ days			Accruing	Nonaccrual
September 30, 2019	30-89 days		past due and	Total past		Loans and	loans and	Total loans	Delinquency
(dollars in thousands)	past due		still accruing	due	Current	leases	leases	and leases	percentage
Commercial mortgage	$	—	—	—	355,869	355,869	1,549	357,418	0.43	%
Home equity lines and loans		592	—	592	82,563	83,155	257	83,412	1.02
Residential mortgage (1)		—	—	—	54,574	54,574	1,698	56,272	3.02
Construction		1,519	—	1,519	152,944	154,463	—	154,463	0.98
Commercial and industrial		394	—	394	283,556	283,950	426	284,376	0.29
Consumer		—	—	—	984	984	—	984	—
Leases		123	—	123	705	828	—	828	14.86
Total	$	2,628	—	2,628	931,195	933,823	3,930	937,753	0.70	%

(1) Includes $11,278  of loans at fair value as of September 30, 2019  ($10,437 of current, $0 of 30-89 days past due and $841 of nonaccrual).

						Total
			90+ days			Accruing	Nonaccrual
December 31, 2018	30-89 days		past due and	Total past		Loans and	loans and	Total loans	Delinquency
(dollars in thousands)	past due		still accruing	due	Current	leases	leases	and leases	percentage
Commercial mortgage	$	—	—	—	324,169	324,169	1,224	325,393	0.38	%
Home equity lines and loans		348	—	348	81,855	82,203	83	82,286	0.52
Residential mortgage (1)		195	—	195	51,018	51,213	2,147	53,360	4.39
Construction		—	—	—	116,906	116,906	—	116,906	—
Commercial and industrial		217	—	217	259,112	259,329	477	259,806	0.27
Consumer		—	—	—	701	701	—	701	—
Leases		49	—	49	1,286	1,335	—	1,335	3.67
Total	$	809	—	809	835,047	835,856	3,931	839,787	0.56	%

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

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Fair Value Measurements and Disclosures - Estimated fair values of financial instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Financial assets:
Securities available-for-sale	$ 52,757	$ 50,428
Securities held-to-maturity	9,028	12,655
Mortgage loans held-for-investment	11,278	11,422
Interest rate lock commitments
Financial assets:
Derivative asset	283
Level 1 | Carrying amount
Financial assets:
Cash and cash equivalents	40,532	23,952
Level 1 | Fair value
Financial assets:
Cash and cash equivalents	40,532	23,952
Level 2 | Carrying amount
Financial assets:
Securities available-for-sale	52,757	50,428
Securities held-to-maturity	8,814	12,741
Mortgage loans held-for-sale	48,615	37,695
Mortgage loans held-for-investment	11,278	11,422
Financial liabilities:
Deposits	858,461	752,130
Short-term borrowings	128,466	114,300
Long-term debt	3,123	6,238
Subordinated debentures	9,176	9,239
Accrued interest payable	669	305
Level 2 | Carrying amount | Forward Commitments
Financial assets:
Derivative asset	30
Financial liabilities:
Derivatives	105	176
Level 2 | Carrying amount | Customer derivatives - Interest rate swaps
Financial assets:
Derivative asset	500	141
Financial liabilities:
Derivatives	568	161
Level 2 | Fair value
Financial assets:
Securities available-for-sale	52,757	50,428
Securities held-to-maturity	9,028	12,655
Mortgage loans held-for-sale	48,615	37,695
Mortgage loans held-for-investment	11,278	11,422
Financial liabilities:
Deposits	896,000	744,300
Short-term borrowings	128,467	114,300
Long-term debt	3,123	6,240
Subordinated debentures	9,792	9,396
Accrued interest payable	669	305
Level 2 | Fair value | Forward Commitments
Financial assets:
Derivative asset	30
Financial liabilities:
Derivatives	105	176
Level 2 | Fair value | Customer derivatives - Interest rate swaps
Financial assets:
Derivative asset	500	141
Financial liabilities:
Derivatives	568	161
Level 3 | Carrying amount
Financial assets:
Loans receivable, net	935,858	818,631
Restricted investment in bank stock	8,237	7,002
Mortgage servicing rights	314	232
SBA loan servicing rights	321
Accrued interest receivable	3,155	2,889
Level 3 | Carrying amount | Interest rate lock commitments
Financial assets:
Derivative asset	283	310
Financial liabilities:
Derivatives	81	40
Level 3 | Fair value
Financial assets:
Loans receivable, net	933,285	820,512
Restricted investment in bank stock	8,237	7,002
Mortgage servicing rights	314	213
SBA loan servicing rights	321
Accrued interest receivable	3,155	2,889
Level 3 | Fair value | Interest rate lock commitments
Financial assets:
Derivative asset	283	310
Financial liabilities:
Derivatives	$ 81	$ 40

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Derivative Financial Instruments - Notional amounts and fair values of derivative financial instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Derivative Financial Instruments
Notional Amount	$ 109,781	$ 66,566
Asset (Liability) Fair Value	59	74
Interest rate lock commitments
Derivative Financial Instruments
Notional Amount	51,207	33,406
Asset (Liability) Fair Value	202	270
Interest rate lock commitments | Other Assets
Derivative Financial Instruments
Notional Amount	37,105	27,188
Asset (Liability) Fair Value	283	310
Interest rate lock commitments | Other Liabilities
Derivative Financial Instruments
Notional Amount	14,102	6,218
Asset (Liability) Fair Value	(81)	(40)
Forward Commitments
Derivative Financial Instruments
Notional Amount	52,000	26,500
Asset (Liability) Fair Value	(75)	(176)
Forward Commitments | Other Assets
Derivative Financial Instruments
Notional Amount	11,000
Asset (Liability) Fair Value	30
Forward Commitments | Other Liabilities
Derivative Financial Instruments
Notional Amount	41,000	26,500
Asset (Liability) Fair Value	(105)	(176)
Customer derivatives - Interest rate swaps
Derivative Financial Instruments
Notional Amount	6,574	6,660
Asset (Liability) Fair Value	(68)	(20)
Customer derivatives - Interest rate swaps | Other Assets
Derivative Financial Instruments
Notional Amount	3,287	3,330
Asset (Liability) Fair Value	500	141
Customer derivatives - Interest rate swaps | Other Liabilities
Derivative Financial Instruments
Notional Amount	3,287	3,330
Asset (Liability) Fair Value	$ (568)	$ (161)

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Allowance for Loan Losses (the "Allowance") - Carrying value based on performance status (Details) $ in Thousands	Sep. 30, 2019 USD ($) item	Dec. 31, 2018 USD ($) item
Loans and Leases by Credit Ratings
Troubled debt restructurings	$ 4,013	$ 4,266
Carrying value of residential mortgage, consumer and leases	46,805	43,974
Performing
Loans and Leases by Credit Ratings
Carrying value of residential mortgage, consumer and leases	45,950	43,005
Nonperforming
Loans and Leases by Credit Ratings
Carrying value of residential mortgage, consumer and leases	855	969
Residential mortgage
Loans and Leases by Credit Ratings
Carrying value of residential mortgage, consumer and leases	44,993	41,938
Residential mortgage | Performing
Loans and Leases by Credit Ratings
Troubled debt restructurings	0	0
Carrying value of residential mortgage, consumer and leases	44,138	40,969
Residential mortgage | Nonperforming
Loans and Leases by Credit Ratings
Carrying value of residential mortgage, consumer and leases	$ 855	$ 969
Number of loans | item	6	6
Loans receivable, net	$ 1,200	$ 1,900
Consumer
Loans and Leases by Credit Ratings
Carrying value of residential mortgage, consumer and leases	984	701
Consumer | Performing
Loans and Leases by Credit Ratings
Carrying value of residential mortgage, consumer and leases	984	701
Leases, net
Loans and Leases by Credit Ratings
Carrying value of residential mortgage, consumer and leases	828	1,335
Leases, net | Performing
Loans and Leases by Credit Ratings
Carrying value of residential mortgage, consumer and leases	$ 828	$ 1,335

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Loans Receivable - Age analysis of past due loans and leases (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Age Analysis of Past Due Loans and Leases
Total past due	$ 2,628	$ 809
Current	931,195	835,047
Total Accruing Loans and leases	933,823	835,856
Nonaccrual loans and leases	3,930	3,931
Loans and Leases Receivable, Gross, Total	$ 937,753	$ 839,787
Delinquency percentage	0.70%	0.56%
Loans at fair value	$ 11,278	$ 11,422
Commercial mortgage
Age Analysis of Past Due Loans and Leases
Current	355,869	324,169
Total Accruing Loans and leases	355,869	324,169
Nonaccrual loans and leases	1,549	1,224
Loans and Leases Receivable, Gross, Total	$ 357,418	$ 325,393
Delinquency percentage	0.43%	0.38%
Home equity lines and loans
Age Analysis of Past Due Loans and Leases
Total past due	$ 592	$ 348
Current	82,563	81,855
Total Accruing Loans and leases	83,155	82,203
Nonaccrual loans and leases	257	83
Loans and Leases Receivable, Gross, Total	$ 83,412	$ 82,286
Delinquency percentage	1.02%	0.52%
Residential mortgage
Age Analysis of Past Due Loans and Leases
Total past due		$ 195
Current	$ 54,574	51,018
Total Accruing Loans and leases	54,574	51,213
Nonaccrual loans and leases	1,698	2,147
Loans and Leases Receivable, Gross, Total	$ 56,272	$ 53,360
Delinquency percentage	3.02%	4.39%
Construction
Age Analysis of Past Due Loans and Leases
Total past due	$ 1,519
Current	152,944	$ 116,906
Total Accruing Loans and leases	154,463	116,906
Loans and Leases Receivable, Gross, Total	$ 154,463	116,906
Delinquency percentage	0.98%
Commercial and industrial
Age Analysis of Past Due Loans and Leases
Total past due	$ 394	217
Current	283,556	259,112
Total Accruing Loans and leases	283,950	259,329
Nonaccrual loans and leases	426	477
Loans and Leases Receivable, Gross, Total	$ 284,376	$ 259,806
Delinquency percentage	0.29%	0.27%
Consumer
Age Analysis of Past Due Loans and Leases
Current	$ 984	$ 701
Total Accruing Loans and leases	984	701
Loans and Leases Receivable, Gross, Total	984	701
Leases, net
Age Analysis of Past Due Loans and Leases
Total past due	123	49
Current	705	1,286
Total Accruing Loans and leases	828	1,335
Loans and Leases Receivable, Gross, Total	$ 828	$ 1,335
Delinquency percentage	14.86%	3.67%
Real estate loans
Age Analysis of Past Due Loans and Leases
Loans and Leases Receivable, Gross, Total	$ 651,565	$ 577,945
Loans at fair value	11,278	11,422
Real estate loans | Commercial mortgage
Age Analysis of Past Due Loans and Leases
Loans and Leases Receivable, Gross, Total	357,418	325,393
Real estate loans | Home equity lines and loans
Age Analysis of Past Due Loans and Leases
Loans and Leases Receivable, Gross, Total	83,412	82,286
Real estate loans | Residential mortgage
Age Analysis of Past Due Loans and Leases
Loans and Leases Receivable, Gross, Total	56,272	53,360
Loans at fair value	11,278	11,422
Real estate loans | Construction
Age Analysis of Past Due Loans and Leases
Loans and Leases Receivable, Gross, Total	154,463	116,906
Current | Real estate loans
Age Analysis of Past Due Loans and Leases
Loans at fair value	10,437	10,098
30-89 days past due
Age Analysis of Past Due Loans and Leases
Total past due	2,628	809
30-89 days past due | Home equity lines and loans
Age Analysis of Past Due Loans and Leases
Total past due	592	348
30-89 days past due | Residential mortgage
Age Analysis of Past Due Loans and Leases
Total past due		195
30-89 days past due | Construction
Age Analysis of Past Due Loans and Leases
Total past due	1,519
30-89 days past due | Commercial and industrial
Age Analysis of Past Due Loans and Leases
Total past due	394	217
30-89 days past due | Leases, net
Age Analysis of Past Due Loans and Leases
Total past due	123	49
30-89 days past due | Real estate loans
Age Analysis of Past Due Loans and Leases
Loans at fair value	0	187
Nonaccrual | Real estate loans
Age Analysis of Past Due Loans and Leases
Loans at fair value	$ 841	$ 1,137

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Tax (benefit) expense on unrealized (losses) gains arising during the period	$ 17	$ (57)	$ 219	$ (155)
Tax expense on reclassification adjustment for net gains on sales realized in net income	(16)	0	(47)	0
Tax (benefit) expense on unrealized investment gains (losses)	$ 1	$ (57)	$ 172	$ (155)

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CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
CONSOLIDATED BALANCE SHEETS
Cash and due from banks	$ 40,267	$ 23,159
Federal funds sold	265	793
Cash and cash equivalents	40,532	23,952
Securities available-for-sale (amortized cost of $48,276 and $50,942 as of June 30, 2019 and December 31, 2018)	52,757	50,428
Securities held-to-maturity (fair value of $12,480 and $12,655 as of June 30, 2019 and December 31, 2018)	8,814	12,741
Mortgage loans held for sale (amortized cost of $39,066 and $37,337 as of June 30, 2019 and December 31, 2018)	48,615	37,695
Loans, net of fees and costs (includes $12,381 and $11,422 of loans at fair value, amortized cost of $12,012 and $11,466 as of June 30, 2019 and December 31, 2018)	935,858	838,106
Allowance for loan and lease losses	(9,312)	(8,053)
Loans, net of the allowance for loan and lease losses	926,546	830,053
Restricted investment in bank stock	8,237	7,002
Bank premises and equipment, net	8,929	9,638
Bank owned life insurance	11,787	11,569
Accrued interest receivable	3,155	2,889
Other real estate owned	120
Deferred income taxes (Footnote 1)	1,803	1,728
Goodwill and intangible assets	4,841	5,046
Other assets	10,801	4,739
Total assets	1,126,937	997,480
Deposits:
Noninterest bearing	129,302	126,150
Interest-bearing	729,159	625,980
Total deposits	858,461	752,130
Short-term borrowings	128,465	114,300
Long-term debt	3,123	6,238
Subordinated debentures	9,176	9,239
Accrued interest payable	669	305
Other liabilities (Footnote 1)	9,271	5,716
Total liabilities	1,009,165	887,928
Stockholders’ equity:
Common stock, $1 par value. Authorized 10,000,000 shares; issued and outstanding 6,406,996 and 6,406,795 as of June 30, 2019 and December 31, 2018	6,408	6,407
Surplus	80,192	79,919
Retained earnings (Footnote 1)	30,961	23,616
Accumulated other comprehensive loss	211	(390)
Total stockholders’ equity	117,772	109,552
Total liabilities and stockholders’ equity	$ 1,126,937	$ 997,480

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Short-Term Borrowings and Long-Term Debt - Short-term borrowings (Details)	9 Months Ended	12 Months Ended
	Sep. 30, 2019 USD ($) item	Dec. 31, 2018 USD ($)
Short-Term Borrowings
Short term borrowings	$ 128,465,000	$ 114,300,000
Federal funds purchased | Federal Home Loan Bank of Pittsburgh
Short-Term Borrowings
Number of borrowing facilities | item	2
Short term borrowings	$ 0	0
Federal funds purchased, facility one | Federal Home Loan Bank of Pittsburgh
Short-Term Borrowings
Maximum borrowing capacity	24,000,000
Federal funds purchased, facility two | Federal Home Loan Bank of Pittsburgh
Short-Term Borrowings
Maximum borrowing capacity	15,000,000
Federal Reserve discount window | Federal Home Loan Bank of Pittsburgh
Short-Term Borrowings
Maximum borrowing capacity	9,600,000
Short term borrowings	0	0
Short-term borrowing with interest rate 2.08% | Federal Home Loan Bank of Pittsburgh
Short-Term Borrowings
Short term borrowings	$ 119,700,000
Interest rate (as a percent)	2.08%
Short-term borrowing with interest rate 2.03% | Federal Home Loan Bank of Pittsburgh
Short-Term Borrowings
Short term borrowings	$ 3,100,000
Interest rate (as a percent)	2.03%
Duration of debt (in years)	3 years
Short-term borrowing with interest rate 2.76% | Federal Home Loan Bank of Pittsburgh
Short-Term Borrowings
Short term borrowings	$ 5,000,000
Interest rate (as a percent)	2.76%
Duration of debt (in years)	7 years
Short-term borrowing with interest rate 3.00% | Federal Home Loan Bank of Pittsburgh | HJ Wealth
Short-Term Borrowings
Short term borrowings	$ 619,000
Interest rate (as a percent)	3.00%
Duration of debt (in years)	3 years
Short-term borrowing with interest rate 1.70% | Federal Home Loan Bank of Pittsburgh
Short-Term Borrowings
Short term borrowings		$ 1,800,000
Interest rate (as a percent)		1.70%
Duration of debt (in years)		4 years
Short-term borrowings with interest rate 2.62% | Federal Home Loan Bank of Pittsburgh
Short-Term Borrowings
Short term borrowings		$ 112,500,000
Interest rate (as a percent)		2.62%

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Servicing Assets - SBA Loans (Details) - SBA Loan Servicing Rights - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2019	Sep. 30, 2018
Servicing Assets at Fair Value [Line Items]
Loans serviced	$ 15,400	$ 15,400	$ 0
Servicing fee income	8,000	8,000
Servicing Asset at Amortized Cost, Balance [Roll Forward]
Balance at beginning of the period	133
Servicing rights capitalized	198	331
Amortization of servicing rights	(6)	(6)
Change in valuation allowance	(4)	(4)
Balance at end of the period	321	321
Valuation Allowance for Impairment of Recognized Servicing Assets [Roll Forward]
Impairment	(4)	(4)
Valuation allowance, end of the period	$ (4)	$ (4)

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Securities - Amortized cost and fair value (Details) $ in Thousands	Sep. 30, 2019 USD ($) security	Dec. 31, 2018 USD ($) security
Securities available-for-sale:
Available-for-sale, Amortized Cost	$ 52,496	$ 50,942
Available-for-sale, Gross Unrealized Gains	476	119
Available-for-sale, Gross Unrealized Losses	(215)	(633)
Available-for-sale, Fair Value	52,757	50,428
Securities held to maturity:
Held-to-maturity, Amortized Cost	8,814	12,741
Held-to-maturity, Gross Unrealized Gains	214	17
Held-to-maturity, Gross Unrealized (Losses)		(103)
Fair Value	9,028	12,655
U.S. asset backed securities
Securities available-for-sale:
Available-for-sale, Amortized Cost	8,919
Available-for-sale, Gross Unrealized Gains	2
Available-for-sale, Gross Unrealized Losses	(39)
Available-for-sale, Fair Value	$ 8,882
Securities held to maturity:
Number of securities in unrealized loss positions | security	5
U.S. government agency mortgage-backed securities
Securities available-for-sale:
Available-for-sale, Amortized Cost	$ 12,843	24,092
Available-for-sale, Gross Unrealized Gains	103	45
Available-for-sale, Gross Unrealized Losses	(46)	(271)
Available-for-sale, Fair Value	$ 12,900	$ 23,866
Securities held to maturity:
Number of securities in unrealized loss positions | security	7	24
U.S. government agency collateralized mortgage obligations
Securities available-for-sale:
Available-for-sale, Amortized Cost	$ 29,734	$ 14,754
Available-for-sale, Gross Unrealized Gains	357	52
Available-for-sale, Gross Unrealized Losses	(130)	(142)
Available-for-sale, Fair Value	$ 29,961	$ 14,664
Securities held to maturity:
Number of securities in unrealized loss positions | security	13	12
State and municipal securities
Securities available-for-sale:
Available-for-sale, Amortized Cost		$ 11,096
Available-for-sale, Gross Unrealized Gains		22
Available-for-sale, Gross Unrealized Losses		(199)
Available-for-sale, Fair Value		10,919
Securities held to maturity:
Held-to-maturity, Amortized Cost	$ 8,814	10,750
Held-to-maturity, Gross Unrealized Gains	214	17
Held-to-maturity, Gross Unrealized (Losses)		(90)
Fair Value	9,028	$ 10,677
Number of securities in unrealized loss positions | security		26
Investments in mutual funds
Securities available-for-sale:
Available-for-sale, Amortized Cost	1,000	$ 1,000
Available-for-sale, Gross Unrealized Gains	14
Available-for-sale, Gross Unrealized Losses		(21)
Available-for-sale, Fair Value	$ 1,014	$ 979
Securities held to maturity:
Number of securities in unrealized loss positions | security		1
U.S. Treasuries
Securities held to maturity:
Held-to-maturity, Amortized Cost		$ 1,991
Held-to-maturity, Gross Unrealized (Losses)		(13)
Fair Value		$ 1,978
Number of securities in unrealized loss positions | security		2

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Basis of Presentation (Details)	Aug. 24, 2018 $ / shares	Sep. 30, 2019 $ / shares	Dec. 31, 2018 $ / shares
Business Acquisition [Line Items]
Common stock, par value		$ 1	$ 1
Share exchange ratio	1
Meridian Bank
Business Acquisition [Line Items]
Common stock, par value	$ 1.00

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Earnings per Common Share

9 Months Ended

Sep. 30, 2019

Earnings per Common Share

Earnings per Common Share

(2)      Earnings per Common Share

Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period. Diluted earnings per common share takes into account the potential dilution computed pursuant to the treasury stock method that could occur if stock options were exercised and converted into common stock. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be anti-dilutive.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands, except per share data)	2019		2018		2019		2018
Numerator:
Net income available to common stockholders	$	3,317		2,727	$	7,345		5,799
Denominator for basic earnings per share - weighted average shares outstanding		6,407		6,402		6,407		6,395
Effect of dilutive common shares		30		28		29		31
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		6,437		6,430		6,436		6,426
Basic earnings per share	$	0.52		0.43	$	1.15		0.91
Diluted earnings per share	$	0.52		0.42	$	1.14		0.90
Antidilutive shares excluded from computation of average dilutive earnings per share		199		116		199		116

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Allowance for Loan Losses (the "Allowance")

9 Months Ended

Sep. 30, 2019

Allowance for Loan Losses (the Allowance)

Allowance for Loan Losses (the Allowance)

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

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

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

Roll-Forward of Allowance for Loan and Lease Losses by Portfolio Segment

The following tables detail the roll‑forward of the Corporation’s Allowance, by portfolio segment, for the three and nine month periods ended September 30, 2019 and 2018, respectively:

	Balance,					Balance,
(dollars in thousands)	June 30, 2019		Charge-offs	Recoveries	Provision	September 30, 2019
Commercial mortgage	$	3,197	—	1	257	3,455
Home Equity lines and loans		354	—	2	(28)	328
Residential mortgage		200	—	2	(30)	172
Construction		2,033	—	—	136	2,169
Commercial and industrial		2,830	(30)	6	369	3,175
Consumer		4	—	1	1	6
Leases		7	—	—	—	7
Total	$	8,625	(30)	12	705	9,312

	Balance,					Balance,
(dollars in thousands)	December 31, 2018		Charge-offs	Recoveries	Provision	September 30, 2019
Commercial mortgage	$	3,209	—	6	240	3,455
Home Equity lines and loans		323	—	10	(5)	328
Residential mortgage		191	—	4	(23)	172
Construction		1,627	—	—	542	2,169
Commercial and industrial		2,690	(30)	328	187	3,175
Consumer		3	—	3	—	6
Leases		10	—	—	(3)	7
Total	$	8,053	(30)	351	938	9,312

	Balance,					Balance,
(dollars in thousands)	June 30, 2018		Charge-offs	Recoveries	Provision	September 30, 2018
Commercial mortgage	$	3,011	—	2	140	3,153
Home Equity lines and loans		269	—	10	37	316
Residential mortgage		166	—	—	14	180
Construction		1,438	—	—	59	1,497
Commercial and industrial		2,559	(50)	8	41	2,558
Consumer		3	—	1	—	4
Leases		3	—	—	—	3
Total	$	7,449	(50)	21	291	7,711

	Balance,					Balance,
(dollars in thousands)	December 31, 2017		Charge-offs	Recoveries	Provision	September 30, 2018
Commercial mortgage	$	2,434	—	6	713	3,153
Home Equity lines and loans		280	(137)	14	159	316
Residential mortgage		82	—	61	37	180
Construction		1,689	—	—	(192)	1,497
Commercial and industrial		2,214	(244)	41	547	2,558
Consumer		5	—	3	(4)	4
Leases		5	—	—	(2)	3
Total	$	6,709	(381)	125	1,258	7,711

Allowance for Loan and Lease Losses Allocated by Portfolio Segment

The following tables detail the allocation of the allowance for loan and lease losses and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of September 30, 2019 and December 31, 2018.

	Allowance on loans and leases				Carrying value of loans and leases
	Individually		Collectively		Individually		Collectively
September 30, 2019	evaluated		evaluated		evaluated		evaluated
(dollars in thousands)	for impairment		for impairment	Total	for impairment		for impairment	Total
Commercial mortgage	$	—	3,455	3,455	$	2,204	355,214	357,418
Home Equity lines and loans		2	326	328		255	83,157	83,412
Residential mortgage		—	172	172		855	44,138	44,993
Construction		—	2,169	2,169		1,262	153,201	154,463
Commercial and industrial		124	3,051	3,175		1,389	282,987	284,376
Consumer		—	6	6		—	984	984
Leases		—	7	7		—	828	828
Total	$	126	9,186	9,312	$	5,965	920,509	926,474	(1)

	Allowance on loans and leases				Carrying value of loans and leases
	Individually		Collectively		Individually		Collectively
December 31, 2018	evaluated		evaluated		evaluated		evaluated
(dollars in thousands)	for impairment		for impairment	Total	for impairment		for impairment	Total
Commercial mortgage	$	—	3,209	3,209	$	1,929	323,464	325,393
Home Equity lines and loans		—	323	323		83	82,203	82,286
Residential mortgage		—	191	191		969	40,969	41,938
Construction		—	1,627	1,627		1,281	115,625	116,906
Commercial and industrial		103	2,587	2,690		1,537	258,269	259,806
Consumer		—	3	3		—	701	701
Leases		—	10	10		—	1,335	1,335
Total	$	103	7,950	8,053	$	5,799	822,566	828,365	(1)

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

Loans and Leases by Credit Ratings

As part of the process of determining the Allowance to the different segments of the loan and lease portfolio, management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by management. The results of these reviews are reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:

· Pass - Loans considered to be satisfactory with no indications of deterioration.

· Special mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

· Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

· Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing factors, conditions, and values, highly questionable and improbable. Loan balances classified as doubtful have been reduced by partial charge-offs and are carried at their net realizable values.

The following tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to determine the allowance for loan and lease losses as of September 30, 2019 and December 31, 2018:

September 30, 2019			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	350,027	3,437	3,954	—	357,418
Home equity lines and loans		83,155	—	257	—	83,412
Construction		151,663	2,774	26	—	154,463
Commercial and industrial		262,217	8,399	13,760	—	284,376
Total	$	847,062	14,610	17,997	—	879,669

December 31, 2018			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	320,130	3,713	1,550	—	325,393
Home equity lines and loans		82,121	—	165	—	82,286
Construction		114,249	2,657	—	—	116,906
Commercial and industrial		239,181	12,620	7,975	30	259,806
Total	$	755,681	18,990	9,690	30	784,391

In addition to credit quality indicators as shown in the above tables, allowance allocations for residential mortgages, consumer loans and leases are also applied based on their performance status as of September 30, 2019 and December 31, 2018. No troubled debt restructurings performing according to modified terms are included in performing residential mortgages below as of September 30, 2019 and December 31, 2018.

	September 30, 2019				December 31, 2018
(dollars in thousands)	Performing		Nonperforming	Total	Performing		Nonperforming	Total
Residential mortgage	$	44,138	855	44,993	$	40,969	969	41,938
Consumer		984	—	984		701	—	701
Leases		828	—	828		1,335	—	1,335
Total	$	45,950	855	46,805	$	43,005	969	43,974

There were six nonperforming residential mortgage loans at September 30, 2019 and December 31, 2018 with a combined outstanding principal balance of $1.2 million and $1.9 million, respectively, which were carried at fair value and not included in the table above.

Impaired Loans

The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related allowance for loan and lease losses and interest income recognized for the periods.

	At September 30, 2019					At December 31, 2018
					Average				Average
	Recorded		Principal	Related	recorded	Recorded	Principal	Related	recorded
(dollars in thousands)	investment		balance	allowance	investment	investment	balance	allowance	investment
Impaired loans with related allowance:
Commercial mortgage	$	—	—	—	—	—	—	—	—
Commercial and industrial		559	559	124	566	676	679	103	680
Home equity lines and loans		255	255	2	256	—	—	—	—
Residential mortgage		—	—	—	—	—	—	—	—
Construction		—	—	—	—	—	—	—	—
Total		814	814	126	822	676	679	103	680
Impaired loans without related allowance:
Commercial mortgage	$	2,204	2,713	—	2,272	1,929	2,379	—	1,982
Commercial and industrial		830	876	—	864	861	945	—	885
Home equity lines and loans		—	—	—	—	83	89	—	84
Residential mortgage		855	855	—	857	969	978	—	978
Construction		1,262	1,263	—	1,286	1,281	1,281	—	1,293
Total		5,151	5,707	—	5,279	5,123	5,672	—	5,222
Grand Total	$	5,965	6,521	126	6,101	5,799	6,351	103	5,902

Interest income recognized on performing impaired loans amounted to $50 thousand and $93 thousand for the three months ended September 30, 2019 and 2018, respectively, and $152 thousand and $218 thousand for the nine months ended September 30, 2019 and 2018, respectively.

Troubled Debt Restructuring

The restructuring of a loan is considered a “troubled debt restructuring” (“TDR”) if both of the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the creditor has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan, and (e) for leases, a reduced lease payment. A less common concession granted is the forgiveness of a portion of the principal.

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower were a concession not granted. The determination of whether a concession has been granted is subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

The balance of TDRs at September 30, 2019 and December 31, 2018 are as follows:

	September 30,		December 31,
(dollars in thousands)	2019		2018
TDRs included in nonperforming loans and leases	$	1,133	1,219
TDRs in compliance with modified terms		2,880	3,047
Total TDRs	$	4,013	4,266

There were no loan and lease modifications granted during the three and nine months ended September 30, 2019 that were categorized as TDRs.    

The following tables present information regarding loan and lease modifications granted during the three and nine months ended September 30, 2018 that were categorized as TDRs:

	For the Three Months Ended September 30, 2018
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded		Related
(dollar in thousands)	Contracts	Investment		Investment		Allowance
Real Estate:
Land and Construction	1		796		796		—
Total	1	$	796	$	796	$	—
	For the Nine Months Ended September 30, 2018
		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded		Related
(dollar in thousands)	Contracts	Investment		Investment		Allowance
Real Estate:
Land and Construction	2		2,410		2,410		—
Commercial and industrial	1		120		120		—
Total	3	$	2,530	$	2,530	$	—

No loan and lease modifications granted during the three and nine months ended September 30, 2019 and 2018 subsequently defaulted during the same time period.

The following table presents information regarding the number of contracts by type of loan and lease modifications granted during the three and nine months ended September 30, 2018:

	For the Three Months Ended		For the Nine Months Ended
	September 30, 2018		September 30, 2018
		Interest Rate		Interest Rate
	Loan Term	Change and Loan	Loan Term	Change and Loan
	Extension	Term Extension	Extension	Term Extension
Real Estate:
Land and Construction	1	—	2	—
Commercial and industrial	—	—	—	1
Total	1	—	2	1

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Derivative Financial Instruments

9 Months Ended

Sep. 30, 2019

Derivative Financial Instruments

Derivative Financial Instruments

(10)    Derivative Financial Instruments

Risk Management Objective of Using Derivatives

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

Mortgage Banking Derivatives

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

Customer Derivatives – Interest Rate Swaps

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

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

		September 30, 2019			December 31, 2018
(dollars in thousands)	Balance Sheet Line Item	Notional Amount		Asset (Liability) Fair Value	Notional Amount	Asset (Liability) Fair Value
Interest Rate Lock Commitments
Positive fair values	Other assets	$	37,105	283	27,188	310
Negative fair values	Other liabilities		14,102	(81)	6,218	(40)
Total			51,207	202	33,406	270
Forward Commitments
Positive fair values	Other assets		11,000	30	—	—
Negative fair values	Other liabilities		41,000	(105)	26,500	(176)
Total			52,000	(75)	26,500	(176)
Customer Derivatives - Interest Rate Swaps
Positive fair values	Other assets		3,287	500	3,330	141
Negative fair values	Other liabilities		3,287	(568)	3,330	(161)
Total			6,574	(68)	6,660	(20)
Total derivative financial instruments		$	109,781	59	66,566	74

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

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2019		2018		2019	2018
Interest Rate Lock Commitments	$	(102)	(224)	$	(68)	(110)
Forward Commitments		124	293		101	168
Customer Derivatives - Interest Rate Swaps		(22)	—		(48)	—
Net fair value gains (losses) on derivative financial instruments	$	—	69	$	(15)	58

Realized gains/(losses) on derivatives were ($299) thousand and ($170) thousand for the three months ended September 30, 2019 and 2018, respectively, and ($792) and $534 thousand for the nine months ended September 30, 2019 and 2018, respectively, and are included in other non-interest income in the unaudited consolidated statements of income.