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Form 10-Q Meridian Corp For: Jun 30

August 9, 2022 1:06 PM EDT
Meridian 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
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
mrbk-20220630_g1.jpg
(Exact name of registrant as specified in its charter)
Pennsylvania83-1561918
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
9 Old Lincoln Highway, Malvern, Pennsylvania 19355
(Address of principal executive offices) (Zip Code)
(484) 568-5000
(Registrant’s telephone number, including area code)
Title of classTrading SymbolName of exchange on which registered
Common Stock, $1 par valueMRBKThe NASDAQ Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerAccelerated Filer
Non-accelerated FilerSmaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of August 5, 2022 there were 6,017,247 outstanding shares of the issuer’s common stock, par value $1.00 per share.


TABLE OF CONTENTS


MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except per share data)June 30,
2022
December 31,
2021
Cash and due from banks$37,093 $23,480 
Cash and cash equivalents37,093 23,480 
Securities available-for-sale (amortized cost of $139,833 and $158,387 as of June 30, 2022 and December 31, 2021)
129,288 159,302 
Securities held-to-maturity (fair value of $33,497 and $6,591 as of June 30, 2022 and December 31, 2021)
37,111 6,372 
Equity investments2,153 2,354 
Mortgage loans held for sale (amortized cost of $58,914 and $80,002 as of June 30, 2022 and December 31, 2021), at fair value
58,938 80,882 
Loans, net of fees and costs (includes $16,212 and $17,558 of loans at fair value, amortized cost of $17,611 and $17,106 as of June 30, 2022 and December 31, 2021)
1,518,893 1,386,457 
Allowance for loan and lease losses(18,805)(18,758)
Loans, net of the allowance for loan and lease losses1,500,088 1,367,699 
Restricted investment in bank stock4,719 5,117 
Bank premises and equipment, net12,185 11,806 
Bank owned life insurance22,778 22,503 
Accrued interest receivable5,108 5,009 
Deferred income taxes4,467 1,413 
Servicing assets12,860 12,765 
Goodwill 899 899 
Intangible assets3,277 3,379 
Other assets22,055 10,463 
Total assets$1,853,019 $1,713,443 
Liabilities:
Deposits:
Non-interest bearing$291,925 $274,528 
Interest bearing1,276,089 1,171,885 
Total deposits1,568,014 1,446,413 
Short-term borrowings59,136 41,344 
Subordinated debentures40,567 40,508 
Accrued interest payable146 31 
Other liabilities 29,069 19,787 
Total liabilities1,696,932 1,548,083 
Stockholders’ equity:
Common stock, $1 par value. Authorized 25,000,000 shares as of June 30, 2022 and December 31, 2021; issued 6,560,956 and 6,534,587 as of June 30, 2022 and December 31, 2021
6,561 6,535 
Surplus84,359 83,663 
Treasury stock - 524,078 and 426,693 shares at June 30, 2022 and December 31, 2021
(11,896)(8,860)
Unearned common stock held by employee stock ownership plan(1,602)(1,602)
Retained earnings87,815 84,916 
Accumulated other comprehensive (loss) income (9,150)708 
Total stockholders’ equity156,087 165,360 
Total liabilities and stockholders’ equity$1,853,019 $1,713,443 
See accompanying notes to the unaudited consolidated financial statements.
3

MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended June 30,Six months ended June 30,
(dollars in thousands, except per share data)2022202120222021
Interest income:
Loans, including fees$19,120 $16,839 $36,339 $33,662 
Securities:
Taxable436 280 772 553 
Tax-exempt429 393 825 746 
Cash and cash equivalents52 5 65 8 
Total interest income20,037 17,517 38,001 34,969 
Interest expense:
Deposits1,818 1,368 3,107 2,934 
Borrowings668 737 1,308 1,502 
Total interest expense2,486 2,105 4,415 4,436 
Net interest income17,551 15,412 33,586 30,533 
Provision for loan losses602 96 1,217 695 
Net interest income after provision for loan losses16,949 15,316 32,369 29,838 
Non-interest income:
Mortgage banking income6,942 19,467 14,038 43,567 
Wealth management income1,254 1,163 2,558 2,299 
SBA loan income437 1,490 2,957 2,735 
Earnings on investment in life insurance137 65 275 131 
Net change in the fair value of derivative instruments(674)(2,148)(840)(3,092)
Net change in the fair value of loans held-for-sale268 1,235 (856)(2,632)
Net change in the fair value of loans held-for-investment(835)41 (1,613)(61)
Net gain on hedging activity1,715 (674)4,542 3,587 
Net gain on sale of investment securities available-for-sale   48 
Service charges31 33 58 65 
Other1,128 1,060 2,386 2,133 
Total non-interest income10,403 21,732 23,505 48,780 
Non-interest expenses:
Salaries and employee benefits12,926 20,213 28,224 42,352 
Occupancy and equipment1,176 1,175 2,428 2,326 
Professional fees913 816 1,761 1,756 
Advertising and promotion1,189 921 2,175 1,707 
Data processing580 520 1,059 1,136 
Information technology728 464 1,438 889 
Pennsylvania bank shares tax212 163 411 326 
Other1,982 1,974 3,643 4,018 
Total non-interest expenses19,706 26,246 41,139 54,510 
Income before income taxes7,646 10,802 14,735 24,108 
Income tax expense1,708 2,544 3,262 5,680 
Net income$5,938 $8,258 $11,473 $18,428 
Basic earnings per common share$0.99 $1.37 $1.91 $3.06 
Diluted earnings per common share0.96 1.33 1.84 2.98 
See accompanying notes to the unaudited consolidated financial statements.
4

MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended June 30,Six months ended
June 30,
(dollars in thousands)2022202120222021
Net income:$5,938 $8,258 $11,473 $18,428 
Other comprehensive income:
Net change in unrealized gains on investment securities available for sale:
Net unrealized losses arising during the period, net of tax effect of $(1,025), $429, $(2,651), and $(163), respectively
(3,481)1,414 (8,850)(469)
Less: reclassification adjustment for net gains realized in net income, net of tax effect of $0, $0, $(3), and $12, respectively
  (9)(36)
Reclassification adjustment for securities transferred from available-for-sale to held-to-maturity, net of tax effect of $7, $0, $(301), and $0, respectively
22  (999)
Unrealized investment losses, net of tax effect of $1,018, $429, $(2,955), and $175, respectively
(3,459)1,414 (9,858)(505)
Total other comprehensive (loss) income(3,459)1,414 (9,858)(505)
Total comprehensive income$2,479 $9,672 $1,615 $17,923 
See accompanying notes to the unaudited consolidated financial statements.
5

MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(dollars in thousands)
Common
Stock
SurplusTreasury
Stock
Unearned
Common
Stock
ESOP
Retained
Earnings
Accumulated
Other
Comprehensive (Loss)
Income
Total
Balance, January 1, 2021$6,456 $81,196 $(5,828)$(1,768)$59,010 $2,556 $141,622 
Comprehensive income:
Net income10,170 10,170 
Net change in unrealized investment losses, net of tax(1,919)(1,919)
Total comprehensive income8,251 
Dividends declared, $1.125 per share
(6,931)(6,931)
Common stock issued through share-based awards and exercises32 302 334 
Stock based compensation229 229 
Balance, March 31, 20216,488 81,727 (5,828)(1,768)62,249 637 143,505 
Comprehensive income:
Net income8,258 8,258 
Net change in unrealized investment gains, net of tax1,414 1,414 
Total comprehensive income9,672 
Dividends paid or accrued, $0.125 per share
(768)(768)
Common stock issued through share-based awards and exercises5 52 57 
Stock based compensation419 419 
Balance, June 30, 2021$6,493 $82,198 $(5,828)$(1,768)$69,739 $2,051 $152,885 
6

(dollars in thousands)
Common
Stock
SurplusTreasury
Stock
Unearned
Common
Stock
ESOP
Retained
Earnings
Accumulated
Other
Comprehensive (Loss)
Income
Total
Balance, January 1, 2022$6,535 $83,663 $(8,860)$(1,602)$84,916 $708 $165,360 
Comprehensive income:
Net income5,535 5,535 
Net change in unrealized investment losses, net of tax(6,399)(6,399)
Total comprehensive loss(864)
Dividends paid or accrued, $1.20 per share
(7,347)(7,347)
Common stock issued through share-based awards and exercises21 254 275 
Stock based compensation260 260 
Balance, March 31, 20226,556 84,177 (8,860)(1,602)83,104 (5,691)157,684 
Comprehensive income:
Net income5,938 5,938 
Net change in unrealized investment losses, net of tax(3,459)(3,459)
Total comprehensive income2,479 
Dividends paid or accrued, $0.20 per share
(1,227)(1,227)
Net purchase of treasury stock through publicly announced plans (97,385)
(3,036)(3,036)
Common stock issued through share-based awards and exercises5 88 93 
Stock based compensation94 94 
Balance, June 30, 2022$6,561 $84,359 $(11,896)$(1,602)$87,815 $(9,150)$156,087 
See accompanying notes to the unaudited consolidated financial statements.
7

MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
(dollars in thousands)20222021
Net income$11,473 $18,428 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Gain on sale of investment securities (48)
Net amortization of investment premiums and discounts and change in fair value of equity securities239 664 
Depreciation and amortization, net749 (2,822)
Provision for loan losses1,217 695 
Amortization of issuance costs on subordinated debt59 59 
Stock based compensation354 648 
Net change in fair value of derivative instruments840 3,092 
Net change in fair value of loans held for sale856 2,632 
Net change in fair value of loans held for investment1,613 61 
Amortization and net impairment of servicing rights1,327 364 
SBA loan income(2,957)(2,735)
Proceeds from sale of loans656,565 1,472,628 
Loans originated for sale(620,013)(1,339,916)
Mortgage banking income(14,038)(43,567)
Increase in accrued interest receivable(99)(37)
Decrease (increase) in other assets1,571 (494)
Earnings from investment in life insurance(275)(131)
Decrease in deferred income tax(153)(810)
Increase (decrease) in accrued interest payable115 (1,034)
Increase (decrease) in other liabilities(3,764)(1,994)
Net cash provided by operating activities35,679 105,683 
Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities, repayments and calls6,327 4,421 
Sales 13,639 
Purchases(15,707)(37,620)
Activity in held-to-maturity securities:
Maturities, repayments and calls362  
Purchases(4,500) 
Decrease in restricted stock398 2,504 
Net increase in loans(136,069)(71,761)
Purchases of premises and equipment(1,028)(1,093)
Net cash used in investing activities(150,217)(89,910)
Cash flows from financing activities:
Net increase in deposits121,601 171,945 
Decrease in short-term borrowings (5,465)
Increase (decrease) in short-term borrowings with original maturity > 90 days17,792 (67,855)
Repayment of long-term debt, net (116,932)
Net purchase of treasury stock(3,036) 
Dividends paid(8,574)(7,699)
Share based awards and exercises368 391 
Net cash provided by (used in) financing activities128,151 (25,615)
Net change in cash and cash equivalents13,613 (9,842)
Cash and cash equivalents at beginning of period23,480 36,744 
Cash and cash equivalents at end of period$37,093 $26,902 
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest4,301 5,471 
Income taxes3,265 8,009 
Supplemental disclosure of cash flow information:
Transfers from loans held for sale to loans held for investment2,848 4,193 
Net loans sold, not settled(962)(4,432)
Investment security purchases, not settled (1,188)
Transfer of securities from AFS to HTM23,652  
Lease liabilities arising from obtaining right-of-use assets10,995  
See accompanying notes to the unaudited consolidated financial statements.
8

MERIDIAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1)     Basis of Presentation
The Corporation’s unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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, and servicing assets.
These unaudited consolidated financial statements should be read in conjunction with the Corporation’s filings with the Securities and Exchange Commission (including our Annual Report on Form 10-K for the year ended December 31, 2021) and, subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in Form 10-K and Form 10-Q filings, if any.
Certain prior period amounts have been reclassified to conform with current period presentation. Reclassifications had no effect on net income or stockholders’ equity. Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results for the year ending December 31, 2022 or for any other period.

(2)     Earnings per Common Share
Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period reduced by unearned ESOP Plan shares and treasury shares. Diluted earnings per common share takes into account the potential dilution computed pursuant to the treasury stock method that could occur if stock options were exercised and converted into common stock and if restricted stock awards were vested, and SERP plan liabilities were satisfied with common shares. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be anti-dilutive.
Three Months Ended
June 30,
Six Months Ended June 30,
(dollars in thousands, except per share data)2022202120222021
Numerator:
Net income available to common stockholders$5,938 8,258 11,473 18,428 
Denominator for basic earnings per share
Weighted average shares outstanding6,101 6,147 6,115 6,135 
Average unearned ESOP shares(102)(115)(104)(117)
Basic weighted averages shares outstanding5,999 6,032 6,011 6,018 
Dilutive effects of assumed exercises of stock options128 171 149 159 
Dilutive effects of SERP shares72  69  
Denominator for diluted earnings per share - adjusted weighted average shares outstanding6,199 6,203 6,229 6,177 
Basic earnings per share$0.99 1.37 1.91 3.06 
Diluted earnings per share$0.96 1.33 1.84 2.98 
Antidilutive shares excluded from computation of average dilutive earnings per share136 140 21 140 
9


(3)    Securities
The amortized cost and fair value of securities as of June 30, 2022 and December 31, 2021 are as follows:
June 30, 2022
(dollars in thousands)Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
# of Securities
in unrealized
loss position
Securities available-for-sale:
U.S. asset backed securities$14,046 10 (316)13,740 12 
U.S. government agency mortgage-backed securities10,110  (470)9,640 10 
U.S. government agency collateralized mortgage obligations21,875 7 (1,276)20,606 26 
State and municipal securities45,070  (5,354)39,716 34 
U.S. Treasuries32,979  (2,555)30,424 25 
Non-U.S. government agency collateralized mortgage obligations9,303  (332)8,971 9 
Corporate bonds6,450  (259)6,191 11 
Total securities available-for-sale$139,833 17 (10,562)129,288 127 
June 30, 2022
Amortized
cost
Gross
unrecognized
gains
Gross
unrecognized
losses
Fair
value
# of Securities
in unrecognized
loss position
Securities held-to-maturity:
State and municipal securities37,111 7 (3,621)33,497 21 
Total securities held-to-maturity$37,111 7 (3,621)33,497 21 
December 31, 2021
(dollars in thousands)Amortized
cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
# of Securities
in unrealized
loss position
Securities available-for-sale:
U.S. asset backed securities$16,850 55 (68)16,837 10 
U.S. government agency mortgage-backed securities9,749 124 (60)9,813 3 
U.S. government agency collateralized mortgage obligations22,276 358 (253)22,381 10 
State and municipal securities72,099 1,379 (496)72,982 12 
U.S. Treasuries29,973 1 (246)29,728 21 
Non-U.S. government agency collateralized mortgage obligations990  (15)975 1 
Corporate bonds6,450 154 (18)6,586 5 
Total securities available-for-sale$158,387 2,071 (1,156)159,302 62 
Securities held-to-maturity:
State and municipal securities6,372 219  6,591  
Total securities held-to-maturity$6,372 219  6,591  

10

Although the Corporation’s investment portfolio overall is in a net unrealized loss position at June 30, 2022, the temporary impairment in the above noted securities is primarily the result of changes in market interest rates subsequent to purchase and it is more likely than not that the Corporation will not be required to sell these securities prior to recovery to satisfy liquidity needs, and therefore, no securities are deemed to be other-than-temporarily impaired.
During the quarter-ended March 31, 2022, $27.7 million of municipal securities, previously classified as available-for-sale on the balance sheet, were transferred to the held-to-maturity portfolio at fair value. After transfer, $1.3 million of unrealized losses remain in accumulated other comprehensive income. No gain or loss was recognized as a result of the transfer.
As of June 30, 2022 and December 31, 2021, securities having a fair value of $81.9 million and $92.2 million, respectively, were specifically pledged as collateral for public funds, the FRB discount window program, FHLB borrowings and other purposes. The FHLB has a blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation’s borrowing agreement with the FHLB.
The following table shows the Corporation’s investment gross unrealized losses and fair value aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position at June 30, 2022 and December 31, 2021:
June 30, 2022
Less than 12 Months12 Months or moreTotal
(dollars in thousands)Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Securities available-for-sale:
U.S. asset backed securities$10,771 (295)747 (21)11,518 (316)
U.S. government agency mortgage-backed securities9,610 (470)  9,610 (470)
U.S. government agency collateralized mortgage obligations15,599 (828)3,897 (448)19,496 (1,276)
State and municipal securities38,130 (5,092)1,585 (262)39,715 (5,354)
U.S. Treasuries30,424 (2,555)  30,424 (2,555)
Non-U.S. government agency collateralized mortgage obligations8,007 (332)  8,007 (332)
Corporate bonds6,191 (259)  6,191 (259)
Total securities available-for-sale$118,732 (9,831)6,229 (731)124,961 (10,562)
June 30, 2022
Less than 12 Months12 Months or moreTotal
Fair
value
Unrecognized
losses
Fair
value
Unrecognized
losses
Fair
value
Unrecognized
losses
Securities held-to-maturity:
State and municipal securities  24,955 (3,621)24,955 (3,621)
Total securities held-to-maturity$  24,955 (3,621)24,955 (3,621)
11

December 31, 2021
Less than 12 Months12 Months or moreTotal
(dollars in thousands)Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Securities available-for-sale:
U.S. asset backed securities$12,330 (68)  12,330 (68)
U.S. government agency mortgage-backed securities3,852 (60)  3,852 (60)
U.S. government agency collateralized mortgage obligations8,836 (187)1,657 (66)10,493 (253)
State and municipal securities14,994 (427)2,019 (69)17,013 (496)
U.S. Treasuries28,750 (246)  28,750 (246)
Non-U.S. government agency collateralized mortgage obligations975 (15)  975 (15)
Corporate bonds2,232 (18)  2,232 (18)
Total securities available-for-sale$71,969 (1,021)3,676 (135)75,645 (1,156)
The amortized cost and carrying value of securities at June 30, 2022 and December 31, 2021 are shown below by contractual maturities. Actual maturities may differ from contractual maturities as issuers may have the right to call or repay obligations with or without call or prepayment penalties.
June 30, 2022December 31, 2021
Available-for-saleHeld-to-maturityAvailable-for-saleHeld-to-maturity
(dollars in thousands)Amortized
cost
Fair
value
Amortized
cost
Fair
value
Amortized
cost
Fair
value
Amortized
cost
Fair
value
Investment securities:
 Due in one year or less$    $  763 769 
 Due after one year through five years17,889 16,823 3,768 3,760 12,934 12,885 2,354 2,397 
 Due after five years through ten years27,543 25,337 4,090 3,885 30,890 30,798 3,255 3,425 
 Due after ten years53,113 47,911 29,253 25,852 81,548 82,450   
 Subtotal98,545 90,071 37,111 33,497 125,372 126,133 6,372 6,591 
Mortgage-related securities41,288 39,217   33,015 33,169   
 Total$139,833 129,288 37,111 33,497 $158,387 159,302 6,372 6,591 
There were no sales of available for sale investment securities for the three and six months ended June 30, 2022. Proceeds from the sale of available for sale investment securities totaled $0 for the three months ended June 30, 2021 and $13.6 million for the six months ended June 30, 2021, resulting in a gross gain on sale of $248 thousand and a gross loss on sale of $200 thousand for the period.
12

(4)    Loans Receivable
Loans and leases outstanding at June 30, 2022 and December 31, 2021 are detailed by category as follows:
(dollars in thousands)June 30, 2022December 31, 2021
Mortgage loans held for sale$58,938 80,882 
Real estate loans:
Commercial mortgage548,267 516,928 
Home equity lines and loans56,613 52,299 
Residential mortgage (1) 112,549 68,175 
Construction201,163 160,905 
Total real estate loans918,592 798,307 
Commercial and industrial335,759 293,771 
Small business loans120,920 114,158 
Paycheck Protection Program loans ("PPP")21,867 90,194 
Main Street Lending Program Loans ("MSLP")597 597 
Consumer446 419 
Leases, net115,872 88,242 
Total portfolio loans and leases1,514,053 1,385,688 
Total loans and leases$1,572,991 1,466,570 
Loans with predetermined rates$473,637 488,220 
Loans with adjustable or floating rates1,099,354 978,350 
Total loans and leases$1,572,991 1,466,570 
Net deferred loan origination costs$4,840 769 

(1) Includes $16,212 and $17,558 of loans at fair value as of June 30, 2022 and December 31, 2021, respectively.

Components of the net investment in leases at June 30, 2022 and December 31, 2021 are detailed as follows:
(dollars in thousands)June 30,
2022
December 31,
2021
Minimum lease payments receivable$137,340 105,608 
Unearned lease income(21,468)(17,366)
Total$115,872 88,242 
13

Age Analysis of Past Due Loans and Leases
The following tables present an aging of the Corporation’s loan and lease portfolio as of June 30, 2022 and December 31, 2021, respectively:
June 30, 202230-89 days
past due
90+ days
past due and
still accruing
Total past
due
CurrentTotal
Accruing
Loans and
leases
Nonaccrual
loans and
leases
Total loans
portfolio
and leases
Delinquency
percentage
(dollars in thousands)
Commercial mortgage$   548,267 548,267  548,267  %
Home equity lines and loans1  1 55,574 55,575 1,038 56,613 1.84 
Residential mortgage (1)   110,497 110,497 2,052 112,549 1.82 
Construction   201,163 201,163  201,163 — 
Commercial and industrial   317,361 317,361 18,398 335,759 5.48 
Small business loans   119,519 119,519 1,401 120,920 1.16 
Paycheck Protection Program loans   21,867 21,867  21,867 — 
Main Street Lending Program loans   597 597  597 — 
Consumer   446 446  446 — 
Leases, net948  948 114,829 115,777 95 115,872 0.90 
Total$949  949 1,490,120 1,491,069 22,984 1,514,053 1.58 %
(1)Includes $16,212 of loans at fair value as of June 30, 2022 ($15,636 are current and $576 are nonaccrual).
December 31, 202130-89 days
past due
90+ days
past due and
still accruing
Total past
due
CurrentTotal
Accruing
Loans and
leases
Nonaccrual
loans and
leases
Total loans
portfolio
and leases
Delinquency
percentage
(dollars in thousands)
Commercial mortgage$   516,928 516,928  516,928  %
Home equity lines and loans103  103 51,285 51,388 911 52,299 1.94 
Residential mortgage (1)600  600 65,177 65,777 2,398 68,175 4.40 
Construction   160,905 160,905  160,905 — 
Commercial and industrial   274,970 274,970 18,801 293,771 6.40 
Small business loans   113,492 113,492 666 114,158 0.58 
Paycheck Protection Program loans   90,194 90,194  90,194 — 
Main Street Lending Program loans   597 597  597 — 
Consumer   419 419  419 — 
Leases, net390  390 87,640 88,030 212 88,242 0.68 
Total$1,093  1,093 1,361,607 1,362,700 22,988 1,385,688 1.74 %
(1)Includes $17,558 of loans at fair value as of December 31, 2021 ($16,768 are current, $189 are 30-89 days past due and $601 are nonaccrual).
14

(5)    Allowance for Loan Losses (the “Allowance”)
The Allowance is evaluated on at least a quarterly basis, as losses are estimated to be probable and incurred. The provision for loan and lease losses increase or decrease the ALLL, if deemed necessary. Loans deemed to be uncollectible are charged against the Allowance, and subsequent recoveries, if any, are credited to the Allowance.

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

Roll-Forward of Allowance by Portfolio Segment
The following tables detail the roll-forward of the Corporation’s Allowance, by portfolio segment, for the three and six month periods ended June 30, 2022 and 2021, respectively:

(dollars in thousands)Balance,
March 31, 2022
Charge-offsRecoveriesProvision (Credit)Balance,
June 30, 2022
Commercial mortgage$4,150   177 4,327 
Home equity lines and loans208  2 30 240 
Residential mortgage357   132 489 
Construction2,257   224 2,481 
Commercial and industrial7,369  9 (1,091)6,287 
Small business loans3,372   309 3,681 
Consumer3  1 (1)3 
Leases1,110 (696)61 822 1,297 
Total$18,826 (696)73 602 18,805 
(dollars in thousands)
Balance,
December 31, 2021
Charge-offsRecoveriesProvision (Credit)
Balance,
June 30, 2022
Commercial mortgage$4,950   (623)4,327 
Home equity lines and loans224  8 8 240 
Residential mortgage283  2 204 489 
Construction2,042   439 2,481 
Commercial and industrial6,533  20 (266)6,287 
Small business loans3,737   (56)3,681 
Consumer3  2 (2)3 
Leases986 (1,263)61 1,513 1,297 
Total$18,758 (1,263)93 1,217 18,805 

15

(dollars in thousands)Balance,
March 31, 2021
Charge-offsRecoveriesProvision (Credit)June 30, 2021
Commercial mortgage$7,655   (509)7,146 
Home equity lines and loans310  2 (31)281 
Residential mortgage314  2 8 324 
Construction2,311   (70)2,241 
Commercial and industrial5,286  13 61 5,360 
Small business loans1,920   315 2,235 
Consumer4  1 (1)4 
Leases576 (129) 323 770 
Total$18,376 (129)18 96 18,361 
(dollars in thousands)
Balance,
December 31, 2020
Charge-offsRecoveriesProvision (Credit)
Balance,
June 30, 2021
Commercial mortgage$7,451   (305)7,146 
Home equity lines and loans434  4 (157)281 
Residential mortgage385  4 (65)324 
Construction2,421   (180)2,241 
Commercial and industrial5,431  18 (89)5,360 
Small business loans1,259   976 2,235 
Consumer4  2 (2)4 
Leases382 (129) 517 770 
Total$17,767 (129)28 695 18,361 

Allowance Allocated by Portfolio Segment
The following tables detail the allocation of the allowance for loan and lease losses and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of June 30, 2022 and December 31, 2021.
Allowance on loans and leasesCarrying value of loans and leases
June 30, 2022Individually
evaluated
for impairment
Collectively
evaluated
for impairment
TotalIndividually
evaluated
for impairment
Collectively
evaluated
for impairment
Total
(dollars in thousands)
Commercial mortgage$ 4,327 4,327 4,223 544,044 548,267 
Home equity lines and loans 240 240 1,038 55,575 56,613 
Residential mortgage 489 489 1,476 94,861 96,337 
Construction 2,481 2,481 1,206 199,957 201,163 
Commercial and industrial2,440 3,847 6,287 16,553 319,206 335,759 
Small business loans376 3,305 3,681 1,495 119,425 120,920 
Paycheck Protection Program loans    21,867 21,867 (2)
Main Street Lending Program    597 597 (2)
Consumer 3 3  446 446 
Leases, net 1,297 1,297 95 115,777 115,872 
Total$2,816 15,989 18,805 26,086 1,471,755 1,497,841 (1)
16

Allowance on loans and leasesCarrying value of loans and leases
December 31, 2021Individually
evaluated
for impairment
Collectively
evaluated
for impairment
TotalIndividually
evaluated
for impairment
Collectively
evaluated
for impairment
Total
(dollars in thousands)
Commercial mortgage$ 4,950 4,950 3,556 513,372 516,928 
Home equity lines and loans 224 224 905 51,394 52,299 
Residential mortgage 283 283 1,797 48,820 50,617 
Construction 2,042 2,042 1,206 159,699 160,905 
Commercial and industrial2,900 3,633 6,533 17,361 276,410 293,771 
Small business loans376 3,361 3,737 792 113,366 114,158 
Paycheck Protection Program loans    90,194 90,194 (2)
Main Street Lending Program    597 597 (2)
Consumer 3 3  419 419 
Leases, net 986 986 212 88,030 88,242 
Total$3,276 15,482 18,758 25,829 1,342,301 1,368,130 (1)
(1)Excludes deferred fees and loans carried at fair value.
(2)PPP and MSLP loans are not reserved against as they are 100% guaranteed.

Loans and Leases by Credit Ratings
As part of the process of determining the Allowance to the different segments of the loan and lease portfolio, Management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by Management. The results of these reviews are reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:
Pass – Loans considered to be satisfactory with no indications of deterioration.
Special mention – Loans classified as special mention have a potential weakness that deserves Management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loan balances classified as doubtful have been reduced by partial charge-offs and are carried at their net realizable values.






17

The following tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to determine the allowance for loan and lease losses as of June 30, 2022 and December 31, 2021:
June 30, 2022PassSpecial
mention
SubstandardDoubtfulTotal
(dollars in thousands)
Commercial mortgage$514,251 28,606 5,410  548,267 
Home equity lines and loans55,107  1,506  56,613 
Construction192,163 9,000   201,163 
Commercial and industrial279,864 11,488 44,407  335,759 
Small business loans119,519  1,401  120,920 
Paycheck Protection Program loans21,867    21,867 
Main Street Lending Program loans597    597 
Total$1,183,368 49,094 52,724  1,285,186 
Commercial and industrial loans classified as substandard totaled $44.4 million as of June 30, 2022, an increase of $1.5 million, from $42.9 million as of December 31, 2021. The majority of this amount is comprised of 19 different loan relationships with no specific industry concentration, and a $13.8 million commercial loan relationship in the advertising industry that became a non-performing loan relationship late in 2021.

December 31, 2021PassSpecial
mention
SubstandardDoubtfulTotal
(dollars in thousands)
Commercial mortgage$481,551 29,452 5,925  516,928 
Home equity lines and loans50,908  1,391  52,299 
Construction151,608 9,297   160,905 
Commercial and industrial236,298 14,603 42,870  293,771 
Small business loans112,096  2,062  114,158 
Paycheck Protection Program loans90,194    90,194 
Main Street Lending Program loans597    597 
Total$1,123,252 53,352 52,248  1,228,852 
In addition to credit quality indicators as shown in the above tables, allowance allocations for residential mortgages, consumer loans and leases are also applied based on their performance status as of June 30, 2022 and December 31, 2021.
June 30, 2022December 31, 2021
(dollars in thousands)PerformingNonperformingTotalPerformingNonperformingTotal
Residential mortgage (1)
$94,285 2,052 96,337 $48,820 1,797 50,617 
Consumer446  446 419  419 
Leases, net115,777 95 115,872 88,030 212 88,242 
Total$210,508 2,147 212,655 $137,269 2,009 139,278 
(1) There were four nonperforming residential mortgage loans at June 30, 2022 and four nonperforming residential mortgage loans at December 31, 2021 with a combined outstanding principal balance of $576 thousand and $601 thousand, respectively, which were carried at fair value and not included in the table above. This decrease was largely due to a residential mortgage loan that was nonperforming at December 31, 2021, which subsequently paid off before June 30, 2022.
No troubled debt restructurings performing according to modified terms are included in performing residential mortgages below as of June 30, 2022 and December 31, 2021.


18


Impaired Loans
The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related Allowance and interest income recognized for the periods.
As of June 30, 2022
As of December 31, 2021
(dollars in thousands)Recorded
investment
Principal
balance
Related
allowance
Recorded
investment
Principal
balance
Related
allowance
Impaired loans with related allowance:
Commercial and industrial$16,281 16,582 2,440 17,147 17,310 2,900 
Small business loans666 666 376 666 666 376 
Home equity lines and loans      
Residential mortgage      
Total$16,947 17,248 2,816 17,813 17,976 3,276 
Impaired loans without related allowance:
Commercial mortgage$4,223 4,233 — 3,556 3,559 — 
Commercial and industrial272 334 — 214 269 — 
Small business loans829 829 — 126 126 — 
Home equity lines and loans1,038 1,074 — 905 935 — 
Residential mortgage1,476 1,476 — 1,797 1,797 — 
Construction1,206 1,206 — 1,206 1,206 — 
Leases95 95 — 212 212 — 
Total9,139 9,247 — 8,016 8,104 — 
Grand Total$26,086 26,495 2,816 25,829 26,080 3,276 
The following table details the average recorded investment and interest income recognized on impaired loans by portfolio segment.
Three Months Ended June 30, 2022Three Months Ended June 30, 2021
(dollars in thousands)Average
Recorded
Investment
Interest
Income
Recognized
Average
recorded
investment
Interest
income
recognized
Impaired loans with related allowance:
Commercial and industrial$16,412  3,309 5 
Small business loans666  917  
Home equity lines and loans  93  
Residential mortgage  686  
Total$17,078  5,005 5 
Impaired loans without related allowance:
Commercial mortgage$4,241 29 726 8 
Commercial and industrial293  969  
Small business loans835 2 161 4 
Home equity lines and loans1,040 23 824  
Residential mortgage1,480 166 1,125 3 
Construction1,206 16 1,206 14 
Leases102  39  
Total$9,197 236 5,050 29 
Grand Total$26,275 236 10,055 34 
19

Six Months Ended
June 30, 2022
Six Months Ended
June 30, 2021
(dollars in thousands)Average
recorded
investment
Interest
income
recognized
Average
recorded
investment
Interest
income
recognized
Impaired loans with related allowance:
Commercial and industrial$16,449  3,339 10 
Small business loans666  917  
Home equity lines and loans  94  
Residential mortgage  687  
Total17,115  5,037 10 
Impaired loans without related allowance:
Commercial mortgage4,279 48 730 16 
Commercial and industrial297  1,002  
Small business loans844 5 169 8 
Home equity lines and loans1,044 23 824  
Residential mortgage1,483 168 1,126 3 
Construction1,206 31 1,206 29 
Leases103  80  
Total9,256 275 5,137 56 
Grand Total$26,371 275 10,174 66 

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

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

The balance of TDRs at June 30, 2022 and December 31, 2021 are as follows:
June 30, 2022December 31, 2021
(dollars in thousands)
TDRs included in nonperforming loans and leases$197 361 
TDRs in compliance with modified terms 3,679 3,446 
Total TDRs $3,876 3,807 
There was 1 new loan modification for $700 thousand granted during the three and six months ended June 30, 2022 for a commercial mortgage, and there were no loan or lease modifications granted during the three and six months June 30, 2021 that were categorized as a TDR, and no subsequent defaults during the same time periods.



20


(6)    Short-Term Borrowings and Long-Term Debt
The Corporation’s short-term borrowings generally consist of federal funds purchased and short-term borrowings extended under agreements with the Federal Home Loan Bank of Pittsburgh (“FHLB”). 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 $0 in Federal funds purchased at June 30, 2022 and December 31, 2021. The Corporation also has a facility with the Federal Reserve Bank discount window of $11.5 million. This facility is fully secured by investment securities. There were no borrowings under this at June 30, 2022 or at December 31, 2021.
Short-term borrowings at June 30, 2022 and December 31, 2021 consisted of the following notes:
Balance as of
(dollars in thousands)Maturity
date
Interest
rate
June 30,
2022
December 31,
2021
Open Repo Plus Weekly6/5/20231.75 %54,250 36,458 
Mid-term Repo-fixed9/12/20220.23 4,886 4,886 
Total$59,136 41,344 
The Corporation had no long-term debt as of June 30, 2022 or December 31, 2021.
The FHLB of Pittsburgh has also issued $56.1 million of letters of credit to the Corporation for the benefit of the Corporation’s public deposit funds and loan customers. These letters of credit expire throughout 2022.
The Corporation has a maximum borrowing capacity with the FHLB of $484.1 million as of June 30, 2022 and $505.4 million as of December 31, 2021. All advances and letters of credit from the FHLB are secured by a blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation’s borrowing agreement with the FHLB.

(7)    Servicing Assets
The Corporation sells certain residential mortgage loans and the guaranteed portion of certain SBA loans to third parties and retains servicing rights and receives servicing fees. All such transfers are accounted for as sales. When the Corporation sells a residential mortgage loan, it does not retain any portion of that loan and its continuing involvement in such transfers is limited to certain servicing responsibilities. While the Corporation may retain a portion of certain sold SBA loans, its continuing involvement in the portion of the loan that was sold is limited to certain servicing responsibilities. When the contractual servicing fees on loans sold with servicing retained are expected to be more than adequate compensation to a servicer for performing the servicing, a capitalized servicing asset is recognized. The Corporation accounts for the transfers and servicing of financial assets in accordance with ASC 860, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
Residential Mortgage Loans
The mortgage servicing rights (“MSRs”) are amortized over the period of the estimated future net servicing life of the underlying assets. MSRs are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the MSR. The Corporation serviced $1.0 billion of residential mortgage loans as of June 30, 2022 and December 31, 2021. During the three and six months ended June 30, 2022, the Corporation recognized servicing fee income of $653 thousand and $1.3 million, compared to $481 thousand and $842 thousand, during the three and six months ended June 30, 2021, respectively.



21



Changes in the MSR balance are summarized as follows:
Three Months Ended June 30,Six Months Ended June 30,
(dollars in thousands)2022202120222021
Balance at beginning of the period$10,888 7,118 $10,756 4,647 
Servicing rights capitalized51 2,154 583 4,496 
Amortization of servicing rights(332)(271)(736)(470)
Change in valuation allowance3 (59)7 269 
Balance at end of the period$10,610 8,942 $10,610 8,942 
Activity in the valuation allowance for MSRs was as follows:
Three Months Ended June 30,Six Months Ended June 30,
(dollars in thousands)2022202120222021
Valuation allowance, beginning of period$(4)(107)$(8)(435)
Impairment (59)  
Recovery3  7 269 
Valuation allowance, end of period$(1)(166)$(1)(166)
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 June 30, 2022, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 7.13% and a discount rate equal to 9.00%. At December 31, 2021, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 7.23% and a discount rate equal to 9.00%. Due in part to market volatility as interest rates increased, the prepayment speed assumption has decreased from December 31, 2021 to June 30, 2022. As interest rates have started to increase and the number of mortgage refinancings have started to decline, model inputs have been adjusted to align the MSRs fair value with market conditions. The discount rate assumption is unchanged over this period as the underlying credit quality of the loans sold in each period is relatively unchanged.
At June 30, 2022 and December 31, 2021, 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)June 30, 2022December 31, 2021
Fair value of residential mortgage servicing rights$12,270 $11,241 
Weighted average life (months)1611
Prepayment speed7.13 %7.23 %
Impact on fair value:
10% adverse change$(445)$(376)
20% adverse change(862)(731)
Discount rate9.00 %9.00 %
Impact on fair value:
10% adverse change$(490)$(436)
20% adverse change(945)(840)
22

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a articular assumption on the fair value of the MSRs is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.
SBA Loans
SBA loan servicing assets are amortized over the period of the estimated future net servicing life of the underlying assets. SBA loan servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the SBA loan servicing asset. The Corporation serviced $143.2 million and $115.1 million of SBA loans, as of June 30, 2022 and December 31, 2021, respectively.
Changes in the SBA loan servicing asset balance are summarized as follows:
Three Months Ended June 30,Six Months Ended June 30,
(dollars in thousands)2022202120222021
Balance at beginning of the period$2,508 1,160 $2,009 970 
Servicing rights capitalized247 304 840 578 
Amortization of servicing rights(225)(87)(350)(154)
Change in valuation allowance(280)8 (249)(9)
Balance at end of the period$2,250 1,385 $2,250 1,385 
Activity in the valuation allowance for SBA loan servicing assets was as follows:
Three Months Ended June 30,Six Months Ended June 30,
(dollars in thousands)2022202120222021
Valuation allowance, beginning of period$(65)(56)$(96)(39)
Impairment(280) (249)(9)
Recovery 8   
Valuation allowance, end of period$(345)(48)$(345)(48)
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 June 30, 2022, the key assumptions used to determine the fair value of the Corporation’s SBA loan servicing rights included a lifetime constant prepayment rate equal to 13.00%, and a discount rate equal to 12.38%. At December 31, 2021, the key assumptions used to determine the fair value of the Corporation’s SBA loan servicing rights included a lifetime constant prepayment rate equal to 12.38%, and a discount rate equal to 9.01%. The change in valuation allowance due to impairment, noted in the tables above, was largely due to the increased prepayment speed experienced in the current year periods and the rising interest rate environment.
At June 30, 2022 and December 31, 2021, 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.
23

(dollars in thousands)June 30, 2022December 31, 2021
Fair value of SBA loan servicing rights$2,295 $2,107 
Weighted average life (years)3.83.8
Prepayment speed13.00 %12.38 %
Impact on fair value:
10% adverse change$(74)$(69)
20% adverse change(137)(132)
Discount rate12.38 %9.01 %
Impact on fair value:
10% adverse change$(59)$(54)
20% adverse change(108)(106)
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the SBA servicing rights is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.
(8)    Fair Value Measurements and Disclosures
The Corporation uses fair value measurements to record fair value adjustments to certain assets and liabilities. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

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

In accordance with this guidance, the Corporation groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 – Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.
Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments
24

whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.
Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis.
Securities
The fair value of securities available-for-sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.
Mortgage Loans Held for Sale
The fair value of loans held for sale is based on secondary market prices.
Mortgage Loans Held for Investment
The fair value of mortgage loans held for investment is based on the price secondary markets are currently offering for similar loans using observable market data.
Derivative Financial Instruments
The fair values of forward commitments and interest rate swaps are based on market pricing and therefore are considered Level 2. Derivatives classified as Level 3 consist of interest rate lock commitments related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement.

25


For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2022 and December 31, 2021 are as follows:
June 30, 2022
(dollars in thousands)TotalLevel 1Level 2Level 3
Assets
Securities available for sale:
U.S. asset backed securities$13,740  13,740  
U.S. government agency mortgage-backed securities9,640  9,640  
U.S. government agency collateralized mortgage obligations20,606  20,606  
State and municipal securities39,716  39,716  
U.S. Treasuries30,424 30,424   
Non-U.S. government agency collateralized mortgage obligations8,971  8,971 
Corporate bonds6,191  6,191  
Equity investments2,153  2,153  
Mortgage loans held for sale58,938  58,938  
Mortgage loans held for investment16,212  16,212  
Interest rate lock commitments374   374 
Forward commitments67  67  
Customer derivatives - interest rate swaps2,893  2,893  
Total$209,925 30,424 179,127 374 
Liabilities
Interest rate lock commitments430   430 
Forward commitments77  77  
Customer derivatives - interest rate swaps2,847  2,847  
Total$3,354  2,924 430 
26

December 31, 2021
(dollars in thousands)TotalLevel 1Level 2Level 3
Assets
Securities available for sale:
U.S. asset backed securities$16,837  16,837  
U.S. government agency mortgage-backed securities9,813  9,813  
U.S. government agency collateralized mortgage obligations22,381  22,381  
State and municipal securities72,982  72,982  
U.S. Treasuries29,728 29,728   
Non-U.S. government agency collateralized mortgage obligations975  975  
Corporate bonds6,586  6,586  
Equity investments2,354  2,354  
Mortgage loans held for sale80,882  80,882  
Mortgage loans held for investment17,558  17,558  
Interest rate lock commitments1,122   1,122 
Forward commitments65  65  
Customer derivatives - interest rate swaps961  961  
Total$262,244 29,728 231,394 1,122 
Liabilities
Interest rate lock commitments203   203 
Forward commitments106  106  
Customer derivatives - interest rate swaps1,018  1,018  
Total$1,327  1,124 203 
Assets measured at fair value on a nonrecurring basis at June 30, 2022 and December 31, 2021 are as follows:
June 30, 2022December 31, 2021
(dollars in thousands)Fair ValueFair Value
Mortgage servicing rights$10,610 10,756 
SBA loan servicing rights2,250 2,009 
Impaired loans (1)
     Commercial and industrial8231,837
     Small business loans290
Total$13,683 14,892 
(1)Impaired loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Refer to the following page for further qualitative discussion around impaired loans.







27

The following table details the valuation techniques for Level 3 impaired loans.
Fair ValueValuationRange of
(dollars in thousands)Level 3TechniqueSignificant Unobservable InputInputs
June 30, 2022$823 Appraisal of collateralManagement adjustments on appraisals for property type and recent activity
2%-15% discount
December 31, 2021$2,127 Appraisal of collateralManagement adjustments on appraisals for property type and recent activity
2%-15% discount
Below is management’s estimate of the fair value of all financial instruments, whether carried at cost or fair value on the Corporation’s balance sheet. The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair value of the Corporation’s financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.
Loans Receivable
The fair value of loans receivable is estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value below is reflective of an exit price.
Servicing Assets
The Corporation estimates the fair value of mortgage servicing rights and SBA loan servicing rights using discounted cash flow models that calculate the present value of estimated future net servicing income. The model uses readily available prepayment speed assumptions for the interest rates of the portfolios serviced. These servicing rights are classified within Level 3 in the fair value hierarchy based upon management’s assessment of the inputs. The Corporation reviews the servicing rights portfolios on a quarterly basis for impairment.
Impaired Loans
Impaired loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third‑party appraisals of the properties, or discounted cash flows based upon the expected proceeds. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the Allowance policy.

Accrued Interest Receivable and Payable
The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.
Deposit Liabilities
The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair
28

values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Short-Term Borrowings
The carrying amounts of short-term borrowings approximate their fair values.
Subordinated Debt
Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity.
Off-Balance Sheet Financial Instruments
Off-balance sheet instruments are primarily comprised of loan commitments, which are generally priced at market at the time of funding. Fees on commitments to extend credit and stand-by letters of credit are deemed to be immaterial and these instruments are expected to be settled at face value or expire unused. It is impractical to assign any fair value to these instruments and as a result they are not included in the table below. Fair values assigned to the notional value of interest rate lock commitments and forward sale contracts are based on market quotes.
Derivative Financial Instruments
The fair value of forward commitments and interest rate swaps is based on market pricing and therefore are considered Level 2. Derivatives classified as Level 3 consist of interest rate lock commitments related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement.
29

The estimated fair values of the Corporation’s financial instruments at June 30, 2022 and December 31, 2021 are as follows:
June 30, 2022December 31, 2021
(dollars in thousands)Fair Value
Hierarchy Level
Carrying
amount
Fair valueCarrying
amount
Fair value
Financial assets:
Cash and cash equivalentsLevel 1$37,093 37,093 23,480 23,480 
Securities available-for-sale (1)Level 2129,288 129,288 159,302 159,302 
Securities held-to-maturityLevel 237,111 33,497 6,372 6,591 
Equity investmentsLevel 22,153 2,153 2,354 2,354 
Mortgage loans held for saleLevel 258,938 58,938 80,882 80,882 
Loans receivable, net of the allowance for loan and lease lossesLevel 31,502,681 1,456,650 1,368,899 1,370,885 
Mortgage loans held for investmentLevel 216,212 16,212 17,558 17,558 
Interest rate lock commitmentsLevel 3374 374 1,122 1,122 
Forward commitmentsLevel 267 67 65 65 
Restricted investment in bank stockNA4,719 NA5,117 NA
Accrued interest receivableLevel 35,108 5,108 5,009 5,009 
Customer derivatives - interest rate swapsLevel 22,893 2,893 961 961 
Financial liabilities:
DepositsLevel 21,568,014 1,484,100 1,446,413 1,549,100 
Short-term borrowingsLevel 259,136 59,136 41,344 41,344 
Subordinated debenturesLevel 240,567 38,054 40,508 40,803 
Accrued interest payableLevel 2146 146 31 31 
Interest rate lock commitmentsLevel 3430 430 203 203 
Forward commitmentsLevel 277 77 106 106 
Customer derivatives - interest rate swapsLevel 22,847 2,847 1,018 1,018 
NotionalNotional
Off-balance sheet financial instruments:amountFair valueamountFair value
 Commitments to extend creditLevel 2$488,561  486,632 
 Letters of creditLevel 222,880  25,986 
(1) U.S. Treasury securities available-for-sale are classified as Level 1.
The following table includes a rollforward of interest rate lock commitments for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the three and six month periods ended June 30, 2022 and 2021.
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Balance at beginning of the period$587 4,595 1,122 6,932 
Decrease in value(213)(1,928)(748)(4,265)
Balance at end of the period$374 2,667 374 2,667 




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The following table details the valuation techniques for Level 3 interest rate lock commitments.
Fair Value
Level 3
Valuation TechniqueSignificant
Unobservable
Input
Range of
Inputs
Weighted
Average
June 30, 2022$374 Market comparable pricingPull through
1 - 99
88.93%
December 31, 20211,122 Market comparable pricingPull through
1 - 99
87.66
Net realized gains and losses due to changes in the fair value of interest rate lock commitments, which are classified as Level 3 assets and liabilities, are recorded in non-interest income as net change in the fair value of derivative instruments in the Corporation's consolidated statements of income. Net realized gains of $165 thousand and net realized losses of $975 thousand were recorded for the three and six months ended June 30, 2022, while net realized gains of $13 thousand and net realized losses of $4.4 million were recorded for the three and six months ended June 30, 2021, respectively.
(9)    Derivative Financial Instruments
Risk Management Objective of Using Derivatives
The Corporation is exposed to certain risk arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Corporation enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Corporation’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation’s known or expected cash receipts and its known or expected cash payments principally related to the Corporation’s loan portfolio.

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

Customer Derivatives – Interest Rate Swaps
Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain customers to swap a fixed rate product for a variable rate product, or vice versa. The Corporation executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies. Those interest rate derivatives are simultaneously hedged by offsetting derivatives that the Corporation executes with a third party, such that the Corporation minimizes its net interest rate risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
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The following table presents a summary of the notional amounts and fair values of derivative financial instruments:
June 30, 2022December 31, 2021
(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 valuesOther assets$50,159 374 108,653 1,122 
Negative fair valuesOther liabilities55,319 (430)35,264 (203)
Total105,478 (56)143,917 919 
Forward Commitments
Positive fair valuesOther assets14,500 67 30,500 65 
Negative fair valuesOther liabilities12,500 (77)45,500 (106)
Total27,000 (10)76,000 (41)
Customer Derivatives - Interest Rate Swaps
Positive fair valuesOther assets41,742 2,893 35,447 961 
Negative fair valuesOther liabilities41,742 (2,847)35,447 (1,018)
Total83,484 46 70,894 (57)
Total derivative financial instruments$215,962 (20)290,811 821 
Interest rate lock commitments are considered Level 3 in the fair value hierarchy, while the forward commitments and interest rate swaps are considered Level 2 in the fair value hierarchy.
The following table presents a summary of the fair value gains and losses on derivative financial instruments:
Three Months Ended June 30,Six Months Ended June 30,
(dollars in thousands)2022202120222021
Interest Rate Lock Commitments$165 13 (975)(4,424)
Forward Commitments(909)(2,102)31 1,294 
Customer Derivatives - Interest Rate Swaps70 (59)104 38 
Net fair value (losses) gains on derivative financial instruments$(674)(2,148)(840)(3,092)
Net realized gains on derivative hedging activities were $1.7 million and $4.5 million for the three and six months ended June 30, 2022, respectively, and net realized losses on derivatives were $674 thousand and net realized gains were $3.6 million for the three and six months ended June 30, 2021. Net realized gains losses on derivative hedging activities are included in non-interest income in the consolidated statements of income.
(10)    Segments
ASC Topic 280 – Segment Reporting identifies operating segments as components of an enterprise which are evaluated regularly by the Corporation’s Chief Operating Decision Maker, our Chief Executive Officer, in deciding how to allocate resources and assess performance. The Corporation has applied the aggregation criterion set forth in this codification to the results of its operations.

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

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Meridian Wealth (“Wealth”), a registered investment advisor and wholly-owned subsidiary of the Bank, provides a comprehensive array of wealth management services and products and the trusted guidance to help its clients and our banking customers prepare for the future. The unit generates non-interest income through advisory fees.

Meridian’s mortgage banking segment (“Mortgage”) consists of 22 loan production offices throughout suburban Philadelphia and Maryland. The Mortgage segment originates 1 – 4 family residential mortgages and sells nearly all of its production to third party investors. The unit generates net interest income on the loans it originates and holds temporarily, then earns fee income (primarily gain on sales) at the time of the sale. The unit also recognizes income from document preparation fees, changes in portfolio pipeline fair values and related net hedging gains (losses).

The table below summarizes income and expenses, directly attributable to each business line, which has been included in the statement of operations. Total assets for each segment is also provided.
Segment Information
Three Months Ended June 30, 2022Three Months Ended June 30, 2021
(Dollars in thousands)BankWealthMortgageTotalBankWealthMortgageTotal
Net interest income$16,923 317 311 17,551 $14,824 2 586 15,412 
Provision for loan losses602   602 96   96 
Net interest income after provision16,321 317 311 16,949 14,728 2 586 15,316 
Non-interest Income
Mortgage banking income125  6,817 6,942 408  19,059 19,467 
Wealth management income 1,254  1,254  1,163  1,163 
SBA income437   437 1,490   1,490 
Net change in fair values71  (1,312)(1,241)(59) (813)(872)
Net gain on hedging activity  1,715 1,715   (674)(674)
Other526  770 1,296 563  595 1,158 
Non-interest income1,159 1,254 7,990 10,403 2,402 1,163 18,167 21,732 
Non-interest expense10,624 822 8,260 19,706 9,415 789 16,042 26,246 
Income before income taxes$6,856 749 41 7,646 7,715 376 2,711 10,802 
Total Assets$1,759,129 7,432 86,458 1,853,019 $1,560,040 5,946 143,024 1,709,010 

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Segment Information
Six Months Ended June 30, 2022Six Months Ended June 30, 2021
(Dollars in thousands)BankWealthMortgageTotalBankWealthMortgageTotal
Net interest income$32,533 411 642 33,586 29,324 (11)1,220 30,533 
Provision for loan losses1,217   1,217 695   695 
Net interest income after provision31,316 411 642 32,369 28,629 (11)1,220 29,838 
Non-interest Income
Mortgage banking income322  13,716 14,038 676  42,891 43,567 
Wealth management income 2,558  2,558  2,299  2,299 
SBA income2,957   2,957 2,735   2,735 
Net change in fair values103  (3,412)(3,309)39  (5,824)(5,785)
Net gain on hedging activity  4,542 4,542   3,587 3,587 
Other1,153  1,566 2,719 1,274  1,103 2,377 
Non-interest income4,535 2,558 16,412 23,505 4,724 2,299 41,757 48,780 
Non-interest expense20,833 1,700 18,606 41,139 18,348 1,684 34,478 54,510 
Income (loss) before income taxes$15,018 1,269 (1,552)14,735 15,005 604 8,499 24,108 
Total Assets$1,759,129 7,432 86,458 1,853,019 1,560,040 5,946 143,024 1,709,010 


(11)    Leases
On January 1, 2022, the Corporation adopted ASU 2016-02 (Topic 842), “Leases”, as further explained in Note 12, Recent Accounting Pronouncements.
The Corporation’s operating leases consist of various retail branch locations and loan production offices. As of June 30, 2022, the Corporation’s leases have remaining lease terms ranging from 8 months to 13 years, including extension options that the Corporation is reasonably certain will be exercised.

The Corporation’s leases include fixed rental payments, and certain of our leases also include variable rental payments where lease payments may increase at pre-determined dates based on the change in the consumer price index. The Corporation’s lease agreements include gross leases as well as leases in which we make separate payments to the lessor for items such as the property taxes assessed on the property or a portion of the common area maintenance associated with the property. We have elected the practical expedient not to separate lease and non-lease components for all of our building leases. The Corporation also elected to not recognize right of use (ROU) assets and lease liabilities for short-term leases.

As of June 30, 2022 the Corporation’s ROU assets and related lease liabilities were $10.0 million and $9.8 million, respectively. These amounts are included within other assets and other liabilities, respectively.








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The components of lease expense were as follows:
(dollars in thousands)Three Months Ended June 30, 2022Six Months Ended June 30, 2022
Operating lease expense$585 $1,171 
Short term lease expense1 2 
Variable lease expense  
Total lease expense$586 $1,173 
Supplemental cash flow information related to leases was as follows:
(dollars in thousands)June 30, 2022
Cash paid for amounts included in the measurement of lease liabilities
    Operating cash flows from operating leases$563 
ROU asset obtained in exchange for lease liabilities$10,995 
Maturities of operating lease liabilities under FASB ASC 842 "Leases" as of June 30, 2022 are as follows:
(dollars in thousands)June 30, 2022
2022$1,102 
20231,892 
20241,746 
20251,456 
20261,436 
Thereafter3,134 
10,766 
Less: Present value discount(948)
Total operating lease liabilities$9,818 
As of June 30, 2022, the weighted-average remaining lease term, including extension options that the Corporation is reasonably certain will be exercised, for all operating leases is 6.63 years.
Because we generally do not have access to the rate implicit in the lease, we utilize our incremental borrowing rate as the discount rate. The weighted average discount rate associated with operating leases as of June 30, 2022 is 2.58%.

As of June 30, 2022, the Corporation had not entered into any material leases that have not yet commenced.


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(12)    Recent Accounting Pronouncements
As an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), the Bank is permitted an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included herein, as well as financial statements that we file up to the date we lose this designation (December 31, 2022) will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period. As a filer under the JOBS Act, we will implement new accounting standards subject to the effective dates required for non-public entities.
Adopted Pronouncements in 2022:

FASB ASU 2016-02 (Topic 842), “Leases”
Issued in February 2016, ASU 2016-02 revises the accounting related to lessee accounting. Under the new guidance, lessees are required to recognize a lease 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. In June 2020, the FASB approved a delay for the implementation of the ASU. Accordingly, the amendments in this update are effective for the Corporation for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. On January 1, 2022 the Corporation recognized a right-of-use asset and a lease obligation liability on the consolidated statement of financial condition. The adoption of the ASU was on a prospective basis and therefore comparative prior periods are still presented under ASC 840. Refer to footnote 12 - leases, for further details.
Pronouncements Not Effective as of June 30, 2022:

FASB ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments”
Issued in June 2016, ASU 2016-13 significantly changes how companies measure and recognize credit impairment for many financial assets. This ASU requires businesses and other organizations to measure the current expected credit losses (“CECL”) on financial assets, such as loans, net investments in leases, certain debt securities, bond insurance and other receivables. The amendments affect entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. Current GAAP requires an incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The amendments in this ASU replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonableness and supportable information to inform credit loss estimates. An entity should apply the amendments through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (modified retrospective approach). Acquired credit impaired loans for which the guidance in Accounting Standards Codification (ASC) Topic 310-30 has been previously applied should prospectively apply the guidance in this ASU. A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date. In October 2019, the FASB approved a delay for the implementation of the ASU. Accordingly, as an emerging growth company, the Corporation’s effective date for the implementation of the ASU will be January 1, 2023. Management is currently determining under which method we will adopt this ASU. Management has assembled a cross-functional team from Finance, Credit, and IT that is leading the implementation efforts to evaluate the impact of this guidance on the Corporation's consolidated financial statements and related disclosures, internal systems, accounting policies, processes and related internal controls. At this time an estimate of the impact to the Corporation's consolidated financial statements cannot be determined.




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FASB ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”
Issued in April 2019, ASU 2019-04 clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments (addressed by ASUs 2016-13, 2017-12, and 2016-01, respectively). The amendments to estimating expected credit losses (ASU 2016-13), in particular, how a company considers recoveries and extension options when estimating expected credit losses, are the most relevant to the Corporation. The ASU clarifies that (1) the estimate of expected credit losses should include expected recoveries of financial assets, including recoveries of amounts expected to be written off and those previously written off, and (2) that contractual extension or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. Management will consider the impact of ASU 2019-04 when considering the impact of ASU 2016-13 as discussed above.
FASB ASU 2020-04 (Topic 848), “Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”
Issued in March 2020, ASU 2020-04 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The Corporation does not have a significant concentration of loans, derivative contracts, borrowings or other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The guidance under ASC-848 will be available for a limited time, generally through December 31, 2022. The Corporation expects to adopt the LIBOR transition relief allowed under this standard.
FASB ASU 2020-06, “Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”
This ASU clarifies the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock by removing the cash conversion model and the beneficial conversion feature models. For public business entities that meet the definition of an SEC filer (excluding smaller reporting entities), the amendments are effective for fiscal years beginning after Dec. 15, 2021, and interim periods within. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2023, and interim periods within. Early adoption is permitted, but no earlier than for fiscal years beginning after Dec. 15, 2020.
FASB ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures."
In March 2022, the FASB issued ASU No. 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted CECL and enhance the disclosure requirements for modifications of receivables made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current period gross write-offs by year of origination for financing receivables and net investment in leases in the existing vintage disclosures. This ASU is effective for fiscal years beginning after December 15, 2022 or January 1, 2023 for the Corporation, including interim periods within those fiscal years for entities that have adopted CECL. Early adoption is permitted if an entity has adopted CECL. The Corporation is in the process of evaluating the amendments but does not expect the adoption of this ASU will have a material impact on the Corporation's financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2021 included in Meridian Corporation’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).
Cautionary Statement Regarding Forward-Looking Statements
Meridian Corporation (the “Corporation”) may from time to time make written or oral “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-
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looking statements include statements with respect to Meridian Corporation’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Meridian Corporation’s control). Numerous competitive, economic, regulatory, legal and technological factors, risks and uncertainties that could cause actual results to differ materially include, without limitation: the impact of the COVID-19 pandemic and government responses thereto; on the U.S. economy, including the markets in which we operate; actions that we and our customers take in response to these factors and the effects such actions have on our operations, products, services and customer relationships; and the risk that the Small Business Administration may not fund some or all Paycheck Protection Program (PPP) loan guaranties; increased competitive pressures; changes in the interest rate environment; changes in general economic conditions and conditions within the securities markets; legislative and regulatory changes; and the effects of inflation, a potential recession, among others, could cause Meridian Corporation’s financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in such forward-looking statements. Meridian Corporation cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Meridian Corporation’s filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2021 and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Meridian Corporation does not undertake to update any forward-looking statement whether written or oral, that may be made from time to time by Meridian Corporation or by or on behalf of Meridian Bank.

Critical Accounting Policies and Estimates
Our accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate. To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information. These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgements are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements. In particular, management has identified the provision and allowance for loan and lease losses as the accounting policy that, due to the estimates, assumptions and judgements inherent in that policy, is critical in understanding our financial statements. Management has presented the application of this policy to the audit committee of our board of directors.
As an emerging growth company, the JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included in this Annual Report, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company (expected to end as of December 31, 2022) or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. If we do so, we will prominently disclose this decision in the first periodic report filed with the SEC following our decision, and such decision is irrevocable.
This critical accounting policy, along with other significant accounting policies, are presented in in Footnote 1 of the Corporation’s Consolidated Financial Statements as of and for the years ended December 31, 2021 and 2020 included in the Annual Report on Form 10-K.
Executive Overview
The following items highlight the Corporation’s changes in its financial condition as of June 30, 2022 compared to March 31, 2022 and December 31, 2021, and the results of operations for the three and six months ended June 30, 2022, as compared to the same periods in 2021. More detailed information related to these highlights can be found in the sections that follow.
Changes in Financial Condition
Total assets increased $21.4 million, or 1.2%, to $1.9 billion as of June 30, 2022 compared to March 31, 2022, and increased $139.6 million, or 8.1%, compared to December 31, 2021.
Portfolio loans, excluding SBA Paycheck Protection Program ("PPP") loans, grew $115.2 million, or 8.3%, to $1.5 billion as of June 30, 2022 compared to March 31, 2022, and increased $199.3 million, or 15.4% since December 31,
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2021, or 31% on an annualized basis. PPP loans decreased $66.8 million, or 75.7%, to $11.7 million as of June 30, 2022 compared to March 31, 2022, and decreased $94.2 million, or 81.4%, compared to December 31, 2021.
Portfolio loan growth since March 31, 2022 was most evident in the commercial real estate/construction portfolio which grew $30.5 million, commercial loans and leases which grew $32.0 million, and residential loans which grew $35.4 million, while compared to December 31, 2021 commercial real estate/construction portfolio which grew $71.5 million, commercial loans and leases which grew $70.7 million, and residential loans which grew $45.8 million.
Cash and cash equivalents and investments decreased a combined $31.1 million or 13.1% since March 31, 2022, and increased $14.1 million, or 7.4%, since December 31, 2021.
During the quarter-ended March 31, 2022, $27.7 million of municipal securities previously classified as available-for-sale on the balance sheet, were transferred to the held-to-maturity portfolio.
Our combined servicing asset portfolio (which includes both mortgage servicing rights and SBA servicing assets) decreased $536 thousand, or 4%, from March 31, 2022, and increased $95 thousand, or 0.7%, to $12.9 million, from December 31, 2021.
Total deposits grew $3.2 million, or 0.2%, from March 31, 2022, and grew $121.6 million, or 8.4%, to $1.6 billion, from December 31, 2021. Non-interest bearing deposits grew $546 thousand, or 0.2%, from March 31, 2022, and grew $17.4 million, or 6.3%, to $291.9 million from December 31, 2021.
Total borrowings increased $23.0 million from March 31, 2022, and $17.8 million from December 31, 2021, as short-term borrowings helped to fund our loan growth.
The Corporation returned $8.6 million of capital to Meridian shareholders during the six months ended June 30, 2022 through dividends, including a $1.00 special dividend, and $0.20 quarterly dividends.

Three Month Results of Operations - June 30, 2022 Compared to the Same Period in 2021
Consolidated net income for the three months ended June 30, 2022 was $5.9 million, a decrease of $2.3 million, or 28.1% compared to the three months ended June 30, 2021, was driven by a decline in non-interest income, offset somewhat by continued strong loan portfolio growth, and expense reduction.
Pre-tax, pre-provision income for second quarter 2022 was $8.2 million, a decrease of $2.7 million, or 24.3%. led by strong growth in net interest income and lower operating expenses, offset by decreases in mortgage loan originations.
The return on average equity (“ROE”) and return on average assets (“ROA”) were 15.03% and 1.31%, respectively, for the second quarter 2022, compared to 22.61% and 1.92%, respectively, for the second quarter 2021.
Net interest margin increased to 4.07% from 3.70%, after recognizing $286 thousand in one-time loan fees as well as deployment of PPP loan payoffs into higher yielding commercial portfolios.
Non-interest income decreased $11.3 million or 52.1%, due to:
Lower level of mortgage banking revenue, which declined $12.5 million, or 64.3%, offset somewhat by an increase in hedging gains of $2.4 million.
A decrease in SBA loan income of $1.1 million, or 70.7% due to lower sales volume and margins.
An increase in other fee income of $68 thousand, or 6.4%.
An increase in wealth management revenue of $91 thousand, or 7.8%.
Changes in fair value related to mortgage banking activities were up $507 thousand over the period.
Provision for loan losses increased $506 thousand, due to loan growth, partially offset by decreases in specific reserves.
Non-interest expenses decreased $6.5 million, or 24.9%, as a result of a lower level of salaries and benefits, due largely to reduced fixed and variable compensation arrangements as well as reduction in full-time equivalent employees in the mortgage segment, combined with a decline in incentive and stock-based compensation for bank and wealth segments.
On July 28, 2022, the Board of Directors declared a quarterly cash dividend of $0.20 per common share, payable August 22, 2022 to shareholders of record as of August 15, 2022.

Six Month Results of Operations - June 30, 2022 Compared to the Same Period in 2021
Consolidated net income for the six months ended June 30, 2022 was $11.5 million, a decrease of $7.0 million, or 37.7% compared to the six months ended June 30, 2021, driven by a lower level of non-interest income from mortgage banking activity.
Pre-tax, pre-provision income was $16.0 million, a decrease of $8.9 million, or 35.7%, led by strong growth in net interest income and lower operating expenses, offset by decreases in mortgage loan originations.
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The return on average equity (“ROE”) and return on average assets (“ROA”) were 14.61% and 1.30%, respectively, for the six months ended June 30, 2022, compared to 26.19% and 2.17%, respectively, for the six months ended June 30, 2021.
Net interest income for the six months ended June 30, 2022 increased $3.1 million, or 10%, compared to the same period in 2021. This increase helped the net interest margin increase to 3.98% from 3.71%, as excess cash and PPP loan payoffs were reinvested in higher yielding commercial portfolios.
Provision for loan losses increased $522 thousand, or 75.1%, due to loan growth, partially offset by decreases in specific reserves.
Non-interest income decreased $25.3 million or 51.8%, due to:
Lower level of mortgage banking revenue, which declined $29.5 million, or 67.8%, partially offset by increased fair value changes of $4.0 million, and hedging gains of $955 thousand.
An increase in wealth management revenue of $259 thousand, or 11.3%, due to increased AUM and favorable market conditions.
An increase in SBA loan sale revenue of $222 thousand, or 8.1%.
An increase in other fee income of $253 thousand, or 11.9%.
Non-interest expenses decreased $13.4 million, or 24.5%, as a result of a lower level of salaries and benefits, due largely to reduced fixed and variable compensation arrangements as well as a reduction in full-time equivalent employees in the mortgage segment, combined with a decline in incentive and stock-based compensation for bank and wealth segments.

Key Performance Ratios
Key financial performance ratios for the three and six months ended June 30, 2022 and 2021 are shown in the table below:
Three Months Ended June 30,Six Months Ended June 30,
2022202120222021
Annualized return on average equity 15.03 %%  22.61 %14.61 %%  26.19 %
Annualized return on average assets 1.31 %%  1.92 %1.30 %%  2.17 %
Net interest margin (tax effected yield)4.07 %%  3.70 %3.98 %%  3.71 %
Basic earnings per share$0.99 $1.37 $1.91 $3.06 
Diluted earnings per share$0.96 $1.33 $1.84 $2.98 

The following table presents certain key period-end balances and ratios as of June 30, 2022 and December 31, 2021:
(dollars in thousands, except per share amounts)June 30, 2022December 31, 2021
Book value per common share $25.85 $27.07 
Tangible book value per common share (1)$25.16 $26.37 
Allowance as a percentage of loans and leases held for investment 1.24 %1.35 %
Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1)1.27 %1.46 %
Tier I capital to risk weighted assets9.79 %10.83 %
Tangible common equity ratio (1) 8.22 %9.42 %
Loans held for investment$1,518,893 $1,386,457 
Total assets $1,853,019 $1,713,443 
Stockholders' equity $156,087 $165,360 
(1) Non-GAAP financial measure. See “Non-GAAP Financial Measures” below for Non-GAAP to GAAP reconciliation.



40

Non-GAAP Financial Measures
Meridian believes that non-GAAP measures are meaningful because they reflect adjustments commonly made by management, investors, regulators and analysts to evaluate performance trends and the adequacy of common equity. This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for performance and financial condition measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of Meridian’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.
Our management used the measure of the tangible common equity ratio to assess our capital strength. We believe that this non-GAAP financial measure is useful to investors because, by removing the impact of our goodwill and other intangible assets, it allows investors to more easily assess our capital adequacy. This non-GAAP financial measure should not be considered a substitute for any regulatory capital ratios and may not be comparable to other similarly titled measures used by other companies.
The table below provides the non-GAAP reconciliation for our tangible common equity ratio for Meridian Corporation:
(dollars in thousands)June 30, 2022December 31, 2021
Tangible common equity ratio:
Total stockholders' equity156,087 165,360 
Less:
Goodwill and intangible assets(4,176)(4,278)
Tangible common equity151,911 161,082 
Total assets1,853,019 1,713,443 
Less:
Goodwill and intangible assets(4,176)(4,278)
Tangible assets$1,848,843 $1,709,165 
Tangible common equity ratio8.22 %9.42 %

The table below provides the non-GAAP reconciliation for our tangible book value per common share for Meridian Corporation:
Reconciliation of tangible book value per common shareJune 30, 2022December 31, 2021
Book value per common share$25.85 $27.07 
Less: Impact of goodwill and intangible assets0.69 0.70 
Tangible book value per common share$25.16 $26.37 
The following is a reconciliation of the allowance for loan losses to total loans held for investment ratio at June 30, 2022. This is considered a non-GAAP measure as the calculation excludes the impact of loans held for investment that are fair valued and the impact of PPP loans as these loan types are not included in the allowance for loan losses calculation.
20222021
Reconciliation of Allowance for Loan Losses / Total loans held for investmentJune 30December 31
Allowance for loan losses / Total loans held for investment1.24 %1.35 %
Less: Impact of loans held for investment - fair valued0.01 %0.02 %
Less: Impact of PPP loans0.02 %0.09 %
Allowance for loan losses / Total loans held for investment (excl. loans at fair value and PPP loans)1.27 %1.46 %

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The table below provides the non-GAAP reconciliation for pre-tax, pre-provision income:
(Dollars in thousands)
Three Months Ended June 30,
Six Months Ended June 30,
Reconciliation of pre-tax, pre-provision income 2022202120222021
Income before income tax expense$7,646 $10,802 14,735 24,108 
Provision for loan losses602 96 1,217 695 
Pre-tax, pre-provision income$8,248 $10,898 15,952 24,803 

The following sections discuss, in detail, the Corporation’s results of operations for the three and six months ended June 30, 2022, as compared to the same periods in 2021, and the changes in its financial condition as of June 30, 2022 as compared to December 31, 2021.
Components of Net Income
Net income is comprised of five major elements:
Net Interest Income, or the difference between the interest income earned on loans, leases and investments and the interest expense paid on deposits and borrowed funds;
Provision For Loan and Lease Losses, or the amount added to the Allowance to provide for estimated inherent losses on portfolio loans and leases;
Non-interest Income, which is made up primarily of mortgage banking income, wealth management income, SBA loan sale income, fair value adjustments, gains and losses from the sale of loans, gains and losses from the sale of investment securities available for sale and other fees from loan and deposit services;
Non-interest Expense, which consists primarily of salaries and employee benefits, occupancy, professional fees, advertising & promotion, data processing, information technology, loan expenses, and other operating expenses; and
Income Taxes, which include state and federal jurisdictions.





NET INTEREST INCOME
Net interest income is an integral source of the Corporation’s revenue. The tables below present a summary, for the three and six months ended June 30, 2022 and 2021, of the Corporation’s average balances and yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities. The net interest margin is the net interest income as a percentage of average interest-earning assets. The net interest spread is the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The difference between the net interest margin and the net interest spread is the result of net free funding sources such as non-interest bearing deposits and stockholders’ equity.
Three Months Ended June 30, 2022 Compared to the Same Period in 2021

Interest income on a tax-equivalent basis increased $2.5 million, or 14.3%, to $20.1 million for the three months ended June 30, 2022, from $17.6 million for the three months ended June 30, 2021, largely due to increases in the yield on interest earning assets. The yield on loans held for investment increased 32 basis points, while the yield on investment securities also increased 15 basis points, both helped by the Fed's interest rate raises. Overall, the yield on interest-earning assets increased 45 basis points to 4.65% over the period. There was a $57.8 million increase in average interest earning assets, year over year, led by increases of $120.5 million in loans held for investment, a $22.7 million increase in investment securities, and a $8.1 million increase in interest earning cash balances, offset partially by a $80.6 million decrease in the average balance of loans held for sale.
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Interest expense was up $381 thousand, or 18.1%, to $2.5 million for the three months ended June 30, 2022. Deposit interest expense was up $450 thousand, or 32.9%, period over period, to $1.8 million, while interest expense on borrowings was down $69 thousand, or 9.4%, to $668 thousand. Total interest-bearing deposit balances increased $141.5 million on average when comparing the three months ended June 30, 2022 to June 30, 2021, while the cost of deposits was up 8 basis points over this same period. The average balance on money market and savings deposits were up $96.3 million, with costs up 7 basis points, while time deposit average balances were up $68.2 million, 13 basis points. Offsetting these average balance increases slightly was a $23.0 million decrease in the average balance of interest-bearing deposits. The average balance of borrowings was down $109.0 million for the three months ended June 30, 2022, compared to June 30, 2021. This decline was largely due to the decline in PPPLF advances used to fund PPP loans as such loans continue to pay off.

Net interest income increased $2.1 million, or 13.9%, to $17.6 million on a tax-equivalent basis for the three months ended June 30, 2022, compared to $15.5 million for the three months ended June 30, 2021. The net interest margin was 4.07% for the second quarter of 2022 compared to 3.70% for the second quarter of 2021. The increase in net interest margin reflects the increased yield on interest earnings assets, that has outpaced the increase in costs paid on deposits and borrowings in a rising rate environment, as well as the recognition of $286 thousand or 6 basis points in one-time loan fees.


Six Months Ended June 30, 2022 Compared to the Same Period in 2021

Interest income increased $3.0 million, or 8.7%, to $38.1 million for six the months ended June 30, 2022, from $35.1 million for the six months ended June 30, 2021, due to increases in average balances and the yields on interest earning assets. There was a $41.6 million increase in average interest earning assets, year over year, led by increases of $111.2 million in loans held for investment, a $27.5 million increase in investment securities, and a $11.4 million increase in interest earning cash balances, offset partially by a $93.5 million decrease in the average balance of loans held for sale. These average balance increases combined with yield increases of 41 basis points on investment securities and 11 basis points on loans held for investment to positively impact interest income. Overall the yield on interest-earning assets increased 25 basis points to 4.50% over the period.

Interest expense was down $21 thousand, or 0.5%, to $4.4 million. Deposit interest expense was up $173 thousand, or 5.9%, period over period, to $3.1 million, while interest expense on borrowings was down $194 thousand, or 12.9%, to $1.3 million. Total interest-bearing deposit balances increased $145.7 million on average when comparing the six months ended June 30, 2022 to June 30, 2021, while the cost of deposits was down 4 basis points over this same period. The average balance of interest-bearing deposits was up $11.1 million, down 14 basis points, while the average balance on money market and savings deposits were up $104.6 million, with no change in the basis points, and the average balance of time deposits was up $30 million, down 2 basis points. The average balance of borrowings was down $138.1 million for the six months ended June 30, 2022, compared to June 30, 2021. This decline was largely due to the decline in PPPLF advances used to fund PPP loans as such loans continue to pay off.

Net interest income increased $3.0 million, or 10.0%, to $33.7 million on a tax-equivalent basis for the six months ended June 30, 2022, compared to $30.7 million for the six months ended June 30, 2021. The net interest margin was 3.98% for the six months ended June 30, 2022 compared to 3.71% for the six months ended June 30, 2021. The increase in net interest margin reflects the increased yield on interest earnings assets, combined with the declining interest rates paid on deposits during the period.










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Analyses of Interest Rates and Interest Differential
The tables below present the major asset and liability categories on an average daily balance basis for the periods presented, along with interest income, interest expense and key rates and yields on a tax equivalent basis.
For the Three Months Ended June 30, (dollars in thousands)
20222021
Average BalanceInterest Income/ ExpenseYields/ RatesAverage BalanceInterest Income/ ExpenseYields/ Rates
Assets
Interest-earning assets
Due from banks$26,909 49 0.73 %$18,833 0.09 %
Federal funds sold3,230 0.35 %16,110 0.02 %
Investment securities(1)
168,853 941 2.24 %146,150 748 2.09 %
Loans held for sale52,859 565 4.28 %133,426 967 2.90 %
Loans held for investment(1)
1,484,696 18,558 4.98 %1,364,204 15,876 4.66 %
Total loans1,537,555 19,123 4.99 %1,497,630 16,843 4.51 %
Total interest-earning assets1,736,547 20,116 4.65 %1,678,723 17,596 4.20 %
Noninterest earning assets77,194 44,700 
Total assets$1,811,335 $1,723,423 
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits$237,856 248 0.42 %$260,834 240 0.37 %
Money market and savings deposits698,557 1,076 0.62 %602,272 823 0.55 %
Time deposits334,391 494 0.59 %266,181 306 0.46 %
Total deposits1,270,804 1,818 0.57 %1,129,287 1,369 0.49 %
Borrowings16,560 77 1.87 %125,531 140 0.45 %
Subordinated debentures40,548 591 5.84 %40,711 597 5.87 %
Total interest-bearing liabilities1,327,912 2,486 0.75 %1,295,529 2,106 0.65 %
Noninterest-bearing deposits296,521 255,964 
Other noninterest-bearing liabilities31,354 25,432 
Total liabilities$1,652,915 $1,576,925 
Total stockholders' equity158,829 146,497 
Total stockholders' equity and liabilities$1,811,335 $1,723,423 
Net interest income (1)
$17,630 $15,490 
Net interest spread (1)
3.90 %3.55 %
Net interest margin (1)
4.07 %3.70 %
(1)Yields and net interest income are reflected on a tax-equivalent basis.





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For the Six Months Ended June 30, (dollars in thousands)
20222021
Average BalanceInterest Income/ ExpenseYields/ RatesAverage BalanceInterest Income/ ExpenseYields/ Rates
Assets
Interest-earning assets
Due from banks$27,645 62 0.45 %$16,254 0.07 %
Federal funds sold2,060 0.29 %16,946 0.02 %
Investment securities(1)
168,370 1,740 2.08 %140,910 1,436 1.67 %
Loans held for sale59,936 1,101 3.67 %153,433 2,098 2.73 %
Loans held for investment(1)
1,450,454 35,243 4.87 %1,339,277 31,568 4.76 %
Total loans1,510,390 36,344 4.85 %1,492,710 33,666 4.55 %
Total interest-earning assets1,708,465 38,149 4.50 %1,666,820 35,110 4.25 %
Noninterest earning assets71,634 42,449 
Total assets$1,780,099 $1,709,269 
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits253,771 385 0.31 %242,699 538 0.45 %
Money market and savings deposits694,539 1,928 0.56 %589,941 1,652 0.56 %
Time deposits298,783 794 0.54 %268,784 745 0.56 %
Total deposits1,247,093 3,107 0.50 %1,101,424 2,935 0.54 %
Borrowings16,136 126 1.57 %154,273 312 0.82 %
Subordinated debentures40,533 1,183 5.84 %40,696 1,190 5.85 %
Total interest-bearing liabilities1,303,762 4,416 0.68 %1,296,393 4,437 0.69 %
Noninterest-bearing deposits284,455 245,057 
Other noninterest-bearing liabilities33,530 25,950 
Total liabilities$1,621,747 $1,567,400 
Total stockholders' equity157,928 141,869 
Total stockholders' equity and liabilities$1,780,099 $1,709,269 
Net interest income (1)
$33,733 $30,673 
Net interest spread (1)
3.82 %3.56 %
Net interest margin (1)
3.98 %3.71 %









45

Rate/Volume Analysis
The rate/volume analysis table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three and six months ended June 30, 2022 as compared to the same periods in 2021, allocated by rate and volume. Changes in interest income and/or expense attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of the change in each category.
(dollars in thousands)2022 Compared to 2021
Three Months Ended June 30,
Six Months Ended June 30,
RateVolumeTotalRateVolumeTotal
Interest income:
Due from banks$42 45 $49 56 
Federal funds sold(5)(6)
Investment securities(1)
60 133 193 169 135 304 
Loans held for sale1,882 (2,284)(402)1,487 (2,484)(997)
Loans held for investment(1)
1,176 1,506 2,682 800 2,875 3,675 
Total loans3,058 (778)2,280 2,287 391 2,678 
Total interest income3,167 (647)2,520 $2,512 527 3,039 
Interest expense:
Interest bearing deposits$106 (98)$(222)69 (153)
Money market and savings deposits111 142 253 (2)278 276 
Time deposits100 88 188 (79)128 49 
Total interest bearing deposits317 132 449 (303)475 172 
Total borrowings719 (782)(63)1,050 (1,236)(186)
Subordinated debentures(3)(3)(6)(3)(4)(7)
Total interest expense1,033 (653)380 744 (765)(21)
Interest differential$2,134 2,140 $1,768 1,292 3,060 
(1)Yields and net interest income are reflected on a tax-equivalent basis.
For the three months ended June 30, 2022 as compared to the same period in 2021, tax-equivalent interest income increased $2.5 million as favorable rate changes contributed $3.2 million, while unfavorable volume changes in average earning assets reduced interest income by $647 thousand. The favorable change in rates was driven by increased yield on loans held for sale (up 138 basis points) and loans held for investment (up 32 basis points). While the loans held for investment average balances increased $120.5 million, leading to a favorable volume impact on interest income of $1.5 million, the decline in loans held for sale average balances of $80.6 million had an unfavorable impact to interest income of $2.3 million as shown in the table above. Within the loans held for investment portfolio, average balances on commercial loans and leases were up $171.1 million, and commercial real estate/construction loans were up $91.3 million, while the average balance of PPP loans were down $182.5 million as such loans continue to be forgiven by the SBA.
On the funding side, interest expense increased $380 thousand due to the impact from rate hikes issued by the Fed, which were partially offset by volume declines on borrowings. The cost of deposits were up modestly across the board, causing a $317 thousand increase to interest expense. The cost of interest-bearing deposits, money market and savings accounts and time deposits increased 5 basis points, 7 basis points and 13 basis points, respectively, while the cost of borrowings increased 142 basis points. Money market/savings accounts and time deposit average balances increased $96.3 million, and $68.2 million, respectively, while interest-bearing deposits decreased $23.0 million on average, and borrowings were down $109.0 million on average.
Overall, the $2.1 million increase in net interest income from rate changes was the main reason for the overall increase in tax-equivalent net interest income of $2.1 million.

46

For the six months ended June 30, 2022 as compared to the same period in 2021, tax-equivalent interest income increased $3.0 million as positive rate changes on average earning assets contributed $2.5 million and favorable volume changes helped to increase interest income by $527 thousand. The favorable change in interest income due to rate changes was driven mostly from growth in the loans held for sale (increase of 94 basis points) and the overall loans held for investment portfolio (increase of 11 basis points). This large increase in the yield on loans held for sale was the result of interest rates hovering at historical lows throughout much of 2021, but then as the Fed raised interest rates in 2022, the yield benefited from this action. While the overall 11 basis point increase in the yield on loans held for investment was largely driven by a 293 basis point increase in the yield on PPP loans as there was a higher rate of forgiveness of such loans in 2022 vs 2021, offset by declines in the yields on most other categories of loans held for investment. The $527 thousand positive impact that volume changes had to interest income was largely the result of loan average balance increases, which contributed $2.9 million to interest income, offset by a decline in the volume of loans held or sale which had an unfavorable impact of $2.5 million on interest income. The increase in loans held for investment average balances were led by an increase in commercial loans and leases of $170.8 million, commercial real estate loans/construction loans of $76.7 million, and residential loans held for investment of $31.5 million, offset somewhat by a $162.4 million decline in PPP loan balances as they continue to be forgiven by the SBA.
On the funding side, interest expense decreased $21 thousand. The cost of deposits was down, having a $303 thousand positive effect on interest expense. The cost of interest-bearing deposits and time deposits declined 14 basis points, and 2 basis points, while the rate on time deposits was relatively unchanged over the period, while the cost of borrowings decreased 75 basis points. Interest-bearing deposits, money market and savings accounts, and time deposits increased $11.1 million, $104.6 million, and $30.0 million on average respectively, and borrowings overall were down $138.1 million on average, leading to a $765 thousand decrease in interest expense.
Overall, the $1.8 million increase in interest income from rate changes, combined with the $1.3 million increase in volume changes, let to an improvement in tax-equivalent net interest income of $3.1 million.
Simulations of net interest income. We use a simulation model on a quarterly basis to measure and evaluate 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 June 30, 2022 and 2021 are presented in the following table. The simulation assumes rate shifts occur upward and downward on the yield curve in even increments over the first twelve months (ramp), followed by rates held constant thereafter.





47



Rate Ramp
Estimated increase
(decrease) in Net Interest
Income
For the Three Months Ended June 30,
Changes in Market Interest Rates20222021
+300 basis points over next 12 months1.42 %1.49 %
+200 basis points over next 12 months1.18 %0.82 %
+100 basis points over next 12 months0.69 %0.36 %
No Change
-100 basis points over next 12 months(1.67)%(0.70)%
-200 basis points over next 12 months(3.77)%(2.68)%
The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of June 30, 2022. In its current position, the table indicates that a 100 basis point increase in interest rates would have a modestly positive impact from rising rates on net interest income over the next 12 months and a more significant positive impact in a 200 and 300 basis point increase. The simulated exposure to a change in interest rates is contained, manageable and well within policy guidelines. The results continue to drive our funding strategy of increasing relationship-based accounts (core deposits) and utilizing term deposits to fund short to medium duration assets.

Simulation of economic value of equity. To quantify the amount of capital required to absorb potential losses in value of our interest-earning assets and interest-bearing liabilities resulting from adverse market movements, we calculate economic value of equity on a quarterly basis. We define economic value of equity as the net present value of our balance sheet’s cash flow, and we calculate economic value of equity by discounting anticipated principal and interest cash flows under the prevailing and hypothetical interest rate environments. Potential changes to our economic value of equity between a flat rate scenario and hypothetical rising and declining rate scenarios, measured as of June 30, 2022 and 2021, are presented in the following table. The projections assume shifts upward and downward in the yield curve of 100, 200 and 300 basis points occurring immediately.
Estimated increase (decrease) in Net Economic
Value at June 30,
Changes in Market Interest Rates20222021
+300 basis points 11 %61 %
+200 basis points%47 %
+100 basis points%27 %
No Change
-100 basis points(13)%(40)%
-200 basis points(35)%(103)%
This economic value of equity profile at June 30, 2022 suggests that we would experience a positive effect from an increase in rates, and that the impact would become greater as rates continue to rise due to the duration of our interest-earning assets. Conversely, we would experience a negative effect from a decrease in rates. While an instantaneous shift in interest rates is used in this analysis to provide an estimate of exposure, we believe that a gradual shift in interest rates would have a much more modest impact. Since economic value of equity measures the discounted present value of cash flows over the estimated lives of instruments, the change in economic value of equity does not directly correlate to the degree that earnings would be impacted over a shorter time horizon.

The results of our net interest income and economic value of equity simulation analysis are purely hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from that projected, our net interest income might vary significantly. Non-parallel yield curve shifts or changes in interest rate spreads would also cause our net interest income to be different from that projected. An increasing interest rate environment could reduce projected net interest income if deposits and other short-
48

term interest-bearing liabilities reprice faster than expected or faster than our interest-earning assets. Actual results could differ from those projected if we grow interest-earning assets and interest-bearing liabilities faster or slower than estimated, or otherwise change its mix of products. Actual results could also differ from those projected if we experience substantially different repayment speeds in our loan portfolio than those assumed in the simulation model. Furthermore, the results do not take into account the impact of changes in loan prepayment rates on loan discount accretion. If prepayment rates were to increase on our loans, we would recognize any remaining loan discounts into interest income. This would result in a current period offset to declining net interest income caused by higher rate loans prepaying. Finally, these simulation results do not contemplate all the actions that we may undertake in response to changes in interest rates, such as changes to our loan, investment, deposit, funding or other strategies.

Finally, these simulation results do not contemplate all the actions that we may undertake in response to changes in interest rates, such as changes to our loan, investment, deposit, funding or other strategies.
Management has and continues to employ strategies to mitigate risk in the Net Interest Income and Economic Value simulations. Strategies include actively lowering deposit and funding rates, adding and maintaining interest rate floors on assets and lengthening liabilities in the low rate environment.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan losses was $602 thousand for the three months ended June 30, 2022, compared to a $96 thousand provision for the three months June 30, 2021. The 2022 second quarter provision was the result of new loan growth as well as covering $695 thousand in charge-offs on small ticket equipment leases, partially offset by decreases in specific reserves on non-performing loans as the underlying credit quality improved.
The provision for loan losses of $1.2 million for the six months ended June 30, 2022 increased $522 thousand, or 75.1%, from the $695 thousand provision for loan losses recorded for the six months ended June 30, 2021. While the COVID-19 pandemic was more relevant in the prior year, the current year provision was higher due to reserving for an increased level of non-performing loans over the prior year combined with the significant level of loan growth year over year.
Asset Quality Summary
Asset quality remains a strong focus of management. Total non-performing loans were $23.0 million as of June 30, 2022, unchanged from $23.0 million as of December 31, 2021. The ratio of non-performing assets to total assets declined to 1.24% as of June 30, 2022, from 1.34% as of December 31, 2021.

Meridian realized net charge-offs of 0.03% of total average loans for the quarter ending June 30, 2022, up from the quarter ended December 31, 2021 level of 0.00%. Charge-offs amounted to $696 thousand for the quarter ending June 30, 2022, while recoveries were $73 thousand during this quarter. Nearly all of the charge-offs for the quarter ending June 30, 2022 were from small ticket equipment leases, as were the majority of recoveries in the quarter. The ratio of allowance for loan losses to total loans held for investment, excluding loans at fair value and PPP loans (a non-GAAP measure, see reconciliation in the Appendix), was 1.27% as of June 30, 2022 and 1.46% as of December 31, 2021. As of June 30, 2022 there were specific reserves of $2.8 million against a non-performing loans, down from $3.2 million as of December 31, 2021, due to improvement in the underlying credit quality for certain loans.

As of June 30, 2022, the Corporation had $3.9 million of troubled debt restructurings (“TDRs”), of which $3.7 million were in compliance with the modified terms and excluded from non-performing loans and leases. As of December 31, 2021, the Corporation had $3.8 million of TDRs, of which $3.4 million were in compliance with the modified terms, and were excluded from non-performing loans and leases. As of June 30, 2022, the Corporation had a recorded investment of $26.1 million of impaired loans and leases which included $3.9 million of TDRs, while as of December 31, 2021, the Corporation had a recorded investment of $25.8 million of impaired loans and leases which included $3.8 million of TDRs.

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
June 30,December 31,
(dollars in thousands)20222021
Non-performing assets:
Nonaccrual loans:
Real estate loans:
Home equity lines and loans1,038 911 
Residential mortgage2,052 2,398 
Total real estate loans3,090 3,309 
Commercial and industrial18,398 18,801 
Small business loans1,401 666 
Leases95 212 
Total nonaccrual loans$22,984 $22,988 
Total non-performing loans$22,984 $22,988 
Total non-performing assets$22,984 $22,988 
Troubled debt restructurings:
TDRs included in non-performing loans 197 361 
TDRs in compliance with modified terms3,679 3,446 
Total TDRs$3,876 3,807 
Asset quality ratios:
Non-performing assets to total assets1.24 %1.34 %
Non-performing loans to:
Total loans and leases1.46 %1.57 %
Total loans held-for-investment1.51 %1.66 %
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)1.55 %1.80 %
Allowance for loan losses to:
Total loans and leases1.19 %1.28 %
Total loans held-for-investment 1.24 %1.35 %
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)1.27 %1.46 %
Non-performing loans 81.82 %81.60 %
Total loans and leases$1,577,831 1,467,339 
Total loans and leases held-for-investment$1,518,893 1,386,457 
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans)$1,481,220 1,280,591 
Allowance for loan and lease losses$18,805 18,758 
(1) The allowance for loan losses to total loans held-for-investment (excluding loans at fair value and PPP loans) ratio is a non-GAAP financial measure. See “Non-GAAP Financial Measures” above for a reconciliation of this measure to its most comparable GAAP measure.

50

NON-INTEREST INCOME
Three Months Ended June 30, 2022 Compared to the Same Period in 2021
Total non-interest income for the three months ended June 30, 2022 was $10.4 million, down $11.3 million or 52.1% from the comparable period in 2021. This decrease in non-interest income came from our mortgage segment. Mortgage banking net revenue decreased $12.5 million or 64.3% over the three months ended June 30, 2021, resulting from decreased levels of mortgage loan originations as rising interest rates and lack of housing inventory has had an impact on mortgage banking activity. Our mortgage segment originated $332.4 million in loans during the three months ended June 30, 2022, a decrease of $284.2 million, or 46.1%, from the three months ended June 30, 2021. The changes in the fair value of derivative instruments and loans held for sale increased a combined over the period. Hedging activity led to a net gain increase of $2.4 million for the three months ended June 30, 2022.
SBA loan income decreased $1.1 million as $12.8 million in loans were sold for the three months ended June 30, 2022, compared to $13.5 million in loans sold for the three months ended June 30, 2021. In addition to the lower volume of SBA loans sold in the current period, the margin on sale was lower, and amortization and impairment was up due to early payoffs and market conditions. Wealth management revenue increased $91 thousand year-over-year due to favorable market conditions. Other fee income was up $68 thousand or 6.4% from the three months ended June 30, 2022, to $1.1 million, due to increases in wire fees, title fee income, and servicing fee income.
Six Months Ended June 30, 2022 Compared to the Same Period in 2021
Total non-interest income for the six months ended June 30, 2022 was $23.5 million, down $25.3 million or 51.8% from the comparable period in 2021. This decrease in non-interest income came from our mortgage segment. Mortgage banking net revenue decreased $29.5 million or 67.8% over the six months ended June 30, 2021, resulting from decreased levels of mortgage loan originations as rising interest rates and lack of housing inventory has had an impact on mortgage banking activity. Our mortgage segment originated $656.1 million in loans during the six months ended June 30, 2022, a decrease of $685.4 million, or 51.1%, from the six months ended June 30, 2021. The changes in the fair value of derivative instruments and loans held for sale increased a combined $4.0 million over the period. Net hedging activity increased as the net gains were up $955 thousand for the six months ended June 30, 2022.
Net revenue from the sales of SBA 7(a) loans increased $222 thousand with $38.0 million in loans sold for the six months ended June 30, 2022 compared to $26.6 million sold for the six months ended June 30, 2021, an increase of 42.9%. While the volume of SBA loans sold period over period was up, the margin on sales was down. Wealth management revenue increased $259 thousand year-over-year due the more favorable market conditions. Other fee income was up $253 thousand or 11.9%, to $2.4 million for the six months ended June 30, 2022, due to increases in wire fees, title fee income, and servicing fee income.
NON-INTEREST EXPENSE
Three Months Ended June 30, 2022 Compared to the Same Period in 2021
Total non-interest expense for the three months ended June 30, 2022 was $19.7 million, down $6.5 million or 24.9%, from the comparable period in 2021. The decrease in non-interest expense is largely attributable to a decrease in salaries and employee benefits expense, which decreased $7.3 million or 36.1%, from the comparable period in 2021. This decrease relates to the mortgage segment, which had reduced fixed and variable based compensation.
Advertising and promotion expense increased $268 thousand, or 29.1%, over the comparable period in 2021 as the result of a renewed and focused priority placed on business development and community outreach efforts throughout the Meridian organization. In the second quarter of 2022 the easing of COVID-19 restrictions has provided our team members with much better opportunities to meet with customers and prospective customers as they were accustomed to pre-pandemic.

Information technology expense increased $264 thousand, or 56.9%, to $728 thousand for the three months ended June 30, 2022. Meridian continued with our strategy to invest in technology that focuses on improving back-office efficiencies through automation and workflow processes. In addition, with a focus on cloud-based computing, IT has improved the scalability of storage; reduced the maintenance process; and eliminated the need and cost for further servers.




51


Six Months Ended June 30, 2022 Compared to the Same Period in 2021
Total non-interest expense for the six months ended June 30, 2022 was $41.1 million, down $13.4 million or 24.5%, from the comparable period in 2021. The decrease in non-interest expense is largely attributable to a decrease in salaries and employee benefits expense, which is down $14.1 million or 33.4%, from the comparable period in 2021. Of this decrease, $12.6 million relates to the mortgage segment, which recognized decreased and variable compensation. Offsetting this decrease somewhat was an increase of $2,907 thousand for the bank and wealth segments due to an increase in FTEs and a higher level of stock-based compensation expense.
Advertising and promotion expense increased $468 thousand, or 27.4%, over the comparable period in 2021 as the result of a renewed and focused priority placed on business development and community outreach efforts as noted above. Information technology expense increased $549 thousand, or 61.8%, to $1.4 million for the six months ended June 30, 2022, as Meridian continued with our strategy to invest in technology that focuses on improving back-office efficiencies through automation and workflow processes.

INCOME TAXES
Income tax expense for the three months ended June 30, 2022 was $1.7 million, as compared to $2.5 million for the same period in 2021. The decrease in income tax expense was attributable to the decrease in earnings, period over period. Our effective tax rate was 22.4% for the three months ended June 30, 2022 and 23.6% for the three months ended June 30, 2021.
Income tax expense for the six months ended June 30, 2022 was $3.3 million, as compared to $5.7 million for the same period in 2021. The decrease in income tax expense was attributable to the decrease in earnings, period over period. Our effective tax rate was 22.1% for the six months ended June 30, 2022 and 23.6% for the six months ended June 30, 2021.
BALANCE SHEET ANALYSIS
As of June 30, 2022, total assets were $1.9 billion, an increase of $139.6 million, or 8.1%, from December 31, 2021. This growth in assets over the prior period was due to loan portfolio growth, as discussed below.
Portfolio loans grew $132.4 million, or 9.6%, to $1.5 billion as of June 30, 2022, from $1.4 billion as of December 31, 2021. Overall portfolio loan growth, excluding PPP loans, was 15.4% since December 31, 2021, or 31% on an annualized basis for 2022. Commercial loans increased $41.9 million, or 14.3%, commercial real estate loans increased $30.3 million, or 5.6%, construction loans increased $41.1 million, or 30.4%, residential real estate loans held in portfolio increased $45.8 million, or 66.9%, and lease financings increased $28.8 million, or 30.9% from December 31, 2021. Partially offsetting the growth in portfolio loans was a decrease of $66.8 million, or 75.7%, in PPP loan balances as such loans continue to be paid off by the SBA.

Deposits were $1.6 billion as of June 30, 2022, up $121.6 million, or 8.4%, from December 31, 2021. Non-interest bearing deposits increased $17.4 million, or 6.3%, from December 31, 2021 due to strong business development efforts. Interest-bearing checking accounts decreased $63.0 million, or 23.5%, while money market accounts/savings accounts combined increased $31.3 million, or 4.5%, since December 31, 2021. Certificates of deposits increased $135.9 million, or 66.0%, from December 31, 2021, as such deposits were utilized as an alternative source of cost-effective wholesale funding.

Capital
Consolidated stockholders’ equity of the Corporation was $156.1 million, or 8.4% of total assets as of June 30, 2022, as compared to $165.4 million, or 9.7% of total assets as of December 31, 2021. The change in stockholders’ equity is the result of year-to-date net income of $5.9 million, offset by dividends of $7.3 million paid as well as a $9.9 million decline in accumulated other comprehensive income (loss) from the investment security portfolio due to changes in interest rates over this period.
As of June 30, 2022, the Tier 1 leverage ratio was 8.87% for the Corporation and 10.86% for the Bank, the Tier 1 risk-based capital and common equity ratios were 9.79% for the Corporation and 11.98% for the Bank, and total risk-based capital was 13.50% for the Corporation and 13.33% for the Bank. Based on these capital ratio levels, we remain above the Community Bank Leverage Ratio ("CBLR") requirement of 8%. Period end numbers show a tangible common equity to
52

tangible assets ratio (a non-GAAP measure) of 8.22% for the Corporation and 10.18% for the Bank. Tangible book value per share (a non-GAAP measure) was $25.16 as of June 30, 2022, compared with $26.37 as of December 31, 2021. A reconciliation of these non-GAAP measures is included above.
The following table presents the Corporation’s capital ratios and the minimum capital requirements to be considered “well capitalized” by regulators as of June 30, 2022 and December 31, 2021:
June 30, 2022
ActualTo Be Well Capitalized Under CBLR Framework
(dollars in thousands)AmountRatioAmountRatio
Tier 1 capital (to average assets)
Corporation$161,066 8.87 %$163,434 9.00 %
Bank197,19210.86 %163,432 9.00 %
December 31, 2021
ActualTo Be Well Capitalized Under CBLR Framework
(dollars in thousands)AmountRatioAmountRatio
Tier 1 capital (to average assets)
Corporation$160,379 9.39 %$136,621 8.00 %
Bank196,506 11.51 %136,620 8.00 %
Community banks have long raised concerns with bank regulators about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In response, Congress provided an “off-ramp” for institutions, like us, with total consolidated assets of less than $10 billion. Section 201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single "Community Bank Leverage Ratio" (“CBLR”) of between 8 and 10%. Under the final rule, a community banking organization is eligible to elect the new framework if it has: less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. The Corporation is exempt from CBLR. The bank regulatory agencies temporarily lowered the CBLR to 8% as a result of the COVID-19 pandemic.
Liquidity
Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Meridian’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization or that can be used as collateral to secure funding. In addition, as part of its liquidity management, Meridian maintains a segment of commercial loan assets that are comprised of shared national credits (“SNCs”), which have a national market and can be sold in a timely manner. Meridian’s available liquidity, which totaled $286.6 million at June 30, 2022, compared to $263.6 million at December 31, 2021, includes investments, SNCs, Federal funds sold, mortgages held-for-sale and cash and cash equivalents, less the amount of securities required to be pledged for certain liabilities. Meridian also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios.

In addition, Meridian maintains borrowing arrangements with various correspondent banks, the FHLB and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. Through its relationship at the Federal Reserve, Meridian had available credit of approximately $11.5 million at June 30, 2022. At June 30, 2022, Meridian had no borrowings from the Federal Reserve. As a member of the FHLB, we are eligible to borrow up to a specific credit limit, which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of June 30, 2022, Meridian’s maximum borrowing capacity with the FHLB was $484.1 million. At June 30, 2022, Meridian had borrowed $59.1 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $56.1 million against its available credit lines. At June 30, 2022, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as $188.4 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $357.3 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.


53


Discussion of Segments

As of June 30, 2022, the Corporation has three principal segments as defined by FASB ASC 280, “Segment Reporting.” The segments are Banking, Mortgage Banking and Wealth Management (see Note 10 in the accompanying Notes to Unaudited Consolidated Financial Statements).
The Banking Segment recorded income before tax of $6.9 million and $15 million for the three and six months ended June 30, 2022, as compared to income before tax of $7.7 million and $15 million for the same periods in 2021. The Banking Segment provided 89.7% and 101.9% of the Corporation’s pre-tax profit for the three and six month periods ended June 30, 2022, as compared to 71.4% and 62.2% for the same period in 2021.
The Wealth Management Segment recorded income before tax of $749 thousand and $1.3 million for the three and six months ended June 30, 2022, as compared to income before tax of $376 thousand and $604 thousand for the same periods in 2021. The increase in income in this segment came from an increase in customer based as the number of accounts grew 2.5% and 4.5%, for the three and six months ended June 30, 2022, respectively.
The Mortgage Banking Segment recorded income before tax of $41 thousand and a loss before tax of 1.6 million for the three and six months ended June 30, 2022, as compared to income before tax of $2.7 million and $8.5 million for the same periods in 2021. Mortgage Banking income and expenses related to loan originations and sales decreased due to lower origination volume.
Off Balance Sheet Risk
The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and loan repurchase commitments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at June 30, 2022 were $488.6 million, as compared to $486.6 million at December 31, 2021.
Standby letters of credit are conditional commitments issued by the Corporation to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Corporation’s obligation under standby letters of credit at June 30, 2022 amounted to $22.9 million, as compared to $26.0 million at December 31, 2021.
Estimated fair values of the Corporation’s off-balance sheet instruments are based on fees and rates currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and the estimated fair value of off-balance sheet instruments.
In certain circumstances the Corporation may be required to repurchase residential mortgage loans from investors under the terms of loan sale agreements. Generally, these circumstances include the breach of representations and warranties made to investors regarding borrower default or early payment, as well as a violation of the applicable federal, state, or local lending laws. The Corporation agrees to repurchase loans if the representations and warranties made with respect to such loans are breached. Based on the obligations described above, the Corporation repurchased two loans totaling $612 thousand for the three months ended June 30, 2022, and six loans totaling $1.5 million for the six months ended June 30, 2022, and repurchased three loans in the amount of $446 thousand for the three and six months ended June 30, 2021.
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 – "Analyses of Interest Rates and Interest Differential,” “Rate/Volume Analysis,” and "Rate Ramp" in this Quarterly Report on Form 10-Q.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
54

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Corporation’s CEO and CFO have concluded that the Corporation’s disclosure controls and procedures were effective as of June 30, 2022 to ensure that the information required to be disclosed by the Corporation in the reports that the Corporation files or submits under the Exchange Act is recorded, processed, summarized, and reported completely and accurately within the time periods specified in SEC rules and forms.
Changes in Internal Control Over Financial Reporting
There was no change in the Corporation’s internal control over financial reporting identified during the quarter ended June 30, 2022 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
55

PART II–OTHER INFORMATION
Item 1. Legal Proceedings.

Item 1A. Risk Factors.
There have been no material changes in the risk factors faced by the Corporation from those disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following table presents the shares repurchased by the Corporation during the second quarter of 2022.
Issuer Purchases of Equity Securities
Total Number ofMaximum Number
Shares Purchasedof Shares that May
as Part of PubliclyYet Be Purchased
    Total Number of    Average Price Paid    Announced Plans or     Under the Plan or
PeriodShares PurchasedPer SharePrograms (1)Programs
April 1, 2022 to April 30, 202219,042 $31.71 19,042487,463
May 1, 2022 to May 31, 202225,664 31.48 25,664487,463
June 1, 2022 to June 30, 202252,679 30.33 52,679487,463
Total97,385 $31.14 97,385487,463
(1) On August 30, 2021, the Corporation announced a stock repurchase plan pursuant to which the Corporation may repurchase up to $20 million of the company’s outstanding common stock, par value $1.00 per share. Stock will be purchased from time to time in the open market or through privately negotiated transactions, or otherwise, at the discretion of management of the company in accordance with legal requirements.
(2) As of June 30, 2022, the maximum number of shares remaining authorized for repurchase was approximately 487,463, based on funds remaining under the plan of approximately $14.8 million and a share price of $30.30 as of June 30, 2022.

Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
The exhibits filed or incorporated by reference as part of this report are listed in the Exhibit Index, which appears at page 57.
56

EXHIBIT INDEX
Exhibit
Number
Description
2.1
3.1
3.2
4.2
4.3
31.1
31.2
32
101.INSXBRL Instance Document – The instance document does not appear in the interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCHInline XBRL Taxonomy Extension Schema Document
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document
101.LABInline XBRL Taxonomy Extension Label Linkbase Document
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 104Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
57

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:August 9, 2022Meridian 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)
58

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:   August 9, 2022
/s/ Christopher J. Annas
Christopher J. Annas
President and Chief Executive Officer
(Principal Executive Officer)



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:   August 9, 2022
/s/ Denise Lindsay
Denise Lindsay
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)



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 June 30, 2022 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:    August 9, 2022




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