Companies: 11,336     total market cap: $152.886 T
โ‚ฌEUR๐Ÿ‡ช๐Ÿ‡บโ‚นINR๐Ÿ‡ฎ๐Ÿ‡ณยฃGBP๐Ÿ‡ฌ๐Ÿ‡ง$CAD๐Ÿ‡จ๐Ÿ‡ฆ$AUD๐Ÿ‡ฆ๐Ÿ‡บ$NZD๐Ÿ‡ณ๐Ÿ‡ฟ$HKD๐Ÿ‡ญ๐Ÿ‡ฐ$SGD๐Ÿ‡ธ๐Ÿ‡ฌ
Meridian Corporation
MRBK
#8856
Rank
$0.23 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$19.77
Share price
0.82%
Change (1 day)
31.27%
Change (1 year)
  1. Meridian Corporation
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2022 Q1

Meridian Corporation - 10-Q quarterly report FY2022 Q1


Text size:
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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 March 31, 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-20220331_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 Filer☐Accelerated Filer☒
Non-accelerated Filer☐Smaller Reporting Company☒
Emerging Growth Company☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 9, 2022 there were 6,114,424 outstanding shares of the issuer’s common stock, par value $1.00 per share.

TABLE OF CONTENTS
Item 1 Financial Statements (Unaudited)
3
Consolidated Balance Sheets – March 31, 2022 and December 31, 2021
3
Consolidated Statements of Income – Three Months Ended March 31, 2022 and 2021
4
Consolidated Statements of Comprehensive (Loss) Income – Three Months Ended March 31, 2022 and 2021
5
Consolidated Statements of Stockholders’ Equity – Three Months Ended March 31, 2022 and 2021
6
Consolidated Statements of Cash Flows – Three Months Ended March 31, 2022 and 2021
7
8
34
49
49
50
50
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
50
50
50
50
50
52

MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(dollars in thousands, except per share data)March 31,
2022		December 31,
2021
Cash and due from banks$56,022 $23,480 
Federal funds sold12,866 — 
Cash and cash equivalents68,888 23,480 
Securities available-for-sale (amortized cost of $136,745 and $158,387 as of March 31, 2022 and December 31, 2021)
130,653 159,302 
Securities held-to-maturity (fair value of $33,556 and $6,591 as of March 31, 2022 and December 31, 2021)
34,977 6,372 
Equity investments2,240 2,354 
Mortgage loans held for sale (amortized cost of $81,502 and $80,002 as of March 31, 2022 and December 31, 2021), at fair value
81,258 80,882 
Loans, net of fees and costs (includes $17,375 and $17,558 of loans at fair value, amortized cost of $17,375 and $17,106 as of March 31, 2022 and December 31, 2021)
1,431,906 1,386,457 
Allowance for loan and lease losses(18,826)(18,758)
Loans, net of the allowance for loan and lease losses1,413,080 1,367,699 
Restricted investment in bank stock4,330 5,117 
Bank premises and equipment, net11,883 11,806 
Bank owned life insurance22,641 22,503 
Accrued interest receivable4,848 5,009 
Deferred income taxes3,190 1,413 
Servicing assets13,396 12,765 
Goodwill 899 899 
Intangible assets3,328 3,379 
Other assets35,978 10,463 
Total assets$1,831,589 1,713,443 
Liabilities:
Deposits:
Non-interest bearing$291,379 274,528 
Interest bearing1,273,472 1,171,885 
Total deposits1,564,851 1,446,413 
Short-term borrowings36,136 41,344 
Subordinated debentures40,538 40,508 
Accrued interest payable575 31 
Other liabilities 31,805 19,787 
Total liabilities1,673,905 1,548,083 
Stockholders’ equity:
Common stock, $1 par value. Authorized 25,000,000 shares as of March 31, 2022 and December 31, 2021; issued 6,555,909 and 6,534,587 as of March 31, 2022 and December 31, 2021
6,556 6,535 
Surplus84,177 83,663 
Treasury stock - 426,693 shares at March 31, 2022 and December 31, 2021
(8,860)(8,860)
Unearned common stock held by employee stock ownership plan(1,602)(1,602)
Retained earnings83,104 84,916 
Accumulated other comprehensive (loss) income (5,691)708 
Total stockholders’ equity157,684 165,360 
Total liabilities and stockholders’ equity$1,831,589 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 March 31,
(dollars in thousands, except per share data)20222021
Interest income:
Loans, including fees17,219 16,822 
Securities:
Taxable336 273 
Tax-exempt396 353 
Cash and cash equivalents13 3 
Total interest income17,964 17,451 
Interest expense:
Deposits1,289 1,566 
Borrowings640 765 
Total interest expense1,929 2,331 
Net interest income16,035 15,120 
Provision for loan losses615 599 
Net interest income after provision for loan losses15,420 14,521 
Non-interest income:
Mortgage banking income7,096 24,100 
Wealth management income1,304 1,136 
SBA loan income2,520 1,245 
Earnings on investment in life insurance138 66 
Net change in the fair value of derivative instruments(166)(944)
Net change in the fair value of loans held-for-sale(1,124)(3,867)
Net change in the fair value of loans held-for-investment(778)(102)
Net gain on hedging activity2,827 4,261 
Net gain on sale of investment securities available-for-sale— 48 
Service charges27 32 
Other1,258 1,073 
Total non-interest income13,102 27,048 
Non-interest expenses:
Salaries and employee benefits15,298 22,139 
Occupancy and equipment1,252 1,152 
Professional fees848 940 
Advertising and promotion986 785 
Data processing479 616 
Information technology710 425 
Pennsylvania bank shares tax199 163 
Other1,661 2,043 
Total non-interest expenses21,433 28,263 
Income before income taxes7,089 13,306 
Income tax expense1,554 3,136 
Net income$5,535 10,170 
Basic earnings per common share$0.92 1.70 
Diluted earnings per common share$0.88 1.65 
See accompanying notes to the unaudited consolidated financial statements.
4
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
Three months ended March 31,
(dollars in thousands)20222021
Net income:$5,535 10,170 
Other comprehensive (loss) income:
Net change in unrealized gains on investment securities available for sale:
Net unrealized losses arising during the period, net of tax benefit of $1,626, and $592, respectively
(5,369)(1,883)
Less: reclassification adjustment for net gains realized in net income, net of tax expense of $3, and $12, respectively
(9)(36)
Reclassification adjustment for securities transferred from available-for-sale to held-to-maturity, net of tax benefit of $308, and $0, respectively
(1,021)— 
Unrealized investment losses, net of tax benefit of $1,936, and $604, respectively
(6,399)(1,919)
Total other comprehensive loss(6,399)(1,919)
Total comprehensive (loss) income$(864)8,251 
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, 2021$6,488 81,727 (5,828)(1,768)62,249 637 143,505 
(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 declared, $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, 2022
$6,556 84,177 (8,860)(1,602)83,104 (5,691)157,684 
See accompanying notes to the unaudited consolidated financial statements.
6
MERIDIAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
(dollars in thousands)20222021
Net income$5,535 10,170 
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 securities(27)331 
Depreciation and amortization, net50 (1,709)
Provision for loan losses615 599 
Amortization of issuance costs on subordinated debt30 30 
Stock based compensation 260 229 
Net change in fair value of derivative instruments166 944 
Net change in fair value of loans held for sale1,124 3,867 
Net change in fair value of loans held for investment778 102 
Amortization and net impairment of servicing rights494 (2,661)
SBA loan income(2,520)(1,245)
Proceeds from sale of loans319,610 803,858 
Loans originated for sale(313,485)(724,675)
Mortgage banking income(7,096)(24,100)
Decrease (increase) in accrued interest receivable161 (85)
Increase in other assets(9,962)(5,246)
Earnings from investment in life insurance(138)(66)
Increase (decrease) in deferred income tax 159 (1,865)
Increase (decrease) in accrued interest payable544 (411)
Increase in other liabilities 10,156 4,745 
Net cash provided by operating activities6,454 62,764 
Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities, repayments and calls3,843 2,343 
Sales— 13,639 
Purchases(9,885)(28,151)
Activity in held-to-maturity securities:
Maturities, repayments and calls390 — 
Purchases(2,500)— 
Decrease in restricted stock787 2,747 
Net increase in loans(59,762)(70,915)
Purchases of premises and equipment(77)(677)
Net cash used in investing activities(67,204)(81,014)
Cash flows from financing activities:
Net increase in deposits118,438 142,255 
Decrease in short-term borrowings(5,208)(5,465)
Decrease in short-term borrowings with original maturity > 90 days— (75,021)
(Repayment) proceeds from long-term debt, net— (42,662)
Dividends paid(7,347)(6,931)
Share based awards and exercises275 334 
Net cash provided by financing activities106,158 12,510 
Net change in cash and cash equivalents 45,408 (5,740)
Cash and cash equivalents at beginning of period23,480 36,744 
Cash and cash equivalents at end of period$68,888 31,004 
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest$1,386 2,742 
Supplemental disclosure of cash flow information:
Transfers from loans held for sale to loans held for investment1,653 2,390 
Net loans sold, not settled(13,857)(4,432)
Investment security purchases, not settled(2,761)(1,188)
Transfer of securities from AFS to HTM23,522 — 
Lease liabilities arising from obtaining right-of-use assets10,995 — 
See accompanying notes to the unaudited consolidated financial statements.
7
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 months ended March 31, 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
March 31,
(dollars in thousands, except per share data)20222021
Numerator:
Net income available to common stockholders$5,535 10,170 
Denominator for basic earnings per share
Weighted average shares outstanding6,128 6,119 
Average unearned ESOP shares(105)(119)
Basic weighted averages shares outstanding6,023 6,000 
Dilutive effects of assumed exercises of stock options173 93 
Dilutive effects of SERP shares66 53 
Denominator for diluted earnings per share - adjusted weighted average shares outstanding6,262 6,146 
Basic earnings per share$0.92 1.70 
Diluted earnings per share$0.88 1.65 
Antidilutive shares excluded from computation of average dilutive earnings per share21 22 
8

(3)    Securities
The amortized cost and fair value of securities as of March 31, 2022 and December 31, 2021 are as follows:
March 31, 2022
(dollars in thousands)Amortized
cost		Gross
unrealized
gains		Gross
unrealized
losses		Fair
value		# of Securities
in unrealized
loss position
Securities available-for-sale:
U.S. asset backed securities$14,664 35 (177)14,522 10 
U.S. government agency mortgage-backed securities9,352 2 (221)9,133 8 
U.S. government agency collateralized mortgage obligations22,037 30 (871)21,196 21 
State and municipal securities45,385 107 (2,832)42,660 31 
U.S. Treasuries32,978 — (1,881)31,097 25 
Non-U.S. government agency collateralized mortgage obligations5,879 — (165)5,714 5 
Corporate bonds6,450 24 (143)6,331 9 
Total securities available-for-sale$136,745 198 (6,290)130,653 109 
March 31, 2022
Amortized
cost		Gross
unrecognized
gains		Gross
unrecognized
losses		Fair
value		# of Securities
in unrecognized
loss position
Securities held-to-maturity:
State and municipal securities34,977 25 (1,446)33,556 15 
Total securities held-to-maturity$34,977 25 (1,446)33,556 15 
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 — 

9
Although the Corporation’s investment portfolio overall is in a net unrealized loss position at March 31, 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 March 31, 2022 and December 31, 2021, securities having a fair value of $83.6 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 March 31, 2022 and December 31, 2021:
March 31, 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$10,458 (177)— — 10,458 (177)
U.S. government agency mortgage-backed securities8,979 (221)— — 8,979 (221)
U.S. government agency collateralized mortgage obligations13,740 (513)4,196 (358)17,936 (871)
State and municipal securities37,982 (2,794)535 (38)38,517 (2,832)
U.S. Treasuries31,097 (1,881)— — 31,097 (1,881)
Non-U.S. government agency collateralized mortgage obligations4,741 (165)— — 4,741 (165)
Corporate bonds4,807 — (143)— — 4,807 (143)
Total securities available-for-sale$111,804 (5,894)4,731 (396)116,535 (6,290)
March 31, 2022
Less than 12 Months12 Months or moreTotal
Fair
value		Unrecognized
losses		Fair
value		Unrecognized
losses		Fair
value		Unrecognized
losses
Securities held-to-maturity:
State and municipal securities— — 24,955 (1,446)24,955 (1,446)
Total securities held-to-maturity$— — 24,955 (1,446)24,955 (1,446)
10
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$71,969 (1,021)3,676 (135)75,645 (1,156)
The amortized cost and carrying value of securities at March 31, 2022 and December 31, 2021 are shown below by contractual maturities. Actual maturities may differ from contractual maturities as issuers may have the right to call or repay obligations with or without call or prepayment penalties.
March 31, 2022December 31, 2021
Available-for-saleHeld-to-maturityAvailable-for-saleHeld-to-maturity
(dollars in thousands)Amortized
cost		Fair
value		Amortized
cost		Fair
value		Amortized
cost		Fair
value		Amortized
cost		Fair
value
Investment securities:
 Due in one year or less$— — — — $— — 763 769 
 Due after one year through five years15,939 15,242 3,789 3,789 12,934 12,885 2,354 2,397 
 Due after five years through ten years28,909 27,323 3,969 3,866 30,890 30,798 3,255 3,425 
 Due after ten years54,629 52,045 27,219 25,901 81,548 82,450 — — 
 Subtotal99,477 94,610 34,977 33,556 125,372 126,133 6,372 6,591 
Mortgage-related securities37,268 36,043 — — 33,015 33,169 — — 
 Total$136,745 130,653 34,977 33,556 $158,387 159,302 6,372 6,591 
There were no sales of available for sale investment securities for the three months ended March 31, 2022. Proceeds from the sale of available for sale investment securities totaled $13.6 million for the three months ended March 31, 2021, resulting in a gross gain on sale of $248 thousand and a gross loss on sale of $200 thousand for the period.
11
(4)    Loans Receivable
Loans and leases outstanding at March 31, 2022 and December 31, 2021 are detailed by category as follows:
(dollars in thousands)March 31, 2022December 31, 2021
Mortgage loans held for sale$81,258 80,882 
Real estate loans:
Commercial mortgage531,157 516,928 
Home equity lines and loans50,657 52,299 
Residential mortgage (1) 78,504 68,175 
Construction187,756 160,905 
Total real estate loans848,074 798,307 
Commercial and industrial318,692 293,771 
Small business loans109,627 114,158 
Paycheck Protection Program loans ("PPP")50,883 90,194 
Main Street Lending Program Loans ("MSLP")597 597 
Consumer478 419 
Leases, net101,413 88,242 
Total portfolio loans and leases1,429,764 1,385,688 
Total loans and leases$1,511,022 1,466,570 
Loans with predetermined rates$467,840 488,220 
Loans with adjustable or floating rates1,043,182 978,350 
Total loans and leases$1,511,022 1,466,570 
Net deferred loan origination costs$2,142 769 

(1) Includes $17,375 and $17,558 of loans at fair value as of March 31, 2022 and December 31, 2021, respectively.

Components of the net investment in leases at March 31, 2022 and December 31, 2021 are detailed as follows:
(dollars in thousands)March 31,
2022		December 31,
2021
Minimum lease payments receivable$120,695 105,608 
Unearned lease income(19,282)(17,366)
Total$101,413 88,242 
12
Age Analysis of Past Due Loans and Leases
The following tables present an aging of the Corporation’s loan and lease portfolio as of March 31, 2022 and December 31, 2021, respectively:
March 31, 202230-89 days
past due		90+ days
past due and
still accruing		Total past
due		CurrentTotal
Accruing
Loans and
leases		Nonaccrual
loans and
leases		Total loans
portfolio
and leases		Delinquency
percentage
(dollars in thousands)
Commercial mortgage$— — — 531,157 531,157 — 531,157 — %
Home equity lines and loans299 — 299 49,359 49,658 999 50,657 2.56 
Residential mortgage (1)1,176 — 1,176 74,916 76,092 2,412 78,504 4.57 
Construction— — — 187,756 187,756 — 187,756 — 
Commercial and industrial— — — 299,943 299,943 18,749 318,692 5.88 
Small business loans— — — 108,961 108,961 666 109,627 0.61 
Paycheck Protection Program loans— — — 50,883 50,883 — 50,883 — 
Main Street Lending Program loans— — — 597 597 — 597 — 
Consumer— — — 478 478 — 478 — 
Leases, net1,322 — 1,322 100,091 101,413 — 101,413 1.30 
Total$2,797 — 2,797 1,404,141 1,406,938 22,826 1,429,764 1.79 %
(1)Includes $17,375 of loans at fair value as of March 31, 2022 ($16,276 are current, $482 are 30-89 days past due, and $617 are nonaccrual).
December 31, 202130-89 days
past due		90+ days
past due and
still accruing		Total past
due		CurrentTotal
Accruing
Loans and
leases		Nonaccrual
loans and
leases		Total loans
portfolio
and leases		Delinquency
percentage
(dollars in thousands)
Commercial mortgage$— — — 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).
13
(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 month periods ended March 31, 2022 and 2021, respectively:

(dollars in thousands)
Balance,
December 31, 2021
Charge-offsRecoveriesProvision (Credit)
Balance,
March 31, 2022
Commercial mortgage$4,950 — — (800)4,150 
Home equity lines and loans224 — 6 (22)208 
Residential mortgage283 — 2 72 357 
Construction2,042 — — 215 2,257 
Commercial and industrial6,533 — 11 825 7,369 
Small business loans3,737 — — (365)3,372 
Consumer3 — — — 3 
Leases986 (566)— 690 1,110 
Total$18,758 (566)19 615 18,826 

(dollars in thousands)
Balance,
December 31, 2020
Charge-offsRecoveriesProvision (Credit)
Balance,
March 31, 2021
Commercial mortgage$7,451 — — 204 7,655 
Home equity lines and loans434 — 2 (126)310 
Residential mortgage385 — 2 (73)314 
Construction2,421 — — (110)2,311 
Commercial and industrial5,431 — 5 (150)5,286 
Small business loans1,259 — — 661 1,920 
Consumer4 — 1 (1)4 
Leases382 — — 194 576 
Total$17,767 — 10 599 18,376 




14
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 March 31, 2022 and December 31, 2021.
Allowance on loans and leasesCarrying value of loans and leases
March 31, 2022Individually
evaluated
for impairment		Collectively
evaluated
for impairment		TotalIndividually
evaluated
for impairment		Collectively
evaluated
for impairment		Total
(dollars in thousands)
Commercial mortgage$— 4,150 4,150 3,540 527,617 531,157 
Home equity lines and loans— 208 208 999 49,658 50,657 
Residential mortgage— 357 357 1,795 59,334 61,129 
Construction— 2,257 2,257 1,206 186,550 187,756 
Commercial and industrial3,804 3,565 7,369 16,900 301,792 318,692 
Small business loans376 2,996 3,372 776 108,851 109,627 
Paycheck Protection Program loans— — — — 50,883 50,883 (2)
Main Street Lending Program— — — — 597 597 (2)
Consumer— 3 3 — 478 478 
Leases, net— 1,110 1,110 — 101,413 101,413 
Total$4,180 14,646 18,826 25,216 1,387,173 1,412,389 (1)
Allowance on loans and leasesCarrying value of loans and leases
December 31, 2021Individually
evaluated
for impairment		Collectively
evaluated
for impairment		TotalIndividually
evaluated
for impairment		Collectively
evaluated
for impairment		Total
(dollars in thousands)
Commercial mortgage$— 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.
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•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.
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 March 31, 2022 and December 31, 2021:
March 31, 2022PassSpecial
mention		SubstandardDoubtfulTotal
(dollars in thousands)
Commercial mortgage$494,850 30,543 5,764 — 531,157 
Home equity lines and loans49,177 — 1,480 — 50,657 
Construction178,728 9,028 — — 187,756 
Commercial and industrial261,848 11,056 45,788 — 318,692 
Small business loans108,961 — 666 — 109,627 
Paycheck Protection Program loans50,883 — — — 50,883 
Main Street Lending Program loans597 — — — 597 
Total$1,145,044 50,627 53,698 — 1,249,369 
Commercial and industrial loans classified as substandard totaled $45.8 million as of March 31, 2022, an increase of $2.9 million, from $42.9 million as of December 31, 2021. The majority of this amount is a $13.8 million commercial loan relationship in the advertising industry that became a non-performing loan relationship late in 2021. The remaining amount was comprised of 19 different loan relationships with no specific industry concentration.

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 March 31, 2022 and December 31, 2021.
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March 31, 2022December 31, 2021
(dollars in thousands)PerformingNonperformingTotalPerformingNonperformingTotal
Residential mortgage (1)
$59,335 1,795 61,130 $48,820 1,797 50,617 
Consumer478 — 478 419 — 419 
Leases, net101,413 — 101,413 88,030 212 88,242 
Total$161,226 1,795 163,021 $137,269 2,009 139,278 
(1) There were four nonperforming residential mortgage loans at March 31, 2022 and five nonperforming residential mortgage loans at December 31, 2021 with a combined outstanding principal balance of $617 thousand and $1.8 million, respectively, which were carried at fair value and not included in the table above.
No troubled debt restructurings performing according to modified terms are included in performing residential mortgages below as of March 31, 2022 and December 31, 2021.
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 March 31, 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$16,466 16,644 3,804 17,147 17,310 2,900 
Small business loans666 666 376 666 666 376 
Home equity lines and loans— — — — — — 
Residential mortgage— — — — — — 
Total$17,132 17,310 4,180 17,813 17,976 3,276 
Impaired loans without related allowance:
Commercial mortgage$3,540 3,545 — 3,556 3,559 — 
Commercial and industrial433 505 — 214 269 — 
Small business loans110 110 — 126 126 — 
Home equity lines and loans999 1,033 — 905 935 — 
Residential mortgage1,795 1,795 — 1,797 1,797 — 
Construction1,206 1,206 — 1,206 1,206 — 
Leases— — — 212 212 — 
Total8,083 8,194 — 8,016 8,104 — 
Grand Total$25,215 25,504 4,180 25,829 26,080 3,276 
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The following table details the average recorded investment and interest income recognized on impaired loans by portfolio segment.
Three Months Ended March 31, 2022Three Months Ended March 31, 2021
(dollars in thousands)Average
Recorded
Investment		Interest
Income
Recognized		Average
recorded
investment		Interest
income
recognized
Impaired loans with related allowance:
Commercial and industrial$16,487 — 3,826 5 
Small business loans666 — 918 — 
Home equity lines and loans— — 95 — 
Residential mortgage— — 688 — 
Total$17,153 — 5,527 5 
Impaired loans without related allowance:
Commercial mortgage$3,547 19 735 8 
Commercial and industrial454 — 579 — 
Small business loans117 3 176 4 
Home equity lines and loans1,002 — 825 — 
Residential mortgage1,796 2 1,127 — 
Construction1,206 15 1,206 15 
Leases— — 122 — 
Total$8,122 39 4,770 27 
Grand Total$25,275 39 10,297 32 
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 March 31, 2022 and December 31, 2021 are as follows:
March 31, 2022December 31, 2021
(dollars in thousands)
TDRs included in nonperforming loans and leases$358 361 
TDRs in compliance with modified terms 3,007 3,446 
Total TDRs $3,365 3,807 
There were no loan or lease modifications granted during the three months ended March 31, 2022 and March 31, 2021 that were categorized as a TDR, and no subsequent defaults during the same time periods.
In accordance with Section 4013 of the CARES Act, loan deferrals granted to customers that resulted from the impact of COVID-19 and who were not past due as of December 31, 2019 were not considered troubled debt restructurings under ASC 310-40 as of March 31, 2022. COVID-19 loan modifications provided to borrowers amounted to $0 as of March 31, 2022, compared to $2.4 million as of December 31, 2021, and $28.8 million as of March 31, 2021.
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(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 $12.9 million in Federal funds purchased at March 31, 2022 and $0 Federal funds purchased at December 31, 2021. The Corporation also has a facility with the Federal Reserve Bank discount window of $3.2 million. This facility is fully secured by investment securities. There were no borrowings under this at March 31, 2022 or at December 31, 2021.
Short-term borrowings at March 31, 2022 and December 31, 2021 consisted of the following notes:
Balance as of
(dollars in thousands)Maturity
date		Interest
rate		March 31,
2022		December 31,
2021
Open Repo Plus Weekly05/31/20220.45 %31,250 36,458 
Mid-term Repo-fixed09/12/20220.23 4,886 4,886 
Total$36,136 41,344 
The FHLB of Pittsburgh has also issued $102 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 $524.3 million as of March 31, 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 $1.1 billion and $1.0 billion of residential mortgage loans as of March 31, 2022 and December 31, 2021, respectively. During the three months ended March 31, 2022, the Corporation recognized servicing fee income of $648 thousand compared to $358 thousand during the three months ended March 31, 2021, respectively.




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Changes in the MSR balance are summarized as follows:
Three Months Ended March 31,
(dollars in thousands)20222021
Balance at beginning of the period$10,756 4,647 
Servicing rights capitalized532 2,342 
Amortization of servicing rights(404)(199)
Change in valuation allowance4 328 
Balance at end of the period$10,888 7,118 
Activity in the valuation allowance for MSRs was as follows:
Three Months Ended March 31,
(dollars in thousands)20222021
Valuation allowance, beginning of period$(8)(435)
Impairment — — 
Recovery4 328 
Valuation allowance, end of period$(4)(107)
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 March 31, 2022, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 9.72% 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%. This quarter, due in part to market volatility as interest rates increased, the prepayment speed assumption has increased from December 31, 2021 to March 31, 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 March 31, 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)March 31, 2022December 31, 2021
Fair value of residential mortgage servicing rights$11,928 $11,241 
Weighted average life (months)1311
Prepayment speed9.72 %7.23 %
Impact on fair value:
10% adverse change$(284)$(376)
20% adverse change(555)(731)
Discount rate9.00 %9.00 %
Impact on fair value:
10% adverse change$(418)$(436)
20% adverse change(808)(840)
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,
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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 $138.9 million and $115.1 million of SBA loans, as of March 31, 2022 and December 31, 2021, respectively.
Changes in the SBA loan servicing asset balance are summarized as follows:
Three Months Ended March 31,
(dollars in thousands)20222021
Balance at beginning of the period$2,009 970 
Servicing rights capitalized593 274 
Amortization of servicing rights(125)(67)
Change in valuation allowance31 (17)
Balance at end of the period$2,508 1,160 
Activity in the valuation allowance for SBA loan servicing assets was as follows:
Three Months Ended March 31,
(dollars in thousands)20222021
Valuation allowance, beginning of period$(96)(39)
Impairment — (17)
Recovery31 — 
Valuation allowance, end of period$(65)(56)
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 March 31, 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 13.03%, and a discount rate equal to 8.67%. 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%.
At March 31, 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.
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(dollars in thousands)March 31, 2022December 31, 2021
Fair value of SBA loan servicing rights$2,629 $2,107 
Weighted average life (years)3.83.8
Prepayment speed13.03 %12.38 %
Impact on fair value:
10% adverse change$(96)$(69)
20% adverse change(183)(132)
Discount rate8.67 %9.01 %
Impact on fair value:
10% adverse change$(71)$(54)
20% adverse change(138)(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
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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.
For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2022 and December 31, 2021 are as follows:
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March 31, 2022
(dollars in thousands)TotalLevel 1Level 2Level 3
Assets
Securities available for sale:
U.S. asset backed securities$14,522 — 14,522 — 
U.S. government agency mortgage-backed securities9,133 — 9,133 — 
U.S. government agency collateralized mortgage obligations21,196 — 21,196 — 
State and municipal securities42,660 — 42,660 — 
U.S. Treasuries31,097 31,097 — — 
Non-U.S. government agency collateralized mortgage obligations5,714 — 5,714 
Corporate bonds6,331 — 6,331 — 
Equity investments2,240 — 2,240 — 
Mortgage loans held for sale81,258 — 81,258 — 
Mortgage loans held for investment17,375 — 17,375 — 
Interest rate lock commitments587 — — 587 
Forward commitments905 — 905 — 
Customer derivatives - interest rate swaps2,256 — 2,256 — 
Total$235,274 31,097 203,590 587 
Liabilities
Interest rate lock commitments808 — — 808 
Forward commitments6 — 6 — 
Customer derivatives - interest rate swaps2,280 — 2,280 — 
$3,094 — 2,286 808 
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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 — 
$1,327 — 1,124 203 
Assets measured at fair value on a nonrecurring basis at March 31, 2022 and December 31, 2021 are as follows:
March 31, 2022December 31, 2021
(dollars in thousands)Fair ValueFair Value
Mortgage servicing rights$10,888 10,756 
SBA loan servicing rights2,508 2,009 
Impaired loans (1)
     Commercial and industrial3,9601,837
     Small business loans—290
Total$17,356 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.







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The following table details the valuation techniques for Level 3 impaired loans.
Fair ValueValuationRange of
(dollars in thousands)Level 3TechniqueSignificant Unobservable InputInputs
March 31, 2022$3,960 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
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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.
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The estimated fair values of the Corporation’s financial instruments at March 31, 2022 and December 31, 2021 are as follows:
March 31, 2022December 31, 2021
(dollars in thousands)Fair Value
Hierarchy Level		Carrying
amount		Fair valueCarrying
amount		Fair value
Financial assets:
Cash and cash equivalentsLevel 1$68,888 68,888 23,480 23,480 
Securities available-for-sale (1)Level 2130,653 130,653 159,302 159,302 
Securities held-to-maturityLevel 234,977 33,556 6,372 6,591 
Equity investmentsLevel 22,240 2,240 2,354 2,354 
Mortgage loans held for saleLevel 281,258 81,258 80,882 80,882 
Loans receivable, net of the allowance for loan and lease lossesLevel 31,414,531 1,403,767 1,368,899 1,370,885 
Mortgage loans held for investmentLevel 217,375 17,375 17,558 17,558 
Interest rate lock commitmentsLevel 3587 587 1,122 1,122 
Forward commitmentsLevel 2905 905 65 65 
Restricted investment in bank stockNA4,330 NA5,117  NA
Accrued interest receivableLevel 34,848 4,848 5,009 5,009 
Customer derivatives - interest rate swapsLevel 22,256 2,256 961 961 
Financial liabilities:
DepositsLevel 21,564,851 1,574,600 1,446,413 1,549,100 
Short-term borrowingsLevel 236,136 36,136 41,344 41,344 
Subordinated debenturesLevel 240,538 38,490 40,508 40,803 
Accrued interest payableLevel 2575 575 31 31 
Interest rate lock commitmentsLevel 3808 808 203 203 
Forward commitmentsLevel 26 6 106 106 
Customer derivatives - interest rate swapsLevel 22,280 2,280 1,018 1,018 
NotionalNotional
Off-balance sheet financial instruments:amountFair valueamountFair value
 Commitments to extend creditLevel 2$475,176 — 486,632 — 
 Letters of creditLevel 223,226 — 25,986 — 
(1) U.S. Treasuries within 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 month periods ended March 31, 2022 and 2021.
Three Months Ended March 31,
20222021
Balance at beginning of the period$1,122 6,932 
Decrease in value(535)(3,647)
Balance at end of the period$587 3,285 




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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
March 31, 2022$587 Market comparable pricingPull through
1 - 99
93.26%
December 31, 20211,122 Market comparable pricingPull through
1 - 99
87.66
Net realized losses of $1.1 million and $4.4 million due to changes in the fair value of interest rate lock commitments which are classified as Level 3 assets and liabilities for the three months ended March 31, 2022, and 2021, respectively, are recorded in non-interest income as net changes in the fair value of derivative instruments in the Corporation's consolidated statements of income.
(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:
March 31, 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$71,681 587 108,653 1,122 
Negative fair valuesOther liabilities66,501 (808)35,264 (203)
Total138,182 (221)143,917 919 
Forward Commitments
Positive fair valuesOther assets49,000 905 30,500 65 
Negative fair valuesOther liabilities2,500 (6)45,500 (106)
Total51,500 899 76,000 (41)
Customer Derivatives - Interest Rate Swaps
Positive fair valuesOther assets42,117 2,256 35,447 961 
Negative fair valuesOther liabilities42,117 (2,280)35,447 (1,018)
Total84,234 (24)70,894 (57)
Total derivative financial instruments$273,916 654 290,811 821 
Interest rate lock commitments are considered Level 3 in the fair value hierarchy, while the forward commitments and interest rate swaps are considered Level 2 in the fair value hierarchy.
The following table presents a summary of the fair value gains and losses on derivative financial instruments:
Three Months Ended March 31,
(dollars in thousands)20222021
Interest Rate Lock Commitments$(1,140)(4,437)
Forward Commitments940 3,396 
Customer Derivatives - Interest Rate Swaps33 97 
Net fair value losses on derivative financial instruments$(167)(944)
Net realized gains on derivative hedging activities were $2.8 million and $4.3 million for the three months ended March 31, 2022 and 2021, respectively, and 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.

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.
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Meridian’s mortgage banking segment (“Mortgage”) consists of one central loan production facility and several retail and profit sharing loan production offices located 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 March 31, 2022Three Months Ended March 31, 2021
(Dollars in thousands)BankWealthMortgageTotalBankWealthMortgageTotal
Net interest income$15,610 94 331 16,035 $14,500 (14)634 15,120 
Provision for loan losses615 — — 615 599 — — 599 
Net interest income after provision14,995 94 331 15,420 13,901 (14)634 14,521 
Non-interest Income
Mortgage banking income196 — 6,900 7,096 268 — 23,832 24,100 
Wealth management income— 1,304 — 1,304 — 1,136 — 1,136 
SBA income2,520 — — 2,520 1,245 — — 1,245 
Net change in fair values32 — (2,100)(2,068)98 — (5,011)(4,913)
Net gain on hedging activity— — 2,827 2,827 — — 4,261 4,261 
Other 628 (1)796 1,423 712 — 507 1,219 
Non-interest income3,376 1,303 8,423 13,102 2,323 1,136 23,589 27,048 
Non-interest expense10,208 878 10,347 21,433 8,932 895 18,436 28,263 
Income (loss) before income taxes$8,163 519 (1,593)7,089 7,292 227 5,787 13,306 
Total Assets$1,728,329 7,251 96,009 1,831,589 $1,578,721 6,092 159,164 1,743,977 

(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 March 31, 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 March 31, 2022 the Corporation’s ROU assets and related lease liabilities were $10.5 million and $10.3 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 March 31, 2022
Operating lease expense$585 
Short term lease expense1 
Variable lease expense— 
Total lease expense$586 
Supplemental cash flow information related to leases was as follows:
(dollars in thousands)
Three Months Ended March 31, 2022
Cash paid for amounts included in the measurement of lease liabilities
    Operating cash flows from operating leases$560 
ROU asset obtained in exchange for lease liabilities$10,995 
Maturities of operating lease liabilities under FASB ASC 842 "Leases" as of March 31, 2022 are as follows:
(dollars in thousands)March 31, 2022
2022$548 
20231,892 
20241,746 
20251,456 
20261,436 
2027 and thereafter3,134 
Total operating lease liabilities$10,212 
As of March 31, 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 March 31, 2022 is 2.58%.

As of March 31, 2022, the Corporation had not entered into any material leases that have not yet commenced.



(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.


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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 teh 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 March 31, 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.
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
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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-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 including, without limitation: the impact of the current 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, 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
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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 results of operations for the three months ended March 31, 2022, as compared to the same periods in 2021, and the changes in its financial condition as of March 31, 2022 as compared to December 31, 2021. More detailed information related to these highlights can be found in the sections that follow.
Changes in Financial Condition
•Total assets increased $118.1 million, or 6.9%, to $1.8 billion as of March 31, 2022.
•Portfolio loans, excluding SBA Paycheck Protection Program ("PPP") loans, grew $84.1 million, or 6.5% quarter-over-quarter, or 26% on an annualized basis. PPP loans decreased $38.6 million, or 43.7%, and mortgage loans held for sale decreased $376 thousand, or 0.5%.
•Quarter-over-quarter portfolio loan growth was most evident in the commercial real estate/construction portfolio which grew $41.0 million, commercial loans and leases which grew $38.7 million, and residential loans which grew $10.3 million, partially offset by a decrease of $4.3 million in SBA loans, and a $1.6 million decrease in home equity loans.
•As of March 31, 2022, we have assisted borrowers with the forgiveness of 904 PPP “round 1” loans totaling approximately $227.4 million, and 324 PPP “round 2” loans totaling approximately $70.0 million.
•Cash and cash equivalents and investments increased a combined $45.4 million or 193.4%.
•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) increased $631 thousand, or 4.9%, to $13.4 million as of March 31, 2022.
•Total deposits grew $118.4 million, or 8.2%, to $1.6 billion as of March 31, 2022. Non-interest bearing deposits grew $16.9 million, or 6.1%, to $291.4 million as of March 31, 2022.
•Total borrowings decreased $5.2 million as short-term borrowings were paid down with available cash on hand. As of March 31, 2022 Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) balances were paid down to $0 as PPP loans have continued to be forgiven or payoff.
•Returned $7.7 million of capital to Meridian shareholders for the three months ended March 31, 2022 through dividends, including a $1.00 special dividend, and the $0.20 quarterly dividend.
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Three Month Results of Operations
•Pre-tax, pre-provision income for the Bank in the first quarter 2022 was $8.8 million, an increase of $1.9 million, or 28.5%, led by strong SBA loan sales volume, wealth management income, and other fee income, combined with lower operating expenses for the quarter.
•Consolidated net income was $5.5 million, a decrease of $2.2 million, or 28.3%, largely led by a lower level of non-interest income from mortgage banking activity.
•The return on average equity (“ROE”) and return on average assets (“ROA”) were 13.86% and 1.28%, respectively, for the first quarter 2022, compared to 19.15% and 1.74%, respectively, for the fourth quarter 2021.
•Net interest margin increased to 3.89% from 3.83%, as excess cash and PPP loan payoffs were reinvested in higher yielding commercial portfolios. Interest income, however, declined modestly $287 thousand, or 1.8% due largely to fewer days in the quarter.
•Non-interest income decreased $4.0 million or 23.3%, due to:
•Lower level of mortgage banking revenue, which declined $6.5 million, or 48%, partially offset by increased hedging gains of $2.3 million.
•An increase in SBA loan sale revenue of $1.0 million, or 70.8%.
•An increase in other fee income of $131 thousand, or 11.7%.
•An increase in wealth management revenue of $34 thousand, or 2.7%, due to increased AUM and favorable market conditions.
•Changes in fair value related to mortgage banking activities were down $236 thousand over the period.
•Provision for loan losses increased $837 thousand due to loan growth.
•Non-interest expenses decreased $2.3 million, or 9.7%, as a result of a lower level of salaries and benefits, largely related to variable compensation in the mortgage segment, combined with a decline in incentive and stock based compensation for bank and wealth segments.
•On April 28, 2022, the Board of Directors declared a quarterly cash dividend of $0.20 per common share, payable May 23, 2022, to shareholders of record as of May 16, 2022.

Key Performance Ratios
Key financial performance ratios for the three months ended March 31, 2022 and 2021 are shown in the table below:
Three Months Ended March 31,
20222021
Annualized return on average equity 13.86%30.06 %
Annualized return on average assets 1.28%2.43 %
Net interest margin (tax effected yield)3.89%3.72 %
Basic earnings per share$0.92$1.70 
Diluted earnings per share$0.88$1.65 








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The following table presents certain key period-end balances and ratios as of March 31, 2022 and December 31, 2021:
(dollars in thousands, except per share amounts)March 31, 2022December 31, 2021
Book value per common share $25.73 $27.07 
Tangible book value per common share (1)$25.04 $26.37 
Allowance as a percentage of loans and leases held for investment 1.31 %1.35 %
Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1)1.38 %1.46 %
Tier I capital to risk weighted assets10.09 %10.83 %
Tangible common equity ratio (1) 8.40 %9.42 %
Loans held for investment$1,431,906 $1,386,457 
Total assets $1,831,589 $1,713,443 
Stockholders' equity $157,684 $165,360 
(1) Non-GAAP financial measure. See “Non-GAAP Financial Measures” below for Non-GAAP to GAAP reconciliation.

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)March 31, 2022December 31, 2021
Tangible common equity ratio:
Total stockholders' equity157,684 165,360 
Less:
Goodwill and intangible assets(4,227)(4,278)
Tangible common equity153,457 161,082 
Total assets1,831,589 1,713,443 
Less:
Goodwill and intangible assets(4,227)(4,278)
Tangible assets$1,827,363 $1,709,165 
Tangible common equity ratio8.40 %9.42 %




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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 shareMarch 31, 2022December 31, 2021
Book value per common share$25.73 $27.07 
Less: Impact of goodwill and intangible assets0.69 0.70 
Tangible book value per common share$25.04 $26.37 
The following is a reconciliation of the allowance for loan losses to total loans held for investment ratio for the three months ended March 31, 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 investmentMarch 31December 31
Allowance for loan losses / Total loans held for investment1.31 %1.35 %
Less: Impact of loans held for investment - fair valued0.02 %0.02 %
Less: Impact of PPP loans0.05 %0.09 %
Allowance for loan losses / Total loans held for investment (excl. loans at fair value and PPP loans)1.38 %1.46 %
The table below provides the non-GAAP reconciliation for pre-tax, pre-provision income:
(Dollars in thousands)
Three Months Ended March 31,
Reconciliation of pre-tax, pre-provision income 20222021
Income before income tax expense$7,089 $13,306 
Provision for loan losses615 599 
Pre-tax, pre-provision income$7,704 $13,905 
The following sections discuss, in detail, the Corporation’s results of operations for the three ended March 31, 2022, as compared to the same periods in 2021, and the changes in its financial condition as of March 31, 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.




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NET INTEREST INCOME
Net interest income is an integral source of the Corporation’s revenue. The tables below present a summary, for the three ended March 31, 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.
Interest income increased $513 thousand, or 2.9%, to $18.0 million from $17.5 million for the first quarter of 2021 largely due to increases in average balances. There was a $25.3 million increase in average interest earning assets, year over year, led by increases of $101.8 million in loans held for investment, a $32.3 million increase in investment securities, and a $14.7 million increase in interest earning cash balances, offset partially by a $106.6 million decrease in the average balance of loans held for sale. These average balance increases helped to offset the negative impact to interest income that a 9 basis point decline in the yield on loans held for investment and a 13 basis point decline in the yield on investment securities had. Overall the yield on interest-earning assets increased 6 basis points to 4.35% over the period.
Interest expense was down $402 thousand, or 17.2%, to $1.9 million. Deposit interest expense was down $277 thousand, or 17.7%, period over period, to $1.3 million, while interest expense on borrowings was down $125 thousand, or 16.3%, to $640 thousand. Total interest-bearing deposit balances increased $149.9 million on average when comparing the three months ended March 31, 2022 to March 31, 2021, while the cost of deposits was down 16 basis points over this same period. The average balance of interest-bearing deposits was up $45.5 million, down 33 basis points, while the average balance on money market and savings deposits were up $113.0 million, down 8 basis points. Offsetting these average balance increases slightly was a $8.6 million decline in time deposit average balances, with a 20 basis point decline. The average balance of borrowings was down $167.6 million for the three months ended March 31, 2022, compared to March 31, 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 $918 thousand, or 6.1%, to $$16.1 million on a tax-equivalent basis for the three months ended March 31, 2022, compared to $15.2 million for the three months ended March 31, 2021. The net interest margin was 3.89% for the first quarter of 2022 compared to 3.72% for the first quarter of 2021. The increase in net interest margin reflects the increased yield on interest earnings assets, combined with the declining interest rates paid on deposits and borrowings loan portfolios overall.

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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 March 31, (dollars in thousands)
20222021
Average BalanceInterest Income/ ExpenseYields/ RatesAverage BalanceInterest Income/ ExpenseYields/ Rates
Assets
Interest-earning assets
Due from banks$28,389 13 0.18 %$13,647 2 0.09 %
Federal funds sold877 — 0.12 %17,791 1 0.02 %
Investment securities(1)
167,881 799 1.93 %135,612 688 2.06 %
Loans held for sale67,092 536 3.20 %173,664 1,131 2.61 %
Loans held for investment(1)
1,415,831 16,685 4.75 %1,314,077 15,695 4.84 %
Total loans1,482,923 17,221 4.71 %1,487,741 16,826 4.59 %
Total interest-earning assets1,680,070 18,033 4.35 %1,654,791 17,517 4.29 %
Noninterest earning assets72,573 40,170 
Total assets$1,752,643 $1,694,961 
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits$269,864 137 0.21 %$224,362 298 0.54 %
Money market and savings deposits690,475 852 0.50 %577,472 829 0.58 %
Time deposits262,779 300 0.46 %271,416 439 0.66 %
Total deposits1,223,118 1,289 0.43 %1,073,250 1,566 0.59 %
Borrowings15,708 49 1.28 %183,336 172 0.38 %
Subordinated debentures40,519 591 5.84 %40,682 593 5.83 %
Total interest-bearing liabilities1,279,345 1,929 0.61 %1,297,268 2,331 0.73 %
Noninterest-bearing deposits281,123 234,030 
Other noninterest-bearing liabilities30,236 26,474 
Total liabilities$1,590,704 $1,557,772 
Total stockholders' equity161,939 137,189 
Total stockholders' equity and liabilities$1,752,643 $1,694,961 
Net interest income (1)
$16,104 $15,186 
Net interest spread (1)
3.74 %3.56 %
Net interest margin (1)
3.89 %3.72 %
(1)Yields and net interest income are reflected on a tax-equivalent basis.





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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 months ended March 31, 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)March 31, 2022 Compared to 2021
Change in interest rate due to:
RateVolumeTotal
Interest income:
Due from banks$5 6 11 
Federal funds sold5 (6)(1)
Investment securities(1)
(255)366 111 
Loans held for sale1,331 (1,926)(595)
Loans held for investment(1)
(1,767)2,757 990 
Total loans(436)831 395 
Total interest income$(681)1,197 516 
Interest expense:
Interest bearing deposits$(491)330 (161)
Money market and savings deposits(532)555 23 
Time deposits(125)(14)(139)
Total interest bearing deposits(1,148)871 (277)
Total borrowings830 (953)(123)
Subordinated debentures4 (6)(2)
Total interest expense(314)(88)(402)
Interest differential$(367)1,285 918 
(1)Yields and net interest income are reflected on a tax-equivalent basis.
For the three months ended March 31, 2022 as compared to the same period in 2021, tax-equivalent interest income increased $516 thousand as volume changes in average earning assets contributed $1.2 million and unfavorable rate changes reduced interest income by $681 thousand. The favorable change in interest income due to volume changes was driven mostly from growth in the loans held for investment portfolio, which increased $101.8 million on average over the three month periods, while the loans held for sale portfolio decreased $106.6 million on average over this period. Within the loans held for investment portfolio, average balances on commercial loans and leases were up $170.5 million, and commercial real estate/construction loans were up $62.0 million, while the average balance of PPP loans were down $142.1 million as such loans continue to be forgiven by the SBA. Partially off-setting these favorable volume changes were unfavorable rate changes of 13 basis points and 9 basis points on investment securities and loans held for investment, reducing interest income by $255 thousand and $1.8 million, respectively. While a decline in volume on loans held for sale had a negative impact on interest income, the increase in the yield on loans held for sale had a $1.3 million positive impact on interest income.
On the funding side, interest expense decreased $402 thousand due to the impact from rate declines which offset the impact from volume increases. The cost of deposits were down across the board, having a $1.1 million positive effect on interest expense. The cost of interest-bearing deposits, money market and savings accounts and time deposits declined 33 basis points, 8 basis points and 20 basis points, respectively, while the cost of borrowings increased 85 basis points. Interest-bearing deposits, and money market and savings accounts increased $45.5 million, and $113.0 million on average, while time deposits decreased $8.6 million on average, and borrowings overall were down $167.6 million on average. These average balance changes led to a $88 thousand decrease in interest expense.
Overall, the increase in interest income from volume changes contributed $1.2 million and out-paced the unfavorable rate changes to improve tax-equivalent net interest income by $918 thousand.
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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 March 31, 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.

Rate Ramp
Estimated increase
(decrease) in Net Interest
Income
For the Three Months Ended March 31,
Changes in Market Interest Rates20222021
+300 basis points over next 12 months0.93 %3.83 %
+200 basis points over next 12 months0.44 %2.28 %
+100 basis points over next 12 months(0.10)%1.06 %
No Change
-100 basis points over next 12 months(0.15)%(1.56)%
-200 basis points over next 12 months(1.29)%(5.01)%
The above interest rate simulation suggests that the Corporation’s balance sheet is liability sensitive as of March 31, 2022. In its current position, the table indicates that a 100 basis point increase in interest rates would have a modestly negative 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 as rates move above the loan floors. 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 March 31, 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. We would note that starting in the first quarter of 2020 that our simulations in a downward parallel shift of the yield curve, interest and discount rates at the short-end of the yield curve are allowed to decline below 0%. Management has and continues to employ strategies to mitigate risk in these scenarios. Strategies include actively lowering deposit and funding rates as well as adding and maintaining the use of interest rate floors on floating rate loans.
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Estimated increase (decrease) in Net Economic
Value at March 31,
Changes in Market Interest Rates20222021
+300 basis points 28 %64 %
+200 basis points22 %48 %
+100 basis points14 %27 %
No Change
-100 basis points(21)%(39)%
-200 basis points(55)%(97)%
This economic value of equity profile at March 31, 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-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 of $615 thousand for the first quarter of 2022 increased $16 thousand, or 2.67%, from the provision for loan losses recorded for the first quarter of 2021. The first quarter 2021 provision was calculated at the time the COVID-19 pandemic was intensifying locally and nationally and was therefore impacted by increased qualitative provisioning for the economic uncertainty as a result of the pandemic, while the first quarter 2022 provision reflects that certain financial and economic indicators have improved over the last few periods, combined with the impact of a specific reserve applied against the non-performing loan relationship discussed below in the Asset Quality Summary section.




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Asset Quality Summary
Asset quality remains a strong focus of management. Total non-performing loans were $22.8 million as of March 31, 2022, relatively unchanged from $23.0 million as of December 31, 2021. As of March 31, 2022 there was a specific reserve of $2.3 million against a non-performing commercial loan relationship. Consequently the ratio of non-performing assets to total assets was elevated to 1.25% as of March 31, 2022 and 1.34% as of December 31, 2021. Despite the near-term impact to these ratios resulting from this one loan relationship, management feels that overall asset quality remains strong. There were no properties in OREO as of March 31, 2022 and December 31, 2021.

Meridian realized net charge-offs of 0.04% of total average loans for the quarter ending March 31, 2022, up from the quarter ended December 31, 2021 level of 0.00%. Charge-offs amounted to $566 thousand for the quarter ending March 31, 2022, while recoveries were $19 thousand during this quarter. Nearly all of the charge-offs for the quarter ending March 31, 2022 were from small ticket equipment leases. 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 1.38% as of March 31, 2022 and 1.46% as of December 31, 2021.

As of March 31, 2022, the Corporation had $3.4 million of troubled debt restructurings (“TDRs”), of which $3.0 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 March 31, 2022, the Corporation had a recorded investment of $25.2 million of impaired loans and leases which included $3.4 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,
while as of December 31, 2021.

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
March 31,December 31,
(dollars in thousands)20222021
Non-performing assets:
Nonaccrual loans:
Real estate loans:
Home equity lines and loans999 911 
Residential mortgage2,412 2,398 
Total real estate loans3,411 3,309 
Commercial and industrial18,749 18,801 
Small business loans666 666 
Leases— 212 
Total nonaccrual loans$22,826 $22,988 
Total non-performing loans$22,826 $22,988 
Total non-performing assets$22,826 $22,988 
Troubled debt restructurings:
TDRs included in non-performing loans 358 361 
TDRs in compliance with modified terms3,007 3,446 
Total TDRs$3,365 3,807 
Asset quality ratios:
Non-performing assets to total assets1.25 %1.34 %
Non-performing loans to:
Total loans and leases1.51 %1.57 %
Total loans held-for-investment1.59 %1.66 %
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)1.67 %1.80 %
Allowance for loan losses to:
Total loans and leases1.24 %1.28 %
Total loans held-for-investment 1.31 %1.35 %
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)1.38 %1.46 %
Non-performing loans 82.48 %81.60 %
Total loans and leases$1,513,164 1,467,339 
Total loans and leases held-for-investment$1,431,906 1,386,457 
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans)$1,364,851 1,280,591 
Allowance for loan and lease losses$18,826 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.

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NON-INTEREST INCOME
Three Months Ended March 31, 2022 Compared to the Same Period in 2021
Total non-interest income for the first quarter of 2022 was $13.1 million, down $13.9 million or 51.6% from the comparable period in 2021. This decrease in non-interest income came from our mortgage segment. Mortgage banking net revenue decreased $17.0 million or 70.6% over the first quarter of 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 $323.8 million in loans during the first quarter of 2022, a decrease of $401.2 million, or 55.3%, from the first quarter of 2021. The changes in the fair value of derivative instruments and loans held for sale increased a combined $3.5 million over the period. Net hedging activity declined as the net gain decreased $1.4 million for the first quarter of 2022.
Net revenue from the sales of SBA 7(a) loans increased $1.3 million as $25.2 million in loans were sold in the first quarter of 2022 compared to $13.0 million in loans sold in the first quarter of 2021, an increase of nearly 93.0%. This represents the 5th straight quarter of net revenue from the sales of SBA 7(a) loans of at least $1.2 million. Wealth management revenue increased $168 thousand year-over-year due to an increase of $166.8 million in assets under management over this period, which benefit from the more favorable market conditions, as discussed above. Other fee income was up $173 thousand or 16.1% from the first quarter of 2021, to $1.2 million, due to increases in wire fees, title fee income, and servicing fee income.

NON-INTEREST EXPENSE
Three Months Ended March 31, 2022 Compared to the Same Period in 2021
Total non-interest expense for the first quarter of 2022 was $21.4 million, down $6.8 million or 24.2%, 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 $6.8 million or 30.9%, from the comparable period in 2021. Of this decrease, $7.5 million relates to the mortgage segment, while there was an increase of $680 thousand for the bank and wealth segments due to an increase of 30 in FTE’s and a higher level of stock-based compensation expense.
Advertising and promotion expense increased $201 thousand, or 25.6%, 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 first 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 $285 thousand, or 67.1%, to $710 thousand for the first quarter of 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. Other non-interest expense decreased $382 thousand, or 18.7%, to $1.7 million for the first quarter of 2022, largely due to a reduction in a reserve for mortgage loan repurchases.

INCOME TAXES
Income tax expense for the three months ended March 31, 2022 was $1.6 million, as compared to $3.1 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 21.9% for the first quarter of 2022 and 23.6% for the first quarter of 2021.

BALANCE SHEET ANALYSIS
As of March 31, 2022, total assets were $1.8 billion, an increase of $118.1 million, or 6.9%, from December 31, 2021. Total assets increased $87.6 million from March 31, 2021. This growth in assets over both periods compared was due to loan portfolio growth, as discussed further below.
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Portfolio loans grew $45.4 million, or 3.3%, to $1.4 billion as of March 31, 2022, from $1.4 billion as of December 31, 2021. Overall portfolio loan growth, excluding PPP loans, was 6.5% quarter-over-quarter, or 26% on an annualized basis for 2022. Commercial loans increased $25.0 million, or 8.5%, commercial real estate loans increased $12.9 million, or 2.4%, construction loans increased $28.1 million, or 20.8%, residential real estate loans held in portfolio increased $10.3 million, or 15.1%, and lease financings increased $13.7 million, or 14.7% from December 31, 2021. Partially offsetting the growth in portfolio loans was a decrease of $38.6 million, or 43.7%, in PPP loan balances.

Deposits were $1.6 billion as of March 31, 2022, up $118.4 million, or 8.2%, from December 31, 2021. Non-interest bearing deposits increased $16.9 million, or 6.1%, from December 31, 2021 due to strong business development efforts.

Interest-bearing checking accounts decreased $16.0 million, or 5.9%, while money market accounts/savings accounts combined decreased $9.5 million, or 1.4%, since December 31, 2021. Certificates of deposits increased $127.0 million, or 61.7%, 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 $157.7 million, or 8.6% of total assets as of March 31, 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 $5.5 million, offset by dividends of $7.3 million paid as well as a $6.4 million decline in accumulated other comprehensive income from the investment security portfolio due to changes in interest rates over this period.
As of March 31, 2022, the Tier 1 leverage ratio was 9.10% for the Corporation and 11.20% for the Bank, the Tier 1 risk-based capital and common equity ratios were 10.09% for the Corporation and 12.41% for the Bank, and total risk-based capital was 13.91% for the Corporation and 13.76% for the Bank. Based on these capital ratio levels, we remain above the Community Bank Leverage Ratio ("CBLR") requirement of 8%. Quarter-end numbers show a tangible common equity to tangible assets ratio (a non-GAAP measure) of 8.40% for the Corporation and 10.40% for the Bank. Tangible book value per share (a non-GAAP measure) was $25.04 as of March 31, 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 March 31, 2022 and December 31, 2021:
March 31, 2022
ActualTo Be Well Capitalized Under CBLR Framework
(dollars in thousands)AmountRatioAmountRatio
Tier 1 capital (to average assets)
Corporation$159,154 9.10 %$139,869 8.00 %
Bank195,81811.20 %139,867 8.00 %
December 31, 2021
(dollars in thousands)ActualTo Be Well Capitalized Under CBLR Framework
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
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consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%.The bank regulatory agencies temporarily lowered the CBLR to 8% as a result of the COVID-19 pandemic.
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 $331.9 million at March 31, 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 $3.2 million at March 31, 2022. At March 31, 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 March 31, 2022, Meridian’s maximum borrowing capacity with the FHLB was $524.3 million. At March 31, 2022, Meridian had borrowed $36.1 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $102 million against its available credit lines. At March 31, 2022, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as $162.8 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $378.3 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.

Discussion of Segments

As of March 31, 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 $8.2 million for the three months ended March 31, 2022, as compared to income before tax of $7.3 million for the same period in 2021. The Banking Segment provided 115.2% of the Corporation’s pre-tax profit for the three month period ended March 31, 2022, as compared to 54.8% for the same period in 2021.
The Wealth Management Segment recorded income before tax of $519 thousand for the three months ended March 31, 2022, as compared to income before tax of $227 thousand for the same period in 2021.
The Mortgage Banking Segment recorded loss before tax of $1.6 million for the three months ended March 31, 2022, as compared to income before tax of $5.8 million for the same periods in 2021. Mortgage Banking income and expenses related to loan originations and sales increased due to higher 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 March 31, 2022 were $475.2 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 March 31, 2022 amounted to $23.2 million, as compared to $26.0 million at December 31, 2021.
48
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 four loans totaling $906 thousand for the three months ended March 31, 2022, and repurchased one loan in the amount of $154 thousand for the three months ended March 31, 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
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 March 31, 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 March 31, 2022 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
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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.

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 51.
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Table of Contents
EXHIBIT INDEX
Exhibit
Number
Description
2.1
Plan of Merger and Reorganization dated April 26, 2018 by and between Registrant, Bank and Meridian Interim Bank, filed as Exhibit 2.1 to Form 8-K on August 24, 2018 and incorporated herein by reference.
3.1
Amended Articles of Incorporation of Registrant, filed herewith.
3.2
Bylaws of Registrant, filed as Exhibit 3.2 to Form 8-K on August 24, 2018 and incorporated herein by reference.
4.2
Indenture, dated as of December 18, 2019, between Meridian Corporation, as Issuer, and U.S. Bank National Association, as Trustee, incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed with the SEC on December 18, 2019.
4.3
Form of 5.375% Subordinated Note due 2029 (included as Exhibit A-1 and Exhibit A-2 to the Indenture incorporated by reference as Exhibit 4.2 hereto), filed with the SEC on December 18, 2019.
31.1
Rule 13a-14(a)/ 15d-14(a) Certification of the Principal Executive Officer, filed herewith.
31.2
Rule 13a-14(a)/ 15d-14(a) Certification of the Principal Financial Officer, filed herewith.
32
Section 1350 Certifications, filed herewith.
101.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
51
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:May 10, 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)
52

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