What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-16 compared with 2021-03-29 · 156 added, 120 removed, 299 unchanged (48% of the section changed)

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Recent Market Conditions

Our financial condition and performance, as well as the ability of our borrowers to repay their loans, the value of collateral securing those loans, as well as demand for loans and other products and services that we offer, are all highly dependent on the business environment in the primary markets in which we operate and in the United States as a whole.

As discussed further in Part I, Item 1, during the first quarter of 2020, an outbreak of a novel strain of coronavirus (COVID-19) spread around the world, including the United States.

COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity and other economic activities have had, are currently having and will continue to have a destabilizing effect on financial markets and economic activity.

The full extent of the impact of COVID-19 on our operational and financial performance is currently uncertain, cannot be predicted and will depend on certain developments, including, among others, the duration and spread of COVID-19, its impact on our customers, employees and vendors, and governmental, regulatory and private sector responses, which may be precautionary, to the coronavirus.

In light of the changing economic outlook as a result of COVID-19, as well as other factors, including the possibility of an oil price war in March 2020, the 10-year Treasury yield had fallen to historic lows, and the equity markets were and continue to be significantly impacted.

In response, the Federal Reserve reduced the target federal funds rate by 50 basis points on March 3, 2020, and then by an additional 100 basis points on March 15, 2020.

Since the assets and liabilities of the Corporation are significantly impacted by changes in interest rates, the Corporation adjusted its deposit and loan offering rates and continues to monitor them during this crisis.

Our financial condition and performance, as well as the ability of our borrowers to repay their loans, the value of collateral securing those loans, and demand for loans and other products and services that we offer, are all highly dependent on the business environment in the primary markets in which we operate and in the United States as a whole.

As discussed further in Part I, Item 1, during the first quarter of 2020, an outbreak of COVID-19 spread around the world, including the United States.

COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity and other economic activities have had a destabilizing effect on financial markets and economic activity.

The full extent of the impact of COVID-19 on our operational and financial performance is currently uncertain, cannot be predicted and will depend largely on when it is widely considered that the pandemic has ended and the negative impacts have lessened.

Critical Accounting Policies and Estimates

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Management has presented the application of this policy to the audit committee of our board of directors.

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 or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.

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.

The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments.

Additional information about these policies can be found in footnote 1 of the Corporation’s Consolidated Financial Statements as of and for the years ended December 31, 2020 and 2019.

Additional information about these policies can be found in the “Summary of Significant Accounting Policies” in footnote 1 of the Corporation’s Consolidated Financial Statements as of and for the years ended December 31, 2021 and 2020.

Provision and allowance for loan and lease losses

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The methodologies are set forth in a formal policy and take into consideration the need for an overall general allowance as well as specific allowances that are determined on an individual loan basis for impaired loans.

We increase our Allowance by charging provisions for losses against our income and decreased by charge-offs, net of recoveries.

The Allowance is increased by charging provisions for losses against our income and decreased by charge-offs, net of recoveries.

The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.

While management uses available information to recognize losses on loans and leases, changes in economic or other conditions may necessitate revision of the estimate in future periods.

The Allowance is maintained at a level sufficient to provide for probable losses based upon an ongoing review of the originated loan and lease portfolios by portfolio category, which include consideration of actual loss experience, peer loss experience, changes in the size and risk profile of the portfolio, identification of individual problem loan and lease situations which may affect a borrower’s ability to repay, and evaluation of prevailing economic conditions.

The Allowance is maintained at a level sufficient to provide for probable losses based upon an ongoing review of the loan and lease portfolios by portfolio category, which includes consideration of actual loss experience, peer loss experience, changes in the size and risk profile of the portfolio, identification of individual problem loan and lease situations which may affect a borrower’s ability to repay, and evaluation of prevailing economic conditions.

Results of operations – Years ended December 31, 2021 and 2020

Our reported net income for the year ended December 31, 2020, was $26.4 million or $4.27 per diluted common share compared to $10.5 million or $1.63 per diluted common share for the same period in 2019.

The increase was driven by growth in earning assets, which contributed $9.8 million in increased interest income, as well as growth in non-interest fee producing divisions such as mortgage, wealth and SBA.

The increase in net income was also driven by a $2.9 million decrease in interest expense, while the provision for loan losses increased $7.4 million.

Total net non-interest income (non-interest income less non-interest expense) improved $15.8 million.

Net income was $35.6 million, or $5.73 per diluted share, for the twelve months ended December 31, 2021 compared to net income of $26.4 million, or $4.27 per diluted share, for the twelve months ended December 31, 2020.

The increase was due largely to the increase in net interest income of $14.1 million, combined with a $1.1 million increase in non-interest income and a $7.2 million decline in the provision for loan losses, partially offset by increases in non-interest expense and income taxes of $10.7 million and $2.6 million, respectively.

Net interest income

Our earnings are derived from net interest income, which is our interest income less interest expense.

Changes in our balance sheet composition, including interest-earning assets, deposits, and borrowings, combined with changes in market interest rates, impact our net interest income.

Net interest margin is net interest income divided by average interest-earning assets.

We manage our interest-earning assets and funding sources, including non-interest and interest-bearing liabilities, in order to maximize this margin.

Net interest income on a tax equivalent yield basis (“TEY”) increased by $12.8 million, or 35.1%, to $49.2 million for the year ended December 31, 2020 from $36.4 million for the same period in 2019.

Our net interest margin was 3.40% on a TEY for the year ended December 31, 2020 as compared to 3.65% for the same period in 2019.

The decrease in net interest margin, year-over-year, reflects the declining yield on certain interest earnings assets, somewhat offset by the declining cost of funds.

Net interest income increased $14.1 million, or 28.8%, to $63.1 million from $49.0 million, for the twelve months ended December 31, 2021, compared to the twelve months ended December 31, 2020.

Growth in net interest income period over period reflects an increase in interest income of $8.9 million along with a decrease in interest expense of $5.2 million.

The increase in interest income was led by growth in portfolio loans, most notably commercial real estate loans, lease financings, and SBA loans, that contributed $3.6 million, $3.5 million and $2.9 million, respectively, to the increase in interest income, while the continued forgiveness of PPP loans led to an increase in interest and fee income of $2.3 million, period over period.

As of December 31, 2021 there was approximately $2 million in PPP fees yet to be recorded in income.

The net interest margin increased 37 basis points to 3.77% for the twelve months ended December 31, 2021 from 3.40% for the twelve months ended December 31, 2020.

The margin in 2020 was negatively impacted by the rapid decline in Fed fund rates as well as the effects of the PPP loan program, while the margin in 2021 felt a positive impact from the PPP loan program as approximately 78% of these loans were forgiven during 2021, leading to a yield on PPP loans of 4.41% for the twelve months ended December 31, 2021, compared to 3.09% for the same period in 2020.

Other contributors to the margin expansion for 2021 related to the increase in non-interest bearing deposits, which rose $68.1 million on average, and the cost of deposits decreased (59 basis points).

Average balance sheet, interest and yield/rate analysis.

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Total deposits

Short-term borrowings

Long-term borrowings

Total Borrowings

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Total stockholders' equity and liabilities

Tax-equivalent net interest income / net interest spread

Tax-equivalent net interest margin

Tax-equivalent adjustment

Net interest income

Net interest spread (1)

Net interest margin (1)

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

(2) Average balances include non-accrual loans.

Rate/Volume Analysis

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As shown in the following Rate/Volume Analysis table, this increase was primarily attributable to volume changes.

Volume related changes contributed $13.3 million towards interest income which was partially offset by unfavorable changes in rate of $567 thousand.

Volume related changes contributed $8.6 million towards interest income, combined with favorable changes in rate of $5.6 million.

The favorable change in net interest income due to volume changes was driven largely from growth in total loans, which increased $168.1 million on average.

This increase contributed $8.1 million to interest income.

Total investment securities, cash and cash equivalents increased $59.2 million on average combined, an increase of $1 million to interest income.

On the funding side, interest checking and money market accounts together rose $227.2 million on average during the year, reducing net interest income by $2.7 million.

Time deposits increased $2.2 million on average year over year, causing a slightly unfavorable change of $51 thousand to net interest income.

Average borrowings increased $108.8 million and had an unfavorable impact of $271 thousand on net interest income, while the increase of $30.3 million increase in average subordinated debt contributed $1.8 million unfavorably to net interest income.

The unfavorable change in net interest income due to rate changes was driven largely from the decrease in the yield on interest-earning assets which decreased net interest income $8.3 million.

The unfavorable change due to cash and investments was $372 thousand.

The yield on loans held for investment declined 76 basis points resulting in a $7.6 million decrease in net interest income.

These unfavorable changes in net interest income were nearly offset by a reduction in the cost of funds.

Most notably the decline in the cost of deposits contributed a favorable $6.7 million to net interest income as the cost of interest-bearing deposits, money market and savings deposits, and time deposits decreased 73, 89, and 81 basis points, respectively.

Total investment securities,

cash and cash equivalents increased $67.4 million on average combined, contributed $955 thousand to interest income.

On the funding side, interest checking and money market accounts together rose $265.6 million on average during the year, reducing net interest income by $1.8 million, time deposits decreased $66.6 million on average year over year, causing a favorable change of $844 thousand to net interest income.

Average borrowings decreased $59.5 million and had a favorable impact of $496 thousand on net interest income.

The favorable change in net interest income due to rate changes was driven largely from the decrease in the cost of deposits which increased net interest income $5.4 million.

The unfavorable rate change due to cash and investments was $457 thousand.

An increase in the yield on loans during 2021 contributed $407 thousand to the favorable change in net interest income.

The following table sets forth, among other things, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense for the periods noted (tax-exempt yields have been adjusted to a tax equivalent basis using a 23.2% tax rate).

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Total interest bearing deposits

Short-term borrowings

Long-term borrowings

Total borrowings

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Provision for loan losses

The provision for loan losses was $8.3 million for the twelve months ended December 31, 2020, compared to a $901 thousand provision for the twelve months ended December 31, 2019.

The provision for the current year period was due largely to qualitative provisioning for the continued economic uncertainty as a result of the COVID-19 pandemic and overall loan portfolio growth, combined with the impact of a $1.5 million specific reserve placed on an impaired commercial loan during the third quarter of 2020.

The provision for loan losses was $1.1 million for the twelve months ended December 31, 2021, compared to an $8.3 million provision for the twelve months ended December 31, 2020.

The decline in the provision period over period is the result of an improvement in the trend of economic and loan deferral factors used in the allowance for loan losses calculation that had been negatively impacted in 2020 due to the COVID-19 pandemic, which have subsequently rebounded as the economy continues to recover.

This improvement outpaced provisioning for loan growth as well as a $1.4 million specific reserve placed against a non-performing loan relationship described further in the “Asset Quality Summary” on page 43.

Non-interest income

Total non-interest income for the year ended December 31, 2020 was $ 86.9 million, up $54.0 million or 164.1%, from the year ended December 31, 2019.

This increase in non-interest income came primarily from our mortgage division as mortgage banking net revenue increased $50.5 million or 194.0% over the prior year period.

The significant increase in the current year period came from increased levels of mortgage loan originations due to both the expansion of the division into Maryland as well as the favorable rate environment for refinance activity.

Our mortgage division originated $2.4 billion in loans during the year ended December 31, 2020, an increase of $1.8 billion, or 311.0%, from the prior year period.

Refinance activity represented 60% of the total residential mortgage loans originated for the year ended December 31, 2020, compared to 30% for the year ended December 31, 2019.

Overall, the margin on mortgage banking activity declined 58 basis points from 2.80% for the year ended December 31, 2019 to 2.22% for the year ended December 31, 2020.

The increase in the mortgage pipeline as a result of the expansion and the refinance activity generated significant positive fair value changes in derivative instruments and loans held-for-sale.

These fair value changes increased non-interest income a combined $8.7 million during the year ended December 31, 2020 compared to the year ended December 31, 2019.

These changes were offset by increases in net hedging losses of $8.6 million.

Wealth management revenue increased $230 thousand, or 6.3%, year-over-year due to the more favorable market conditions that existed in the year ended December 31, 2020, compared to the prior year comparable period.

Non-interest income from the sales of investments amounted to $1.3 million for the year ended December 31, 2020, an increase of $1.2 million from the prior year period.

Income from the sales of SBA 7(a) loans increased $1.2 million, or 83.5%, from the prior year period, to $2.6 million.

$41.1 million in SBA 7(a) loans were sold for the year ended December 31, 2020, compared to $22.4 million in loans sold for the year ended December 21, 2019.

Other fee income was up $934 thousand or 57.7% for the year ended December 31, 2020, from the year ended December 31, 2019 due largely to $319 thousand in swap fee income from customer loan swaps recorded in the current year period, an increase of $144 thousand in title fee income, a $149 thousand increase in wire fee income as well as $436 thousand in mortgage fee income, respectively, as loan closing activity increased period-over-period.

Total non-interest income for the twelve months ended December 31, 2021 was $88.0 million, up $1.1 million, or 1.2%, from the twelve months ended December 31, 2020.

This increase in non-interest income was largely the result of an increase of $4.3 million in SBA loan sales income as fiscal year 2021 sales of SBA 7(a) loans amounted to $67.2 million, an increase of $26.1 million, or 63.5%, compared to fiscal year 2020.

Wealth management revenue increased $947 thousand, or 24.6%, year-over-year due to an increase in average assets under management of $295 million over this period.

In addition, these assets benefited from the more favorable market conditions that existed in the twelve months ended December 31, 2021, compared to the prior year period.

Other fee income was up $1.8 million, or 68.5%, for the twelve months ended December 31, 2021, from the twelve months ended December 31, 2020 due to increases in mortgage fees, wire fees, title fee income, as well as an increase in in mortgage and SBA servicing fee income.

Mortgage banking net revenue decreased $529 thousand, or 0.7%, over the prior year period.

The decrease in the 2021 income was the result of a decline in the gain on sale margin of 48 basis points, despite the increase in mortgage loans sold over 2020.

Mortgage loan originations, however, decreased $74.7 million from $2.37 billion in 2020 to $2.29 billion in 2021, with refinancing activity representing 47% of the total residential mortgage loans originated in 2021, compared to 60% in 2020.

The refinancing opportunities have declined significantly with the change in mortgage rates recently causing the current period end pipeline to be lower at December 31, 2021, compared to December 31, 2020.

The changes in the mortgage pipeline generated significant negative fair value changes in derivative instruments (predominantly interest rate lock commitments) and loans held-for-sale.

These fair value changes decreased non-interest income a combined $17.0 million during the twelve months ended December 31, 2021 compared to the twelve months ended December 31, 2020.

These changes were significantly offset by increases in net hedging gains of $12.4 million.

Year Ended December 31,

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Non-interest expense

Total non-interest expense for the year ended December 31, 2020 was $93.1 million, up $38.3 million or 69.8%, from the year ended December 31, 2019.

The increase is largely attributable to the variable expenses from loan originations overall, particularly mortgage commissions.

Total salaries and employee benefits expense was $72.1 million, an increase of $37.0 million or 105.2%, compared to the year ended December 31, 2019.

Of this increase, $33.2 million relates to the mortgage division.

Full-time equivalent employees, particularly in the mortgage division, increased year-over-year.

As noted above, in the first quarter of 2020, we expanded our mortgage division into Maryland with the hiring of nearly 90 individuals year to date.

Advertising expenses increased by $377 thousand or 15.2% during the year ended December 31, 2020, due mainly to an increase in marketing related costs from the mortgage division.

Professional fees increased $499 thousand or 19.1%, compared to the prior year period due largely to an increase in consulting costs incurred on several IT related projects that Meridian has undertaken to improve efficiency and automation in processes, combined with an increase in third party valuation services related to the increased mortgage division activity.

Other expenses were down year over year due largely to the impacts from stay at home orders and business restrictions brought on by the COVID-19 pandemic.

Total non-interest expense for the twelve months ended December 31, 2021 was $103.7 million, up $10.7 million or 11.4%, from the twelve months ended December 31, 2020.

Year Ended December 31,

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Total non-interest expenses

Total salaries and employee benefits expense was $78.9 million, an increase of $6.7 million or 9.3%, compared to the twelve months ended December 31, 2020.

Salaries and benefits for the Bank and Wealth segments increased $5.4 million due to an increased level of full-time equivalent employees as well as increase in the value of stock-based compensation expense.

$1.3 million of the overall increase relates to the Mortgage segment as the number of employees in this segment have increased period over period.

Professional fees were up $445 thousand, or 14.3% year over year, while information technology expenses were up $690 thousand, or 44.7% year over year.

Increases in these two categories of expense were largely the result of Meridian’s ongoing strategy to invest in technology that focuses on improving back-office efficiencies through automation and workflow processes, as well improving the scalability of our IT systems overall with a focus on cloud based computing.

The increase in professional fees was also impacted by one-time consent fees incurred in 2021 related to the filing of the Corporation’s December 31, 2020 Form 10K, in conjunction with the change in Accountants made in 2020.

Advertising and promotion expenses were up $862 thousand, or 30.2%, over the same period due to the improvements to the economy and a pull back on COVID-19 related restrictions that has allowed bank employees to spend more time in a business development and community outreach capacity, combined with increased spend year over year in different advertising campaigns, including mortgage segment lead generation expenses.

Other non-interest expense was up $1.9 million, or 30.6%, from the prior year due to an increase in employee travel and training expenses as 2021 allowed for more travel opportunities due to a pullback in COVID-19 restrictions, as well as increases in insurance expense, director compensation, and other less significant items.

Income tax expense

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Balance Sheet Summary

As of December 31, 2020, total assets were $1.7 billion compared with $1.2 billion as of December 31, 2019.

Total assets increased $570.2 million, or 49.6%, from December 31, 2019 primarily due to strong loan growth.

Total loans, excluding mortgage loans held for sale, increased by $320.1 million, or 33.2%.

Investment securities and cash and cash equivalents increased $59.8 million, or 55.4%, year-over-year.

Our overall asset growth was funded largely by an increase in deposits of $390.2 million, or 45.8%, to $1.2 billion at December 31, 2020 from $851.2 million at December 31, 2019.

Increases in borrowings of $145.6 million, or 114.8% year-over-year, particularly from PPPLF advances, also helped to fund the growth in our loan portfolio.

As of December 31, 2021, total assets were $1.7 billion, a decrease of $6.8 million from December 31, 2020.

Total loans, net of allowance, grew $101 million, or 7.9%, to $1.4 billion as of December 31, 2021, from $1.3 billion as of December 31, 2020.

There was growth in several commercial loan categories from December 31, 2020, as we continue to expand our presence in the Philadelphia market region and beyond.

Small business loans increased $64.6 million, or 130.4%, commercial real estate loans increased $31.8 million, or 6.6%, and lease financings increased $57.2 million, or 184.3%, as our Meridian Equipment Finance (“MEF”) leasing team continued their strong growth trajectory after starting up in early 2020.

Additionally, commercial & industrial loans, shared national credits and commercial construction loans combined increased $46.6 million in total over the period.

Residential real estate loans held for sale decreased $148.3 million, or 64.7%, to $80.9 million as of December 31, 2021, while PPP loans decreased $113.3 million, or 55.7%, over this period, as our SBA and commercial lending teams are making a strong effort to assist our PPP loan customers in obtaining forgiveness on their loans with the SBA.

As of December 31, 2021 there was approximately $88.3 million in PPP loans remaining to be forgiven, net of deferred fees.

Our loan portfolio is the largest category of our interest-earning assets.

As of December 31, 2020 and 2019, our total loans amounted to $1.5 billion and $1.0 billion, respectively.

Our loan portfolio is comprised of loans originated to be held in

portfolio, as well as residential mortgage loans originated for sale.

As of December 31, 2021 and 2020, our total loans amounted to $1.5 billion.

Our loan portfolio is comprised of loans originated to be held in portfolio, as well as residential mortgage loans originated for sale.

Meridian engages in the origination of residential mortgages, most typically for 1-4 family dwellings, with the intention of the Corporation to principally sell substantially all of these loans in the secondary market to qualified investors.

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Total loans and leases

The following table shows the amounts of loans outstanding as of December 31, 2021 which, based on remaining scheduled repayments of principal, are due in the periods indicated.

(dollars in thousands)

After 15 years

Mortgage loans held for sale

Commercial mortgage

Home equity lines and loans

Residential mortgage

Commercial and industrial

Small business loans

The amounts have been classified according to sensitivity to changes in interest rates for amounts due after one year, as of December 31, 2021.

Variance rate loans are those loans with floating or adjustable interest rates.

(dollars in thousands)

Mortgage loans held for sale

Commercial mortgage

Home equity lines and loans

Residential mortgage

Commercial and industrial

Small business loans

Commercial and industrial loans, commercial construction loans and commercial real estate loans increased a combined $84.5 million, or 9.5%, for the year ended December 31, 2021.

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The primary source of repayment for commercial business loans is generally operating cash flows of the business and may also include collateralization of inventory, accounts receivable, equipment and/or personal guarantees.

Our commercial and industrial loans decreased by $11.5 million, or 4.2%, to $261.8 million at December 31, 2020 from $273.3 million at December 31, 2019.

Our commercial and industrial loans increased by $32.0 million, or 12.2%, to $293.8 million at December 31, 2021 from $261.8 million at December 31, 2020.

The total commercial portfolio represented 20.0% and 17.2% of our total loan portfolio at December 31, 2021 and 2020, respectively.

Small Business Loans

We provide financing to small businesses in various industries that include guarantees under the Small Business Administrations (SBA’s) loan programs.

We provide financing to small businesses in various industries that include guarantees under the Small Business Administration’s (SBA’s) loan programs.

Our small business loans increased by $64.6 million, or 130.4%, to $114.2 million at December 31, 2021 from $49.5 million at December 31, 2020.

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Meridian participated in the SBA’s Paycheck Protection Program (PPP) loan program and the Federal Reserve’s Main Street Lending Program (MSLP) to support lending to small and medium sized businesses that were impacted by the COVID-19 pandemic.

At December 31, 2020 the balance of PPP loans was $203.5 million, while at December 31, 2020 the balance of MSLP loans was $580 thousand, after netting out participations.

PPP loans and MSLP loans represented 13.4% and 0.0% of our total loan portfolio at December 31, 2020, respectively.

At December 31, 2021 the balance of PPP loans was $90.2 million, compared to $203.5 million at December 31, 2020.

MSLP loans amounted to less than $600 thousand and are included within Commercial and Industrial loans.

PPP loans represented 6.1% of our total loan portfolio at December 31, 2021.

Residential loans

Our residential loans held in portfolio are primarily secured by single-family homes located in our market areas.

Our loan pipeline is fed via our mortgage loan production offices (“LPOs”) and through relationships with commercial lending and through relationships with sales brokers and agents who actively refer clients to Meridian.

The balance of residential loans in portfolio decreased $1.2 million, or 2.3%, to $52.5 million at December 31, 2020 from $53.7 million at December 31, 2019.

Our loan pipeline is fed via our mortgage loan production offices (“LPOs”) and through relationships with sales brokers and agents who actively refer clients to Meridian as well as referrals from our commercial and private banking lenders.

The balance of residential loans in portfolio increased $15.7 million, or 30.0%, to $68.2 million at December 31, 2021 from $52.5 million at December 31, 2020.

The total residential loan portfolio represented 4.6% and 3.5% of our total loan portfolio at December 31, 2021 and 2020, respectively.

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These loans typically fund completely at closing.

Additional products include smaller dollar personal loans and our newly introduced student loan refinance product, designed to provide additional flexibility in repayment terms desired in the marketplace.

Our consumer credit products include home equity lines and loans, personal lines and loans, and student loan refinancing.

The total consumer loan portfolio represented 0.1% of our total loan portfolio at December 31, 2020 and 2019.

Additional products include smaller dollar personal loans and our student loan

refinance product, designed to provide additional flexibility in repayment terms desired in the marketplace.

The total consumer loan portfolio represented 3.6% and 4.3% of our total loan portfolio at December 31, 2021 and 2020, respectively.

Our securities portfolio is used to make various term investments, maintain a source of liquidity and serve as collateral for certain types of deposits and borrowings.

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Investments in our securities portfolio may change over time based on our funding needs and interest rate risk management objectives.

Our liquidity levels take into account anticipated future cash flows

and other available sources of funds and are maintained at levels that we believe are appropriate to provide the necessary flexibility to meet our anticipated funding requirements.

Our liquidity levels take into account anticipated future cash flows and other available sources of funds and are maintained at levels that we believe are appropriate to provide the necessary flexibility to meet our anticipated funding requirements.

As of December 31, 2021 the fair value of our investment portfolio totaled $165.9 million, with an effective tax equivalent yield of 1.81% and an estimated duration of approximately 4.89 years.

The majority of our investment portfolio, or 55.1%, consists of municipal securities, along with 19.52% in U.S.

The largest category of our investment portfolio, or 47.0%, consists of municipal securities, along with 17.6% in U.S.

Agency asset-backed securities.

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We regularly evaluate the composition of our investment portfolio as the interest rate yield curve changes and may sell investment securities from time to time to adjust our exposure to interest rates or to provide liquidity to meet loan demand.

Not included in the tables below are equity investments that had fair values of $2.4 million and $1.0 million, as of December 31, 2021 and 2020, respectively.

December 31, 2021

# of Securities

in unrealized

(dollars in thousands)

loss position

Securities available-for-sale:

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State and municipal securities

government agency collateralized mortgage obligations

Corporate bonds

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December 31, 2020

# of Securities

in unrealized

(dollars in thousands)

loss position

Securities available-for-sale:

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State and municipal securities

Corporate bonds

Total securities available-for-sale

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Asset Quality Summary

Asset quality remains strong year-over-year despite the pressures that the COVD-19 pandemic has had on businesses and the economy locally and nationally.

Meridian realized net charge-offs of 0.00% of total average loans for the year ended December 31, 2020, compared with net recoveries of (0.06)% for the year ended December 31, 2019.

Total non-performing assets, including loans and other real estate property, were $7.9 million as of December 31, 2020, $3.4 million as of December 31, 2019.

The increase to non-performing loans from December 31, 2019 to December 31, 2020 resulted from a $2.3 million increase in nonperforming commercial mortgages, an $864 thousand increase in nonperforming commercial loans, a $1.2 million increase in residential mortgage loans, and a $322 thousand increase in home equity lines and loans.

The ratio of non-performing assets to total assets as of December 31, 2020 was 0.46% compared to 0.29% as of December 31, 2019.

The ratio of allowance for loan losses to total loans, was 1.38% as of December 31, 2020, up from the 0.99% recorded as of December 31, 2019.

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), was 1.65% as of December 31, 2020, up from the 1.00% recorded as of December 31, 2019.

Asset quality remains a strong focus of management, which is committed to working with customers significantly impacted by the COVID-19 pandemic.

While COVID-19 loan deferrals provided to borrowers amounted to only $2.4 million as of December 31, 2021, down from $24.2 million as of December 31, 2020, one commercial loan relationship for $13.8 million became a non-performing loan relationship with a specific reserve of $1.4 million during the quarter ending December 31, 2021.

This change in status caused non-performing loans to increase to $23.0 million (not including past due PPP loans of $63 thousand) as of December 31, 2021, compared to $7.9 million as of December 31, 2020.

Consequently the ratio of non-performing assets to total assets as of December 31, 2021 was 1.34% compared to 0.46% as of December 31, 2020.

Despite the near-term impact to these ratios resulting from this loan relationship downgrade, the overall asset quality remains strong.

There was no other real estate property included in non-performing assets for either period.

Meridian realized net charge-offs of $79 thousand, or 0.01%, of total average loans for the year ended December 31, 2021, compared to net charge-offs of $48 thousand, or 0.00%, of total average loans for the year ended December 31, 2020.

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 1.46% as of December 31, 2021 compared to 1.65% as of December 31, 2020.

PPP loans are excluded from calculation of this ratio as they are guaranteed by the SBA and therefore we have not provided for in the allowance for loan losses.

A reconciliation of this non-GAAP measure is included in the Non-GAAP Financial Measures section below.

During 2019 one residential mortgage loan was foreclosed on and the property was recorded within other real estate owned (“OREO”) in the balance sheet at the lower of cost or fair value less cost to sell of $120 thousand.

There were no properties in OREO as of December 31, 2020, as the above noted property was sold during 2020 and a gain of $6 thousand was recorded on the sale.

A reconciliation of this non-GAAP measure is included in the Non-GAAP Financial Measures section on page 46.

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 excluded from non-performing loans and leases.

As of December 31, 2020, the Corporation had $3.6 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 December 31, 2020, the Corporation had a recorded investment of $10.4 million of impaired loans and leases which included $3.6 million of TDRs.

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, 2020 impaired loans totaled $10.4 million, which included $3.6 million of TDRs.

The increase in impaired loans was largely due to the one commercial loan relationship for $13.8 million, discussed above, that became a non-performing loan relationship late in 2021 with a specific reserve of $1.4 million.

Impaired loans and leases are those for which it is probable that the Corporation will not be able to collect all scheduled principal and interest in accordance with the original terms of the loans and leases.

Impaired loans and leases as of December 31, 2019 totaled $7.3 million, which included $3.9 million of TDRs.

Refer to footnote 6 in the notes to the Consolidated Financial Statements for more information regarding the Corporation’s impaired loans and leases.

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Commercial and industrial

Small business loans

Total nonaccrual loans

Other real estate owned

Total non-performing loans

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Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)

Allowance for loan losses to:

Allowance for loan and lease losses to:

Total loans and leases

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(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.

See “Non-GAAP Financial Measures” on page 46 for a reconciliation of this measure to its most comparable GAAP measure.

PPP loans have only been excluded from this calculation as of December 31, 2021.

Allowance for Loan and Lease Losses

The following is a summary of the allocation of the allowance for loan and lease losses by loan category for the periods presented.

(dollars in thousands)

December 31, 2021

December 31, 2020

Commercial mortgage

Home equity lines and loans

Residential mortgage

Commercial and industrial

Small business loans

The following table provides information on net charge-offs by loan category:

December 31, 2021

December 31, 2020

offs as a % of

(dollars in thousands)

Average Loans

Commercial mortgage

Home equity lines and loans

Residential mortgage

Commercial and industrial

Small business loans

Deposits and Equity

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Non-interest bearing deposits increased $70.7 million, or 34.7%, from December 31, 2020.

Interest-bearing checking accounts increased $112.2 million, or 118.8%, from December 31, 2019.

Money market accounts/savings accounts increased $267.2 million, or 87.5% since December 31, 2019, driven by business money market accounts and sweep accounts.

Interest-bearing checking accounts increased $61.7 million, or 29.9%, from December 31, 2020, while money market accounts/savings accounts increased $125.0 million, or 21.8%, since December 31, 2020.

Increases in core deposits were driven from loan customers as part of new business and municipal relationships and also as a result of the PPP loan process.

Certificates of deposit decreased $53.5 million, or 17.2%, from December 31, 2019, as non-term deposits were preferred by customers in this low rate environment.

Certificates of deposits decreased $52.3 million, or 20.2%, from December 31, 2020, as lower levels of wholesale funding have been replaced by core deposits that bear lower interest rates.

The following table summarizes our deposit balances and weighted average rate paid for the periods presented.

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Time deposits

Under $100,000

$100,000 and greater

Time deposits of $250 thousand or more had remaining maturities as follows:

Year ended December 31, 2021

3 months or less

Over 3 months through 6 months

Over 6 months through 12 months

Over 12 months

Consolidated stockholders’ equity of the Corporation was $165.4 million, or 9.7% of total assets as of December 31, 2021, as compared to $141.6 million, or 8.2% of total assets as of December 31, 2020.

The change in stockholders’ equity is the result of year-to-date net income of $26.4 million and an increase in unrealized gain on AFS securities of $2.6 million, partially offset by unearned compensation due to leveraged ESOP of $2 million, net of a $212 thousand payment on the ESOP loan which released 13,328 shares to the ESOP, as well as dividends paid of $1.5 million year to date.

The change in stockholders’ equity is the result of year-to-date comprehensive income of $33.8 million, $2.7 million in stock-based compensation and stock options exercised, partially offset by dividends of $9.7 million paid during 2021 and common stock repurchases of $3.0 million.

Non-GAAP Financial Measures

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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 share:

Book value per common shares

Reconciliation of tangible book value per common share at December 31:

Book value per common share

Impact of goodwill and intangible assets

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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.

Reconciliation of Allowance for Loan Losses / Total loans held for investment

Reconciliation of Allowance for Loan Losses / Total loans held for investment at December 31:

Allowance for loan losses / Total loans held for investment

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In addition, as part of its liquidity management, Meridian maintains a segment of commercial loan assets that are comprised of shared national credits (“SNCs”), which have a national market and can be sold in a timely manner.

Meridian’s primary liquidity, which totaled $408.8 million at December 31, 2020, compared to $161.5 million at December 31, 2019, 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’s available liquidity, which totaled $262.9 million at December 31, 2021, compared to $408.8 million at December 31, 2020, 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.

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Through its relationship at the Federal Reserve, Meridian had available credit of approximately $3.5 million at December 31, 2021.

At December 31, 2020, Meridian had borrowed $10 million from the Federal Reserve under its available borrowing arrangement and $153.3 million under the Federal Reserve’s PPPLF program.

At December 31, 2021, 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.

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At December 31, 2021, Meridian had borrowed $41.3 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $131.5 million against its available credit lines.

At December 31, 2020, Meridian also had available $39 million of unsecured lines of credit with other financial institutions as well as $256.6 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $182.4 million of available short or long term funding through brokered CD arrangements.

At December 31, 2021, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as $255.4 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $449.3 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.

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December 31, 2020

To be well capitalized under

For capital adequacy

prompt corrective action

To Be Well Capitalized

Under CBLR Framework

(dollars in thousands)

Total capital (to risk-weighted assets)

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

Tier 1 capital (to risk-weighted assets)

Tier 1 capital (to average assets)

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

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

What changed 10-K

Item 7. Management’s Discussion and Analysis