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Item 7. Management’s Discussion and Analysis

2023-03-16 compared with 2022-03-16 · 313 added, 219 removed, 236 unchanged (69% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is intended to assist in understanding the financial condition and results of operations of Meridian as of and for the year ended December 31, 2022.

The information contained in this section should be read together with the December 31, 2022 audited Consolidated Financial Statements and the accompanying Notes included in Item 8.

Financial Statements And Supplementary Data of this Form 10-K.

This section of this Form 10-K generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.

Discussions of 2021 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found

in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Corporation’s Form 10-K for the fiscal year ended December 31, 2021.

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, 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.

Bank Sector Concerns

Meridian is a regional community bank with loans and deposits that are well diversified in size, type, location and industry.

We manage this diversification carefully, while avoiding concentrations in business lines.

Meridian’s model continues to build on our strong and stable financial position, which serves our regional customers and communities with the banking products and services needed to help build their prosperity.

Total balance sheet liquidity, which is derived from cash and investments, as well as salable commercial loans and residential mortgage loans held for sale, was $264.4 million at December 31, 2022.

Meridian maintains a high-quality investment bond portfolio comprised of U.S Treasuries, government agencies, government agency mortgage-backed securities, and general obligation municipal securities with an average duration of 4 years.

Meridian’s investment portfolio represented 8.5% of total assets at December 31, 2022.

Meridian also maintains borrowing arrangements with various correspondent banks to meet short-term liquidity needs and has access to approximately $850 million in liquidity from numerous sources including its borrowing capacity with the FHLB and other financial institutions, as well as funding through the CDARS program or through brokered CD arrangements.

In addition, the Bank is eligible to receive funds under the new Bank Term Funding Program announced by the Federal Reserve.

Management believes that the above sources of liquidity provide Meridian with the necessary resources to meet its short-term and long-term funding requirements.

COVID-19 Concerns

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.

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

economy has since strengthened despite the spread of COVID-19 variants, with higher inflation and housing values beginning in 2021.

Also, the ongoing global supply chain issues and the military conflict between Russia and Ukraine contributed to higher inflation in 2022.

In response, the Federal Reserve began normalizing monetary policy with its decision in late 2021 to taper its quantitative easing and raising the federal funds rate beginning in March 2022.

Inflation remains elevated in 2022, reflecting supply and demand imbalances related to COVID-19 and its variants, higher food and energy prices from the military conflict between Russia and Ukraine, and broader price pressures.

The Federal Reserve has raised interest rates significantly throughout 2022 and in the early part of 2023 in attempts to bring the inflation to its long run target rate of two percent.

Future rate hikes are expected during the remainder of 2023, as the Federal Reserve has indicated ongoing interest rate increases in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to two percent over time.

Significant uncertainties as to future economic conditions continue to exist, including higher inflation, global supply chain issues, and higher oil and commodity prices exacerbated by the military conflict between Russia and Ukraine.

We have taken deliberate actions in response, including maintaining higher reserves for credit losses on loans and leases and off-balance sheet credit exposures and strong capital ratios.

As our commercial loan portfolio has a high percentage of variable rate loans, we are well positioned to take advantage of this in a rising rate environment.

We are also focused on growing our non-interest bearing and lower-cost interest-bearing deposits to position the Bank for higher interest rates.

We also continue to monitor closely the impact of COVID-19 and its variants, macroeconomic uncertainties, as well as any effects that may result from the federal government's responses including future rate hikes;

however, the extent to which these factors will impact our operations and financial results in 2023 is highly uncertain.

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.

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.

While we were an emerging growth company (up to December 31, 2022), the JOBS Act permitted us an extended transition period for complying with new or revised accounting standards affecting public companies.

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

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Provision and allowance for loan and lease losses

The provision for loan and lease losses reflects the amount required to maintain the allowance for loan and lease losses (“Allowance”) at an appropriate level based upon management’s evaluation of the adequacy of general and specific loss reserves.

The Allowance is maintained at a level that management believes is appropriate to provide for incurred loan and lease losses as of the date of the Consolidated Balance Sheet and we have established methodologies for the determination of its adequacy.

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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

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.

Beginning on January 1, 2023, the Corporation adopted an expected credit loss model retrospectively, at the beginning of the period of adoption, through a cumulative-effect adjustment to retained earnings at January 1, 2023.

The Corporation has largely completed its assessment of related processes, internal controls, and data sources and has developed, documented, and validated a discounted cash flows model utilizing a third-party software provider.

While the Corporation continues to analyze and evaluate the impact of the adoption of this guidance on the Corporation's financial statements, it is anticipated that the reserve for credit losses will increase by 10% to 20% and stockholders' equity will decrease by 1% to 3%.

The Corporation anticipates that the Corporation and the Bank will continue to be well capitalized after the negative impact resulting from the adoption of CECL.

See the section entitled “Recent Accounting Pronouncements” in footnote (1) Summary of Significant Accounting Policies.

Executive Overview

The following items highlight the Corporation’s changes in its financial condition as of December 31, 2022 compared to December 31, 2021 and the results of operations for the year ended December 31, 2022 compared to the same periods in 2021.

More detailed information related to these highlights can be found in the sections that follow.

Changes in Financial Condition

• Total assets increased $348.8 million, or 20.4%, to $2.1 billion as of December 31, 2022.

• Portfolio loans, excluding PPP loans, increased $435.4 million, or 33.6%, to $1.73 billion as of December 31, 2022,

• PPP loans decreased to just $4.6 million as of December 31, 2022 which is a decrease of $83.7 million, or 94.8%, since December 31, 2021.

Results of Operations

• Consolidated net income decreased $13.8 million, or 38.7%, driven by a lower level of non-interest revenue from mortgage banking activity.

• The return on average assets and return on average equity was 1.18% and 13.87%, respectively, for the year ended December 31, 2022, compared to 2.06% and 23.74%, respectively, for the year ended December 31, 2021.

• Provision for loan losses increased $1.4 million, or 132.5%, due to loan growth, partially offset by decreases in specific reserves on non-performing loans.

Key Performance Ratios

The following table presents key financial performance ratios for the periods indicated:

Year Ended December 31,

Return on average assets 1.18 % 2.06 %

Return on average equity 13.87 % 23.74 %

Net interest margin (tax effected yield) 3.98 % 3.77 %

Basic earnings per share $ 1.85 $ 2.96

Diluted earnings per share $ 1.79 $ 2.87

The following table presents certain key period-end balances and ratios at the dates indicated:

(dollars in thousands, except per share amounts) December 31,

2022 December 31,

Book value per common share $ 13.37 $ 13.54

Tangible book value per common share (1)

$ 13.01 $ 13.19

Allowance as a percentage of loans and leases held for investment 1.08 % 1.35 %

Allowance as a percentage of loans and leases held for investment (excl.

loans at fair value and PPP loans) (1)

1.09 % 1.46 %

Tier I capital to risk weighted assets 8.8 % 10.8 %

Tangible common equity to tangible assets ratio (1)

Loans and other finance receivables, net of fees and costs $ 1,743,682 $ 1,386,457

Total assets $ 2,062,228 $ 1,713,443

Total stockholders’ equity $ 153,280 $ 165,360

(1) Non-GAAP financial measure.

See “Non-GAAP Financial Measures” below for Non-GAAP to GAAP reconciliation.

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;

• Income Taxes , which include state and federal jurisdictions.

NET INTEREST INCOME

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.

The following table presents average balance sheet information, interest income, interest expense and the corresponding average yield earned, on a tax equivalent basis, and rates paid for the years ended December 31, 2021 and 2020.

The average balances are principally daily averages and, for loans, include both performing and nonperforming loans.

Net interest income is an integral source of the Corporation’s income.

The tables below present a summary for the year ended December 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.

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 Year Ended December 31,

(dollars in thousands) 2022 2021

Interest-earning assets

Average Balance Interest Income/ Expense Yields/ Rates Average Balance Interest Income/ Expense Yields/ Rates

Due from banks $ 21,045 $ 279 1.33 % $ 30,844 $ 41 0.13 %

Federal funds sold 1,160 7 0.60 17,823 7 0.04

Investment securities (1)

Investment securities - taxable (1) 106,246 2,420 2.28 83,720 1,463 1.75

Investment securities - tax exempt (1) 63,425 1,691 2.67 64,440 1,464 2.27

Loans held for sale 44,238 1,872 4.23 125,444 3,540 3.76

Loans held for investment (1) 1,535,943 82,764 5.39 1,358,282 65,292 4.81

Total loans 1,580,181 84,636 5.36 1,483,726 68,832 4.64

Total interest-earning assets 1,772,057 89,033 5.02 % 1,680,553 71,807 4.27 %

Noninterest earning assets 76,983 48,015

Total assets $ 1,849,040 $ 1,728,568

Liabilities and stockholders' equity:

Interest bearing liabilities

Interest-bearing deposits

Interest-bearing demand deposits $ 237,554 $ 2,570 1.08 % $ 257,950 $ 880 0.34 %

Money market and savings deposits 703,561 7,854 1.12 630,977 3,346 0.53

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Total deposits 1,295,937 15,396 1.19 1,134,850 5,494 0.48

Total Borrowings

Borrowings 27,637 830 3.00 119,721 534 0.45

Subordinated debentures 40,560 2,366 5.83 40,724 2,383 5.85

Total interest-bearing liabilities 1,364,134 18,592 1.36 1,295,295 8,411 0.65

Non-interest bearing deposits

Other non-interest bearing liabilities

Noninterest-bearing deposits 296,563 258,298

Other noninterest-bearing liabilities 30,929 25,100

Total liabilities 1,691,626 1,578,693

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Total stockholders' equity and liabilities $ 1,849,040 $ 1,728,568

Tax-equivalent net interest income / net interest spread

Tax-equivalent net interest margin

Tax-equivalent adjustment

Net interest income

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

(2) Average balances include non-accrual loans.

Net interest income and spread (1)

$ 70,441 3.66 $ 63,396 3.62

Net interest margin (1) 3.98 % 3.77 %

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

Rate/Volume Analysis

During 2021, net interest income increased $14.2 million or 28.9% on a tax equivalent basis.

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

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 $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).

For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (i) changes in rate (change in rate multiplied by old volume) and (ii) changes in volume (change in volume multiplied by new rate).

The net change attributable to the combined impact of rate and volume has been allocated proportionately to the change due to rate and the change due to volume.

December 31, 2021 Compared to 2020

Change in Interest Due to:

(dollars in thousands)

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 year ended December 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.

2022 Compared to 2021

(dollars in thousands) Rate Volume Total

Interest income:

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Federal funds sold 12 (12) —

Investment securities (1)

Investment securities - taxable (1)

Investment securities - tax exempt (1)

Loans held for sale 1,270 (2,938) (1,668)

Loans held for investment (1)

8,395 9,077 17,472

Total loans 9,665 6,139 15,804

Total interest income $ 10,689 6,537 17,226

Interest expense:

Interest bearing deposits

Interest-bearing demand deposits $ 1,765 (75) 1,690

Money market and savings deposits 4,083 425 4,508

Time deposits 2,945 759 3,704

Total interest bearing deposits

Total borrowings

Total deposits 8,793 1,109 9,902

Borrowings 985 (689) 296

Subordinated debentures (7) (10) (17)

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

Provision for loan losses

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.

Interest income increased $17.2 million on a tax equivalent basis, year over year, due to a higher yield on earning assets, which went up 75 basis points, in addition to a higher level of average earning assets, which increased by $91.5 million.

Included in interest income was approximately $280 thousand of one-time fees and interest recapture from the quarter ended December 31, 2022.

The average yield on loans held for investment increased 58 basis points and the yield on cash and investments increased 46 basis points in total, reflecting the impact in rates caused by the Federal Reserve’s monetary policy.

Average total loans held for investment, excluding PPP loans and residential loans for sale, increased $315.7 million, most notably in commercial real estate and construction, commercial loans and leases and small business loans, which increased $190.8 million on average, combined.

Home equity loans and residential real estate loans held in portfolio increased $44.6 million on average, combined.

Residential loans for sale and PPP loans decreased $81.2 million, and $138.0 million on average, respectively.

Interest expense increased $10.2 million, year over year, due primarily to market interest rate rises, as well as an increase of $161.1 million in average interest bearing deposits.

Interest expense on deposits increased $9.9 million with the cost of interest-bearing deposits increasing 71 basis points to 1.19%.

Total cost of deposits increased 58 basis points reflecting an increase of $38.3 million in average non-interest bearing deposits.

Interest expense on borrowings increased $296 thousand as the cost increased 255 basis points, and total average short-term borrowings decreased $92.1 million.

Net interest margin increased 21 basis points to 3.98% for the year ended December 31, 2022 from 3.77% for the year ended December 31, 2021, as the increase in yield on earnings assets was higher than the increase of costs of funds, helped also by the $38.3 million increase in average non-interest bearing deposits.

Excluding the impact from PPP, net interest margin increased 20 basis points to 3.92% from 3.72%.

A reconciliation of this non-GAAP measure is included in the Appendix.

PROVISION FOR LOAN AND LEASE LOSSES

The provision for loan losses was $2.5 million for the year ended December 31, 2022, compared to an $1.1 million provision for the year ended December 31, 2021.

The increase in the provision period over period is the result of provisioning for loan growth and charge-offs, offset partially by an improvement in specific reserves and the trend in economic qualitative factors in the allowance for loan losses calculation.

NON-INTEREST INCOME

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.

The following table presents the components of non-interest income for the periods indicated:

Year Ended December 31,

(dollars in thousands)

Non-interest income:

(Dollars in thousands) 2022 2021 $ Change % Change

Mortgage banking income $ 25,325 $ 75,932 $ (50,607) (66.6) %

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Net change in the fair value of loans held-for-investment (2,408) (189) (2,219) 1174.1 %

Net loss on hedging activity

Net gain on hedging activity 5,439 2,961 2,478 83.7 %

Net gain on sale of investment securities available-for-sale — 435 (435) (100.0) %

Service charges 125 129 (4) (3.1) %

Other 5,037 4,305 732 17.0 %

Total non-interest income $ 41,724 $ 87,988 $ (46,264) (52.6) %

Total non-interest income decreased $46.3 million as a result of lower mortgage banking revenue, and to a lesser degree, lower SBA loan sale income.

Mortgage banking income was down $50.6 million, due primarily to lower levels of mortgage loan originations as rising interest rates and lack of housing inventory has had a negative impact on mortgage banking activity.

Partially offsetting the impact of the decline in mortgage banking income were net changes in the fair value of derivative instruments and loans held-for-sale, along with an improvement in net gains on hedging activity increased $8.6 million, combined, year over year.

SBA loan sale income decreased $2.4 million, or 35.2%, over the prior year, despite an increase of $8.8 million, 13.0%, in the volume of loans sold in 2022 compared to 2021.

The upward movement in interest rates during 2022 had a negative impact on gross margins on the SBA loan sales, which declined to 7.4% for all sales in 2022, compared to 11.4% in 2021.

Also contributing to the decline in income was increased amortization of $340 thousand and increased impairment of $211 thousand on SBA servicing assets.

The net change in the fair value of loans held-for-investment decreased to a loss of $2.4 million for the year ended December 31, 2022, compared to a loss of $189 thousand for the comparable prior year, due to the negative impact the rising interest rate environment had on the fair value of the loans in portfolio that are held at fair value.

Other non-interest income was up $732 thousand due to increases in title fee income, swap fee income, FHLB stock dividend income and broker fee income.

NON-INTEREST EXPENSE

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.

The following table presents the components of non-interest income for the periods indicated:

Year Ended December 31,

(dollars in thousands)

Non-interest expenses:

(Dollars in thousands) 2022 2021 $ Change % Change

Salaries and employee benefits $ 54,378 $ 78,866 $ (24,488) (31.1) %

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Advertising and promotion 4,336 3,714 622 16.7 %

Data processing

Information technology

Data processing and software 5,451 4,382 1,069 24.4 %

Pennsylvania bank shares tax 793 609 184 30.2 %

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.

Other 8,014 8,053 (39) (0.5) %

Total non-interest expense $ 81,444 $ 103,727 $ (22,283) (21.5) %

Total non-interest expense decreased $22.3 million due largely to a decrease in salaries and employee benefits expense at the mortgage segment, which recognized decreased fixed and variable compensation.

Partially offsetting this decrease was an increase for the bank and wealth segments salaries & benefits, due to an increase in FTEs and a higher level of stock-based compensation expense.

Advertising and promotion expense increased as the result of a renewed and focused priority placed on business development and community outreach efforts.

Data processing and software expense increased as Meridian continued with our strategy to invest in technology that focuses on improving back-office efficiencies through automation and workflow processes.

INCOME TAX EXPENSE

Income tax expense for the year ended December 31, 2021 was $10.7 million as compared to $8.1 million for the same period in 2020.

The effective tax rates for the twelve-month periods ended December 31, 2021 and 2020 were 23.1% and 23.4%, respectively.

For more information related to income taxes, refer to footnote 14 in the Notes to Consolidated Financial Statements.

The following table presents income tax expense and related metrics for the periods indicated:

Year Ended December 31,

(Dollars in thousands) 2022 2021 Change % Change

Income before income taxes $ 27,920 $ 46,302 $ (18,382) (39.7) %

Income tax expense $ 6,091 $ 10,717 $ (4,626) (43.2) %

Effective tax rate 21.81 % 23.14 % (1.33) % (5.7) %

The effective tax rate decreased as a result of higher levels of non-taxable revenue (BOLI and tax free interest), as well as lower level of state tax expense.

Both income tax expense and the effective tax rate (as it related to state tax expense) decreased due primarily to the decrease in income before income taxes.

Balance Sheet Summary

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.

As of December 31, 2022, total assets were $2.1 billion which increased $348.8 million, or 20.4%, from December 31, 2021.

This growth in assets over the prior period was due primarily to loan portfolio growth, as detailed in the following section.

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

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

As of December 31, 2022 and 2021, our total loans and leases amounted to $1.8 billion, and $1.5 billion, respectively.

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

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Our commercial loans have been proactively managed in an effort to achieve a balanced portfolio with no unusual exposure to one industry.

Loans and leases outstanding at December 31, 2021 and 2020 are detailed by category as follows:

(dollars in thousands)

The following table presents our loan and lease portfolio at the dates indicated:

(Dollars in thousands) December 31,

2022 December 31,

2021 $ Change % Change

Mortgage loans held for sale $ 22,243 $ 80,882 $ (58,639) (72.5) %

3 unchanged sentences

Residential mortgage 221,837 68,175 153,662 225.4 %

Construction 271,955 160,905 111,050 69.0 %

Total real estate loans 1,118,591 798,307 320,284 40.1 %

1 unchanged sentence

Small business loans 136,155 114,158 21,997 19.3 %

Paycheck Protection Program loans ("PPP")

Main Street Lending Program loans ("MSLP")

Consumer 488 419 69 16.5 %

Leases, net 138,986 88,242 50,744 57.5 %

Total portfolio loans and leases $ 1,735,598 $ 1,385,688 $ 349,910 25.3 %

Total loans and leases $ 1,757,841 $ 1,466,570 $ 291,271 19.9 %

Portfolio loans increased grew $349.9 million, or 25.3% to $1.7 billion as of December 31, 2022, from $1.4 billion as of December 31, 2021.

The following table shows the amounts of loans outstanding as of December 31, 2022 which, based on remaining scheduled repayments of principal, are due in the periods indicated:

(dollars in thousands)

After 15 years

(dollars in thousands) 12 months or Less 1 - 5 years 5 - 15 years After 15 years Total

Mortgage loans held for sale $ — $ — $ — $ 22,243 $ 22,243

2 unchanged sentences

Residential mortgage 3,291 730 1,802 216,014 221,837

Construction 120,064 62,178 89,713 — 271,955

Commercial and industrial 26,002 135,355 62,629 117,392 341,378

Small business loans 237 4,672 79,483 51,763 136,155

Consumer 3 208 136 141 488

Leases, net 129 123,034 15,823 — 138,986

Total $ 173,542 $ 467,747 $ 697,935 $ 418,617 $ 1,757,841

The amounts have been classified according to sensitivity to changes in interest rates for amounts due after one year, as of December 31, 2022.

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

(dollars in thousands)

(dollars in thousands) Fixed Rate Variable Rate Total

Mortgage loans held for sale $ 22,243 $ — $ 22,243

2 unchanged sentences

Residential mortgage 199,472 22,365 221,837

Construction 46,854 225,101 271,955

Commercial and industrial 68,722 272,656 341,378

Small business loans 202 135,953 136,155

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.

The growth in the commercial portfolios continues to reflect the work of our strategically expanded lending team as well as strong local market conditions.

Consumer 353 135 488

Leases, net 138,986 — 138,986

Total $ 576,879 $ 1,180,962 $ 1,757,841

Commercial real estate loans .

4 unchanged sentences

• Permanent – Investor Real Estate Loans

o Purchase and refinance loan opportunities for a number of product types, including single-family rentals, multi-family residential as well as tenanted income producing properties in a variety of real estate types, including office, retail, industrial, and flex space

• Purchase and refinance loan opportunities for a number of product types, including single-family rentals, multi-family residential as well as tenanted income producing properties in a variety of real estate types, including office, retail, industrial, and flex space

• Construction Loans

o Residential construction loans to finance new construction and renovation of single and 1-4 family homes located within our market area

o Commercial construction loans for investment properties, generally with semi-permanent attributes

o Construction loans for new, expanded or renovated operations for our owner occupied business clients

• Residential construction loans to finance new construction and renovation of single and 1-4 family homes located within our market area

• Commercial construction loans for investment properties, generally with semi-permanent attributes

• Construction loans for new, expanded or renovated operations for our owner occupied business clients

• Land Development Loans

o Meridian considers a limited number of strictly land development oriented loans based upon the risk, merit of the future project and strength of the borrower/guarantor relationship

• Meridian considers a limited number of strictly land development oriented loans based upon the risk, merit of the future project and strength of the borrower/guarantor relationship

Our commercial real estate loans increased by $48.5 million, or 9.4%, to $565.4 million at December 31, 2022 from $516.9 million at December 31, 2021.

Our total commercial real estate loan portfolio represented 32.2% and 35.2% of our total loan portfolio at December 31, 2022 and 2021, respectively.

Construction loans increased $111.1 million, or 69.0%, to $272.0 million at December 31, 2022 from $160.9 million at December 31, 2021.

Construction loans represented 15.5% of our total loan portfolio at both December 31, 2022 and 2021.

Commercial and Industrial Loans

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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 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.

Our commercial and industrial loans decreased $43.2 million, or 11.2%, to $341.4 million at December 31, 2022 from $384.6 million at December 31, 2021, as PPP loans declined $85.5 million, or 94.8% during the year as nearly all such loans were forgiven by December 31, 2022.

Commercial and industrial loans overall represented 19.4% and 26.2% of our total loan portfolio at December 31, 2022 and 2021, respectively.

Small Business Loans

1 unchanged sentence

Our small business loans increased by $22.0 million, or 19.3%, to $136.2 million at December 31, 2022 from $114.2 million at December 31, 2021.

During 2022 we sold $75.9 million in SBA loans, an increase of $8.8 million, or 13.0%, from $67.2 million in SBA loans sold in 2021.

The small business loans portfolio represented 7.7% and 7.8% of our total loan portfolio at December 31, 2022 and 2021, respectively.

Paycheck Protection Program Loans / Main Street Lending Program Loans

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, 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 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.

Consumer and Personal Loans

Our consumer-lending department principally originates home equity based products for our clients and prospects.

Our consumer-lending department principally originates residential mortgage and home equity based products for our clients and prospects.

These loans typically fund completely at closing.

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.

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.

Home equity lines and loans increased $7.1 million, or 13.6%, to $59.4 million at December 31, 2022 from $57.6 million at December 31, 2021, while residential mortgage loans increased by $153.7 million, or 225.4%, to $221.8 million at December 31, 2022 from $68.2 million at December 31, 2021.

Overall the total consumer loan portfolio represented 16.0% and 8.2% of our total loan portfolio at December 31, 2022 and 2021, respectively.

Meridian Equipment Finance specializes in small ticket equipment leases for small and mid-sized businesses nationally and through a broad range of industries.

The Bank’s credit risk generally results from the potential default of borrowers which may be driven by customer specific or broader industry related conditions.

Leases increased $50.7 million, or 57.5%, to $139.0 million at December 31, 2022 from $88.2 million at December 31, 2021.

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.

2 unchanged sentences

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

Agency asset-backed securities.

The remainder of our securities portfolio is invested in other securities.

As of December 31, 2022 our available-for-sale investment portfolio had a fair value of $135.3 million, with an effective tax equivalent yield of 2.83% and an estimated duration of approximately 4 years.

The largest category of this investment portfolio, or 28.7%, consists of municipal securities, along with 25.9% in U.S.

agency securities, and 21.8% in U.S.

Treasury securities.

The remainder of our available-for-sale securities portfolio is invested in other securities.

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 $2.1 million and $2.4 million, as of December 31, 2022 and 2021, respectively.

As of December 31, 2022 we also had a held-to-maturity investment portfolio with amortized cost of $37.5 million.

During the year ended December 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.

The following table presents the amortized cost and fair value of securities at the dates indicated:

December 31, 2022

# of Securities

in unrealized

(dollars in thousands)

loss position

(dollars in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Fair value # of Securities in unrealized loss position

Securities available-for-sale:

asset backed securities $ 15,581 $ 14 $ (314) $ 15,281 12

government agency mortgage-backed securities

government agency collateralized mortgage obligations

government agency MBS 12,272 5 (538) 11,739 12

government agency CMO 25,520 40 (2,242) 23,318 29

State and municipal securities 44,700 — (5,862) 38,838 34

government agency collateralized mortgage obligations

December 31, 2022

(dollars in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Fair value # of Securities in unrealized loss position

Treasuries 32,980 — (3,457) 29,523 25

government agency CMO 9,722 — (633) 9,089 11

Corporate bonds 8,201 — (643) 7,558 12

Total securities available-for-sale $ 148,976 $ 59 $ (13,689) $ 135,346 135

Amortized cost Gross unrecognized gains Gross unrecognized losses Fair value # of Securities in unrecognized loss position

Securities held-to-maturity:

State and municipal securities $ 37,479 $ — $ (4,394) $ 33,085 25

Total securities held-to-maturity

December 31, 2021

# of Securities

in unrealized

(dollars in thousands)

loss position

(dollars in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Fair value # of Securities in unrealized loss position

Securities available-for-sale:

asset backed securities $ 16,850 $ 55 $ (68) $ 16,837 10

government agency mortgage-backed securities

government agency collateralized mortgage obligations

government agency MBS 9,749 124 (60) 9,813 3

government agency CMO 22,276 358 (253) 22,381 10

State and municipal securities 72,099 1,379 (496) 72,982 12

Treasuries 29,973 1 (246) 29,728 21

government agency CMO 990 — (15) 975 1

Corporate bonds 6,450 154 (18) 6,586 5

Total securities available-for-sale $ 158,387 $ 2,071 $ (1,156) $ 159,302 62

Amortized cost Gross unrecognized gains Gross unrecognized losses Fair value # of Securities in unrecognized loss position

Securities held-to-maturity:

State and municipal securities $ 6,372 $ 219 $ — $ 6,591 —

Total securities held-to-maturity

Asset Quality Summary

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.

Meridian's credit culture is strong and asset quality remains a primary focus of management.

The ratio of non-performing assets to total assets declined to 1.11% as of December 31, 2022, from 1.34% as of December 31, 2021.

There was $1.7 million in other real estate property included in non-performing assets as of December 31, 2022 related to a well security residential property, and $0 as of December 31, 2021.

Total non-performing loans were $21.2 million and $23.0 million as of December 31, 2022 and December 31, 2021, respectively.

The decline in non-performing loans over the period was due to a $2.7 million payoff of a non-performing loan and principal payments on another non-performing loan relationship of over $3 million, both partially offset by an increase in SBA loans considered non-performing.

Meridian realized net charge-offs of $2.4 million, or 0.15%, of total average loans for the year ended December 31, 2022, compared to net charge-offs of $79 thousand, or 0.01%, of total average loans for the year ended December 31, 2021.

Nearly all of the charge-offs for the year ended December 31, 2022 were from equipment leases, while recoveries were split between commercial loans, equipment leases, and home equity loans.

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 1.09% as of December 31, 2022 compared to 1.46% as of December 31, 2021.

4 unchanged sentences

As of December 31, 2022, the Corporation had a recorded investment of $24.2 million of impaired loans and leases which included $3.8 million of TDRs, while as of December 31, 2021 impaired loans totaled $25.8 million, which included $3.8 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.

The decrease in impaired loans was largely due to payments received in the fourth quarter of 2022 on one commercial loan relationship that became a non-performing loan relationship late in 2021.

This loan had a specific reserve of $1.4 million of as December 31, 2021, which decreased to $776 thousand as of December 31, 2022.

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.

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

Refer to footnote 6 for more information regarding the Corporation’s impaired loans and leases.

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.

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.

(dollars in thousands)

The following table presents nonperforming assets and related ratios for the periods indicated:

(dollars in thousands) December 31,

2022 December 31,

Non-performing assets:

7 unchanged sentences

Small business loans 4,465 666

Leases 902 212

Total nonaccrual loans 21,236 22,988

Total non-performing loans

Other real estate owned 1,703 —

Total non-performing assets $ 22,939 $ 22,988

2 unchanged sentences

TDRs in compliance with modified terms 3,573 3,446

Total TDRs $ 3,780 $ 3,807

Asset quality ratios:

4 unchanged sentences

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

Allowance for loan and lease losses to:

1.23 % 1.80 %

Allowance for loan losses to:

Total loans and leases 1.07 % 1.28 %

1 unchanged sentence

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

1.09 % 1.46 %

Non-performing loans 88.66 % 81.60 %

4 unchanged sentences

(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” 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.

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

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

(dollars in thousands) December 31,

2022 % of Loan Type to Total Loans December 31,

2021 % of Loan Type to Total Loans

Commercial mortgage $ 4,095 33% $ 4,950 37%

1 unchanged sentence

Residential mortgage 948 13% 283 5%

Construction 3,075 16% 2,042 12%

Commercial and industrial 4,012 19% 6,533 28%

Small business loans 4,909 8% 3,737 8%

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

Consumer 3 —% 3 —%

Leases 1,598 8% 986 6%

Total $ 18,828 100%

$ 18,758 100%

The following table provides information on (charge-offs) and recoveries by loan category:

December 31, 2022 December 31, 2021

Home equity lines and loans $ 31 $ 1

1 unchanged sentence

Commercial and industrial 97 41

Small business loans

Deposits and Equity

Deposits were $1.4 billion as of December 31, 2021, up $205.1 million, or 16.5%, from December 31, 2020.

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

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 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.

Year ended December 31, 2021

Year ended December 31, 2020

(dollars in thousands)

total deposits

Non-interest bearing deposits

Leases (2,552) (130)

Total Net Charge-offs $ (2,418) $ (79)

The following table presents the major categories of deposits at the dates indicated:

(Dollars in thousands) December 31,

2022 December 31,

2021 $ Change % Change

Noninterest-bearing deposits $ 301,727 $ 274,528 $ 27,199 9.9 %

Interest-bearing deposits:

Interest-bearing demand deposits 219,838 268,248 (48,410) (18.0) %

Money market and savings deposits 697,564 697,628 (64) — %

Time deposits 493,350 206,009 287,341 139.5 %

Total interest-bearing deposits 1,410,752 1,171,885 238,867 20.4 %

Total deposits $ 1,712,479 $ 1,446,413 $ 266,066 18.4 %

Total deposits were $1.7 billion as of December 31, 2022, up $266.1 million, or 18.4%, from December 31, 2021.

Non-interest bearing deposits increased $27.2 million, or 9.9%, from December 31, 2021.

Interest-bearing demand deposits decreased $48.4 million, or 18.0%, from December 31, 2021, while money market accounts/savings accounts did not change materially from December 31, 2021.

Certificates of deposits increased $287.3 million, or 139.5%, from December 31, 2021, as lower levels of core deposits, combined with continued loan growth year over year, led to the need to obtain more wholesale funding.

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

Year ended December 31, 2021

December 31, 2022

3 months or less $ 183,758 46.6%

2 unchanged sentences

Over 12 months 68,921 17.5%

Total $ 394,285 100.0%

Consolidated stockholders’ equity of the Corporation was $153.3 million, or 7.4% of total assets as of December 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 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.

The change in stockholders’ equity is the result of year-to-date comprehensive loss of $12.2 million, dividends paid of $10.9 million and common stock repurchases of $13.0 million during 2022, partially offset by $1.0 million in stock-based compensation and stock options exercised.

On February 28, 2023, the Corporation approved and declared a two-for-one stock split in the form of a 100% stock dividend, payable March 20, 2023, to shareholders of record as of March 14, 2023.

Under the terms of the stock split, the Corporation’s shareholders will receive a dividend of one share for every share held on the record date.

The dividend will be paid in authorized but unissued shares of common stock of the Corporation.

The par value of the Corporation's stock was not affected by the split and remained at $1.00 per share.

All share and per share amounts reported in the consolidated financial statements have been adjusted to reflect the two-for-one stock split effective February 28, 2023.

Non-GAAP Financial Measures

1 unchanged sentence

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.

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 at December 31:

Book value per common share

Impact of goodwill and intangible assets

Tangible book value per common share

The following is a reconciliation of the allowance for loan losses to total loans held for investment ratio for the years ended December 31, 2021 and 2020.

The table below provides the non-GAAP reconciliation for our tangible common equity ratio and tangible book value per common share.

All per share amounts have been adjusted to reflect the two-for-one stock split effective February 28, 2023.

(dollars in thousands) December 31,

2022 December 31,

Total stockholders' equity (GAAP) $ 153,280 $ 165,360

Goodwill and intangible assets 4,074 4,278

Tangible common equity (non-GAAP) 149,206 161,082

Total assets (GAAP) 2,062,228 1,713,443

Goodwill and intangible assets 4,074 4,278

Tangible assets (non-GAAP) $ 2,058,154 $ 1,709,165

Stockholders' equity to total assets (GAAP) 7.43 % 9.65 %

Tangible common equity to tangible assets (non-GAAP) 7.25 % 9.42 %

Shares outstanding 11,466 12,216

Book value per share (GAAP) $ 13.37 $ 13.54

Tangible book value per share (non-GAAP) $ 13.01 $ 13.19

The following is a reconciliation of the allowance for loan losses to total loans held for investment ratio at December 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.

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

Allowance for loan losses / Total loans held for investment

Impact of loans held for investment - fair valued

Impact of PPP loans

Allowance for loan losses / Total loans held for investment (excl.

loans at fair value and PPP loans)

(dollars in thousands) December 31,

2022 December 31,

Allowance for loan and lease losses (GAAP) $ 18,828 $ 18,758

Loans, net of fees and costs (GAAP) 1,743,682 1,386,457

PPP loans (4,579) (88,245)

Loans fair valued (14,502) (17,558)

Loans, net of fees and costs, excluding PPP and fair valued loans (non-GAAP) $ 1,724,601 $ 1,280,654

Allowance for loan and leases losses to loans, net of fees and costs (GAAP) 1.08 % 1.35 %

Allowance for loan and leases losses to loans, net of fees and costs, excluding PPP and fair valued loans (non-GAAP) 1.09 % 1.46 %

Liquidity and Capital Resources

1 unchanged sentence

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.

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

Meridian’s available liquidity, which totaled $264.4 million at December 31, 2022, compared to $262.9 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 $3.5 million at December 31, 2021.

In addition, Meridian maintains borrowing arrangements with various correspondent banks, the FHLB and the FRB to meet short-term liquidity needs.

Through its relationship at the FRB, Meridian had available credit of approximately $8.8 million at December 31, 2022.

At December 31, 2022, Meridian had no borrowings from the Federal Reserve.

2 unchanged sentences

At December 31, 2022, Meridian had borrowed $122.1 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $49 million against its available credit lines.

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.

At December 31, 2022, Meridian also had available $39.0 million of unsecured federal funds lines of credit with other financial institutions as well as $237.6 million of available short or long term funding through the CDARS program and $241.0 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.

11 unchanged sentences

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%.

Section 201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single CBLR of between 8 and 10%.

The Bank adopted this framework in 2020.

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

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

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

less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%.

This requirement was 8% in 2021 as the bank regulatory agencies temporarily lowered the CBLR as a result of the COVID-19 pandemic.

T he Bank’s CBLR was 9.95% and 11.51% as of December 31, 2022 and 2021, respectively, but reports all ratios for comparative purposes.

The following table summarizes data and ratios pertaining to our capital structure.

Corporation Bank Well-capitalized minimum

2022 December 31,

To Be Well Capitalized

Under CBLR Framework

(dollars in thousands)

Tier 1 capital (to average assets)

2021 December 31,

To Be Well Capitalized

Under CBLR Framework

(dollars in thousands)

Tier 1 capital (to average assets)

2022 December 31,

Tier 1 leverage ratio 8.13 % 9.39 % 9.95 % 11.51 % 5.00 %

Common tier 1 risk-based capital ratio 8.77 % 10.83 % 10.73 % 13.27 % 6.50 %

Tier 1 risk-based capital ratio 8.77 % 10.83 % 10.73 % 13.27 % 8.00 %

Total risk-based capital ratio 12.05 % 14.81 % 11.87 % 14.63 % 10.00 %

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