Meridian Corp 10-Q

mrbk-20230331 Table of Conte n t s UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2023 Or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number: 000-55983 (Exact name of registrant as specified in its charter) Pennsylvania 83-1561918 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 9 Old Lincoln Highway , Malvern , Pennsylvania 19355 (Address of principal executive offices) (Zip Code) ( 484 ) 568-5000 (Registrant’s telephone number, including area code) Title of class Trading Symbol Name of exchange on which registered Common Stock, $1 par value MRBK The NASDAQ Stock Market Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large Accelerated Filer ☐ Accelerated Filer ☒ Non-accelerated Filer ☐ Smaller Reporting Company ☒ Emerging Growth Company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 5, 2023 there were 11,177,751 outstanding shares of the issuer’s common stock, par value $1.00 per share. Table of Conte n t s TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1 Financial Statements (Unaudited) 3 Consolidated Balance Sheets – March 31, 2023 and December 31, 2022 3 Consolidated Statements of Income – Three Months Ended March 31, 2023 and 2022 4 Consolidated Statements of Comprehensive Income (Loss) – Three Months Ended March 31, 2023 and 2022 5 Consolidated Statements of Stockholders’ Equity – Three Months Ended March 31, 2023 and 2022 6 Consolidated Statements of Cash Flows – Three Months Ended March 31, 2023 and 2022 7 Notes to Consolidated Financial Statements (Unaudited) 8 Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 33 Item 3 Quantitative and Qualitative Disclosures about Market Risk 44 Item 4 Controls and Procedures 45 PART II OTHER INFORMATION Item 1 Legal Proceedings 46 Item 1A Risk Factors 46 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 47 Item 3 Defaults Upon Senior Securities 47 Item 4 Mine Safety Disclosures 47 Item 5 Other Information 47 Item 6 Exhibits 48 Signatures 49 Table of Conte n t s Glossary of Acronyms, Abbreviations, and Terms The acronyms, abbreviations, and terms listed below are used in various sections of this report. As used throughout this report, the terms "Meridian", “we”, “our”, or “us” refer to Meridian Corporation and its consolidated subsidiaries, unless the context otherwise requires. Acronym Description ACH Automated clearing house ACL Allowance for credit losses AFS Available-for-sale ALCO Asset/Liability Committee ALLL Allowance for loan and lease losses ALM Asset / liability management AOCI Accumulated other comprehensive income ASC Accounting Standards Codification ASU Accounting Standards Update BHC Act Bank Holding Company Act of 1956 BOLI Bank owned life insurance BSA-AML Bank Secrecy Act - Anti-Money Laundering BTFP Federal Reserve Bank Term Funding Program CBCA Change in Bank Control Act CBLR Community Bank Leverage Ratio CDARS Certificate of Deposit Account Registry Service CECL Current expected credit losses CET1 Common equity tier 1 CFPB Consumer Financial Protection Bureau CMO Collateralized mortgage obligation COVID-19 Coronavirus Disease 2019 CRE Commercial real estate DIF FDIC’s deposit insurance fund ECOA Equal Credit Opportunity Act ESOP Employee Stock Ownership Plan FASB Financial Accounting Standards Board FDIC Federal Deposit Insurance Corporation FFIEC Federal Financial Institutions Examination Council FHA Federal Housing Authority FHFA Federal Housing Finance Agency FHLB Federal Home Loan Bank of Pittsburgh FHLMC Federal Home Loan Mortgage Corporation or Freddie Mac FICO Financing Corporation FNMA Federal National Mortgage Association or Fannie Mae FRB Federal Reserve Bank of Philadelphia FTE Fully taxable equivalent GAAP U.S. generally accepted accounting principles GLB Act Gramm-Leach-Bliley Act GNMA Government National Mortgage Association or Ginnie Mae GSE Government-sponsored entities HTM Held-to-maturity ICBA Independent Community Bankers of America JOBS Act Jumpstart Our Business Startups Act of 2012 LBP Look-back period LEP Loss emergence period Table of Conte n t s LGD Loss given default LIBOR London Inter-bank Offering Rate MBS Mortgage-backed securities MSLP Main Street Lending Programs MSR Mortgage servicing rights OFAC Office of Foreign Assets Control OREO Other real estate owned PCAOB Public Company Accounting Oversight Board PD Probability of default PDBS Pennsylvania Department of Banking and Securities PPP Paycheck Protection Program ROU Right-of-use SBA Small Business Administration SEC Securities and Exchange Commission SERP Supplemental Executive Retirement Plan SNC Shared national credit TILA Truth in Lending Act TDR Troubled debt restructuring USDA U.S. Department of Agriculture VA U.S. Department of Veteran’s Affairs Table of Conte n t s MERIDIAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) (dollars in thousands, except share data) March 31, 2023 December 31, 2022 Assets: Cash and due from banks $ 8,473 $ 11,299 Interest-bearing deposits at other banks 100,030 27,092 Cash and cash equivalents 108,503 38,391 Securities available-for-sale, at fair value (amortized cost of $ 154,431 and $ 148,976 , respectively) 142,933 135,346 Securities held-to-maturity, at amortized cost (fair value of $ 33,076 and $ 33,085 , respectively) 36,525 37,479 Equity investments 2,110 2,086 Mortgage loans held for sale 35,701 22,243 Loans, net of fees and costs 1,818,189 1,743,682 Allowance for credit losses ( 20,442 ) ( 18,828 ) Loans and other finance receivables, net of the allowance for credit losses 1,797,747 1,724,854 Restricted investment in bank stock 10,173 6,931 Bank premises and equipment, net 13,281 13,349 Bank owned life insurance 28,247 28,055 Accrued interest receivable 7,651 7,363 Other real estate owned 1,703 1,703 Deferred income taxes 4,017 3,936 Servicing assets 12,125 12,346 Goodwill 899 899 Intangible assets 3,124 3,175 Other assets 25,044 24,072 Total assets $ 2,229,783 $ 2,062,228 Liabilities: Deposits: Non-interest bearing $ 262,636 $ 301,727 Interest bearing 1,507,777 1,410,752 Total deposits 1,770,413 1,712,479 Borrowings 233,883 122,082 Subordinated debentures 40,319 40,346 Accrued interest payable 3,836 2,389 Other liabilities 28,283 31,652 Total liabilities 2,076,734 1,908,948 Stockholders’ equity: Common stock, $ 1 par value per share. 25,000,000 shares authorized; 13,180,184 and 13,156,308 shares issued and 11,177,001 and 11,465,572 shares outstanding, respectively 13,180 13,156 Surplus 79,473 79,072 Treasury stock, 2,003,183 and 1,690,736 shares, respectively, at cost ( 24,512 ) ( 21,821 ) Unearned common stock held by employee stock ownership plan ( 1,403 ) ( 1,403 ) Retained earnings 96,180 95,815 Accumulated other comprehensive loss ( 9,869 ) ( 11,539 ) Total stockholders’ equity 153,049 153,280 Total liabilities and stockholders’ equity $ 2,229,783 $ 2,062,228 See accompanying notes to the unaudited consolidated financial statements. 3 Table of Conte n t s MERIDIAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three months ended March 31, (dollars in thousands, except per share data) 2023 2022 Interest income: Loans and other finance receivables, including fees $ 29,417 $ 17,219 Securities - taxable 959 426 Securities - tax-exempt 354 306 Cash and cash equivalents 217 13 Total interest income 30,947 17,964 Interest expense: Deposits 11,447 1,289 Borrowings 1,823 640 Total interest expense 13,270 1,929 Net interest income 17,677 16,035 Provision for credit losses 1,399 615 Net interest income after provision for credit losses 16,278 15,420 Non-interest income: Mortgage banking income 3,272 7,096 Wealth management income 1,196 1,304 SBA loan income 713 2,520 Earnings on investment in life insurance 192 138 Net change in the fair value of derivative instruments ( 69 ) ( 166 ) Net change in the fair value of loans held-for-sale ( 1 ) ( 1,124 ) Net change in the fair value of loans held-for-investment 117 ( 778 ) Net gain (loss) on hedging activity — 2,827 Service charges 35 27 Other 1,183 1,258 Total non-interest income 6,638 13,102 Non-interest expense: Salaries and employee benefits 11,061 15,298 Occupancy and equipment 1,244 1,252 Professional fees 823 848 Advertising and promotion 861 986 Data processing and software 1,432 1,189 Pennsylvania bank shares tax 245 199 Other 2,123 1,661 Total non-interest expense 17,789 21,433 Income before income taxes 5,127 7,089 Income tax expense 1,106 1,554 Net income $ 4,021 $ 5,535 Basic earnings per common share $ 0.36 $ 0.46 Diluted earnings per common share $ 0.34 $ 0.44 Basic weighted average shares outstanding 11,272 12,046 Diluted weighted average shares outstanding 11,656 12,524 See accompanying notes to the unaudited consolidated financial statements. 4 Table of Conte n t s MERIDIAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) Three months ended March 31, (dollars in thousands) 2023 2022 Net income: $ 4,021 $ 5,535 Net change in unrealized gains (losses) on investment securities available for sale: Change in fair value of investment securities available for sale, net of tax of $ 460 , $( 1,626 ), respectively 1,670 ( 5,369 ) Reclassification adjustment for net losses realized in net income, net of tax effect of $ 0 , and $( 3 ), respectively — ( 9 ) Reclassification adjustment for securities transferred from available-for-sale to held-to-maturity, net of tax effect of $ 0 , and $ 308 , respectively — ( 1,021 ) Unrealized investment gains (losses), net of tax effect of $ 460 , and $( 1,937 ), respectively 1,670 ( 6,399 ) Total other comprehensive income (loss) 1,670 ( 6,399 ) Total comprehensive income (loss) $ 5,691 $ ( 864 ) See accompanying notes to the unaudited consolidated financial statements. 5 Table of Conte n t s MERIDIAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (dollars in thousands, except per share data) Common Stock Surplus Treasury Stock Unearned ESOP Retained Earnings AOCI Total Balance at January 1, 2023 $ 13,156 $ 79,072 $ ( 21,821 ) $ ( 1,403 ) $ 95,815 $ ( 11,539 ) $ 153,280 Adjustment to initially apply ASU No. 2016-13 for CECL (1), net of tax ( 2,228 ) ( 2,228 ) Net income — — — — 4,021 — 4,021 Other comprehensive income — — — — — 1,670 1,670 Dividends paid or accrued, $ 0.125 per share — — — — ( 1,428 ) — ( 1,428 ) Net purchase of treasury stock through publicly announced plans ( 184,598 shares) — — ( 2,691 ) — — — ( 2,691 ) Common stock issued through share-based awards and exercises 24 124 — — — — 148 Stock based compensation expense — 277 — — — — 277 Balance at March 31, 2023 $ 13,180 $ 79,473 $ ( 24,512 ) $ ( 1,403 ) $ 96,180 $ ( 9,869 ) $ 153,049 (dollars in thousands, except per share data) Common Stock Surplus Treasury Stock Unearned ESOP Retained Earnings AOCI Total Balance at January 1, 2022 $ 13,070 $ 77,128 $ ( 8,860 ) $ ( 1,602 ) $ 84,916 $ 708 $ 165,360 Net income — — — — 5,535 — 5,535 Other comprehensive loss — — — — — ( 6,399 ) ( 6,399 ) Dividends paid or accrued, $ 0.60 per share — — — — ( 7,347 ) — ( 7,347 ) Common stock issued through share-based awards and exercises 21 254 — — — — 275 Stock based compensation expense — 260 — — — — 260 Balance at March 31, 2022 $ 13,091 $ 77,642 $ ( 8,860 ) $ ( 1,602 ) $ 83,104 $ ( 5,691 ) $ 157,684 (1) See Note 1, "Summary of Significant Accounting Policies - Pronouncements Adopted in 2023" for additional information. See accompanying notes to the unaudited consolidated financial statements. 6 Table of Conte n t s MERIDIAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three months ended March 31, (dollars in thousands) 2023 2022 Net income $ 4,021 $ 5,535 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Net amortization of investment premiums and discounts and change in fair value of equity securities 373 ( 27 ) Depreciation and amortization (accretion), net ( 2 ) 50 Provision for credit losses 1,399 615 Amortization of issuance costs on subordinated debt 27 30 Stock based compensation 277 260 Net change in fair value of derivative instruments 4 166 Net change in fair value of loans held for sale 1 1,124 Net change in fair value of loans held for investment ( 117 ) 778 Amortization and net impairment of servicing rights 435 494 SBA loan income ( 713 ) ( 2,520 ) Proceeds from sale of loans 136,837 319,610 Loans originated for sale ( 147,238 ) ( 313,485 ) Mortgage banking income ( 3,272 ) ( 7,096 ) (Increase) decrease in accrued interest receivable ( 288 ) 161 Decrease (increase) in other assets ( 1,542 ) ( 9,962 ) Earnings from investment in life insurance ( 192 ) ( 138 ) (Increase) decrease in deferred income tax ( 54 ) 159 Increase in accrued interest payable 1,447 544 (Decrease) increase in other liabilities ( 2,803 ) 10,156 Net cash (used in) provided by operating activities ( 11,400 ) 6,454 Cash flows from investing activities: Activity in available-for-sale securities: Maturities, repayments and calls 2,222 3,843 Purchases ( 10,702 ) ( 9,885 ) Activity in held-to-maturity securities: Maturities, repayments and calls 865 390 Purchases — ( 2,500 ) (Decrease) increase in restricted stock ( 3,242 ) 787 Net increase in loans ( 73,057 ) ( 59,762 ) Purchases of premises and equipment ( 284 ) ( 77 ) Net cash used in investing activities ( 84,198 ) ( 67,204 ) Cash flows from financing activities: Net increase in deposits 57,934 118,438 Increase (decrease) in short-term borrowings 108,368 ( 5,208 ) Increase in long-term debt 3,433 — Repayment of subordinated debt ( 54 ) — Net purchase of treasury stock ( 2,691 ) — Dividends paid ( 1,428 ) ( 7,347 ) Share based awards and exercises 148 275 Net cash provided by financing activities 165,710 106,158 Net change in cash and cash equivalents 70,112 45,408 Cash and cash equivalents at beginning of period 38,391 23,480 Cash and cash equivalents at end of period $ 108,503 $ 68,888 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 11,823 $ 1,386 Transfers from loans held for sale to loans held for investment — 1,653 Transfer of securities from AFS to HTM — 23,522 See accompanying notes to the unaudited consolidated financial statements. 7 Table of Conte n t s MERIDIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) Summary of Significant Accounting Policies Basis of Presentation The Corporation’s unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and the results of operations for the interim periods presented have been included. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Amounts subject to significant estimates are items such as the allowance for credit losses, lending related commitments and the related unfunded commitment reserve, the fair value of financial instruments, other-than-temporary impairments of investment securities, and the valuations of goodwill, intangible assets, and servicing assets. These unaudited consolidated financial statements should be read in conjunction with the Corporation’s filings with the SEC (including our Annual Report on Form 10-K for the year ended December 31, 2022), subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in Form 10-K and Form 10-Q filings, if any. Certain prior period amounts have been reclassified to conform with current period presentation. Reclassifications had no effect on net income or stockholders’ equity. Operating results for the three months ended March 31, 2023 are not necessarily indicative of the results for the year ending December 31, 2023 or for any other period. Stock Split On February 28, 2023, the Corporation approved and declared a two -for-one stock split in the form of a 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. Loans Loans held for investment are recorded at amortized cost, net of ACL. Amortized cost is the amount at which a financial asset is originated or acquired, adjusted for the amortization of premium and discount, net deferred fees or costs, collection of cash, and write-offs. Interest income on loans is recognized using the level yield method. Loan origination fees, commitment fees and direct loan origination costs are deferred and recognized over the life of the related loans using a level yield method over the period to maturity. Allowance for Credit Losses - Loans and Leases On January 1, 2023, we adopted ASU 2016-13, Financial Instruments-Credit Losses ("Topic 326"), which replaced the incurred loss impairment model with an expected loss methodology that is referred to as the CECL methodology. We now establish our ACL in accordance with Topic 326. The ACL includes quantitative and qualitative factors that comprise management's current estimate of expected credit losses, including our portfolio mix and segmentation, modeling methodology, historical loss experience, relevant available information from internal and external sources relating to reasonable and supportable forecasts about future economic conditions, prepayment speeds, and qualitative adjustment factors. The Corporation's portfolio segments, established based on similar risk characteristics and loss behaviors, are: • Commercial mortgage, commercial and industrial, construction, SBA loans, and commercial small business leases (commercial loans), and • Residential, equity secured lines and loans, and installment loans (retail loans). Expected credit losses are estimated over the contractual term, adjusted for expected prepayments and recoveries. The contractual term excludes any extensions, renewals and modifications unless the Corporation has reasonable expectations at the reporting date that it will result in a modification, or they are not unconditionally cancellable. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The allowance includes two primary components: (i) an allowance established on loans which share similar risk characteristics collectively evaluated for credit losses (collective basis) and (ii) an allowance established on loans which do not share similar risk characteristics with any loan segment and are individually evaluated for credit losses (individual basis). Loans that share similar risk characteristics are collectively reviewed for credit loss and are evaluated based on historical loss experience, adjusted for current economic conditions and future economic forecasts. Estimated losses are determined differently for commercial and consumer loans, and each portfolio segment is further segmented by internally assessed risk ratings. 8 Table of Conte n t s Management uses a third-party economic forecast to modify the calculated historical loss rates of the portfolio segments. Our economic forecast extends out 4 quarters (the forecast period) and reverts to the historical loss rates on a straight-line basis over 1 quarter (the reversion period) as we believe this to be reasonable and supportable in the current environment. The economic forecast and reversion periods will be evaluated periodically by management and updated as appropriate. The historical loss rates for commercial loans are estimated by determining the PD and expected LGD. The PD is calculated based on the historical rate of migration to an event of credit loss during the look-back period. The historical loss rates for retail loans is calculated based solely on average net loss rates over the same look-back period. Our current look-back period is 32 quarters which allows us to ensure that historical loss rates are adequately considering losses over a full economic cycle. Loans that do not share similar risk characteristics with any loan segments are evaluated on an individual basis. These loans, which may include borrowers experiencing financial difficulties, are not included in the collective basis evaluation. When it is probable we will not collect all principal and interest due according to their contractual terms, which is assessed based on the credit characteristics of the loan and/or payment status, these loans are individually reviewed and measured for potential credit loss. The amount of the potential credit loss is measured using one of three methods: (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the fair value of collateral, if the loan is collateral dependent; or (iii) the loan’s observable market price. If the measured fair value of the loan is less than the amortized cost basis of the loan, an allowance for credit loss is recorded. For collateral dependent loans, the expected credit losses at the individual asset level is the difference between the collateral's fair value (less cost to sell) and the amortized cost. Qualitative adjustment factors consider various internal and external conditions which are allocated among loan segments and take into consideration: • Current underwriting policies, staff and portfolio concentrations, • Risk rating accuracy, credit and administration, • Internal risk emergence (including internal trends of delinquency, portfolio growth, and collateral value), and • , Competitive environment, as it could impact loan structure and underwriting. These factors are based on their relative standing compared to the period in which historical losses are used in quantitative reserve estimates and current directional trends, and reasonable and supportable forecasts. Qualitative factors in our model can add to or subtract from quantitative reserves. Our loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with individual problem loans. In addition, various regulatory agencies periodically review our loan ratings and allowance for credit losses and the Bank’s internal loan review department performs loan reviews. Accrued interest receivable on loans is excluded from the estimate of credit losses and is included in Accrued interest receivable on the Consolidated Balance Sheets. For additional detail regarding the allowance for credit losses and the provision for credit losses, see Note 5. Past Due and Nonaccrual Loans Past due loans are defined as loans contractually past due 30 days or more as to principal or interest payments but which remain in accrual status because they are considered well secured and in the process of collection. Nonaccruing loans and leases are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the loan is not well secured and in the process of collection. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal and interest. Loans are returned to accrual status when we assess that the borrower has the ability to make all principal and interest payments in accordance with the terms of the loan (i.e. a consistent repayment record, generally six consecutive payments, has been demonstrated). Unless loans are well-secured and collection is imminent, for loans greater than 90 days past due their respective reserves are generally charged off once the loss has been confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off. Securities Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Securities classified as available-for-sale are those securities that the Corporation intends to hold for an indefinite period of time but not necessarily to maturity. Securities available-for-sale are carried at fair value. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Corporation’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Unrealized gains and losses are reported as increases or decreases in other comprehensive income. Gains or losses on disposition are based on the net proceeds and cost of the securities sold, adjusted for the amortization of premiums and accretion of discounts, using the specific identification method. 9 Table of Conte n t s Securities classified as held to maturity are those debt securities the Corporation has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for the amortization of premium and accretion of discount, computed on a level yield basis. Investments in equity securities are recorded in accordance with ASC 321-10, Investments - Equity Securities. Equity securities are carried at fair value, with changes in fair value reported in net income. At March 31, 2023 and December 31, 2022, investments in equity securities consisted of an investment in mutual funds with a fair value of $ 2.1 million, and $ 2.1 million, respectively. The Corporation’s accounting policy specifies that (a) if the Corporation does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired, unless there is a credit loss. When the Corporation does not intend to sell the security, and it is more likely than not, the Corporation will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. The Corporation did not recognize any other-than-temporary impairment charges during the quarters ended March 31, 2023 and 2022. Allowance for Credit Losses - Held-to-Maturity Debt Securities We follow Accounting Standards Codification (ASC) 326-20, Financial Instruments - Credit Loss - Measured at Amortized Cost, to measure expected credit losses on held-to-maturity debt securities on a collective basis by security investment grade. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. The Corporation classifies the held-to-maturity debt securities into the following major security types: state and municipal securities. These securities are highly rated with a history of no credit losses, and are assigned ratings based on the most recent data from ratings agencies depending on the availability of data for the security. Credit ratings of held-to-maturity debt securities, which are a significant input in calculating the expected credit loss, are reviewed on a quarterly basis. Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses and is included in Accrued interest receivable on the Consolidated Balance Sheets. Allowance for Credit Losses - Available-for-Sale Debt Securities We follow ASC 326-30, Financial Instruments - Cre dit Loss - Available-for-Sale Debt Securities, which provides guidance related to the recognition of and expanded disclosure requirements for expected credit losses on available-for-sale debt securities. For available-for-sale debt securities in an unrealized loss position, the Corporation first evaluates whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is reduced to fair value and recognized as a reduction to Noninterest income in the Consolidated Statements of Income. For debt securities available-for-sale which the Corporation does not intend to sell, or it is not likely the security would be required to be sold before recovery, we evaluate whether a decline in fair value has resulted from credit losses or other adverse factors, such as a change in the security's credit rating. In assessing whether a credit loss exists, the Corporation compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance is recorded, limited to the fair value of the security. Management performs this analysis on a quarterly basis to review the conditions and risks associated with the individual securities. Credit losses on an impaired security shall continue to be measured using the present value of expected future cash flows. Any impairment not recorded through an allowance for credit loss is included in other comprehensive income (loss), net of the tax effect. We are required to use our judgment in determining impairment in certain circumstances. For additional detail regarding debt securities, see Note 3. Unfunded Lending Commitments For unfunded lending commitments, the Corporation estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. The estimate includes consideration of the probability of default and utilization rate at default to calculate expected credit losses on commitments expected to be funded over its estimated life of one year, based on historical losses, and qualitative adjustment factors. The allowance for credit losses for off-balance sheet exposures is included in Other liabilities on the Consolidated Balance Sheets and the provision for credit losses for off-balance sheet exposure is included in the provision for credit losses on the Consolidated Statements of Income. The allowance for credit losses for off-balance sheet exposures was $ 1.4 million and $ 173 thousand as of March 31, 2023 and December 31, 2022, respectively. Pronouncements Adopted in 2023 FASB ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments” The Corporation adopted ASU 2016-13, as amended, on January 1, 2023, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans, net of fees and costs, securities HTM, 10 Table of Conte n t s unfunded lending commitments (including loan commitments on loans held for investment, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842. In addition, ASC 326 made changes to the accounting for securities AFS which now requires credit losses to be presented as an allowance rather than as an other-than-temporary impairment on securities AFS management does not intend to sell or believes that it is more likely than not they will be required to sell. We applied the modified retrospective method for all financial assets measured at amortized cost and securities AFS. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Corporation recorded a one-time decrease to retained earnings of $ 2.2 million on January 1, 2023 for the cumulative effect of adopting ASC 326, net of tax. The transition adjustment includes $ 1.2 million and $ 974 thousand post-tax impacts for loans, net of fees and costs and unfunded loan commitments, respectively, due to higher expected credit losses compared to the incurred loss methodology primarily driven by longer duration commercial and consumer real estate loans. The impact of the change from the incurred loss model to the current expected credit loss model is detailed below. January 1, 2023 (dollars in thousands) Pre-adoption Adoption Impact As Reported Assets: ACL on loans and leases: Commercial mortgage $ 4,095 $ ( 526 ) $ 3,569 Home equity lines and loans 188 439 627 Residential mortgage 948 17 965 Construction 3,075 ( 1,763 ) 1,312 Commercial and industrial 4,012 ( 1,023 ) 2,989 Small business loans 4,909 1,110 6,019 Consumer 3 ( 3 ) — Leases, net 1,598 3,345 4,943 Total ACL on loans and leases $ 18,828 $ 1,596 $ 20,424 Liabilities: Reserve for unfunded commitments $ 173 $ 1,256 $ 1,429 FASB ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” Issued in April 2019, ASU 2019-04 clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments (addressed by ASUs 2016-13, 2017-12, and 2016-01, respectively). The amendments to estimating expected credit losses (ASU 2016-13), in particular, how a company considers recoveries and extension options when estimating expected credit losses, are the most relevant to the Corporation. The ASU clarifies that (1) the estimate of expected credit losses should include expected recoveries of financial assets, including recoveries of amounts expected to be written off and those previously written off, and (2) that contractual extension or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. The Corporation adopted ASU 2019-04 at the same time ASU 2016-13 was adopted. FASB ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." In March 2022, the FASB issued ASU No. 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted CECL and enhance the disclosure requirements for modifications of receivables made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current period gross write-offs by year of origination for financing receivables and net investment in leases in the existing vintage disclosures. The Corporation adopted ASU 2022-02 at the same time 11 Table of Conte n t s ASU 2016-13 was adopted, as of January 1, 2023. The adoption of this ASU resulted in updated disclosures within our financial statements but otherwise did not have a material impact on the Corporation's financial statements. Pronouncements Not Yet Effective as of March 31, 2023: FASB ASU 2020-04 (Topic 848), “Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” Issued in March 2020, ASU 2020-04 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The Corporation does not have a significant concentration of loans, derivative contracts, borrowings or other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The Corporation expects to adopt the LIBOR transition relief allowed under this standard. FASB ASU 2020-06, “Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” This ASU clarifies the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock by removing the cash conversion model and the beneficial conversion feature models. For public business entities that meet the definition of an SEC filer (excluding smaller reporting entities), the amendments are effective for fiscal years beginning after Dec. 15, 2021, and interim periods within. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2023, and interim periods within. Early adoption is permitted, but no earlier than for fiscal years beginning after Dec. 15, 2020. The Corporation does not expect this to have a material impact on our consolidated financial statements. (2) Earnings per Common Share Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period reduced by unearned ESOP Plan shares and treasury shares. Diluted earnings per common share takes into account the potential dilution computed pursuant to the treasury stock method that could occur if stock options were exercised and converted into common stock and if restricted stock awards were vested, and SERP plan liabilities were satisfied with common shares. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be anti-dilutive. Three months ended March 31, (dollars in thousands, except per share data) 2023 2022 Numerator for earnings per share: Net income available to common stockholders $ 4,021 $ 5,535 Denominators for earnings per share: Weighted average shares outstanding 11,456 12,256 Average unearned ESOP shares ( 184 ) ( 210 ) Basic weighted averages shares outstanding 11,272 12,046 Dilutive effects of assumed exercises of stock options 230 346 Dilutive effects of SERP shares 154 132 Diluted weighted averages shares outstanding 11,656 12,524 Basic earnings per share $ 0.36 $ 0.46 Diluted earnings per share $ 0.34 $ 0.44 Antidilutive shares excluded from computation of average dilutive earnings per share 463 42 12 Table of Conte n t s (3) Securities The following tables presents the amortized cost, allowance for credit losses, and fair value of securities at the dates indicated: March 31, 2023 (dollars in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Allowance for Credit Losses Fair value # of Securities in unrealized loss position Securities available-for-sale: U.S. asset backed securities $ 17,676 $ 166 $ ( 250 ) $ — $ 17,592 14 U.S. government agency MBS 12,192 12 ( 467 ) — 11,737 10 U.S. government agency CMO 27,059 66 ( 2,003 ) — 25,122 30 State and municipal securities 44,514 11 ( 4,732 ) — 39,793 32 U.S. Treasuries 32,981 — ( 2,917 ) — 30,064 25 Non-U.S. government agency CMO 11,808 7 ( 706 ) — 11,109 12 Corporate bonds 8,201 — ( 685 ) — 7,516 12 Total securities available-for-sale $ 154,431 $ 262 $ ( 11,760 ) $ — $ 142,933 135 Securities held-to-maturity: State and municipal securities $ 36,525 $ 11 $ ( 3,460 ) $ — $ 33,076 22 Total securities held-to-maturity $ 36,525 $ 11 $ ( 3,460 ) $ — $ 33,076 22 December 31, 2022 (dollars in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Fair value # of Securities in unrealized loss position Securities available-for-sale: U.S. asset backed securities $ 15,581 $ 14 $ ( 314 ) $ 15,281 12 U.S. government agency MBS 12,272 5 ( 538 ) 11,739 12 U.S. government agency CMO 25,520 40 ( 2,242 ) 23,318 29 State and municipal securities 44,700 — ( 5,862 ) 38,838 34 U.S. Treasuries 32,980 — ( 3,457 ) 29,523 25 Non-U.S. 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 Securities held-to-maturity: State and municipal securities $ 37,479 $ — $ ( 4,394 ) $ 33,085 25 Total securities held-to-maturity $ 37,479 $ — $ ( 4,394 ) $ 33,085 25 Although the Corporation’s investment portfolio overall is in a net unrealized loss position at March 31, 2023, the temporary impairment in the above noted securities is primarily the result of changes in market interest rates subsequent to purchase and it is more likely than not that the Corporation will not be required to sell these securities prior to recovery to satisfy liquidity needs, and therefore, no securities are deemed to be other-than-temporarily impaired. During the quarter-ended March 31, 2022, $ 27.7 million of municipal securities, previously classified as available-for-sale on the balance sheet, were transferred to the held-to-maturity portfolio at fair value. After transfer, $ 1.3 million of unrealized losses remain in accumulated other comprehensive income. No gain or loss was recognized as a result of the transfer. 13 Table of Conte n t s The following table shows the Corporation’s investment gross unrealized losses and fair value aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position at the dates indicated: March 31, 2023 Less than 12 Months 12 Months or more Total (dollars in thousands) Fair value Unrealized losses Fair value Unrealized losses Fair value Unrealized losses Securities available-for-sale: U.S. asset backed securities $ 3,658 $ ( 29 ) $ 7,244 $ ( 221 ) $ 10,902 $ ( 250 ) U.S. government agency MBS 20 ( 1 ) 8,417 ( 466 ) 8,437 ( 467 ) U.S. government agency CMO 4,004 ( 173 ) 16,274 ( 1,830 ) 20,278 ( 2,003 ) State and municipal securities 1,056 ( 6 ) 35,911 ( 4,726 ) 36,967 ( 4,732 ) U.S. Treasuries — — 30,064 ( 2,917 ) 30,064 ( 2,917 ) Non-U.S. government agency CMO 6,207 ( 126 ) 4,132 ( 580 ) 10,339 ( 706 ) Corporate bonds 2,086 ( 163 ) 4,428 ( 522 ) 6,514 ( 685 ) Total securities available-for-sale $ 17,031 $ ( 498 ) $ 106,470 $ ( 11,262 ) $ 123,501 $ ( 11,760 ) Securities held-to-maturity: State and municipal securities $ 4,723 $ ( 43 ) $ 25,836 $ ( 3,417 ) $ 30,559 $ ( 3,460 ) Total securities held-to-maturity $ 4,723 $ ( 43 ) $ 25,836 $ ( 3,417 ) $ 30,559 $ ( 3,460 ) December 31, 2022 Less than 12 Months 12 Months or more Total (dollars in thousands) Fair value Unrealized losses Fair value Unrealized losses Fair value Unrealized losses Securities available-for-sale: U.S. asset backed securities $ 6,531 $ ( 80 ) $ 4,863 $ ( 234 ) $ 11,394 $ ( 314 ) U.S. government agency MBS 6,022 ( 230 ) 4,637 ( 308 ) 10,659 ( 538 ) U.S. government agency CMO 9,859 ( 821 ) 9,549 ( 1,421 ) 19,408 ( 2,242 ) State and municipal securities 7,487 ( 726 ) 31,351 ( 5,136 ) 38,838 ( 5,862 ) U.S. Treasuries 1,902 ( 97 ) 27,622 ( 3,360 ) 29,524 ( 3,457 ) Non-U.S. government agency CMO 8,423 ( 464 ) 666 ( 169 ) 9,089 ( 633 ) Corporate bonds 5,019 ( 431 ) 1,538 ( 212 ) 6,557 ( 643 ) Total securities available-for-sale $ 45,243 $ ( 2,849 ) $ 80,226 $ ( 10,840 ) $ 125,469 $ ( 13,689 ) Securities held-to-maturity: State and municipal securities $ 10,130 $ ( 364 ) $ 22,543 $ ( 4,030 ) $ 32,673 $ ( 4,394 ) Total securities held-to-maturity $ 10,130 $ ( 364 ) $ 22,543 $ ( 4,030 ) $ 32,673 $ ( 4,394 ) 14 Table of Conte n t s The amortized cost and carrying value of securities are shown below by contractual maturities at the dates indicated. Actual maturities may differ from contractual maturities as issuers may have the right to call or repay obligations with or without call or prepayment penalties. March 31, 2023 December 31, 2022 Available-for-sale Held-to-maturity Available-for-sale Held-to-maturity (dollars in thousands) Amortized cost Fair value Amortized cost Fair value Amortized cost Fair value Amortized cost Fair value Due in one year or less $ — $ — $ — $ — $ — $ — $ — $ — Due after one year through five years 23,767 21,921 3,389 3,365 18,865 17,289 4,275 4,238 Due after five years through ten years 27,799 25,624 3,941 3,507 28,647 25,459 2,998 2,683 Due after ten years 51,806 47,419 29,195 26,204 53,950 48,453 30,206 26,164 Subtotal 103,372 94,964 36,525 33,076 101,462 91,201 37,479 33,085 Mortgage-related securities 51,059 47,969 — — 47,514 44,145 — — Total $ 154,431 $ 142,933 $ 36,525 $ 33,076 $ 148,976 $ 135,346 $ 37,479 $ 33,085 The following table presents the gross gain on sale of investment securities available for sale on the dates indicated: Three months ended March 31, (dollars in thousands) 2023 2022 Gross gain on sale of available for sale investments $ — $ 314 Gross loss on sale of available for sale investments — — Pledged Securities As of March 31, 2023 and December 31, 2022, securities having a fair value of $ 110.0 million and $ 78.4 million, respectively, were specifically pledged as collateral for public funds, the FRB discount window program, FHLB borrowings and other purposes. The FHLB has a blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation’s borrowing agreement with the FHLB. ACL on Securities AFS and HTM We use credit ratings quarterly and the most recent financial information of securities' issuers annually to help evaluate the credit quality of our securities AFS and HTM portfolios on a quarterly basis. The securities portfolio consists primarily of U.S. government treasuries and U.S. government agency asset backed securities which have no probability of default. The remaining portfolio consists of highly rated municipal bonds, non-agency CMO, and corporate bonds that have a low probability of default. For the three months ended March 31, 2023, we had no significant ACL or provision expense and no charge-offs or recoveries on AFS or HTM securities. (4) Loans and Other Finance Receivables The following table presents loans and other finance receivables, net of fees and costs detailed by category at the dates indicated: (dollars in thousands) March 31, 2023 December 31, 2022 Real estate loans: Commercial mortgage $ 617,063 $ 565,400 Home equity lines and loans 62,050 59,399 Residential mortgage 238,831 221,837 Construction 267,388 271,955 Total real estate loans 1,185,332 1,118,591 Commercial and industrial 331,082 341,378 Small business loans 148,570 136,155 Consumer 387 488 Leases, net 151,057 138,986 Total loans $ 1,816,428 $ 1,735,598 15 Table of Conte n t s Balances included in loans, net of fees and costs: Residential mortgage real estate loans accounted under fair value option, at fair value $ 14,434 $ 14,502 Residential mortgage real estate loans accounted under fair value option, at amortized cost 16,745 16,930 Unearned lease income included in leases, net ( 26,352 ) ( 25,715 ) Unamortized net deferred loan origination costs 1,761 8,084 Fair Value Option for Residential Mortgage Real Estate Loans Residential mortgage real estate loans that were originated by the Corporation and intended for sale in the secondary market to permanent investors, but were either repurchased or unsalable due to defect, and that the Corporation has the ability and intent to hold for the foreseeable future or until maturity or payoff are carried at fair value pursuant to the Corporation's election of the fair value option for these loans. The remaining loans, net of fees and costs are stated at their outstanding unpaid principal balances, net of deferred fees or costs, since the original intent for these loans was to hold them until payoff or maturity. Nonaccrual and Past Due Loans, Net of Fees and Costs The following tables present an aging of the Corporation’s loans at the dates indicated: March 31, 2023 (dollars in thousands) 30-89 days past due 90+ days past due and still accruing Total past due Current Total Accruing Loans and leases Nonaccrual loans and leases Total loans % Delinquent Commercial mortgage $ — $ — $ — $ 617,063 $ 617,063 $ — $ 617,063 — % Home equity lines and loans 159 — 159 60,906 61,065 985 62,050 1.84 Residential mortgage (1) 1,558 — 1,558 235,204 236,762 2,069 238,831 1.52 Construction 3,418 — 3,418 262,764 266,182 1,206 267,388 1.73 Commercial and industrial 99 — 99 317,767 317,866 13,216 331,082 4.02 Small business loans 2,532 — 2,532 140,759 143,291 5,279 148,570 5.26 Consumer — — — 387 387 — 387 — Leases, net 1,190 — 1,190 149,500 150,690 367 151,057 1.03 % Total $ 8,956 $ — $ 8,956 $ 1,784,350 $ 1,793,306 $ 23,122 $ 1,816,428 1.77 % (1) Includes $ 14,434 of loans at fair value of which $ 13,418 are current, $ 456 are 30-89 days past due and $ 560 are nonaccrual. December 31, 2022 (dollars in thousands) 30-89 days past due 90+ days past due and still accruing Total past due Current Total Accruing Loans and leases Nonaccrual loans and leases Total loans % Delinquent Commercial mortgage $ — $ — $ — $ 565,260 $ 565,260 $ 140 $ 565,400 0.02 % Home equity lines and loans 146 — 146 58,156 58,302 1,097 59,399 2.09 Residential mortgage (1) 4,262 — 4,262 215,490 219,752 2,085 221,837 2.86 Construction 1,206 — 1,206 270,749 271,955 — 271,955 0.44 Commercial and industrial 101 — 101 328,730 328,831 12,547 341,378 3.70 Small business loans 939 — 939 130,751 131,690 4,465 136,155 3.97 Consumer — — — 488 488 — 488 — Leases, net 1,173 — 1,173 136,911 138,084 902 138,986 1.49 % Total $ 7,827 $ — $ 7,827 $ 1,706,535 $ 1,714,362 $ 21,236 $ 1,735,598 1.67 % (1) Includes $ 14,502 of loans at fair value of which $ 13,760 are current, $ 184 are 30-89 days past due and $ 558 are nonaccrual. Foreclosed and Repossessed Assets At March 31, 2023, there were no consumer mortgage loans secured by residential real estate properties (included in loans, net of fees and costs on the Consolidated Balance Sheets) for which formal foreclosure proceedings were in process. 16 Table of Conte n t s Risks and Uncertainties We have no particular credit concentration. Our commercial loans have been proactively managed in an effort to achieve a balanced portfolio with no unusual exposure to one industry. Additionally, most of our lending activity occurs within our primary market areas which are concentrated in southeastern Pennsylvania, Delaware, and Maryland as well as other contiguous markets and represents a geographic concentration. Additionally, our loan portfolio is concentrated in commercial loans. Commercial loans are generally viewed as having more inherent risk of default than residential real estate loans or other consumer loans. Also, the commercial loan balance per borrower is typically larger than that for residential real estate loans and consumer loans, implying higher potential losses on an individual loan basis. Past Due and Nonaccrual Status The following table presents the amortized costs basis of loans and leases on nonaccrual status and loans 90 days or more past due and still accruing, net of fees and costs as of March 31, 2023: March 31, 2023 (dollars in thousands) Nonaccrual Without ACL Nonaccrual With ACL Total Nonaccrual Real estate loans: Home equity lines and loans $ 985 $ — $ 985 Residential mortgage 1,440 629 2,069 Construction — 1,206 1,206 Total real estate loans 2,425 1,835 4,260 Commercial and industrial 6 13,210 13,216 Small business loans 734 4,545 5,279 Leases, net — 367 367 Total $ 3,165 $ 19,957 $ 23,122 Collateral-dependent Loans The following table presents the amortized cost basis of non-accruing collateral-dependent loans by class or loans as of March 31, 2023 under the current expected credit loss model: March 31, 2023 (dollars in thousands) Real Estate Equipment and Other Total Home equity lines and loans $ 985 $ — $ 985 Residential mortgage 2,069 — 2,069 Construction 1,206 — 1,206 Commercial and industrial 1,289 11,927 13,216 Small business loans 3,890 1,389 5,279 Leases, net — 367 367 Total $ 9,439 $ 13,683 $ 23,122 (5) Allowance for Credit Losses The ACL is evaluated on at least a quarterly basis, as losses are estimated to be probable and incurred. The provision for loan and lease losses increase or decrease the ACL, if deemed necessary. Loans deemed to be uncollectible are charged against the Allowance, and subsequent recoveries, if any, are credited to the Allowance. The ACL is maintained at a level considered adequate to provide for losses that are probable and estimable. Management’s periodic evaluation of the adequacy of the ACL is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is subjective as it requires material estimates that may be susceptible to significant revisions as more information becomes available. 17 Table of Conte n t s Roll-Forward of Allowance by Portfolio Segment The following table provides the activity of our allowance for credit losses for the three months ended March 31, 2023 under the CECL model in accordance with ASC 326 (as adopted on January 1, 2023): Three Months Ended March 31, 2023 (dollars in thousands) Beginning Balance, prior to adoption of ASU No. 2016-13 for CECL Adjustment to initially apply ASU No. 2016-13 for CECL Charge-offs Recoveries Provision (recovery of provision) for credit losses Ending balance Commercial mortgage $ 4,095 $ ( 526 ) $ — $ — $ ( 94 ) $ 3,475 Home equity lines and loans 188 439 ( 33 ) 2 19 615 Residential mortgage 948 17 — — ( 97 ) 868 Construction 3,075 ( 1,763 ) — — ( 193 ) 1,119 Commercial and industrial 4,012 ( 1,023 ) — 39 ( 295 ) 2,733 Small business loans 4,909 1,110 — — 297 6,316 Consumer 3 ( 3 ) — — — — Leases 1,598 3,345 ( 1,464 ) 3 1,834 5,316 Total $ 18,828 $ 1,596 $ ( 1,497 ) $ 44 $ 1,471 $ 20,442 The following table provides the activity of the allowance for loan and lease losses for the three months ended March 31, 2022 under the incurred loss model: Three Months Ended March 31, 2022 (dollars in thousands) Beginning Balance Charge-offs Recoveries Provision (Reversal) Ending Balance Commercial mortgage $ 4,950 $ — $ — $ ( 800 ) $ 4,150 Home equity lines and loans 224 — 6 ( 22 ) 208 Residential mortgage 283 — 2 72 357 Construction 2,042 — — 215 2,257 Commercial and industrial 6,533 — 11 825 7,369 Small business loans 3,737 — — ( 365 ) 3,372 Consumer 3 — — — 3 Leases 986 ( 566 ) — 690 1,110 Total $ 18,758 $ ( 566 ) $ 19 $ 615 $ 18,826 18 Table of Conte n t s Allowance Allocated by Portfolio Segment The following tables detail the allocation of the allowance for loan and lease losses and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment at the dates indicated: March 31, 2023 Allowance for credit losses Carrying value of loans and leases (dollars in thousands) Individually evaluated for impairment Collectively evaluated for impairment Total Individually evaluated for impairment Collectively evaluated for impairment Total Commercial mortgage $ — $ 3,475 $ 3,475 $ 2,263 $ 614,800 $ 617,063 Home equity lines and loans — 615 615 985 61,065 62,050 Residential mortgage — 868 868 1,440 222,957 224,397 Construction — 1,119 1,119 1,206 266,182 267,388 Commercial and industrial 903 1,830 2,733 13,233 317,849 331,082 Small business loans 1,555 4,761 6,316 5,324 143,246 148,570 Consumer — — — — 387 387 Leases, net — 5,316 5,316 367 150,690 151,057 Total (1) $ 2,458 $ 17,984 $ 20,442 $ 24,818 $ 1,777,176 $ 1,801,994 (1) Excludes deferred fees and loans carried at fair value. The following table details the pre-CECL allocation of the allowance for loan and lease losses and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment at the dates indicated: December 31, 2022 Allowance on loans and leases Carrying value of loans and leases (dollars in thousands) Individually evaluated for impairment Collectively evaluated for impairment Total Individually evaluated for impairment Collectively evaluated for impairment Total Commercial mortgage $ — $ 4,095 $ 4,095 $ 2,445 $ 562,955 $ 565,400 Home equity lines and loans — 188 188 1,097 58,302 59,399 Residential mortgage — 948 948 1,454 205,881 207,335 Construction — 3,075 3,075 1,206 270,749 271,955 Commercial and industrial 776 3,236 4,012 12,547 328,831 341,378 Small business loans 1,449 3,460 4,909 4,527 131,628 136,155 Consumer — 3 3 — 488 488 Leases, net — 1,598 1,598 902 138,084 138,986 Total (1) $ 2,225 $ 16,603 $ 18,828 $ 24,178 $ 1,696,918 $ 1,721,096 (1) Excludes deferred fees and loans carried at fair value. Credit Quality Indicators As part of the process of determining the ACL to the different segments of the loan and lease portfolio, Management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by Management. The results of these reviews are reflected in the risk grade assigned to each loan. These internally assigned grades are as follows: • Pass – Loans considered to be satisfactory with no indications of deterioration. • Special mention – Loans classified as special mention have a potential weakness that deserves Management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. 19 Table of Conte n t s • Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. • Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loan balances classified as doubtful have been reduced by partial charge-offs and are carried at their net realizable values. The following tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to determine the allowance for credit losses at the dates indicated: March 31, 2023 Revolving Loans Converted to Term Loans Revolving Loans Total Term Loans 2023 2022 2021 2020 2019 Prior Commercial mortgage Pass/Watch $ 24,466 $ 128,528 $ 140,094 $ 99,498 $ 54,655 $ 143,017 $ 511 $ 378 $ 591,147 Special Mention — 4,749 — — 5,872 10,893 — — 21,514 Substandard — — — — 1,675 2,394 — 333 4,402 Total $ 24,466 $ 133,277 $ 140,094 $ 99,498 $ 62,202 $ 156,304 $ 511 $ 711 $ 617,063 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Construction Pass/Watch $ 8,301 $ 92,502 $ 66,901 $ 47,378 $ 4,739 $ 2,493 $ — $ 26,126 $ 248,440 Special Mention — — 67 — 4,449 13,226 — — 17,742 Substandard — — — — — 1,206 — — 1,206 Total $ 8,301 $ 92,502 $ 66,968 $ 47,378 $ 9,188 $ 16,925 $ — $ 26,126 $ 267,388 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial and industrial Pass/Watch $ 8,954 $ 51,139 $ 38,432 $ 10,429 $ 14,175 $ 46,074 $ 9,981 $ 110,982 $ 290,166 Special Mention — 4,724 — — — 2,689 — 1,578 8,991 Substandard — — 3,636 933 300 8,827 — 18,229 31,925 Total $ 8,954 $ 55,863 $ 42,068 $ 11,362 $ 14,475 $ 57,590 $ 9,981 $ 130,789 $ 331,082 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Small business loans Pass/Watch $ 15,999 $ 38,100 $ 50,952 $ 16,419 $ 5,979 $ 1,405 $ 2,638 $ 11,799 $ 143,291 Special Mention — — — — — — — — — Substandard — — 2,489 890 912 — — 988 5,279 Total $ 15,999 $ 38,100 $ 53,441 $ 17,309 $ 6,891 $ 1,405 $ 2,638 $ 12,787 $ 148,570 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Total by risk rating Pass/Watch $ 57,720 $ 310,269 $ 296,379 $ 173,724 $ 79,548 $ 192,989 $ 13,130 $ 149,285 $ 1,273,044 Special Mention — 9,473 67 — 10,321 26,808 — 1,578 48,247 Substandard — — 6,125 1,823 2,887 12,427 — 19,550 42,812 Doubtful — — — — — — — — — Total $ 57,720 $ 319,742 $ 302,571 $ 175,547 $ 92,756 $ 232,224 $ 13,130 $ 170,413 $ 1,364,103 Total current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — The Corporation had no loans with a risk rating of Doubtful included within recorded investment in loans and leases held for investment at March 31, 2023. 20 Table of Conte n t s In addition to credit quality indicators as shown in the above tables, allowance allocations for residential mortgages, consumer loans and leases are also applied based on their performance status at the dates indicated: March 31, 2023 Revolving Loans Total Term Loans 2023 2022 2021 2020 2019 Prior Home equity lines and loans Performing $ — $ 816 $ 402 $ 371 $ 2,374 $ 2,514 $ 54,588 $ 61,065 Nonperforming — — — — — — 985 985 Total $ — $ 816 $ 402 $ 371 $ 2,374 $ 2,514 $ 55,573 $ 62,050 Current period gross charge-offs $ — $ — $ — $ — $ — $ ( 33 ) $ — $ ( 33 ) Residential mortgage (1) Performing $ 18,023 $ 159,453 $ 24,365 $ 7,228 $ 466 $ 13,353 $ — $ 222,888 Nonperforming — — — 316 — 1,193 — 1,509 Total $ 18,023 $ 159,453 $ 24,365 $ 7,544 $ 466 $ 14,546 $ — $ 224,397 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Consumer Performing $ — $ 45 $ — $ — $ 43 $ 256 $ 43 $ 387 Nonperforming — — — — — — — — Total $ — $ 45 $ — $ — $ 43 $ 256 $ 43 $ 387 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Leases, net Performing $ 16,610 $ 74,726 $ 44,180 $ 15,174 $ — $ — $ — $ 150,690 Nonperforming — 198 152 17 — — — 367 Total $ 16,610 $ 74,924 $ 44,332 $ 15,191 $ — $ — $ — $ 151,057 Current period gross charge-offs $ — $ ( 561 ) $ ( 881 ) $ ( 22 ) $ — $ — $ — $ ( 1,464 ) Total by Payment Performance Performing $ 34,633 $ 235,040 $ 68,947 $ 22,773 $ 2,883 $ 16,123 $ 54,631 $ 435,030 Nonperforming — 198 152 333 — 1,193 985 2,861 Total $ 34,633 $ 235,238 $ 69,099 $ 23,106 $ 2,883 $ 17,316 $ 55,616 $ 437,891 Total current period gross charge-offs $ — $ ( 561 ) $ ( 881 ) $ ( 22 ) $ — $ ( 33 ) $ — $ ( 1,497 ) (1) Excludes $ 14,434 of loans at fair value. Commercial and industrial loans classified as substandard totaled $ 31.9 million as of March 31, 2023, a decrease of $ 7.4 million, from $ 39.3 million as of December 31, 2022. The majority of commercial and industrial substandard loans is comprised of 14 different loan relationships with no specific industry concentration and an $ 11.0 million commercial loan relationship in the advertising industry that became a non-performing loan relationship late in 2021. December 31, 2022 (dollars in thousands) Pass Special mention Substandard Doubtful Total Commercial mortgage $ 536,705 $ 25,309 $ 3,386 $ — $ 565,400 Home equity lines and loans 57,822 — 1,577 — 59,399 Construction 260,085 11,870 — — 271,955 Commercial and industrial 295,502 6,587 39,289 — 341,378 Small business loans 131,690 — 4,465 — 136,155 Total $ 1,281,804 $ 43,766 $ 48,717 $ — $ 1,374,287 21 Table of Conte n t s In addition to credit quality indicators as shown in the above tables, allowance allocations for residential mortgages, consumer loans and leases are also applied based on their performance status at the dates indicated: December 31, 2022 (dollars in thousands) Performing Non- performing Total Residential mortgage (1) $ 205,881 $ 1,454 $ 207,335 Consumer 488 — 488 Leases, net 138,084 902 138,986 Total $ 344,453 $ 2,356 $ 346,809 (1) There were four nonperforming residential mortgage loans at March 31, 2023 and four nonperforming residential mortgage loans at December 31, 2022 with a combined outstanding principal balance of $ 560 thousand and $ 558 thousand, respectively, which were carried at fair value and not included in the table above. Individually Evaluated Loans The following tables detail the recorded investment and principal balance of individually evaluated loans by portfolio segment, their related Allowance and interest income recognized at the dates indicated. The following tables detail the pre-CECL recorded investment and principal balance of individually evaluated loans by portfolio segment, their related Allowance and interest income recognized at the dates indicated. March 31, 2023 December 31, 2022 (dollars in thousands) Recorded investment Principal balance Related allowance Recorded investment Principal balance Related allowance Individually evaluated loans with related allowance: Commercial and industrial $ 10,986 $ 12,319 $ 903 $ 11,099 $ 12,095 $ 776 Small business loans 4,544 4,584 1,555 3,730 3,730 1,449 Total $ 15,530 $ 16,903 $ 2,458 $ 14,829 $ 15,825 $ 2,225 Individually evaluated loans without related allowance: Commercial mortgage $ 2,263 $ 2,263 $ — $ 2,445 $ 2,456 $ — Commercial and industrial 2,247 2,277 — 1,448 1,494 — Small business loans 780 780 — 797 797 — Home equity lines and loans 985 987 — 1,097 1,097 — Residential mortgage 1,440 1,440 — 1,454 1,454 — Construction 1,206 1,206 — 1,206 1,206 — Leases 367 367 — 902 902 — Total $ 9,288 $ 9,320 $ — $ 9,349 $ 9,406 $ — Grand Total $ 24,818 $ 26,223 $ 2,458 $ 24,178 $ 25,231 $ 2,225 22 Table of Conte n t s The following table details the average recorded investment and interest income recognized on individually evaluated loans by portfolio segment. Three Months Ended March 31, 2023 Three Months Ended March 31, 2022 (dollars in thousands) Average Recorded Investment Interest Income Recognized Average recorded investment Interest income recognized Individually evaluated loans with related allowance: Commercial and industrial $ 10,917 $ — $ 16,487 $ — Small business loans 4,584 — 666 — Total $ 15,501 $ — $ 17,153 $ — Individually evaluated loans without related allowance: Commercial mortgage 2,311 58 3,547 19 Commercial and industrial 2,170 — 454 — Small business loans 796 2 117 3 Home equity lines and loans 998 — 1,002 — Residential mortgage 1,445 30 1,796 2 Construction 1,032 — 1,206 15 Leases 423 — — — Total $ 9,175 $ 90 $ 8,122 $ 39 Grand Total $ 24,676 $ 90 $ 25,275 $ 39 Troubled Debt Restructuring As result of the adoption of guidance related to CECL effective as of January 1, 2023, the Corporation had no reportable balances related to TDRs as of and for the three months ended March 31, 2023. See Note 1 “Summary of Significant Accounting Policies” for additional information. The following table presents information about TDRs at the dates indicated: (dollars in thousands) December 31, 2022 TDRs included in nonperforming loans and leases $ 207 TDRs in compliance with modified terms 3,573 Total TDRs $ 3,780 There was 1 new modification on a commercial mortgage for $ 684 thousand for the year ended December 31, 2022. Total TDRs declined year-over-year, despite the new modification in 2022, as two TDRs from prior to 2021 totaling $ 563 thousand paid off in 2022. No modifications granted during the twelve months ended December 31, 2022 subsequently defaulted during the same time period. Modifications to Debtors Experiencing Financial Difficulty An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the ACL on loans and leases, a change to the allowance for credit losses is generally not recorded upon modification. However, when principal forgiveness is provided, the amortized cost basis of the asset is written off against the ACL on loans and leases. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses. In some cases, the Corporation will modify a certain loan by providing multiple types of concessions. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. When a combination of at least two different types of concessions are granted within the same reporting period on a loan, that loan is only reported once and classified as a combination of as a combination of 2 or more types of modifications. There were no modifications granted to debtors experiencing financial difficulty for the three months ended March 31, 2023. 23 Table of Conte n t s (6) Short-Term Borrowings and Long-Term Debt The Corporation’s short-term borrowings generally consist of federal funds purchased and short-term borrowings extended under agreements with the FHLB or other correspondent banks. The Corporation has two unsecured Federal funds borrowing facilities with correspondent banks: one of $ 24 million and one of $ 15 million. Federal funds purchased generally represent one-day borrowings. The Corporation had $ 0 in Federal funds purchased at March 31, 2023 and December 31, 2022. The Corporation also has a facility with the Federal Reserve Bank discount window of $ 5.6 million. This facility is fully secured by investment securities. There were no borrowings under this at March 31, 2023 and December 31, 2022. Additionally, the Corporation has a facility with the Federal Reserve’s BTFP of $ 33 million. This facility was created by the Federal Reserve in March 2023 and is fully secured by United States Treasury Bonds. There were $ 33 million in borrowings under this facility at March 31, 2023. The following table presents short-term borrowings at the dates indicated: (dollars in thousands) Maturity date Interest rate March 31, 2023 December 31, 2022 FHLB Open Repo Plus Weekly 06/05/2023 5.15 % - 3.11 % $ 173,102 $ 113,147 FHLB Mid-term Repo Fixed 06/20/2023 5.29 % 15,413 — FRB BTFP Advances 03/29/2024 4.76 % 33,000 — Total Short-Term Borrowings $ 221,515 $ 113,147 The following table presents long-term borrowings at the dates indicated: Maturity date Interest rate March 31, 2023 December 31, 2022 FHLB Mid-term Repo Fixed 12/22/2025 4.23 % $ 8,935 $ 8,935 FHLB Mid-term Repo Fixed 9/30/2024 4.60 % 3,433 — Total Long-Term Borrowings $ 12,368 $ 8,935 The FHLB has also issued $ 79.7 million of letters of credit to the Corporation for the benefit of the Corporation’s public deposit funds and loan customers. These letters of credit expire throughout the remainder of 2023. The Corporation has a maximum borrowing capacity with the FHLB of $ 558.2 million as of March 31, 2023 and $ 505.4 million as of December 31, 2022. All advances and letters of credit from the FHLB are secured by a blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation’s borrowing agreement with the FHLB. (7) Servicing Assets The Corporation sells certain residential mortgage loans and the guaranteed portion of certain SBA loans to third parties and retains servicing rights and receives servicing fees. All such transfers are accounted for as sales. When the Corporation sells a residential mortgage loan, it does not retain any portion of that loan and its continuing involvement in such transfers is limited to certain servicing responsibilities. While the Corporation may retain a portion of certain sold SBA loans, its continuing involvement in the portion of the loan that was sold is limited to certain servicing responsibilities. When the contractual servicing fees on loans sold with servicing retained are expected to be more than adequate compensation to a servicer for performing the servicing, a capitalized servicing asset is recognized. Residential Mortgage Loans The related MSR asset is amortized over the period of the estimated future net servicing life of the underlying assets. MSRs are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the MSR. The Corporation serviced $ 1.0 billion of residential mortgage loans as of March 31, 2023 and December 31, 2022. During the three months ended March 31, 2023, the Corporation recognized servicing fee income of $ 636 thousand compared to $ 648 thousand during the three months ended March 31, 2022. 24 Table of Conte n t s Changes in the MSR balance are summarized as follows: Three months ended March 31, (dollars in thousands) 2023 2022 Balance at beginning of the period $ 9,942 $ 10,756 Servicing rights capitalized — 532 Amortization of servicing rights ( 371 ) ( 404 ) Change in valuation allowance 2 4 Balance at end of the period $ 9,573 $ 10,888 Activity in the valuation allowance for MSRs was as follows: Three months ended March 31, (dollars in thousands) 2023 2022 Valuation allowance, beginning of period $ ( 2 ) $ ( 8 ) Recovery 2 4 Valuation allowance, end of period $ — $ ( 4 ) The Corporation uses assumptions and estimates in determining the fair value of MSRs. These assumptions include prepayment speeds and discount rates. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge. At March 31, 2023, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 5.97 % and a discount rate equal to 9.50 %. At December 31, 2022, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 8.05 % and a discount rate equal to 9.50 %. Due in part to market volatility as interest rates increased, the prepayment speed assumption has decreased from December 31, 2022 to March 31, 2023. As interest rates have started to increase and the number of mortgage refinancings have started to decline, model inputs have been adjusted to align the MSRs fair value with market conditions. The sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table. (dollars in thousands) March 31, 2023 December 31, 2022 Fair value of residential mortgage servicing rights $ 12,114 $ 11,567 Weighted average life (months) 25 22 Prepayment speed 5.97 % 8.05 % Impact on fair value: 10% adverse change $ ( 520 ) $ ( 268 ) 20% adverse change ( 994 ) ( 525 ) Discount rate 9.50 % 9.50 % Impact on fair value: 10% adverse change $ ( 457 ) $ ( 404 ) 20% adverse change ( 921 ) ( 777 ) The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a articular assumption on the fair value of the MSRs is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change. SBA Loans SBA loan servicing assets are amortized over the period of the estimated future net servicing life of the underlying assets. SBA loan servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the SBA loan servicing asset. The Corporation serviced $ 171.6 million and $ 166.1 million of SBA loans, as of March 31, 2023 and December 31, 2022, respectively. 25 Table of Conte n t s Changes in the SBA loan servicing asset balance are summarized as follows: Three months ended March 31, (dollars in thousands) 2023 2022 Balance at beginning of the period $ 2,404 $ 2,009 Servicing rights capitalized 214 593 Amortization of servicing rights ( 195 ) ( 125 ) Change in valuation allowance 129 31 Balance at end of the period $ 2,552 $ 2,508 Activity in the valuation allowance for SBA loan servicing assets was as follows: Three months ended March 31, (dollars in thousands) 2023 2022 Valuation allowance, beginning of period $ ( 364 ) $ ( 96 ) Recovery 129 31 Valuation allowance, end of period $ ( 235 ) $ ( 65 ) The Corporation uses assumptions and estimates in determining the fair value of SBA loan servicing rights. These assumptions include prepayment speeds, discount rates, and other assumptions. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge. At March 31, 2023, the key assumptions used to determine the fair value of the Corporation’s SBA loan servicing rights included a lifetime constant prepayment rate equal to 12.51 % and a discount rate equal to 16.09 %. At December 31, 2022, the key assumptions used to determine the fair value of the Corporation’s SBA loan servicing rights included a lifetime constant prepayment rate equal to 12.73 % and a discount rate equal to 18.96 %. The sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table. (dollars in thousands) March 31, 2023 December 31, 2022 Fair value of SBA loan servicing rights $ 2,712 $ 2,422 Weighted average life (years) 3.8 3.8 Prepayment speed 12.51 % 12.73 % Impact on fair value: 10% adverse change $ ( 86 ) $ ( 73 ) 20% adverse change ( 166 ) ( 141 ) Discount rate 16.09 % 18.96 % Impact on fair value: 10% adverse change $ ( 62 ) $ ( 53 ) 20% adverse change ( 122 ) ( 104 ) The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the SBA servicing rights is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change. (8) Fair Value Measurements and Disclosures The Corporation uses fair value measurements to record fair value adjustments to certain assets and liabilities. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices 26 Table of Conte n t s are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation techniques or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Corporation groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 – Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation. Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis. Securities The fair value of securities available-for-sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. Mortgage Loans Held for Sale The fair value of loans held for sale is based on secondary market prices. Mortgage Loans Held for Investment The fair value of mortgage loans held for investment is based on the price secondary markets are currently offering for similar loans using observable market data. Derivative Financial Instruments The fair values of forward commitments and interest rate swaps are based on market pricing and therefore are considered Level 2. Derivatives classified as Level 3 consist of interest rate lock commitments related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement. The following table presents the fair value of financial assets measured at fair value on a recurring basis by level within the fair value hierarchy at the dates indicated : March 31, 2023 (dollars in thousands) Total Level 1 Level 2 Level 3 Assets Securities available for sale: U.S. asset backed securities $ 17,592 $ — $ 17,592 $ — U.S. government agency MBS 11,737 — 11,737 — U.S. government agency CMO 25,122 — 25,122 — State and municipal securities 39,793 — 39,793 — U.S. Treasuries 30,064 30,064 — — Non-U.S. government agency CMO 11,109 — 11,109 Corporate bonds 7,516 — 7,516 — 27 Table of Conte n t s March 31, 2023 (dollars in thousands) Total Level 1 Level 2 Level 3 Equity investments 2,110 — 2,110 — Mortgage loans held for sale 35,701 — 35,701 — Mortgage loans held for investment 14,434 — 14,434 — Interest rate lock commitments 139 — — 139 Customer derivatives - interest rate swaps 3,178 — 3,178 — Total $ 198,495 $ 30,064 $ 168,292 $ 139 Liabilities Interest rate lock commitments $ 168 $ — $ — $ 168 Customer derivatives - interest rate swaps 3,159 — 3,159 — Risk Participation Agreements 21 — 21 — Total $ 3,348 $ — $ 3,180 $ 168 December 31, 2022 (dollars in thousands) Total Level 1 Level 2 Level 3 Assets Securities available for sale: U.S. asset backed securities $ 15,281 $ — $ 15,281 $ — U.S. government agency MBS 11,739 — 11,739 — U.S. government agency CMO 23,318 — 23,318 — State and municipal securities 38,838 — 38,838 — U.S. Treasuries 29,523 29,523 — — Non-U.S. government agency CMO 9,089 — 9,089 — Corporate bonds 7,558 — 7,558 — Equity investments 2,086 — 2,086 — Mortgage loans held for sale 22,243 — 22,243 — Mortgage loans held for investment 14,502 — 14,502 — Interest rate lock commitments 87 — — 87 Customer derivatives - interest rate swaps 3,846 — 3,846 — Total $ 178,110 $ 29,523 $ 148,500 $ 87 Liabilities Interest rate lock commitments $ 79 $ — $ — $ 79 Customer derivatives - interest rate swaps 3,799 — 3,799 — Risk Participation Agreements 17 — 17 — Total $ 3,895 $ — $ 3,816 $ 79 The following table presents assets measured at fair value on a nonrecurring basis at the dates indicated: (dollars in thousands) March 31, 2023 December 31, 2022 Mortgage servicing rights $ 9,573 $ 9,942 SBA loan servicing rights 2,552 2,404 Individually evaluated loans (1) Small business loans 2,989 2,281 Total $ 15,114 $ 14,627 (1) Individually evaluated loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Refer to the following page for further qualitative discussion around individually evaluated loans. 28 Table of Conte n t s The following table details the valuation techniques for Level 3 individually evaluated loans. (dollars in thousands) Fair Value Valuation Technique Significant Unobservable Input Range of Inputs March 31, 2023 $ 2,989 Appraisal of collateral Management adjustments on appraisals for property type and recent activity 2 %- 15 % discount December 31, 2022 $ 2,281 Appraisal of collateral Management adjustments on appraisals for property type and recent activity 2 %- 15 % discount Below is management’s estimate of the fair value of all financial instruments, whether carried at cost or fair value on the Corporation’s balance sheet. The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair value of the Corporation’s financial instruments: Cash and Cash Equivalents The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values. Loans Receivable The fair value of loans receivable is estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value below is reflective of an exit price. Servicing Assets The Corporation estimates the fair value of mortgage servicing rights and SBA loan servicing rights using discounted cash flow models that calculate the present value of estimated future net servicing income. The model uses readily available prepayment speed assumptions for the interest rates of the portfolios serviced. These servicing rights are classified within Level 3 in the fair value hierarchy based upon management’s assessment of the inputs. The Corporation reviews the servicing rights portfolios on a quarterly basis for impairment. Individually Evaluated Loans Individually evaluated loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third‑party appraisals of the properties, or discounted cash flows based upon the expected proceeds. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. Individually evaluated loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the Allowance policy. Accrued Interest Receivable and Payable The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value. Deposit Liabilities The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. Short-Term Borrowings The carrying amounts of short-term borrowings approximate their fair values. Subordinated Debt Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity. Off-Balance Sheet Financial Instruments Off-balance sheet instruments are primarily comprised of loan commitments, which are generally priced at market at the time of funding. Fees on commitments to extend credit and stand-by letters of credit are deemed to be immaterial and these instruments are expected to be settled at face value or expire unused. It is impractical to assign any fair value to these instruments and as a result they are not included in the table below. Fair values assigned to the notional value of interest rate lock commitments and forward sale contracts are based on market quotes. 29 Table of Conte n t s Derivative Financial Instruments The fair value of forward commitments and interest rate swaps is based on market pricing and therefore are considered Level 2. Derivatives classified as Level 3 consist of interest rate lock commitments related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement. The following table presents the estimated fair values of the Corporation’s financial instruments at the dates indicated: March 31, 2023 December 31, 2022 (dollars in thousands) Fair Value Hierarchy Level Carrying amount Fair value Carrying amount Fair value Financial assets: Cash and cash equivalents Level 1 $ 108,503 $ 108,503 $ 38,391 $ 38,391 Mortgage loans held for sale Level 2 35,701 35,701 22,243 22,243 Loans receivable, net of the allowance for credit losses Level 3 1,803,755 1,761,865 1,729,180 1,679,955 Mortgage loans held for investment Level 2 14,434 14,434 14,502 14,502 Financial liabilities: Deposits Level 2 1,770,413 1,711,600 1,712,479 1,575,600 Borrowings Level 2 233,883 233,883 122,082 122,082 Subordinated debentures Level 2 40,319 40,865 40,346 40,020 The following table includes a rollforward of interest rate lock commitments for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the periods indicated. Three months ended March 31, (dollars in thousands) 2023 2022 Balance at beginning of the period $ 87 $ 1,122 Decrease in value 52 ( 535 ) Balance at end of the period $ 139 $ 587 The following table details the valuation techniques for Level 3 interest rate lock commitments. (dollars in thousands) Fair Value Valuation Technique Significant Unobservable Input Range of Inputs Weighted Average March 31, 2023 $ 139 Market comparable pricing Pull through 0 - 1 % 77.34 % December 31, 2022 87 Market comparable pricing Pull through 0 - 1 84.05 (9) Derivative Financial Instruments Risk Management Objective of Using Derivatives The Corporation is exposed to certain risk arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Corporation enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Corporation’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation’s known or expected cash receipts and its known or expected cash payments principally related to the Corporation’s loan portfolio. Mortgage Banking Derivatives In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation may enter into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans or interest rate locks at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, 30 Table of Conte n t s including interest rate and term, as of the date fair value is measured. Interest rate lock commitments and forward commitments are recorded within other assets/liabilities on the consolidated balance sheets, with changes in fair values during the period recorded within net change in the fair value of derivative instruments on the consolidated statements of income. Due to the volatile rate environment, the Corporation was locking rates on a best efforts basis and had no forward commitments at March 31, 2023. Customer Derivatives – Interest Rate Swaps Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain customers to swap a fixed rate product for a variable rate product, or vice versa. The Corporation executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies. Those interest rate derivatives are simultaneously hedged by offsetting derivatives that the Corporation executes with a third party, such that the Corporation minimizes its net interest rate risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. The following table presents a summary of notional amounts and fair values of derivative financial instruments at the dates indicated: March 31, 2023 December 31, 2022 (dollars in thousands) Balance Sheet Line Item Notional Amount Asset (Liability) Fair Value Notional Amount Asset (Liability) Fair Value Interest Rate Lock Commitments Positive fair values Other assets $ 31,591 $ 139 $ 16,590 $ 87 Negative fair values Other liabilities 27,110 ( 168 ) 16,108 ( 79 ) Total $ 58,701 $ ( 29 ) $ 32,698 $ 8 Customer Derivatives - Interest Rate Swaps Positive fair values Other assets $ 43,422 $ 3,178 $ 43,779 $ 3,846 Negative fair values Other liabilities 43,422 ( 3,159 ) 43,779 ( 3,799 ) Total $ 86,844 $ 19 $ 87,558 $ 47 Risk Participation Agreements Positive fair values Other assets $ — $ — $ — $ — Negative fair values Other liabilities 7,170 ( 21 ) 7,200 ( 17 ) Total $ 7,170 $ ( 21 ) $ 7,200 $ ( 17 ) Total derivative financial instruments $ 152,715 $ ( 31 ) $ 127,456 $ 38 Interest rate lock commitments are considered Level 3 in the fair value hierarchy, while the forward commitments and interest rate swaps are considered Level 2 in the fair value hierarchy. The following table presents a summary of the fair value gains and (losses) on derivative financial instruments: Three months ended March 31, (dollars in thousands) 2023 2022 Interest Rate Lock Commitments $ ( 37 ) $ ( 1,140 ) Forward Commitments — 940 Customer Derivatives - Interest Rate Swaps ( 28 ) 33 Risk Participation Agreements ( 4 ) — Net fair value (losses) gains on derivative financial instruments $ ( 69 ) $ ( 167 ) Net realized gains on derivative hedging activities were $ 0 million and $ 2.8 million for the three months ended March 31, 2023 and 2022, respectively, and are included in non-interest income in the consolidated statements of income. (10) Segments ASC Topic 280 – Segment Reporting identifies operating segments as components of an enterprise which are evaluated regularly by the Corporation’s Chief Operating Decision Maker, our Chief Executive Officer, in deciding how to allocate resources and assess performance. The Corporation has applied the aggregation criterion set forth in this codification to the results of its operations. Our Banking segment (“Bank”) consists of commercial and retail banking. The Banking segment generates interest income from its lending (including leasing) and investing activities and is dependent on the gathering of lower cost deposits from its branch network or 31 Table of Conte n t s borrowed funds from other sources for funding its loans, resulting in the generation of net interest income. The Banking segment also derives revenues from other sources including gains on the sale of available for sale investment securities, service charges on deposit accounts, cash sweep fees, overdraft fees, BOLI income, title insurance fees, and other less significant non-interest income. Meridian Wealth (“Wealth”), a registered investment advisor and wholly-owned subsidiary of the Bank, provides a comprehensive array of wealth management services and products and the trusted guidance to help its clients and our banking customers prepare for the future. The unit generates non-interest income through advisory fees. Meridian’s mortgage banking segment (“Mortgage”) consists of 13 loan production offices throughout suburban Philadelphia and Maryland. The Mortgage segment originates 1 – 4 family residential mortgages and sells nearly all of its production to third party investors. The unit generates net interest income on the loans it originates and holds temporarily, then earns fee income (primarily gain on sales) at the time of the sale. The unit also recognizes income from document preparation fees, changes in portfolio pipeline fair values and net hedging gains (losses), if any. The table below summarizes income and expenses, directly attributable to each business line, which have been included in the statement of operations. Total assets for each segment is also provided. Segment Information Three Months Ended March 31, 2023 Three Months Ended March 31, 2022 (Dollars in thousands) Bank Wealth Mortgage Total Bank Wealth Mortgage Total Net interest income $ 17,627 $ 24 $ 26 $ 17,677 $ 15,610 $ 94 $ 331 $ 16,035 Provision for credit losses 1,399 — — 1,399 615 — — 615 Net interest income after provision 16,228 24 26 16,278 14,995 94 331 15,420 Non-interest Income Mortgage banking income 58 — 3,214 3,272 196 — 6,900 7,096 Wealth management income — 1,196 — 1,196 — 1,304 — 1,304 SBA loan income 713 — — 713 2,520 — — 2,520 Net change in fair values ( 31 ) — 78 47 32 — ( 2,100 ) ( 2,068 ) Net gain on hedging activity — — — — — — 2,827 2,827 Other 689 — 721 1,410 628 ( 1 ) 796 1,423 Non-interest income 1,429 1,196 4,013 6,638 3,376 1,303 8,423 13,102 Non-interest expense 10,698 989 6,102 17,789 10,208 878 10,347 21,433 Income (loss) before income taxes $ 6,959 $ 231 $ ( 2,063 ) $ 5,127 $ 8,163 $ 519 $ ( 1,593 ) $ 7,089 Total Assets $ 2,171,679 $ 8,090 $ 50,014 $ 2,229,783 $ 1,728,329 $ 7,251 $ 96,009 $ 1,831,589 32 Table of Conte n t s Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2022 included in Meridian Corporation’s Annual Report on Form 10-K filed with the SEC. Forward-Looking Statements Meridian Corporation may from time to time make written or oral “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to Meridian Corporation’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Meridian Corporation’s control). Numerous competitive, economic, regulatory, legal and technological factors, risks and uncertainties that could cause actual results to differ materially include, without limitation: • changes in general business and economic conditions on a national basis and in the local markets in which we operate; • changes in customer behavior due to political, business and economic conditions, including inflation and concerns about liquidity; • legislative, regulatory and accounting changes, including increased assessments by the FDIC; • monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System; • inflation or volatility in interest rates that reduce our margins and yields, the fair value of financial instruments or our level of loan originations or prepayments on loans we have made and make; • changes in loan demand and collectability; • the possibility that future credits losses are higher than currently expected due to changes in economic assumptions or adverse economic developments; • increases in defaults and charge-off rates; • fluctuations in real estate values in our market area; • demand for our financial products and services in our market area; • decreases in the value of securities and other assets; • changes in the size and nature of our competition; • operational risks including, but not limited to, changes in information technology, cybersecurity incidents, fraud, natural disasters, war, terrorism, civil unrest and future pandemics; • reputational risks; and • changes in the assumptions used in making such forward-looking statements. Meridian Corporation cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Meridian Corporation’s filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2022 and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Meridian Corporation does not undertake to update any forward-looking statement whether written or oral, that may be made from time to time by Meridian Corporation or by or on behalf of Meridian Bank. Critical Accounting Policies and Estimates Our critical accounting policies are described in detail in the "Critical Accounting Policies" section within Item 7 of our 2022 Annual Form Form 10-K. The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. See Note 1, "Summary of Significant Accounting Policies" for additional information on the adoption of ASC 326, which changes the methodology under which management calculates its reserve for loans and leases, now referred to as the allowance for credit losses. Management considers the measurement of the allowance for credit losses to be a critical accounting policy. Executive Overview The following items highlight the Corporation’s changes in its financial condition as of March 31, 2023 compared to December 31, 2022 and the results of operations for the three months ended March 31, 2023 compared to the same periods in 2022. More detailed information related to these highlights can be found in the sections that follow. Bank Sector Concerns 33 Table of Conte n t s 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. As a commercial bank, the majority of Meridian's deposit base is comprised of business deposits (57%), with consumer deposits amounting to 11% at March 31, 2023. Municipal deposits (9%) and brokered deposits (23%) provide growth funding. Historically, business deposits lag loan fundings. A typical business relationship maintains operating accounts, investment accounts or sweep accounts and business owners may also have personal savings or wealth accounts. Deposit balances in business accounts have a tendency to be higher on average than consumer accounts. At March 31, 2023, 64% of business accounts and 73% of consumer accounts were fully insured by the FDIC. The municipal deposits are 100% collateralized and brokered deposits are 100% FDIC insured. The level of uninsured deposits for the entire deposit base was 23% at March 31, 2023. 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 $317.8 million at March 31, 2023, up from $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 8.1% of total assets at March 31, 2023, compared to 8.5% at December 31, 2022. Total cash at March 31, 2023 was $108.5 million compared to $38.4 million at December 31, 2022 and $68.9 million at March 31, 2022. Meridian also maintains borrowing arrangements with various correspondent banks to meet short-term liquidity needs and has access to approximately $817.9 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 BTFP announced by the Federal Reserve. At March 31, 2023 Meridian elected to secure $33 million in borrowings from the Federal Reserve under the BTFP due to the favorable rate. Management believes that the above sources of liquidity provide Meridian with the necessary resources to meet its short-term and long-term funding requirements. Changes in Financial Condition - March 31, 2023 Compared to December 31, 2022 • Total assets increased $167.6 million, or 8.1%, to $2.2 billion as of March 31, 2023. • Portfolio loans increased $80.8 million, or 4.7%, to $1.8 billion as of March 31, 2023, which is 18.6% on an annualized basis. • Mortgage loans held for sale increased $13.5 million, or 60.5%, to $35.7 million at March 31, 2023. • PPP loans decreased to $409 thousand as of March 31, 2023 which is a decrease of $8.4 million, or 95.4%, since December 31, 2022. • Upon adoption ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326) (“CECL”) effective January 1, 2023, we recorded an increase to our allowance for credit losses of $1.6 million and an adjustment to the reserve for unfunded commitments of $1.3 million. The after-tax retained earnings impact of this adoption was $2.2 million. • Total deposits increased $57.9 million or 3.4% to $1.77 billion at March 31, 2023. • The Corporation returned $1.4 million of capital to Meridian shareholders during the three months ended March 31, 2023 through a $0.125 quarterly dividend, and also purchased $2.7 million or 184,598 shares of treasury stock. Three Month Results of Operations - March 31, 2023 Compared to the Same Period in 2022 • Net income was $4.0 million, or $0.34 per diluted share, down $1.5 million, or 27.4%, driven by a decline in non-interest income, partially offset by an increase in net interest income and lower operating expenses. • The return on average assets and return on average equity was 0.78% and 10.65%, respectively, for the first quarter 2023, compared to 1.28% and 13.86%, respectively, for the first quarter 2022. • Net interest margin decreased to 3.61% from 3.89% due to the impact of deposit and borrowing repricing outpacing the repricing of interest earnings assets, mainly loans. • Provision for credit losses increased $784 thousand to help cover for increased loan growth period over period, combined with providing for the $906 thousand increase in net charge-offs period over period. • Non-interest income decreased $6.5 million, or 49.3%, to $6.6 million driven by a $3.8 million decrease in mortgage banking income and a $1.8 million decrease in SBA loan income. • Non-interest expense decreased $3.6 million, or 17.0%, to $17.8 million due to a $4.2 million decrease in salaries and employee benefits. • On April 27, 2023, the Board of Directors declared a quarterly cash dividend of $0.125 per common share payable May 22, 2023 to shareholders of record as of May 15, 2023. 34 Table of Conte n t s Key Performance Ratios The following table presents key financial performance ratios for the periods indicated: Three months ended March 31, 2023 2022 Return on average assets, annualized 0.78 % 1.28 % Return on average equity, annualized 10.65 % 13.86 % Net interest margin (tax effected yield) 3.61 % 3.89 % Basic earnings per share $ 0.36 $ 0.46 Diluted earnings per share $ 0.34 $ 0.44 The following table presents certain key period-end balances and ratios at the dates indicated: (dollars in thousands, except per share amounts) March 31, 2023 December 31, 2022 Book value per common share $ 13.69 $ 13.37 Tangible book value per common share (1) $ 13.33 $ 13.01 Allowance as a percentage of loans and leases held for investment 1.12 % 1.08 % Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1) 1.13 % 1.09 % Tier I capital to risk weighted assets 8.44 % 8.77 % Tangible common equity to tangible assets ratio (1) 6.70 % 7.25 % Loans and other finance receivables, net of fees and costs $ 1,818,189 $ 1,743,682 Total assets $ 2,229,783 $ 2,062,228 Total stockholders’ equity $ 153,049 $ 153,280 (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 Credit Losses , or the amount added to the Allowance to provide for current expected credit losses on portfolio loans and leases; • Non-interest Income, which is made up primarily of mortgage banking income, wealth management income, SBA loan sale income, fair value adjustments, gains and losses from the sale of loans, gains and losses from the sale of investment securities available for sale and other fees from loan and deposit services; • Non-interest Expense , which consists primarily of salaries and employee benefits, occupancy, professional fees, advertising & promotion, data processing, information technology, loan expenses, and other operating expenses; and • Income Taxes , which include state and federal jurisdictions. NET INTEREST INCOME Net interest income is an integral source of the Corporation’s revenue. The tables below present a summary for the three months ended March 31, 2023 and 2022, 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. 35 Table of Conte n t s Analyses of Interest Rates and Interest Differential The tables below present the major asset and liability categories on an average daily balance basis for the periods presented, along with interest income, interest expense and key rates and yields on a tax equivalent basis. For the Three Months Ended March 31, (dollars in thousands) 2023 2022 Average Balance Interest Income/ Expense Yields/ Rates Average Balance Interest Income/ Expense Yields/ Rates Assets: Due from banks $ 19,314 $ 215 4.51 % $ 28,389 $ 13 0.18 % Federal funds sold 204 2 3.98 877 — 0.12 Investment securities - taxable (1) 114,378 959 3.40 104,093 426 1.66 Investment securities - tax exempt (1) 62,839 430 2.78 63,788 373 2.37 Loans held for sale 15,403 217 5.71 67,092 536 3.20 Loans held for investment (1) 1,783,322 29,202 6.64 1,415,831 16,685 4.75 Total loans 1,798,725 29,419 6.63 1,482,923 17,221 4.71 Total interest-earning assets 1,995,460 31,025 6.31 % 1,680,070 18,033 4.35 % Noninterest earning assets 93,139 72,573 Total assets $ 2,088,599 $ 1,752,643 Liabilities and stockholders' equity: Interest-bearing demand deposits $ 232,089 $ 1,855 3.24 % $ 269,864 $ 137 0.21 % Money market and savings deposits 648,911 4,477 2.80 690,475 852 0.50 Time deposits 582,534 5,115 3.56 262,779 300 0.46 Total deposits 1,463,534 11,447 3.17 1,223,118 1,289 0.43 Borrowings 100,054 1,237 5.01 15,708 49 1.28 Subordinated debentures 40,336 586 5.89 40,519 591 5.84 Total interest-bearing liabilities 1,603,924 13,270 3.36 1,279,345 1,929 0.61 Noninterest-bearing deposits 296,037 281,123 Other noninterest-bearing liabilities 35,459 30,236 Total liabilities 1,935,420 1,590,704 Total stockholders' equity 153,179 161,939 Total stockholders' equity and liabilities $ 2,088,599 $ 1,752,643 Net interest income and spread (1) $ 17,755 2.95 $ 16,104 3.74 Net interest margin (1) 3.61 % 3.89 % (1) Yields and net interest income are reflected on a tax-equivalent basis. 36 Table of Conte n t s Volume Analysis The rate/volume analysis table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three months ended March 31, 2023 as compared to the same periods in 2022, allocated by rate and volume. Changes in interest income and/or expense attributable to both rate and volume have been allocated proportionately based on the relationship of the absolute dollar amount of the change in each category. 2023 Compared to 2022 Three Months Ended March 31, (dollars in thousands) Rate Volume Total Interest income: Due from banks $ 207 $ (5) $ 202 Federal funds sold 2 — 2 Investment securities - taxable (1) 487 46 533 Investment securities - tax exempt (1) 63 (6) 57 Loans held for sale 252 (571) (319) Loans held for investment (1) 7,512 5,005 12,517 Total loans 7,764 4,434 12,198 Total interest income $ 8,523 $ 4,469 $ 12,992 Interest expense: Interest-bearing demand deposits $ 1,740 $ (22) $ 1,718 Money market and savings deposits 3,679 (54) 3,625 Time deposits 4,074 741 4,815 Total deposits 9,493 665 10,158 Borrowings 422 766 1,188 Subordinated debentures (2) (3) (5) Total interest expense $ 9,913 $ 1,428 $ 11,341 Interest differential $ (1,390) $ 3,041 $ 1,651 (1) Yields and net interest income are reflected on a tax-equivalent basis. Three Months Ended March 31, 2023 Compared to the Same Period in 2022 For the three months ended March 31, 2023 as compared to the same period in 2022, tax-equivalent interest income increased $13.0 million as favorable rate and volume changes contributed $8.5 million, and $4.5 million, respectively. The favorable change in rates led to increased yields on loans held for sale (up 251 basis points) and loans held for investment (up 189 basis points) that favorably impact interest income by $7.8 million, overall. The loans held for investment average balances increased $367.5 million, leading to a favorable volume impact on interest income of $5.0 million, while the decline in loans held for sale average balances of $51.7 million had an unfavorable impact to interest income of $571 thousand. Within the loans held for investment portfolio, average balances on commercial loans, SBA loans, and leases increased $33.6 million, $52.0 million, and $54.0 million, respectively, construction loans were up $65.3 million, and residential real estate loans average balances increased $78.2 million, while the average balance of PPP loans decreased $132.4 million as such loans are nearly fully forgiven now by the SBA. On the funding side, overall interest expense increased $11.3 million, largely driven by the impact from rate hikes issued by the Fed. The cost of deposits were up across the board, leading to a $10.2 million increase to interest expense. The cost of interest-bearing demand deposits, money market and savings accounts and time deposits increased 303 basis points, 230 basis points and 310 basis points, respectively, while the cost of borrowings increased 373 basis points. Time deposit average balances increased $319.8 million, while money market/savings accounts average balances and interest-bearing demand deposits decreased $41.6 million, and $37.8 million, respectively, and borrowings increased $84.3 million on average. Overall, the $1.7 million increase in net interest income was derived by the volume changes as the impact from increased average earning assets and the $14.9 million in free funding outpaced the increase in average interest bearing liabilities and overcame the unfavorable impact from the funding costs. 37 Table of Conte n t s PROVISION FOR CREDIT LOSSES Three Months Ended March 31, 2023 Compared to the Same Period in 2022 The provision for credit losses increased $784 thousand to help cover for increased loan growth period over period, combined with providing for the $906 thousand increase in net charge-offs period over period. Asset Quality Summary The ratio of non-performing assets to total assets was unchanged at 1.11% as of March 31, 2023, and December 31, 2022. There was $1.7 million in other real estate owned included in non-performing assets, the result of taking possession of a well collateralized residential real estate property in the quarter end December 31, 2022. Total non-performing loans of $23.1 million as of March 31, 2023, increased $1.9 million from $21.2 million as December 31, 2022 due to a $1.5 million commercial loan relationship that was reclassified to non-performing as of March 31, 2023. Meridian realized net charge-offs of 0.08% of total average loans for the quarter ending March 31, 2023 increased from the quarter ended December 31, 2022 level of 0.05%. Net charge-offs for the quarter ended March 31, 2023 were $1.5 million, comprised of $1.5 million in charge-offs, with $44 thousand in recoveries for the quarter. Nearly all of the charge-offs for the quarter ended March 31, 2023 were from small ticket equipment leases. The ratio of allowance for credit 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 1.13% as of March 31, 2023 and 1.09% as of December 31, 2022. As of March 31, 2023 there were specific reserves of $2.5 million against a non-performing loans, an increase from $2.2 million as of December 31, 2022 due to an increase in the reserve for one commercial loan and one SBA loan. The Corporation continues to be diligent in its credit underwriting process and proactive with its loan review process, including the engagement of the services of an independent outside loan review firm, which helps identify developing credit issues. Proactive steps that are taken include the procurement of additional collateral (preferably outside the current loan structure) whenever possible and frequent contact with the borrower. The Corporation believes that timely identification of credit issues and appropriate actions early in the process serve to mitigate overall risk of loss. 38 Table of Conte n t s Nonperforming Assets and Related Ratios The following table presents nonperforming assets and related ratios for the periods indicated: (dollars in thousands) March 31, 2023 December 31, 2022 Non-performing assets: Nonaccrual loans: Real estate loans: Commercial mortgage $ — $ 140 Home equity lines and loans 985 1,097 Residential mortgage 2,069 2,085 Construction 1,206 — Total real estate loans 4,260 3,322 Commercial and industrial 13,216 12,547 Small business loans 5,279 4,465 Leases 367 902 Total nonaccrual loans 23,122 21,236 Other real estate owned 1,703 1,703 Total non-performing assets $ 24,825 $ 22,939 Asset quality ratios: Non-performing assets to total assets 1.11 % 1.11 % Non-performing loans to: Total loans and leases 1.25 % 1.20 % Total loans held-for-investment 1.27 % 1.22 % Total loans held-for-investment (excluding loans at fair value and PPP loans) (1) 1.28 % 1.23 % Allowance for credit losses to (2) : Total loans and leases 1.10 % 1.07 % Total loans held-for-investment 1.12 % 1.08 % Total loans held-for-investment (excluding loans at fair value and PPP loans) (1) 1.13 % 1.09 % Non-performing loans 88.41 % 88.66 % Total loans and leases $ 1,853,890 $ 1,765,925 Total loans and leases held-for-investment $ 1,818,189 $ 1,743,682 Total loans and leases held-for-investment (excluding loans at fair value and PPP loans) $ 1,803,517 $ 1,724,601 Allowance for credit losses (2) $ 20,442 $ 18,828 (1) The allowance for credit 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” for a reconciliation of this measure to its most comparable GAAP measure. (2) See Note 1, "Summary of Significant Accounting Policies - Pronouncements Adopted in 2023. 39 Table of Conte n t s NON-INTEREST INCOME Three Months Ended March 31, 2023 Compared to the Same Period in 2022 The following table presents the components of non-interest income for the periods indicated: Quarter Ended (Dollars in thousands) March 31, 2023 March 31, 2022 $ Change % Change Mortgage banking income $ 3,272 $ 7,096 $ (3,824) (53.9) % Wealth management income 1,196 1,304 (108) (8.3) % SBA loan income 713 2,520 (1,807) (71.7) % Earnings on investment in life insurance 192 138 54 39.1 % Net change in the fair value of derivative instruments (69) (166) 97 (58.4) % Net change in the fair value of loans held-for-sale (1) (1,124) 1,123 (99.9) % Net change in the fair value of loans held-for-investment 117 (778) 895 (115.0) % Net gain on hedging activity — 2,827 (2,827) (100.0) % Service charges 35 27 8 29.6 % Other 1,183 1,258 (75) (6.0) % Total non-interest income $ 6,638 $ 13,102 $ (6,464) (49.3) % Total non-interest income decreased $6.5 million due primarily to lower income from our mortgage segment, which continues to be impacted by lower levels of mortgage loan originations in a rising rate environment and a lack of housing inventory. Driven by the decline in mortgage banking income, the net changes in the fair value of derivative instruments and loans held-for-sale, along with an improvement in net gains on hedging activity which decreased $1.6 million, combined. SBA loan income decreased $1.8 million as a higher volume of SBA loans were sold into the secondary market in the prior year comparable quarter: $10.9 million of loans were sold in the quarter-ending March 31, 2023 with an average gross margin of 7.7%, compared to $25.2 million in loans sold in the quarter-ending March 31, 2022 with an average gross margin of 10.7%. The net change in the fair value of loans held-for-investment increased to a gain of $117 thousand for the quarter ended March 31, 2023, compared to a loss of $778 thousand for the comparable prior year quarter, 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. NON-INTEREST EXPENSE Three Months Ended March 31, 2023 Compared to the Same Period in 2022 The following table presents the components of non-interest income for the periods indicated: Quarter Ended (Dollars in thousands) March 31, 2023 March 31, 2022 $ Change % Change Salaries and employee benefits $ 11,061 $ 15,298 $ (4,237) (27.7) % Occupancy and equipment 1,244 1,252 (8) (0.6) % Professional fees 823 848 (25) (2.9) % Advertising and promotion 861 986 (125) (12.7) % Data processing and software 1,432 1,189 243 20.4 % Pennsylvania bank shares tax 245 199 46 23.1 % Other 2,123 1,661 462 27.8 % Total non-interest expense $ 17,789 $ 21,433 $ (3,644) (17.0) % Total non-interest expense decreased $3.6 million, or 17.0%, largely attributable to a decrease in salaries and employee benefits expense in the mortgage segment, which had reduced fixed and variable based compensation due to the overall decline in mortgage banking income. Data processing and software expense increased $243 thousand due to cybersecurity improvements, cloud-based costs and other software upgrades, all as a result of growth. Other non-interest expense increased $462 thousand due to the increased level of client engagement and business development our employees were able to do in the current period versus the prior year due to COVID-19 pandemic restrictions. 40 Table of Conte n t s INCOME TAX EXPENSE Income tax expense for the three months ended March 31, 2023 was $1.1 million, as compared to $1.6 million for the same period in 2022. The decrease in income tax expense was attributable to the decrease in earnings, period over period. Our effective tax rate was 21.6% for the three months ended March 31, 2023 and 21.9% for the three months ended March 31, 2022. BALANCE SHEET ANALYSIS As of March 31, 2023, total assets were $2.2 billion which increased $167.6 million, or 8.1%, from December 31, 2022. This growth in assets over the prior period was due primarily to loan portfolio growth, as detailed in the following table: (Dollars in thousands) March 31, 2023 December 31, 2022 $ Change % Change Mortgage loans held for sale $ 35,701 $ 22,243 $ 13,458 60.5 % Real estate loans: Commercial mortgage 617,063 565,400 51,663 9.1 Home equity lines and loans 62,050 59,399 2,651 4.5 Residential mortgage 238,831 221,837 16,994 7.7 Construction 267,388 271,955 (4,567) (1.7) Total real estate loans 1,185,332 1,118,591 66,741 6.0 Commercial and industrial 331,082 341,378 (10,296) (3.0) Small business loans 148,570 136,155 12,415 9.1 Consumer 387 488 (101) (20.7) Leases, net 151,057 138,986 12,071 8.7 Total portfolio loans and leases $ 1,816,428 $ 1,735,598 $ 80,830 4.7 Total loans and leases $ 1,852,129 $ 1,757,841 $ 94,288 5.4 % Portfolio loans increased grew $80.8 million, or 4.7%, to $1.8 billion as of March 31, 2023, from $1.7 billion as of December 31, 2022. Overall portfolio loan growth was 4.7% since December 31, 2022, or 18.6% on an annualized basis for 2023. Commercial real estate loans increased $51.7 million, or 9.1%, residential real estate loans held in portfolio increased $17.0 million, or 7.7%, small business loans increased $12.4 million, or 9.1%, and lease financings increased $151.1 million, or 8.7% from December 31, 2022. Commercial loans decreased $10.3 million, or 3.0%, and construction loans decreased $4.6 million, or 1.7% over the same period. The following table presents the major categories of deposits at the dates indicated: (Dollars in thousands) March 31, 2023 December 31, 2022 $ Change % Change Noninterest-bearing deposits $ 262,636 $ 301,727 $ (39,091) (13.0) % Interest-bearing deposits: Interest-bearing demand deposits 232,616 219,838 12,778 5.8 % Money market and savings deposits 647,904 697,564 (49,660) (7.1) % Time deposits 627,257 493,350 133,907 27.1 % Total interest-bearing deposits $ 1,507,777 $ 1,410,752 $ 97,025 6.9 % Total deposits $ 1,770,413 $ 1,712,479 $ 57,934 3.4 % Total deposits increased $57.9 million, or 3.4%, since December 31, 2022. Noninterest-bearing deposits and money market accounts decreased $39.1 million, and $49.7 million, respectively, during the period, with notable withdrawals of $19.9 million from 4 separate business customers due to their respective business sales. In addition, $20.2 million in municipal deposits were let go and replaced by brokered deposits due to more favorable wholesale rates and 2 loan relationships with $11.2 million in deposits combined, left Meridian as a result of growth (e.g. private equity). Time deposits grew $133.9 million, or 27.1%, from retail and wholesale efforts as customers prefer the higher term interest rates. Included in time deposits as of March 31, 2023, and December 31, 2022, are $409.3 million and $375.3 million of brokered deposits, respectively, which comprise 23.1% and 21.9% of total deposits as of these dates. Capital Consolidated stockholders’ equity of the Corporation was $153.0 million, or 6.9% of total assets as of March 31, 2023, as compared to $153.3 million, or 7.4% of total assets as of December 31, 2022. 41 Table of Conte n t s Period end numbers show a tangible common equity to tangible assets ratio (a non-GAAP measure) of 6.7% for the Corporation and 8.1% for the Bank. Tangible book value per share (a non-GAAP measure) was $13.33 as of March 31, 2023, compared with $13.01 as of December 31, 2022. A reconciliation of these non-GAAP measures is below. The following table presents the Corporation’s capital ratios and the minimum capital requirements to be considered “well capitalized” by regulators at the periods indicated: Corporation Bank Well-capitalized minimum March 31, 2023 December 31, 2022 March 31, 2023 December 31, 2022 Tier 1 leverage ratio 7.65 % 8.13 % 9.32 % 9.95 % 5.00 % Common tier 1 risk-based capital ratio 8.44 % 8.77 % 10.27 % 10.73 % 6.50 % Tier 1 risk-based capital ratio 8.44 % 8.77 % 10.27 % 10.73 % 8.00 % Total risk-based capital ratio 11.63 % 12.05 % 11.41 % 11.87 % 10.00 % Under the Community Bank Leverage Ratio framework, a community banking organization that is less than $10 billion in total consolidated assets, and has limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9% can elect to report a single regulatory capital ratio. The Corporation has elected to be measured under this framework for Bank capital adequacy and had ratios of 9.32% and 9.95% at March 31, 2023 and December 31, 2022, respectively. The Corporation is exempt from CBLR. In December 2018, the Federal Reserve announced that a banking organization that experiences a reduction in retained earnings due to the CECL adoption as of the beginning of the fiscal year in which CECL is adopted may elect to phase in the regulatory capital impact of adopting CECL. Transitional amounts are calculated for the following items: retained earnings, temporary difference deferred tax assets and credit loss allowances eligible for inclusion in regulatory capital. When calculating regulatory capital ratios, 25% of the transitional amounts are phased in during the first year. An additional 25% of the transitional amounts are phased in over each of the next two years and at the beginning of the fourth year, the day-one effects of CECL are completely reflected in regulatory capital. Liquidity Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Meridian’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization or that can be used as collateral to secure funding. In addition, as part of its liquidity management, Meridian maintains a segment of commercial loan assets that are comprised of SNCs, which have a national market and can be sold in a timely manner. Meridian’s available liquidity, which totaled $317.8 million at March 31, 2023, compared to $264.4 million at December 31, 2022, 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 and has access to approximately $817.9 million in liquidity from these sources. Through its relationship at the Federal Reserve, Meridian had available credit of approximately $5.6 million at March 31, 2023. At March 31, 2023, Meridian had $33 million in borrowings from the Federal Reserve under the BTFP. As a member of the FHLB, we are eligible to borrow up to a specific credit limit, which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of March 31, 2023, Meridian’s maximum borrowing capacity with the FHLB was $558.2 million. At March 31, 2023, Meridian had borrowed $200.9 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $79.7 million against its available credit lines. At March 31, 2023, Meridian also had available $39.0 million of unsecured federal funds lines of credit with other financial institutions as well as $169.4 million of available short or long term funding through the CDARS program and $371.1 million of available short or long term funding through brokered CD arrangements. Management believes that Meridian has adequate resources to meet its short-term and long-term funding requirements. Discussion of Segments As of March 31, 2023, the Corporation has three principal segments as defined by FASB ASC 280, “ Segment Reporting.” The segments are Banking, Mortgage Banking and Wealth Management (see Note 10 in the accompanying Notes to Unaudited Consolidated Financial Statements). The Banking Segment recorded income before tax of $7.0 million for the three months ended March 31, 2023 as compared to income before tax of $8.2 million for the same period in 2022. The Banking Segment provided 135.7% of the Corporation’s pre-tax profit for the three month periods ended March 31, 2023, as compared to 113.9% for the same period in 2022. The Wealth Management Segment recorded income before tax of $231 thousand for the three months ended March 31, 2023 as compared to income before tax of $519 thousand for the same periods in 2022. The decrease in income in this segment was the result of declines in market conditions over the period. 42 Table of Conte n t s The Mortgage Banking Segment recorded a loss before tax of $2.1 million for the three months ended March 31, 2023 as compared to income before tax of $1.6 million for the same period in 2022. Mortgage Banking income and expenses related to loan originations and sales decreased due to lower origination volume. Off Balance Sheet Risk The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and loan repurchase commitments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at March 31, 2023 were $498.9 million as compared to $506.2 million at December 31, 2022. Standby letters of credit are conditional commitments issued by the Corporation to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Corporation’s obligation under standby letters of credit at March 31, 2023 amounted to $14.6 million as compared to $19.0 million at December 31, 2022. Estimated fair values of the Corporation’s off-balance sheet instruments are based on fees and rates currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and the estimated fair value of off-balance sheet instruments. In certain circumstances the Corporation may be required to repurchase residential mortgage loans from investors under the terms of loan sale agreements. Generally, these circumstances include the breach of representations and warranties made to investors regarding borrower default or early payment, as well as a violation of the applicable federal, state, or local lending laws. The Corporation agrees to repurchase loans if the representations and warranties made with respect to such loans are breached. Based on the obligations described above, the Corporation did not repurchase any loans for the three months ended March 31, 2023, and four loans totaling $906 thousand for the three March 31, 2022. Non-GAAP Financial Measures Meridian believes that non-GAAP measures are meaningful because they reflect adjustments commonly made by management, investors, regulators and analysts to evaluate performance trends and the adequacy of common equity. This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for performance and financial condition measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of Meridian’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies. Our management used the measure of the tangible common equity ratio to assess our capital strength. We believe that this non-GAAP financial measure is useful to investors because, by removing the impact of our goodwill and other intangible assets, it allows investors to more easily assess our capital adequacy. This non-GAAP financial measure should not be considered a substitute for any regulatory capital ratios and may not be comparable to other similarly titled measures used by other companies. The table below provides the non-GAAP reconciliation for our tangible common equity ratio and tangible book value per common share: (dollars in thousands) March 31, 2023 December 31, 2022 Total stockholders' equity (GAAP) $ 153,049 $ 153,280 Less: Goodwill and intangible assets 4,023 4,074 Tangible common equity (non-GAAP) 149,026 149,206 Total assets (GAAP) 2,229,783 2,062,228 Less: Goodwill and intangible assets 4,023 4,074 Tangible assets (non-GAAP) $ 2,225,760 $ 2,058,154 Stockholders' equity to total assets (GAAP) 6.86 % 7.43 % Tangible common equity to tangible assets (non-GAAP) 6.70 % 7.25 % Shares outstanding 11,177 11,466 Book value per share (GAAP) $ 13.69 $ 13.37 Tangible book value per share (non-GAAP) $ 13.33 $ 13.01 43 Table of Conte n t s The following is a reconciliation of the allowance for credit losses to total loans held for investment ratio at March 31, 2023. 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 credit losses calculation. March 31, 2023 December 31, 2022 Allowance for credit losses $ 20,442 $ 18,828 Loans, net of fees and costs (GAAP) 1,818,189 1,743,682 Less: PPP loans (238) (4,579) Less: Loans fair valued (14,434) (14,502) Loans, net of fees and costs, excluding PPP and fair valued loans (non-GAAP) $ 1,803,517 $ 1,724,601 Allowance for credit losses, net of fees and costs (GAAP) 1.12 % 1.08 % Allowance for credit losses, net of fees and costs, excluding PPP and fair valued loans (non-GAAP) 1.13 % 1.09 % Item 3. Quantitative and Qualitative Disclosures About Market Risk. Simulations of Net Interest Income We use a simulation model on a quarterly basis to measure and evaluate potential changes in our net interest income resulting from various hypothetical interest rate scenarios. Our model incorporates various assumptions that management believes to be reasonable, but which may have a significant impact on results such as: • The timing of changes in interest rates; • Shifts or rotations in the yield curve; • Repricing characteristics for market rate sensitive instruments on the balance sheet; • Differing sensitivities of financial instruments due to differing underlying rate indices; • Varying timing of loan prepayments for different interest rate scenarios; • The effect of interest rate floors, periodic loan caps and lifetime loan caps; • Overall growth rates and product mix of interest-earning assets and interest-bearing liabilities. Because of the limitations inherent in any approach used to measure interest rate risk, simulated results are not intended to be used as a forecast of the actual effect of a change in market interest rates on our results, but rather as a means to better plan and execute appropriate Asset / Liability Management (“ALM”) strategies. Potential increase (decrease) to our net interest income between a flat interest rate scenario and hypothetical rising and declining interest rate scenarios, measured over a one-year period as of the dates indicated, are presented in the following table which assuming rate shifts occur upward and downward on the yield curve in even increments over the first twelve months (ramp) followed by rates held constant thereafter. Threes Ended March 31, Changes in Market Interest Rates 2023 2022 +300 basis points over next 12 months 1.58 % 0.93 % +200 basis points over next 12 months 1.21 % 0.44 % +100 basis points over next 12 months 0.76 % (0.10) % No Change -100 basis points over next 12 months (1.80) % (0.15) % -200 basis points over next 12 months (3.19) % (1.29) % The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of March 31, 2023. In its current position, the table indicates that a 100 basis point increase in interest rates would have a positive impact from rising rates on net interest income over the next 12 months as well as in a 200 and 300 basis point increase. The simulated exposure to a change in interest rates is contained, manageable and well within policy guidelines. The results continue to drive our funding strategy of increasing relationship-based accounts (core deposits) and utilizing term deposits to fund short to medium duration assets. 44 Table of Conte n t s Simulation of economic value of equity To quantify the amount of capital required to absorb potential losses in value of our interest-earning assets and interest-bearing liabilities resulting from adverse market movements, we calculate economic value of equity on a quarterly basis. We define economic value of equity as the net present value of our balance sheet’s cash flow, and we calculate economic value of equity by discounting anticipated principal and interest cash flows under the prevailing and hypothetical interest rate environments. Potential changes to our economic value of equity between a flat rate scenario and hypothetical rising and declining rate scenarios are presented in the following table. The projections assume shifts upward and downward in the yield curve of 100, 200 and 300 basis points occurring immediately. Changes in Market Interest Rates March 31, 2023 March 31, 2022 +300 basis points 3 % 28 % +200 basis points 4 % 22 % +100 basis points 3 % 14 % No Change -100 basis points (10) % (21) % -200 basis points (25) % (55) % This economic value of equity profile at March 31, 2023 suggests that we would experience a positive effect from an increase in rates, and that the impact would remain stable as rates continue to rise. Conversely, we would experience a negative effect from a decrease in rates. While an instantaneous shift in interest rates is used in this analysis to provide an estimate of exposure, we believe that a gradual shift in interest rates would have a much more modest impact. Since economic value of equity measures the discounted present value of cash flows over the estimated lives of instruments, the change in economic value of equity does not directly correlate to the degree that earnings would be impacted over a shorter time horizon. The results of our net interest income and economic value of equity simulation analysis are purely hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from that projected, our net interest income might vary significantly. Non-parallel yield curve shifts or changes in interest rate spreads would also cause our net interest income to be different from that projected. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term interest-bearing liabilities reprice faster than expected or faster than our interest-earning assets. Actual results could differ from those projected if we grow interest-earning assets and interest-bearing liabilities faster or slower than estimated, or otherwise change its mix of products. Actual results could also differ from those projected if we experience substantially different repayment speeds in our loan portfolio than those assumed in the simulation model. Furthermore, the results do not take into account the impact of changes in loan prepayment rates on loan discount accretion. If prepayment rates were to increase on our loans, we would recognize any remaining loan discounts into interest income. This would result in a current period offset to declining net interest income caused by higher rate loans prepaying. Finally, these simulation results do not contemplate all the actions that we may undertake in response to changes in interest rates, such as changes to our loan, investment, deposit, funding or other strategies. Finally, these simulation results do not contemplate all the actions that we may undertake in response to changes in interest rates, such as changes to our loan, investment, deposit, funding or other strategies. Management has and continues to employ strategies to mitigate risk in the Net Interest Income and Economic Value simulations. Strategies include actively lowering deposit and funding rates, adding and maintaining interest rate floors on assets and lengthening liabilities in the low rate environment. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Corporation’s CEO and CFO have concluded that the Corporation’s disclosure controls and procedures were effective as of March 31, 2023 to ensure that the information required to be disclosed by the Corporation in the reports that the Corporation files or submits under the Exchange Act is recorded, processed, summarized, and reported completely and accurately within the time periods specified in SEC rules and forms. Changes in Internal Control Over Financial Reporting Effective January 1, 2023, the Corporation adopted CECL. The Corporation designed new controls and modified existing controls as part of this adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. There were no other changes in the Corporation's internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended March 31, 2023 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting. 45 Table of Conte n t s PART II–OTHER INFORMATION Item 1. Legal Proceedings. None Item 1A. Risk Factors. In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material updates and additions to the risk factors previously disclosed in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC. Additional risks not presently known to the Corporation, or that are currently deemed immaterial, may also adversely affect business, financial condition or results of operations of the Corporation. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause the Corporation’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of it. A continuation of recent turmoil in the financial services industry, and responsive measures to manage it, could have an adverse effect on our stock price, financial position and results of operations. In addition, if we are unable to adequately manage our liquidity, deposits, capital levels and interest rate risk, which have come under greater scrutiny in light of recent bank failures, it could have a material adverse effect on our stock price, financial condition and results of operations. In recent months, several financial services institutions have failed or required outside liquidity support. The impact of this situation has led to market volatility and risk of additional stress to other financial services institutions and the financial services industry generally as a result of increased lack of confidence in the financial services sector. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements regarding the safety and soundness of the banking system and taken actions, such as establishing the Bank Term Funding Program, as an additional source of liquidity for banks, there is no guarantee that such actions will be successful in restoring customer confidence. As a result of these events, customers may choose to withdraw uninsured deposit amounts, maintain deposits with larger financial institutions that may be perceived to be more stable or seek to switch their existing deposits into other higher yielding alternatives, which could materially adversely affect our liquidity, loan funding capacity, net interest margin, capital and results of operations. In addition, these recent events may result in potentially adverse changes to laws or regulations governing banks and bank holding companies, increased oversight by regulatory authorities and/or the imposition of restrictions on certain business activities through supervisory or enforcement activities, including higher capital or liquidity requirements, which could have a material impact on our current and planned business. The cost of resolving the recent bank failures is also expected to result in action by the FDIC to increase its deposit insurance premiums or assessments. These recent events also have led to a greater focus by regulators and investors on liquidity of existing assets and funding sources for financial institutions, the composition of deposits, including the amount of uninsured deposits, the amount of accumulated other comprehensive loss, capital levels and interest rate risk management. if we are unable to adequately manage our liquidity, deposits, capital levels and interest rate risk, it could have a material adverse effect on our stock price, financial condition and results of operations. Rising interest rates have decreased the value of the Corporation’s securities portfolio, and the Corporation would realize losses if it were required to sell such securities to meet liquidity needs. As a result of inflationary pressures and the resulting rapid increases in interest rates over the last year, the trading value of previously issued government and other fixed income securities has declined significantly. These securities make up a majority of the securities portfolio of most banks in the U.S., including the Corporation’s, resulting in unrealized losses embedded in the securities portfolios. While the Corporation does not currently intend to sell these securities, if the Corporation were required to sell such securities to meet liquidity needs, it may incur losses, which could impair the Corporation’s capital, financial condition, and results of operations and require the Corporation to raise additional capital on unfavorable terms, thereby negatively impacting its profitability. While the Corporation has taken actions to maximize its funding sources, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs. Furthermore, while the Federal Reserve Board has announced a Bank Term Funding Program available to eligible depository institutions secured by U.S. treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral at par, to mitigate the risk of potential losses on the sale of such instruments, there is no guarantee that such programs will be effective in addressing liquidity needs as they arise. 46 Table of Conte n t s Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. The following table presents the shares repurchased by the Corporation during the quarter ended March 31, 2023: Issuer Purchases of Equity Securities Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value that May Yet Be Purchased Under the Plan or Programs (1)($000's) (Dollars in thousands, except shares and per share amounts) January 1 to January 31, 2023 29,142 $ 15.67 29,142 February 1 to February 28, 2023 45,194 $ 15.24 45,194 March 1 to March 31, 2023 110,262 $ 15.99 110,262 Total 184,598 $ 15.63 $1,961 (1) On August 30, 2021, the Corporation announced a stock repurchase plan pursuant to which the Corporation may repurchase up to $20 million of the company’s outstanding common stock, par value $1.00 per share. Stock is purchased under the plan from time to time in the open market or through privately negotiated transactions, or otherwise, at the discretion of management of the company in accordance with legal requirements. On April 22, 2023, the stock repurchase plan expired. The total amount of stock repurchased under the plan was $19.6 million. Item 3. Defaults upon Senior Securities. None. Item 4. Mine Safety Disclosures. Not applicable. Item 5. Other Information. None. 47 Table of Conte n t s Item 6. Exhibits. EXHIBIT INDEX Exhibit Number Description 2.1 Plan of Merger and Reorganization dated April 26, 2018 by and between Registrant, Bank and Meridian Interim Bank, filed as Exhibit 2.1 to Form 8-K on August 24, 2018 and incorporated herein by reference. 3.1 Amended Articles of Incorporation of Registrant, filed herewith. 3.2 Bylaws of Registrant, filed as Exhibit 3.2 to Form 8-K on August 24, 2018 and incorporated herein by reference. 4.2 Indenture, dated as of December 18, 2019, between Meridian Corporation, as Issuer, and U.S. Bank National Association, as Trustee, incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed with the SEC on December 18, 2019. 4.3 Form of 5.375% Subordinated Note due 2029 (included as Exhibit A-1 and Exhibit A-2 to the Indenture incorporated by reference as Exhibit 4.2 hereto), filed with the SEC on December 18, 2019. 31.1 Rule 13a-14(a)/ 15d-14(a) Certification of the Principal Executive Officer, filed herewith. 31.2 Rule 13a-14(a)/ 15d-14(a) Certification of the Principal Financial Officer, filed herewith. 32 Section 1350 Certifications, filed herewith. 101.INS XBRL Instance Document – The instance document does not appear in the interactive Data File because its XBRL tags are embedded within the Inline XBRL document 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document Exhibit 104 Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document 48 Table of Conte n t s SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: May 10, 2023 Meridian Corporation By: /s/ Christopher J. Annas Christopher J. Annas President and Chief Executive Officer (Principal Executive Officer) By: /s/ Denise Lindsay Denise Lindsay Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 49