What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-16 · 124 added, 148 removed, 401 unchanged (40% of the section changed)

4 unchanged sentences

This section of this Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.

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

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

Recent Market Conditions

8 unchanged sentences

Meridian also maintains borrowing arrangements with various correspondent banks to meet short-term liquidity needs and has access to approximately $987 million in liquidity from numerous sources including its borrowing capacity with the FHLB and other financial institutions, as well as funding through the CDARS program or through brokered CD arrangements.

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

In addition, the Bank is eligible to receive funds under the Bank Term Funding Program.

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

COVID-19 Concerns

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Critical Accounting Policies and Estimates

3 unchanged sentences

These estimates, assumptions and judgements are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements.

In particular, management has identified the provision and allowance for loan and lease losses as the accounting policy that, due to the estimates, assumptions and judgements inherent in that policy, is critical in understanding our financial statements.

In particular, management has identified the provision and allowance for credit losses as the accounting policy that, due to the estimates, assumptions and judgements inherent in that policy, is critical in understanding our financial statements.

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

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

The JOBS Act permitted us an extended transition period for complying with new or revised accounting standards affecting public companies.

We have elected to take advantage of this extended transition period, which means that the financial statements included in this Annual Report, as well as any financial statements that were filed prior to this Annual Report, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period.

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

Additional information about these policies can be found in the “Summary of Significant Accounting Policies” in footnote 1 of the Corporation’s Consolidated Financial Statements as of and for the years ended December 31, 2022 and 2021.

Provision and allowance for loan and lease losses

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

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

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

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

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

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

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

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

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

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

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

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

Additional information about these policies can be found in Note 1 - Summary of Significant Accounting Policies, to the Corporation’s Consolidated Financial Statements as of and for the years ended December 31, 2023 and 2022.

Provision and allowance for credit losses

Beginning on January 1, 2023, we adopted ASC 326, which replaced the former incurred loss methodology with an expected credit loss methodology that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of an asset.

The ACL is a valuation reserve established and maintained by charges against operating income.

It is an estimate of expected credit losses, measured over the contractual life of a loan, that considers historical loss experience, current conditions and forecasts of future economic conditions.

Management’s evaluation process used to determine the appropriateness of the ACL is complex and requires the use of estimates, assumptions and judgments which are inherently subject to high uncertainty.

The evaluation process combines several factors:

historical loan loss experience, managements ongoing review of lending policies and practices, experience and depth of staff, quality of the loan grading system, the fair value of underlying collateral, concentration of loans to specific borrowers or industries, existing economic conditions and forecasts, segment specific risks and other quantitative and qualitative factors which could affect future credit losses.

Our reasonable and supportable forecast is for a period of four quarters.

For periods beyond our one-year forecast, we revert to historical loss rates over one quarter.

Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans and the appropriateness of the ACL could change significantly.

It is challenging to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

Executive Overview

3 unchanged sentences

• Total assets increased $184.0 million, or 8.9%, to $2.2 billion as of December 31, 2023.

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

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

• Portfolio loans, increased $152.9 million, or 8.8%, to $1.9 billion as of December 31, 2023,

Results of Operations

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

• Consolidated net income decreased $8.6 million, or 39.3%, driven by a lower level of non-interest revenue from mortgage banking activity, and a decline in net interest income after provision for credit losses, due to increased interest expense on deposits and an increase in the provision for credit losses.

• The return on average assets and return on average equity was 0.61% and 8.53%, respectively, for the year ended December 31, 2023, compared to 1.18% and 13.87%, respectively, for the year ended December 31, 2022.

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

• Provision for credit losses increased $4.3 million, or 173.9%, due to an increase in specific reserves on a commercial loan relationship and small business loans, combined with provisioning for loan growth and charge-offs.

Key Performance Ratios

14 unchanged sentences

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

loans at fair value and PPP loans) (1)

loans at fair value) (1)

1.17 % 1.09 %

9 unchanged sentences

• Net Interest Income , or the difference between the interest income earned on loans, leases and investments and the interest expense paid on deposits and borrowed funds;

• Provision For Loan and Lease Losses , or the amount added to the Allowance to provide for estimated inherent losses on portfolio loans and leases;

• 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;

3 unchanged sentences

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

The tables below present a summary for the year ended December 31, 2022 and 2021, of the Corporation’s average balances and yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities.

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

6 unchanged sentences

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

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

Cash and cash equivalents $ 24,218 $ 1,259 5.20 % $ 21,045 $ 279 1.33 %

Federal funds sold 136 7 5.15 1,160 7 0.60

25 unchanged sentences

Rate/Volume Analysis

The rate/volume analysis table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the year ended December 31, 2022 as compared to the same periods in 2021, allocated by rate and volume.

The rate/volume analysis table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the year ended December 31, 2023 as compared to the year ended December 31, 2022, allocated by rate and volume.

Changes in interest income and/or expense attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of the change in each category.

2 unchanged sentences

Interest income:

Due from banks $ 255 $ (17) $ 238

Cash and cash equivalents $ 932 $ 45 $ 977

Federal funds sold 11 (8) 3

1 unchanged sentence

Investment securities - tax exempt (1)

97 (118) (22)

Loans held for sale 717 (1,109) (392)

13 unchanged sentences

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

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

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

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

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

Interest income increased $47.9 million on a tax equivalent basis, year over year, due to a higher yield on earning assets, which increased 160 basis points, in addition to a higher level of average earning assets, which increased by $296.8 million.

The average yield on loans held for investment increased 156 basis points and the yield on cash and investments increased 119 basis points in total, reflecting the impact on rates caused by the Federal Reserve’s monetary policy.

Average total loans held for investment increased $314.1 million, most notably in commercial real estate and construction, commercial loans and small business loans, which increased $191.5 million on average, combined.

Home equity loans and residential real estate loans held in portfolio increased $157.1 million on average, combined.

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

Residential loans for sale decreased $21.0 million on average.

Interest expense increased $49.1 million, year over year, due primarily to market interest rate rises, as well as an increase of $221.2 million in average interest bearing deposits.

Interest expense on deposits increased $42.4 million with the cost of interest-bearing deposits increasing 262 basis points to 3.81%.

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

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

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

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

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

PROVISION FOR LOAN AND LEASE LOSSES

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

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

Total cost of deposits increased 227 basis points reflecting a decrease of $29.2 million in average non-interest bearing deposits.

Interest expense on borrowings increased $6.4 million as the cost increased 199 basis points, and total average short-term borrowings increased $117.9 million.

Net interest margin decreased 63 basis points to 3.35% for the year ended December 31, 2023 from 3.98% for the year ended December 31, 2022, as the increase in yield on earnings assets was outpaced by the increase in costs of funds, impacted also by the $29.2 million decrease in average non-interest bearing deposits.

PROVISION FOR CREDIT LOSSES

The provision for credit losses was $6.8 million for the year ended December 31, 2023, compared to a $2.5 million provision for the year ended December 31, 2022.

The provision for credit losses for the year ended December 31, 2023 was calculated under the current expected credit losses method, while the provision for the year ended December 31, 2022 was calculated under the incurred loss model, which impacts comparability.

The overall provision for credit losses for 2023 is comprised of provisioning for funded loans as well as unfunded loan commitments.

The increase in provision for funded loans was due to a $4.7 million increase in specific reserves on new, mainly small business loans, and existing non-accrual loans combined with provisioning for loan growth and charge-offs.

$2.3 million of the increase in specific reserves related to a commercial loan relationship for which new information became available related to the value of the underlying collateral, and an estimate of disposition costs.

This increase was partially offset by the impact of favorable changes in certain portfolio baseline loss rates and some macroeconomic factors underlying the funded loss model.

The provision for unfunded loan commitments decreased $419 thousand during the year due to the impact of favorable changes in certain portfolio baseline loss rates and some macroeconomic factors underlying the unfunded loss model.

NON-INTEREST INCOME

10 unchanged sentences

Net gain on hedging activity 28 5,439 (5,411) (99.5) %

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

Service charges 125 129 (4) (3.1) %

Net loss on sale of investment securities available-for-sale (58) — (58) (100.0) %

Other 5,001 5,162 (161) (3.1) %

Total non-interest income $ 31,965 $ 41,724 $ (9,759) (23.4) %

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

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

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

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

Total non-interest income decreased $9.8 million largely as a result of lower mortgage banking revenue.

Mortgage banking income was down $8.8 million, due primarily to lower levels of mortgage loan originations as rising interest rates and lack of housing inventory has had a negative impact on mortgage banking activity throughout the year.

Compounding the impact of the decline in mortgage banking income were net changes in the fair value of derivative instruments and loans held-for-sale, along with a decline in net gains on hedging activity that decreased $3.7 million, combined, year over year.

SBA loan sale income was relatively unchanged year-over-year, despite an increase of $9.1 million, or 12.0%, in the volume of loans sold in 2023 compared to 2022.

The upward movement in interest rates during 2023 had a negative impact on gross margins on the SBA loan sales, which declined to 6.7% for all sales in 2023, compared to 7.4% in 2022.

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

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

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

The net change in the fair value of loans held-for-investment increased $2.5 million to a gain of $132 thousand for the year ended December 31, 2023, compared to a loss of $2.4 million for the comparable prior year, due to the negative impact the rising interest rate environment had on the fair value of the loans in portfolio that are held at fair value.

NON-INTEREST EXPENSE

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

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

Year Ended December 31,

5 unchanged sentences

Data processing and software 6,415 5,451 964 17.7 %

Pennsylvania bank shares tax 793 609 184 30.2 %

FDIC premiums 2,929 1,247 1,682 134.9 %

Other 7,520 7,560 (40) (0.5) %

Total non-interest expense $ 77,125 $ 81,444 $ (4,319) (5.3) %

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

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

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

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

Total non-interest expense decreased $4.3 million mainly due to a decrease in salaries and employee benefits expense at the mortgage segment, which recognized decreased fixed and variable compensation as the volume of loan originations and sales were both down year-over-year.

Partially offsetting this decrease was an increase for the bank and wealth segments salaries & benefits as FTEs were up and a higher level of stock-based compensation expense.

Professional fees increased $677 thousand as we incurred OREO expense during the year to maintain the one property held, non-performing loan and lease workout expenses increased, and we also incurred system conversion fees for a new loan servicing platform for our mortgage segment.

Advertising and promotion expense decreased $606 thousand as the result of a decline in mortgage related advertising expense and other promotional expense.

Data processing and software expense increased $964 thousand as Meridian continued with the strategy to invest in technology that focuses on improving back-office efficiencies through automation and workflow processes.

Data processing expense was up over the prior year due to an increase in customer account transaction volume.

INCOME TAX EXPENSE

5 unchanged sentences

Effective tax rate 21.95 % 21.81 % 0.14 % 0.6 %

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

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

While income tax expense decreased primarily due to the decrease in income before income taxes, the effective tax rate increased slightly due to the impact of additional nondeductible stock based compensation in 2023, partially offset by an increase in tax-free bank owned life insurance income.

The effective tax rate reflects the recognition of certain tax benefits in the financial statements including those benefits from tax-exempt interest income, federal low-income housing tax credits, and excess tax benefits from recognized stock compensation.

These tax benefits are offset by the tax effect of stock-based compensation expense related to incentive stock options and a provision for state income tax expense.

We frequently analyze our projections of taxable income and make adjustments to our provision for income taxes accordingly.

Balance Sheet Summary

26 unchanged sentences

Total loans and leases $ 1,913,264 $ 1,757,841 $ 155,423 8.8 %

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

Portfolio loans increased $152.9 million, or 8.8% to $1.9 billion as of December 31, 2023, from $1.7 billion as of December 31, 2022.

The following table shows the amounts of loans outstanding as of December 31, 2023 which, based on remaining scheduled repayments of principal, are due in the periods indicated:

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

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

Commercial mortgage $ 39,903 $ 205,960 $ 484,840 $ 7,160 $ 737,863

10 unchanged sentences

(dollars in thousands) Fixed Rate Variable Rate Total

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

Commercial mortgage $ 143,798 $ 594,065 $ 737,863

10 unchanged sentences

Owner-occupied commercial real estate loans generally involve less risk than an investment property and are distinctly reported from non-owner occupied commercial real estate loans for measuring loan concentrations for regulatory purposes.

Our owner-occupied commercial real estate loans are originated and managed within our commercial loan department and comprised 34.4% of our total commercial real estate loan portfolio at December 31, 2022.

Our owner-occupied commercial real estate loans are originated and managed within our commercial loan department and comprise d 33.8% of our total commercial real estate loan portfolio at December 31, 2023.

The remaining commercial real estate loans are managed by our commercial real estate department which offer the following commercial real estate products:

9 unchanged sentences

Our total commercial real estate loan portfolio represented 38.6% and 32.2% of our total loan portfolio at December 31, 2023 and 2022, respectively.

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

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

Construction loans decreased $25.5 million, or 9.4%, to $246.4 million at December 31, 2023 from $272.0 million at December 31, 2022.

Construction loans represented 12.9% and 15.5% of our total loan portfolio at December 31, 2023 and 2022, respectively.

Commercial and Industrial Loans

4 unchanged sentences

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

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

Our commercial and industrial loans decreased $38.5 million, or 11.3%, to $302.9 million at December 31, 2023 from

$341.4 million at December 31, 2022.

Commercial and industrial loans overall represented 15.8% and 19.4% of our total loan portfolio at December 31, 2023 and 2022, respectively.

12 unchanged sentences

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

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

Leases decreased $17.4 million, or 12.5%, to $121.6 million at December 31, 2023 from $139.0 million at December 31, 2022.

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

8 unchanged sentences

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

Not included in the tables below are equity investments that had fair values of $2.1 million and $2.4 million, as of December 31, 2022 and 2021, respectively.

Not included in the tables below are equity investments that had fair values of $2.1 million as of December 31, 2023 and 2022.

As of December 31, 2023 we also had a held-to-maturity investment portfolio with amortized cost of $35.8 million.

During the year ended December 31, 2022, $27.7 million of municipal securities, previously classified as available-for-sale on the balance sheet, were transferred to the held-to-maturity portfolio at fair value.

After transfer, $1.3 million of unrealized losses remain in accumulated other comprehensive income.

No gain or loss was recognized as a result of the transfer.

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

December 31, 2023

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

(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:

3 unchanged sentences

State and municipal securities 40,093 — (3,877) — 36,216 31

December 31, 2022

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

Treasuries 32,982 — (2,560) — 30,422 25

2 unchanged sentences

Total securities available-for-sale $ 156,492 $ 491 $ (10,964) $ — $ 146,019 133

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

Amortized cost Gross unrecognized gains Gross unrecognized losses Allowance for Credit Losses Fair value # of Securities in unrecognized loss position

Securities held to maturity:

State and municipal securities $ 35,781 $ 52 $ (3,103) $ — $ 32,730 21

Total securities held-to-maturity $ 35,781 $ 52 $ (3,103) $ — $ 32,730 21

December 31, 2022

12 unchanged sentences

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

Total securities held-to-maturity $ 37,479 $ — $ (4,394) $ 33,085 25

Asset Quality Summary

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

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

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

The ratio of non-performing assets to total assets increased to 1.58% as of December 31, 2023, from 1.11% as of December 31, 2022.

There was $1.7 million in other real estate property included in non-performing assets as of December 31, 2023 and 2022, related to a well secured residential property.

Total non-performing loans were $33.8 million and $21.2 million as of December 31, 2023 and December 31, 2022, respectively.

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

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

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

The ratio of allowance for loan losses to total loans held for investment, excluding loans at fair value and PPP loans (a non-GAAP measure, see reconciliation in the Appendix), was 1.09% as of December 31, 2022 compared to 1.46% as of December 31, 2021.

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

A reconciliation of this non-GAAP measure is included in the Non-GAAP Financial Measures section on page 36.

As of December 31, 2022, the Corporation had $3.8 million of TDRs, of which $3.6 million were in compliance with the modified terms and excluded from non-performing loans and leases.

As of December 31, 2021, the Corporation had $3.8 million of TDRs, of which $3.4 million were in compliance with the modified terms, and were excluded from non-performing loans and leases.

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

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

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

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

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

The increase in non-performing loans over the period was due to increases in non-performing small business loans, commercial loans, residential real estate loans and construction loans of $5.0 million, $2.9 million, $2.5 million, and $1.2 million, respectively.

Meridian realized net charge-offs of $5.6 million, or 0.30%, of total average loans for the year ended December 31, 2023, compared to net charge-offs of $2.4 million, or 0.15%, of total average loans for the year ended December 31, 2022.

A majority of charge-offs for the year ended December 31, 2023 were from equipment leases, $4.0 million, and $1.5 million were from small business loans.

The ratio of allowance for credit losses to total loans held for investment, excluding loans at fair value (a non-GAAP measure, see reconciliation in the Appendix), was 1.17% as of December 31, 2023 compared to 1.09% as of December 31, 2022.

As of December 31, 2023 there were specific reserves of $6.5 million against individually evaluated loans, an increase from $2.2 million as of December 31, 2022.

The drivers of the increase related to a $2.3 million increase in a commercial loan relationship specific reserve for which new information became available related to the value of the underlying collateral, combined with the net impact of establishing $2.3 million in specific reserves on SBA loan relationships classified as non-performing, netted with the charge-off an 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.

10 unchanged sentences

Residential mortgage 4,536 2,085

Construction 1,206 —

Total real estate loans 6,779 3,322

5 unchanged sentences

Total non-performing assets $ 35,466 $ 22,939

Troubled debt restructurings:

TDRs included in non-performing loans $ 207 $ 361

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

Total TDRs $ 3,780 $ 3,807

Asset quality ratios:

3 unchanged sentences

Total loans held-for-investment 1.78 % 1.22 %

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

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

1.79 % 1.23 %

Allowance for loan losses to:

Allowance for credit losses to:

Total loans and leases 1.15 % 1.07 %

Total loans held-for-investment 1.17 % 1.08 %

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

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

1.17 % 1.09 %

2 unchanged sentences

Total loans and leases held-for-investment $ 1,895,806 $ 1,743,682

Total loans and leases held-for-investment (excluding loans at fair value and PPP loans) $ 1,724,601 $ 1,280,654

Allowance for loan and lease losses $ 18,828 $ 18,758

(1) The allowance for loan losses to total loans held-for-investment (excluding loans at fair value and PPP loans) ratio is a non-GAAP financial measure.

Total loans and leases held-for-investment (excluding loans at fair value) $ 1,882,080 $ 1,729,180

Allowance for credit losses (2)

$ 22,107 $ 18,828

(1) The allowance for credit losses to total loans held-for-investment (excluding loans at fair value) ratio is a non-GAAP financial measure.

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

Allowance for Loan and Lease Losses

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

(2) The allowance for credit losses for the year ended December 31, 2023 was calculated under the current expected credit loss model, while the allowance for the year ended December 21, 2022 was calculated under the incurred loss model.

Allowance for Credit Losses

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

(dollars in thousands) December 31,

10 unchanged sentences

Total $ 22,107 100% $ 18,828 100%

$ 18,758 100%

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

(1) The allowance for credit losses for the year ended December 31, 2023 was calculated under the current expected credit loss model, while the allowance for the year ended December 21, 2022 was calculated under the incurred loss model.

The following table provides information on net (charge-offs) and recoveries by loan category for the years ended:

December 31, 2023 December 31, 2022

2 unchanged sentences

Commercial and industrial (209) 97

Small business loans (1,483) —

Leases (3,779) (2,552)

12 unchanged sentences

Total deposits were $1.8 billion as of December 31, 2023, up $111.0 million, or 6.5%, from December 31, 2022.

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

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

Non-interest bearing deposits decreased $62.4 million, or 20.7%, from December 31, 2022.

Interest-bearing demand deposits decreased $68.9 million, or 31.4%, from December 31, 2022, while money market accounts/savings accounts increased $50.2 million, or 7.2%, from December 31, 2022.

Certificates of deposits increased $192.1 million, or 38.9%, from December 31, 2022, as lower levels of core deposits, combined with continued loan growth year over year, led to the need to obtain more wholesale funding.

Included in time deposits as of December 31, 2023, and December 31, 2022, are $429.9 million and $375.3 million of brokered deposits, respectively, which comprise 23.8% and 21.9% of total deposits as of these dates.

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

December 31, 2023

(Dollars in thousands) Amount %

3 months or less $ 101,332 22.1%

4 unchanged sentences

Consolidated stockholders’ equity of the Corporation was $158.0 million, or 7.0% of total assets as of December 31, 2023 as compared to $153.3 million, or 7.4% of total assets as of December 31, 2022.

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

The increase in stockholders’ equity is the result of year-to-date net income of $13.2 million, and comprehensive income of $2.1 million, partially offset by dividends paid of $5.6 million, common stock repurchases of $4.3 million, and $1.0 million in stock-based compensation and stock options exercised.

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

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

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

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

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

3 unchanged sentences

This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for performance and financial condition measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of Meridian’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

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

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

The tables below provides the non-GAAP reconciliation for the Corporation’s pre-tax, pre-provision income.

(dollars in thousands) December 31,

2023 December 31,

Income before income tax expense $ 16,967 $ 27,920

Provision for credit losses 6,815 2,488

Pre-tax, pre-provision income $ 23,782 $ 30,408

(dollars in thousands) December 31,

2023 December 31,

Bank $ 27,751 $ 31,004

Wealth 1,240 2,030

Mortgage (5,209) (2,626)

Pre-tax, pre-provision income $ 23,782 $ 30,408

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

(dollars in thousands) December 31,

2023 December 31,

Total stockholders' equity (GAAP) $ 158,022 $ 153,280

9 unchanged sentences

Tangible book value per share (non-GAAP) $ 13.78 $ 13.01

The following is a reconciliation of the allowance for loan losses to total loans held for investment ratio at December 31, 2022.

This is considered a non-GAAP measure as the calculation excludes the impact of loans held for investment that are fair valued and the impact of PPP loans as these loan types are not included in the allowance for loan losses calculation.

The following is a reconciliation of the allowance for credit losses to total loans held for investment ratio at December 31, 2023.

This is considered a non-GAAP measure as the calculation excludes the impact of loans held for investment that are fair valued as these loan types are not included in the allowance for credit losses calculation.

(dollars in thousands) December 31,

2023 December 31,

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

Allowance for credit losses (GAAP) $ 22,107 $ 18,828

Loans, net of fees and costs (GAAP) 1,895,806 1,743,682

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

Loans fair valued (13,726) (14,502)

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

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

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

Liquidity and Capital Resources

Loans, net of fees and costs, excluding loans at fair value (non-GAAP) $ 1,882,080 $ 1,729,180

Allowance for credit losses to loans, net of fees and costs (GAAP) 1.17 % 1.08 %

Allowance for credit losses to loans, net of fees and costs, excluding loans at fair value (non-GAAP) 1.17 % 1.09 %

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.

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 $273.4 million at December 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.

2 unchanged sentences

Through its relationship at the FRB, Meridian had available credit of approximately $7.8 million at December 31, 2023.

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

At December 31, 2023, Meridian had $33.0 million in borrowings from the Federal Reserve.

As a member of the FHLB, we are eligible to borrow up to a specific credit limit, which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral.

3 unchanged sentences

Management believes that Meridian has adequate resources to meet its short-term and long-term funding requirements.

Loan Commitments

At December 31, 2023, Meridian had $528.7 million in unfunded loan commitments.

2 unchanged sentences

Management believes that the majority of such deposits will be reinvested with Meridian and that certificates that are not renewed will be funded by a reduction in cash and cash equivalents or by pay-downs and maturities of loans and investments.

At December 31, 2022, Meridian had a reserve for unfunded loan commitments of $173 thousand.

At December 31, 2023, Meridian had a reserve for unfunded loan commitments of $1.0 million.

Capital Resources

Meridian meets the definition of “well capitalized” for regulatory purposes on December 31, 2023.

9 unchanged sentences

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

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

T he Bank’s CBLR was 9.46% and 9.95% as of December 31, 2023 and 2022, respectively, but reports all ratios for comparative purposes.

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

Corporation Bank Well-capitalized minimum

2022 December 31,

2021 December 31,

2022 December 31,

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

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

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

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

Tables presenting the Bank’s capital amounts and ratios as of December 31, 2023 and 2022 are included in Note 17 - Regulatory Matters.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis