Meridian Corp 10-K

Item 8. Financial Statements and Supplementary Data The consolidated financial statements are set forth in this Annual Report on Form 10-K as follows: i. Report of Crowe LLP, Independent Registered Public Accounting Firm (PCAOB ID 173 ) ii. Consolidated Balance Sheets iii. Consolidated Statements of Income iv. Consolidated Statements of Comprehensive Income v. Consolidated Statements of Stockholders’ Equity vi. Consolidated Statements of Cash Flows vii. Notes to Consolidated Financial Statements 41 Report of Independent Registered Public Accounting Firm Shareholders and the Board of Directors of Meridian Corporation and Subsidiaries Malvern, Pennsylvania Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Meridian Corporation and Subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2023 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO. Change in Accounting Principle As discussed in Notes 1, 5, and 6 of the financial statements, the Company has changed its method of accounting for credit losses effective January 1, 2023 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Codification No. 326, Financial Instruments - Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also related to the critical audit matter communicated below. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 42 Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses In accordance with Accounting Standards Update (the “ASU”) 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , the Company adopted Accounting Standards Codification (“ASC”) 326 as of January 1, 2023 as described in Notes 1, 5, and 6 of the consolidated financial statements and the explanatory paragraph above. The Company has identified the ACL as a critical accounting estimate. The ACL includes quantitative and qualitative factors that comprise management's current estimate of expected credit losses, including 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 Company disclosed the impact of adoption of this standard on January 1, 2023 with a $2.9 million increase to the allowance for credit losses and a $2.2 million decrease to retained earnings for the cumulative effect adjustment recorded upon adoption. As of December 31, 2023, the allowance for credit losses attributable to loans held for investment is $22.1 million. We determined that auditing the allowance for credit losses on loans was a critical audit matter because of the extent of auditor judgment applied and significant audit effort to evaluate the significant subjective and complex judgments made by management throughout the initial adoption and subsequent application processes, including segmentation, the reasonable and supportable forecasts about future economic conditions, the quantitative factors, and the qualitative adjustments factors. In addition, we used individuals with specialized skill or knowledge to assist us in auditing the judgments made by management. The primary procedures we performed to address this critical audit matter included: Testing the effectiveness of the following controls: • Management’s initial selection of the model, including modeling methodology, historical loss experience, reasonable and supportable forecasts about future economic conditions, qualitative adjustment factors, and the model validation performed over these selections. • Management’s review of the completeness and accuracy of internally produced data and the relevance and reliability of the external data used in the determination of the quantitative factors and the qualitative adjustment factors. • Management’s review of the accuracy of the calculation of the quantitative factors and the qualitative adjustment factors. • Management’s review of the reasonableness of the judgments applied in the quantitative factors and the qualitative adjustment factors. Substantively testing management’s process to determine the allowance for credit losses, including: • Evaluating the appropriateness of the Company’s methodology applied to the adoption of ASC 326. • Testing the relevance and reliability of the external data utilized and the completeness and accuracy of internally produced data utilized in the determination of the quantitative factors and the qualitative adjustment factors. • Testing the mathematical accuracy of the calculation of the quantitative factors and qualitative adjustment factors. • Evaluating the reasonableness of management’s judgments used in the determination of the quantitative factors and the qualitative adjustment factors. • Utilizing internal specialists to evaluate the appropriateness of valuation methodologies and testing significant judgments used in the model. /s/ Crowe LLP We have served as the Company’s auditor since 2020. Washington, D.C. March 15, 2024 43 MERIDIAN CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except shares and per share data) December 31, 2023 December 31, 2022 Assets: Cash and due from banks $ 10,067 $ 11,299 Interest-bearing deposits at other banks 46,630 27,092 Cash and cash equivalents 56,697 38,391 Securities available-for-sale, at fair value (amortized cost of $ 156,492 and $ 148,976 , respectively) 146,019 135,346 Securities held-to-maturity, at amortized cost (fair value of $ 32,730 and $ 33,085 , respectively) 35,781 37,479 Equity investments 2,121 2,086 Mortgage loans held for sale 24,816 22,243 Loans and other finance receivables, net of fees and costs 1,895,806 1,743,682 Allowance for credit losses ( 22,107 ) ( 18,828 ) Loans and other finance receivables, net of the allowance for credit losses 1,873,699 1,724,854 Restricted investment in bank stock 8,072 6,931 Bank premises and equipment, net 13,557 13,349 Bank owned life insurance 28,844 28,055 Accrued interest receivable 9,325 7,363 Other real estate owned 1,703 1,703 Deferred income taxes 4,201 3,936 Servicing assets 11,748 12,346 Goodwill 899 899 Intangible assets 2,971 3,175 Other assets 25,740 24,072 Total assets $ 2,246,193 $ 2,062,228 Liabilities: Deposits: Non-interest bearing $ 239,289 $ 301,727 Interest bearing 1,584,173 1,410,752 Total deposits 1,823,462 1,712,479 Borrowings 174,896 122,082 Subordinated debentures 49,836 40,346 Accrued interest payable 10,324 2,389 Other liabilities 29,653 31,652 Total liabilities 2,088,171 1,908,948 Stockholders’ equity: Common stock, $ 1 par value: 25,000,000 shares authorized; 13,186,198 and 13,156,308 shares issued, respectively; and 11,183,015 and 11,465,572 shares outstanding, respectively. 13,186 13,156 Surplus 80,325 79,072 Treasury stock - 2,003,183 and 1,690,736 shares, respectively, at cost ( 26,079 ) ( 21,821 ) Unearned common stock held by employee stock ownership plan ( 1,204 ) ( 1,403 ) Retained earnings 101,216 95,815 Accumulated other comprehensive loss ( 9,422 ) ( 11,539 ) Total stockholders’ equity 158,022 153,280 Total liabilities and stockholders’ equity $ 2,246,193 $ 2,062,228 The accompanying notes are an integral part of these consolidated financial statements. 44 MERIDIAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, (dollars in thousands, except shares and per share data) 2023 2022 Interest income: Loans and other finance receivables, including fees $ 130,081 $ 84,627 Securities - taxable 3,873 2,420 Securities - tax-exempt 1,369 1,388 Cash and cash equivalents 1,266 286 Total interest income 136,589 88,721 Interest expense: Deposits 57,819 15,397 Borrowings 9,828 3,196 Total interest expense 67,647 18,593 Net interest income 68,942 70,128 Provision for credit losses 6,815 2,488 Net interest income after provision for credit losses 62,127 67,640 Non-interest income: Mortgage banking income 16,537 25,325 Wealth management income 4,928 4,733 SBA loan income 4,485 4,467 Earnings on investment in life insurance 789 553 Net change in the fair value of derivative instruments 91 ( 703 ) Net change in the fair value of loans held-for-sale 32 ( 844 ) Net change in the fair value of loans held-for-investment 132 ( 2,408 ) Net gain on hedging activity 28 5,439 Net loss on sale of investment securities available-for-sale ( 58 ) — Other 5,001 5,162 Total non-interest income 31,965 41,724 Non-interest expense: Salaries and employee benefits 47,377 54,378 Occupancy and equipment 4,842 4,837 Professional fees 4,312 3,635 Advertising and promotion 3,730 4,336 Data processing and software 6,415 5,451 FDIC premiums 2,929 1,247 Other 7,520 7,560 Total non-interest expense 77,125 81,444 Income before income taxes 16,967 27,920 Income tax expense 3,724 6,091 Net income $ 13,243 $ 21,829 Basic earnings per common share $ 1.19 $ 1.85 Diluted earnings per common share $ 1.16 $ 1.79 Basic weighted average shares outstanding 11,115 11,792 Diluted weighted average shares outstanding 11,387 12,204 The accompanying notes are an integral part of these consolidated financial statements. 45 MERIDIAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, (dollars in thousands) 2023 2022 Net income: $ 13,243 $ 21,829 Other comprehensive income (loss): Net change in unrealized losses on investment securities available for sale: Change in fair value of investment securities available for sale, net of tax of $ 682 , and $( 3,059 ), respectively 2,417 ( 11,285 ) Reclassification adjustment for net losses (gains) realized in net income, net of tax effect of $13, and $ 0 , respectively 45 — Reclassification adjustment for securities transferred from available-for-sale to held-to-maturity, net of tax effect of $ 19 , and $( 293 ), respectively 67 ( 962 ) Unrealized investment losses, net of tax effect of $ 714 , and $( 3,352 ), respectively 2,529 ( 12,247 ) Net change in unrealized gains (losses) on interest rate swaps used in cash flow hedges, net of tax effect of $ 22 and $ 0 , respectively ( 412 ) — Total other comprehensive income (loss) 2,117 ( 12,247 ) Total comprehensive income $ 15,360 $ 9,582 The accompanying notes are an integral part of these consolidated financial statements. 46 MERIDIAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (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 — — — — 21,829 — 21,829 Other comprehensive loss — — — — — ( 12,247 ) ( 12,247 ) Dividends declared, $ 0.90 per share — — — — ( 10,930 ) — ( 10,930 ) Net purchase of treasury stock through publicly announced plans ( 836,490 shares) — — ( 12,961 ) — — — ( 12,961 ) Common stock issued through share-based awards and exercises ( 158,042 ) 43 711 — — — — 754 ESOP shares committed to be released ( 26,656 ) — 228 — 199 — — 427 Stock based compensation expense — 1,048 — — — — 1,048 Balance at December 31, 2022 $ 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 — — — — 13,243 — 13,243 Other Comprehensive income — — — — — 2,117 2,117 Dividends declared, $ 0.50 per share — — — — ( 5,614 ) — ( 5,614 ) Net purchase of treasury stock through publicly announced plans ( 312,447 shares) — — ( 4,258 ) — — — ( 4,258 ) Common stock issued through share-based awards and exercises ( 29,500 ) 30 279 — — — — 309 ESOP shares committed to be released ( 26,656 ) 324 199 523 Stock based compensation expense — 650 — — — — 650 Balance at December 31, 2023 $ 13,186 $ 80,325 $ ( 26,079 ) $ ( 1,204 ) $ 101,216 $ ( 9,422 ) $ 158,022 (1) See Note 1 - Summary of Significant Accounting Policies - Pronouncements Adopted in 2023, for additional information . The accompanying notes are an integral part of these consolidated financial statements. 47 MERIDIAN CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, (dollars in thousands) 2023 2022 Net income $ 13,243 $ 21,829 Adjustments to reconcile net income to net cash provided by operating activities: Loss on sale of investment securities 58 — Net amortization of investment premiums and discounts and change in fair value of equity securities 2,429 1,202 Depreciation and amortization (accretion), net 432 ( 1,406 ) Provision for credit losses 6,815 2,488 Amortization of issuance costs on subordinated debt 87 117 Stock based compensation 1,173 1,475 Net change in fair value of derivative instruments ( 91 ) 703 Net change in fair value of loans held for sale ( 32 ) 844 Net change in fair value of loans held for investment ( 132 ) 2,408 Amortization and net impairment of servicing rights 2,045 2,483 SBA loan income ( 4,485 ) ( 4,467 ) Proceeds from sale of loans 657,563 1,100,333 Loans originated for sale ( 645,365 ) ( 1,016,130 ) Mortgage banking income ( 16,537 ) ( 25,325 ) Increase in accrued interest receivable ( 1,962 ) ( 2,354 ) Increase in other assets ( 2,021 ) ( 823 ) Earnings from investment in bank owned life insurance ( 789 ) ( 553 ) (Increase) decrease in deferred income tax ( 234 ) 1,112 Increase in accrued interest payable 7,935 2,358 Decrease in other liabilities ( 1,278 ) ( 1,623 ) Net cash provided by operating activities $ 18,854 $ 84,671 Cash flows used in investing activities: Activity in available-for-sale securities: Maturities, repayments and calls 9,652 12,124 Sales 13,514 — Purchases ( 33,211 ) ( 31,496 ) Activity in held-to-maturity securities: Maturities, repayments and calls 1,400 905 Purchases — ( 5,500 ) Increase in restricted stock ( 1,141 ) ( 1,814 ) Net increase in loans ( 152,576 ) ( 359,460 ) Purchases of premises and equipment ( 1,823 ) ( 2,907 ) Purchase of bank owned life insurance — ( 5,000 ) Net cash used in investing activities $ ( 164,185 ) $ ( 393,148 ) Cash flows provided by financing activities: Net increase in deposits 110,983 266,066 Increase in short-term borrowings 28,077 71,803 Increase in long-term debt 24,737 8,935 Repayment of subordinated debt ( 328 ) ( 279 ) Proceeds from issuance of subordinated debt 9,740 — 48 Issuance costs on subordinated debt ( 9 ) — Net purchase of treasury stock ( 4,258 ) ( 12,961 ) Dividends paid ( 5,614 ) ( 10,930 ) Share based awards and exercises 309 754 Net cash provided by financing activities $ 163,637 $ 323,388 Net change in cash and cash equivalents 18,306 14,911 Cash and cash equivalents at beginning of period 38,391 23,480 Cash and cash equivalents at end of period $ 56,697 $ 38,391 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 59,712 $ 16,235 Income taxes 3,104 5,365 Transfers from loans held for sale to loans held for investment 351 3,147 Transfers from loans held for investment to loans held for sale 21,800 — Non-cash transfers from loans receivable to OREO — 1,703 Transfer of securities from AFS to HTM — 23,655 The accompanying notes are an integral part of these consolidated financial statements. 49 MERIDIAN CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Summary of Significant Accounting Policies Nature of Operations Meridian Corporation (“Meridian” or the “Corporation”) is a bank holding company engaged in banking activities through its wholly-owned subsidiary, Meridian Bank (the “Bank”), a full-service, state-chartered commercial bank with offices in the Delaware Valley tri-state market, which includes Pennsylvania, New Jersey and Delaware, as well as the Central Maryland market area, and Florida. We have a financial services business model with significant noninterest income streams from mortgage banking, SBA lending and wealth management services. We provide services to small and middle market businesses, professionals and retail customers throughout our market area. We have a modern, progressive, consultative approach to creating innovative solutions for our customers. We are technology driven, with a culture that incorporates significant use of customer preferred alternative delivery channels, such as mobile banking, remote deposit capture and bank-to-bank ACH. Our ‘Meridian everywhere’ philosophy of community presence, along with our strategic business footprint, allows us to provide the high degree of service, convenience and products our customers need to achieve their financial objectives. We provide this service through three principal business line distribution channels, described further below. The Corporation operates in highly competitive market areas that includes local, regional, and national banks as competitors along with savings banks, credit unions, fintech companies, insurance companies, trust companies and registered investment advisors. The Corporation and its subsidiaries are regulated by many regulatory agencies including the SEC, FDIC, the FRB and the PDBS. The Bank was incorporated on March 16, 2004 under the laws of the Commonwealth of Pennsylvania and is a Pennsylvania state-chartered bank. The Bank commenced operations on July 8, 2004 and is a full-service bank providing personal and business lending and deposit services through 6 full-service banking offices in Pennsylvania, 6 mortgage loan production offices throughout the Delaware Valley, and 4 mortgage loan production offices in Maryland, and a lending office in Florida. The Bank and Corporation are headquartered in Malvern, Pennsylvania, located in the western suburbs of Philadelphia. Basis of Presentation The accounting policies of the Corporation conform to U.S. GAAP. The consolidated financial statements include accounts of the Corporation and its wholly owned subsidiary, the Bank, and the wholly owned subsidiaries of the Bank: Meridian Land Settlement Services LLC (“MLSS”); APEX Realty LLC (“APEX”); Meridian Wealth Partners LLC (“MWP”); and Meridian Equipment Finance LLC (“MEF”). All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year’s presentation. Reclassifications had no effect on prior year net income or total stockholders’ equity. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant Concentrations of Credit Risk Most of the Corporation’s activities are with customers located in the Delaware Valley tri-state market and the central Maryland market area. Note 4 discusses the types of securities that the Corporation invests in, and Note 5 discusses types of lending that the Corporation engages in. Although the Corporation has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy. The Corporation does not have any significant concentrations to any one industry or customer, however there is significant concentration of commercial real estate-backed loans, amounting to 39 % and 34 % of total loans held for investment, as of December 31, 2023 and December 31, 2022, respectively. Presentation of Cash Flows For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased or sold for one day periods. The FRB removed cash minimum reserve requirements in March 2020. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and the federal funds purchased and repurchased agreements. 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. 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. 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. 50 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 December 31, 2023 and 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. 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 - Credit 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 4. Loans and Other Finance Receivables Loans and other finance receivables that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for credit losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Corporation generally amortizes these amounts over the contractual life of the loan. 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, are held for the foreseeable future or until maturity or payoff, are carried at fair value. Past Due and Nonaccrual Loans Past due loans and leases are defined as loans and leases contractually past due 30 - 89 days as to principal or interest payments but which remain in accrual status, or loans delinquent 90 days or more but 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. A loan that is not past due more than 90 days could be classified as nonaccrual if management comes to the conclusion that we will not be in a position to collect all principal and interest. 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 it is determined 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. 51 Allowance for Credit Losses - Loans and Leases On January 1, 2023, the Corporation 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. Prior to January 1, 2023, the Corporation calculated the Allowance based on a probable incurred credit loss model. The Corporation now establishes an ACL in accordance with Topic 326. The ACL includes quantitative and qualitative factors that comprise management's current estimate of expected credit losses, including 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). Commercial mortgage – Our commercial real estate loans are secured by real estate that is both owner-occupied and investor owned. 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. Repayment of commercial real estate loans depends on the cash flow of the borrower and the net operating income of the property, the borrower’s profitability, and the value of the underlying property. Of primary concern in commercial real estate lending is the borrower’s creditworthiness and the cash flows from the property. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. Commercial real estate is also subject to adverse market conditions that cause a decrease in market value or lease rates, obsolescence in location or function and market conditions associated with oversupply of units in a specific region. Commercial and Industrial – We provide a variety of variable and fixed rate commercial business loans, lines of credit, and other finance receivables. These credit facilities are made to small and medium-sized manufacturers and wholesale, retail and service-related businesses. Commercial business loans generally include lines of credit and term loans with a maturity of 5 years or less. The primary source of repayment for commercial business loans and other finance receivables is generally operating cash flows of the business and may also include collateralization of inventory, accounts receivable, equipment and/or personal guarantees. As a result, the availability of funds for repayment may depend substantially on the success of the business itself. Furthermore, any collateral may depreciate over time, may be difficult to appraise, and may fluctuate in value. Construction – Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, additional funds may be required to be advanced in excess of the amount originally committed to permit completion of the building. Leases – Meridian Equipment Finance specializes in small ticket equipment leases for small and mid-sized businesses nationally and through a broad range of industries. The Bank’s credit risk generally results from the potential default of borrowers which may be driven by customer specific or broader industry related conditions. Residential mortgage – Residential loans held in portfolio are primarily secured by single-family homes located in our market areas. Residential loans are generally made on the basis of the borrower’s ability to make repayment from employment income or other income, and are secured by real property whose value tends to be more easily ascertainable. Repayment of single-family loans are subject to adverse employment conditions in the local economy leading to increased default rates and decreased market values, including from oversupply in a geographic area. In general, these loans depend on the borrower’s continuing financial stability and, therefore, are likely to be adversely affected by various factors, including job loss, divorce, illness, or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans. Consumer, including home equity – Our consumer-lending department principally originates home equity based products for our clients and prospects. These loans typically fund completely at closing. Additional products include smaller dollar personal loans and our student loan refinance product, designed to provide additional flexibility in repayment terms desired in the marketplace. Most consumer loans are originated in Meridian’s primary market and surrounding areas. The largest component of Meridian’s consumer loan portfolio consists of fixed rate home equity loans and variable rate home equity lines of credit. Substantially all home equity loans and lines of credit are secured by junior lien mortgages on principal residences. The Bank will lend amounts, which, together with all prior liens, typically may be up to 90 % of the appraised value of the property securing the loan. Home equity term loans may have maximum terms up to 20 years, while home equity lines of credit generally have maximum terms of 15 years . Credit risk on such loans is mitigated through prudent underwriting standards, including evaluation of the creditworthiness of the borrower through credit scores and debt-to-income ratios and, if secured, the collateral value of the assets 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 52 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 the Corporation’s historical loss experience and peer loss rate data, 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. Management uses a third-party economic forecast to modify the calculated historical loss rates of the portfolio segments. The Corporation's 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. The Corporation's current look-back period is 36 quarters which helps 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 that collection of all principal and interest due according to their contractual terms is not likely, 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 the model can add to or subtract from quantitative reserves. 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 6. Mortgage Banking Activities and Mortgage Loans Held for Sale The Corporation’s mortgage banking division operates 6 offices in the tri-state area of Pennsylvania, Delaware and New Jersey and another 4 offices in Maryland. The mortgage banking division originates conventional mortgages, FHA, VA, USDA, and other state insured mortgages. The loans are generally sold to various investors in the secondary market. Mortgage loans originated by the Corporation and intended for sale in the secondary market to permanent investors are classified as mortgage loans held for sale on the balance sheet as the Corporation has elected to measure loans held for sale at fair value. Fair value is based on outstanding investor commitments or, in the absence of such commitments, on current investor yield requirements based on third party models. Gains and losses on sales of these loans, as well as loan origination costs, are recorded as a component of non-interest income in the consolidated statements of income. The Corporation’s current practice is to sell residential mortgage loans and retain the servicing rights, as discussed further below. Interest on loans held for sale is credited to income based on the principal amounts outstanding. The Corporation enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (interest rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Time 53 elapsing between the issuance of a loan commitment and closing and sale of the loan generally ranges from 30 days to 120 days. The Corporation protects itself from changes in interest rates through the use of best efforts forward sale contracts, whereby the Corporation commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. The Corporation may also commit to loan sales through a mandatory sales channel which are economically hedged by the future sale of mortgage-backed securities to third-party counterparties to mitigate the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. By entering into best efforts commitments and economically hedging the mandatory commitments, the Corporation limits its exposure to loss and its realization of significant gains related to its rate lock commitments due to changes in interest rates. The Corporation utilizes a third-party model to determine the fair value of rate lock commitments or forward sale contracts. This model uses investor quotes while taking into consideration the probability that the rate lock commitments will close. Net derivative assets and liabilities are recorded within other assets or other liabilities, respectively, on the consolidated balance sheets, with changes in fair value during the period recorded within net change in the fair value of derivative instruments on the consolidated statements of income. Loan Servicing Rights The Corporation sells substantially all of the residential mortgage loans originated for sale in the secondary market; however, the Corporation may retain the servicing rights related to some of these loans. A fee, usually based on a percentage of the outstanding principal balance of the loan, is received in return for these services. MSRs are recognized when a loan’s servicing rights are retained upon sale of a loan. When mortgage loans are sold with servicing retained, MSRs are initially recorded at fair value with the income effect recorded in non-interest income. The Corporation also sells 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. 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. These servicing assets amortize in proportion to, and over the period of, the estimated future net servicing life of the underlying loans. The 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 servicing assets. Other Real Estate Owned OREO is comprised of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure. The Corporation acquires OREO through the wholly owned subsidiary of the Bank, Apex Realty. OREO is recorded at the lower of cost or fair value, or the loan amount net of estimated selling costs, at the date of foreclosure. The cost basis of OREO is its recorded value at the time of acquisition. After acquisition, valuations are periodically performed by management and subsequent changes in the valuation allowance are charged to OREO expense. Revenues, such as rental income, and holding expenses, as applicable, are included in other income and other expenses, respectively. The Corporation had one property of $ 1.7 million in OREO at December 31, 2023 and December 31, 2022. Restricted Investment in Bank Stock Restricted bank stock is principally comprised of stock in the FHLB. Federal law requires a member institution of the FHLB to hold stock according to a predetermined formula. As of December 31, 2023, and 2022, the Corporation had an investment of $ 8.1 million and $ 6.9 million, respectively, related to the FHLB stock. Also included in restricted stock is secondary stock from a correspondent bank in the amount of $ 50 thousand as of December 31, 2023 and 2022. All restricted stock is carried at cost. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) significance of the decline in net assets of the banks as compared to the capital stock amount and the length of time this situation has persisted, (2) commitments by the banks to make payments required by law or regulation and the level of such payments in relation to the operating performance of the banks, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the banks. Management believes no impairment charge is necessary related to these bank restricted stocks as of December 31, 2023 or 2022. Transfers of Financial Assets Transfers of financial assets, including loan and loan participation sales, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Bank Premises and Equipment Bank premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 12 to 40 years Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years and 3 to 5 years for computer software and hardware, respectively. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. The costs of maintenance and repairs are expensed as incurred; while major replacements, improvements and additions are capitalized. 54 Lease Liabilities and Right of Use Assets The Corporation is obligated under non-cancelable operating leases for premises for various retail branch locations and loan production offices. The Corporation determines if an arrangement is a lease at inception by assessing whether a contract contains a right to control an identified asset for a period of time in exchange for consideration. Operating leases are included in operating lease right-of-use assets and operating lease liabilities in the consolidated balance sheets. For purposes of calculating operating lease liabilities, lease terms include options to extend or terminate the lease when it is reasonably certain that the Corporation will exercise that option and begins when the Corporation has control and possession of the leased property, which may be before rental payments are due under the lease. Right-of use assets and operating lease liabilities are recognized based on the present value of lease payments, discounted using the Corporation's incremental borrowing rate, over the lease term at the possession date. The Corporation determines its incremental borrowing rate using publicly available information available for debt issuers with similar credit ratings as the Bank, as the substantial majority of the Corporation's leases are related to properties of the Bank. The Corporation separately accounts for lease and non-lease components such as property taxes, insurance, and maintenance costs. Operating lease expense for the Corporation's leases, which generally have escalating rental payments over the term of the lease, is recognized on a straight-line basis over the lease term. At December 31, 2023, the Corporation's leases have remaining terms of 2 months to 12 years. Bank-Owned Life Insurance The Corporation invests in BOLI as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Corporation on a chosen group of employees. The Corporation is the owner and beneficiary of the policies. This life insurance investment is carried at the cash surrender value of the underlying policies. Earnings from the increase in cash surrender value of the policies are included in non-interest income on the consolidated statements of income. Advertising Costs The Corporation follows the policy of charging the costs of advertising to expense as incurred. Employee Benefit Plans The Corporation has a 401(k) Plan (the Plan) and an ESOP. All employees are eligible to participate in the Plan and ESOP after they have attained the age of 21 and have also completed three months consecutively of service. Employees must participate in the Plan to be eligible for participation in the ESOP. The employees may contribute to the Plan up to the maximum percentage allowable by law of their compensation. The Corporation may make a discretionary matching contribution to the Plan and the ESOP. Full vesting in the Corporation’s contribution to the Plan and ESOP is over a three-year period. The Corporation recorded expense for the Plan and ESOP of $ 1.0 million and $ 858 thousand, respectively for the year ended December 31, 2023 and $ 1.0 million and $ 1.1 million, respectively for the year ended December 31, 2022. The expense recorded by the Corporation for the ESOP for the year ended December 31, 2023 included a $ 536 thousand employer contribution, in addition to $ 523 thousand in stock compensation related expense. The expense recorded by the Corporation for the ESOP for the year ended December 31, 2022 included a $ 671 thousand employer contribution, in addition to $ 426 thousand in stock compensation related expense. During the year ended December 31, 2023, 81,316 shares were purchased by the ESOP, while for the year ended December 31, 2022, 0 shares were purchased by the ESOP. Shares in the ESOP that are committed to be released to employees are treated as outstanding shares in the Corporation’s computation of earnings per share. As of December 31, 2023, 93,296 of these common shares were released to the ESOP leaving 173,264 unallocated shares. There were 610,735 shares in the ESOP as of December 31, 2023. Shares in the ESOP would be impacted by any stock dividends and stock splits in the same manner as all other outstanding common shares of the Corporation. Income Taxes Deferred income taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating losses and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and net operating loss carry-forwards and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The Corporation follows accounting guidance related to accounting for uncertainty in income taxes. Under the “more likely than not” threshold guidelines, the Corporation believes no significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-recognition of an existing tax benefit. As of December 31, 2023, and 2022, the Corporation had no material unrecognized tax benefits or accrued interest and penalties. The Corporation’s policy is to account for interest as a component of interest expense and penalties as a component of other expense. The Corporation is no longer subject to examination by federal, state and local taxing authorities for years before January 1, 2020. 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 55 share. All share and per share amounts reported in the consolidated financial statements have been adjusted to reflect the two -for-one stock split effective February 28, 2023. Stock Compensation Plans Stock compensation accounting guidance requires that the compensation cost relating to share-based payment transactions be recognized in the consolidated financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options and restricted share plans. The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Scholes model is used to estimate the fair value of stock options, while the market price of the Corporation’s common stock at the date of grant is used for restricted stock awards. All stock compensation issued has been adjusted for the two -for-one stock split effective February 28, 2023, as discussed further in Note 13. Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. The components of other comprehensive income (loss) for the years ended December 31, 2023 and 2022 consist of unrealized holding gains and (losses) arising during the year on available-for-sale securities, unrealized gains and (losses) arising during the year on interest rate swaps used in cash flow hedges. Off-Balance Sheet Financial Instruments In the ordinary course of business, the Corporation has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the balance sheet when they are funded. 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 for the periods ended December 31, 2023, and in other non-interest expense for periods prior to the adoption of ASU-2016-13 on January 1, 2023. The allowance for credit losses for off-balance sheet exposures was $ 1.0 million and $ 173 thousand as of December 31, 2023 and December 31, 2022, respectively. Derivative Financial Instruments The Corporation recognizes all derivative financial instruments related to its mortgage banking activities on its balance sheet at fair value. The Corporation utilizes investor quotes to determine the fair value of interest rate lock commitment derivatives and market pricing to determine the fair value of forward security purchase commitment derivatives. All changes in fair value of derivative instruments are recognized in earnings. The Corporation enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. The interest rate swaps are recognized on the Corporation’s balance sheet at fair value. Under these agreements, the Corporation originates variable-rate loans with customers in addition to interest rate swap agreements, which serve to effectively swap the customers’ variable-rate loans into fixed-rate loans. The Corporation then enters into corresponding swap agreements with swap dealer counterparties to economically hedge its exposure on the variable and fixed components of the customer agreements. The interest rate swaps with both the customers and third parties are not designated as hedges under ASC 815 and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by ASC 820. Cash flow hedges are used to mitigate the variability in the cash flows of borrowings, caused by interest rate fluctuations. The changes in the fair value of cash flow hedges are initially reported in other comprehensive income. Amounts are subsequently reclassified from accumulated other comprehensive income to earnings when the hedged transactions occur, specifically within the same line item as the hedged item. 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 stock. Diluted earnings per common share takes into account the potential dilution that would occur if in the-money stock options were exercised and 56 converted into shares of common stock and restricted stock awards and performance-based stock awards were vested. Proceeds assumed to have been received on options exercises are assumed to be used to purchase shares of the Corporation’s common stock at the average market price during the period, as required by the treasury stock method of accounting. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive. Revenue Recognition The Corporation recognizes all sources of income on the accrual method, with the exception of nonaccrual loans and leases. In addition to lending and related activities, the Corporation offers various services that generate revenue, certain of which are in the scope of FASB ASU 2014-09 (Topic 606), “Revenue for Contracts with Customers” (ASC 606) is recognized within non-interest income and include wealth management fees, and transaction based and fees. Revenue is recognized when the transactions occur or as services as performed over primarily monthly or quarterly periods. Payment is typically received in the period the transactions occur. Fees may be fixed or, where applicable based on a percentage of transaction size. Wealth management income for the years ended December 31, 2023 and 2022 is $ 4.9 million and $ 4.7 million. Within other non-interest income is $ 750 thousand and $ 1.1 million for the years ended December 31, 2023 and 2022, respectively, which are in the scope of ASC 606. These amounts include wire transfer fees, ATM/debit card commissions, title fee income. The Corporation earns wealth management fee income from investment advisory services provided to individual and 401k customers. Fees that are determined based on the market value of the assets held in their accounts are generally billed quarterly, in advance, based on the market value of assets at the end of the previous billing period. Other related services that are based on a fixed fee schedule are recognized when the services are rendered. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e. the trade date. Included in other assets on the balance sheet is a receivable for wealth management fees that have been earned but not yet collected. The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance. Other sources of the Corporation’s non-interest income that are not within the scope of ASC 606 include mortgage banking income, SBA loan income, net changes in fair values, hedging gains and losses, earnings on investments in life insurance, gains or losses on sale of investment securities, and dividends on FHLB stock. Loss Contingencies Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe such matters will have a material effect on the financial statements. Operating Segments While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis. The Corporation has identified three segments: a banking segment, a wealth management segment and a mortgage banking segment, as more fully disclosed in Note 20 - Segments. Fair Value of Financial Instruments Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 18 - Fair Value Measurements and Disclosures. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates. Recent Accounting Pronouncements As an “emerging growth company” under the JOBS Act until December 31, 2022, the Bank was permitted an extended transition period for complying with new or revised accounting standards affecting public companies up to this date. We were classified as an emerging growth company until the end of the fiscal year following the fifth anniversary of the completion of our initial public offering, which took place on November 7, 2022. While an emerging growth company we had elected to take advantage of this extended transition period, which means that the financial statements included herein, as well as any financial statements that we filed in the past, are not subject to all new or revised accounting standards generally applicable to public companies for the transition period. 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, 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. 57 The Corporation 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 small ticket equipment leases and 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 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 Effective as of December 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 58 (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. The Corporation does not expect this to have a material impact on our consolidated financial statements. FASB ASU 2023-02, "Investments Equity Method and Joint Ventures (Topic 323) Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method" In March 2023, the FASB issued ASU 2023-02, Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method to allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits. If certain conditions are met, a reporting entity may elect to account for its tax equity investments by using the proportional amortization method regardless of the program from which it receives income tax credits, instead of only LIHTC structures. This amendment also eliminates certain LIHTC specific guidance aligning the accounting with other equity investments in tax credit structures. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Corporation does not expect this to have a material impact on our consolidated financial statements. FASB ASU 2023-07, “Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures” The amendments in this update improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analyses. The amendments in this update also do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Corporation is currently evaluating the impact on its results of operation, financial position, liquidity, and disclosures. FAS ASU 2023-09, “Income Taxes (Topic 740) Improvements to Income Tax Disclosures” The amendments in this update address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. This update also includes certain other amendments to improve the effectiveness of income tax disclosures. The amendments in this update are effective for fiscal years beginning after December 15, 2024 and are to be applied on a prospective basis. Early adoption is permitted.The Corporation is currently evaluating the impact on its disclosures. (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; 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. All share and per share amounts have been adjusted to reflect the two -for-one stock split effective February 28, 2023. Year Ended December 31, (dollars in thousands, except per share data) 2023 2022 Numerator for earnings per share: Net income available to common stockholders $ 13,243 $ 21,829 Denominators for earnings per share: Weighted average shares outstanding 11,289 11,992 Average unearned ESOP shares ( 174 ) ( 200 ) Basic weighted average shares outstanding 11,115 11,792 Dilutive effects of assumed exercises of stock options 144 268 Dilutive effects of SERP shares 128 144 Diluted weighted average shares outstanding 11,387 12,204 Basic earnings per share $ 1.19 $ 1.85 Diluted earnings per share $ 1.16 $ 1.79 Antidilutive shares excluded from computation of average dilutive earnings per share 489 464 59 (3) Goodwill and Other Intangibles The Corporation’s goodwill and intangible assets are detailed below: (dollars in thousands) December 31, 2022 Amortization Expense December 31, 2023 Amortization Period (in years) Goodwill $ 899 $ — $ 899 Indefinite Intangible assets - customer relationships 266 — 266 Indefinite Intangible assets - non competition agreements 2,909 ( 204 ) 2,705 20 Total Intangible Assets $ 3,175 $ ( 204 ) $ 2,971 Total $ 4,074 $ ( 204 ) $ 3,870 Accumulated amortization of intangible assets was $ 1.6 million and $ 1.4 million as of December 31, 2023 and 2022, respectively. In accordance with ASC Topic 350, the Corporation performed a qualitative assessment of goodwill and identifiable intangible assets as of December 31, 2023 and determined it was more likely than not that the fair value of the Corporation was more than its carrying amount. At December 31, 2023, the schedule of future intangible asset amortization is as follows (in thousands): 2024 $ 204 2025 204 2026 204 2027 204 2028 204 Thereafter 1,685 Total $ 2,705 (4) Securities 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 Allowance for Credit Losses Fair value # of Securities in unrealized loss position Securities available-for-sale: U.S. asset backed securities $ 17,012 $ 25 $ ( 213 ) $ — $ 16,824 11 U.S. government agency MBS 22,750 364 ( 480 ) — 22,634 14 U.S. government agency CMO 21,850 — ( 2,277 ) — 19,573 30 State and municipal securities 40,093 — ( 3,877 ) — 36,216 31 U.S. Treasuries 32,982 — ( 2,560 ) — 30,422 25 Non-U.S. government agency CMO 13,605 102 ( 552 ) — 13,155 9 Corporate bonds 8,200 — ( 1,005 ) — 7,195 13 Total securities available-for-sale $ 156,492 $ 491 $ ( 10,964 ) $ — $ 146,019 133 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 60 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 Amortized cost Gross unrecognized gains Gross unrecognized losses Fair value # of Securities in unrecognized loss position Securities held-to-maturity: State and municipal securities $ 37,479 $ — $ ( 4,394 ) $ 33,085 25 Total securities held-to-maturity $ 37,479 $ — $ ( 4,394 ) $ 33,085 25 Although the Corporation’s investment portfolio overall is in a net unrealized loss position at December 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. 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 year ended December 31, 2023, we had no significant ACL or provision expense and no charge-offs or recoveries on AFS or HTM securities. 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: December 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 $ 4,981 $ ( 25 ) $ 6,195 $ ( 188 ) $ 11,176 $ ( 213 ) U.S. government agency MBS 4,864 ( 35 ) 8,170 ( 445 ) 13,034 ( 480 ) U.S. government agency CMO 2,687 ( 36 ) 16,886 ( 2,241 ) 19,573 ( 2,277 ) State and municipal securities — — 36,216 ( 3,877 ) 36,216 ( 3,877 ) U.S. Treasuries — — 30,422 ( 2,560 ) 30,422 ( 2,560 ) Non-U.S. government agency CMO 1,127 ( 4 ) 6,065 ( 548 ) 7,192 ( 552 ) Corporate bonds 907 ( 93 ) 6,288 ( 912 ) 7,195 ( 1,005 ) Total securities available-for-sale $ 14,566 $ ( 193 ) $ 110,242 $ ( 10,771 ) $ 124,808 $ ( 10,964 ) Less than 12 Months 12 Months or more Total Fair value Unrecognized losses Fair value Unrecognized losses Fair value Unrecognized losses Securities held-to-maturity: State and municipal securities $ 1,021 $ ( 6 ) $ 29,404 $ ( 3,097 ) $ 30,425 $ ( 3,103 ) Total securities held-to-maturity $ 1,021 $ ( 6 ) $ 29,404 $ ( 3,097 ) $ 30,425 $ ( 3,103 ) 61 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 ) Less than 12 Months 12 Months or more Total Fair value Unrecognized losses Fair value Unrecognized losses Fair value Unrecognized losses 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 ) 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. December 31, 2023 Available-for-sale Held-to-maturity (dollars in thousands) Amortized cost Fair value Amortized cost Fair value Due in one year or less $ — $ — $ — $ — Due after one year through five years 32,982 30,423 3,911 3,797 Due after five years through ten years 16,746 15,208 4,332 3,676 Due after ten years 48,559 45,026 27,538 25,257 Subtotal 98,287 90,657 35,781 32,730 Mortgage-related securities 58,205 55,362 — — Total $ 156,492 $ 146,019 $ 35,781 $ 32,730 The following table presents the gross gain on sale of investment securities available for sale on the dates indicated: Year Ended December 31, (dollars in thousands) 2023 2022 Proceeds from sale of investment securities $ 13,514 $ — Gross loss on sale of available for sale investments 58 — Pledged Securities As of December 31, 2023 and December 31, 2022, securities having an amortized cost of $ 60.1 million and $ 89.0 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. (5) 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) December 31, 2023 December 31, 2022 Real estate loans: Commercial mortgage $ 737,863 $ 565,400 Home equity lines and loans 76,287 59,399 Residential mortgage 260,604 221,837 Construction 246,440 271,955 62 Total real estate loans 1,321,194 1,118,591 Commercial and industrial 302,891 341,378 Small business loans 142,342 136,155 Consumer 389 488 Leases, net 121,632 138,986 Loans and other finance receivables, net of fees and costs $ 1,888,448 $ 1,735,598 Balances included in loans, net of fees and costs: Residential mortgage real estate loans accounted under fair value option, at fair value $ 13,726 $ 14,502 Residential mortgage real estate loans accounted under fair value option, at amortized cost 16,198 16,930 Unearned lease income included in leases, net ( 19,210 ) ( 25,715 ) Unamortized net deferred loan origination costs 7,358 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 in prior years 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, net of fees and costs at the dates indicated: December 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, net of fees and costs % Delinquent Commercial mortgage $ 571 $ — $ 571 $ 737,292 $ 737,863 $ — $ 737,863 0.08 % Home equity lines and loans 566 — 566 74,684 75,250 1,037 76,287 2.10 Residential mortgage (1) 1,103 — 1,103 254,965 256,068 4,536 260,604 2.16 Construction — — — 245,234 245,234 1,206 246,440 0.49 Commercial and industrial — — — 287,478 287,478 15,413 302,891 5.09 Small business loans 1,499 — 1,499 131,403 132,902 9,440 142,342 7.69 Consumer — — — 389 389 — 389 — Leases, net 2,197 — 2,197 117,304 119,501 2,131 121,632 3.56 % Total $ 5,936 $ — $ 5,936 $ 1,848,749 $ 1,854,685 $ 33,763 $ 1,888,448 2.10 % (1) Includes $ 13.7 million of loans at fair value of which $ 12.9 million are current, $ 0 are 30-89 days past due, and $ 786 thousand 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, net of fees and costs % 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 $ 14.5 million of loans at fair value of which $ 13.8 million are current, $ 184 thousand are 30-89 days past due and $ 558 thousand are nonaccrual. 63 Foreclosed and Repossessed Assets At December 31, 2023, there were 4 consumer mortgage loans totaling $ 937 thousand, 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. 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, New Jersey, Maryland, and Florida, 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, net of fees and costs as of December 31, 2023. As of this date here were no loans 90 days or more past due and still accruing. December 31, 2023 (dollars in thousands) Nonaccrual Without ACL Nonaccrual With ACL Total Nonaccrual Home equity lines and loans $ 1,037 $ — $ 1,037 Residential mortgage 4,536 — 4,536 Construction 1,206 — 1,206 Commercial and industrial 3,343 12,070 15,413 Small business loans 3,607 5,833 9,440 Leases, net 2,131 — 2,131 Total $ 15,860 $ 17,903 $ 33,763 Collateral-dependent Loans The following table presents the amortized cost basis of non-accruing collateral-dependent loans by class of loans and type of collateral identified as of December 31, 2023 under the current expected credit loss model: December 31, 2023 (dollars in thousands) Real Estate Equipment and Other Total Home equity lines and loans $ 1,037 $ — $ 1,037 Residential mortgage 4,536 — 4,536 Construction 1,206 — 1,206 Commercial and industrial 1,890 13,523 15,413 Small business loans 6,320 3,120 9,440 Leases, net — 2,131 2,131 Total $ 14,989 $ 18,774 $ 33,763 (6) Allowance for Credit Losses (the Allowance) The ACL is maintained at a level considered adequate to provide for estimated expected credit losses within the loan portfolio over the contractual life of an instrument that considers our historical loss experience, current conditions and forecasts of future economic conditions as of the balance sheet date. 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. 64 Roll-Forward of Allowance by Portfolio Segment The following tables provide the activity of our allowance for credit losses for the year ended December 31, 2023 under the CECL model in accordance with ASC 326 (as adopted on January 1, 2023): Year Ended December 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 ) $ — $ — $ 806 $ 4,375 Home equity lines and loans 188 439 ( 87 ) 5 453 998 Residential mortgage 948 17 — — 55 1,020 Construction 3,075 ( 1,763 ) — — ( 827 ) 485 Commercial and industrial 4,012 ( 1,023 ) ( 266 ) 57 1,738 4,518 Small business loans 4,909 1,110 ( 1,488 ) 5 2,469 7,005 Consumer 3 ( 3 ) ( 2 ) 4 ( 2 ) — Leases 1,598 3,345 ( 4,033 ) 254 2,542 3,706 Total $ 18,828 $ 1,596 $ ( 5,876 ) $ 325 $ 7,234 $ 22,107 Year Ended December 31, 2022 (dollars in thousands) Beginning Balance Charge-offs Recoveries Provision (Credit) Ending Balance Commercial mortgage $ 4,950 $ — $ — $ ( 855 ) $ 4,095 Home equity lines and loans 224 ( 12 ) 43 ( 67 ) 188 Residential mortgage 283 — 2 663 948 Construction 2,042 — — 1,033 3,075 Commercial and industrial 6,533 — 97 ( 2,618 ) 4,012 Small business loans 3,737 — — 1,172 4,909 Consumer 3 — 4 ( 4 ) 3 Leases 986 ( 2,616 ) 64 3,164 1,598 Total $ 18,758 $ ( 2,628 ) $ 210 $ 2,488 $ 18,828 Reconciliation of Provision for Credit Losses The following table provides a reconciliation of the provision for credit losses on the consolidated statements of income between the funded and unfunded components at the dates indicated: Year Ended December 31, (dollars in thousands) 2023 2022 Provision for credit losses - funded $ 7,234 $ 2,488 Recovery of provision for credit losses - unfunded ( 419 ) — Total provision for credit losses $ 6,815 $ 2,488 65 Allowance Allocated by Portfolio Segment The following tables detail the allocation of the ACL and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases at the dates indicated: December 31, 2023 Allowance for credit losses Carrying value of loans and leases (dollars in thousands) Individually evaluated Collectively evaluated Total Individually evaluated Collectively evaluated Total Commercial mortgage $ — $ 4,375 $ 4,375 $ — $ 737,863 $ 737,863 Home equity lines and loans — 998 998 1,037 75,250 76,287 Residential mortgage — 1,020 1,020 3,750 243,128 246,878 Construction — 485 485 1,206 245,234 246,440 Commercial and industrial 3,691 827 4,518 15,413 287,478 302,891 Small business loans 2,805 4,200 7,005 9,440 132,902 142,342 Consumer — — — — 389 389 Leases, net — 3,706 3,706 2,131 119,501 121,632 Total (1) $ 6,496 $ 15,611 $ 22,107 $ 32,977 $ 1,841,745 $ 1,874,722 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: 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 — 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. • 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. 66 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: December 31, 2023 Revolving Loans Converted to Term Loans Revolving Loans Total Term Loans 2023 2022 2021 2020 2019 Prior Commercial mortgage Pass/Watch $ 106,341 $ 160,302 $ 158,647 $ 97,535 $ 56,382 $ 133,349 $ 511 $ 423 $ 713,490 Special Mention — — — 4,425 4,341 9,975 667 — 19,408 Substandard 200 — 571 — 1,635 2,233 — 326 4,965 Doubtful — — — — — — — — — Total $ 106,541 $ 160,302 $ 159,218 $ 101,960 $ 62,358 $ 145,557 $ 1,178 $ 749 $ 737,863 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Construction Pass/Watch $ 67,776 $ 88,737 $ 21,793 $ 27,336 $ 2,307 $ 2,093 $ 123 $ 25,976 $ 236,141 Special Mention — — 1,329 — 511 4,329 — 2,924 9,093 Substandard — — — — — 1,206 — — 1,206 Doubtful — — — — — — — — — Total $ 67,776 $ 88,737 $ 23,122 $ 27,336 $ 2,818 $ 7,628 $ 123 $ 28,900 $ 246,440 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — $ — Commercial and industrial Pass/Watch $ 26,314 $ 38,748 $ 24,523 $ 8,449 $ 4,148 $ 33,726 $ — $ 131,304 $ 267,212 Special Mention 500 9 — — — 1,361 — 6,440 8,310 Substandard — — 2,906 — 300 9,469 — 14,694 27,369 Doubtful — — — — — — — — — Total $ 26,814 $ 38,757 $ 27,429 $ 8,449 $ 4,448 $ 44,556 $ — $ 152,438 $ 302,891 Current period gross charge-offs $ ( 209 ) $ ( 55 ) $ — $ ( 2 ) $ — $ — $ — $ — $ ( 266 ) Small business loans Pass/Watch $ 35,764 $ 26,621 $ 37,278 $ 11,687 $ 6,672 $ 920 $ — $ 12,507 $ 131,449 Special Mention — — — 909 — — — 314 1,223 Substandard 49 1,523 5,090 2,122 — — — 886 9,670 Doubtful — — — — — — — — — Total $ 35,813 $ 28,144 $ 42,368 $ 14,718 $ 6,672 $ 920 $ — $ 13,707 $ 142,342 Current period gross charge-offs $ — $ — $ — $ ( 11 ) $ ( 912 ) $ — $ — $ ( 565 ) $ ( 1,488 ) Total by risk rating Pass/Watch $ 236,195 $ 314,408 $ 242,241 $ 145,007 $ 69,509 $ 170,088 $ 634 $ 170,210 1,348,292 Special Mention 500 9 1,329 5,334 4,852 15,665 667 9,678 38,034 Substandard 249 1,523 8,567 2,122 1,935 12,908 — 15,906 43,210 Doubtful — — — — — — — — — Total $ 236,944 $ 315,940 $ 252,137 $ 152,463 $ 76,296 $ 198,661 $ 1,301 $ 195,794 $ 1,429,536 Total current period gross charge-offs $ ( 209 ) $ ( 55 ) $ — $ ( 13 ) $ ( 912 ) $ — $ — $ ( 565 ) $ ( 1,754 ) The Corporation had no loans with a risk rating of Doubtful included within recorded investment in loans and leases held for investment at December 31, 2023. 67 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, 2023 Revolving Loans Total Term Loans 2023 2022 2021 2020 2019 Prior Home equity lines and loans Performing $ 343 $ 795 $ 314 $ 352 $ 2,191 $ 2,295 $ 68,600 $ 74,890 Nonperforming — — — — — — 1,397 1,397 Total $ 343 $ 795 $ 314 $ 352 0 $ 2,191 $ 2,295 $ 69,997 $ 76,287 Current period gross charge-offs $ — $ — $ — $ — $ ( 33 ) $ — $ ( 54 ) $ ( 87 ) Residential mortgage (2) Performing $ 48,576 $ 154,219 $ 22,237 $ 6,260 $ 456 $ 11,380 $ — $ 243,128 Nonperforming — 1,350 — 1,043 — 1,357 — 3,750 Total $ 48,576 $ 155,569 $ 22,237 $ 7,303 $ 456 $ 12,737 $ — $ 246,878 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ — $ — Consumer Performing $ 39 $ 35 $ — $ — $ 32 $ 234 $ 49 $ 389 Nonperforming — — — — — — — — Total $ 39 $ 35 $ — $ — $ 32 $ 234 $ 49 $ 389 Current period gross charge-offs $ — $ — $ — $ — $ — $ — $ ( 2 ) $ ( 2 ) Leases, net Performing $ 23,054 $ 55,940 $ 30,876 $ 9,718 $ — $ — $ — $ 119,588 Nonperforming 263 1,194 368 219 — — — 2,044 Total $ 23,317 $ 57,134 $ 31,244 $ 9,937 $ — $ — $ — $ 121,632 Current period gross charge-offs $ ( 128 ) $ ( 2,165 ) $ ( 1,450 ) $ ( 290 ) $ — $ — $ — $ ( 4,033 ) Total by Payment Performance Performing $ 72,012 $ 210,989 $ 53,427 16,330 $ 2,679 $ 13,909 $ 68,649 $ 437,995 Nonperforming 263 2,544 368 1,262 — 1,357 1,397 7,191 Total $ 72,275 $ 213,533 $ 53,795 $ 17,592 $ 2,679 $ 15,266 $ 70,046 $ 445,186 Total current period gross charge-offs $ ( 128 ) $ ( 2,165 ) $ ( 1,450 ) $ ( 290 ) $ ( 33 ) $ — $ ( 56 ) $ ( 4,122 ) (1) Excludes $ 13.7 million of loans at fair value. 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 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 December 31, 2022 with a combined outstanding principal balance of $ 558 thousand, which were carried at fair value and not included in the table above. 68 Impaired Loans The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related Allowance and interest income recognized at the dates indicated. December 31, 2022 (dollars in thousands) Recorded investment Principal balance Related allowance Impaired loans with related allowance: Commercial and industrial $ 11,099 $ 12,095 $ 776 Small business loans 3,730 3,730 1,449 Total $ 14,829 $ 15,825 $ 2,225 Impaired loans without related allowance: Commercial mortgage $ 2,445 $ 2,456 $ — Commercial and industrial 1,448 1,494 — Small business loans 797 797 — Home equity lines and loans 1,097 1,097 — Residential mortgage 1,454 1,454 — Construction 1,206 1,206 — Leases 902 902 — Total $ 9,349 $ 9,406 $ — Grand Total $ 24,178 $ 25,231 $ 2,225 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 year ended December 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 modification granted during the year ended December 31, 2022 on commercial mortgages for $ 684 thousand. No modifications granted during the twelve months ended December 31, 2022 subsequently defaulted during the same time period. Modifications to Borrowers 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. The following presents, by class of loans, information regarding accruing and nonaccrual modified loans to borrowers experiencing financial difficulty during the year ended December 31, 2023. Year Ended December 31, 2023 Number of Loans Amortized Cost Basis % of Total Class of Financing Receivable Related Reserve (dollars in thousands) Accruing Modified Loans to Borrowers Experiencing Financial Difficulty: Small business loans 6 $ 1,880 1.3 % $ — Commercial & industrial 2 2,401 0.8 % — Total 8 $ 4,281 $ — Nonaccrual Modified Loans to Borrowers Experiencing Financial Difficulty: Small business loans 3 $ 1,726 1.2 % $ 38 Commercial & industrial 1 1,324 0.4 % 689 Total 4 $ 3,050 $ 727 69 The following presents, by class of loans, information regarding accruing and nonaccrual modified loans to borrowers experiencing financial difficulty during the year ended December 31, 2023. Year Ended December 31, 2023 Number of Loans Financial Effect Accruing Modified Loans to Borrowers Experiencing Financial Difficulty: Small business loans 6 Extend maturity date Commercial & industrial 2 Extend maturity date Total 8 Nonaccrual Modified Loans to Borrowers Experiencing Financial Difficulty: Small business loans 3 Extend term and allow additional lender funding Commercial & industrial 1 Extend term and allow additional lender funding Total 4 There were 12 modifications granted to borrowers experiencing financial difficulty for the year ended December 31, 2023. There were no loans that had a payment default during the year ended December 31, 2023 that were modified in the 12 months before default to borrowers experiencing financial difficulty. There were no commitments to lend additional funds to the borrowers experiencing financial difficulty that had modifications during the year ended December 31, 2023. (7) Bank Premises and Equipment The components of premises and equipment at December 31, 2023 and 2022 are as follows: (dollars in thousands) December 31, 2023 December 31, 2022 Buildings $ 9,287 $ 9,150 Leasehold improvements 4,234 3,347 Land 600 600 Land Improvements 218 218 Furniture, fixtures and equipment 3,587 3,577 Computer equipment and data processing software 9,397 9,242 Construction in process — 40 Less: accumulated depreciation ( 13,766 ) ( 12,825 ) Total $ 13,557 $ 13,349 Total depreciation expense for the years ended December 31, 2023 and 2022 totaled $ 1.6 million and $ 1.4 million, respectively. (8) Deposits The components of deposits at December 31, 2023 and 2022 are as follows: (dollars in thousands) December 31, 2023 December 31, 2022 Demand, non-interest bearing $ 239,289 $ 301,727 Demand, interest bearing 150,898 219,838 Savings accounts 14,469 36,125 Money market accounts 733,334 661,439 Time deposits 685,472 493,350 Total $ 1,823,462 $ 1,712,479 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. The aggregate amount of time deposits in denominations over $250 thousand were $ 458.8 million and $ 394.3 million as of December 31, 2023 and 2022, respectively. 70 At December 31, 2023, the scheduled maturities of time deposits are as follows (in thousands): 2024 $ 533,161 2025 101,912 2026 50,084 2027 15 2028 300 Total $ 685,472 (9) 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 and one unsecured Federal funds borrowing facilities with correspondent banks of $ 15 million. Federal funds purchased generally represent one-day borrowings. The Corporation had $ 0 in Federal funds purchased at December 31, 2023 and December 31, 2022. The Corporation also has a facility with the Federal Reserve Bank discount window of $ 7.8 million. This facility is fully secured by investment securities. There were no borrowings under this at December 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 December 31, 2023. The following table presents short-term borrowings at the dates indicated: (dollars in thousands) Maturity date Interest rate December 31, 2023 December 31, 2022 FHLB Open Repo Plus Weekly 6/10/2024 5.68 % $ 104,792 $ 113,147 FRB BTFP Advances 3/29/2024 4.76 % 33,000 — FHLB Mid-term Repo Fixed 9/30/2024 4.60 % 3,432 — Total Short-Term Borrowings $ 141,224 $ 113,147 The following table presents long-term borrowings at the dates indicated: (dollars in thousands) Maturity date Interest rate December 31, 2023 December 31, 2022 FHLB Mid-term Repo Fixed 12/22/2025 4.23 % $ 8,935 $ 8,935 FHLB Mid-term Repo Fixed 7/14/2026 4.57 % 15,245 — FHLB Mid-term Repo Fixed 10/14/2025 5.16 % 9,492 — Total Long-Term Borrowings $ 33,672 $ 8,935 The FHLB has also issued $ 104.3 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 2024. The Corporation has a maximum borrowing capacity with the FHLB of $ 626.8 million as of December 31, 2023 and $ 561.7 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. (10) Subordinated Debentures The following table presents subordinated debentures at the dates indicated: Maturity date Interest rate December 31, 2023 December 31, 2022 2023 Debentures 08/31/2033 8.00 % $ 9,740 $ — 2019 Debentures 12/30/2029 5.38 % 40,000 40,000 2013 Debentures 12/31/2028 6.50 % 497 653 2011 Debentures 12/31/2026 6.00 % 347 463 2008 Debentures 12/18/2023 6.00 % — 56 Debt Origination Costs ( 748 ) ( 826 ) Total Subordinated Debentures $ 49,836 $ 40,346 The Corporation issued the 2023 and 2019 Debentures, while the Bank issued the 2013, 2011 and 2008 Debentures. Upon formation of the bank holding company, the Corporation assumed the 2013, 2011 and 2008 Debentures. Interest is paid semi-annually on the 2023 and 2019 Debentures, and paid quarterly on the 2013, 2011 and 2008 debentures. The 2013, 2011 and 2008 Debentures are includable as Tier 2 capital for determining the Bank’s compliance with regulatory capital requirements. 71 The 2019 and 2023 Debentures are included as Tier 2 capital for the Corporation and as Tier 1 capital for the Bank. The debt issuance costs are included as a direct deduction from the debt liability and these costs are amortized to interest expense using the effective yield method. (11) 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 $ 945.2 million of residential mortgage loans as of December 31, 2023 and $ 1.0 billion as of December 31, 2022. During the year ended December 31, 2023 the Corporation recognized servicing fee income of $ 2.5 million compared to $ 2.6 million, during the year ended December 31, 2022. Changes in the MSR balance are summarized as follows: Year Ended December 31, (dollars in thousands) 2023 2022 Balance at beginning of the period $ 9,942 $ 10,756 Servicing rights capitalized 20 668 Amortization of servicing rights ( 1,343 ) ( 1,488 ) Change in valuation allowance 2 6 Balance at end of the period $ 8,621 $ 9,942 Activity in the valuation allowance for MSRs was as follows: Year Ended December 31, (dollars in thousands) 2023 2022 Valuation allowance, beginning of period $ ( 2 ) $ ( 8 ) Impairment — ( 4 ) Recovery 2 10 Valuation allowance, end of period $ — $ ( 2 ) 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 December 31, 2023, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 8.57 % 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 %. As interest rates increased and the number of mortgage refinancings have declined, model inputs have been adjusted to align the MSRs fair value with market conditions. 72 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) December 31, 2023 December 31, 2022 Fair value of residential mortgage servicing rights $ 11,221 $ 11,567 Weighted average life (months) 28 22 Prepayment speed 8.57 % 8.05 % Impact on fair value: 10% adverse change $ ( 506 ) $ ( 268 ) 20% adverse change ( 973 ) ( 525 ) Discount rate 9.50 % 9.50 % Impact on fair value: 10% adverse change $ ( 415 ) $ ( 404 ) 20% adverse change ( 799 ) ( 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 particular 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 $ 225.8 million and $ 166.1 million of SBA loans, as of December 31, 2023 and December 31, 2022, respectively. Changes in the SBA loan servicing asset balance are summarized as follows: Year Ended December 31, (dollars in thousands) 2023 2022 Balance at beginning of the period $ 2,404 $ 2,009 Servicing rights capitalized 1,525 1,395 Amortization of servicing rights ( 898 ) ( 732 ) Change in valuation allowance 96 ( 268 ) Balance at end of the period $ 3,127 $ 2,404 Activity in the valuation allowance for SBA loan servicing assets was as follows: Year Ended December 31, (dollars in thousands) 2023 2022 Valuation allowance, beginning of period $ ( 364 ) $ ( 96 ) Impairment ( 178 ) ( 408 ) Recovery 274 140 Valuation allowance, end of period $ ( 268 ) $ ( 364 ) 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 December 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 14.70 % and a discount rate equal to 14.66 %. 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 change in valuation allowance due to impairment noted in the tables above, was largely due to the decrease in discount rate partially offset by the increase in prepayment speed as a result of the rising interest rate environment. 73 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) December 31, 2023 December 31, 2022 Fair value of SBA loan servicing rights $ 3,376 $ 2,422 Weighted average life (years) 3.5 3.8 Prepayment speed 14.70 % 12.73 % Impact on fair value: 10% adverse change $ ( 125 ) $ ( 73 ) 20% adverse change ( 241 ) ( 141 ) Discount rate 14.66 % 18.96 % Impact on fair value: 10% adverse change $ ( 74 ) $ ( 53 ) 20% adverse change ( 145 ) ( 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. (12) Lease Commitments On January 1, 2022, the Corporation adopted ASU 2016-02 (Topic 842), “Leases”, as further explained in Note 1, Summary of Significant Accounting Policies. The Corporation’s operating leases consist of various retail branch locations and loan production offices. As of December 31, 2023, the Corporation’s leases have remaining lease terms ranging from 2 months to 12 years, including extension options. The Corporation’s leases include fixed rental payments, and certain of our leases also include variable rental payments where lease payments may increase at pre-determined dates based on the change in the consumer price index. The Corporation’s lease agreements include gross leases as well as leases in which we make separate payments to the lessor for items such as the property taxes assessed on the property or a portion of the common area maintenance associated with the property. We have elected the practical expedient not to separate lease and non-lease components for all of our building leases. The Corporation also elected to not recognize ROU assets and lease liabilities for short-term leases. As of December 31, 2023, the Corporation’s ROU assets and related lease liabilities were $ 9.4 million and $ 9.4 million, respectively. As of December 31, 2022 and the Corporation’s ROU assets and related lease liabilities were $ 9.0 million and $ 8.9 million, respectively. These amounts are included within other assets and other liabilities , respectively. The components of lease expense were as follows: Year Ended December 31, (dollars in thousands) 2023 2022 Operating lease expense $ 2,319 $ 2,242 Short term lease expense 8 13 Variable lease expense 52 — Total lease expense $ 2,379 $ 2,255 Supplemental cash flow information related to leases was as follows: (dollars in thousands) December 31, 2023 December 31, 2022 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 2,131 $ 2,150 ROU asset obtained in exchange for lease liabilities 2,476 10,936 74 Maturities of operating lease liabilities were as follows for the period indicated: (dollars in thousands) December 31, 2023 2024 $ 2,167 2025 1,736 2026 1,649 2027 1,493 2028 741 Thereafter 3,029 $ 10,815 Less: Present value discount ( 1,373 ) Total operating lease liabilities $ 9,442 As of December 31, 2023, the weighted-average remaining lease term for all operating leases, including extension options that the Corporation is reasonably certain will be exercised for retail branch locations, is 6.2 years. Because we generally do not have access to the rate implicit in the lease, we utilize our incremental borrowing rate as the discount rate. The weighted average discount rate associated with operating leases as of December 31, 2023 is 3.23 %. (13) Stock-Based Compensation The Corporation has issued stock options under the Meridian Bank 2004 Stock Option Plan (2004 Plan). The 2004 Plan authorized the Board of Directors to grant options up to an aggregate of 892,182 shares, as adjusted for the 5 % stock dividends in 2012, 2014 and 2016, and the two -for-one stock split effective February 28, 2023, to officers, other employees and directors of the Corporation. No additional shares are available for future grants. The shares granted under the 2004 Plan to directors are nonqualified options. The shares granted under the 2004 Plan to officers and other employees are incentive stock options, and are subject to the limitations under Section 422 of the Internal Revenue Code. The Meridian Bank 2016 Equity Incentive Plan (2016 Plan) was amended on March 25, 2023 to authorize the Board of Directors to grant up to an aggregate of 1,673,800 stock awards that can take different forms. A total of 1,222,000 stock options and 86,416 shares of restricted stock have been granted under the 2016 Plan through December 31, 2023, including the impact of the two -for-one stock split. As of December 31, 2023 there were 119,540 stock awards remaining to be issued. Options granted under the 2016 Plan to directors are nonqualified options, while options granted to officers and other employees are incentive stock options, and are subject to the limitations under Section 422 of the Internal Revenue Code. Stock Options Stock-based compensation cost is measured at the grant date, based on the fair value of the award and the cost is recognized as an expense over the vesting period. The fair value of stock option grants is determined using the Black-Scholes pricing model. The assumptions necessary for the calculation of the fair value are expected life of options, annual volatility of stock price, risk-free interest rate and annual dividend yield. Stock option awards granted under the 2016 Plan have a term that does not exceed 10 years and vest according to each award’s specific vesting schedule. Currently, all option awards granted to date vest 25 % upon grant and become fully exercisable after 3 years of service from the grant date. The following table provides information about stock options outstanding as of December 31, 2023 and 2022: Shares Weighted average exercise price Weighted average grant date fair value Outstanding at December 31, 2021 923,928 $ 10.19 $ 3.10 Exercised ( 87,134 ) 8.67 2.43 Granted 246,500 16.22 5.38 Forfeited ( 29,606 ) 12.14 3.92 Outstanding at December 31, 2022 1,053,688 $ 11.67 $ 3.67 Exercised ( 29,890 ) 8.86 2.56 Granted 98,000 10.08 2.37 Forfeited ( 22,000 ) 14.38 4.84 Outstanding at December 31, 2023 1,099,798 $ 11.55 $ 3.56 Exercisable at December 31, 2023 846,294 10.87 3.32 Nonvested at December 31, 2023 253,504 13.83 4.35 The weighted average remaining contractual life of the outstanding stock options at December 31, 2023 is 7.4 years. At December 31, 2023 the range of exercise prices is $ 5.90 to $ 17.76 . The aggregate intrinsic value of options outstanding and exercisable was $ 3.1 million and $ 2.8 million, respectively, as of December 31, 2023. 75 The fair value of each option granted in 2023 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield of 3.6 %, risk-free interest rate of 4.73 %, expected life of 5.75 years, and volatility of 33.42 % based on an average of the Corporation’s share price since going public. The weighted average fair value of options granted in 2023 was $ 2.37 to per share. The fair value of each option granted in 2022 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield of 2.6 %, risk-free interest rate of 2.93 %, expected life of 5.75 years, and volatility of 37.73 % based on an average of the Corporation’s share price since going public. The weighted average fair value of options granted in 2022 was $ 5.38 to per share. Total stock option compensation cost for the years ended December 31, 2023 and 2022 was $ 650 thousand and $ 1.0 million, respectively. During the year ended December 31, 2023 and 2022, the Corporation received $ 279 thousand and $ 711 thousand from the exercise of stock options, respectively. The Corporation recognized and $ 3 thousand and $ 116 thousand in excess tax benefits related to stock compensation cost for the twelve months ended December 31, 2023 and 2022. In accordance with ASU 2016-09 – Compensation – Stock Compensation (ASU 2016-09), forfeitures are recognized as they occur instead of applying an estimated forfeiture rate to each grant. For purposes of the determination of stock-based compensation expense for the years ended December 31, 2023, and 2022, we recognized the forfeiture of 22,000 , and 29,606 of shares of stock options that were previously granted to officers and other employees, respectively. As of December 31, 2023, there was $ 1.1 million of unrecognized compensation cost related to nonvested stock options. This cost will be recognized over a weighted average period of 7.4 years. During 2023, the intrinsic value of options exercised was $ 179 thousand. Restricted Stock The restricted stock awards granted under the 2016 Plan vest according to each award’s specific vesting schedule. No awards were granted in 2023 and 2022. All awards granted in 2022 vested 100 % one year from the grant date. The grant date fair value of the restricted stock is based on the closing price on the date prior to the grant. Shares Weighted Average Grant Date Fair Value Outstanding at December 31, 2022 53,210 $ 9.33 Granted — — Vested ( 53,210 ) 9.33 Outstanding / nonvested at December 31, 2022 — $ — Compensation expense for restricted stock is measured based on the market price of the stock on the day prior to the grant date and is recognized on a straight-line basis over the vesting period. For the years ended December 31, 2023 and 2022, the Corporation recognized $ 0 and $ 70 thousand of expense related to the restricted stock, respectively. As of December 31, 2023 and 2022 there was $ 0 in unrecognized compensation costs related to restricted stock. (14) Income Taxes The following table presents the components of federal and state income tax expense for the periods indicated: (dollars in thousands) December 31, 2023 December 31, 2022 Federal: Current $ 3,594 $ 4,580 Deferred ( 217 ) 903 Total federal income tax expense $ 3,377 $ 5,483 State: Current $ 364 $ 494 Deferred ( 17 ) 114 Total state income tax expense $ 347 $ 608 Total income tax expense $ 3,724 $ 6,091 A reconciliation of the statutory income tax at 21% to the income tax expense included in the statement of operations is as follows for 2023 and 2022, respectively: (dollars in thousands) December 31, 2023 December 31, 2022 Federal income tax at statutory rate $ 3,563 21.0 % $ 5,863 21.0 % State tax expense, net of federal benefit 274 1.6 480 1.7 Tax exempt interest ( 219 ) ( 1.3 ) ( 276 ) ( 1.0 ) Bank owned life insurance ( 166 ) ( 1.0 ) ( 116 ) ( 0.4 ) 76 (dollars in thousands) December 31, 2023 December 31, 2022 Stock based compensation 123 0.7 36 0.1 ESOP 26 0.2 48 0.2 Other 123 0.8 56 0.2 Effective income tax rate $ 3,724 22.0 % $ 6,091 21.8 % The components of the net deferred tax asset at December 31, 2023 and 2022 are as follows: (dollars in thousands) December 31, 2023 December 31, 2022 Deferred tax assets: Allowance for credit losses $ 4,949 $ 4,212 Unrealized loss on available for sale securities 2,718 3,327 Accrued retirement 826 891 Mortgage pipeline fair-value adjustment 538 535 Deferred rent 81 96 Mortgage repurchase reserve 114 192 Unfunded commitment reserve 226 — Other 153 179 Total deferred tax asset $ 9,605 $ 9,432 Deferred tax liabilities: Property and equipment $ ( 752 ) $ ( 948 ) Loan servicing rights ( 2,630 ) ( 2,762 ) Intangibles ( 106 ) ( 23 ) Hedge instrument fair-value adjustment ( 42 ) ( 12 ) Prepaid expenses ( 237 ) ( 341 ) Deferred loan costs ( 1,637 ) ( 1,410 ) Total deferred tax liability $ ( 5,404 ) $ ( 5,496 ) Net deferred tax asset $ 4,201 $ 3,936 The effective tax rates for the twelve-month periods ended December 31, 2023 and 2022 were 22.0 % and 21.8 % respectively. The increase in rate between 2022 and 2023 was primarily related to the impact of additional nondeductible stock compensation expense in 2023 partially offset by an increase in tax-free bank owned life insurance income. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Corporation will realize the benefits of these deferred tax assets. As of December 31, 2023, the Corporation had an investment in low-income housing tax credits of $ 4.9 million on which it recognized tax credits of $ 343 thousand, amortization of $ 340 thousand and tax benefits from losses of $ 168 thousand during the year ended December 31, 2023. As of December 31, 2022, the Corporation had an investment in low-income housing tax credits of $ 5.3 million on which it recognized tax credits of $ 294 thousand, amortization of $ 381 thousand and tax benefits from losses of $ 131 thousand during the year ended December 31, 2022. The tax benefits are included within other in the statutory rate reconciliation above. (15) Transactions with Executive Officers, Directors and Principal Stockholders The Corporation has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal stockholders, their immediate families and affiliated companies (commonly referred to as related parties) Year Ended December 31, (dollars in thousands) 2023 2022 Loans receivable from related parties - beginning at end of period $ 2,046 $ 5,098 Advances for related parties 447 5,196 Proceeds repayments from related party ( 415 ) ( 6,070 ) Effect of changes in composition of related parties ( 499 ) ( 2,178 ) Loans receivable from related parties - balance at end of period $ 1,579 $ 2,046 77 Deposits of related parties totaled $ 30.6 million and $ 32.6 million at December 31, 2023 and 2022, respectively. Subordinated debt held by related parties totaled $ 1.1 million and $ 208 thousand at December 31, 2023 and 2022, respectively. The Corporation paid legal fees of $ 14 thousand to a law firm of a director for the year ended December 31, 2022. The director retired from the law firm in 2022. (16) Financial Instruments with Off-Balance Sheet Risk, Commitments and Contingencies 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 and letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Corporation’s financial instrument commitments at the dates indicated: (dollars in thousands) December 31, 2023 December 31, 2022 Commitments to fund loans and commitments under lines of credit $ 517,743 $ 506,203 Letters of credit 10,924 19,042 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Corporation evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment. Outstanding letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. The majority of these are standby letters of credit that expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Corporation requires collateral supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees. Loans sold under FHA or investor programs are subject to indemnification or repurchase if they fail to meet the origination criteria of those programs or if the loan is two or three months delinquent during a set period that usually varies from the first six months to a year after the loan is sold. There was 3 indemnifications signed for the year ended December 31, 2023 for $ 860 thousand, and 2 indemnification signed for the year ended December 31, 2022 for $ 734 thousand. A repurchase reserve of $ 508 thousand was recorded at December 31, 2023, as compared to $ 858 thousand as of December 31, 2022. There were 5 loans repurchased for the year ended December 31, 2023 with a total unpaid principal balance of $ 1.3 million, as compared to 8 loans repurchased for the year ended December 31, 2022 with an unpaid principal balance of $ 1.8 million. (17) Regulatory Matters The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2023, that the Bank met all capital adequacy requirements to which it is subject. Community banks have long raised concerns with bank regulators about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In response, Congress provided an “off-ramp” for institutions, like us, with total consolidated assets of less than $10 billion. Section 201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single CBLR of between 8 and 10%. Under the final rule, a community banking organization is eligible to elect the new framework if it has: less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. The Bank’s CBLR ratio wa s 9.46 % at December 31, 2023 . As of December 31, 2023, the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category. 78 The Bank is subject to certain restrictions on the amount of dividends that it may declare and pay to the Corporation due to regulatory considerations. The Pennsylvania Banking Code provides that cash dividends may be declared and paid only out of accumulated net earnings. The Banks’s actual and required capital amounts and ratios under the CBLR rules at December 31, 2023 and 2022 are presented below. Actual For Capital Adequacy Purposes (includes applicable capital conservation buffer) To Be Well Capitalized Under Prompt Corrective Action Provisions (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio December 31, 2023 Tier 1 leverage ratio: Meridian Bank $ 211,355 9.46 % $ 89,399 4.00 % $ 111,749 5.00 % Common tier 1 risk-based capital ratio: Meridian Bank 211,355 10.10 % 146,448 7.00 % 135,987 6.50 % Tier 1 risk-based capital ratio: Meridian Bank 211,355 10.10 % 177,829 8.50 % 167,369 8.00 % Total risk-based capital ratio: Meridian Bank 233,671 11.17 % 219,672 10.50 % 209,211 10.00 % December 31, 2022 Tier 1 leverage ratio: Meridian Bank $ 196,584 9.95 % $ 78,995 4.00 % $ 98,743 5.00 % Common tier 1 risk-based capital ratio: Meridian Bank 196,584 10.73 % 128,305 7.00 % 119,140 6.50 % Tier 1 risk-based capital ratio: Meridian Bank 196,584 10.73 % 155,799 8.50 % 146,634 8.00 % Total risk-based capital ratio: Meridian Bank 217,593 11.87 % 192,457 10.50 % 183,293 10.00 % (18) Fair Value Measurements and Disclosures The Corporation uses fair value measurements to record fair value adjustments to certain assets and liabilities. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation techniques or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions. In accordance with this guidance, the Corporation groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 – Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing 79 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 : December 31, 2023 (dollars in thousands) Total Level 1 Level 2 Level 3 Assets Securities available for sale: U.S. asset backed securities $ 16,824 $ — $ 16,824 $ — U.S. government agency MBS 22,634 — 22,634 — U.S. government agency CMO 19,573 — 19,573 — State and municipal securities 36,216 — 36,216 — U.S. Treasuries 30,422 30,422 — — Non-U.S. government agency CMO 13,155 — 13,155 — Corporate bonds 7,195 — 7,195 — Equity investments 2,121 — 2,121 — Mortgage loans held for sale 24,816 — 24,816 — Mortgage loans held for investment 13,726 — 13,726 — Interest rate lock commitments 214 — — 214 Customer derivatives - interest rate swaps 3,528 — 3,528 — Total $ 190,424 $ 30,422 $ 159,788 $ 214 Liabilities Interest rate lock commitments $ 17 $ — $ — $ 17 Forward commitments 41 — 41 — Customer derivatives - interest rate swaps 3,544 — 3,544 — Risk Participation Agreements 11 — 11 — Total $ 3,613 $ — $ 3,596 $ 17 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 — 80 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 Forward commitments — — — — 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) December 31, 2023 December 31, 2022 Mortgage servicing rights $ 8,621 $ 9,942 SBA loan servicing rights 3,127 2,404 Individually evaluated loans (1) Commercial and industrial 9,818 — Small business loans 3,134 2,281 Total $ 24,700 $ 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. The following table details the valuation techniques for Level 3 impaired loans. (dollars in thousands) Fair Value Valuation Technique Significant Unobservable Input Range of Inputs December 31, 2023 $ 12,952 Appraisal of collateral Management adjustments on appraisals for property type and recent activity 2 %- 33 % 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. 81 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. Long-Term Debt Fair values of FHLB advances and the acquisition purchase note payable are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party. Subordinated Debt Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity. Off-Balance Sheet Financial Instruments Off-balance sheet instruments are primarily comprised of loan commitments, which are generally priced at market at the time of funding. Fees on commitments to extend credit and stand-by letters of credit are deemed to be immaterial and these instruments are expected to be settled at face value or expire unused. It is impractical to assign any fair value to these instruments and as a result they are not included in the table below. Fair values assigned to the notional value of interest rate lock commitments and forward sale contracts are based on market quotes. Derivative Financial Instruments The fair value of forward commitments and interest rate swaps is based on market pricing and therefore are considered Level 2. Derivatives classified as Level 3 consist of interest rate lock commitments related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement. The following table presents the estimated fair values of the Corporation’s financial instruments at the dates indicated: December 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 $ 56,697 $ 56,697 $ 38,391 $ 38,391 Mortgage loans held for sale Level 2 24,816 24,816 22,243 22,243 Loans receivable, net of the allowance for credit losses Level 3 1,882,080 1,832,558 1,729,180 1,679,955 Mortgage loans held for investment Level 2 13,726 13,726 14,502 14,502 Financial liabilities: Deposits Level 2 $ 1,823,462 $ 1,834,700 $ 1,712,479 $ 1,575,600 Borrowings Level 2 174,896 176,400 122,082 122,082 Subordinated debentures Level 2 49,836 50,223 40,346 40,020 82 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. Year Ended December 31, (dollars in thousands) 2023 2022 Balance at beginning of the period $ 87 $ 1,122 Decrease in value 127 ( 1,035 ) Balance at end of the period $ 214 $ 87 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 December 31, 2023 $ 214 Market comparable pricing Pull through 1 % - 99 % 79.48 % December 31, 2022 87 Market comparable pricing Pull through 1 % - 99 % 84.05 % (19) 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. Interest Rate Swaps The Corporation uses interest rate swap agreements to modify interest rate characteristics from variable to fixed or fixed to variable in order to reduce the impact of interest rate changes on future net interest income. The Corporation’s credit exposure on interest rate swaps includes changes in fair value and any collateral that is held by a third party. In June 2023, the Corporation entered into three interest rate swaps classified as cash flow hedges with notional amounts of $ 25 million each, to hedge the interest payments received on short term borrowings. Under the terms of the three swap agreements, the Corporation pays average fixed rates of 4.070 %, 4.027 % and 4.117 %, and receives variable rates in return indexed to SOFR. The swaps mature between May, June, and December 2026. The Corporation performed an assessment of the hedge for effectiveness at the inception of the hedge and performs an assessment on a recurring basis and determined that the derivative currently is and is expected to be highly effective in offsetting changes in cash flows of the hedged item. For the year ended December 31, 2023, $ 412 thousand, net of tax, is recorded in total comprehensive income as unrealized gains. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations and the addition of other hedges subsequent to December 31, 2023. As of December 31, 2023, the combined notional amount of the interest rate swaps was $ 75 million and the fair value was an liability of $ 539 thousand. Mortgage Banking Derivatives In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans or interest rate locks at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Interest rate lock commitments and forward commitments are recorded within other assets/liabilities on the consolidated balance sheets, with changes in fair values during the period recorded within net change in the fair value of derivative instruments on the consolidated statements of income. Customer Derivatives – Interest Rate Swaps Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain customers to swap a fixed rate product for a variable rate product, or vice versa. The Corporation executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies. Those interest rate derivatives are simultaneously hedged by offsetting derivatives that the Corporation executes with a third party, such that the Corporation minimizes its net interest rate risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. 83 The following table presents a summary of notional amounts and fair values of derivative financial instruments at the dates indicated: December 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 $ 33,735 $ 214 $ 16,590 $ 87 Negative fair values Other liabilities 5,399 ( 17 ) 16,108 ( 79 ) Total $ 39,134 $ 197 $ 32,698 $ 8 Forward Commitments Positive fair values Other assets $ — $ — $ — $ — Negative fair values Other liabilities 4,250 ( 41 ) — — Total $ 4,250 $ ( 41 ) $ — $ — Customer Derivatives - Interest Rate Swaps Positive fair values Other assets $ 50,593 $ 3,528 $ 43,779 $ 3,846 Negative fair values Other liabilities 50,593 ( 3,544 ) 43,779 ( 3,799 ) Total $ 101,186 $ ( 16 ) $ 87,558 $ 47 Risk Participation Agreements Positive fair values Other assets $ — $ — $ — $ — Negative fair values Other liabilities 7,082 ( 11 ) 7,200 ( 17 ) Total $ 7,082 $ ( 11 ) $ 7,200 $ ( 17 ) Interest Rate Swaps Positive fair values Other assets $ — $ — $ — $ — Negative fair values Other liabilities 75,000 ( 539 ) — — $ 75,000 $ ( 539 ) $ — $ — Total derivative financial instruments $ 226,652 $ ( 410 ) $ 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 (losses) gains on derivative financial instruments: Year Ended December 31, (dollars in thousands) 2023 2022 Interest Rate Lock Commitments $ 189 $ ( 911 ) Forward Commitments ( 41 ) 41 Customer Derivatives - Interest Rate Swaps ( 63 ) 105 Risk Participation Agreements 6 62 Interest Rate Swaps ( 539 ) — Net fair value gains (losses) on derivative financial instruments $ ( 448 ) $ ( 703 ) Net realized gains on derivative hedging activities were $ 28 thousand and $ 5.4 million for the year ended December 31, 2023 and 2022, respectively, and are included in non-interest income in the consolidated statements of income. (20) Segments ASC Topic 280 – Segment Reporting identifies operating segments as components of an enterprise which are evaluated regularly by the Corporation’s Chief Operating Decision Maker, our Chief Executive Officer, in deciding how to allocate resources and assess performance. The Corporation has applied the aggregation criterion set forth in this codification to the results of its operations. Our Banking segment (“Bank”) consists of commercial and retail banking. The Banking segment generates interest income from its lending (including leasing) and investing activities and is dependent on the gathering of lower cost deposits from its branch network or borrowed funds from other sources for funding its loans, resulting in the generation of net interest income. The Banking segment also derives revenues from other sources including gains on the sale of SBA loans, sales 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. 84 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 8 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 related net hedging gains (losses). The table below summarizes income and expenses, directly attributable to each business line, which has been included in the statement of operations. Total assets for each segment is also provided. Segment Information Year Ended December 31, 2023 Year Ended December 31, 2022 (dollars in thousands) Bank Wealth Mortgage Total Bank Wealth Mortgage Total Net interest income $ 68,835 $ ( 27 ) $ 134 $ 68,942 $ 68,570 $ 697 $ 861 $ 70,128 Provision for loan losses 6,815 — — 6,815 2,488 — — 2,488 Net interest income after provision 62,020 ( 27 ) 134 62,127 66,082 697 861 67,640 Non-interest Income Mortgage banking income 306 — 16,231 16,537 436 — 24,889 25,325 Wealth management income — 4,928 — 4,928 — 4,733 — 4,733 SBA income 4,485 — — 4,485 4,467 — — 4,467 Net change in fair values ( 59 ) — 314 255 167 — ( 4,122 ) ( 3,955 ) Net gain on hedging activity — — 28 28 — — 5,439 5,439 Other 3,011 — 2,721 5,732 2,486 ( 1 ) 3,230 5,715 Non-interest income 7,743 4,928 19,294 31,965 7,556 4,732 29,436 41,724 Non-interest expense 48,827 3,661 24,637 77,125 45,122 3,399 32,923 81,444 Income (loss) before income taxes $ 20,936 $ 1,240 $ ( 5,209 ) $ 16,967 $ 28,516 $ 2,030 $ ( 2,626 ) $ 27,920 Total Assets $ 2,186,017 $ 7,251 $ 52,925 $ 2,246,193 $ 2,011,835 $ 8,142 $ 42,251 $ 2,062,228 85 (21) Parent Company Financial Statements The condensed financial statements of the Corporation (parent company only) are presented below. These statements should be read in conjunction with the notes to the consolidated financial statements. All share amounts have been adjusted to reflect the two-for-one stock split effective February 28, 2023. A. Condensed Balance Sheets (dollars in thousands, except share data) December 31, 2023 December 31, 2022 Assets: Cash and due from banks $ 2,600 $ 4,839 Investments in subsidiaries 204,132 186,686 Other assets 2,239 1,382 Total assets $ 208,971 $ 192,907 Liabilities: Subordinated debentures $ 48,992 $ 39,175 Accrued interest payable 220 6 Other liabilities 1,737 446 Total liabilities $ 50,949 $ 39,627 Stockholders’ equity: Common stock, $ 1 par value: 25,000,000 shares authorized; 13,186,198 and 13,156,308 shares issued, respectively; and 11,183,015 and 11,465,572 shares outstanding, respectively. 13,186 13,156 Surplus 80,325 79,072 Treasury Stock - 2,003,183 and 1,690,736 shares, respectively, at cost ( 26,079 ) ( 21,821 ) Unearned common stock held by employee stock ownership plan ( 1,204 ) ( 1,403 ) Retained earnings 101,216 95,815 Accumulated other comprehensive income ( 9,422 ) ( 11,539 ) Total stockholders’ equity $ 158,022 $ 153,280 Total liabilities and stockholders’ equity $ 208,971 $ 192,907 B. Condensed Statements of Income Year Ended December 31, (dollars in thousands) 2023 2022 Dividends from Bank $ 9,655 $ 27,813 Interest income 2 8 Other income 122 — Total operating income 9,779 27,821 Interest expense 2,484 2,268 Other expenses 1,168 1,412 Income before equity in undistributed income of subsidiaries 6,127 24,141 Equity in undistributed income of subsidiaries 6,376 ( 3,084 ) Income before income taxes 12,503 21,057 Income tax benefit ( 740 ) ( 772 ) Net income 13,243 21,829 Total other comprehensive income (loss) 2,117 ( 12,247 ) Total comprehensive income $ 15,360 $ 9,582 C. Condensed Statements of Cash Flows Year Ended December 31, (dollars in thousands) 2023 2022 Cash flows from operating activities: Net Income $ 13,243 $ 21,829 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed income of subsidiaries ( 6,376 ) 3,084 86 Year Ended December 31, (dollars in thousands) 2023 2022 Share-based compensation 1,173 1,475 Amortization of issuance costs on subordinated debt 118 118 Other, net ( 2,748 ) ( 1,369 ) Net cash provided by operating activities 5,624 25,137 Cash flows from investing activities: Investment in subsidiaries ( 8,000 ) — Net cash (used in) investing activities ( 8,000 ) — Cash flows from financing activities: Net activity from subordinated debt issuance 9,699 — Net purchase of treasury stock ( 4,258 ) ( 12,961 ) Dividends paid ( 5,614 ) ( 10,926 ) Share based awards and exercises 309 754 Net cash provided by (used in) financing activities 136 ( 23,133 ) Net change in cash and cash equivalents ( 2,240 ) 2,004 Cash and cash equivalents at beginning of period 4,840 2,836 Cash and cash equivalents at end of period $ 2,600 $ 4,840 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.