UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 000-55983

(Exact name of registrant as specified in its charter)


Pennsylvania			83-1561918
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

9 Old Lincoln Highway, Malvern, Pennsylvania 19355

(Address of principal executive offices) (Zip Code)

(484) 568-5000

(Registrant’s telephone number, including area code)


Title of class	Trading Symbol	Name of exchange on which registered
Common Stock, $1 par value	MRBK	The NASDAQ Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes ☐No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒Yes ☐No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☐

Accelerated Filer

☒

Non-accelerated Filer

☐

Smaller Reporting Company

☒

Emerging Growth Company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of ~~August 5,~~November 2, 2022 there were ~~6,017,247~~5,800,526 outstanding shares of the issuer’s common stock, par value $1.00 per share.

Table of Contents

TABLE OF CONTENTS


PART I FINANCIAL INFORMATION

Item 1 Financial Statements (Unaudited)			3

Consolidated Balance Sheets – ~~June~~September 30, 2022and December 31, ~~202~~12021			3

Consolidated Statements of Income – Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2022 and ~~202~~12021			4

Consolidated Statements of Comprehensive Income – Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2022 and ~~202~~12021			5

Consolidated Statements of Stockholders’ Equity – Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2022 and ~~202~~12021			6

Consolidated Statements of Cash Flows – ~~Six~~Nine Months Ended ~~June~~September 30, 2022 and ~~202~~12021			87

Notes to Consolidated Financial Statements (Unaudited)			98

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			3729

Item 3 Quantitative and Qualitative Disclosures about Market Risk			5442

Item 4 Controls and Procedures			5443

PART II OTHER INFORMATION

Item 1 Legal Proceedings			5644

Item 1A Risk Factors			5644

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			5644

Item 3 Defaults Upon Senior Securities			5644

Item 4 Mine Safety Disclosures			5644

Item 5 Other Information			5644

Item 6 Exhibits			5645

Signatures			5846

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Glossary of Acronyms, Abbreviations, and Terms

The acronyms, abbreviations, and terms listed below are used in various sections of this report. As used throughout this report, the terms "Meridian", “we”, “our”, or “us” refer to Meridian Corporation and its consolidated subsidiaries, unless the context otherwise requires.


Acronym			Description

ALLL			Allowance for loan and lease losses
AOCI			Accumulated other comprehensive (loss) income
ASC			Accounting Standards Codification
ASU			Accounting Standards Update
BOLI			Bank owned life insurance
CECL			Current expected credit losses
CET1			Common equity tier 1
CMO			Collateralized mortgage obligation
ESOP			Employee Stock Ownership Plan
FASB			Financial Accounting Standards Board
FHLB			Federal Home Loan Bank of Pittsburgh
FRB			Board of Governors of the Federal Reserve System
FTE			Fully taxable equivalent
GAAP			U.S. generally accepted accounting principles
JOBS Act			Jumpstart Our Business Startups Act of 2012
LIBOR			London Inter-bank Offering Rate
MBS			Mortgage-backed securities
MSLP			Main Street Lending Programs
MSR			Mortgage servicing rights

PPP			Paycheck Protection Program
ROU			Right-of-use
SBA			Small Business Administration
SEC			Securities and Exchange Commission
SERP			Supplemental Executive Retirement Plan
TDR			Troubled debt restructuring

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	June 30, 2022		December 31, 2021		(dollars in thousands, except per share data)	September 30, 2022		December 31, 2021
Assets:						Assets:
Cash and due from banks	Cash and due from banks	$	37,093	$	23,480	Cash and due from banks	$	12,114	$	3,966
Interest-bearing deposits at other banks						Interest-bearing deposits at other banks	20,774		19,514

Cash and cash equivalents	Cash and cash equivalents	37,093		23,480		Cash and cash equivalents	32,888		23,480
Securities available-for-sale (amortized cost of $139,833 and $158,387 as of June 30, 2022 and December 31, 2021)		129,288		159,302
Securities held-to-maturity (fair value of $33,497 and $6,591 as of June 30, 2022 and December 31, 2021)		37,111		6,372
Securities available-for-sale, at fair value (amortized cost of $143,581 and $158,387, respectively)						Securities available-for-sale, at fair value (amortized cost of $143,581 and $158,387, respectively)	127,999		159,302
Securities held-to-maturity, at amortized cost (fair value of $32,323 and $6,591, respectively)						Securities held-to-maturity, at amortized cost (fair value of $32,323 and $6,591, respectively)	37,922		6,372
Equity investments	Equity investments	2,153		2,354		Equity investments	2,092		2,354
Mortgage loans held for sale (amortized cost of $58,914 and $80,002 as of June 30, 2022 and December 31, 2021), at fair value		58,938		80,882
Loans, net of fees and costs (includes $16,212 and $17,558 of loans at fair value, amortized cost of $17,611 and $17,106 as of June 30, 2022 and December 31, 2021)		1,518,893		1,386,457
Mortgage loans held for sale						Mortgage loans held for sale	33,800		80,882
Loans, net of fees and costs						Loans, net of fees and costs	1,610,349		1,386,457
Allowance for loan and lease losses	Allowance for loan and lease losses	(18,805)		(18,758)		Allowance for loan and lease losses	(18,974)		(18,758)
Loans, net of the allowance for loan and lease losses	Loans, net of the allowance for loan and lease losses	1,500,088		1,367,699		Loans, net of the allowance for loan and lease losses	1,591,375		1,367,699
Restricted investment in bank stock	Restricted investment in bank stock	4,719		5,117		Restricted investment in bank stock	5,217		5,117
Bank premises and equipment, net	Bank premises and equipment, net	12,185		11,806		Bank premises and equipment, net	12,835		11,806
Bank owned life insurance	Bank owned life insurance	22,778		22,503		Bank owned life insurance	22,916		22,503
Accrued interest receivable	Accrued interest receivable	5,108		5,009		Accrued interest receivable	6,008		5,009
Deferred income taxes	Deferred income taxes	4,467		1,413		Deferred income taxes	5,722		1,413
Servicing assets	Servicing assets	12,860		12,765		Servicing assets	12,807		12,765
Goodwill	Goodwill	899		899		Goodwill	899		899
Intangible assets	Intangible assets	3,277		3,379		Intangible assets	3,226		3,379
Other assets	Other assets	22,055		10,463		Other assets	26,218		10,463
Total assets	Total assets	$	1,853,019	$	1,713,443	Total assets	$	1,921,924	$	1,713,443

Liabilities:	Liabilities:					Liabilities:
Deposits:	Deposits:					Deposits:
Non-interest bearing	Non-interest bearing	$	291,925	$	274,528	Non-interest bearing	$	290,169	$	274,528
Interest bearing	Interest bearing	1,276,089		1,171,885		Interest bearing	1,383,384		1,171,885
Total deposits	Total deposits	1,568,014		1,446,413		Total deposits	1,673,553		1,446,413
Short-term borrowings	Short-term borrowings	59,136		41,344		Short-term borrowings	23,458		41,344

Subordinated debentures	Subordinated debentures	40,567		40,508		Subordinated debentures	40,597		40,508
Accrued interest payable	Accrued interest payable	146		31		Accrued interest payable	1,154		31
Other liabilities	Other liabilities	29,069		19,787		Other liabilities	32,001		19,787
Total liabilities	Total liabilities	1,696,932		1,548,083		Total liabilities	1,770,763		1,548,083

Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Common stock, $1 par value. Authorized 25,000,000 shares as of June 30, 2022 and December 31, 2021; issued 6,560,956 and 6,534,587 as of June 30, 2022 and December 31, 2021		6,561		6,535
Common stock, $1 par value per share. 25,000,000 shares authorized; 6,566,356 and 6,534,587 shares issued and outstanding, respectively						Common stock, $1 par value per share. 25,000,000 shares authorized; 6,566,356 and 6,534,587 shares issued and outstanding, respectively	6,566		6,535
Surplus	Surplus	84,359		83,663		Surplus	84,848		83,663
Treasury stock - 524,078 and 426,693 shares at June 30, 2022 and December 31, 2021		(11,896)		(8,860)
Treasury stock, 721,927 and 426,693 shares, respectively, at cost						Treasury stock, 721,927 and 426,693 shares, respectively, at cost	(18,033)		(8,860)
Unearned common stock held by employee stock ownership plan	Unearned common stock held by employee stock ownership plan	(1,602)		(1,602)		Unearned common stock held by employee stock ownership plan	(1,602)		(1,602)
Retained earnings	Retained earnings	87,815		84,916		Retained earnings	92,405		84,916
Accumulated other comprehensive (loss) income	Accumulated other comprehensive (loss) income	(9,150)		708		Accumulated other comprehensive (loss) income	(13,023)		708
Total stockholders’ equity	Total stockholders’ equity	156,087		165,360		Total stockholders’ equity	151,161		165,360
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	1,853,019	$	1,713,443	Total liabilities and stockholders’ equity	$	1,921,924	$	1,713,443

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


		Three months ended June 30,				Six months ended June 30,				Three months ended September 30,				Nine months ended September 30,
(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	2022		2021		2022		2021			(dollars in thousands, except per share data)	2022		2021		2022		2021
Interest income:	Interest income:										Interest income:
Loans, including fees	Loans, including fees	$	19,120	$	16,839	$	36,339	$	33,662		Loans, including fees	$	21,848	$	17,626	$	58,187	$	51,287
Securities:
Taxable		436		280		772		553
Tax-exempt		429		393		825		746
Securities - taxable											Securities - taxable	648		357		1,599		1,076
Securities - tax-exempt											Securities - tax-exempt	369		306		1,015		886
Cash and cash equivalents	Cash and cash equivalents	52		5		65		8			Cash and cash equivalents	93		17		157		25
Total interest income	Total interest income	20,037		17,517		38,001		34,969			Total interest income	22,958		18,306		60,958		53,274
Interest expense:	Interest expense:										Interest expense:
Deposits	Deposits	1,818		1,368		3,107		2,934			Deposits	4,075		1,327		7,182		4,261
Borrowings	Borrowings	668		737		1,308		1,502			Borrowings	857		722		2,166		2,224
Total interest expense	Total interest expense	2,486		2,105		4,415		4,436			Total interest expense	4,932		2,049		9,348		6,485
Net interest income	Net interest income	17,551		15,412		33,586		30,533			Net interest income	18,026		16,257		51,610		46,789
Provision for loan losses	Provision for loan losses	602		96		1,217		695			Provision for loan losses	526		597		1,743		1,292
Net interest income after provision for loan losses	Net interest income after provision for loan losses	16,949		15,316		32,369		29,838			Net interest income after provision for loan losses	17,500		15,660		49,867		45,497
Non-interest income:	Non-interest income:										Non-interest income:
Mortgage banking income	Mortgage banking income	6,942		19,467		14,038		43,567			Mortgage banking income	7,329		18,726		21,367		62,293
Wealth management income	Wealth management income	1,254		1,163		2,558		2,299			Wealth management income	1,114		1,232		3,672		3,531
SBA loan income	SBA loan income	437		1,490		2,957		2,735			SBA loan income	989		2,688		3,946		5,423
Earnings on investment in life insurance	Earnings on investment in life insurance	137		65		275		131			Earnings on investment in life insurance	138		93		413		224
Net change in the fair value of derivative instruments	Net change in the fair value of derivative instruments	(674)		(2,148)		(840)		(3,092)			Net change in the fair value of derivative instruments	127		(339)		(713)		(3,431)
Net change in the fair value of loans held-for-sale	Net change in the fair value of loans held-for-sale	268		1,235		(856)		(2,632)			Net change in the fair value of loans held-for-sale	(237)		(532)		(1,094)		(3,164)
Net change in the fair value of loans held-for-investment	Net change in the fair value of loans held-for-investment	(835)		41		(1,613)		(61)			Net change in the fair value of loans held-for-investment	(886)		37		(2,499)		(24)
Net gain on hedging activity		1,715		(674)		4,542		3,587
Net gain (loss) on hedging activity											Net gain (loss) on hedging activity	399		(1,189)		4,941		2,397
Net gain on sale of investment securities available-for-sale	Net gain on sale of investment securities available-for-sale	—		—		—		48			Net gain on sale of investment securities available-for-sale	—		314		—		362
Service charges	Service charges	31		33		58		65			Service charges	32		35		90		99
Other	Other	1,128		1,060		2,386		2,133			Other	1,219		1,057		3,605		3,192
Total non-interest income	Total non-interest income	10,403		21,732		23,505		48,780			Total non-interest income	10,224		22,122		33,728		70,902
Non-interest expenses:
Non-interest expense:											Non-interest expense:
Salaries and employee benefits	Salaries and employee benefits	12,926		20,213		28,224		42,352			Salaries and employee benefits	13,360		19,472		41,585		61,824
Occupancy and equipment	Occupancy and equipment	1,176		1,175		2,428		2,326			Occupancy and equipment	1,191		1,133		3,619		3,460
Professional fees	Professional fees	913		816		1,761		1,756			Professional fees	899		873		2,659		2,629
Advertising and promotion	Advertising and promotion	1,189		921		2,175		1,707			Advertising and promotion	1,165		1,089		3,340		2,795
Data processing	Data processing	580		520		1,059		1,136			Data processing	574		530		1,633		1,666
Information technology	Information technology	728		464		1,438		889			Information technology	868		476		2,306		1,365
Pennsylvania bank shares tax	Pennsylvania bank shares tax	212		163		411		326			Pennsylvania bank shares tax	202		152		612		478
Other	Other	1,982		1,974		3,643		4,018			Other	2,002		1,756		5,646		5,773
Total non-interest expenses		19,706		26,246		41,139		54,510
Total non-interest expense											Total non-interest expense	20,261		25,481		61,400		79,990
Income before income taxes	Income before income taxes	7,646		10,802		14,735		24,108			Income before income taxes	7,463		12,301		22,195		36,409
Income tax expense	Income tax expense	1,708		2,544		3,262		5,680			Income tax expense	1,665		2,863		4,927		8,543
Net income	Net income	$	5,938	$	8,258	$	11,473	$	18,428		Net income	$	5,798	$	9,438	$	17,268	$	27,866
Basic earnings per common share	Basic earnings per common share	$	0.99	$	1.37	$	1.91	$	3.06		Basic earnings per common share	$	0.99	$	1.56	$	2.90	$	4.62
Diluted earnings per common share	Diluted earnings per common share	0.96		1.33		1.84		2.98			Diluted earnings per common share	$	0.96	$	1.52	$	2.80	$	4.49
Basic weighted average shares outstanding											Basic weighted average shares outstanding	5,868		6,045		5,964		6,033
Diluted weighted average shares outstanding											Diluted weighted average shares outstanding	6,060		6,231		6,172		6,201

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Three months ended June 30, Six months ended
June 30,
(dollars in thousands) 2022 2021 2022 2021
Net income: $ 5,938 $ 8,258 $ 11,473 $ 18,428
Other comprehensive income:
Net change in unrealized gains on investment securities available for sale:
Net unrealized losses arising during the period, net of tax effect of $(1,025), $429, $(2,651), and $(163), respectively (3,481) 1,414 (8,850) (469)
Less: reclassification adjustment for net gains realized in net income, net of tax effect of $0, $0, $(3), and $12, respectively — — (9) (36)
Reclassification adjustment for securities transferred from available-for-sale to held-to-maturity, net of tax effect of $7, $0, $(301), and $0, respectively 22 — (999) 0
Unrealized investment losses, net of tax effect of $1,018, $429, $(2,955), and $175, respectively (3,459) 1,414 (9,858) (505)
Total other comprehensive (loss) income (3,459) 1,414 (9,858) (505)
Total comprehensive income $ 2,479 $ 9,672 $ 1,615 $ 17,923


	Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)	2022		2021		2022		2021
Net income:	$	5,798	$	9,438	$	17,268	$	27,866

Net change in unrealized gains on investment securities available for sale:
Change in fair value of investment securities available for sale, net of tax of $(1,129), $(312), $(3,694), and $(475), respectively	(3,910)		(1,021)		(12,760)		(1,490)
Reclassification adjustment for net gains (losses) realized in net income, net of tax effect of $0, $(71), $(1), and $(83), respectively	—		(243)		(9)		(279)
Reclassification adjustment for securities transferred from available-for-sale to held-to-maturity, net of tax effect of $8, $0, $(293), and $0, respectively	37		—		(962)		—
Unrealized investment losses, net of tax effect of $(1,121), $(383), $(3,989), and $(558), respectively	(3,873)		(1,264)		(13,731)		(1,769)
Other comprehensive loss	(3,873)		(1,264)		(13,731)		(1,769)

Comprehensive income	$	1,925	$	8,174	$	3,537	$	26,097

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(dollars in thousands)
Common
Stock
Surplus Treasury
Stock Unearned
Common
Stock
ESOP Retained
Earnings Accumulated
Other
Comprehensive (Loss)
Income Total
Balance, January 1, 2021 $ 6,456 $ 81,196 $ (5,828) $ (1,768) $ 59,010 $ 2,556 $ 141,622
Comprehensive income:
Net income 10,170 10,170
Net change in unrealized investment losses, net of tax (1,919) (1,919)
Total comprehensive income 8,251
Dividends declared, $1.125 per share (6,931) (6,931)
Common stock issued through share-based awards and exercises 32 302 334
Stock based compensation 229 229
Balance, March 31, 2021 6,488 81,727 (5,828) (1,768) 62,249 637 143,505
Comprehensive income:
Net income 8,258 8,258
Net change in unrealized investment gains, net of tax 1,414 1,414
Total comprehensive income 9,672
Dividends paid or accrued, $0.125 per share (768) (768)
Common stock issued through share-based awards and exercises 5 52 57
Stock based compensation 419 419
Balance, June 30, 2021 $ 6,493 $ 82,198 $ (5,828) $ (1,768) $ 69,739 $ 2,051 $ 152,885


(dollars in thousands, except per share data)	Common Stock		Surplus		Treasury Stock		Unearned ESOP		Retained Earnings		AOCI		Total
Balance at June 30, 2022	$	6,561	$	84,359	$	(11,896)	$	(1,602)	$	87,815	$	(9,150)	$	156,087
Net income	—		—		—		—		5,798		—		5,798
Other comprehensive loss	—		—		—		—		—		(3,873)		(3,873)
Dividends paid or accrued, $0.20 per share	—		—		—		—		(1,208)		—		(1,208)
Net purchase of treasury stock through publicly announced plans (197,849 shares)	—		—		(6,137)		—		—		—		(6,137)
Common stock issued through share-based awards and exercises	5		112		—		—		—		—		117
Stock based compensation expense	—		377		—		—		—		—		377
Balance at September 30, 2022	$	6,566	$	84,848	$	(18,033)	$	(1,602)	$	92,405	$	(13,023)	$	151,161


(dollars in thousands, except per share data)	Common Stock		Surplus		Treasury Stock		Unearned ESOP		Retained Earnings		AOCI		Total
Balance at December 31, 2021	$	6,535	$	83,663	$	(8,860)	$	(1,602)	$	84,916	$	708	$	165,360
Net income	—		—		—		—		17,268		—		17,268
Other comprehensive loss	—		—		—		—		—		(13,731)		(13,731)
Dividends paid or accrued, $1.60 per share	—		—		—		—		(9,779)		—		(9,779)
Net purchase of treasury stock through publicly announced plans (295,234 shares)	—		—		(9,173)		—		—		—		(9,173)
Common stock issued through share-based awards and exercises	31		454		—		—		—		—		485
Stock based compensation expense	—		731		—		—		—		—		731
Balance at September 30, 2022	$	6,566	$	84,848	$	(18,033)	$	(1,602)	$	92,405	$	(13,023)	$	151,161


(dollars in thousands, except per share data)	Common Stock		Surplus		Treasury Stock		Unearned ESOP		Retained Earnings		AOCI		Total
Balance at June 30, 2021	$	6,493	$	82,198	$	(5,828)	$	(1,768)	$	69,739	$	2,051	$	152,885
Net income	—		—		—		—		9,438		—		9,438
Other comprehensive loss	—		—		—		—		—		(1,264)		(1,264)
Dividends paid or accrued, $0.125 per share	—		—		—		—		(769)		—		(769)
Net purchase of treasury stock through publicly announced plans (78,491 shares)	—		—		(2,197)		—		—		—		(2,197)
Common stock issued through share-based awards and exercises	13		167		—		—		—		—		180
Stock based compensation expense	—		143		—		—		—		—		143
Balance at September 30, 2021	$	6,506	$	82,508	$	(8,025)	$	(1,768)	$	78,408	$	787	$	158,416


(dollars in thousands, except per share data)	Common Stock		Surplus		Treasury Stock		Unearned ESOP		Retained Earnings		AOCI		Total
Balance at December 31, 2020	$	6,456	$	81,196	$	(5,828)	$	(1,768)	$	59,010	$	2,556	$	141,622
Net income	—		—		—		—		27,866		—		27,866
Other comprehensive loss	—		—		—		—		—		(1,769)		(1,769)
Dividends declared, $1.375 per share	—		—		—		—		(8,468)		—		(8,468)
Net purchase of treasury stock through publicly announced plans (78,491 shares)	—		—		(2,197)		—		—		—		(2,197)
Common stock issued through share-based awards and exercises	50		521		—		—		—		—		571
Stock based compensation expense	—		791		—		—		—		—		791
Balance at September 30, 2021	$	6,506	$	82,508	$	(8,025)	$	(1,768)	$	78,408	$	787	$	158,416

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

(dollars in thousands)
Common
Stock
Surplus Treasury
Stock Unearned
Common
Stock
ESOP Retained
Earnings Accumulated
Other
Comprehensive (Loss)
Income Total
Balance, January 1, 2022 $ 6,535 $ 83,663 $ (8,860) $ (1,602) $ 84,916 $ 708 $ 165,360
Comprehensive income:
Net income 5,535 5,535
Net change in unrealized investment losses, net of tax (6,399) (6,399)
Total comprehensive loss (864)
Dividends paid or accrued, $1.20 per share (7,347) (7,347)
Common stock issued through share-based awards and exercises 21 254 275
Stock based compensation 260 260
Balance, March 31, 2022 6,556 84,177 (8,860) (1,602) 83,104 (5,691) 157,684
Comprehensive income:
Net income 5,938 5,938
Net change in unrealized investment losses, net of tax (3,459) (3,459)
Total comprehensive income 2,479
Dividends paid or accrued, $0.20 per share (1,227) (1,227)
Net purchase of treasury stock through publicly announced plans (97,385) (3,036) (3,036)
Common stock issued through share-based awards and exercises 5 88 93
Stock based compensation 94 94
Balance, June 30, 2022 $ 6,561 $ 84,359 $ (11,896) $ (1,602) $ 87,815 $ (9,150) $ 156,087
MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine months ended September 30,
(dollars in thousands)	2022		2021
Net income	$	17,268	$	27,866
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of investment securities	—		(362)
Net amortization of investment premiums and discounts and change in fair value of equity securities	668		991
Depreciation and amortization, net	(1,343)		(4,677)
Provision for loan losses	1,743		1,292
Amortization of issuance costs on subordinated debt	89		88
Stock based compensation	731		791
Net change in fair value of derivative instruments	713		3,431
Net change in fair value of loans held for sale	1,094		3,164
Net change in fair value of loans held for investment	2,499		24
Amortization and net impairment of servicing rights	1,753		707
SBA loan income	(3,946)		(5,423)
Proceeds from sale of loans	863,056		2,027,443
Loans originated for sale	(794,541)		(1,864,132)
Mortgage banking income	(21,367)		(62,293)
(Increase) decrease in accrued interest receivable	(999)		402
Increase in other assets	(1,675)		(2,648)
Earnings from investment in life insurance	(413)		(224)
Decrease in deferred income tax	(219)		(817)
Increase (decrease) in accrued interest payable	1,123		(490)
(Decrease) increase in other liabilities	(2,579)		1,299
Net cash provided by operating activities	63,655		126,432

Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities, repayments and calls	8,662		6,173
Sales	—		20,855
Purchases	(22,176)		(52,468)
Activity in held-to-maturity securities:
Maturities, repayments and calls	540		—
Purchases	(5,500)		—
Increase (decrease) in restricted stock	(100)		3,699
Net increase in loans	(225,967)		(82,711)
Purchases of premises and equipment	(2,020)		(1,496)
Purchase of bank owned life insurance	—		(10,000)
Net cash used in investing activities	(246,561)		(115,948)

Cash flows from financing activities:
Net increase in deposits	227,140		197,712
Decrease in short-term borrowings	—		(3,187)
Decrease in short-term borrowings with original maturity > 90 days	(17,886)		(81,397)
Repayment of long-term debt, net	—		(87,141)


Net purchase of treasury stock	(9,173)		(2,197)
Dividends paid	(9,779)		(8,468)
Share based awards and exercises	485		571
Net cash provided by financing activities	190,787		15,893

Net change in cash and cash equivalents	7,881		26,377
Cash and cash equivalents at beginning of period	23,480		36,744
Cash and cash equivalents at end of period	$	31,361	$	63,121

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	8,225	$	6,976
Income taxes	5,365		11,354


Transfers from loans held for sale to loans held for investment	2,955		7,116


Transfer of securities from AFS to HTM	23,655		—
Lease liabilities arising from obtaining right-of-use assets	10,995		—

See accompanying notes to the unaudited consolidated financial statements.

Table of Contents

MERIDIAN CORPORATION AND SUBSIDIARIES

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(Unaudited)~~

Six months ended June 30,
(dollars in thousands) 2022 2021
Net income $ 11,473 $ 18,428
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Gain on sale of investment securities — (48)
Net amortization of investment premiums and discounts and change in fair value of equity securities 239 664
Depreciation and amortization, net 749 (2,822)
Provision for loan losses 1,217 695
Amortization of issuance costs on subordinated debt 59 59
Stock based compensation 354 648
Net change in fair value of derivative instruments 840 3,092
Net change in fair value of loans held for sale 856 2,632
Net change in fair value of loans held for investment 1,613 61
Amortization and net impairment of servicing rights 1,327 364
SBA loan income (2,957) (2,735)
Proceeds from sale of loans 656,565 1,472,628
Loans originated for sale (620,013) (1,339,916)
Mortgage banking income (14,038) (43,567)
Increase in accrued interest receivable (99) (37)
Decrease (increase) in other assets 1,571 (494)
Earnings from investment in life insurance (275) (131)
Decrease in deferred income tax (153) (810)
Increase (decrease) in accrued interest payable 115 (1,034)
Increase (decrease) in other liabilities (3,764) (1,994)
Net cash provided by operating activities 35,679 105,683
Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities, repayments and calls 6,327 4,421
Sales — 13,639
Purchases (15,707) (37,620)
Activity in held-to-maturity securities:
Maturities, repayments and calls 362 —
Purchases (4,500) —
Decrease in restricted stock 398 2,504
Net increase in loans (136,069) (71,761)
Purchases of premises and equipment (1,028) (1,093)
Net cash used in investing activities (150,217) (89,910)
Cash flows from financing activities:
Net increase in deposits 121,601 171,945
Decrease in short-term borrowings — (5,465)
Increase (decrease) in short-term borrowings with original maturity > 90 days 17,792 (67,855)
Repayment of long-term debt, net — (116,932)
Net purchase of treasury stock (3,036) —
Dividends paid (8,574) (7,699)
Share based awards and exercises 368 391
Net cash provided by (used in) financing activities 128,151 (25,615)
Net change in cash and cash equivalents 13,613 (9,842)
Cash and cash equivalents at beginning of period 23,480 36,744
Cash and cash equivalents at end of period $ 37,093 $ 26,902
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest 4,301 5,471
Income taxes 3,265 8,009
Supplemental disclosure of cash flow information:
Transfers from loans held for sale to loans held for investment 2,848 4,193
Net loans sold, not settled (962) (4,432)
Investment security purchases, not settled — (1,188)
Transfer of securities from AFS to HTM 23,652 —
Lease liabilities arising from obtaining right-of-use assets 10,995 —

~~See accompanying notes to the unaudited consolidated financial statements.~~

~~Table of Contents~~

~~MERIDIAN CORPORATION AND SUBSIDIARIES~~

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of Presentation

The Corporation’s unaudited consolidated financial statements have been prepared in accordance with U.S. ~~generally accepted accounting principles (“GAAP”)~~GAAP for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the consolidated financial position and the results of operations for the interim periods presented have been included.

The preparation of financial statements in conformity with U.S. ~~generally accepted accounting principles~~GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Amounts subject to significant estimates are items such as the allowance for loan losses, ~~and~~ lending related commitments, the fair value of financial instruments, other-than-temporary impairments of investment securities, and the valuations of goodwill, ~~and~~ intangible assets, and servicing assets.

These unaudited consolidated financial statements should be read in conjunction with the Corporation’s filings with the Securities and Exchange Commission (including our Annual Report on Form 10-K for the year ended December 31, 2021) ~~and,~~, subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in Form 10-K and Form 10-Q filings, if any.

Certain prior period amounts have been reclassified to conform with current period presentation. Reclassifications had no effect on net income or stockholders’ equity. Operating results for the three and ~~six~~nine months ended ~~June~~September 30, 2022 are not necessarily indicative of the results for the year ending December 31, 2022 or for any other period.

(2) Earnings per Common Share

Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period reduced by unearned ESOP Plan shares and treasury shares. Diluted earnings per common share takes into account the potential dilution computed pursuant to the treasury stock method that could occur if stock options were exercised and converted into common stock and if restricted stock awards were vested, and SERP plan liabilities were satisfied with common shares. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be anti-dilutive.


		Three Months Ended June 30,			Six Months Ended June 30,		Three months ended September 30,				Nine months ended September 30,
(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	2022		2021	2022	2021		(dollars in thousands, except per share data)	2022		2021		2022		2021
Numerator:
Numerator for earnings per share:								Numerator for earnings per share:
Net income available to common stockholders	Net income available to common stockholders	$	5,938	8,258	11,473	18,428		Net income available to common stockholders	$	5,798	$	9,438	$	17,268	$	27,866
Denominator for basic earnings per share

Denominators for earnings per share:								Denominators for earnings per share:
Weighted average shares outstanding	Weighted average shares outstanding	6,101		6,147	6,115	6,135		Weighted average shares outstanding	5,968		6,157		6,038		6,148
Average unearned ESOP shares	Average unearned ESOP shares	(102)		(115)	(104)	(117)		Average unearned ESOP shares	(100)		(112)		(74)		(115)
Basic weighted averages shares outstanding	Basic weighted averages shares outstanding	5,999		6,032	6,011	6,018		Basic weighted averages shares outstanding	5,868		6,045		5,964		6,033
Dilutive effects of assumed exercises of stock options	Dilutive effects of assumed exercises of stock options	128		171	149	159		Dilutive effects of assumed exercises of stock options	116		125		137		113
Dilutive effects of SERP shares	Dilutive effects of SERP shares	72		—	69	—		Dilutive effects of SERP shares	75		61		71		55
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		6,199		6,203	6,229	6,177
Diluted weighted averages shares outstanding								Diluted weighted averages shares outstanding	6,060		6,231		6,172		6,201

Basic earnings per share	Basic earnings per share	$	0.99	1.37	1.91	3.06		Basic earnings per share	$	0.99	$	1.56	$	2.90	$	4.62
Diluted earnings per share	Diluted earnings per share	$	0.96	1.33	1.84	2.98		Diluted earnings per share	$	0.96	$	1.52	$	2.80	$	4.49
Antidilutive shares excluded from computation of average dilutive earnings per share	Antidilutive shares excluded from computation of average dilutive earnings per share	136		140	21	140		Antidilutive shares excluded from computation of average dilutive earnings per share	237		140		236		140

Table of Contents

(3) Securities

The following table presents the amortized cost and fair value of securities ~~as of June 30, 2022 and December 31, 2021 are as follows:~~at the dates indicated:


		June 30, 2022							September 30, 2022
(dollars in thousands)	(dollars in thousands)	Amortized cost		Gross unrealized gains	Gross unrealized losses	Fair value	# of Securities in unrealized loss position	(dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		# of Securities in unrealized loss position
Securities available-for-sale:	Securities available-for-sale:							Securities available-for-sale:
U.S. asset backed securities	U.S. asset backed securities	$	14,046	10	(316)	13,740	12	U.S. asset backed securities	$	15,763	$	21	$	(311)	$	15,473	14
U.S. government agency mortgage-backed securities		10,110		—	(470)	9,640	10
U.S. government agency collateralized mortgage obligations		21,875		7	(1,276)	20,606	26
U.S. government agency MBS								U.S. government agency MBS	12,079		—		(735)		11,344		13
U.S. government agency CMO								U.S. government agency CMO	21,248		—		(2,079)		19,169		28
State and municipal securities	State and municipal securities	45,070		—	(5,354)	39,716	34	State and municipal securities	44,885		—		(7,646)		37,239		34
U.S. Treasuries	U.S. Treasuries	32,979		—	(2,555)	30,424	25	U.S. Treasuries	32,980		—		(3,699)		29,281		25
Non-U.S. government agency collateralized mortgage obligations		9,303		—	(332)	8,971	9
Non-U.S. government agency CMO								Non-U.S. government agency CMO	9,426		—		(599)		8,827		11
Corporate bonds	Corporate bonds	6,450		—	(259)	6,191	11	Corporate bonds	7,200		—		(534)		6,666		12
Total securities available-for-sale	Total securities available-for-sale	$	139,833	17	(10,562)	129,288	127	Total securities available-for-sale	$	143,581	$	21	$	(15,603)	$	127,999	137

		June 30, 2022
		Amortized cost		Gross unrecognized gains	Gross unrecognized losses	Fair value	# of Securities in unrecognized loss position
Securities held-to-maturity:	Securities held-to-maturity:							Securities held-to-maturity:
State and municipal securities	State and municipal securities	37,111		7	(3,621)	33,497	21	State and municipal securities	$	37,922	$	—	$	(5,599)	$	32,323	27
Total securities held-to-maturity	Total securities held-to-maturity	$	37,111	7	(3,621)	33,497	21	Total securities held-to-maturity	$	37,922	$	—	$	(5,599)	$	32,323	—

December 31, 2021
(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 $ 16,850 55 (68) 16,837 10
U.S. government agency mortgage-backed securities 9,749 124 (60) 9,813 3
U.S. government agency collateralized mortgage obligations 22,276 358 (253) 22,381 10
State and municipal securities 72,099 1,379 (496) 72,982 12
U.S. Treasuries 29,973 1 (246) 29,728 21
Non-U.S. government agency collateralized mortgage obligations 990 — (15) 975 1
Corporate bonds 6,450 154 (18) 6,586 5
Total securities available-for-sale $ 158,387 2,071 (1,156) 159,302 62
Securities held-to-maturity:
State and municipal securities 6,372 219 — 6,591 —
Total securities held-to-maturity $ 6,372 219 — 6,591 —

~~Table of Contents~~


	December 31, 2021
(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	$	16,850	$	55	$	(68)	$	16,837	10
U.S. government agency MBS	9,749		124		(60)		9,813		3
U.S. government agency CMO	22,276		358		(253)		22,381		10
State and municipal securities	72,099		1,379		(496)		72,982		12
U.S. Treasuries	29,973		1		(246)		29,728		21
Non-U.S. government agency CMO	990		—		(15)		975		1
Corporate bonds	6,450		154		(18)		6,586		5
Total securities available-for-sale	$	158,387	$	2,071	$	(1,156)	$	159,302	62

Securities held-to-maturity:
State and municipal securities	$	6,372	$	219	$	—	$	6,591	—
Total securities held-to-maturity	$	6,372	$	219	$	—	$	6,591	—

Although the Corporation’s investment portfolio overall is in a net unrealized loss position at ~~June~~September 30, 2022, the temporary impairment in the above noted securities is primarily the result of changes in market interest rates subsequent to purchase and it is more likely than not that the Corporation will not be required to sell these securities prior to recovery to satisfy liquidity needs, and therefore, no securities are deemed to be other-than-temporarily impaired.

During the quarter-ended March 31, 2022, $27.7 million of municipal securities, previously classified as available-for-sale on the balance sheet, were transferred to the held-to-maturity portfolio at fair value. After transfer, $1.3 million of unrealized losses remain in accumulated other comprehensive income. No gain or loss was recognized as a result of the transfer.

As of ~~June~~September 30, 2022 and December 31, 2021, securities having a fair value of ~~$81.9~~$76.5 million and $92.2 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.

Table of Contents

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 ~~June 30, 2022 and December 31, 2021:~~the dates indicated:


		June 30, 2022								September 30, 2022
		Less than 12 Months			12 Months or more		Total			Less than 12 Months				12 Months or more				Total
(dollars in thousands)	(dollars in thousands)	Fair value		Unrealized losses	Fair value	Unrealized losses	Fair value	Unrealized losses	(dollars in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Securities available-for-sale:	Securities available-for-sale:								Securities available-for-sale:
U.S. asset backed securities	U.S. asset backed securities	$	10,771	(295)	747	(21)	11,518	(316)	U.S. asset backed securities	$	10,122	$	(129)	$	3,254	$	(182)	$	13,376	$	(311)
U.S. government agency mortgage-backed securities		9,610		(470)	—	—	9,610	(470)
U.S. government agency collateralized mortgage obligations		15,599		(828)	3,897	(448)	19,496	(1,276)
U.S. government agency MBS									U.S. government agency MBS	9,795		(638)		1,549		(97)		11,344		(735)
U.S. government agency CMO									U.S. government agency CMO	10,526		(850)		8,617		(1,229)		19,143		(2,079)
State and municipal securities	State and municipal securities	38,130		(5,092)	1,585	(262)	39,715	(5,354)	State and municipal securities	34,801		(7,077)		2,438		(569)		37,239		(7,646)
U.S. Treasuries	U.S. Treasuries	30,424		(2,555)	—	—	30,424	(2,555)	U.S. Treasuries	15,468		(1,443)		13,813		(2,256)		29,281		(3,699)
Non-U.S. government agency collateralized mortgage obligations		8,007		(332)	—	—	8,007	(332)
Non-U.S. government agency CMO									Non-U.S. government agency CMO	8,112		(470)		715		(129)		8,827		(599)
Corporate bonds	Corporate bonds	6,191		(259)	—	—	6,191	(259)	Corporate bonds	5,565		(384)		1,101		(150)		6,666		(534)
Total securities available-for-sale	Total securities available-for-sale	$	118,732	(9,831)	6,229	(731)	124,961	(10,562)	Total securities available-for-sale	$	94,389	$	(10,991)	$	31,487	$	(4,612)	$	125,876	$	(15,603)

		June 30, 2022
		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:	Securities held-to-maturity:								Securities held-to-maturity:
State and municipal securities	State and municipal securities	—		—	24,955	(3,621)	24,955	(3,621)	State and municipal securities	$	—	$	—	$	24,955	$	(5,599)	$	24,955	$	(5,599)
Total securities held-to-maturity	Total securities held-to-maturity	$	—	—	24,955	(3,621)	24,955	(3,621)	Total securities held-to-maturity	$	—	$	—	$	24,955	$	(5,599)	$	24,955	$	(5,599)

~~Table of Contents~~


		December 31, 2021								December 31, 2021
		Less than 12 Months			12 Months or more		Total			Less than 12 Months				12 Months or more				Total
(dollars in thousands)	(dollars in thousands)	Fair value		Unrealized losses	Fair value	Unrealized losses	Fair value	Unrealized losses	(dollars in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Securities available-for-sale:	Securities available-for-sale:								Securities available-for-sale:
U.S. asset backed securities	U.S. asset backed securities	$	12,330	(68)	—	—	12,330	(68)	U.S. asset backed securities	$	12,330	$	(68)	$	—	$	—	$	12,330	$	(68)
U.S. government agency mortgage-backed securities		3,852		(60)	—	—	3,852	(60)
U.S. government agency collateralized mortgage obligations		8,836		(187)	1,657	(66)	10,493	(253)
U.S. government agency MBS									U.S. government agency MBS	3,852		(60)		—		—		3,852		(60)
U.S. government agency CMO									U.S. government agency CMO	8,836		(187)		1,657		(66)		10,493		(253)
State and municipal securities	State and municipal securities	14,994		(427)	2,019	(69)	17,013	(496)	State and municipal securities	14,994		(427)		2,019		(69)		17,013		(496)
U.S. Treasuries	U.S. Treasuries	28,750		(246)	—	—	28,750	(246)	U.S. Treasuries	28,750		(246)		—		—		28,750		(246)
Non-U.S. government agency collateralized mortgage obligations		975		(15)	—	—	975	(15)
Non-U.S. government agency CMO									Non-U.S. government agency CMO	975		(15)		—		—		975		(15)
Corporate bonds	Corporate bonds	2,232		(18)	—	—	2,232	(18)	Corporate bonds	2,232		(18)		—		—		2,232		(18)
Total securities available-for-sale	Total securities available-for-sale	$	71,969	(1,021)	3,676	(135)	75,645	(1,156)	Total securities available-for-sale	$	71,969	$	(1,021)	$	3,676	$	(135)	$	75,645	$	(1,156)

The amortized cost and carrying value of securities ~~at June 30, 2022 and December 31, 2021~~ are shown below by contractual ~~maturities.~~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.

June 30, 2022 December 31, 2021
Available-for-sale Held-to-maturity Available-for-sale Held-to-maturity
(dollars in thousands) Amortized
cost Fair
value Amortized
cost Fair
value Amortized
cost Fair
value Amortized
cost Fair
value
Investment securities:
Due in one year or less $ — — — — $ — — 763 769
Due after one year through five years 17,889 16,823 3,768 3,760 12,934 12,885 2,354 2,397
Due after five years through ten years 27,543 25,337 4,090 3,885 30,890 30,798 3,255 3,425
Due after ten years 53,113 47,911 29,253 25,852 81,548 82,450 — —
Subtotal 98,545 90,071 37,111 33,497 125,372 126,133 6,372 6,591
Mortgage-related securities 41,288 39,217 — — 33,015 33,169 — —
Total $ 139,833 129,288 37,111 33,497 $ 158,387 159,302 6,372 6,591

There were 0 sales of available for sale investment securities for the three and six months ended June 30, 2022. Proceeds from the sale of available for sale investment securities totaled $0 for the three months ended June 30, 2021 and $13.6 million for the six months ended June 30, 2021, resulting in a gross gain on sale of $248 thousand and a gross loss on sale of $200 thousand for the period.


	September 30, 2022								December 31, 2021
	Available-for-sale				Held-to-maturity				Available-for-sale				Held-to-maturity
(dollars in thousands)	Amortized cost		Fair value		Amortized cost		Fair value		Amortized cost		Fair value		Amortized cost		Fair value
Due in one year or less	$	—	$	—	$	—	$	—	$	—	$	—	$	763	$	769
Due after one year through five years	17,892		16,326		4,665		4,588		12,934		12,885		2,354		2,397
Due after five years through ten years	27,386		24,111		3,003		2,643		30,890		30,798		3,255		3,425
Due after ten years	55,550		48,222		30,254		25,092		81,548		82,450		—		—
Subtotal	100,828		88,659		37,922		32,323		125,372		126,133		6,372		6,591
Mortgage-related securities	42,753		39,340		—		—		33,015		33,169		—		—
Total	$	143,581	$	127,999	$	37,922	$	32,323	$	158,387	$	159,302	$	6,372	$	6,591

~~Table of Contents~~

~~(4) Loans Receivable~~

~~Loans and leases outstanding at June 30, 2022 and December 31, 2021 are detailed by category as follows:~~

(dollars in thousands) June 30, 2022 December 31, 2021
Mortgage loans held for sale $ 58,938 80,882
Real estate loans:
Commercial mortgage 548,267 516,928
Home equity lines and loans 56,613 52,299
Residential mortgage (1) 112,549 68,175
Construction 201,163 160,905
Total real estate loans 918,592 798,307
Commercial and industrial 335,759 293,771
Small business loans 120,920 114,158
Paycheck Protection Program loans ("PPP") 21,867 90,194
Main Street Lending Program Loans ("MSLP") 597 597
Consumer 446 419
Leases, net 115,872 88,242
Total portfolio loans and leases 1,514,053 1,385,688
Total loans and leases $ 1,572,991 1,466,570
Loans with predetermined rates $ 473,637 488,220
Loans with adjustable or floating rates 1,099,354 978,350
Total loans and leases $ 1,572,991 1,466,570
Net deferred loan origination costs $ 4,840 769

~~(1) Includes $16,212 and $17,558 of loans at fair value as of June 30, 2022 and December 31, 2021, respectively.~~

~~Components of the net investment in leases at June 30, 2022 and December 31, 2021 are detailed as follows:~~

(dollars in thousands) June 30,
2022 December 31,
2021
Minimum lease payments receivable $ 137,340 105,608
Unearned lease income (21,468) (17,366)
Total $ 115,872 88,242

1310

Table of Contents

~~Age Analysis~~The following table presents the gross gain and (loss) on sale of investment securities available for sale on the dates indicated:


	Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)	2022		2021		2022		2021
Gross gain on sale of available for sale investments	$	—	$	314	$	—	$	562
Gross loss on sale of available for sale investments	—		—		—		200

(4) Loans

The following table presents loans detailed by category at the dates indicated:


(dollars in thousands)	September 30, 2022		December 31, 2021
Real estate loans:
Commercial mortgage	$	545,736	$	516,928
Home equity lines and loans	57,648		52,299
Residential mortgage	153,513		68,175
Construction	244,435		160,905
Total real estate loans	1,001,332		798,307
Commercial and industrial	329,451		293,771
Small business loans	133,904		114,158
PPP loans	8,837		90,194
MSLP loans	597		597
Consumer	497		419
Leases, net	129,574		88,242
Total loans	$	1,604,192	$	1,385,688





Balances included in loans, net of fees and costs:
Residential mortgage real estate loans accounted under fair value option, at fair value	$	14,702	$	17,558
Residential mortgage real estate loans accounted under fair value option, at amortized cost	17,217		17,106
Unearned lease income included in leases, net	(23,940)		(17,366)
Unamortized net deferred loan origination costs	6,157		769

Fair Value Option for Residential Mortgage Real Estate Loans

Residential mortgage real estate loans that were originated by the Corporation and intended for sale in the secondary market to permanent investors, but were either repurchased or unsalable due to defect, and that the Corporation has the ability and intent to hold for the foreseeable future or until maturity or payoff are carried at fair value pursuant to the Corporation's election of the fair value option for these loans. The remaining loans, net of fees and costs are stated at their outstanding unpaid principal balances, net of deferred fees or costs, since the original intent for these loans was to hold them until payoff or maturity.

Nonaccrual and Past Due Loans, Net of Fees and ~~Leases~~Costs

The following tables present an aging of the Corporation’s ~~loan and lease portfolio as~~loans at the dates indicated:


	September 30, 2022
(dollars in thousands)	30-89 days past due		90+ days past due and still accruing		Total past due		Current		Total Accruing Loans and leases		Nonaccrual loans and leases		Total loans		% Delinquent
Commercial mortgage	$	684	$	—	$	684	$	543,208	$	543,892	$	1,844	$	545,736	0.46	%
Home equity lines and loans	189		—		189		56,581		56,770		878		57,648		1.85
Residential mortgage (1)	819		—		819		150,679		151,498		2,015		153,513		1.85
Construction	—		—		—		244,435		244,435		—		244,435		—
Commercial and industrial	887		—		887		312,220		313,107		16,344		329,451		5.23
Small business loans	1,803		—		1,803		130,700		132,503		1,401		133,904		2.39
PPP	—		—		—		8,837		8,837		—		8,837		—

Table of ~~June 30, 2022 and December 31, 2021, respectively:~~Contents

June 30, 2022 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
portfolio
and leases Delinquency
percentage
(dollars in thousands)
Commercial mortgage $ — — — 548,267 548,267 — 548,267 — %
Home equity lines and loans 1 — 1 55,574 55,575 1,038 56,613 1.84
Residential mortgage (1) — — — 110,497 110,497 2,052 112,549 1.82
Construction — — — 201,163 201,163 — 201,163 —
Commercial and industrial — — — 317,361 317,361 18,398 335,759 5.48
Small business loans — — — 119,519 119,519 1,401 120,920 1.16
Paycheck Protection Program loans — — — 21,867 21,867 — 21,867 —
Main Street Lending Program loans — — — 597 597 — 597 —
Consumer — — — 446 446 — 446 —
Leases, net 948 — 948 114,829 115,777�� 95 115,872 0.90
Total $ 949 — 949 1,490,120 1,491,069 22,984 1,514,053 1.58 %


	September 30, 2022
(dollars in thousands)	30-89 days past due		90+ days past due and still accruing		Total past due		Current		Total Accruing Loans and leases		Nonaccrual loans and leases		Total loans		% Delinquent
MSLP	—		—		—		597		597		—		597		—
Consumer	—		—		—		497		497		—		497		—
Leases, net	1,378		—		1,378		127,690		129,068		506		129,574		1.45	%
Total	$	5,760	$	—	$	5,760	$	1,575,444	$	1,581,204	$	22,988	$	1,604,192	1.79	%

(1)Includes ~~$16,212~~$14,702 of loans at fair value as of ~~June 30, 2022 ($15,636~~which $14,151 are current and ~~$576~~$551 are ~~nonaccrual).~~nonaccrual.


December 31, 2021		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 portfolio and leases				Delinquency percentage
											December 31, 2021
(dollars in thousands)	(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 portfolio and leases			Delinquency percentage		(dollars in thousands)		30-89 days past due					90+ days past due and still accruing				Total past due			Current		Total Accruing Loans and leases		Nonaccrual loans and leases	Total loans	% Delinquent
Commercial mortgage	Commercial mortgage									Commercial mortgage	$	—		$	—		$	—					$	516,928							$	516,928							$	—				$	516,928				—	%
Home equity lines and loans	Home equity lines and loans	103				—			103			51,285				51,388			911			52,299					1.94	Home equity lines and loans		103					—			103					51,285					51,388				911		52,299		1.94
Residential mortgage (1)	Residential mortgage (1)	600			—		600		65,177			65,777		2,398			68,175				4.40		Residential mortgage (1)		600			—					600			65,177					65,777					2,398				68,175			4.40
Construction	Construction	—			—		—		160,905			160,905		—			160,905				—		Construction		—			—					—			160,905					160,905					—				160,905			—
Commercial and industrial	Commercial and industrial	—			—		—		274,970			274,970		18,801			293,771				6.40		Commercial and industrial		—			—					—			274,970					274,970					18,801				293,771			6.40
Small business loans	Small business loans	—			—		—		113,492			113,492		666			114,158				0.58		Small business loans		—			—					—			113,492					113,492					666				114,158			0.58
Paycheck Protection Program loans		—			—		—		90,194			90,194		—			90,194				—
Main Street Lending Program loans		—			—		—		597			597		—			597				—
PPP																							PPP		—			—					—			90,194					90,194					—				90,194			—
MSLP																							MSLP		—			—					—			597					597					—				597			—
Consumer	Consumer	—			—		—		419			419		—			419				—		Consumer		—			—					—			419					419					—				419			—
Leases, net	Leases, net	390			—		390		87,640			88,030		212			88,242				0.68		Leases, net		390			—					390			87,640					88,030					212				88,242			0.68	%
Total	Total	$	1,093		—		1,093		1,361,607			1,362,700		22,988			1,385,688				1.74	%	Total		$	1,093		$	—				$	1,093		$	1,361,607				$	1,362,700				$	22,988			$	1,385,688		1.74	%

(1)Includes $17,558 of loans at fair value as of ~~December 31, 2021 ($16,768~~which $16,768 are current, $189 are 30-89 days past due and $601 are ~~nonaccrual).~~nonaccrual.

Foreclosed and Repossessed Assets

At September 30, 2022, there were no consumer mortgage loans secured by residential real estate properties (included in loans, net of fees and costs on the Consolidated Balance Sheets) for which formal foreclosure proceedings were in process.

Risks and Uncertainties

We have no particular credit concentration. Our commercial loans have been proactively managed in an effort to achieve a balanced portfolio with no unusual exposure to one industry. Additionally, most of our lending activity occurs within our primary market areas which are concentrated in southeastern Pennsylvania, Delaware, and Maryland as well as other contiguous markets and represents a geographic concentration. Additionally, our loan portfolio is concentrated in commercial loans. Commercial loans are generally viewed as having more inherent risk of default than residential real estate loans or other consumer loans. Also, the commercial loan balance per borrower is typically larger than that for residential real estate loans and consumer loans, implying higher potential losses on an individual loan basis.

~~Table of Contents~~

(5) Allowance for Loan and Lease Losses (the “Allowance”)

The Allowance is evaluated on at least a quarterly basis, as losses are estimated to be probable and incurred.The provision for loan and lease losses increase or decrease the ALLL, if deemed necessary.Loans deemed to be uncollectible are charged against the Allowance, and subsequent recoveries, if any, are credited to the Allowance.

The Allowance is maintained at a level considered adequate to provide for losses that are probable and estimable. Management’s periodic evaluation of the adequacy of the Allowance 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.

Table of Contents

Roll-Forward of Allowance by Portfolio Segment

The following tables detail the roll-forward of the Corporation’s Allowance, by portfolio segment, for the ~~three and six month~~ periods ~~ended June 30, 2022 and 2021, respectively:~~indicated:


	Three Months Ended September 30, 2022
(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (Credit)		Ending Balance
Commercial mortgage	$	4,327	$	—	$	—	$	(238)	$	4,089
Home equity lines and loans	240		(12)		34		(25)		237
Residential mortgage	489		—		—		217		706
Construction	2,481		—		—		378		2,859
Commercial and industrial	6,287		—		39		(657)		5,669
Small business loans	3,681		—		—		319		4,000
Consumer	3		—		1		(1)		3
Leases	1,297		(419)		—		533		1,411
Total	$	18,805	$	(431)	$	74	$	526	$	18,974

	Nine Months Ended September 30, 2022
(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (Credit)		Ending Balance
Commercial mortgage	$	4,950	$	—	$	—	$	(861)	$	4,089
Home equity lines and loans	224		(12)		42		(17)		237
Residential mortgage	283		—		2		421		706
Construction	2,042		—		—		817		2,859
Commercial and industrial	6,533		—		58		(922)		5,669
Small business loans	3,737		—		—		263		4,000
Consumer	3		—		3		(3)		3
Leases	986		(1,682)		62		2,045		1,411
Total	$	18,758	$	(1,694)	$	167	$	1,743	$	18,974

(dollars in thousands) Balance,
March 31, 2022 Charge-offs Recoveries Provision (Credit) Balance,
June 30, 2022
Commercial mortgage $ 4,150 — — 177 4,327
Home equity lines and loans 208 — 2 30 240
Residential mortgage 357 — — 132 489
Construction 2,257 — — 224 2,481
Commercial and industrial 7,369 — 9 (1,091) 6,287
Small business loans 3,372 — — 309 3,681
Consumer 3 — 1 (1) 3
Leases 1,110 (696) 61 822 1,297
Total $ 18,826 (696) 73 602 18,805
(dollars in thousands)
Balance,
December 31, 2021
Charge-offs Recoveries Provision (Credit)
Balance,
June 30, 2022
Commercial mortgage $ 4,950 — — (623) 4,327
Home equity lines and loans 224 — 8 8 240
Residential mortgage 283 — 2 204 489
Construction 2,042 — — 439 2,481
Commercial and industrial 6,533 — 20 (266) 6,287
Small business loans 3,737 — — (56) 3,681
Consumer 3 — 2 (2) 3
Leases 986 (1,263) 61 1,513 1,297
Total $ 18,758 (1,263) 93 1,217 18,805


	Three Months Ended September 30, 2021
(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (Credit)		Ending Balance
Commercial mortgage	$	7,146	$	—	$	—	$	(604)	$	6,542
Home equity lines and loans	281		—		1		(9)		273
Residential mortgage	324		—		1		(49)		276
Construction	2,241		—		—		44		2,285
Commercial and industrial	5,360		—		15		239		5,614
Small business loans	2,235		—		—		864		3,099
Consumer	4		—		1		(2)		3
Leases	770		—		—		114		884
Total	$	18,361	$	—	$	18	$	597	$	18,976

	Nine Months Ended September 30, 2021
(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (Credit)		Ending Balance
Commercial mortgage	$	7,451	$	—	$	—	$	(909)	$	6,542
Home equity lines and loans	434		—		5		(166)		273
Residential mortgage	385		—		5		(114)		276
Construction	2,421		—		—		(136)		2,285
Commercial and industrial	5,431		—		33		150		5,614
Small business loans	1,259		—		—		1,840		3,099
Consumer	4		—		3		(4)		3
Leases	382		(129)		—		631		884
Total	$	17,767	$	(129)	$	46	$	1,292	$	18,976

1513

Table of Contents

(dollars in thousands) Balance,
March 31, 2021 Charge-offs Recoveries Provision (Credit) June 30, 2021
Commercial mortgage $ 7,655 — — (509) 7,146
Home equity lines and loans 310 — 2 (31) 281
Residential mortgage 314 — 2 8 324
Construction 2,311 — — (70) 2,241
Commercial and industrial 5,286 — 13 61 5,360
Small business loans 1,920 — — 315 2,235
Consumer 4 — 1 (1) 4
Leases 576 (129) — 323 770
Total $ 18,376 (129) 18 96 18,361
(dollars in thousands)
Balance,
December 31, 2020
Charge-offs Recoveries Provision (Credit)
Balance,
June 30, 2021
Commercial mortgage $ 7,451 — — (305) 7,146
Home equity lines and loans 434 — 4 (157) 281
Residential mortgage 385 — 4 (65) 324
Construction 2,421 — — (180) 2,241
Commercial and industrial 5,431 — 18 (89) 5,360
Small business loans 1,259 — — 976 2,235
Consumer 4 — 2 (2) 4
Leases 382 (129) — 517 770
Total $ 17,767 (129) 28 695 18,361

Allowance Allocated by Portfolio Segment

The following tables detail the allocation of the allowance for loan and lease losses and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment ~~as of June 30, 2022 and December 31, 2021.~~at the dates indicated:


		Allowance on loans and leases							Carrying value of loans and leases										September 30, 2022
June 30, 2022		Individually evaluated for impairment			Collectively evaluated for impairment		Total		Individually evaluated for impairment			Collectively evaluated for impairment			Total
											Allowance on loans and leases										Carrying value of loans and leases
(dollars in thousands)	(dollars in thousands)			Individually evaluated for impairment				Collectively evaluated for impairment		Total							Individually evaluated for impairment			Collectively evaluated for impairment					Total			(dollars in thousands)		Individually evaluated for impairment					Collectively evaluated for impairment					Total				Individually evaluated for impairment		Collectively evaluated for impairment	Total
Commercial mortgage	Commercial mortgage											Commercial mortgage	$	—		$		4,089				$	4,089					$	4,196				$	541,540				$	545,736
Home equity lines and loans	Home equity lines and loans	—				240		240		1,038				55,575			56,613				Home equity lines and loans		—			237					237					878					56,770				57,648
Residential mortgage	Residential mortgage	—			489		489		1,476			94,861			96,337			Residential mortgage	—					706			706					1,464					137,347					138,811
Construction	Construction	—			2,481		2,481		1,206			199,957			201,163			Construction	—					2,859			2,859					1,206					243,229					244,435
Commercial and industrial	Commercial and industrial	2,440			3,847		6,287		16,553			319,206			335,759			Commercial and industrial	2,193					3,476			5,669					16,358					313,093					329,451
Small business loans	Small business loans	376			3,305		3,681		1,495			119,425			120,920			Small business loans	376					3,624			4,000					1,479					132,425					133,904
Paycheck Protection Program loans		—			—		—		—			21,867			21,867		(2)
Main Street Lending Program		—			—		—		—			597			597		(2)
PPP (2)																		PPP (2)	—					—			—					—					8,837					8,837
MSLP (2)																		MSLP (2)	—					—			—					—					597					597
Consumer	Consumer	—			3		3		—			446			446			Consumer	—					3			3					—					497					497
Leases, net	Leases, net	—			1,297		1,297		95			115,777			115,872			Leases, net	—					1,411			1,411					506					129,068					129,574
Total(1)	Total(1)	$	2,816		15,989		18,805		26,086			1,471,755			1,497,841		(1)	Total(1)	$	2,569				$	16,405		$	18,974				$	26,087				$	1,563,403				$	1,589,490

~~Table of Contents~~


		Allowance on loans and leases							Carrying value of loans and leases										December 31, 2021
December 31, 2021		Individually evaluated for impairment			Collectively evaluated for impairment		Total		Individually evaluated for impairment			Collectively evaluated for impairment			Total
											Allowance on loans and leases										Carrying value of loans and leases
(dollars in thousands)	(dollars in thousands)			Individually evaluated for impairment				Collectively evaluated for impairment		Total							Individually evaluated for impairment			Collectively evaluated for impairment					Total			(dollars in thousands)		Individually evaluated for impairment					Collectively evaluated for impairment					Total				Individually evaluated for impairment		Collectively evaluated for impairment	Total
Commercial mortgage	Commercial mortgage											Commercial mortgage	$	—		$		4,950				$	4,950					$	3,556				$	513,372				$	516,928
Home equity lines and loans	Home equity lines and loans	—				224		224		905				51,394			52,299				Home equity lines and loans		—			224					224					905					51,394				52,299
Residential mortgage	Residential mortgage	—			283		283		1,797			48,820			50,617			Residential mortgage	—					283			283					1,797					48,820					50,617
Construction	Construction	—			2,042		2,042		1,206			159,699			160,905			Construction	—					2,042			2,042					1,206					159,699					160,905
Commercial and industrial	Commercial and industrial	2,900			3,633		6,533		17,361			276,410			293,771			Commercial and industrial	2,900					3,633			6,533					17,361					276,410					293,771
Small business loans	Small business loans	376			3,361		3,737		792			113,366			114,158			Small business loans	376					3,361			3,737					792					113,366					114,158
Paycheck Protection Program loans		—			—		—		—			90,194			90,194		(2)
Main Street Lending Program		—			—		—		—			597			597		(2)
PPP (2)																		PPP (2)	—					—			—					—					90,194					90,194
MSLP (2)																		MSLP (2)	—					—			—					—					597					597
Consumer	Consumer	—			3		3		—			419			419			Consumer	—					3			3					—					419					419
Leases, net	Leases, net	—			986		986		212			88,030			88,242			Leases, net	—					986			986					212					88,030					88,242
Total(1)	Total(1)	$	3,276		15,482		18,758		25,829			1,342,301			1,368,130		(1)	Total(1)	$	3,276				$	15,482		$	18,758				$	25,829				$	1,342,301				$	1,368,130

(1)Excludes deferred fees and loans carried at fair value.

(2)PPP and MSLP loans are not reserved against as they are 100% guaranteed.

Loans and Leases by Credit Ratings

As part of the process of determining the Allowance 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

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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.

~~Table of Contents~~

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 loan and lease losses ~~as of June 30, 2022 and December 31, 2021:~~at the dates indicated:


June 30, 2022		Pass			Special mention		Substandard			Doubtful			Total
									September 30, 2022
(dollars in thousands)	(dollars in thousands)			Pass			Special mention				Substandard						Doubtful					Total	(dollars in thousands)		Pass				Special Mention				Substandard			Doubtful	Total
Commercial mortgage	Commercial mortgage							Commercial mortgage	$	511,993			$	28,382					$	5,361						$	—			$	545,736
Home equity lines and loans	Home equity lines and loans	55,107				—		1,506				—				56,613		Home equity lines and loans		56,290				—				1,358				—			57,648
Construction	Construction	192,163			9,000		—			—			201,163		Construction	235,464					8,971				—				—				244,435
Commercial and industrial	Commercial and industrial	279,864			11,488		44,407			—			335,759		Commercial and industrial	280,929					5,414				43,108				—				329,451
Small business loans	Small business loans	119,519			—		1,401			—			120,920		Small business loans	132,503					—				1,401				—				133,904
Paycheck Protection Program loans		21,867			—		—			—			21,867
Main Street Lending Program loans		597			—		—			—			597
PPP															PPP	8,837					—				—				—				8,837
MSLP															MSLP	597					—				—				—				597
Total	Total	$	1,183,368		49,094		52,724			—			1,285,186		Total	$	1,226,613				$	42,767			$	51,228			$	—			$	1,320,608

Commercial and industrial loans classified as substandard totaled ~~$44.4~~$43.1 million as of ~~June~~September 30, 2022, an increase of ~~$1.5 million,~~$238 thousand, from $42.9 million as of December 31, 2021. The majority of this amount is comprised of 1916 different loan relationships with no specific industry concentration and a ~~$13.8~~$13.5 million commercial loan relationship in the advertising industry that became a non-performing loan relationship late in 2021.


December 31, 2021		Pass			Special mention		Substandard			Doubtful			Total
									December 31, 2021
(dollars in thousands)	(dollars in thousands)			Pass			Special mention				Substandard						Doubtful					Total	(dollars in thousands)		Pass				Special mention				Substandard			Doubtful	Total
Commercial mortgage	Commercial mortgage							Commercial mortgage	$	481,551			$	29,452					$	5,925						$	—			$	516,928
Home equity lines and loans	Home equity lines and loans	50,908				—		1,391				—				52,299		Home equity lines and loans		50,908				—				1,391				—			52,299
Construction	Construction	151,608			9,297		—			—			160,905		Construction	151,608					9,297				—				—				160,905
Commercial and industrial	Commercial and industrial	236,298			14,603		42,870			—			293,771		Commercial and industrial	236,298					14,603				42,870				—				293,771
Small business loans	Small business loans	112,096			—		2,062			—			114,158		Small business loans	112,096					—				2,062				—				114,158
Paycheck Protection Program loans		90,194			—		—			—			90,194
Main Street Lending Program loans		597			—		—			—			597
PPP															PPP	90,194					—				—				—				90,194
MSLP															MSLP	597					—				—				—				597
Total	Total	$	1,123,252		53,352		52,248			—			1,228,852		Total	$	1,123,252				$	53,352			$	52,248			$	—			$	1,228,852

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 ~~as of June 30, 2022 and December 31, 2021.~~at the dates indicated:


		June 30, 2022				December 31, 2021					September 30, 2022						December 31, 2021
(dollars in thousands)	(dollars in thousands)	Performing		Nonperforming	Total	Performing		Nonperforming	Total	(dollars in thousands)	Performing		Non- performing		Total		Performing		Non- performing		Total
Residential mortgage (1)	Residential mortgage (1)	$	94,285	2,052	96,337	$	48,820	1,797	50,617	Residential mortgage (1)	$	151,498	$	2,015	$	153,513	$	48,820	$	1,797	$	50,617
Consumer	Consumer	446		—	446	419		—	419	Consumer	497		—		497		419		—		419
Leases, net	Leases, net	115,777		95	115,872	88,030		212	88,242	Leases, net	129,068		506		129,574		88,030		212		88,242
Total	Total	$	210,508	2,147	212,655	$	137,269	2,009	139,278	Total	$	281,063	$	2,521	$	283,584	$	137,269	$	2,009	$	139,278

(1) There were 4four nonperforming residential mortgage loans at ~~June~~September 30, 2022 and 4four nonperforming residential mortgage loans at December 31, 2021 with a combined outstanding principal balance of ~~$576~~$551 thousand and $601 thousand, respectively, which were carried at fair value and not included in the table above. This decrease was largely due to a residential mortgage loan that was nonperforming at December 31, 2021, which subsequently paid off before ~~June~~September 30, 2022.

~~No troubled debt restructurings performing according to modified terms are included in performing residential mortgages below as of June 30, 2022 and December 31, 2021.~~

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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 ~~for~~at the ~~periods.~~dates indicated.


		As of June 30, 2022				As of December 31, 2021				September 30, 2022						December 31, 2021
(dollars in thousands)	(dollars in thousands)	Recorded investment		Principal balance	Related allowance	Recorded investment	Principal balance	Related allowance	(dollars in thousands)	Recorded investment		Principal balance		Related allowance		Recorded investment		Principal balance		Related allowance
Impaired loans with related allowance:	Impaired loans with related allowance:								Impaired loans with related allowance:
Commercial and industrial	Commercial and industrial	$	16,281	16,582	2,440	17,147	17,310	2,900	Commercial and industrial	$	16,095	$	16,552	$	2,193	$	17,147	$	17,310	$	2,900
Small business loans	Small business loans	666		666	376	666	666	376	Small business loans	666		666		376		666		666		376
Home equity lines and loans		—		—	—	—	—	—
Residential mortgage		—		—	—	—	—	—

Total	Total	$	16,947	17,248	2,816	17,813	17,976	3,276	Total	$	16,761	$	17,218	$	2,569	$	17,813	$	17,976	$	3,276
Impaired loans without related allowance:	Impaired loans without related allowance:								Impaired loans without related allowance:
Commercial mortgage	Commercial mortgage	$	4,223	4,233	—	3,556	3,559	—	Commercial mortgage	$	4,196	$	4,206	$	—	$	3,556	$	3,559	$	—
Commercial and industrial	Commercial and industrial	272		334	—	214	269	—	Commercial and industrial	263		329		—		214		269		—
Small business loans	Small business loans	829		829	—	126	126	—	Small business loans	813		813		—		126		126		—
Home equity lines and loans	Home equity lines and loans	1,038		1,074	—	905	935	—	Home equity lines and loans	878		878		—		905		935		—
Residential mortgage	Residential mortgage	1,476		1,476	—	1,797	1,797	—	Residential mortgage	1,464		1,464		—		1,797		1,797		—
Construction	Construction	1,206		1,206	—	1,206	1,206	—	Construction	1,206		1,206		—		1,206		1,206		—
Leases	Leases	95		95	—	212	212	—	Leases	506		506		—		212		212		—
Total	Total	9,139		9,247	—	8,016	8,104	—	Total	$	9,326	$	9,402	$	—	$	8,016	$	8,104	$	—
Grand Total	Grand Total	$	26,086	26,495	2,816	25,829	26,080	3,276	Grand Total	$	26,087	$	26,620	$	2,569	$	25,829	$	26,080	$	3,276

The following table details the average recorded investment and interest income recognized on impaired loans by portfolio segment.


		Three Months Ended June 30, 2022			Three Months Ended June 30, 2021		Three Months Ended September 30, 2022				Three Months Ended September 30, 2021
(dollars in thousands)	(dollars in thousands)	Average Recorded Investment		Interest Income Recognized	Average recorded investment	Interest income recognized		(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average recorded investment		Interest income recognized
Impaired loans with related allowance:	Impaired loans with related allowance:							Impaired loans with related allowance:
Commercial and industrial	Commercial and industrial	$	16,412	—	3,309	5		Commercial and industrial	$	16,195	$	—	$	3,242	$	5
Small business loans	Small business loans	666		—	917	—		Small business loans	666		—		916		—
Home equity lines and loans	Home equity lines and loans	—		—	93	—		Home equity lines and loans	—		—		89		—
Residential mortgage	Residential mortgage	—		—	686	—		Residential mortgage	—		—		169		—
Total	Total	$	17,078	—	5,005	5		Total	$	16,861	$	—	$	4,416	$	5
Impaired loans without related allowance:	Impaired loans without related allowance:							Impaired loans without related allowance:
Commercial mortgage	Commercial mortgage	$	4,241	29	726	8		Commercial mortgage	$	4,212	$	29	$	2,573	$	8
Commercial and industrial	Commercial and industrial	293		—	969	—		Commercial and industrial	286		—		473		19
Small business loans	Small business loans	835		2	161	4		Small business loans	819		2		147		3
Home equity lines and loans	Home equity lines and loans	1,040		23	824	—		Home equity lines and loans	878		15		823		—
Residential mortgage	Residential mortgage	1,480		166	1,125	3		Residential mortgage	1,468		22		1,636		6
Construction	Construction	1,206		16	1,206	14		Construction	1,206		20		1,206		17
Leases	Leases	102		—	39	—		Leases	500		—		—		—
Total	Total	$	9,197	236	5,050	29		Total	$	9,369	$	88	$	6,858	$	53
Grand Total	Grand Total	$	26,275	236	10,055	34		Grand Total	$	26,230	$	88	$	11,274	$	58


	Nine Months Ended September 30, 2022				Nine Months Ended September 30, 2021
(dollars in thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Impaired loans with related allowance:
Commercial and industrial	$	16,363	$	—	$	3,306	$	15
Small business loans	666		—		917		—

1916

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Six Months Ended
June 30, 2022 Six Months Ended
June 30, 2021
(dollars in thousands) Average
recorded
investment Interest
income
recognized Average
recorded
investment Interest
income
recognized
Impaired loans with related allowance:
Commercial and industrial $ 16,449 — 3,339 10
Small business loans 666 — 917 —
Home equity lines and loans — — 94 —
Residential mortgage — — 687 —
Total 17,115 — 5,037 10
Impaired loans without related allowance:
Commercial mortgage 4,279 48 730 16
Commercial and industrial 297 — 1,002 —
Small business loans 844 5 169 8
Home equity lines and loans 1,044 23 824 —
Residential mortgage 1,483 168 1,126 3
Construction 1,206 31 1,206 29
Leases 103 — 80 —
Total 9,256 275 5,137 56
Grand Total $ 26,371 275 10,174 66


	Nine Months Ended September 30, 2022				Nine Months Ended September 30, 2021
(dollars in thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Impaired loans with related allowance:
Home equity lines and loans	—		—		92		—
Residential mortgage	—		—		170		—
Total	$	17,029	$	—	$	4,485	$	15
Impaired loans without related allowance:
Commercial mortgage	4,257		77		2,584		24
Commercial and industrial	293		—		485		19
Small business loans	835		7		161		11
Home equity lines and loans	878		39		824		—
Residential mortgage	1,478		190		1,640		9
Construction	1,206		51		1,206		47
Leases	510		—		53		—
Total	$	9,457	$	364	$	6,953	$	110
Grand Total	$	26,486	$	364	$	11,438	$	125

Troubled Debt Restructuring

The restructuring of a loan is considered a TDR if both of the following conditions are met: (i) the borrower is experiencing financial difficulties, and (ii) the creditor has granted a concession. The most common concessions granted include one or more modifications to the terms of the debt, such as (a) a reduction in the interest rate for the remaining life of the debt, (b) an extension of the maturity date at an interest rate lower than the current market rate for new debt with similar risk, (c) a temporary period of interest-only payments, (d) a reduction in the contractual payment amount for either a short period or remaining term of the loan, and (e) for leases, a reduced lease payment. A less common concession granted is the forgiveness of a portion of the principal.

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower, were a concession not granted. The determination of whether a concession has been granted is very subjective in nature. For example, simply extending the term of a loan at its original interest rate or even at a higher interest rate could be interpreted as a concession unless the borrower could readily obtain similar credit terms from a different lender.

The ~~balance of~~following table presents information about TDRs at ~~June~~the dates indicated:


(dollars in thousands)	September 30, 2022		December 31, 2021
TDRs included in nonperforming loans and leases	$	193	$	361
TDRs in compliance with modified terms	3,637		3,446
Total TDRs	$	3,830	$	3,807

There were no new loan modifications granted during the three months ended September 30, 2022 and ~~December 31, 2021 are as follows:~~

June 30, 2022 December 31, 2021
(dollars in thousands)
TDRs included in nonperforming loans and leases $ 197 361
TDRs in compliance with modified terms 3,679 3,446
Total TDRs $ 3,876 3,807

~~There was~~ 1 new loan modification ~~for $700 thousand granted during the three and six months ended June 30, 2022 for~~on a commercial mortgage ~~and~~for $684 thousand for the nine months ended September 30, 2022, while there were no loan or lease modifications granted during the three and ~~six~~nine months ~~June~~September 30, 2021 that were ~~categorized~~classified as a TDR, and there were no subsequent defaults during the same time periods.

~~Table of Contents~~

(6) Short-Term Borrowings and Long-Term Debt

The Corporation’s short-term borrowings generally consist of federal funds purchased and short-term borrowings extended under agreements with the ~~Federal Home Loan Bank of Pittsburgh (“FHLB”).~~FHLB or other correspondent banks. The Corporation has 2two unsecured Federal funds borrowing facilities with correspondent banks: one of $24 million and one of $15 million. Federal funds purchased generally represent one-day borrowings. The Corporation had $0 in Federal funds purchased at ~~June~~September 30, 2022 and December 31, 2021. The Corporation also has a facility with the Federal Reserve Bank discount window of ~~$11.5~~$9.2 million. This facility is fully secured by investment securities. There were no borrowings under this at ~~June 30, 2022 or at December 31, 2021.~~

~~Short-term borrowings at June~~September 30, 2022 and December 31, ~~2021 consisted~~2021.

Table of Contents

The following table presents short-term borrowings at the ~~following notes:~~dates indicated:


					Balance as of
(dollars in thousands)	(dollars in thousands)	Maturity date	Interest rate		June 30, 2022		December 31, 2021	(dollars in thousands)	Maturity date	Interest rate		September 30, 2022		December 31, 2021
Open Repo Plus Weekly	Open Repo Plus Weekly	6/5/2023	1.75	%	54,250		36,458	Open Repo Plus Weekly	6/5/2023	3.11	%	$	23,458	$	36,458
Mid-term Repo-fixed	Mid-term Repo-fixed	9/12/2022	0.23		4,886		4,886	Mid-term Repo-fixed	9/12/2022	0.23		—		4,886
Total	Total				$	59,136	41,344	Total				$	23,458	$	41,344

The Corporation had no long-term debt as of ~~June~~September 30, 2022 or December 31, 2021.

The FHLB ~~of Pittsburgh~~ has also issued ~~$56.1~~$74.8 million of letters of credit to the Corporation for the benefit of the Corporation’s public deposit funds and loan customers. These letters of credit expire throughout the remainder of 2022.

The Corporation has a maximum borrowing capacity with the FHLB of ~~$484.1~~$529.0 million as of ~~June~~September 30, 2022 and $505.4 million as of December 31, 2021. All advances and letters of credit from the FHLB are secured by a blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation’s borrowing agreement with the FHLB.

(7) Servicing Assets

The Corporation sells certain residential mortgage loans and the guaranteed portion of certain SBA loans to third parties and retains servicing rights and receives servicing fees. All such transfers are accounted for as sales. When the Corporation sells a residential mortgage loan, it does not retain any portion of that loan and its continuing involvement in such transfers is limited to certain servicing responsibilities. While the Corporation may retain a portion of certain sold SBA loans, its continuing involvement in the portion of the loan that was sold is limited to certain servicing responsibilities. When the contractual servicing fees on loans sold with servicing retained are expected to be more than adequate compensation to a servicer for performing the servicing, a capitalized servicing asset is recognized. ~~The Corporation accounts for the transfers and servicing of financial assets in accordance with ASC 860, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.~~

Residential Mortgage Loans

The ~~mortgage servicing rights (“MSRs”) are~~related MSR asset is amortized over the period of the estimated future net servicing life of the underlying assets. MSRs are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the MSR. The Corporation serviced $1.0 billion of residential mortgage loans as of ~~June~~September 30, 2022 and December 31, 2021. During the three and ~~six~~nine months ended ~~June~~September 30, 2022, the Corporation recognized servicing fee income of ~~$653~~$643 thousand and ~~$1.3~~$1.9 million compared to ~~$481~~$562 thousand and ~~$842 thousand,~~$1.4 million, during the three and ~~six~~nine months ended ~~June~~September 30, 2021, respectively.

~~Table of Contents~~

Changes in the MSR balance are summarized as follows:


		Three Months Ended June 30,			Six Months Ended June 30,			Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)	(dollars in thousands)	2022		2021	2022		2021		(dollars in thousands)	2022		2021		2022		2021
Balance at beginning of the period	Balance at beginning of the period	$	10,888	7,118	$	10,756	4,647		Balance at beginning of the period	$	10,610	$	8,942	$	10,756	$	4,647
Servicing rights capitalized	Servicing rights capitalized	51		2,154	583		4,496		Servicing rights capitalized	65		1,360		648		5,856
Amortization of servicing rights	Amortization of servicing rights	(332)		(271)	(736)		(470)		Amortization of servicing rights	(356)		(316)		(1,092)		(786)
Change in valuation allowance	Change in valuation allowance	3		(59)	7		269		Change in valuation allowance	(4)		111		3		380
Balance at end of the period	Balance at end of the period	$	10,610	8,942	$	10,610	8,942		Balance at end of the period	$	10,315	$	10,097	$	10,315	$	10,097

Activity in the valuation allowance for MSRs was as follows:


		Three Months Ended June 30,			Six Months Ended June 30,			Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)	(dollars in thousands)	2022		2021	2022		2021		(dollars in thousands)	2022		2021		2022		2021
Valuation allowance, beginning of period	Valuation allowance, beginning of period	$	(4)	(107)	$	(8)	(435)		Valuation allowance, beginning of period	$	(1)	$	(166)	$	(8)	$	(435)
Impairment	Impairment	—		(59)	—		—		Impairment	(4)		—		(4)		—
Recovery	Recovery	3		—	7		269		Recovery	—		111		7		380
Valuation allowance, end of period	Valuation allowance, end of period	$	(1)	(166)	$	(1)	(166)		Valuation allowance, end of period	$	(5)	$	(55)	$	(5)	$	(55)

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 ~~June~~September 30, 2022, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to ~~7.13%~~7.11% and a discount rate equal to ~~9.00%~~9.50%. At December 31, 2021, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 7.23% and a discount rate equal to 9.00%. Due in part to market volatility as interest rates increased, the prepayment speed assumption has decreased from December 31, 2021 to ~~June~~September 30, 2022. As interest rates have started to increase and the number of mortgage refinancings have started to decline, model inputs have been adjusted to align the MSRs fair value with market conditions. ~~The discount rate assumption is unchanged over this period as the underlying credit quality~~

Table of ~~the loans sold in each period is relatively unchanged.~~Contents

~~At June 30, 2022 and December 31, 2021, the~~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) June 30, 2022 December 31, 2021
Fair value of residential mortgage servicing rights $ 12,270 $ 11,241
Weighted average life (months) 16 11
Prepayment speed 7.13 % 7.23 %
Impact on fair value:
10% adverse change $ (445) $ (376)
20% adverse change (862) (731)
Discount rate 9.00 % 9.00 %
Impact on fair value:
10% adverse change $ (490) $ (436)
20% adverse change (945) (840)

~~Table of Contents~~


(dollars in thousands)	September 30, 2022			December 31, 2021
Fair value of residential mortgage servicing rights	$	12,132		$	11,241

Weighted average life (months)	19			11

Prepayment speed	7.11		%	7.23		%
Impact on fair value:
10% adverse change	$	(524)		$	(376)
20% adverse change	(1,010)			(731)

Discount rate	9.50		%	9.00		%
Impact on fair value:
10% adverse change	$	(426)		$	(436)
20% adverse change	(824)			(840)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a articular assumption on the fair value of the MSRs is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.

SBA Loans

SBA loan servicing assets are amortized over the period of the estimated future net servicing life of the underlying assets. SBA loan servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the SBA loan servicing asset. The Corporation serviced ~~$143.2~~$156.3 million and $115.1 million of SBA loans, as of ~~June~~September 30, 2022 and December 31, 2021, respectively.

Changes in the SBA loan servicing asset balance are summarized as follows:


		Three Months Ended June 30,			Six Months Ended June 30,			Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)	(dollars in thousands)	2022		2021	2022		2021		(dollars in thousands)	2022		2021		2022		2021
Balance at beginning of the period	Balance at beginning of the period	$	2,508	1,160	$	2,009	970		Balance at beginning of the period	$	2,250	$	1,385	$	2,009	$	970
Servicing rights capitalized	Servicing rights capitalized	247		304	840		578		Servicing rights capitalized	306		588		1,146		1,166
Amortization of servicing rights	Amortization of servicing rights	(225)		(87)	(350)		(154)		Amortization of servicing rights	(173)		(112)		(523)		(266)
Change in valuation allowance	Change in valuation allowance	(280)		8	(249)		(9)		Change in valuation allowance	109		(26)		(140)		(35)
Balance at end of the period	Balance at end of the period	$	2,250	1,385	$	2,250	1,385		Balance at end of the period	$	2,492	$	1,835	$	2,492	$	1,835

Activity in the valuation allowance for SBA loan servicing assets was as follows:


		Three Months Ended June 30,			Six Months Ended June 30,			Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)	(dollars in thousands)	2022		2021	2022		2021		(dollars in thousands)	2022		2021		2022		2021
Valuation allowance, beginning of period	Valuation allowance, beginning of period	$	(65)	(56)	$	(96)	(39)		Valuation allowance, beginning of period	$	(345)	$	(48)	$	(96)	$	(39)
Impairment	Impairment	(280)		—	(249)		(9)		Impairment	—		(26)		(280)		(35)
Recovery	Recovery	—		8	—		—		Recovery	109		—		140		—
Valuation allowance, end of period	Valuation allowance, end of period	$	(345)	(48)	$	(345)	(48)		Valuation allowance, end of period	$	(236)	$	(74)	$	(236)	$	(74)

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 ~~June~~September 30, 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 ~~13.00%,~~12.88% and a discount rate equal to ~~12.38%~~12.24%. At December 31, 2021, the key assumptions used to determine the fair value of the Corporation’s SBA

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loan servicing rights included a lifetime constant prepayment rate equal to 12.38%, and a discount rate equal to 9.01%. The change in valuation allowance due to impairment, noted in the tables above, was largely due to the increased prepayment speed experienced in the current year periods and the rising interest rate environment.

~~At June 30, 2022 and December 31, 2021, the~~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.

~~Table of Contents~~


(dollars in thousands)	(dollars in thousands)	June 30, 2022			December 31, 2021			(dollars in thousands)	September 30, 2022			December 31, 2021
Fair value of SBA loan servicing rights	Fair value of SBA loan servicing rights	$	2,295		$	2,107		Fair value of SBA loan servicing rights	$	2,578		$	2,107

Weighted average life (years)	Weighted average life (years)	3.8			3.8			Weighted average life (years)	3.8			3.8

Prepayment speed	Prepayment speed	13.00		%	12.38		%	Prepayment speed	12.88		%	12.38		%
Impact on fair value:	Impact on fair value:							Impact on fair value:
10% adverse change	10% adverse change	$	(74)		$	(69)		10% adverse change	$	(83)		$	(69)
20% adverse change	20% adverse change	(137)			(132)			20% adverse change	(160)			(132)

Discount rate	Discount rate	12.38		%	9.01		%	Discount rate	12.24		%	9.01		%
Impact on fair value:	Impact on fair value:							Impact on fair value:
10% adverse change	10% adverse change	$	(59)		$	(54)		10% adverse change	$	(61)		$	(54)
20% adverse change	20% adverse change	(108)			(106)			20% adverse change	(120)			(106)

The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. As indicated, changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of an adverse variation in a particular assumption on the fair value of the SBA servicing rights is calculated without changing any other assumption; while in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments), which may magnify or counteract the effect of the change.

(8) Fair Value Measurements and Disclosures

The Corporation uses fair value measurements to record fair value adjustments to certain assets and liabilities. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices 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

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whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

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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.

~~Table~~The following table presents the fair value of ~~Contents~~

~~For~~ financial assets measured at fair value on a recurring basis ~~the fair value measurements~~ by level within the fair value hierarchy ~~used~~ at ~~June 30, 2022 and December 31, 2021 are as follows~~the dates indicated:


		June 30, 2022						September 30, 2022
(dollars in thousands)	(dollars in thousands)	Total		Level 1	Level 2	Level 3	(dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets	Assets						Assets
Securities available for sale:	Securities available for sale:						Securities available for sale:
U.S. asset backed securities	U.S. asset backed securities	$	13,740	—	13,740	—	U.S. asset backed securities	$	15,473	$	—	$	15,473	$	—
U.S. government agency mortgage-backed securities		9,640		—	9,640	—
U.S. government agency collateralized mortgage obligations		20,606		—	20,606	—
U.S. government agency MBS							U.S. government agency MBS	11,344		—		11,344		—
U.S. government agency CMO							U.S. government agency CMO	19,169		—		19,169		—
State and municipal securities	State and municipal securities	39,716		—	39,716	—	State and municipal securities	37,239		—		37,239		—
U.S. Treasuries	U.S. Treasuries	30,424		30,424	—	—	U.S. Treasuries	29,281		29,281		—		—
Non-U.S. government agency collateralized mortgage obligations		8,971		—	8,971	0
Non-U.S. government agency CMO							Non-U.S. government agency CMO	8,827		—		8,827
Corporate bonds	Corporate bonds	6,191		—	6,191	—	Corporate bonds	6,666		—		6,666		—
Equity investments	Equity investments	2,153		—	2,153	—	Equity investments	2,092		—		2,092		—
Mortgage loans held for sale	Mortgage loans held for sale	58,938		—	58,938	—	Mortgage loans held for sale	33,800		—		33,800		—
Mortgage loans held for investment	Mortgage loans held for investment	16,212		—	16,212	—	Mortgage loans held for investment	14,702		—		14,702		—
Interest rate lock commitments	Interest rate lock commitments	374		—	—	374	Interest rate lock commitments	137		—		—		137
Forward commitments	Forward commitments	67		—	67	—	Forward commitments	475		—		475		—
Customer derivatives - interest rate swaps	Customer derivatives - interest rate swaps	2,893		—	2,893	—	Customer derivatives - interest rate swaps	4,572		—		4,572		—
Total	Total	$	209,925	30,424	179,127	374	Total	$	183,777	$	29,281	$	154,359	$	137

Liabilities	Liabilities						Liabilities
Interest rate lock commitments	Interest rate lock commitments	430		—	—	430	Interest rate lock commitments	$	598	$	—	$	—	$	598
Forward commitments	Forward commitments	77		—	77	—	Forward commitments	—		—		—		—
Customer derivatives - interest rate swaps	Customer derivatives - interest rate swaps	2,847		—	2,847	—	Customer derivatives - interest rate swaps	4,479		—		4,479		—
Total	Total	$	3,354	—	2,924	430	Total	$	5,077	$	—	$	4,479	$	598

2621

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		December 31, 2021						December 31, 2021
(dollars in thousands)	(dollars in thousands)	Total		Level 1	Level 2	Level 3	(dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets	Assets						Assets
Securities available for sale:	Securities available for sale:						Securities available for sale:
U.S. asset backed securities	U.S. asset backed securities	$	16,837	—	16,837	—	U.S. asset backed securities	$	16,837	$	—	$	16,837	$	—
U.S. government agency mortgage-backed securities		9,813		—	9,813	—
U.S. government agency collateralized mortgage obligations		22,381		—	22,381	—
U.S. government agency MBS							U.S. government agency MBS	9,813		—		9,813		—
U.S. government agency CMO							U.S. government agency CMO	22,381		—		22,381		—
State and municipal securities	State and municipal securities	72,982		—	72,982	—	State and municipal securities	72,982		—		72,982		—
U.S. Treasuries	U.S. Treasuries	29,728		29,728	—	—	U.S. Treasuries	29,728		29,728		—		—
Non-U.S. government agency collateralized mortgage obligations		975		—	975	—
Non-U.S. government agency CMO							Non-U.S. government agency CMO	975		—		975		—
Corporate bonds	Corporate bonds	6,586		—	6,586	—	Corporate bonds	6,586		—		6,586		—
Equity investments	Equity investments	2,354		—	2,354	—	Equity investments	2,354		—		2,354		—
Mortgage loans held for sale	Mortgage loans held for sale	80,882		—	80,882	—	Mortgage loans held for sale	80,882		—		80,882		—
Mortgage loans held for investment	Mortgage loans held for investment	17,558		—	17,558	—	Mortgage loans held for investment	17,558		—		17,558		—
Interest rate lock commitments	Interest rate lock commitments	1,122		—	—	1,122	Interest rate lock commitments	1,122		—		—		1,122
Forward commitments	Forward commitments	65		—	65	—	Forward commitments	65		—		65		—
Customer derivatives - interest rate swaps	Customer derivatives - interest rate swaps	961		—	961	—	Customer derivatives - interest rate swaps	961		—		961		—
Total	Total	$	262,244	29,728	231,394	1,122	Total	$	262,244	$	29,728	$	231,394	$	1,122

Liabilities	Liabilities						Liabilities
Interest rate lock commitments	Interest rate lock commitments	203		—	—	203	Interest rate lock commitments	$	203	$	—	$	—	$	203
Forward commitments	Forward commitments	106		—	106	—	Forward commitments	106		—		106		—
Customer derivatives - interest rate swaps	Customer derivatives - interest rate swaps	1,018		—	1,018	—	Customer derivatives - interest rate swaps	1,018		—		1,018		—
Total	Total	$	1,327	—	1,124	203	Total	$	1,327	$	—	$	1,124	$	203

~~Assets~~The following table presents assets measured at fair value on a nonrecurring basis at ~~June 30, 2022 and December 31, 2021 are as follows:~~the dates indicated:


		June 30, 2022		December 31, 2021
(dollars in thousands)	(dollars in thousands)	Fair Value		Fair Value	(dollars in thousands)	September 30, 2022		December 31, 2021
Mortgage servicing rights	Mortgage servicing rights	$	10,610	10,756	Mortgage servicing rights	$	10,315	$	10,756
SBA loan servicing rights	SBA loan servicing rights	2,250		2,009	SBA loan servicing rights	2,492		2,009
Impaired loans (1)	Impaired loans (1)				Impaired loans (1)
Commercial and industrial	Commercial and industrial	823		1,837	Commercial and industrial	820		1,837
Small business loans	Small business loans	—		290	Small business loans	—		290
Total	Total	$	13,683	14,892	Total	$	13,627	$	14,892

(1)Impaired loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Refer to the following page for further qualitative discussion around impaired loans.

~~Table of Contents~~

The following table details the valuation techniques for Level 3 impaired loans.

(dollars in thousands)

Fair Value

Valuation

~~Range of~~

~~(dollars in thousands)~~

~~Level 3~~

Technique

Significant Unobservable Input

Range of Inputs

~~June~~September 30, 2022

~~823~~820

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

2%-15% discount

December 31, 2021

2,127

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:

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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.

Impaired Loans

Impaired 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.Impaired 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

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values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-Term Borrowings

The carrying amounts of short-term borrowings approximate their fair values.

Subordinated Debt

Fair values of junior subordinated debt are estimated using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit risk characteristics, terms and remaining maturity.

Off-Balance Sheet Financial Instruments

Off-balance sheet instruments are primarily comprised of loan commitments, which are generally priced at market at the time of funding. Fees on commitments to extend credit and stand-by letters of credit are deemed to be immaterial and these instruments are expected to be settled at face value or expire unused. It is impractical to assign any fair value to these instruments and as a result they are not included in the table below. Fair values assigned to the notional value of interest rate lock commitments and forward sale contracts are based on market quotes.

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.

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The following table presents the estimated fair values of the Corporation’s financial instruments at ~~June 30, 2022 and December 31, 2021 are as follows:~~the dates indicated:

June 30, 2022 December 31, 2021
(dollars in thousands) Fair Value
Hierarchy Level Carrying
amount Fair value Carrying
amount Fair value
Financial assets:
Cash and cash equivalents Level 1 $ 37,093 37,093 23,480 23,480
Securities available-for-sale (1) Level 2 129,288 129,288 159,302 159,302
Securities held-to-maturity Level 2 37,111 33,497 6,372 6,591
Equity investments Level 2 2,153 2,153 2,354 2,354
Mortgage loans held for sale Level 2 58,938 58,938 80,882 80,882
Loans receivable, net of the allowance for loan and lease losses Level 3 1,502,681 1,456,650 1,368,899 1,370,885
Mortgage loans held for investment Level 2 16,212 16,212 17,558 17,558
Interest rate lock commitments Level 3 374 374 1,122 1,122
Forward commitments Level 2 67 67 65 65
Restricted investment in bank stock NA 4,719 NA 5,117 NA
Accrued interest receivable Level 3 5,108 5,108 5,009 5,009
Customer derivatives - interest rate swaps Level 2 2,893 2,893 961 961
Financial liabilities:
Deposits Level 2 1,568,014 1,484,100 1,446,413 1,549,100
Short-term borrowings Level 2 59,136 59,136 41,344 41,344
Subordinated debentures Level 2 40,567 38,054 40,508 40,803
Accrued interest payable Level 2 146 146 31 31
Interest rate lock commitments Level 3 430 430 203 203
Forward commitments Level 2 77 77 106 106
Customer derivatives - interest rate swaps Level 2 2,847 2,847 1,018 1,018
Notional Notional
Off-balance sheet financial instruments: amount Fair value amount Fair value
Commitments to extend credit Level 2 $ 488,561 — 486,632 0
Letters of credit Level 2 22,880 — 25,986 0

~~(1) U.S. Treasury securities available-for-sale are classified as Level 1.~~


		September 30, 2022				December 31, 2021
(dollars in thousands)	Fair Value Hierarchy Level	Carrying amount		Fair value		Carrying amount		Fair value
Financial assets:
Cash and cash equivalents	Level 1	$	32,888	$	32,888	$	23,480	$	23,480
Securities available-for-sale	Level 1 / 2	127,999		127,999		159,302		159,302
Securities held-to-maturity	Level 2	37,922		32,323		6,372		6,591
Equity investments	Level 2	2,092		2,092		2,354		2,354
Mortgage loans held for sale	Level 2	33,800		33,800		80,882		80,882
Loans receivable, net of the allowance for loan and lease losses	Level 3	1,595,647		1,535,398		1,368,899		1,370,885
Mortgage loans held for investment	Level 2	14,702		14,702		17,558		17,558
Interest rate lock commitments	Level 3	137		137		1,122		1,122
Forward commitments	Level 2	475		475		65		65
Restricted investment in bank stock	NA	5,217		NA		5,117		NA
Accrued interest receivable	Level 3	6,008		6,008		5,009		5,009
Customer derivatives - interest rate swaps	Level 2	4,572		4,572		961		961
Financial liabilities:
Deposits	Level 2	1,673,553		1,526,400		1,446,413		1,549,100
Short-term borrowings	Level 2	23,458		23,458		41,344		41,344
Subordinated debentures	Level 2	40,597		40,285		40,508		40,803
Accrued interest payable	Level 2	1,154		1,154		31		31
Interest rate lock commitments	Level 3	598		598		203		203
Forward commitments	Level 2	—		—		106		106
Customer derivatives - interest rate swaps	Level 2	4,479		4,479		1,018		1,018

		Notional				Notional
Off-balance sheet financial instruments:		amount		Fair value		amount		Fair value
Commitments to extend credit	Level 2	$	505,860	$	—	$	486,632	$	—
Letters of credit	Level 2	21,462		—		25,986		—

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 ~~three and six month~~ periods ~~ended June 30, 2022 and 2021.~~indicated.

Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Balance at beginning of the period $ 587 4,595 1,122 6,932
Decrease in value (213) (1,928) (748) (4,265)
Balance at end of the period $ 374 2,667 374 2,667

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	Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)	2022		2021		2022		2021
Balance at beginning of the period	$	374	$	2,667	$	1,122	$	6,932
Decrease in value	(237)		(955)		(985)		(5,220)
Balance at end of the period	$	137	$	1,712	$	137	$	1,712

The following table details the valuation techniques for Level 3 interest rate lock commitments.

Fair Value
Level 3

Valuation Technique

Significant
Unobservable
Input

Range of
Inputs

Weighted

Average

June 30, 2022

374

Market comparable pricing

Pull through

1 - 99

88.93%

(dollars in thousands)

Fair Value

Valuation Technique

Significant Unobservable Input

Range of Inputs

Weighted Average

September 30, 2022

137

Market comparable pricing

Pull through

1 - 99%

96.93%

December 31, 2021

1,122

Market comparable pricing

Pull through

1 - 99

87.66

December 31, 2021

1,122

Market comparable pricing

Pull through

1 - 99

87.66

~~Net realized gains and losses due to changes in the fair value~~

Table of interest rate lock commitments, which are classified as Level 3 assets and liabilities, are recorded in non-interest income as net change in the fair value of derivative instruments in the Corporation's consolidated statements of income. Net realized gains of $165 thousand and net realized losses of $975 thousand were recorded for the three and six months ended June 30, 2022, while net realized gains of $13 thousand and net realized losses of $4.4 million were recorded for the three and six months ended June 30, 2021, respectively.Contents

(9) Derivative Financial Instruments

Risk Management Objective of Using Derivatives

The Corporation is exposed to certain risk arising from both its business operations and economic conditions. The Corporation principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Corporation manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Corporation enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Corporation’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Corporation’s known or expected cash receipts and its known or expected cash payments principally related to the Corporation’s loan portfolio.

Mortgage Banking Derivatives

In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation 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.

~~Table of Contents~~

The following table presents a summary of ~~the~~ notional amounts and fair values of derivative financial ~~instruments:~~instruments at the dates indicated:


			June 30, 2022			December 31, 2021				September 30, 2022				December 31, 2021
(dollars in thousands)	(dollars in thousands)	Balance Sheet Line Item	Notional Amount		Asset (Liability) Fair Value	Notional Amount	Asset (Liability) Fair Value	(dollars in thousands)	Balance Sheet Line Item	Notional Amount		Asset (Liability) Fair Value		Notional Amount		Asset (Liability) Fair Value
Interest Rate Lock Commitments	Interest Rate Lock Commitments							Interest Rate Lock Commitments
Positive fair values	Positive fair values	Other assets	$	50,159	374	108,653	1,122	Positive fair values	Other assets	$	23,037	$	137	$	108,653	$	1,122
Negative fair values	Negative fair values	Other liabilities	55,319		(430)	35,264	(203)	Negative fair values	Other liabilities	45,063		(598)		35,264		(203)
Total	Total		105,478		(56)	143,917	919	Total		68,100		(461)		143,917		919

Forward Commitments	Forward Commitments							Forward Commitments
Positive fair values	Positive fair values	Other assets	14,500		67	30,500	65	Positive fair values	Other assets	12,000		475		30,500		65
Negative fair values	Negative fair values	Other liabilities	12,500		(77)	45,500	(106)	Negative fair values	Other liabilities	—		—		45,500		(106)
Total	Total		27,000		(10)	76,000	(41)	Total		12,000		475		76,000		(41)

Customer Derivatives - Interest Rate Swaps	Customer Derivatives - Interest Rate Swaps							Customer Derivatives - Interest Rate Swaps
Positive fair values	Positive fair values	Other assets	41,742		2,893	35,447	961	Positive fair values	Other assets	41,352		4,572		35,447		961
Negative fair values	Negative fair values	Other liabilities	41,742		(2,847)	35,447	(1,018)	Negative fair values	Other liabilities	41,352		(4,479)		35,447		(1,018)
Total	Total		83,484		46	70,894	(57)	Total		82,704		93		70,894		(57)
Total derivative financial instruments	Total derivative financial instruments		$	215,962	(20)	290,811	821	Total derivative financial instruments		$	162,804	$	107	$	290,811	$	821

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.

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The following table presents a summary of the fair value gains and ~~losses~~(losses) on derivative financial instruments:


		Three Months Ended June 30,			Six Months Ended June 30,		Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)	(dollars in thousands)	2022		2021	2022	2021		(dollars in thousands)	2022		2021		2022		2021
Interest Rate Lock Commitments	Interest Rate Lock Commitments	$	165	13	(975)	(4,424)		Interest Rate Lock Commitments	$	(405)	$	(1,056)	$	(1,380)	$	(5,480)
Forward Commitments	Forward Commitments	(909)		(2,102)	31	1,294		Forward Commitments	485		703		516		1,997
Customer Derivatives - Interest Rate Swaps	Customer Derivatives - Interest Rate Swaps	70		(59)	104	38		Customer Derivatives - Interest Rate Swaps	47		14		151		52
Net fair value (losses) gains on derivative financial instruments	Net fair value (losses) gains on derivative financial instruments	$	(674)	(2,148)	(840)	(3,092)		Net fair value (losses) gains on derivative financial instruments	$	127	$	(339)	$	(713)	$	(3,431)

Net realized gains on derivative hedging activities were $1.7 million and $4.5 million for the three and six months ended June 30, 2022, respectively, and net realized losses on derivatives were $674 thousand and net realized gains were $3.6 million for the three and six months ended June 30, 2021. Net realized gains losses on derivative hedging activities are included in non-interest income in the consolidated statements of income.

(10) Segments

ASC Topic 280 – Segment Reporting identifies operating segments as components of an enterprise which are evaluated regularly by the Corporation’s Chief Operating Decision Maker, our Chief Executive Officer, in deciding how to allocate resources and assess performance. The Corporation has applied the aggregation criterion set forth in this codification to the results of its operations.

Our Banking segment (“Bank”) consists of commercial and retail banking. The Banking segment generates interest income from its lending (including leasing) and investing activities and is dependent on the gathering of lower cost deposits from its branch network or borrowed funds from other sources for funding its loans, resulting in the generation of net interest income. The Banking segment also derives revenues from other sources including gains on the sale of available for sale investment securities, service charges on deposit accounts, cash sweep fees, overdraft fees, BOLI income, title insurance fees, and other less significant non-interest income.

~~Table of Contents~~

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 2213 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~~have been included in the statement of operations. Total assets for each segment is also provided.


		Segment Information											Segment Information
		Three Months Ended June 30, 2022					Three Months Ended June 30, 2021						Three Months Ended September 30, 2022								Three Months Ended September 30, 2021
(Dollars in thousands)	(Dollars in thousands)	Bank		Wealth	Mortgage	Total	Bank		Wealth	Mortgage	Total	(Dollars in thousands)	Bank		Wealth		Mortgage		Total		Bank		Wealth		Mortgage		Total
Net interest income	Net interest income	$	16,923	317	311	17,551	$	14,824	2	586	15,412	Net interest income	$	17,664	$	218	$	144	$	18,026	$	15,777	$	2	$	478	$	16,257
Provision for loan losses	Provision for loan losses	602		—	—	602	96		—	—	96	Provision for loan losses	526		—		—		526		597		—		—		597
Net interest income after provision	Net interest income after provision	16,321		317	311	16,949	14,728		2	586	15,316	Net interest income after provision	17,138		218		144		17,500		15,180		2		478		15,660

Non-interest Income	Non-interest Income											Non-interest Income
Mortgage banking income	Mortgage banking income	125		—	6,817	6,942	408		—	19,059	19,467	Mortgage banking income	72		—		7,257		7,329		215		—		18,511		18,726
Wealth management income	Wealth management income	—		1,254	—	1,254	—		1,163	—	1,163	Wealth management income	—		1,114		—		1,114		—		1,232		—		1,232
SBA income		437		—	—	437	1,490		—	—	1,490
SBA loan income												SBA loan income	989		—		—		989		2,688		—		—		2,688
Net change in fair values	Net change in fair values	71		—	(1,312)	(1,241)	(59)		—	(813)	(872)	Net change in fair values	47		—		(1,043)		(996)		13		—		(847)		(834)
Net gain on hedging activity	Net gain on hedging activity	—		—	1,715	1,715	—		—	(674)	(674)	Net gain on hedging activity	—		—		399		399		—		—		(1,189)		(1,189)
Other	Other	526		—	770	1,296	563		—	595	1,158	Other	622		—		767		1,389		836		—		663		1,499
Non-interest income	Non-interest income	1,159		1,254	7,990	10,403	2,402		1,163	18,167	21,732	Non-interest income	1,730		1,114		7,380		10,224		3,752		1,232		17,138		22,122
Non-interest expense	Non-interest expense	10,624		822	8,260	19,706	9,415		789	16,042	26,246	Non-interest expense	11,354		780		8,127		20,261		10,633		802		14,046		25,481
Income before income taxes		$	6,856	749	41	7,646	7,715		376	2,711	10,802
Income (loss) before income taxes												Income (loss) before income taxes	$	7,514	$	552	$	(603)	$	7,463	$	8,299	$	432	$	3,570	$	12,301

Total Assets	Total Assets	$	1,759,129	7,432	86,458	1,853,019	$	1,560,040	5,946	143,024	1,709,010	Total Assets	$	1,858,770	$	7,927	$	55,227	$	1,921,924	$	1,625,468	$	6,396	$	130,581	$	1,762,445

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Segment Information
Six Months Ended June 30, 2022 Six Months Ended June 30, 2021
(Dollars in thousands) Bank Wealth Mortgage Total Bank Wealth Mortgage Total
Net interest income $ 32,533 411 642 33,586 29,324 (11) 1,220 30,533
Provision for loan losses 1,217 — — 1,217 695 — — 695
Net interest income after provision 31,316 411 642 32,369 28,629 (11) 1,220 29,838
Non-interest Income
Mortgage banking income 322 — 13,716 14,038 676 — 42,891 43,567
Wealth management income — 2,558 — 2,558 — 2,299 — 2,299
SBA income 2,957 — — 2,957 2,735 — — 2,735
Net change in fair values 103 — (3,412) (3,309) 39 — (5,824) (5,785)
Net gain on hedging activity — — 4,542 4,542 — — 3,587 3,587
Other 1,153 — 1,566 2,719 1,274 — 1,103 2,377
Non-interest income 4,535 2,558 16,412 23,505 4,724 2,299 41,757 48,780
Non-interest expense 20,833 1,700 18,606 41,139 18,348 1,684 34,478 54,510
Income (loss) before income taxes $ 15,018 1,269 (1,552) 14,735 15,005 604 8,499 24,108
Total Assets $ 1,759,129 7,432 86,458 1,853,019 1,560,040 5,946 143,024 1,709,010


	Segment Information
	Nine Months Ended September 30, 2022								Nine Months Ended September 30, 2021
(Dollars in thousands)	Bank		Wealth		Mortgage		Total		Bank		Wealth		Mortgage		Total
Net interest income	$	50,197	$	628	$	785	$	51,610	$	45,340	$	(249)	$	1,698	$	46,789
Provision for loan losses	1,743		—		—		1,743		1,292		—		—		1,292
Net interest income after provision	48,454		628		785		49,867		44,048		(249)		1,698		45,497

Non-interest Income
Mortgage banking income	394		—		20,973		21,367		892		—		61,401		62,293
Wealth management income	—		3,672		—		3,672		—		3,531		—		3,531
SBA loan income	3,946		—		—		3,946		5,423		—		—		5,423
Net change in fair values	151		—		(4,457)		(4,306)		52		—		(6,671)		(6,619)
Net gain on hedging activity	—		—		4,941		4,941		—		—		2,397		2,397
Other	1,776		(1)		2,333		4,108		2,110		—		1,767		3,877
Non-interest income	6,267		3,671		23,790		33,728		8,477		3,531		58,894		70,902
Non-interest expense	32,186		2,480		26,734		61,400		28,981		2,486		48,523		79,990
Income (loss) before income taxes	$	22,535	$	1,819	$	(2,159)	$	22,195	$	23,544	$	796	$	12,069	$	36,409

Total Assets	$	1,858,770	$	7,927	$	55,227	$	1,921,924	$	1,625,468	$	6,396	$	130,581	$	1,762,445

(11) Leases

On January 1, 2022, the Corporation adopted ASU 2016-02 (Topic 842), “Leases”, as further explained in Note 12, Recent Accounting Pronouncements.

The Corporation’s operating leases consist of various retail branch locations and loan production offices. As of ~~June~~September 30, 2022, the Corporation’s leases have remaining lease terms ranging from 8 months to 13 years, including extension options that the Corporation is reasonably certain will be exercised.

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 ~~right of use (ROU)~~ROU assets and lease liabilities for short-term leases.

As of ~~June~~September 30, 2022 the Corporation’s ROU assets and related lease liabilities were ~~$10.0~~$9.5 million and ~~$9.8~~$9.4 million, respectively. These amounts are included within other assets and other liabilities, respectively.

~~Table of Contents~~

The components of lease expense were as follows:


(dollars in thousands)	(dollars in thousands)	Three Months Ended June 30, 2022		Six Months Ended June 30, 2022		(dollars in thousands)	Three Months Ended September 30, 2022		Nine Months Ended September 30, 2022
Operating lease expense	Operating lease expense	$	585	$	1,171	Operating lease expense	$	585	$	1,742
Short term lease expense	Short term lease expense	1		2		Short term lease expense	1		3
Variable lease expense	Variable lease expense	—		—		Variable lease expense	—		—
Total lease expense	Total lease expense	$	586	$	1,173	Total lease expense	$	586	$	1,745

Supplemental cash flow information related to leases was as follows:


(dollars in thousands)			~~June~~Nine Months Ended September 30, 2022
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	563
ROU asset obtained in exchange for lease liabilities	$	10,995

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Maturities of operating lease liabilities ~~under FASB ASC 842 "Leases"~~were as ~~of June 30, 2022 are as follows:~~follows for the period indicated:


(dollars in thousands)	(dollars in thousands)	June 30, 2022		(dollars in thousands)	September 30, 2022
2022	2022	$	1,102	2022	$	559
2023	2023	1,892		2023	1,919
2024	2024	1,746		2024	1,746
2025	2025	1,456		2025	1,456
2026	2026	1,436		2026	1,436
Thereafter	Thereafter	3,134		Thereafter	3,134
		10,766
Total				Total	$	10,250
Less: Present value discount	Less: Present value discount	(948)		Less: Present value discount	(887)
Total operating lease liabilities	Total operating lease liabilities	$	9,818	Total operating lease liabilities	$	9,363

As of ~~June~~September 30, 2022, the weighted-average remaining lease term, including extension options that the Corporation is reasonably certain will be exercised for all operating leases is ~~6.63~~6.33 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 ~~June~~September 30, 2022 is ~~2.58%~~2.61%.

As of ~~June~~September 30, 2022, the Corporation had not entered into any material leases that have not yet commenced.

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(12) Recent Accounting Pronouncements

As an “emerging growth company” under the ~~Jumpstart Our Business Startups~~JOBS Act, ~~of 2012 (“JOBS Act”),~~ the ~~Bank~~Corporation is permitted an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included herein, as well as financial statements that we file up to the date we lose this designation (December 31, 2022) will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period. As a filer under the JOBS Act, we will implement new accounting standards subject to the effective dates required for non-public ~~entities.~~entities

Pronouncements Adopted ~~Pronouncements~~ in 2022:

FASB ASU 2016-02 (Topic 842), “Leases”

Issued in February 2016, ASU 2016-02 revises the accounting related to lessee accounting. Under the new guidance, lessees are required to recognize a lease ROU liability and a ~~right-of-use~~ROU asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. In June 2020, the FASB approved a delay for the implementation of the ASU. Accordingly, the amendments in this update are effective for the Corporation for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. On January 1, 2022 the Corporation recognized a right-of-use asset and a lease obligation liability on the consolidated statement of financial condition. The adoption of the ASU was on a prospective basis and therefore comparative prior periods are still presented under ASC 840. Refer to footnote 1211 - leases, for further details.

Pronouncements Not Yet Effective as of ~~June~~September 30, 2022:

FASB ASU 2016-13 (Topic 326), “Measurement of Credit Losses on Financial Instruments”

Issued in June 2016, ASU 2016-13 significantly changes how companies measure and recognize credit impairment for many financial assets. This ASU requires businesses and other organizations to measure the current expected credit losses ~~(“CECL”)~~ on financial assets, such as loans, net investments in leases, certain debt securities, bond insurance and other receivables. The amendments affect entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. Current GAAP requires an incurred loss methodology for recognizing credit losses that delays recognition until it is probable a loss has been incurred. The amendments in this ASU replace the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonableness and supportable information to inform credit loss estimates. An entity should apply the amendments through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (modified retrospective approach). Acquired credit impaired loans for which the guidance in ~~Accounting Standards Codification (ASC)~~ASC Topic 310-30 has been previously applied should prospectively apply the guidance in this ASU. A prospective transition approach is required for debt securities for which an other-than-temporary impairment has been recognized before the effective date. In October 2019, the FASB approved a delay for the implementation of the ASU. Accordingly, as an emerging growth company, the Corporation’s effective date for the implementation of the ASU will be January 1, 2023. ~~Management is currently determining~~The Corporation expects to recognize a one-time cumulative-effect adjustment to the allowance for credit losses as of the date of adoption. While the Corporation anticipates the allowance for credit losses will increase under ~~which method we will adopt this ASU. Management has assembled a cross-functional team from Finance, Credit, and IT that is leading the implementation efforts to evaluate~~current model assumptions, it expects the impact of ~~this guidance on~~adopting ASU 2016-13 will be influenced by the ~~Corporation's consolidated financial statements~~composition, characteristics and ~~related disclosures, internal systems, accounting policies, processes~~quality of its loan and ~~related internal controls. At this time an estimate of the impact to the Corporation's consolidated financial statements cannot be determined.~~

investment securities portfolios, as well as general economic conditions and

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forecasts at the date of adoption. Management is currently running parallel tests under different methods and using various assumptions to determine the best approach for when we adopt this ASU, and has engaged a third party vendor to perform a model validation prior to adoption.

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. Management ~~will consider~~is considering the impact of ASU 2019-04 ~~when~~while considering the impact of ASU 2016-13 as discussed above.

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 guidance under ASC-848 will be available for a limited time, generally through December 31, 2022. The Corporation expects to adopt the LIBOR transition relief allowed under this standard.

FASB ASU 2020-06, “Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”

This ASU clarifies the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock by removing the cash conversion model and the beneficial conversion feature models. For public business entities that meet the definition of an SEC filer (excluding smaller reporting entities), the amendments are effective for fiscal years beginning after Dec. 15, 2021, and interim periods within. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2023, and interim periods within. Early adoption is permitted, but no earlier than for fiscal years beginning after Dec. 15, 2020. The Company does not expect this to have a material impact on our consolidated financial statements.

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. This ASU is effective for fiscal years beginning after December 15, 2022 or January 1, 2023 for the Corporation, including interim periods within those fiscal years for entities that have adopted CECL. Early adoption is permitted if an entity has adopted CECL. The Corporation is in the process of evaluating the amendments but does not expect the adoption of this ASU will have a material impact on the Corporation's financial statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2021 included in Meridian Corporation’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

Cautionary Statement Regarding Forward-Looking Statements

Meridian Corporation ~~(the “Corporation”)~~ may from time to time make written or oral “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These ~~forward-~~

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~~looking~~forward-looking statements include statements with respect to Meridian Corporation’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Meridian Corporation’s control). Numerous competitive, economic, regulatory, legal and technological factors, risks and uncertainties that could cause actual results to differ materially include, without limitation: the impact of the COVID-19 pandemic and government responses thereto; on the U.S. economy, including the markets in which we operate; actions that we and our customers take in response to these factors and the effects such actions have on our operations, products, services and customer relationships; and the risk that the Small Business Administration may not fund some or all ~~Paycheck Protection Program (PPP)~~PPP loan guaranties; increased competitive pressures; changes in the interest rate environment; changes in

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general economic conditions and conditions within the securities markets; legislative and regulatory changes; geopolitical tensions; and the effects of inflation, a potential recession, among others, could cause Meridian Corporation’s financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in such forward-looking statements. Meridian Corporation cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Meridian Corporation’s filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2021 and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Meridian Corporation does not undertake to update any forward-looking statement whether written or oral, that may be made from time to time by Meridian Corporation or by or on behalf of Meridian Bank.

Critical Accounting Policies and Estimates

Our ~~accounting and reporting policies conform to GAAP and conform to general practices within the industry in which we operate.To prepare financial statements in conformity with GAAP, management makes estimates, assumptions and judgments based on available information.These estimates, assumptions and judgments affect the amounts reported in the financial statements and accompanying notes.~~These estimates, assumptions and judgements are based on information available as of the date of the financial statements and, as this information changes, actual results could differ from the estimates, assumptions and judgments reflected in the financial statements.In particular, management has identified the provision and allowance for loan and lease losses as the accounting policy that, due to the estimates, assumptions and judgements inherent in that policy, is critical ~~in understanding our financial statements. Management has presented the application of this policy to the audit committee of our board of directors.~~

~~As an emerging growth company, the JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies.~~We have elected to take advantage of this extended transition period, which means that the financial statements included in this Annual Report, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company (expected to end as of December 31, 2022) or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.~~If we do so, we will prominently disclose this decision in the first periodic report filed with the SEC following our decision, and such decision is irrevocable.~~

~~This critical accounting policy, along with other significant~~ accounting policies are ~~presented~~described in detail in ~~Footnote 1~~the "Critical Accounting Policies" section within Item 7 of our 2021 Annual Form Form 10-K. The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the ~~Corporation’s Consolidated Financial Statements as~~need to make estimates about the effect of matters that are inherently uncertain and ~~for~~may change in future periods. There have been no material changes in these policies during the ~~years~~nine months ended ~~December 31, 2021 and 2020 included in the Annual Report on Form 10-K.~~September 30, 2022.

Executive Overview

The following items highlight the Corporation’s changes in its financial condition as of ~~June~~September 30, 2022 compared to ~~March 31, 2022 and~~ December 31, 2021 and the results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2022 as compared to the same periods in 2021. More detailed information related to these highlights can be found in the sections that follow.

Changes in Financial Condition - September 30, 2022 Compared to December 31, 2021

•Total assets increased ~~$21.4~~$208.5 million, or ~~1.2%~~12.2%, to ~~$1.9~~$1.92 billion as of ~~June~~September 30, ~~2022 compared to March 31, 2022, and increased $139.6 million, or 8.1%, compared to December 31, 2021.~~2022.

•Portfolio loans, excluding ~~SBA Paycheck Protection Program ("PPP")~~PPP loans, ~~grew $115.2~~increased $299.9 million, or ~~8.3%~~23.1%, to ~~$1.5~~$1.60 billion as of ~~June~~September 30, 2022, ~~compared to March 31, 2022, and increased $199.3 million, or 15.4% since December 31,~~

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~~2021, or 31%~~which is 30.9% on an annualized basis. ~~PPP loans decreased $66.8 million, or 75.7%, to $11.7 million as of June 30, 2022 compared to March 31, 2022, and decreased $94.2 million, or 81.4%, compared to December 31, 2021.~~

•Portfolio loan growth since March 31, 2022 was most evident in the commercial real estate/construction portfolio which grew $30.5 million, commercial loans and leases which grew $32.0 million, and residential loans which grew $35.4 million, while compared to December 31, 2021 commercial real estate/construction portfolio which grew $71.5 million, commercial loans and leases which grew $70.7 million, and residential loans which grew $45.8 million.

•~~Cash and cash equivalents and investments~~Mortgage loans held for sale decreased ~~a combined $31.1~~$47.1 million, or ~~13.1% since March 31,~~58.2%, to $33.8 million at September 30, 2022.

•PPP loans decreased to $8.8 million as of September 30, 2022 ~~and increased $14.1~~which is a decrease of $81.4 million, or ~~7.4%~~90.2%, since December 31, 2021.

•During the quarter-ended March 31, 2022, $27.7 million of municipal securities previously classified as available-for-sale on the balance sheet, were transferred to the held-to-maturity portfolio.

•Our combined servicing asset portfolio (which includes both mortgage servicing rights and SBA servicing assets) decreased $536 thousand, or 4%, from March 31, 2022, and increased $95 thousand, or 0.7%, to $12.9 million, from December 31, 2021.

•Total deposits ~~grew $3.2~~increased $227.1 million or ~~0.2%, from March 31, 2022, and grew $121.6 million, or 8.4%,~~15.7% to ~~$1.6~~$1.67 billion ~~from December 31, 2021. Non-interest bearing deposits grew $546 thousand, or 0.2%, from March 31, 2022, and grew $17.4 million, or 6.3%, to $291.9 million from December 31, 2021.~~

•~~Total borrowings increased $23.0 million from March 31, 2022, and $17.8 million from December 31, 2021, as short-term borrowings helped to fund our loan growth.~~at September 30, 2022.

•The Corporation returned ~~$8.6~~$19.0 million of capital to Meridian shareholders during the ~~six~~nine months ended ~~June~~September 30, 2022 through dividends, including a $1.00 special dividend, ~~and~~ $0.20 quarterly ~~dividends.~~dividends, and also purchased $9.2 million or 295 thousand shares of treasury stock.

Three Month Results of Operations - ~~June~~September 30, 2022 Compared to the Same Period in 2021

•Consolidated net income ~~for the three months ended June 30, 2022~~ was ~~$5.9 million, a decrease of $2.3~~$5.8 million, or ~~28.1% compared to the three months ended June 30, 2021, was~~$0.96 per diluted share, down $3.6 million, or 38.6%, driven by a decline in non-interest income, partially offset ~~somewhat~~ by continued strong ~~loan portfolio growth, and expense reduction.~~

•~~Pre-tax, pre-provision income for second quarter 2022 was $8.2 million, a decrease of $2.7 million, or 24.3%. led by strong growth in net interest income~~margin and lower operating ~~expenses, offset by decreases in mortgage loan originations.~~expenses.

•The return on average ~~equity (“ROE”)~~assets and return on average ~~assets (“ROA”) were 15.03%~~equity was 1.23% and ~~1.31%~~14.59%, respectively, for the ~~second~~third quarter 2022, compared to ~~22.61%~~2.15% and ~~1.92%~~24.07%, respectively, for the ~~second~~third quarter 2021.

•Net interest margin increased to ~~4.07%~~4.01% from ~~3.70%, after recognizing $286 thousand in one-time loan fees as well as deployment of PPP loan payoffs into higher yielding commercial portfolios.~~

•~~Non-interest income decreased $11.3 million or 52.1%, due to:~~

•~~Lower level of mortgage banking revenue, which declined $12.5 million, or 64.3%, offset somewhat by an increase in hedging gains of $2.4 million.~~

•~~A decrease in SBA loan income of $1.1 million, or 70.7%~~3.83% due to ~~lower sales volume and margins.~~

•~~An increase~~higher yield on earning assets in ~~other fee income of $68 thousand, or 6.4%.~~

•~~An increase in wealth management revenue of $91 thousand, or 7.8%.~~

•~~Changes in fair value related to mortgage banking activities were up $507 thousand over the period.~~this rising rate environment.

•Provision for loan losses ~~increased $506~~decreased $71 thousand ~~due to loan growth, partially~~as a result of lower levels of specific reserves and improvements in certain qualitative factors, largely offset by ~~decreases in specific reserves.~~increased provisioning for loan growth.

•Non-interest ~~expenses~~income decreased ~~$6.5~~$11.9 million, or ~~24.9%~~53.8%, asto $10.2 million driven by a ~~result of~~$11.4 million decrease in mortgage banking income and a ~~lower level of~~$1.7 million decrease in SBA loan income.

•Non-interest expense decreased $5.2 million, or 20.5%, to $20.3 million due to a $6.1 million decrease in salaries and benefits, due largely to reduced fixed and variable compensation arrangements as well as reduction in full-time equivalent employees in the mortgage segment, combined with a decline in incentive and stock-based compensation for bank and wealth segments.employee benefits.

•On ~~July 28,~~October 27, 2022, the Board of Directors declared a quarterly cash dividend of $0.20 per common share payable ~~August 22,~~November 21, 2022 to shareholders of record as of ~~August 15,~~November 14, 2022.

~~Six~~Nine Month Results of Operations - ~~June~~September 30, 2022 Compared to the Same Period in 2021

•Consolidated net income ~~for the six months ended June 30, 2022~~ was ~~$11.5 million, a decrease of $7.0~~$17.3 million, or ~~37.7% compared to the six months ended June 30, 2021,~~$2.80 per diluted share, down $10.6 million, or 38.0%, driven by a lower level of non-interest income from mortgage banking ~~activity.~~

•~~Pre-tax, pre-provision income was $16.0 million, a decrease of $8.9 million, or 35.7%, led~~activity, partially offset by continued strong ~~growth in net interest income~~margin and lower operating ~~expenses, offset by decreases in mortgage loan originations.~~expenses.

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��•The return on average ~~equity (“ROE”)~~assets and return on average ~~assets (“ROA”)~~equity were ~~14.61%~~1.28% and ~~1.30%~~14.49%, respectively, for the ~~six~~nine months ended ~~June~~September 30, 2022, compared to ~~26.19%~~2.17% and ~~2.17%~~25.43%, respectively, for the ~~six~~nine months ended ~~June~~September 30, 2021.

•Net interest ~~income for the six months ended June 30, 2022~~margin increased ~~$3.1 million, or 10%, compared~~ to ~~the same period~~3.99% from 3.75% due to higher yield on earning assets in ~~2021. This increase helped the net interest margin increase to 3.98% from 3.71%, as excess cash and PPP~~this rising rate environment along with $286 thousand in one-time loan ~~payoffs were reinvested in higher yielding commercial portfolios.~~fees.

•Provision for loan losses increased ~~$522~~$451 thousand, or ~~75.1%~~34.9%, due to loan growth, partially offset by decreases in specific reserves.

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•Non-interest income decreased ~~$25.3~~$37.2 million, or ~~51.8%~~52.4%, ~~due to:~~

•~~Lower level of~~to $33.7 million driven by a $40.9 million decrease in mortgage banking ~~revenue, which declined $29.5~~income and a $2.5 million ~~or 67.8%,~~decline in the fair value on loans held-for-investment, partially offset by ~~increased~~an increase of $4.8 million in the fair value ~~changes~~ of ~~$4.0~~derivatives and loans held-for-sale and a $2.5 million ~~and hedging gains of $955 thousand.~~

•An increase in ~~wealth management revenue of $259 thousand, or 11.3%, due~~net gains on hedging activity related to ~~increased AUM and favorable market conditions.~~

•~~An increase in SBA loan sale revenue of $222 thousand, or 8.1%.~~

•~~An increase in other fee income of $253 thousand, or 11.9%.~~mortgage banking activity.

•Non-interest ~~expenses~~expense decreased ~~$13.4~~$18.6 million, or ~~24.5%,~~23.2% to $61.4 million as athe result of a ~~lower level of~~$20.2 million decrease in salaries and employee benefits ~~due largely~~tied to ~~reduced fixed and~~a decrease in variable compensation ~~arrangements as well as a reduction~~ in ~~full-time equivalent employees in the~~our mortgage ~~segment, combined with a decline in incentive and stock-based compensation for bank and wealth segments.~~segment.

Key Performance Ratios

~~Key~~The following table presents key financial performance ratios for the ~~three and six months ended June 30, 2022 and 2021 are shown in the table below:~~periods indicated:

Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Annualized return on average equity 15.03 % %   22.61 % 14.61 % %   26.19 %
Annualized return on average assets 1.31 % %   1.92 % 1.30 % %   2.17 %
Net interest margin (tax effected yield) 4.07 % %   3.70 % 3.98 % %   3.71 %
Basic earnings per share $ 0.99 $ 1.37 $ 1.91 $ 3.06
Diluted earnings per share $ 0.96 $ 1.33 $ 1.84 $ 2.98


	Three months ended September 30,						Nine months ended September 30,
	2022			2021			2022			2021
Return on average assets, annualized	1.23		%	2.15		%	1.28		%	2.17		%
Return on average equity, annualized	14.59		%	24.07		%	14.49		%	25.43		%
Net interest margin (tax effected yield), annualized	4.01		%	3.83		%	3.99		%	3.75		%
Basic earnings per share	$	0.99		$	1.56		$	2.90		$	4.62
Diluted earnings per share	$	0.96		$	1.52		$	2.80		$	4.49

The following table presents certain key period-end balances and ratios ~~as of June 30, 2022 and December 31, 2021:~~at the dates indicated:


(dollars in thousands, except per share amounts)	(dollars in thousands, except per share amounts)	June 30, 2022			December 31, 2021			(dollars in thousands, except per share amounts)	September 30, 2022			December 31, 2021
Book value per common share	Book value per common share	$	25.85		$	27.07		Book value per common share	$	25.86		$	27.07
Tangible book value per common share (1)	Tangible book value per common share (1)	$	25.16		$	26.37		Tangible book value per common share (1)	$	25.16		$	26.37
Allowance as a percentage of loans and leases held for investment	Allowance as a percentage of loans and leases held for investment	1.24		%	1.35		%	Allowance as a percentage of loans and leases held for investment	1.18		%	1.35		%
Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1)	Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1)	1.27		%	1.46		%	Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1)	1.20		%	1.46		%
Tier I capital to risk weighted assets	Tier I capital to risk weighted assets	9.79		%	10.83		%	Tier I capital to risk weighted assets	9.28		%	10.83		%
Tangible common equity ratio (1)		8.22		%	9.42		%
Loans held for investment		$	1,518,893		$	1,386,457
Tangible common equity to tangible assets ratio (1)								Tangible common equity to tangible assets ratio (1)	7.67		%	9.42		%
Loans, net of fees and costs								Loans, net of fees and costs	$	1,610,349		$	1,386,457
Total assets	Total assets	$	1,853,019		$	1,713,443		Total assets	$	1,921,924		$	1,713,443
Stockholders' equity		$	156,087		$	165,360
Total stockholders’ equity								Total stockholders’ equity	$	151,161		$	165,360

(1) Non-GAAP financial measure. See “Non-GAAP Financial Measures” below for Non-GAAP to GAAP reconciliation.

Components of Net Income

Net income is comprised of five major elements:

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

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

•Non-interest Income, which is made up primarily of mortgage banking income, wealth management income, SBA loan sale income, fair value adjustments, gains and losses from the sale of loans, gains and losses from the sale of investment securities available for sale and other fees from loan and deposit services;

•Non-interest Expense, which consists primarily of salaries and employee benefits, occupancy, professional fees, advertising & promotion, data processing, information technology, loan expenses, and other operating expenses; and

•Income Taxes, which include state and federal jurisdictions.

NET INTEREST INCOME

Net interest income is an integral source of the Corporation’s revenue. The tables below present a summary for the three and nine months ended September 30, 2022 and 2021, of the Corporation’s average balances and yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities. The net interest margin is the net interest income as a percentage of average interest-earning assets. The net interest spread is the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The difference between the net interest margin and the net interest spread is the result of net free funding sources such as non-interest bearing deposits and stockholders’ equity.

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Analyses of Interest Rates and Interest Differential

The tables below present the major asset and liability categories on an average daily balance basis for the periods presented, along with interest income, interest expense and key rates and yields on a tax equivalent basis.


	For the Three Months Ended September 30,
(dollars in thousands)	2022						2021						Change
	Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates
Assets:
Due from banks	$	15,678	$	92	2.33	%	$	40,249	$	16	0.16	%	$	(24,571)	$	76	2.17	%
Federal funds sold	219		1		1.81		23,013		1		0.02		(22,794)		—		1.79
Investment securities - taxable (1)	107,929		648		2.38		79,785		357		1.78		28,144		291		0.60
Investment securities - tax exempt (1)	63,711		451		2.81		67,250		377		2.22		(3,539)		74		0.59
Loans held for sale	37,857		479		5.02		110,905		824		2.97		(73,048)		(345)		2.05
Loans held for investment (1)	1,565,861		21,371		5.41		1,370,439		16,804		4.84		195,422		4,567		0.57
Total loans	1,603,718		21,850		5.41		1,481,344		17,628		4.72		122,374		4,222		0.69
Total interest-earning assets	1,791,255		23,042		5.10	%	1,691,641		18,379		4.31	%	99,614		4,663		0.79	%
Noninterest earning assets	76,939						48,207						28,732
Total assets	$	1,868,194					$	1,739,848					$	128,346
Liabilities and stockholders' equity:
Interest-bearing demand deposits	$	221,402	$	798	1.43	%	$	270,518	$	201	0.29	%	$	(49,116)	$	597	1.14	%
Money market and savings deposits	718,744		2,075		1.15		647,093		853		0.52		71,651		1,222		0.63
Time deposits	361,527		1,202		1.32		237,080		273		0.46		124,447		929		0.86
Total deposits	1,301,673		4,075		1.24		1,154,691		1,327		0.46		146,982		2,748		0.78
Borrowings	41,313		266		2.55		111,075		126		0.45		(69,762)		140		2.10
Subordinated debentures	40,578		591		5.78		40,740		596		5.85		(162)		(5)		(0.07)
Total interest-bearing liabilities	1,383,564		4,932		1.41		1,306,506		2,049		0.62		77,058		2,883		0.79
Noninterest-bearing deposits	295,975						254,843						41,132
Other noninterest-bearing liabilities	31,041						22,919						8,122
Total liabilities	1,710,580						1,584,268						126,312
Total stockholders' equity	157,614						155,580						2,034
Total stockholders' equity and liabilities	$	1,868,194					$	1,739,848					$	128,346
Net interest income and spread (1)			$	18,110	3.69				$	16,330	3.69				$	1,780	—
Net interest margin (1)					4.01	%					3.83	%					0.18	%

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

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	For the Nine Months Ended September 30,
(dollars in thousands)	2022						2021						Change
	Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates
Assets:
Due from banks	$	23,612	$	153	0.87	%	$	24,340	$	22	0.12	%	$	(728)	$	131	0.75	%
Federal funds sold	1,440		4		0.37		18,991		3		0.02		(17,551)		1		0.35
Investment securities - taxable (1)	105,624		1,599		2.02		78,951		1,076		1.82		26,673		523		0.20
Investment securities - tax exempt (1)	63,848		1,240		2.60		64,023		1,094		2.28		(175)		146		0.32
Loans held for sale	52,495		1,580		4.02		139,101		2,922		2.80		(86,606)		(1,342)		1.22
Loans held for investment (1)	1,489,345		56,614		5.08		1,349,780		48,375		4.79		139,565		8,239		0.29
Total loans	1,541,840		58,194		5.05		1,488,881		51,297		4.61		52,959		6,897		0.44
Total interest-earning assets	1,736,364		61,190		4.71	%	1,675,186		53,492		4.27	%	61,178		7,698		0.44	%
Noninterest earning assets	74,313						44,388						29,925
Total assets	$	1,810,677					$	1,719,574					$	91,103
Liabilities and stockholders' equity:
Interest-bearing demand deposits	$	242,863	$	1,183	0.65	%	$	252,074	$	739	0.39	%	$	(9,211)	$	444	0.26	%
Money market and savings deposits	702,696		4,003		0.76		609,201		2,505		0.55		93,495		1,498		0.21
Time deposits	319,927		1,996		0.83		258,099		1,017		0.53		61,828		979		0.30
Total deposits	1,265,486		7,182		0.76		1,119,374		4,261		0.51		146,112		2,921		0.25
Borrowings	24,621		391		2.12		139,716		437		0.42		(115,095)		(46)		1.70
Subordinated debentures	40,548		1,775		5.85		40,711		1,787		5.87		(163)		(12)		(0.02)
Total interest-bearing liabilities	1,330,655		9,348		0.94		1,299,801		6,485		0.67		30,854		2,863		0.27
Noninterest-bearing deposits	291,261						248,355						42,906
Other noninterest-bearing liabilities	29,452						24,928						4,524
Total liabilities	1,651,368						1,573,084						78,284
Total stockholders' equity	159,309						146,490						12,819
Total stockholders' equity and liabilities	$	1,810,677					$	1,719,574					$	91,103
Net interest income and spread (1)			$	51,842	3.77				$	47,007	3.60				$	4,835	0.17
Net interest margin (1)					3.99	%					3.75	%					0.24	%

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

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Rate/Volume Analysis

The rate/volume analysis table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three and nine months ended September 30, 2022 as compared to the same periods in 2021, allocated by rate and volume. Changes in interest income and/or expense attributable to both rate and volume have been allocated proportionately based on the relationship of the absolute dollar amount of the change in each category.


	2022 Compared to 2021
	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	Rate		Volume		Total		Rate		Volume		Total
Interest income:
Due from banks	$	91	$	(15)	$	76	$	132	$	(1)	$	131
Federal funds sold	2		(2)		—		6		(5)		1
Investment securities - taxable (1)	143		148		291		129		394		523
Investment securities - tax exempt (1)	95		(21)		74		149		(3)		146
Loans held for sale	382		(727)		(345)		942		(2,284)		(1,342)
Loans held for investment (1)	2,020		2,547		4,567		3,046		5,193		8,239
Total loans	2,402		1,820		4,222		3,988		2,909		6,897
Total interest income	$	2,733	$	1,930	$	4,663	$	4,404	$	3,294	$	7,698
Interest expense:
Interest-bearing demand deposits	$	640	$	(43)	$	597	$	472	$	(28)	$	444
Money market and savings deposits	1,118		104		1,222		1,071		427		1,498
Time deposits	727		202		929		694		285		979
Total deposits	2,485		263		2,748		2,237		684		2,921
Borrowings	263		(123)		140		561		(607)		(46)
Subordinated debentures	(3)		(2)		(5)		(5)		(7)		(12)
Total interest expense	$	2,745	$	138	$	2,883	$	2,793	$	70	$	2,863
Interest differential	$	(12)	$	1,792	$	1,780	$	1,611	$	3,224	$	4,835

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

Three Months Ended September 30, 2022 Compared to the Same Period in 2021

For the three months ended September 30, 2022 as compared to the same period in 2021, tax-equivalent interest income increased $4.7 million as favorable rate and volume changes contributed $2.7 million, and $1.9 million, respectively. The favorable change in rates was driven by increased yield on loans held for sale (up 205 basis points) and loans held for investment (up 57 basis points) that favorably impact interest income by $2.4 million, combined. The loans held for investment average balances increased $195.4 million, leading to a favorable volume impact on interest income of $2.5 million, while the decline in loans held for sale average balances of $73.0 million had an unfavorable impact to interest income of $727 thousand as shown in the table above. Within the loans held for investment portfolio, average balances on commercial loans and leases increased $33.6 million, and $54.0 million, respectively, construction loans were up $65.3 million, and residential real estate loans average balances increased $78.2 million, while the average balance of PPP loans decreased $132.4 million as such loans continue to be forgiven by the SBA.

On the funding side, interest expense increased $2.9 million due to the impact from rate hikes issued by the Fed, which were partially offset by volume declines on borrowings. The cost of deposits were up across the board, causing a $2.5 million increase to interest expense. The cost of interest-bearing demand deposits, money market and savings accounts and time deposits increased 114 basis points, 63 basis points and 86 basis points, respectively, while the cost of borrowings increased 210 basis points. Money market/savings accounts and time deposit average balances increased $71.7 million, and $124.4 million, respectively, while interest-bearing demand deposits decreased $49.1 million on average, and borrowings decreased $69.8 million on average.

Overall, the $1.8 million increase in net interest income was derived by volume changes as the impact from increased average earning assets and the $41.1 million in free funding outpaced the increase in average interest bearing liabilities.

Nine Months Ended September 30, 2022 Compared to the Same Period in 2021

For the nine months ended September 30, 2022 as compared to the same period in 2021, tax-equivalent interest income increased $7.7 million as positive rate changes on average earning assets contributed $4.4 million and favorable volume changes helped to increase interest income by $3.3 million. The favorable change in interest income due to rate changes was driven by growth in the loans held for sale (increase of 122 basis points) and the overall loans held for investment portfolio (increase of 29 basis points). This large

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increase in the yield on loans held for sale was the result of interest rates hovering at historical lows throughout much of 2021, but then as the Fed raised interest rates in 2022, the yield benefited from this action. The $3.3 million positive impact that volume changes had to interest income was largely the result of loan average balance increases, which contributed $5.2 million to interest income, offset by a decline in the volume of loans held or sale which had an unfavorable impact of $2.3 million on interest income. The increase in loans held for investment average balances were led by an increases in commercial loans, small business loans and leases of $30 million, $58.1 million, and $56.5 million, respectively, construction loans of $50.8 million, and residential loans held for investment of $47.3 million, offset somewhat by a $152.3 million decline in PPP loan balances as they continue to be forgiven by the SBA.

On the funding side, interest expense increased $2.9 million. The cost of deposits was up, having a $2.9 million negative effect on interest expense. The cost of interest-bearing demand deposits, money market and savings deposits, and time deposits increased 26 basis points, 21 basis points, and 30 basis points, respectively, while the cost of borrowings increased 170 basis points. Money market and savings accounts, and time deposits increased $93.5 million, and $61.8 million on average respectively, while interest bearing demand deposits and borrowings were down $9.2 million and $115.1 million on average, respectively, leading to a $70 thousand increase in interest expense.

Overall, the $4.8 million increase in net interest income was derived by volume changes as the impact from increased average earning assets and the $42.9 million in free funding outpaced the increase in average interest bearing liabilities.

PROVISION FOR LOAN AND LEASE LOSSES

Three Months Ended September 30, 2022 Compared to the Same Period in 2021

The provision for loan losses decreased $71 thousand due to decreases in specific reserves on non-performing loans as the underlying credit quality improved and certain qualitative factors improved as well, partially offset by providing for continued loan growth and charge-offs on small ticket equipment leases.

Nine Months Ended September 30, 2022 Compared to the Same Period in 2021

The provision for loan losses increased $451 thousand to provide for the significant level of loan growth year over year, partially offset by the impact of decreases to specific reserves and qualitative factors noted above.

Asset Quality Summary

Meridian's credit culture is strong and asset quality remains a primary focus of management. The ratio of non-performing assets to total assets declined to 1.20% as of September 30, 2022, from 1.34% as of December 31, 2021. There was no other real estate property included in non-performing assets for either period. Total non-performing loans were $23.1 million and $23.0 million as of September 30, 2022 and December 31, 2021, respectively, however subsequent to September 30, 2022, principal payments of $3.2 million and $307 thousand on a non-performing loan relationship were received.

Meridian realized net charge-offs of 0.10% of total average loans for the year ending September 30, 2022 which is higher than the 0.01% over the same period in 2021. Charge-offs amounted to $431 thousand for the quarter ending September 30, 2022, while recoveries were $74 thousand during this quarter. Nearly all of the charge-offs for the quarter ending September 30, 2022 were from small ticket equipment leases, while recoveries were split between commercial loans and home equity loans. The ratio of allowance for loan losses to total loans held for investment, excluding loans at fair value and PPP loans (a non-GAAP measure, see reconciliation in the Appendix), was 1.20% as of September 30, 2022 and 1.46% as of December 31, 2021. As of September 30, 2022 there were specific reserves of $2.8 million against a non-performing loans, down from $3.2 million as of December 31, 2021 due to improvement in the underlying credit quality for certain loans, as discussed in the above paragraph.

The Corporation continues to be diligent in its credit underwriting process and proactive with its loan review process, including the engagement of the services of an independent outside loan review firm, which helps identify developing credit issues. Proactive steps that are taken include the procurement of additional collateral (preferably outside the current loan structure) whenever possible and frequent contact with the borrower. The Corporation believes that timely identification of credit issues and appropriate actions early in the process serve to mitigate overall risk of loss.

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Nonperforming Assets and Related Ratios

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


(dollars in thousands)	September 30, 2022			December 31, 2021
Non-performing assets:
Nonaccrual loans:
Real estate loans:

Home equity lines and loans	$	878		$	911
Residential mortgage	2,097			2,398

Total real estate loans	2,975			3,309
Commercial and industrial	18,202			18,801
Small business loans	1,401			666
Leases	506			212
Total nonaccrual loans	23,084			22,988

Total non-performing assets	$	23,084		$	22,988

Troubled debt restructurings:
TDRs included in non-performing loans and leases	$	193		$	361
TDRs in compliance with modified terms	3,637			3,446
Total TDRs	$	3,830		$	3,807

Asset quality ratios:
Non-performing assets to total assets	1.20		%	1.34		%
Non-performing loans to:
Total loans and leases	1.40		%	1.57		%
Total loans held-for-investment	1.43		%	1.66		%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)	1.45		%	1.80		%
Allowance for loan losses to:
Total loans and leases	1.15		%	1.28		%
Total loans held-for-investment	1.18		%	1.35		%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)	1.20		%	1.46		%
Non-performing loans	82.20		%	81.60		%

Total loans and leases	$	1,644,149		$	1,467,339
Total loans and leases held-for-investment	$	1,610,349		$	1,386,457
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans)	$	1,587,037		$	1,280,654
Allowance for loan and lease losses	$	18,974		$	18,758

(1) The allowance for loan losses to total loans held-for-investment (excluding loans at fair value and PPP loans) ratio is a non-GAAP financial measure. See “Non-GAAP Financial Measures” for a reconciliation of this measure to its most comparable GAAP measure.

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NON-INTEREST INCOME

Three Months Ended September 30, 2022 Compared to the Same Period in 2021

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


	Quarter Ended
(Dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Mortgage banking income	$	7,329	$	18,726	$	(11,397)	(60.9)	%
Wealth management income	1,114		1,232		(118)		(9.6)	%
SBA loan income	989		2,688		(1,699)		(63.2)	%
Earnings on investment in life insurance	138		93		45		48.4	%
Net change in the fair value of derivative instruments	127		(339)		466		(137.5)	%
Net change in the fair value of loans held-for-sale	(237)		(532)		295		(55.5)	%
Net change in the fair value of loans held-for-investment	(886)		37		(923)		(2494.6)	%
Net gain on hedging activity	399		(1,189)		1,588		(133.6)	%
Net gain on sale of investment securities available-for-sale	—		314		(314)		(100.0)	%
Service charges	32		35		(3)		(8.6)	%
Other	1,219		1,057		162		15.3	%
Total non-interest income	$	10,224	$	22,122	$	(11,898)	(53.8)	%

Total non-interest income decreased $11.9 million due primarily to lower income from our mortgage segment, which was impacted by lower levels of mortgage loan originations in a rising rate environment and a lack of housing inventory. Partially offsetting the impact of the decline in mortgage banking income were net changes in the fair value of derivative instruments and loans held-for-sale, along with an improvement in net gains on hedging activity which increased $2.3 million, combined.

SBA loan income decreased $1.7 million as a higher volume of SBA loans were sold into the secondary market in the prior year comparable quarter: $20.8 million of loans were sold in the quarter-ending September 30, 2022 compared to $25.0 million in loans sold in the quarter-ending September 30, 2021. Contributing to lower SBA loan income, margins on the SBA loan sales decreased from the prior year due to the upward movement in interest rates, which drove SBA loan prices down.

The net change in the fair value of loans held-for-investment decreased to a loss of $886 thousand for the quarter ended September 30, 2022, compared to a gain of $37 thousand for the comparable prior year quarter, due to the negative impact the rising interest rate environment had on the fair value of the loans in portfolio that are held at fair value. Other non-interest income was up $162 thousand due to increases in title fee income, FHLB stock dividend income and broker fee income.

Nine Months Ended September 30, 2022 Compared to the Same Period in 2021

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


	Year Ended
(Dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Mortgage banking income	$	21,367	$	62,293	$	(40,926)	(65.7)	%
Wealth management income	3,672		3,531		141		4.0	%
SBA loan income	3,946		5,423		(1,477)		(27.2)	%
Earnings on investment in life insurance	413		224		189		84.4	%
Net change in the fair value of derivative instruments	(713)		(3,431)		2,718		(79.2)	%
Net change in the fair value of loans held-for-sale	(1,094)		(3,164)		2,070		(65.4)	%
Net change in the fair value of loans held-for-investment	(2,499)		(24)		(2,475)		10312.5	%
Net gain on hedging activity	4,941		2,397		2,544		106.1	%
Net gain on sale of investment securities available-for-sale	—		362		(362)		(100.0)	%
Service charges	90		99		(9)		(9.1)	%
Other	3,605		3,192		413		12.9	%
Total non-interest income	$	33,728	$	70,902	$	(37,174)	(52.4)	%

Total non-interest income decreased due primarily to lower income from our mortgage segment, which was impacted by lower levels of mortgage loan originations in a rising rate environment and a lack of housing inventory.

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NON-INTEREST EXPENSE

Three Months Ended September 30, 2022 Compared to the Same Period in 2021

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


	Quarter Ended
(Dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Salaries and employee benefits	$	13,360	$	19,472	$	(6,112)	(31.4)	%
Occupancy and equipment	1,191		1,133		58		5.1	%
Professional fees	899		873		26		3.0	%
Advertising and promotion	1,165		1,089		76		7.0	%
Data processing	574		530		44		8.3	%
Information technology	868		476		392		82.4	%
Pennsylvania bank shares tax	202		152		50		32.9	%
Other	2,002		1,756		246		14.0	%
Total non-interest expense	$	20,261	$	25,481	$	(5,220)	(20.5)	%

Total non-interest expense decreased largely attributable to a decrease in salaries and employee benefits expense in the mortgage segment, which had reduced fixed and variable based compensation.

Information technology expense increased $392 thousand due to cybersecurity improvements, cloud-based costs and other software upgrades, all as a result of growth. Other non-interest expense increased $246 thousand due to the increased level of client engagement and business development our employees were able to do in the current period versus the prior year due to COVID-19 pandemic restrictions.

Nine Months Ended September 30, 2022 Compared to the Same Period in 2021

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


	Year Ended
(Dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Salaries and employee benefits	$	41,585	$	61,824	$	(20,239)	(32.7)	%
Occupancy and equipment	3,619		3,460		159		4.6	%
Professional fees	2,659		2,629		30		1.1	%
Advertising and promotion	3,340		2,795		545		19.5	%
Data processing	1,633		1,666		(33)		(2.0)	%
Information technology	2,306		1,365		941		68.9	%
Pennsylvania bank shares tax	612		478		134		28.0	%
Other	5,646		5,773		(127)		(2.2)	%
Total non-interest expense	$	61,400	$	79,990	$	(18,590)	(23.2)	%

Total non-interest expense decreased largely attributable to a decrease in salaries and employee benefits expense at the mortgage segment, which recognized decreased and variable compensation. Partially offsetting this decrease was an increase in salaries & benefits expense for the bank and wealth segments due to an increase in FTEs and a higher level of stock-based compensation expense year-over-year.

Advertising and promotion expense increased $545 thousand as the result of a renewed and focused priority placed on business development and community outreach efforts. Information technology expense increased $941 thousand due to cybersecurity improvements, cloud-based costs and other software upgrades, all as a result of growth.

INCOME TAX EXPENSE

Income tax expense for the three months ended September 30, 2022 was $1.7 million, as compared to $2.9 million for the same period in 2021. The decrease in income tax expense was attributable to the decrease in earnings, period over period. Our effective tax rate was 22.3% for the three months ended September 30, 2022 and 23.3% for the three months ended September 30, 2021.

Income tax expense for the nine months ended September 30, 2022 was $4.9 million, as compared to $8.5 million for the same period in 2021. The decrease in income tax expense was attributable to the decrease in earnings, period over period. Our effective tax rate was 22.2% for the nine months ended September 30, 2022 and 23.5% for the nine months ended June 30, 2021.

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BALANCE SHEET ANALYSIS

As of September 30, 2022, total assets were $1.92 billion which increased $208.5 million, or 12.2%, from December 31, 2021. This growth in assets over the prior period was due primarily to loan portfolio growth, as detailed in the following table:


(Dollars in thousands)	September 30, 2022		December 31, 2021		$ Change		% Change
Mortgage loans held for sale	$	33,800	$	80,882	$	(47,082)	(58.2)	%
Real estate loans:
Commercial mortgage	545,736		516,928		28,808		5.6	%
Home equity lines and loans	57,648		52,299		5,349		10.2	%
Residential mortgage (1)	153,513		68,175		85,338		125.2	%
Construction	244,435		160,905		83,530		51.9	%
Total real estate loans	1,001,332		798,307		203,025		25.4	%

Commercial and industrial	329,451		293,771		35,680		12.1	%
Small business loans	133,904		114,158		19,746		17.3	%
Paycheck Protection Program loans	8,837		90,194		(81,357)		(90.2)	%
Main Street Lending Program Loans	597		597		—		—	%
Consumer	497		419		78		18.6	%
Leases, net	129,574		88,242		41,332		46.8	%
Total portfolio loans and leases	$	1,604,192	$	1,385,688	$	218,504	15.8	%
Total loans and leases	$	1,637,992	$	1,466,570	$	171,422	11.7	%

Portfolio loans increased grew $218.5 million, or 15.8%, to $1.6 billion as of September 30, 2022, from $1.4 billion as of December 31, 2021. Overall portfolio loan growth, excluding PPP loans, was 23.1% since December 31, 2021, or 30.9% on an annualized basis for 2022. Commercial loans increased $35.7 million, or 12.1%, commercial real estate loans increased $28.8 million, or 5.6%, construction loans increased $83.5 million, or 51.9%, residential real estate loans held in portfolio increased $85.3 million, or 125.2%, and lease financings increased $41.3 million, or 46.8% from December 31, 2021. Partially offsetting the growth in portfolio loans was a decrease of $81.4 million, or 90.2%, in PPP loan balances as such loans continue to be paid off by the SBA.

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


(Dollars in thousands)	September 30, 2022		December 31, 2021		$ Change		% Change
Noninterest-bearing deposits	$	290,169	$	274,528	$	15,641	5.7	%
Interest-bearing deposits:
Interest-bearing demand deposits	236,562		268,248		(31,686)		(11.8)	%
Money market and savings deposits	709,127		697,628		11,499		1.6	%
Time deposits	437,695		206,009		231,686		112.5	%
Total interest-bearing deposits	1,383,384		1,171,885		211,499		18.0	%
Total deposits	$	1,673,553	$	1,446,413	$	227,140	15.7	%

Total deposits increased $227.1 million, or 15.7%, since December 31, 2021. While noninterest-bearing deposits increased $15.6 million over this period, the largest increase was in time deposits, $211.5 million, or 18.0%, largely from retail and wholesale time deposits due to more favorable interest rates.

Capital

Consolidated stockholders’ equity of the Corporation was $151.2 million, or 7.9% of total assets as of September 30, 2022, as compared to $165.4 million, or 9.7% of total assets as of December 31, 2021.

Period end numbers show a tangible common equity to tangible assets ratio (a non-GAAP measure) of 7.7% for the Corporation and 9.6% for the Bank. Tangible book value per share (a non-GAAP measure) was $25.16 as of September 30, 2022, compared with 26.37 as of December 31, 2021. A reconciliation of these non-GAAP measures is below.

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The following table presents the Corporation’s capital ratios and the minimum capital requirements to be considered “well capitalized” by regulators at the periods indicated:


	Corporation				Bank				Well-capitalized minimum
	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Tier 1 leverage ratio	8.54	%	9.39	%	10.52	%	11.51	%	5.00	%
Common tier 1 risk-based capital ratio	9.28	%	10.83	%	11.44	%	13.27	%	6.50	%
Tier 1 risk-based capital ratio	9.28	%	10.83	%	11.44	%	13.27	%	8.00	%
Total risk-based capital ratio	12.80	%	14.81	%	12.70	%	14.63	%	10.00	%

Under the Community Bank Leverage Ratio framework, a community banking organization that is less than $10 billion in total consolidated assets, and has limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9% can elect to report a single regulatory capital ratio. The Corporation has elected to be measured under this framework for Bank capital adequacy and had ratios of 10.52% and 11.51% at September 30, 2022 and December 31, 2021, respectively. The Corporation is exempt from CBLR. The bank regulatory agencies temporarily lowered the CBLR to 8% as a result of the COVID-19 pandemic.

Liquidity

Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Meridian’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization or that can be used as collateral to secure funding. In addition, as part of its liquidity management, Meridian maintains a segment of commercial loan assets that are comprised of shared national credits (“SNCs”), which have a national market and can be sold in a timely manner. Meridian’s available liquidity, which totaled $264.7 million at September 30, 2022, compared to $263.6 million at December 31, 2021, includes investments, SNCs, Federal funds sold, mortgages held-for-sale and cash and cash equivalents, less the amount of securities required to be pledged for certain liabilities. Meridian also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios.

In addition, Meridian maintains borrowing arrangements with various correspondent banks, the FHLB and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. Through its relationship at the Federal Reserve, Meridian had available credit of approximately $9.2 million at September 30, 2022. At September 30, 2022, Meridian had no borrowings from the Federal Reserve. As a member of the FHLB, we are eligible to borrow up to a specific credit limit, which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of September 30, 2022, Meridian’s maximum borrowing capacity with the FHLB was $529.2 million. At September 30, 2022, Meridian had borrowed $23.4 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $74.8 million against its available credit lines. At September 30, 2022, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as $214.7 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $333.1 million of available short or long term funding through brokered CD arrangements. Management believes that Meridian has adequate resources to meet its short-term and long-term funding requirements.

Discussion of Segments

As of September 30, 2022, the Corporation has three principal segments as defined by FASB ASC 280, “Segment Reporting.” The segments are Banking, Mortgage Banking and Wealth Management (see Note 10 in the accompanying Notes to Unaudited Consolidated Financial Statements).

The Banking Segment recorded income before tax of $7.5 million and $22.5 million for the three and nine months ended September 30, 2022 as compared to income before tax of $8.3 million and $23.5 million for the same periods in 2021. The Banking Segment provided 100.6% and 101.4% of the Corporation’s pre-tax profit for the three and nine month periods ended September 30, 2022, as compared to 69.0% and 65.9% for the same period in 2021.

The Wealth Management Segment recorded income before tax of $552 thousand and $1.8 million for the three and nine months ended September 30, 2022 as compared to income before tax of $432 thousand and $796 thousand for the same periods in 2021. The increase in income in this segment came from an increase in customer based as the number of accounts grew 2.5% and 4.5%, for the three and nine months ended September 30, 2022, respectively.

The Mortgage Banking Segment recorded a loss before tax of $603 thousand and a loss before tax of $2.2 million for the three and nine months ended September 30, 2022 as compared to income before tax of $3.6 million and $12.1 million for the same periods in 2021. Mortgage Banking income and expenses related to loan originations and sales decreased due to lower origination volume.

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Off Balance Sheet Risk

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit, and loan repurchase commitments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at September 30, 2022 were $505.9 million as compared to $486.6 million at December 31, 2021.

Standby letters of credit are conditional commitments issued by the Corporation to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Corporation’s obligation under standby letters of credit at September 30, 2022 amounted to $21.5 million as compared to $26.0 million at December 31, 2021.

Estimated fair values of the Corporation’s off-balance sheet instruments are based on fees and rates currently charged to enter into similar loan agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. Since fees and rates charged for off-balance sheet items are at market levels when set, there is no material difference between the stated amount and the estimated fair value of off-balance sheet instruments.

In certain circumstances the Corporation may be required to repurchase residential mortgage loans from investors under the terms of loan sale agreements. Generally, these circumstances include the breach of representations and warranties made to investors regarding borrower default or early payment, as well as a violation of the applicable federal, state, or local lending laws. The Corporation agrees to repurchase loans if the representations and warranties made with respect to such loans are breached. Based on the obligations described above, the Corporation repurchased one loan totaling $126 thousand for the three months ended September 30, 2022 and seven loans totaling $1.6 million for the nine months ended September 30, 2022, and repurchased one loan in the amount of $115 thousand for the three months ended September 30, 2021 and four loans totaling $561 thousand for the nine months ended September 30, 2021.

~~Non-GAAP Financial Measures~~NET INTEREST INCOME

~~Meridian believes that non-GAAP measures are meaningful because they reflect adjustments commonly made by management, investors, regulators~~Net interest income is an integral source of the Corporation’s revenue. The tables below present a summary for the three and ~~analysts to evaluate performance trends~~nine months ended September 30, 2022 and 2021, of the Corporation’s average balances and yields earned on its interest-earning assets and the ~~adequacy of common equity. This non-GAAP disclosure has limitations as an analytical tool, should not be viewed~~rates paid on its interest-bearing liabilities. The net interest margin is the net interest income as a ~~substitute~~percentage of average interest-earning assets. The net interest spread is the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The difference between the net interest margin and the net interest spread is the result of net free funding sources such as non-interest bearing deposits and stockholders’ equity.

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Analyses of Interest Rates and Interest Differential

The tables below present the major asset and liability categories on an average daily balance basis for ~~performance~~the periods presented, along with interest income, interest expense and ~~financial condition measures determined~~key rates and yields on a tax equivalent basis.


	For the Three Months Ended September 30,
(dollars in thousands)	2022						2021						Change
	Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates
Assets:
Due from banks	$	15,678	$	92	2.33	%	$	40,249	$	16	0.16	%	$	(24,571)	$	76	2.17	%
Federal funds sold	219		1		1.81		23,013		1		0.02		(22,794)		—		1.79
Investment securities - taxable (1)	107,929		648		2.38		79,785		357		1.78		28,144		291		0.60
Investment securities - tax exempt (1)	63,711		451		2.81		67,250		377		2.22		(3,539)		74		0.59
Loans held for sale	37,857		479		5.02		110,905		824		2.97		(73,048)		(345)		2.05
Loans held for investment (1)	1,565,861		21,371		5.41		1,370,439		16,804		4.84		195,422		4,567		0.57
Total loans	1,603,718		21,850		5.41		1,481,344		17,628		4.72		122,374		4,222		0.69
Total interest-earning assets	1,791,255		23,042		5.10	%	1,691,641		18,379		4.31	%	99,614		4,663		0.79	%
Noninterest earning assets	76,939						48,207						28,732
Total assets	$	1,868,194					$	1,739,848					$	128,346
Liabilities and stockholders' equity:
Interest-bearing demand deposits	$	221,402	$	798	1.43	%	$	270,518	$	201	0.29	%	$	(49,116)	$	597	1.14	%
Money market and savings deposits	718,744		2,075		1.15		647,093		853		0.52		71,651		1,222		0.63
Time deposits	361,527		1,202		1.32		237,080		273		0.46		124,447		929		0.86
Total deposits	1,301,673		4,075		1.24		1,154,691		1,327		0.46		146,982		2,748		0.78
Borrowings	41,313		266		2.55		111,075		126		0.45		(69,762)		140		2.10
Subordinated debentures	40,578		591		5.78		40,740		596		5.85		(162)		(5)		(0.07)
Total interest-bearing liabilities	1,383,564		4,932		1.41		1,306,506		2,049		0.62		77,058		2,883		0.79
Noninterest-bearing deposits	295,975						254,843						41,132
Other noninterest-bearing liabilities	31,041						22,919						8,122
Total liabilities	1,710,580						1,584,268						126,312
Total stockholders' equity	157,614						155,580						2,034
Total stockholders' equity and liabilities	$	1,868,194					$	1,739,848					$	128,346
Net interest income and spread (1)			$	18,110	3.69				$	16,330	3.69				$	1,780	—
Net interest margin (1)					4.01	%					3.83	%					0.18	%

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

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	For the Nine Months Ended September 30,
(dollars in thousands)	2022						2021						Change
	Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates
Assets:
Due from banks	$	23,612	$	153	0.87	%	$	24,340	$	22	0.12	%	$	(728)	$	131	0.75	%
Federal funds sold	1,440		4		0.37		18,991		3		0.02		(17,551)		1		0.35
Investment securities - taxable (1)	105,624		1,599		2.02		78,951		1,076		1.82		26,673		523		0.20
Investment securities - tax exempt (1)	63,848		1,240		2.60		64,023		1,094		2.28		(175)		146		0.32
Loans held for sale	52,495		1,580		4.02		139,101		2,922		2.80		(86,606)		(1,342)		1.22
Loans held for investment (1)	1,489,345		56,614		5.08		1,349,780		48,375		4.79		139,565		8,239		0.29
Total loans	1,541,840		58,194		5.05		1,488,881		51,297		4.61		52,959		6,897		0.44
Total interest-earning assets	1,736,364		61,190		4.71	%	1,675,186		53,492		4.27	%	61,178		7,698		0.44	%
Noninterest earning assets	74,313						44,388						29,925
Total assets	$	1,810,677					$	1,719,574					$	91,103
Liabilities and stockholders' equity:
Interest-bearing demand deposits	$	242,863	$	1,183	0.65	%	$	252,074	$	739	0.39	%	$	(9,211)	$	444	0.26	%
Money market and savings deposits	702,696		4,003		0.76		609,201		2,505		0.55		93,495		1,498		0.21
Time deposits	319,927		1,996		0.83		258,099		1,017		0.53		61,828		979		0.30
Total deposits	1,265,486		7,182		0.76		1,119,374		4,261		0.51		146,112		2,921		0.25
Borrowings	24,621		391		2.12		139,716		437		0.42		(115,095)		(46)		1.70
Subordinated debentures	40,548		1,775		5.85		40,711		1,787		5.87		(163)		(12)		(0.02)
Total interest-bearing liabilities	1,330,655		9,348		0.94		1,299,801		6,485		0.67		30,854		2,863		0.27
Noninterest-bearing deposits	291,261						248,355						42,906
Other noninterest-bearing liabilities	29,452						24,928						4,524
Total liabilities	1,651,368						1,573,084						78,284
Total stockholders' equity	159,309						146,490						12,819
Total stockholders' equity and liabilities	$	1,810,677					$	1,719,574					$	91,103
Net interest income and spread (1)			$	51,842	3.77				$	47,007	3.60				$	4,835	0.17
Net interest margin (1)					3.99	%					3.75	%					0.24	%

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

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Rate/Volume Analysis

The rate/volume analysis table below analyzes dollar changes in ~~accordance with GAAP,~~the components of interest income and ~~should not be considered~~interest expense as they relate to the change in ~~isolation~~ balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three and nine months ended September 30, 2022 as compared to the same periods in 2021, allocated by rate and volume. Changes in interest income and/or ~~as a substitute for analysis of Meridian’s results as reported under GAAP, nor is it necessarily comparable~~expense attributable to ~~non-GAAP performance measures that may be presented by other companies.~~

~~Our management used~~both rate and volume have been allocated proportionately based on the ~~measure~~relationship of the ~~tangible common equity ratio~~absolute dollar amount of the change in each category.


	2022 Compared to 2021
	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	Rate		Volume		Total		Rate		Volume		Total
Interest income:
Due from banks	$	91	$	(15)	$	76	$	132	$	(1)	$	131
Federal funds sold	2		(2)		—		6		(5)		1
Investment securities - taxable (1)	143		148		291		129		394		523
Investment securities - tax exempt (1)	95		(21)		74		149		(3)		146
Loans held for sale	382		(727)		(345)		942		(2,284)		(1,342)
Loans held for investment (1)	2,020		2,547		4,567		3,046		5,193		8,239
Total loans	2,402		1,820		4,222		3,988		2,909		6,897
Total interest income	$	2,733	$	1,930	$	4,663	$	4,404	$	3,294	$	7,698
Interest expense:
Interest-bearing demand deposits	$	640	$	(43)	$	597	$	472	$	(28)	$	444
Money market and savings deposits	1,118		104		1,222		1,071		427		1,498
Time deposits	727		202		929		694		285		979
Total deposits	2,485		263		2,748		2,237		684		2,921
Borrowings	263		(123)		140		561		(607)		(46)
Subordinated debentures	(3)		(2)		(5)		(5)		(7)		(12)
Total interest expense	$	2,745	$	138	$	2,883	$	2,793	$	70	$	2,863
Interest differential	$	(12)	$	1,792	$	1,780	$	1,611	$	3,224	$	4,835

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

Three Months Ended September 30, 2022 Compared to ~~assess our capital strength. We believe~~the Same Period in 2021

Nine Months Ended September 30, 2022 Compared to the Same Period in 2021

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increase in the yield on loans held for sale was the result of interest rates hovering at historical lows throughout much of 2021, but then as the Fed raised interest rates in 2022, the yield benefited from this ~~non-GAAP financial measure is useful~~action. The $3.3 million positive impact that volume changes had to ~~investors because,~~interest income was largely the result of loan average balance increases, which contributed $5.2 million to interest income, offset by ~~removing~~a decline in the volume of loans held or sale which had an unfavorable impact of $2.3 million on interest income. The increase in loans held for investment average balances were led by an increases in commercial loans, small business loans and leases of $30 million, $58.1 million, and $56.5 million, respectively, construction loans of $50.8 million, and residential loans held for investment of $47.3 million, offset somewhat by a $152.3 million decline in PPP loan balances as they continue to be forgiven by the SBA.

PROVISION FOR LOAN AND LEASE LOSSES

Three Months Ended September 30, 2022 Compared to the Same Period in 2021

Nine Months Ended September 30, 2022 Compared to the Same Period in 2021

The provision for loan losses increased $451 thousand to provide for the significant level of loan growth year over year, partially offset by the impact of ~~our goodwill~~decreases to specific reserves and other intangible assets, it allows investors to more easily assess our capital adequacy. This non-GAAP financial measure should not be considered a substitute for any regulatory capital ratios and may not be comparable to other similarly titled measures used by other companies.

~~The table below provides the non-GAAP reconciliation for our tangible common equity ratio for Meridian Corporation:~~

(dollars in thousands) June 30, 2022 December 31, 2021
Tangible common equity ratio:
Total stockholders' equity 156,087 165,360
Less:
Goodwill and intangible assets (4,176) (4,278)
Tangible common equity 151,911 161,082
Total assets 1,853,019 1,713,443
Less:
Goodwill and intangible assets (4,176) (4,278)
Tangible assets $ 1,848,843 $ 1,709,165
Tangible common equity ratio 8.22 % 9.42 %
qualitative factors noted above.

Asset Quality Summary

Meridian's credit culture is strong and asset quality remains a primary focus of management. The ~~table below provides~~ratio of non-performing assets to total assets declined to 1.20% as of September 30, 2022, from 1.34% as of December 31, 2021. There was no other real estate property included in non-performing assets for either period. Total non-performing loans were $23.1 million and $23.0 million as of September 30, 2022 and December 31, 2021, respectively, however subsequent to September 30, 2022, principal payments of $3.2 million and $307 thousand on a non-performing loan relationship were received.

Meridian realized net charge-offs of 0.10% of total average loans for the ~~non-GAAP reconciliation~~year ending September 30, 2022 which is higher than the 0.01% over the same period in 2021. Charge-offs amounted to $431 thousand for ~~our tangible book value per common share for Meridian Corporation:~~

Reconciliation of tangible book value per common share June 30, 2022 December 31, 2021
Book value per common share $ 25.85 $ 27.07
Less: Impact of goodwill and intangible assets 0.69 0.70
Tangible book value per common share $ 25.16 $ 26.37

~~The following is a reconciliation~~the quarter ending September 30, 2022, while recoveries were $74 thousand during this quarter. Nearly all of the charge-offs for the quarter ending September 30, 2022 were from small ticket equipment leases, while recoveries were split between commercial loans and home equity loans. The ratio of allowance for loan losses to total loans held for investment, ~~ratio~~excluding loans at ~~June 30, 2022. This is considered a~~fair value and PPP loans (a non-GAAP measure, see reconciliation in the Appendix), was 1.20% as of September 30, 2022 and 1.46% as of December 31, 2021. As of September 30, 2022 there were specific reserves of $2.8 million against a non-performing loans, down from $3.2 million as of December 31, 2021 due to improvement in the ~~calculation excludes~~underlying credit quality for certain loans, as discussed in the ~~impact~~above paragraph.

The Corporation continues to be diligent in its credit underwriting process and proactive with its loan review process, including the engagement of ~~loans held for investment~~the services of an independent outside loan review firm, which helps identify developing credit issues. Proactive steps that are ~~fair valued~~taken include the procurement of additional collateral (preferably outside the current loan structure) whenever possible and frequent contact with the ~~impact~~borrower. The Corporation believes that timely identification of ~~PPP loans as these loan types are not included~~credit issues and appropriate actions early in the process serve to mitigate overall risk of loss.

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Nonperforming Assets and Related Ratios

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


(dollars in thousands)	September 30, 2022			December 31, 2021
Non-performing assets:
Nonaccrual loans:
Real estate loans:

Home equity lines and loans	$	878		$	911
Residential mortgage	2,097			2,398

Total real estate loans	2,975			3,309
Commercial and industrial	18,202			18,801
Small business loans	1,401			666
Leases	506			212
Total nonaccrual loans	23,084			22,988

Total non-performing assets	$	23,084		$	22,988

Troubled debt restructurings:
TDRs included in non-performing loans and leases	$	193		$	361
TDRs in compliance with modified terms	3,637			3,446
Total TDRs	$	3,830		$	3,807

Asset quality ratios:
Non-performing assets to total assets	1.20		%	1.34		%
Non-performing loans to:
Total loans and leases	1.40		%	1.57		%
Total loans held-for-investment	1.43		%	1.66		%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)	1.45		%	1.80		%
Allowance for loan losses to:
Total loans and leases	1.15		%	1.28		%
Total loans held-for-investment	1.18		%	1.35		%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)	1.20		%	1.46		%
Non-performing loans	82.20		%	81.60		%

Total loans and leases	$	1,644,149		$	1,467,339
Total loans and leases held-for-investment	$	1,610,349		$	1,386,457
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans)	$	1,587,037		$	1,280,654
Allowance for loan and lease losses	$	18,974		$	18,758

(1) The allowance for loan losses ~~calculation.~~to total loans held-for-investment (excluding loans at fair value and PPP loans) ratio is a non-GAAP financial measure. See “Non-GAAP Financial Measures” for a reconciliation of this measure to its most comparable GAAP measure.

2022 2021
Reconciliation of Allowance for Loan Losses / Total loans held for investment June 30 December 31
Allowance for loan losses / Total loans held for investment 1.24 % 1.35 %
Less: Impact of loans held for investment - fair valued 0.01 % 0.02 %
Less: Impact of PPP loans 0.02 % 0.09 %
Allowance for loan losses / Total loans held for investment (excl. loans at fair value and PPP loans) 1.27 % 1.46 %

4136

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NON-INTEREST INCOME

Three Months Ended September 30, 2022 Compared to the Same Period in 2021

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


	Quarter Ended
(Dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Mortgage banking income	$	7,329	$	18,726	$	(11,397)	(60.9)	%
Wealth management income	1,114		1,232		(118)		(9.6)	%
SBA loan income	989		2,688		(1,699)		(63.2)	%
Earnings on investment in life insurance	138		93		45		48.4	%
Net change in the fair value of derivative instruments	127		(339)		466		(137.5)	%
Net change in the fair value of loans held-for-sale	(237)		(532)		295		(55.5)	%
Net change in the fair value of loans held-for-investment	(886)		37		(923)		(2494.6)	%
Net gain on hedging activity	399		(1,189)		1,588		(133.6)	%
Net gain on sale of investment securities available-for-sale	—		314		(314)		(100.0)	%
Service charges	32		35		(3)		(8.6)	%
Other	1,219		1,057		162		15.3	%
Total non-interest income	$	10,224	$	22,122	$	(11,898)	(53.8)	%

Nine Months Ended September 30, 2022 Compared to the Same Period in 2021

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


	Year Ended
(Dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Mortgage banking income	$	21,367	$	62,293	$	(40,926)	(65.7)	%
Wealth management income	3,672		3,531		141		4.0	%
SBA loan income	3,946		5,423		(1,477)		(27.2)	%
Earnings on investment in life insurance	413		224		189		84.4	%
Net change in the fair value of derivative instruments	(713)		(3,431)		2,718		(79.2)	%
Net change in the fair value of loans held-for-sale	(1,094)		(3,164)		2,070		(65.4)	%
Net change in the fair value of loans held-for-investment	(2,499)		(24)		(2,475)		10312.5	%
Net gain on hedging activity	4,941		2,397		2,544		106.1	%
Net gain on sale of investment securities available-for-sale	—		362		(362)		(100.0)	%
Service charges	90		99		(9)		(9.1)	%
Other	3,605		3,192		413		12.9	%
Total non-interest income	$	33,728	$	70,902	$	(37,174)	(52.4)	%

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NON-INTEREST EXPENSE

Three Months Ended September 30, 2022 Compared to the Same Period in 2021

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


	Quarter Ended
(Dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Salaries and employee benefits	$	13,360	$	19,472	$	(6,112)	(31.4)	%
Occupancy and equipment	1,191		1,133		58		5.1	%
Professional fees	899		873		26		3.0	%
Advertising and promotion	1,165		1,089		76		7.0	%
Data processing	574		530		44		8.3	%
Information technology	868		476		392		82.4	%
Pennsylvania bank shares tax	202		152		50		32.9	%
Other	2,002		1,756		246		14.0	%
Total non-interest expense	$	20,261	$	25,481	$	(5,220)	(20.5)	%

Total non-interest expense decreased largely attributable to a decrease in salaries and employee benefits expense in the mortgage segment, which had reduced fixed and variable based compensation.

Nine Months Ended September 30, 2022 Compared to the Same Period in 2021

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


	Year Ended
(Dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Salaries and employee benefits	$	41,585	$	61,824	$	(20,239)	(32.7)	%
Occupancy and equipment	3,619		3,460		159		4.6	%
Professional fees	2,659		2,629		30		1.1	%
Advertising and promotion	3,340		2,795		545		19.5	%
Data processing	1,633		1,666		(33)		(2.0)	%
Information technology	2,306		1,365		941		68.9	%
Pennsylvania bank shares tax	612		478		134		28.0	%
Other	5,646		5,773		(127)		(2.2)	%
Total non-interest expense	$	61,400	$	79,990	$	(18,590)	(23.2)	%

INCOME TAX EXPENSE

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BALANCE SHEET ANALYSIS


(Dollars in thousands)	September 30, 2022		December 31, 2021		$ Change		% Change
Mortgage loans held for sale	$	33,800	$	80,882	$	(47,082)	(58.2)	%
Real estate loans:
Commercial mortgage	545,736		516,928		28,808		5.6	%
Home equity lines and loans	57,648		52,299		5,349		10.2	%
Residential mortgage (1)	153,513		68,175		85,338		125.2	%
Construction	244,435		160,905		83,530		51.9	%
Total real estate loans	1,001,332		798,307		203,025		25.4	%

Commercial and industrial	329,451		293,771		35,680		12.1	%
Small business loans	133,904		114,158		19,746		17.3	%
Paycheck Protection Program loans	8,837		90,194		(81,357)		(90.2)	%
Main Street Lending Program Loans	597		597		—		—	%
Consumer	497		419		78		18.6	%
Leases, net	129,574		88,242		41,332		46.8	%
Total portfolio loans and leases	$	1,604,192	$	1,385,688	$	218,504	15.8	%
Total loans and leases	$	1,637,992	$	1,466,570	$	171,422	11.7	%

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


(Dollars in thousands)	September 30, 2022		December 31, 2021		$ Change		% Change
Noninterest-bearing deposits	$	290,169	$	274,528	$	15,641	5.7	%
Interest-bearing deposits:
Interest-bearing demand deposits	236,562		268,248		(31,686)		(11.8)	%
Money market and savings deposits	709,127		697,628		11,499		1.6	%
Time deposits	437,695		206,009		231,686		112.5	%
Total interest-bearing deposits	1,383,384		1,171,885		211,499		18.0	%
Total deposits	$	1,673,553	$	1,446,413	$	227,140	15.7	%

Capital

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The following table ~~below provides~~presents the ~~non-GAAP reconciliation~~Corporation’s capital ratios and the minimum capital requirements to be considered “well capitalized” by regulators at the periods indicated:


	Corporation				Bank				Well-capitalized minimum
	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Tier 1 leverage ratio	8.54	%	9.39	%	10.52	%	11.51	%	5.00	%
Common tier 1 risk-based capital ratio	9.28	%	10.83	%	11.44	%	13.27	%	6.50	%
Tier 1 risk-based capital ratio	9.28	%	10.83	%	11.44	%	13.27	%	8.00	%
Total risk-based capital ratio	12.80	%	14.81	%	12.70	%	14.63	%	10.00	%

(Dollars in thousands) Three Months Ended June 30, Six Months Ended June 30,
Reconciliation of pre-tax, pre-provision income 2022 2021 2022 2021
Income before income tax expense $ 7,646 $ 10,802 14,735 24,108
Provision for loan losses 602 96 1,217 695
Pre-tax, pre-provision income $ 8,248 $ 10,898 15,952 24,803
Bank capital adequacy and had ratios of 10.52% and 11.51% at September 30, 2022 and December 31, 2021, respectively. The Corporation is exempt from CBLR. The bank regulatory agencies temporarily lowered the CBLR to 8% as a result of the COVID-19 pandemic.

Liquidity

Discussion of Segments

As of September 30, 2022, the Corporation has three principal segments as defined by FASB ASC 280, “Segment Reporting.” The ~~following sections discuss,~~segments are Banking, Mortgage Banking and Wealth Management (see Note 10 in ~~detail,~~ the ~~Corporation’s results~~accompanying Notes to Unaudited Consolidated Financial Statements).

The Banking Segment recorded income before tax of ~~operations~~$7.5 million and $22.5 million for the three and ~~six~~nine months ended ~~June~~September 30, 2022 as compared to income before tax of $8.3 million and $23.5 million for the same periods in ~~2021,~~2021. The Banking Segment provided 100.6% and 101.4% of the ~~changes in its financial condition as of June~~Corporation’s pre-tax profit for the three and nine month periods ended September 30, 2022, as compared to ~~December 31,~~69.0% and 65.9% for the same period in 2021.

~~Components~~The Wealth Management Segment recorded income before tax of ~~Net Income~~$552 thousand and $1.8 million for the three and nine months ended September 30, 2022 as compared to income before tax of $432 thousand and $796 thousand for the same periods in 2021. The increase in income in this segment came from an increase in customer based as the number of accounts grew 2.5% and 4.5%, for the three and nine months ended September 30, 2022, respectively.

~~Net~~The Mortgage Banking Segment recorded a loss before tax of $603 thousand and a loss before tax of $2.2 million for the three and nine months ended September 30, 2022 as compared to income ~~is comprised~~before tax of ~~five major elements:~~

•~~Net Interest Income, or~~$3.6 million and $12.1 million for the ~~difference between the interest~~same periods in 2021. Mortgage Banking income ~~earned on loans, leases~~ and ~~investments~~expenses related to loan originations and ~~the interest expense paid on deposits and borrowed funds;~~

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

•~~Non-interest Income,~~ which is made up primarily of mortgage banking income, wealth management income, SBA loan sale income, fair value adjustments, gains and losses from the sale of loans, gains and losses from the sale of investment securities available for sale and other fees from loan and deposit services;

•~~Non-interest Expense~~, which consists primarily of salaries and employee benefits, occupancy, professional fees, advertising & promotion, data processing, information technology, loan expenses, and other operating expenses; and

•~~Income Taxes, which include state and federal jurisdictions.~~lower origination volume.

Table of Contents

Off Balance Sheet Risk

NET INTEREST INCOME

Net interest income is an integral source of the Corporation’s revenue. The tables below present a summary for the three and ~~six~~nine months ended ~~June~~September 30, 2022 and 2021, of the Corporation’s average balances and yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities. The net interest margin is the net interest income as a percentage of average interest-earning assets. The net interest spread is the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The difference between the net interest margin and the net interest spread is the result of net free funding sources such as non-interest bearing deposits and stockholders’ equity.

~~Three Months Ended June 30, 2022 Compared to the Same Period in 2021~~

Interest income on a tax-equivalent basis increased $2.5 million, or 14.3%, to $20.1 million for the three months ended June 30, 2022, from $17.6 million for the three months ended June 30, 2021, largely due to increases in the yield on interest earning assets. The yield on loans held for investment increased 32 basis points, while the yield on investment securities also increased 15 basis points, both helped by the Fed's interest rate raises. Overall, the yield on interest-earning assets increased 45 basis points to 4.65% over the period. There was a $57.8 million increase in average interest earning assets, year over year, led by increases of $120.5 million in loans held for investment, a $22.7 million increase in investment securities, and a $8.1 million increase in interest earning cash balances, offset partially by a $80.6 million decrease in the average balance of loans held for sale.

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Interest expense was up $381 thousand, or 18.1%, to $2.5 million for the three months ended June 30, 2022. Deposit interest expense was up $450 thousand, or 32.9%, period over period, to $1.8 million, while interest expense on borrowings was down $69 thousand, or 9.4%, to $668 thousand. Total interest-bearing deposit balances increased $141.5 million on average when comparing the three months ended June 30, 2022 to June 30, 2021, while the cost of deposits was up 8 basis points over this same period. The average balance on money market and savings deposits were up $96.3 million, with costs up 7 basis points, while time deposit average balances were up $68.2 million, 13 basis points. Offsetting these average balance increases slightly was a $23.0 million decrease in the average balance of interest-bearing deposits. The average balance of borrowings was down $109.0 million for the three months ended June 30, 2022, compared to June 30, 2021. This decline was largely due to the decline in PPPLF advances used to fund PPP loans as such loans continue to pay off.

Net interest income increased $2.1 million, or 13.9%, to $17.6 million on a tax-equivalent basis for the three months ended June 30, 2022, compared to $15.5 million for the three months ended June 30, 2021. The net interest margin was 4.07% for the second quarter of 2022 compared to 3.70% for the second quarter of 2021. The increase in net interest margin reflects the increased yield on interest earnings assets, that has outpaced the increase in costs paid on deposits and borrowings in a rising rate environment, as well as the recognition of $286 thousand or 6 basis points in one-time loan fees.

~~Six Months Ended June 30, 2022 Compared to the Same Period in 2021~~

Interest income increased $3.0 million, or 8.7%, to $38.1 million for six the months ended June 30, 2022, from $35.1 million for the six months ended June 30, 2021, due to increases in average balances and the yields on interest earning assets. There was a $41.6 million increase in average interest earning assets, year over year, led by increases of $111.2 million in loans held for investment, a $27.5 million increase in investment securities, and a $11.4 million increase in interest earning cash balances, offset partially by a $93.5 million decrease in the average balance of loans held for sale. These average balance increases combined with yield increases of 41 basis points on investment securities and 11 basis points on loans held for investment to positively impact interest income. Overall the yield on interest-earning assets increased 25 basis points to 4.50% over the period.

Interest expense was down $21 thousand, or 0.5%, to $4.4 million. Deposit interest expense was up $173 thousand, or 5.9%, period over period, to $3.1 million, while interest expense on borrowings was down $194 thousand, or 12.9%, to $1.3 million. Total interest-bearing deposit balances increased $145.7 million on average when comparing the six months ended June 30, 2022 to June 30, 2021, while the cost of deposits was down 4 basis points over this same period. The average balance of interest-bearing deposits was up $11.1 million, down 14 basis points, while the average balance on money market and savings deposits were up $104.6 million, with no change in the basis points, and the average balance of time deposits was up $30 million, down 2 basis points. The average balance of borrowings was down $138.1 million for the six months ended June 30, 2022, compared to June 30, 2021. This decline was largely due to the decline in PPPLF advances used to fund PPP loans as such loans continue to pay off.

Net interest income increased $3.0 million, or 10.0%, to $33.7 million on a tax-equivalent basis for the six months ended June 30, 2022, compared to $30.7 million for the six months ended June 30, 2021. The net interest margin was 3.98% for the six months ended June 30, 2022 compared to 3.71% for the six months ended June 30, 2021. The increase in net interest margin reflects the increased yield on interest earnings assets, combined with the declining interest rates paid on deposits during the period.

~~Table of Contents~~

Analyses of Interest Rates and Interest Differential


For the Three Months Ended June 30, (dollars in thousands)		2022						2021
		Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates
Assets
Interest-earning assets
															For the Three Months Ended September 30,
(dollars in thousands)														(dollars in thousands)	2022						2021						Change
															Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates
Assets:														Assets:
Due from banks	Due from banks	$	26,909	49		0.73	%	$	18,833	4		0.09	%	Due from banks	$	15,678	$	92	2.33	%	$	40,249	$	16	0.16	%	$	(24,571)	$	76	2.17	%
Federal funds sold	Federal funds sold	3,230		3		0.35	%	16,110		1		0.02	%	Federal funds sold	219		1		1.81		23,013		1		0.02		(22,794)		—		1.79
Investment securities(1)		168,853		941		2.24	%	146,150		748		2.09	%
Investment securities - taxable (1)														Investment securities - taxable (1)	107,929		648		2.38		79,785		357		1.78		28,144		291		0.60
Investment securities - tax exempt (1)														Investment securities - tax exempt (1)	63,711		451		2.81		67,250		377		2.22		(3,539)		74		0.59
Loans held for sale	Loans held for sale	52,859		565		4.28	%	133,426		967		2.90	%	Loans held for sale	37,857		479		5.02		110,905		824		2.97		(73,048)		(345)		2.05
Loans held for investment(1)	Loans held for investment(1)	1,484,696		18,558		4.98	%	1,364,204		15,876		4.66	%	Loans held for investment (1)	1,565,861		21,371		5.41		1,370,439		16,804		4.84		195,422		4,567		0.57
Total loans	Total loans	1,537,555		19,123		4.99	%	1,497,630		16,843		4.51	%	Total loans	1,603,718		21,850		5.41		1,481,344		17,628		4.72		122,374		4,222		0.69
Total interest-earning assets	Total interest-earning assets	1,736,547		20,116		4.65	%	1,678,723		17,596		4.20	%	Total interest-earning assets	1,791,255		23,042		5.10	%	1,691,641		18,379		4.31	%	99,614		4,663		0.79	%
Noninterest earning assets	Noninterest earning assets	77,194						44,700						Noninterest earning assets	76,939						48,207						28,732
Total assets	Total assets	$	1,811,335					$	1,723,423					Total assets	$	1,868,194					$	1,739,848					$	128,346
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits		$	237,856	248		0.42	%	$	260,834	240		0.37	%
Liabilities and stockholders' equity:														Liabilities and stockholders' equity:
Interest-bearing demand deposits														Interest-bearing demand deposits	$	221,402	$	798	1.43	%	$	270,518	$	201	0.29	%	$	(49,116)	$	597	1.14	%
Money market and savings deposits	Money market and savings deposits	698,557		1,076		0.62	%	602,272		823		0.55	%	Money market and savings deposits	718,744		2,075		1.15		647,093		853		0.52		71,651		1,222		0.63
Time deposits	Time deposits	334,391		494		0.59	%	266,181		306		0.46	%	Time deposits	361,527		1,202		1.32		237,080		273		0.46		124,447		929		0.86
Total deposits	Total deposits	1,270,804		1,818		0.57	%	1,129,287		1,369		0.49	%	Total deposits	1,301,673		4,075		1.24		1,154,691		1,327		0.46		146,982		2,748		0.78
Borrowings	Borrowings	16,560		77		1.87	%	125,531		140		0.45	%	Borrowings	41,313		266		2.55		111,075		126		0.45		(69,762)		140		2.10
Subordinated debentures	Subordinated debentures	40,548		591		5.84	%	40,711		597		5.87	%	Subordinated debentures	40,578		591		5.78		40,740		596		5.85		(162)		(5)		(0.07)
Total interest-bearing liabilities	Total interest-bearing liabilities	1,327,912		2,486		0.75	%	1,295,529		2,106		0.65	%	Total interest-bearing liabilities	1,383,564		4,932		1.41		1,306,506		2,049		0.62		77,058		2,883		0.79
Noninterest-bearing deposits	Noninterest-bearing deposits	296,521						255,964						Noninterest-bearing deposits	295,975						254,843						41,132
Other noninterest-bearing liabilities	Other noninterest-bearing liabilities	31,354						25,432						Other noninterest-bearing liabilities	31,041						22,919						8,122
Total liabilities	Total liabilities	$	1,652,915					$	1,576,925					Total liabilities	1,710,580						1,584,268						126,312
Total stockholders' equity	Total stockholders' equity	158,829						146,497						Total stockholders' equity	157,614						155,580						2,034
Total stockholders' equity and liabilities	Total stockholders' equity and liabilities	$	1,811,335					$	1,723,423					Total stockholders' equity and liabilities	$	1,868,194					$	1,739,848					$	128,346
Net interest income (1)				$	17,630					$	15,490
Net interest spread (1)						3.90	%					3.55	%
Net interest income and spread (1)														Net interest income and spread (1)			$	18,110	3.69				$	16,330	3.69				$	1,780	—
Net interest margin (1)	Net interest margin (1)					4.07	%					3.70	%	Net interest margin (1)					4.01	%					3.83	%					0.18	%

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

Table of Contents


	For the Nine Months Ended September 30,
(dollars in thousands)	2022						2021						Change
	Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates
Assets:
Due from banks	$	23,612	$	153	0.87	%	$	24,340	$	22	0.12	%	$	(728)	$	131	0.75	%
Federal funds sold	1,440		4		0.37		18,991		3		0.02		(17,551)		1		0.35
Investment securities - taxable (1)	105,624		1,599		2.02		78,951		1,076		1.82		26,673		523		0.20
Investment securities - tax exempt (1)	63,848		1,240		2.60		64,023		1,094		2.28		(175)		146		0.32
Loans held for sale	52,495		1,580		4.02		139,101		2,922		2.80		(86,606)		(1,342)		1.22
Loans held for investment (1)	1,489,345		56,614		5.08		1,349,780		48,375		4.79		139,565		8,239		0.29
Total loans	1,541,840		58,194		5.05		1,488,881		51,297		4.61		52,959		6,897		0.44
Total interest-earning assets	1,736,364		61,190		4.71	%	1,675,186		53,492		4.27	%	61,178		7,698		0.44	%
Noninterest earning assets	74,313						44,388						29,925
Total assets	$	1,810,677					$	1,719,574					$	91,103
Liabilities and stockholders' equity:
Interest-bearing demand deposits	$	242,863	$	1,183	0.65	%	$	252,074	$	739	0.39	%	$	(9,211)	$	444	0.26	%
Money market and savings deposits	702,696		4,003		0.76		609,201		2,505		0.55		93,495		1,498		0.21
Time deposits	319,927		1,996		0.83		258,099		1,017		0.53		61,828		979		0.30
Total deposits	1,265,486		7,182		0.76		1,119,374		4,261		0.51		146,112		2,921		0.25
Borrowings	24,621		391		2.12		139,716		437		0.42		(115,095)		(46)		1.70
Subordinated debentures	40,548		1,775		5.85		40,711		1,787		5.87		(163)		(12)		(0.02)
Total interest-bearing liabilities	1,330,655		9,348		0.94		1,299,801		6,485		0.67		30,854		2,863		0.27
Noninterest-bearing deposits	291,261						248,355						42,906
Other noninterest-bearing liabilities	29,452						24,928						4,524
Total liabilities	1,651,368						1,573,084						78,284
Total stockholders' equity	159,309						146,490						12,819
Total stockholders' equity and liabilities	$	1,810,677					$	1,719,574					$	91,103
Net interest income and spread (1)			$	51,842	3.77				$	47,007	3.60				$	4,835	0.17
Net interest margin (1)					3.99	%					3.75	%					0.24	%

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

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For the Six Months Ended June 30, (dollars in thousands)
2022 2021
Average Balance Interest Income/ Expense Yields/ Rates Average Balance Interest Income/ Expense Yields/ Rates
Assets
Interest-earning assets
Due from banks $ 27,645 62 0.45 % $ 16,254 6 0.07 %
Federal funds sold 2,060 3 0.29 % 16,946 2 0.02 %
Investment securities(1)
168,370 1,740 2.08 % 140,910 1,436 1.67 %
Loans held for sale 59,936 1,101 3.67 % 153,433 2,098 2.73 %
Loans held for investment(1)
1,450,454 35,243 4.87 % 1,339,277 31,568 4.76 %
Total loans 1,510,390 36,344 4.85 % 1,492,710 33,666 4.55 %
Total interest-earning assets 1,708,465 38,149 4.50 % 1,666,820 35,110 4.25 %
Noninterest earning assets 71,634 42,449
Total assets $ 1,780,099 $ 1,709,269
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits 253,771 385 0.31 % 242,699 538 0.45 %
Money market and savings deposits 694,539 1,928 0.56 % 589,941 1,652 0.56 %
Time deposits 298,783 794 0.54 % 268,784 745 0.56 %
Total deposits 1,247,093 3,107 0.50 % 1,101,424 2,935 0.54 %
Borrowings 16,136 126 1.57 % 154,273 312 0.82 %
Subordinated debentures 40,533 1,183 5.84 % 40,696 1,190 5.85 %
Total interest-bearing liabilities 1,303,762 4,416 0.68 % 1,296,393 4,437 0.69 %
Noninterest-bearing deposits 284,455 245,057
Other noninterest-bearing liabilities 33,530 25,950
Total liabilities $ 1,621,747 $ 1,567,400
Total stockholders' equity 157,928 141,869
Total stockholders' equity and liabilities $ 1,780,099 $ 1,709,269
Net interest income (1)
$ 33,733 $ 30,673
Net interest spread (1)
3.82 % 3.56 %
Net interest margin (1)
3.98 % 3.71 %

~~Table of Contents~~

Rate/Volume Analysis

The rate/volume analysis table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three and ~~six~~nine months ended ~~June~~September 30, 2022 as compared to the same periods in 2021, allocated by rate and volume. Changes in interest income and/or expense attributable to both ~~volume~~rate and ~~rate~~volume have been allocated proportionately based on the relationship of the absolute dollar amount of the change in each category.


(dollars in thousands)		2022 Compared to 2021
		Three Months Ended June 30,				Six Months Ended June 30,
											2022 Compared to 2021
											Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	(dollars in thousands)	Rate		Volume	Total	Rate		Volume	Total	(dollars in thousands)	Rate		Volume		Total		Rate		Volume		Total
										Interest income:
		$	42	3	45	$	49	7	56	Due from banks	$	91	$	(15)	$	76	$	132	$	(1)	$	131
Federal funds sold	Federal funds sold	7		(5)	2	7		(6)	1	Federal funds sold	2		(2)		—		6		(5)		1
Investment securities(1)		60		133	193	169		135	304
Investment securities - taxable (1)										Investment securities - taxable (1)	143		148		291		129		394		523
Investment securities - tax exempt (1)										Investment securities - tax exempt (1)	95		(21)		74		149		(3)		146
Loans held for sale	Loans held for sale	1,882		(2,284)	(402)	1,487		(2,484)	(997)	Loans held for sale	382		(727)		(345)		942		(2,284)		(1,342)
Loans held for investment(1)	Loans held for investment(1)	1,176		1,506	2,682	800		2,875	3,675	Loans held for investment (1)	2,020		2,547		4,567		3,046		5,193		8,239
Total loans	Total loans	3,058		(778)	2,280	2,287		391	2,678	Total loans	2,402		1,820		4,222		3,988		2,909		6,897
Total interest income	Total interest income	3,167		(647)	2,520	$	2,512	527	3,039	Total interest income	$	2,733	$	1,930	$	4,663	$	4,404	$	3,294	$	7,698
Interest expense:	Interest expense:									Interest expense:
Interest bearing deposits		$	106	(98)	8	$	(222)	69	(153)
Interest-bearing demand deposits										Interest-bearing demand deposits	$	640	$	(43)	$	597	$	472	$	(28)	$	444
Money market and savings deposits	Money market and savings deposits	111		142	253	(2)		278	276	Money market and savings deposits	1,118		104		1,222		1,071		427		1,498
Time deposits	Time deposits	100		88	188	(79)		128	49	Time deposits	727		202		929		694		285		979
Total interest bearing deposits		317		132	449	(303)		475	172
Total borrowings		719		(782)	(63)	1,050		(1,236)	(186)
Total deposits										Total deposits	2,485		263		2,748		2,237		684		2,921
Borrowings										Borrowings	263		(123)		140		561		(607)		(46)
Subordinated debentures	Subordinated debentures	(3)		(3)	(6)	(3)		(4)	(7)	Subordinated debentures	(3)		(2)		(5)		(5)		(7)		(12)
Total interest expense	Total interest expense	1,033		(653)	380	744		(765)	(21)	Total interest expense	$	2,745	$	138	$	2,883	$	2,793	$	70	$	2,863
Interest differential	Interest differential	$	2,134	6	2,140	$	1,768	1,292	3,060	Interest differential	$	(12)	$	1,792	$	1,780	$	1,611	$	3,224	$	4,835

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

Three Months Ended September 30, 2022 Compared to the Same Period in 2021

For the three months ended ~~June~~September 30, 2022 as compared to the same period in 2021, tax-equivalent interest income increased ~~$2.5~~$4.7 million as favorable rate and volume changes contributed ~~$3.2~~$2.7 million, ~~while unfavorable volume changes in average earning assets reduced interest income by $647 thousand.~~and $1.9 million, respectively. The favorable change in rates was driven by increased yield on loans held for sale (up ~~138~~205 basis points) and loans held for investment (up 3257 basis points)~~. While the~~ that favorably impact interest income by $2.4 million, combined. The loans held for investment average balances increased ~~$120.5~~$195.4 million, leading to a favorable volume impact on interest income of ~~$1.5~~$2.5 million, while the decline in loans held for sale average balances of ~~$80.6~~$73.0 million had an unfavorable impact to interest income of ~~$2.3 million~~$727 thousand as shown in the table above. Within the loans held for investment portfolio, average balances on commercial loans and leases ~~were up $171.1~~increased $33.6 million, and ~~commercial real estate/~~$54.0 million, respectively, construction loans were up ~~$91.3~~$65.3 million, and residential real estate loans average balances increased $78.2 million, while the average balance of PPP loans ~~were down $182.5~~decreased $132.4 million as such loans continue to be forgiven by the SBA.

On the funding side, interest expense increased ~~$380 thousand~~$2.9 million due to the impact from rate hikes issued by the Fed, which were partially offset by volume declines on borrowings. The cost of deposits were up ~~modestly~~ across the board, causing a ~~$317 thousand~~$2.5 million increase to interest expense. The cost of interest-bearing demand deposits, money market and savings accounts and time deposits increased 5114 basis points, 763 basis points and 1386 basis points, respectively, while the cost of borrowings increased ~~142~~210 basis points. Money market/savings accounts and time deposit average balances increased ~~$96.3~~$71.7 million, and ~~$68.2~~$124.4 million, respectively, while interest-bearing demand deposits decreased ~~$23.0~~$49.1 million on average, and borrowings ~~were down $109.0~~decreased $69.8 million on average.

Overall, the ~~$2.1~~$1.8 million increase in net interest income was derived by volume changes as the impact from ~~rate changes was~~increased average earning assets and the ~~main reason for~~$41.1 million in free funding outpaced the ~~overall~~ increase in ~~tax-equivalent net~~average interest ~~income of $2.1 million.~~bearing liabilities.

~~Table of Contents~~

Nine Months Ended September 30, 2022 Compared to the Same Period in 2021

For the ~~six~~nine months ended ~~June~~September 30, 2022 as compared to the same period in 2021, tax-equivalent interest income increased ~~$3.0~~$7.7 million as positive rate changes on average earning assets contributed ~~$2.5~~$4.4 million and favorable volume changes helped to increase interest income by ~~$527 thousand.~~$3.3 million. The favorable change in interest income due to rate changes was driven ~~mostly from~~by growth in the loans held for sale (increase of 94122 basis points) and the overall loans held for investment portfolio (increase of 1129 basis points). This large

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increase in the yield on loans held for sale was the result of interest rates hovering at historical lows throughout much of 2021, but then as the Fed raised interest rates in 2022, the yield benefited from this action. While the overall 11 basis point increase in the yield on loans held for investment was largely driven by a 293 basis point increase in the yield on PPP loans as there was a higher rate of forgiveness of such loans in 2022 vs 2021, offset by declines in the yields on most other categories of loans held for investment. The ~~$527 thousand~~$3.3 million positive impact that volume changes had to interest income was largely the result of loan average balance increases, which contributed ~~$2.9~~$5.2 million to interest income, offset by a decline in the volume of loans held or sale which had an unfavorable impact of ~~$2.5~~$2.3 million on interest income. The increase in loans held for investment average balances were led by an ~~increase~~increases in commercial loans, small business loans and leases of ~~$170.8~~$30 million, ~~commercial real estate loans/~~$58.1 million, and $56.5 million, respectively, construction loans of ~~$76.7~~$50.8 million, and residential loans held for investment of ~~$31.5~~$47.3 million, offset somewhat by a ~~$162.4~~$152.3 million decline in PPP loan balances as they continue to be forgiven by the SBA.

On the funding side, interest expense ~~decreased $21 thousand.~~increased $2.9 million. The cost of deposits was ~~down,~~up, having a ~~$303 thousand positive~~$2.9 million negative effect on interest expense. The cost of interest-bearing demand deposits, money market and savings deposits, and time deposits ~~declined 14~~increased 26 basis points, 21 basis points, and 230 basis points, ~~while the rate on time deposits was relatively unchanged over the period,~~respectively, while the cost of borrowings ~~decreased 75~~increased 170 basis points. ~~Interest-bearing deposits, money~~Money market and savings accounts, and time deposits increased ~~$11.1 million, $104.6~~$93.5 million, and ~~$30.0~~$61.8 million on average respectively, while interest bearing demand deposits and borrowings ~~overall~~ were down ~~$138.1~~$9.2 million and $115.1 million on average, respectively, leading to a ~~$765~~$70 thousand ~~decrease~~increase in interest expense.

Overall, the ~~$1.8~~$4.8 million increase in ~~interest income from rate changes, combined with the $1.3 million increase in volume changes, let to an improvement in tax-equivalent~~ net interest income ~~of $3.1 million.~~

~~Simulations of net interest income.~~ ~~We use a simulation model on a quarterly basis to measure and evaluate potential~~was derived by volume changes ~~in our net interest income resulting~~as the impact from ~~various hypothetical interest rate scenarios. Our model incorporates various assumptions that management believes to be reasonable, but which may have a significant impact on results such as:~~

•~~The timing of changes in interest rates;~~

•~~Shifts or rotations in the yield curve;~~

•~~Repricing characteristics for market rate sensitive instruments on the balance sheet;~~

•~~Differing sensitivities of financial instruments due to differing underlying rate indices;~~

•~~Varying timing of loan prepayments for different interest rate scenarios;~~

•~~The effect of interest rate floors, periodic loan caps and lifetime loan caps;~~

•~~Overall growth rates and product mix of interest-earning~~increased average earning assets and ~~interest-bearing~~the $42.9 million in free funding outpaced the increase in average interest bearing liabilities.

Because of the limitations inherent in any approach used to measure interest rate risk, simulated results are not intended to be used as a forecast of the actual effect of a change in market interest rates on our results, but rather as a means to better plan and execute appropriate Asset / Liability Management (“ALM”) strategies.

Potential changes to our net interest income between a flat interest rate scenario and hypothetical rising and declining interest rate scenarios, measured over a one-year period as of June 30, 2022 and 2021 are presented in the following table. The simulation assumes rate shifts occur upward and downward on the yield curve in even increments over the first twelve months (ramp), followed by rates held constant thereafter.

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~~Rate Ramp~~

Estimated increase
(decrease) in Net Interest
Income
For the Three Months Ended June 30,
Changes in Market Interest Rates 2022 2021
+300 basis points over next 12 months 1.42 % 1.49 %
+200 basis points over next 12 months 1.18 % 0.82 %
+100 basis points over next 12 months 0.69 % 0.36 %
No Change
-100 basis points over next 12 months (1.67) % (0.70) %
-200 basis points over next 12 months (3.77) % (2.68) %

The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of June 30, 2022. In its current position, the table indicates that a 100 basis point increase in interest rates would have a modestly positive impact from rising rates on net interest income over the next 12 months and a more significant positive impact in a 200 and 300 basis point increase. The simulated exposure to a change in interest rates is contained, manageable and well within policy guidelines. The results continue to drive our funding strategy of increasing relationship-based accounts (core deposits) and utilizing term deposits to fund short to medium duration assets.

~~Simulation of economic value of equity~~. To quantify the amount of capital required to absorb potential losses in value of our interest-earning assets and interest-bearing liabilities resulting from adverse market movements, we calculate economic value of equity on a quarterly basis. We define economic value of equity as the net present value of our balance sheet’s cash flow, and we calculate economic value of equity by discounting anticipated principal and interest cash flows under the prevailing and hypothetical interest rate environments. Potential changes to our economic value of equity between a flat rate scenario and hypothetical rising and declining rate scenarios, measured as of June 30, 2022 and 2021, are presented in the following table. The projections assume shifts upward and downward in the yield curve of 100, 200 and 300 basis points occurring immediately.

Estimated increase (decrease) in Net Economic
Value at June 30,
Changes in Market Interest Rates 2022 2021
+300 basis points 11 % 61 %
+200 basis points 9 % 47 %
+100 basis points 7 % 27 %
No Change
-100 basis points (13) % (40) %
-200 basis points (35) % (103) %

This economic value of equity profile at June 30, 2022 suggests that we would experience a positive effect from an increase in rates, and that the impact would become greater as rates continue to rise due to the duration of our interest-earning assets. Conversely, we would experience a negative effect from a decrease in rates. While an instantaneous shift in interest rates is used in this analysis to provide an estimate of exposure, we believe that a gradual shift in interest rates would have a much more modest impact. Since economic value of equity measures the discounted present value of cash flows over the estimated lives of instruments, the change in economic value of equity does not directly correlate to the degree that earnings would be impacted over a shorter time horizon.

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term interest-bearing liabilities reprice faster than expected or faster than our interest-earning assets. Actual results could differ from those projected if we grow interest-earning assets and interest-bearing liabilities faster or slower than estimated, or otherwise change its mix of products. Actual results could also differ from those projected if we experience substantially different repayment speeds in our loan portfolio than those assumed in the simulation model. Furthermore, the results do not take into account the impact of changes in loan prepayment rates on loan discount accretion. If prepayment rates were to increase on our loans, we would recognize any remaining loan discounts into interest income. This would result in a current period offset to declining net interest income caused by higher rate loans prepaying. Finally, these simulation results do not contemplate all the actions that we may undertake in response to changes in interest rates, such as changes to our loan, investment, deposit, funding or other strategies.

Finally, these simulation results do not contemplate all the actions that we may undertake in response to changes in interest rates, such as changes to our loan, investment, deposit, funding or other strategies.

Management has and continues to employ strategies to mitigate risk in the Net Interest Income and Economic Value simulations. Strategies include actively lowering deposit and funding rates, adding and maintaining interest rate floors on assets and lengthening liabilities in the low rate environment.

PROVISION FOR LOAN AND LEASE LOSSES

Three Months Ended September 30, 2022 Compared to the Same Period in 2021

The provision for loan losses ~~was $602~~decreased $71 thousand ~~for the three months ended June 30, 2022, compared~~due to a $96 thousand provision for the three months June 30, 2021. The 2022 second quarter provision was the result of new loan growth as well as covering $695 thousand in charge-offs on small ticket equipment leases, partially offset by decreases in specific reserves on non-performing loans as the underlying credit quality ~~improved.~~improved and certain qualitative factors improved as well, partially offset by providing for continued loan growth and charge-offs on small ticket equipment leases.

Nine Months Ended September 30, 2022 Compared to the Same Period in 2021

The provision for loan losses ~~of $1.2 million~~increased $451 thousand to provide for the six months ended June 30, 2022 increased $522 thousand, or 75.1%, from the $695 thousand provision for loan losses recorded for the six months ended June 30, 2021. While the COVID-19 pandemic was more relevant in the prior year, the current year provision was higher due to reserving for an increased level of non-performing loans over the prior year combined with the significant level of loan growth year over ~~year.~~year, partially offset by the impact of decreases to specific reserves and qualitative factors noted above.

Asset Quality Summary

~~Asset~~Meridian's credit culture is strong and asset quality remains a ~~strong~~primary focus of management. ~~Total non-performing loans were $23.0 million as of June 30, 2022, unchanged from $23.0 million as of December 31, 2021.~~ The ratio of non-performing assets to total assets declined to ~~1.24%~~1.20% as of ~~June~~September 30, 2022, from 1.34% as of December 31, 2021.

There was no other real estate property included in non-performing assets for either period. Total non-performing loans were $23.1 million and $23.0 million as of September 30, 2022 and December 31, 2021, respectively, however subsequent to September 30, 2022, principal payments of $3.2 million and $307 thousand on a non-performing loan relationship were received.

Meridian realized net charge-offs of ~~0.03%~~0.10% of total average loans for the ~~quarter~~year ending ~~June~~September 30, 2022 ~~up from~~which is higher than the ~~quarter ended December 31, 2021 level of 0.00%.~~0.01% over the same period in 2021. Charge-offs amounted to ~~$696~~$431 thousand for the quarter ending ~~June~~September 30, 2022, while recoveries were ~~$73~~$74 thousand during this quarter. Nearly all of the charge-offs for the quarter ending ~~June~~September 30, 2022 were from small ticket equipment leases, aswhile recoveries were ~~the majority of recoveries in the quarter.~~split between commercial loans and home equity loans. The ratio of allowance for loan losses to total loans held for investment, excluding loans at fair value and PPP loans (a non-GAAP measure, see reconciliation in the Appendix), was ~~1.27%~~1.20% as of ~~June~~September 30, 2022 and 1.46% as of December 31, 2021. As of ~~June~~September 30, 2022 there were specific reserves of $2.8 million against a non-performing loans, down from $3.2 million as of December 31, 2021 due to improvement in the underlying credit quality for certain ~~loans.~~

~~As of June 30, 2022,~~loans, as discussed in the Corporation had $3.9 million of troubled debt restructurings (“TDRs”), of which $3.7 million were in compliance with the modified terms and excluded from non-performing loans and leases. As of December 31, 2021, the Corporation had $3.8 million of TDRs, of which $3.4 million were in compliance with the modified terms, and were excluded from non-performing loans and leases. As of June 30, 2022, the Corporation had a recorded investment of $26.1 million of impaired loans and leases which included $3.9 million of TDRs, while as of December 31, 2021, the Corporation had a recorded investment of $25.8 million of impaired loans and leases which included $3.8 million of TDRs.

above paragraph.

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Nonperforming Assets and Related Ratios

As of
June 30, December 31,
(dollars in thousands) 2022 2021
Non-performing assets:
Nonaccrual loans:
Real estate loans:
Home equity lines and loans 1,038 911
Residential mortgage 2,052 2,398
Total real estate loans 3,090 3,309
Commercial and industrial 18,398 18,801
Small business loans 1,401 666
Leases 95 212
Total nonaccrual loans $ 22,984 $ 22,988
Total non-performing loans $ 22,984 $ 22,988
Total non-performing assets $ 22,984 $ 22,988
Troubled debt restructurings:
TDRs included in non-performing loans 197 361
TDRs in compliance with modified terms 3,679 3,446
Total TDRs $ 3,876 3,807
Asset quality ratios:
Non-performing assets to total assets 1.24 % 1.34 %
Non-performing loans to:
Total loans and leases 1.46 % 1.57 %
Total loans held-for-investment 1.51 % 1.66 %
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1) 1.55 % 1.80 %
Allowance for loan losses to:
Total loans and leases 1.19 % 1.28 %
Total loans held-for-investment 1.24 % 1.35 %
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1) 1.27 % 1.46 %
Non-performing loans 81.82 % 81.60 %
Total loans and leases $ 1,577,831 1,467,339
Total loans and leases held-for-investment $ 1,518,893 1,386,457
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans) $ 1,481,220 1,280,591
Allowance for loan and lease losses $ 18,805 18,758
The following table presents nonperforming assets and related ratios for the periods indicated:


(dollars in thousands)	September 30, 2022			December 31, 2021
Non-performing assets:
Nonaccrual loans:
Real estate loans:

Home equity lines and loans	$	878		$	911
Residential mortgage	2,097			2,398

Total real estate loans	2,975			3,309
Commercial and industrial	18,202			18,801
Small business loans	1,401			666
Leases	506			212
Total nonaccrual loans	23,084			22,988

Total non-performing assets	$	23,084		$	22,988

Troubled debt restructurings:
TDRs included in non-performing loans and leases	$	193		$	361
TDRs in compliance with modified terms	3,637			3,446
Total TDRs	$	3,830		$	3,807

Asset quality ratios:
Non-performing assets to total assets	1.20		%	1.34		%
Non-performing loans to:
Total loans and leases	1.40		%	1.57		%
Total loans held-for-investment	1.43		%	1.66		%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)	1.45		%	1.80		%
Allowance for loan losses to:
Total loans and leases	1.15		%	1.28		%
Total loans held-for-investment	1.18		%	1.35		%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)	1.20		%	1.46		%
Non-performing loans	82.20		%	81.60		%

Total loans and leases	$	1,644,149		$	1,467,339
Total loans and leases held-for-investment	$	1,610,349		$	1,386,457
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans)	$	1,587,037		$	1,280,654
Allowance for loan and lease losses	$	18,974		$	18,758

(1) The allowance for loan losses to total loans held-for-investment (excluding loans at fair value and PPP loans) ratio is a non-GAAP financial measure. See “Non-GAAP Financial Measures” ~~above~~ for a reconciliation of this measure to its most comparable GAAP measure.

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NON-INTEREST INCOME

Three Months Ended ~~June~~September 30, 2022 Compared to the Same Period in 2021

~~Total~~The following table presents the components of non-interest income for the ~~three months ended June 30, 2022 was $10.4 million, down $11.3 million or 52.1% from the comparable period in 2021. This decrease in~~periods indicated:


	Quarter Ended
(Dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Mortgage banking income	$	7,329	$	18,726	$	(11,397)	(60.9)	%
Wealth management income	1,114		1,232		(118)		(9.6)	%
SBA loan income	989		2,688		(1,699)		(63.2)	%
Earnings on investment in life insurance	138		93		45		48.4	%
Net change in the fair value of derivative instruments	127		(339)		466		(137.5)	%
Net change in the fair value of loans held-for-sale	(237)		(532)		295		(55.5)	%
Net change in the fair value of loans held-for-investment	(886)		37		(923)		(2494.6)	%
Net gain on hedging activity	399		(1,189)		1,588		(133.6)	%
Net gain on sale of investment securities available-for-sale	—		314		(314)		(100.0)	%
Service charges	32		35		(3)		(8.6)	%
Other	1,219		1,057		162		15.3	%
Total non-interest income	$	10,224	$	22,122	$	(11,898)	(53.8)	%

Total non-interest income ~~came~~decreased $11.9 million due primarily to lower income from our mortgage ~~segment. Mortgage banking net revenue decreased $12.5 million or 64.3% over the three months ended June 30, 2021, resulting from decreased~~segment, which was impacted by lower levels of mortgage loan originations asin a rising ~~interest rates~~rate environment and a lack of housing ~~inventory has had an~~inventory. Partially offsetting the impact onof the decline in mortgage banking ~~activity. Our mortgage segment originated $332.4 million in loans during the three months ended June 30, 2022, a decrease of $284.2 million, or 46.1%, from the three months ended June 30, 2021. The~~income were net changes in the fair value of derivative instruments and loans ~~held for sale~~held-for-sale, along with an improvement in net gains on hedging activity which increased ~~a combined over the period. Hedging activity led to a net gain increase of $2.4~~$2.3 million, ~~for the three months ended June 30, 2022.~~combined.

SBA loan income decreased ~~$1.1~~$1.7 million as ~~$12.8 million in~~a higher volume of SBA loans were sold ~~for~~into the ~~three months ended June~~secondary market in the prior year comparable quarter: $20.8 million of loans were sold in the quarter-ending September 30, 2022 compared to ~~$13.5~~$25.0 million in loans sold in the quarter-ending September 30, 2021. Contributing to lower SBA loan income, margins on the SBA loan sales decreased from the prior year due to the upward movement in interest rates, which drove SBA loan prices down.

The net change in the fair value of loans held-for-investment decreased to a loss of $886 thousand for the ~~three months~~quarter ended ~~June~~September 30, ~~2021. In addition~~2022, compared to a gain of $37 thousand for the comparable prior year quarter, due to the ~~lower volume~~negative impact the rising interest rate environment had on the fair value of ~~SBA~~the loans ~~sold~~ in the current period, the margin on sale was lower, and amortization and impairment was up due to early payoffs and market conditions. Wealth management revenue increased $91 thousand year-over-year due to favorable market conditions.portfolio that are held at fair value. Other ~~fee~~non-interest income was up ~~$68~~$162 thousand ~~or 6.4% from the three months ended June 30, 2022, to $1.1 million,~~ due to increases in ~~wire fees,~~ title fee income, FHLB stock dividend income and ~~servicing~~broker fee income.

~~Six~~Nine Months Ended ~~June~~September 30, 2022 Compared to the Same Period in 2021

~~Total~~The following table presents the components of non-interest income for the ~~six months ended June 30, 2022 was $23.5 million, down $25.3 million or 51.8% from the comparable period in 2021. This decrease in~~periods indicated:


	Year Ended
(Dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Mortgage banking income	$	21,367	$	62,293	$	(40,926)	(65.7)	%
Wealth management income	3,672		3,531		141		4.0	%
SBA loan income	3,946		5,423		(1,477)		(27.2)	%
Earnings on investment in life insurance	413		224		189		84.4	%
Net change in the fair value of derivative instruments	(713)		(3,431)		2,718		(79.2)	%
Net change in the fair value of loans held-for-sale	(1,094)		(3,164)		2,070		(65.4)	%
Net change in the fair value of loans held-for-investment	(2,499)		(24)		(2,475)		10312.5	%
Net gain on hedging activity	4,941		2,397		2,544		106.1	%
Net gain on sale of investment securities available-for-sale	—		362		(362)		(100.0)	%
Service charges	90		99		(9)		(9.1)	%
Other	3,605		3,192		413		12.9	%
Total non-interest income	$	33,728	$	70,902	$	(37,174)	(52.4)	%

Total non-interest income ~~came~~decreased due primarily to lower income from our mortgage ~~segment. Mortgage banking net revenue decreased $29.5 million or 67.8% over the six months ended June 30, 2021, resulting from decreased~~segment, which was impacted by lower levels of mortgage loan originations asin a rising ~~interest rates~~rate environment and a lack of housing ~~inventory has had an impact on mortgage banking activity. Our mortgage segment originated $656.1 million in loans during the six months ended June 30, 2022, a decrease~~inventory.

Table of $685.4 million, or 51.1%, from the six months ended June 30, 2021. The changes in the fair value of derivative instruments and loans held for sale increased a combined $4.0 million over the period. Net hedging activity increased as the net gains were up $955 thousand for the six months ended June 30, 2022.Contents

Net revenue from the sales of SBA 7(a) loans increased $222 thousand with $38.0 million in loans sold for the six months ended June 30, 2022 compared to $26.6 million sold for the six months ended June 30, 2021, an increase of 42.9%. While the volume of SBA loans sold period over period was up, the margin on sales was down. Wealth management revenue increased $259 thousand year-over-year due the more favorable market conditions. Other fee income was up $253 thousand or 11.9%, to $2.4 million for the six months ended June 30, 2022, due to increases in wire fees, title fee income, and servicing fee income.

NON-INTEREST EXPENSE

Three Months Ended ~~June~~September 30, 2022 Compared to the Same Period in 2021

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


	Quarter Ended
(Dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Salaries and employee benefits	$	13,360	$	19,472	$	(6,112)	(31.4)	%
Occupancy and equipment	1,191		1,133		58		5.1	%
Professional fees	899		873		26		3.0	%
Advertising and promotion	1,165		1,089		76		7.0	%
Data processing	574		530		44		8.3	%
Information technology	868		476		392		82.4	%
Pennsylvania bank shares tax	202		152		50		32.9	%
Other	2,002		1,756		246		14.0	%
Total non-interest expense	$	20,261	$	25,481	$	(5,220)	(20.5)	%

Total non-interest expense ~~for the three months ended June 30, 2022 was $19.7 million, down $6.5 million or 24.9%, from the comparable period in 2021. The decrease in non-interest expense is~~decreased largely attributable to a decrease in salaries and employee benefits expense ~~which decreased $7.3 million or 36.1%, from the comparable period~~ in ~~2021. This decrease relates to~~ the mortgage segment, which had reduced fixed and variable based compensation.

Advertising and promotion expense increased $268 thousand, or 29.1%, over the comparable period in 2021 as the result of a renewed and focused priority placed on business development and community outreach efforts throughout the Meridian organization. In the second quarter of 2022 the easing of COVID-19 restrictions has provided our team members with much better opportunities to meet with customers and prospective customers as they were accustomed to pre-pandemic.

Information technology expense increased ~~$264~~$392 thousand ~~or 56.9%,~~due to ~~$728~~cybersecurity improvements, cloud-based costs and other software upgrades, all as a result of growth. Other non-interest expense increased $246 thousand ~~for~~due to the ~~three months ended June 30, 2022. Meridian continued with~~increased level of client engagement and business development our ~~strategy~~employees were able to ~~invest~~do in ~~technology that focuses on improving back-office efficiencies through automation and workflow processes. In addition, with a focus on cloud-based computing, IT has improved~~ the ~~scalability of storage; reduced~~current period versus the ~~maintenance process; and eliminated the need and cost for further servers.~~prior year due to COVID-19 pandemic restrictions.

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~~Six~~Nine Months Ended ~~June~~September 30, 2022 Compared to the Same Period in 2021

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


	Year Ended
(Dollars in thousands)	September 30, 2022		September 30, 2021		$ Change		% Change
Salaries and employee benefits	$	41,585	$	61,824	$	(20,239)	(32.7)	%
Occupancy and equipment	3,619		3,460		159		4.6	%
Professional fees	2,659		2,629		30		1.1	%
Advertising and promotion	3,340		2,795		545		19.5	%
Data processing	1,633		1,666		(33)		(2.0)	%
Information technology	2,306		1,365		941		68.9	%
Pennsylvania bank shares tax	612		478		134		28.0	%
Other	5,646		5,773		(127)		(2.2)	%
Total non-interest expense	$	61,400	$	79,990	$	(18,590)	(23.2)	%

Total non-interest expense ~~for the six months ended June 30, 2022 was $41.1 million, down $13.4 million or 24.5%, from the comparable period in 2021. The decrease in non-interest expense is~~decreased largely attributable to a decrease in salaries and employee benefits expense ~~which is down $14.1 million or 33.4%, from the comparable period in 2021. Of this decrease, $12.6 million relates to~~at the mortgage segment, which recognized decreased and variable compensation. ~~Offsetting~~Partially offsetting this decrease ~~somewhat~~ was an increase ~~of $2,907 thousand~~in salaries & benefits expense for the bank and wealth segments due to an increase in FTEs and a higher level of stock-based compensation ~~expense.~~expense year-over-year.

Advertising and promotion expense increased ~~$468~~$545 thousand ~~or 27.4%, over the comparable period in 2021~~ as the result of a renewed and focused priority placed on business development and community outreach ~~efforts as noted above.~~efforts. Information technology expense increased ~~$549~~$941 thousand ~~or 61.8%,~~due to ~~$1.4 million for the six months ended June 30, 2022,~~cybersecurity improvements, cloud-based costs and other software upgrades, all as ~~Meridian continued with our strategy to invest in technology that focuses on improving back-office efficiencies through automation and workflow processes.~~a result of growth.

INCOME ~~TAXES~~TAX EXPENSE

Income tax expense for the three months ended ~~June~~September 30, 2022 was $1.7 million, as compared to ~~$2.5~~$2.9 million for the same period in 2021. The decrease in income tax expense was attributable to the decrease in earnings, period over period. Our effective tax rate was ~~22.4%~~22.3% for the three months ended ~~June~~September 30, 2022 and ~~23.6%~~23.3% for the three months ended ~~June~~September 30, 2021.

Income tax expense for the ~~six~~nine months ended ~~June~~September 30, 2022 was ~~$3.3~~$4.9 million, as compared to ~~$5.7~~$8.5 million for the same period in 2021. The decrease in income tax expense was attributable to the decrease in earnings, period over period. Our effective tax rate was ~~22.1%~~22.2% for the ~~six~~nine months ended September 30, 2022 and 23.5% for the nine months ended June 30, ~~2022 and 23.6% for the six months ended June 30,~~ 2021.

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BALANCE SHEET ANALYSIS

As of ~~June~~September 30, 2022, total assets were ~~$1.9~~$1.92 billion ~~an increase of $139.6~~which increased $208.5 million, or ~~8.1%~~12.2%, from December 31, 2021. This growth in assets over the prior period was due primarily to loan portfolio growth, as ~~discussed below.~~detailed in the following table:


(Dollars in thousands)	September 30, 2022		December 31, 2021		$ Change		% Change
Mortgage loans held for sale	$	33,800	$	80,882	$	(47,082)	(58.2)	%
Real estate loans:
Commercial mortgage	545,736		516,928		28,808		5.6	%
Home equity lines and loans	57,648		52,299		5,349		10.2	%
Residential mortgage (1)	153,513		68,175		85,338		125.2	%
Construction	244,435		160,905		83,530		51.9	%
Total real estate loans	1,001,332		798,307		203,025		25.4	%

Commercial and industrial	329,451		293,771		35,680		12.1	%
Small business loans	133,904		114,158		19,746		17.3	%
Paycheck Protection Program loans	8,837		90,194		(81,357)		(90.2)	%
Main Street Lending Program Loans	597		597		—		—	%
Consumer	497		419		78		18.6	%
Leases, net	129,574		88,242		41,332		46.8	%
Total portfolio loans and leases	$	1,604,192	$	1,385,688	$	218,504	15.8	%
Total loans and leases	$	1,637,992	$	1,466,570	$	171,422	11.7	%

Portfolio loans increased grew ~~$132.4~~$218.5 million, or ~~9.6%~~15.8%, to ~~$1.5~~$1.6 billion as of ~~June~~September 30, 2022, from $1.4 billion as of December 31, 2021. Overall portfolio loan growth, excluding PPP loans, was ~~15.4%~~23.1% since December 31, 2021, or ~~31%~~30.9% on an annualized basis for 2022. Commercial loans increased ~~$41.9~~$35.7 million, or ~~14.3%~~12.1%, commercial real estate loans increased ~~$30.3~~$28.8 million, or 5.6%, construction loans increased ~~$41.1~~$83.5 million, or ~~30.4%~~51.9%, residential real estate loans held in portfolio increased ~~$45.8~~$85.3 million, or ~~66.9%~~125.2%, and lease financings increased ~~$28.8~~$41.3 million, or ~~30.9%~~46.8% from December 31, 2021. Partially offsetting the growth in portfolio loans was a decrease of ~~$66.8~~$81.4 million, or ~~75.7%~~90.2%, in PPP loan balances as such loans continue to be paid off by the SBA.

~~Deposits were $1.6 billion as~~The following table presents the major categories of ~~June 30, 2022, up $121.6~~deposits at the dates indicated:


(Dollars in thousands)	September 30, 2022		December 31, 2021		$ Change		% Change
Noninterest-bearing deposits	$	290,169	$	274,528	$	15,641	5.7	%
Interest-bearing deposits:
Interest-bearing demand deposits	236,562		268,248		(31,686)		(11.8)	%
Money market and savings deposits	709,127		697,628		11,499		1.6	%
Time deposits	437,695		206,009		231,686		112.5	%
Total interest-bearing deposits	1,383,384		1,171,885		211,499		18.0	%
Total deposits	$	1,673,553	$	1,446,413	$	227,140	15.7	%

Total deposits increased $227.1 million, or 8.4%, from December 31, 2021. Non-interest bearing deposits increased $17.4 million, or 6.3%, from December 31, 2021 due to strong business development efforts. Interest-bearing checking accounts decreased $63.0 million, or 23.5%, while money market accounts/savings accounts combined increased $31.3 million, or 4.5%15.7%, since December 31, 2021. ~~Certificates of~~While noninterest-bearing deposits increased ~~$135.9~~$15.6 million over this period, the largest increase was in time deposits, $211.5 million, or ~~66.0%~~18.0%, largely from ~~December 31, 2021, as such~~retail and wholesale time deposits ~~were utilized as an alternative source of cost-effective wholesale funding.~~due to more favorable interest rates.

Capital

Consolidated stockholders’ equity of the Corporation was ~~$156.1~~$151.2 million, or ~~8.4%~~7.9% of total assets as of ~~June~~September 30, 2022, as compared to $165.4 million, or 9.7% of total assets as of December 31, 2021. The change in stockholders’ equity is the result of year-to-date net income of $5.9 million, offset by dividends of $7.3 million paid as well as a $9.9 million decline in accumulated other comprehensive income (loss) from the investment security portfolio due to changes in interest rates over this period.

As of June 30, 2022, the Tier 1 leverage ratio was 8.87% for the Corporation and 10.86% for the Bank, the Tier 1 risk-based capital and common equity ratios were 9.79% for the Corporation and 11.98% for the Bank, and total risk-based capital was 13.50% for the Corporation and 13.33% for the Bank. Based on these capital ratio levels, we remain above the Community Bank Leverage Ratio ("CBLR") requirement of 8%. Period end numbers show a tangible common equity to

~~Table of Contents~~

tangible assets ratio (a non-GAAP measure) of ~~8.22%~~7.7% for the Corporation and ~~10.18%~~9.6% for the Bank. Tangible book value per share (a non-GAAP measure) was $25.16 as of ~~June~~September 30, 2022, compared with ~~$26.37~~26.37 as of December 31, 2021. A reconciliation of these non-GAAP measures is ~~included above.~~below.

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The following table presents the Corporation’s capital ratios and the minimum capital requirements to be considered “well capitalized” by regulators ~~as of June 30, 2022 and December 31, 2021:~~at the periods indicated:

June 30, 2022
Actual To Be Well Capitalized Under CBLR Framework
(dollars in thousands) Amount Ratio Amount Ratio
Tier 1 capital (to average assets)
Corporation $ 161,066 8.87 % $ 163,434 9.00 %
Bank 197,192 10.86 % 163,432 9.00 %

December 31, 2021
Actual To Be Well Capitalized Under CBLR Framework
(dollars in thousands) Amount Ratio Amount Ratio
Tier 1 capital (to average assets)
Corporation $ 160,379 9.39 % $ 136,621 8.00 %
Bank 196,506 11.51 % 136,620 8.00 %


	Corporation				Bank				Well-capitalized minimum
	September 30, 2022		December 31, 2021		September 30, 2022		December 31, 2021
Tier 1 leverage ratio	8.54	%	9.39	%	10.52	%	11.51	%	5.00	%
Common tier 1 risk-based capital ratio	9.28	%	10.83	%	11.44	%	13.27	%	6.50	%
Tier 1 risk-based capital ratio	9.28	%	10.83	%	11.44	%	13.27	%	8.00	%
Total risk-based capital ratio	12.80	%	14.81	%	12.70	%	14.63	%	10.00	%

~~Community banks have long raised concerns with bank regulators about~~Under 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 "CommunityCommunity Bank Leverage ~~Ratio" (“CBLR”) of between 8 and 10%. Under the final rule,~~Ratio framework, a community banking organization that is ~~eligible to elect the new framework if it has:~~ less than $10 billion in total consolidated assets, and has limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. can elect to report a single regulatory capital ratio. The Corporation has elected to be measured under this framework for Bank capital adequacy and had ratios of 10.52% and 11.51% at September 30, 2022 and December 31, 2021, respectively. The Corporation is exempt from CBLR. The bank regulatory agencies temporarily lowered the CBLR to 8% as a result of the COVID-19 pandemic.

Liquidity

Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Meridian’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization or that can be used as collateral to secure funding. In addition, as part of its liquidity management, Meridian maintains a segment of commercial loan assets that are comprised of shared national credits (“SNCs”), which have a national market and can be sold in a timely manner. Meridian’s available liquidity, which totaled ~~$286.6~~$264.7 million at ~~June~~September 30, 2022, compared to $263.6 million at December 31, 2021, includes investments, SNCs, Federal funds sold, mortgages held-for-sale and cash and cash equivalents, less the amount of securities required to be pledged for certain liabilities. Meridian also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios.

In addition, Meridian maintains borrowing arrangements with various correspondent banks, the FHLB and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. Through its relationship at the Federal Reserve, Meridian had available credit of approximately ~~$11.5~~$9.2 million at ~~June~~September 30, 2022. At ~~June~~September 30, 2022, Meridian had no borrowings from the Federal Reserve. As a member of the FHLB, we are eligible to borrow up to a specific credit limit, which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of ~~June~~September 30, 2022, Meridian’s maximum borrowing capacity with the FHLB was ~~$484.1~~$529.2 million. At ~~June~~September 30, 2022, Meridian had borrowed ~~$59.1~~$23.4 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling ~~$56.1~~$74.8 million against its available credit lines. At ~~June~~September 30, 2022, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as ~~$188.4~~$214.7 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and ~~$357.3~~$333.1 million of available short or long term funding through brokered CD arrangements. Management believes that Meridian has adequate resources to meet its short-term and long-term funding requirements.

~~Table of Contents~~

Discussion of Segments

As of ~~June~~September 30, 2022, the Corporation has three principal segments as defined by FASB ASC 280, “Segment Reporting.” The segments are Banking, Mortgage Banking and Wealth Management (see Note 10 in the accompanying Notes to Unaudited Consolidated Financial Statements).

The Banking Segment recorded income before tax of ~~$6.9~~$7.5 million and ~~$15~~$22.5 million for the three and ~~six~~nine months ended ~~June~~September 30, 2022 as compared to income before tax of ~~$7.7~~$8.3 million and ~~$15~~$23.5 million for the same periods in 2021. The Banking Segment provided ~~89.7%~~100.6% and ~~101.9%~~101.4% of the Corporation’s pre-tax profit for the three and ~~six~~nine month periods ended ~~June~~September 30, 2022, as compared to ~~71.4%~~69.0% and ~~62.2%~~65.9% for the same period in 2021.

The Wealth Management Segment recorded income before tax of ~~$749~~$552 thousand and ~~$1.3~~$1.8 million for the three and ~~six~~nine months ended ~~June~~September 30, 2022 as compared to income before tax of ~~$376~~$432 thousand and ~~$604~~$796 thousand for the same periods in 2021. The increase in income in this segment came from an increase in customer based as the number of accounts grew 2.5% and 4.5%, for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively.

The Mortgage Banking Segment recorded ~~income~~a loss before tax of ~~$41~~$603 thousand and a loss before tax of ~~1.6~~$2.2 million for the three and ~~six~~nine months ended ~~June~~September 30, 2022 as compared to income before tax of ~~$2.7~~$3.6 million and ~~$8.5~~$12.1 million for the same periods in 2021. Mortgage Banking income and expenses related to loan originations and sales decreased due to lower origination volume.

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Off Balance Sheet Risk

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at ~~June~~September 30, 2022 were ~~$488.6~~$505.9 million as compared to $486.6 million at December 31, 2021.

Standby letters of credit are conditional commitments issued by the Corporation to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Corporation’s obligation under standby letters of credit at ~~June~~September 30, 2022 amounted to ~~$22.9~~$21.5 million as compared to $26.0 million at December 31, 2021.

In certain circumstances the Corporation may be required to repurchase residential mortgage loans from investors under the terms of loan sale agreements. Generally, these circumstances include the breach of representations and warranties made to investors regarding borrower default or early payment, as well as a violation of the applicable federal, state, or local lending laws. The Corporation agrees to repurchase loans if the representations and warranties made with respect to such loans are breached. Based on the obligations described above, the Corporation repurchased ~~two loans~~one loan totaling ~~$612~~$126 thousand for the three months ended ~~June~~September 30, 2022 and ~~six~~seven loans totaling ~~$1.5~~$1.6 million for the ~~six~~nine months ended ~~June~~September 30, 2022, and repurchased ~~three loans~~one loan in the amount of ~~$446~~$115 thousand for the three ~~and six~~ months ended ~~June~~September 30, 2021 and four loans totaling $561 thousand for the nine months ended September 30, 2021.

Non-GAAP Financial Measures

Meridian believes that non-GAAP measures are meaningful because they reflect adjustments commonly made by management, investors, regulators and analysts to evaluate performance trends and the adequacy of common equity. This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for performance and financial condition measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of Meridian’s results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

Our management used the measure of the tangible common equity ratio to assess our capital strength. We believe that this non-GAAP financial measure is useful to investors because, by removing the impact of our goodwill and other intangible assets, it allows investors to more easily assess our capital adequacy. This non-GAAP financial measure should not be considered a substitute for any regulatory capital ratios and may not be comparable to other similarly titled measures used by other companies.

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


(dollars in thousands)	September 30, 2022			December 31, 2021
Total stockholders' equity (GAAP)	$	151,161		$	165,360
Less: Goodwill and intangible assets	4,125			4,278
Tangible common equity (non-GAAP)	147,036			161,082

Total assets (GAAP)	1,921,924			1,713,443
Less: Goodwill and intangible assets	4,125			4,278
Tangible assets (non-GAAP)	$	1,917,799		$	1,709,165

Stockholders' equity to total assets (GAAP)	7.87		%	9.65		%
Tangible common equity to tangible assets (non-GAAP)	7.67		%	9.42		%

Shares outstanding	5,844			6,108

Book value per share (GAAP)	$	25.86		$	27.07
Tangible book value per share (non-GAAP)	$	25.16		$	26.37

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The following is a reconciliation of the allowance for loan losses to total loans held for investment ratio at September 30, 2022. This is considered a non-GAAP measure as the calculation excludes the impact of loans held for investment that are fair valued and the impact of PPP loans as these loan types are not included in the allowance for loan losses calculation.


	September 30, 2022			December 31, 2021
Allowance for loan and lease losses	$	18,974		$	18,758

Loans, net of fees and costs (GAAP)	1,610,349			1,386,457
Less: PPP loans	(8,610)			(88,245)
Less: Loans fair valued	(14,702)			(17,558)
Loans, net of fees and costs, excluding PPP and fair valued loans (non-GAAP)	$	1,587,037		$	1,280,654

Allowance for loan and leases losses to loans, net of fees and costs (GAAP)	1.18		%	1.35		%
Allowance for loan and leases losses to loans, net of fees and costs, excluding PPP and fair valued loans (non-GAAP)	1.20		%	1.46		%

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

~~See~~Simulations of Net Interest Income

We use a simulation model on a quarterly basis to measure and evaluate potential changes in our net interest income resulting from various hypothetical interest rate scenarios. Our model incorporates various assumptions that management believes to be reasonable, but which may have a significant impact on results such as:

•The timing of changes in interest rates;

•Shifts or rotations in the ~~discussion~~yield curve;

•Repricing characteristics for market rate sensitive instruments on the balance sheet;

•Differing sensitivities of ~~quantitative~~financial instruments due to differing underlying rate indices;

•Varying timing of loan prepayments for different interest rate scenarios;

•The effect of interest rate floors, periodic loan caps and ~~qualitative disclosures about~~lifetime loan caps;

•Overall growth rates and product mix of interest-earning assets and interest-bearing liabilities.

Because of the limitations inherent in any approach used to measure interest rate risk, simulated results are not intended to be used as a forecast of the actual effect of a change in market ~~risks~~interest rates on our results, but rather as a means to better plan and execute appropriate Asset / Liability Management (“ALM”) strategies.

Potential increase (decrease) to our net interest income between a flat interest rate scenario and hypothetical rising and declining interest rate scenarios, measured over a one-year period as of the dates indicated, are presented in ~~“Management’s Discussion~~the following table which assuming rate shifts occur upward and ~~Analysis~~downward on the yield curve in even increments over the first twelve months (ramp) followed by rates held constant thereafter.


	Nine Months Ended September 30,
Changes in Market Interest Rates	2022		2021
+300 basis points over next 12 months	0.13	%	1.75	%
+200 basis points over next 12 months	0.29	%	1.01	%
+100 basis points over next 12 months	0.15	%	0.43	%
No Change
-100 basis points over next 12 months	(1.40)	%	(0.68)	%
-200 basis points over next 12 months	(3.19)	%	(3.03)	%

The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of ~~Results~~September 30, 2022. In its current position, the table indicates that a 100 basis point increase in interest rates would have a positive impact from rising rates on net interest income over the next 12 months as well as in a 200 and 300 basis point increase. The simulated exposure to a change in interest rates is contained, manageable and well within policy guidelines. The results continue to drive our funding strategy of ~~Operations – "Analyses~~increasing relationship-based accounts (core deposits) and utilizing term deposits to fund short to medium duration assets.

Table of ~~Interest Rates~~Contents

Simulation of economic value of equity

To quantify the amount of capital required to absorb potential losses in value of our interest-earning assets and ~~Interest Differential,” “Rate/Volume Analysis,”~~interest-bearing liabilities resulting from adverse market movements, we calculate economic value of equity on a quarterly basis. We define economic value of equity as the net present value of our balance sheet’s cash flow, and ~~"Rate Ramp"~~we calculate economic value of equity by discounting anticipated principal and interest cash flows under the prevailing and hypothetical interest rate environments. Potential changes to our economic value of equity between a flat rate scenario and hypothetical rising and declining rate scenarios are presented in the following table. The projections assume shifts upward and downward in the yield curve of 100, 200 and 300 basis points occurring immediately.


Changes in Market Interest Rates	September 30, 2022		September 30, 2021
+300 basis points	5	%	62	%
+200 basis points	6	%	47	%
+100 basis points	4	%	28	%
No Change
-100 basis points	(9)	%	(41)	%
-200 basis points	(25)	%	(103)	%

This economic value of equity profile at September 30, 2022 suggests that we would experience a positive effect from an increase in rates, and that the impact would remain stable as rates continue to rise. Conversely, we would experience a negative effect from a decrease in rates. While an instantaneous shift in interest rates is used in this ~~Quarterly Report~~analysis to provide an estimate of exposure, we believe that a gradual shift in interest rates would have a much more modest impact. Since economic value of equity measures the discounted present value of cash flows over the estimated lives of instruments, the change in economic value of equity does not directly correlate to the degree that earnings would be impacted over a shorter time horizon.

The results of our net interest income and economic value of equity simulation analysis are purely hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from that projected, our net interest income might vary significantly. Non-parallel yield curve shifts or changes in interest rate spreads would also cause our net interest income to be different from that projected. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term interest-bearing liabilities reprice faster than expected or faster than our interest-earning assets. Actual results could differ from those projected if we grow interest-earning assets and interest-bearing liabilities faster or slower than estimated, or otherwise change its mix of products. Actual results could also differ from those projected if we experience substantially different repayment speeds in our loan portfolio than those assumed in the simulation model. Furthermore, the results do not take into account the impact of changes in loan prepayment rates on ~~Form 10-Q.~~loan discount accretion. If prepayment rates were to increase on our loans, we would recognize any remaining loan discounts into interest income. This would result in a current period offset to declining net interest income caused by higher rate loans prepaying. Finally, these simulation results do not contemplate all the actions that we may undertake in response to changes in interest rates, such as changes to our loan, investment, deposit, funding or other strategies.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

~~Table of Contents~~

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Corporation’s CEO and CFO have concluded that the Corporation’s disclosure controls and procedures were effective as of ~~June~~September 30, 2022 to ensure that the information required to be disclosed by the Corporation in the reports that the Corporation files or submits under the Exchange Act is recorded, processed, summarized, and reported completely and accurately within the time periods specified in SEC rules and forms.

Changes in Internal Control Over Financial Reporting

There was no change in the Corporation’s internal control over financial reporting identified during the quarter ended ~~June~~September 30, 2022 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II–OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

There have been no material changes in the risk factors faced by the Corporation from those disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table presents the shares repurchased by the Corporation during the ~~second~~ quarter ~~of 2022.~~ended September 30, 2022:

Issuer Purchases of Equity Securities
Total Number of Maximum Number
Shares Purchased of Shares that May
as Part of Publicly Yet Be Purchased
Total Number of Average Price Paid Announced Plans or Under the Plan or
Period Shares Purchased Per Share Programs (1) Programs
April 1, 2022 to April 30, 2022 19,042 $ 31.71 19,042 487,463
May 1, 2022 to May 31, 2022 25,664 31.48 25,664 487,463
June 1, 2022 to June 30, 2022 52,679 30.33 52,679 487,463
Total 97,385 $ 31.14 97,385 487,463


	Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value that May Yet Be Purchased Under the Plan or Programs (1)($000's)
	(Dollars in thousands, except shares and per share amounts)
July 1 to July 31, 2022	16,370	$	28.74	16,370
August 1 to August 31, 2022	159,010	$	30.53	159,010
September 1 to September 30, 2022	22,469	$	29.90	22,469
Total	197,849	$	29.76		$5,610

(1) On August 30, 2021, the Corporation announced a stock repurchase plan pursuant to which the Corporation may repurchase up to $20 million of the company’s outstanding common stock, par value $1.00 per share. Stock ~~will be~~is purchased under the plan from time to time in the open market or through privately negotiated transactions, or otherwise, at the discretion of management of the company in accordance with legal requirements.

(2) As of June 30, 2022, the maximum number of shares remaining authorized for repurchase was approximately 487,463, based on funds remaining under the plan of approximately $14.8 million and a share price of $30.30 as of June 30, 2022.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

~~Item 6. Exhibits.~~


~~The exhibits filed or incorporated by reference as part of this report are listed in the Exhibit Index, which appears at page~~ 57.

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Item 6. Exhibits.

EXHIBIT INDEX


Exhibit Number						Description
2.1						Plan of Merger and Reorganization dated April 26, 2018 by and between Registrant, Bank and Meridian Interim Bank, filed as Exhibit 2.1 to Form 8-K on August 24, 2018 and incorporated herein by reference.
3.1						Amended Articles of Incorporation of Registrant, filed herewith.
3.2						Bylaws of Registrant, filed as Exhibit 3.2 to Form 8-K on August 24, 2018 and incorporated herein by reference.
4.2						Indenture, dated as of December 18, 2019, between Meridian Corporation, as Issuer, and U.S. Bank National Association, as Trustee, incorporated by reference to Exhibit 4.1 of the Registrant's Form 8-K filed with the SEC on December 18, 2019.
4.3						Form of 5.375% Subordinated Note due 2029 (included as Exhibit A-1 and Exhibit A-2 to the Indenture incorporated by reference as Exhibit 4.2 hereto), filed with the SEC on December 18, 2019.
31.1						Rule 13a-14(a)/ 15d-14(a) Certification of the Principal Executive Officer, filed herewith.
31.2						Rule 13a-14(a)/ 15d-14(a) Certification of the Principal Financial Officer, filed herewith.
32						Section 1350 Certifications, filed herewith.
101.INS						XBRL Instance Document – The instance document does not appear in the interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH						Inline XBRL Taxonomy Extension Schema Document
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 104						Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date:	~~August~~November 9, 2022	Meridian Corporation

		By:	/s/ Christopher J. Annas
			Christopher J. Annas President and Chief Executive Officer (Principal Executive Officer)

		By:	/s/ Denise Lindsay
			Denise Lindsay Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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	Three months ended June 30,				Six months ended June 30,
(dollars in thousands)	2022		2021		2022		2021
Net income:	$	5,938	$	8,258	$	11,473	$	18,428

Other comprehensive income:
Net change in unrealized gains on investment securities available for sale:
Net unrealized losses arising during the period, net of tax effect of $(1,025), $429, $(2,651), and $(163), respectively	(3,481)		1,414		(8,850)		(469)
Less: reclassification adjustment for net gains realized in net income, net of tax effect of $0, $0, $(3), and $12, respectively	—		—		(9)		(36)
Reclassification adjustment for securities transferred from available-for-sale to held-to-maturity, net of tax effect of $7, $0, $(301), and $0, respectively	22		—		(999)		0
Unrealized investment losses, net of tax effect of $1,018, $429, $(2,955), and $175, respectively	(3,459)		1,414		(9,858)		(505)
Total other comprehensive (loss) income	(3,459)		1,414		(9,858)		(505)
Total comprehensive income	$	2,479	$	9,672	$	1,615	$	17,923


(dollars in thousands)	Balance, March 31, 2022		Charge-offs	Recoveries	Provision (Credit)	Balance, June 30, 2022
Commercial mortgage	$	4,150	—	—	177	4,327
Home equity lines and loans	208		—	2	30	240
Residential mortgage	357		—	—	132	489
Construction	2,257		—	—	224	2,481
Commercial and industrial	7,369		—	9	(1,091)	6,287
Small business loans	3,372		—	—	309	3,681
Consumer	3		—	1	(1)	3
Leases	1,110		(696)	61	822	1,297
Total	$	18,826	(696)	73	602	18,805

(dollars in thousands)	Balance, December 31, 2021		Charge-offs	Recoveries	Provision (Credit)	Balance, June 30, 2022
Commercial mortgage	$	4,950	—	—	(623)	4,327
Home equity lines and loans	224		—	8	8	240
Residential mortgage	283		—	2	204	489
Construction	2,042		—	—	439	2,481
Commercial and industrial	6,533		—	20	(266)	6,287
Small business loans	3,737		—	—	(56)	3,681
Consumer	3		—	2	(2)	3
Leases	986		(1,263)	61	1,513	1,297
Total	$	18,758	(1,263)	93	1,217	18,805


(dollars in thousands)	Balance, March 31, 2021		Charge-offs	Recoveries	Provision (Credit)	June 30, 2021
Commercial mortgage	$	7,655	—	—	(509)	7,146
Home equity lines and loans	310		—	2	(31)	281
Residential mortgage	314		—	2	8	324
Construction	2,311		—	—	(70)	2,241
Commercial and industrial	5,286		—	13	61	5,360
Small business loans	1,920		—	—	315	2,235
Consumer	4		—	1	(1)	4
Leases	576		(129)	—	323	770
Total	$	18,376	(129)	18	96	18,361

(dollars in thousands)	Balance, December 31, 2020		Charge-offs	Recoveries	Provision (Credit)	Balance, June 30, 2021
Commercial mortgage	$	7,451	—	—	(305)	7,146
Home equity lines and loans	434		—	4	(157)	281
Residential mortgage	385		—	4	(65)	324
Construction	2,421		—	—	(180)	2,241
Commercial and industrial	5,431		—	18	(89)	5,360
Small business loans	1,259		—	—	976	2,235
Consumer	4		—	2	(2)	4
Leases	382		(129)	—	517	770
Total	$	17,767	(129)	28	695	18,361


	Six Months Ended June 30, 2022			Six Months Ended June 30, 2021
(dollars in thousands)	Average recorded investment		Interest income recognized	Average recorded investment	Interest income recognized
Impaired loans with related allowance:
Commercial and industrial	$	16,449	—	3,339	10
Small business loans	666		—	917	—
Home equity lines and loans	—		—	94	—
Residential mortgage	—		—	687	—
Total	17,115		—	5,037	10
Impaired loans without related allowance:
Commercial mortgage	4,279		48	730	16
Commercial and industrial	297		—	1,002	—
Small business loans	844		5	169	8
Home equity lines and loans	1,044		23	824	—
Residential mortgage	1,483		168	1,126	3
Construction	1,206		31	1,206	29
Leases	103		—	80	—
Total	9,256		275	5,137	56
Grand Total	$	26,371	275	10,174	66


	Segment Information
	Six Months Ended June 30, 2022					Six Months Ended June 30, 2021
(Dollars in thousands)	Bank		Wealth	Mortgage	Total	Bank	Wealth	Mortgage	Total
Net interest income	$	32,533	411	642	33,586	29,324	(11)	1,220	30,533
Provision for loan losses	1,217		—	—	1,217	695	—	—	695
Net interest income after provision	31,316		411	642	32,369	28,629	(11)	1,220	29,838

Non-interest Income
Mortgage banking income	322		—	13,716	14,038	676	—	42,891	43,567
Wealth management income	—		2,558	—	2,558	—	2,299	—	2,299
SBA income	2,957		—	—	2,957	2,735	—	—	2,735
Net change in fair values	103		—	(3,412)	(3,309)	39	—	(5,824)	(5,785)
Net gain on hedging activity	—		—	4,542	4,542	—	—	3,587	3,587
Other	1,153		—	1,566	2,719	1,274	—	1,103	2,377
Non-interest income	4,535		2,558	16,412	23,505	4,724	2,299	41,757	48,780
Non-interest expense	20,833		1,700	18,606	41,139	18,348	1,684	34,478	54,510
Income (loss) before income taxes	$	15,018	1,269	(1,552)	14,735	15,005	604	8,499	24,108

Total Assets	$	1,759,129	7,432	86,458	1,853,019	1,560,040	5,946	143,024	1,709,010


	2022		2021
Reconciliation of Allowance for Loan Losses / Total loans held for investment	June 30		December 31
Allowance for loan losses / Total loans held for investment	1.24	%	1.35	%
Less: Impact of loans held for investment - fair valued	0.01	%	0.02	%
Less: Impact of PPP loans	0.02	%	0.09	%
Allowance for loan losses / Total loans held for investment (excl. loans at fair value and PPP loans)	1.27	%	1.46	%


	As of
	June 30,			December 31,
(dollars in thousands)	2022			2021
Non-performing assets:
Nonaccrual loans:
Real estate loans:

Home equity lines and loans	1,038			911
Residential mortgage	2,052			2,398
Total real estate loans	3,090			3,309
Commercial and industrial	18,398			18,801
Small business loans	1,401			666
Leases	95			212
Total nonaccrual loans	$	22,984		$	22,988
Total non-performing loans	$	22,984		$	22,988
Total non-performing assets	$	22,984		$	22,988

Troubled debt restructurings:
TDRs included in non-performing loans	197			361
TDRs in compliance with modified terms	3,679			3,446
Total TDRs	$	3,876		3,807

Asset quality ratios:
Non-performing assets to total assets	1.24		%	1.34		%
Non-performing loans to:
Total loans and leases	1.46		%	1.57		%
Total loans held-for-investment	1.51		%	1.66		%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)	1.55		%	1.80		%
Allowance for loan losses to:
Total loans and leases	1.19		%	1.28		%
Total loans held-for-investment	1.24		%	1.35		%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)	1.27		%	1.46		%
Non-performing loans	81.82		%	81.60		%

Total loans and leases	$	1,577,831		1,467,339
Total loans and leases held-for-investment	$	1,518,893		1,386,457
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans)	$	1,481,220		1,280,591
Allowance for loan and lease losses	$	18,805		18,758


	June 30, 2022
	Actual				To Be Well Capitalized Under CBLR Framework
(dollars in thousands)	Amount		Ratio		Amount		Ratio
Tier 1 capital (to average assets)
Corporation	$	161,066	8.87	%	$	163,434	9.00	%
Bank	197,192		10.86	%	163,432		9.00	%


	Issuer Purchases of Equity Securities
				Total Number of	Maximum Number
				Shares Purchased	of Shares that May
				as Part of Publicly	Yet Be Purchased
	Total Number of	Average Price Paid		Announced Plans or	Under the Plan or
Period	Shares Purchased	Per Share		Programs (1)	Programs
April 1, 2022 to April 30, 2022	19,042	$	31.71	19,042	487,463
May 1, 2022 to May 31, 2022	25,664		31.48	25,664	487,463
June 1, 2022 to June 30, 2022	52,679		30.33	52,679	487,463
Total	97,385	$	31.14	97,385	487,463