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, 2023


☐			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 4,~~November 3, 2023 there were 11,177,751 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, 2023 and December 31, 2022			3

Consolidated Statements of Income – Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2023 and 2022			4

Consolidated Statements of Comprehensive Income (Loss) – Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2023 and 2022			5

Consolidated Statements of Stockholders’ Equity – Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2023 and 2022			6

Consolidated Statements of Cash Flows – ~~Six~~Nine Months Ended ~~June~~September 30, 2023 and 2022			87

Notes to Consolidated Financial Statements (Unaudited)			98

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			3736

Item 3 Quantitative and Qualitative Disclosures about Market Risk			5049

Item 4 Controls and Procedures			5150

PART II OTHER INFORMATION

Item 1 Legal Proceedings			5251

Item 1A Risk Factors			5251

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			5251

Item 3 Defaults Upon Senior Securities			5251

Item 4 Mine Safety Disclosures			52

Item 5 Other Information			52

Item 6 Exhibits			53

Signatures			54

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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

ACH			Automated clearing house
ACL			Allowance for credit losses
AFS			Available-for-sale
ALCO			Asset/Liability Committee
ALLL			Allowance for loan and lease losses
ALM			Asset / liability management
AOCI			Accumulated other comprehensive income
ASC			Accounting Standards Codification
ASU			Accounting Standards Update
BHC Act			Bank Holding Company Act of 1956
BOLI			Bank owned life insurance
BSA-AML			Bank Secrecy Act - Anti-Money Laundering
BTFP			Federal Reserve Bank Term Funding Program
CBCA			Change in Bank Control Act
CBLR			Community Bank Leverage Ratio
CDARS			Certificate of Deposit Account Registry Service
CECL			Current expected credit losses
CET1			Common equity tier 1
CFPB			Consumer Financial Protection Bureau
CMO			Collateralized mortgage obligation
COVID-19			Coronavirus Disease 2019
CRE			Commercial real estate
DIF			FDIC’s deposit insurance fund
ECOA			Equal Credit Opportunity Act
ESOP			Employee Stock Ownership Plan
FASB			Financial Accounting Standards Board

FDIC			Federal Deposit Insurance Corporation
FFIEC			Federal Financial Institutions Examination Council
FHA			Federal Housing Authority
FHFA			Federal Housing Finance Agency
FHLB			Federal Home Loan Bank of Pittsburgh
FHLMC			Federal Home Loan Mortgage Corporation or Freddie Mac
FICO			Financing Corporation
FNMA			Federal National Mortgage Association or Fannie Mae
FRB			Federal Reserve Bank of Philadelphia
FTE			Fully taxable equivalent
GAAP			U.S. generally accepted accounting principles
GLB Act			Gramm-Leach-Bliley Act
GNMA			Government National Mortgage Association or Ginnie Mae
GSE			Government-sponsored entities
HTM			Held-to-maturity
ICBA			Independent Community Bankers of America
JOBS Act			Jumpstart Our Business Startups Act of 2012
LBP			Look-back period
LEP			Loss emergence period

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LGD			Loss given default
LIBOR			London Inter-bank Offering Rate
LIHTC			Low-income-housing tax credit
MBS			Mortgage-backed securities
MSLP			Main Street Lending Programs
MSR			Mortgage servicing rights
OFAC			Office of Foreign Assets Control
OREO			Other real estate owned
PCAOB			Public Company Accounting Oversight Board
PD			Probability of default
PDBS			Pennsylvania Department of Banking and Securities
PPP			Paycheck Protection Program
ROU			Right-of-use
SBA			Small Business Administration
SEC			Securities and Exchange Commission
SERP			Supplemental Executive Retirement Plan
SNC			Shared national credit
SOFR			Secure Overnight Financing Rate
TILA			Truth in Lending Act
TDR			Troubled debt restructuring
USDA			U.S. Department of Agriculture
VA			U.S. Department of Veteran’s Affairs

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


(dollars in thousands, except share data)	(dollars in thousands, except share data)	June 30, 2023		December 31, 2022		(dollars in thousands, except share data)	September 30, 2023		December 31, 2022
Assets:	Assets:					Assets:
Cash and due from banks	Cash and due from banks	$	10,576	$	11,299	Cash and due from banks	$	13,737	$	11,299
Interest-bearing deposits at other banks	Interest-bearing deposits at other banks	36,290		27,092		Interest-bearing deposits at other banks	46,022		27,092

Cash and cash equivalents	Cash and cash equivalents	46,866		38,391		Cash and cash equivalents	59,759		38,391
Securities available-for-sale, at fair value (amortized cost of $139,854 and $148,976, respectively)		126,668		135,346
Securities held-to-maturity, at amortized cost (fair value of $32,858 and $33,085, respectively)		36,463		37,479
Securities available-for-sale, at fair value (amortized cost of $138,014 and $148,976, respectively)						Securities available-for-sale, at fair value (amortized cost of $138,014 and $148,976, respectively)	122,218		135,346
Securities held-to-maturity, at amortized cost (fair value of $30,665 and $33,085, respectively)						Securities held-to-maturity, at amortized cost (fair value of $30,665 and $33,085, respectively)	36,232		37,479
Equity investments	Equity investments	2,097		2,086		Equity investments	2,019		2,086
Mortgage loans held for sale	Mortgage loans held for sale	40,422		22,243		Mortgage loans held for sale	23,144		22,243
Loans, net of fees and costs	Loans, net of fees and costs	1,859,839		1,743,682		Loans, net of fees and costs	1,885,629		1,743,682
Allowance for credit losses	Allowance for credit losses	(20,242)		(18,828)		Allowance for credit losses	(19,683)		(18,828)
Loans and other finance receivables, net of the allowance for credit losses	Loans and other finance receivables, net of the allowance for credit losses	1,839,597		1,724,854		Loans and other finance receivables, net of the allowance for credit losses	1,865,946		1,724,854
Restricted investment in bank stock	Restricted investment in bank stock	9,157		6,931		Restricted investment in bank stock	8,309		6,931
Bank premises and equipment, net	Bank premises and equipment, net	13,234		13,349		Bank premises and equipment, net	13,310		13,349
Bank owned life insurance	Bank owned life insurance	28,440		28,055		Bank owned life insurance	28,641		28,055
Accrued interest receivable	Accrued interest receivable	7,651		7,363		Accrued interest receivable	8,984		7,363
Other real estate owned	Other real estate owned	1,703		1,703		Other real estate owned	1,703		1,703
Deferred income taxes	Deferred income taxes	4,258		3,936		Deferred income taxes	4,993		3,936
Servicing assets	Servicing assets	12,193		12,346		Servicing assets	11,835		12,346
Goodwill	Goodwill	899		899		Goodwill	899		899
Intangible assets	Intangible assets	3,073		3,175		Intangible assets	3,022		3,175
Other assets	Other assets	34,156		24,072		Other assets	39,957		24,072
Total assets	Total assets	$	2,206,877	$	2,062,228	Total assets	$	2,230,971	$	2,062,228

Liabilities:	Liabilities:					Liabilities:
Deposits:	Deposits:					Deposits:
Non-interest bearing	Non-interest bearing	$	269,174	$	301,727	Non-interest bearing	$	244,668	$	301,727
Interest bearing	Interest bearing	1,513,431		1,410,752		Interest bearing	1,563,977		1,410,752
Total deposits	Total deposits	1,782,605		1,712,479		Total deposits	1,808,645		1,712,479
Borrowings	Borrowings	194,636		122,082		Borrowings	177,959		122,082

Subordinated debentures	Subordinated debentures	40,348		40,346		Subordinated debentures	50,079		40,346
Accrued interest payable	Accrued interest payable	5,612		2,389		Accrued interest payable	7,814		2,389
Other liabilities	Other liabilities	29,714		31,652		Other liabilities	31,360		31,652
Total liabilities	Total liabilities	2,052,915		1,908,948		Total liabilities	2,075,857		1,908,948

Stockholders’ equity:	Stockholders’ equity:					Stockholders’ equity:
Common stock, $1 par value per share. 25,000,000 shares authorized; 13,180,934 and 13,156,308 shares issued and 11,177,751 and 11,465,572 shares outstanding, respectively	Common stock, $1 par value per share. 25,000,000 shares authorized; 13,180,934 and 13,156,308 shares issued and 11,177,751 and 11,465,572 shares outstanding, respectively	13,181		13,156		Common stock, $1 par value per share. 25,000,000 shares authorized; 13,180,934 and 13,156,308 shares issued and 11,177,751 and 11,465,572 shares outstanding, respectively	13,181		13,156
Surplus	Surplus	79,650		79,072		Surplus	79,731		79,072
Treasury stock, 2,003,183 and 1,690,736 shares, respectively, at cost	Treasury stock, 2,003,183 and 1,690,736 shares, respectively, at cost	(26,079)		(21,821)		Treasury stock, 2,003,183 and 1,690,736 shares, respectively, at cost	(26,079)		(21,821)
Unearned common stock held by employee stock ownership plan	Unearned common stock held by employee stock ownership plan	(1,403)		(1,403)		Unearned common stock held by employee stock ownership plan	(1,403)		(1,403)
Retained earnings	Retained earnings	99,434		95,815		Retained earnings	102,043		95,815
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(10,821)		(11,539)		Accumulated other comprehensive loss	(12,359)		(11,539)
Total stockholders’ equity	Total stockholders’ equity	153,962		153,280		Total stockholders’ equity	155,114		153,280
Total liabilities and stockholders’ equity	Total liabilities and stockholders’ equity	$	2,206,877	$	2,062,228	Total liabilities and stockholders’ equity	$	2,230,971	$	2,062,228

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)	2023		2022		2023			2022		(dollars in thousands, except per share data)	2023		2022		2023			2022
Interest income:	Interest income:										Interest income:
Loans and other finance receivables, including fees	Loans and other finance receivables, including fees	$	32,215	$	19,120	$	61,632		$	36,339	Loans and other finance receivables, including fees	$	33,980	$	21,848	$	95,612		$	58,187
Securities - taxable	Securities - taxable	992		525		1,951			951		Securities - taxable	901		648		2,853			1,599
Securities - tax-exempt	Securities - tax-exempt	351		340		705			646		Securities - tax-exempt	333		369		1,038			1,015
Cash and cash equivalents	Cash and cash equivalents	278		52		495			65		Cash and cash equivalents	245		93		741			157
Total interest income	Total interest income	33,836		20,037		64,783			38,001		Total interest income	35,459		22,958		100,244			60,958
Interest expense:	Interest expense:										Interest expense:
Deposits	Deposits	14,023		1,818		25,470			3,107		Deposits	15,543		4,075		41,013			7,182
Borrowings	Borrowings	2,715		668		4,538			1,308		Borrowings	2,692		857		7,230			2,166
Total interest expense	Total interest expense	16,738		2,486		30,008			4,415		Total interest expense	18,235		4,932		48,243			9,348
Net interest income	Net interest income	17,098		17,551		34,775			33,586		Net interest income	17,224		18,026		52,001			51,610
Provision for credit losses	Provision for credit losses	705		602		2,104			1,217		Provision for credit losses	82		526		2,186			1,743
Net interest income after provision for credit losses	Net interest income after provision for credit losses	16,393		16,949		32,671			32,369		Net interest income after provision for credit losses	17,142		17,500		49,815			49,867
Non-interest income:	Non-interest income:										Non-interest income:
Mortgage banking income	Mortgage banking income	5,050		6,942		8,322			14,038		Mortgage banking income	4,819		7,329		13,143			21,367
Wealth management income	Wealth management income	1,235		1,254		2,431			2,558		Wealth management income	1,258		1,114		3,689			3,672
SBA loan income	SBA loan income	1,767		437		2,480			2,957		SBA loan income	982		989		3,463			3,946
Earnings on investment in life insurance	Earnings on investment in life insurance	193		137		385			275		Earnings on investment in life insurance	201		138		585			413
Net change in the fair value of derivative instruments	Net change in the fair value of derivative instruments	183		(674)		114			(840)		Net change in the fair value of derivative instruments	103		127		217			(713)
Net change in the fair value of loans held-for-sale	Net change in the fair value of loans held-for-sale	(199)		268		(200)			(856)		Net change in the fair value of loans held-for-sale	111		(237)		(88)			(1,094)
Net change in the fair value of loans held-for-investment	Net change in the fair value of loans held-for-investment	(219)		(835)		(102)			(1,613)		Net change in the fair value of loans held-for-investment	(570)		(886)		(673)			(2,499)
Net (loss) gain on hedging activity		(1)		1,715		(1)			4,542
Net gain on hedging activity											Net gain on hedging activity	82		399		81			4,941
Net loss on sale of investment securities available-for-sale	Net loss on sale of investment securities available-for-sale	(54)		—		(54)			—		Net loss on sale of investment securities available-for-sale	(3)		—		(58)			—
Service charges		37		31		72			58

Other	Other	1,132		1,128		2,315			2,386		Other	1,103		1,251		3,489			3,695
Total non-interest income	Total non-interest income	9,124		10,403		15,762			23,505		Total non-interest income	8,086		10,224		23,848			33,728
Non-interest expense:	Non-interest expense:										Non-interest expense:
Salaries and employee benefits	Salaries and employee benefits	12,152		12,926		23,213			28,224		Salaries and employee benefits	12,420		13,360		35,633			41,585
Occupancy and equipment	Occupancy and equipment	1,140		1,176		2,384			2,428		Occupancy and equipment	1,226		1,191		3,610			3,619
Professional fees	Professional fees	1,004		913		1,827			1,761		Professional fees	1,104		899		2,930			2,659
Advertising and promotion	Advertising and promotion	1,091		1,189		1,952			2,175		Advertising and promotion	848		1,165		2,799			3,340
Data processing and software	Data processing and software	1,681		1,308		3,113			2,497		Data processing and software	1,652		1,442		4,764			3,939

Other	Other	2,547		2,194		4,915		—	4,054		Other	2,768		2,204		7,686		—	6,258
Total non-interest expense	Total non-interest expense	19,615		19,706		37,404			41,139		Total non-interest expense	20,018		20,261		57,422			61,400
Income before income taxes	Income before income taxes	5,902		7,646		11,029			14,735		Income before income taxes	5,210		7,463		16,241			22,195
Income tax expense	Income tax expense	1,257		1,708		2,363			3,262		Income tax expense	1,205		1,665		3,568			4,927
Net income	Net income	$	4,645	$	5,938	$	8,666		$	11,473	Net income	$	4,005	$	5,798	$	12,673		$	17,268
Basic earnings per common share	Basic earnings per common share	$	0.42	$	0.49	$	0.78		$	0.95	Basic earnings per common share	$	0.36	$	0.49	$	1.14		$	1.45
Diluted earnings per common share	Diluted earnings per common share	$	0.41	$	0.48	$	0.75		$	0.92	Diluted earnings per common share	$	0.35	$	0.48	$	1.11		$	1.40
Basic weighted average shares outstanding	Basic weighted average shares outstanding	11,062		11,998		11,167			12,022		Basic weighted average shares outstanding	11,058		11,736		11,129			11,928
Diluted weighted average shares outstanding	Diluted weighted average shares outstanding	11,304		12,398		11,494			12,458		Diluted weighted average shares outstanding	11,363		12,118		11,449			12,344

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

Three months ended
June 30, Six months ended
June 30,
(dollars in thousands) 2023 2022 2023 2022
Net income: $ 4,645 $ 5,938 $ 8,666 $ 11,473
Net change in unrealized (losses) gains on investment securities:
Change in fair value of investment securities, net of tax of $(371), $(1,025), $83, and $(2,651), respectively (1,356) (3,481) 292 (8,850)
Reclassification adjustment for net losses (gains) realized in net income, net of tax effect of $11, $0, $11, and $(3), respectively 43 — 43 (9)
Reclassification adjustment for investment securities transferred to held-to-maturity, net of tax effect of $6, $7, $12, and $(301), respectively 23 22 45 (999)
Unrealized investment gains (losses), net of tax effect of $(353), $(1,018), $107, and $(2,955), respectively $ (1,290) $ (3,459) $ 380 $ (9,858)
Net change in unrealized gains (losses) on interest rate swaps used in cash flow hedges, net of tax effect of $(97), $0, $(97), and $0, respectively 338 — 338 —
Total other comprehensive income (loss) $ (952) $ (3,459) $ 718 $ (9,858)
Total comprehensive income (loss) $ 3,693 $ 2,479 $ 9,384 $ 1,615


	Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)	2023		2022		2023		2022
Net income:	$	4,005	$	5,798	$	12,673	$	17,268

Net change in unrealized gains (losses) on investment securities available for sale:
Change in fair value of investment securities, net of tax of $(575), $(1,129), $(489), and $(3,694), respectively	(2,059)		(3,910)		(1,757)		(12,760)
Reclassification adjustment for net losses (gains) realized in net income, net of tax effect of $1, $0, $13, and $(1), respectively	2		—		45		(9)
Reclassification adjustment for investment securities transferred to held-to-maturity, net of tax effect of $7, $8, $19, and $(293), respectively	22		37		67		(962)
Unrealized investment losses, net of tax effect of $(566), $(1,121), $(457), and $(3,989), respectively	$	(2,035)	$	(3,873)	$	(1,645)	$	(13,731)
Net change in unrealized gains (losses) on interest rate swaps used in cash flow hedges, net of tax effect of $(140), $0, $(233), and $0, respectively	497		—		825		—



Total other comprehensive loss	$	(1,538)	$	(3,873)	$	(820)	$	(13,731)
Total comprehensive income	$	2,467	$	1,925	$	11,853	$	3,537

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(dollars in thousands, except per share data)
Common
Stock
Surplus Treasury
Stock Unearned
ESOP Retained
Earnings AOCI Total
Three Months Ended June 30, 2023
Balance at April 1, 2023 $ 13,180 $ 79,473 $ (24,512) $ (1,403) $ 96,180 $ (9,869) $ 153,049
Net income — — — — 4,645 — 4,645
Other comprehensive loss — — — — — (952) (952)
Dividends paid or accrued, $0.125 per share — — — — (1,391) — (1,391)
Net purchase of treasury stock through publicly announced plans (127,849 shares) — — (1,567) — — — (1,567)
Common stock issued through share-based awards and exercises 1 20 — — — — 21
Stock based compensation expense — 157 — — — — 157
Balance at June 30, 2023 $ 13,181 $ 79,650 $ (26,079) $ (1,403) $ 99,434 $ (10,821) $ 153,962


(dollars in thousands, except per share data)	Common Stock		Surplus		Treasury Stock		Unearned ESOP		Retained Earnings		AOCI		Total
Three Months Ended September 30, 2023
Balance at July 1, 2023	$	13,181	$	79,650	$	(26,079)	$	(1,403)	$	99,434	$	(10,821)	$	153,962
Net income	—		—		—		—		4,005		—		4,005
Other comprehensive loss	—		—		—		—		—		(1,538)		(1,538)
Dividends declared ($0.125 per share)	—		—		—		—		(1,396)		—		(1,396)


Stock based compensation expense	—		81		—		—		—		—		81
Balance at September 30, 2023	$	13,181	$	79,731	$	(26,079)	$	(1,403)	$	102,043	$	(12,359)	$	155,114


(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	Common Stock		Surplus		Treasury Stock		Unearned ESOP		Retained Earnings		AOCI		Total		(dollars in thousands, except per share data)	Common Stock		Surplus		Treasury Stock		Unearned ESOP		Retained Earnings		AOCI		Total
Six Months Ended June 30, 2023
Nine Months Ended September 30, 2023																Nine Months Ended September 30, 2023
Balance at January 1, 2023	Balance at January 1, 2023	$	13,156	$	79,072	$	(21,821)	$	(1,403)	$	95,815	$	(11,539)	$	153,280	Balance at January 1, 2023	$	13,156	$	79,072	$	(21,821)	$	(1,403)	$	95,815	$	(11,539)	$	153,280
Adjustment to initially apply ASU No. 2016-13 for CECL (1), net of tax	Adjustment to initially apply ASU No. 2016-13 for CECL (1), net of tax									(2,228)				(2,228)		Adjustment to initially apply ASU No. 2016-13 for CECL (1), net of tax									(2,228)				(2,228)
Net income	Net income	—		—		—		—		8,666		—		8,666		Net income	—		—		—		—		12,673		—		12,673
Other comprehensive income		—		—		—		—		—		718		718
Dividends paid or accrued, $0.25 per share		—		—		—		—		(2,819)		—		(2,819)
Net purchase of treasury stock through publicly announced plans (312,447 shares)		—		—		(4,258)		—		—		—		(4,258)
Other comprehensive loss																Other comprehensive loss	—		—		—		—		—		(820)		(820)
Dividends declared ($0.375 per share)																Dividends declared ($0.375 per share)	—		—		—		—		(4,217)		—		(4,217)
Net purchase of treasury stock through publicly announced plans (127,849 shares)																Net purchase of treasury stock through publicly announced plans (127,849 shares)	—		—		(4,258)		—		—		—		(4,258)
Common stock issued through share-based awards and exercises	Common stock issued through share-based awards and exercises	25		144		—		—		—		—		169		Common stock issued through share-based awards and exercises	25		144		—		—		—		—		169

Stock based compensation expense	Stock based compensation expense	—		434		—		—		—		—		434		Stock based compensation expense	—		515		—		—		—		—		515
Balance at June 30, 2023		$	13,181	$	79,650	$	(26,079)	$	(1,403)	$	99,434	$	(10,821)	$	153,962
Balance at September 30, 2023																Balance at September 30, 2023	$	13,181	$	79,731	$	(26,079)	$	(1,403)	$	102,043	$	(12,359)	$	155,114


(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	Common Stock		Surplus		Treasury Stock		Unearned ESOP		Retained Earnings		AOCI		Total		(dollars in thousands, except per share data)	Common Stock		Surplus		Treasury Stock		Unearned ESOP		Retained Earnings		AOCI		Total
Three Months Ended June 30, 2022
Balance at April 1, 2022		$	13,091	$	77,642	$	(8,860)	$	(1,602)	$	83,104	$	(5,691)	$	157,684
Three Months Ended September 30, 2022																Three Months Ended September 30, 2022
Balance at July 1, 2022																Balance at July 1, 2022	$	13,096	$	77,824	$	(11,896)	$	(1,602)	$	87,815	$	(9,150)	$	156,087
Net income	Net income	—		—		—		—		5,938		—		5,938		Net income	—		—		—		—		5,798		—		5,798
Other comprehensive loss	Other comprehensive loss	—		—		—		—		—		(3,459)		(3,459)		Other comprehensive loss	—		—		—		—		—		(3,873)		(3,873)
Dividends paid or accrued, $0.10 per share		—		—		—		—		(1,227)		—		(1,227)
Net purchase of treasury stock through publicly announced plans (194,770 shares)		—		—		(3,036)		—		—		—		(3,036)
Dividends declared ($0.10 per share)																Dividends declared ($0.10 per share)	—		—		—		—		(1,208)		—		(1,208)
Net purchase of treasury stock through publicly announced plans (394,838 shares)																Net purchase of treasury stock through publicly announced plans (394,838 shares)	—		—		(6,137)		—		—		—		(6,137)
Common stock issued through share-based awards and exercises	Common stock issued through share-based awards and exercises	5		88		—		—		—		—		93		Common stock issued through share-based awards and exercises	5		112		—		—		—		—		117
Stock based compensation expense	Stock based compensation expense	—		94		—		—		—		—		94		Stock based compensation expense	—		377		—		—		—		—		377
Balance at June 30, 2022		$	13,096	$	77,824	$	(11,896)	$	(1,602)	$	87,815	$	(9,150)	$	156,087
Balance at September 30, 2022																Balance at September 30, 2022	$	13,101	$	78,313	$	(18,033)	$	(1,602)	$	92,405	$	(13,023)	$	151,161

~~Table of Contents~~


(dollars in thousands, except per share data)	(dollars in thousands, except per share data)	Common Stock		Surplus		Treasury Stock		Unearned ESOP		Retained Earnings		AOCI		Total		(dollars in thousands, except per share data)	Common Stock		Surplus		Treasury Stock		Unearned ESOP		Retained Earnings		AOCI		Total
Six Months Ended June 30, 2022
Nine Months Ended September 30, 2022																Nine Months Ended September 30, 2022
Balance at January 1, 2022	Balance at January 1, 2022	$	13,070	$	77,128	$	(8,860)	$	(1,602)	$	84,916	$	708	$	165,360	Balance at January 1, 2022	$	13,070	$	77,128	$	(8,860)	$	(1,602)	$	84,916	$	708	$	165,360
Net income	Net income	—		—		—		—		11,473		—		11,473		Net income	—		—		—		—		17,268		—		17,268
Other comprehensive loss	Other comprehensive loss	—		—		—		—		—		(9,858)		(9,858)		Other comprehensive loss	—		—		—		—		—		(13,731)		(13,731)
Dividends declared, $0.70 per share		—		—		—		—		(8,574)		—		(8,574)
Net purchase of treasury stock through publicly announced plans (194,770 shares)		—		—		(3,036)		—		—		—		(3,036)
Dividends declared ($0.80 per share)																Dividends declared ($0.80 per share)	—		—		—		—		(9,779)		—		(9,779)
Net purchase of treasury stock through publicly announced plans (589,608 shares)																Net purchase of treasury stock through publicly announced plans (589,608 shares)	—		—		(9,173)		—		—		—		(9,173)
Common stock issued through share-based awards and exercises	Common stock issued through share-based awards and exercises	26		342		—		—		—		—		368		Common stock issued through share-based awards and exercises	31		454		—		—		—		—		485
Stock based compensation expense	Stock based compensation expense	—		354		—		—		—		—		354		Stock based compensation expense	—		731		—		—		—		—		731
Balance at June 30, 2022		$	13,096	$	77,824	$	(11,896)	$	(1,602)	$	87,815	$	(9,150)	$	156,087
Balance at September 30, 2022																Balance at September 30, 2022	$	13,101	$	78,313	$	(18,033)	$	(1,602)	$	92,405	$	(13,023)	$	151,161

(1) See Note 1, "Summary of Significant Accounting Policies - Pronouncements Adopted in 2023" for additional information.

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


		Six months ended June 30,					Nine months ended September 30,
(dollars in thousands)	(dollars in thousands)	2023		2022		(dollars in thousands)	2023		2022
Net income	Net income	$	8,666	$	11,473	Net income	$	12,673	$	17,268
Adjustments to reconcile net income to net cash (used in) provided by operating activities:	Adjustments to reconcile net income to net cash (used in) provided by operating activities:					Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Loss on sale of investment securities	Loss on sale of investment securities	54		—		Loss on sale of investment securities	58		—
Net amortization of investment premiums and discounts and change in fair value of equity securities	Net amortization of investment premiums and discounts and change in fair value of equity securities	498		239		Net amortization of investment premiums and discounts and change in fair value of equity securities	1,225		668
Depreciation and amortization (accretion), net	Depreciation and amortization (accretion), net	145		749		Depreciation and amortization (accretion), net	289		(1,343)
Provision for credit losses	Provision for credit losses	2,104		1,217		Provision for credit losses	2,186		1,743
Amortization of issuance costs on subordinated debt	Amortization of issuance costs on subordinated debt	56		59		Amortization of issuance costs on subordinated debt	56		89
Stock based compensation	Stock based compensation	578		354		Stock based compensation	515		731
Net change in fair value of derivative instruments	Net change in fair value of derivative instruments	(604)		840		Net change in fair value of derivative instruments	(217)		713
Net change in fair value of loans held for sale	Net change in fair value of loans held for sale	200		856		Net change in fair value of loans held for sale	88		1,094
Net change in fair value of loans held for investment	Net change in fair value of loans held for investment	102		1,613		Net change in fair value of loans held for investment	673		2,499
Amortization and net impairment of servicing rights	Amortization and net impairment of servicing rights	879		1,327		Amortization and net impairment of servicing rights	1,618		1,753
SBA loan income	SBA loan income	(2,480)		(2,957)		SBA loan income	(3,463)		(3,946)
Proceeds from sale of loans	Proceeds from sale of loans	305,304		656,565		Proceeds from sale of loans	515,573		863,056
Loans originated for sale	Loans originated for sale	(316,437)		(620,013)		Loans originated for sale	(504,880)		(794,541)
Mortgage banking income	Mortgage banking income	(8,322)		(14,038)		Mortgage banking income	(13,143)		(21,367)
Increase in accrued interest receivable	Increase in accrued interest receivable	(288)		(99)		Increase in accrued interest receivable	(1,621)		(999)
(Increase) decrease increase in other assets		(2,864)		1,571
Increase in other assets						Increase in other assets	(4,874)		(1,675)
Earnings from investment in bank owned life insurance	Earnings from investment in bank owned life insurance	(385)		(275)		Earnings from investment in bank owned life insurance	(585)		(413)
Increase in deferred income tax		(100)		(153)
(Increase) decrease in deferred income tax						(Increase) decrease in deferred income tax	170		(219)
Increase in accrued interest payable	Increase in accrued interest payable	3,223		115		Increase in accrued interest payable	5,425		1,123
Decrease in other liabilities	Decrease in other liabilities	(1,874)		(3,764)		Decrease in other liabilities	(778)		(2,579)
Net cash (used in) provided by operating activities		$	(11,545)	$	35,679
Net cash provided by operating activities						Net cash provided by operating activities	$	10,988	$	63,655

Cash flows from investing activities:	Cash flows from investing activities:					Cash flows from investing activities:
Activity in available-for-sale securities:	Activity in available-for-sale securities:					Activity in available-for-sale securities:
Maturities, repayments and calls	Maturities, repayments and calls	4,590		6,327		Maturities, repayments and calls	7,301		8,662
Sales	Sales	13,514		—		Sales	13,514		—
Purchases	Purchases	(11,571)		(15,707)		Purchases	(12,949)		(22,176)
Activity in held-to-maturity securities:	Activity in held-to-maturity securities:					Activity in held-to-maturity securities:
Maturities, repayments and calls	Maturities, repayments and calls	865		362		Maturities, repayments and calls	1,020		540
Purchases	Purchases	—		(4,500)		Purchases	—		(5,500)
(Decrease) increase in restricted stock		(2,226)		398
Increase in restricted stock						Increase in restricted stock	(1,378)		(100)
Net increase in loans	Net increase in loans	(120,124)		(136,069)		Net increase in loans	(149,462)		(225,967)
Purchases of premises and equipment	Purchases of premises and equipment	(601)		(1,028)		Purchases of premises and equipment	(1,080)		(2,020)

Net cash used in investing activities	Net cash used in investing activities	$	(115,553)	$	(150,217)	Net cash used in investing activities	$	(143,034)	$	(246,561)

Cash flows from financing activities:	Cash flows from financing activities:					Cash flows from financing activities:
Net increase in deposits	Net increase in deposits	70,126		121,601		Net increase in deposits	96,166		227,140

Increase (decrease) in short-term borrowings	Increase (decrease) in short-term borrowings	69,122		17,792		Increase (decrease) in short-term borrowings	37,201		(17,886)
Increase in long-term debt	Increase in long-term debt	3,432		—		Increase in long-term debt	18,676		—

Repayment of subordinated debt	Repayment of subordinated debt	(54)		—		Repayment of subordinated debt	(54)		—

Proceeds from issuance of subordinated debt						Proceeds from issuance of subordinated debt	9,740		—
Issuance costs on subordinated debt						Issuance costs on subordinated debt	(9)		—
Net purchase of treasury stock	Net purchase of treasury stock	(4,259)		(3,036)		Net purchase of treasury stock	(4,258)		(9,173)
Dividends paid	Dividends paid	(2,819)		(8,574)		Dividends paid	(4,217)		(9,779)
Share based awards and exercises	Share based awards and exercises	25		368		Share based awards and exercises	169		485
Net cash provided by financing activities	Net cash provided by financing activities	$	135,573	$	128,151	Net cash provided by financing activities	$	153,414	$	190,787

Net change in cash and cash equivalents	Net change in cash and cash equivalents	8,475		13,613		Net change in cash and cash equivalents	21,368		7,881
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	38,391		23,480		Cash and cash equivalents at beginning of period	38,391		23,480
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	46,866	$	37,093	Cash and cash equivalents at end of period	$	59,759	$	31,361

Supplemental disclosure of cash flow information:	Supplemental disclosure of cash flow information:					Supplemental disclosure of cash flow information:
Cash paid during the period for:	Cash paid during the period for:					Cash paid during the period for:
Interest	Interest	$	26,785	$	4,301	Interest	$	42,818	$	8,225
Income taxes	Income taxes	308		3,265		Income taxes	1,839		5,365

Supplemental disclosure of cash flow information:

Transfers from loans held for sale to loans held for investment	Transfers from loans held for sale to loans held for investment	351		2,848		Transfers from loans held for sale to loans held for investment	351		2,955
Net loans sold, not settled	Net loans sold, not settled	9,205		(962)		Net loans sold, not settled	12,820		—

Transfer of securities from AFS to HTM	Transfer of securities from AFS to HTM	—		23,652		Transfer of securities from AFS to HTM	—		23,655

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Summary of Significant Accounting Policies

Basis of Presentation

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

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

These unaudited consolidated financial statements should be read in conjunction with the Corporation’s filings with the SEC (including our Annual Report on Form 10-K for the year ended December 31, 2022), subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in Form 10-K and Form 10-Q filings, if any.

Certain prior period amounts have been reclassified to conform with current period presentation. Reclassifications had no effect on net income or stockholders’ equity. Operating results for the three and ~~six~~nine months ended ~~June~~September 30, 2023 are not necessarily indicative of the results for the year ending December 31, 2023 or for any other period.

Stock Split

On February 28, 2023, the Corporation approved and declared a two-for-one stock split in the form of a stock dividend, paid March 20, 2023, to shareholders of record as of March 14, 2023. Under the terms of the stock split, the Corporation’s shareholders received a dividend of one share for every share held on the record date. The dividend was paid in authorized but unissued shares of common stock of the Corporation. The par value of the Corporation's stock was not affected by the split and remained at $1.00 per share. All share and per share amounts reported in the consolidated financial statements have been adjusted to reflect the two-for-one stock split.

Loans

Loans held for investment are recorded at amortized cost, net of ACL. Amortized cost is the amount at which a financial asset is originated or acquired, adjusted for the amortization of premium and discount, net deferred fees or costs, collection of cash, and write-offs. Interest income on loans is recognized using the level yield method. Loan origination fees, commitment fees and direct loan origination costs are deferred and recognized over the life of the related loans using a level yield method over the period to maturity.

Allowance for Credit Losses - Loans and Leases

On January 1, 2023, the Corporation adopted ASU 2016-13, Financial Instruments-Credit Losses ("Topic 326"), which replaced the incurred loss impairment model with an expected loss methodology that is referred to as the CECL methodology. The Corporation now establishes an ACL in accordance with Topic 326. The ACL includes quantitative and qualitative factors that comprise management's current estimate of expected credit losses, including portfolio mix and segmentation, modeling methodology, historical loss experience, relevant available information from internal and external sources relating to reasonable and supportable forecasts about future economic conditions, prepayment speeds, and qualitative adjustment factors.

The Corporation's portfolio segments, established based on similar risk characteristics and loss behaviors, are:

• Commercial mortgage, commercial and industrial, construction, SBA loans, and commercial small business leases (commercial loans), and

• Residential, equity secured lines and loans, and installment loans (retail loans).

Expected credit losses are estimated over the contractual term, adjusted for expected prepayments and recoveries. The contractual term excludes any extensions, renewals and modifications unless the Corporation has reasonable expectations at the reporting date that it will result in a modification, or they are not unconditionally cancellable. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The allowance includes two primary components: (i) an allowance established on loans which share similar risk characteristics collectively evaluated for credit losses (collective basis) and (ii) an allowance established on loans which do not share similar risk characteristics with any loan segment and are individually evaluated for credit losses (individual basis).

Loans that share similar risk characteristics are collectively reviewed for credit loss and are evaluated based on historical loss experience, adjusted for current economic conditions and future economic forecasts. Estimated losses are determined differently for commercial and consumer loans, and each portfolio segment is further segmented by internally assessed risk ratings.

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Management uses a third-party economic forecast to modify the calculated historical loss rates of the portfolio segments. The Corporation's economic forecast extends out 4 quarters (the forecast period) and reverts to the historical loss rates on a straight-line basis over 1 quarter (the reversion period) as we believe this to be reasonable and supportable in the current environment. The economic forecast and reversion periods will be evaluated periodically by management and updated as appropriate.

The historical loss rates for commercial loans are estimated by determining the PD and expected LGD. The PD is calculated based on the historical rate of migration to an event of credit loss during the look-back period. The historical loss rates for retail loans is calculated based solely on average net loss rates over the same look-back period. The Corporation's current look-back period is 32 quarters which helps to ensure that historical loss rates are adequately considering losses over a full economic cycle.

Loans that do not share similar risk characteristics with any loan segments are evaluated on an individual basis. These loans, which may include borrowers experiencing financial difficulties, are not included in the collective basis evaluation. When it is probable that collection of all principal and interest due according to their contractual terms is not likely, which is assessed based on the credit characteristics of the loan and/or payment status, these loans are individually reviewed and measured for potential credit loss.

The amount of the potential credit loss is measured using one of three methods: (i) the present value of expected future cash flows discounted at the loan’s effective interest rate; (ii) the fair value of collateral, if the loan is collateral dependent; or (iii) the loan’s observable market price. If the measured fair value of the loan is less than the amortized cost basis of the loan, an allowance for credit loss is recorded.

For collateral dependent loans, the expected credit losses at the individual asset level is the difference between the collateral's fair value (less cost to sell) and the amortized cost.

Qualitative adjustment factors consider various internal and external conditions which are allocated among loan segments and take into consideration:

• Current underwriting policies, staff and portfolio concentrations,

• Risk rating accuracy, credit and administration,

• Internal risk emergence (including internal trends of delinquency, portfolio growth, and collateral value), and

• , Competitive environment, as it could impact loan structure and underwriting.

These factors are based on their relative standing compared to the period in which historical losses are used in quantitative reserve estimates and current directional trends, and reasonable and supportable forecasts. Qualitative factors in the model can add to or subtract from quantitative reserves.

Loan officers and risk managers meet at least quarterly to discuss and review the conditions and risks associated with individual problem loans. In addition, various regulatory agencies periodically review our loan ratings and allowance for credit losses and the Bank’s internal loan review department performs loan reviews.

Accrued interest receivable on loans is excluded from the estimate of credit losses and is included in Accrued interest receivable on the Consolidated Balance Sheets.

For additional detail regarding the allowance for credit losses and the provision for credit losses, see Note 5.

Past Due and Nonaccrual Loans

Past due loans and leases are defined as loans contractually past due 30 - 89 days as to principal or interest payments but which remain in accrual status, or loans delinquent 90 days or more but are considered well secured and in the process of collection.

Nonaccruing loans and leases are those on which the accrual of interest has ceased. Loans are placed on nonaccrual status immediately if, in the opinion of management, collection is doubtful, or when principal or interest is past due 90 days or more and the loan is not well secured and in the process of collection. Interest accrued but not collected at the date a loan is placed on nonaccrual status is reversed and charged against interest income. In addition, the amortization of net deferred loan fees is suspended when a loan is placed on nonaccrual status. Subsequent cash receipts are applied either to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectability of principal and interest. Loans are returned to accrual status when it is determined that the borrower has the ability to make all principal and interest payments in accordance with the terms of the loan (i.e. a consistent repayment record, generally six consecutive payments, has been demonstrated).

Unless loans are well-secured and collection is imminent, for loans greater than 90 days past due their respective reserves are generally charged off once the loss has been confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged off and expected to be charged off.

Securities

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date.

Securities classified as available-for-sale are those securities that the Corporation intends to hold for an indefinite period of time but not necessarily to maturity. Securities available-for-sale are carried at fair value. Any decision to sell a security classified as available-for-sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Corporation’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Unrealized gains and losses are reported as increases or decreases in other comprehensive income. Gains or losses on disposition are based on the net proceeds and cost of the securities sold, adjusted for the amortization of premiums and accretion of discounts, using the specific identification method.

109

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Securities classified as held to maturity are those debt securities the Corporation has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for the amortization of premium and accretion of discount, computed on a level yield basis.

Investments in equity securities are recorded in accordance with ASC 321-10, Investments - Equity Securities. Equity securities are carried at fair value, with changes in fair value reported in net income. At ~~June~~September 30, 2023 and December 31, 2022, investments in equity securities consisted of an investment in mutual funds with a fair value of ~~$2.1~~$2.0 million, and $2.1 million, respectively.

The Corporation’s accounting policy specifies that (a) if the Corporation does not have the intent to sell a debt security prior to recovery and (b) it is more likely than not that it will not have to sell the debt security prior to recovery, the security would not be considered other-than-temporarily impaired, unless there is a credit loss. When the Corporation does not intend to sell the security, and it is more likely than not, the Corporation will not have to sell the security before recovery of its cost basis, it will recognize the credit component of an other-than-temporary impairment of a debt security in earnings and the remaining portion in other comprehensive income. The Corporation did not recognize any other-than-temporary impairment charges during the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022.

Allowance for Credit Losses - Held-to-Maturity Debt Securities

We follow Accounting Standards Codification (ASC) 326-20, Financial Instruments - Credit Loss - Measured at Amortized Cost, to measure expected credit losses on held-to-maturity debt securities on a collective basis by security investment grade. The estimate of expected credit losses considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

The Corporation classifies the held-to-maturity debt securities into the following major security types: state and municipal securities. These securities are highly rated with a history of no credit losses, and are assigned ratings based on the most recent data from ratings agencies depending on the availability of data for the security. Credit ratings of held-to-maturity debt securities, which are a significant input in calculating the expected credit loss, are reviewed on a quarterly basis.

Accrued interest receivable on held-to-maturity debt securities is excluded from the estimate of credit losses and is included in Accrued interest receivable on the Consolidated Balance Sheets.

Allowance for Credit Losses - Available-for-Sale Debt Securities

We follow ASC 326-30, Financial Instruments - Credit Loss - Available-for-Sale Debt Securities, which provides guidance related to the recognition of and expanded disclosure requirements for expected credit losses on available-for-sale debt securities. For available-for-sale debt securities in an unrealized loss position, the Corporation first evaluates whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either criteria is met, the security's amortized cost basis is reduced to fair value and recognized as a reduction to Noninterest income in the Consolidated Statements of Income.

For debt securities available-for-sale which the Corporation does not intend to sell, or it is not likely the security would be required to be sold before recovery, we evaluate whether a decline in fair value has resulted from credit losses or other adverse factors, such as a change in the security's credit rating. In assessing whether a credit loss exists, the Corporation compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance is recorded, limited to the fair value of the security.

Management performs this analysis on a quarterly basis to review the conditions and risks associated with the individual securities. Credit losses on an impaired security shall continue to be measured using the present value of expected future cash flows. Any impairment not recorded through an allowance for credit loss is included in other comprehensive income (loss), net of the tax effect. We are required to use our judgment in determining impairment in certain circumstances. For additional detail regarding debt securities, see Note 3.

Unfunded Lending Commitments

For unfunded lending commitments, the Corporation estimates expected credit losses over the contractual period in which the Corporation is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Corporation. The estimate includes consideration of the probability of default and utilization rate at default to calculate expected credit losses on commitments expected to be funded over its estimated life of one year, based on historical losses, and qualitative adjustment factors.

The allowance for credit losses for off-balance sheet exposures is included in Other liabilities on the Consolidated Balance Sheets and the provision for credit losses for off-balance sheet exposure is included in the provision for credit losses on the Consolidated Statements of Income for the periods ended ~~June~~September 30, 2023, and in other non-interest expense for periods prior to the adoption of ASU-2016-13 on January 1, 2023. The allowance for credit losses for off-balance sheet exposures was ~~$1.4~~$1.0 million and $173 thousand as of ~~June~~September 30, 2023 and December 31, 2022, respectively.

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Pronouncements Adopted in 2023

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

The Corporation adopted ASU 2016-13, as amended, on January 1, 2023, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. The measurement of expected credit losses under the CECL

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methodology is applicable to financial assets measured at amortized cost, including loans, net of fees and costs, securities HTM, unfunded lending commitments (including loan commitments on loans held for investment, standby letters of credit, financial guarantees, and other similar instruments) and net investments in leases recognized by a lessor in accordance with Topic 842. In addition, ASC 326 made changes to the accounting for securities AFS which now requires credit losses to be presented as an allowance rather than as an other-than-temporary impairment on securities AFS management does not intend to sell or believes that it is more likely than not they will be required to sell.

We applied the modified retrospective method for all financial assets measured at amortized cost and securities AFS. Results for reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Corporation recorded a one-time decrease to retained earnings of $2.2 million on January 1, 2023 for the cumulative effect of adopting ASC 326, net of tax. The transition adjustment includes $1.2 million and $974 thousand post-tax impacts for loans, net of fees and costs and unfunded loan commitments, respectively, due to higher expected credit losses compared to the incurred loss methodology primarily driven by longer duration commercial and consumer real estate loans.

FASB ASU 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments”

Issued in April 2019, ASU 2019-04 clarifies certain aspects of accounting for credit losses, hedging activities, and financial instruments (addressed by ASUs 2016-13, 2017-12, and 2016-01, respectively). The amendments to estimating expected credit losses (ASU 2016-13), in particular, how a company considers recoveries and extension options when estimating expected credit losses, are the most relevant to the Corporation. The ASU clarifies that (1) the estimate of expected credit losses should include expected recoveries of financial assets, including recoveries of amounts expected to be written off and those previously written off, and (2) that contractual extension or renewal options that are not unconditionally cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. The Corporation adopted ASU 2019-04 at the same time ASU 2016-13 was adopted.

FASB ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures."

In March 2022, the FASB issued ASU No. 2022-02, "Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures." The amendments eliminate the accounting guidance for troubled debt restructurings by creditors that have adopted CECL and enhance the disclosure requirements for modifications of receivables made with borrowers experiencing financial difficulty. In addition, the amendments require disclosure of current period gross write-offs by year of origination for financing receivables and net investment in leases in the existing vintage disclosures. The Corporation adopted ASU 2022-02 at the same time ASU 2016-13 was adopted, as of January 1, 2023. The adoption of this ASU resulted in updated disclosures within our financial statements but otherwise did not have a material impact on the Corporation's financial statements. See Note 5.

Pronouncements Not Yet Effective as of ~~June~~September 30, 2023:

FASB ASU 2020-04 (Topic 848), “Reference Rate Reform (“ASC 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”

Issued in March 2020, ASU 2020-04 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The Corporation does not have a significant concentration of loans, derivative contracts, borrowings or other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The Corporation expects to adopt the LIBOR transition relief allowed under this standard.

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

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

FASB ASU 2023-02, "Investments Equity Method and Joint Ventures (Topic 323) Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method"

In March 2023, the FASB issued ASU 2023-02, Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method to allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits. If certain conditions are met,

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a reporting entity may elect to account for its tax equity investments by using the proportional amortization method regardless of the program from which it receives income tax credits, instead of only LIHTC structures. This amendment also eliminates certain LIHTC specific guidance aligning the accounting with other equity investments in tax credit structures. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. We are evaluating the accounting and disclosure requirements of ASU 2023-02 and do not expect them to have a material effect on our consolidated financial statements.

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(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)	2023		2022		2023		2022		(dollars in thousands, except per share data)	2023		2022		2023		2022
Numerator for earnings per share:	Numerator for earnings per share:									Numerator for earnings per share:
Net income available to common stockholders	Net income available to common stockholders	$	4,645	$	5,938	$	8,666	$	11,473	Net income available to common stockholders	$	4,005	$	5,798	$	12,673	$	17,268

Denominators for earnings per share:	Denominators for earnings per share:									Denominators for earnings per share:
Weighted average shares outstanding	Weighted average shares outstanding	11,240		12,202		11,348		12,230		Weighted average shares outstanding	11,228		11,936		11,307		12,076
Average unearned ESOP shares	Average unearned ESOP shares	(178)		(204)		(181)		(208)		Average unearned ESOP shares	(170)		(200)		(178)		(148)
Basic weighted averages shares outstanding	Basic weighted averages shares outstanding	11,062		11,998		11,167		12,022		Basic weighted averages shares outstanding	11,058		11,736		11,129		11,928
Dilutive effects of assumed exercises of stock options	Dilutive effects of assumed exercises of stock options	72		256		165		298		Dilutive effects of assumed exercises of stock options	119		232		149		274
Dilutive effects of SERP shares	Dilutive effects of SERP shares	170		144		162		138		Dilutive effects of SERP shares	186		150		171		142
Diluted weighted averages shares outstanding	Diluted weighted averages shares outstanding	11,304		12,398		11,494		12,458		Diluted weighted averages shares outstanding	11,363		12,118		11,449		12,344

Basic earnings per share	Basic earnings per share	$	0.42	$	0.49	$	0.78	$	0.95	Basic earnings per share	$	0.36	$	0.49	$	1.14	$	1.45
Diluted earnings per share	Diluted earnings per share	$	0.41	$	0.48	$	0.75	$	0.92	Diluted earnings per share	$	0.35	$	0.48	$	1.11	$	1.40
Antidilutive shares excluded from computation of average dilutive earnings per share	Antidilutive shares excluded from computation of average dilutive earnings per share	512		272		507		42		Antidilutive shares excluded from computation of average dilutive earnings per share	490		474		490		472

(3) Securities

The following tables presents the amortized cost, allowance for credit losses, and fair value of securities at the dates indicated:

June 30, 2023
(dollars in thousands) Amortized cost Gross unrealized gains Gross unrealized losses Allowance for Credit Losses Fair value # of Securities in unrealized loss position
Securities available-for-sale:
U.S. asset backed securities $ 12,158 $ 110 $ (235) $ — $ 12,033 9
U.S. government agency MBS 10,985 — (539) — 10,446 12
U.S. government agency CMO 22,684 — (2,387) — 20,297 30
State and municipal securities 40,456 — (4,877) — 35,579 31
U.S. Treasuries 32,981 — (3,323) — 29,658 25
Non-U.S. government agency CMO 12,390 1 (820) — 11,571 13
Corporate bonds 8,200 — (1,116) — 7,084 13
Total securities available-for-sale $ 139,854 $ 111 $ (13,297) $ — $ 126,668 133
Securities held to maturity:
State and municipal securities $ 36,463 $ — $ (3,605) $ — $ 32,858 24
Total securities held-to-maturity $ 36,463 $ — $ (3,605) $ — $ 32,858 24


	September 30, 2023
(dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Allowance for Credit Losses		Fair value		# of Securities in unrealized loss position
Securities available-for-sale:
U.S. asset backed securities	$	11,580	$	98	$	(202)	$	—	$	11,476	9
U.S. government agency MBS	11,744		—		(610)		—		11,134		13
U.S. government agency CMO	22,226		—		(2,854)		—		19,372		30
State and municipal securities	40,275		—		(6,890)		—		33,385		31
U.S. Treasuries	32,982		—		(3,453)		—		29,529		25
Non-U.S. government agency CMO	11,007		1		(788)		—		10,220		13
Corporate bonds	8,200		—		(1,098)		—		7,102		13
Total securities available-for-sale	$	138,014	$	99	$	(15,895)	$	—	$	122,218	134

Securities held to maturity:
State and municipal securities	$	36,232	$	—	$	(5,567)	$	—	$	30,665	24
Total securities held-to-maturity	$	36,232	$	—	$	(5,567)	$	—	$	30,665	24

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	December 31, 2022
(dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Fair value		# of Securities in unrealized loss position
Securities available-for-sale:
U.S. asset backed securities	$	15,581	$	14	$	(314)	$	15,281	12
U.S. government agency MBS	12,272		5		(538)		11,739		12
U.S. government agency CMO	25,520		40		(2,242)		23,318		29
State and municipal securities	44,700		—		(5,862)		38,838		34
U.S. Treasuries	32,980		—		(3,457)		29,523		25
Non-U.S. government agency CMO	9,722		—		(633)		9,089		11
Corporate bonds	8,201		—		(643)		7,558		12
Total securities available-for-sale	$	148,976	$	59	$	(13,689)	$	135,346	135

Securities held-to-maturity:
State and municipal securities	$	37,479	$	—	$	(4,394)	$	33,085	25

Although the Corporation’s investment portfolio overall is in a net unrealized loss position at ~~June~~September 30, 2023, the temporary impairment in the above noted securities is primarily the result of changes in market interest rates subsequent to purchase and it is more likely than not that the Corporation will not be required to sell these securities prior to recovery to satisfy liquidity needs, and therefore, no securities are deemed to be other-than-temporarily impaired.

ACL on Securities AFS and HTM

We use credit ratings quarterly and the most recent financial information of securities' issuers annually to help evaluate the credit quality of our securities AFS and HTM portfolios on a quarterly basis. The securities portfolio consists primarily of U.S. government treasuries and U.S. government agency asset backed securities which have no probability of default. The remaining portfolio consists of highly rated municipal bonds, non-agency CMO, and corporate bonds that have a low probability of default.

For the three and ~~six~~nine months ended ~~June~~September 30, 2023, we had no significant ACL or provision expense and no charge-offs or recoveries on AFS or HTM securities.

The following table shows the Corporation’s investment gross unrealized losses and fair value aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position at the dates indicated:


		June 30, 2023													September 30, 2023
		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	$	—	$	—	$	7,423	$	(235)	$	7,423	$	(235)	U.S. asset backed securities	$	1,345	$	—	$	6,489	$	(202)	$	7,834	$	(202)
U.S. government agency mortgage-backed securities	U.S. government agency mortgage-backed securities	2,151		(7)		8,296		(532)		10,446		(539)		U.S. government agency mortgage-backed securities	3,092		(32)		8,042		(578)		11,134		(610)
U.S. government agency collateralized mortgage obligations	U.S. government agency collateralized mortgage obligations	3,676		(104)		16,621		(2,283)		20,297		(2,387)		U.S. government agency collateralized mortgage obligations	2,728		(76)		16,644		(2,778)		19,372		(2,854)
State and municipal securities	State and municipal securities	—		—		35,579		(4,877)		35,579		(4,877)		State and municipal securities	—		—		33,385		(6,890)		33,385		(6,890)
U.S. Treasuries	U.S. Treasuries	—		—		29,658		(3,323)		29,658		(3,323)		U.S. Treasuries	—		—		29,529		(3,453)		29,529		(3,453)
Non-U.S. government agency collateralized mortgage obligations	Non-U.S. government agency collateralized mortgage obligations	4,674		(84)		6,221		(736)		10,895		(820)		Non-U.S. government agency collateralized mortgage obligations	3,229		(22)		6,400		(766)		9,629		(788)
Corporate bonds	Corporate bonds	2,208		(292)		4,876		(824)		7,084		(1,116)		Corporate bonds	907		(93)		6,195		(1,005)		7,102		(1,098)
Total securities available-for-sale	Total securities available-for-sale	$	12,709	$	(487)	$	108,674	$	(12,810)	$	121,382	$	(13,297)	Total securities available-for-sale	$	11,301	$	(223)	$	106,684	$	(15,672)	$	117,985	$	(15,895)

Securities held-to-maturity:	Securities held-to-maturity:													Securities held-to-maturity:
State and municipal securities	State and municipal securities	$	6,740	$	(95)	$	25,681	$	(3,510)	$	32,421	$	(3,605)	State and municipal securities	$	2,966	$	(155)	$	27,245	$	(5,412)	$	30,211	$	(5,567)
Total securities held-to-maturity	Total securities held-to-maturity	$	6,740	$	(95)	$	25,681	$	(3,510)	$	32,421	$	(3,605)	Total securities held-to-maturity	$	2,966	$	(155)	$	27,245	$	(5,412)	$	30,211	$	(5,567)

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	December 31, 2022
	Less than 12 Months				12 Months or more				Total
(dollars in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Securities available-for-sale:
U.S. asset backed securities	$	6,531	$	(80)	$	4,863	$	(234)	$	11,394	$	(314)
U.S. government agency MBS	6,022		(230)		4,637		(308)		10,659		(538)
U.S. government agency CMO	9,859		(821)		9,549		(1,421)		19,408		(2,242)
State and municipal securities	7,487		(726)		31,351		(5,136)		38,838		(5,862)
U.S. Treasuries	1,902		(97)		27,622		(3,360)		29,524		(3,457)
Non-U.S. government agency CMO	8,423		(464)		666		(169)		9,089		(633)
Corporate bonds	5,019		(431)		1,538		(212)		6,557		(643)
Total securities available-for-sale	$	45,243	$	(2,849)	$	80,226	$	(10,840)	$	125,469	$	(13,689)

Securities held-to-maturity:
State and municipal securities	$	10,130	$	(364)	$	22,543	$	(4,030)	$	32,673	$	(4,394)
Total securities held-to-maturity	$	10,130	$	(364)	$	22,543	$	(4,030)	$	32,673	$	(4,394)

The amortized cost and carrying value of securities are shown below by contractual maturities at the dates indicated. Actual maturities may differ from contractual maturities as issuers may have the right to call or repay obligations with or without call or prepayment penalties.


		June 30, 2023								December 31, 2022									September 30, 2023								December 31, 2022
		Available-for-sale				Held-to-maturity				Available-for-sale				Held-to-maturity					Available-for-sale				Held-to-maturity				Available-for-sale				Held-to-maturity
(dollars in thousands)	(dollars in thousands)	Amortized cost		Fair value		Amortized cost		Fair value		Amortized cost		Fair value		Amortized cost		Fair value		(dollars in thousands)	Amortized cost		Fair value		Amortized cost		Fair value		Amortized cost		Fair value		Amortized cost		Fair value
Due in one year or less	Due in one year or less	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	Due in one year or less	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Due after one year through five years	Due after one year through five years	26,779		24,295		3,370		3,326		18,865		17,289		4,275		4,238		Due after one year through five years	30,793		27,666		4,226		4,147		18,865		17,289		4,275		4,238
Due after five years through ten years	Due after five years through ten years	23,433		20,894		3,937		3,457		28,647		25,459		2,998		2,683		Due after five years through ten years	19,161		17,047		2,901		2,326		28,647		25,459		2,998		2,683
Due after ten years	Due after ten years	43,583		39,165		29,156		26,075		53,950		48,453		30,206		26,164		Due after ten years	43,083		36,780		29,105		24,192		53,950		48,453		30,206		26,164
Subtotal	Subtotal	93,795		84,354		36,463		32,858		101,462		91,201		37,479		33,085		Subtotal	93,037		81,493		36,232		30,665		101,462		91,201		37,479		33,085
Mortgage-related securities	Mortgage-related securities	46,059		42,314		—		—		47,514		44,145		—		—		Mortgage-related securities	44,977		40,725		—		—		47,514		44,145		—		—
Total	Total	$	139,854	$	126,668	$	36,463	$	32,858	$	148,976	$	135,346	$	37,479	$	33,085	Total	$	138,014	$	122,218	$	36,232	$	30,665	$	148,976	$	135,346	$	37,479	$	33,085

The following table presents the gross loss on sale of investment securities available for sale on the dates indicated:


		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)	2023		2022		2023		2022		(dollars in thousands)	2023		2022		2023		2022
Proceeds from sale of investment securities	Proceeds from sale of investment securities	$	13,514	$	—	$	13,514	$	—	Proceeds from sale of investment securities	$	155	$	—	$	13,514	$	—
Gross gain on sale of available for sale investments	Gross gain on sale of available for sale investments	—		—		—		—		Gross gain on sale of available for sale investments	—		—		—		—
Gross loss on sale of available for sale investments	Gross loss on sale of available for sale investments	54		—		54		—		Gross loss on sale of available for sale investments	3		—		58		—

Pledged Securities

As of ~~June~~September 30, 2023 and December 31, 2022, securities having a fair value of ~~$53.5~~$51.8 million and $78.4 million, respectively, were specifically pledged as collateral for public funds, the FRB discount window program, FHLB borrowings and other purposes. The FHLB has a blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation’s borrowing agreement with the FHLB.

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(4) Loans and Other Finance Receivables

The following table presents loans and other finance receivables detailed by category at the dates indicated:


(dollars in thousands)	(dollars in thousands)	June 30, 2023		December 31, 2022		(dollars in thousands)	September 30, 2023		December 31, 2022
Real estate loans:	Real estate loans:					Real estate loans:
Commercial mortgage	Commercial mortgage	$	648,235	$	565,400	Commercial mortgage	$	696,124	$	565,400
Home equity lines and loans	Home equity lines and loans	67,226		59,399		Home equity lines and loans	73,844		59,399
Residential mortgage	Residential mortgage	247,848		221,837		Residential mortgage	256,343		221,837
Construction	Construction	286,082		271,955		Construction	276,590		271,955
Total real estate loans	Total real estate loans	1,249,391		1,118,591		Total real estate loans	1,302,901		1,118,591
Commercial and industrial	Commercial and industrial	310,280		341,378		Commercial and industrial	299,861		341,378
Small business loans	Small business loans	147,937		136,155		Small business loans	141,265		136,155
Consumer	Consumer	440		488		Consumer	434		488
Leases, net	Leases, net	150,029		138,986		Leases, net	138,963		138,986
Total loans	Total loans	$	1,858,077	$	1,735,598	Total loans	$	1,883,424	$	1,735,598

Balances included in loans, net of fees and costs:	Balances included in loans, net of fees and costs:					Balances included in loans, net of fees and costs:
Residential mortgage real estate loans accounted under fair value option, at fair value	Residential mortgage real estate loans accounted under fair value option, at fair value	$	14,403	$	14,502	Residential mortgage real estate loans accounted under fair value option, at fair value	$	13,231	$	14,502
Residential mortgage real estate loans accounted under fair value option, at amortized cost	Residential mortgage real estate loans accounted under fair value option, at amortized cost	16,976		16,930		Residential mortgage real estate loans accounted under fair value option, at amortized cost	16,508		16,930
Unearned lease income included in leases, net	Unearned lease income included in leases, net	(24,698)		(25,715)		Unearned lease income included in leases, net	(22,385)		(25,715)
Unamortized net deferred loan origination costs	Unamortized net deferred loan origination costs	1,762		8,084		Unamortized net deferred loan origination costs	$	2,205	$	8,084

Fair Value Option for Residential Mortgage Real Estate Loans

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

Nonaccrual and Past Due Loans

The following tables present an aging of the Corporation’s loans at the dates indicated:


		June 30, 2023																	September 30, 2023
(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		% Delinquent		(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		% Delinquent
Commercial mortgage	Commercial mortgage	$	—	$	—	$	—	$	648,235	$	648,235	$	—	$	648,235	—	%	Commercial mortgage	$	574	$	—	$	574	$	695,550	$	696,124	$	—	$	696,124	0.08	%
Home equity lines and loans	Home equity lines and loans	89		—		89		66,206		66,295		931		67,226		1.52		Home equity lines and loans	216		—		216		72,699		72,915		929		73,844		1.55
Residential mortgage (1)	Residential mortgage (1)	871		—		871		244,705		245,576		2,272		247,848		1.27		Residential mortgage (1)	5,525		—		5,525		247,721		253,246		3,097		256,343		3.36
Construction	Construction	—		—		—		284,876		284,876		1,206		286,082		0.42		Construction	—		—		—		275,384		275,384		1,206		276,590		0.44
Commercial and industrial	Commercial and industrial	—		—		—		294,617		294,617		15,663		310,280		5.05		Commercial and industrial	—		—		—		284,286		284,286		15,575		299,861		5.19
Small business loans	Small business loans	1,742		—		1,742		140,038		141,780		6,157		147,937		5.34		Small business loans	1,842		—		1,842		132,186		134,028		7,237		141,265		6.43
Consumer	Consumer	—		—		—		440		440		—		440		—		Consumer	—		—		—		434		434		—		434		—
Leases, net	Leases, net	1,048		—		1,048		147,846		148,894		1,135		150,029		1.46	%	Leases, net	2,346		—		2,346		135,550		137,896		1,067		138,963		2.46	%
Total	Total	$	3,750	$	—	$	3,750	$	1,826,963	$	1,830,713	$	27,364	$	1,858,077	1.67	%	Total	$	10,503	$	—	$	10,503	$	1,843,810	$	1,854,313	$	29,111	$	1,883,424	2.10	%

(1) Includes ~~$14,403~~$13,231 of loans at fair value of which ~~$13,680~~$12,108 are current, ~~$173~~$376 are 30-89 days past due and ~~$550~~$747 are nonaccrual.

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	December 31, 2022
(dollars in thousands)	30-89 days past due		90+ days past due and still accruing		Total past due		Current		Total Accruing Loans and leases		Nonaccrual loans and leases		Total loans portfolio and leases		% Delinquent
Commercial mortgage	$	—	$	—	$	—	$	565,260	$	565,260	$	140	$	565,400	0.02	%
Home equity lines and loans	146		—		146		58,156		58,302		1,097		59,399		2.09
Residential mortgage (1)	4,262		—		4,262		215,490		219,752		2,085		221,837		2.86
Construction	1,206		—		1,206		270,749		271,955		—		271,955		0.44
Commercial and industrial	101		—		101		328,730		328,831		12,547		341,378		3.70
Small business loans	939		—		939		130,751		131,690		4,465		136,155		3.97
Consumer	—		—		—		488		488		—		488		—
Leases, net	1,173		—		1,173		136,911		138,084		902		138,986		1.49	%
Total	$	7,827	$	—	$	7,827	$	1,706,535	$	1,714,362	$	21,236	$	1,735,598	1.67	%

(1) Includes $14,502 of loans at fair value of which $13,760 are current, $184 are 30-89 days past due and $558 are nonaccrual.

Foreclosed and Repossessed Assets

At ~~June~~September 30, 2023, there were 4 consumer mortgage loans secured by residential real estate properties (included in loans, net of fees and costs on the Consolidated Balance Sheets) totaling ~~$948~~$937 thousand 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.

Past Due and Nonaccrual Status

The following table presents the amortized costs basis of loans and leases on nonaccrual status and loans 90 days or more past due and still accruing, net of fees and costs as of ~~June~~September 30, 2023. As of this date here were no loans 90 days or more past due and still accruing.


		June 30, 2023							September 30, 2023
(dollars in thousands)	(dollars in thousands)	Nonaccrual Without ACL		Nonaccrual With ACL		Total Nonaccrual		(dollars in thousands)	Nonaccrual Without ACL		Nonaccrual With ACL		Total Nonaccrual

Home equity lines and loans	Home equity lines and loans	$	931	$	—	$	931	Home equity lines and loans	$	929	$	—	$	929
Residential mortgage	Residential mortgage	2,272		—		2,272		Residential mortgage	3,097		—		3,097
Construction	Construction	1,206		—		1,206		Construction	1,206		—		1,206

Commercial and industrial	Commercial and industrial	3,348		12,315		15,663		Commercial and industrial	3,346		12,229		15,575
Small business loans	Small business loans	1,564		4,593		6,157		Small business loans	3,457		3,780		7,237

Leases, net	Leases, net	—		1,135		1,135		Leases, net	1,067		—		1,067
Total	Total	$	9,321	$	18,043	$	27,364	Total	$	13,102	$	16,009	$	29,111

Collateral-dependent Loans

The following table presents the amortized cost basis of non-accruing collateral-dependent loans by class or loans as of ~~June~~September 30, 2023 under the current expected credit loss model:


		June 30, 2023							September 30, 2023
(dollars in thousands)	(dollars in thousands)	Real Estate		Equipment and Other		Total		(dollars in thousands)	Real Estate		Equipment and Other		Total

Home equity lines and loans	Home equity lines and loans	$	931	$	—	$	931	Home equity lines and loans	$	929	$	—	$	929
Residential mortgage	Residential mortgage	2,272		—		2,272		Residential mortgage	3,097		—		3,097
Construction	Construction	1,206		—		1,206		Construction	1,206		—		1,206
Commercial and industrial	Commercial and industrial	1,895		13,768		15,663		Commercial and industrial	1,893		13,682		15,575
Small business loans	Small business loans	4,572		1,585		6,157		Small business loans	5,347		1,890		7,237

Leases, net	Leases, net	—		1,135		1,135		Leases, net	—		1,067		1,067
Total	Total	$	10,876	$	16,488	$	27,364	Total	$	12,472	$	16,639	$	29,111

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(5) Allowance for Credit Losses

The ACL is maintained at a level considered adequate to provide for estimated expected credit losses within the loan portfolio over the

contractual life of an instrument that considers our historical loss experience, current conditions and forecasts of future economic conditions as of the balance sheet date. Management’s periodic evaluation of the adequacy of the ACL is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is subjective as it requires material estimates that may be susceptible to significant revisions as more information becomes available.

Roll-Forward of ACL by Portfolio Segment

The following tables provide the activity of our allowance for credit losses for the three and ~~six~~nine months ended ~~June~~September 30, 2023 under the CECL model in accordance with ASC 326 (as adopted on January 1, 2023):


		Three Months Ended June 30, 2023											Three Months Ended September 30, 2023
(dollars in thousands)	(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (recovery of provision) for credit losses		Ending balance		(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (recovery of provision) for credit losses		Ending balance
Commercial mortgage	Commercial mortgage	$	3,475	$	—	$	—	$	(226)	$	3,249	Commercial mortgage	$	3,249	$	—	$	—	$	916	$	4,165
Home equity lines and loans	Home equity lines and loans	615		(54)		1		228		790		Home equity lines and loans	790				2		153		945
Residential mortgage	Residential mortgage	868		—		—		179		1,047		Residential mortgage	1,047		—		—		157		1,204
Construction	Construction	1,119		—		—		175		1,294		Construction	1,294		—		—		(453)		841
Commercial and industrial	Commercial and industrial	2,733		—		17		(509)		2,241		Commercial and industrial	2,241		(130)		1		267		2,379
Small business loans	Small business loans	6,316		(326)		—		878		6,868		Small business loans	6,868		(272)		1		(511)		6,086
Consumer	Consumer	—		—		1		(1)		—		Consumer	—		(1)		1		—		—
Leases	Leases	5,316		(775)		149		63		4,753		Leases	4,753		(606)		90		(174)		4,063
Total	Total	$	20,442	$	(1,155)	$	168	$	787	$	20,242	Total	$	20,242	$	(1,009)	$	95	$	355	$	19,683


		Six Months Ended June 30, 2023													Nine Months Ended September 30, 2023
(dollars in thousands)	(dollars in thousands)	Beginning Balance, prior to adoption of ASU No. 2016-13 for CECL		Adjustment to initially apply ASU No. 2016-13 for CECL		Charge-offs		Recoveries		Provision (recovery of provision) for credit losses		Ending balance		(dollars in thousands)	Beginning Balance, prior to adoption of ASU No. 2016-13 for CECL		Adjustment to initially apply ASU No. 2016-13 for CECL		Charge-offs		Recoveries		Provision (recovery of provision) for credit losses		Ending balance
Commercial mortgage	Commercial mortgage	$	4,095	$	(526)	$	—	$	—	$	(320)	$	3,249	Commercial mortgage	$	4,095	$	(526)	$	—	$	—	$	596	$	4,165
Home equity lines and loans	Home equity lines and loans	188		439		(87)		3		247		790		Home equity lines and loans	188		439		(87)		5		400		945
Residential mortgage	Residential mortgage	948		17		—		—		82		1,047		Residential mortgage	948		17		—		—		239		1,204
Construction	Construction	3,075		(1,763)		—		—		(18)		1,294		Construction	3,075		(1,763)		—		—		(471)		841
Commercial and industrial	Commercial and industrial	4,012		(1,023)		—		56		(804)		2,241		Commercial and industrial	4,012		(1,023)		(130)		57		(537)		2,379
Small business loans	Small business loans	4,909		1,110		(326)		—		1,175		6,868		Small business loans	4,909		1,110		(598)		1		664		6,086
Consumer	Consumer	3		(3)		—		2		(2)		—		Consumer	3		(3)		(1)		3		(2)		—
Leases	Leases	1,598		3,345		(2,239)		152		1,897		4,753		Leases	1,598		3,345		(2,845)		242		1,723		4,063
Total	Total	$	18,828	$	1,596	$	(2,652)	$	213	$	2,257	$	20,242	Total	$	18,828	$	1,596	$	(3,661)	$	308	$	2,612	$	19,683

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The following tables provide the activity of the allowance for loan and lease losses for the three and ~~six~~nine months ended ~~June~~September 30, 2022 under the incurred loss model:


		Three Months Ended June 30, 2022											Three Months Ended September 30, 2022
(dollars in thousands)	(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (Reversal)		Ending balance		(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (Reversal)		Ending balance
Commercial mortgage	Commercial mortgage	$	4,150	$	—	$	—	$	177	$	4,327	Commercial mortgage	$	4,327	$	—	$	—	$	(238)	$	4,089
Home equity lines and loans	Home equity lines and loans	208		—		2		30		240		Home equity lines and loans	240		(12)		34		(25)		237
Residential mortgage	Residential mortgage	357		—		—		132		489		Residential mortgage	489		—		—		217		706
Construction	Construction	2,257		—		—		224		2,481		Construction	2,481		—		—		378		2,859
Commercial and industrial	Commercial and industrial	7,369		—		9		(1,091)		6,287		Commercial and industrial	6,287		—		39		(657)		5,669
Small business loans	Small business loans	3,372		—		—		309		3,681		Small business loans	3,681		—		—		319		4,000
Consumer	Consumer	3		—		1		(1)		3		Consumer	3		—		1		(1)		3
Leases	Leases	1,110		(696)		61		822		1,297		Leases	1,297		(419)		—		533		1,411
Total	Total	$	18,826	$	(696)	$	73	$	602	$	18,805	Total	$	18,805	$	(431)	$	74	$	526	$	18,974


		Six Months Ended June 30, 2022											Nine Months Ended September 30, 2022
(dollars in thousands)	(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (Reversal)		Ending balance		(dollars in thousands)	Beginning Balance		Charge-offs		Recoveries		Provision (Reversal)		Ending balance
Commercial mortgage	Commercial mortgage	$	4,950	$	—	$	—	$	(623)	$	4,327	Commercial mortgage	$	4,950	$	—	$	—	$	(861)	$	4,089
Home equity lines and loans	Home equity lines and loans	224		—		8		8		240		Home equity lines and loans	224		(12)		42		(17)		237
Residential mortgage	Residential mortgage	283		—		2		204		489		Residential mortgage	283		—		2		421		706
Construction	Construction	2,042		—		—		439		2,481		Construction	2,042		—		—		817		2,859
Commercial and industrial	Commercial and industrial	6,533		—		20		(266)		6,287		Commercial and industrial	6,533		—		58		(922)		5,669
Small business loans	Small business loans	3,737		—		—		(56)		3,681		Small business loans	3,737		—		—		263		4,000
Consumer	Consumer	3		—		2		(2)		3		Consumer	3		—		3		(3)		3
Leases	Leases	986		(1,263)		61		1,513		1,297		Leases	986		(1,682)		62		2,045		1,411
Total	Total	$	18,758	$	(1,263)	$	93	$	1,217	$	18,805	Total	$	18,758	$	(1,694)	$	167	$	1,743	$	18,974

Reconciliation of Provision for Credit Losses

The following table provides a reconciliation of the provision for credit losses on the consolidated statements of income between the funded and unfunded components at the dates indicated:


		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)	2023		2022		2023		2022		(dollars in thousands)	2023		2022		2023		2022
Provision for credit losses - funded	Provision for credit losses - funded	$	787	$	602	$	2,257	$	1,217	Provision for credit losses - funded	$	355	$	526	$	2,612	$	1,743
Recovery of provision for credit losses - unfunded	Recovery of provision for credit losses - unfunded	(82)		—		(153)		—		Recovery of provision for credit losses - unfunded	(273)		—		(426)		—
Total provision for credit losses	Total provision for credit losses	$	705	$	602	$	2,104	$	1,217	Total provision for credit losses	$	82	$	526	$	2,186	$	1,743

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Allowance Allocated by Portfolio Segment

The following tables detail the allocation of the ACL and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases at the dates indicated:


		June 30, 2023													September 30, 2023
		Allowance for credit losses						Carrying value of loans and leases							Allowance for credit losses						Carrying value of loans and leases
(dollars in thousands)	(dollars in thousands)	Individually evaluated		Collectively evaluated		Total		Individually evaluated		Collectively evaluated		Total		(dollars in thousands)	Individually evaluated		Collectively evaluated		Total		Individually evaluated		Collectively evaluated		Total
Commercial mortgage	Commercial mortgage	$	—	$	3,249	$	3,249	$	—	$	648,235	$	648,235	Commercial mortgage	$	—	$	4,165	$	4,165	$	—	$	696,124	$	696,124
Home equity lines and loans	Home equity lines and loans	—		790		790		931		66,295		67,226		Home equity lines and loans	—		945		945		929		72,915		73,844
Residential mortgage	Residential mortgage	—		1,047		1,047		1,722		231,723		233,445		Residential mortgage	—		1,204		1,204		2,164		240,948		243,112
Construction	Construction	—		1,294		1,294		1,206		284,876		286,082		Construction	—		841		841		1,206		275,384		276,590
Commercial and industrial	Commercial and industrial	998		1,243		2,241		15,681		294,599		310,280		Commercial and industrial	1,145		1,234		2,379		15,575		284,286		299,861
Small business loans	Small business loans	1,599		5,269		6,868		6,157		141,780		147,937		Small business loans	1,393		4,693		6,086		7,237		134,028		141,265
Consumer	Consumer	—		—		—		—		440		440		Consumer	—		—		—		—		434		434
Leases, net	Leases, net	—		4,753		4,753		1,135		148,894		150,029		Leases, net	—		4,063		4,063		1,067		137,896		138,963
Total (1)	Total (1)	$	2,597	$	17,645	$	20,242	$	26,832	$	1,816,842	$	1,843,674	Total (1)	$	2,538	$	17,145	$	19,683	$	28,178	$	1,842,015	$	1,870,193

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

The following table details the pre-CECL allocation of the allowance for loan and lease losses and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment at the dates indicated:


	December 31, 2022
	Allowance on loans and leases						Carrying value of loans and leases
(dollars in thousands)	Individually evaluated		Collectively evaluated		Total		Individually evaluated		Collectively evaluated		Total
Commercial mortgage	$	—	$	4,095	$	4,095	$	2,445	$	562,955	$	565,400
Home equity lines and loans	—		188		188		1,097		58,302		59,399
Residential mortgage	—		948		948		1,454		205,881		207,335
Construction	—		3,075		3,075		1,206		270,749		271,955
Commercial and industrial	776		3,236		4,012		12,547		328,831		341,378
Small business loans	1,449		3,460		4,909		4,527		131,628		136,155
Consumer	—		3		3		—		488		488
Leases, net	—		1,598		1,598		902		138,084		138,986
Total (1)	$	2,225	$	16,603	$	18,828	$	24,178	$	1,696,918	$	1,721,096

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

Credit Quality Indicators

As part of the process of determining the ACL to the different segments of the loan and lease portfolio, Management considers certain credit quality indicators. For the commercial mortgage, construction and commercial and industrial loan segments, periodic reviews of the individual loans are performed by Management. The results of these reviews are reflected in the risk grade assigned to each loan. These internally assigned grades are as follows:

•Pass – Loans considered to be satisfactory with no indications of deterioration.

•Special mention – Loans classified as special mention have a potential weakness that deserves Management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

•Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

•Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loan balances classified as doubtful have been reduced by partial charge-offs and are carried at their net realizable values.

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The following tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to

determine the allowance for credit losses at the dates indicated:


		June 30, 2023												Revolving Loans Converted to Term Loans				Revolving Loans					Total			September 30, 2023																				Revolving Loans Converted to Term Loans			Revolving Loans			Total
		Term Loans																				Term Loans
		2023		2022		2021		2020		2019		Prior										2023					2022					2021			2020			2019			Prior
Commercial mortgage	Commercial mortgage																												Commercial mortgage
Pass/Watch	Pass/Watch	$	56,635	$	128,590	$	142,562	$	97,800	$	54,142	$	138,257			$	511			$	375					$	618,872	Pass/Watch		$	82,314		$	137,909		$	161,963		$	96,103		$	51,149		$	136,069		$	511		$	426		$	666,444
Special Mention	Special Mention	—		4,687		—		—		9,331		10,145		667				—					24,830		Special Mention	—					4,625			—			—			9,291			10,060			667			—			24,643
Substandard	Substandard	200		—		—		—		1,662		2,340		—				331					4,533		Substandard	200					—			574			—			1,648			2,287			—			328			5,037

Total	Total	$	56,835	$	133,277	$	142,562	$	97,800	$	65,135	$	150,742	$	1,178			$	706				$	648,235	Total	$	82,514				$	142,534		$	162,537		$	96,103		$	62,088		$	148,416		$	1,178		$	754		$	696,124
Current period gross charge-offs	Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—			$	—				$	—	Current period gross charge-offs	$	—				$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—

Construction	Construction																								Construction
Pass/Watch	Pass/Watch	$	32,623	$	103,126	$	55,014	$	48,430	$	4,563	$	2,147	$	123			$	23,654				$	269,680	Pass/Watch	$	53,495				$	101,776		$	29,115		$	47,458		$	4,548		$	2,120		$	123		$	24,083		$	262,718
Special Mention	Special Mention	—		—		1,084		—		503		11,916		—				1,693					15,196		Special Mention	—					—			1,084			—			511			8,934			—			2,137			12,666
Substandard	Substandard	—		—		—		—		—		1,206		—				—					1,206		Substandard	—					—			—			—			—			1,206			—			—			1,206

Total	Total	$	32,623	$	103,126	$	56,098	$	48,430	$	5,066	$	15,269	$	123			$	25,347				$	286,082	Total	$	53,495				$	101,776		$	30,199		$	47,458		$	5,059		$	12,260		$	123		$	26,220		$	276,590
Current period gross charge-offs	Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—			$	—				$	—	Current period gross charge-offs	$	—				$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—

Commercial and industrial	Commercial and industrial																								Commercial and industrial
Pass/Watch	Pass/Watch	$	7,917	$	43,176	$	33,533	$	8,425	$	5,169	$	43,263	$	—			$	123,781				$	265,264	Pass/Watch	$	18,566				$	35,631		$	26,734		$	8,891		$	4,579		$	37,658		$	—		$	126,466		$	258,525
Special Mention	Special Mention	1,000		4,802		—		—		—		2,679		—				3,670					12,151		Special Mention	1,000					4,766			—			—			—			1,665			—			2,816			10,247
Substandard	Substandard	—		—		4,659		933		300		8,762		—				18,211					32,865		Substandard	—					—			2,906			—			300			9,730			—			18,153			31,089

Total	Total	$	8,917	$	47,978	$	38,192	$	9,358	$	5,469	$	54,704	$	—			$	145,662				$	310,280	Total	$	19,566				$	40,397		$	29,640		$	8,891		$	4,879		$	49,053		$	—		$	147,435		$	299,861
Current period gross charge-offs	Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—			$	—				$	—	Current period gross charge-offs	$	(73)				$	(55)		$	—		$	(2)		$	—		$	—		$	—		$	—		$	(130)

Small business loans	Small business loans																								Small business loans
Pass/Watch	Pass/Watch	$	36,484	$	24,949	$	44,952	$	14,512	$	7,198	$	1,115	$	—			$	12,301				$	141,511	Pass/Watch	$	39,356				$	19,977		$	39,053		$	13,148		$	6,996		$	1,018		$	—		$	13,102		$	132,650
Special Mention	Special Mention	—		169		—		—		—		—		—				100					269		Special Mention	—					—			—			—			—			—			—			100			100
Substandard	Substandard	—		—		2,829		1,916		912		—		—				500					6,157		Substandard	—					673			5,038			1,914			890			—			—			—			8,515

Total	Total	$	36,484	$	25,118	$	47,781	$	16,428	$	8,110	$	1,115	$	—			$	12,901				$	147,937	Total	$	39,356				$	20,650		$	44,091		$	15,062		$	7,886		$	1,018		$	—		$	13,202		$	141,265
Current period gross charge-offs	Current period gross charge-offs	$	—	$	—	$	—	$	(161)	$	(165)	$	—	$	—			$	—				$	(326)	Current period gross charge-offs	$	—				$	—		$	—		$	(411)		$	(187)		$	—		$	—		$	—		$	(598)

Total by risk rating	Total by risk rating																								Total by risk rating
Pass/Watch	Pass/Watch	$	133,659	$	299,841	$	276,062	$	169,168	$	71,072	$	184,782	$	634			$	160,111				$	1,295,328	Pass/Watch	$	193,731				$	295,293		$	256,865		$	165,600		$	67,272		$	176,865		$	634		$	164,077		$	1,320,337
Special Mention	Special Mention	1,000		9,658		1,084		—		9,834		24,740		667				5,463					52,446		Special Mention	1,000					9,391			1,084			—			9,802			20,659			667			5,053			47,656
Substandard	Substandard	200		—		7,488		2,849		2,874		12,308		—				19,042					44,761		Substandard	200					673			8,518			1,914			2,838			13,223			—			18,481			45,847
Doubtful		—		—		—		—		—		—		—				—					—

Total	Total	$	134,859	$	309,498	$	284,633	$	172,016	$	83,780	$	221,830	$	1,301			$	184,616				$	1,392,535	Total	$	194,931				$	305,357		$	266,467		$	167,514		$	79,912		$	210,747		$	1,301		$	187,611		$	1,413,840
Total current period gross charge-offs	Total current period gross charge-offs	$	—	$	—	$	—	$	(161)	$	(165)	$	—	$	—			$	—				$	(326)	Total current period gross charge-offs	$	(73)				$	(55)		$	—		$	(413)		$	(187)		$	—		$	—		$	—		$	(728)

The Corporation had no loans with a risk rating of Doubtful included within recorded investment in loans and leases held for investment at ~~June~~September 30, 2023.

2120

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In addition to credit quality indicators as shown in the above tables, allowance allocations for residential mortgages, consumer loans and leases are also applied based on their performance status at the dates indicated:


		June 30, 2023												Revolving Loans					Total			September 30, 2023																				Revolving Loans			Total
		Term Loans																Term Loans
		2023		2022		2021		2020		2019		Prior						2023					2022					2021			2020			2019			Prior
Home equity lines and loans	Home equity lines and loans																								Home equity lines and loans
Performing	Performing	$	53	$	808	$	400	$	366	$	2,348	$	2,456			$	59,864					$	66,295	Performing		$	52		$	801		$	318		$	359		$	2,289		$	2,375		$	66,721		$	72,915
Nonperforming	Nonperforming	—		—		—		—		—		—		931					931		Nonperforming	—					—			—			—			—			—			929			929
Total	Total	$	53	$	808	$	400	$	366	$	2,348	$	2,456	$	60,795				$	67,226	Total	$	52				$	801		$	318		$	359		$	2,289		$	2,375		$	67,650		$	73,844
Current period gross charge-offs	Current period gross charge-offs	$	—	$	—	$	—	$	(54)	$	—	$	(33)	$	—				$	(87)	Current period gross charge-offs	$	—				$	—		$	—		$	(54)		$	—		$	(33)		$	—		$	(87)

Residential mortgage (1)	Residential mortgage (1)																				Residential mortgage (1)
Performing	Performing	$	29,016	$	158,223	$	23,827	$	7,491	$	464	$	12,702	$	—				$	231,723	Performing	$	42,601				$	157,600		$	21,967		$	7,353		$	461		$	11,408		$	—		$	241,390
Nonperforming	Nonperforming	—		—		—		—		—		1,722		—					1,722		Nonperforming	—					—			—						—			1,722			—			1,722
Total	Total	$	29,016	$	158,223	$	23,827	$	7,491	$	464	$	14,424	$	—				$	233,445	Total	$	42,601				$	157,600		$	21,967		$	7,353		$	461		$	13,130		$	—		$	243,112
Current period gross charge-offs	Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—				$	—	Current period gross charge-offs	$	—				$	—		$	—		$	—		$	—		$	—		$	—		$	—

Consumer	Consumer																				Consumer
Performing	Performing	$	43	$	47	$	—	$	—	$	39	$	250	$	61				$	440	Performing	$	41				$	35		$	—		$	—		$	34		$	248		$	76		$	434
Nonperforming	Nonperforming	—		—		—		—		—		—		—					—		Nonperforming	—					—			—			—			—			—			—			—
Total	Total	$	43	$	47	$	—	$	—	$	39	$	250	$	61				$	440	Total	$	41				$	35		$	—		$	—		$	34		$	248		$	76		$	434
Current period gross charge-offs	Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—				$	—	Current period gross charge-offs	$	—				$	(1)		$	—		$	—		$	—		$	—		$	—		$	(1)

Leases, net	Leases, net																				Leases, net
Performing	Performing	$	26,018	$	69,383	$	40,192	$	13,301	$	—	$	—	$	—				$	148,894	Performing	$	25,583				$	64,581		$	35,930		$	11,802		$	—		$	—		$	—		$	137,896
Nonperforming	Nonperforming	—		670		277		188		—		—		—					1,135		Nonperforming	—					499			385			183			—			—			—			1,067
Total	Total	$	26,018	$	70,053	$	40,469	$	13,489	$	—	$	—	$	—				$	150,029	Total	$	25,583				$	65,080		$	36,315		$	11,985		$	—		$	—		$	—		$	138,963
Current period gross charge-offs	Current period gross charge-offs	$	(3)	$	(1,005)	$	(1,095)	$	(136)	$	—	$	—	$	—				$	(2,239)	Current period gross charge-offs	$	(3)				$	(1,438)		$	(1,268)		$	(136)		$	—		$	—		$	—		$	(2,845)

Total by Payment Performance	Total by Payment Performance																				Total by Payment Performance
Performing	Performing	$	55,130	$	228,461	$	64,419	$	21,158	$	2,851	$	15,408	$	59,925				$	447,352	Performing	$	68,277				$	223,017		$	58,215		$	19,514		$	2,784		$	14,031		$	66,797		$	452,635
Nonperforming	Nonperforming	—		670		277		188		—		1,722		931					3,788		Nonperforming	—					499			385			183			—			1,722			929			3,718
Total	Total	$	55,130	$	229,131	$	64,696	$	21,346	$	2,851	$	17,130	$	60,856				$	451,140	Total	$	68,277				$	223,516		$	58,600		$	19,697		$	2,784		$	15,753		$	67,726		$	456,353
Total current period gross charge-offs	Total current period gross charge-offs	$	(3)	$	(1,005)	$	(1,095)	$	(190)	$	—	$	(33)	$	—				$	(2,326)	Total current period gross charge-offs	$	(3)				$	(1,439)		$	(1,268)		$	(190)		$	—		$	(33)		$	—		$	(2,933)
(1) Excludes $14,403 of loans at fair value.	(1) Excludes $14,403 of loans at fair value.																				(1) Excludes $14,403 of loans at fair value.

Commercial and industrial loans classified as substandard totaled ~~$32.9~~$31.1 million as of ~~June~~September 30, 2023, a decrease of ~~$6.4~~$8.2 million, from $39.3 million as of December 31, 2022. This decrease was the result of the payoff of one credit in the amount of $3 million, combined with the upgrade of several loan relationships that make up the remainder of the decrease. The majority of commercial and industrial substandard loans is comprised of 1415 different loan relationships with no specific industry concentration and an $11.0 million commercial loan relationship in the advertising industry that became a non-performing loan relationship late in 2021.


	December 31, 2022
(dollars in thousands)	Pass		Special mention		Substandard		Doubtful		Total
Commercial mortgage	$	536,705	$	25,309	$	3,386	$	—	$	565,400
Home equity lines and loans	57,822		—		1,577		—		59,399
Construction	260,085		11,870		—		—		271,955
Commercial and industrial	295,502		6,587		39,289		—		341,378
Small business loans	131,690		—		4,465		—		136,155
Total	$	1,281,804	$	43,766	$	48,717	$	—	$	1,374,287

2221

Table of Contents


	December 31, 2022
(dollars in thousands)	Performing		Non- performing		Total
Residential mortgage (1)	$	205,881	$	1,454	$	207,335
Consumer	488		—		488
Leases, net	138,084		902		138,986
Total	$	344,453	$	2,356	$	346,809

(1) There were four nonperforming residential mortgage loans at ~~June~~September 30, 2023 and four nonperforming residential mortgage loans at December 31, 2022 with a combined outstanding principal balance of $550 thousand and $558 thousand, respectively, which were carried at fair value and not included in the table above.

~~Individually Evaluated~~Impaired Loans

The following table details the recorded investment and principal balance of ~~individually evaluated~~impaired loans by portfolio segment, their related Allowance and interest income recognized at the dates indicated.


		June 30, 2023						December 31, 2022							December 31, 2022
(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
Individually evaluated loans with related allowance:
Impaired loans with related allowance:														Impaired loans with related allowance:
Commercial and industrial	Commercial and industrial	$	12,315	$	13,760	$	998	$	11,099	$	12,095	$	776	Commercial and industrial	$	11,099	$	12,095	$	776
Small business loans	Small business loans	4,593		4,618		1,599		3,730		3,730		1,449		Small business loans	3,730		3,730		1,449

Total	Total	$	16,908	$	18,378	$	2,597	$	14,829	$	15,825	$	2,225	Total	$	14,829	$	15,825	$	2,225
Individually evaluated loans without related allowance:
Impaired loans without related allowance:														Impaired loans without related allowance:
Commercial mortgage	Commercial mortgage	$	—	$	—	$	—	$	2,445	$	2,456	$	—	Commercial mortgage	$	2,445	$	2,456	$	—
Commercial and industrial	Commercial and industrial	3,366		3,398		—		1,448		1,494		—		Commercial and industrial	1,448		1,494		—
Small business loans	Small business loans	1,564		1,642		—		797		797		—		Small business loans	797		797		—
Home equity lines and loans	Home equity lines and loans	931		933		—		1,097		1,097		—		Home equity lines and loans	1,097		1,097		—
Residential mortgage	Residential mortgage	1,722		1,722		—		1,454		1,454		—		Residential mortgage	1,454		1,454		—
Construction	Construction	1,206		1,206		—		1,206		1,206		—		Construction	1,206		1,206		—
Leases	Leases	1,135		1,135		—		902		902		—		Leases	902		902		—
Total	Total	9,924		10,036		—		9,349		9,406		—		Total	9,349		9,406		—
Grand Total	Grand Total	$	26,832	$	28,414	$	2,597	$	24,178	$	25,231	$	2,225	Grand Total	$	24,178	$	25,231	$	2,225

2322

Table of Contents

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

Three Months Ended
June 30, 2023 Three Months Ended
June 30, 2022
(dollars in thousands) Average recorded investment Interest income recognized Average recorded investment Interest income recognized
Individually evaluated loans with related allowance:
Commercial and industrial $ 10,700 $ 18 $ 16,412 $ —
Small business loans 4,014 — 666 —
Total $ 14,714 $ 18 $ 17,078 $ —
Individually evaluated loans without related allowance:
Commercial mortgage — — 4,241 29
Commercial and industrial 4,516 — 293 —
Small business loans 2,166 — 835 2
Home equity lines and loans 931 — 1,040 23
Residential mortgage 1,725 8 1,480 166
Construction 1,206 — 1,206 16
Leases 1,153 — 102 —
Total $ 11,697 $ 8 $ 9,197 $ 236
Grand Total $ 26,411 $ 26 $ 26,275 $ 236

Six Months Ended
June 30, 2023 Six Months Ended
June 30, 2022
(dollars in thousands) Average recorded investment Interest income recognized Average recorded investment Interest income recognized
Individually evaluated loans with related allowance:
Commercial and industrial $ 10,808 $ 18 $ 16,449 $ —
Small business loans 4,047 — 666 —
Total $ 14,855 $ 18 $ 17,115 $ —
Individually evaluated loans without related allowance:
Commercial mortgage — 58 4,279 48
Commercial and industrial 3,350 — 297 —
Small business loans 1,458 2 844 5
Home equity lines and loans 937 — 1,044 23
Residential mortgage 1,585 38 1,483 168
Construction 1,120 — 1,206 31
Leases 1,157 — 103 —
Total $ 9,607 $ 98 $ 9,256 $ 275
Grand Total $ 24,462 $ 116 $ 26,371 $ 275


	Three Months Ended September 30, 2022			Nine Months Ended September 30, 2022
(dollars in thousands)		Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Individually evaluated loans with related allowance:
Commercial and industrial		$	16,195	$	—	$	16,363	$	—
Small business loans		666		—		666		—


Total		$	16,861	$	—	$	17,029	$	—
Individually evaluated loans without related allowance:
Commercial mortgage		4,212		29		4,257		77
Commercial and industrial		286		—		293		—
Small business loans		819		2		835		7
Home equity lines and loans		878		15		878		39
Residential mortgage		1,468		22		1,478		190
Construction		1,206		20		1,206		51
Leases		500		—		510		—
Total		$	9,369	$	88	$	9,457	$	364
Grand Total		$	26,230	$	88	$	26,486	$	364

~~Table of Contents~~

Troubled Debt Restructuring

As result of the adoption of guidance related to CECL effective as of January 1, 2023, the Corporation had no reportable balances related to TDRs as of and for the three and ~~six~~nine months ended ~~June~~September 30, 2023. See Note 1 “Summary of Significant Accounting Policies” for additional information.

The following table presents information about TDRs at the dates indicated:


(dollars in thousands)	December 31, 2022
TDRs included in nonperforming loans and leases	$	207
TDRs in compliance with modified terms	3,573
Total TDRs	$	3,780

There was 1 new modification on a commercial mortgage for $684 thousand for the year ended December 31, 2022. Total TDRs declined year-over-year, despite the new modification in 2022, as two TDRs from prior to 2021 totaling $563 thousand paid off in 2022. No modifications granted during the twelve months ended December 31, 2022 subsequently defaulted during the same time period.

Modifications to ~~Debtors~~Borrowers Experiencing Financial Difficulty

An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the ACL on loans and leases, a change to the allowance for credit losses is generally not recorded upon modification. However, when principal forgiveness is provided, the amortized cost basis of the asset is written off against the ACL on loans and leases. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

Table of Contents

The following presents, by class of loans, information regarding accruing and nonaccrual modified loans to borrowers experiencing financial difficulty during the three and ~~six~~nine months ended ~~June~~September 30, 2023.


		Three and Six Months Ended June 30, 2023									Three Months Ended September 30, 2023
		Number of Loans	Amortized Cost Basis		% of Total Class of Financing Receivable		Related Reserve				Number of Loans		Amortized Cost Basis		% of Total Class of Financing Receivable	Related Reserve
(dollars in thousands)	(dollars in thousands)					(dollars in thousands)
Accruing Modified Loans to Borrowers Experiencing Financial Difficulty:	Accruing Modified Loans to Borrowers Experiencing Financial Difficulty:											Accruing Modified Loans to Borrowers Experiencing Financial Difficulty:
Commercial & industrial		1	$	3,233	1.0%				$	—
Small business loans									Small business loans		3		$	1,517	1.1%	$	—
Total	Total	1	$	3,233			$	—	Total		3		$	1,517		$	—
Nonaccrual Modified Loans to Borrowers Experiencing Financial Difficulty:	Nonaccrual Modified Loans to Borrowers Experiencing Financial Difficulty:								Nonaccrual Modified Loans to Borrowers Experiencing Financial Difficulty:
Commercial & industrial		1	$	1,406	0.5%		$	422
Small business loans									Small business loans		2		$	306	0.2%	$	77
Total	Total	1	$	1,406			$	422	Total		2		$	306		$	77


	Nine Months Ended September 30, 2023
	Number of Loans	Amortized Cost Basis		% of Total Class of Financing Receivable	Related Reserve
(dollars in thousands)
Accruing Modified Loans to Borrowers Experiencing Financial Difficulty:
Small business loans	3	$	1,517	1.1%	$	—
Commercial & industrial	1	2,407		0.8%	—
Total	4	$	3,924		$	—
Nonaccrual Modified Loans to Borrowers Experiencing Financial Difficulty:
Small business loans	2	$	306	0.2%	$	77
Commercial & industrial	1	1,406		0.5%	422
Total	3	$	1,712		$	499

The following presents, by class of loans, information regarding ~~the financial effect on~~ accruing and nonaccrual modified loans to borrowers experiencing financial difficulty during the three and nine months ended ~~June~~September 30, 2023.

Number of Loans

Financial Effect

Accruing Modified Loans to Borrowers Experiencing Financial Difficulty:

Small business loans

Extend maturity date

Commercial & industrial

Extend maturity date

Total

Nonaccrual Modified Loans to Borrowers Experiencing Financial Difficulty:

Small business loans

Extend term and allow additional lender funding

Commercial & industrial

Extend term and allow additional lender funding

Total

There were no5 modifications granted to borrowers experiencing financial difficulty for the three months ended ~~March 31,~~September 30, 2023. There were no loans that had a payment default during the three and ~~six~~nine months ended ~~June~~September 30, 2023 that were modified in the 12 months before default to borrowers experiencing financial difficulty. There ~~is one commitment~~were no commitments to lend an additional ~~$267 thousand~~funds to ~~a borrower~~the borrowers experiencing financial difficulty that had ~~a modification~~modifications during the three and ~~six~~nine months ended ~~June~~September 30, 2023.

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

The Corporation’s short-term borrowings generally consist of federal funds purchased and short-term borrowings extended under agreements with the FHLB or other correspondent banks. The Corporation has ~~two~~one unsecured Federal funds borrowing ~~facilities~~facility with a correspondent ~~banks: one of $24 million and one of~~bank for up to $15 million. Federal funds purchased generally represent one-day borrowings. The Corporation had $0 in Federal funds purchased at ~~June~~September 30, 2023 and December 31, 2022. The Corporation also has a facility with the Federal Reserve Bank discount window of ~~$7.9~~$7.7 million. This facility is fully secured by investment securities. There were no borrowings under this at ~~June~~September 30, 2023 and December 31, 2022. Additionally, the Corporation has a facility with the Federal Reserve’s BTFP of $33 million. This facility was created by the Federal Reserve in March 2023 and is fully secured by United States Treasury Bonds. There were $33 million in borrowings under this facility at ~~June~~September 30, 2023.

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


(dollars in thousands)	(dollars in thousands)	Maturity date	Interest rate	June 30, 2023		December 31, 2022		(dollars in thousands)	Maturity date	Interest rate	September 30, 2023		December 31, 2022
FHLB Open Repo Plus Weekly	FHLB Open Repo Plus Weekly	06/10/2024	5.39%	$	133,727	$	113,147	FHLB Open Repo Plus Weekly	06/10/2024	5.68%	$	117,348	$	113,147
FHLB Mid-term Repo Fixed		07/14/2023	5.37%	15,542		—
FRB BTFP Advances	FRB BTFP Advances	03/29/2024	4.76%	33,000		—		FRB BTFP Advances	03/29/2024	4.76%	33,000		—
Total Short-Term Borrowings	Total Short-Term Borrowings			$	182,269	$	113,147	Total Short-Term Borrowings			$	150,348	$	113,147

The following table presents long-term borrowings at the dates indicated:


		Maturity date	Interest rate	June 30, 2023		December 31, 2022
(dollars in thousands)								(dollars in thousands)	Maturity date	Interest rate	September 30, 2023		December 31, 2022
FHLB Mid-term Repo Fixed								FHLB Mid-term Repo Fixed	12/22/2025	4.23%	$	8,935	$	8,935
FHLB Mid-term Repo Fixed	FHLB Mid-term Repo Fixed	12/22/2025	4.23%	$	8,935	$	8,935	FHLB Mid-term Repo Fixed	9/30/2024	4.60%	3,432		—
FHLB Mid-term Repo Fixed	FHLB Mid-term Repo Fixed	9/30/2024	4.60%	3,432		—		FHLB Mid-term Repo Fixed	7/14/2026	4.57%	15,244		—
Total Long-Term Borrowings	Total Long-Term Borrowings			$	12,367	$	8,935	Total Long-Term Borrowings			$	27,611	$	8,935

The FHLB has also issued ~~$120.0~~$112.7 million of letters of credit to the Corporation for the benefit of the Corporation’s public deposit funds and loan customers. These letters of credit expire throughout the remainder of ~~2023.~~2023 and through 2024.

The Corporation has a maximum borrowing capacity with the FHLB of ~~$620.6~~$637.6 million as of ~~June~~September 30, 2023 and $505.4 million as of December 31, 2022. All advances and letters of credit from the FHLB are secured by a blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation’s borrowing agreement with the FHLB.

(7) Servicing Assets

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

Residential Mortgage Loans

The related MSR asset is amortized over the period of the estimated future net servicing life of the underlying assets. MSRs are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the MSR. The Corporation serviced $1.0 billion of residential mortgage loans as of ~~June~~September 30, 2023 and December 31, 2022. During the three and ~~six~~nine months ended ~~June~~September 30, 2023, the Corporation recognized servicing fee income of ~~$618~~$612 thousand and ~~$1.3~~$1.9 million, respectively, compared to ~~$653~~$643 thousand and ~~$1.3~~$1.9 million, during the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively.

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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)	2023		2022		2023		2022		(dollars in thousands)	2023		2022		2023		2022
Balance at beginning of the period	Balance at beginning of the period	$	9,573	$	10,888	$	9,942	$	10,756	Balance at beginning of the period	$	9,238	$	10,610	$	9,942	$	10,756
Servicing rights capitalized	Servicing rights capitalized	—		51		—		583		Servicing rights capitalized	9		65		9		648
Amortization of servicing rights	Amortization of servicing rights	(335)		(332)		(706)		(736)		Amortization of servicing rights	(319)		(356)		(1,025)		(1,092)
Change in valuation allowance	Change in valuation allowance	—		3		2		7		Change in valuation allowance	—		(4)		2		3
Balance at end of the period	Balance at end of the period	$	9,238	$	10,610	$	9,238	$	10,610	Balance at end of the period	$	8,928	$	10,315	$	8,928	$	10,315

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)	2023		2022		2023		2022		(dollars in thousands)	2023		2022		2023		2022
Valuation allowance, beginning of period	Valuation allowance, beginning of period	$	—	$	(4)	$	(2)	$	(8)	Valuation allowance, beginning of period	$	—	$	(1)	$	(2)	$	(8)

Impairment										Impairment	—		(4)		—		(4)
Recovery	Recovery	—		3		2		7		Recovery	—		—		2		7
Valuation allowance, end of period	Valuation allowance, end of period	$	—	$	(1)	$	—	$	(1)	Valuation allowance, end of period	$	—	$	(5)	$	—	$	(5)

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, 2023, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to ~~6.60%~~8.73% and a discount rate equal to 9.50%. At December 31, 2022, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 8.05% and a discount rate equal to 9.50%. Due in part to market volatility as interest rates increased, the prepayment speed assumption has decreased from December 31, 2022 to ~~June~~September 30, 2023. As interest rates have started to increase and the number of mortgage refinancings have started to decline, model inputs have been adjusted to align the MSRs fair value with market conditions.

The sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.


(dollars in thousands)	(dollars in thousands)	June 30, 2023			December 31, 2022			(dollars in thousands)	September 30, 2023			December 31, 2022
Fair value of residential mortgage servicing rights	Fair value of residential mortgage servicing rights	$	12,080		$	11,567		Fair value of residential mortgage servicing rights	$	11,977		$	11,567

Weighted average life (months)	Weighted average life (months)	28			22			Weighted average life (months)	28			22

Prepayment speed	Prepayment speed	6.60		%	8.05		%	Prepayment speed	8.73		%	8.05		%
Impact on fair value:	Impact on fair value:							Impact on fair value:
10% adverse change	10% adverse change	$	(524)		$	(268)		10% adverse change	$	(512)		$	(268)
20% adverse change	20% adverse change	(1,007)			(525)			20% adverse change	(986)			(525)

Discount rate	Discount rate	9.50		%	9.50		%	Discount rate	9.50		%	9.50		%
Impact on fair value:	Impact on fair value:							Impact on fair value:
10% adverse change	10% adverse change	$	(459)		$	(404)		10% adverse change	$	(460)		$	(404)
20% adverse change	20% adverse change	(885)			(777)			20% adverse change	(889)			(777)

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

SBA Loans

SBA loan servicing assets are amortized over the period of the estimated future net servicing life of the underlying assets. SBA loan servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the SBA loan

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servicing asset. The Corporation serviced ~~$195.9~~$211.1 million and $166.1 million of SBA loans, as of ~~June~~September 30, 2023 and December 31, 2022, respectively.

~~Table of Contents~~

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)	2023		2022		2023		2022		(dollars in thousands)	2023		2022		2023		2022
Balance at beginning of the period	Balance at beginning of the period	$	2,552	$	2,508	$	2,404	$	2,009	Balance at beginning of the period	$	2,955	$	2,250	$	2,404	$	2,009
Servicing rights capitalized	Servicing rights capitalized	512		247		726		840		Servicing rights capitalized	373		306		1,099		1,146
Amortization of servicing rights	Amortization of servicing rights	(252)		(225)		(447)		(350)		Amortization of servicing rights	(243)		(173)		(690)		(523)
Change in valuation allowance	Change in valuation allowance	143		(280)		272		(249)		Change in valuation allowance	(178)		109		94		(140)
Balance at end of the period	Balance at end of the period	$	2,955	$	2,250	$	2,955	$	2,250	Balance at end of the period	$	2,907	$	2,492	$	2,907	$	2,492

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

Three months ended
June 30, Six months ended
June 30,
(dollars in thousands) 2023 2022 2023 2022
Valuation allowance, beginning of period $ (235) $ (65) $ (364) $ (96)
Impairment — (280) — (249)
Recovery 143 — 272 —
Valuation allowance, end of period $ (92) $ (345) $ (92) $ (345)


	Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)	2023		2022		2023		2022
Valuation allowance, beginning of period	$	(92)	$	(345)	$	(364)	$	(96)
Impairment	(178)		—		(178)		(280)
Recovery	—		109		272		140
Valuation allowance, end of period	$	(270)	$	(236)	$	(270)	$	(236)

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, 2023, the key assumptions used to determine the fair value of the Corporation’s SBA loan servicing rights included a lifetime constant prepayment rate equal to ~~12.98%~~13.79% and a discount rate equal to ~~15.60%~~17.06%. At December 31, 2022, the key assumptions used to determine the fair value of the Corporation’s SBA loan servicing rights included a lifetime constant prepayment rate equal to 12.73% and a discount rate equal to 18.96%.

The sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.


(dollars in thousands)	(dollars in thousands)	June 30, 2023			December 31, 2022			(dollars in thousands)	September 30, 2023			December 31, 2022
Fair value of SBA loan servicing rights	Fair value of SBA loan servicing rights	$	3,056		$	2,422		Fair value of SBA loan servicing rights	$	3,009		$	2,422

Weighted average life (years)	Weighted average life (years)	3.8			3.8			Weighted average life (years)	3.5			3.8

Prepayment speed	Prepayment speed	12.98		%	12.73		%	Prepayment speed	13.79		%	12.73		%
Impact on fair value:	Impact on fair value:							Impact on fair value:
10% adverse change	10% adverse change	$	(107)		$	(73)		10% adverse change	$	(102)		$	(73)
20% adverse change	20% adverse change	(205)			(141)			20% adverse change	(196)			(141)

Discount rate	Discount rate	15.60		%	18.96		%	Discount rate	17.06		%	18.96		%
Impact on fair value:	Impact on fair value:							Impact on fair value:
10% adverse change	10% adverse change	$	(71)		$	(53)		10% adverse change	$	(64)		$	(53)
20% adverse change	20% adverse change	(138)			(104)			20% adverse change	(125)			(104)

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

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

Following is a description of the valuation methodologies used for instruments measured at fair value on a recurring basis.

Securities

The fair value of securities available-for-sale (carried at fair value) and held to maturity (carried at amortized cost) are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

Mortgage Loans Held for Sale

The fair value of loans held for sale is based on secondary market prices.

Mortgage Loans Held for Investment

The fair value of mortgage loans held for investment is based on the price secondary markets are currently offering for similar loans using observable market data.

Derivative Financial Instruments

The fair values of forward commitments and interest rate swaps are based on market pricing and therefore are considered Level 2. Derivatives classified as Level 3 consist of interest rate lock commitments related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement.

The following table presents the fair value of financial assets measured at fair value on a recurring basis by level within the fair value hierarchy at the dates indicated:


		June 30, 2023									September 30, 2023
(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	$	12,033	$	—	$	12,033	$	—	U.S. asset backed securities	$	11,476	$	—	$	11,476	$	—
U.S. government agency MBS	U.S. government agency MBS	10,446		—		10,446		—		U.S. government agency MBS	11,134		—		11,134		—
U.S. government agency CMO	U.S. government agency CMO	20,297		—		20,297		—		U.S. government agency CMO	19,372		—		19,372		—

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		June 30, 2023									September 30, 2023
(dollars in thousands)	(dollars in thousands)	Total		Level 1		Level 2		Level 3		(dollars in thousands)	Total		Level 1		Level 2		Level 3
State and municipal securities	State and municipal securities	35,579		—		35,579		—		State and municipal securities	33,385		—		33,385		—
U.S. Treasuries	U.S. Treasuries	29,658		29,658		—		—		U.S. Treasuries	29,529		29,529		—		—
Non-U.S. government agency CMO	Non-U.S. government agency CMO	11,571		—		11,571				Non-U.S. government agency CMO	10,220		—		10,220
Corporate bonds	Corporate bonds	7,084		—		7,084		—		Corporate bonds	7,102		—		7,102		—
Equity investments	Equity investments	2,097		—		2,097		—		Equity investments	2,019		—		2,019		—
Mortgage loans held for sale	Mortgage loans held for sale	40,422		—		40,422		—		Mortgage loans held for sale	23,144		—		23,144		—
Mortgage loans held for investment	Mortgage loans held for investment	14,403		—		14,403		—		Mortgage loans held for investment	13,231		—		13,231		—
Interest rate lock commitments	Interest rate lock commitments	261		—		—		261		Interest rate lock commitments	229		—		—		229
Forward commitments	Forward commitments	14		—		14		—		Forward commitments	50		—		50		—
Customer derivatives - interest rate swaps	Customer derivatives - interest rate swaps	3,737		—		3,737		—		Customer derivatives - interest rate swaps	4,387		—		4,387		—
Interest rate swaps	Interest rate swaps	435		—		435		—		Interest rate swaps	1,023		—		1,023		—
Total	Total	$	188,037	$	29,658	$	158,118	$	261	Total	$	166,303	$	29,529	$	136,545	$	229

Liabilities	Liabilities									Liabilities
Interest rate lock commitments	Interest rate lock commitments	$	144	$	—	$	—	$	144	Interest rate lock commitments	$	83	$	—	$	—	$	83
Forward commitments	Forward commitments	1		—		1		—		Forward commitments	—		—		—		—
Customer derivatives - interest rate swaps	Customer derivatives - interest rate swaps	3,704		—		3,704		—		Customer derivatives - interest rate swaps	4,321		—		4,321		—
Risk Participation Agreements	Risk Participation Agreements	12		—		12		—		Risk Participation Agreements	6		—		6		—
Total	Total	$	3,861	$	—	$	3,717	$	144	Total	$	4,410	$	—	$	4,327	$	83


	December 31, 2022
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets
Securities available for sale:
U.S. asset backed securities	$	15,281	$	—	$	15,281	$	—
U.S. government agency MBS	11,739		—		11,739		—
U.S. government agency CMO	23,318		—		23,318		—
State and municipal securities	38,838		—		38,838		—
U.S. Treasuries	29,523		29,523		—		—
Non-U.S. government agency CMO	9,089		—		9,089		—
Corporate bonds	7,558		—		7,558		—
Equity investments	2,086		—		2,086		—
Mortgage loans held for sale	22,243		—		22,243		—
Mortgage loans held for investment	14,502		—		14,502		—
Interest rate lock commitments	87		—		—		87
Customer derivatives - interest rate swaps	3,846		—		3,846		—
Total	$	178,110	$	29,523	$	148,500	$	87

Liabilities
Interest rate lock commitments	$	79	$	—	$	—	$	79
Customer derivatives - interest rate swaps	3,799		—		3,799		—
Risk Participation Agreements	17		—		17		—
Total	$	3,895	$	—	$	3,816	$	79

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The following table presents assets measured at fair value on a nonrecurring basis at the dates indicated:


(dollars in thousands)	(dollars in thousands)	June 30, 2023		December 31, 2022		(dollars in thousands)	September 30, 2023		December 31, 2022
Mortgage servicing rights	Mortgage servicing rights	$	9,238	$	9,942	Mortgage servicing rights	$	8,928	$	9,942
SBA loan servicing rights	SBA loan servicing rights	2,955		2,404		SBA loan servicing rights	2,907		2,404
Individually evaluated loans (1)	Individually evaluated loans (1)					Individually evaluated loans (1)
Commercial and industrial	Commercial and industrial	2,429		—		Commercial and industrial	12,371		—
Small business loans	Small business loans	3,019		2,281		Small business loans	2,456		2,281
Total	Total	$	17,641	$	14,627	Total	$	26,662	$	14,627

(1) Individually evaluated loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. ~~Refer to the following page for further qualitative discussion around~~The increase in individually evaluated ~~loans.~~commercial and industrial loans noted above was due to reassessing how we evaluate the impairment on a loan relationship to now be based on the fair value of collateral.

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

(dollars in thousands)

Fair Value

Valuation Technique

Significant Unobservable Input

Range of Inputs

~~June~~September 30, 2023

~~5,448~~14,827

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

2%~~-15%~~-33% discount

December 31, 2022

2,281

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

2%-15% discount

Below is management’s estimate of the fair value of all financial instruments, whether carried at cost or fair value on the Corporation’s balance sheet. The following information should not be interpreted as an estimate of the fair value of the entire Corporation since a fair value calculation is only provided for a limited portion of the Corporation’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair value of the Corporation’s financial instruments:

Cash and Cash Equivalents

The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair values.

Loans Receivable

The fair value of loans receivable is estimated using discounted cash flow analyses, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair value below is reflective of an exit price.

Servicing Assets

The Corporation estimates the fair value of mortgage servicing rights and SBA loan servicing rights using discounted cash flow models that calculate the present value of estimated future net servicing income. The model uses readily available prepayment speed assumptions for the interest rates of the portfolios serviced. These servicing rights are classified within Level 3 in the fair value hierarchy based upon management’s assessment of the inputs. The Corporation reviews the servicing rights portfolios on a quarterly basis for impairment.

Individually Evaluated Loans

Individually evaluated loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third‑party appraisals of the properties, or discounted cash flows based upon the expected proceeds. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. Individually evaluated loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the Allowance policy.

Accrued Interest Receivable and Payable

The carrying amount of accrued interest receivable and accrued interest payable approximates its fair value.

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Deposit Liabilities

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate

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

Short-Term Borrowings

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

Long-Term Debt

Fair values of FHLB advances and the acquisition purchase note payable are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Subordinated Debt

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

Off-Balance Sheet Financial Instruments

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

Derivative Financial Instruments

The fair value of forward commitments and interest rate swaps is based on market pricing and therefore are considered Level 2. Derivatives classified as Level 3 consist of interest rate lock commitments related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment will ultimately result in a closed loan, which is a significant unobservable assumption. A significant increase or decrease in the external market price would result in a significantly higher or lower fair value measurement.

The following table presents the estimated fair values of the Corporation’s financial instruments at the dates indicated:


			June 30, 2023				December 31, 2022						September 30, 2023				December 31, 2022
(dollars in thousands)	(dollars in thousands)	Fair Value Hierarchy Level	Carrying amount		Fair value		Carrying amount		Fair value		(dollars in thousands)	Fair Value Hierarchy Level	Carrying amount		Fair value		Carrying amount		Fair value
Financial assets:	Financial assets:										Financial assets:
Cash and cash equivalents	Cash and cash equivalents	Level 1	$	46,866	$	46,866	$	38,391	$	38,391	Cash and cash equivalents	Level 1	$	59,759	$	59,759	$	38,391	$	38,391
Mortgage loans held for sale	Mortgage loans held for sale	Level 2	40,422		40,422		22,243		22,243		Mortgage loans held for sale	Level 2	23,144		23,144		22,243		22,243
Loans receivable, net of the allowance for credit losses	Loans receivable, net of the allowance for credit losses	Level 3	1,845,436		1,790,075		1,729,180		1,679,955		Loans receivable, net of the allowance for credit losses	Level 3	1,872,398		1,827,125		1,729,180		1,679,955
Mortgage loans held for investment	Mortgage loans held for investment	Level 2	14,403		14,403		14,502		14,502		Mortgage loans held for investment	Level 2	13,231		13,231		14,502		14,502

Financial liabilities:	Financial liabilities:										Financial liabilities:
Deposits	Deposits	Level 2	1,782,605		1,688,900		1,712,479		1,575,600		Deposits	Level 2	1,808,645		1,780,200		1,712,479		1,575,600
Borrowings		Level 2	194,636		194,502		122,082		122,082
Subordinated debentures		Level 2	40,348		40,631		40,346		40,020

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Borrowings	Level 2	177,959	179,000	122,082	122,082
Subordinated debentures	Level 2	50,079	50,218	40,346	40,020

The following table includes a rollforward of interest rate lock commitments for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the periods indicated.

Three months ended
June 30, Six months ended
June 30,
(dollars in thousands) 2023 2022 2023 2022
Balance at beginning of the period $ 139 $ 587 $ 87 $ 1,122
Decrease in value 122 (213) 174 (748)
Balance at end of the period $ 261 $ 374 $ 261 $ 374

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	Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)	2023		2022		2023		2022
Balance at beginning of the period	$	261	$	374	$	87	$	1,122
(Decrease) increase in value	(32)		(237)		142		(985)
Balance at end of the period	$	229	$	137	$	229	$	137

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

(dollars in thousands)

Fair Value

Valuation Technique

Significant Unobservable Input

Range of Inputs

Weighted Average

(dollars in thousands)

Fair Value

Valuation Technique

Significant Unobservable Input

Range of Inputs

Weighted Average

June 30, 2023

261

Market comparable pricing

Pull through

1 - 99%

83.47%

September 30, 2023

229

Market comparable pricing

Pull through

1 - 99%

84.12%

December 31, 2022

Market comparable pricing

Pull through

1 - 99%

84.05

December 31, 2022

Market comparable pricing

Pull through

1 - 99%

84.05

(9) Derivative Financial Instruments

Risk Management Objective of Using Derivatives

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

Interest Rate Swaps

The Corporation uses interest rate swap agreements to modify interest rate characteristics from variable to fixed or fixed to variable in order to reduce the impact of interest rate changes on future net interest income. The Corporation’s credit exposure on interest rate swaps includes changes in fair value and any collateral that is held by a third party.

In June 2023, the Corporation entered into three interest rate swaps classified as cash flow hedges with notional amounts of $25 million each, to hedge the interest payments received on short term borrowings. Under the terms of the three swap agreements, the Corporation pays average fixed rates of 4.070%, 4.027% and 4.117%, and receives variable rates in return indexed to SOFR. The swaps mature between May, June, and December 2026. The Corporation performed an assessment of the hedge for effectiveness at the inception of the hedge and performs an assessment on a recurring basis and determined that the derivative currently is and is expected to be highly effective in offsetting changes in cash flows of the hedged item. ~~At June~~For the three and nine months ended September 30, 2023, approximately ~~$338~~$497 thousand and $825 thousand respectively, net of tax, is recorded in ~~accumulated other~~total comprehensive ~~loss.~~income as unrealized gains. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations and the addition of other hedges subsequent to ~~June~~September 30, 2023. At ~~June~~September 30, 2023, the combined notional amount of the interest rate swaps was $75 million and the fair value was an asset of ~~$435 thousand.~~$1.0 million.

Mortgage Banking Derivatives

In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation may enter into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans or interest rate locks at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, 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

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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.

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


			June 30, 2023				December 31, 2022						September 30, 2023				December 31, 2022
(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	$	46,565	$	261	$	16,590	$	87	Positive fair values	Other assets	$	40,015	$	229	$	16,590	$	87
Negative fair values	Negative fair values	Other liabilities	21,059		(144)		16,108		(79)		Negative fair values	Other liabilities	21,260		(83)		16,108		(79)
Total	Total		$	67,624	$	117	$	32,698	$	8	Total		$	61,275	$	146	$	32,698	$	8

Forward Commitments	Forward Commitments										Forward Commitments
Positive fair values	Positive fair values	Other assets	$	4,250	$	14	$	—	$	—	Positive fair values	Other assets	$	6,750	$	50	$	—	$	—
Negative fair values	Negative fair values	Other liabilities	750		(1)		—		—		Negative fair values	Other liabilities	—		—		—		—
Total	Total		$	5,000	$	13	$	—	$	—	Total		$	6,750	$	50	$	—	$	—

Customer Derivatives - Interest Rate Swaps	Customer Derivatives - Interest Rate Swaps										Customer Derivatives - Interest Rate Swaps
Positive fair values	Positive fair values	Other assets	$	46,337	$	3,737	$	43,779	$	3,846	Positive fair values	Other assets	$	46,337	$	4,387	$	43,779	$	3,846
Negative fair values	Negative fair values	Other liabilities	46,337		(3,704)		43,779		(3,799)		Negative fair values	Other liabilities	46,337		(4,321)		43,779		(3,799)
Total	Total		$	92,674	$	33	$	87,558	$	47	Total		$	92,674	$	66	$	87,558	$	47

Risk Participation Agreements	Risk Participation Agreements										Risk Participation Agreements
Positive fair values	Positive fair values	Other assets	$	—	$	—	$	—	$	—	Positive fair values	Other assets	$	—	$	—	$	—	$	—
Negative fair values	Negative fair values	Other liabilities	7,141		(12)		7,200		(17)		Negative fair values	Other liabilities	7,111		(6)		7,200		(17)
Total	Total		$	7,141	$	(12)	$	7,200	$	(17)	Total		$	7,111	$	(6)	$	7,200	$	(17)

Interest Rate Swaps	Interest Rate Swaps										Interest Rate Swaps
Positive fair values	Positive fair values	Other assets	$	75,000	$	435	$	—	$	—	Positive fair values	Other assets	$	75,000	$	1,023	$	—	$	—
Negative fair values	Negative fair values	Other liabilities	—		—		—		—		Negative fair values	Other liabilities	—		—		—		—
Total	Total		$	75,000	$	435	$	—	$	—	Total		$	75,000	$	1,023	$	—	$	—

Total derivative financial instruments	Total derivative financial instruments		$	247,439	$	586	$	127,456	$	38	Total derivative financial instruments		$	242,810	$	1,279	$	127,456	$	38

Interest rate lock commitments are considered Level 3 in the fair value hierarchy, while the forward commitments and interest rate swaps are considered Level 2 in the fair value hierarchy.

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


		Three months ended June 30,				Six months ended June 30,					Three months ended September 30,				Nine months ended September 30,
(dollars in thousands)	(dollars in thousands)	2023		2022		2023		2022		(dollars in thousands)	2023		2022		2023		2022
Interest Rate Lock Commitments	Interest Rate Lock Commitments	$	146	$	165	$	109	$	(975)	Interest Rate Lock Commitments	$	29	$	(405)	$	138	$	(1,380)
Forward Commitments	Forward Commitments	13		(909)		13		31		Forward Commitments	37		485		50		516
Customer Derivatives - Interest Rate Swaps	Customer Derivatives - Interest Rate Swaps	14		70		(14)		104		Customer Derivatives - Interest Rate Swaps	33		47		19		151
Risk Participation Agreements	Risk Participation Agreements	9		—		5		—		Risk Participation Agreements	6		—		11		—
Interest Rate Swaps	Interest Rate Swaps	435		—		435		—		Interest Rate Swaps	588		—		1,023		—
Net fair value (losses) gains on derivative financial instruments		$	617	$	(674)	$	548	$	(840)
Net fair value gains (losses) on derivative financial instruments										Net fair value gains (losses) on derivative financial instruments	$	693	$	127	$	1,241	$	(713)

Net realized ~~losses~~gains on derivative hedging activities were $1$82 thousand and $81 thousand for the three and ~~six~~nine months ended ~~June~~September 30, 2023, respectively, and net realized gains on derivative hedging activities were ~~$1.7 million~~$399 thousand and ~~$4.5~~$4.9 million for the three and ~~six~~nine months ended ~~June~~September 30, 2022, respectively, and are included in non-interest income in the consolidated statements of income.

3433

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(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 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.

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 1112 loan production offices throughout suburban Philadelphia and Maryland. The Mortgage segment originates 1 – 4 family residential mortgages and sells nearly all of its production to third party investors. The unit generates net interest income on the loans it originates and holds temporarily, then earns fee income (primarily gain on sales) at the time of the sale. The unit also recognizes income from document preparation fees, changes in portfolio pipeline fair values and net hedging gains (losses), if any.

The table below summarizes income and expenses, directly attributable to each business line, which have been included in the statement of operations. Total assets for each segment is also provided.


		Segment Information																	Segment Information
		Three Months Ended June 30, 2023								Three Months Ended June 30, 2022									Three Months Ended September 30, 2023								Three Months Ended September 30, 2022
(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	$	17,102	$	(29)	$	25	$	17,098	$	16,923	$	317	$	311	$	17,551	Net interest income	$	17,205	$	(15)	$	34	$	17,224	$	17,664	$	218	$	144	$	18,026
Provision for credit losses	Provision for credit losses	705		—		—		705		602		—		—		602		Provision for credit losses	82		—		—		82		526		—		—		526
Net interest income after provision	Net interest income after provision	16,397		(29)		25		16,393		16,321		317		311		16,949		Net interest income after provision	17,123		(15)		34		17,142		17,138		218		144		17,500

Non-interest Income	Non-interest Income																	Non-interest Income
Mortgage banking income	Mortgage banking income	81		—		4,969		5,050		125		—		6,817		6,942		Mortgage banking income	80		—		4,739		4,819		72		—		7,257		7,329
Wealth management income	Wealth management income	—		1,235		—		1,235		—		1,254		—		1,254		Wealth management income	—		1,258		—		1,258		—		1,114		—		1,114
SBA loan income	SBA loan income	1,767		—		—		1,767		437		—		—		437		SBA loan income	982		—		—		982		989		—		—		989
Net change in fair values	Net change in fair values	23		—		(258)		(235)		71		—		(1,312)		(1,241)		Net change in fair values	38		—		(394)		(356)		47		—		(1,043)		(996)
Net gain on hedging activity	Net gain on hedging activity	—		—		(1)		(1)		—		—		1,715		1,715		Net gain on hedging activity	—		—		82		82		—		—		399		399
Other	Other	637		—		671		1,308		526		—		770		1,296		Other	658		—		643		1,301		622		—		767		1,389
Non-interest income	Non-interest income	2,508		1,235		5,381		9,124		1,159		1,254		7,990		10,403		Non-interest income	1,758		1,258		5,070		8,086		1,730		1,114		7,380		10,224
Non-interest expense	Non-interest expense	12,325		889		6,401		19,615		10,624		822		8,260		19,706		Non-interest expense	12,564		826		6,628		20,018		11,354		780		8,127		20,261
Income (loss) before income taxes	Income (loss) before income taxes	$	6,580	$	317	$	(995)	$	5,902	$	6,856	$	749	$	41	$	7,646	Income (loss) before income taxes	$	6,317	$	417	$	(1,524)	$	5,210	$	7,514	$	552	$	(603)	$	7,463

Total Assets	Total Assets	$	2,143,278	$	8,485	$	55,114	$	2,206,877	$	1,759,129	$	7,432	$	86,458	$	1,853,019	Total Assets	$	2,177,145	$	8,833	$	44,993	$	2,230,971	$	1,858,770	$	7,927	$	55,227	$	1,921,924

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	Segment Information
	Nine Months Ended September 30, 2023								Nine Months Ended September 30, 2022
(Dollars in thousands)	Bank		Wealth		Mortgage		Total		Bank		Wealth		Mortgage		Total
Net interest income	$	51,928	$	(12)	$	85	$	52,001	$	50,197	$	628	$	785	$	51,610
Provision for credit losses	2,186		—		—		2,186		1,743		—		—		1,743
Net interest income after provision	49,742		(12)		85		49,815		48,454		628		785		49,867

Non-interest Income
Mortgage banking income	221		—		12,922		13,143		394		—		20,973		21,367
Wealth management income	—		3,689		—		3,689		—		3,672		—		3,672
SBA loan income	3,463		—		—		3,463		3,946		—		—		3,946
Net change in fair values	30		—		(574)		(544)		151		—		(4,457)		(4,306)
Net gain on hedging activity	—		—		81		81		—		—		4,941		4,941
Other	1,982		—		2,034		4,016		1,776		(1)		2,333		4,108
Non-interest income	5,696		3,689		14,463		23,848		6,267		3,671		23,790		33,728
Non-interest expense	35,608		2,704		19,110		57,422		32,186		2,480		26,734		61,400
Income (loss) before income taxes	$	19,830	$	973	$	(4,562)	$	16,241	$	22,535	$	1,819	$	(2,159)	$	22,195

Total Assets	$	2,177,145	$	8,833	$	44,993	$	2,230,971	$	1,858,770	$	7,927	$	55,227	$	1,921,924

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Segment Information
Six Months Ended June 30, 2023 Six Months Ended June 30, 2022
(Dollars in thousands) Bank Wealth Mortgage Total Bank Wealth Mortgage Total
Net interest income $ 34,721 $ 3 $ 51 $ 34,775 $ 32,533 $ 411 $ 642 $ 33,586
Provision for credit losses 2,104 — — 2,104 1,217 — — 1,217
Net interest income after provision 32,617 3 51 32,671 31,316 411 642 32,369
Non-interest Income
Mortgage banking income 139 — 8,183 8,322 322 — 13,716 14,038
Wealth management income — 2,431 — 2,431 — 2,558 — 2,558
SBA loan income 2,480 — — 2,480 2,957 — — 2,957
Net change in fair values (8) — (180) (188) 103 — (3,412) (3,309)
Net gain on hedging activity — — (1) (1) — — 4,542 4,542
Other 1,327 — 1,391 2,718 1,153 — 1,566 2,719
Non-interest income 3,938 2,431 9,393 15,762 4,535 2,558 16,412 23,505
Non-interest expense 23,024 1,877 12,503 37,404 20,833 1,700 18,606 41,139
Income (loss) before income taxes $ 13,531 $ 557 $ (3,059) $ 11,029 $ 15,018 $ 1,269 $ (1,552) $ 14,735
Total Assets $ 2,143,278 $ 8,485 $ 55,114 $ 2,206,877 $ 1,759,129 $ 7,432 $ 86,458 $ 1,853,019

(11) Subordinated Debentures

36In September, Meridian Corporation raised $9.7 million in subordinated debt at 8.00% with a term of 10 years, the 2023 Debentures. The issuance of this subordinated debt improved tier 2 capital, as well as tangible book value of the Corporation. The funds will be used for general corporate purposes, including providing capital to the Corporation's bank subsidiary, Meridian Bank, and supporting organic growth. The subordinated debt also helped to improve Meridian Bank's tier 1 capital.

The following table presents subordinated debentures at the dates indicated:


(dollars in thousands)	Maturity date	Interest rate	September 30, 2023		December 31, 2022
2023 Debentures	8/31/2033	8.00%	$	9,740	$	—
2019 Debentures	12/30/2029	5.38%	40,000		40,000
2013 Debentures	12/31/2028	6.50%	596		653
2011 Debentures	12/31/2026	6.00%	463		463
2008 Debentures	12/18/2023	6.00%	56		56
Debt Origination Costs			(776)		(826)
Total Subordinated Debentures			$	50,079	$	40,346

The Corporation issued the 2023 and 2019 Debentures, while the Bank issued the 2013, 2011 and 2008 Debentures. Upon formation of the bank holding company, the Corporation assumed the 2013, 2011 and 2008 Debentures.

Interest is paid semi-annually on the 2023 and 2019 Debentures, and paid quarterly on the 2013, 2011 and 2008 debentures. The 2013, 2011 and 2008 Debentures are includable as Tier 2 capital for determining the Bank’s compliance with regulatory capital requirements. The 2019 and 2023 Debentures are included as Tier 2 capital for the Corporation and as Tier 1 capital for the Bank.

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

You should read the following discussion and analysis in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2022 included in Meridian Corporation’s Annual Report on Form 10-K filed with the SEC.

Forward-Looking Statements

Meridian Corporation may from time to time make written or oral “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to Meridian Corporation’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Meridian Corporation’s control). Numerous competitive, economic, regulatory, legal and technological factors, risks and uncertainties that could cause actual results to differ materially include, without limitation:

• credit losses and the credit risk of our commercial and consumer loan products; changes in the level of charge-offs and changes in estimates of the adequacy of the allowance for credit losses, or ACL; cyber-security concerns; rapid technological developments and changes; increased competitive pressures; changes in spreads on interest-earning assets and interest-bearing liabilities; changes in general ~~business and~~ economic conditions ~~on a national basis~~ and inconditions within the ~~local markets in which we operate;~~

•securities markets; unanticipated changes in ~~customer behavior due to political, business and economic conditions, including inflation and concerns about liquidity;~~

•~~legislative,~~our liquidity position; unanticipated changes in regulatory and governmental policies impacting interest rates and financial markets; legislation affecting the financial services industry as a whole, and Meridian Corporation, in particular; changes in accounting ~~changes, including increased assessments by~~policies, practices or guidance; developments affecting the ~~FDIC;~~

•~~monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury~~industry and the ~~Board of Governors of the Federal Reserve System;~~

•~~inflation or volatility in interest rates that reduce our margins and yields, the fair value~~soundness of financial ~~instruments or our level of loan originations or prepayments on loans we have made~~institutions and ~~make;~~

•~~changes~~further disruption to the economy and U.S. banking system; among others, could cause Meridian Corporation’s financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in ~~loan demand and collectability;~~

•~~the possibility that future credits losses are higher than currently expected due to changes in economic assumptions or adverse economic developments;~~

•~~increases in defaults and charge-off rates;~~

•~~fluctuations in real estate values in our market area;~~

•~~demand for our financial products and services in our market area;~~

•~~decreases in the value of securities and other assets;~~

•~~changes in the size and nature of our competition;~~

•~~operational risks including, but not limited to, changes in information technology, cybersecurity incidents, fraud, natural disasters, war, terrorism, civil unrest and future pandemics;~~

•~~reputational risks; and~~

•~~changes in the assumptions used in making~~ such forward-looking statements.

Meridian Corporation cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Meridian Corporation’s filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2022 and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Meridian Corporation does not undertake to update any forward-looking statement whether written or oral, that may be made from time to time by Meridian Corporation or by or on behalf of Meridian Bank.

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Critical Accounting Policies and Estimates

Our critical accounting policies are described in detail in the "Critical Accounting Policies" section within Item 7 of our 2022 Annual Form Form 10-K. The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. See Note 1, "Summary of Significant Accounting Policies" for additional information on the adoption of ASC 326, which changes the methodology under which management calculates its reserve for loans and leases, now referred to as the allowance for credit losses. Management considers the measurement of the allowance for credit losses to be a critical accounting policy.

Executive Overview

The following items highlight the Corporation’s changes in its financial condition as of ~~June~~September 30, 2023 compared to December 31, 2022 and the results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2023 compared to the same periods in 2022. More detailed information related to these highlights can be found in the sections that follow.

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Bank Sector ~~Concerns~~Considerations

Meridian is a regional community bank with loans and deposits that are well diversified in size, type, location and industry. We manage this diversification carefully, while avoiding concentrations in business lines. Meridian’s model continues to build on our strong and stable financial position, which serves our regional customers and communities with the banking products and services needed to help build their prosperity.

As a commercial bank, the majority of Meridian's deposit base is comprised of business deposits (58%), with consumer deposits amounting to ~~11%~~12% at ~~June~~September 30, 2023. Municipal deposits (8%) and brokered deposits ~~(23%~~(22%) provide growth funding. Historically, business deposits lag loan fundings. A typical business relationship maintains operating accounts, investment accounts or sweep accounts and business owners may also have personal savings or wealth accounts. Deposit balances in business accounts have a tendency to be higher on average than consumer accounts. At ~~June~~September 30, 2023, 63% of business accounts and ~~87%~~88% of consumer accounts were fully insured by the FDIC. The municipal deposits are 100% collateralized and brokered deposits are 100% FDIC insured. The level of uninsured deposits for the entire deposit base was 23% at ~~June~~September 30, 2023.

Total balance sheet liquidity, which is derived from cash and investments, as well as salable commercial loans and residential mortgage loans held for sale, was $276.8 million at June 30, 2023, up from $264.4 million at December 31, 2022. Meridian maintains a high-quality investment bond portfolio comprised of U.S Treasuries, government agencies, government agency mortgage-backed securities, and general obligation municipal securities with an average duration of 4 years. Meridian’s investment portfolio represented 7.5% of total assets at June 30, 2023, compared to 8.5% at December 31, 2022. Total cash at June 30, 2023 was $46.9 million compared to $38.4 million at December 31, 2022 and $37.1 million at June 30, 2022.

Meridian also maintains borrowing arrangements with various correspondent banks to meet short-term liquidity needs and has access to approximately ~~$853.3 million~~$1.0 billion in liquidity from numerous sources including its borrowing capacity with the FHLB and other financial institutions, as well as funding through the CDARS program or through brokered CD arrangements. In addition, the Bank is eligible to receive funds under the new BTFP announced by the Federal Reserve. Meridian elected to secure borrowings from the Federal Reserve under the BTFP due to the favorable rate and as of ~~June~~September 30, 2023 had a balance of $33 million. Management believes that the above sources of liquidity provide Meridian with the necessary resources to meet its short-term and long-term funding requirements.

Changes in Financial Condition - ~~June~~September 30, 2023 Compared to December 31, 2022

•Total assets increased ~~$144.6~~$168.7 million, or ~~7.0%~~8.2%, to $2.2 billion as of ~~June~~September 30, 2023.

•Portfolio loans increased ~~$41.6~~$147.8 million, or ~~2.3%~~8.5%, to $1.9 billion as of ~~June~~September 30, ~~2023, which is 9.2% on an annualized basis.~~2023.

•Mortgage loans held for sale increased ~~$18.2 million,~~$901 thousand, or ~~81.7%~~4.1%, to ~~$40.4~~$23.1 million at ~~June~~September 30, 2023.

•Upon adoption ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326) (“CECL”) effective January 1, 2023, we recorded an increase to our allowance for credit losses of $1.6 million and an adjustment to the reserve for unfunded commitments of $1.3 million. The after-tax retained earnings impact of this adoption was $2.2 million.

•Total deposits increased ~~$70.1~~$96.2 million or ~~4.1%~~5.6% to ~~$1.78~~$1.8 billion at ~~June~~September 30, 2023.

•Non-interest bearing deposits decreased ~~$32.6~~$57.1 million, or ~~10.8%~~18.9%, to ~~$269.2~~$244.7 million as of ~~June~~September 30, 2023.

•The Corporation returned ~~$2.8~~$4.2 million of capital to Meridian shareholders during the ~~six~~nine months ended ~~June~~September 30, 2023 through a $0.125 quarterly dividend in each of the first ~~two~~three quarters of 2023, and also purchased $4.3 million or 312,447 shares of treasury stock.

Three Month Results of Operations - ~~June~~September 30, 2023 Compared to the Same Period in 2022

•Net income was ~~$4.6~~$4.0 million, or ~~$0.41~~$0.35 per diluted share, down ~~$1.3~~$1.8 million, or ~~21.8%~~30.9%, driven by a decline in non-interest income, and to a lesser degree a decline in net interest income, partially offset by lower operating expenses.

•The return on average assets and return on average equity were ~~0.86%~~0.73% and ~~12.08%~~10.17%, respectively, for the ~~second~~third quarter 2023, compared to ~~1.31%~~1.23% and ~~15.03%~~14.59%, respectively, for the ~~second~~third quarter 2022.

•Net interest margin decreased to ~~3.33%~~3.29% from ~~4.07%~~4.01% due to the impact of deposit and borrowing repricing outpacing the repricing of interest earnings assets, mainly loans.

•~~Provision~~On January 1, 2023, the Corporation adopted the new accounting standard, referred to as CECL, which transitioned from the incurred loss model based on historical loss experience and economic and market conditions to the expected loss model. Expected credit losses are estimated over the contractual term, adjusted for expected prepayments and recoveries, and take into account macroeconomic forecasts. The provision for credit losses ~~increased $103~~decreased $444 thousand when comparing the third quarter 2023 to ~~help cover~~the third quarter 2022. The reduction was due in part to a decline in the overall exposure to unfunded loan

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balances at the end of the third quarter, causing a reduction in the unfunded reserve of $273 thousand. The decrease in provision was also due to favorable changes in some baseline loss rates and certain macroeconomic factors underlying the funded loss model. In addition, the provision for ~~increased loan growth period over period, combined with providing for~~credit losses is impacted by the ~~$364 thousand increase~~change in ~~net charge-offs period over period.~~expected loss rates under CECL.

•Non-interest income decreased ~~$1.3~~$2.1 million, or ~~12.3%~~20.9%, to ~~$9.1~~$8.1 million driven by a ~~$1.9~~$2.5 million decrease in mortgage banking income and a ~~$1.7 million~~$317 thousand decrease in net gains on hedging ~~activities, while SBA loan income increased $1.3 million.~~activities.

•Non-interest expense decreased ~~$91~~$243 thousand, or ~~0.5%~~1.2%, to ~~$19.6~~$20.0 million due to a ~~$774~~$940 thousand decrease in salaries and employee benefits, largely offset by increases in professional fees ($205 thousand), data processing ~~information technology~~($210 thousand), and other expenses ~~of $216 thousand, $157 thousand, and $320 thousand, respectively.~~($564 thousand).

~~Six~~Nine Month Results of Operations - ~~June~~September 30, 2023 Compared to the Same Period in 2022

•Net income was ~~$8.7~~$12.7 million, or ~~$0.75~~$1.11 per diluted share, down ~~$2.8~~$4.6 million, or ~~24.5%~~26.6%, driven by a decline in non-interest income, partially offset by an increase in net interest income and lower operating expenses.

•The return on average assets and return on average equity was ~~0.82%~~0.79% and ~~11.37%~~10.96%, respectively, for the ~~six~~nine months ended ~~June~~September 30, 2023, compared to ~~1.30%~~1.28% and ~~14.61%~~14.49%, respectively, for the ~~six~~nine months ended ~~June~~September 30, 2022.

•Net interest margin decreased to ~~3.46%~~3.40% from ~~3.98%~~3.99% due to the impact of deposit and borrowing repricing outpacing the repricing of interest earnings assets, mainly loans.

•Provision for credit losses increased ~~$887~~$443 thousand to ~~help~~ cover for increased loan growth period over period, combined with providing for the ~~$1.3~~$1.8 million increase in net charge-offs period over period. As noted above, the provision for credit losses is impacted by the change in expected loss rates under CECL.

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•Non-interest income decreased ~~$7.7~~$9.9 million, or ~~32.9%~~29.3%, to ~~$15.8~~$23.8 million driven by a ~~$5.7~~$8.2 million decrease in mortgage banking income, combined with decreased net gains on hedging activity of ~~$4.5~~$4.9 million.

•Non-interest expense decreased ~~$3.7~~$4.0 million, or ~~9.1%~~6.5%, to ~~$37.4~~$57.4 million as salaries and employee benefits decreased ~~$5.0~~$6.0 million.

Key Performance Ratios

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


		Three months ended June 30,						Six months ended June 30,							Three months ended September 30,						Nine months ended September 30,
		2023			2022			2023			2022				2023			2022			2023			2022
Return on average assets, annualized	Return on average assets, annualized	0.86		%	1.31		%	0.82		%	1.30		%	Return on average assets, annualized	0.73		%	1.23		%	0.79		%	1.28		%
Return on average equity, annualized	Return on average equity, annualized	12.08		%	15.03		%	11.37		%	14.61		%	Return on average equity, annualized	10.17		%	14.59		%	10.96		%	14.49		%
Net interest margin (tax effected yield)	Net interest margin (tax effected yield)	3.33		%	4.07		%	3.46		%	3.98		%	Net interest margin (tax effected yield)	3.29		%	4.01		%	3.40		%	3.99		%
Basic earnings per share	Basic earnings per share	$	0.42		$	0.49		$	0.78		$	0.95		Basic earnings per share	$	0.36		$	0.49		$	1.14		$	1.45
Diluted earnings per share	Diluted earnings per share	$	0.41		$	0.48		$	0.75		$	0.92		Diluted earnings per share	$	0.35		$	0.48		$	1.11		$	1.40

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


(dollars in thousands, except per share amounts)	(dollars in thousands, except per share amounts)	June 30, 2023			December 31, 2022			(dollars in thousands, except per share amounts)	September 30, 2023			December 31, 2022
Book value per common share	Book value per common share	$	13.77		$	13.37		Book value per common share	$	13.88		$	13.37
Tangible book value per common share (1)	Tangible book value per common share (1)	$	13.42		$	13.01		Tangible book value per common share (1)	$	13.53		$	13.01
Allowance as a percentage of loans and leases held for investment	Allowance as a percentage of loans and leases held for investment	1.09		%	1.08		%	Allowance as a percentage of loans and leases held for investment	1.04		%	1.08		%
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)	1.10		%	1.09		%	Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1)	1.05		%	1.09		%
Tier I capital to risk weighted assets	Tier I capital to risk weighted assets	8.38		%	8.77		%	Tier I capital to risk weighted assets	8.43		%	8.77		%
Tangible common equity to tangible assets ratio (1)	Tangible common equity to tangible assets ratio (1)	6.81		%	7.25		%	Tangible common equity to tangible assets ratio (1)	6.79		%	7.25		%
Loans and other finance receivables, net of fees and costs	Loans and other finance receivables, net of fees and costs	$	1,859,839		$	1,743,682		Loans and other finance receivables, net of fees and costs	$	1,885,629		$	1,743,682
Total assets	Total assets	$	2,206,877		$	2,062,228		Total assets	$	2,230,971		$	2,062,228
Total stockholders’ equity	Total stockholders’ equity	$	153,962		$	153,280		Total stockholders’ equity	$	155,114		$	153,280

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

Components of Net Income

Net income is comprised of five major elements:

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

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•Provision For Credit Losses, or the amount added to the Allowance to provide for current expected credit losses on portfolio loans and leases;

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

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

•Income Taxes, which include state and federal jurisdictions.

NET INTEREST INCOME

Net interest income is an integral source of the Corporation’s revenue. The tables below present a summary for the three and ~~six~~nine months ended ~~June~~September 30, 2023 and 2022, of the Corporation’s average balances and yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities. The net interest margin is the net interest income as a percentage of average interest-earning assets. The net interest spread is the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The difference between the net interest margin and the net interest spread is the result of net free funding sources such as non-interest bearing deposits and stockholders’ equity.

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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 June 30,																For the Three Months Ended September 30,
(dollars in thousands)	(dollars in thousands)	2023						2022						(dollars in thousands)	2023						2022
		Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates				(dollars in thousands)	Average Balance			Interest Income/ Expense			Yields/ Rates			Average Balance			Interest Income/ Expense			Yields/ Rates
Assets:	Assets:
Due from banks	Due from banks	$	21,425	$	275	5.15	%	$	26,909	$	49	0.73	%				Due from banks	$	17,356		$	244		5.58	%		$	15,678		$	92		2.33	%
Federal funds sold	Federal funds sold	222		3		5.42		3,230		3		0.35					Federal funds sold	44			1			9.02			219			1			1.81
Investment securities - taxable ~~(1)~~	Investment securities - taxable ~~(1)~~	114,993		992		3.46		104,806		525		2.01					Investment securities - taxable ~~(1)~~	106,369			901			3.36			107,929			648			2.38
Investment securities - tax exempt (1)	Investment securities - tax exempt (1)	59,143		426		2.89		64,047		416		2.61					Investment securities - tax exempt (1)	58,196			410			2.80			63,711			450			2.80
Loans held for sale	Loans held for sale	27,121		407		6.02		52,859		565		4.28					Loans held for sale	27,718			456			6.53			37,857			479			5.02
Loans held for investment (1)	Loans held for investment (1)	1,847,736		31,810		6.91		1,484,696		18,558		4.98					Loans held for investment (1)	1,876,648			33,526			7.09			1,565,861			21,371			5.41
Total loans	Total loans	1,874,857		32,217		6.89		1,537,555		19,123		4.99					Total loans	1,904,366			33,982			7.08			1,603,718			21,850			5.41
Total interest-earning assets	Total interest-earning assets	2,070,640		33,913		6.57	%	1,736,547		20,116		4.65	%				Total interest-earning assets	2,086,331			35,538			6.76	%		1,791,255			23,041			5.10	%
Noninterest earning assets	Noninterest earning assets	95,935						74,788									Noninterest earning assets	98,054									76,939
Total assets	Total assets	$	2,166,575					$	1,811,335								Total assets	$	2,184,385								$	1,868,194
Liabilities and stockholders' equity:	Liabilities and stockholders' equity:																Liabilities and stockholders' equity:
Interest-bearing demand deposits	Interest-bearing demand deposits	$	203,605	$	1,840	3.62	%	$	237,856	$	248	0.42	%				Interest-bearing demand deposits	$	160,886		$	1,488		3.67	%		$	221,402		$	798		1.43	%
Money market and savings deposits	Money market and savings deposits	651,816		5,371		3.31		698,557		1,076		0.62					Money market and savings deposits	719,123			6,755			3.73			718,744			2,075			1.15
Time deposits	Time deposits	653,348		6,812		4.18		334,391		494		0.59					Time deposits	648,646			7,300			4.46			361,527			1,202			1.32
Total deposits	Total deposits	1,508,769		14,023		3.73		1,270,804		1,818		0.57					Total deposits	1,528,655			15,543			4.03			1,301,673			4,075			1.24
Borrowings	Borrowings	163,177		2,129		5.23		16,560		77		1.87					Borrowings	167,889			2,086			4.93			41,313			266			2.55
Subordinated debentures	Subordinated debentures	40,329		586		5.83		40,548		591		5.84					Subordinated debentures	41,311			606			5.82			40,578			591			5.78
Total interest-bearing liabilities	Total interest-bearing liabilities	1,712,275		16,738		3.92		1,327,912		2,486		0.75					Total interest-bearing liabilities	1,737,855			18,235			4.16			1,383,564			4,932			1.41
Noninterest-bearing deposits	Noninterest-bearing deposits	266,675						296,521									Noninterest-bearing deposits	253,485									295,975
Other noninterest-bearing liabilities	Other noninterest-bearing liabilities	33,442						28,482									Other noninterest-bearing liabilities	36,774									31,041
Total liabilities	Total liabilities	2,012,392						1,652,915									Total liabilities	2,028,114									1,710,580
Total stockholders' equity	Total stockholders' equity	154,183						158,420									Total stockholders' equity	156,271									157,614
Total stockholders' equity and liabilities	Total stockholders' equity and liabilities	$	2,166,575					$	1,811,335								Total stockholders' equity and liabilities	$	2,184,385								$	1,868,194
Net interest income and spread (1)	Net interest income and spread (1)			$	17,175	2.65				$	17,630	3.90					Net interest income and spread (1)				$	17,303		2.60						$	18,109		3.69
Net interest margin (1)	Net interest margin (1)					3.33	%					4.07	%				Net interest margin (1)							3.29	%								4.01	%

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

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		For the Six Months Ended June 30,													For the Nine Months Ended September 30,
(dollars in thousands)	(dollars in thousands)	2023						2022						(dollars in thousands)	2023						2022
		Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates			Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates
Assets:	Assets:													Assets:
Due from banks	Due from banks	$	20,376	$	490	4.85	%	$	27,645	$	62	0.45	%	Due from banks	$	19,358	$	735	5.08	%	$	23,612	$	153	0.87	%
Federal funds sold	Federal funds sold	213		5		4.73		2,060		3		0.29		Federal funds sold	156		6		5.14		1,440		4		0.37
Investment securities - taxable ~~(1)~~	Investment securities - taxable ~~(1)~~	114,687		1,951		3.43		104,452		951		1.84		Investment securities - taxable ~~(1)~~	111,884		2,853		3.41		105,624		1,599		2.02
Investment securities - tax exempt (1)	Investment securities - tax exempt (1)	60,981		856		2.83		63,918		789		2.49		Investment securities - tax exempt (1)	60,042		1,266		2.82		63,848		1,240		2.60
Loans held for sale	Loans held for sale	21,294		624		5.91		59,936		1,101		3.67	%	Loans held for sale	23,459		1,080		6.16		52,495		1,580		4.02	%
Loans held for investment (1)	Loans held for investment (1)	1,815,707		61,012		6.78		1,450,454		35,243		4.87		Loans held for investment (1)	1,836,244		94,538		6.88		1,489,345		56,614		5.08
Total loans	Total loans	1,837,001		61,636		6.77		1,510,390		36,344		4.85		Total loans	1,859,703		95,618		6.87		1,541,840		58,194		5.05
Total interest-earning assets	Total interest-earning assets	2,033,258		64,938		6.44	%	1,708,465		38,149		4.50	%	Total interest-earning assets	2,051,143		100,478		6.55	%	1,736,364		61,190		4.71	%
Noninterest earning assets	Noninterest earning assets	94,566						71,634						Noninterest earning assets	95,740						74,313
Total assets	Total assets	$	2,127,824					$	1,780,099					Total assets	$	2,146,883					$	1,810,677
Liabilities and stockholders' equity:	Liabilities and stockholders' equity:													Liabilities and stockholders' equity:
Interest-bearing demand deposits	Interest-bearing demand deposits	$	217,768	$	3,695	3.42	%	$	253,771	$	385	0.31	%	Interest-bearing demand deposits	$	198,599	$	5,184	3.49	%	$	242,863	$	1,183	0.65	%
Money market and savings deposits	Money market and savings deposits	650,371		9,848		3.05		694,539		1,928		0.56		Money market and savings deposits	673,540		16,603		3.30		702,696		4,003		0.76
Time deposits	Time deposits	618,137		11,927		3.89		298,783		794		0.54		Time deposits	628,419		19,226		4.09		319,927		1,996		0.83
Total deposits	Total deposits	1,486,276		25,470		3.46		1,247,093		3,107		0.50		Total deposits	1,500,558		41,013		3.65		1,265,486		7,182		0.76
Borrowings	Borrowings	131,790		3,365		5.15		16,136		126		1.57		Borrowings	143,955		5,450		5.06		24,621		391		2.12
Subordinated debentures	Subordinated debentures	40,333		1,173		5.86		40,533		1,183		5.84		Subordinated debentures	40,662		1,779		5.85		40,548		1,775		5.85
Total interest-bearing liabilities	Total interest-bearing liabilities	1,658,399		30,008		3.65		1,303,762		4,416		0.68		Total interest-bearing liabilities	1,685,175		48,242		3.83		1,330,655		9,348		0.94
Noninterest-bearing deposits	Noninterest-bearing deposits	281,275						284,455						Noninterest-bearing deposits	271,909						291,261
Other noninterest-bearing liabilities	Other noninterest-bearing liabilities	34,451						33,530						Other noninterest-bearing liabilities	35,234						29,452
Total liabilities	Total liabilities	1,974,125						1,621,747						Total liabilities	1,992,318						1,651,368
Total stockholders' equity	Total stockholders' equity	153,699						158,352						Total stockholders' equity	154,565						159,309
Total stockholders' equity and liabilities	Total stockholders' equity and liabilities	$	2,127,824					$	1,780,099					Total stockholders' equity and liabilities	$	2,146,883					$	1,810,677
Net interest income and spread (1)	Net interest income and spread (1)			$	34,930	2.79				$	33,733	3.82		Net interest income and spread (1)			$	52,236	2.72				$	51,842	3.77
Net interest margin (1)	Net interest margin (1)					3.46	%					3.98	%	Net interest margin (1)					3.40	%					3.99	%

(1)Yields and 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 ~~six~~nine months ended ~~June~~September 30, 2023 as compared to the same periods in 2022, allocated by rate and volume. Changes in interest income and/or expense attributable to both rate and volume have been allocated proportionately based on the relationship of the absolute dollar amount of the change in each category.


		2023 Compared to 2022													2023 Compared to 2022
		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)	Rate		Volume		Total		Rate		Volume		Total		(dollars in thousands)	Rate		Volume		Total		Rate		Volume		Total
Interest income:	Interest income:													Interest income:
Due from banks	Due from banks	$	238	$	(12)	$	226	$	450	$	(22)	$	428	Due from banks	$	141	$	11	$	152	$	617	$	(35)	$	582
Federal funds sold	Federal funds sold	5		(5)		—		9		(7)		2		Federal funds sold	1		(1)		—		10		(8)		2
Investment securities - taxable ~~(1)~~	Investment securities - taxable ~~(1)~~	412		55		467		899		101		1,000		Investment securities - taxable ~~(1)~~	262		(9)		253		1,154		100		1,254
Investment securities - tax exempt (1)	Investment securities - tax exempt (1)	43		(33)		10		105		(38)		67		Investment securities - tax exempt (1)	(1)		(39)		(40)		103		(77)		26
Loans held for sale	Loans held for sale	178		(336)		(158)		453		(930)		(477)		Loans held for sale	123		(146)		(23)		610		(1,110)		(500)
Loans held for investment (1)	Loans held for investment (1)	8,041		5,211		13,252		15,546		10,223		25,769		Loans held for investment (1)	7,401		4,754		12,155		22,884		15,040		37,924
Total loans	Total loans	8,219		4,875		13,094		15,999		9,293		25,292		Total loans	7,524		4,608		12,132		23,494		13,930		37,424
Total interest income	Total interest income	$	8,917	$	4,880	$	13,797	$	17,462	$	9,327	$	26,789	Total interest income	$	7,927	$	4,570	$	12,497	$	25,378	$	13,910	$	39,288
Interest expense:	Interest expense:													Interest expense:
Interest-bearing demand deposits	Interest-bearing demand deposits	$	1,633	$	(41)	$	1,592	$	3,372	$	(62)	$	3,310	Interest-bearing demand deposits	$	959	$	(269)	$	690	$	4,254	$	(253)	$	4,001
Money market and savings deposits	Money market and savings deposits	4,372		(77)		4,295		8,050		(130)		7,920		Money market and savings deposits	4,679		1		4,680		12,773		(173)		12,600
Time deposits	Time deposits	5,458		860		6,318		9,510		1,623		11,133		Time deposits	4,575		1,523		6,098		13,817		3,413		17,230
Total deposits	Total deposits	11,463		742		12,205		20,932		1,431		22,363		Total deposits	10,213		1,255		11,468		30,844		2,987		33,831
Borrowings	Borrowings	348		1,704		2,052		779		2,460		3,239		Borrowings	424		1,396		1,820		1,124		3,935		5,059
Subordinated debentures	Subordinated debentures	(2)		(3)		(5)		(4)		(6)		(10)		Subordinated debentures	4		11		15		(1)		5		4
Total interest expense	Total interest expense	$	11,809	$	2,443	$	14,252	$	21,707	$	3,885	$	25,592	Total interest expense	$	10,641	$	2,662	$	13,303	$	31,967	$	6,927	$	38,894
Interest differential	Interest differential	$	(2,892)	$	2,437	$	(455)	$	(4,245)	$	5,442	$	1,197	Interest differential	$	(2,714)	$	1,908	$	(806)	$	(6,589)	$	6,983	$	394

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

Three Months Ended ~~June~~September 30, 2023 Compared to the Same Period in 2022

For the three months ended ~~June~~September 30, 2023 as compared to the same period in 2022, tax-equivalent interest income increased ~~$13.8~~$12.5 million as favorable rate and volume changes contributed ~~$8.9~~$7.9 million, and ~~$4.9~~$4.6 million, respectively. The favorable change in rates led to increased yields on loans held for sale (up ~~174~~151 basis points) and loans held for investment (up ~~193~~168 basis points) that favorably impact interest income by ~~$8.2~~$7.5 million, overall. The loans held for investment average balances increased ~~$363.0~~$310.8 million, leading to a favorable volume impact on interest income of ~~$5.2~~$4.8 million, while the decline in loans held for sale average balances of ~~$25.7~~$10.1 million had an unfavorable impact to interest income of ~~$336~~$146 thousand. ~~Within~~Growth in the loans held for investment portfolio was led by average ~~balances on~~balance increases in commercial ~~loans, SBA loans, and construction loans increased $33.6 million, $52.0 million, and $65.3 million, respectively, and~~real estate ($125.2 million), residential real estate ($121.9 million), construction ($59.2 million), and SBA loans ~~average balances increased $78.2 million, while the average balance of PPP loans decreased $132.4 million as such loans are nearly fully forgiven now by the SBA.~~($17.6 million).

On the funding side, overall interest expense increased ~~$14.3~~$13.3 million, largely driven by the impact from rate hikes issued by the Fed. The cost of deposits were up across the board, leading to a ~~$12.2~~$11.5 million increase to interest expense. The cost of interest-bearing demand deposits, money market and savings accounts and time deposits increased ~~320~~224 basis points, ~~269~~258 basis points and ~~359~~314 basis points, respectively, while the cost of borrowings increased ~~336~~238 basis points. Time ~~deposit~~deposits were the largest drivers of the interest expense increase due to volume as average balances on such accounts increased ~~$319.0~~$287.1 million, while money market/savings accounts average balances increased only $379 thousand, and the average balances on interest-bearing demand deposits decreased ~~$46.7~~$60.5 million, ~~and $34.3 million, respectively,~~ while borrowings increased ~~$146.6~~$126.6 million on average.

Overall, the ~~$455~~$806 thousand decrease in net interest income over this period was driven by rate changes as the cost of interest bearing liabilities ~~increased 317 basis points, which~~ outpaced the increase in the yield on interest earning ~~assets, which was up 192 basis points.~~assets.

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~~Six~~Nine Months Ended ~~June~~September 30, 2023 Compared to the Same Period in 2022

For the ~~six~~nine months ended ~~June~~September 30, 2023 as compared to the same period in 2022, tax-equivalent interest income increased ~~$26.8~~$39.3 million as favorable rate and volume changes contributed ~~$17.5~~$25.4 million, and ~~$9.3~~$13.9 million, respectively. The favorable change in rates led to increased yields on loans held for investment (up ~~191~~180 basis points) and loans held for sale (up ~~224~~214 basis points), that favorably impact interest income by ~~$16.0~~$23.5 million, overall. The loans held for investment average balances increased ~~$365.3~~$346.9 million, leading to a favorable volume impact on interest income of ~~$10.2~~$15.0 million, while the decline in loans held for sale average balances of ~~$38.6~~$29.0 million had an unfavorable impact to interest income of ~~$930 thousand.~~$1.1 million. Within the loans held for investment portfolio, average balances on commercial loans, SBA loans, and leases increased ~~$30.0~~$1.3 million, ~~$58.1~~$24.4 million, and ~~$56.5~~$34.2 million, respectively, construction loans were up ~~$50.8~~$71.9 million, and residential real estate loans average balances increased ~~$47.3~~$145.8 million, while the average balance of PPP loans decreased ~~$152.3~~$38.9 million as such loans are nearly fully forgiven now by the SBA.

On the funding side, overall interest expense increased ~~$25.6~~$38.9 million, largely driven by the impact from rate hikes issued by the Fed. The cost of deposits were up across the board, leading to a ~~$22.4~~$33.8 million increase to interest expense. The cost of interest-bearing demand deposits, money market and savings accounts and time deposits increased ~~311~~284 basis points, ~~249~~254 basis points and ~~335~~326 basis points, respectively, while the cost of borrowings increased ~~358~~294 basis points. Time deposit average balances increased ~~$319.4~~$308.5 million, while money market/savings accounts average balances and interest-bearing demand deposits decreased ~~$44.2~~$29.2 million, and ~~$36.0~~$44.3 million, respectively, and borrowings increased ~~$115.7~~$119.3 million on average.

Overall, the ~~$1.2~~$0.4 million increase in net interest income was derived by the volume changes as the impact from increased average earning assets, particularly loans held for investment, overcame the unfavorable impact from the funding costs.

PROVISION FOR CREDIT LOSSES

Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2023 Compared to the Same Periods in 2022

The provision for credit losses ~~increased $103~~decreased $444 thousand ~~and increased $887 thousand, respectively~~ for the three ~~and six~~ months ended ~~June~~September 30, 2023, and increased $443 thousand for the nine months ended September 30, 2023. The provision decrease over the three month comparable period was due in part to a decline in the overall exposure to unfunded loan balances at the end of the third quarter, causing a reduction in the unfunded reserve. The remaining decrease in provisioning was due largely to favorable changes in the some baseline loss rates and certain economic factors. The provision increase over the nine month comparable periods was to help provide for loan growth over the period, in addition to helping to cover ~~increased loan growth period over period, combined with providing~~ for the ~~$364 thousand and $1.3 million increase in net~~increased level of charge-offs, ~~period~~largely over ~~period.~~small equipment leases.

Asset Quality Summary

The ratio of non-performing assets to total assets was ~~1.32%~~1.38% as of ~~June~~September 30, 2023, up from 1.11% reported as of December 31, 2022. There was $1.7 million in other real estate owned included in non-performing assets, the result of taking possession of a well collateralized residential real estate property in the quarter end December 31, 2022. Total non-performing loans of ~~$27.4~~$29.1 million as of ~~June~~September 30, 2023, increased ~~$6.1~~$7.9 million from $21.2 million as December 31, 2022 due to downgrades of 46 SBA loans, 1 shared national credit loan, 13 commercial loan ~~relationship,~~relationships, and several small balance equipment leases during this period.

Meridian realized net charge-offs of ~~0.13%~~0.18% of total average loans for the ~~six~~nine months ending ~~June~~September 30, 2023, which was up from ~~0.08%~~0.10% reported for the same period in 2022. Net charge-offs for the quarter ended ~~June~~September 30, 2023 were ~~$987~~$914 thousand, comprised of ~~$1.2~~$1.0 million in charge-offs, with ~~$168~~$95 thousand in recoveries for the quarter. While ~~nearly all~~a large percentage of ~~the~~ charge-offs for the quarter ended ~~June~~September 30, 2023 continue to be from small ticket equipment leases, the level of charge-offs in this portfolio declined by ~~$689~~$169 thousand, while we also realized ~~$149~~$90 thousand of recoveries related to the small ticket equipment lease portfolio. There were also charge-offs of $272 thousand on SBA loans that had previously been classified as non-performing loans in a prior period.

The ratio of allowance for credit losses to total loans held for investment, excluding loans at fair value and PPP loans (a non-GAAP measure, see reconciliation in the Appendix), was ~~1.10%~~1.05% as of ~~June~~September 30, 2023 and 1.09% as of December 31, 2022. As of ~~June~~September 30, 2023 there were specific reserves of $2.5 million against non-performing loans, an increase from $2.2 million as of December 31, 2022 due to the establishment of a specific reserve on a commercial loan that was classified as a non-performing loan, ~~during the current quarter,~~ partially offset by a decline in the specific reserve on another commercial loan relationship.

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)	(dollars in thousands)	June 30, 2023			December 31, 2022			(dollars in thousands)	September 30, 2023			December 31, 2022
Non-performing assets:	Non-performing assets:							Non-performing assets:
Nonaccrual loans:	Nonaccrual loans:							Nonaccrual loans:
Real estate loans:	Real estate loans:							Real estate loans:
Commercial mortgage	Commercial mortgage	$	—		$	140		Commercial mortgage	$	—		$	140
Home equity lines and loans	Home equity lines and loans	931			1,097			Home equity lines and loans	929			1,097
Residential mortgage	Residential mortgage	2,272			2,085			Residential mortgage	3,097			2,085
Land development		1,206			—
Construction								Construction	1,206			—

Total real estate loans	Total real estate loans	4,409			3,322			Total real estate loans	5,232			3,322
Commercial and industrial	Commercial and industrial	15,663			12,547			Commercial and industrial	15,575			12,547
Small business loans	Small business loans	6,157			4,465			Small business loans	7,237			4,465
Leases	Leases	1,135			902			Leases	1,067			902
Total nonaccrual loans	Total nonaccrual loans	27,364			21,236			Total nonaccrual loans	29,111			21,236
Other real estate owned	Other real estate owned	1,703			1,703			Other real estate owned	1,703			1,703
Total non-performing assets	Total non-performing assets	$	29,067		$	22,939		Total non-performing assets	$	30,814		$	22,939

Asset quality ratios:	Asset quality ratios:							Asset quality ratios:
Non-performing assets to total assets	Non-performing assets to total assets	1.32		%	1.11		%	Non-performing assets to total assets	1.38		%	1.11		%
Non-performing loans to:	Non-performing loans to:							Non-performing loans to:
Total loans and leases	Total loans and leases	1.44		%	1.20		%	Total loans and leases	1.53		%	1.20		%
Total loans held-for-investment	Total loans held-for-investment	1.47		%	1.22		%	Total loans held-for-investment	1.54		%	1.22		%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)		1.48		%	1.23		%
Total loans held-for-investment (excluding loans at fair value) (1)								Total loans held-for-investment (excluding loans at fair value) (1)	1.55		%	1.23		%
Allowance for credit losses to (2):	Allowance for credit losses to (2):							Allowance for credit losses to (2):
Total loans and leases	Total loans and leases	1.07		%	1.07		%	Total loans and leases	1.03		%	1.07		%
Total loans held-for-investment	Total loans held-for-investment	1.09		%	1.08		%	Total loans held-for-investment	1.04		%	1.08		%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)		1.10		%	1.09		%
Total loans held-for-investment (excluding loans at fair value) (1)								Total loans held-for-investment (excluding loans at fair value) (1)	1.05		%	1.09		%
Non-performing loans	Non-performing loans	73.97		%	88.66		%	Non-performing loans	67.61		%	88.66		%

Total loans and leases	Total loans and leases	$	1,900,261		$	1,765,925		Total loans and leases	$	1,908,773		$	1,765,925
Total loans and leases held-for-investment	Total loans and leases held-for-investment	$	1,859,839		$	1,743,682		Total loans and leases held-for-investment	$	1,885,629		$	1,743,682
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans)		$	1,845,249		$	1,724,601
Total loans and leases held-for-investment (excluding loans at fair value)								Total loans and leases held-for-investment (excluding loans at fair value)	$	1,872,109		$	1,724,601
Allowance for credit losses (2)	Allowance for credit losses (2)	$	20,242		$	18,828		Allowance for credit losses (2)	$	19,683		$	18,828

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

(2) See Note 1, "Summary of Significant Accounting Policies - Pronouncements Adopted in 2023.

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NON-INTEREST INCOME

Three Months Ended ~~June~~September 30, 2023 Compared to the Same Period in 2022

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


		Quarter Ended									Quarter Ended
(Dollars in thousands)	(Dollars in thousands)	June 30, 2023		June 30, 2022		$ Change		% Change		(Dollars in thousands)	September 30, 2023		September 30, 2022		$ Change		% Change
Mortgage banking income	Mortgage banking income	$	5,050	$	6,942	$	(1,892)	(27.3)	%	Mortgage banking income	$	4,819	$	7,329	$	(2,510)	(34.2)	%
Wealth management income	Wealth management income	1,235		1,254		(19)		(1.5)	%	Wealth management income	1,258		1,114		144		12.9	%
SBA loan income	SBA loan income	1,767		437		1,330		304.3	%	SBA loan income	982		989		(7)		(0.7)	%
Earnings on investment in life insurance	Earnings on investment in life insurance	193		137		56		40.9	%	Earnings on investment in life insurance	201		138		63		45.7	%
Net change in the fair value of derivative instruments	Net change in the fair value of derivative instruments	183		(674)		857		(127.2)	%	Net change in the fair value of derivative instruments	103		127		(24)		(18.9)	%
Net change in the fair value of loans held-for-sale	Net change in the fair value of loans held-for-sale	(199)		268		(467)		(174.3)	%	Net change in the fair value of loans held-for-sale	111		(237)		348		(146.8)	%
Net change in the fair value of loans held-for-investment	Net change in the fair value of loans held-for-investment	(219)		(835)		616		(73.8)	%	Net change in the fair value of loans held-for-investment	(570)		(886)		316		(35.7)	%
Net (loss) gain on hedging activity		(1)		1,715		(1,716)		(100.1)	%
Net gain on hedging activity										Net gain on hedging activity	82		399		(317)		(79.4)	%
Net loss on sale of investment securities available-for-sale	Net loss on sale of investment securities available-for-sale	(54)		—		(54)		(100.0)	%	Net loss on sale of investment securities available-for-sale	(3)		—		(3)		(100.0)	%
Service charges		37		31		6		19.4	%
Other	Other	1,132		1,128		4		0.4	%	Other	1,103		1,251		(148)		(11.8)	%
Total non-interest income	Total non-interest income	$	9,124	$	10,403	$	(1,279)	(12.3)	%	Total non-interest income	$	8,086	$	10,224	$	(2,138)	(20.9)	%

Total non-interest income decreased ~~$1.3~~$2.1 million due primarily to lower income from our mortgage segment, which continues to be impacted by lower levels of mortgage loan originations in a rising rate environment and a lack of housing inventory. ~~Driven by~~Mortgage loan originations decreased $104.0 million to $187.1 million when comparing the decline in mortgage banking income, the net changes in the fair value of derivative instruments and loans held-for-sale, along with an improvement in net gains on hedging activity which decreased $1.3 million, combined.

~~SBA loan income increased $1.3 million as a higher volume of SBA loans were sold into the secondary market in the quarter-ending June~~quarter ended September 30, 2023 ~~($27.8 million of loans sold at an average gross margin of 7.0%), compared~~ to the ~~quarter-ending June~~quarter ended September 30, ~~2022 ($12.8 million in loans sold at an average gross margin of 7.6%).~~2022.

The net change in the fair value of loans held-for-investment improved to a loss of ~~$219~~$570 thousand for the quarter ended ~~June~~September 30, 2023, compared to a loss of ~~$835~~$886 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.

~~Six~~Nine Months Ended ~~June~~September 30, 2023 Compared to the Same Period in 2022

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

Six Months Ended
(Dollars in thousands) June 30,
2023 June 30,
2022 $ Change % Change
Mortgage banking income $ 8,322 $ 14,038 $ (5,716) (40.7) %
Wealth management income 2,431 2,558 (127) (5.0) %
SBA loan income 2,480 2,957 (477) (16.1) %
Earnings on investment in life insurance 385 275 110 40.0 %
Net change in the fair value of derivative instruments 114 (840) 954 (113.6) %
Net change in the fair value of loans held-for-sale (200) (856) 656 (76.6) %
Net change in the fair value of loans held-for-investment (102) (1,613) 1,511 (93.7) %
Net (loss) gain on hedging activity (1) 4,542 (4,543) (100.0) %
Net loss on sale of investment securities available-for-sale (54) — (54) (100.0) %
Service charges 72 58 14 24.1 %
Other 2,315 2,386 (71) (3.0) %
Total non-interest income $ 15,762 $ 23,505 $ (7,743) (32.9) %


	Nine Months Ended
(Dollars in thousands)	September 30, 2023		September 30, 2022		$ Change		% Change
Mortgage banking income	$	13,143	$	21,367	$	(8,224)	(38.5)	%
Wealth management income	3,689		3,672		17		0.5	%
SBA loan income	3,463		3,946		(483)		(12.2)	%
Earnings on investment in life insurance	585		413		172		41.6	%
Net change in the fair value of derivative instruments	217		(713)		930		(130.4)	%
Net change in the fair value of loans held-for-sale	(88)		(1,094)		1,006		(92.0)	%
Net change in the fair value of loans held-for-investment	(673)		(2,499)		1,826		(73.1)	%
Net (loss) gain on hedging activity	81		4,941		(4,860)		(98.4)	%
Net loss on sale of investment securities available-for-sale	(58)		—		(58)		(100.0)	%
Other	3,489		3,695		(206)		(5.6)	%
Total non-interest income	$	23,848	$	33,728	$	(9,880)	(29.3)	%

Total non-interest income decreased $9.9 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. Mortgage loan originations decreased $392.0 million to $531.4 million when comparing the nine months ended September 30, 2023 to the nine months ended September 30, 2022. Driven by the decline in mortgage banking income over the nine month comparable periods, the net changes in the fair value of derivative instruments and loans held-for-sale, along with changes in net gains on hedging activity decreased $2.9 million, combined.

SBA loan income decreased $483 thousand as a lower volume of SBA loans were sold into the secondary market for the nine months ending September 30, 2023 ($64.9 million of loans sold at an average gross margin of 6.8%), compared to the nine months ending September 30, 2022 ($75.9 million in loans sold at an average gross margin of 7.4%).

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NON-INTEREST EXPENSE

Three Months Ended ~~June~~September 30, 2023 Compared to the Same Period in 2022

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


		Quarter Ended									Quarter Ended
(Dollars in thousands)	(Dollars in thousands)	June 30, 2023		June 30, 2022		$ Change		% Change		(Dollars in thousands)	September 30, 2023		September 30, 2022		$ Change		% Change
Salaries and employee benefits	Salaries and employee benefits	$	12,152	$	12,926	$	(774)	(6.0)	%	Salaries and employee benefits	$	12,420	$	13,360	$	(940)	(7.0)	%
Occupancy and equipment	Occupancy and equipment	1,140		1,176		(36)		(3.1)	%	Occupancy and equipment	1,226		1,191		35		2.9	%
Professional fees	Professional fees	1,004		913		91		10.0	%	Professional fees	1,104		899		205		22.8	%
Advertising and promotion	Advertising and promotion	1,091		1,189		(98)		(8.2)	%	Advertising and promotion	848		1,165		(317)		(27.2)	%
Data processing and software	Data processing and software	1,681		1,308		373		28.5	%	Data processing and software	1,652		1,442		210		14.6	%
Other	Other	2,547		2,194		353		16.1	%	Other	2,768		2,204		564		25.6	%
Total non-interest expense	Total non-interest expense	$	19,615	$	19,706	$	(91)	(0.5)	%	Total non-interest expense	$	20,018	$	20,261	$	(243)	(1.2)	%

Total non-interest expense decreased ~~$91~~$243 thousand, or ~~0.5%~~1.2%, largely attributable to a decrease in salaries and employee benefits expense in the mortgage segment, which had reduced fixed and variable based compensation due to the overall decline in mortgage banking income.

Professional fees increased $205 thousand over this period largely due to an increase in loan and lease workout expenses which has helped lead to an increase in recoveries when compared to recoveries in the prior year. Professional fees were also impacted by system conversion fees for a new loan servicing platform for our mortgage segment. Advertising and promotion expense decreased $317 thousand over this period as a result of a decrease in business development expense and certain advertising expenses' seasonality.

Data processing and software expense increased ~~$373~~$210 thousand due to cybersecurity improvements, cloud-based costs, other software upgrades, and an increase in customer account volume, all as a result of growth. Other non-interest expense increased ~~$353~~$564 thousand due largely to an increase in FDIC insurance expense, which reflected the new 2 basis point increase in ~~assessment.~~assessment, and an increase in certain commercial and consumer related loan expenses due to portfolio growth.

~~Six~~Nine Months Ended ~~June~~September 30, 2023 Compared to the Same Period in 2022

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


		Six Months Ended									Nine Months Ended
(Dollars in thousands)	(Dollars in thousands)	June 30, 2023		June 30, 2022		$ Change		% Change		(Dollars in thousands)	September 30, 2023		September 30, 2022		$ Change		% Change
Salaries and employee benefits	Salaries and employee benefits	$	23,213	$	28,224	$	(5,011)	(17.8)	%	Salaries and employee benefits	$	35,633	$	41,585	$	(5,952)	(14.3)	%
Occupancy and equipment	Occupancy and equipment	2,384		2,428		(44)		(1.8)	%	Occupancy and equipment	3,610		3,619		(9)		(0.2)	%
Professional fees	Professional fees	1,827		1,761		66		3.7	%	Professional fees	2,930		2,659		271		10.2	%
Advertising and promotion	Advertising and promotion	1,952		2,175		(223)		(10.3)	%	Advertising and promotion	2,799		3,340		(541)		(16.2)	%
Data processing and software	Data processing and software	3,113		2,497		616		24.7	%	Data processing and software	4,764		3,939		825		20.9	%
Other	Other	4,915		4,054		861		21.2	%	Other	7,686		6,258		1,428		22.8	%
Total non-interest expense	Total non-interest expense	$	37,404	$	41,139	$	(3,735)	(9.1)	%	Total non-interest expense	$	57,422	$	61,400	$	(3,978)	(6.5)	%

Total non-interest expense decreased $4.0 million largely attributable to a decrease in salaries and employee benefits expense at the mortgage segment, which recognized decreased fixed and variable compensation. Partially offsetting this decrease was an increase 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 decreased ~~$223~~$541 thousand as the result of a reduction in mortgage segment advertising and leads expense as mortgage origination volume was down significantly from the prior year. Data processing and software expense increased ~~$616~~$825 thousand due to cybersecurity improvements, cloud-based costs and other software upgrades, all as a result of growth. Other non-interest expense increased ~~$861 thousand~~$1.4 million over the period due largely to an increase in FDIC insurance expense, which reflected the new 2 basis point increase in ~~assessment.~~assessment, and the adjustment of the unfunded allowance for credit losses which increased nearly $1 million due to the adoption of ASC 326 as of January 1, 2023.

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INCOME TAX EXPENSE

Income tax expense for the three months ended ~~June~~September 30, 2023 was ~~$1.3~~$1.2 million, as compared to $1.7 million for the same period in 2022. The decrease in income tax expense was attributable to the decrease in earnings, period over period. Our effective tax rate was ~~21.3%~~23.1% for the three months ended ~~June~~September 30, 2023 and ~~22.4%~~22.3% for the three months ended ~~June~~September 30, 2022.

Income tax expense for the ~~six~~nine months ended ~~June~~September 30, 2023 was ~~$2.4~~$3.6 million, as compared to ~~$3.3~~$4.9 million for the same period in 2022. The decrease in income tax expense was attributable to the decrease in earnings, period over period. Our effective tax rate was ~~21.43%~~22.0% for the ~~six~~nine months ended ~~June~~September 30, 2023 and ~~22.14%~~22.2% for the ~~six~~nine months ended ~~June~~September 30, 2022.

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BALANCE SHEET ANALYSIS

As of ~~June~~September 30, 2023, total assets were $2.2 billion which increased ~~$144.6~~$168.7 million, or ~~7.0%~~8.2%, from December 31, 2022. This growth in assets over the prior period was due primarily to loan portfolio growth, as detailed in the following table:


(Dollars in thousands)	(Dollars in thousands)	June 30, 2023		December 31, 2022		$ Change		% Change		(Dollars in thousands)	September 30, 2023		December 31, 2022		$ Change		% Change
Mortgage loans held for sale	Mortgage loans held for sale	$	40,422	$	22,243	$	18,179	81.7	%	Mortgage loans held for sale	$	23,144	$	22,243	$	901	4.1	%
Real estate loans:	Real estate loans:									Real estate loans:
Commercial mortgage	Commercial mortgage	648,235		565,400		82,835		14.7		Commercial mortgage	696,124		565,400		130,724		23.1
Home equity lines and loans	Home equity lines and loans	67,226		59,399		7,827		13.2		Home equity lines and loans	73,844		59,399		14,445		24.3
Residential mortgage	Residential mortgage	247,848		221,837		26,011		11.7		Residential mortgage	256,343		221,837		34,506		15.6
Construction	Construction	286,082		271,955		14,127		5.2		Construction	276,590		271,955		4,635		1.7
Total real estate loans	Total real estate loans	1,249,391		1,118,591		130,800		11.7		Total real estate loans	1,302,901		1,118,591		184,310		16.5

Commercial and industrial	Commercial and industrial	310,280		341,378		(31,098)		(9.1)		Commercial and industrial	299,861		341,378		(41,517)		(12.2)
Small business loans	Small business loans	147,937		136,155		11,782		8.7		Small business loans	141,265		136,155		5,110		3.8
Consumer	Consumer	440		488		(48)		(9.8)		Consumer	434		488		(54)		(11.1)
Leases, net	Leases, net	150,029		138,986		11,043		7.9		Leases, net	138,963		138,986		(23)		—
Total portfolio loans and leases	Total portfolio loans and leases	$	1,858,077	$	1,735,598	$	122,479	7.1		Total portfolio loans and leases	$	1,883,424	$	1,735,598	$	147,826	8.5
Total loans and leases	Total loans and leases	$	1,898,499	$	1,757,841	$	140,658	8.0	%	Total loans and leases	$	1,906,568	$	1,757,841	$	148,727	8.5	%

Portfolio loans increased ~~$122.5~~$147.8 million, to $1.9 billion as of ~~June~~September 30, 2023, from $1.8 billion as of December 31, 2022. Overall portfolio loan growth was ~~7.1%~~8.5% since December 31, 2022, or ~~14.1%~~11.4% on an annualized basis for 2023. Commercial real estate loans increased ~~$82.8~~$130.7 million, or ~~14.7%~~23.1%, residential real estate loans held in portfolio increased ~~$26.0~~$34.5 million, or ~~11.7%~~15.6%, construction loans increased ~~$14.1~~$4.6 million, or ~~5.2%~~1.7%, and small business loans increased ~~$11.8~~$5.1 million, or ~~8.7%~~3.8%.

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


(Dollars in thousands)	(Dollars in thousands)	June 30, 2023		December 31, 2022		$ Change		% Change		(Dollars in thousands)	September 30, 2023		December 31, 2022		$ Change		% Change
Noninterest-bearing deposits	Noninterest-bearing deposits	$	269,174	$	301,727	$	(32,553)	(10.8)	%	Noninterest-bearing deposits	$	244,668	$	301,727	$	(57,059)	(18.9)	%
Interest-bearing deposits:	Interest-bearing deposits:									Interest-bearing deposits:
Interest-bearing demand deposits	Interest-bearing demand deposits	155,907		219,838		(63,931)		(29.1)	%	Interest-bearing demand deposits	156,537		219,838		(63,301)		(28.8)	%
Money market and savings deposits	Money market and savings deposits	710,546		697,564		12,982		1.9	%	Money market and savings deposits	746,599		697,564		49,035		7.0	%
Time deposits	Time deposits	646,978		493,350		153,628		31.1	%	Time deposits	660,841		493,350		167,491		33.9	%
Total interest-bearing deposits	Total interest-bearing deposits	$	1,513,431	$	1,410,752	$	102,679	7.3	%	Total interest-bearing deposits	$	1,563,977	$	1,410,752	$	153,225	10.9	%
Total deposits	Total deposits	$	1,782,605	$	1,712,479	$	70,126	4.1	%	Total deposits	$	1,808,645	$	1,712,479	$	96,166	5.6	%

Total deposits increased ~~$70.1~~$96.2 million, or ~~4.1%~~5.6%, since December 31, 2022. Noninterest-bearing deposits and interest-bearing accounts decreased ~~$32.6~~$57.1 million, and ~~$63.9~~$63.3 million, respectively, during the ~~period, with notable withdrawals of $19.9 million from 4 separate business customers~~period. This decline was largely due to ~~their respective business sales. In addition, $20.2 million in municipal~~customer preference for money market deposits ~~were let go and replaced by brokered deposits due to more favorable wholesale~~which carry higher interest rates ~~and 2 loan relationships with $11.2 million in deposits combined, left Meridian as a result of growth.~~than interest-bearing demand deposits. Time deposits grew ~~$153.6~~$167.5 million, or ~~31.1%~~33.9%, from retail and wholesale efforts as customers prefer the higher term interest rates. Included in time deposits as of ~~June~~September 30, 2023, and December 31, 2022, are ~~$409.6~~$401.3 million and $409.3 million of brokered deposits, respectively, which comprise ~~23.0%~~22.2% and 21.9% of total deposits as of these dates.

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Capital

Consolidated stockholders’ equity of the Corporation was ~~$154.0~~$155.1 million, or 7.0% of total assets as of ~~June~~September 30, 2023, as compared to $153.3 million, or 7.4% of total assets as of December 31, 2022. On ~~July 27,~~October 26, 2023, the Board of Directors declared a quarterly cash dividend of $0.125 per common share payable ~~August 21,~~November 20, 2023 to shareholders of record as of ~~August 14,~~November 13, 2023.

In September, Meridian Corporation raised $9.7 million in subordinated debt at 8.00% with a term of 10 years. The ~~June~~issuance of this subordinated debt improved tier 2 capital, as well as tangible book value of the Corporation. The funds will be used for general corporate purposes, including providing capital to the Corporation's bank subsidiary, Meridian Bank, and supporting organic growth. The subordinated debt also helped to improve Meridian Bank's tier 1 capital.

The September 30, 2023 tangible common equity to tangible assets ratio (a non-GAAP measure) was 6.8% for the Corporation and ~~8.5%~~8.9% for the Bank, compared to 7.2% for the Corporation and 8.8% for the Bank at December 31, 2022. Tangible book value per share (a non-GAAP measure) was ~~$13.42~~$13.53 as of ~~June~~September 30, 2023, compared with $13.01 as of December 31, 2022. 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			Corporation				Bank				Well-capitalized minimum
		June 30, 2023		December 31, 2022		June 30, 2023		December 31, 2022					September 30, 2023		December 31, 2022		September 30, 2023		December 31, 2022
Tier 1 leverage ratio	Tier 1 leverage ratio	7.46	%	8.13	%	9.22	%	9.95	%	5.00	%	Tier 1 leverage ratio	7.52	%	8.13	%	9.65	%	9.95	%	5.00	%
Common tier 1 risk-based capital ratio	Common tier 1 risk-based capital ratio	8.38	%	8.77	%	10.35	%	10.73	%	6.50	%	Common tier 1 risk-based capital ratio	8.43	%	8.77	%	10.82	%	10.73	%	6.50	%
Tier 1 risk-based capital ratio	Tier 1 risk-based capital ratio	8.38	%	8.77	%	10.35	%	10.73	%	8.00	%	Tier 1 risk-based capital ratio	8.43	%	8.77	%	10.82	%	10.73	%	8.00	%
Total risk-based capital ratio	Total risk-based capital ratio	11.49	%	12.05	%	11.43	%	11.87	%	10.00	%	Total risk-based capital ratio	11.96	%	12.05	%	11.85	%	11.87	%	10.00	%

Under the Community Bank Leverage Ratio framework, a community banking organization that is less than $10 billion in total consolidated assets, and has limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9% can elect to report a single regulatory capital ratio. The Corporation has elected to be measured under this framework for Bank capital adequacy and had ratios of ~~9.22%~~9.65% and 9.95% at ~~June~~September 30, 2023 and December 31, 2022, respectively. The Corporation is exempt from CBLR.

In December 2018, the Federal Reserve announced that a banking organization that experiences a reduction in retained earnings due to the CECL adoption as of the beginning of the fiscal year in which CECL is adopted may elect to phase in the regulatory capital impact of adopting CECL. Transitional amounts are calculated for the following items: retained earnings, temporary difference deferred tax assets and credit loss allowances eligible for inclusion in regulatory capital. When calculating regulatory capital ratios, 25% of the transitional amounts are phased in during the first year. An additional 25% of the transitional amounts are phased in over each of the next two years and at the beginning of the fourth year, the day-one effects of CECL are completely reflected in regulatory capital.

Liquidity

Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Meridian’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization or that can be used as collateral to secure funding. In addition, as part of its liquidity management, Meridian maintains a segment of commercial loan assets that are comprised of SNCs, which have a national market and can be sold in a timely manner. Meridian’s available liquidity, which totaled $276.8 million at June 30, 2023, compared to $264.4 million at December 31, 2022, includes investments, SNCs, Federal funds sold, mortgages held-for-sale and cash and cash equivalents, less the amount of securities required to be pledged for certain liabilities. Meridian also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios.

In addition, Meridian maintains borrowing arrangements with various correspondent banks, the FHLB and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs and has access to approximately ~~$853.3 million~~$1.0 billion in liquidity from these sources. Through its relationship at the Federal Reserve, Meridian had available credit of approximately ~~$7.9~~$7.7 million at ~~June~~September 30, 2023. At ~~June~~September 30, 2023, Meridian had $33 million in borrowings from the Federal Reserve under the BTFP. As a member of the FHLB, we are eligible to borrow up to a specific credit limit, which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of ~~June~~September 30, 2023, Meridian’s maximum borrowing capacity with the FHLB was ~~$620.6~~$637.6 million. At ~~June~~September 30, 2023, Meridian had borrowed ~~$161.6~~$145.0 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling ~~$120.0~~$112.7 million against its available credit lines. At ~~June~~September 30, 2023, Meridian also had available $15.0 million of unsecured federal funds lines of credit with other financial institutions as well as ~~$151.8~~$137.5 million of available short or long term funding through the CDARS program and ~~$362.8~~$379.4 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 ~~June~~September 30, 2023, the Corporation has three principal segments as defined by FASB ASC 280, “Segment Reporting.” The segments are Banking, Mortgage Banking and Wealth Management (see Note 10 in the accompanying Notes to Unaudited Consolidated Financial Statements).

The Banking Segment recorded income before tax of ~~$6.6~~$6.3 million and ~~$13.5~~$19.8 million for the three and ~~six~~nine months ended ~~June~~September 30, 2023 as compared to income before tax of ~~$6.9~~$7.5 million and ~~$15.0~~$22.5 million for the same periods in 2022. The Banking Segment provided ~~111.5%~~

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121.2% and ~~122.7%~~122.1% of the Corporation’s pre-tax profit for the three and ~~six~~nine month periods ended ~~June~~September 30, 2023, as compared to ~~89.7%~~100.7% and ~~101.9%~~101.5% for the same periods in 2022.

The Wealth Management Segment recorded income before tax of ~~$317~~$417 thousand and ~~$557~~$973 thousand for the three and ~~six~~nine months ended ~~June~~September 30, 2023 as compared to income before tax of ~~$749~~$552 thousand and ~~$1.3~~$1.8 million for the same periods in 2022. The decrease in income in this segment was the result of declines in market conditions over the period.

The Mortgage Banking Segment recorded a loss before tax of ~~$1.0~~$1.5 million and ~~$3.1~~$4.6 million for the three and ~~six~~nine months ended ~~June~~September 30, 2023 as compared to ~~income before tax of $41 thousand and~~ a loss before tax of ~~$1.6~~$603 thousand and $2.2 million for the same periods in 2022. Mortgage Banking income and expenses related to loan originations and sales decreased due to lower origination ~~volume.~~volume in the higher rate environment. Originations have been significantly impacted by a lack of homes for sale.

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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 ~~June~~September 30, 2023 were ~~$513.4~~$517.7 million as compared to $506.2 million at December 31, 2022.

Standby letters of credit are conditional commitments issued by the Corporation to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Corporation’s obligation under standby letters of credit at ~~June~~September 30, 2023 amounted to ~~$10.6~~$10.7 million as compared to $19.0 million at December 31, 2022.

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

In certain circumstances the Corporation may be required to repurchase residential mortgage loans from investors under the terms of loan sale agreements. Generally, these circumstances include the breach of representations and warranties made to investors regarding borrower default or early payment, as well as a violation of the applicable federal, state, or local lending laws. The Corporation agrees to repurchase loans if the representations and warranties made with respect to such loans are breached. Based on the obligations described above, the Corporation ~~was not required to repurchase~~repurchased two loans totaling $730 thousand for the three and ~~six~~nine months ended ~~June~~September 30, 2023, while we 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.

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)		June 30, 2023			December 31, 2022
(dollars in thousands, except share data)								(dollars in thousands, except share data)	September 30, 2023		December 31, 2022
Total stockholders' equity (GAAP)	Total stockholders' equity (GAAP)	$	153,962		$	153,280		Total stockholders' equity (GAAP)	$	155,114	$	153,280
Less: Goodwill and intangible assets	Less: Goodwill and intangible assets	3,972			4,074			Less: Goodwill and intangible assets	3,921		4,074
Tangible common equity (non-GAAP)	Tangible common equity (non-GAAP)	149,990			149,206			Tangible common equity (non-GAAP)	151,193		149,206

Total assets (GAAP)	Total assets (GAAP)	2,206,877			2,062,228			Total assets (GAAP)	2,230,971		2,062,228
Less: Goodwill and intangible assets	Less: Goodwill and intangible assets	3,972			4,074			Less: Goodwill and intangible assets	3,921		4,074
Tangible assets (non-GAAP)	Tangible assets (non-GAAP)	$	2,202,905		$	2,058,154		Tangible assets (non-GAAP)	$	2,227,050	$	2,058,154

Stockholders' equity to total assets (GAAP)		6.98		%	7.43		%
Tangible common equity to tangible assets (non-GAAP)		6.81		%	7.25		%

Shares outstanding		11,178			11,466

Book value per share (GAAP)		$	13.77		$	13.37
Tangible book value per share (non-GAAP)		$	13.42		$	13.01

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(dollars in thousands, except share data)	September 30, 2023			December 31, 2022
Stockholders' equity to total assets (GAAP)	6.95		%	7.43		%
Tangible common equity to tangible assets (non-GAAP)	6.79		%	7.25		%

Shares outstanding	11,178			11,466

Book value per share (GAAP)	$	13.88		$	13.37
Tangible book value per share (non-GAAP)	$	13.53		$	13.01

The following is a reconciliation of the allowance for credit losses to total loans held for investment ratio at ~~June~~September 30, 2023. This is considered a non-GAAP measure as the calculation excludes the impact of loans held for investment that are fair valued and the impact of PPP loans as these loan types are not included in the allowance for credit losses calculation.


		June 30, 2023			December 31, 2022
(dollars in thousands)								(dollars in thousands)	September 30, 2023			December 31, 2022
Allowance for credit losses	Allowance for credit losses	$	20,242		$	18,828		Allowance for credit losses	$	19,683		$	18,828

Loans, net of fees and costs (GAAP)	Loans, net of fees and costs (GAAP)	1,859,839			1,743,682			Loans, net of fees and costs (GAAP)	1,885,629			1,743,682
Less: PPP loans	Less: PPP loans	(187)			(4,579)			Less: PPP loans	(289)			(4,579)
Less: Loans fair valued	Less: Loans fair valued	(14,403)			(14,502)			Less: Loans fair valued	(13,231)			(14,502)
Loans, net of fees and costs, excluding PPP and fair valued loans (non-GAAP)	Loans, net of fees and costs, excluding PPP and fair valued loans (non-GAAP)	$	1,845,249		$	1,724,601		Loans, net of fees and costs, excluding PPP and fair valued loans (non-GAAP)	$	1,872,109		$	1,724,601

Allowance for credit losses, net of fees and costs (GAAP)	Allowance for credit losses, net of fees and costs (GAAP)	1.09		%	1.08		%	Allowance for credit losses, net of fees and costs (GAAP)	1.04		%	1.08		%
Allowance for credit losses, net of fees and costs, excluding PPP and fair valued loans (non-GAAP)	Allowance for credit losses, net of fees and costs, excluding PPP and fair valued loans (non-GAAP)	1.10		%	1.09		%	Allowance for credit losses, net of fees and costs, excluding PPP and fair valued loans (non-GAAP)	1.05		%	1.09		%

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Simulations of Net Interest Income

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

•The timing of changes in interest rates;

•Shifts or rotations in the yield curve;

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

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

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

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

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

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

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

June 30,
Changes in Market Interest Rates 2023 2022
+300 basis points over next 12 months (1.92) % 1.42 %
+200 basis points over next 12 months (1.14) % 1.18 %
+100 basis points over next 12 months (0.44) % 0.69 %
No Change
-100 basis points over next 12 months (1.14) % (1.67) %
-200 basis points over next 12 months (2.29) % (3.77) %

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	September 30,
Changes in Market Interest Rates	2023		2022
+300 basis points over next 12 months	(1.25)	%	0.13	%
+200 basis points over next 12 months	(0.74)	%	0.29	%
+100 basis points over next 12 months	(0.29)	%	0.15	%
No Change
-100 basis points over next 12 months	(1.33)	%	(1.40)	%
-200 basis points over next 12 months	(2.63)	%	(3.19)	%

The above interest rate simulation suggests that the Corporation’s balance sheet is ~~liability~~asset sensitive as of ~~June~~September 30, 2023. In its current position, the table indicates that net interest income will fluctuate between ~~(0.44%~~(1.33%) and ~~(1.44%~~(0.29%) in an up or down 100 basis point environment over the next 12 months. The simulated exposure to a change in interest rates is 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.

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


							September 30,
Changes in Market Interest Rates	Changes in Market Interest Rates	June 30, 2023		June 30, 2022		Changes in Market Interest Rates	2023		2022
+300 basis points	+300 basis points	1	%	11	%	+300 basis points	(10)	%	5	%
+200 basis points	+200 basis points	3	%	9	%	+200 basis points	(6)	%	6	%
+100 basis points	+100 basis points	3	%	7	%	+100 basis points	(2)	%	4	%
No Change	No Change					No Change
-100 basis points	-100 basis points	(7)	%	(13)	%	-100 basis points	—	%	(9)	%
-200 basis points	-200 basis points	(20)	%	(35)	%	-200 basis points	(5)	%	(25)	%

This economic value of equity profile at ~~June~~September 30, 2023 suggests that we would experience a ~~positive~~negative effect from an increase or decrease in rates, and ~~that~~ the impact would ~~remain stable~~worsen as rates ~~continue~~continued to ~~rise. Conversely, we would experience a negative effect from a decrease~~move in ~~rates.~~either direction. While an instantaneous shift in interest rates is used in this analysis to provide an estimate of exposure, we believe that a gradual shift in interest rates would have a much more modest impact. Since economic value of equity measures the discounted present value of cash flows over the estimated lives of instruments, the change in economic value of equity does not directly correlate to the degree that earnings would be impacted over a shorter time horizon.

The results of our net interest income and economic value of equity simulation analysis are purely hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from that projected, our net interest income might vary significantly. Non-parallel yield curve shifts or changes in interest rate spreads would also cause 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 interest-earning assets and interest-bearing liabilities grow faster or slower than estimated, or otherwise change its mix of products. Actual results could also differ from those projected if actual repayment speeds in the loan portfolio are substantially different 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 loan prepayment rates were to increase, any remaining loan discounts would be recognized 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 management may undertake in response to changes in interest rates, such as changes to 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.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Corporation’s CEO and CFO have concluded that the Corporation’s disclosure controls and procedures were effective as of ~~June~~September 30, 2023 to ensure that the information required to be disclosed by the

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Corporation in the reports that the Corporation files or submits under the Exchange Act is recorded, processed, summarized, and reported completely and accurately within the time periods specified in SEC rules and forms.

Changes in Internal Control Over Financial Reporting

Effective January 1, 2023, the Corporation adopted CECL. The Corporation designed new controls and modified existing controls as part of this adoption. These additional controls over financial reporting included controls over model creation and design, model governance, assumptions, and expanded controls over loan level data. There were no other changes in the Corporation's internal control over financial reporting (as defined in Rule 13a-15(f)) during the quarter ended ~~June~~September 30, 2023 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II–OTHER INFORMATION

~~Table of Contents~~

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk ~~factor represents~~factors represent material updates and additions to the risk factors previously disclosed in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022 as filed with the SEC. Additional risks not presently known to the Corporation, or that are currently deemed immaterial, may also adversely affect business, financial condition or results of operations of the Corporation. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause the Corporation’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of it.

Adverse developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity, may have a material effect on our operations.

The rapid rise in interest rates starting in 2022; the resulting industry-wide reduction in the fair value of securities portfolios and capital; and several bank runs resulting in high profile bank failures, have caused a current state of volatility in the financial services industry with respect to liquidity and the health of the U.S. banking system. A financial institution's liquidity reflects its ability to meet customer demand for loans, accommodating possible outflows in deposits and accessing alternative sources of funds when needed, while at the same time taking advantage of interest rate market opportunities. The ability to manage liquidity is fundamental to a financial institution's business and success. These recent events have, and could continue to adversely impact earnings as well as the market price and volatility of the Corporation's common stock. Additionally, the cost of resolving recent bank failures prompted the FDIC to announce plans to collect additional special assessments. These recent events may also result in potentially adverse changes to laws or regulations applicable to the Corporation, which could have a material impact on the Corporation's business and result in increased costs necessary to comply with any such changes.

Weakness in the secondary residential mortgage loan markets or demand for mortgage loans may adversely affect income.

Our mortgage banking segment can provide a significant portion of our non-interest income. Mortgage activity throughout the industry decreased significantly in 2022 and our mortgage activity decreased as well. Residential mortgage lending is subject to substantial volatility due to changes in interest rates, the continued lack of housing inventory, housing demand, inflation, cash buyers, new mortgage lending regulations and other market conditions, such as the number of third-party investors and their demand to purchase mortgage loans. These factors have a direct effect on loan originations across the industry. In particular, in the current higher interest rate environment compounded by a sustained lack of housing inventory, our originations of mortgage loans decreased resulting in fewer loans available to be sold to investors, which has resulted in a decrease in non-interest income that may continue into future periods, and which may occur during other periods of rising interest rates.

Based on the above factors we may not be able to return our mortgage business to the rates of growth achieved in recent years or even grow our mortgage business from current levels. The success of our mortgage segment is dependent upon our ability to originate a high volume of loans and sell them in the secondary market to investors at a gain. In addition, our results of operations are affected by the amount of non-interest expenses (including for personnel and systems infrastructure) associated with mortgage banking activities. During periods of reduced loan demand, our results of operations are adversely affected if we are unable to reduce expenses commensurate with the decline in mortgage loan origination activity.

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

~~The following table presents the shares repurchased by the Corporation during the quarter ended June 30, 2023:~~

Issuer Purchases of Equity Securities
Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value that May Yet Be Purchased Under the Plan or Programs (1)($000's)
(Dollars in thousands, except shares and per share amounts)
April 1 to April 30, 2023 127,849 $ 12.21 127,849
Total 127,849 $ 12.21 $—

(1) On August 30, 2021, the Corporation announced a stock repurchase plan pursuant to which the Corporation may repurchase up to $20 million of the company’s outstanding common stock, par value $1.00 per share. Stock is purchased under the plan from time to time in the open market or through privately negotiated transactions, or otherwise, at the discretion of management of the company in accordance with legal requirements. On April 22, 2023, the stock repurchase plan expired. The total amount of stock repurchased under the plan was $19.6 million in total.None.

Item 3. Defaults upon Senior Securities.

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None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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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, 2023	Meridian Corporation

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

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


	Three Months Ended June 30, 2023				Three Months Ended June 30, 2022
(dollars in thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Individually evaluated loans with related allowance:
Commercial and industrial	$	10,700	$	18	$	16,412	$	—
Small business loans	4,014		—		666		—


Total	$	14,714	$	18	$	17,078	$	—
Individually evaluated loans without related allowance:
Commercial mortgage	—		—		4,241		29
Commercial and industrial	4,516		—		293		—
Small business loans	2,166		—		835		2
Home equity lines and loans	931		—		1,040		23
Residential mortgage	1,725		8		1,480		166
Construction	1,206		—		1,206		16
Leases	1,153		—		102		—
Total	$	11,697	$	8	$	9,197	$	236
Grand Total	$	26,411	$	26	$	26,275	$	236


	Six Months Ended June 30, 2023				Six Months Ended June 30, 2022
(dollars in thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Individually evaluated loans with related allowance:
Commercial and industrial	$	10,808	$	18	$	16,449	$	—
Small business loans	4,047		—		666		—


Total	$	14,855	$	18	$	17,115	$	—
Individually evaluated loans without related allowance:
Commercial mortgage	—		58		4,279		48
Commercial and industrial	3,350		—		297		—
Small business loans	1,458		2		844		5
Home equity lines and loans	937		—		1,044		23
Residential mortgage	1,585		38		1,483		168
Construction	1,120		—		1,206		31
Leases	1,157		—		103		—
Total	$	9,607	$	98	$	9,256	$	275
Grand Total	$	24,462	$	116	$	26,371	$	275


	June 30,
Changes in Market Interest Rates	2023		2022
+300 basis points over next 12 months	(1.92)	%	1.42	%
+200 basis points over next 12 months	(1.14)	%	1.18	%
+100 basis points over next 12 months	(0.44)	%	0.69	%
No Change
-100 basis points over next 12 months	(1.14)	%	(1.67)	%
-200 basis points over next 12 months	(2.29)	%	(3.77)	%


	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)
April 1 to April 30, 2023	127,849	$	12.21	127,849


Total	127,849	$	12.21		$—