Meridian 10K 2021 Annual report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20429

FORM 10-K

☒	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2021

☐	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)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading Symbol(s)	Name of Exchange on Which Registered
Common Stock, par value $1 per share	MRBK	The Nasdaq Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐Yes ☒No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐Yes ☒No

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 USC. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒Yes ☐No

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

The approximate aggregate market value of voting stock held by non-affiliates of the registrant is $143,633,306 as of June 30, 2021 based upon the last sales price in which our common stock was quoted on the NASDAQ Stock Market on June 30, 2021.

As of March 11, 2022 there were 6,129,216 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement, to be filed with the Commission no later than 120 days after December 31, 2021 in connection with the 2022 Annual Meeting of Stockholders, are incorporated by reference into Part III of this Annual Report on Form 10-K.

Table of Contents

MERIDIAN CORPORATION

ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2021

TABLE OF CONTENTS

		Page

	PART I	1

Item 1.	Business	2

Item 1A.	Risk Factors	16

Item 1B.	Unresolved Staff Comments	29

Item 2.	Properties	29

Item 3.	Legal Proceedings	30

Item 4.	Mine Safety Disclosures	30

	PART II	30

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	30

Item 6.	Selected Financial Data	32

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	48

Item 8.	Financial Statements and Supplementary Data	51

Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	104

Item 9A.	Controls and Procedures	104

Item 9B.	Other Information	105

	PART III	105

Item 10.	Directors, Executive Officers and Corporate Governance	105

Item 11.	Executive Compensation	105

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	105

Item 13.	Certain Relationships and Related Transactions, and Director Independence	105

Item 14.	Principal Accounting Fees and Services	105

	PART IV	106

Item 15.	Exhibits, Financial Statement Schedules	106

Item 16.	Form 10-K Summary	107

Table of Contents

PART I

Cautionary Statement Regarding Forward-Looking Statements

Meridian Corporation (the “Corporation” or “Meridian”) 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 “will”, “may,” “could,” “should,” “pro forma,” “looking forward,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “project”, or similar expressions generally indicate a forward-looking statement. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

Local, regional, national and international economic conditions and the impact they may have on us and our customers and our assessment of that impact.

Volatility and disruption in national and international financial markets.

- Government intervention in the U.S. financial system.

Changes in the mix of loan geographies, sectors and types or the level of non-performing assets and charge-offs.

Changes in estimates of future reserve requirements based upon the periodic review thereof under relevant regulatory and accounting requirements.

The effects of and changes in trade and monetary and fiscal policies and laws, including the interest rate policies of the Federal Reserve Board.

Inflation, interest rate, securities market and monetary fluctuations.

The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) with which we and our subsidiaries must comply.

- Impairment of our goodwill or other intangible assets.

Acts of God or of war or terrorism.

Changes in consumer spending, borrowings and savings habits.

Changes in the financial performance and/or condition of our borrowers.

Technological changes.

The cost and effects of cyber incidents or other failures, interruption or security breaches of our systems or those of third-party providers.

Acquisitions and integration of acquired businesses.

Our ability to increase market share and control expenses.

Our ability to attract and retain qualified employees.

Changes in the competitive environment in our markets and among banking organizations and other financial service providers.

The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters.

- Changes in the reliability of our vendors, internal control systems or information systems.

- Changes in our liquidity position.

- Changes in our organization, compensation and benefit plans.

- The impact of the ongoing COVID-19 pandemic and any other pandemic, epidemic or health-related crisis.

The costs and effects of legal and regulatory developments, the resolution of legal proceedings or regulatory or other governmental inquiries, the results of regulatory examinations or reviews and the ability to obtain required regulatory approvals.

- Greater than expected costs or difficulties related to the integration of new products and lines of business.

- Our success at managing the risks involved in the foregoing items.

Meridian Corporation cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events.

All forward-looking statements and information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Meridian Corporation’s filings with the Securities and Exchange Commission, including this Annual Report on Form 10-K for the year ended December 31, 2021 and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide

Table of Contents

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, except as may be required under applicable laws.

Item 1. Business

General

Meridian Corporation is a bank holding company engaged in banking activities through its wholly-owned subsidiary, Meridian Bank (the “Bank”), a full-service, state-chartered commercial bank with offices in the Delaware Valley tri-state market, which includes Pennsylvania, New Jersey and Delaware, as well as in the Central Maryland market. We have a financial services business model with significant non-interest income streams from mortgage lending, small business (“SBA”) lending and wealth management services. We provide services to small and middle market businesses, professionals and retail customers throughout our market area. We have a modern, progressive, consultative approach to creating innovative solutions for our customers. We are technology driven, with a culture that incorporates significant use of customer preferred alternative delivery channels, such as mobile banking, remote deposit capture and bank-to-bank ACH. Our ‘Meridian everywhere’ philosophy of community presence, along with our strategic business footprint, allows us to provide the high degree of service, convenience and products our customers need to achieve their financial objectives. We provide this service through three principal business line distribution channels, described further below.

Corporate Structure and Business Lines

The Corporation is the parent to the Bank. The Bank is the parent to four wholly-owned subsidiaries: Meridian Land Settlement Services, LLC, which provides title insurance services; Apex Realty, LLC, a real estate holding company; Meridian Wealth Partners, LLC, a registered investment advisory firm, (“Meridian Wealth”); and Meridian Equipment Finance, LLC, an equipment leasing company. With these subsidiaries, the Corporation is organized into the following three lines of business.

Commercial Banking

The first line of business is our traditional banking operations, serving both commercial and consumer customers via deposits and treasury management, commercial and industrial lending and leasing, commercial real estate lending, small business lending, consumer and home equity lending, private banking, merchant services, and title and land settlement services.

We have a strong credit culture that promotes diversity of lending products with a focus on commercial businesses. 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.

Our commercial and industrial lending department supports our small business and middle market borrowers with a comprehensive selection of loan products including financing solutions for wholesalers, manufacturers, distributors, service providers, importers and exporters, among others. Our portfolio includes business lines of credit, term loans, small business lending (“SBA”), lease financing and shared national credits (“SNCs”).

Our SBA team and their alliances with local economic development councils provide SBA 504 and 7(a) financing options to help grow local businesses, create and retain jobs and stimulate our local economy. In addition, Meridian understands that connections with the local professional industries benefit us, not only with these individuals as customers or investors, but also given the proven potential for business referrals.

The commercial real estate division offers permanent financing for owner-occupied commercial real estate loans and land development and construction loans for residential and commercial projects. Our approach is to apply disciplined and integrated standards to underwriting, credit and portfolio management. The extensive backgrounds of our commercial real

Table of Contents

estate lending team, not only in banking, but also directly in the builder/developer fields, bring a unique perspective and ability to communicate and consider all elements of a project and related risk from the clients’ viewpoint as well as ours.

Mortgage Banking

The second line of business is mortgage banking. Our mortgage consultants guide our clients through the complex process of obtaining a loan to meet consumer needs. Originations consist of consumer for-sale mortgage loans, loans to be held within our portfolio, and wholesale mortgage loans. Clients include homeowners and smaller scale investors. The mortgage division operates and originates mortgage loans in the Delaware Valley tri-state market, and Maryland markets, most typically for 1-4 family dwellings, with the intention of selling substantially all of these loans in the secondary market to qualified investors, while retaining the servicing rights on these loans. Mortgages are originated through sales and marketing initiatives, as well as realtor, builder, bank, advertising and customer referral resources. The mortgage division performs origination, processing, underwriting, closing and post-closing functions both from our Blue Bell mortgage headquarters with 8 other production/processing offices in the Delaware Valley tri-state market, and from Maryland through our expanded footprint of 7 other production/processing offices in the state.

Wealth Management and Advisory Services

Meridian 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. Such clients include professionals, higher net worth individuals, companies seeking to provide benefits plans for their employees, and more. Acquiring and sustaining wealth is a gradual progression, one that requires a considerable amount of thought and planning. Our process takes a comprehensive approach to financial planning and encompasses all aspects of retirement, with an emphasis on sustainability. Meridian Wealth offers a significant enhancement to both our capacity and the variety of tools we can use to help bring effective financial planning and wealth management services to a broad segment of customers.

Market Area

Meridian is headquartered in Malvern, PA and has six full-service branches in Philadelphia and surrounding counties. Its main branch, in Paoli, serves the Main Line. The West Chester and Media branches serve Chester and Delaware counties, respectively, while the Doylestown and Blue Bell branches serve Bucks and Montgomery counties, respectively. Our sixth branch is in Philadelphia. These branches provide “Relationship Hubs” for our regional lending groups and allow Meridian to proceed in its plan for serving markets in each of the central (at or near the county seat) townships of the counties in and surrounding Philadelphia.

In addition to our deposit taking branches, there are currently 19 other locations, including Corporate headquarters, that serve as loan production offices primarily for our mortgage division. These offices extend from the Philadelphia market area to Central Maryland.

Demographic information for the five county Philadelphia metropolitan area (Philadelphia County, Chester County, Delaware County, Montgomery County, Bucks County) shows our primary market to be stable, with moderate population growth. According to the U.S. Census Bureau – 2020, the median household income in this area is $80,261 compared to the national average of $62,843, while the total population in this market was 4,218,131. Demographic information for the five county Baltimore metropolitan area (Baltimore County, Howard County, Montgomery County, Anne Arundel County, Prince George’s County) also shows that this secondary market is stable. According to the U.S. Census Bureau – 2020, the median household income in the Baltimore metropolitan area is $98,513 compared to the national average of $62,843, while the total population in this market was 3,804,375.


	United States	Pennsylvania	Maryland
Population (1)	308,449,281	13,002,700	6,177,224
Median household income (1)	$ 62,843	$ 61,744	$ 84,805
Unemployment rate (2)	3.9%	4.0%	4.0%

Table of Contents


	Philadelphia Metropolitan Area Counties
	Bucks County	Montgomery County	Delaware County	Chester County	Philadelphia County	Total
Population (1)	646,538	856,553	576,830	534,413	1,603,797	4,218,131
Median household income (1)	$ 89,139	$ 91,546	$ 74,477	$ 100,214	$ 45,927	$ 80,261
Unemployment rate (2)	3.3%	3.0%	3.9%	2.5%	5.8%

	Baltimore Metropolitan Area Counties
	Howard County	Montgomery County	Anne Arundel County	Prince George's County	Baltimore County	Total
Population (1)	332,317	1,062,061	588,261	967,201	854,535	3,804,375
Median household income (1)	$ 121,160	$ 108,820	$ 100,798	$ 84,920	$ 76,866	$ 98,513
Unemployment rate (2)	3.0%	3.6%	3.3%	5.0%	3.9%

(1)

– Source: U.S. Census Data – 2020

(2)

– Source: U.S. Bureau of Labor Statistics – December 2021

Competition

Overall, the banking business in our market area is highly competitive. Meridian Bank faces substantial competition both in attracting deposits and in originating loans. Meridian Bank competes with local, regional and national commercial banks, savings banks, and savings and loan associations. Other competitors include non-bank fintech and finance companies, money market mutual funds, mortgage bankers, insurance companies, securities brokerage firms, regulated small loan companies, credit unions, and issuers of commercial paper and other securities.

Meridian Bank seeks to compete for business principally on the basis of high quality, personal service to customers, customer access to our decision-makers, and customer preferred electronic delivery channels while providing an attractive banking platform and competitive interest rates and fees.

Human Capital Resources

At December 31, 2021, we employed 413 individuals, nearly all of whom are full-time and of which 48% are women. Women make up 32% of all officers throughout the Meridian organization. None of these employees are covered by collective bargaining agreements, and Meridian believes it enjoys good relations with its personnel. In December of 2020, the Bank was named by the Independent Community Bankers of American (“ICBA”) as one of their ‘Best Community Banks to Work For’. As an integrated full-service financial institution, approximately 36% of our employees are employed through our banking segment, 62% through our mortgage segment, and 2% for our wealth segment.

The safety of our employees has been our top priority over the last two years due to the COVID-19 pandemic. A portion of our workforce continues to work remotely and we have occasionally closed lobbies to appointment-only during times of heightened transmission of COVID-19 to protect the health of our employees. We will continue to follow all of the appropriate guidance and engage our staff members as needed to deal with new challenges.

Meridian is committed to giving back to our communities. In 2021 we donated $486 thousand to nearly 100 organizations throughout the various communities that we serve in Pennsylvania, New Jersey, Delaware, and Maryland. Meridian also sponsors individual / group service days and provides time off to employees to participate.

In order to compete effectively and continue to provide excellent service to our clients, we must attract, retain, and motivate qualified professionals. During the hiring process Meridian looks to bring onboard well-qualified individuals, without bias to race or gender. As we are currently in a very competitive hiring market, we utilize various methods to find well-qualified talent including third party search firms, social media, internal candidates already in our organization and on campus recruiting at local universities.

Table of Contents

During 2021 we hired 84 professionals, 46% of which were women, and 21% of which were ethnically diverse. For 2021 our turnover rate was approximately 1.5%, which makes our overall retention rate very high compared to peers. We believe our culture, our effort to maintain a meritocracy in terms of opportunity and our continued evolution and growth contribute to our success in attracting and retaining strong talent.

Our benefits are designed to attract and retain employees by providing employees and their families with health and wellness programs (medical, dental, vision), retirement wealth accumulation, paid time off, income replacement (paid sick and disability leaves and life insurance) and family oriented benefits (parental leaves and child care assistance).

We aim to continually build on the expertise of our workforce. At entry levels, we have implemented trainee and internship programs. During 2021 Meridian invested throughout the organization in terms of in-house and external training programs to help our employees develop leadership skills, stay current on professional development topic in their area of focus, as well as to keep up to date on cybersecurity, and risk & compliance matters that impact the organization overall.

Our Current Capital Stock Structure

As of December 31, 2021 Meridian had 6,534,587 shares of common stock, $1 par value, issued and 6,107,894 shares outstanding. There is no preferred stock outstanding.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined by the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). An emerging growth company may take advantage of reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company,

●

we may present only two years of audited financial statements and only two years of related management discussion and analysis of financial condition and results of operations;

●

we are permitted to provide less extensive disclosure about our executive compensation arrangements; and

●

we are not required to give our shareholders non-binding advisory votes on executive compensation or golden parachute arrangements.

We have elected to take advantage of the scaled disclosure requirements and other relief described above and may take advantage of these exemptions for so long as we remain an emerging growth company. We will remain an emerging growth company until December 31, 2022, the end of the fiscal year following the fifth anniversary of the completion of our initial public offering.

In addition to scaled disclosure and the other relief described above, the JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included herein, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. If we do so, we will prominently disclose this decision in the first periodic report following our decision, and such decision is irrevocable.

Information about Meridian

Our executive offices are located at 9 Old Lincoln Highway, Malvern, PA 19355 and our telephone number is (484) 568-5000. Our Internet website is www.meridianbanker.com and our investor relations page can be found at investor.meridianbanker.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and all amendments thereto, from November 7, 2017 through August 18, 2018 have been filed with the FDIC. Since August 19, 2018, all reports on Form 8-K, and Form 10-Q along with this Annual Report on Form 10-K have been filed with the SEC. Also on our website are our Audit Committee and Compensation Committee Charters. The information contained in our website or in any websites linked by our website, is not part of this Annual Report on Form 10-K. The Corporation’s filings with the SEC can also be accessed at the SEC’s internet website: http://www.sec.gov.

Table of Contents

Investors can obtain copies of Meridian’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, on Meridian’s website (accessible under “Investor Relations” – “SEC Filings”) as soon as reasonably practicable after Meridian has filed such materials with, or furnished them to, the SEC. Meridian will also furnish a paper copy of such filings free of charge upon request.

Reports of the Bank’s condition and income, known as “Call Reports,” are filed with the FDIC and the Parent Company Only Financial Statement for Small Holding Companies known as the “FR Y-9SP” with the Federal Reserve. These reports are available on the FFIEC Central Data Repository’s Public Data Distribution website at cdr.ffiec.gov/public.

SUPERVISION AND REGULATION

Meridian and its subsidiaries are subject to extensive regulation under federal and state banking laws that establish a comprehensive framework for our operations. This framework may materially affect our growth potential and financial performance and is intended primarily for the protection of depositors, customers, federal deposit insurance funds and the banking system as a whole, not for the protection of our shareholders and creditors. The following discussion summarizes certain laws, regulations and policies to which Corporation and the Bank are subject. It does not address all applicable laws, regulations and policies that affect us currently or might affect us in the future. This discussion is qualified in its entirety by reference to the full texts of the laws, regulations and policies described.

The Bank is an FDIC-insured commercial bank chartered under the laws of Pennsylvania with regulatory oversight from the FDIC and the Pennsylvania Department of Banking and Securities (“PDBS”). The holding company, Meridian Corporation, is subject to supervision and examination by, and the regulations and reporting requirements of, the Board of Governors of the Federal Reserve System, and is subject to the disclosure and regulatory requirements of the Exchange Act. In order to adhere to regulatory expectations on an ongoing basis and to successfully prepare for the normal examination processes, Meridian maintains numerous internal controls including policies and programs appropriate to maintain the Bank’s safety and soundness, under such key areas as lending, compliance, BSA-AML, information security, human resources, deposit and cash management products, enterprise risk, merchant services, finance, title services, branch security and wealth management. As a public company, the Corporation also files reports with the SEC and is subject to its regulatory authority, as well as the disclosure and regulatory requirements of the Securities Act, as amended, and the Exchange Act, as amended, with respect to the Corporation’s securities, financial reporting and certain governance matters. Because the Corporation’s securities are listed on the NASDAQ Stock Market, we are subject to NASDAQ's rules for listed companies, including rules relating to corporate governance.

Permissible Activities for Bank Holding Companies

The Corporation is a registered bank holding company under the Bank Holding Company Act of 1956 (“BHC Act”). In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the Federal Reserve has determined to be so closely related to banking as to be a proper incident thereto, which include certain activities relating to extending credit or acting as an investment or financial advisor.

Bank holding companies that qualify and elect to be treated as “financial holding companies” may engage in a broader range of additional activities than bank holding companies that are not financial holding companies. In particular, financial holding companies may engage in activities that are (i) financial in nature or incidental to such financial activities or (ii) complementary to a financial activity and do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. These activities include securities underwriting and dealing, insurance underwriting and making merchant banking investments. As of this filing, we have not elected to be treated as a financial holding company.

The Federal Reserve has the power to order any bank holding company or any of its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the Federal Reserve has reasonable grounds to believe that continuing such activity, ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.

Table of Contents

Permissible Activities for Banks

As a Pennsylvania-chartered commercial bank, our business is subject to extensive supervision and regulation by state and federal bank regulatory agencies. Our business is generally limited to activities permitted by Pennsylvania law and any applicable federal laws. Under the Pennsylvania Banking Code of 1965 (the “Pennsylvania Banking Code”), the Bank may generally engage in all usual banking activities, including, among other things, accepting deposits; lending money on personal and real estate security; issuing letters of credit; buying, discounting, and negotiating promissory notes and other forms of indebtedness; buying and selling foreign currency and, subject to certain limitations, certain investment securities; engaging in certain insurance activities and management services providing cash.

The FDIC has adopted regulations pertaining to the other activity restrictions imposed upon insured state banks and their subsidiaries. Pursuant to such regulations, insured state banks engaging in impermissible activities may seek approval from the FDIC to continue such activities. State banks not engaging in such activities but that desire to engage in otherwise impermissible activities either directly or through a subsidiary may apply for approval from the FDIC to do so; however, if such bank fails to meet the minimum capital requirements or the activities present a significant risk to the Deposit Insurance Fund, such application will not be approved by the FDIC. Pursuant to this authority, the FDIC has determined that investments in certain majority-owned subsidiaries of insured state banks do not represent a significant risk to the deposit insurance funds. Investments permitted under that authority include real estate activities and securities activities.

Meridian currently conducts certain non-banking activities through certain of the Bank’s non-bank subsidiaries. Meridian Bank currently operates four wholly-owned subsidiaries: Meridian Land Settlement Services, which provides title insurance services; Apex Realty, a real estate holding company; Meridian Wealth, a registered investment advisory firm, and Meridian Equipment Finance, an equipment leasing company.

Pennsylvania law also imposes restrictions on Meridian Bank’s activities intended to ensure the safety and soundness of the Bank. For example, Meridian Bank is restricted under the Pennsylvania Banking Code from investing in certain types of investment securities and is generally limited in the amount of money it can lend to a single borrower or invest in securities issued by a single issuer.

Acquisitions by Bank Holding Companies

Control Acquisitions. The Change in Bank Control Act (“CBCA”) prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as Meridian Corporation, would, under the circumstances set forth in the presumption, constitute acquisition of control of Meridian Corporation.

In addition, the CBCA prohibits any entity from acquiring 25% (the BHC Act has a lower limit for acquirers that are existing bank holding companies) or more of a bank holding company’s or bank’s voting securities, or otherwise obtaining control or a controlling influence over a bank holding company or bank without the approval of the Federal Reserve. On January 31, 2020, the Federal Reserve Board approved the issuance of a final rule (which became effective April 1, 2020) that clarifies and codifies the Federal Reserve’s standards for determining whether one company has control over another. The final rule establishes four categories of tiered presumptions of non-control that are based on the percentage of voting shares held by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and the presence of other indicia of control. As the percentage of ownership increases, fewer indicia of control are permitted without falling outside of the presumption of non-control. These indicia of control include nonvoting equity ownership, director representation, management interlocks, business relationship and restrictive contractual covenants. Under the final rule, investors can hold up to 24.9% of the voting securities and up to 33% of the total equity of a company without necessarily having a controlling influence.

Table of Contents

Dividends

Meridian is a legal entity separate and distinct from the Bank and the wholly-owned subsidiaries of the Bank. As a Pennsylvania banking institution, the Bank is subject to certain restrictions on its ability to pay dividends under applicable banking laws and regulations.

Federal banking regulators are authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. In particular, federal banking regulators have stated that paying dividends that deplete a banking organization’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. In addition, in the current financial and economic environment, the federal banking regulators have indicated that banks should carefully review their dividend policy and have discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong. Under the Capital Rules, institutions that seek to pay dividends must maintain 2.5% in Common Equity Tier 1 capital attributable to the capital conservation buffer, which was phased in over a three-year period that began on January 1, 2016. See “—Regulatory Capital Requirements”.

Our principal source of cash flow and income is dividends from our subsidiaries, which is also the component of our liquidity. In addition to the restrictions discussed above, the Bank is subject to limitations under Pennsylvania law regarding the level of dividends that it may pay to our shareholders. Under the Pennsylvania Banking Code, the Bank generally may not pay dividends in excess of its net profits.

Parity Regulation

A Pennsylvania banking institution may, in accordance with Pennsylvania law and regulations issued by the PDBS, exercise any power and engage in any activity that has been authorized for national banks, federal thrifts or state banks in a state other than Pennsylvania, provided that the activity is permissible under applicable federal law and not specifically prohibited by Pennsylvania law. Such powers and activities must be subject to the same limitations and restrictions imposed on the national bank, federal thrift or out-of-state bank that exercised the power or activity, subject to a required notice to the PDBS. The FDIA, however, prohibits state-chartered banks from making new investments, loans, or becoming involved in activities as principal and equity investments which are not permitted for national banks unless (1) the FDIC determines the activity or investment does not pose a significant risk of loss to the Deposit Insurance Fund and (2) the Bank meets all applicable capital requirements. Accordingly, the additional operating authority provided to the Bank by the Pennsylvania Banking Code is restricted by the FDIA.

Transactions with Affiliates and Insiders

Transactions between our subsidiaries, or between the Corporation and our subsidiaries, are regulated under Sections 23A and 23B of the Federal Reserve Act. The Federal Reserve Act imposes quantitative and qualitative requirements and collateral requirements on covered transactions by the Bank with, or for the benefit of, its affiliates. Generally, the Federal Reserve Act limits the extent to which a bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of a bank’s capital stock and surplus, limits the aggregate amount of all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus, and requires those transactions to be on terms at least as favorable to a bank as if the transaction were conducted with an unaffiliated third party. Covered transactions are defined by statute to include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve) from the affiliate, certain derivative transactions with an affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate. In addition, any credit transactions with any affiliate, must be secured by designated amounts of specified collateral.

Federal law also limits a bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not

Table of Contents

involve more than the normal risk of non-repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons individually and in the aggregate.

Source of Strength

Federal Reserve policy and federal law require bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this requirement, Meridian is expected to commit resources to support the Bank, including at times when it may not be in a financial position to provide such resources, and it may not be in our, or our shareholders’ or creditors’, best interests to do so. In addition, any capital loans Meridian makes to the Bank are subordinate in right of payment to depositors and to certain other indebtedness of the Bank. In the event of our bankruptcy, any commitment by us to a federal banking regulatory agency to maintain the capital of the Bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

Regulatory Capital Requirements

The Federal Reserve monitors the capital adequacy of the holding company on a consolidated basis, and the FDIC and the PDBS monitor the capital adequacy of the Bank. The banking regulators use a combination of risk-based guidelines and a leverage ratio to evaluate capital adequacy. The risk-based capital guidelines applicable to us are based on the Basel Committee’s December 2010 final capital framework, known as Basel III, as implemented by the federal banking regulators. The risk-based guidelines are intended to make regulatory capital requirements sensitive to differences in credit and market risk profiles among banks and bank holding companies, to account for off-balance sheet exposure and to minimize disincentives for holding liquid assets.

Basel III and the Capital Rules. In July 2013, the federal banking regulators approved final rules, or the Capital Rules, implementing the Basel Committee’s December 2010 final capital framework for strengthening international capital standards, known as Basel III, and various provisions of the Dodd-Frank Act. The Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and banks, including us, compared to the previous risk-based capital rules. The Capital Rules revise the components of capital and address other issues affecting the numerator in regulatory capital ratio calculations. The Capital Rules, among other things, (i) include a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and (iv) expand the scope of the deductions/adjustments to capital as compared to prior regulations.

Under the Basel III Capital Rules, the minimum capital ratios are (i) 4.5% CET1 to risk-weighted assets, (ii) 6% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets, (iii) 8% total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets and (iv) 4% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (known as the “leverage ratio”).

The current Capital Rules also include a capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is composed entirely of CET1, on top of these minimum risk-weighted asset ratios.

The Capital Rules require us to maintain an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios of (i) 7% CET1 to risk-weighted assets, (ii) 8.5% Tier 1 capital to risk-weighted assets, (iii) 10.5% total capital to risk-weighted assets and (iv) a minimum leverage ratio of 4%. The Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, certain deferred tax assets and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 began on January 1, 2016 and was phased in over a four-year period, until it became fully implemented on January 1, 2019. In addition, the Capital Rules provide for a countercyclical capital buffer applicable only to certain covered institutions. We do not expect the countercyclical capital buffer to be applicable to us. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the capital conservation buffer (or below the combined capital conservation buffer and countercyclical capital

Table of Contents

buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

In addition, under the general risk-based Capital Rules, the effects of accumulated other comprehensive income items included in capital were excluded for the purposes of determining regulatory capital ratios. Under the Capital Rules, the effects of certain accumulated other comprehensive income items are not excluded; however, non-advanced approaches banking organizations, including the Bank, were able to make a one-time permanent election to continue to exclude these items. The Bank made this election.

The Capital Rules also prescribed a new standardized approach for risk weightings that expanded the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0%, for U.S. government and agency securities, to 600%, for certain equity exposures, and resulting in higher risk weights for a variety of asset categories.

Community banks have long raised concerns with bank regulators about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In response, Congress provided an “off-ramp” for institutions, like us, with total consolidated assets of less than $10 billion. Section 201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single "Community Bank Leverage Ratio" (“CBLR”) of between 8 and 10%. Under the final rule, a community banking organization is eligible to elect the new framework if it has: less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%.The bank regulatory agencies temporarily lowered the CBLR to 8% as a result of the COVID-19 pandemic. During the first quarter of 2020, the Bank adopted the community bank leverage ratio framework as its primary regulatory capital ratio.

With respect to the Bank, the Capital Rules also revised the prompt corrective action regulations pursuant to Section 38 of the FDIA. See “—Prompt Corrective Action Framework” below.

Prompt Corrective Action Framework

The Federal Deposit Insurance Act, as amended (“FDIA”), requires among other things, that the federal banking agencies take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. The FDIA sets forth the following five capital tiers for purposes of implementing the PCA regulations: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.”

Liquidity Regulations

Historically, the regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III final framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio, or LCR, is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio, or NSFR, is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incentivize banking entities to increase their holdings of U.S. Treasury securities and other sovereign debt as a component of assets and increase the use of long-term debt as a funding source.

Safety and Soundness Standards

The FDIA requires the federal banking agencies to prescribe standards, by regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. The federal banking agencies have adopted the

Table of Contents

Interagency Guidelines for Establishing Standards for Safety and Soundness. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, these guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. These guidelines also prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal shareholder. In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying all safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the banking regulator must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution may be subject under the FDIA. See “—Prompt Corrective Action Framework”. If an institution fails to comply with such an order, the banking regulator may seek to enforce such order in judicial proceedings and to impose civil money penalties.

Deposit Insurance

FDIC insurance assessments

As an FDIC-insured bank, the Bank must pay deposit insurance assessments to the FDIC based on its average total assets minus its average tangible equity. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government.

As an institution with less than $10 billion in assets, the Bank’s assessment rates are based on the level of risk it poses to the FDIC’s deposit insurance fund (“DIF”). Pursuant to changes adopted by the FDIC that were effective July 1, 2016, the initial base rate for deposit insurance is between three and 30 basis points. Total base assessment after possible adjustments now ranges between 1.5 and 40 basis points. For established smaller institutions, like the Bank, supervisory ratings are used along with (i) an initial base assessment rate, (ii) an unsecured debt adjustment (which can be positive or negative), and (iii) a brokered deposit adjustment, to calculate a total base assessment rate.

Under the Dodd-Frank Act, the limit on FDIC deposit insurance was increased to $250 thousand. The coverage limit is per depositor, per insured depository institution for each account ownership category. The Dodd-Frank Act also set a new minimum DIF reserve ratio at 1.35% of estimated insured deposits. In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. In December 2018, the FDIC announced that the DIF reserve ratio had surpassed this benchmark.

The FDIC adopted a final rule effective June 26, 2020, and applied as of April 1, 2020, to mitigate the effect on deposit insurance assessments of a bank’s participation in the Paycheck Protection Program, the Paycheck Protection Program Liquidity Facility and the Money Market Mutual Fund Liquidity Facility in connection with the COVID-19 pandemic.

Under the FDIA, the FDIC may terminate deposit insurance upon a finding that an institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Other assessments

In addition, the Deposit Insurance Funds Act of 1996 authorized the Financing Corporation (“FICO”) to impose assessments on certain deposits in order to service the interest on the FICO’s bond obligations from deposit insurance fund assessments. The amount assessed on individual institutions is in addition to the amount, if any, paid for deposit insurance according to the FDIC’s risk-related assessment rate schedules. Assessment rates may be adjusted quarterly to reflect changes in the assessment base.

Table of Contents

Depositor Preference

The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of deposits of the institution, including the claims of the FDIC as subrogate of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the United States and the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution.

Interstate Branching

Pennsylvania banking laws authorize banks in Pennsylvania to acquire existing branches or branch de novo in other states, and also permits out-of-state banks to acquire existing branches or branch de novo in Pennsylvania.

Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) any state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger. The establishment of new interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) has historically been permitted only in those states the laws of which expressly authorize such expansion. However, the Dodd-Frank Act permits well-capitalized and well-managed banks to establish new branches across state lines without these impediments.

Consumer Financial Protection

We are subject to a number of federal and state consumer protection laws that extensively govern our relationship with our customers. These laws include the Equal Credit Opportunity Act (“ECOA”), the Fair Credit Reporting Act, the Truth in Lending Act (“TILA”), the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, Fair Credit Reporting Act, the Service Members Civil Relief Act, the Right to Financial Privacy Act, Telephone Consumer Protection Act, CAN-SPAM Act, and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, restrict our ability to raise interest rates on extensions of credit and subject us to substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by customers, including actual damages, restitution and attorneys’ fees. Federal banking regulators, state attorneys general and state and local consumer protection agencies may also seek to enforce consumer protection requirements and obtain these and other remedies, including regulatory sanctions, customer rescission rights, action by the state and local attorneys general in each jurisdiction in which we operate and civil money penalties. Failure to comply with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish to pursue or our prohibition from engaging in such transactions even if approval is not required.

The Consumer Financial Protection Bureau (“CFPB”), has broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws with respect to certain consumer financial products and services, including the ability to require reimbursements and other payments to customers for alleged legal violations. The CFPB has the authority to impose significant penalties, as well as injunctive relief that prohibits lenders from engaging in allegedly unlawful practices. The CFPB is also authorized to engage in consumer financial education, track consumer complaints, request data and promote the availability of financial services to underserved consumers and communities. Although all institutions are subject to rules adopted by the CFPB and examination by the CFPB in conjunction with examinations by the institution’s primary federal regulator, the CFPB has primary examination and enforcement authority over institutions with assets of $10 billion or more. The FDIC has primary responsibility for examination of the Bank and enforcement with respect to various federal consumer protection laws so long as the Bank has total consolidated assets of less than $10 billion, and state authorities are responsible for monitoring our compliance with all state consumer laws. The

Table of Contents

CFPB also has the authority to require reports from institutions with less than $10 billion in assets, such as the Bank, to support the CFPB in implementing federal consumer protection laws, supporting examination activities, and assessing and detecting risks to consumers and financial markets.

The consumer protection provisions of the Dodd-Frank Act and the examination, supervision and enforcement of those laws and implementing regulations by the CFPB have created a more intense and complex environment for consumer finance regulation. The CFPB has significant authority to implement and enforce federal consumer finance laws, including the TILA, the ECOA and new requirements for financial services products provided for in the Dodd-Frank Act.

The CFPB has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks including, among other things, the authority to prohibit “unfair, deceptive, or abusive” acts and practices. Abusive acts or practices are defined in the Dodd-Frank Act as those that (1) materially interfere with a consumer’s ability to understand a term or condition of a consumer financial product or service, or (2) take unreasonable advantage of a consumer’s (a) lack of financial savvy, (b) inability to protect herself or himself in the selection or use of consumer financial products or services, or (c) reasonable reliance on a covered entity to act in the consumer’s interests. The review of products and practices to prevent such acts and practices is a continuing focus of the CFPB, and of banking regulators more broadly. The ultimate impact of this heightened scrutiny is uncertain but it could result in changes to pricing, practices, products and procedures. It could also result in increased costs related to regulatory oversight, supervision and examination, additional remediation efforts and possible penalties. The Dodd-Frank Act does not prevent states from adopting stricter consumer protection standards. State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations.

Federal Home Loan Bank Membership

The Bank is a member of the Federal Home Loan Bank of Pittsburgh (“FHLB”), which serves as a central credit facility for its members. The FHLB is funded primarily from proceeds from the sale of obligations of the FHLB system. It makes loans to member banks in the form of FHLB advances. All advances from the FHLB are required to be fully collateralized as determined by the FHLB.

Ability-To-Pay Rules and Qualified Mortgages

As required by the Dodd-Frank Act, the CFPB issued a series of final rules in January 2013 amending Regulation Z, implementing TILA, which requires mortgage lenders to make a reasonable and good faith determination, based on verified and documented information, that a consumer applying for a residential mortgage loan has a reasonable ability to repay the loan according to its terms. These final rules prohibit creditors, such as the Bank, from extending residential mortgage loans without regard for the consumer’s ability to repay and add restrictions and requirements to residential mortgage origination and servicing practices. In addition, these rules restrict the imposition of prepayment penalties and restrict compensation practices relating to residential mortgage loan origination. Mortgage lenders are required to determine consumers’ ability to repay in one of two ways. The first alternative requires the mortgage lender to consider eight underwriting factors when making the credit decision. Alternatively, the mortgage lender can originate “qualified mortgages”, which are entitled to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a qualified mortgage is a residential mortgage loan that does not have certain high risk features, such as negative amortization, interest-only payments, balloon payments, or a term exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer cannot exceed 3% of the total loan amount and the borrower’s total debt-to-income ratio must be no higher than 43% (subject to certain limited exceptions for loans eligible for purchase, guarantee or insurance by a government sponsored enterprise or a federal agency).

Commercial Real Estate Guidance

In December 2015, the federal banking regulators released a statement entitled “Interagency Statement on Prudent Risk Management for Commercial Real Estate Lending” (the “CRE Guidance”). In the CRE Guidance, the federal banking regulators (i) expressed concerns with institutions that ease commercial real estate underwriting standards, (ii) directed financial institutions to maintain underwriting discipline and exercise risk management practices to identify, measure and monitor lending risks, and (iii) indicated that they will continue to pay special attention to commercial real estate lending

Table of Contents

activities and concentrations going forward. The federal banking regulators previously issued guidance in December 2006, entitled “Interagency Guidance on Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices”, which stated that an institution is potentially exposed to significant commercial real estate concentration risk, and should employ enhanced risk management practices, where (1) total commercial real estate loans represent 300% or more of its total capital and (2) the outstanding balance of such institution’s commercial real estate loan portfolio has increased by 50% or more during the prior 36 months.

Leveraged Lending Guidance

In March 2013, the federal banking regulators jointly issued guidance on leveraged lending that updates and replaces the guidance for leveraged finance activities issued by the federal banking regulators in April 2001. The revised leveraged lending guidance describes regulatory expectations for the sound risk management of leveraged lending activities, including the importance for institutions to maintain, among other things, (i) a credit limit and concentration framework consistent with the institution’s risk appetite, (ii) underwriting standards that define acceptable leverage levels, (iii) strong pipeline management policies and procedures and (iv) guidelines for conducting periodic portfolio and pipeline stress tests.

Community Reinvestment Act of 1977

Under the CRA, the Bank has an obligation, consistent with safe and sound operations, to help meet the credit needs of the market areas where it operates, which includes providing credit to low- and moderate-income individuals and communities. In connection with its examination of the Bank, the FDIC is required to assess our compliance with the CRA. Our bank’s failure to comply with the CRA could, among other things, result in the denial or delay in certain corporate applications filed by us, including applications for branch openings or relocations and applications to acquire, merge or consolidate with another banking institution or holding company. Our bank received a rating of “Satisfactory” in its most recently completed CRA examination in 2020 that was as of February 11, 2020.

Financial Privacy

The federal banking regulators have adopted rules limiting the ability of banks and other financial institutions to disclose non-public information about consumers to unaffiliated third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to an unaffiliated third party. These regulations affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

Anti-Money Laundering and the USA PATRIOT ACT

The USA PATRIOT Act of 2001, which was enacted in the wake of the September 11, 2001 attacks, includes provisions designed to combat international money laundering and advance the U.S. government’s war against terrorism. The USA PATRIOT Act and the regulations which implement it contain many obligations which must be satisfied by financial institutions, including the Bank. Those regulations impose obligations on financial institutions, such as the Bank, to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. The failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing could have serious legal and reputational consequences for the financial institution.

Office of Foreign Assets Control Regulation

The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) administers and enforces economic and trade sanctions against targeted foreign countries and regimes, under authority of various laws, including designated foreign countries, nationals and others. OFAC publishes lists of specially designated targets and countries. We are responsible for, among other things, blocking accounts of, and transactions with, such targets and countries, prohibiting unlicensed trade and financial transactions with them and reporting blocked transactions after their occurrence. Failure to comply with these sanctions could have serious legal and reputational consequences and could result in civil money penalties imposed on the institution by OFAC. Failure to comply with these sanctions could also cause applicable bank regulatory authorities not to

Table of Contents

approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

Incentive Compensation

The Federal Reserve will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as us, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

During the second quarter of 2016, certain U.S. regulators, including the Federal Reserve, the FDIC and the SEC, proposed revised rules on incentive-based payment arrangements at specified regulated entities having at least $1 billion in total assets (which would not include the Bank). The proposed revised rules would establish general qualitative requirements applicable to all covered entities, which would include: (i) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation; (ii) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss; (iii) establishing requirements for performance measures to appropriately balance risk and reward; (iv) requiring board of director oversight of incentive arrangements; and (v) mandating appropriate record-keeping.

Pursuant to rules adopted by the stock exchanges and approved by the SEC in January 2013 under the Dodd-Frank Act, public company compensation committee members must meet heightened independence requirements and consider the independence of compensation consultants, legal counsel and other advisors to the compensation committee. A compensation committee must have the authority to hire advisors and to have the public company fund reasonable compensation of such advisors.

Public companies will be required, once stock exchanges impose additional listing requirements under the Dodd-Frank Act, to implement “clawback” procedures for incentive compensation payments and to disclose the details of the procedures which allow recovery of incentive compensation that was paid on the basis of erroneous financial information necessitating a restatement due to material noncompliance with financial reporting requirements. This clawback policy is intended to apply to compensation paid within a three-year look-back window of the restatement and would cover all executives who received incentive awards.

Cybersecurity

In March 2015, federal regulators issued two related statements regarding cybersecurity. One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing internet-based services of the financial institution. The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption and maintenance of the institution’s operations after a cyberattack involving destructive malware. A financial institution is also expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyberattack. If we fail to observe the regulatory guidance, we could be subject to various regulatory sanctions, including financial penalties.

In June 2016, federal regulators also issued a joint statement on cybersecurity of interbank messaging and wholesale payment networks. This statement highlights that cyberattacks have targeted interbank messaging and wholesale payment networks, resulting in large-dollar fraud at several foreign institutions. The statement notes that financial institutions

Table of Contents

should review their risk management practices and controls over information technology and wholesale payment systems networks, including authentication, authorization, fraud detection, and response management systems and processes.

An increasing number of state laws and regulations have been enacted in recent years to implement privacy and cybersecurity standards and regulations, including data breach notification and data privacy requirements. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs that meet specified requirements. This trend of activity is expected to continue to expand, requiring continual monitoring of developments in the states and nations in which our customers are located and ongoing investments in our information systems and compliance capabilities.

In the ordinary course of business, we rely on electronic communications and information systems to conduct our operations and to store sensitive data. We employ an in-depth, layered, defensive approach that leverages people, processes and technology to manage and maintain cybersecurity controls. We employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats. Notwithstanding the strength of our defensive measures, the threat from cyberattacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. While to date, we have not experienced a significant compromise, significant data loss or any material financial losses related to cybersecurity attacks, our systems and those of our customers and third party service providers are under constant threat and it is possible that we could experience a significant event in the future. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.

Future Legislation and Regulation

Congress may enact legislation from time to time that affects the regulation of the financial services industry, and state legislatures may enact legislation from time to time affecting the regulation of financial institutions chartered by or operating in those states. Federal and state regulatory agencies also periodically propose and adopt changes to their regulations or change the manner in which existing regulations are applied. The substance or impact of pending or future legislation or regulation, or the application thereof, cannot be predicted, although enactment of the proposed legislation could affect the regulatory structure under which we operate and may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital or modify our business strategy, or limit our ability to pursue business opportunities in an efficient manner. Our business, financial condition, results of operations or prospects may be adversely affected, perhaps materially, as a result.

Item 1A. Risk Factors

Investing in our common stock involves a significant degree of risk. The material risks and uncertainties that management believes affect us are described below. Before investing in our common stock, you should carefully consider the risks and uncertainties described below, in addition to the other information contained in this Annual Report. Any of the following risks, as well as risks that we do not know or currently deem immaterial, could have a material adverse effect on our business, financial condition or results of operations. As a result, the trading price of our common stock could decline, and you could lose some or all of your investment. Further, to the extent that any of the information in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors below are cautionary statements identifying important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. See “Cautionary Note Regarding Forward-Looking Statements”.

Risks Related to Our Business / Operations

Our business and operations may be materially adversely affected by national and local market economic conditions.

Our business and operations, which primarily consist of banking and wealth management activities, including lending money to customers in the form of loans and borrowing money from customers in the form of deposits, are sensitive to general business and economic conditions in the United States generally, and in our local markets in particular. If economic

Table of Contents

conditions in the United States or any of our local markets weaken, our growth and profitability from our operations could be constrained. The current economic environment is characterized by interest rates near historically low levels, which impacts our ability to attract deposits and to generate attractive earnings through our loan and investment portfolios. All of these factors can individually or in the aggregate be detrimental to our business, and the interplay between these factors can be complex and unpredictable. Unfavorable market conditions can result in a deterioration in the credit quality of our borrowers and the demand for our products and services, an increase in the number of delinquencies, defaults and charge-offs, additional provisions for loan losses, a decline in the value of our collateral, and an overall material adverse effect on the quality of our loan portfolio.

The economic conditions in our local markets may be different from the economic conditions in the United States as a whole. Our success depends to a certain extent on the general economic conditions of the geographic markets that we serve in Pennsylvania, New Jersey, Delaware and Maryland. Local economic conditions in these areas have a significant impact on our commercial, real estate and construction loans, the ability of borrowers to repay these loans and the value of the collateral securing these loans. Adverse changes in the economic conditions of the northeastern United States in general or any one or more of these local markets could negatively impact the financial results of our banking operations and have a negative effect on our profitability.

We May Be Adversely Impacted By The Transition From LIBOR As A Reference Rate

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). In November 2020, the administrator of LIBOR announced it will consult on its intention to extend the retirement date of certain offered rates whereby the publication of the one week and two month LIBOR offered rates will cease after December 31, 2021; but, the publication of the remaining LIBOR offered rates will continue until June 30, 2023. Given consumer protection, litigation, and reputation risks, the bank regulatory agencies have indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and that they will examine bank practices accordingly. Therefore, the agencies encouraged banks to cease entering into new contracts that use LIBOR as a reference rate by December 31, 2021.

It is not possible to predict what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments. In particular, regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fall-back language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., AMERIBOR or the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments.

At December 31, 2021, we do not have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR however, the transition from LIBOR could result in added costs and employee efforts and could present additional risk. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. Transition from LIBOR did not have a material impact on our business, financial condition and results of operations.

The value of the financial instruments we own may decline in the future.

As of December 31, 2021, we owned $168.0 million of investment securities, which consisted primarily of our positions in U.S. government and government-sponsored enterprises and federal agency obligations, mortgage and asset-backed securities and municipal securities. We evaluate our investment securities on at least a quarterly basis, and more frequently when economic and market conditions warrant such an evaluation, to determine whether any decline in fair value below amortized cost is the result of an other-than-temporary impairment. The process for determining whether impairment is other-than-temporary usually requires complex, subjective judgments about the future financial performance of the issuer in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting issuers, we may be required to recognize other-than-temporary impairment in future periods, which could adversely affect our business, results of operations or financial condition.

Table of Contents

In addition, an increase in market interest rates may affect the market value of our securities portfolio, potentially reducing accumulated other comprehensive income and/or earnings.

Our small business customers may lack the resources to weather a downturn in the economy.

One of our primary strategies is serving the banking and financial services needs of small and medium sized businesses. These businesses generally have fewer financial resources than larger entities and less access to capital sources and loan facilities. If economic conditions are generally unfavorable in our market areas, our small business borrowers may be disproportionately affected and their ability to repay outstanding loans may be negatively affected, resulting in an adverse effect on our results of operations and financial condition.

We may be adversely affected by risks associated with completed and potential acquisitions.

We evaluate opportunities to acquire and invest in banks and in other complementary businesses. As a result, we may engage in negotiations or discussions that, if they were to result in a transaction, could have a material effect on our operating results and financial condition, including short and long-term liquidity and capital structure. Our acquisition activities could be material to us. For example, we could issue additional shares of common stock in a merger transaction, which could dilute current shareholders' ownership interest. An acquisition could require us to use a substantial amount of cash, other liquid assets, and/or incur debt.

Our acquisition activities could involve a number of additional risks, including the risks of:

●

Incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions;

●

Using inaccurate estimates and judgments to evaluate credit, operations, management, and market risks with respect to the target institution or its assets;

●

The time and expense required to integrate the operations and personnel of the combined businesses;

●

Creating an adverse short-term effect on our results of operations;

●

Failing to realize related revenue synergies and/or cost savings within expected time frames; and

●

Losing key employees and customers or a reduction in our stock price as a result of an acquisition that is poorly.

We may not be successful in overcoming these risks or any other problems encountered in connection with potential acquisitions. Our inability to overcome these risks could have an adverse effect on our ability to achieve our business strategy and could have an adverse effect on our financial condition and results of operations.

Liquidity risks could affect operations and jeopardize our business, financial condition and results of operations.

Liquidity risk is the risk that we will not be able to meet our obligations, including financial commitments, as they come due and is inherent in our operations. An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities and from other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of our customer deposits. Deposit balances can decrease for a variety of reasons, including when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, we could lose a stable source of funds. This loss would require us to seek other funding alternatives, in order to continue to grow, thereby potentially increasing our funding costs and reducing our net interest income and net income.

Other primary sources of funds consist of cash from operations and investment maturities, redemptions and sales. To a lesser extent, proceeds from the issuance and sale of securities to investors has become a source of funds. Additional liquidity is provided by wholesale funding such as brokered deposits and borrowings from the Federal Reserve Bank of Philadelphia and the FHLB. We also may borrow from correspondent banks or third party lenders from time to time. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services

Table of Contents

industry. Economic conditions and a loss of confidence in financial institutions may increase our cost of funding or access to certain customary sources of funds, including inter-bank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve System.

Any decline in available funding could adversely impact our ability to continue to implement our business plan, including originating loans, investing in securities, meeting our expenses or fulfilling obligations such as repaying our borrowings and meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.

The Corporation’s liquidity is dependent on dividends from the Bank.

The Corporation is a legal entity separate and distinct from the Bank, which is a wholly-owned banking subsidiary. A substantial portion of our cash flow from operating activities, including cash flow to pay principal and interest on any debt we may incur, will come from dividends from the Bank. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to our shareholders. For example, Pennsylvania law only permits the Bank to pay dividends out of its net profits then on hand, after first deducting the Bank’s losses and any debts owed to the Bank on which interest is past due and unpaid for a period of six months or more, unless the same are well secured and in the process of collection. Also, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.

Our shareholders are only entitled to receive such dividends as our Board of Directors may declare out of funds legally available for such payments. Although we currently pay quarterly dividends on our common stock, we are not required to do so and may reduce or eliminate our common stock dividend in the future. Our ability to pay dividends to our shareholders is subject to the restrictions set forth in Pennsylvania law, by the Federal Reserve, and depends on, among other things, our results of operations, financial condition, debt service requirements, other cash needs and any other factors our Board of Directors deems relevant. Notification to the Federal Reserve is also required prior to our declaring and paying a cash dividend to our shareholders during any period in which our quarterly and/or cumulative twelve-month net earnings are insufficient to fund the dividend amount, among other requirements. We may not pay a dividend if the Federal Reserve objects or until such time as we receive approval from the Federal Reserve or we no longer need to provide notice under applicable regulations. In addition, we may be restricted by applicable law or regulation or actions taken by our regulators, now or in the future, from paying dividends to our shareholders. We cannot provide assurance that we will continue paying dividends on our common stock at current levels or at all. A reduction or discontinuance of dividends on our common stock could have a material adverse effect on our business, including the market price of our common stock.

Loss of deposits could increase our funding costs.

As do many banking companies, we rely on customer deposits to meet a considerable portion of our funding needs, and we continue to seek customer deposits to maintain this funding base. We accept deposits directly from consumer and commercial customers and, as of December 31, 2021, we had $1.4 billion in deposits. These deposits are subject to potentially dramatic fluctuations in availability or the price we must pay (in the form of interest) to obtain them due to certain factors outside our control, such as a loss of confidence by customers in us or the banking sector generally, customer perceptions of our financial health and general reputation, increasing competitive pressures from other financial services firms for consumer or corporate customer deposits, changes in interest rates and returns on other investment classes, which could result in significant outflows of deposits within short periods of time or significant changes in pricing necessary to maintain current customer deposits or attract additional deposits. The loss of customer deposits for any reason could increase our funding costs.

We may need to raise additional capital in the future, and such capital may not be available when needed or at all.

We may need to raise additional capital, in the form of debt or equity securities, in the future to have sufficient capital resources to meet our commitments and fund our business needs and future growth, particularly if the quality of our assets or earnings were to deteriorate significantly. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial condition. We may not be able to obtain capital on acceptable terms or at all. Any occurrence that may limit our access to capital, such as a

Table of Contents

decline in the confidence of debt purchasers, depositors of the Bank or counterparties participating in the capital markets or other disruption in capital markets, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Further, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would then have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have a material adverse effect on our business, financial condition or results of operations and could be dilutive to both tangible book value and our share price.

We may not be able to implement our growth strategy or manage costs effectively, resulting in lower earnings or profitability.

There can be no assurance that we will be able to continue to grow and to be profitable in future periods, or, if profitable, that our overall earnings will remain consistent or increase in the future. Our strategy is focused on organic growth, supplemented by opportunistic acquisitions.

Our growth requires that we increase our loans and deposits while managing risks by following prudent loan underwriting standards without increasing interest rate risk or compressing our net interest margin, maintaining more than adequate capital at all times, hiring and retaining qualified employees and successfully implementing strategic projects and initiatives. Even if we are able to increase our interest income, our earnings may nonetheless be reduced by increased expenses, such as additional employee compensation or other general and administrative expenses and increased interest expense on any liabilities incurred or deposits solicited to fund increases in assets. Additionally, if our competitors extend credit on terms we find to pose excessive risks, or at interest rates which we believe do not warrant the credit exposure, we may not be able to maintain our lending volume and could experience deteriorating financial performance.

Our inability to manage our growth successfully or to continue to expand into new markets could have a material adverse effect on our business, financial condition or results of operations.

The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents could have a material adverse effect on our business, financial condition or results of operations.

We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and we could be negatively affected by these laws. As a financial institution, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting customer or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services, which could have a material adverse effect on our business, financial conditions or results of operations.

Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us or our clients, denial or degradation of service attacks, and malware or other cyberattacks. In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyberattacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. Consistent with industry trends, we have also experienced an increase in attempted electronic fraudulent activity, security breaches and cybersecurity-related incidents in recent periods. Moreover, in recent periods, several large corporations, including financial institutions and retail companies, have suffered major data breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their customers and employees and subjecting them to potential fraudulent activity. Some of our clients may have been affected by these breaches, which could increase their risks of identity theft and other fraudulent activity that could involve their accounts with us.

We also face risks related to cyberattacks and other security breaches in connection with debit card transactions that typically involve the transmission of sensitive information regarding our customers through various third parties, including

Table of Contents

retailers and payment processors. Some of these parties have in the past been the target of security breaches and cyberattacks, and because the transactions involve third parties and environments such as the point of sale that we do not control or secure, future security breaches or cyberattacks affecting any of these third parties could affect us through no fault of our own, and in some cases we may have exposure and suffer losses for breaches or attacks relating to them, including costs to replace compromised debit cards and address fraudulent transactions.

Information pertaining to us and our customers is maintained, and transactions are executed, on networks and systems maintained by us and certain third party partners, such as our online banking systems or third party services. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our customers against fraud and security breaches and to maintain our customers’ confidence. Breaches of information security also may occur, through intentional or unintentional acts by those having access to our systems or our customers’ or counterparties’ confidential information, including employees. In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our customers and underlying transactions, as well as the technology used by our customers to access our systems. Although we have developed, and continue to invest in, systems and processes that are designed to detect and prevent security breaches and cyberattacks and periodically test our security, our or our third party partners’ inability to anticipate, or failure to adequately mitigate, breaches of security could result in: losses to us or our customers; our loss of business and/or customers; damage to our reputation; the incurrence of additional expenses; disruption to our business; our inability to grow our online services or other businesses; additional regulatory scrutiny or penalties; or our exposure to civil litigation and possible financial liability—any of which could have a material adverse effect on our business, financial condition or results of operations.

More generally, publicized information concerning security and cyber-related problems could inhibit the use or growth of electronic or web-based applications or solutions as a means of conducting commercial transactions. Such publicity may also cause damage to our reputation as a financial institution. As a result, our business, financial condition or results of operations could be adversely affected.

We depend on information technology and telecommunications systems of third parties, and any systems failures, interruptions or data breaches involving these systems could adversely affect our operations and financial condition.

We are dependent for the majority of our technology, including our core operating system, on third-party providers. If these companies were to discontinue providing services to us, we may experience significant disruption to our business. In addition, each of these third parties faces the risk of cyber attack, information breach or loss, or technology failure. If any of our third-party service providers experience such difficulties, or if there is any other disruption in our relationships with them, we may be required to find alternative sources of such services. We are dependent on these third-party providers

securing their information systems, over which we have limited control, and a breach of their information systems could adversely affect our ability to process transactions, service our clients or manage our exposure to risk and could result in the disclosure of sensitive, personal customer information, which could have a material adverse impact on our business through damage to our reputation, loss of business, remedial costs, additional regulatory scrutiny or exposure to civil litigation and possible financial liability. Assurance cannot be provided that we could negotiate terms with alternative service sources that are as favorable or could obtain services with similar functionality as found in existing systems without the need to expend substantial resources, if at all, thereby resulting in a material adverse impact on our business and results of operations.

We continually encounter technological change.

The financial services industry is continually undergoing rapid technological change with frequent introductions of new, technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to serve customers better and to reduce costs. Our future success depends, in part, on our ability to effectively embrace technology to better serve customers and reduce costs. The Corporation may be required to expend additional resources to employ the latest technologies. Failure to keep pace with technological change could potentially have an adverse effect on our business operations and financial condition and results of operations.

Table of Contents

We may not be able to attract and retain key personnel and other skilled employees.

We are dependent on the ability and experience of a number of key management personnel, who have substantial experience with the markets in which we offer products and services, the financial services industry, and our operations. The loss of one or more senior executives or key managers may have an adverse effect on our businesses. We maintain change in control agreements with certain executive officers to aid in our retention of these individuals. Our success depends on our ability to continue to attract, manage, and retain other qualified management personnel.

New lines of business, products, product enhancements or services may subject us to additional risks.

From time to time, we may implement new lines of business or offer new products and product enhancements as well as new services within our existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances in which the markets are not fully developed. In implementing, developing or marketing new lines of business, products, product enhancements or services, we may invest significant time and resources, but may not fully realize their expected benefits. Further, initial timetables for the introduction and development of new lines of business, products, product enhancements or services may not be achieved, and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also affect the ultimate implementation of a new line of business or offerings of new products, product enhancements or services. Furthermore, any new line of business, product, product enhancement or service or system conversion could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or offerings of new products, product enhancements or services could have a material adverse effect on our business, financial condition or results of operations.

We operate in a highly competitive and changing industry and market area and compete with both banks and non-banks.

The banking and financial services industry in our market area is highly competitive. We may not be able to compete effectively in our markets, which could adversely affect our results of operations. The increasingly competitive environment is a result of changes in regulation, advances in technology and product delivery systems, and consolidation among financial service providers. Larger institutions have greater resources and access to capital markets, with higher lending limits, more advanced technology and broader suites of services. Competition at times requires increases in deposit rates and decreases in loan rates, and adversely impact our net interest margin.

Our ability to maintain, attract and retain customer relationships is highly dependent on our reputation.

We rely, in part, on the reputation of the Bank to attract customers and retain our customer relationships. Damage to our reputation could undermine the confidence of our current and potential customers in our ability to provide high-quality financial services. Such damage could also impair the confidence of our counterparties and vendors and ultimately affect our ability to effect transactions. Maintenance of our reputation depends not only on our success in maintaining our service-focused culture and controlling and mitigating the various risks described in this Annual Report on Form 10-K, but also on our success in identifying and appropriately addressing issues that may arise in areas such as potential conflicts of interest, anti-money laundering, customer personal information and privacy issues, customer and other third party fraud, record-keeping, regulatory investigations and any litigation that may arise from the failure or perceived failure of us to comply with legal and regulatory requirements. Maintaining our reputation also depends on our ability to successfully prevent third parties from infringing on the “Meridian” brand and associated trademarks and our other intellectual property. Defense of our reputation, trademarks and other intellectual property, including through litigation, could result in costs that could have a material adverse effect on our business, financial condition or results of operations.

Accounting standards periodically change and the application of our accounting policies and methods may require management to make estimates about matters that are uncertain.

The regulatory bodies that establish accounting standards, including, among others, the Financial Accounting Standards Board (“FASB”) and the SEC, periodically revise or issue new financial accounting and reporting standards that govern

Table of Contents

the preparation of our consolidated financial statements. The effect of such revised or new standards on our financial statements can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.

In addition, management must exercise judgment in appropriately applying many of our accounting policies and methods so they comply with generally accepted accounting principles. In some cases, management may have to select a particular accounting policy or method from two or more alternatives. In some cases, the accounting policy or method chosen might be reasonable under the circumstances and yet might result in our reporting materially different amounts than would have been reported if we had selected a different policy or method. Accounting policies are critical to fairly presenting our financial condition and results of operations and may require management to make difficult, subjective or complex judgments about matters that are uncertain.

The Corporation’s controls and procedures may fail or be circumvented.

Our management diligently reviews and updates the Corporation’s internal controls over financial reporting, disclosure controls and procedures, and corporate governance policies and procedures. Any failure or undetected circumvention of these controls could have a material adverse impact on our financial condition and results of operations.

Risks Related to COVID-19

Our business, financial condition, liquidity and results of operations have been, and will likely continue to be, adversely affected by the COVID-19 pandemic.

The COVID-19 pandemic created economic and financial disruptions that adversely affected our business, financial condition, liquidity and results of operations. While the pandemic-related restrictions imposed by state and local governments have largely been lifted, COVID-19 continues to disrupt business and negatively impact consumer and business confidence. The extent to which the COVID-19 pandemic will continue to negatively affect our business, financial condition, liquidity and results of operations will depend on future developments, which are highly uncertain and cannot be predicted and many of which are outside of our control, including the scope and duration of the pandemic, the effectiveness of our business continuity and health emergency response plans, the direct and indirect impact of the pandemic on our employees, customers, clients, counterparties and service providers, as well as other market participants, and actions taken, or that may yet be taken, or inaction, by governmental authorities and other third parties in response to the pandemic. Any disruption to our ability to deliver financial products or services to, or interact with, our clients and customers could result in losses or increased operational costs, regulatory fines, penalties and other sanctions, or harm our reputation.

Risks Related to Lending Activities

We must effectively manage the credit risks of our loan portfolio.

Our business depends on the creditworthiness of our customers. There are risks inherent in making loans, including risks of nonpayment, risks resulting from uncertainties of the future value of collateral, and risks resulting from changes in economic and industry conditions. We attempt to reduce our credit risk through prudent loan application, underwriting and approval procedures, including internal loan reviews before and after proceeds have been disbursed, careful monitoring of the concentration of our loans within specific industries, and collateral and guarantee requirements. These procedures cannot, however, be expected to completely eliminate our credit risks, and we can make no guarantees concerning the strength of our loan portfolio.

Our allowance for loan and lease losses may be insufficient, and an increase in the allowance would reduce earnings.

We maintain an allowance for loan and lease losses at a level we believe adequate to absorb probable losses inherent in our existing loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry

Table of Contents

concentrations; specific credit risks; credit loss experience; current loan portfolio quality; present economic, political and regulatory conditions; and unidentified losses inherent in the current loan portfolio.

Determination of the allowance is inherently subjective as it requires significant estimates and management’s judgment of credit risks and future trends, all of which may undergo material changes. Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review our allowance and may require an increase in the provision for loan losses or the recognition of additional loan charge-offs, based on judgments different from those of management. Also, if charge-offs in future periods exceed the allowance for loan losses, we will need additional provisions to increase the allowance. Any increases in provisions will result in a decrease in net income and capital and may have a material adverse effect on our financial condition and results of operations.

In addition, in June 2016, the Financial Accounting Standards Board (the “FASB”) issued ASU 2016-13 (Topic 326 -Credit Losses), commonly referenced as the Current Expected Credit Loss (“CECL”). This standard will replace the current approach under GAAP for establishing allowances for loan and lease losses (the “Allowance”), which generally considers only past events and current conditions, with a forward-looking methodology that reflects the expected credit losses over the lives of financial assets, starting when such assets are first originated or acquired. Under the revised methodology, credit losses will be measured based on past events, current conditions and reasonable and supportable forecasts of future conditions that affect the collectability of financial assets. We are currently evaluating the effect that the new accounting standard will have on the consolidated financial statements and related disclosures. The standard will be effective for us as of January 1, 2023.

Our business, profitability and liquidity may be adversely affected by deterioration in the credit quality of, or defaults by, third parties who owe us money, securities or other assets or whose securities or obligations we hold.

In addition to relying on borrowers to repay their loans and leases, we are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. A default by a significant market participant, or concerns that such a party may default, could lead to significant liquidity problems, losses or defaults by other parties, which in turn could adversely affect us.

We are also subject to the risk that our rights against third parties may not be enforceable in all circumstances. Deterioration in the credit quality of third parties whose securities or obligations we hold, including the Federal Home Loan Mortgage Corporation, Government National Mortgage Corporation and municipalities, could result in significant losses.

Our mortgage lending business may not provide us with significant non-interest income.

The residential mortgage business is highly competitive, and highly susceptible to changes in market interest rates, consumer confidence levels, employment statistics, the capacity and willingness of secondary market purchasers to acquire and hold or securitize loans, and other factors beyond our control.

Because we sell substantially all of the mortgage loans we originate, the profitability of our mortgage banking business also depends in large part on our ability to aggregate a high volume of loans and sell them in the secondary market at a gain. In fact, as rates rise, we expect increasing industry-wide competitive pressures related to changing market conditions to reduce our pricing margins and mortgage revenues generally. Thus, in addition to our dependence on the interest rate environment, we are dependent upon (i) the existence of an active secondary market and (ii) our ability to profitably sell loans or securities into that market. If our level of mortgage production declines, the profitability will depend upon our ability to reduce our costs commensurate with the reduction of revenue from our mortgage operations.

Our ability to originate and sell mortgage loans readily is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by government-sponsored entities (“GSEs”) and other institutional and non-institutional investors. These entities account for a substantial portion of the secondary market in residential mortgage loans. We are highly dependent on these purchasers

Table of Contents

continuing their mortgage purchasing programs. Additionally, because the largest participants in the secondary market are Ginnie Mae, Fannie Mae and Freddie Mac, GSEs whose activities are governed by federal law, any future changes in laws that significantly affect the activity of these GSEs could, in turn, adversely affect our operations. Since September 2008 Fannie Mae and Freddie Mac have been operating in a conservatorship setup by the U.S. government as a response to the financial crisis of 2008. The Federal Housing Finance Agency (“FHFA”) continues to carry out its responsibilities as conservator.

Our SBA lending program is dependent upon the federal government and we face specific risks associated with originating SBA loans.

Our SBA lending program is dependent upon the federal government. As an SBA Preferred Lender, we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose enforcement actions, including revocation of the lender’s Preferred Lender status. If we lose our status as a Preferred Lender, we may lose some or all of our customers to lenders who are SBA Preferred Lenders. Also, any changes to the SBA program, including changes to the level of guarantee provided by the federal government on SBA loans, could adversely affect our business and earnings.

We generally sell the guaranteed portion of our SBA 7(a) program loans in the secondary market. These sales have resulted in premium income for us at the time of sale and created a stream of future servicing income. We may not be able to continue originating these loans or selling them in the secondary market. Furthermore, even if we are able to continue originating and selling SBA 7(a) program loans in the secondary market, we might not continue to realize premiums upon the sale of the guaranteed portion of these loans. When we sell the guaranteed portion of our SBA 7(a) program loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on the non-guaranteed portion of a loan, we share any loss and recovery related to the loan pro-rata with the SBA. If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by us, the SBA may seek recovery of the principal loss related to the deficiency from us, which could adversely affect our business and earnings.

The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in the future. We cannot predict the effects of these changes on our business and profitability. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies, changes in the laws, regulations and procedures applicable to SBA loans could adversely affect our business and earnings.

Our loan servicing rights could become impaired, which may require us to take non-cash charges.

Because we retain the servicing rights on many loans we sell in the secondary market, we are required to record mortgage servicing right assets and SBA servicing right assets, which we test quarterly for impairment. The values of these servicing rights are heavily dependent on market interest rates and tends to increase with rising interest rates and decrease with falling interest rates. If we are required to record an impairment charge, it would adversely affect our financial condition and results of operations.

We may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances, which could harm liquidity, results of operations and financial condition.

We sell substantially all of the mortgage loans held for sale that we originated. When mortgage loans are sold, whether as whole loans or pursuant to a securitization, we are required to make customary representations and warranties to purchasers, guarantors and insurers, including the GSEs, about the mortgage loans and the manner in which they were originated. Whole loan sale agreements require repurchase or substitute mortgage loans, or indemnify buyers against losses, in the event we breach these representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of early payment default of the borrower on a mortgage loan, resulting in these mortgage loans being placed on our books and subjecting us to the risk of a potential default.

Table of Contents

We are subject to environmental liability risk associated with our lending activities and with the property we own.

In the course of our business, we may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. The Corporation may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or the release of hazardous or toxic substances at a property. Our policies and procedures require environmental factors to be considered during the loan application process. An environmental review is performed before initiating any commercial foreclosure action; however, these reviews may not be sufficient to detect all potential environmental hazards. Possible remediation costs and liabilities could have a material adverse effect on our financial condition.

Our business is significantly dependent on the real estate markets in which we operate, as a significant percentage of our loan portfolio is secured by real estate or mortgage loans originated for sale.

Many of the loans in our portfolio are secured by real estate. As of December 31, 2021, our real estate loans, excluding mortgages held for sale, include $160.9 million of construction and development loans, $52.3 million of home equity loans, $516.9 million of commercial real estate (“CRE”) loans and $68.2 million of residential mortgage loans, with the majority of these real estate loans concentrated in the southeast Pennsylvania, Delaware and southern New Jersey. Real property values in our market may be different from, and in some instances worse than, real property values in other markets or in the United States as a whole, and may be affected by a variety of factors outside of our control and the control of our borrowers, including national and local economic conditions, generally. Southeast Pennsylvania, Delaware and southern New Jersey has experienced volatility in real estate values over the past decade. Declines in real estate values, including prices for homes and commercial properties in southeast Pennsylvania, Delaware and southern New Jersey, could result in a deterioration of the credit quality of our borrowers, an increase in the number of loan delinquencies, defaults and charge-offs, and reduced demand for our products and services, generally.

Risks Related our Wealth Management Business

An economic slowdown could impact Meridian Wealth division revenues.

A general economic slowdown may cause current clients to seek alternative investment opportunities with other providers, which would decrease the value of Meridian Wealth’s assets under management resulting in lower fee income to the Corporation.

A significant decrease in Meridian Wealth’s assets under management could also lead to impairment of the goodwill recorded upon the acquisition of HJ Wealth in 2017. Goodwill is initially recorded at fair value and is not amortized, but is reviewed at least annually or more frequently if events or changes in circumstances indicate that the carrying value may not be fully recoverable. If our estimates of goodwill fair value change, we may determine that impairment charges are necessary. Estimates of fair value are determined based on a complex model using cash flows and company comparisons. If management’s estimates of future cash flows are inaccurate, the fair value determined could be inaccurate and impairment may not be recognized in a timely manner.

Risks Related to Interest Rates

Fluctuations in market interest rates, particularly in a continuing period of low market interest rates, and relative balances of rate-sensitive assets to rate-sensitive liabilities, can negatively impact net interest margin and net interest income.

Our results of operations are largely dependent on net interest income, which is the difference between the interest and fees earned on interest-earning assets and the interest paid on interest-bearing liabilities. Therefore, any change in general market interest rates, including changes resulting from the Federal Reserve Board’s policies, can have a significant effect on our net interest income and total income. There may be mismatches between the maturity and repricing of our assets and liabilities that could cause the net interest rate spread to compress, depending on the level and type of changes in the interest rate environment. Interest rates are highly sensitive to many factors that are beyond our control, including general

Table of Contents

economic conditions and the policies of various governmental agencies. In addition, some of our customers often have the ability to prepay loans or redeem deposits with either no penalties or penalties that are insufficient to compensate us for the lost income. A significant reduction in our net interest income will adversely affect our business and results of operations. If we are unable to manage interest rate risk effectively, our business, financial condition and results of operations could be materially harmed.

Increases in interest rate may negatively impact the volume of mortgage originations and re-financings, adversely affecting the profitability of our mortgage segment. Increases in interest rates generally decrease the market values of loans held, the value of mortgage and other loans produced, including long term fixed-rate loans and the value of loans sold, mortgage loan activities and the collateral securing our loans, and therefore may adversely affect our liquidity and earnings, to the extent not offset by potential increases in our net interest margin.

Changes in interest rates might also impact the values of equity and debt securities under management and administration by the Meridian Wealth which may have a negative impact on fee income.

Like all financial institutions, the Corporation's consolidated statement of financial condition is affected by fluctuations in interest rates. See the section entitled “Interest Rate Risk” in Management’s Discussion and Analysis of Financial Condition, for the Corporation’s position on interest earning assets and interest bearing liabilities.

Risks Related to Regulation

Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and/or increase our costs of operations.

We are subject to extensive regulation, supervision, and examination by our primary regulators, the Pennsylvania Department of Banking and Securities and federal regulators of the FDIC and Federal Reserve Bank of Philadelphia. Also, as a member of the FHLB, the Bank must comply with applicable regulations of the Federal Housing Finance Agency and the FHLB. Regulation by these agencies is intended primarily for the protection of our depositors and the deposit insurance fund and not for the benefit of our shareholders. The Bank's activities are also regulated under consumer protection laws applicable to our lending, deposit, and other activities. A large claim against the Bank under these laws or an enforcement action by our regulators could have a material adverse effect on our financial condition and results of operations. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the ability to impose restrictions on our operations, comments on the classification of our assets, and determine the level of our allowance for credit losses. These regulations, along with the currently existing tax, accounting, securities, deposit insurance and monetary laws, rules, standards, policies, and interpretations, control the ways financial institutions conduct business, implement strategic initiatives, and prepare financial reporting and disclosures. Changes in such regulation and oversight, whether in the form of regulatory policy, new regulations, legislation or supervisory action, may have a material impact on our operations. Further, compliance with such regulation may increase our costs and limit our ability to pursue business opportunities.

We cannot predict the effect of legislative and regulatory initiatives, which could increase our costs of doing business and adversely affect our results of operations and financial condition.

Changes to statutes, regulations, regulatory or accounting policies could affect the Corporation in substantial and unpredictable ways. Such changes could subject the Corporation to additional costs, limit the types of financial services and products the Corporation may offer, limit the fees we may charge, increase the ability of non-banks to offer competing financial services and products, change regulatory capital requirements or the required size of our allowance for loan losses and change deposit insurance assessments, any of which would negatively impact our financial condition and result of operations. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Corporation's business, financial condition and results of operations.

Table of Contents

We are subject to capital adequacy requirements and may be subject to more stringent capital requirements.

We are subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that we must maintain. From time to time, the regulators change these regulatory capital adequacy and liquidity guidelines. If we fail to meet these minimum capital adequacy and liquidity guidelines and other regulatory requirements, we or our subsidiaries may be restricted in the types of activities we may conduct and we may be prohibited from taking certain capital actions, such as paying dividends and repurchasing or redeeming capital securities. See “Supervision and Regulation—Regulatory Capital Requirements” for more information on the capital adequacy standards that we must meet and maintain.

While we currently meet the requirements of the Basel III-based Capital Rules, we may fail to do so in the future. The failure to meet applicable regulatory capital requirements could result in one or more of our regulators placing limitations or conditions on our activities, including our growth initiatives, or restricting the commencement of new activities, and could affect customer and investor confidence, our costs of funds and level of required deposit insurance assessments to the FDIC, our ability to pay dividends on our capital stock, our ability to make acquisitions, and our business, results of operations and financial conditions, generally.

General Risk Factors

Our stock price, like many of our peers, may be volatile, and you could lose part or all of your investment as a result.

Our stock price may fluctuate significantly in response to a variety of factors including, among other things:

●

actual or anticipated variations in our quarterly results of operations;

●

the failure of securities analysts to cover, or continue to cover, us after this offering;

●

operating and stock price performance of other companies that investors deem comparable to us;

●

news reports relating to trends, concerns and other issues in the financial services industry;

●

perceptions in the marketplace regarding us, our competitors or other financial institutions;

●

future sales of our common stock;

●

departure of our management team or other key personnel;

●

new technology used, or services offered, by competitors;

●

significant acquisitions or business combinations, strategic partnerships, joint ventures or capital commitments by or involving us or our competitors;

●

changes or proposed changes in laws or regulations, or differing interpretations thereof affecting our business, or enforcement of these laws and regulations;

●

litigation and governmental investigations; and

●

geopolitical conditions such as acts or threats of terrorism or military conflicts.

Because we have elected to use the extended transition period for complying with new or revised accounting standards for an “emerging growth company” our financial statements may not be comparable to companies that comply with these accounting standards as of the public company effective dates.

We have elected to use the extended transition period for complying with new or revised accounting standards under Section 7(a)(2)(B) of the Securities Act. This election allows us to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. As a result of this election, our financial statements may not be comparable to companies that comply with these accounting standards as of the public company effective dates. Consequently, our financial statements may not be comparable to companies that comply with public company effective dates. Because our financial statements may not be comparable to companies that comply with public company effective dates, investors may have difficulty evaluating or comparing our business, performance or prospects in comparison to other public companies, which may have a negative impact on the value and liquidity of our common stock. We cannot predict if investors will find our common stock less attractive because we plan to rely on this exemption. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

Table of Contents

Certain banking laws and certain provisions of our articles of incorporation may have an anti-takeover effect.

Provisions of federal banking laws, including regulatory approval requirements, could make it difficult for a third party to acquire us, even if doing so would be perceived to be beneficial to our shareholders. Acquisition of 10% or more of any class of voting stock of a bank holding company or depository institution, generally creates a rebuttable presumption that the acquirer “controls” the bank holding company or depository institution. Also, a bank holding company must obtain the prior approval of the Federal Reserve before, among other things, acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, including the Bank.

There also are provisions in our articles of incorporation and our bylaws, such as limitations on the ability to call a special meeting of our shareholders, that may be used to delay or block a takeover attempt. In addition, our board of directors are be authorized under our articles of incorporation to issue shares of our preferred stock, and determine the rights, terms conditions and privileges of such preferred stock, without shareholder approval. These provisions may effectively inhibit a non-negotiated merger or other business combination, which, in turn, could have a material adverse effect on the market price of our common stock.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

The Corporation is headquartered in Malvern, Pennsylvania and has six full-service branches. Its main branch, in Paoli, serves the Main Line. The West Chester and Media branches serve Chester and Delaware counties, respectively, while the Doylestown and Blue Bell branches serve Bucks and Montgomery counties, respectively. In addition to our deposit taking branches, there are currently 19 other offices, including headquarters for Corporate and Operations, the Wealth Division and the Mortgage Division. Other than our corporate and operations headquarters, all of our offices are leased. The Bank had a net book value of $5.8 million for all locations at December 31, 2021.

Branch locations:

●

Paoli Branch – 1176 Lancaster Avenue, Paoli, PA 19301

●

West Chester Branch – 16 W. Market Street, West Chester, PA 19382

●

Media Branch – 100 E. State Street, Media, PA 19063

●

Doylestown Branch – 1719A S. Easton Road, Doylestown, PA 18901

●

Blue Bell Branch – 653 Skippack Pike, Ste. 116, Blue Bell, PA 19422

●

Philadelphia Branch – 1760 Market Street, Philadelphia, PA 19103

Other offices:

●

Corporate Headquarters – 9 Old Lincoln Highway, Malvern, PA 19355

●

Mortgage Headquarters – 653 Skippack Pike, Suite 200, Blue Bell, PA 19462

●

Operations Headquarters – 367 Eagleview Boulevard, Exton, PA 19341

●

Meridian Wealth Office – 653 Skippack Pike, Suite 200, Blue Bell, PA 19462

●

SBA Lending Group Office -1760 Market Street, Philadelphia, PA 19103

●

Commercial Loan Office – 24860 S. Tamiami Trail, Suite 3, Bonita Springs, FL 34134

●

Mortgage Loan Production Office – 1601 Concord Pike, Suite 45, Wilmington, DE 19803

●

Mortgage Loan Production Office – 5301 Limestone Road, Suite 202, Wilmington, DE 19801

●

Mortgage Loan Production Office – 22128 Sussex Highway, Seaford, DE 19973

●

Mortgage Loan Production Office – 111 Continental Drive, Suite 406, Newark, DE 19713

●

Mortgage Loan Production Office – 5001 Louise Drive, Suite 101, Mechanicsburg, PA 17055

●

Mortgage Loan Production Office – 350 Highland Drive, Suite 160, Mountville, PA 17554

●

Mortgage Loan Production Office – 2330 New Road, Northfield, NJ 08225

●

Mortgage Loan Production Office – 1221 College Park Drive, Suite 118, Dover, DE 19904

●

Mortgage Loan Production Office – 8894 Stanford Boulevard, #203, Columbia, MD 21045

●

Mortgage Loan Production Office – 2448 Holly Avenue, Ste. 100, Annapolis, MD 21401

Table of Contents

●

Mortgage Loan Production Office – 110 West Road, Towson, MD 21204

●

Mortgage Loan Production Office – 9515 Deereco Road, Timonium, MD 21093

●

Mortgage Loan Production Office – 2028 E. Joppa Road, 2^nd Fl., Baltimore, MD 21234

●

Mortgage Loan Production Office – 4940 Campbell Blvd., Baltimore, MD 21236

●

Mortgage Loan Production Office – 15722 Crabbs Branch Way, Ste. 2D, Rockville, MD 20855

●

Mortgage Loan Production Office – 2809 Boston Street, Ste. 505, Baltimore, MD 21224

Item 3. Legal Proceedings

None.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Shares of our common stock trade on the NASDAQ Global Select Market under the symbol "MRBK". As of March 11, 2022, there were approximately 1,581 registered shareholders of the Corporation's common stock. Certain shares are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.

Share Repurchases

The following table presents the shares repurchased by the Corporation’s during the fourth quarter of 2021.


	Issuer Purchases of Equity Securities
				Total Number of	Maximum Number
				Shares Purchased	of Shares that May
				as Part of Publicly	Yet Be Purchased
	Total Number of	Average Price Paid		Announced Plans or	Under the Plan or
Period	Shares Purchased	Per Share		Programs (1)	Programs
October 1, 2021 - October 31, 2021	25,935	$	29.56	25,935	80,837
November 1, 2021 - November 30, 2021	2,267		31.71	2,267	80,837
Total	28,202	$	29.91	28,202	80,837

(1)

On April 26, 2021, the Corporation announced a stock repurchase plan pursuant to which the Corporation may repurchase up to $6 million of the company’s outstanding common stock, par value $1.00 per share. Stock will be purchased 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 August 30, 2021, the Corporation announced that the purchase limit under the stock repurchase plan has been increased to $20 million of the company’s outstanding common stock over a two-year period.

(2)

As of December 31, 2021, the maximum number of shares remaining authorized for repurchase was approximately 80,837, based on funds remaining under the plan of approximately $3.0 million and a share price of $36.77 as of December 31, 2021.

Table of Contents

Dividend Policy

In 2020 the Corporation commenced quarterly cash dividends on its common stock. During 2020 and 2021 the Board of Directors declared cash dividends as follows:


Date	Date of	Date		Quarterly		Special
Declared	Record	Paid		Dividend		Dividend
July 23, 2020	August 10, 2020	August 24, 2020	$	0.125	$	—
October 22, 2020	November 9, 2020	November 23, 2020		0.125		—
January 28, 2021	February 8, 2021	February 22, 2021		0.125		—
February 16, 2021	March 1, 2021	March 15, 2021		—		1.00
April 22, 2021	May 10, 2021	May 17, 2021		0.125		—
July 22, 2021	August 9, 2021	August 16, 2021		0.125		—
October 28, 2021	November 15, 2021	November 22, 2021		0.200		—

Special Dividends

On February 16, 2021, the Corporation’s Board of Directors declared a special dividend of $1.00 per share on its Common Stock, payable on March 15, 2021 to shareholders of record as of March 1, 2021.

On October, 28, 2021, the Corporation’s Board of Directors increased its quarterly dividend to $0.20 per share from $0.125 per share.

On January 27, 2022, the Corporation’s Board of Directors declared a special dividend of $1.00 per share on its Common Stock, payable on February 21, 2022 to shareholders of record as of February 14, 2022.

Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. Also, the Corporation and the Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities.

Table of Contents

Item 6. Selected Financial Data

Selected historical consolidated financial information

The following table should be read in conjunction with our Consolidated Financial Statements and related notes and "Management’s Discussion and Analysis of Financial Condition and Results of Operations", each of which is included elsewhere in this Annual Report on Form 10-K.


	As of and for the Years Ended December 31,
(Dollars in thousands, except per share data)	2021		2020	2019	2018	2017
Selected Period End Balance Sheet Data:
Cash and cash equivalents	$	23,480	36,744	39,371	23,952	35,506
Investment securities		165,674	130,072	67,636	63,169	52,867
Loans receivable, gross		1,386,457	1,284,764	964,710	838,106	694,637
Loans held for sale		80,882	229,199	33,704	37,695	35,024
Allowance for loans losses		(18,758)	(17,767)	(9,513)	(8,053)	(6,709)
Goodwill and intangible assets, net		4,278	4,500	4,773	5,046	5,495
Total assets		1,713,443	1,720,197	1,150,019	997,480	856,035
Interest-bearing deposits		1,171,885	1,037,492	711,718	625,980	526,655
Total deposits		1,446,413	1,241,335	851,168	752,130	627,109
Total liabilities		1,548,083	1,578,575	1,029,324	887,928	754,672
Total stockholders' equity		165,360	141,622	120,695	109,552	101,363

Selected Income Statement Data:
Interest income	$	71,522	62,656	52,863	44,064	35,720
Interest expense		8,411	13,660	16,527	11,407	6,782
Net interest income		63,111	48,996	36,336	32,657	28,938
Provisions for loan losses		1,070	8,302	901	1,577	2,161
Net interest income after provisions for loan losses		62,041	40,694	35,435	31,080	26,777
Non-interest income		87,988	86,918	32,893	32,355	36,700
Non-interest expense		103,727	93,076	54,814	52,945	57,691
Net income before income taxes		46,302	34,536	13,514	10,490	5,786
Income tax expense		10,717	8,098	3,033	2,327	2,754
Net income		35,585	26,438	10,481	8,163	3,032
Preferred stock dividends and net accretion		—	—	—	—	(1,167)
Net income available to common stockholders		35,585	26,438	10,481	8,163	1,865

Selected Per Share Data:
Earnings per common share, basic	$	5.91	4.32	1.64	1.28	0.50
Earnings per common share, diluted	$	5.73	4.27	1.63	1.27	0.49
Book value per common share	$	27.07	23.08	18.84	17.10	15.86
Tangible book value per share⁽¹⁾	$	26.37	22.35	18.09	16.31	15.00
Weighted average common shares outstanding, basic		6,019	6,122	6,407	6,397	3,743
Weighted average common shares outstanding, diluted		6,206	6,187	6,438	6,427	3,770
Shares outstanding at the end of period		6,108	6,136	6,405	6,407	6,392

Selected Performance Metrics:
Return on average assets (ROAA)		2.06%	1.78%	1.01%	0.90%	0.39%
Return on average equity (ROAE)		23.74%	21.33%	9.09%	7.77%	3.97%
Net interest spread		3.62%	3.17%	3.21%	3.44%	3.69%
Net interest margin (NIM)		3.77%	3.40%	3.65%	3.80%	3.93%
Efficiency ratio		68.65%	68.48%	79.18%	81.44%	87.78%
Non-interest income to average assets		5.09%	5.85%	3.17%	3.62%	4.69%
Non-interest expense to average assets		6.00%	6.26%	5.29%	5.87%	7.41%
Yield on interest-earning assets		4.27%	4.35%	5.30%	5.14%	4.83%
Cost of interest-bearing liabilities		0.65%	1.18%	2.10%	1.69%	1.16%
Yield on loans		4.64%	4.59%	5.51%	5.35%	5.10%
Cost of deposits		0.48%	1.07%	1.97%	1.54%	0.95%

Selected Credit Quality Ratios:
Non-performing assets to total assets		1.34%	0.46%	0.29%	0.39%	0.42%
Non-performing loans to total loans		1.57%	0.52%	0.34%	0.45%	0.43%
Allowance for loan losses to non-performing loans		81.60%	224.04%	294.12%	204.85%	212.51%
Allowance for loan losses to total loans		1.35%	1.38%	0.99%	0.96%	0.92%
Allowance for loan losses to total loans held-for-investment (excluding loans at fair value and PPP loans) ⁽¹⁾		1.46%	1.65%	1.00%	1.01%	0.96%
Net charge-offs to average loans		0.01%	0.00%	(0.06)%	0.03%	0.13%

Corporation Capital Ratios:
Tier 1 leverage capital ratio		9.39%	8.96%	10.55%	11.16%	12.37%
Tier 1 risk-based capital ratio		10.83%	10.22%	11.21%	11.72%	12.86%
Total risk-based capital ratio		14.81%	14.55%	16.10%	13.66%	15.53%
Common equity tier 1 capital ratio		10.83%	10.22%	11.21%	11.72%	12.86%
(1) A non-GAAP measure. Refer to Non-GAAP Financial Measures section for reconciliation to GAAP.

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Recent Market Conditions

Our financial condition and performance, as well as the ability of our borrowers to repay their loans, the value of collateral securing those loans, and demand for loans and other products and services that we offer, are all highly dependent on the business environment in the primary markets in which we operate and in the United States as a whole. As discussed further in Part I, Item 1, during the first quarter of 2020, an outbreak of COVID-19 spread around the world, including the United States. COVID-19 and its associated impacts on trade (including supply chains and export levels), travel, employee productivity and other economic activities have had a destabilizing effect on financial markets and economic activity. The full extent of the impact of COVID-19 on our operational and financial performance is currently uncertain, cannot be predicted and will depend largely on when it is widely considered that the pandemic has ended and the negative impacts have lessened.

Critical Accounting Policies and Estimates

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

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

The following is a discussion of the critical accounting policies and significant estimates that require us to make complex and subjective judgments. Additional information about these policies can be found in the “Summary of Significant Accounting Policies” in footnote 1 of the Corporation’s Consolidated Financial Statements as of and for the years ended December 31, 2021 and 2020.

Provision and allowance for loan and lease losses

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

The Allowance is maintained at a level that management believes is appropriate to provide for incurred loan and lease losses as of the date of the Consolidated Balance Sheet and we have established methodologies for the determination of its adequacy. The methodologies are set forth in a formal policy and take into consideration the need for an overall general allowance as well as specific allowances that are determined on an individual loan basis for impaired loans. The Allowance is increased by charging provisions for losses against our income and decreased by charge-offs, net of recoveries.

Table of Contents

The evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. While management uses available information to recognize losses on loans and leases, changes in economic or other conditions may necessitate revision of the estimate in future periods.

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

Results of operations – Years ended December 31, 2021 and 2020

Overview

Net income was $35.6 million, or $5.73 per diluted share, for the twelve months ended December 31, 2021 compared to net income of $26.4 million, or $4.27 per diluted share, for the twelve months ended December 31, 2020. The increase was due largely to the increase in net interest income of $14.1 million, combined with a $1.1 million increase in non-interest income and a $7.2 million decline in the provision for loan losses, partially offset by increases in non-interest expense and income taxes of $10.7 million and $2.6 million, respectively.

Net interest income

Net interest income increased $14.1 million, or 28.8%, to $63.1 million from $49.0 million, for the twelve months ended December 31, 2021, compared to the twelve months ended December 31, 2020. Growth in net interest income period over period reflects an increase in interest income of $8.9 million along with a decrease in interest expense of $5.2 million. The increase in interest income was led by growth in portfolio loans, most notably commercial real estate loans, lease financings, and SBA loans, that contributed $3.6 million, $3.5 million and $2.9 million, respectively, to the increase in interest income, while the continued forgiveness of PPP loans led to an increase in interest and fee income of $2.3 million, period over period. As of December 31, 2021 there was approximately $2 million in PPP fees yet to be recorded in income.

The net interest margin increased 37 basis points to 3.77% for the twelve months ended December 31, 2021 from 3.40% for the twelve months ended December 31, 2020. The margin in 2020 was negatively impacted by the rapid decline in Fed fund rates as well as the effects of the PPP loan program, while the margin in 2021 felt a positive impact from the PPP loan program as approximately 78% of these loans were forgiven during 2021, leading to a yield on PPP loans of 4.41% for the twelve months ended December 31, 2021, compared to 3.09% for the same period in 2020. Other contributors to the margin expansion for 2021 related to the increase in non-interest bearing deposits, which rose $68.1 million on average, and the cost of deposits decreased (59 basis points).

Table of Contents

Average balance sheet, interest and yield/rate analysis.

The following table presents average balance sheet information, interest income, interest expense and the corresponding average yield earned, on a tax equivalent basis, and rates paid for the years ended December 31, 2021 and 2020. The average balances are principally daily averages and, for loans, include both performing and nonperforming loans.


	2021					2020
			Interest					Interest
For the Year Ended December 31,	Average		Income/		Yields/	Average		Income/		Yields/
(dollars in thousands)	Balance		Expense		rates	Balance		Expense		rates
Assets
Interest-earning assets
Due from banks	$	30,844		41	0.13%	$	9,351		31	0.33%
Federal funds sold		17,823		7	0.04%		17,795		38	0.21%
Investment securities⁽¹⁾		148,160		2,927	2.01%		102,285		2,408	2.35%
Loans held for sale		125,444		3,540	2.82%		127,829		3,693	2.89%
Loans held for investment⁽¹⁾⁽²⁾		1,358,282		65,292	4.81%		1,187,819		56,675	4.77%
Total loans		1,483,726		68,832	4.64%		1,315,648		60,368	4.59%
Total interest-earning assets		1,680,553		71,807	4.27%		1,445,079		62,845	4.35%
Noninterest earning assets		48,015					41,400
Total assets	$	1,728,568				$	1,486,479
Liabilities and stockholders' equity
Interest bearing liabilities
Interest-bearing deposits	$	257,950		880	0.34%	$	195,141		1,644	0.84%
Money market and savings deposits		630,977		3,346	0.53%		428,227		3,606	0.84%
Time deposits		245,923		1,268	0.52%		312,528		4,720	1.51%
Total deposits		1,134,850		5,494	0.48%		935,896		9,970	1.07%
Total Borrowings		119,721		534	0.45%		179,201		1,303	0.73%
Subordinated Debentures		40,724		2,383	5.85%		41,010		2,387	5.73%
Total interest-bearing liabilities		1,295,295		8,411	0.65%		1,156,107		13,660	1.18%
Non-interest bearing deposits		258,298					190,209
Other non-interest bearing liabilities		25,100					16,240
Total liabilities	$	1,578,693				$	1,362,556
Total stockholders' equity		149,875					123,923
Total stockholders' equity and liabilities	$	1,728,568				$	1,486,479
Tax-equivalent net interest income / net interest spread			$	63,396	3.62%			$	49,185	3.17%
Tax-equivalent net interest margin					3.77%					3.40%
Tax-equivalent adjustment				(285)					(189)
Net interest income			$	63,111				$	48,996

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

(2)	Average balances include non-accrual loans.

Rate/Volume Analysis

During 2021, net interest income increased $14.2 million or 28.9% on a tax equivalent basis. As shown in the following Rate/Volume Analysis table, this increase was primarily attributable to volume changes. Volume related changes contributed $8.6 million towards interest income, combined with favorable changes in rate of $5.6 million.

The favorable change in net interest income due to volume changes was driven largely from growth in total loans, which increased $168.1 million on average. This increase contributed $8.1 million to interest income. Total investment securities,

Table of Contents

cash and cash equivalents increased $67.4 million on average combined, contributed $955 thousand to interest income. On the funding side, interest checking and money market accounts together rose $265.6 million on average during the year, reducing net interest income by $1.8 million, time deposits decreased $66.6 million on average year over year, causing a favorable change of $844 thousand to net interest income. Average borrowings decreased $59.5 million and had a favorable impact of $496 thousand on net interest income.

The favorable change in net interest income due to rate changes was driven largely from the decrease in the cost of deposits which increased net interest income $5.4 million. The unfavorable rate change due to cash and investments was $457 thousand. An increase in the yield on loans during 2021 contributed $407 thousand to the favorable change in net interest income.

The following table sets forth, among other things, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense for the periods noted (tax-exempt yields have been adjusted to a tax equivalent basis using a 23.2% tax rate). For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (i) changes in rate (change in rate multiplied by old volume) and (ii) changes in volume (change in volume multiplied by new rate). The net change attributable to the combined impact of rate and volume has been allocated proportionately to the change due to rate and the change due to volume.


	December 31, 2021 Compared to 2020
	Change in Interest Due to:
(dollars in thousands)	Rate		Volume	Total
Interest income:
Due from banks	$	(27)	37	10
Federal funds sold		(31)	0	(31)
Investment securities⁽¹⁾		(399)	918	519
Loans held for sale		(85)	(68)	(153)
Loans held for investment⁽¹⁾		492	8,125	8,617
Total loans		407	8,057	8,464
Total interest income	$	(50)	9,012	8,962
Interest expense:
Interest bearing deposits	$	(1,179)	415	(764)
Money market and savings deposits		(1,605)	1,345	(260)
Time deposits		(2,608)	(844)	(3,452)
Total interest bearing deposits		(5,392)	916	(4,476)
Total borrowings		(415)	(354)	(769)
Subordinated debentures		22	(26)	(4)
Total interest expense		(5,784)	535	(5,249)
Interest differential	$	5,734	8,476	14,211

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

Provision for loan losses

The provision for loan losses was $1.1 million for the twelve months ended December 31, 2021, compared to an $8.3 million provision for the twelve months ended December 31, 2020. The decline in the provision period over period is the result of an improvement in the trend of economic and loan deferral factors used in the allowance for loan losses calculation that had been negatively impacted in 2020 due to the COVID-19 pandemic, which have subsequently rebounded as the economy continues to recover. This improvement outpaced provisioning for loan growth as well as a $1.4 million specific reserve placed against a non-performing loan relationship described further in the “Asset Quality Summary” on page 43.

Table of Contents

Non-interest income

Total non-interest income for the twelve months ended December 31, 2021 was $88.0 million, up $1.1 million, or 1.2%, from the twelve months ended December 31, 2020. This increase in non-interest income was largely the result of an increase of $4.3 million in SBA loan sales income as fiscal year 2021 sales of SBA 7(a) loans amounted to $67.2 million, an increase of $26.1 million, or 63.5%, compared to fiscal year 2020.

Wealth management revenue increased $947 thousand, or 24.6%, year-over-year due to an increase in average assets under management of $295 million over this period. In addition, these assets benefited from the more favorable market conditions that existed in the twelve months ended December 31, 2021, compared to the prior year period.

Other fee income was up $1.8 million, or 68.5%, for the twelve months ended December 31, 2021, from the twelve months ended December 31, 2020 due to increases in mortgage fees, wire fees, title fee income, as well as an increase in in mortgage and SBA servicing fee income.

Mortgage banking net revenue decreased $529 thousand, or 0.7%, over the prior year period. The decrease in the 2021 income was the result of a decline in the gain on sale margin of 48 basis points, despite the increase in mortgage loans sold over 2020. Mortgage loan originations, however, decreased $74.7 million from $2.37 billion in 2020 to $2.29 billion in 2021, with refinancing activity representing 47% of the total residential mortgage loans originated in 2021, compared to 60% in 2020. The refinancing opportunities have declined significantly with the change in mortgage rates recently causing the current period end pipeline to be lower at December 31, 2021, compared to December 31, 2020. The changes in the mortgage pipeline generated significant negative fair value changes in derivative instruments (predominantly interest rate lock commitments) and loans held-for-sale. These fair value changes decreased non-interest income a combined $17.0 million during the twelve months ended December 31, 2021 compared to the twelve months ended December 31, 2020. These changes were significantly offset by increases in net hedging gains of $12.4 million.


	Year Ended December 31,
(dollars in thousands)	2021		2020
Non-interest income:
Mortgage banking income	$	75,932		76,461
Wealth management income		4,801		3,854
SBA loan income		6,898		2,572
Earnings on investment in life insurance		365		279
Net change in the fair value of derivative instruments		(4,338)		4,975
Net change in the fair value of loans held-for-sale		(3,311)		3,847
Net change in the fair value of loans held-for-investment		(189)		323
Net loss on hedging activity		2,961		(9,400)
Net gain on sale of investment securities available-for-sale		435		1,345
Service charges		129		107
Other		4,305		2,555
Total non-interest income	$	87,988		86,918

Table of Contents

Non-interest expense

Total non-interest expense for the twelve months ended December 31, 2021 was $103.7 million, up $10.7 million or 11.4%, from the twelve months ended December 31, 2020.


	Year Ended December 31,
(dollars in thousands)	2021		2020
Non-interest expenses:
Salaries and employee benefits	$	78,866		72,147
Occupancy and equipment		4,545		4,292
Professional fees		3,558		3,113
Advertising and promotion		3,714		2,852
Data processing		2,150		1,913
Information technology		2,232		1,542
Pennsylvania bank shares tax		609		1,049
Other		8,053		6,168
Total non-interest expenses	$	103,727		93,076

Total salaries and employee benefits expense was $78.9 million, an increase of $6.7 million or 9.3%, compared to the twelve months ended December 31, 2020. Salaries and benefits for the Bank and Wealth segments increased $5.4 million due to an increased level of full-time equivalent employees as well as increase in the value of stock-based compensation expense. $1.3 million of the overall increase relates to the Mortgage segment as the number of employees in this segment have increased period over period.

Professional fees were up $445 thousand, or 14.3% year over year, while information technology expenses were up $690 thousand, or 44.7% year over year. Increases in these two categories of expense were largely the result of Meridian’s ongoing strategy to invest in technology that focuses on improving back-office efficiencies through automation and workflow processes, as well improving the scalability of our IT systems overall with a focus on cloud based computing. The increase in professional fees was also impacted by one-time consent fees incurred in 2021 related to the filing of the Corporation’s December 31, 2020 Form 10K, in conjunction with the change in Accountants made in 2020.

Advertising and promotion expenses were up $862 thousand, or 30.2%, over the same period due to the improvements to the economy and a pull back on COVID-19 related restrictions that has allowed bank employees to spend more time in a business development and community outreach capacity, combined with increased spend year over year in different advertising campaigns, including mortgage segment lead generation expenses. Other non-interest expense was up $1.9 million, or 30.6%, from the prior year due to an increase in employee travel and training expenses as 2021 allowed for more travel opportunities due to a pullback in COVID-19 restrictions, as well as increases in insurance expense, director compensation, and other less significant items.

Income tax expense

Income tax expense for the year ended December 31, 2021 was $10.7 million as compared to $8.1 million for the same period in 2020. The effective tax rates for the twelve-month periods ended December 31, 2021 and 2020 were 23.1% and 23.4%, respectively. For more information related to income taxes, refer to footnote 14 in the Notes to Consolidated Financial Statements.

Table of Contents

Balance Sheet Summary

Assets

As of December 31, 2021, total assets were $1.7 billion, a decrease of $6.8 million from December 31, 2020.

Total loans, net of allowance, grew $101 million, or 7.9%, to $1.4 billion as of December 31, 2021, from $1.3 billion as of December 31, 2020. There was growth in several commercial loan categories from December 31, 2020, as we continue to expand our presence in the Philadelphia market region and beyond. Small business loans increased $64.6 million, or 130.4%, commercial real estate loans increased $31.8 million, or 6.6%, and lease financings increased $57.2 million, or 184.3%, as our Meridian Equipment Finance (“MEF”) leasing team continued their strong growth trajectory after starting up in early 2020. Additionally, commercial & industrial loans, shared national credits and commercial construction loans combined increased $46.6 million in total over the period. Residential real estate loans held for sale decreased $148.3 million, or 64.7%, to $80.9 million as of December 31, 2021, while PPP loans decreased $113.3 million, or 55.7%, over this period, as our SBA and commercial lending teams are making a strong effort to assist our PPP loan customers in obtaining forgiveness on their loans with the SBA. As of December 31, 2021 there was approximately $88.3 million in PPP loans remaining to be forgiven, net of deferred fees.

Loans

Our loan portfolio is the largest category of our interest-earning assets. As of December 31, 2021 and 2020, our total loans amounted to $1.5 billion. Our loan portfolio is comprised of loans originated to be held in portfolio, as well as residential mortgage loans originated for sale. Meridian engages in the origination of residential mortgages, most typically for 1-4 family dwellings, with the intention of the Corporation to principally sell substantially all of these loans in the secondary market to qualified investors. Our loans held in portfolio are originated by our commercial and consumer loan divisions. We have a strong credit culture that promotes diversity of lending products with a focus on commercial businesses. 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.

Loans and leases outstanding at December 31, 2021 and 2020 are detailed by category as follows:


			% of		% of
(dollars in thousands)	2021		Portfolio	2020	Portfolio
Mortgage loans held for sale	$	80,882	5.5%	229,199	15.1%
Real estate loans:
Commercial mortgage		516,928	35.2%	485,103	31.9%
Home equity lines and loans		52,299	3.6%	64,987	4.3%
Residential mortgage		68,175	4.6%	52,454	3.5%
Construction		160,905	11.0%	140,246	9.2%
Total real estate loans		798,307	54.4%	742,790	48.9%

Commercial and industrial		293,771	20.0%	261,750	17.2%
Small business loans		114,158	7.8%	49,542	3.3%
Paycheck Protection Program loans ("PPP")		90,194	6.1%	203,543	13.4%
Main Street Lending Program loans ("MSLP")		597	0.0%	580	0.0%
Consumer		419	0.0%	511	0.0%
Leases, net		88,242	6.0%	31,040	2.0%
Total portfolio loans and leases		1,385,688	94.5%	1,289,756	84.9%
Total loans and leases	$	1,466,570	100.0%	1,518,955	100.0%

Table of Contents

The following table shows the amounts of loans outstanding as of December 31, 2021 which, based on remaining scheduled repayments of principal, are due in the periods indicated.


	12 Months
(dollars in thousands)	or Less		1 - 5 years	5 - 15 years	After 15 years	Total
Mortgage loans held for sale	$	—	—	235	80,647	80,882
Commercial mortgage		36,884	115,865	353,396	10,783	516,928
Home equity lines and loans		1,080	4,401	40,820	5,998	52,299
Residential mortgage		1,744	—	1,830	64,601	68,175
Construction		69,664	47,683	43,175	383	160,905
Commercial and industrial		26,453	107,032	58,102	102,184	293,771
Small business loans		8	3,577	66,043	44,530	114,158
PPP loans		25,100	65,094	—	—	90,194
MSLP loans		—	597	—	—	597
Consumer		5	118	146	150	419
Leases, net		1,140	72,605	14,497	—	88,242
Total	$	162,078	416,972	578,244	309,276	1,466,570

The amounts have been classified according to sensitivity to changes in interest rates for amounts due after one year, as of December 31, 2021. Variance rate loans are those loans with floating or adjustable interest rates.


	Fixed		Variable
(dollars in thousands)	Rate		Rate	Total
Mortgage loans held for sale	$	80,882	—	80,882
Commercial mortgage		64,491	415,553	480,044
Home equity lines and loans		7,129	44,090	51,219
Residential mortgage		50,144	16,287	66,431
Construction		26,102	65,139	91,241
Commercial and industrial		44,438	222,880	267,318
Small business loans		218	113,932	114,150
PPP loans		65,094	—	65,094
MSLP loans		—	597	597
Consumer		346	68	414
Leases, net		87,102	—	87,102
Total	$	425,946	878,546	1,304,492

Commercial and industrial loans, commercial construction loans and commercial real estate loans increased a combined $84.5 million, or 9.5%, for the year ended December 31, 2021. The growth in the commercial portfolios continues to reflect the work of our strategically expanded lending team as well as strong local market conditions.

Commercial real estate loans. Our commercial real estate loans are secured by real estate that is both owner-occupied and investor owned. Owner-occupied commercial real estate loans generally involve less risk than an investment property and are distinctly reported from non-owner occupied commercial real estate loans for measuring loan concentrations for regulatory purposes. Our owner-occupied commercial real estate loans are originated and managed within our commercial loan department and comprised 34.4% of our total commercial real estate loan portfolio at December 31, 2021. The remaining commercial real estate loans are managed by our commercial real estate department which offer the following commercial real estate products:

●

Permanent – Investor Real Estate Loans

Purchase and refinance loan opportunities for a number of product types, including single-family rentals, multi-family residential as well as tenanted income producing properties in a variety of real estate types, including office, retail, industrial, and flex space

Table of Contents

●

Construction Loans

Residential construction loans to finance new construction and renovation of single and 1-4 family homes located within our market area

Commercial construction loans for investment properties, generally with semi-permanent attributes

Construction loans for new, expanded or renovated operations for our owner occupied business clients

●

Land Development Loans

Meridian considers a limited number of strictly land development oriented loans based upon the risk, merit of the future project and strength of the borrower/guarantor relationship

Our commercial real estate loans increased by $31.8 million, or 6.6%, to $516.9 million at December 31, 2021 from $485.1 million at December 31, 2020. Our total commercial real estate loan portfolio represented 35.2% and 31.9% of our total loan portfolio at December 31, 2021 and 2020, respectively.

Commercial and Industrial Loans

We provide a variety of variable and fixed rate commercial business loans and lines of credit. These loans and lines of credit are made to small and medium-sized manufacturers and wholesale, retail and service-related businesses. Additionally, we lend to companies in the technology, healthcare, real estate and financial service industries. Commercial business loans generally include lines of credit and term loans with a maturity of five years or less. The primary source of repayment for commercial business loans is generally operating cash flows of the business and may also include collateralization of inventory, accounts receivable, equipment and/or personal guarantees. Our commercial and industrial loans increased by $32.0 million, or 12.2%, to $293.8 million at December 31, 2021 from $261.8 million at December 31, 2020. The total commercial portfolio represented 20.0% and 17.2% of our total loan portfolio at December 31, 2021 and 2020, respectively.

Small Business Loans

We provide financing to small businesses in various industries that include guarantees under the Small Business Administration’s (SBA’s) loan programs. Our small business loans increased by $64.6 million, or 130.4%, to $114.2 million at December 31, 2021 from $49.5 million at December 31, 2020. The small business loans portfolio represented 7.8% and 3.3% of our total loan portfolio at December 31, 2021 and 2020, respectively.

Paycheck Protection Program Loans / Main Street Lending Program Loans

Meridian participated in the SBA’s Paycheck Protection Program (PPP) loan program and the Federal Reserve’s Main Street Lending Program (MSLP) to support lending to small and medium sized businesses that were impacted by the COVID-19 pandemic. At December 31, 2021 the balance of PPP loans was $90.2 million, compared to $203.5 million at December 31, 2020. MSLP loans amounted to less than $600 thousand and are included within Commercial and Industrial loans. PPP loans represented 6.1% of our total loan portfolio at December 31, 2021.

Residential loans

Our residential loans held in portfolio are primarily secured by single-family homes located in our market areas. Our loan pipeline is fed via our mortgage loan production offices (“LPOs”) and through relationships with sales brokers and agents who actively refer clients to Meridian as well as referrals from our commercial and private banking lenders. The balance of residential loans in portfolio increased $15.7 million, or 30.0%, to $68.2 million at December 31, 2021 from $52.5 million at December 31, 2020. The total residential loan portfolio represented 4.6% and 3.5% of our total loan portfolio at December 31, 2021 and 2020, respectively.

Consumer and Personal Loans

Our consumer-lending department principally originates home equity based products for our clients and prospects. These loans typically fund completely at closing. Additional products include smaller dollar personal loans and our student loan

Table of Contents

refinance product, designed to provide additional flexibility in repayment terms desired in the marketplace. The total consumer loan portfolio represented 3.6% and 4.3% of our total loan portfolio at December 31, 2021 and 2020, respectively.

Investments

Our securities portfolio is used to make various term investments, maintain a source of liquidity and serve as collateral for certain types of deposits and borrowings. We manage our investment portfolio according to written investment policies approved by our board of directors. Investments in our securities portfolio may change over time based on our funding needs and interest rate risk management objectives. Our liquidity levels take into account anticipated future cash flows and other available sources of funds and are maintained at levels that we believe are appropriate to provide the necessary flexibility to meet our anticipated funding requirements.

As of December 31, 2021 the fair value of our investment portfolio totaled $165.9 million, with an effective tax equivalent yield of 1.81% and an estimated duration of approximately 4.89 years. The largest category of our investment portfolio, or 47.0%, consists of municipal securities, along with 17.6% in U.S. Agency asset-backed securities. The remainder of our securities portfolio is invested in other securities. We regularly evaluate the composition of our investment portfolio as the interest rate yield curve changes and may sell investment securities from time to time to adjust our exposure to interest rates or to provide liquidity to meet loan demand. Not included in the tables below are equity investments that had fair values of $2.4 million and $1.0 million, as of December 31, 2021 and 2020, respectively.


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


	December 31, 2020
			Gross	Gross		# of Securities
	Amortized		unrealized	unrealized	Fair	in unrealized
(dollars in thousands)	cost		gains	losses	value	loss position
Securities available-for-sale:
U.S. asset backed securities	$	25,303	364	(75)	25,592	8
U.S. government agency mortgage-backed securities		3,854	192	—	4,046	—
U.S. government agency collateralized mortgage obligations		23,010	916	(17)	23,909	1
State and municipal securities		63,848	2,025	(63)	65,810	3
Corporate bonds		4,200	7	(2)	4,205	2
Total securities available-for-sale	$	120,215	3,504	(157)	123,562	14
Securities held-to-maturity:
State and municipal securities		6,510	347	—	6,857	—
Total securities held-to-maturity	$	6,510	347	—	6,857	—

Table of Contents

Asset Quality Summary

Asset quality remains a strong focus of management, which is committed to working with customers significantly impacted by the COVID-19 pandemic. While COVID-19 loan deferrals provided to borrowers amounted to only $2.4 million as of December 31, 2021, down from $24.2 million as of December 31, 2020, one commercial loan relationship for $13.8 million became a non-performing loan relationship with a specific reserve of $1.4 million during the quarter ending December 31, 2021. This change in status caused non-performing loans to increase to $23.0 million (not including past due PPP loans of $63 thousand) as of December 31, 2021, compared to $7.9 million as of December 31, 2020. Consequently the ratio of non-performing assets to total assets as of December 31, 2021 was 1.34% compared to 0.46% as of December 31, 2020. Despite the near-term impact to these ratios resulting from this loan relationship downgrade, the overall asset quality remains strong. There was no other real estate property included in non-performing assets for either period.

Meridian realized net charge-offs of $79 thousand, or 0.01%, of total average loans for the year ended December 31, 2021, compared to net charge-offs of $48 thousand, or 0.00%, of total average loans for the year ended December 31, 2020. The ratio of allowance for loan losses to total loans held for investment, excluding loans at fair value and PPP loans (a non-GAAP measure, see reconciliation in the Appendix), was 1.46% as of December 31, 2021 compared to 1.65% as of December 31, 2020. PPP loans are excluded from calculation of this ratio as they are guaranteed by the SBA and therefore we have not provided for in the allowance for loan losses. A reconciliation of this non-GAAP measure is included in the Non-GAAP Financial Measures section on page 46.

As of December 31, 2021, the Corporation had $3.8 million of TDRs, of which $3.4 million were in compliance with the modified terms and excluded from non-performing loans and leases. As of December 31, 2020, the Corporation had $3.6 million of TDRs, of which $3.4 million were in compliance with the modified terms, and were excluded from non-performing loans and leases.

As of December 31, 2021, the Corporation had a recorded investment of $25.8 million of impaired loans and leases which included $3.8 million of TDRs, while as of December 31, 2020 impaired loans totaled $10.4 million, which included $3.6 million of TDRs. The increase in impaired loans was largely due to the one commercial loan relationship for $13.8 million, discussed above, that became a non-performing loan relationship late in 2021 with a specific reserve of $1.4 million. Impaired loans and leases are those for which it is probable that the Corporation will not be able to collect all scheduled principal and interest in accordance with the original terms of the loans and leases. Refer to footnote 6 in the notes to the Consolidated Financial Statements for more information regarding the Corporation’s impaired loans and leases.

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

Table of Contents

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.


	As of
	December 31,		December 31,
(dollars in thousands)	2021		2020
Non-performing assets:
Nonaccrual loans:
Real estate loans:
Commercial mortgage	$	—		3,061
Home equity lines and loans		911		859
Residential mortgage		2,398		2,725
Total real estate loans	$	3,309		6,645
Commercial and industrial		18,801		1,285
Small business loans		666		—
Leases		212		—
Total nonaccrual loans	$	22,988		7,930
Total non-performing loans	$	22,988		7,930
Total non-performing assets	$	22,988		7,930

Troubled debt restructurings:
TDRs included in non-performing loans		361		244
TDRs in compliance with modified terms		3,446		3,362
Total TDRs	$	3,807		3,606

Asset quality ratios:
Non-performing assets to total assets		1.34%		0.46%
Non-performing loans to:
Total loans and leases		1.57%		0.52%
Total loans held-for-investment		1.66%		0.62%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)		1.80%		0.74%
Allowance for loan and lease losses to:
Total loans and leases		1.28%		1.17%
Total loans held-for-investment		1.35%		1.38%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)		1.46%		1.65%
Non-performing loans		81.60%		224.04%

Total loans and leases	$	1,467,339		1,513,963
Total loans and leases held-for-investment	$	1,386,457		1,284,764
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans)	$	1,280,591		1,072,727
Allowance for loan and lease losses	$	18,758		17,767

(1) The allowance for loan losses to total loans held-for-investment (excluding loans at fair value and PPP loans) ratio is a non-GAAP financial measure. See “Non-GAAP Financial Measures” on page 46 for a reconciliation of this measure to its most comparable GAAP measure. PPP loans have only been excluded from this calculation as of December 31, 2021.

Table of Contents

Allowance for Loan and Lease Losses

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


		Balance,			Balance,
(dollars in thousands)		December 31, 2021	%		December 31, 2020	%
Commercial mortgage	$	4,950	26%	$	7,451	42%
Home equity lines and loans		224	1%		434	2%
Residential mortgage		283	2%		385	2%
Construction		2,042	11%		2,421	14%
Commercial and industrial		6,533	35%		5,431	31%
Small business loans		3,737	20%		1,259	7%
Consumer		3	0%		4	0%
Leases		986	5%		382	2%
Total	$	18,758	100%	$	17,767	100%

The following table provides information on net charge-offs by loan category:


		December 31, 2021				December 31, 2020
			% of	Net Charge-			% of	Net Charge-
		Net	Total Net	offs as a % of		Net	Total Net	offs as a % of
(dollars in thousands)		Charge-offs	Charge-offs	Average Loans		Charge-offs	Charge-offs	Average Loans
Commercial mortgage	$	—	0.00%	0.00%	$	—	0.00%	0.00%
Home equity lines and loans		1	(1.27)%	0.00%		(76)	158.33%	0.01%
Residential mortgage		5	(6.33)%	0.00%		7	(14.58)%	0.00%
Construction		—	0.00%	0.00%		—	0.00%	0.00%
Commercial and industrial		41	(51.90)%	0.00%		27	(56.25)%	0.00%
Small business loans		—	0.00%	0.00%		—	0.00%	0.00%
Consumer		4	(5.06)%	0.00%		(6)	12.50%	0.00%
Leases		(130)	164.56%	0.01%		—	0.00%	0.00%
Total	$	(79)	100.00%	0.01%	$	(48)	100.00%	0.00%

Deposits and Equity

Deposits were $1.4 billion as of December 31, 2021, up $205.1 million, or 16.5%, from December 31, 2020. Non-interest bearing deposits increased $70.7 million, or 34.7%, from December 31, 2020. Interest-bearing checking accounts increased $61.7 million, or 29.9%, from December 31, 2020, while money market accounts/savings accounts increased $125.0 million, or 21.8%, since December 31, 2020. Increases in core deposits were driven from loan customers as part of new business and municipal relationships and also as a result of the PPP loan process. Certificates of deposits decreased $52.3 million, or 20.2%, from December 31, 2020, as lower levels of wholesale funding have been replaced by core deposits that bear lower interest rates.

Table of Contents

The following table summarizes our deposit balances and weighted average rate paid for the periods presented.


	Year ended December 31, 2021				Year ended December 31, 2020
			Weighted				Weighted
	Average		average	Percent of	Average		average	Percent of
(dollars in thousands)	amount		rate paid	total deposits	amount		rate paid	total deposits
Non-interest bearing deposits	$	258,298	—	18.54%	$	190,209	—	16.89%
Interest bearing deposits		888,927	0.48%	63.81%		623,368	0.84%	55.36%
Time deposits		245,923	0.52%	17.65%		312,528	1.51%	27.75%
Total	$	1,393,148	0.48%	100.00%	$	1,126,105	1.07%	100.00%

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


			Year ended December 31, 2021
			Amount	%
3 months or less		$	65,310	36%
Over 3 months through 6 months			1,807	1%
Over 6 months through 12 months			40,140	22%
Over 12 months			72,528	40%
	Total	$	179,785	100%

Consolidated stockholders’ equity of the Corporation was $165.4 million, or 9.7% of total assets as of December 31, 2021, as compared to $141.6 million, or 8.2% of total assets as of December 31, 2020. The change in stockholders’ equity is the result of year-to-date comprehensive income of $33.8 million, $2.7 million in stock-based compensation and stock options exercised, partially offset by dividends of $9.7 million paid during 2021 and common stock repurchases of $3.0 million.

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.

The table below provides the non-GAAP reconciliation for our tangible book value per common share for Meridian Corporation:


Reconciliation of tangible book value per common share at December 31:	2021		2020
Book value per common share	$	27.07	$	23.08
Less: Impact of goodwill and intangible assets		0.70		0.73
Tangible book value per common share	$	26.37	$	22.35

The following is a reconciliation of the allowance for loan losses to total loans held for investment ratio for the years ended December 31, 2021 and 2020. This is considered a non-GAAP measure as the calculation excludes the impact of loans held for investment that are fair valued and the impact of PPP loans as these loan types are not included in the allowance for loan losses calculation.


Reconciliation of Allowance for Loan Losses / Total loans held for investment at December 31:	2021		2020
Allowance for loan losses / Total loans held for investment		1.35%		1.38%
Less: Impact of loans held for investment - fair valued		0.02%		0.00%
Less: Impact of PPP loans		0.09%		0.27%
Allowance for loan losses / Total loans held for investment (excl. loans at fair value and PPP loans)		1.46%		1.65%

Table of Contents

Liquidity and Capital Resources

Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Meridian’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization or that can be used as collateral to secure funding. In addition, as part of its liquidity management, Meridian maintains a segment of commercial loan assets that are comprised of shared national credits (“SNCs”), which have a national market and can be sold in a timely manner. Meridian’s available liquidity, which totaled $262.9 million at December 31, 2021, compared to $408.8 million at December 31, 2020, includes investments, SNCs, Federal funds sold, mortgages held-for-sale and cash and cash equivalents, less the amount of securities required to be pledged for certain liabilities. Meridian also anticipates scheduled payments and prepayments on its loan and mortgage-backed securities portfolios.

In addition, Meridian maintains borrowing arrangements with various correspondent banks, the FHLB and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. Through its relationship at the Federal Reserve, Meridian had available credit of approximately $3.5 million at December 31, 2021. At December 31, 2021, Meridian had no borrowings from the Federal Reserve. As a member of the FHLB, we are eligible to borrow up to a specific credit limit, which is determined by the amount of our residential mortgages, commercial mortgages and other loans that have been pledged as collateral. As of December 31, 2021, Meridian’s maximum borrowing capacity with the FHLB was $505.4 million. At December 31, 2021, Meridian had borrowed $41.3 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $131.5 million against its available credit lines. At December 31, 2021, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as $255.4 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $449.3 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.

At December 31, 2021, Meridian had $512.6 million in unfunded loan commitments. Management anticipates these commitments will be funded by means of normal cash flows. Certificates of deposit greater than or equal to $250 thousand scheduled to mature in one year or less from December 31, 2021 totaled $107.3 million. Management believes that the majority of such deposits will be reinvested with Meridian and that certificates that are not renewed will be funded by a reduction in cash and cash equivalents or by pay-downs and maturities of loans and investments. At December 31, 2021, Meridian had a reserve for unfunded loan commitments of $209 thousand.

Meridian meets the definition of “well capitalized” for regulatory purposes on December 31, 2021. Our capital category is determined for the purposes of applying the bank regulators’ “prompt corrective action” regulations and for determining levels of deposit insurance assessments and may not constitute an accurate representation of Meridian’s overall financial condition or prospects.

Under federal banking laws and regulations, Meridian is required to maintain minimum capital as determined by certain regulatory ratios. Capital adequacy for regulatory purposes, and the capital category assigned to an institution by its regulators, may be determinative of an institution’s overall financial condition. Under the final capital rules that became effective as of January 1, 2019, a capital conservation buffer is fully phased in at 2.5%.

Community banks have long raised concerns with bank regulators about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In response, Congress provided an “off-ramp” for institutions, like us, with total consolidated assets of less than $10 billion. Section 201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single "Community Bank Leverage Ratio" (“CBLR”) of between 8 and 10%. Under the final rule, a community banking organization is eligible to elect the new framework if it has: less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%.The bank regulatory agencies temporarily lowered the CBLR to 8% as a result of the COVID-19 pandemic. During the first quarter of 2020, the Bank adopted the CBLR framework as its primary regulatory capital ratio, but reports all ratios for comparative purposes.

Table of Contents

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


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


	December 31, 2020
				To Be Well Capitalized
	Actual			Under CBLR Framework
(dollars in thousands)	Amount		Ratio	Amount		Ratio
Tier 1 capital (to average assets)
Corporation	$	134,564	8.96%	$	120,082	8.00%
Bank		173,231	11.54%		120,080	8.00%

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Our primary market risk is interest rate risk, which is defined as the risk of loss of net interest income or net interest margin because of changes in interest rates.

Asset/Liability Management

As a financial institution, one of our primary market risks is interest rate volatility. Changes in market interest rates, whether they are increases or decreases, can trigger repricing and changes in the pace of payments for both assets and liabilities (prepayment risk), which individually or in combination may affect our net income, net interest income and net interest margin, either positively or negatively. In recognition of this, we actively manage our assets and liabilities to minimize the impact of changing interest rates on our net interest margin and maximize our net interest income and the return on equity, while maintaining adequate liquidity and capital.

Our board of directors has established a Board Risk Committee that, among other duties, sets broad asset and liability management policy (“ALM” policy) and directives for asset/liability management, as well as establishes review and control procedures to ensure adherence to this policy. The board of directors has delegated authority for the development and implementation of all asset and liability management policies, procedures, and strategies to the Asset/Liability Committee (“ALCO”). ALCO is comprised of various members of senior management responsible for interpreting the longer range objectives established by the board of directors. As such ALCO sets basic direction for the Corporation’s sources and uses of funds, establishes numerical ranges for primary and secondary objectives, monitors risk and the delivery of services, establishes subs to manage specific ALM activities, and monitors the counterparties engaged in ALM activities. Our ALM policy is reviewed by ALCO and the board of directors at least annually, which includes an evaluation of the ALM policy limits and guidelines in light of our risk profile, business strategies, regulatory guidelines and overall market conditions.

As part of our management of interest rate risk, we utilize the following modeling techniques that simulate the effects of variations in interest rates: (1) repricing gap analysis; (2) net interest income simulation; and (3) economic value of equity simulation. These models require that we use various assumptions, including asset and liability pricing responses, asset and liability new business, repayment and redemption responses, behavior of imbedded options and sensitivity of relationships across different rate indexes and product types. These assumptions are inherently uncertain and, as a result, the models cannot precisely predict the fluctuations in market interest rates or precisely measure the impact of future changes in interest rates. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

Table of Contents

Gap analysis. Management measures and evaluates the potential effects of interest rate movements on earnings through an interest rate sensitivity “gap” analysis. Given the size and turnover rate of the originated mortgage loans held for sale, loans held for sale are treated as having a maturity of 12 months or less. Interest rate sensitivity reflects the potential effect on net interest income when there is movement in interest rates. An institution is considered to be asset sensitive, or having a positive gap, when the amount of its interest-earning assets reprices within a given period exceeds the amount of its interest-bearing liabilities also repricing within that time period. Conversely, an institution is considered to be liability sensitive, or having a negative gap, when the amount of its interest-bearing liabilities reprices within a given period exceeds the amount of its interest-earning assets also within that time period. During a period of rising interest rates, a negative gap would tend to decrease net interest income, while a positive gap would tend to increase net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income, while a positive gap would tend to decrease net interest income.

The following table presents the interest rate gap analysis of our assets and liabilities as of December 31, 2021.


					Greater
					Than
					5 years and
As of December 31, 2021	12 Months				Not Rate
(dollars in thousands)	or Less		1-2 Years	2-5 Years	Sensitive	Total
Cash and investments	$	48,861	4,246	31,144	107,257	191,508
Loans (1)		920,570	155,542	332,792	39,677	1,448,581
Other Assets		—	—	—	73,354	73,354
Total Assets	$	969,431	159,788	363,936	220,288	1,713,443

Non-interest bearing deposits		9,232	8,946	25,977	230,373	274,528
Interest bearing deposits		965,876	—	—	—	965,876
Time deposits		126,719	18,106	61,184	—	206,009
Borrowings		41,344	—	—	—	41,344
Other Liabilities		—	—	—	60,326	60,326
Total stockholders' equity		—	—	—	165,360	165,360
Total liabilities and stockholders' equity	$	1,143,171	27,052	87,161	456,059	1,713,443

Repricing gap:
Positive (negative)	$	(173,740)	132,736	276,775	(235,771)	—
Cumulative repricing gap: Dollar amount	$	(173,740)	(41,004)	235,771	—	—
Percent of total assets		(10.1)%	(2.4)%	13.8%	—

(1)	Loans include portfolio loans and loans held-for-sale

Under the static repricing gap analysis for the fiscal year ended December 31, 2021, we model as slightly liability-sensitive through two years. This result is mainly due to core-deposit growth from our strategy of increasing the concentration of relationship-based transaction accounts through the efforts of our business developers. Core customer preference, in the current economic environment, is for short term or liquid deposits. In addition, excess cash from PPP loan forgiveness and sale of loans held for sale were used to pay down borrowings at the end of the year to manage the margin.

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;

Table of Contents

●

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

●

Varying timing of loan prepayments for different interest rate scenarios;

●

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

●

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

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

Potential changes to our net interest income between a flat interest rate scenario and hypothetical rising and declining interest rate scenarios, measured over a one-year period as of December 31, 2021 and 2020 are presented in the following table. The simulation assumes rate shifts occur upward and downward on the yield curve in even increments over the first twelve months (ramp), followed by rates held constant thereafter.

Rate Ramp:


	Estimated increase
	(decrease) in Net Interest
	Income
	For the year ending
	December 31,
Changes in Market Interest Rates	2021		2020
+300 basis points over next 12 months	0.21	%	1.87	%
+200 basis points over next 12 months	(0.18)	%	1.02	%
+100 basis points over next 12 months	(0.31)	%	0.50	%
No Change
-100 basis points over next 12 months	(0.22)	%	(1.73)	%
-200 basis points over next 12 months	(2.34)	%	(5.21)	%

The above interest rate simulation suggests that the Corporation’s balance sheet is narrowly liability sensitive as of December 31, 2021. In its current position, the table indicates that a 100 or 200 basis point increase in interest rates would have a modestly negative impact from rising rates on net interest income over the next 12 months and a modestly positive impact in a 300 basis point increase. The simulated exposure to a change in interest rates is contained, manageable and well within policy guidelines. The results continue to drive our funding strategy of increasing relationship-based accounts (core deposits).

Simulation of economic value of equity. To quantify the amount of capital required to absorb potential losses in value of our interest-earning assets and interest-bearing liabilities resulting from adverse market movements, we calculate economic value of equity on a quarterly basis. We define economic value of equity as the net present value of our balance sheet’s cash flow, and we calculate economic value of equity by discounting anticipated principal and interest cash flows under the prevailing and hypothetical interest rate environments. Potential changes to our economic value of equity between a flat rate scenario and hypothetical rising and declining rate scenarios, measured as of December 31, 2021 and 2020, 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. We would note that starting in the first quarter of 2020 that our simulations in a downward parallel shift of the yield curve, interest and discount rates at the short-end of the yield curve are allowed to decline below 0%. Management has and continues to employ strategies to mitigate risk in these scenarios.

Table of Contents

Strategies include actively lowering deposit and funding rates as well as adding and maintaining the use of interest rate floors on floating rate loans.



	Estimated increase (decrease) in Net
	Economic Value at December 31,
Changes in Market Interest Rates	2021		2020
+300 basis points	60	%	103	%
+200 basis points	45	%	78	%
+100 basis points	26	%	45	%
No Change
-100 basis points	(37)	%	(67)	%
-200 basis points	(97)	%	(175)	%

This economic value of equity profile at December 31, 2021 suggests that we would experience a positive effect from an increase in rates, and that the impact would become greater as rates continue to rise due to the duration of our interest-earning assets. Conversely, we would experience a negative effect from a decrease in rates. While an instantaneous shift in interest rates is used in this analysis to provide an estimate of exposure, we believe that a gradual shift in interest rates would have a much more modest impact. Since economic value of equity measures the discounted present value of cash flows over the estimated lives of instruments, the change in economic value of equity does not directly correlate to the degree that earnings would be impacted over a shorter time horizon.

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

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements are set forth in this Annual Report on Form 10-K as follows:

Report of Crowe LLP, Independent Registered Public Accounting Firm (PCAOB ID 173)

ii.

Consolidated Balance Sheets

iii.

Consolidated Statements of Income

iv.

Consolidated Statements of Comprehensive Income

Consolidated Statements of Stockholders’ Equity

vi.

Consolidated Statements of Cash Flows

vii.

Notes to Consolidated Financial Statements

Table of Contents

Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors of Meridian Corporation and Subsidiaries

Malvern, Pennsylvania

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Meridian Corporation and Subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Crowe LLP

We have served as the Company’s auditor since 2020.

Washington, D.C.
March 16, 2022

Table of Contents

Meridian Corporation and Subsidiaries

Consolidated Balance Sheets


	December 31,		December 31,
(dollars in thousands, except per share data)	2021		2020
Cash and due from banks	$	23,480	34,190
Federal funds sold		—	2,554
Cash and cash equivalents		23,480	36,744
Securities available-for-sale (amortized cost of $158,387 and $120,215 as of December 31, 2021 and December 31, 2020)		159,302	123,562
Securities held-to-maturity (fair value of $6,591 and $6,857 as of December 31, 2021 and December 31, 2020)		6,372	6,510
Equity investments		2,354	1,031
Mortgage loans held for sale (amortized cost of $80,002 and $225,007 as of December 31, 2021 and December 31, 2020), at fair value		80,882	229,199
Loans, net of fees and costs (includes $17,558 and $12,182 of loans at fair value, amortized cost of $17,106 and $11,514 as of December 31, 2021 and December 31, 2020)		1,386,457	1,284,764
Allowance for loan and lease losses		(18,758)	(17,767)
Loans, net of the allowance for loan and lease losses		1,367,699	1,266,997
Restricted investment in bank stock		5,117	7,861
Bank premises and equipment, net		11,806	7,777
Bank owned life insurance		22,503	12,138
Accrued interest receivable		5,009	5,482
Deferred income taxes		1,413	62
Servicing assets		12,765	5,617
Goodwill		899	899
Intangible assets		3,379	3,601
Other assets		10,463	12,717
Total assets	$	1,713,443	1,720,197
Liabilities:
Deposits:
Non-interest bearing	$	274,528	203,843
Interest bearing		1,171,885	1,037,492
Total deposits		1,446,413	1,241,335
Short-term borrowings		41,344	106,862
Long-term debt		—	165,546
Subordinated debentures		40,508	40,671
Accrued interest payable		31	1,154
Other liabilities		19,787	23,007
Total liabilities		1,548,083	1,578,575
Stockholders’ equity:
Common stock, $1 par value. Authorized 25,000,000 and 10,000,000 shares as of December 31, 2021 and December 31, 2020; issued 6,534,587 and 6,455,566 as of December 31, 2021 and December 31, 2020		6,535	6,456
Surplus		83,663	81,196
Treasury stock - 426,693 and 320,000 shares at December 31, 2021 and December 31, 2020		(8,860)	(5,828)
Unearned common stock held by employee stock ownership plan		(1,602)	(1,768)
Retained earnings		84,916	59,010
Accumulated other comprehensive income		708	2,556
Total stockholders’ equity		165,360	141,622
Total liabilities and stockholders’ equity	$	1,713,443	1,720,197

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Meridian Corporation and Subsidiaries

Consolidated Statements of Income


		Year ended
		December 31,
(dollars in thousands, except per share data)		2021	2020
Interest income:
Loans, including fees	$	68,822	60,357
Securities:
Taxable		1,460	1,186
Tax-exempt		1,192	1,044
Cash and cash equivalents		48	69
Total interest income		71,522	62,656
Interest expense:
Deposits		5,494	9,970
Borrowings		2,917	3,690
Total interest expense		8,411	13,660
Net interest income		63,111	48,996
Provision for loan losses		1,070	8,302
Net interest income after provision for loan losses		62,041	40,694
Non-interest income:
Mortgage banking income		75,932	76,461
Wealth management income		4,801	3,854
SBA loan income		6,898	2,572
Earnings on investment in life insurance		365	279
Net change in the fair value of derivative instruments		(4,338)	4,975
Net change in the fair value of loans held-for-sale		(3,311)	3,847
Net change in the fair value of loans held-for-investment		(189)	323
Net gain (loss) on hedging activity		2,961	(9,400)
Net gain on sale of investment securities available-for-sale		435	1,345
Service charges		129	107
Other		4,305	2,555
Total non-interest income		87,988	86,918
Non-interest expenses:
Salaries and employee benefits		78,866	72,147
Occupancy and equipment		4,545	4,292
Professional fees		3,558	3,113
Advertising and promotion		3,714	2,852
Data processing		2,150	1,913
Information technology		2,232	1,542
Pennsylvania bank shares tax		609	1,049
Other		8,053	6,168
Total non-interest expenses		103,727	93,076
Income before income taxes		46,302	34,536
Income tax expense		10,717	8,098
Net income	$	35,585	26,438
Basic earnings per common share	$	5.91	4.32
Diluted earnings per common share	$	5.73	4.27

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Meridian Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income


		Year ended
		December 31,
(dollars in thousands)		2021	2020
Net income:	$	35,585	26,438

Other comprehensive (loss) income:
Net change in unrealized gains on investment securities available for sale:
Net unrealized (losses) gains arising during the period, net of tax expense of ($485), and $1,121, respectively		(1,514)	3,584
Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of ($101), and ($320), respectively		(334)	(1,025)
Unrealized investment (losses) gains, net of tax expense of $(584), and $801, respectively		(1,848)	2,559
Total other comprehensive (loss) income		(1,848)	2,559
Total comprehensive income	$	33,737	28,997

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Meridian Corporation and Subsidiaries

Consolidated Statements of Stockholders' Equity


					Unearned		Accumulated
					Common		Other
		Common		Treasury	Stock -	Retained	Comprehensive
(dollars in thousands)		Stock	Surplus	Stock	ESOP	Earnings	Income	Total
Balance, January 1, 2020	$	6,408	80,196	(3)	—	34,097	(3)	120,695
Comprehensive income:
Net income						26,438		26,438
Net change in unrealized gains on securities available-for-sale, net of tax							2,559	2,559
Total comprehensive income								28,997
Dividends paid or accrued, $0.250 per share						(1,525)		(1,525)
Shares purchased for ESOP plan (133,601)					(2,000)			(2,000)
Net purchase of treasury stock through publicly announced plans (316,625)			122	(5,825)				(5,703)
Common stock issued through share-based awards and exercises (47,881)		48	347					395
ESOP shares committed to be released (13,328)					232			232
Stock based compensation			531					531
Balance, December 31, 2020	$	6,456	81,196	(5,828)	(1,768)	59,010	2,556	141,622
Comprehensive income:
Net income						35,585		35,585
Net change in unrealized losses on securities available-for-sale, net of tax							(1,848)	(1,848)
Total comprehensive income								33,737
Dividends paid or accrued, $1.575 per share						(9,679)		(9,679)
Net purchase of treasury stock through publicly announced plans (106,693)				(3,032)				(3,032)
Common stock issued through share-based awards and exercises, net of shares withheld (79,021)		79	1,026					1,105
ESOP shares committed to be released (13,328)			228		166			394
Stock based compensation			1,213					1,213
Balance, December 31, 2021	$	6,535	83,663	(8,860)	(1,602)	84,916	708	165,360

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

Meridian Corporation and Subsidiaries

Consolidated Statements of Cash Flows


	Year ended
	December 31,
(dollars in thousands)	2021		2020
Net income	$	35,585	26,438
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Gain on sale of investment securities		(435)	(1,345)
Net amortization of investment premiums and discounts and change in fair value of equity securities		1,369	425
Depreciation and amortization, net		(5,922)	(2,890)
Provision for loan losses		1,070	8,302
Amortization of issuance costs on subordinated debt		118	112
Share-based compensation		1,607	763
Net change in fair value of derivative instruments		4,338	(4,975)
Net change in fair value of loans held for sale		3,311	(3,847)
Net change in fair value of loans held for investment		189	(323)
Gain on sale of OREO		—	(6)
Amortization and net impairment of servicing rights		1,109	816
SBA loan income		(6,898)	(2,733)
Proceeds from sale of loans		2,483,373	2,235,986
Loans originated for sale		(2,270,693)	(2,356,821)
Mortgage banking income		(75,932)	(77,116)
Decrease (increase) in accrued interest receivable		473	(2,334)
(Increase) decrease in other assets		(3,693)	8,995
Earnings from investment in life insurance		(365)	(279)
(Increase) decrease income in deferred income tax		(768)	1,254
(Decrease) increase in accrued interest payable		(1,122)	66
(Decreased) increase in other liabilities		(1,591)	11,047
Net cash provided by (used in) operating activities		165,123	(158,465)
Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities, repayments and calls		10,447	8,247
Sales		23,585	45,927
Purchases		(74,341)	(114,494)
Activity in held-to-maturity securities:
Maturities, repayments and calls		—	2,140
Proceeds from sale of OREO		—	126
Decrease in restricted stock		2,743	211
Net increase in loans		(87,575)	(312,112)
Purchases of premises and equipment		(5,374)	(747)
Purchase of bank owned life insurance		(10,000)	—
Net cash used in investing activities		(140,515)	(370,702)
Cash flows from financing activities:
Net increase in deposits		205,079	390,167
Decrease in short-term borrowings		(44,939)	(922)
Decrease in short-term borrowings with original maturity > 90 days		(20,579)	(15,479)
Repayment of long-term debt (subordinated debt)		(281)	(172)
(Repayment) proceeds from long-term debt, net		(165,546)	162,423
Repayment of acquisition note payable		—	(413)
Issuance costs on subordinated debt		—	(231)
Net purchase of treasury stock		(3,032)	(5,703)
Dividends paid		(9,679)	(1,525)
Purchase of common shares for ESOP		—	(2,000)
Share based awards and exercises		1,105	395
Net cash (used in) provided by financing activities		(37,872)	526,540
Net change in cash and cash equivalents		(13,264)	(2,627)
Cash and cash equivalents at beginning of period		36,744	39,371
Cash and cash equivalents at end of period	$	23,480	36,744
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	9,534	13,594
Income taxes		14,069	5,295
Supplemental disclosure of cash flow information:
Transfers from loans held for sale to loans held for investment		8,410	3,313
Net loans purchased, not settled		—	325

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

(1) Summary of Significant Accounting Policies

(a) Nature of Operations

Meridian Corporation (“Meridian” or the “Corporation”) is a bank holding company engaged in banking activities through its wholly-owned subsidiary, Meridian Bank (the “Bank”), a full-service, state-chartered commercial bank with offices in the Delaware Valley tri-state market, which includes Pennsylvania, New Jersey and Delaware, as well as the Central Maryland market area. We have a financial services business model with significant noninterest income streams from mortgage lending, small business (“SBA”) lending and wealth management services. We provide services to small and middle market businesses, professionals and retail customers throughout our market area. We have a modern, progressive, consultative approach to creating innovative solutions for our customers. We are technology driven, with a culture that incorporates significant use of customer preferred alternative delivery channels, such as mobile banking, remote deposit capture and bank-to-bank ACH. Our ‘Meridian everywhere’ philosophy of community presence, along with our strategic business footprint, allows us to provide the high degree of service, convenience and products our customers need to achieve their financial objectives. We provide this service through three principal business line distribution channels, described further below.

The Corporation operates in a highly competitive market areas that includes local, national and regional banks as competitors along with savings banks, credit unions, insurance companies, trust companies and registered investment advisors. The Corporation and its subsidiaries are regulated by many regulatory agencies including the Securities and Exchange Commission (“SEC”), Federal Deposit Insurance Corporation (“FDIC”), the Federal Reserve and the Pennsylvania Department of Banking and Securities.

The Bank was incorporated on March 16, 2004 under the laws of the Commonwealth of Pennsylvania and is a Pennsylvania state-chartered bank. The Bank commenced operations on July 8, 2004 and is a full-service bank providing personal and business lending and deposit services through 6 full-service banking offices in Pennsylvania, 9 mortgage loan production offices throughout the Delaware Valley, and 8 mortgage loan production offices in Maryland. The Bank and Corporation are headquartered in Malvern, Pennsylvania, located in the western suburbs of Philadelphia.

(b) Basis of Presentation

The accounting policies of the Corporation conform to U.S. generally accepted accounting principles (“GAAP”).

The consolidated financial statements include accounts of the Corporation and its wholly owned subsidiary, the Bank, and the wholly owned subsidiaries of the Bank: Meridian Land Settlement Services LLC; APEX Realty LLC; Meridian Wealth Partners LLC; and Meridian Equipment Finance LLC. All significant intercompany balances and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform to the current year’s presentation. Reclassifications had no effect on prior year net income or total stockholders’ equity.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Although our current estimates contemplate current conditions and how we expect them to change in the future, due to the continuing impact that the COVID-19 pandemic has had on financial markets and the economy both locally and nationally, it is reasonably possible that this could continue to materially affect these significant estimates and our results of operations and financial condition.

Most of the Corporation’s activities are with customers located in the Delaware Valley tri-state market and the central Maryland market area. Note 4 discusses the types of securities that the Corporation invests in. Note 5

Table of Contents

discusses types of lending that the Corporation engages in. Although the Corporation has a diversified loan portfolio, its debtors’ ability to honor their contracts is influenced by the region’s economy. The Corporation does not have any significant concentrations to any one industry or customer, however there is significant concentration of commercial real estate-backed loans, amounting to 37% and 38% of total loans held for investment, as of December 31, 2021 and December 31, 2020, respectively.

(d) Presentation of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased or sold for one day periods. The Federal Reserve Board removed cash minimum reserve requirements in March 2020. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and the federal funds purchased and repurchased agreements.

(e) 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.

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 December 31, 2021 and 2020, investments in equity securities consisted of an investment in mutual funds with a fair value of $2.4 million, and $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 years ended December 31, 2021 and 2020.

(f) Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the yield (interest income) of the related loans. The Corporation generally amortizes these amounts over the contractual life of the loan.

Table of Contents

Loans that were originated by the Corporation and intended for sale in the secondary market to permanent investors, but were either repurchased or unsalable due to defect, are held for the foreseeable future or until maturity or payoff, are carried at fair value.

The accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed and charged against current year income. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

(g) Allowance for Loan and Lease Losses

The allowance for loan and lease losses (“Allowance”) is a valuation for probable incurred credit losses established through provisions for loan losses charged against income. Loans deemed to be uncollectible are charged against the Allowance, and subsequent recoveries, if any, are credited to the Allowance. All, or part, of the principal balance of loans receivable are charged off to the Allowance as soon as it is determined that the repayment of all, or part, of the principal balance is highly unlikely. Charge-offs for retail consumer loans are generally made for any balance not adequately secured after 120 cumulative days past due.

The Allowance is maintained at a level considered adequate to provide for probable incurred credit losses. Management’s periodic evaluation of the adequacy of the Allowance is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is subjective as it requires material estimates that may be susceptible to significant revisions as more information becomes available. In addition, Federal regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s Allowance and may require the Corporation to recognize additions to the Allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management.

The Allowance consists of general and specific components. The general component covers non-classified loans, as well as, non-impaired classified loans and is based on historical loss experience adjusted for qualitative factors. The specific component relates to loans that are classified as doubtful, substandard, and are on non-accrual and have been deemed impaired. Loan classifications are determined based on various assessments such as the borrower’s overall financial condition, payment history, repayment sources, guarantors and value of collateral.

We apply historical loss rates to pools of loans with similar risk characteristics. Loss rates are calculated by historical charge-offs that have occurred within each pool of loans over the loss emergence period (“LEP”). The LEP is an estimate of the average amount of time from when an event happens that causes the borrower to be unable to pay on a loan until the loss is confirmed through a loan charge-off.

Another key assumption is the look-back period (“LBP”), which represents the historical data period utilized to calculate loss rates. Our LBP goes back to Q1 2010 for all portfolio segments, as applicable, which encompasses our loss experience during the Financial Crisis, and our more recent improved loss experience.

After consideration of the historic loss calculations, management applies qualitative adjustments so that the Allowance is reflective of the inherent losses that exist in the loan portfolio at the balance sheet date. Qualitative adjustments are made based upon changes in lending policies and practices, economic conditions, changes in the loan portfolio, changes in lending management, results of internal loan reviews, asset quality trends, collateral values, concentrations of credit risk and other external factors. The evaluation of the various components of the Allowance requires considerable judgment in order to estimate inherent loss exposures.

Table of Contents

A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement, or a troubled debt restructure (“TDR”). Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.

For commercial and construction loans, impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral adjusted for cost to sell, if the loan is collateral dependent.

Large groups of smaller balance homogeneous residential mortgage and consumer loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual loans of this nature for impairment disclosures, unless such loans become impaired or are troubled and the subject of a restructuring agreement.

Loans whose terms are modified are classified as TDRs if the Corporation grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a TDR generally involve a temporary reduction in interest rate or an extension of a loan’s stated maturity date. TDRs are considered impaired loans

No portion of the Allowance is restricted to any individual loan or groups of loans, and the entire Allowance is available to absorb any and all loan and lease losses.

The Corporation has identified the following portfolio segments with similar risk characteristics for measuring credit losses:

Commercial mortgage – Our commercial real estate loans are secured by real estate that is both owner-occupied and investor owned. Owner-occupied commercial real estate loans generally involve less risk than an investment property and are distinctly reported from non-owner occupied commercial real estate loans for measuring loan concentrations for regulatory purposes. Repayment of commercial real estate loans depends on the cash flow of the borrower and the net operating income of the property, the borrower’s profitability, and the value of the underlying property. Of primary concern in commercial real estate lending is the borrower’s creditworthiness and the cash flows from the property. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject, to a greater extent than residential real estate loans, to adverse conditions in the real estate market or the economy. Commercial real estate is also subject to adverse market conditions that cause a decrease in market value or lease rates, obsolescence in location or function and market conditions associated with oversupply of units in a specific region.

Residential mortgage – Residential loans held in portfolio are primarily secured by single-family homes located in our market areas. Residential loans are generally made on the basis of the borrower’s ability to make repayment from employment income or other income, and are secured by real property whose value tends to be more easily ascertainable. Repayment of single-family loans are subject to adverse employment conditions in the local economy leading to increased default rates and decreased market values, including from oversupply in a geographic area. In general, these loans depend on the borrower’s continuing financial stability and, therefore, are likely to be adversely affected by various factors, including job loss, divorce, illness, or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Table of Contents

Construction – Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, additional funds may be required to be advanced in excess of the amount originally committed to permit completion of the building.

Commercial and Industrial – We provide a variety of variable and fixed rate commercial business loans and lines of credit. These loans and lines of credit are made to small and medium-sized manufacturers and wholesale, retail and service-related businesses. Commercial business loans generally include lines of credit and term loans with a maturity of five years or less. The primary source of repayment for commercial business loans is generally operating cash flows of the business and may also include collateralization of inventory, accounts receivable, equipment and/or personal guarantees. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. Furthermore, any collateral securing such loans may depreciate over time, may be difficult to appraise, and may fluctuate in value.

Leases – Meridian Equipment Finance (“MEF”) specializes in small ticket equipment leases for small and mid-sized businesses nationally and through a broad range of industries. The Bank’s credit risk generally results from the potential default of borrowers which may be driven by customer specific or broader industry related conditions.

Consumer, including home equity – Our consumer-lending department principally originates home equity based products for our clients and prospects. These loans typically fund completely at closing. Additional products include smaller dollar personal loans and our student loan refinance product, designed to provide additional flexibility in repayment terms desired in the marketplace. Most consumer loans are originated in Meridian’s primary market and surrounding areas.

The largest component of Meridian’s consumer loan portfolio consists of fixed rate home equity loans and variable rate home equity lines of credit. Substantially all home equity loans and lines of credit are secured by junior lien mortgages on principal residences. The Bank will lend amounts, which, together with all prior liens, typically may be up to 90 percent of the appraised value of the property securing the loan. Home equity term loans may have maximum terms up to 20 years, while home equity lines of credit generally have maximum terms of 15 years.

Credit risk on such loans is mitigated through prudent underwriting standards, including evaluation of the creditworthiness of the borrower through credit scores and debt-to-income ratios and, if secured, the collateral value of the assets.

h) Mortgage Banking Activities and Mortgage Loans Held for Sale

The Corporation’s mortgage banking division operates 9 offices in the tri-state area of Pennsylvania, Delaware and New Jersey and another 8 offices in Maryland. The mortgage banking division originates conventional mortgages, FHA, VA, USDA, and other state insured mortgages. The loans are generally sold to various investors in the secondary market.

Mortgage loans originated by the Corporation and intended for sale in the secondary market to permanent investors are classified as mortgage loans held for sale on the balance sheet as the Corporation has elected to measure loans held for sale at fair value. Fair value is based on outstanding investor commitments or, in the absence of such commitments, on current investor yield requirements based on third party models. Gains and losses on sales of these loans, as well as loan origination costs, are recorded as a component of noninterest income in the Consolidated Statements of Income. The Corporation’s current practice is to sell residential mortgage loans and retain the servicing rights, as discussed further below. Interest on loans held for sale is credited to income based on the principal amounts outstanding.

Table of Contents

The Corporation enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (interest rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Time elapsing between the issuance of a loan commitment and closing and sale of the loan generally ranges from 30 to 120 days. The Corporation protects itself from changes in interest rates through the use of best efforts forward sale contracts, whereby the Corporation commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. The Corporation also commits to loan sales through a mandatory sales channel which are economically hedged by the future sale of mortgage-backed securities to third-party counterparties to mitigate the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. By entering into best efforts commitments and economically hedging the mandatory commitments, the Corporation limits its exposure to loss and its realization of significant gains related to its rate lock commitments due to changes in interest rates.

The Corporation utilizes a third-party model to determine the fair value of rate lock commitments or forward sale contracts. This model uses investor quotes while taking into consideration the probability that the rate lock commitments will close. Net derivative assets and liabilities are recorded within other assets or other liabilities, respectively, on the consolidated balance sheets, with changes in fair value during the period recorded within net change in the fair value of derivative instruments on the consolidated statements of income.

(i)Loan Servicing Rights

The Corporation sells substantially all of the residential mortgage loans originated for sale in the secondary market; however, the Corporation may retain the servicing rights related to some of these loans. A fee, usually based on a percentage of the outstanding principal balance of the loan, is received in return for these services. Mortgage servicing rights (“MSRs") are recognized when a loan’s servicing rights are retained upon sale of a loan. When mortgage loans are sold with servicing retained, MSRs are initially recorded at fair value with the income effect recorded in non-interest income.

The Corporation also sells the guaranteed portion of certain Small Business Administration (“SBA”) loans to third parties and retains servicing rights and receives servicing fees. All such transfers are accounted for as sales. While the Corporation may retain a portion of certain sold SBA loans, its continuing involvement in the portion of the loan that was sold is limited to certain servicing responsibilities.

These servicing assets amortize in proportion to, and over the period of, the estimated future net servicing life of the underlying loans. The servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the servicing assets.

(j) Other Real Estate Owned

Other real estate owned (OREO) is comprised of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure. The Corporation acquires OREO through the wholly owned subsidiary of the Bank, Apex Realty. OREO is recorded at the lower of cost or fair value, or the loan amount net of estimated selling costs, at the date of foreclosure. The cost basis of OREO is its recorded value at the time of acquisition. After acquisition, valuations are periodically performed by management and subsequent changes in the valuation allowance are charged to OREO expense. Revenues, such as rental income, and holding expenses are included in other income and other expenses, respectively. The Corporation had 0 OREO at December 31, 2021 and 2020.

(k) Restricted Investment in Bank Stock

Restricted bank stock is principally comprised of stock in the Federal Home Loan Bank of Pittsburgh (FHLB). Federal law requires a member institution of the FHLB to hold stock according to a predetermined formula. As of December 31, 2021, and 2020, the Corporation had an investment of $5.1 million and $7.9 million,

Table of Contents

respectively, related to the FHLB stock. Also included in restricted stock is secondary stock from a correspondent bank in the amount of $50 thousand as of December 31, 2021 and 2020. All restricted stock is carried at cost.

Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) significance of the decline in net assets of the banks as compared to the capital stock amount and the length of time this situation has persisted, (2) commitments by the banks to make payments required by law or regulation and the level of such payments in relation to the operating performance of the banks, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the banks.

Management believes 0 impairment charge is necessary related to these bank restricted stocks as of December 31, 2021 or 2020.

(l) Transfers of Financial Assets

Transfers of financial assets, including loan and loan participation sales, are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Corporation, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Corporation does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

(m) Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation. Land is carried at cost. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 12 to 40 years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years and 3 to 5 years for computer software and hardware, respectively. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. The costs of maintenance and repairs are expensed as incurred; while major replacements, improvements and additions are capitalized.

(n)Bank-Owned Life Insurance

The Corporation invests in bank owned life insurance (“BOLI”) as a source of funding for employee benefit expenses. BOLI involves the purchasing of life insurance by the Corporation on a chosen group of employees. The Corporation is the owner and beneficiary of the policies. This life insurance investment is carried at the cash surrender value of the underlying policies. Earnings from the increase in cash surrender value of the policies are included in non-interest income on the consolidated statements of income.

(o) Advertising Costs

The Corporation follows the policy of charging the costs of advertising to expense as incurred.

(p) Employee Benefit Plans

The Corporation has a 401(k) Plan (the Plan) and an Employee Stock Ownership Plan (ESOP). All employees are eligible to participate in the Plan and ESOP after they have attained the age of 21 and have also completed 3 consecutive months of service. Employees must participate in the Plan to be eligible for participation in the ESOP. The employees may contribute to the Plan up to the maximum percentage allowable by law of their compensation. The Corporation may make a discretionary matching contribution to the Plan and the ESOP. Full vesting in the Corporation’s contribution to the Plan and ESOP is over a three-year period. The Corporation recorded expense for the Plan and ESOP of $1.4 million and $1.1 million, respectively for the year ended December 31, 2021 and

Table of Contents

$1.1 million and $1.2 million, respectively for the year ended December 31, 2020. The expense recorded by the Corporation for the ESOP for the year ended December 31, 2021 included a $663 thousand employer contribution, in addition to $437 thousand in stock compensation related expense. The expense recorded by the Corporation for the ESOP for the year ended December 31, 2020 included a $550 thousand employer contribution, and a $600 thousand one-time contribution approved by the Board of Directors. There was 0 such contribution made in 2021.

During the year ended December 31, 2021, 45,606 shares were purchased by the ESOP at an average market value of $24.30, while for the year ended December 31, 2020, 161,576 shares were purchased by the ESOP at an average market value of $15.06. Shares in the ESOP that are committed to be released to employees are treated as outstanding shares in the Corporation’s computation of earnings per share.

On August 31, 2020 the Corporation established a $2 million stock purchase authorization with the ESOP. By the end of 2020 the ESOP had fully utilized the $2 million loan to purchase 133,280 Corporation common shares and as of December 31, 2021, 26,656 of these common shares were released to the ESOP leaving 106,624 unallocated shares. The 133,280 common shares purchased using the loan proceeds are included in the 161,576 shares purchased by the ESOP in 2020.

There were 269,904 shares in the ESOP as of December 31, 2021. Shares in the ESOP would be impacted by any stock dividends and stock splits in the same manner as all other outstanding common shares of the Corporation.

(q) Income Taxes

Deferred income taxes are provided on the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences and net operating losses and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and net operating loss carry-forwards and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Corporation follows accounting guidance related to accounting for uncertainty in income taxes. Under the “more likely than not” threshold guidelines, the Corporation believes no significant uncertain tax positions exist, either individually or in the aggregate, that would give rise to the non-recognition of an existing tax benefit. As of December 31, 2021, and 2020, the Corporation had no material unrecognized tax benefits or accrued interest and penalties. The Corporation’s policy is to account for interest as a component of interest expense and penalties as a component of other expense. The Corporation is no longer subject to examination by federal, state and local taxing authorities for years before January 1, 2018.

(r) Stock Compensation Plans

Stock compensation accounting guidance requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the grant date fair value of the equity or liability instruments issued. The stock compensation accounting guidance covers a wide range of share-based compensation arrangements including stock options and restricted share plans.

The stock compensation accounting guidance requires that compensation cost for all stock awards be calculated and recognized over the employees’ service period, generally defined as the vesting period. For awards with graded-vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award. A Black-Scholes model is used to estimate the fair value of stock options, while the market price of the Corporation’s common stock at the date of grant is used for restricted stock awards.

Table of Contents

(s) Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

The components of other comprehensive income (loss) for the years ended December 31, 2021 and 2020 consist of unrealized holding gains and (losses) arising during the year on available-for-sale securities.

(t) Off-Balance Sheet Financial Instruments

In the ordinary course of business, the Corporation has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded in the balance sheet when they are funded.

(u) Derivative Financial Instruments

The Corporation recognizes all derivative financial instruments related to its mortgage banking activities on its balance sheet at fair value. The Corporation utilizes investor quotes to determine the fair value of interest rate lock commitment derivatives and market pricing to determine the fair value of forward security purchase commitment derivatives. All changes in fair value of derivative instruments are recognized in earnings.

The Corporation enters into interest rate swaps that allow commercial loan customers to effectively convert a variable-rate commercial loan agreement to a fixed-rate commercial loan agreement. The interest rate swaps are recognized on the Corporation’s balance sheet at fair value. Under these agreements, the Corporation originates variable-rate loans with customers in addition to interest rate swap agreements, which serve to effectively swap the customers’ variable-rate loans into fixed-rate loans. The Corporation then enters into corresponding swap agreements with swap dealer counterparties to economically hedge its exposure on the variable and fixed components of the customer agreements. The interest rate swaps with both the customers and third parties are not designated as hedges under ASC 815 and are marked to market through earnings. As the interest rate swaps are structured to offset each other, changes to the underlying benchmark interest rates considered in the valuation of these instruments do not result in an impact to earnings; however, there may be fair value adjustments related to credit quality variations between counterparties, which may impact earnings as required by ASC 820.

(v) Earnings per Common Share

Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average common shares outstanding during the period reduced by unearned ESOP Plan shares and treasury stock. Diluted earnings per common share takes into account the potential dilution that would occur if in the-money stock options were exercised and converted into shares of common stock and restricted stock awards and performance-based stock awards were vested. Proceeds assumed to have been received on options exercises are assumed to be used to purchase shares of the Corporation’s common stock at the average market price during the period, as required by the treasury stock method of accounting. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be antidilutive.

(w)Revenue Recognition

The Corporation recognizes all sources of income on the accrual method, with the exception of nonaccrual loans and leases.

The Corporation earns wealth management fee income from investment advisory services provided to individual and 401k customers. Fees that are determined based on the market value of the assets held in their accounts are

Table of Contents

generally billed quarterly, in advance, based on the market value of assets at the end of the previous billing period. Other related services that are based on a fixed fee schedule are recognized when the services are rendered. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e. the trade date. Included in other assets on the balance sheet is a receivable for wealth management fees that have been earned but not yet collected.

(x)Loss Contingencies

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

(y) Operating Segments

While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis. The Corporation has identified 3 segments: a banking segment, a wealth management segment and a mortgage banking segment, as more fully disclosed in the Segment note to the consolidated financial statements.

(z)Fair Value of Financial Instruments

Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in the Fair Value Measurements and Disclosures note to the consolidated financial statements. Fair value estimates involve uncertainties and matters of significant judgment. Changes in assumptions or in market conditions could significantly affect the estimates.

(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.


	Year Ended
	December 31,
(dollars in thousands, except per share data)	2021		2020
Numerator:
Net income available to common stockholders	$	35,585		26,438
Denominator for basic earnings per share
Weighted average shares outstanding		6,133		6,159
Average unearned ESOP shares		(114)		(37)
Basic weighted averages shares outstanding		6,019		6,122
Dilutive effects of assumed exercises of stock options		130		23
Dilutive effects of SERP shares		57		42
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		6,206		6,187
Basic earnings per share	$	5.91		4.32
Diluted earnings per share	$	5.73		4.27
Antidilutive shares excluded from computation of average dilutive earnings per share		139		275

Table of Contents

(3)	Goodwill and Other Intangibles

The Corporation’s goodwill and intangible assets are detailed below:


	Balance			Balance	Amortization
	December 31,		Amortization	December 31,	Period
(dollars in thousands)	2020		Expense	2021	(in years)
Goodwill - Wealth	$	899	—	899	Indefinite
Total Goodwill		899	—	899

Intangible assets - trade name		266	—	266	Indefinite
Intangible assets - customer relationships		3,319	(206)	3,113	20
Intangible assets - non competition agreements		16	(16)	—	4
Total Intangible Assets		3,601	(222)	3,379
Total	$	4,500	(222)	4,278

Accumulated amortization of intangible assets was $1.2 million and $1 million as of December 31, 2021 and 2020, respectively.

In accordance with ASC Topic 350, the Corporation performed a qualitative assessment of goodwill and identifiable intangible assets as of December 31, 2021 and determined it was more likely than not that the fair value of the Corporation, including the wealth reporting unit where the goodwill and identifiable intangible assets are held, was more than its carrying amount.

At December 31, 2021, the schedule of future intangible asset amortization is as follows (in thousands):


2022		204
2023		204
2024		204
2025		204
2026		204
Thereafter		2,093
	$	3,113

Table of Contents

(4)	Securities

The amortized cost and approximate fair value of securities as of December 31, 2021 and 2020 are as follows:


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


	December 31, 2020
			Gross	Gross		# of Securities
	Amortized		unrealized	unrealized	Fair	in unrealized
(dollars in thousands)	cost		gains	losses	value	loss position
Securities available-for-sale:
U.S. asset backed securities	$	25,303	364	(75)	25,592	8
U.S. government agency mortgage-backed securities		3,854	192	—	4,046	—
U.S. government agency collateralized mortgage obligations		23,010	916	(17)	23,909	1
State and municipal securities		63,848	2,025	(63)	65,810	3
Corporate bonds		4,200	7	(2)	4,205	2
Total securities available-for-sale	$	120,215	3,504	(157)	123,562	14
Securities held-to-maturity:
State and municipal securities		6,510	347	—	6,857	—
Total securities held-to-maturity	$	6,510	347	—	6,857	—

Although the Corporation’s investment portfolio overall is in a net unrealized gain position at December 31, 2021, the temporary impairment in the above noted securities is primarily the result of changes in market interest rates subsequent to purchase and the Corporation does not intend to sell these securities prior to recovery 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, 0 securities are deemed to be other-than-temporarily impaired.

As of December 31, 2021 and 2020, securities having a fair value of $92.2 million and $55.9 million, respectively, were specifically pledged as collateral for public funds, the FRB discount window program, FHLB borrowings and other purposes. The FHLB has a blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation’s borrowing agreement with the FHLB.

Table of Contents

The following table shows the Corporation’s investment gross unrealized losses and fair value aggregated by investment category and length of time that individual securities have been in continuous unrealized loss position at December 31, 2021 and 2020:


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


	December 31, 2020
	Less than 12 Months			12 Months or more		Total
	Fair		Unrealized	Fair	Unrealized	Fair	Unrealized
(dollars in thousands)	value		losses	value	losses	value	losses
Securities available-for-sale:
U.S. asset backed securities	$	2,884	(4)	7,443	(71)	10,327	(75)
U.S. government agency collateralized mortgage obligations		2,284	(17)	—	—	2,284	(17)
State and municipal securities		4,163	(63)	—	—	4,163	(63)
Corporate bonds		1,198	(2)	—	—	1,198	(2)
Total securities available-for-sale	$	10,529	(86)	7,443	(71)	17,972	(157)

The amortized cost and carrying value of securities at December 31, 2021 and 2020 are shown below by contractual maturities. Actual maturities may differ from contractual maturities as issuers may have the right to call or repay obligations with or without call or prepayment penalties.


	December 31, 2021					December 31, 2020
	Available-for-sale			Held-to-maturity		Available-for-sale			Held-to-maturity
	Amortized		Fair	Amortized	Fair	Amortized		Fair	Amortized	Fair
(dollars in thousands)	cost		value	cost	value	cost		value	cost	value
Investment securities:
Due in one year or less	$	—	—	763	769	$	—	—	—	—
Due after one year through five years		12,934	12,885	2,354	2,397		—	—	3,181	3,288
Due after five years through ten years		30,890	30,798	3,255	3,425		12,035	12,095	3,329	3,569
Due after ten years		81,548	82,450	—	—		81,316	83,512	—	—
Subtotal		125,372	126,133	6,372	6,591		93,351	95,607	6,510	6,857
Mortgage-related securities		33,015	33,169	—	—		26,864	27,955	—	—
Mutual funds with no stated maturity		—	—	—	—		—	—	—	—
Total	$	158,387	159,302	6,372	6,591	$	120,215	123,562	6,510	6,857

Proceeds from the sale of available for sale investment securities totaled $23.6 million for the year ended December 31, 2021, resulting in a gross gain on sale of $634 thousand and a gross loss on sale of $199 thousand for the year ended December 31, 2021. Proceeds from the sale of available for sale investment securities totaled $45.9 million for the year

Table of Contents

ended December 31, 2020, resulting in a gross gain on sale of $1.5 million and a gross loss on sale of $196 thousand for the year ended December 31, 2020.

(5)	Loans Receivable

Loans and leases outstanding at December 31, 2021 and 2020 are detailed by category as follows:


	December 31,		December 31,
(dollars in thousands)	2021		2020
Mortgage loans held for sale	$	80,882	229,199
Real estate loans:
Commercial mortgage		516,928	485,103
Home equity lines and loans		52,299	64,987
Residential mortgage (1)		68,175	52,454
Construction		160,905	140,246
Total real estate loans		798,307	742,790

Commercial and industrial		293,771	261,750
Small business loans		114,158	49,542
Paycheck Protection Program ("PPP") loans		90,194	203,543
Main Street Lending Program ("MSLP") loans		597	580
Consumer		419	511
Leases, net		88,242	31,040
Total portfolio loans and leases		1,385,688	1,289,756
Total loans and leases	$	1,466,570	1,518,955

Loans with predetermined rates	$	488,220	658,458
Loans with adjustable or floating rates		978,350	860,497
Total loans and leases	$	1,466,570	1,518,955

Net deferred loan origination costs (fees)	$	769	(4,992)

(1) Includes $17,558 and $12,182 of loans at fair value as of December 31, 2021 and 2020, respectively.

Components of the net investment in leases at December 31, 2021 and 2020 are detailed as follows:


	December 31,		December 31,
(dollars in thousands)	2021		2020
Minimum lease payments receivable	$	105,608	37,919
Unearned lease income		(17,366)	(6,879)
Total	$	88,242	31,040

Table of Contents

Age Analysis of Past Due Loans and Leases

The following table presents an aging of the Corporation’s loan and lease portfolio as of December 31, 2021 and 2020, respectively:


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

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

The increase in nonaccrual loans and leases was largely due to 1 commercial loan relationship for $13.8 million that had been on COVID-19 deferral but became a non-performing loan relationship late in 2021.


						Total
			90+ days			accruing	Nonaccrual	Total loans
December 31, 2020	30-89 days		past due and	Total past		loans and	loans and	portfolio	Delinquency
(dollars in thousands)	past due		still accruing	due	Current	leases	leases	and leases	percentage
Commercial mortgage	$	—	—	—	482,042	482,042	3,061	485,103	0.63	%
Home equity lines and loans		—	—	—	64,128	64,128	859	64,987	1.32
Residential mortgage (1)		3,595	—	3,595	46,134	49,729	2,725	52,454	12.05
Construction		—	—	—	140,246	140,246	—	140,246	—
Commercial and industrial		—	—	—	260,465	260,465	1,285	261,750	0.49
Small business loans		—	—	—	49,542	49,542	—	49,542	—
Paycheck Protection Program loans		—	—	—	203,543	203,543	—	203,543	—
Main Street Lending Program loans		—	—	—	580	580	—	580	—
Consumer		—	—	—	511	511	—	511	—
Leases, net		109	—	109	30,931	31,040	—	31,040	0.35
Total	$	3,704	—	3,704	1,278,122	1,281,826	7,930	1,289,756	0.90	%

(1) Includes $12,182 of loans at fair value as of December 31, 2020 ($10,314 of current, $958 of 30-89 days past due and $910 of nonaccrual).

Table of Contents

(6)Allowance for Loan and Lease Losses (the Allowance)

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

The Allowance is maintained at a level considered adequate to provide for losses that are probable and estimable. Management’s periodic evaluation of the adequacy of the Allowance is based on known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is subjective as it requires material estimates that may be susceptible to significant revisions as more information becomes available.

Roll-Forward of the Allowance by Portfolio Segment

The following tables detail the roll-forward of the Corporation’s Allowance, by portfolio segment, as of December 31, 2021 and 2020, respectively:


	Balance,					Balance,
(dollars in thousands)	December 31, 2020		Charge-offs	Recoveries	Provision	December 31, 2021
Commercial mortgage	$	7,451	—	—	(2,501)	4,950
Home equity lines and loans		434	(81)	82	(211)	224
Residential mortgage		385	—	5	(107)	283
Construction		2,421	—	—	(379)	2,042
Commercial and industrial		5,431	—	41	1,061	6,533
Small business loans		1,259	—	—	2,478	3,737
Consumer		4	—	4	(5)	3
Leases		382	(130)	—	734	986
Total	$	17,767	(211)	132	1,070	18,758


	Balance,					Balance,
(dollars in thousands)	December 31, 2019		Charge-offs	Recoveries	Provision	December 31, 2020
Commercial mortgage	$	3,426	—	—	4,025	7,451
Home equity lines and loans		342	(90)	14	168	434
Residential mortgage		179	—	7	199	385
Construction		2,362	—	—	59	2,421
Commercial and industrial		2,684	(31)	58	2,720	5,431
Small business loans		509	—	—	750	1,259
Consumer		6	(10)	4	4	4
Leases		5	—	—	377	382
Total	$	9,513	(131)	83	8,302	17,767

Table of Contents

The Allowance Allocated by Portfolio Segment

The following table details the allocation of the Allowance and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of December 31, 2021 respectively:


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

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

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


	Allowance on loans and leases				Carrying value of loans and leases
	Individually		Collectively		Individually		Collectively
December 31, 2020	evaluated		evaluated		evaluated		evaluated
(dollars in thousands)	for impairment		for impairment	Total	for impairment		for impairment	Total
Commercial mortgage	$	—	7,451	7,451	$	1,606	483,497	485,103
Home equity lines and loans		9	425	434		921	64,066	64,987
Residential mortgage		73	312	385		1,817	38,455	40,272
Construction		—	2,421	2,421		1,206	139,040	140,246
Commercial and industrial		1,563	3,868	5,431		4,645	257,105	261,750
Small business loans		—	1,259	1,259		185	49,357	49,542
Paycheck Protection Program loans		—	—	—		—	203,543	203,543	(2)
Main Street Lending Program		—	—	—		—	580	580	(2)
Consumer		—	4	4		—	511	511
Leases, net		—	382	382		—	31,040	31,040
Total	$	1,645	16,122	17,767	$	10,380	1,267,194	1,277,574	(1)

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

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

Loans and Leases by Credit Ratings

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

●

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

Table of Contents

●

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.

The following table details the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to determine the Allowance as of December 31, 2021 and 2020, respectively:


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

Commercial and industrial loans classified as substandard totaled $42.9 million as of December 31, 2021, an increase of $33.9 million, from $9.0 million as of December 31, 2020. The increase was driven by the $13.8 million commercial loan relationship in the advertising industry that became a non-performing loan relationship late in 2021, discussed above. The remaining $20.1 million of increase year-over-year was comprised of 18 different loan relationships with no specific industry concentration.


December 31, 2020			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	449,545	32,059	3,499	—	485,103
Home equity lines and loans		63,923	—	1,064	—	64,987
Construction		132,286	7,960	—	—	140,246
Commercial and industrial		227,349	21,721	9,000	3,680	261,750
Small business loans		46,789	—	2,753	—	49,542
Paycheck Protection Program loans		203,543	—	—	—	203,543
Main Street Lending Program loans		580	—	—	—	580
Total	$	1,124,015	61,740	16,316	3,680	1,205,751

In addition to credit quality indicators as shown in the above tables, Allowance allocations for residential mortgages, consumer loans and leases are also applied based on their performance status as December 31, 2021 and 2020, respectively.


	December 31, 2021				December 31, 2020
(dollars in thousands)	Performing		Nonperforming	Total	Performing		Nonperforming	Total
Residential mortgage	$	48,820	1,797	50,617	$	38,457	1,815	40,272
Consumer		419	—	419		511	—	511
Leases, net		88,030	212	88,242		31,040	—	31,040
Total	$	137,269	2,009	139,278	$	70,008	1,815	71,823

Table of Contents

There were 4 nonperforming residential mortgage loans at December 31, 2021 and 5 at December 31, 2020 with a combined outstanding principal balance of $601 thousand and $910 thousand, respectively, which were carried at fair value and not included in the table above. NaN TDR’s performing according to modified terms are included in performing residential mortgages above for the twelve months ended December 31, 2021 and 2020, respectively.

Impaired Loans

The following tables detail the recorded investment and principal balance of impaired loans by portfolio segment, their related Allowance and interest income recognized for the periods.


	As of December 31, 2021				As of December 31, 2020
	Recorded		Principal	Related	Recorded	Principal	Related
(dollars in thousands)	investment		balance	allowance	investment	balance	allowance
Impaired loans with related allowance:
Commercial and industrial	$	17,147	17,310	2,900	3,860	3,902	1,563
Small business loans		666	666	376	—	—	—
Home equity lines and loans		—	—	—	95	105	9
Residential mortgage		—	—	—	689	689	73
Total	$	17,813	17,976	3,276	4,644	4,696	1,645
Impaired loans without related allowance:
Commercial mortgage	$	3,556	3,559	—	1,606	1,642	—
Commercial and industrial		214	269	—	785	862	—
Small business loans		126	126	—	185	185	—
Home equity lines and loans		905	935	—	826	839	—
Residential mortgage		1,797	1,797	—	1,128	1,128	—
Construction		1,206	1,206	—	1,206	1,206	—
Leases		212	212	—	—	—	—
Total		8,016	8,104	—	5,736	5,862	—
Grand Total	$	25,829	26,080	3,276	10,380	10,558	1,645


		Year Ended		Year Ended
		December 31, 2021		December 31, 2020
		Average	Interest	Average	Interest
		recorded	income	recorded	income
(dollars in thousands)		investment	recognized	investment	recognized
Impaired loans with related allowance:
Commercial and industrial		17,349	15	3,907	31
Small business loans		887	—	—	—
Home equity lines and loans		—	—	102	—
Residential mortgage		—	—	689	—
Total	$	18,236	15	4,698	31
Impaired loans without related allowance:
Commercial mortgage	$	3,578	43	1,697	86
Commercial and industrial		239	24	832	19
Small business loans		154	14	213	14
Home equity lines and loans		914	—	831	—
Residential mortgage		1,807	11	1,131	133
Construction		1,206	62	1,208	45
Leases		240	—	—	—
Total	$	8,138	154	5,912	297
Grand Total	$	26,374	169	10,610	328

Table of Contents

Troubled Debt Restructuring (“TDR’s”)

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

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

The balance of TDRs at December 31, 2021 and 2020 are as follows:


	December 31,		December 31,
(dollars in thousands)	2021		2020
TDRs included in nonperforming loans and leases	$	361	244
TDRs in compliance with modified terms		3,446	3,362
Total TDRs	$	3,807	3,606

There were 2 loan and lease modifications granted during the year ended December 31, 2021 on commercial mortgages and 0 loan and lease modifications granted during the year ended December 31, 2020 that were categorized as TDRs. NaN loan and lease modifications granted during the twelve months ended December 31, 2021 and 2020 subsequently defaulted during the same time period.

COVID-19 Assistance to Customers

During 2021 and 2020 we assisted customers that were impacted by the COVID-19 pandemic through 2 distinct and impactful ways: the issuance of PPP loans and short-term loan deferrals on a limited basis, in accordance with Section 4103 of the CARES Act.

Throughout the life of the PPP loan program we helped borrowers with the issuance of 1,451 such loans totaling over $370 million. As of March 10, 2022, approximately $314 million, or 1,224 loans, had been paid back. Out of the remaining $56.3 million that have yet to be forgiven by the SBA, $31.7 million have submitted for forgiveness and are awaiting a response from the SBA, while the remaining $24.6 million has not yet submitted a request for forgiveness.

We also provided COVID-19 loan deferrals, typically in 3 month increments, to loan customers that amounted to $2.4 million as of December 31, 2021, down $21.8 million, or 90%, from the $24.2 million as of December 31, 2020 as detailed by industry concentration of the borrower in the table below:


	December 31,		December 31,
(dollars in thousands)	2021		2020
Hotels	$	—	11,832
C&I building construction		—	10,103
Other		2,424	2,243
Total	$	2,424	24,178

As these modifications related to the COVID-19 pandemic and qualify under the provisions of either Section 4013 of the CARES Act or Interagency Guidance, they are not considered TDR’s. Management continues to monitor these deferrals and has adequately considered these credits in the December 31, 2021 allowance for loan losses balance. These modified

Table of Contents

loans are classified as performing and are not considered past due. Loans are to be placed on non-accrual when it becomes apparent that payment of interest or recovery of all principal is questionable, and the COVID-19 related modification is no longer considered short-term or the modification is deemed ineffective. As of January 31, 2022 the $2.4 million of deferrals that had existed as of December 31, 2021 expired without further deferral or modification given to these borrowers.

(7)	Bank Premises and Equipment

The components of premises and equipment at December 31, 2021 and 2020 are as follows:


(dollars in thousands)	2021		2020
Building	$	4,141	4,141
Leasehold improvements		3,347	3,202
Land		600	600
Land Improvements		218	218
Furniture, fixtures and equipment		3,229	2,700
Computer equipment and data processing software		7,971	7,034
Construction in process		3,763	—
Less: accumulated depreciation		(11,463)	(10,118)
Total	$	11,806	7,777

Total depreciation expense for the years ended December 31, 2021 and 2020 totaled $1.3 million and $1.6 million, respectively.

In November 2021 Meridian purchased a building for $3.8 million that will serve as the future headquarters of our bank operations department, as well as other departments. As of December 31, 2021 this building was classified as construction in process as it has not yet been put into service, and therefore has not started to be depreciated.

(8)

Deposits

The components of deposits at December 31, 2021 and 2020 are as follows:


(dollars in thousands)	2021		2020
Demand, non-interest bearing	$	274,528		203,843
Demand, interest bearing		268,248		206,573
Savings accounts		45,038		8,056
Money market accounts		652,590		564,566
Time deposits		206,009		258,297
Total	$	1,446,413		1,241,335

The aggregate amount of time deposits in denominations over $250 thousand were $179.8 million and $233.1 milllion as of December 31, 2021 and 2020, respectively.

At December 31, 2021, the scheduled maturities of time deposits are as follows (in thousands):


2022	$	126,719
2023		18,106
2024		4,071
2025		24,271
2026		32,842
Total	$	206,009

Table of Contents

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

The Corporation’s short-term borrowings generally consist of federal funds purchased and short-term borrowings extended under agreements with the Federal Home Loan Bank of Pittsburgh (“FHLB”). The Corporation has 2 unsecured Federal Funds borrowing facilities with correspondent banks: one of $24 million and one of $15 million. Federal funds purchased generally represent one-day borrowings. The Corporation had 0 Federal Funds purchased at December 31, 2021 and December 31, 2020. The Corporation also has a facility with the Federal Reserve discount window of $3.5 million. This facility is fully secured by investment securities. There were 0 borrowings under this at December 31, 2021 and $10 million at December 31, 2020.

Short-term borrowings at December 31, 2021 and December 31, 2020 consisted of the following notes:


				Balance as of
	Maturity	Interest		December 31,		December 31,
(dollars in thousands)	date	rate		2021		2020
Open Repo Plus Weekly	05/31/2022	0.33	%	$	36,458	60,416
Mid-term Repo-fixed	09/12/2022	0.23			4,886	—
Federal Reserve Discount Window	03/31/2021	0.25			—	10,000
Mid-term Repo-fixed	01/13/2021	0.36			—	4,605
Mid-term Repo-fixed	06/10/2021	0.10			—	6,376
Mid-term Repo-fixed	09/10/2021	0.11			—	10,000
Mid-term Repo-fixed	12/10/2021	0.16			—	10,000
Mid-term Repo-fixed	01/27/2021	0.23			—	5,465
Total				$	41,344	106,862

As part of the CARES Act, the FRB of Philadelphia offered secured discounted borrowings to banks who originated PPP loans through the Paycheck Protection Program Liquidity Facility or PPPLF program. Advances from this facility are secured 100% by the aggregate face value of pools comprised of loans with common maturity dates. PPPLF advances mature concurrently with the loans in a given pool. At December, 2021, the Corporation had 0 of PPPLF advances with the FRB of Philadelphia. Advances made on the PPPLF were ended by the FRB on July 30, 2021.

Long-term debt at December 31, 2021 and December 31, 2020 consisted of the following fixed rate notes with the FHLB of Pittsburgh:


				Balance as of
	Maturity	Interest		December 31,		December 31,
(dollars in thousands)	date	rate		2021		2020
PPPLF Advances	2022	0.35	%	$	—	153,269
Mid-term Repo-fixed	06/29/2022	0.32			—	7,392
Mid-term Repo-fixed	09/12/2022	0.23			—	4,885
Total	`			$	—	165,546

The FHLB of Pittsburgh has also issued $131.5 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 2021.

The Corporation has a maximum borrowing capacity with the FHLB of $505.4 million as of December 31, 2021 and $638.9 million as of December 31, 2020. 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.

Table of Contents

(10)	Subordinated Debentures

In December 2008, the Bank issued $550 thousand of mandatory convertible unsecured subordinated debentures (2008 Debentures). The 2008 Debentures have a maturity date of December 18, 2023 and interest on the 2008 Debentures is paid quarterly at 6%. The 2008 Debentures are convertible into 1 share of the Corporation’s common stock for every $15 in principal amount of the 2008 Debentures automatically on such date, if any, as accumulated losses of the Bank first exceed the sum of the retained earnings and capital surplus accounts of the Bank. The 2008 Debentures began to repay principal in 8 equal installments which commenced in December of 2016. As of December 31, 2021, $113 thousand of the 2008 Debentures remained outstanding, after pay downs of $56 thousand for 2021 and 2020 combined.

In December 2011, the Bank issued $1.4 million of mandatory convertible unsecured subordinated debentures (2011 Debentures). The 2011 Debentures have a maturity date of December 31, 2026 and interest on the 2011 Debentures is paid quarterly at 6%. The 2011 Debentures are convertible into 1 share of the Corporation’s common stock for every $17 in principal amount of the 2011 Debentures automatically on such date, if any, as accumulated losses of the Bank first exceed the sum of the retained earnings and capital surplus accounts of the Bank. The 2011 Debentures began to repay principal in 8 equal installments which commenced in December of 2020. As of December 31, 2021, $578 thousand of the 2011 Debentures remained outstanding, after pay downs of $116 thousand each during 2021 and 2020.

In April 2013, the Bank issued $1.4 million of mandatory convertible unsecured subordinated debentures (2013 Debentures). The 2013 Debentures have a maturity date of December 31, 2028 and interest on the 2013 Debentures is paid quarterly at 6.5%. The 2013 Debentures are convertible into 1 share of the Corporation’s common stock for every $22 in principal amount of the 2013 Debentures automatically on such date, if any, as accumulated losses of the Bank first exceed the sum of the retained earnings and capital surplus accounts of the Bank. As of December 31, 2021, $761 thousand of the 2013 Debentures remained outstanding, after pay downs of $109 thousand during 2021 and 0 payments during 2020.

In June, August and September 2014, the Bank issued $3 million, $100 thousand, and $7 million of non-convertible unsecured subordinated debentures (2014 Debentures). The 2014 Debentures have maturity dates of June 30, 2024, June 30, 2024 and September 30, 2024, respectively. Interest on all 3 tranches of the 2014 Debentures is paid quarterly at 7.25%. During 2020, the Corporation redeemed the remaining $7.1 million of 2014 Debentures and therefore there was $0 outstanding as of December 31, 2021 and 2020.

Upon formation of the bank holding company, the Corporation assumed the 2008, 2011, 2013 and 2014 Debentures that were originally issued by the Bank.

During December 2019, the Corporation issued $40 million of fixed-to-floating rate non-convertible unsecured subordinated debentures (2019 Debentures). The 2019 Debentures have a maturity date of December 30, 2029 and interest on the 2019 Debentures is paid semiannually at 5.375%. The debt issuance costs are included as a direct deduction from the debt liability and these costs are amortized to interest expense using the effective yield method. During 2021 and 2020 the Corporation made interest payments of $2.2 million and $2.2 million on the 2019 Debentures, respectively.

The 2008, 2011, and 2013 Debentures are includable as Tier 2 capital for determining the Bank’s compliance with regulatory capital requirements (see footnote 19). The 2019 Debentures are included as Tier 2 capital for the Corporation and as Tier 1 capital for the Bank.

Table of Contents

(11)Servicing Assets

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

Residential Mortgage Loans

MSRs are amortized to non-interest expense in proportion to, and over the period of, the estimated future net servicing life of the underlying assets. MSR’s 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 and $506.0 million of residential mortgage loans as of December 31, 2021 and 2020, respectively. During the twelve months ended December 31, 2021, the Corporation recognized servicing fee income of $2.0 million, compared to $498 thousand during the twelve months ended December 31, 2020, respectively.

Changes in the MSR balance are summarized as follows:


	Year Ended December 31,
(dollars in thousands)	2021		2020
Balance at beginning of the period	$	4,647	446
Servicing rights capitalized		6,769	4,856
Amortization of servicing rights		(1,087)	(318)
Change in valuation allowance		427	(337)
Balance at end of the period	$	10,756	4,647

Activity in the valuation allowance for MSR’s was as follows:


	Year Ended December 31,
(dollars in thousands)	2021		2020
Valuation allowance, beginning of period	$	(435)	(98)
Impairment		—	(337)
Recovery		427	—
Valuation allowance, end of period	$	(8)	(435)

The Corporation uses assumptions and estimates in determining the fair value of MSRs. These assumptions include prepayment speeds and discount rates. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge. At December 31, 2021, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 7.23% and a discount rate equal to 9.00%. At December 31, 2020, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 9.39% and a discount rate equal to 9.00%.

Table of Contents

At December 31, 2021 and 2020, the sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% unfavorable changes in key economic assumptions are included in the following table.



(dollars in thousands)	December 31, 2021		December 31, 2020
Fair value of residential mortgage servicing rights	$	11,241	$	4,647

Weighted average life (months)		11.0		5.0

Prepayment speed		7.23%		9.39%
Impact on fair value:
10% adverse change	$	(376)	$	(183)
20% adverse change		(731)		(354)

Discount rate		9.00%		9.00%
Impact on fair value:
10% adverse change	$	(436)	$	(168)
20% adverse change		(840)		(329)

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

SBA Loans

SBA loan servicing assets are amortized to non-interest expense in proportion to, and over the period of, the estimated future net servicing life of the underlying assets. SBA loan servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the SBA loan servicing asset. The Corporation serviced $115.1 million of SBA loans, as of December 31, 2021 and $55.9 million as of December 31, 2020.

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


	Year Ended December 31,
(dollars in thousands)	2021		2020
Balance at beginning of the period	$	970	337
Servicing rights capitalized		1,488	794
Amortization of servicing rights		(392)	(148)
Change in valuation allowance		(57)	(13)
Balance at end of the period	$	2,009	970

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


	Year Ended December 31,
(dollars in thousands)	2021		2020
Valuation allowance, beginning of period	$	(39)	(26)
Impairment		(57)	(13)
Recovery		—	—
Valuation allowance, end of period	$	(96)	(39)

Table of Contents

The Corporation uses assumptions and estimates in determining the fair value of SBA loan servicing rights. These assumptions include prepayment speeds, discount rates, and other assumptions. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge.

At December 31, 2021, 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 12.38%, and a discount rate equal to 9.01%. At December 31, 2020, 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 8.33%.

At December 31, 2021 and 2020, the sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% unfavorable changes in key economic assumptions are included in the following table.



(dollars in thousands)	December 31, 2021		December 31, 2020
Fair value of SBA loan servicing rights	$	2,107	$	1,010

Weighted average life (years)		3.8		3.7

Prepayment speed		12.38%		12.73%
Impact on fair value:
10% adverse change	$	(69)	$	(37)
20% adverse change		(132)		(71)

Discount rate		9.01%		8.33%
Impact on fair value:
10% adverse change	$	(54)	$	(25)
20% adverse change		(106)		(49)

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

(12)	Lease Commitments

The Corporation leases NaN offices from third parties under operating lease agreements expiring at different periods through March 2031. Under all current agreements, the Corporation is responsible for its portion of real estate taxes, utilities, insurance, and repairs and maintenance.

Total rental expense for the years ended December 31, 2021 and 2020 was $2.2 million and $1.9 million, respectively. Future minimum lease payments by year and in the aggregate, under these lease agreements, are as follows:


Future minimum lease payments

(dollars in thousands)
2022	$	2,179
2023		1,874
2024		1,737
2025		1,456
2026		1,436
Thereafter		3,134
	$	11,816

Table of Contents

Refer to footnote 23 for discussion of ASU 2016-02 Leases, which the Corporation adopted as of January 1, 2022.

(13)	Stock-Based Compensation

The Corporation has issued stock options under the Meridian Bank 2004 Stock Option Plan (2004 Plan). The 2004 Plan authorized the Board of Directors to grant options up to an aggregate of 446,091 shares, as adjusted for the 5% stock dividends in 2012, 2014 and 2016 to officers, other employees and directors of the Corporation. NaN additional shares are available for future grants. The shares granted under the 2004 Plan to directors are nonqualified options. The shares granted under the 2004 Plan to officers and other employees are incentive stock options, and are subject to the limitations under Section 422 of the Internal Revenue Code.

The Meridian Bank 2016 Equity Incentive Plan (2016 Plan) was amended on May 24, 2019 to authorize the Board of Directors to grant up to an aggregate of 686,900 stock awards that can take different forms. A total of 438,750 stock options and 43,208 shares of restricted stock have been granted under the 2016 Plan through December 31, 2021. As of December 31, 2021 there were 204,942 stock awards remaining to be issued. Options granted under the 2016 Plan to directors are nonqualified options, while options granted to officers and other employees are incentive stock options, and are subject to the limitations under Section 422 of the Internal Revenue Code.

Stock Options

Stock-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as an expense over the vesting period. The fair value of stock option grants is determined using the Black-Scholes pricing model. The assumptions necessary for the calculation of the fair value are expected life of options, annual volatility of stock price, risk-free interest rate and annual dividend yield.

Stock option awards granted under the 2016 Plan have a term that does not exceed ten years and vest according to each award’s specific vesting schedule. Currently, all option awards granted to date vest 25% upon grant and become fully exercisable after three years of service from the grant date.

The following table provides information about stock options outstanding as of December 31, 2021 and 2020:


		Weighted		Weighted
		average		average
		exercise		grant date
	Shares	price		fair value
Outstanding at December 31, 2019	346,381	$	16.13	$	4.55
Exercised	(14,673)		13.64		3.74
Granted	94,650		17.70		5.07
Forfeited	(25,631)		17.03		4.73
Outstanding at December 31, 2020	400,727		16.53		4.69
Exercised	(77,265)		13.68		4.35
Granted	142,650		27.50		9.47
Forfeited	(4,148)		18.63		6.57
Outstanding at December 31, 2021	461,964		20.38		6.21
Exercisable at December 31, 2021	291,832		18.40		5.27
Nonvested at December 31, 2021	170,132	$	23.77	$	7.81

The weighted average remaining contractual life of the outstanding stock options at December 31, 2021 is 7.6 years. At December 31, 2021 the range of exercise prices is $11.79 to $31.00. The aggregate intrinsic value of options outstanding and exercisable was $7.6 million and $5.4 million, respectively, as of December 31, 2021.

Table of Contents

The fair value of each option granted in 2021 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield of 0.0%, risk-free interest rate of between 1.02% and 1.54%, expected life of 5.75 years, and expected volatility of between 39.25% and 40.97% based on an average of the Corporation’s share price since going public. The weighted average fair value of options granted in 2021 was $8.14 to $9.57 per share.

The fair value of each option granted in 2020 was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield of 0.0%, risk-free interest rate of between 0.47% and 1.68%, expected life of 5.75 years, and expected volatility of 21.81% and 39.65% based on an average of the Corporation’s share price since going public. The weighted average fair value of options granted in 2020 was $4.47 to $5.87 per share.

Total stock option compensation cost for the twelve months ended December 31, 2021 and December 31, 2020 was $803 thousand and $451 thousand, respectively. During the twelve months ended December 31, 2021 and December 31, 2020, the Corporation received $1.0 million and $200 thousand from the exercise of stock options, respectively. There were 0 tax benefits recognized related to stock compensation cost for the twelve months ended December 31, 2021 and 2020.

In accordance with ASU 2016-09 – Compensation – Stock Compensation (ASU 2016-09), forfeitures are recognized as they occur instead of applying an estimated forfeiture rate to each grant. For purposes of the determination of stock-based compensation expense for the year ended December 31, 2021, we recognized the forfeiture of 4,148 of shares of stock options that were previously granted to officers and other employees.

As of December 31, 2021, there was $1.3 million of unrecognized compensation cost related to nonvested stock options. This cost will be recognized over a weighted average period of 1.24 years. During 2021, the intrinsic value of options exercised was $1.2 million.

Restricted Stock

The restricted stock granted under the 2016 Plan vest according to each award’s specific vesting schedule. All awards granted in 2021 vest 100% one year from the grant date, while all awards granted in 2020 vest 50% one year from the grant date and the remaining 50% on the second anniversary of the grant date. The grant date fair value of the restricted stock is based on the closing price on the date prior to the grant.


		Weighted		Weighted
		average		average
		exercise		grant date
	Shares	price		fair value
Outstanding at December 31, 2019	—	$	—	$	—
Granted	33,208		14.00		14.00
Outstanding at December 31, 2020	33,208		14.00		14.00
Granted	10,000		26.36		26.36
Vested	(16,603)		14.00		14.00
Outstanding at December 31, 2021	26,605		18.65		18.65
Nonvested at December 31, 2021	26,605	$	18.65	$	18.65

Compensation expense for restricted stock is measured based on the market price of the stock on the day prior to the grant date and is recognized on a straight-line basis over the vesting period. For the years ended December 31, 2021 and 2020, the Corporation recognized $460 thousand and $80 thousand of expense related to the restricted stock, respectively. As of December 31, 2021, there was $189 thousand in unrecognized compensation costs related to restricted stock. This cost will be recognized over a weighted average period of 0.23 years.

Table of Contents

(14)	Income Taxes

The components of the federal and state income tax expense for the years ended December 31, 2021 and 2020 were:


(dollars in thousands)	2021		2020
Federal:
Current	$	10,022	5,703
Deferred		(717)	1,242
Total federal income tax expense		9,305	6,945
State:
Current		1,463	1,141
Deferred		(51)	12
Total state income tax expense		1,412	1,153
Total income tax expense	$	10,717	8,098

A reconciliation of the statutory income tax at 21% to the income tax expense included in the statement of operations is as follows for 2021 and 2020, respectively:


(dollars in thousands)		2021			2020
Federal income tax at statutory rate	$	9,733	21.0	%	7,252	21.0	%
State tax expense, net of federal benefit		1,116	2.4		911	2.6
Tax exempt interest		(248)	(0.5)		(153)	(0.4)
Bank owned life insurance		(77)	(0.2)		(59)	(0.2)
Incentive stock options		81	0.2		74	0.2
ESOP		41	0.1		—	—
Other		71	0.1		73	0.2
Effective income tax rate	$	10,717	23.1	%	8,098	23.4	%

The components of the net deferred tax asset at December 31, 2021 and 2020 are as follows:


(dollars in thousands)	2021		2020
Deferred tax assets:
Allowance for loan and lease losses	$	4,345	4,230
Intangibles		—	30
Accrued incentive compensation		287	—
Accrued retirement		874	528
Deferred rent		141	180
Mortgage repurchase reserve		738	641
Other		183	122
Total deferred tax asset		6,568	5,731
Deferred tax liabilities:
Property and equipment		(535)	(377)
Loan servicing rights		(2,957)	(1,337)
Intangibles		(15)	—
Mortgage pipeline fair-value adjustment		(308)	(1,156)
Hedge instrument fair-value adjustment		(190)	(1,252)
Unrealized gain on available for sale securities		(213)	(797)
Prepaid expenses		(465)	(340)
Deferred loan costs		(471)	(406)
Other		(1)	(4)
Total deferred tax liability		(5,155)	(5,669)
Net deferred tax asset	$	1,413	62

Table of Contents

The effective tax rates for the twelve-month periods ended December 31, 2021 and 2020 were 23.1% and 23.4% respectively. The decrease in rate from 23.4% to 23.1% between 2020 and 2021 was primarily related to the decrease in state income tax expense from Meridian’s mortgage division, specifically in Maryland.

Under ASC 740, Income Taxes, the effect of income tax law changes on deferred taxes should be recognized as a component of income tax expense related to continuing operations in the period in which the law is enacted. This requirement applies not only to items initially recognized in continuing operations, but also to items initially recognized in other comprehensive income. The CARES Act, enacted in March 2020 grants potential tax relief to businesses, including corporate tax provisions that: temporarily allow for the carryback of certain net operating losses, increase interest expense deduction limitations, and allow accelerated depreciation deductions on certain fixed asset improvements. The tax relief under the CARES Act had no material impact to the Corporation’s Consolidated Financial Statements.

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deferred tax assets.

As of December 31, 2021, the Corporation had an investment in low income housing tax credits of $3.3 million on which it recognized tax credits of $161 thousand, amortization of $183 thousand and tax benefits from losses of $144 thousand during the year ended December 31, 2021. As of December 31, 2020, the Corporation had an investment in low income housing tax credits of $1.3 million on which it recognized tax credits of $161 thousand, amortization of $180 thousand and tax benefits from losses of $26 thousand during the year ended December 31, 2020.

(15)Revenue from Contracts with Customers

All of the Corporation’s revenue from contracts with customers in the scope of FASB ASU 2014-09 (Topic 606), “Revenue for Contracts with Customers” (ASC 606) is recognized within non-interest income. The following table presents the Corporation’s non-interest income by revenue stream and reportable segment for the years ended December 31, 2021 and 2020.


	Year Ended December 31, 2021					Year Ended December 31, 2020
(Dollars in thousands)	Bank		Wealth	Mortgage	Total	Bank		Wealth	Mortgage	Total
Non-interest Income
Mortgage banking income (1)	$	1,097	—	74,835	75,932	$	1,632	—	74,829	76,461
Wealth management income		—	4,801	—	4,801		—	3,854	—	3,854
SBA loan income (1)		6,898	—	—	6,898		2,572	—	—	2,572
Net change in fair values (1)		43	—	(7,881)	(7,838)		(40)	—	9,185	9,145
Net gain (loss) on hedging activity (1)		—	—	2,961	2,961		—	—	(9,400)	(9,400)
Earnings on investment in life insurance (1)		365	—	—	365		279	—	—	279
Net gain on sale of investment securities available-for-sale (1)		435	—	—	435		1,345	—	—	1,345
Dividends on FHLB stock (1)		191	—	—	191		325	—	—	325
Service charges		128	—	—	128		107	—	—	107
Other (2)		1,622	1	2,492	4,115		1,468	14	748	2,230
Non-interest income	$	10,779	4,802	72,407	87,988	$	7,688	3,868	75,362	86,918

(1)	Not within the scope of ASC 606.

(2)	Within other non-interest income is $1.2 million and $925 thousand for the years ended December 31, 2021 and 2020, respectively, which are in the scope of ASC 606. These amounts include wire transfer fees, ATM/debit card commissions, and title fee income.

Table of Contents

A description of the Corporation’s primary revenue streams accounted for under ASC 606 follows:

Wealth Management Income: The Corporation earns wealth management fee income from investment advisory services provided to individual and 401k customers. Fees that are determined based on the market value of the assets held in their accounts are generally billed quarterly, in advance, based on the market value of assets at the end of the previous billing period. Other related services that are based on a fixed fee schedule are recognized when the services are rendered. Fees that are transaction based, including trade execution services, are recognized at the point in time that the transaction is executed, i.e. the trade date. Included in other assets on the balance sheet is a receivable for wealth management fees that have been earned but not yet collected.

Service Charges on Deposit Accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the Corporation satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer’s account balance.

(16)Transactions with Executive Officers, Directors and Principal Stockholders

The Corporation has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its executive officers, directors, principal stockholders, their immediate families and affiliated companies (commonly referred to as related parties). Loans receivable from related parties totaled $5.1 million and $3.3 million at December 31, 2021 and 2020, respectively. Advances, repayments, and the effect of changes in composition of related parties during 2021 totaled $2.8 million, $1.3 million, and $284 thousand, respectively. Advances, repayments, and the effect of changes in composition of related parties during 2020 totaled $4.9 million, $3.8 million, and $1.5 million, respectively.

Deposits of related parties totaled $34.7 million and $25.6 million at December 31, 2021 and 2020, respectively. Subordinated debt held by related parties totaled $409 thousand and $485 thousand at December 31, 2021 and 2020, respectively.

The Corporation paid legal fees of $22 thousand and $8 thousand to a law firm of a director for the years ended December 31, 2021 and 2020, respectively.

(17)Financial Instruments with Off-Balance Sheet Risk, Commitments and Contingencies

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

A summary of the Corporation’s financial instrument commitments at December 31, 2021 and 2020 is as follows:


(dollars in thousands)	2021		2020
Commitments to fund loans and commitments under lines of credit	$	486,632	421,399
Letters of credit		25,986	8,928

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may

Table of Contents

require payment of a fee. The Corporation evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.

Outstanding letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. The majority of these are standby letters of credit that expire within the next twelve months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending other loan commitments. The Corporation requires collateral supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the corresponding guarantees.

Not included in commitments outstanding, in the table above are mortgage loan commitments of $143.9 million and $428.8 million in 2021 and 2020, respectively, which included interest rate lock commitments. These rate lock commitments represent an agreement to extend credit to a mortgage loan applicant whereby the interest rate on the loan is set prior to funding. The loan commitment binds the Corporation to lend funds to a potential borrower at the specified rate, regardless of whether interest rates change between the commitment date and the loan funding date. The Corporation’s loan commitments generally range between 30 and 120 days; however, the borrower is not obligated to obtain the loans. As such, these commitments are subject to interest rate risk and related price risk during the period from interest rate lock commitment through the loan funding date or expiration date. To manage this risk, the Corporation either locks the rate with the investor purchasing the loan on a “best efforts” basis or economically hedges this risk for loans sold to investors on its mandatory sales channel using the forward sale of mortgage-backed securities, in addition to best-efforts forward sale commitments to substantially eliminate these risks. At December 31, 2021 and 2020, the Corporation had a notional amount of $68.6 million and $230.1 million, respectively, related to commitments on the mandatory channel. At December 31, 2021 and 2020, the Corporation had best efforts forward sale commitments to sell loans amounting to $75.8 million and $198.7 million, respectively. The Corporation is only obligated to settle the forward sale commitment if the loan closes in accordance with the terms of the interest rate lock commitment. The Corporation’s forward sale commitments generally expire within 90 days.

Loans sold under FHA or investor programs are subject to indemnification or repurchase if they fail to meet the origination criteria of those programs or if the loan is two or three months delinquent during a set period that usually varies from the first six months to a year after the loan is sold. There was 1 indemnification signed for the year ended December 31, 2021 for $109 thousand, and 0 indemnifications signed for the year ended December 31, 2020. A repurchase reserve of $3.2 million was recorded at December 31, 2021, as compared to $2.7 million as of December 31, 2020. There were 6 loans repurchased for the year ended December 31, 2021 with a total unpaid principal balance of $1.3 million, as compared to 1 loan repurchased for the year ended December 31, 2020 with an unpaid principal balance of $153 thousand.

(18)Recent Litigation

In the ordinary course of business, the Corporation and its subsidiaries are routinely defendants in or parties to pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. These actions and proceedings are generally based on alleged violations of banking, employment, contract and other laws. In some of these actions and proceedings, claims for substantial monetary damages are asserted against the Corporation and its subsidiaries. In the ordinary course of business, the Corporation and its subsidiaries are also subject to regulatory and governmental examinations, information gathering requests, inquiries, investigations, and threatened legal actions and proceedings. In connection with formal and informal inquiries by federal, state, and local agencies, the Corporation and its subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of their activities.

Table of Contents

(19)Regulatory Matters

The Bank and the Corporation are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and the Corporation must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s and the Corporation’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Corporation to maintain minimum amounts and ratios (set forth below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 2021, that the Bank and the Corporation meet all capital adequacy requirements to which it is subject.

As of December 31, 2021, the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Bank is subject to certain restrictions on the amount of dividends that it may declare and pay to the Corporation due to regulatory considerations. The Pennsylvania Banking Code provides that cash dividends may be declared and paid only out of accumulated net earnings.

The Corporation’s and the Banks’s actual and required capital amounts and ratios under the CBLR rules at December 31, 2021 and the Basel III rules at December 31, 2020 are presented below.


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


	December 31, 2020
				To Be Well Capitalized
	Actual			Under CBLR Framework
(dollars in thousands)	Amount		Ratio	Amount		Ratio
Tier 1 capital (to average assets)
Corporation	$	134,564	8.96%	$	120,082	8.00%
Bank		173,231	11.54%		120,080	8.00%

Table of Contents

(20)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.

Table of Contents

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2021 and 2020 are as follows:


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

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


	December 31, 2020
(dollars in thousands)	Total		Level 1	Level 2	Level 3
Assets
Securities available for sale:
U.S. asset backed securities	$	25,592	—	25,592	—
U.S. government agency mortgage-backed securities		4,046	—	4,046	—
U.S. government agency collateralized mortgage obligations		23,909	—	23,909	—
State and municipal securities		65,810	—	65,810	—
Corporate bonds		4,205	—	4,205	—
Equity investments		1,031	—	1,031	—
Mortgage loans held for sale		229,199	—	229,199	—
Mortgage loans held for investment		12,182	—	12,182	—
Interest rate lock commitments		6,932	—	—	6,932
Forward commitments		—	—	—	—
Customer derivatives - interest rate swaps		1,118	—	1,118	—
Total	$	374,024	—	367,092	6,932

Liabilities
Interest rate lock commitments		100	—	—	100
Forward commitments		1,572	—	1,572	—
Customer derivatives - interest rate swaps		1,219	—	1,219	—
	$	2,891	—	2,791	100

Table of Contents

Assets measured at fair value on a nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2021 and 2020 are as follows:


	December 31, 2021		December 31, 2020
(dollars in thousands)	Fair Value		Fair Value
Mortgage servicing rights	$	10,756		4,647
SBA loan servicing rights		2,009		970
Impaired loans ⁽¹⁾
Commercial and industrial		1,837		2,297
Small business loans		290		—
Home equity lines and loans		—		86
Residential mortgage		—		615
Total	$	14,892		8,615

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

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


	Fair Value			Unobservable
(dollars in thousands)	Level 3		Valuation Technique	Input	Range of Inputs
December 31, 2021	$	2,127	Appraisal of collateral	Management adjustments on appraisals for property type and recent activity	2-15% discount
December 31, 2020		2,998	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:

(a) Cash and Cash Equivalents

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

(b) Securities

The fair value of securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing, 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. U.S. Treasuries includes in the available for sale portfolio are the only securities considered Level 1, while all other securities are considered Level 2.

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

Table of Contents

(d) 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.

(e) 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.

(f) Loan Servicing Rights

The Corporation estimates the fair value of mortgage servicing rights and SBA 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.

(g) Impaired Loans

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

(h) Restricted Investment in Bank Stock

The carrying amount of restricted investment in bank stock approximates fair value, and considers the limited marketability of such securities.

(i) Accrued Interest Receivable and Payable

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

(j) Deposit Liabilities

The fair values disclosed for demand deposits (e.g., interest and noninterest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.

(k) Short-Term Borrowings

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

Table of Contents

(l) 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.

(m) 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.

(n) 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.

(o) 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.

Table of Contents

The estimated fair values of the Corporation’s financial instruments at December 31, 2021 and 2020 are as follows:


		December 31, 2021			December 31, 2020
	Fair Value	Carrying			Carrying
(dollars in thousands)	Hierarchy Level	amount		Fair value	amount	Fair value
Financial assets:
Cash and cash equivalents	Level 1	$	23,480	23,480	36,744	36,744
Securities available-for-sale (1)	Level 2		159,302	159,302	123,562	123,562
Securities held-to-maturity	Level 2		6,372	6,591	6,510	6,857
Equity investments	Level 2		2,354	2,354	1,031	1,031
Mortgage loans held for sale	Level 2		80,882	80,882	229,199	229,199
Loans receivable, net of the allowance for loan and lease losses	Level 3		1,368,899	1,370,885	1,272,582	1,289,776
Mortgage loans held for investment	Level 2		17,558	17,558	12,182	12,182
Interest rate lock commitments	Level 3		1,122	1,122	6,932	6,932
Forward commitments	Level 2		65	65	—	—
Restricted investment in bank stock	NA		5,117	NA	7,861	NA
Accrued interest receivable	Level 3		5,009	5,009	5,482	5,482
Customer derivatives - interest rate swaps	Level 2		961	961	1,118	1,118
Financial liabilities:
Deposits	Level 2		1,446,413	1,549,100	1,241,335	1,392,500
Short-term borrowings	Level 2		41,344	41,344	106,862	106,862
Long-term debt	Level 2		—	—	165,546	168,000
Subordinated debentures	Level 2		40,508	40,803	40,671	38,375
Accrued interest payable	Level 2		31	31	1,154	1,154
Interest rate lock commitments	Level 3		203	203	100	100
Forward commitments	Level 2		106	106	1,572	1,572
Customer derivatives - interest rate swaps	Level 2		1,018	1,018	1,219	1,219

		Notional			Notional
Off-balance sheet financial instruments:		amount		Fair value	amount	Fair value
Commitments to extend credit	Level 2	$	486,632	—	421,399	—
Letters of credit	Level 2		25,986	—	8,928	—

(1)	U.S. Treasuries within securities available-for-sale are classified as Level 1.

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 years ended December 31, 2021 and 2020.


	Year Ended December 31,
	2021		2020
Balance at beginning of the period	$	6,932	504
(Decrease) increase in value		(5,810)	6,428
Balance at end of the period	$	1,122	6,932

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

Significant

Fair Value

Unobservable

Range of

Weighted

(dollars in thousands)

Level 3

Valuation Technique

Input

Inputs

Average

December 31, 2021

1,122

Market comparable pricing

Pull through

1 - 99

87.66

December 31, 2020

6,932

Market comparable pricing

Pull through

1 - 99

83.08

Table of Contents

Net realized losses of $5.9 million and gains of $6.5 million due to changes in the fair value of interest rate lock commitments which are classified as Level 3 assets and liabilities for the twelve months ended December 31, 2021 and 2020, respectively, are recorded in non-interest income as net change in the fair value of derivative instruments in the Corporation’s consolidated statements of income.

(21)Derivative Financial Instruments

Risk Management Objective of Using Derivatives

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

Mortgage Banking Derivatives

In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans or interest rate locks at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. Interest rate lock commitments and forward commitments are recorded within other assets/liabilities on the consolidated balance sheets, with changes in fair values during the period recorded within net change in the fair value of derivative instruments on the consolidated statements of income.

Customer Derivatives – Interest Rate Swaps

Derivatives not designated as hedges are not speculative and result from a service the Corporation provides to certain customers to swap a fixed rate product for a variable rate product, or vice versa. The Corporation executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies. Those interest rate derivatives are simultaneously hedged by offsetting derivatives that the Corporation executes with a third party, such that the Corporation minimizes its net interest rate risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

Table of Contents

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


		December 31, 2021			December 31, 2020
(dollars in thousands)	Balance Sheet Line Item	Notional Amount		Asset (Liability) Fair Value	Notional Amount	Asset (Liability) Fair Value
Interest Rate Lock Commitments
Positive fair values	Other assets	$	108,653	1,122	406,422	6,932
Negative fair values	Other liabilities		35,264	(203)	22,406	(100)
Total			143,917	919	428,828	6,832

Forward Commitments
Positive fair values	Other assets		30,500	65	—	—
Negative fair values	Other liabilities		45,500	(106)	218,000	(1,572)
Total			76,000	(41)	218,000	(1,572)

Customer Derivatives - Interest Rate Swaps
Positive fair values	Other assets		35,447	961	20,979	1,118
Negative fair values	Other liabilities		35,447	(1,018)	20,979	(1,219)
Total			70,894	(57)	41,958	(101)
Total derivative financial instruments		$	290,811	821	688,786	5,159

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:


		Year Ended December 31,
(dollars in thousands)		2021	2020
Interest Rate Lock Commitments	$	(5,913)	6,486
Forward Commitments		1,531	(1,459)
Customer Derivatives - Interest Rate Swaps		44	(52)
Net fair value (losses) gains on derivative financial instruments	$	(4,338)	4,975

Net realized gains on derivative hedging activities were $3.0 million and net realized losses were $9.4 million for the year ended December 31, 2021 and 2020, respectively, and are included in non-interest income in the consolidated statements of income.

(22)Segments

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

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

Table of Contents

Meridian Wealth (“Wealth”), a registered investment advisor and wholly-owned subsidiary of the Bank, provides a comprehensive array of wealth management services and products and the trusted guidance to help its clients and our banking customers prepare for the future. The unit generates non-interest income through advisory fees.

Meridian’s mortgage banking segment (“Mortgage”) consists of 1 central loan production facility and several retail and profit sharing loan production offices located throughout suburban Philadelphia and Maryland. The Mortgage segment originates 1 – 4 family residential mortgages and sells nearly all of its production to third party investors. The unit generates net interest income on the loans it originates and holds temporarily, then earns fee income (primarily gain on sales) at the time of the sale. The unit also recognizes income from document preparation fees, changes in portfolio pipeline fair values and related net hedging gains (losses).

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


	Year Ended December 31, 2021					Year Ended December 31, 2020
(Dollars in thousands)	Bank		Wealth	Mortgage	Total	Bank		Wealth	Mortgage	Total
Net interest income	$	61,032	15	2,064	63,111	$	46,997	(48)	2,047	48,996
Provision for loan losses		1,070	—	—	1,070		8,302	—	—	8,302
Net interest income after provision		59,962	15	2,064	62,041		38,695	(48)	2,047	40,694

Non-interest Income
Mortgage banking income		1,097	—	74,835	75,932		1,632	—	74,829	76,461
Wealth management income		—	4,801	—	4,801		—	3,854	—	3,854
SBA loan income		6,898	—	—	6,898		2,572	—	—	2,572
Net change in fair values		43	—	(7,881)	(7,838)		(40)	—	9,185	9,145
Net gain (loss) on hedging activity		—	—	2,961	2,961		—	—	(9,400)	(9,400)
Other		2,741	1	2,492	5,234		3,524	14	748	4,286
Non-interest income		10,779	4,802	72,407	87,988		7,688	3,868	75,362	86,918
Non-interest expense		40,392	3,496	59,839	103,727		33,351	3,213	56,512	93,076
Income before income taxes	$	30,349	1,321	14,632	46,302	$	13,032	607	20,897	34,536

Total Assets	$	1,608,305	6,355	98,783	1,713,443	$	1,488,312	5,479	226,406	1,720,197

(23)Recent Accounting Pronouncements

As an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), the Bank is permitted an extended transition period for complying with new or revised accounting standards affecting public companies. We will remain an emerging growth company until the earliest of (i) the end of the fiscal year during which we have total annual gross revenues of $1,070,000,000 or more, (ii) the end of the fiscal year following the fifth anniversary of the completion of our initial public offering (December 31, 2022), (iii) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt and (iv) the end of the fiscal year in which the market value of our equity securities that are held by non-affiliates exceeds $700 million as of June 30 of that year. We have elected to take advantage of this extended transition period, which means that the financial statements included herein, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. If we do so, we will prominently disclose this decision in the first periodic report following our decision, and such decision is irrevocable. As a filer under the JOBS Act, we will implement new accounting standards subject to the effective dates required for non-public entities.

Table of Contents

Adopted Pronouncements in 2021:

FASB ASU 2018-15 (Topic 350), "Intangibles - Goodwill and Other - Internal-Use Software"

Issued in August 2018, ASU 2018-15 provides clarity on capitalizing and expensing implementation costs for cloud computing arrangements in a service contract. If an implementation cost is capitalized, the cost should be recognized over the noncancellable term and periodically assessed for impairment. The guidance is effective in annual and interim periods in fiscal years beginning after December 15, 2020 and interim periods within annual periods beginning after December 15, 2021. Adoption should be applied retrospectively or prospectively to all implementation costs incurred after the date of adoption. The adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures.

FASB ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”

Issued in December 2019, ASU 2019-12 adds new guidance to simplify accounting for income taxes, changes the accounting for certain income tax transactions and makes minor improvements to the codification. The guidance is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. The adoption of this ASU did not have a material impact on our consolidated financial statements and related disclosures.

Pronouncements Not Effective as of December 31, 2021:

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

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

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

100

Table of Contents

cancellable by the lender are considered when determining the contractual term over which expected credit losses are measured. Management will consider the impact of ASU 2019-04 when considering the impact of ASU 2016-13 as discussed above.

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

Issued in February 2016, ASU 2016-02 revises the accounting related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use (ROU) asset for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

The new standard became effective for us on January 1, 2022. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. Management has elected to use the effective date as its date of initial application. Consequently, financial information will not be updated, and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2022.

The Corporation has implemented a third party lease accounting system to assist with the measurement of lease liabilities and related right-of-use assets, the post-implementation administration aspect of lease accounting, and the preparation of applicable disclosures related to the new guidance.

The new standard provided a number of optional practical expedients in transition. We have elected the ‘package of practical expedients’, which permitted us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.

This standard will have a material effect on our Consolidated Balance Sheet and related disclosures but is not expected to have a material impact on our Consolidated Statement of Income. Any additional assets recorded as a result of adoption is expected to have a negative impact on the Corporation and Bank capital ratios under current regulatory guidance. On adoption, we recorded approximately $10.6 million of operating lease liabilities and $10.8 million of related right-of-use assets at January 1, 2022.

The new standard also provides practical expedients for an entity’s ongoing accounting. We have elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also have elected the practical expedient to not separate lease and non-lease components for all of our leases.

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

Issued in March 2020, ASU 2020-04 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The Corporation does not have a significant concentration of loans, derivative contracts, borrowings or other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The guidance under ASC-848 will be available for a limited time, generally through December 31, 2022. The Corporation expects to adopt the LIBOR transition relief allowed under this standard.

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

This ASU clarifies the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible

101

Table of Contents

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.

(24)Parent Company Financial Statements

The condensed financial statements of the Corporation (parent company only) are presented below. These statements should be read in conjunction with the notes to the consolidated financial statements.

A. Condensed Balance Sheets


	December 31,		December 31,
(dollars in thousands, except per share data)	2021		2020
Cash and due from banks	$	2,836	213
Investments in subsidiaries		200,410	180,288
Other assets		1,382	360
Total assets	$	204,628	180,861

Liabilities:
Subordinated debentures		39,057	38,904
Accrued interest payable		6	6
Other liabilities		205	329
Total liabilities		39,268	39,239
Stockholders’ equity:
Common stock, $1 par value. Authorized 25,000,000 shares; issued 6,534,587 and 6,455,566 as of December 31, 2021 and December 31, 2020		6,535	6,456
Surplus		83,663	81,196
Treasury Stock- 426,693 and 320,000 shares at December 31, 2021 and December 31, 2020, respectively		(8,860)	(5,828)
Unearned common stock held by employee stock ownership plan		(1,602)	(1,768)
Retained earnings		84,916	59,010
Accumulated other comprehensive income		708	2,556
Total stockholders’ equity		165,360	141,622
Total liabilities and stockholders’ equity	$	204,628	180,861

102

Table of Contents

B. Condensed Statements of Income


	Year ended
	December 31,
(dollars in thousands, except per share data)	2021		2020
Dividends from Bank	$	17,187	11,512
Non-interest and other income		—	10
Total operating income		17,187	11,522
Interest expense		2,303	2,202
Other expenses		1,675	—
Income before equity in undistributed income of subsidiaries		13,209	9,320
Equity in undistributed income of subsidiaries		22,376	17,118
Income before income taxes		35,585	26,438
Income tax expense		—	—
Net income		35,585	26,438
Total other comprehensive (loss) income		(1,848)	2,559
Total comprehensive income	$	33,737	28,997

C. Condensed Statements of Cash Flows


	Year ended
	December 31,
(dollars in thousands)	2021		2020
Net income	$	35,585	26,438
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in undistributed income of subsidiaries		(22,376)	(17,818)
Share-based compensation		1,607	763
Amortization of issuance costs on subordinated debt		153	112
(Decrease) in accrued interest payable		—	(72)
Other, net		(740)	(294)
Net cash provided by operating activities		14,229	9,129
Cash flows from financing activities:
Issuance cost on subordinated debt		—	(231)
Net purchase of treasury stock		(3,032)	(5,703)
Dividends paid		(9,679)	(1,525)
Purchase of common shares for ESOP		—	(2,000)
Share based awards and exercises		1,105	395
Net cash (used in) provided by financing activities		(11,606)	(9,064)
Net change in cash and cash equivalents		2,623	65
Cash and cash equivalents at beginning of period		213	148
Cash and cash equivalents at end of period	$	2,836	213

(25)Subsequent Events

Special Dividend

103

Table of Contents

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Management, with the participation of the Corporation’s President/Chief Executive Officer and its Chief Financial Officer, evaluated the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures (as defined in Rule l3a-l5(e) and 15d-15(e) promulgated under the Exchange Act) as of December 31, 2021. Based on this evaluation, the Corporation’s President /Chief Executive Officer and Chief Financial Officer have concluded, as of and for the end of the period covered by this report, that such disclosure controls and procedures were effective.

Design and Evaluation of Internal Control Over Financial Reporting

Pursuant to Section 404 of Sarbanes-Oxley, the following is a report of management’s assessment of the design and effectiveness of our internal controls for the fiscal year ended December 31, 2021.

Management’s Report on Internal Control Over Financial Reporting

The Corporation is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this Annual Report on Form 10-K. The consolidated financial statements and notes included in this Annual Report on Form 10-K have been prepared in conformity with United States generally accepted accounting principles and necessarily include some amounts that are based on Management’s best estimates and judgments.

The Corporation’s Management is responsible for establishing and maintaining effective internal control over financial reporting that is designed to produce reliable financial statements in conformity with United States generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Corporation; provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles; provide a reasonable assurance that receipts and expenditures of the Corporation are only being made in accordance with authorizations of Management and directors of the Corporation; and provide a reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation’s assets that could have a material effect on the financial statements. The system of internal control over financial reporting as it relates to the financial statements is evaluated for effectiveness by Management and tested for reliability through a program of internal audits. Actions are taken to correct potential deficiencies as they are noted.

Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation.

The Corporation’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, assessed the Corporation’s system of internal control over financial reporting as of December 31, 2021, in relation to the criteria for effective control over financial reporting as described in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013). Based on this assessment, Management concludes that, as of December 31, 2021, the Corporation’s system of internal control over financial reporting is effective. This annual report does not include an attestation report of the Corporation’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Corporation (as an Emerging Growth Company) to provide only management’s report in this annual report.

104

Table of Contents

Changes in Internal Control Over Financial Reporting

There was no change in the Corporation’s internal control over financial reporting identified during the fourth quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by Item 10 is incorporated by reference to information appearing in Meridian Corporation’s definitive proxy statement to be used in connection with the 2022 Annual Meeting of Shareholders under the headings, “ELECTION OF DIRECTORS,” “EXECUTIVE OFFICERS,” “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE,” “CODE OF ETHICS,” “CORPORATE GOVERNANCE,” and “AUDIT COMMITTEE.”

Item 11. Executive Compensation

The information required by Item 11 is incorporated by reference to the information appearing in Meridian Corporation’s definitive proxy statement to be used in connection with the 2022 Annual Meeting of Shareholders under the headings, “EXECUTIVE COMPENSATION,” “SUMMARY COMPENSATION TABLE,” “OUTSTANDING AWARDS AT FISCAL YEAR-END TABLE,” “EXECUTIVE INCENTIVE, EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS,” and “DIRECTOR COMPENSATION.”

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 is incorporated by reference to the information appearing in Meridian Corporation’s definitive proxy statement to be used in connection with the 2022 Annual Meeting of Shareholders under the headings, “EQUITY COMPENSATION PLAN INFORMATION” and “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.”

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 is incorporated by reference to the information appearing in Meridian Corporation’s definitive proxy statement to be used in connection with the 2022 Annual Meeting of Shareholders under the headings, “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” and “DIRECTOR INDEPENDENCE.”

Item 14. Principal Accounting Fees and Services

The information required by Item 14 is incorporated by reference to the information appearing in Meridian Corporation’s definitive proxy statement to be used in connection with the 2022 Annual Meeting of Shareholders under the heading, “PROPOSAL TO RATIFY THE APPOINTMENT OF CROWE LLP AS THE CORPORATION’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR THE YEAR ENDING DECEMBER 31, 2022.”

105

Table of Contents

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)(1) The following portions of the Corporation’s consolidated financial statements are set forth in Item 8 – “Financial Statements and Supplementary Data”:

i. Report of Crowe LLP, Independent Registered Public Accounting Firm (PCAOB ID 173)

ii. Consolidated Balance Sheets

iii. Consolidated Statements of Income

iv. Consolidated Statements of Comprehensive Income

v. Consolidated Statements of Changes in Stockholders’ Equity

vi. Consolidated Statements of Cash Flows

vii. Notes to Consolidated Financial Statements

(a)(2) The financial statement schedules required by this Item are omitted because the information is either inapplicable, not required or is presented in the consolidated financial statements or notes thereto.

106

Table of Contents

(a)(3) The following exhibits are incorporated by reference herein or filed with this Form 10-K:

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 as Exhibit 3.1 to Form 10-Q on August 16, 2021 and incorporated herein by reference.
3.2		Bylaws of Registrant, filed as Exhibit 3.2 to Form 8-K on August 24, 2018 and incorporated herein by reference.
4.1		Description of Capital Securities, filed herewith
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.
10.1		Meridian Bank 2016 Equity Incentive Plan, filed as Exhibit 10.1 of the Registration Statement on Form 10, filed with the FDIC on September 29, 2017 and incorporated herein by reference.
10.2		Employment Agreement between Meridian Bank and Christopher Annas, effective April 11, 2019, filed as Exhibit 10.1 to Form 8-K on April 11, 2019 and incorporated herein by reference.
10.3		Amendment to Meridian Corporation Supplemental Executive Retirement and Deferred Compensation Plan, filed as Exhibit 10.1 to Form 8-K on March 12, 2020 and incorporated herein by reference.
10.4		Meridian Bank Employee Stock Ownership Plan, filed as Exhibit 10.4 of the Registration Statement on Form 10, filed with the FDIC on September 29, 2017 and incorporated herein by reference.
10.5		Employment Agreement between Meridian Bank and Denise Lindsay, effective July 23, 2018, filed as Exhibit 10.2, to Form 8-K with the FDIC on July 23, 2018, and incorporated herein by reference.
10.6		Meridian Bank 2004 Stock Option Plan, as amended June 15, 2006 and incorporated herein by reference.
10.7		Change in Control Agreement between Meridian Bank and Joseph Cafarchio, effective July 23, 2018, filed as exhibit 10.1, to Form 8-K with the FDIC on July 23, 2018, and incorporated herein by reference.
10.8		Change in Control Agreement between Meridian Bank and Charlie Kochka, effective July 23, 2018, filed as exhibit 10.1, to Form 8-K with the FDIC on July 23, 2018, and incorporated herein by reference.
10.9		Change in Control Agreement between Meridian Bank and Randy McGarry, effective November 2, 2018, and incorporated herein by reference.
21.1		List of Subsidiaries, filed herewith
23.1		Consent of Crowe LLP, Independent Registered Public Accounting Firm
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		Inline 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 Calculation Linkbase Document.*
101.LAB		Inline XBRL Taxonomy Label Linkbase Document.*
101.PRE		Inline XBRL Taxonomy Presentation Linkbase Document.*
101.DEF		Inline XBRL Taxonomy Definition Document.*
104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).*

Item 16. Form 10-K Summary

None.

107

Table of Contents

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.


	Meridian Bank

Date: March 16, 2022	By:	/s/ Christopher J. Annas
		Christopher J. Annas
		President and Chief Executive Officer
		(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Date: March 16, 2022	By:	/s/ Christopher J. Annas
		Christopher J. Annas, Chairman of the Board

Date: March 16, 2022	By:	/s/ Denise Lindsay
		Denise Lindsay, Director, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Date: March 16, 2022	By:	/s/ Robert M. Casciato
		Robert M. Casciato, Director

Date: March 16, 2022	By:	/s/ George C. Collier
		George C. Collier, Director

Date: March 16, 2022	By:	/s/ Robert T. Holland
		Robert T. Holland, Director

Date: March 16, 2022	By:	/s/ Edward J. Hollin
		Edward J. Hollin, Director

Date: March 16, 2022	By:	/s/ Anthony M. Imbesi
		Anthony M. Imbesi, Director

Date: March 16, 2022	By:	/s/ Kenneth H. Slack
		Kenneth H. Slack, Director

108

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Meridian (MRBK) 10-K2021 FY Annual report

Content analysis