Meridian Corp - Interim / Quarterly Report 2021

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended September 30, 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	(I.R.S. Employer Identification No.)
incorporation or organization)

9 Old Lincoln Highway , Malvern , Pennsylvania 19355

(Address of principal executive offices) (Zip Code)

( 484 ) 568-5000

(Registrant’s telephone number, including area code)


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

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

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

☒ Yes ☐ No

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

Large Accelerated Filer ☐	Accelerated Filer ☐

Non-accelerated Filer ☒	Smaller Reporting Company ☒

Emerging Growth Company ☒

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 15, 2021 there were 6,079,335 outstanding shares of the issuer’s common stock, par value $1.00 per share.

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TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

Item 1 Financial Statements (Unaudited)	3

Consolidated Balance Sheets – September 30, 2021 and December 31, 2020	3

Consolidated Statements of Income – Three and Nine Months Ended September 30, 2021 and 2020	4

Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2021 and 2020	5

Consolidated Statements of Stockholders’ Equity – Three and Nine Months Ended September 30, 2021 and 2020	6

Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2021 and 2020	8

Notes to Consolidated Financial Statements (Unaudited)	9

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3 Quantitative and Qualitative Disclosures about Market Risk	55

Item 4 Controls and Procedures	55

PART II OTHER INFORMATION

Item 1 Legal Proceedings	56

Item 1A Risk Factors	56

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	56

Item 3 Defaults Upon Senior Securities	56

Item 4 Mine Safety Disclosures	56

Item 5 Other Information	56

Item 6 Exhibits	56

Signatures	58

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30,		December 31,
(dollars in thousands, except per share data)	2021		2020
Cash and due from banks	$	45,875	34,190
Federal funds sold		17,246	2,554
Cash and cash equivalents		63,121	36,744
Securities available-for-sale (amortized cost of $ 145,129 and $ 120,215 as of September 30, 2021 and December 31, 2020)		146,149	123,562
Securities held-to-maturity (fair value of $ 6,660 and $ 6,857 as of September 30, 2021 and December 31, 2020)		6,406	6,510
Equity investments		1,011	1,031
Mortgage loans held for sale (amortized cost of $ 116,968 and $ 225,007 as of September 30, 2021 and December 31, 2020), at fair value		117,996	229,199
Loans, net of fees and costs (includes $ 17,142 and $ 12,182 of loans at fair value, amortized cost of $ 16,515 and $ 11,514 as of September 30, 2021 and December 31, 2020)		1,378,670	1,284,764
Allowance for loan and lease losses		( 18,976 )	( 17,767 )
Loans, net of the allowance for loan and lease losses		1,359,694	1,266,997
Restricted investment in bank stock		4,162	7,861
Bank premises and equipment, net		8,242	7,777
Bank owned life insurance		22,362	12,138
Accrued interest receivable		5,080	5,482
Deferred income taxes		1,457	62
Servicing assets		11,932	5,617
Goodwill		899	899
Intangible assets		3,430	3,601
Other assets		10,504	12,717
Total assets	$	1,762,445	1,720,197
Liabilities:
Deposits:
Non-interest bearing	$	265,842	203,843
Interest bearing		1,173,205	1,037,492
Total deposits		1,439,047	1,241,335
Short-term borrowings		22,278	106,862
Long-term debt		78,405	165,546
Subordinated debentures		40,760	40,671
Accrued interest payable		663	1,154
Other liabilities		22,876	23,007
Total liabilities		1,604,029	1,578,575
Stockholders’ equity:
Common stock, $ 1 par value. Authorized 25,000,000 and 10,000,000 shares as of September 30, 2021 and December 31, 2020; issued 6,506,028 and 6,455,566 as of September 30, 2021 and December 31, 2020		6,506	6,456
Surplus		82,508	81,196
Treasury stock - 398,491 and 320,000 shares at September 30, 2021 and December 31, 2020		( 8,025 )	( 5,828 )
Unearned common stock held by employee stock ownership plan		( 1,768 )	( 1,768 )
Retained earnings		78,408	59,010
Accumulated other comprehensive income		787	2,556
Total stockholders’ equity		158,416	141,622
Total liabilities and stockholders’ equity	$	1,762,445	1,720,197

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
(dollars in thousands, except per share data)	2021		2020		2021	2020
Interest income:
Loans, including fees	$	17,626	15,321	$	51,287	43,048
Securities:
Taxable		284	251		837	920
Tax-exempt		379	305		1,125	698
Cash and cash equivalents		17	3		25	63
Total interest income		18,306	15,880		53,274	44,729
Interest expense:
Deposits		1,327	2,235		4,261	8,064
Borrowings		722	930		2,224	2,687
Total interest expense		2,049	3,165		6,485	10,751
Net interest income		16,257	12,715		46,789	33,978
Provision for loan losses		597	3,956		1,292	7,139
Net interest income after provision for loan losses		15,660	8,759		45,497	26,839
Non-interest income:
Mortgage banking income		18,726	21,812		62,293	45,395
Wealth management income		1,232	951		3,531	2,825
SBA loan income		2,688	641		5,423	1,821
Earnings on investment in life insurance		93	70		224	210
Net change in the fair value of derivative instruments		( 339 )	3,028		( 3,431 )	6,346
Net change in the fair value of loans held-for-sale		( 532 )	2,932		( 3,164 )	4,424
Net change in the fair value of loans held-for-investment		37	93		( 24 )	174
Net gain (loss) on hedging activity		( 1,189 )	( 2,637 )		2,397	( 7,363 )
Net gain on sale of investment securities available-for-sale		314	1,290		362	1,345
Service charges		35	28		99	77
Other		1,057	852		3,192	1,718
Total non-interest income		22,122	29,060		70,902	56,972
Non-interest expenses:
Salaries and employee benefits		19,472	20,447		61,824	46,529
Occupancy and equipment		1,133	1,108		3,460	3,159
Professional fees		873	681		2,629	2,118
Advertising and promotion		1,089	781		2,795	1,996
Data processing		530	460		1,666	1,260
Information technology		476	394		1,365	1,100
Pennsylvania bank shares tax		152	254		478	734
Other		1,756	1,709		5,773	4,256
Total non-interest expenses		25,481	25,834		79,990	61,152
Income before income taxes		12,301	11,985		36,409	22,659
Income tax expense		2,863	2,773		8,543	5,218
Net income	$	9,438	9,212	$	27,866	17,441
Basic earnings per common share	$	1.56	1.51	$	4.62	2.83
Diluted earnings per common share	$	1.52	1.51	$	4.49	2.82

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


		Three months ended		Nine months ended
		September 30,		September 30,
(dollars in thousands)		2021	2020	2021	2020
Net income:	$	9,438	9,212	27,866	17,441

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 ($ 312 ), $ 144 , ($ 475 ), and $ 761 , respectively		( 1,021 )	304	( 1,490 )	2,489
Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of ($ 71 ), ($ 301 ), ($ 83 ), and ($ 313 ), respectively		( 243 )	( 989 )	( 279 )	( 1,032 )
Unrealized investment (losses) gains, net of tax expense of $( 383 ), $( 157 ), $( 558 ), and $ 448 , respectively		( 1,264 )	( 685 )	( 1,769 )	1,457
Total other comprehensive (loss) income		( 1,264 )	( 685 )	( 1,769 )	1,457
Total comprehensive income	$	8,174	8,527	26,097	18,898

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


					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	80,255	( 62 )	—	34,097	( 3 )	120,695
Comprehensive income:
Net income						2,516		2,516
Change in unrealized gains on securities available-for-sale, net of tax							429	429
Total comprehensive income								2,945
Share-based awards and exercises		6	26					32
Net purchase of treasury stock through publicly announced plans			63	( 5,766 )				( 5,703 )
Compensation expense related to stock option grants			64					64
Balance, March 31, 2020	$	6,414	80,408	( 5,828 )	—	36,613	426	118,033
Comprehensive income:
Net income						5,713		5,713
Change in unrealized gains on securities available-for-sale, net of tax							1,713	1,713
Total comprehensive income								7,426
Compensation expense related to stock option grants			59					59
Balance, June 30, 2020	$	6,414	80,467	( 5,828 )	—	42,326	2,139	125,518
Comprehensive income:
Net income						9,212		9,212
Change in unrealized gains on securities available-for-sale, net of tax							( 685 )	( 685 )
Total comprehensive income								8,527
Dividends paid or accrued, $ 0.125 per share						( 763 )		( 763 )
Shares purchased for ESOP plan ( 133,601 )					( 2,000 )			( 2,000 )
Common stock issued through share-based awards and exercises		36	337					373
Stock based compensation			177					177
Balance, September 30, 2020	$	6,450	80,981	( 5,828 )	( 2,000 )	50,775	1,454	131,832

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					Unearned		Accumulated
					Common		Other
		Common		Treasury	Stock -	Retained	Comprehensive
(dollars in thousands)		Stock	Surplus	Stock	ESOP	Earnings	Income	Total
Balance, January 1, 2021	$	6,456	81,196	( 5,828 )	( 1,768 )	59,010	2,556	141,622
Comprehensive income:
Net income						10,170		10,170
Net change in unrealized losses on securities available-for-sale, net of tax							( 1,919 )	( 1,919 )
Total comprehensive income								8,251
Dividends paid or accrued, $ 1.125 per share						( 6,931 )		( 6,931 )
Common stock issued through share-based awards and exercises		32	302					334
Stock based compensation			229					229
Balance, March 31, 2021	$	6,488	81,727	( 5,828 )	( 1,768 )	62,249	637	143,505
Comprehensive income:
Net income						8,258		8,258
Change in unrealized gains on securities available-for-sale, net of tax							1,414	1,414
Total comprehensive income								9,672
Dividends paid or accrued, $ 0.125 per share						( 768 )		( 768 )
Common stock issued through share-based awards and exercises		5	52					57
Stock based compensation			419					419
Balance, June 30, 2021	$	6,493	82,198	( 5,828 )	( 1,768 )	69,739	2,051	152,885
Comprehensive income:
Net income						9,438		9,438
Change in unrealized gains on securities available-for-sale, net of tax							( 1,264 )	( 1,264 )
Total comprehensive income								8,174
Dividends paid or accrued, $ 0.125 per share						( 769 )		( 769 )
Net purchase of treasury stock through publicly announced plans ( 78,491 )				( 2,197 )				( 2,197 )
Common stock issued through share-based awards and exercises		13	167					180
Stock based compensation			143					143
Balance, September 30, 2021	$	6,506	82,508	( 8,025 )	( 1,768 )	78,408	787	158,416

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine months ended
	September 30,
(dollars in thousands)	2021		2020
Net income	$	27,866	17,441
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Gain on sale of investment securities		( 362 )	( 1,345 )
Depreciation and amortization, net		( 4,677 )	( 992 )
Net amortization of investment premiums and discounts and change in fair value of equity securities		991	238
Provision for loan losses		1,292	7,139
Amortization of issuance costs on subordinated debt		88	83
Share-based compensation		791	300
Net change in fair value of derivative instruments		3,431	( 6,346 )
Net change in fair value of loans held for sale		3,164	( 4,424 )
Net change in fair value of loans held for investment		24	( 174 )
Gain on sale of OREO		—	( 6 )
Amortization and net impairment of servicing rights		707	350
Capitalization of servicing rights, net		( 7,021 )	( 2,992 )
SBA loan income		( 5,423 )	( 1,821 )
Proceeds from sale of loans		2,034,464	1,356,637
Loans originated for sale		( 1,864,132 )	( 1,498,614 )
Mortgage banking income		( 62,293 )	( 45,395 )
Decrease (increase) in accrued interest receivable		402	( 1,518 )
(Increase) decrease in other assets		( 2,648 )	8,503
Earnings from investment in life insurance		( 224 )	( 210 )
(Increase) decrease income in deferred income tax		( 817 )	1,274
(Decrease) increase in accrued interest payable		( 490 )	1,170
Increase in other liabilities		1,299	9,054
Net cash provided by (used in) operating activities		126,432	( 161,648 )
Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities, repayments and calls		6,173	6,319
Sales		20,855	44,592
Purchases		( 52,468 )	( 92,476 )
Activity in held-to-maturity securities:
Maturities, repayments and calls		—	2,140
Proceeds from sale of OREO		—	126
Decrease in restricted stock		3,699	422
Net increase in loans		( 82,711 )	( 339,459 )
Purchases of premises and equipment		( 1,496 )	( 651 )
Purchase of bank owned life insurance		( 10,000 )	—
Net cash used in investing activities		( 115,948 )	( 378,987 )
Cash flows from financing activities:
Net increase in deposits		197,712	357,856
(Decrease) increase in short-term borrowings		( 3,187 )	( 31,928 )
Decrease in short-term borrowings with original maturity > 90 days		( 81,397 )	12,902
(Repayment) proceeds from long-term debt, net		( 87,141 )	247,008
Repayment of acquisition note payable		—	( 413 )
Issuance costs on subordinated debt		—	( 231 )
Net purchase of treasury stock		( 2,197 )	( 5,703 )
Dividends paid		( 8,468 )	( 763 )
Purchase of common shares for ESOP		—	( 2,000 )
Share based awards and exercises		571	405
Net cash provided by financing activities		15,893	577,133
Net change in cash and cash equivalents		26,377	36,498
Cash and cash equivalents at beginning of period		36,744	39,371
Cash and cash equivalents at end of period	$	63,121	75,869
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	6,976	9,581
Income taxes		11,354	2,490
Supplemental disclosure of cash flow information:
Transfers from loans held for sale to loans held for investment		7,116	—
Net loans sold, not settled		—	( 1,657 )

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(1) Basis of Presentation

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

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

These unaudited consolidated financial statements should be read in conjunction with the Corporation’s filings with the Securities and Exchange Commission (including our Annual Report on Form 10-K for the year ended December 31, 2020) and, subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in Form 10-K and Form 10-Q filings, if any.

Certain prior period amounts have been reclassified to conform with current period presentation. Reclassifications had no effect on net income or stockholders’ equity. Operating results for the three months ended September 30, 2021 are not necessarily indicative of the results for the year ending December 31, 2021 or for any other period.

Estimates for the allowance for loan and lease losses at September 30, 2021 include probable losses related to the COVID-19 pandemic. While there have been signals of economic recovery and a resumption of many types of business activity, there remains significant uncertainty involved in the measurement of these losses. If economic conditions deteriorate further, then additional provision for loan losses may be required in future periods. It is unknown how long these conditions will last and what the ultimate financial impact will be to the Corporation.

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(2) Earnings per Common Share

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands, except per share data)	2021		2020		2021		2020
Numerator:
Net income available to common stockholders	$	9,438		9,212	$	27,866		17,441
Denominator for basic earnings per share
Weighted average shares outstanding		6,157		6,099		6,148		6,172
Average unearned ESOP shares		( 112 )		—		( 115 )		—
Basic weighted averages shares outstanding		6,045		6,099		6,033		6,172
Effect of dilutive common shares		186		11		168		21
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		6,231		6,110		6,201		6,193
Basic earnings per share	$	1.56		1.51	$	4.62		2.83
Diluted earnings per share	$	1.52		1.51	$	4.49		2.82
Antidilutive shares excluded from computation of average dilutive earnings per share		140		265		140		192

(3) Securities

The amortized cost and fair value of securities as of September 30, 2021 and December 31, 2020 are as follows:


	September 30, 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	$	21,120	199	( 26 )	21,293	4
U.S. government agency mortgage-backed securities		5,351	137	( 29 )	5,459	1
U.S. government agency collateralized mortgage obligations		23,712	483	( 142 )	24,053	7
State and municipal securities		72,415	874	( 461 )	72,828	23
U.S. Treasuries		15,082	6	( 78 )	15,010	11
Non-U.S. government agency collateralized mortgage obligations		999	—	—	999	1
Corporate bonds		6,450	73	( 16 )	6,507	4
Total securities available-for-sale	$	145,129	1,772	( 752 )	146,149	51
Securities held-to-maturity:
State and municipal securities		6,406	254	─	6,660	—
Total securities held-to-maturity	$	6,406	254	—	6,660	—

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	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 September 30, 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, no securities are deemed to be other-than-temporarily impaired.

As of September 30, 2021 and December 31, 2020, securities having a fair value of $ 63.6 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.

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 September 30, 2021 and December 31, 2020:


	September 30, 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	$	4,158	( 26 )	—	—	4,158	( 26 )
U.S. government agency mortgage-backed securities		1,614	( 29 )	—	—	1,614	( 29 )
U.S. government agency collateralized mortgage obligations		7,315	( 142 )	—	—	7,315	( 142 )
State and municipal securities		34,808	( 451 )	568	( 10 )	35,376	( 461 )
U.S. Treasuries		12,049	( 78 )	—	—	12,049	( 78 )
Corporate bonds		2,244	( 6 )	439	( 10 )	2,683	( 16 )
Total securities available-for-sale	$	62,188	( 732 )	1,007	( 20 )	63,195	( 752 )

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	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 September 30, 2021 and December 31, 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.


	September 30, 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	$	—	—	—	—	$	—	—	—	—
Due after one year through five years		—	—	3,133	3,197		—	—	3,181	3,288
Due after five years through ten years		28,999	29,010	3,273	3,463		12,035	12,095	3,329	3,569
Due after ten years		86,068	86,628	—	—		81,316	83,512	—	—
Subtotal		115,067	115,638	6,406	6,660		93,351	95,607	6,510	6,857
Mortgage-related securities		30,062	30,511	—	—		26,864	27,955	—	—
Total	$	145,129	146,149	6,406	6,660	$	120,215	123,562	6,510	6,857

Proceeds from the sale of available for sale investment securities totaled $ 7.3 million for the three months ended September 30, 2021 and $ 20.9 million for the nine months ended September 30, 2021, resulting in a gross gain on sale of $ 314 thousand and no gross loss on sale for the three months ended September 30, 2021, and a gross gain on sale of $ 562 thousand and a gross loss on sale of $ 200 thousand for the nine months ended September 30, 2021. Proceeds from the sale of available for sale investment securities totaled $ 26.4 million and $ 44.6 million for the three and nine months ended September 30, 2020, respectively, resulting in a gross gain on sale of $ 1.3 million and no gross loss on sale for the three months ended September 30, 2020, and a gross gain on sale of $ 1.5 million and a gross loss on sale of $ 202 thousand for the nine months ended September 30, 2020.

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(4) Loans Receivable

Loans and leases outstanding at September 30, 2021 and December 31, 2020 are detailed by category as follows:


	September 30,		December 31,
(dollars in thousands)	2021		2020
Mortgage loans held for sale	$	117,996	229,199
Real estate loans:
Commercial mortgage		542,473	485,103
Home equity lines and loans		52,819	64,987
Residential mortgage (1)		59,295	52,454
Construction		162,192	140,246
Total real estate loans		816,779	742,790

Commercial and industrial		278,976	261,750
Small business loans		90,477	49,542
Paycheck Protection Program loans ("PPP")		118,585	203,543
Main Street Lending Program Loans ("MSLP")		592	580
Consumer		427	511
Leases, net		73,993	31,040
Total portfolio loans and leases		1,379,829	1,289,756
Total loans and leases	$	1,497,825	1,518,955

Loans with predetermined rates	$	542,289	658,458
Loans with adjustable or floating rates		955,536	860,497
Total loans and leases	$	1,497,825	1,518,955

Net deferred loan origination (fees) costs	$	( 1,159 )	( 4,992 )

(1) Includes $ 17,142 and $ 12,182 of loans at fair value as of September 30, 2021 and December 31, 2020, respectively.

Components of the net investment in leases at September 30, 2021 and December 31, 2020 are detailed as follows:


	September 30,		December 31,
(dollars in thousands)	2021		2020
Minimum lease payments receivable	$	89,051	37,919
Unearned lease income		( 15,058 )	( 6,879 )
Total	$	73,993	31,040

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Age Analysis of Past Due Loans and Leases

The following tables present an aging of the Corporation’s loan and lease portfolio as of September 30, 2021 and December 31, 2020, respectively:


						Total
			90+ days			Accruing	Nonaccrual	Total loans
September 30, 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	$	—	—	—	542,473	542,473	—	542,473	—	%
Home equity lines and loans		65	—	65	51,844	51,909	910	52,819	1.85
Residential mortgage (1)		143	—	143	56,874	57,017	2,278	59,295	4.08
Construction		—	—	—	162,192	162,192	—	162,192	—
Commercial and industrial		770	—	770	273,117	273,887	5,089	278,976	2.10
Small business loans		—	—	—	89,561	89,561	916	90,477	1.01
Paycheck Protection Program loans		2,422	—	2,422	116,163	118,585	—	118,585	2.04
Main Street Lending Program loans		—	—	—	592	592	—	592	—
Consumer		—	—	—	427	427	—	427	—
Leases, net		263	—	263	73,730	73,993	—	73,993	0.36
Total	$	3,663	—	3,663	1,366,973	1,370,636	9,193	1,379,829	0.93	%

(1) Includes $ 17,142 of loans at fair value as of September 30, 2021 ($ 16,523 are current, $ 143 are 30-89 days past due, and $ 475 are nonaccrual).


						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 are current, $ 958 are 30-89 days past due and $ 910 are nonaccrual).

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

The Allowance is 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. The Allowance is maintained at a level considered adequate to provide for losses that are probable and estimatable. 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. Estimates for the allowance for loan and lease losses at September 30, 2021 include probable losses related to the COVID-19 pandemic.

Roll-Forward of Allowance by Portfolio Segment

The following tables detail the roll-forward of the Corporation’s Allowance, by portfolio segment, for the three and nine month periods ended September 30, 2021 and 2020, respectively:


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


	Balance,					Balance,
(dollars in thousands)	December 31, 2020		Charge-offs	Recoveries	Provision	September 30, 2021
Commercial mortgage	$	7,451	—	—	( 909 )	6,542
Home equity lines and loans		434	—	5	( 166 )	273
Residential mortgage		385	—	5	( 114 )	276
Construction		2,421	—	—	( 136 )	2,285
Commercial and industrial		5,431	—	33	150	5,614
Small business loans		1,259	—	—	1,840	3,099
Consumer		4	—	3	( 4 )	3
Leases		382	( 129 )	—	631	884
Total	$	17,767	( 129 )	46	1,292	18,976


	Balance,					Balance,
(dollars in thousands)	June 30, 2020		Charge-offs	Recoveries	Provision	September 30, 2020
Commercial mortgage	$	5,277	—	—	1,658	6,935
Home equity lines and loans		672	( 75 )	2	( 82 )	517
Residential mortgage		346	—	1	( 13 )	334
Construction		2,019	—	—	463	2,482
Commercial and industrial		3,606	( 22 )	4	1,450	5,038
Small business loans		747	—	—	360	1,107
Consumer		4	—	1	( 1 )	4
Leases		35	—	—	121	156
Total	$	12,706	( 97 )	8	3,956	16,573

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	Balance,					Balance,
(dollars in thousands)	December 31, 2019		Charge-offs	Recoveries	Provision	September 30, 2020
Commercial mortgage	$	3,426	—	—	3,509	6,935
Home equity lines and loans		342	( 89 )	6	258	517
Residential mortgage		179	—	5	150	334
Construction		2,362	—	—	120	2,482
Commercial and industrial		2,684	( 31 )	37	2,348	5,038
Small business loans		509	—	—	598	1,107
Consumer		6	( 10 )	3	5	4
Leases		5	—	—	151	156
Total	$	9,513	( 130 )	51	7,139	16,573

Allowance Allocated by Portfolio Segment

The following tables detail the allocation of the allowance for loan and lease losses and the carrying value for loans and leases by portfolio segment based on the methodology used to evaluate the loans and leases for impairment as of September 30, 2021 and December 31, 2020.


	Allowance on loans and leases				Carrying value of loans and leases
	Individually		Collectively		Individually		Collectively
September 30, 2021	evaluated		evaluated		evaluated		evaluated
(dollars in thousands)	for impairment		for impairment	Total	for impairment		for impairment	Total
Commercial mortgage	$	—	6,542	6,542	$	2,568	539,905	542,473
Home equity lines and loans		2	271	273		910	51,909	52,819
Residential mortgage		12	264	276		1,802	40,351	42,153
Construction		—	2,285	2,285		1,206	160,986	162,192
Commercial and industrial		1,526	4,088	5,614		3,651	275,325	278,976
Small business loans		376	2,723	3,099		1,057	89,420	90,477
Paycheck Protection Program loans		—	—	—		—	118,585	118,585	(2)
Main Street Lending Program		—	—	—		—	592	592	(2)
Consumer		—	3	3		—	427	427
Leases, net		—	884	884		—	73,993	73,993
Total	$	1,916	17,060	18,976	$	11,194	1,351,493	1,362,687	(1)




	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.

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Loans and Leases by Credit Ratings

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

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

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

● Substandard – Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Substandard loans have a well-defined weakness or weaknesses that jeopardize 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 tables detail the carrying value of loans and leases by portfolio segment based on the credit quality indicators used to determine the allowance for loan and lease losses as of September 30, 2021 and December 31, 2020:


September 30, 2021			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	505,355	31,464	5,654	—	542,473
Home equity lines and loans		51,427	—	1,392	—	52,819
Construction		153,200	8,992	—	—	162,192
Commercial and industrial		222,041	35,756	21,179	—	278,976
Small business loans		87,161	—	3,316	—	90,477
Paycheck Protection Program loans		118,585	—	—	—	118,585
Main Street Lending Program loans		592	—	—	—	592
Total	$	1,138,361	76,212	31,541	—	1,246,114


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 of September 30, 2021 and

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December 31, 2020. No troubled debt restructurings performing according to modified terms are included in performing residential mortgages below as of September 30, 2021 and December 31, 2020.


	September 30, 2021				December 31, 2020
(dollars in thousands)	Performing		Nonperforming	Total	Performing		Nonperforming	Total
Residential mortgage	$	40,351	1,802	42,153	$	38,457	1,815	40,272
Consumer		427	—	427		511	—	511
Leases, net		73,993	—	73,993		31,040	—	31,040
Total	$	114,771	1,802	116,573	$	70,008	1,815	71,823

There were three nonperforming residential mortgage loans at September 30, 2021 and five nonperforming residential mortgage loans at December 31, 2020 with a combined outstanding principal balance of $ 476 thousand and $ 910 thousand, respectively, which were carried at fair value and not included in the table above.

Impaired Loans

The following table details the recorded investment and principal balance of impaired loans by portfolio segment, and their related allowance for loan and lease losses.




	As of September 30, 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	$	3,201	3,321	1,526	3,860	3,902	1,563
Small business loans		916	916	376	—	—	—
Home equity lines and loans		88	102	2	95	105	9
Residential mortgage		169	169	12	689	689	73
Total	$	4,374	4,508	1,916	4,644	4,696	1,645
Impaired loans without related allowance:
Commercial mortgage	$	2,568	2,568	—	1,606	1,642	—
Commercial and industrial		450	515	—	785	862	—
Small business loans		141	141	—	185	185	—
Home equity lines and loans		822	836	—	826	839	—
Residential mortgage		1,633	1,633	—	1,128	1,128	—
Construction		1,206	1,206	—	1,206	1,206	—
Total		6,820	6,899	—	5,736	5,862	—
Grand Total	$	11,194	11,407	1,916	10,380	10,558	1,645

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


		Three Months Ended		Three Months Ended
		September 30, 2021		September 30, 2020
		Average	Interest	Average	Interest
		recorded	Income	recorded	Income
(dollars in thousands)		investment	Recognized	investment	Recognized
Impaired loans with related allowance:
Commercial and industrial	$	3,242	5	3,907	26
Small business loans		916	—	—	—
Home equity lines and loans		89	—	100	—
Residential mortgage		169	—	—	—
Total	$	4,416	5	4,007	26
Impaired loans without related allowance:
Commercial mortgage	$	2,573	8	2,080	47
Commercial and industrial		473	19	874	6
Small business loans		147	3	208	5
Home equity lines and loans		823	—	564	—
Residential mortgage		1,636	6	1,649	41
Construction		1,206	17	1,206	14
Total	$	6,858	53	6,581	113
Grand Total	$	11,274	58	10,588	139

		Nine Months Ended		Nine Months Ended
		September 30, 2021		September 30, 2020
		Average	Interest	Average	Interest
		recorded	Income	recorded	Income
(dollars in thousands)		investment	Recognized	investment	Recognized
Impaired loans with related allowance:
Commercial and industrial	$	3,306	15	1,766	36
Small business loans		917	—	—	—
Home equity lines and loans		92	—	103	—
Residential mortgage		170	—	—	—
Total	$	4,485	15	1,869	36

Impaired loans without related allowance:
Commercial mortgage	$	2,584	24	1,852	89
Commercial and industrial		485	19	700	14
Small business loans		161	11	220	16
Home equity lines and loans		824	—	575	—
Residential mortgage		1,640	9	1,478	133
Construction		1,206	47	1,209	46
Leases		53	—	—	—
Total	$	6,953	110	6,034	298
Grand Total	$	11,438	125	7,903	334

Troubled Debt Restructuring

The restructuring of a loan is considered a “troubled debt restructuring” (“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.

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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 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 September 30, 2021 and December 31, 2020 are as follows:


	September 30,	December 31,
(dollars in thousands)	2021	2020
TDRs included in nonperforming loans and leases	$ 367	244
TDRs in compliance with modified terms	2,476	3,362
Total TDRs	$ 2,843	3,606

There were no loan and lease modifications granted during the three and nine months ended September 30, 2021 and 1 loan and lease modification granted during the three and nine months ended September 30, 2020 that were categorized as a TDR. No loan and lease modifications granted during the three and nine months ended September 30, 2021 and 2020 subsequently defaulted during the same time period.

In accordance with Section 4013 of the CARES Act, loan deferrals granted to customers that resulted from the impact of COVID-19 and who were not past due at the time of deferral were not considered trouble debt restructurings under ASC 310-40 as of September 30, 2021. COVID-19 loan modifications provided to borrowers amounted to $ 24.9 million as of September 30, 2021, down from $ 26.9 million as of December 31, 2020. Loan modifications were $ 19.1 million as of September 30, 2020.

This provision of Section 4013 of the CARES Act was extended to January 1, 2022 under the Consolidated Appropriations Act, 2021. Management continues to monitor these deferrals and has adequately considered these credits in the September 30, 2021 allowance for loan losses balance. These modified 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.

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

The Corporation’s short-term borrowings generally consist of federal funds purchased and short-term borrowings extended under agreements with the Federal Home Loan Bank of Pittsburgh (“FHLB”). The Corporation has two unsecured Federal Funds borrowing facilities with correspondent banks totaling $ 39 million combined. Federal Funds purchased generally represent one-day borrowings. The Corporation had no Federal Funds purchased at September 30, 2021 and December 31, 2020. The Corporation also has a facility with the Federal Reserve Bank (“FRB”) of Philadelphia discount window of $ 3.7 million. This facility is fully secured by investment securities. There were no borrowings under this at September 30, 2021 and $ 10 million at December 31, 2020.

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Short-term borrowings at September 30, 2021 and December 31, 2020 consisted of the following notes:


				Balance as of
	Maturity	Interest		September 30,		December 31,
(dollars in thousands)	date	rate		2021		2020
Open Repo Plus Weekly	05/31/2022	0.33	%		—	60,416
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	10,000
Mid-term Repo-fixed	01/27/2021	0.23			—	5,465
Mid-term Repo-fixed	06/29/2022	0.32			7,392	—
Mid-term Repo-fixed	09/12/2022	0.23			4,886	—
Total				$	22,278	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 September 30, 2021, the Corporation pledged $ 78.4 million of PPP loans to the FRB of Philadelphia to borrow $ 78.4 million of funds at a rate of 0.35 %. Advances made on the PPPLF were ended by the FRB on July 30, 2021.

Long-term debt at September 30, 2021 and December 31, 2020 consisted of the following notes:


				Balance as of
	Maturity	Interest		September 30,		December 31,
(dollars in thousands)	date	rate		2021		2020
PPPLF Advances	2022	0.35	%		—	153,269
PPPLF Advances	2026	0.35		$	78,405	—
Mid-term Repo-fixed	06/29/2022	0.32			—	7,392
Mid-term Repo-fixed	09/12/2022	0.23			—	4,885
Total	`			$	78,405	165,546

The FHLB of Pittsburgh has also issued $ 128.5 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 $ 533.4 million as of September 30, 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.

(7) Servicing Assets

The Corporation sells certain residential mortgage loans and the guaranteed portion of certain small business loans (“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

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assets in accordance with ASC 860, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.

Residential Mortgage Loan Servicing Rights

The mortgage servicing rights (“MSRs”) are amortized 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 $ 968.6 million and $ 506.0 million of residential mortgage loans as of September 30, 2021 and December 31, 2020, respectively. During the three and nine months ended September 30, 2021, the Corporation recognized servicing fee income of $ 562 thousand and $ 1.4 million, respectively, compared to $ 140 thousand and $ 247 thousand during the three and nine months ended September 30, 2020, respectively.

Changes in the MSR balance are summarized as follows:


	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2021		2020	2021		2020
Balance at beginning of the period	$	8,942	1,294	$	4,647	446
Servicing rights capitalized		1,360	1,333		5,856	2,469
Amortization of servicing rights		( 316 )	( 90 )		( 786 )	( 173 )
Change in valuation allowance		111	102		380	( 103 )
Balance at end of the period	$	10,097	2,639	$	10,097	2,639

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


	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2021		2020	2021		2020
Valuation allowance, beginning of period	$	( 166 )	( 303 )	$	( 435 )	( 98 )
Impairment		—	—		—	( 103 )
Recovery		111	102		380	—
Valuation allowance, end of period	$	( 55 )	( 201 )	$	( 55 )	( 201 )

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 September 30, 2021, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 7.26 % 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 %. The prepayment speed assumption has declined from December 31, 2020 to September 30, 2021 as interest rates have started to increase and the number of mortgage refinancings have started to decline, while the discount rate assumption is unchanged over this period as the underlying credit quality of the loans sold in each period is relatively unchanged.

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At September 30, 2021 and December 31, 2020, the sensitivity of the current fair value of the residential mortgage servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.



(dollars in thousands)	September 30, 2021		December 31, 2020
Fair value of residential mortgage servicing rights	$	10,296	$	4,647

Weighted average life (years)		9.0		5.0

Prepayment speed		7.26 %		9.39 %
Impact on fair value:
10% adverse change	$	( 358 )	$	( 183 )
20% adverse change		( 695 )		( 354 )

Discount rate		9.00 %		9.00 %
Impact on fair value:
10% adverse change	$	( 397 )	$	( 168 )
20% adverse change		( 768 )		( 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 Loan Servicing Rights

SBA loan servicing assets are amortized over the period of the estimated future net servicing life of the underlying assets. SBA loan servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the SBA loan servicing asset. The Corporation serviced $ 102.5 million and $ 55.9 million of SBA loans, as of September 30, 2021 and December 31, 2020, respectively.

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


	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2021		2020	2021		2020
Balance at beginning of the period	$	1,385	632	$	970	337
Servicing rights capitalized		588	183		1,166	524
Amortization of servicing rights		( 112 )	( 42 )		( 266 )	( 88 )
Change in valuation allowance		( 26 )	14		( 35 )	14
Balance at end of the period	$	1,835	787	$	1,835	787

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


	Three Months Ended September 30,			Nine Months Ended September 30,
(dollars in thousands)	2021		2020	2021		2020
Valuation allowance, beginning of period	$	( 48 )	( 26 )	$	( 39 )	( 26 )
Impairment		( 26 )	—		( 35 )	—
Recovery		—	14		—	14
Valuation allowance, end of period	$	( 74 )	( 12 )	$	( 74 )	( 12 )

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 September 30, 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 12.91 %, and a discount rate equal to 7.47 %. 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 September 30, 2021 and December 31, 2020, the sensitivity of the current fair value of the SBA loan servicing rights to immediate 10% and 20% favorable and unfavorable changes in key economic assumptions are included in the following table.



(dollars in thousands)	September 30, 2021		December 31, 2020
Fair value of SBA loan servicing rights	$	1,954	$	1,010

Weighted average life (years)		3.8		3.7

Prepayment speed		12.91 %		12.73 %
Impact on fair value:
10% adverse change	$	( 77 )	$	( 37 )
20% adverse change		( 148 )		( 71 )

Discount rate		7.47 %		8.33 %
Impact on fair value:
10% adverse change	$	( 53 )	$	( 25 )
20% adverse change		( 103 )		( 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.

(8) Fair Value Measurements and Disclosures

The Corporation uses fair value measurements to record fair value adjustments to certain assets and liabilities. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the

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assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation techniques or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

In accordance with this guidance, the Corporation groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

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

Securities

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

Mortgage Loans Held for Sale

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

Mortgage Loans Held for Investment

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

Derivative Financial Instruments

The fair values of forward commitments and interest rate swaps are based on market pricing and therefore are considered Level 2. Derivatives classified as Level 3 consist of interest rate lock commitments related to mortgage loan commitments. The determination of fair value includes assumptions related to the likelihood that a commitment

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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.

For financial assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at September 30, 2021 and December 31, 2020 are as follows :


	September 30, 2021
(dollars in thousands)	Total		Level 1	Level 2	Level 3
Assets
Securities available for sale:
U.S. asset backed securities	$	21,293	—	21,293	—
U.S. government agency mortgage-backed securities		5,459	—	5,459	—
U.S. government agency collateralized mortgage obligations		24,053	—	24,053	—
State and municipal securities		72,828	—	72,828	—
U.S. Treasuries		15,010	—	15,010	—
Non-U.S. government agency collateralized mortgage obligations		999	—	999	—
Corporate bonds		6,507	—	6,507	—
Equity investments		1,011	—	1,011	—
Mortgage loans held for sale		117,996	—	117,996	—
Mortgage loans held for investment		17,142	—	17,142	—
Interest rate lock commitments		1,712	—	—	1,712
Forward commitments		447	—	447	—
Customer derivatives - interest rate swaps		1,052	—	1,052	—
Total	$	285,509	—	283,797	1,712

Liabilities
Interest rate lock commitments		360	—	—	360
Forward commitments		22	—	22	—
Customer derivatives - interest rate swaps		1,101	—	1,101	—
	$	1,483	—	1,123	360


	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

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Financial assets measured at fair value on a nonrecurring basis, are considered Level 3 assets in the fair value hierarchy. The fair value used at September 30, 2021 and December 31, 2020 are as follows:


	September 30, 2021		December 31, 2020
(dollars in thousands)	Fair Value		Fair Value
Mortgage servicing rights	$	10,097	4,647
SBA loan servicing rights		1,835	970
Impaired loans (1)		2,458	2,998
Total	$	14,390	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. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values.

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

Cash and Cash Equivalents

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

Loans Receivable

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

Loan Servicing Rights

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

Impaired Loans

Impaired loans are those in which the Corporation has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Accrued Interest Receivable and Payable

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

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Deposit Liabilities

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

Short-Term Borrowings

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

Long-Term Debt

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

Subordinated Debt

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

Off-Balance Sheet Financial Instruments

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

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The estimated fair values of the Corporation’s financial instruments at September 30, 2021 and December 31, 2020 are as follows:


		September 30, 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	$	63,121	63,121	36,744	36,744
Securities available-for-sale	Level 2		146,149	146,149	123,562	123,562
Securities held-to-maturity	Level 2		6,406	6,660	6,510	6,857
Equity investments	Level 2		1,011	1,011	1,031	1,031
Mortgage loans held for sale	Level 2		117,996	117,996	229,199	229,199
Loans receivable, net of the allowance for loan and lease losses	Level 3		1,361,528	1,391,260	1,272,582	1,289,776
Mortgage loans held for investment	Level 2		17,142	17,142	12,182	12,182
Interest rate lock commitments	Level 3		1,712	1,712	6,932	6,932
Forward commitments	Level 2		447	447	—	—
Restricted investment in bank stock	NA		4,162	NA	7,861	NA
Accrued interest receivable	Level 3		5,080	5,080	5,482	5,482
Customer derivatives - interest rate swaps	Level 2		1,052	1,052	1,118	1,118
Financial liabilities:
Deposits	Level 2		1,439,047	1,552,500	1,241,335	1,392,500
Short-term borrowings	Level 2		22,278	22,278	106,862	106,862
Long-term debt	Level 2		78,405	79,373	165,546	168,000
Subordinated debentures	Level 2		40,760	41,859	40,671	38,375
Accrued interest payable	Level 2		663	663	1,154	1,154
Interest rate lock commitments	Level 3		360	360	100	100
Forward commitments	Level 2		22	22	1,572	1,572
Customer derivatives - interest rate swaps	Level 2		1,101	1,101	1,219	1,219

		Notional			Notional
Off-balance sheet financial instruments:		amount		Fair value	amount	Fair value
Commitments to extend credit	Level 2	$	505,018	1,712	421,399	6,932
Letters of credit	Level 2		17,711	—	8,928	—

The following table includes a rollforward of interest rate lock commitments for which the Corporation utilized Level 3 inputs to determine fair value on a recurring basis for the three and nine month peiods ended September 30, 2021 and 2020.


	Three Months Ended September 30,			Nine Months Ended September 30,
	2021		2020	2021		2020
Balance at beginning of the period	$	2,667	4,595	$	6,932	504
(Decrease) increase in value		( 955 )	3,203		( 5,220 )	7,294
Balance at end of the period	$	1,712	7,798	$	1,712	7,798

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


				Significant
	Fair Value			Unobservable	Range of		Weighted
	Level 3		Valuation Technique	Input	Inputs		Average
September 30, 2021	$	1,712	Market comparable pricing	Pull through	1 - 99	%	87.26	%
December 31, 2020		6,932	Market comparable pricing	Pull through	1 - 99		83.08

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Net realized gains and losses due to changes in the fair value of interest rate lock commitments, which are classified as Level 3 assets and liabilities, are recorded in non-interest income as net change in the fair value of derivative instruments in the Corporation’s consolidated statements of income. Net realized losses of $ 1.1 million and $ 5.5 million were recorded for the three and nine months ended September 30, 2021, respectively, while net realized gains of $ 3.2 million and $ 7.2 million were recorded for the three and nine months ended September 30, 2020, respectively.

(9) Derivative Financial Instruments

Risk Management Objective of Using Derivatives

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

Mortgage Banking Derivatives

In connection with its mortgage banking activities, the Corporation enters into commitments to originate certain fixed rate residential mortgage loans for customers, also referred to as interest rate locks. In addition, the Corporation enters into forward commitments for the future sales or purchases of mortgage-backed securities to or from third-party counterparties to hedge the effect of changes in interest rates on the values of both the interest rate locks and mortgage loans held for sale. Forward sales commitments may also be in the form of commitments to sell individual mortgage loans or interest rate locks at a fixed price at a future date. The amount necessary to settle each interest rate lock is based on the price that secondary market investors would pay for loans with similar characteristics, including interest rate and term, as of the date fair value is measured. The fair value of 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 unaudited 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. The fair value of interest rate derivatives are recorded within other assets/liabilities on the consolidated balance sheets. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

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


		September 30, 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	$	159,507	1,712	406,422	6,932
Negative fair values	Other liabilities		58,039	( 360 )	22,406	( 100 )
Total			217,546	1,352	428,828	6,832

Forward Commitments
Positive fair values	Other assets		86,000	447	—	—
Negative fair values	Other liabilities		11,500	( 22 )	218,000	( 1,572 )
Total			97,500	425	218,000	( 1,572 )

Customer Derivatives - Interest Rate Swaps
Positive fair values	Other assets		35,790	1,052	20,979	1,118
Negative fair values	Other liabilities		35,790	( 1,101 )	20,979	( 1,219 )
Total			71,580	( 49 )	41,958	( 101 )
Total derivative financial instruments		$	386,626	1,728	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:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2021		2020		2021	2020
Interest Rate Lock Commitments	$	( 1,056 )	3,161	$	( 5,480 )	7,226
Forward Commitments		703	( 129 )		1,997	( 801 )
Customer Derivatives - Interest Rate Swaps		14	( 4 )		52	( 79 )
Net fair value (losses) gains on derivative financial instruments	$	( 339 )	3,028	$	( 3,431 )	6,346

Net realized losses on derivatives were $ 1.2 million and net realized gains were $ 2.4 million for the three and nine months ended September 30, 2021, respectively, and net realized losses on derivatives were $ 2.6 million and $ 7.4 million for the three and nine months ended September 30, 2020, respectively.

(10) Segments

ASC Topic 280 – Segment Reporting identifies operating segments as components of an enterprise which are evaluated regularly by the 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 investment securities, gains on the sale of loans, SBA income, service charges on deposit accounts, cash sweep fees, overdraft fees, BOLI income, title insurance fees, and other less significant non-interest income.

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Meridian Wealth Partners (“Wealth”), is a registered investment advisor and wholly-owned subsidiary of the Bank, that 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 Mortgage (“Mortgage”) consists of 16 loan production offices located throughout the Delaware Valley 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.

The table below summarizes income and expenses, directly attributable to each business line, which has been included in the statement of operations.


	Segment Information
	Three Months Ended September 30, 2021					Three Months Ended September 30, 2020
(Dollars in thousands)	Bank		Wealth	Mortgage	Total	Bank		Wealth	Mortgage	Total
Net interest income	$	15,777	2	478	16,257	$	12,104	( 19 )	630	12,715
Provision for loan losses		597	—	—	597		3,956	—	—	3,956
Net interest income after provision		15,180	2	478	15,660		8,148	( 19 )	630	8,759

Non-interest Income
Mortgage banking income		215	—	18,511	18,726		574	—	21,238	21,812
Wealth management income		—	1,232	—	1,232		—	951	—	951
SBA income		2,688	—	—	2,688		641	—	—	641
Net change in fair values		13	—	( 847 )	( 834 )		( 4 )	—	6,057	6,053
Net loss on hedging activity		—	—	( 1,189 )	( 1,189 )		—	—	( 2,637 )	( 2,637 )
Other		836	—	663	1,499		2,045	—	195	2,240
Non-interest income		3,752	1,232	17,138	22,122		3,256	951	24,853	29,060
Non-interest expense		10,633	802	14,046	25,481		8,829	788	16,217	25,834
Income before income taxes	$	8,299	432	3,570	12,301	$	2,575	144	9,266	11,985
Total Assets	$	1,625,468	6,396	130,581	1,762,445	$	1,525,883	5,399	227,366	1,758,648


	Nine Months Ended September 30, 2021					Nine Months Ended September 30, 2020
(Dollars in thousands)	Bank		Wealth	Mortgage	Total	Bank		Wealth	Mortgage	Total
Net interest income	$	45,340	( 249 )	1,698	46,789	$	32,725	( 24 )	1,277	33,978
Provision for loan losses		1,292	—	—	1,292		7,139	—	—	7,139
Net interest income after provision		44,048	( 249 )	1,698	45,497		25,586	( 24 )	1,277	26,839

Non-interest Income
Mortgage banking income		892	—	61,401	62,293		973	—	44,422	45,395
Wealth management income		—	3,531	—	3,531		—	2,825	—	2,825
SBA income		5,423	—	—	5,423		1,821	—	—	1,821
Net change in fair values		52	—	( 6,671 )	( 6,619 )		( 68 )	—	11,012	10,944
Net gain (loss) on hedging activity		—	—	2,397	2,397		—	—	( 7,363 )	( 7,363 )
Other		2,110	—	1,767	3,877		2,931	14	405	3,350
Non-interest income		8,477	3,531	58,894	70,902		5,657	2,839	48,476	56,972
Non-interest expense		28,981	2,486	48,523	79,990		23,341	2,363	35,448	61,152
Income before income taxes	$	23,544	796	12,069	36,409	$	7,902	452	14,305	22,659
Total Assets	$	1,625,468	6,396	130,581	1,762,445	$	1,525,883	5,399	227,366	1,758,648

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(11) Stockholders’ Equity

During the nine months ended September 30, 2021 the Corporation had the following dividend activity:


Date	Date of	Date		Quarterly		Special
Declared	Record	Paid		Dividend		Dividend
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		—

On April 26, 2021, the Corporation announced that its Board of Directors has authorized 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. This program is subject to applicable regulatory protocol. There were 78,491 shares purchased during the three months ended September 30, 2021 at an average price of $ 27.41 , for an aggregate purchase price of $ 2.2 million.

At the Annual Meeting of Shareholders held on June 17, 2021, the shareholders of the Corporation approved to amend the Corporation’s Articles of Incorporation to increase the authorized numbers of shares of common stock of the Corporation from 10,000,000 shares to 25,000,000 shares. The Articles of Amendment of the Corporation were filed with the Secretary of State of the Commonwealth of Pennsylvania on June 21, 2021.

(12) 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.

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

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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 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 asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. In June 2020, the FASB approved a delay for the implementation of the ASU. Accordingly, the amendments in this update are effective for the Corporation for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. Under ASU 2016-02, the Corporation will recognize a right-of-use asset and a lease obligation liability on the consolidated statement of financial condition, which will increase the Corporation’s assets and liabilities. The Corporation is evaluating the impacts that ASU 2016-02 will have on its consolidated financial statements when adopted as of January 1, 2022.

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 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 Corporation does not expect the adoption of this ASU to have a material impact on our consolidated financial statements and related disclosures.

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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.

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

This ASU clarifies the accounting for certain financial instruments with characteristics of liabilities and equity. The amendments in this update reduce the number of accounting models for convertible debt instruments and convertible preferred stock by removing the cash conversion model and the beneficial conversion feature models. For public business entities that meet the definition of an SEC filer (excluding smaller reporting entities), the amendments are effective for fiscal years beginning after Dec. 15, 2021, and interim periods within. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2023, and interim periods within. Early adoption is permitted, but no earlier than for fiscal years beginning after Dec. 15, 2020.

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

You should read the following discussion and analysis in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2020 included in Meridian Corporation’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”).

Cautionary Statement Regarding Forward-Looking Statements

Meridian Corporation (the “Corporation”) may from time to time make written or oral “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to Meridian Corporation’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Meridian Corporation’s control). Numerous competitive, economic, regulatory, legal and technological factors, risks and uncertainties including, without limitation: the impact of the current COVID-19 pandemic and government responses thereto, on the U.S. economy, including the markets in which we operate; actions that we and our customers take in response to these factors and the effects such actions have on our operations, products, services and customer relationships; and the risk that the Small Business Administration may not fund some or all Paycheck Protection Program (PPP) loan guaranties, among others, could cause Meridian Corporation’s financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in such forward-looking statements. Meridian Corporation cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Meridian Corporation’s filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2020 and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Meridian Corporation does not undertake to update any forward-looking statement whether written or oral, that may be made from time to time by Meridian Corporation or by or on behalf of Meridian Bank.

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Critical Accounting Policies, Judgments 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. While certain valuation assumptions and judgments will change to account for COVID-19 pandemic-related circumstances such as widening credit spreads, the Corporation does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP. In particular, management has identified the provision and allowance for loan 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.

This critical accounting policy, along with other significant accounting policies, are presented in in Footnote 1 of the Corporation’s Consolidated Financial Statements as of and for the years ended December 31, 2020 and 2019 included in the Annual Report on Form 10-K.

Executive Overview

The following items highlight the Corporation’s results of operations for the three and nine months ended September 30, 2021, as compared to the same periods in 2020, and the changes in its financial condition as of September 30, 2021 as compared to December 31, 2020. More detailed information related to these highlights can be found in the sections that follow.

Three Month Results of Operations

● Net income was $9.4 million or $1.52 per diluted share, compared to net income of $9.2 million, or $1.51 per diluted share, for the third quarter of 2020. The increase of $226 thousand, or 2.5%, was driven largely by the bank segment’s continued improvement from interest income on portfolio loans, combined with an increase in SBA 7(a) loan sales and wealth management revenue, partially offset by a decline in mortgage banking activity.

● ROE and ROA were 24.07% and 2.15%, respectively, for the third quarter 2021, compared to 29.30% and 2.29%, respectively, for the third quarter 2020.

● Pre-tax, pre-provision income (a non-GAAP measure) for the third quarter of 2021 was $12.9 million, a decrease of $3.0 million or 19.1%. A reconciliation of this non-GAAP measure is included in the Non-GAAP Financial Measures section below.

● Total revenue was $40.4 million, a decrease of $4.5 million or 10.0%.

● Net interest income increased $3.5 million, or 27.9%, with interest expense down $1.1 million or 35.3%.

● Non-interest income decreased $6.9 million or 23.9%, driven by a decline in mortgage banking net revenue.

o Mortgage banking net revenue decreased $3.1 million or 14.2% over the third quarter of 2020. The decrease in third quarter 2021 came from decreased levels of mortgage loan originations. Our mortgage segment originated $522.9 million in loans during the third quarter of 2021, a decrease of $185.3 million, or 26.2%, from the third quarter of 2020. The fair value of derivative instruments and loans held for sale decreased a combined $6.8 million over the period. Net hedging activity improved as the net loss decreased $1.5 million to a net loss of $1.2 million for the third quarter of 2021.

o Wealth management revenue increased $281 thousand year-over-year due to an increase of $340.0 million in assets under management over this period.

o Net revenue from the sales of SBA 7(a) loans increased $2.0 million as $25.0 million in loans were sold in the third quarter of 2021 compared to $9.5 million in loans sold in the third quarter of 2020, an increase of nearly 162.0%.

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o Other fee income was up $205 thousand or 24.1% from the third quarter of 2020, to $1.1 million, due to increases in wire fees, title fee income, and servicing fee income.

● The provision for loan losses of $597 thousand for the third quarter of 2021 decreased $3.4 million, or 84.9%, from the provision for loan losses recorded for the third quarter of 2020.

● Total non-interest expense for the third quarter of 2021 was $25.5 million, down $353 thousand or 1.4%, from the comparable period in 2020. The decrease in non-interest expense is largely attributable to a decrease in salaries and employee benefits expense, which decreased $975 thousand or 4.8%, from the comparable period in 2020.

Nine Month Results of Operations

● Net income was $27.9 million, or $4.49 per diluted share, for the nine months ended September 30, 2021 compared to net income of $17.4 million, or $2.82 per diluted share, for the nine months ended September 30, 2020. The increase was due largely to the increase in net interest income of $12.8 million, combined with a $13.9 million increase in non-interest income and a $5.8 million decline in the provision for loan losses, partially offset by increases in non-interest expense and income taxes of $18.8 million and $3.3 million, respectively.

● ROE and ROA were 25.43% and 2.17%, respectively, for the nine months ended September 30, 2021, compared to 18.85% and 1.65%, respectively, for the nine months ended September 30, 2020.

● Pre-tax, pre-provision income (a non-GAAP measure) for the nine months ended September 30, 2021 was $37.7 million, an increase of $7.9 million or 26.5%. A reconciliation of this non-GAAP measure is included in the Non-GAAP Financial Measures section below.

● Total revenue was $124.2 million, an increase of $22.5 million or 22.1%.

● Net interest income increased $12.8 million, or 37.7%, to $46.8 million from $34.0 million, for the nine months ended September 30, 2021.

● Non-interest income increased $13.9 million or 24.5%, driven by mortgage banking revenue, wealth management income, SBA income, and other fee income.

o Our mortgage segment originated $1.9 billion in loans during the nine months ended September 30, 2021, an increase of $365.4 million, or 24.4%, from the prior year period. Refinance activity represented 50% of the total residential mortgage loans originated for the nine months ended September 30, 2021, compared to 59% for the nine months ended September 30, 2020. The changes in the mortgage pipeline as a result of the expansion and the refinance activity generated significant fair value changes in derivative instruments and loans held-for-sale. These fair value changes decreased non-interest income a combined $17.4 million during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. These changes were offset by increases in net hedging gains of $9.8 million.

o Wealth management revenue increased $706 thousand, or 25.0%, year-over-year due to an increase in assets under management of $315.7 million over this period.

o Net revenue from the sales of SBA 7(a) loans increased $3.6 million, or 197.8%, from the prior year period, to $5.4 million, as the bank sold $22.1 million, or 74.9% more loans in the current year period. Other fee income increased $1.5 million, or 85.8%.

● The provision for loan losses was $1.3 million for the nine months ended September 30, 2021, compared to a $7.1 million provision for the nine months ended September 30, 2020.

● Total non-interest expense for the nine months ended September 30, 2021 was $80.0 million, up $18.8 million or 30.8%, from the nine months ended September 30, 2020.

Changes in Financial Condition

● Total assets increased $42.2 million to $1.8 billion as of September 30, 2021, compared to December 31, 2020.

● Cash and cash equivalents and investments increased a combined $48.8 million or 29.1%, compared to December 31, 2020, due predominantly to liquidity from PPP loan forgiveness.

● Total loans, net of allowance, increased $92.7 million, or 7.3%, to $1.4 billion as of September 30, 2021. There was growth in several commercial categories from December 31, 2020, as we continue to expand our presence in the Philadelphia market region. Small business loans increased $41.2 million, or 82.7%, commercial real

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estate loans increased $60.7 million, or 12.1%, and lease financings increased $45.2 million, or 136.8%, as our Meridian Equipment Finance (“MEF”) leasing team continued their strong growth pattern after starting up in early 2020.

● Residential real estate loans held for sale decreased $111.2 million, or 48.5%, to $118.0 million as of September 30, 2021, while PPP loans decreased $83.0 million, or 41.8%, over this period.

● Mortgage segment originated $1.9 billion in loans for the nine months ended September 30, 2021.

● Total deposits grew $197.7 million, or 15.9%, to $1.4 billion as of September 30, 2021.

● Non-interest bearing deposits increased $62.0 million, or 30.4%, from December 31, 2020.

● Borrowings from the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) were $78.4 million as of September 30, 2021, a decrease of $87.1 million, or 52.6% from December 31, 2020. Other borrowings were down $84.6 million or 79.2%.

● Returned $8.5 million of capital to Meridian shareholders for the nine months ended September 30, 2021 through dividends, including a $1.00 special dividend.

● Meridian repurchased 78,491 shares of its common stock in the third quarter of 2021, at an average price of $27.41.

Key Performance Ratios

Key financial performance ratios for the three and nine months ended September 30, 2021 and 2020 are shown in the table below:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
Annualized return on average equity		24.07	%		29.30	%		25.43	%		18.85	%
Annualized return on average assets		2.15	%		2.29	%		2.17	%		1.65	%
Net interest margin (tax effected yield)		3.83	%		3.26	%		3.75	%		3.33	%
Basic earnings per share	$	1.56		$	1.51		$	4.62		$	2.83
Diluted earnings per share	$	1.52		$	1.51		$	4.49		$	2.82

The following table presents certain key period-end balances and ratios as of September 30, 2021 and December 31, 2020:


	September 30,			December 31,
(dollars in thousands, except per share amounts)	2021			2020
Book value per common share	$	25.94		$	23.08
Tangible book value per common share (1)	$	25.23		$	22.35
Allowance as a percentage of loans and leases held for investment		1.38	%		1.38	%
Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1)		1.52	%		1.65	%
Tier I capital to risk weighted assets		10.64	%		10.22	%
Tangible common equity ratio (1)		8.76	%		7.99	%
Loans held for investment	$	1,378,670		$	1,284,764
Total assets	$	1,762,445		$	1,720,197
Stockholders' equity	$	158,416		$	141,622

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

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.

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

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



(dollars in thousands)	September 30, 2021		December 31, 2020
Tangible common equity ratio:
Total stockholders' equity		158,416		141,622
Less:
Goodwill and intangible assets		(4,329)		(4,500)
Tangible common equity		154,087		137,122
Total assets		1,762,445		1,720,197
Less:
Goodwill and intangible assets		(4,329)		(4,500)
Tangible assets	$	1,758,116	$	1,715,697
Tangible common equity ratio		8.76%		7.99%

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	2021		2020
	September 30		December 31
Book value per common share	$	25.94	$	23.08
Less: Impact of goodwill and intangible assets		0.71		0.73
Tangible book value per common share	$	25.23	$	22.35

The following is a reconciliation of the allowance for loan losses to total loans held for investment ratio for the three months ended September 30, 2021. 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	2021		2021		2020
	September 30		June 30		December 31
Allowance for loan losses / Total loans held for investment		1.38%		1.35%		1.38%
Less: Impact of loans held for investment - fair valued		0.01%		0.01%		0.00%
Less: Impact of PPP loans		0.13%		0.22%		0.27%
Allowance for loan losses / Total loans held for investment (excl. loans at fair value and PPP loans)		1.52%		1.58%		1.65%

The table below provides the non-GAAP reconciliation for pre-tax, pre-provision income:


(Dollars in thousands)	Three Months Ended September 30,				Nine Months Ended September 30,
Reconciliation of pre-tax, pre-provision income	2021		2020		2021		2020
Income before income tax expense	$	12,301	$	11,985	$	36,409	$	22,659
Provision for loan losses		597		3,956		1,292		7,139
Pre-tax, pre-provision income	$	12,898	$	15,941	$	37,701	$	29,798

The following sections discuss, in detail, the Corporation’s results of operations for the three and nine months ended September 30, 2021, as compared to the same periods in 2020, and the changes in its financial condition as of September 30, 2021 as compared to December 31, 2020.

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Components of Net Income

Net income is comprised of five major elements:

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

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

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

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

● Income Taxes , which include state and federal jurisdictions.

NET INTEREST INCOME

Net interest income is an integral source of the Corporation’s revenue. The tables below present a summary, for the three and nine months ended September 30, 2021 and 2020, of the Corporation’s average balances and yields earned on its interest-earning assets and the rates paid on its interest-bearing liabilities. The net interest margin is the net interest income as a percentage of average interest-earning assets. The net interest spread is the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities. The difference between the net interest margin and the net interest spread is the result of net free funding sources such as non-interest bearing deposits and stockholders’ equity.

Total interest income for the three months ending September 30, 2021 was $18.3 million (and $18.4 million on a tax equivalent basis), which represented a $2.4 million, or 15.3%, increase compared with the three months ending September 30, 2020. The increase in interest income was attributable to a $133.0 million increase in average interest earning assets, year over year, led by increases of $48.7 million, $111.9 million and $65.6 million in average balances of small business loans, commercial real estate loans and leases, respectively. The yield on interest earning assets increased 24 basis points over the same period in 2020, led by a 43 basis point increase in the yield on loans held for investment. Partially offsetting the loan yield expansion was the yield on cash, cash equivalents and investments, which declined 26 basis points over the prior quarter.

Total interest expense declined $1.1 million or 35.3% to $2.0 million for the three months ending September 30, 2021, compared with $3.2 million for the three months ending September 30, 2020. Total interest-bearing deposit balances increased $50.7 million in total from September 30, 2020 compared to September 30, 2021, which was offset by the decline in the cost of all deposit types of 44 basis points. The cost of money market and savings deposits declined 15 basis points and the cost of time deposits decreased by 91 basis points over the period. Interest expense on borrowings declined $208 thousand or 62.3% to $126 thousand for the three months ended September 30, 2021. The average balance of borrowings decreased $124.4 million due largely to a decline in PPPLF advances used to fund PPP loans as such loans continue to pay off, while the cost of borrowings declined 11 basis points over this period.

Net interest income increased $3.5 million, or 27.8%, to $16.3 million on a tax-equivalent basis for the three months ended September 30, 2021, compared to $12.8 million for the three months ended September 30, 2020. The net-interest margin increased 57 basis points for the three months ending September 30, 2021 at 3.83%, compared with 3.26% for the three month ending September 30, 2020. The increase in net interest margin reflects the increased yield on interest earnings assets, combined with the declining interest rates paid on deposits and borrowings loan portfolios overall. Contributing to

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the decline in interest expense on deposits over this period was the $61.8 million increase in average non-interest bearing deposits.

Total interest income for the nine months ending September 30, 2021 was $53.5 million on a tax-equivalent basis, which represented a $8.6 million, or 19.3%, increase compared with the nine months ending September 30, 2020. The increase in interest income was attributable to a $306.0 million increase in average interest earning assets, year over year, led by increases of $36.0 million, $47.0 million, $119.3 million, and $54.2 million in the average balances of small business loans, PPP loans, commercial real estate loans and leases, respectively, as well as an increase of $67.4 million of average interest earning cash and cash equivalents and investments. Overall the loans held for investment yield increased 9 basis points over the same period in 2020, but this expansion was partially offset by a lower yield on cash, cash equivalents and investments.

Total interest expense declined $4.3 million or 39.7% to $6.5 million for the nine months ending September 30, 2021, compared with $10.8 million for the nine months ending September 30, 2020. While all interest-bearing deposit balances increased $216.0 million from September 30, 2020 compared to September 30, 2021, the cost of all deposit types declined sharply over this period. The cost of interest-bearing deposits declined 53 basis points, while the cost of money market and savings deposits declined 38 basis points and the cost of time deposits decreased by 114 basis points over the period. Interest expense on borrowings declined $463 thousand or 51.4% to $437 thousand for the nine months ended September 30, 2021. The average balance of borrowings decreased $8.5 million due largely to PPPLF advances used to fund PPP loans, while the cost of borrowings increased 46 basis points over this period.

Net interest income increased $12.9 million, or 37.8%, to $47.0 million on a tax-equivalent basis for the nine months ended September 30, 2021, compared to $34.1 million for the nine months ended September 30, 2020. The net-interest margin increased 42 basis points for the nine months ending September 30, 2021 at 3.75%, compared with 3.33% for the nine month ending September 30, 2020. The increase in net interest margin reflects declining interest rates paid on deposits and borrowings overall, out-pacing the declines in the yields on interest earning assets during the year-over-year period presented. Contributing to the decline in interest expense on deposits over this period was the $63.9 million increase in non-interest bearing deposits.

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Analyses of Interest Rates and Interest Differential

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


	2021					2020
			Interest					Interest
For the Three Months Ended September 30,	Average		Income/		Yields/	Average		Income/		Yields/
(dollars in thousands)	Balance		Expense		rates	Balance		Expense		rates
Assets
Interest-earning assets
Due from banks	$	40,249		16	0.16%	$	10,928		2	0.08%
Federal funds sold		23,013		1	0.02%		12,655		2	0.02%
Investment securities (1)		147,035		734	2.01%		109,106		612	2.27%
Loans held for sale		110,905		824	2.97%		150,925		1,100	2.91%
Loans held for investment (1)		1,370,439		16,804	4.84%		1,275,046		14,224	4.41%
Total loans		1,481,344		17,628	4.72%		1,425,971		15,324	4.28%
Total interest-earning assets		1,691,641		18,379	4.31%		1,558,660		15,940	4.07%
Noninterest earning assets		48,207					39,647
Total assets	$	1,739,848				$	1,598,307
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits	$	270,518		201	0.29%	$	219,853		392	0.71%
Money market and savings deposits		647,093		853	0.52%		454,922		770	0.67%
Time deposits		237,080		273	0.46%		312,538		1,073	1.37%
Total deposits		1,154,691		1,327	0.46%		987,313		2,235	0.90%
Total Borrowings		111,075		126	0.45%		235,455		334	0.56%
Subordinated Debentures		40,740		596	5.85%		40,802		596	5.84%
Total interest-bearing liabilities		1,306,506		2,049	0.62%		1,263,570		3,165	1.00%
Noninterest-bearing deposits		254,843					193,020
Other noninterest-bearing liabilities		22,919					16,664
Total liabilities	$	1,584,268				$	1,473,254
Total stockholders' equity		155,580					125,053
Total stockholders' equity and liabilities	$	1,739,848				$	1,598,307
Net interest income (1)			$	16,330				$	12,775
Net interest spread (1)					3.69%					3.07%
Net interest margin (1)					3.83%					3.26%

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	2021					2020
			Interest					Interest
For the Nine Months Ended September 30,	Average		Income/		Yields/	Average		Income/		Yields/
(dollars in thousands)	Balance		Expense		rates	Balance		Expense		rates
Assets
Interest-earning assets
Due from banks	$	24,340		22	0.12%	$	7,620		27	0.47%
Federal funds sold		18,991		3	0.02%		15,692		36	0.30%
Investment securities (1)		142,974		2,170	2.06%		95,563		1,735	2.45%
Loans held for sale		139,101		2,922	2.80%		99,633		2,301	3.08%
Loans held for investment (1)		1,349,780		48,375	4.79%		1,150,662		40,753	4.70%
Total loans		1,488,881		51,297	4.61%		1,250,295		43,054	4.60%
Total interest-earning assets		1,675,186		53,492	4.27%		1,369,170		44,852	4.38%
Noninterest earning assets		44,388					43,940
Total assets	$	1,719,574				$	1,413,110
Liabilities and stockholders' equity
Interest bearing liabilities
Interest-bearing deposits	$	252,074		739	0.39%	$	187,987		1,302	0.92%
Money market and savings deposits		609,201		2,505	0.55%		392,863		2,736	0.93%
Time deposits		258,099		1,017	0.53%		322,574		4,026	1.67%
Total deposits		1,119,374		4,261	0.51%		903,424		8,064	1.19%
Total Borrowings		139,716		437	0.42%		148,192		900	0.81%
Subordinated Debentures		40,711		1,787	5.85%		41,075		1,787	5.80%
Total interest-bearing liabilities		1,299,801		6,485	0.67%		1,092,691		10,751	1.31%
Non-interest bearing deposits		248,355					184,503
Other non-interest bearing liabilities		24,928					12,349
Total liabilities	$	1,573,084				$	1,289,543
Total stockholders' equity		146,490					123,567
Total stockholders' equity and liabilities	$	1,719,574				$	1,413,110
Net interest income (1)			$	47,007				$	34,101
Net interest spread (1)					3.60%					3.06%
Net interest margin (1)					3.75%					3.33%

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

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Rate/Volume Analysis

The rate/volume analysis table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three and nine months ended September 30, 2021 as compared to the same periods in 2020, allocated by rate and volume. Changes in interest income and/or expense attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of the change in each category.


	2021 Compared to 2020
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	Rate		Volume	Total	Rate		Volume	Total
Interest income:
Due from banks	$	4	10	14	$	(41)	36	(5)
Federal funds sold		(1)	(0)	(1)		(43)	10	(33)
Investment securities (1)		(406)	528	122		(790)	1,225	435
Loans held for sale		153	(429)	(276)		(337)	958	621
Loans held for investment (1)		1,464	1,116	2,580		797	6,825	7,622
Total loans		1,617	687	2,304		460	7,783	8,243
Total interest income	$	1,214	1,225	2,439	$	(414)	9,054	8,640
Interest expense:
Interest bearing deposits	$	(653)	462	(191)	$	(1,093)	530	(563)
Money market and savings deposits		(852)	935	83		(1,813)	1,582	(231)
Time deposits		(588)	(213)	(801)		(2,329)	(680)	(3,009)
Total interest bearing deposits		(2,093)	1,184	(909)		(5,235)	1,432	(3,803)
Total borrowings		(56)	(152)	(208)		(296)	(167)	(463)
Subordinated debentures		4	(4)	—		21	(21)	—
Total interest expense		(2,145)	1,028	(1,117)		(5,510)	1,244	(4,266)
Interest differential	$	3,359	197	3,556	$	5,096	7,810	12,906

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

For the three months ended September 30, 2021 as compared to the same period in 2020, tax-equivalent interest income increased $2.4 million as volume changes in average earning assets contributed $1.2 million and favorable rate changes increased interest income by $1.2 million. The favorable change in interest income due to volume changes was driven mostly from growth in the loans held for investment portfolio, which increased $95.4 million on average over the three month periods, along with an increase in investment securities of $37.9 million on average. The loans held for sale portfolio decreased $40.0 million on average over this period. Within the loans held for investment portfolio, the average balance on small business loans, commercial real estate loans and leases increased $48.7 million, $111.9 million, and $65.6 million, respectively, while PPP loans decreased $109.5 million. Partially off-setting these favorable volume changes was an unfavorable rate change of 26 basis points on investment securities, reducing interest income by $406 thousand.

On the funding side, interest expense decreased $1.1 million due to the impact from rate declines which offset the impact from volume increases. The cost of deposits and borrowings were down across the board, having a $2.1 million positive effect on interest expense. The cost of interest-bearing deposits, money market and savings accounts and time deposits declined 42 basis points, 15 basis points and 91 basis points, respectively, while the cost of borrowings declined 11 basis points. Interest-bearing deposits, and money market and savings accounts increased $50.7 million, and $192.2 million on average, while time deposits decreased $75.5 million on average, and borrowings overall were down $124.4 million on average. These average balance changes led to a $1.0 million increase in interest expense.

Overall, the increase in net interest income from rate changes contributed $3.4 million while volume changes contributed $197 thousand to improve tax-equivalent net interest income by $3.6 million.

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For the nine months ended September 30, 2021 as compared to the same period in 2020, tax-equivalent interest income increased $8.6 million as volume changes in average earning assets contributed $9.1 million and unfavorable rate changes reduced interest income by $414 thousand. The favorable change in interest income due to volume changes was driven by growth in all asset portfolios, most notably the loans held for investment portfolio, which increased $199.1 million on average over the nine month periods. The loans held for sale portfolio increased $39.5 million and the investment securities portfolio increased $47.4 million on average over this period. Within the loans held for investment portfolio, the average balance on small business loans, PPP loans, commercial real estate loans and leases increased $36.0 million, $47.0 million, $119.3 million, and $54.2 million, respectively. Partially off-setting these favorable volume changes were unfavorable rate changes of 87 basis points and 28 basis points on investment securities and loans held for sale, reducing interest income by $790 thousand and $337 thousand, respectively.

On the funding side, interest expense decreased $4.3 million due to the impact from rate declines which offset the impact from volume increases. The cost of deposits and borrowings were down across the board, having a $5.5 million positive effect on interest expense. The cost of interest-bearing deposits, money market and savings accounts and time deposits declined 53 basis points, 38 basis points and 114 basis points, respectively, while the cost of borrowings increased 46 basis points. Interest-bearing deposits, and money market and savings accounts increased $64.1 million, and $216.3 million on average, while time deposits decreased $64.5 million on average, and borrowings overall were down $8.5 million on average. These average balance changes led to a $1.2 million increase in interest expense.

Overall, the increase in net interest income from volume changes contributed $7.8 million while rate changes contributed $5.1 million to improve tax-equivalent net interest income by $12.9 million.

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

● The timing of changes in interest rates;

● Shifts or rotations in the yield curve;

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

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

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

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

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

Because of the limitations inherent in any approach used to measure interest rate risk, simulated results are not intended to be used as a forecast of the actual effect of a change in market interest rates on our results, but rather as a means to better plan and execute appropriate 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 September 30, 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.

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Rate Ramp


	Estimated increase
	(decrease) in Net Interest
	Income
	For the year ending
	September 30,
Changes in Market Interest Rates	2021	2020
+300 basis points over next 12 months	1.75 %	1.98 %
+200 basis points over next 12 months	1.01 %	0.95 %
+100 basis points over next 12 months	0.43 %	0.15 %
No Change
-100 basis points over next 12 months	(0.68) %	(4.33) %
-200 basis points over next 12 months	(3.03) %	(14.19) %

The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of September 30, 2021. In its current position, the table indicates that a 100, 200 or 300 basis point increase in interest rates would have a positive impact from rising rates on net interest income over the next 12 months. The simulated exposure to a change in interest rates is contained, manageable and well within policy guidelines. The results continue to drive our funding strategy of increasing relationship-based accounts (core deposits) and utilizing term deposits to fund short to medium duration assets.

Simulation of economic value of equity . To quantify the amount of capital required to absorb potential losses in value of our interest-earning assets and interest-bearing liabilities resulting from adverse market movements, we calculate economic value of equity on a quarterly basis. We define economic value of equity as the net present value of our balance sheet’s cash flow, and we calculate economic value of equity by discounting anticipated principal and interest cash flows under the prevailing and hypothetical interest rate environments. Potential changes to our economic value of equity between a flat rate scenario and hypothetical rising and declining rate scenarios, measured as of September 30, 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. 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 September 30,
Changes in Market Interest Rates	2021		2020
+300 basis points	62	%	129	%
+200 basis points	47	%	98	%
+100 basis points	28	%	57	%
No Change
-100 basis points	(41)	%	(83)	%
-200 basis points	(103)	%	(213)	%

This economic value of equity profile at September 30, 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 and 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.

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

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, these loans 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 repricing 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 repricing 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 tables present the interest rate gap analysis of our assets and liabilities as of September 30, 2021 and December 31, 2020.


					Greater
					Than
					5 years and
As of September 30, 2021	12 Months				Not Rate
(dollars in thousands)	or Less		1-2 Years	2-5 Years	Sensitive	Total
Cash and investments	$	81,095	5,172	19,318	111,102	216,687
Loans (1)		953,683	185,714	330,199	8,094	1,477,690
Other Assets		—	—	—	68,068	68,068
Total Assets	$	1,034,778	190,886	349,517	187,264	1,762,445

Non-interest bearing deposits		9,324	8,994	26,075	221,449	265,842
Interest bearing deposits		949,760	—	—	—	949,760
Time deposits		142,699	18,786	61,960	—	223,445
Borrowings		65,232	22,704	12,747	—	100,683
Other Liabilities		—	—	—	64,299	64,299
Total stockholders' equity		—	—	—	158,416	158,416
Total liabilities and stockholders' equity	$	1,167,015	50,484	100,782	444,164	1,762,445

Repricing gap:
Positive (negative)	$	(132,237)	140,402	248,735	(256,900)	—
Cumulative repricing gap: Dollar amount	$	(132,237)	8,165	256,900	—
Percent of total assets		(7.5)%	0.5%	14.6%	—

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

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					Greater
					Than
					5 years and
As of December 31, 2020					Not Rate
(dollars in thousands)	12 Months		1-2 Years	2-5 Years	Sensitive	Total
Cash and investments	$	59,739	5,376	20,303	82,429	167,847
Loans (1)		1,041,269	199,978	226,594	10,588	1,478,429
Other Assets		—	—	—	73,921	73,921
Total Assets		1,101,008	205,354	246,897	166,938	1,720,197

Noninterest-bearing deposits		6,871	6,638	19,280	171,054	203,843
Interest-bearing deposits		779,195	—	—	—	779,195
Time deposits		197,649	41,533	19,115	—	258,297
Borrowings		106,862	165,546	—	—	272,408
Other Liabilities		—	—	169	64,663	64,832
Total stockholders' equity		—	—	—	141,622	141,622
Total liabilities and stockholders' equity	$	1,090,577	213,717	38,564	377,339	1,720,197

Repricing gap:
Positive (negative)		10,431	(8,363)	208,333	(210,401)	—
Cumulative repricing gap: Dollar amount	$	10,431	2,068	210,401	—
Percent of total assets		0.6%	0.1%	12.2%	—

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

Under the repricing gap analysis for the period ended September 30, 2021, we are liability-sensitive in the short term due mainly to core-deposit growth which has outpacing loan growth. Deposit growth has been strong throughout the year, driven by economic conditions and customer preference for short-term or liquid deposits. Loan growth has been impacted by PPP loan forgiveness. Although PPP loans are contractually longer term loans, the majority are expected to be forgiven in the near term, which will continue to impact asset growth rates. With the strong growth in deposits, management has been able to reduce balances of borrowings and wholesale deposits, lower costs and lengthen maturities. On a cumulative basis through projecting out 2 years our profile is more neutral. We generally manage our interest rate risk profile close to neutral, using a strategy that is focused on increasing our concentration of relationship-based transaction accounts through efforts of our business developers and new branches.

The gap results presented could vary substantially if different assumptions are used or if actual experience differs from the assumptions used in the preparation of the gap analysis. Furthermore, the gap analysis provides a static view of interest rate risk exposure at a specific point in time and offers only an approximate estimate of the relative sensitivity of our interest-earning assets and interest-bearing liabilities to changes in market interest rates. In addition, the impact of certain optionality is embedded in our balance sheet such as contractual caps and floors, and trends in asset and liability growth. Accordingly, we combine the use of gap analysis with the use of an earnings simulation model that provides a dynamic assessment of interest rate sensitivity.

PROVISION FOR LOAN AND LEASE LOSSES

For the three months ended September 30, 2021, the Corporation recorded a provision for loan and lease losses (“Provision”) of $597 thousand which was a $3.4 million, or 84.9% decrease from the same period in 2020. For the three months ended September 30, 2021 there was a net recovery of $18 thousand as compared to net charge-offs of $89 thousand for the same period in 2020. The third quarter 2020 provision was calculated at the time the COVID-19 pandemic was intensifying locally and nationally and was therefore impacted by qualitative provisioning for the economic uncertainty as a result of the pandemic, while the third quarter 2021 provision had less such impact as certain financial and economic indicators have improved period over period.

For the nine months ended September 30, 2021, the Corporation recorded a provision of $1.3 million which was a $5.8 million, 81.9% decrease from the same period in 2020. For the nine months ended September 30, 2021 there were net

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charge-offs of $83 thousand as compared to net charge-offs of $79 thousand for the same period in 2020. The decline in the provision period over period is the result of an improvement in the trend of certain financial and economic factors used in the allowance for loan losses that had been negatively impacted in 2020 due to the COVID-19 pandemic, which have since started to rebound as the economy continues to recover.

The provision for loan and lease losses could increase in future periods based on our belief that the credit quality of our loan portfolio could decline and loan defaults could increase if the COVID-19 pandemic continues for a prolonged period of time.

Asset Quality and Analysis of Credit Risk

Asset quality remains strong despite the pressures that the COVID-19 pandemic has had on businesses and the economy locally and nationally. COVID-19 loan modifications provided to borrowers amounted to $24.9 million as of September 30, 2021, compared to $29.0 million as of June 30, 2021.

Meridian realized net recoveries of 0.00% of total average loans for the quarter ending September 30, 2021, compared to net charge-offs of 0.00% for the quarter ended December 31, 2020 and net charge-offs of 0.01% for the quarter ended September 30, 2020. Total non-performing assets, including loans and other real estate property, were $9.2 million as of September 30, 2021, compared to $7.9 million as of December 31, 2020 and September 30, 2020. The ratio of non-performing assets to total assets as of September 30, 2021 was 0.52% compared to 0.46% as of December 31, 2020, and 0.45% as of September 30, 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), was 1.52% as of September 30, 2021, 1.65% as of December 31, 2020, and 1.59% as of September 30, 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 above.

There were no properties in OREO as of September 30, 2021 and December 31, 2020.

As of September 30, 2021, the Corporation had $2.8 million of troubled debt restructurings (“TDRs”), of which $2.5 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 September 30, 2020, the Corporation had $3.7 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 September 30, 2021, the Corporation had a recorded investment of $11.2 million of impaired loans and leases which included $2.8 million of TDRs.

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

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Nonperforming Assets and Related Ratios


	As of
	September 30,		December 31,
(dollars in thousands)	2021		2020
Non-performing assets:
Nonaccrual loans:
Real estate loans:
Commercial mortgage	$	—		3,061
Shared national commercial credits		—		—
Home equity lines and loans		910		859
Residential mortgage		2,278		2,725
Total real estate loans	$	3,188		6,645
Commercial and industrial		5,089		1,285
Small business loans		916
Total nonaccrual loans	$	9,193		7,930
Total non-performing loans	$	9,193		7,930
Total non-performing assets	$	9,193		7,930

Troubled debt restructurings:
TDRs included in non-performing loans		367		244
TDRs in compliance with modified terms		2,476		3,362
Total TDRs	$	2,843		3,606

Asset quality ratios:
Non-performing assets to total assets		0.52%		0.46%
Non-performing loans to:
Total loans and leases		0.61%		0.52%
Total loans held-for-investment		0.67%		0.62%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)		0.74%		0.74%
Allowance for loan losses to:
Total loans and leases		1.27%		1.17%
Total loans held-for-investment		1.38%		1.38%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)		1.52%		1.65%
Non-performing loans		206.42%		224.04%

Total loans and leases	$	1,496,666		1,513,963
Total loans and leases held-for-investment	$	1,378,670		1,284,764
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans)	$	1,245,895		1,072,727
Allowance for loan and lease losses	$	18,976		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” above for a reconciliation of this measure to its most comparable GAAP measure. PPP loans have only been excluded from this calculation as of September 30, 2021.

NON-INTEREST INCOME

Three Months Ended September 30, 2021 Compared to the Same Period in 2020

Total non-interest income for the third quarter of 2021 was $22.1 million, down $6.9 million or 23.9% from the comparable period in 2020. This overall decrease in non-interest income came largely from our mortgage segment. Mortgage banking net revenue decreased $3.1 million or 14.2% over the third quarter of 2020. The decrease in third quarter 2021 came from decreased levels of mortgage loan originations as rate-driven refinancing activity declined. Our mortgage segment originated $522.9 million in loans during the third quarter of 2021, a decrease of $185.3 million, or 26.2%, from the third quarter of 2020. The fair value of derivative instruments and loans held for sale decreased a combined $6.8 million over

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the period. Net hedging activity improved as the net loss decreased $1.5 million to a net loss of $1.2 million for the third quarter of 2021.

Net revenue from the sales of SBA 7(a) loans increased $2.0 million as $25.0 million in loans were sold in the third quarter of 2021 compared to $9.5 million in loans sold in the third quarter of 2020, an increase of nearly 162.0%. Wealth management revenue increased $281 thousand year-over-year due to an increase of $340.0 million in assets under management over this period, due to new clients and more favorable market conditions. Other fee income was up $205 thousand or 24.1% from the third quarter of 2020, to $1.1 million, due to increases in wire fees, title fee income, and servicing fee income.

Nine Months Ended September 30, 2021 Compared to the Same Period in 2020

Total non-interest income for the nine months ended September 30, 2021 was $70.9 million, up $13.9 million or 24.5%, from the nine months ended September 30, 2020. This increase in non-interest income came primarily from our mortgage segment as mortgage banking net revenue increased $16.9 million or 37.2% over the prior year period. The significant increase in the current year period came from increased levels of mortgage loan originations due to both the expansion of the segment into Maryland as well as the favorable rate environment. Our mortgage segment originated $1.9 billion in loans during the nine months ended September 30, 2021, an increase of $365.4 million, or 24.4%, from the prior year period. Refinance activity represented 50% of the total residential mortgage loans originated for the nine months ended September 30, 2021, compared to 59% for the nine months ended September 30, 2020. The changes in the mortgage pipeline as a result of the expansion and the refinance activity generated significant fair value changes in derivative instruments and loans held-for-sale. These fair value changes decreased non-interest income a combined $17.4 million during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. These changes were offset by increases in net hedging gains of $9.8 million.

Wealth management revenue increased $706 thousand, or 25.0%, year-over-year due to an increase in assets under management of $315.7 million over this period due to new clients and the more favorable market conditions that existed in the nine months ended September 30, 2021, compared to the prior year period.

Net revenue from the sales of SBA 7(a) loans increased $3.6 million, or 197.8%, from the prior year period, to $5.4 million, as the bank sold $22.1 million, or 74.9% more loans in the current year period. Other fee income was up $1.5 million or 85.8% for the nine months ended September 30, 2021, from the nine months ended September 30, 2020 due to increases in wire fees, title fee income, as well as an increase in income recorded on interest rate swaps entered into with several loan customers, and an increase in mortgage and SBA servicing fee income.

NON-INTEREST EXPENSE

Three Months Ended September 30, 2021 Compared to the Same Period in 2020

Total non-interest expense for the third quarter of 2021 was $25.5 million, down $353 thousand or 1.4%, from the comparable period in 2020. The decrease in non-interest expense is largely attributable to a decrease in salaries and employee benefits expense, which decreased $975 thousand or 4.8%, from the comparable period in 2020. Of this decrease, $2.5 million relates to the variable portion of the mortgage segment, while there was an increase of $1.5 million for the bank and wealth segments due to an increase of 31 in FTE’s and a higher level of incentive and stock -based compensation expense.

Professional fees increased $192 thousand, or 28.2%, from the comparable period in 2020 largely due to increased consulting costs incurred throughout the organization. As we continue to improve and add to our customer facing and back office IT systems, business intelligence initiatives, software and information systems for loan processing and reporting have been implemented, as well as upgrades to cloud-based file storage and retrieval, desktop operating systems, mail archiving and security.

Advertising and promotion expense increased $308 thousand, or 39.4%, from the comparable period in 2020 as the result of an increase in the business development and community outreach efforts that our employees were more able to do in

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the third quarter of 2021 as the weather improved and COVID-19 restrictions continued to lessen and allow for more in person gatherings.

Nine Months Ended September 30, 2021 Compared to the Same Period in 2020

Total non-interest expense for the nine months ended September 30, 2021 was $80.0 million, up $18.8 million or 30.8%, from the nine months ended September 30, 2020. The increase is largely attributable to the variable expenses from loan originations overall, particularly mortgage commissions. Total salaries and employee benefits expense was $61.8 million, an increase of $15.3 million or 32.9%, compared to the nine months ended September 30, 2020. Of this increase, $10.9 million relates to the mortgage segment as the number of employees in this segment have increased period over period. Salaries and benefits for the Bank and Wealth segments increased due to an increased level of full-time equivalent employees as well as increase in incentives and stock-based compensation expense.

Occupancy and equipment expense increased $301 thousand, or 9.5%, over the period due largely to the expansion of our physical office footprint into Maryland with 8 mortgage loan production offices having opened since early 2020. Professional fees were up $511 thousand, or 24.1%, over the period due largely to 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 we made in 2020. This is combined with an increase in consulting fees as Meridian continues to invest in various company-wide technology focused projects as discussed above. Advertising and promotion expenses were up $799 thousand, or 40.1%, 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 business development and community outreach capacity.

INCOME TAXES

Income tax expense for the three months ended September 30, 2021 was $2.9 million, as compared to $2.8 million for the same period in 2020. The increase in income tax expense was attributable to the increase in earnings, period over period. Our effective tax rate was 23.3% for the third quarter of 2021 and 23.1% for the third quarter of 2020.

Income tax expense for the nine months ended September 30, 2021 was $8.5 million, as compared to $5.2 million, for the same periods in 2020. The increase in income tax expense was attributable to the increase in earnings, period over period. Our effective tax rate was 23.5% for the first nine months of 2021 and 23.0% for the first nine months of 2020.

BALANCE SHEET ANALYSIS

As of September 30, 2021, total assets were $1.8 billion, an increase of $42.2 million from December 31, 2020. Total assets increased $3.8 million, or 0.2%, from September 30, 2020 due to a higher level of cash, investments, commercial loans and PPP loans on the balance sheet as of September 30, 2020. Cash and cash equivalents increased $26.4 million due to liquidity from mortgage loans held for sale and PPP loan forgiveness. The securities available-for-sale portfolio grew to $146.1 million as of September 30, 2021, up $22.6 million, or 18.3%, from December 31, 2020. State and municipal securities increased $7.0 million and U.S. treasuries were up $15 million.

Total loans, net of allowance, grew $92.7 million, or 7.3%, to $1.4 billion as of September 30, 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. Small business loans increased $41.2 million, or 82.7%, commercial real estate loans increased $60.7 million, or 12.1%, and lease financings increased $45.2 million, or 136.8%, as our Meridian Equipment Finance (“MEF”) leasing team continued their strong growth pattern after starting up in early 2020. Residential real estate loans held for sale decreased $111.2 million, or 48.5%, to $118.0 million as of September 30, 2021, while PPP loans decreased $83.0 million, or 41.8%, over this period.

Servicing assets were $11.9 million as of September 30, 2021, up $6.3 million, or 112.4%, from December 31, 2020. $10.1 million of this balance is comprised of mortgage servicing rights, while $1.8 million is comprised of SBA loan servicing assets. The increase in both servicing asset types was the result of the continued strong loan sales markets since December 31, 2020.

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Deposits were $1.4 billion as of September 30, 2021, up $197.7 million, or 15.9%, from December 31, 2020. Non-interest bearing deposits increased $62.0 million, or 30.4%, from December 31, 2020. Interest-bearing checking accounts increased $73.1 million, or 35.4%, from December 31, 2020, while money market accounts/savings accounts increased $97.5 million, or 17.0% 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 $34.9 million, or 13.5%, from December 31, 2020, as lower levels of wholesale funding have been replaced by core deposits.

Short-term borrowings were $22.3 million as of September 30, 2021, down $84.6 million, or 79.2%, from December 31, 2020, while long-term debt was $78.4 million as of September 30, 2021, down $87.1 million, or 52.6%, from December 31, 2020. Short-term borrowings declined from December 31, 2020 to September 30, 2021, largely due to the increase in non-interest deposits noted above. As non-interest bearing deposits increased over this period, the need for borrowings to fund loan growth, declined. The decline in long-term debt was due to a decrease in PPPLF advances, which were funding sources for PPP loans.

Capital

Consolidated stockholders’ equity of the Corporation was $158.4 million, or 9.0% of total assets as of September 30, 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 net income of $27.9 million, partially offset by dividends of $8.5 million paid during the first nine months of 2021 as well as an increase in treasury stock from the publicly announced share repurchase program.

As of September 30, 2021, the Tier 1 leverage ratio was 9.28% for the Corporation and 11.55% for the Bank, the Tier 1 risk-based capital and common equity ratios were 10.64% for the Corporation and 13.25% for the Bank, and total risk-based capital was 14.72% for the Corporation and 14.62% for the Bank. Quarter-end numbers show a tangible common equity to tangible assets ratio (a non-GAAP measure) of 8.76% for the Corporation and 10.90% for the Bank. A reconciliation of this non-GAAP measure is included in the Appendix. Tangible book value per share was $25.23 as of September 30, 2021, compared with $24.06 as of June 30, 2021.

The following table presents the Corporation’s capital ratios and the minimum capital requirements to be considered “well capitalized” by regulators as of September 30, 2021 and December 31, 2020:


	September 30, 2021
				To Be Well Capitalized
	Actual			Under CBLR Framework
(dollars in thousands)	Amount		Ratio	Amount		Ratio
Tier 1 capital (to average assets)
Corporation	$	153,300	9.28%	$	132,220	8.00%
Bank		190,892	11.55%		132,219	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%

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

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quarter of 2020, the Bank adopted the CBLR framework as its primary regulatory capital ratio, but reports all ratios for comparative purposes.

Liquidity

Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Meridian’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization or that can be used as collateral to secure funding. In addition, as part of its liquidity management, Meridian maintains a segment of commercial loan assets that are comprised of shared national credits (“SNCs”), which have a national market and can be sold in a timely manner. Meridian’s primary liquidity, which totaled $323.0 million at September 30, 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 $3.7 million at September 30, 2021. At September 30, 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 September 30, 2021, Meridian’s maximum borrowing capacity with the FHLB was $533.4 million. At September 30, 2021, Meridian had borrowed $22.3 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $128.5 million against its available credit lines. At September 30, 2021, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as $263.2 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $397.0 million of available short or long term funding through brokered CD arrangements. Management believes that Meridian has adequate resources to meet its short-term and long-term funding requirements.

Discussion of Segments

As of September 30, 2021, the Corporation has three principal segments as defined by FASB ASC 280, “ Segment Reporting.” The segments are Banking, Mortgage Banking and Wealth Management (see Note 10 in the accompanying Notes to Unaudited Consolidated Financial Statements).

The Banking Segment recorded income before tax of $8.3 million and $23.5 million for the three and nine months ended September 30, 2021, as compared to income before tax of $2.6 million and $7.9 million for the same periods in 2020. The Banking Segment provided 67.5% and 64.7% of the Corporation’s pre-tax profit for the three and nine month periods ended September 30, 2021, as compared to 21.5% and 34.9% for the same periods in 2020.

The Wealth Management Segment recorded income before tax of $432 thousand and $796 thousand for the three and nine months ended September 30, 2021, as compared to income before tax of $144 thousand and $452 thousand for the same periods in 2020.

The Mortgage Banking Segment recorded income before tax of $3.6 million and $12.1 million for the three and nine months ended September 30, 2021, as compared to income before tax of $9.3 million and $14.3 million for the same periods in 2020. Mortgage Banking income and expenses related to loan originations and sales increased due to higher origination volume.

Off Balance Sheet Risk

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

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Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at September 30, 2021 were $505.0 million, as compared to $421.4 million at December 31, 2020.

Standby letters of credit are conditional commitments issued by the Corporation to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Corporation’s obligation under standby letters of credit at September 30, 2021 amounted to $17.7 million, as compared to $8.9 million at December 31, 2020.

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

In certain circumstances the Corporation may be required to repurchase residential mortgage loans from investors under the terms of loan sale agreements. Generally, these circumstances include the breach of representations and warranties made to investors regarding borrower default or early payment, as well as a violation of the applicable federal, state, or local lending laws. The Corporation agrees to repurchase loans if the representations and warranties made with respect to such loans are breached. Based on the obligations described above, the Corporation repurchased one loan in the amount of $115 thousand for the three months ended September 30, 2021 and a total of four loans totaling $561 thousand for the nine months ended September 30, 2021. The Corporation repurchased one loan in the amount of $154 thousand for the three and nine months ended September 30, 2020.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

See the discussion of quantitative and qualitative disclosures about market risks in “Management’s Discussion and Analysis of Results of Operations – Interest Rate Summary,” “– Interest Rate Sensitivity,” and “Gap Analysis” in this Quarterly Report on Form 10-Q.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Corporation’s CEO and CFO have concluded that the Corporation’s disclosure controls and procedures were effective as of September 30, 2021 to ensure that the information required to be disclosed by the Corporation in the reports that the Corporation files or submits under the Exchange Act is recorded, processed, summarized, and reported completely and accurately within the time periods specified in SEC rules and forms.

Changes in Internal Control Over Financial Reporting

There was no change in the Corporation’s internal control over financial reporting identified during the quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II–OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risk Factors.

There have been no material changes in the risk factors faced by the Corporation from those disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020.

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

The following table presents the shares repurchased by the Corporation during the third 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
July 1, 2021 - July 31, 2021	4,427	$	27.11	4,427	132,486
August 1, 2021 - August 31, 2021	19,316		27.15	19,316	132,486
September 1, 2021 - September 30, 2021	54,748		28.02	54,748	132,486
Total	78,491	$	27.41	78,491	132,486

(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. S tock 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.

(2) As of September 30, 2021, the maximum number of shares remaining authorized for repurchase was approximately 132,486, based on funds remaining under the plan of approximately $3.8 million and a share price of $28.73 as of September 30, 2021.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

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

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EXHIBIT INDEX

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

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SIGNATURES

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

Date:	November 15, 2021	Meridian Corporation

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

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

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