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 June 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 August 13, 2021 there were 6,168,623 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 – June 30, 2021 and December 31, 2020	3

Consolidated Statements of Income – Three and Six Months Ended June 30, 2021 and 2020	4

Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2021 and 2020	5

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

Consolidated Statements of Cash Flows – Three and Six Months Ended June 30, 2021 and 2020	7

Notes to Consolidated Financial Statements (Unaudited)	8

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3 Quantitative and Qualitative Disclosures about Market Risk	54

Item 4 Controls and Procedures	54

PART II OTHER INFORMATION

Item 1 Legal Proceedings	55

Item 1A Risk Factors	55

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	55

Item 3 Defaults Upon Senior Securities	55

Item 4 Mine Safety Disclosures	55

Item 5 Other Information	55

Item 6 Exhibits	55

Signatures	57

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	June 30,		December 31,
(dollars in thousands, except per share data)	2021		2020
Cash and due from banks	$	26,902	34,190
Federal funds sold		—	2,554
Cash and cash equivalents		26,902	36,744
Securities available-for-sale (amortized cost of $ 139,242 and $ 120,215 as of June 30, 2021 and December 31, 2020)		141,909	123,562
Securities held-to-maturity (fair value of $ 6,726 and $ 6,857 as of June 30, 2021 and December 31, 2020)		6,441	6,510
Equity investments		1,016	1,031
Mortgage loans held for sale (amortized cost of $ 130,789 and $ 225,007 as of June 30, 2021 and December 31, 2020), at fair value		132,348	229,199
Loans, net of fees and costs (includes $ 15,129 and $ 12,182 of loans at fair value, amortized cost of $ 14,539 and $ 11,514 as of June 30, 2021 and December 31, 2020)		1,362,750	1,284,764
Allowance for loan and lease losses		( 18,361 )	( 17,767 )
Loans, net of the allowance for loan and lease losses		1,344,389	1,266,997
Restricted investment in bank stock		5,357	7,861
Bank premises and equipment, net		8,160	7,777
Bank owned life insurance		12,269	12,138
Accrued interest receivable		5,519	5,482
Deferred income taxes		1,047	62
Servicing assets		10,327	5,617
Goodwill		899	899
Intangible assets		3,481	3,601
Other assets		8,946	12,717
Total assets	$	1,709,010	1,720,197
Liabilities:
Deposits:
Non-interest bearing	$	261,806	203,843
Interest bearing		1,151,474	1,037,492
Total deposits		1,413,280	1,241,335
Short-term borrowings		33,542	106,862
Long-term debt		48,614	165,546
Subordinated debentures		40,730	40,671
Accrued interest payable		120	1,154
Other liabilities		19,839	23,007
Total liabilities		1,556,125	1,578,575
Stockholders’ equity:
Common stock, $ 1 par value. Authorized 25,000,000 and 10,000,000 shares as of June 30, 2021 and December 31, 2020 ; issued 6,492,900 and 6,455,566 as of June 30, 2021 and December 31, 2020		6,493	6,456
Surplus		82,198	81,196
Treasury stock - 320,000 shares at June 30, 2021 and December 31, 2020		( 5,828 )	( 5,828 )
Unearned common stock held by employee stock ownership plan		( 1,768 )	( 1,768 )
Retained earnings		69,739	59,010
Accumulated other comprehensive income		2,051	2,556
Total stockholders’ equity		152,885	141,622
Total liabilities and stockholders’ equity	$	1,709,010	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				Six months ended
	June 30,				June 30,
(dollars in thousands, except per share data)	2021		2020		2021	2020
Interest income:
Loans, including fees	$	16,839	14,457	$	33,662	27,727
Securities:
Taxable		280	305		553	669
Tax-exempt		393	290		746	392
Cash and cash equivalents		5	3		8	61
Total interest income		17,517	15,055		34,969	28,849
Interest expense:
Deposits		1,368	2,575		2,934	5,829
Borrowings		737	883		1,502	1,757
Total interest expense		2,105	3,458		4,436	7,586
Net interest income		15,412	11,597		30,533	21,263
Provision for loan losses		96	1,631		695	3,183
Net interest income after provision for loan losses		15,316	9,966		29,838	18,080
Non-interest income:
Mortgage banking income		19,467	16,788		43,567	23,583
Wealth management income		1,163	853		2,299	1,874
SBA loan income		1,490	638		2,735	1,180
Earnings on investment in life insurance		65	69		131	139
Net change in the fair value of derivative instruments		( 2,148 )	2,364		( 3,092 )	3,318
Net change in the fair value of loans held-for-sale		1,235	633		( 2,632 )	1,493
Net change in the fair value of loans held-for-investment		41	143		( 61 )	81
Net gain (loss) on hedging activity		( 674 )	( 3,301 )		3,587	( 4,726 )
Net gain on sale of investment securities available-for-sale		—	55		48	55
Service charges		33	21		64	49
Other		1,060	428		2,134	866
Total non-interest income		21,732	18,691		48,780	27,912
Non-interest expenses:
Salaries and employee benefits		20,213	16,198		42,352	26,082
Occupancy and equipment		1,175	1,127		2,326	2,051
Professional fees		816	770		1,756	1,437
Advertising and promotion		921	605		1,707	1,214
Data processing		520	456		1,136	800
Information technology		464	388		889	706
Pennsylvania bank shares tax		163	254		326	480
Other		1,974	1,456		4,018	2,548
Total non-interest expenses		26,246	21,254		54,510	35,318
Income before income taxes		10,802	7,403		24,108	10,674
Income tax expense		2,544	1,690		5,680	2,445
Net income	$	8,258	5,713	$	18,428	8,229
Basic earnings per common share	$	1.37	0.94	$	3.06	1.33
Diluted earnings per common share	$	1.33	0.94	$	2.98	1.32

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		Six months ended
		June 30,		June 30,
(dollars in thousands)		2021	2020	2021	2020
Net income:	$	8,258	5,713	18,428	8,229

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 $ 429 , $ 515 , ($ 163 ), and $ 617 , respectively		1,414	1,756	( 469 )	2,185
Less: reclassification adjustment for net gains on sales realized in net income, net of tax expense of $ 0 , $ 12 , ($ 12 ), and $ 12 , respectively		—	( 43 )	( 36 )	( 43 )
Unrealized investment (losses) gains, net of tax expense of $ 429 , $ 503 , ($ 175 ), and $ 605 , respectively		1,414	1,713	( 505 )	2,142
Total other comprehensive (loss) income		1,414	1,713	( 505 )	2,142
Total comprehensive income	$	9,672	7,426	17,923	10,371

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


					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

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six months ended
	June 30,
(dollars in thousands)	2021		2020
Net income	$	18,428	8,229
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Gain on sale of investment securities		( 48 )	( 55 )
Depreciation and amortization, net		( 2,822 )	( 281 )
Net amortization of investment premiums and discounts and change in fair value of equity securities		664	97
Provision for loan losses		695	3,183
Amortization of issuance costs on subordinated debt		59	53
Share-based compensation		648	123
Net change in fair value of derivative instruments		3,092	( 3,318 )
Net change in fair value of loans held for sale		2,632	( 1,493 )
Net change in fair value of loans held for investment		61	( 81 )
Gain on sale of OREO		—	( 6 )
Amortization and net impairment of servicing rights		364	334
Capitalization of servicing rights, net		( 5,074 )	( 1,478 )
SBA loan income		( 2,735 )	( 1,180 )
Proceeds from sale of loans		1,477,702	731,636
Loans originated for sale		( 1,339,916 )	( 790,926 )
Mortgage banking income		( 43,567 )	( 23,583 )
Increase in accrued interest receivable		( 37 )	( 977 )
Increase in other assets		( 494 )	( 1,839 )
Earnings from investment in life insurance		( 131 )	( 139 )
(Decrease) income in deferred income tax		( 810 )	809
(Decrease) increase in accrued interest payable		( 1,034 )	517
(Decrease) Increase in other liabilities		( 1,994 )	1,023
Net cash provided by (used in) operating activities		105,683	( 79,352 )
Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities, repayments and calls		4,421	3,733
Sales		13,639	18,212
Purchases		( 37,620 )	( 57,501 )
Activity in held-to-maturity securities:
Maturities, repayments and calls		—	2,140
Proceeds from sale of OREO		—	126
Decrease in restricted stock		2,504	838
Net increase in loans		( 71,761 )	( 295,701 )
Purchases of premises and equipment		( 1,093 )	( 469 )
Net cash used in investing activities		( 89,910 )	( 328,622 )
Cash flows from financing activities:
Net increase in deposits		171,945	315,529
(Decrease) increase in short-term borrowings		( 5,465 )	10,001
Decrease in short-term borrowings with original maturity > 90 days		( 67,855 )	( 46,220 )
Repayment of long-term debt (subordinated debt)		—	( 413 )
(Repayment) proceeds from long-term debt, net		( 116,932 )	142,324
Issuance costs on subordinated debt		—	( 206 )
Net purchase of treasury stock		—	( 5,703 )
Dividends paid		( 7,699 )	—
Share based awards and exercises		391	32
Net cash (used in) provided by financing activities		( 25,615 )	415,344
Net change in cash and cash equivalents		( 9,842 )	7,370
Cash and cash equivalents at beginning of period		36,744	39,371
Cash and cash equivalents at end of period	$	26,902	46,741
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	5,471	7,069
Income taxes		8,009	1,195
Supplemental disclosure of cash flow information:
Transfers from loans held for sale to loans held for investment		4,193	—

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 June 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 June 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				Six Months Ended
	June 30,				June 30,
(dollars in thousands, except per share data)	2021		2020		2021		2020
Numerator:
Net income available to common stockholders	$	8,258		5,713	$	18,428		8,229
Denominator for basic earnings per share
Weighted average shares outstanding		6,147		6,094		6,135		6,210
Average unearned ESOP shares		( 115 )		—		( 117 )		—
Basic weighted averages shares outstanding		6,032		6,094		6,018		6,210
Effect of dilutive common shares		171		13		159		25
Denominator for diluted earnings per share - adjusted weighted average shares outstanding		6,203		6,107		6,177		6,235
Basic earnings per share	$	1.37		0.94	$	3.06		1.33
Diluted earnings per share	$	1.33		0.94	$	2.98		1.32
Antidilutive shares excluded from computation of average dilutive earnings per share		140		281		140		204

(3) Securities

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


	June 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	$	26,300	468	( 33 )	26,735	8
U.S. government agency mortgage-backed securities		3,750	155	─	3,905	─
U.S. government agency collateralized mortgage obligations		21,501	627	( 104 )	22,024	6
State and municipal securities		73,750	1,590	( 159 )	75,181	11
U.S. Treasuries		7,991	38	─	8,029	─
Corporate bonds		5,950	95	( 10 )	6,035	2
Total securities available-for-sale	$	139,242	2,973	( 306 )	141,909	27
Securities held-to-maturity:
State and municipal securities		6,441	285	—	6,726	—
Total securities held-to-maturity	$	6,441	285	—	6,726	—

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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 June 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 June 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 June 30, 2021 and December 31, 2020:


	June 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	$	4,304	( 19 )	4,746	( 14 )	9,050	( 33 )
U.S. government agency collateralized mortgage obligations		6,673	( 104 )	—	—	6,673	( 104 )
State and municipal securities		14,039	( 159 )	—	—	14,039	( 159 )
Corporate bonds		940	( 10 )	—	—	940	( 10 )
Total securities available-for-sale	$	25,956	( 292 )	4,746	( 14 )	30,702	( 306 )

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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 June 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.


	June 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		—	—	3,149	3,228		—	—	3,181	3,288
Due after five years through ten years		20,009	20,157	3,292	3,498		12,035	12,095	3,329	3,569
Due after ten years		93,982	95,822	—	—		81,316	83,512	—	—
Subtotal		113,991	115,979	6,441	6,726		93,351	95,607	6,510	6,857
Mortgage-related securities		25,251	25,930	—	—		26,864	27,955	—	—
Total	$	139,242	141,909	6,441	6,726	$	120,215	123,562	6,510	6,857

Proceeds from the sale of available for sale investment securities totaled $ 0 for the three months ended June 30, 2021 and $ 13.6 milllion for the six months ended June 30, 2021, resulting in a gross gain on sale of $ 248 thousand and a gross loss on sale of $ 200 thousand for the six months ended June 30, 2021. Proceeds from the sale of available for sale investment securities totaled $ 18.2 million for the three and six months ended June 30, 2020, resulting in a gross gain on sale of $ 257 thousand and a gross loss on sale of $ 202 thousand for the periods.

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(4) Loans Receivable

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


	June 30,		December 31,
(dollars in thousands)	2021		2020
Mortgage loans held for sale	$	132,348	229,199
Real estate loans:
Commercial mortgage		530,163	485,103
Home equity lines and loans		54,076	64,987
Residential mortgage (1)		55,497	52,454
Construction		132,547	140,246
Total real estate loans		772,283	742,790

Commercial and industrial		263,030	261,750
Small business loans		74,987	49,542
Paycheck Protection Program loans ("PPP")		189,337	203,543
Main Street Lending Program Loans ("MSLP")		588	580
Consumer		526	511
Leases, net		64,542	31,040
Total portfolio loans and leases		1,365,293	1,289,756
Total loans and leases	$	1,497,641	1,518,955

Loans with predetermined rates	$	607,507	658,458
Loans with adjustable or floating rates		890,134	860,497
Total loans and leases	$	1,497,641	1,518,955

Net deferred loan origination (fees) costs	$	( 2,543 )	( 4,992 )

(1) Includes $ 15,129 and $ 12,182 of loans at fair value as of June 30, 2021 and December 31, 2020, respectively.

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


	June 30,		December 31,
(dollars in thousands)	2021		2020
Minimum lease payments receivable	$	78,233	37,919
Unearned lease income		( 13,691 )	( 6,879 )
Total	$	64,542	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 June 30, 2021 and December 31, 2020, respectively:


						Total
			90+ days			Accruing	Nonaccrual	Total loans
June 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	$	—	—	—	530,163	530,163	—	530,163	—	%
Home equity lines and loans		—	—	—	53,160	53,160	916	54,076	1.69
Residential mortgage (1)		—	—	—	52,795	52,795	2,702	55,497	4.87
Construction		231	—	231	132,316	132,547	—	132,547	0.17
Commercial and industrial		1,856	—	1,856	257,514	259,370	3,660	263,030	2.10
Small business loans		—	—	—	74,070	74,070	917	74,987	1.22
Paycheck Protection Program loans		—	—	—	189,337	189,337	—	189,337	—
Main Street Lending Program loans		—	—	—	588	588	—	588	—
Consumer		—	—	—	526	526	—	526	—
Leases, net		155	—	155	64,387	64,542	—	64,542	0.24
Total	$	2,242	—	2,242	1,354,856	1,357,098	8,195	1,365,293	0.76	%

(1) Includes $ 15,129 of loans at fair value as of June 30, 2021 ($ 14,235 are current and $ 894 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 June 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 six month periods ended June 30, 2021 and 2020, respectively:


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


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


	Balance,					Balance,
(dollars in thousands)	March 31, 2020		Charge-offs	Recoveries	Provision	June 30, 2020
Commercial mortgage	$	4,112	—	—	1,165	5,277
Home equity lines and loans		484	( 13 )	2	199	672
Residential mortgage		219	—	2	125	346
Construction		2,381	—	—	( 362 )	2,019
Commercial and industrial		3,169	( 9 )	4	442	3,606
Small business loans		725	—	—	22	747
Consumer		4	( 10 )	1	9	4
Leases		4	—	—	31	35
Total	$	11,098	( 32 )	9	1,631	12,706

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	Balance,					Balance,
(dollars in thousands)	December 31, 2019		Charge-offs	Recoveries	Provision	June 30, 2020
Commercial mortgage	$	3,426	—	—	1,851	5,277
Home equity lines and loans		342	( 13 )	4	339	672
Residential mortgage		179	—	4	163	346
Construction		2,362	—	—	( 343 )	2,019
Commercial and industrial		2,684	( 9 )	32	899	3,606
Small business loans		509	—	—	238	747
Consumer		6	( 10 )	2	6	4
Leases		5	—	—	30	35
Total	$	9,513	( 32 )	42	3,183	12,706

Allowance Allocated by Portfolio Segment

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


	Allowance on loans and leases				Carrying value of loans and leases
	Individually		Collectively		Individually		Collectively
June 30, 2021	evaluated		evaluated		evaluated		evaluated
(dollars in thousands)	for impairment		for impairment	Total	for impairment		for impairment	Total
Commercial mortgage	$	—	7,146	7,146	$	722	529,441	530,163
Home equity lines and loans		6	275	281		916	53,160	54,076
Residential mortgage		68	256	324		1,808	38,560	40,368
Construction		—	2,241	2,241		1,206	131,341	132,547
Commercial and industrial		1,528	3,832	5,360		4,062	258,968	263,030
Small business loans		376	1,859	2,235		1,072	73,915	74,987
Paycheck Protection Program loans		—	—	—		—	189,337	189,337	(2)
Main Street Lending Program		—	—	—		—	588	588	(2)
Consumer		—	4	4		—	526	526
Leases, net		—	770	770		—	64,542	64,542
Total	$	1,978	16,383	18,361	$	9,786	1,340,378	1,350,164	(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 June 30, 2021 and December 31, 2020:


June 30, 2021			Special
(dollars in thousands)	Pass		mention	Substandard	Doubtful	Total
Commercial mortgage	$	492,532	34,509	3,122	—	530,163
Home equity lines and loans		52,677	—	1,399	—	54,076
Construction		123,389	9,158	—	—	132,547
Commercial and industrial		207,105	36,451	16,133	3,341	263,030
Small business loans		71,459	—	3,528	—	74,987
Paycheck Protection Program loans		189,337	—	—	—	189,337
Main Street Lending Program loans		588	—	—	—	588
Total	$	1,137,087	80,118	24,182	3,341	1,244,728


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 June 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 June 30, 2021 and December 31, 2020.


	June 30, 2021				December 31, 2020
(dollars in thousands)	Performing		Nonperforming	Total	Performing		Nonperforming	Total
Residential mortgage	$	38,560	1,808	40,368	$	38,457	1,815	40,272
Consumer		526	—	526		511	—	511
Leases, net		64,542	—	64,542		31,040	—	31,040
Total	$	103,628	1,808	105,436	$	70,008	1,815	71,823

There were five nonperforming residential mortgage loans at June 30, 2021 and five nonperforming residential mortgage loans at December 31, 2020 with a combined outstanding principal balance of $ 894 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 June 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	$	3,271	3,362	1,528	3,860	3,902	1,563
Small business loans		916	3,415	376	—	—	—
Home equity lines and loans		92	104	6	95	105	9
Residential mortgage		684	684	68	689	689	73
Total	$	4,963	7,565	1,978	4,644	4,696	1,645
Impaired loans without related allowance:
Commercial mortgage	$	722	722	—	1,606	1,642	—
Commercial and industrial		791	896	—	785	862	—
Small business loans		156	1,091	—	185	185	—
Home equity lines and loans		824	837	—	826	839	—
Residential mortgage		1,124	1,124	—	1,128	1,128	—
Construction		1,206	1,206	—	1,206	1,206	—
Leases		—	—	—	—	—	—
Total		4,823	5,876	—	5,736	5,862	—
Grand Total	$	9,786	13,441	1,978	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
		June 30, 2021		June 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	$	3,309	5	446	5
Small business loans		917	—	—	—
Home equity lines and loans		93	—	357	—
Residential mortgage		686	—	—	—
Total	$	5,005	5	803	5
Impaired loans without related allowance:
Commercial mortgage	$	726	8	2,106	21
Commercial and industrial		969	—	1,109	4
Small business loans		161	4	220	5
Home equity lines and loans		824	—	400	—
Residential mortgage		1,125	3	4,310	92
Construction		1,206	14	1,206	15
Leases		39	—	—	—
Total	$	5,050	29	9,351	137
Grand Total	$	10,055	34	10,154	142

		Six Months Ended		Six Months Ended
		June 30, 2021		June 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	$	3,339	10	449	10
Small business loans		917	—	—	—
Home equity lines and loans		94	—	360	—
Residential mortgage		687	—	—	—
Total	$	5,037	10	809	10
Impaired loans without related allowance:
Commercial mortgage	$	730	16	2,117	42
Commercial and industrial		1,002	—	1,122	8
Small business loans		169	8	227	11
Home equity lines and loans		824	—	400	—
Residential mortgage		1,126	3	4,317	92
Construction		1,206	29	1,210	32
Leases		80	—	—	—
Total	$	5,137	56	9,393	185
Grand Total	$	10,174	66	10,202	195

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,

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and (e) for leases, a reduced lease payment. A less common concession granted is the forgiveness of a portion of the principal.

The determination of whether a borrower is experiencing financial difficulties takes into account not only the current financial condition of the borrower, but also the potential financial condition of the borrower were a concession not granted. The determination of whether a concession has been granted is 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 June 30, 2021 and December 31, 2020 are as follows:


	June 30,	December 31,
(dollars in thousands)	2021	2020
TDRs included in nonperforming loans and leases	$ 239	244
TDRs in compliance with modified terms	2,486	3,362
Total TDRs	$ 2,725	3,606

There were no loan and lease modifications granted during the three and six months ended June 30, 2021 and 1 loan and lease modification granted during the three and six months ended June 30, 2020 that were categorized as a TDR. No loan and lease modifications granted during the three and six months ended June 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 June 30, 2021. COVID-19 loan modifications provided to borrowers amounted to $ 29.0 million as of June 30, 2021, up slightly from $ 26.9 million as of December 31, 2020, while down from the $ 144.1 million as of June 30, 2020.

This provision 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 June 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: one of $ 24 million and one of $ 15 million. Federal Funds purchased generally represent one-day borrowings. The Corporation had no Federal Funds purchased at June 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 June 30, 2021 and $ 10 million at December 31, 2020.

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


				Balance as of
	Maturity	Interest		June 30,		December 31,
(dollars in thousands)	date	rate		2021		2020
Open Repo Plus Weekly	05/31/2022	0.33	%		13,542	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	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
Total				$	33,542	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 June 30, 2021, the Corporation pledged $ 36.3 million of PPP loans to the FRB of Philadelphia to borrow $ 36.3 million of funds at a rate of 0.35 %. Advances made on the PPPLF can be made through July 30, 2021.

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


				Balance as of
	Maturity	Interest		June 30,		December 31,
(dollars in thousands)	date	rate		2021		2020
PPPLF Advances	2022	0.35	%		—	153,269
PPPLF Advances	2026	0.35		$	36,337	—
Mid-term Repo-fixed	06/29/2022	0.32			7,392	7,392
Mid-term Repo-fixed	09/12/2022	0.23			4,885	4,885
Total	`			$	48,614	165,546

The FHLB of Pittsburgh has also issued $ 108 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 $ 549.0 million as of June 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 assets in accordance with ASC 860, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.

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Residential Mortgage Loans

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 $ 863.2 million and $ 506.0 million of residential mortgage loans as of June 30, 2021 and December 31, 2020, respectively. During the three and six months ended June 30, 2021, the Corporation recognized servicing fee income of $ 481 thousand and $ 842 thousand, respectively, compared to $ 67 thousand and $ 107 thousand during the three and six months ended June 30, 2020, respectively.

Changes in the MSR balance are summarized as follows:


	Three Months Ended June 30,			Six Months Ended June 30,
(dollars in thousands)	2021		2020	2021		2020
Balance at beginning of the period	$	7,118	423	$	4,647	446
Servicing rights capitalized		2,154	952		4,496	1,136
Amortization of servicing rights		( 271 )	( 50 )		( 470 )	( 83 )
Change in valuation allowance		( 59 )	( 31 )		269	( 205 )
Balance at end of the period	$	8,942	1,294	$	8,942	1,294

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


	Three Months Ended June 30,			Six Months Ended June 30,
(dollars in thousands)	2021		2020	2021		2020
Valuation allowance, beginning of period	$	( 107 )	( 272 )	$	( 435 )	( 98 )
Impairment		( 59 )	( 31 )		—	( 205 )
Recovery		—	—		269	—
Valuation allowance, end of period	$	( 166 )	( 303 )	$	( 166 )	( 303 )

The Corporation uses assumptions and estimates in determining the fair value of MSRs. These assumptions include prepayment speeds and discount rates. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge. At June 30, 2021, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 7.61 % 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 June 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 June 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)	June 30, 2021		December 31, 2020
Fair value of residential mortgage servicing rights	$	9,024	$	4,647

Weighted average life (years)		7.0		5.0

Prepayment speed		7.61 %		9.39 %
Impact on fair value:
10% adverse change	$	( 321 )	$	( 183 )
20% adverse change		( 629 )		( 354 )

Discount rate		9.00 %		9.00 %
Impact on fair value:
10% adverse change	$	( 347 )	$	( 168 )
20% adverse change		( 669 )		( 329 )

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

SBA Loans

SBA loan servicing assets are amortized 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 $ 79.5 million and $ 55.9 million of SBA loans, as of June 30, 2021 and December 31, 2020, respectively.

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


	Three Months Ended June 30,			Six Months Ended June 30,
(dollars in thousands)	2021		2020	2021		2020
Balance at beginning of the period	$	1,160	469	$	970	337
Servicing rights capitalized		304	183		578	342
Amortization of servicing rights		( 87 )	( 28 )		( 154 )	( 47 )
Change in valuation allowance		8	8		( 9 )	—
Balance at end of the period	$	1,385	632	$	1,385	632

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


	Three Months Ended June 30,			Six Months Ended June 30,
(dollars in thousands)	2021		2020	2021		2020
Valuation allowance, beginning of period	$	( 56 )	( 34 )	$	( 39 )	( 26 )
Impairment		—	—		( 9 )	—
Recovery		8	8		—	—
Valuation allowance, end of period	$	( 48 )	( 26 )	$	( 48 )	( 26 )

The Corporation uses assumptions and estimates in determining the fair value of SBA loan servicing rights. These assumptions include prepayment speeds, discount rates, and other assumptions. The assumptions used in the valuation were based on input from buyers, brokers and other qualified personnel, as well as market knowledge. At June 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 13.28 %, and a discount rate equal to 5.82 %. 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 June 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)	June 30, 2021		December 31, 2020
Fair value of SBA loan servicing rights	$	1,520	$	1,010

Weighted average life (years)		3.6		3.7

Prepayment speed		13.28 %		12.73 %
Impact on fair value:
10% adverse change	$	( 62 )	$	( 37 )
20% adverse change		( 118 )		( 71 )

Discount rate		5.82 %		8.33 %
Impact on fair value:
10% adverse change	$	( 41 )	$	( 25 )
20% adverse change		( 79 )		( 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.

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(8) Fair Value Measurements and Disclosures

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

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

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

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

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

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

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

Securities

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

Mortgage Loans Held for Sale

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

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Mortgage Loans Held for Investment

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

Derivative Financial Instruments

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

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


	June 30, 2021
(dollars in thousands)	Total		Level 1	Level 2	Level 3
Assets
Securities available for sale:
U.S. asset backed securities	$	26,735	—	26,735	—
U.S. government agency mortgage-backed securities		3,905	—	3,905	—
U.S. government agency collateralized mortgage obligations		22,024	—	22,024	—
State and municipal securities		75,181	—	75,181	—
U.S. Treasuries		8,029		8,029
Corporate bonds		6,035	—	6,035	—
Equity investments		1,016	—	1,016	—
Mortgage loans held for sale		132,348	—	132,348	—
Mortgage loans held for investment		15,129	—	15,129	—
Interest rate lock commitments		2,667	—	—	2,667
Forward commitments		13	—	13	—
Customer derivatives - interest rate swaps		1,118	—	1,118	—
Total	$	294,200	—	291,533	2,667

Liabilities
Interest rate lock commitments		259	—	—	259
Forward commitments		291	—	291	—
Customer derivatives - interest rate swaps		1,181	—	1,181	—
	$	1,731	—	1,472	259

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	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

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


	June 30, 2021		December 31, 2020
(dollars in thousands)	Fair Value		Fair Value
Mortgage servicing rights	$	8,942	4,647
SBA loan servicing rights		1,385	970
Impaired loans (1)		2,985	2,998
Total	$	13,312	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.

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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.

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.

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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.

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


		June 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	$	26,902	26,902	36,744	36,744
Securities available-for-sale	Level 2		141,909	141,909	123,562	123,562
Securities held-to-maturity	Level 2		6,441	6,726	6,510	6,857
Equity investments	Level 2		1,016	1,016	1,031	1,031
Mortgage loans held for sale	Level 2		132,348	132,348	229,199	229,199
Loans receivable, net of the allowance for loan and lease losses	Level 3		1,329,260	1,376,721	1,272,582	1,289,776
Mortgage loans held for investment	Level 2		15,129	15,129	12,182	12,182
Interest rate lock commitments	Level 3		2,667	2,667	6,932	6,932
Forward commitments	Level 2		13	13	—	—
Restricted investment in bank stock	NA		5,357	NA	7,861	NA
Accrued interest receivable	Level 3		5,519	5,519	5,482	5,482
Customer derivatives - interest rate swaps	Level 2		1,118	1,118	1,118	1,118
Financial liabilities:
Deposits	Level 2		1,413,280	1,523,900	1,241,335	1,392,500
Short-term borrowings	Level 2		33,542	33,542	106,862	106,862
Long-term debt	Level 2		48,614	49,102	165,546	168,000
Subordinated debentures	Level 2		40,730	41,961	40,671	38,375
Accrued interest payable	Level 2		120	120	1,154	1,154
Interest rate lock commitments	Level 3		259	259	100	100
Forward commitments	Level 2		291	291	1,572	1,572
Customer derivatives - interest rate swaps	Level 2		1,181	1,181	1,219	1,219

		Notional			Notional
Off-balance sheet financial instruments:		amount		Fair value	amount	Fair value
Commitments to extend credit	Level 2	$	461,207	2,667	421,399	6,932
Letters of credit	Level 2		16,975	—	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 six month peiods ended June 30, 2021 and 2020.


	Three Months Ended June 30,			Six Months Ended June 30,
	2021		2020	2021		2020
Balance at beginning of the period	$	4,595	4,021	$	6,932	504
(Decrease) increase in value		( 1,928 )	574		( 4,265 )	4,091
Balance at end of the period	$	2,667	4,595	$	2,667	4,595

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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
June 30, 2021	$	2,667	Market comparable pricing	Pull through	1 - 99	%	89.91	%
December 31, 2020		6,932	Market comparable pricing	Pull through	1 - 99		83.08

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 gains of $ 13 thousand and net realized losses of $ 4.4 million were recorded for the three and six months ended June 30, 2021, respsectively, while net realized gains of $ 724 thousand and $ 4.1 million were recorded for the three and six months ended June 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

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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.

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


		June 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	$	202,834	2,667	406,422	6,932
Negative fair values	Other liabilities		45,797	( 259 )	22,406	( 100 )
Total			248,631	2,408	428,828	6,832

Forward Commitments
Positive fair values	Other assets		10,500	13	—	—
Negative fair values	Other liabilities		119,000	( 291 )	218,000	( 1,572 )
Total			129,500	( 278 )	218,000	( 1,572 )

Customer Derivatives - Interest Rate Swaps
Positive fair values	Other assets		36,132	1,118	20,979	1,118
Negative fair values	Other liabilities		36,132	( 1,181 )	20,979	( 1,219 )
Total			72,264	( 63 )	41,958	( 101 )
Total derivative financial instruments		$	450,395	2,067	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 June 30,				Six Months Ended June 30,
(dollars in thousands)	2021		2020		2021	2020
Interest Rate Lock Commitments	$	13	724	$	( 4,424 )	4,065
Forward Commitments		( 2,102 )	1,638		1,294	( 672 )
Customer Derivatives - Interest Rate Swaps		( 59 )	2		38	( 75 )
Net fair value (losses) gains on derivative financial instruments	$	( 2,148 )	2,364	$	( 3,092 )	3,318

Net realized losses on derivatives were $ 674 thousand and net realized gains were $ 3.6 million for the three and six months ended June 30, 2021, and net realized losses on derivatives were $ 3.3 million and $ 4.7 million for the three and six months ended June 30, 2020, respectively.

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(10) Segments

ASC Topic 280 – Segment Reporting identifies operating segments as components of an enterprise which are evaluated regularly by the 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.

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 June 30, 2021					Three Months Ended June 30, 2020
(Dollars in thousands)	Bank		Wealth	Mortgage	Total	Bank		Wealth	Mortgage	Total
Net interest income	$	14,824	2	586	15,412	$	11,101	( 2 )	498	11,597
Provision for loan losses		96	—	—	96		1,631	—	—	1,631
Net interest income after provision		14,728	2	586	15,316		9,470	( 2 )	498	9,966

Non-interest Income
Mortgage banking income		408	—	19,059	19,467		297	—	16,491	16,788
Wealth management income		—	1,163	—	1,163		—	853	—	853
SBA income		1,490	—	—	1,490		638	—	—	638
Net change in fair values		( 59 )	—	( 813 )	( 872 )		2	—	3,138	3,140
Net loss on hedging activity		—	—	( 674 )	( 674 )		—	—	( 3,301 )	( 3,301 )
Other		563	—	595	1,158		442	14	117	573
Non-interest income		2,402	1,163	18,167	21,732		1,379	867	16,445	18,691
Non-interest expense		9,415	789	16,042	26,246		7,572	788	12,894	21,254
Income before income taxes	$	7,715	376	2,711	10,802	$	3,277	77	4,049	7,403
Total Assets	$	1,560,040	5,946	143,024	1,709,010	$	1,462,449	5,206	111,428	1,579,083

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	Six Months Ended June 30, 2021					Six Months Ended June 30, 2020
(Dollars in thousands)	Bank		Wealth	Mortgage	Total	Bank		Wealth	Mortgage	Total
Net interest income	$	29,324	( 11 )	1,220	30,533	$	20,619	( 4 )	648	21,263
Provision for loan losses		695	—	—	695		3,183	—	—	3,183
Net interest income after provision		28,629	( 11 )	1,220	29,838		17,436	( 4 )	648	18,080

Non-interest Income
Mortgage banking income		676	—	42,891	43,567		399	—	23,184	23,583
Wealth management income		—	2,299	—	2,299		—	1,874	—	1,874
SBA income		2,735	—	—	2,735		1,180	—	—	1,180
Net change in fair values		39	—	( 5,824 )	( 5,785 )		( 63 )	—	4,955	4,892
Net gain (loss) on hedging activity		—	—	3,587	3,587		—	—	( 4,726 )	( 4,726 )
Other		1,274	—	1,103	2,377		886	14	209	1,109
Non-interest income		4,724	2,299	41,757	48,780		2,402	1,888	23,622	27,912
Non-interest expense		18,348	1,684	34,478	54,510		14,510	1,575	19,233	35,318
Income before income taxes	$	15,005	604	8,499	24,108	$	5,328	309	5,037	10,674
Total Assets	$	1,560,040	5,946	143,024	1,709,010	$	1,462,449	5,206	111,428	1,579,083

(11) Stockholders’ Equity

On January 28, 2021, the Corporation announced that its Board of Directors declared a cash dividend of $ 0.125 per share, payable on February 22, 2021 to shareholders of record as of February 8, 2021. On February 16, 2021, the Corporation announced that its Board of Directors declared a special dividend of $ 1.00 per share. The special dividend was paid on March 15, 2021 to shareholders of record as of March 1, 2021. During the first quarter of 2021, the Corporation paid a quarterly dividend of $ 0.125 per share and the special dividend of $ 1.00 per share noted above. On April 22, 2021, the Corporation’s Board of Directors declared a cash dividend of $ 0.125 per common share, payable on May 17, 2021 to shareholders of record as of May 10, 2021. On July 22, 2021, the Board of Directors declared a quarterly cash dividend of $ 0.125 per common share, payable August 16, 2021, to shareholders of record as of August 9, 2021.

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. While no shares were repurchased under the plan for the three months-ended June 30, 2021, there were 13,755 shares repurchased between July 1, 2021 and August 13, 2021.

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

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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 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

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will increase the Corporation’s assets and liabilities. The Corporation is evaluating other potential impacts of ASU 2016-02 on its consolidated financial statements.

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.

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”).

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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.

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 six months ended June 30, 2021, as compared to the same periods in 2020, and the changes in its financial condition as of June 30, 2021 as compared to December 31, 2020. More detailed information related to these highlights can be found in the sections that follow.

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Three Month Results of Operations

● Net income was $8.3 million or $1.33 per diluted share, compared to net income of $5.7 million, or $0.94 per diluted share, for the second quarter of 2020. The increase of $2.5 million, or 44.5%, was due largely to the increase in interest income on portfolio loans, combined with an increase in SBA loan sales and wealth management revenue, as well as an increase in mortgage banking activity.

● ROE and ROA were 22.61% and 1.92%, respectively, for the second quarter 2021, compared to 19.16% and 1.56%, respectively, for the second quarter 2020.

● Pre-tax, pre-provision income (a non-GAAP measure) for the second quarter of 2021 was $10.9 million, an increase of $1.9 million or 20.6%. A reconciliation of this non-GAAP measure is included in the Non-GAAP Financial Measures section below.

● Total revenue was $39.2 million, an increase of $5.5 million or 16.3%.

● Net interest income increased $3.8 million, or 32.9%, with interest expense down $1.4 million or 39.1%.

● Non-interest income increased $3.0 million or 16.3%, driven by mortgage banking revenue, wealth management income, SBA income, and other fee income.

o Mortgage banking net revenue increased $2.7 million, or 16.0%, due to increased levels of mortgage loan originations due to the expansion of the segment into Maryland as well as the favorable rate environment. The fair value of derivative instruments and loans held for sale decreased a combined $3.9 million over the period. Net hedging activity improved as the net loss decreased $2.6 million to a net loss of $674 thousand for the second quarter of 2021.

o Wealth management income was up $310 thousand, or 36.3%.

o SBA income was up $852 thousand, or 133.5% as the number and value of SBA loans sold increased from the prior year.

o Other fee income increased $632 thousand, or 147.7%.

● Provision for loan losses was $96 thousand in the second quarter of 2021 compared to $1.6 million in the second quarter of 2020.

● Non-interest expenses increased $5.0 million, or 23.5%, driven by an increase in salaries and benefits.

Six Month Results of Operations

● Net income was $18.4 million, or $2.98 per diluted share, for the six months ended June 30, 2021 compared to net income of $8.2 million, or $1.32 per diluted share, for the six months ended June 30, 2020. The increase was due largely to the increase in net interest income of $9.3 million, combined with increased non-interest income of $20.9 million and a $2.5 million decrease in the provision for loan losses, partially offset by increases in non-interest expense and income taxes of $19.2 million and $3.2 million, respectively.

● ROE and ROA were 26.19% and 2.17%, respectively, for the six months ended June 30, 2021, compared to 13.70% and 1.26%, respectively, for the six months ended June 30, 2020.

● Pre-tax, pre-provision income (a non-GAAP measure) for the six months ended June 30, 2021 was $24.8 million, an increase of $10.9 million or 79.0%. A reconciliation of this non-GAAP measure is included in the Non-GAAP Financial Measures section below.

● Total revenue was $83.7 million, an increase of $27.0 million or 47.5%.

● Net interest income increased $9.3 million, or 43.6%, to $30.5 million from $21.3 million, for the six months ended June 30, 2021.

● Non-interest income increased $20.9 million or 74.8%, driven by mortgage banking revenue, wealth management income, SBA income, and other fee income.

o Mortgage banking net revenue increased $20.0 million, or 84.7%, due to increased levels of mortgage loan originations due to the expansion of the segment into Maryland as well as the favorable rate environment. The changes in the mortgage pipeline as a result of the expansion and the refinance

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activity generated significant fair value changes in derivative instruments and loans held-for-sale. These fair value changes decreased non-interest income a combined $10.5 million during the six months ended June 30, 2021 compared to the six months ended June 30, 2020. These changes were offset by increases in net hedging gains of $8.3 million.

o Wealth management income was up $425 thousand, or 22.7%.

o SBA income was up $1.6 million, or 131.8% as the number and value of SBA loans sold increased from the prior year.

o Other fee income increased $1.3 million, or 146.4%.

● The provision for loan losses was $695 thousand for the six months ended June 30, 2021, compared to a $3.2 million provision for the six months ended June 30, 2020.

● Total non-interest expense for the six months ended June 30, 2021 was $54.5 million, up $19.2 million or 54.3%, from the six months ended June 30, 2020, driven by an increase in salaries and benefits.

Changes in Financial Condition

● Total assets decreased $11.2 million to $1.7 billion as of June 30, 2021.

● Total loans, net of allowance, increased $77.4 million, or 6.1%, to $1.3 billion as of June 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. Commercial real estate loans increased $44.2 million, or 8.8%, small business loans increased $25.8 million, or 51.7%, and lease financings increased $35.4 million, or 107.2%, as our Meridian Equipment Finance (“MEF”) leasing team continued their strong growth pattern after starting up in early 2020. Residential mortgage loans held for sale decreased $95.5 million, or 41.7%, to $133.7 million as of June 30, 2021, while PPP loans decreased $13.7 million, or 6.9%, over this period.

● Mortgage loans held for sale decreased $96.9 million, or 42.3%, to $132.3 million as of June 30, 2021.

● Mortgage segment originated $1.3 billion in loans for the six months ended June 30, 2021.

● Total deposits grew $171.9 million, or 13.9%, to $1.4 billion as of June 30, 2021.

● Non-interest bearing deposits grew $58.0 million, or 28.4%, to $261.8 million as of June 30, 2021.

● Borrowings from the Federal Reserve’s Paycheck Protection Program Liquidity Facility (“PPPLF”) were $36.3 million as of June 30, 2021, a decrease of $117.0 million, or 76.3% from December 31, 2020. Other borrowings were down $73.4 million or 68.7%.

● Returned $7.7 million of capital to Meridian shareholders for the six months ended June 30, 2021 through dividends, including a $1.00 special dividend.

Key Performance Ratios

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


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2021			2020			2021			2020
Annualized return on average equity		22.61	%		19.16	%		26.19	%		13.70	%
Annualized return on average assets		1.92	%		1.56	%		2.17	%		1.26	%
Net interest margin (tax effected yield)		3.70	%		3.27	%		3.71	%		3.37	%
Basic earnings per share	$	1.37		$	0.94		$	3.06		$	1.33
Diluted earnings per share	$	1.33		$	0.94		$	2.98		$	1.32

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


	June 30,			December 31,
(dollars in thousands, except per share amounts)	2021			2020
Book value per common share	$	24.77		$	23.08
Tangible book value per common share (1)	$	24.06		$	22.35
Allowance as a percentage of loans and leases held for investment		1.35	%		1.38	%
Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1)		1.58	%		1.65	%
Tier I capital to risk weighted assets		10.16	%		10.22	%
Tangible common equity ratio (1)		8.71	%		7.99	%
Loans held for investment	$	1,362,750		$	1,284,764
Total assets	$	1,709,010		$	1,720,197
Stockholders' equity	$	152,885		$	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.

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)	June 30, 2021		December 31, 2020
Tangible common equity ratio:
Total stockholders' equity		152,885		141,622
Less:
Goodwill and intangible assets		(4,380)		(4,500)
Tangible common equity		148,505		137,122
Total assets		1,709,010		1,720,197
Less:
Goodwill and intangible assets		(4,380)		(4,500)
Tangible assets	$	1,704,630	$	1,715,697
Tangible common equity ratio		8.71%		7.99%

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


	2021		2020
Reconciliation of tangible book value per common share	June 30		December 31
Book value per common share	$	24.77	$	23.08
Less: Impact of goodwill and intangible assets		0.71		0.73
Tangible book value per common share	$	24.06	$	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 June 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.


	2021		2020
Reconciliation of Allowance for Loan Losses / Total loans held for investment	June 30		December 31
Allowance for loan losses / Total loans held for investment		1.35%		1.38%
Less: Impact of loans held for investment - fair valued		0.01%		0.00%
Less: Impact of PPP loans		0.22%		0.27%
Allowance for loan losses / Total loans held for investment (excl. loans at fair value and PPP loans)		1.58%		1.65%

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


(Dollars in thousands)	Three Months Ended June 30,				Six Months Ended June 30,
Reconciliation of pre-tax, pre-provision income	2021		2020		2021		2020
Income before income tax expense	$	10,802	$	7,403	$	24,108	$	10,674
Provision for loan losses		96		1,631		695		3,183
Pre-tax, pre-provision income	$	10,898	$	9,034	$	24,803	$	13,857

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

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;

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

● Income Taxes , which include state and federal jurisdictions.

NET INTEREST INCOME

Net interest income is an integral source of the Corporation’s revenue. The tables below present a summary, for the three and six months ended June 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 June 30, 2021 was $17.5 million (and $17.6 million on a tax equivalent basis), which represented a $2.5 million, or 16.4%, increase compared with the three months ending June 30, 2020. The increase in interest income was attributable to a $247.2 million increase in average interest earning assets, year over year, led by increases of $219.0 million, $57.4 million and $51.2 million in average balances of PPP loans, leases and small business loans, respectively. The yield on interest earning assets declined 4 basis points over the same period in 2020. While the yield on the investment portfolio declined 49 basis points over the period, the overall yield on loans held for investment increased 10 basis points.

Total interest expense declined $1.4 million or 39.1% to $2.1 million for the three months ending June 30, 2021, compared with $3.5 million for the three months ending June 30, 2020. Total interest-bearing deposit balances increased $196.9 million in total from June 30, 2020 compared to June 30, 2021, which was offset by the decline in the cost of all deposit types of 62 basis points. The cost of money market and savings deposits declined 26 basis points and the cost of time deposits decreased by 120 basis points over the period. Interest expense on borrowings declined $145 thousand or 50.9% to $140 thousand for the three months ended June 30, 2021. The average balance of borrowings decreased $24.6 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 31 basis points over this period.

Net interest income increased $3.8 million, or 33.0%, to $15.5 million on a tax-equivalent basis for the three months ended June 30, 2021, compared to $11.6 million for the three months ended June 30, 2020. The net-interest margin increased 43 basis points for the three months ending June 30, 2021 at 3.70%, compared with 3.27% for the three month ending June 30, 2020. The increase in net interest margin reflects declining interest rates paid on deposits and borrowings loan portfolios overall, out-pacing the declines in the yields on certain interest earning assets during the year-over-year period presented. Contributing to the decline in interest expense on deposits over this period was the $32.7 million increase in average non-interest bearing deposits.

Total interest income for the six months ending June 30, 2021 was $35.1 million on a tax-equivalent basis, which represented a $6.2 million, or 21.4%, increase compared with the six months ending June 30, 2020. The increase in interest income was attributable to a $393.5 million increase in average interest earning assets, year over year, led by increases of $215.5 million, $48.7 million and $34.9 million in the average balances of PPP loans, leases and small business loans, respectively, offset partially by a decrease of 32 basis points in yield on earning assets, to 4.25% from 4.57%, for same period in 2020. The commercial loan portfolio yield, and the home equity loan portfolio yield fell 71 and 89 basis points, respectively, over the same period in 2020. The impact of these yield decreases was partially offset by the higher yielding lease portfolio.

Total interest expense declined $3.2 million or 41.5% to $4.4 million for the six months ending June 30, 2021, compared with $7.6 million for the six months ending June 30, 2020. While all interest-bearing deposit balances increased $240.4 million from June 30, 2020 compared to June 30, 2021, the cost of all deposit types declined sharply over this period. The cost of interest-bearing deposits declined 61 basis points, while the cost of money market and savings deposits declined

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53 basis points and the cost of time deposits decreased by 125 basis points over the period. Interest expense on borrowings declined $254 thousand or 44.9% to $312 thousand for the six months ended June 30, 2021. The average balance of borrowings increased $50.2 million due largely to PPPLF advances used to fund PPP loans, while the cost of borrowings declined 27 basis points over this period.

Net interest income increased $9.3 million, or 43.8%, to $30.7 million on a tax-equivalent basis for the six months ended June 30, 2021, compared to $21.3 million for the six months ended June 30, 2020. The net-interest margin increased 34 basis points for the six months ending June 30, 2021 at 3.71%, compared with 3.37% for the six month ending June 30, 2020. The increase in net interest margin reflects declining interest rates paid on deposits and borrowings loan portfolios 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 $64.9 million increase in non-interest bearing deposits.

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 June 30,	Average		Income/		Yields/	Average		Income/		Yields/
(dollars in thousands)	Balance		Expense		rates	Balance		Expense		rates
Assets
Interest-earning assets
Due from banks	$	18,833		4	0.09%	$	6,407		1	0.06%
Federal funds sold		16,110		1	0.02%		25,437		2	0.02%
Investment securities (1)		146,150		748	2.09%		101,891		644	2.58%
Loans held for sale		133,426		967	2.90%		103,561		833	3.22%
Loans held for investment (1)		1,364,204		15,876	4.66%		1,194,197		13,627	4.56%
Total loans		1,497,630		16,843	4.51%		1,297,758		14,460	4.48%
Total interest-earning assets		1,678,723		17,596	4.20%		1,431,493		15,107	4.24%
Noninterest earning assets		44,700					45,627
Total assets	$	1,723,423				$	1,477,120
Liabilities and stockholders' equity
Interest-bearing liabilities
Interest-bearing deposits	$	260,834		240	0.37%	$	204,008		396	0.78%
Money market and savings deposits		602,272		823	0.55%		389,164		782	0.81%
Time deposits		266,181		306	0.46%		339,265		1,397	1.66%
Total deposits		1,129,287		1,369	0.49%		932,437		2,575	1.11%
Total Borrowings		125,531		140	0.45%		150,124		285	0.76%
Subordinated Debentures		40,711		597	5.87%		40,836		598	5.86%
Total interest-bearing liabilities		1,295,529		2,106	0.65%		1,123,397		3,458	1.24%
Noninterest-bearing deposits		255,964					223,253
Other noninterest-bearing liabilities		25,432					10,533
Total liabilities	$	1,576,925				$	1,357,183
Total stockholders' equity		146,497					119,937
Total stockholders' equity and liabilities	$	1,723,423				$	1,477,120
Net interest income (1)			$	15,490				$	11,649
Net interest spread (1)					3.55%					3.00%
Net interest margin (1)					3.70%					3.27%

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	2021					2020
			Interest					Interest
For the Six Months Ended June 30,	Average		Income/		Yields/	Average		Income/		Yields/
(dollars in thousands)	Balance		Expense		rates	Balance		Expense		rates
Assets
Interest-earning assets
Due from banks	$	16,254		6	0.07%	$	5,947		25	0.84%
Federal funds sold		16,946		2	0.02%		17,226		36	0.40%
Investment securities (1)		140,910		1,436	1.67%		88,718		1,122	2.57%
Loans held for sale		153,433		2,098	2.73%		73,706		1,202	3.26%
Loans held for investment (1)		1,339,277		31,568	4.76%		1,087,749		26,530	4.87%
Total loans		1,492,710		33,666	4.55%		1,161,455		27,732	4.80%
Total interest-earning assets		1,666,820		35,110	4.25%		1,273,346		28,915	4.57%
Noninterest earning assets		42,449					43,554
Total assets	$	1,709,269				$	1,316,900
Liabilities and stockholders' equity
Interest bearing liabilities
Interest-bearing deposits	$	242,699		538	0.45%	$	171,879		910	1.06%
Money market and savings deposits		589,941		1,652	0.56%		361,492		1,966	1.09%
Time deposits		268,784		745	0.56%		327,647		2,953	1.81%
Total deposits		1,101,424		2,935	0.54%		861,018		5,829	1.36%
Total Borrowings		154,273		312	0.82%		104,081		566	1.09%
Subordinated Debentures		40,696		1,190	5.85%		41,213		1,191	5.78%
Total interest-bearing liabilities		1,296,393		4,437	0.69%		1,006,312		7,586	1.52%
Non-interest bearing deposits		245,057					180,197
Other non-interest bearing liabilities		25,950					9,618
Total liabilities	$	1,567,400				$	1,196,127
Total stockholders' equity		141,869					120,773
Total stockholders' equity and liabilities	$	1,709,269				$	1,316,900
Net interest income (1)			$	30,673				$	21,329
Net interest spread (1)					3.56%					3.05%
Net interest margin (1)					3.71%					3.37%

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

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Rate/Volume Analysis

The rate/volume analysis table below analyzes dollar changes in the components of interest income and interest expense as they relate to the change in balances (volume) and the change in interest rates (rate) of tax-equivalent net interest income for the three and six months ended June 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				Six Months Ended
	June 30,				June 30,
(dollars in thousands)	Rate		Volume	Total	Rate		Volume	Total
Interest income:
Due from banks	$	1	2	3	$	(66)	47	(19)
Federal funds sold		1	(2)	(1)		(33)	(1)	(34)
Investment securities (1)		(664)	768	104		(882)	1,196	314
Loans held for sale		(460)	594	134		(558)	1,454	896
Loans held for investment (1)		304	1,945	2,249		(1,663)	6,701	5,038
Total loans		(156)	2,539	2,383		(2,221)	8,155	5,934
Total interest income	$	(818)	3,307	2,489	$	(3,202)	9,397	6,195
Interest expense:
Interest bearing deposits	$	(682)	526	(156)	$	(1,094)	722	(372)
Money market and savings deposits		(1,266)	1,307	41		(2,291)	1,977	(314)
Time deposits		(840)	(251)	(1,091)		(1,752)	(456)	(2,208)
Total interest bearing deposits		(2,788)	1,582	(1,206)		(5,137)	2,243	(2,894)
Total borrowings		(104)	(41)	(145)		(457)	203	(254)
Subordinated debentures		3	(4)	(1)		28	(29)	(1)
Total interest expense		(2,889)	1,537	(1,352)		(5,566)	2,417	(3,149)
Interest differential	$	2,071	1,770	3,841	$	2,364	6,980	9,344

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

For the three months ended June 30, 2021 as compared to the same period in 2020, tax-equivalent interest income increased $2.5 million as volume changes in average earning assets contributed $3.3 million and unfavorable rate changes reduced interest income by $818 thousand. The favorable change in interest income due to volume changes was driven mostly from growth in the loans held for investment portfolio, which increased $170.0 million on average over the three month periods, while the loans held for sale portfolio also increased $29.9 million on average over this period. Within the loans held for investment portfolio, the average balance on PPP loans increased $219.0 million. Partially off-setting these favorable volume changes were unfavorable rate changes of 49 basis points and 32 basis points on investment securities and loans held for sale, reducing interest income by $664 thousand and $460 thousand, respectively.

On the funding side, interest expense decreased $1.4 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 $2.9 million positive effect on interest expense. The cost of interest-bearing deposits, money market and savings accounts and time deposits declined 41 basis points, 26 basis points and 120 basis points, respectively, while the cost of borrowings declined 31 basis points. Interest-bearing deposits, and money market and savings accounts increased $56.8 million, and $213.1 million on average, while time deposits decreased $73.1 million on average, and borrowings overall were down $24.6 million on average. These average balance changes led to a $1.5 million increase in interest expense.

Overall, the increase in interest income from volume changes contributed $3.3 million and out-paced the unfavorable rate changes to improve tax-equivalent net interest income by $3.8 million.

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For the six months ended June 30, 2021 as compared to the same period in 2020, tax-equivalent interest income increased $6.2 million as volume changes in average earning assets contributed $9.4 million and unfavorable rate changes reduced interest income by $3.2 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 $251.5 million on average over the six month periods, while the loans held for sale portfolio also increased $79.7 million on average over this period. Within the loans held for investment portfolio, the average balance on PPP loans increased $215.5 million. Partially off-setting these favorable volume changes were unfavorable rate changes of 90 basis points and 53 basis points on investment securities and loans held for sale, reducing interest income by $882 thousand and $558 thousand, respectively.

On the funding side, interest expense decreased $3.1 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 $5.6 million positive effect on interest expense. The cost of interest-bearing deposits, money market and savings accounts and time deposits declined 61 basis points, 53 basis points and 125 basis points, respectively, while the cost of borrowings declined 27 basis points. Interest-bearing deposits, and money market and savings accounts increased $70.8 million, and $228.4 million on average, while time deposits decreased $58.9 million on average, and borrowings overall were up $50.2 million on average. These average balance changes led to a $2.4 million increase in interest expense.

Overall, the increase in interest income from volume changes contributed $9.4 million and out-paced the unfavorable rate changes to improve tax-equivalent net interest income by $9.3 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 June 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.

Rate Ramp


	Estimated increase
	(decrease) in Net Interest
	Income
	For the year ending
	June 30,
Changes in Market Interest Rates	2021	2020
+300 basis points over next 12 months	1.49 %	0.98 %
+200 basis points over next 12 months	0.82 %	0.52 %
+100 basis points over next 12 months	0.36 %	0.21 %
No Change
-100 basis points over next 12 months	(0.70) %	(1.37) %
-200 basis points over next 12 months	(2.68) %	(4.47) %

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The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of June 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 June 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 June 30,
Changes in Market Interest Rates	2021		2020
+300 basis points	61	%	153	%
+200 basis points	47	%	117	%
+100 basis points	27	%	69	%
No Change
-100 basis points	(40)	%	(100)	%
-200 basis points	(103)	%	(257)	%

This economic value of equity profile at June 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.

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

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

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 June 30, 2021 and December 31, 2020.


					Greater
					Than
					5 years and
As of June 30, 2021	12 Months				Not Rate
(dollars in thousands)	or Less		1-2 Years	2-5 Years	Sensitive	Total
Cash and investments	$	47,909	4,314	16,674	107,371	176,268
Loans (1)		975,195	185,659	305,413	10,470	1,476,737
Other Assets		—	—	—	56,004	56,004
Total Assets	$	1,023,104	189,973	322,087	173,845	1,709,010

Non-interest bearing deposits		9,395	9,045	26,167	217,199	261,806
Interest bearing deposits		889,544	—	—	—	889,544
Time deposits		151,131	44,061	66,738	—	261,930
Borrowings		40,933	4,886	36,337	—	82,156
Other Liabilities		—	—		60,689	60,689
Total stockholders' equity		—	—	—	152,885	152,885
Total liabilities and stockholders' equity	$	1,091,003	57,992	129,242	430,773	1,709,010

Repricing gap:
Positive (negative)	$	(67,899)	131,981	192,845	(256,928)	—
Cumulative repricing gap: Dollar amount	$	(67,899)	64,082	256,927	—
Percent of total assets		(4.0)%	3.7%	15.0%	—

(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 as of June 30, 2021, we are temporarily liability-sensitive as longer term lease loans replaced approximately $70 million in forgiven PPP loans that were scheduled to mature in twelve months or less. The longer term leases are generally matched against non-interest bearing deposits and time deposits. Non-interest bearing deposits have grown nicely, up $58 million or 28% from December 31, 2020. Time deposit balances have remained relatively the same, but management has initiated a lengthening plan in this low rate environment, pushing wholesale funding out to the 2-5 year maturity bucket. Since we generally manage our interest rate risk profile close to neutral, as illustrated in the December 31, 2020 gap schedule, this strategy is expected to adjust the gap over the next few periods.

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 June 30, 2021, the Corporation recorded a provision for loan and lease losses (“Provision”) of $96 thousand which was a $1.5 million, or 94.1% decrease from the same period in 2020. For the three months ended June 30, 2021 there were net charge-offs of $111 thousand as compared to net charge-offs of $23 thousand for the same period in 2020. The second 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 second quarter 2021 provision had less such impact as certain financial and economic indicators have improved period over period.

For the six months ended June 30, 2021, the Corporation recorded a provision for loan and lease losses (“Provision”) of $695 thousand which was a $2.5 million, 78.2% decrease from the same period in 2020. For the six months ended June 30, 2021 there were net charge-offs of $101 thousand as compared to net recoveries of $10 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

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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 $29.0 million as of June 30, 2021, compared to $28.8 million as of March 31, 2021.

Meridian realized net charge-offs of 0.01% of total average loans for the quarter ending June 30, 2021, compared to net charge-offs of 0.00% for the quarter ended December 31, 2020 and net charge-offs of 0.00% for the qurarter ended June 30, 2020. Total non-performing assets, including loans and other real estate property, were $8.2 million as of June 30, 2021, compared to $7.9 million as of December 31, 2020, and $7.4 million as of June 30, 2020. The ratio of non-performing assets to total assets as of June 30, 2021 was 0.48% compared to 0.46% as of December 31, 2020, and 0.47% as of June 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 1.58% as of June 30, 2021, 1.65% as of December 31, 2020, and 1.27% as of June 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 June 30, 2021 and December 31, 2020.

As of June 30, 2021, the Corporation had $2.7 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 June 30, 2020, the Corporation had $3.7 million of TDRs, of which $3.5 million were in compliance with the modified terms, and were excluded from non-performing loans and leases. As of June 30, 2021, the Corporation had a recorded investment of $9.8 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
	June 30,		December 31,
(dollars in thousands)	2021		2020
Non-performing assets:
Nonaccrual loans:
Real estate loans:
Commercial mortgage	$	—		3,061
Shared national commercial credits		271		—
Home equity lines and loans		916		859
Residential mortgage		2,702		2,725
Total real estate loans	$	3,889		6,645
Commercial and industrial		3,389		1,285
Small business loans		917
Total nonaccrual loans	$	8,195		7,930
Total non-performing loans	$	8,195		7,930
Total non-performing assets	$	8,195		7,930

Troubled debt restructurings:
TDRs included in non-performing loans		239		244
TDRs in compliance with modified terms		2,486		3,362
Total TDRs	$	2,725		3,606

Asset quality ratios:
Non-performing assets to total assets		0.48%		0.46%
Non-performing loans to:
Total loans and leases		0.55%		0.52%
Total loans held-for-investment		0.60%		0.62%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)		0.70%		0.74%
Allowance for loan losses to:
Total loans and leases		1.23%		1.17%
Total loans held-for-investment		1.35%		1.38%
Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)		1.58%		1.65%
Non-performing loans		224.07%		224.04%

Total loans and leases	$	1,495,098		1,513,963
Total loans and leases held-for-investment	$	1,362,750		1,284,764
Total loans and leases held-for-investment (excluding loans at fair value and PPP loans)	$	1,162,706		1,072,727
Allowance for loan and lease losses	$	18,361		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 June 30, 2021.

NON-INTEREST INCOME

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

Total non-interest income for the second quarter of 2021 was $21.7 million, up $3.0 million or 16.3% from the comparable period in 2020. This overall increase in non-interest income came largely from our mortgage segment. Mortgage banking net revenue increased $2.7 million or 16.0% over the second quarter of 2020. The significant increase in second quarter 2021 came from increased levels of mortgage loan originations due to the expansion of the segment into Maryland as well as the favorable rate environment. Our mortgage segment originated $615.2 million in loans during the second quarter of 2021, an increase of $79.3 million, or 14.8%, from the second quarter of 2020. The fair value of derivative instruments

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and loans held for sale decreased a combined $3.9 million over the period. Net hedging activity improved as the net loss decreased $2.6 million to a net loss of $674 thousand for the second quarter of 2021.

Non-interest income from the sales of SBA 7(a) loans increased $852 thousand as $13.5 million in loans were sold in the second quarter of 2021 compared to $9.7 million in loans sold in the second quarter of 2020, an increase of nearly 40%. Wealth management revenue increased $310 thousand year-over-year due to the favorable market conditions. Other fee income was up $632 thousand or 147.7% from the second quarter of 2020, to $1.1 million, due to increases period over period in wire transfer fee income, title transfer fee income, and mortgage servicing fee income.

Six Months Ended June 30, 2021 Compared to the Same Period in 2020

Total non-interest income for the six months ended June 30, 2021 was $48.8 million, up $20.9 million or 74.8%, from the six months ended June 30, 2020. This increase in non-interest income came primarily from our mortgage segment as mortgage banking net revenue increased $20.0 million or 84.7% 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 $1.3 billion in loans during the six months ended June 30, 2021, an increase of $549.4 million, or 69.5%, from the prior year period. Refinance activity represented 55% of the total residential mortgage loans originated for the six months ended June 30, 2021, compared to 63% for the six months ended June 30, 2020. Fair value changes as a result in rate movements and pipeline changes decreased non-interest income a combined $10.5 million during the six months ended June 30, 2021 compared to the six months ended June 30, 2020. These changes were offset by increases in net hedging gains of $8.3 million.

Wealth management revenue increased $425 thousand, or 22.7%, year-over-year due to the more favorable market conditions that existed in the six months ended June 30, 2021, compared to the prior year comparable period.

Non-interest income from the sales of SBA 7(a) loans increased $1.6 million, or 131.8%, from the prior year period, to $2.7 million, as the bank sold $6.6 million, or 33.2% more loans in the current year period. Other fee income was up $1.3 million or 146.4% for the six months ended June 30, 2021, from the six months ended June 30, 2020 due to increases in wire transfer fee income, 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 servicing fee income.

NON-INTEREST EXPENSE

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

Total non-interest expense for the second quarter of 2021 was $26.2 million, up $5.0 million or 23.5%, from the comparable period in 2020. The increase in non-interest expense is largely attributable to an increase in salaries and employee benefits expense, which increased $4.0 million or 24.8%, from the comparable period in 2020. Of this increase, $2.5 million relates to the mortgage segment.

Advertising and promotion expense increased $316 thousand, or 52.2%, 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 the second quarter of 2021 as the weather improved and COVID-19 restrictions continued to lessen and allow for more in person gatherings. Other non-interest expenses were up $518 thousand, or 35.6%, from the comparable period in 2020, due to an increase in certain loan related expenses and an increase in employee related expenses.

Six Months Ended June 30, 2021 Compared to the Same Period in 2020

Total non-interest expense for the six months ended June 30, 2021 was $54.5 million, up $19.2 million or 54.3%, from the six months ended June 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 $42.4 million, an increase

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of $16.3 million or 62.4%, compared to the six months ended June 30, 2020. Of this increase, $13.3 million relates to the mortgage segment as the number of employees in this segment have increased period over period.

Occupancy and equipment expense increased $275 thousand, or 13.4%, 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 $319 thousand, or 22.2%, over the period due to largely to a one-time consent fees related to the change in accountants early in 2021, not in 2020. This is combined with an increase in consulting fees as the bank continues to invest in various company-wide technology focused projects. Advertising and promotion expenses were up $493 thousand, or 40.6%, 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 June 30, 2021 was $2.5 million, as compared to $1.7 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 23.6% for the second quarter of 2021 and 22.8% for the second quarter of 2020.

Income tax expense for the six months ended June 30, 2021 was $5.7 million, as compared to $2.5 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 23.6% for the first six months of 2021 and 22.9% for the first six months of 2020.

BALANCE SHEET ANALYSIS

As of June 30, 2021, total assets were $1.7 billion, a decrease of $11.2 million from December 31, 2020. Total assets increased $129.9 million, or 8.2%, from June 30, 2020 primarily due to growth in loans held for investment and securities available-for-sale.

Total loans, net of allowance, grew $77.4 million, or 6.1%, to $1.3 billion as of June 30, 2021, from $1.3 billion as of December 31, 2020. There was growth in several commercial categories from December 31, 2020, as we continue to expand our presence in the Philadelphia market region. Commercial real estate loans increased $44.2 million, or 8.8%, small business loans increased $25.8 million, or 51.7%, and lease financings increased $35.4 million, or 107.2%, as our Meridian Equipment Finance (“MEF”) leasing team continued their strong growth pattern after starting up in early 2020. Residential mortgage loans held for sale decreased $96.9 million, or 42.3%, to $132.3 million as of June 30, 2021, while PPP loans decreased $13.7 million, or 6.9%, over this period.

The securities available-for-sale portfolio grew to $141.9 million as of June 30, 2021, up $18.3 million, or 14.8%, from December 31, 2020. This increase was driven by an increase of $9.4 million in state and municipal securities and $8 million in U.S. treasuries.

Servicing assets were $10.3 million as of June 30, 2021, up $4.7 million, or 83.8%, from December 31, 2020. $8.9 million of this balance is comprised of mortgage servicing rights, while $1.4 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, 2021.

Deposits were $1.4 billion as of June 30, 2021, up $171.9 million, or 13.9%, from December 31, 2020. Non-interest bearing deposits increased $58.0 million, or 28.4%, from December 31, 2020. Interest-bearing checking accounts increased $51.4 million, or 24.9%, from December 31, 2020, while money market accounts/savings accounts increased $59.0 million, or 10.3% since December 31, 2020. Increases in core deposits were driven from loan customers as part of new

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business and municipal relationships and also as a result of the PPP loan process. Certificates of deposits increased $3.6 million, or 1.4%, from December 31, 2020.

Short-term borrowings were $33.5 million as of June 30, 2021, down $73.3 million, or 68.6%, from December 31, 2020, while long-term debt was $48.6 million as of June 30, 2021, down $116.9 million, or 70.6%, from December 31, 2020. Short-term borrowings declined from December 31, 2020 to June 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 $152.9 million, or 8.9% of total assets as of June 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 $18.4 million, partially offset by dividends of $7.7 million paid during the first six months of 2021. Net unrealized gains on available for sale investment securities declined by $505 thousand from December 31, 2020 to June 30, 2021 due to the changing interest rate environment over this period.

As of June 30, 2021, the Tier 1 leverage ratio was 8.97% for the Corporation and 11.28% for the Bank, the Tier 1 risk-based capital and common equity ratios were 10.16% for the Corporation and 12.80% for the Bank, and total risk-based capital was 14.23% for the Corporation and 14.18% for the Bank. Quarter-end numbers show a tangible common equity to tangible assets ratio (a non-GAAP measure) of 8.71% for the Corporation and 10.92% for the Bank. A reconciliation of this non-GAAP measure is included in the Non-GAAP Financial Measures section above. Tangible book value per share was $24.06 as of June 30, 2021, compared with $22.55 as of March 31, 2021.

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


	June 30, 2021
				To Be Well Capitalized
	Actual			Under CBLR Framework
(dollars in thousands)	Amount		Ratio	Amount		Ratio
Tier 1 capital (to average assets)
Corporation	$	146,453	8.97%	$	130,546	8.00%
Bank		184,044	11.28%		130,545	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 quarter of 2020, the Bank adopted the CBLR framework as its primary regulatory capital ratio, but reports all ratios for comparative purposes.

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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 $315.3 million at June 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 June 30, 2021. At June 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 June 30, 2021, Meridian’s maximum borrowing capacity with the FHLB was $549.0 million. At June 30, 2021, Meridian had borrowed $45.8 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $108 million against its available credit lines. At June 30, 2021, Meridian also had available $39 million of unsecured federal funds lines of credit with other financial institutions as well as $255.1 million of available short or long term funding through the Certificate of Deposit Account Registry Service (“CDARS”) program and $355.8 million of available short or long term funding through brokered CD arrangements. Management believes that Meridian has adequate resources to meet its short-term and long-term funding requirements.

Discussion of Segments

As of June 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 $7.7 million and $15.0 million for the three and six months ended June 30, 2021, as compared to income before tax of $3.3 million and $5.3 million for the same periods in 2020. The Banking Segment provided 71.4% and 62.2% of the Corporation’s pre-tax profit for the three and six month periods ended June 30, 2021, as compared to 44.3% and 49.9% for the same periods in 2020.

The Wealth Management Segment recorded income before tax of $376 thousand and $604 thousand for the three and six months ended June 30, 2021, as compared to income before tax of $77 thousand and $309 thousand for the same periods in 2020.

The Mortgage Banking Segment recorded income before tax of $2.7 million and $8.5 million for the three and six months ended June 30, 2021, as compared to income before tax of $4.0 million and $5.0 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.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the loan agreement. Total commitments to extend credit at June 30, 2021 were $461.2 million, as compared to $421.4 million at December 31, 2020.

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Standby letters of credit are conditional commitments issued by the Corporation to a customer for a third party. Such standby letters of credit are issued to support private borrowing arrangements. The credit risk involved in issuing standby letters of credit is similar to that involved in granting loan facilities to customers. The Corporation’s obligation under standby letters of credit at June 30, 2021 amounted to $17.0 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 three loans totaling $446 thousand for the three and six months ended June 30, 2021, and repurchased one loan in the amount of $154 thousand for the three and six months ended June 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 June 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 June 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.

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 56.

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

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SIGNATURES

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

Date:	August 16, 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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