mrbk-20240331

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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 March 31, 2024


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

For the transition period from __________ to __________

Commission File Number: 000-55983

(Exact name of registrant as specified in its charter)


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

9 Old Lincoln Highway, Malvern, Pennsylvania 19355

(Address of principal executive offices) (Zip Code)

(484) 568-5000

(Registrant’s telephone number, including area code)


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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒Yes ☐No

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

Large Accelerated Filer

☐

Accelerated Filer

☒

Non-accelerated Filer

☐

Smaller Reporting Company

☒

Emerging Growth Company

☐

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 6, 2024 there were 11,185,515 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 – March 31, 2024 and December 31, 2023			3

Consolidated Statements of Income – Three Months Ended March 31, 2024 and 2023			4

Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2024 and 2023			5

Consolidated Statements of Stockholders’ Equity – Three Months Ended March 31, 2024 and 2023			6

Consolidated Statements of Cash Flows – Three Months Ended March 31, 2024 and 2023			7

Notes to Consolidated Financial Statements (Unaudited)			8

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			31

Item 3 Quantitative and Qualitative Disclosures about Market Risk			42

Item 4 Controls and Procedures			43

PART II OTHER INFORMATION

Item 1 Legal Proceedings			44

Item 1A Risk Factors			44

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			44

Item 3 Defaults Upon Senior Securities			44

Item 4 Mine Safety Disclosures			44

Item 5 Other Information			44

Item 6 Exhibits			45

Signatures			46

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Glossary of Acronyms, Abbreviations, and Terms

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


Acronym			Description

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

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

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

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)


(dollars in thousands, except share data)	March 31, 2024		December 31, 2023
Assets:
Cash and due from banks	$	8,935	$	10,067
Interest-bearing deposits at other banks	14,092		46,630

Cash and cash equivalents	23,027		56,697
Securities available-for-sale, at fair value (amortized cost of $161,865 and $156,492, respectively)	150,996		146,019
Securities held-to-maturity, at amortized cost (fair value of $32,003 and $32,730, respectively)	35,157		35,781
Equity investments	2,092		2,121
Mortgage loans held for sale	29,124		24,816
Loans, net of fees and costs	1,956,315		1,895,806
Allowance for credit losses	(23,171)		(22,107)
Loans and other finance receivables, net of the allowance for credit losses	1,933,144		1,873,699
Restricted investment in bank stock	8,560		8,072
Bank premises and equipment, net	13,451		13,557
Bank owned life insurance	29,051		28,844
Accrued interest receivable	9,864		9,325
Other real estate owned	1,703		1,703
Deferred income taxes	4,339		4,201
Servicing assets	11,573		11,748
Goodwill	899		899
Intangible assets	2,920		2,971
Other assets	37,023		25,740
Total assets	$	2,292,923	$	2,246,193

Liabilities:
Deposits:
Non-interest bearing	$	220,581	$	239,289
Interest bearing	1,680,115		1,584,173
Total deposits	1,900,696		1,823,462
Borrowings	145,803		174,896

Subordinated debentures	49,867		49,836
Accrued interest payable	8,350		10,324
Other liabilities	28,271		29,653
Total liabilities	2,132,987		2,088,171

Stockholders’ equity:
Common stock, $1 par value per share. 25,000,000 shares authorized; 13,188,698 and 13,186,198 shares issued and 11,185,515 and 11,183,015 shares outstanding, respectively	13,189		13,186
Surplus	80,487		80,325
Treasury stock, 2,003,183 and 2,003,183 shares, respectively, at cost	(26,079)		(26,079)
Unearned common stock held by employee stock ownership plan	(1,204)		(1,204)
Retained earnings	102,492		101,216
Accumulated other comprehensive loss	(8,949)		(9,422)
Total stockholders’ equity	159,936		158,022
Total liabilities and stockholders’ equity	$	2,292,923	$	2,246,193

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 March 31,
(dollars in thousands, except per share data)	2024		2023
Interest income:
Loans and other finance receivables, including fees	$	35,339	$	29,417
Securities - taxable	1,251		959
Securities - tax-exempt	325		354
Cash and cash equivalents	300		217
Total interest income	37,215		30,947
Interest expense:
Deposits	17,392		11,447
Borrowings	3,214		1,823
Total interest expense	20,606		13,270
Net interest income	16,609		17,677
Provision for credit losses	2,866		1,399
Net interest income after provision for credit losses	13,743		16,278
Non-interest income:
Mortgage banking income	3,634		3,272
Wealth management income	1,317		1,196
SBA loan income	986		713
Earnings on investment in life insurance	207		192
Net change in the fair value of derivative instruments	75		(69)
Net change in the fair value of loans held-for-sale	(2)		(1)
Net change in the fair value of loans held-for-investment	(175)		117
Net (loss) gain on hedging activity	(19)		—


Other	1,961		1,218
Total non-interest income	7,984		6,638
Non-interest expense:
Salaries and employee benefits	10,573		11,061
Occupancy and equipment	1,233		1,244
Professional fees	1,498		823
Advertising and promotion	748		861
Data processing and software	1,532		1,432
Pennsylvania bank shares tax	274		245
Other	2,316		2,123
Total non-interest expense	18,174		17,789
Income before income taxes	3,553		5,127
Income tax expense	877		1,106
Net income	$	2,676	$	4,021
Basic earnings per common share	$	0.24	$	0.36
Diluted earnings per common share	$	0.24	$	0.34
Basic weighted average shares outstanding	11,088		11,272
Diluted weighted average shares outstanding	11,201		11,656

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 March 31,
(dollars in thousands)	2024		2023
Net income:	$	2,676	$	4,021

Net change in unrealized (losses) gains on investment securities available for sale:
Change in fair value of investment securities, net of tax of $(98) and $460, respectively	(298)		1,670

Reclassification adjustment for investment securities transferred to held-to-maturity, net of tax effect of $7 and $0, respectively	22		—
Unrealized investment (losses) gains, net of tax effect of $(90) and $460, respectively	$	(276)	$	1,670
Net change in unrealized gains on interest rate swaps used in cash flow hedges, net of tax effect of $(247) and $0, respectively	749		—



Total other comprehensive income	$	473	$	1,670
Total comprehensive income	$	3,149	$	5,691

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


(dollars in thousands, except per share data)	Common Stock		Surplus		Treasury Stock		Unearned ESOP		Retained Earnings		AOCI		Total
Three Months Ended March 31, 2024
Balance at January 1, 2024	$	13,186	$	80,325	$	(26,079)	$	(1,204)	$	101,216	$	(9,422)	$	158,022
Net income	—		—		—		—		2,676		—		2,676
Other comprehensive income	—		—		—		—		—		473		473
Dividends declared ($0.125 per share)	—		—		—		—		(1,400)		—		(1,400)

Common stock issued through share-based awards and exercises	3		20		—		—		—		—		23
Stock based compensation expense	—		142		—		—		—		—		142
Balance at March 31, 2024	$	13,189	$	80,487	$	(26,079)	$	(1,204)	$	102,492	$	(8,949)	$	159,936


(dollars in thousands, except per share data)	Common Stock		Surplus		Treasury Stock		Unearned ESOP		Retained Earnings		AOCI		Total
Three Months Ended March 31, 2023
Balance at January 1, 2023	$	13,156	$	79,072	$	(21,821)	$	(1,403)	$	95,815	$	(11,539)	$	153,280
Adjustment to initially apply ASU No. 2016-13 for CECL, net of tax	—		—		—		—		(2,228)		—		(2,228)
Net income	—		—		—		—		4,021		—		4,021
Other comprehensive income	—		—		—		—		—		1,670		1,670
Dividends declared ($0.125 per share)	—		—		—		—		(1,428)		—		(1,428)
Net purchase of treasury stock through publicly announced plans (184,598 shares)	—		—		(2,691)		—		—		—		(2,691)
Common stock issued through share-based awards and exercises	24		124		—		—		—		—		148
Stock based compensation expense	—		277		—		—		—		—		277
Balance at March 31, 2023	$	13,180	$	79,473	$	(24,512)	$	(1,403)	$	96,180	$	(9,869)	$	153,049

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three months ended March 31,
(dollars in thousands)	2024		2023
Net income	$	2,676	$	4,021
Adjustments to reconcile net income to net cash used in operating activities:

Net amortization of investment premiums and discounts and change in fair value of equity securities	240		373
Depreciation and amortization (accretion), net	1,780		(2)
Provision for credit losses	2,866		1,399
Amortization of issuance costs on subordinated debt	31		27
Stock based compensation	142		277
Net change in fair value of derivative instruments	(75)		69
Net change in fair value of loans held for sale	2		1
Net change in fair value of loans held for investment	175		(117)
Amortization and net impairment of servicing rights	479		435
SBA loan income	(986)		(713)
Proceeds from sale of loans	143,457		136,837
Loans originated for sale	(144,437)		(147,238)
Mortgage banking income	(3,634)		(3,272)
Increase in accrued interest receivable	(539)		(288)
Increase in other assets	(353)		(1,607)
Earnings from investment in bank owned life insurance	(207)		(192)
Increase in deferred income tax	(251)		(54)
(Decrease) increase in accrued interest payable	(1,974)		1,447
Decrease in other liabilities	(1,098)		(2,803)
Net cash used in operating activities	$	(1,706)	$	(11,400)

Cash flows from investing activities:
Activity in available-for-sale securities:
Maturities, repayments and calls	3,554		2,222

Purchases	(9,068)		(10,702)
Activity in held-to-maturity securities:
Maturities, repayments and calls	554		865

Increase in restricted stock	(488)		(3,242)
Net increase in loans	(71,370)		(73,057)
Purchases of premises and equipment	(1,910)		(284)

Net cash used in investing activities	$	(78,728)	$	(84,198)

Cash flows from financing activities:
Net increase in deposits	77,234		57,934

(Decrease) increase in short-term borrowings	(29,093)		108,368
Increase in long-term debt	—		3,433


Repayment of subordinated debt	—		(54)


Net purchase of treasury stock	—		(2,691)
Dividends paid	(1,400)		(1,428)
Share based awards and exercises	23		148
Net cash provided by financing activities	$	46,764	$	165,710

Net change in cash and cash equivalents	(33,670)		70,112
Cash and cash equivalents at beginning of period	56,697		38,391
Cash and cash equivalents at end of period	$	23,027	$	108,503

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	22,580	$	11,823




Net loans sold, not settled	10,631		—

See accompanying notes to the unaudited consolidated financial statements.

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MERIDIAN CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Summary of Significant Accounting Policies

Basis of Presentation

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

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

These unaudited consolidated financial statements should be read in conjunction with the Corporation’s filings with the SEC (including our Annual Report on Form 10-K for the year ended December 31, 2023), 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 March 31, 2024 are not necessarily indicative of the results for the year ending December 31, 2024 or for any other period.

Stock Split

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

Pronouncements Adopted in 2024

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. Adoption of this standard did not have a material impact on our consolidated financial statements.

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

In March 2023, the FASB issued ASU 2023-02, Investments Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method to allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits and other income tax benefits. If certain conditions are met, a reporting entity may elect to account for its tax equity investments by using the proportional amortization method regardless of the program from which it receives income tax credits, instead of only LIHTC structures. This amendment also eliminates certain LIHTC specific guidance aligning the accounting with other equity investments in tax credit structures. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Adoption of this standard did not have a material effect on our consolidated financial statements.

Pronouncements Not Yet Effective as of March 31, 2024:

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

Issued in March 2020, ASU 2020-04 contains optional expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. The Corporation does not have a significant concentration of loans, derivative contracts, borrowings or other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The Corporation expects to adopt the LIBOR transition relief allowed under this standard throughout 2024.

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FASB ASU 2023-07, “Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures”

The amendments in this update improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analyses. The amendments in this update also do not change how a public entity identifies its operating segments, aggregates those operating segments, or applies the quantitative thresholds to determine its reportable segments. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Corporation is currently evaluating the impact on its results of operation, financial position, liquidity, and disclosures.

FASB ASU 2023-09, “Income Taxes (Topic 740) Improvements to Income Tax Disclosures”

The amendments in this update address investor requests for more transparency about income tax information through improvements to income tax disclosures primarily related to the rate reconciliation and income taxes paid information. This update also includes certain other amendments to improve the effectiveness of income tax disclosures. The amendments in this update are effective for fiscal years beginning after December 15, 2024 and are to be applied on a prospective basis. Early adoption is permitted.The Corporation is currently evaluating the impact on its disclosures.

FASB ASU 2024-01 Stock Compensation - Scope Application of Profits Interest and Similar Awards

The amendments in this update improve the understandability of paragraph 718-10-15-3 apply to all entities that enter into share-based payments transactions. The amendments in this update are effective for fiscal years beginning after December 15, 2024 and are to be applied on a prospective basis. The Corporation is currently evaluating the impact on its disclosures.

(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, if restricted stock awards were vested, and if SERP plan liabilities were satisfied with common shares. The effects of stock options are excluded from the computation of diluted earnings per share in periods in which the effect would be anti-dilutive.


	Three months ended March 31,
(dollars in thousands, except per share data)	2024		2023
Numerator for earnings per share:
Net income available to common stockholders	$	2,676	$	4,021

Denominators for earnings per share:
Weighted average shares outstanding	11,245		11,456
Average unearned ESOP shares	(157)		(184)
Basic weighted averages shares outstanding	11,088		11,272
Dilutive effects of assumed exercises of stock options	113		230
Dilutive effects of SERP shares	—		154
Diluted weighted averages shares outstanding	11,201		11,656

Basic earnings per share	$	0.24	$	0.36
Diluted earnings per share	$	0.24	$	0.34
Antidilutive shares excluded from computation of average dilutive earnings per share	585		463

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(3) Securities

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


	March 31, 2024
(dollars in thousands)	Amortized cost		Gross unrealized gains		Gross unrealized losses		Allowance for credit losses		Fair value		# of Securities in unrealized loss position
Securities available-for-sale:
U.S. asset backed securities	$	19,285	$	43	$	(175)	$	—	$	19,153	10
U.S. government agency MBS	22,539		251		(443)		—		22,347		13
U.S. government agency CMO	25,440		—		(2,321)		—		23,119		31
State and municipal securities	39,911		—		(4,180)		—		35,731		31
U.S. Treasuries	32,983		—		(2,665)		—		30,318		25
Non-U.S. government agency CMO	13,507		89		(535)		—		13,061		10
Corporate bonds	8,200		—		(933)		—		7,267		13
Total securities available-for-sale	$	161,865	$	383	$	(11,252)	$	—	$	150,996	133

	Amortized cost		Gross unrecognized gains		Gross unrecognized losses		Allowance for credit losses		Fair value		# of Securities in unrecognized loss position
Securities held to maturity:
State and municipal securities	$	35,157	$	20	$	(3,174)	$	—	$	32,003	21
Total securities held-to-maturity	$	35,157	$	20	$	(3,174)	$	—	$	32,003	21


	December 31, 2023
	Amortized cost		Gross unrealized gains		Gross unrealized losses		Allowance for credit losses		Fair value		# of Securities in unrealized loss position
Securities available-for-sale:
U.S. asset backed securities	$	17,012	$	25	$	(213)	$	—	$	16,824	11
U.S. government agency MBS	22,750		364		(480)		—		22,634		14
U.S. government agency CMO	21,850		—		(2,277)		—		19,573		30
State and municipal securities	40,093		—		(3,877)		—		36,216		31
U.S. Treasuries	32,982		—		(2,560)		—		30,422		25
Non-U.S. government agency CMO	13,605		102		(552)		—		13,155		9
Corporate bonds	8,200		—		(1,005)		—		7,195		13
Total securities available-for-sale	$	156,492	$	491	$	(10,964)	$	—	$	146,019	133

	Amortized cost		Gross unrecognized gains		Gross unrecognized losses		Allowance for credit losses		Fair value		# of Securities in unrecognized loss position
Securities held to maturity:
State and municipal securities	$	35,781	$	52	$	(3,103)	$	—	$	32,730	21
Total securities held-to-maturity	$	35,781	$	52	$	(3,103)	$	—	$	32,730	21

Although the Corporation’s investment portfolio overall is in a net unrealized loss position at March 31, 2024, the temporary impairment in the above noted securities is primarily the result of changes in market interest rates subsequent to purchase and it is more likely than not that the Corporation will not be required to sell these securities prior to recovery to satisfy liquidity needs, and therefore, no securities are deemed to be other-than-temporarily impaired.

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


	March 31, 2024
	Less than 12 Months				12 Months or more				Total
(dollars in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Securities available-for-sale:
U.S. asset backed securities	$	5,729	$	(32)	$	5,207	$	(143)	$	10,936	$	(175)
U.S. government agency MBS	3,653		(70)		8,255		(373)		11,908		(443)
U.S. government agency CMO	4,837		(57)		18,282		(2,264)		23,119		(2,321)
State and municipal securities	—		—		35,731		(4,180)		35,731		(4,180)
U.S. Treasuries	—		—		30,318		(2,665)		30,318		(2,665)
Non-U.S. government agency CMO	2,438		(14)		5,937		(521)		8,375		(535)
Corporate bonds	907		(94)		6,360		(839)		7,267		(933)
Total securities available-for-sale	$	17,564	$	(267)	$	110,090	$	(10,985)	$	127,654	$	(11,252)

	Less than 12 Months				12 Months or more				Total
	Fair value		Unrecognized losses		Fair value		Unrecognized losses		Fair value		Unrecognized losses
Securities held-to-maturity:
State and municipal securities	$	1,067	$	(2)	$	29,631	$	(3,172)	$	30,698	$	(3,174)
Total securities held-to-maturity	$	1,067	$	(2)	$	29,631	$	(3,172)	$	30,698	$	(3,174)


	December 31, 2023
	Less than 12 Months				12 Months or more				Total
(dollars in thousands)	Fair value		Unrealized losses		Fair value		Unrealized losses		Fair value		Unrealized losses
Securities available-for-sale:
U.S. asset backed securities	$	4,981	$	(25)	$	6,195	$	(188)	$	11,176	$	(213)
U.S. government agency MBS	4,864		(35)		8,170		(445)		13,034		(480)
U.S. government agency CMO	2,687		(36)		16,886		(2,241)		19,573		(2,277)
State and municipal securities	—		—		36,216		(3,877)		36,216		(3,877)
U.S. Treasuries	—		—		30,422		(2,560)		30,422		(2,560)
Non-U.S. government agency CMO	1,127		(4)		6,065		(548)		7,192		(552)
Corporate bonds	907		(93)		6,288		(912)		7,195		(1,005)
Total securities available-for-sale	$	14,566	$	(193)	$	110,242	$	(10,771)	$	124,808	$	(10,964)

	Less than 12 Months				12 Months or more				Total
	Fair value		Unrecognized losses		Fair value		Unrecognized losses		Fair value		Unrecognized losses
Securities held-to-maturity:
State and municipal securities	$	1,021	$	(6)	$	29,404	$	(3,097)	$	30,425	$	(3,103)
Total securities held-to-maturity	$	1,021	$	(6)	$	29,404	$	(3,097)	$	30,425	$	(3,103)

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


	March 31, 2024
	Available-for-sale				Held-to-maturity
(dollars in thousands)	Amortized cost		Fair value		Amortized cost		Fair value
Due in one year or less	$	—	$	—	$	—	$	—
Due after one year through five years	32,983		30,318		3,334		3,212
Due after five years through ten years	16,509		15,036		4,337		3,677
Due after ten years	50,887		47,115		27,486		25,114
Subtotal	100,379		92,469		35,157		32,003
Mortgage-related securities	61,486		58,527		—		—
Total	$	161,865	$	150,996	$	35,157	$	32,003

There were no sales of investment securities available for sale for the three month ended March 31, 2024, or 2023.

ACL on Securities AFS and HTM

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

For the three months ended March 31, 2024 and 2023, we had no significant ACL or provision expense and no charge-offs or recoveries on AFS or HTM securities.

Pledged Securities

As of March 31, 2024 and December 31, 2023, securities having a carrying value of $57.8 million and $60.1 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.

(4) Loans and Other Finance Receivables

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


(dollars in thousands)	March 31, 2024		December 31, 2023
Real estate loans:
Commercial mortgage	$	763,356	$	737,863
Home equity lines and loans	76,746		76,287
Residential mortgage	262,837		260,604
Construction	263,072		246,440
Total real estate loans	1,366,011		1,321,194
Commercial and industrial	328,148		302,891
Small business loans	146,604		142,342
Consumer	381		389
Leases, net	108,892		121,632
Total loans	$	1,950,036	$	1,888,448





Balances included in loans, net of fees and costs:
Residential mortgage real estate loans accounted under fair value option, at fair value	$	13,139	$	13,726
Residential mortgage real estate loans accounted under fair value option, at amortized cost	15,812		16,198
Unearned lease income included in leases, net	(16,083)		(19,210)
Unamortized net deferred loan origination costs	$	6,279	$	7,358

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Fair Value Option for Residential Mortgage Real Estate Loans

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

Nonaccrual and Past Due Loans

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


	March 31, 2024
(dollars in thousands)	30-89 days past due		Total past due		Current		Total accruing loans and leases		Nonaccrual loans and leases		Total loans portfolio and leases		% Delinquent
Commercial mortgage	$	—	$	—	$	762,785	$	762,785	$	571	$	763,356	0.07	%
Home equity lines and loans	417		417		75,148		75,565		1,181		76,746		2.08
Residential mortgage (1)	3,931		3,931		254,234		258,165		4,672		262,837		3.27
Construction	192		192		261,096		261,288		1,784		263,072		0.75
Commercial and industrial	—		—		312,841		312,841		15,307		328,148		4.66
Small business loans	1,712		1,712		132,146		133,858		12,746		146,604		9.86
Consumer	20		20		361		381		—		381		5.25
Leases, net	1,707		1,707		105,201		106,908		1,984		108,892		3.39	%
Total	$	7,979	$	7,979	$	1,903,812	$	1,911,791	$	38,245	$	1,950,036	2.37	%

(1) Includes $13.1 million of loans at fair value of which $12.4 million are current, $— are 30-89 days past due and $771 thousand are nonaccrual.


	December 31, 2023
(dollars in thousands)	30-89 days past due		Total past due		Current		Total accruing loans and leases		Nonaccrual loans and leases		Total loans portfolio and leases		% Delinquent
Commercial mortgage	$	571	$	571	$	737,292	$	737,863	$	—	$	737,863	0.08	%
Home equity lines and loans	566		566		74,684		75,250		1,037		76,287		2.10
Residential mortgage (1)	1,103		1,103		254,965		256,068		4,536		260,604		2.16
Construction	—		—		245,234		245,234		1,206		246,440		0.49
Commercial and industrial	—		—		287,478		287,478		15,413		302,891		5.09
Small business loans	1,499		1,499		131,403		132,902		9,440		142,342		7.69
Consumer	—		—		389		389		—		389		—
Leases, net	2,197		2,197		117,304		119,501		2,131		121,632		3.56	%
Total	$	5,936	$	5,936	$	1,848,749	$	1,854,685	$	33,763	$	1,888,448	2.10	%

(1) Includes $13.7 million of loans at fair value of which $12.9 million are current, $— are 30-89 days past due and $786 thousand are nonaccrual.

There were no loans in the tables above as of March 31, 2024 or December 31, 2023 that were 90+days past due and still accruing interest.

Foreclosed and Repossessed Assets

At both March 31, 2024 and December 31, 2023, there were 4 consumer mortgage loans secured by residential real estate properties (included in loans, net of fees and costs on the Consolidated Balance Sheets) totaling $937 thousand for which formal foreclosure proceedings were in process.

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Risks and Uncertainties

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

Past Due and Nonaccrual Status

The following tables presents the amortized costs basis of loans and leases on nonaccrual status and loans 90 days or more past due and still accruing, net of fees and costs as of March 31, 2024 and December 31, 2023. As of this date here were no loans 90 days or more past due and still accruing.


	March 31, 2024						December 31, 2023
(dollars in thousands)	Nonaccrual without ACL		Nonaccrual with ACL		Total nonaccrual		Nonaccrual without ACL		Nonaccrual with ACL		Total nonaccrual
Commercial mortgage	$	571	$	—	$	571	$	—	$	—	$	—
Home equity lines and loans	1,181		—		1,181		1,037		—		1,037
Residential mortgage	4,672		—		4,672		4,536		—		4,536
Construction	1,784		—		1,784		1,206		—		1,206

Commercial and industrial	3,341		11,966		15,307		3,343		12,070		15,413
Small business loans	2,609		10,137		12,746		3,607		5,833		9,440
Leases, net	1,984		—		1,984		2,131		—		2,131
Total	$	16,142	$	22,103	$	38,245	$	15,860	$	17,903	$	33,763

Collateral-dependent Loans

The following tables presents the amortized cost basis of non-accruing collateral-dependent loans by class or loans as of March 31, 2024 and December 31, 2023 under the current expected credit loss model:


	March 31, 2024						December 31, 2023
(dollars in thousands)	Real estate		Equipment and other		Total		Real estate		Equipment and other		Total
Commercial mortgage	$	571	$	—	$	571	$	—	$	—	$	—
Home equity lines and loans	1,181		—		1,181		1,037		—		1,037
Residential mortgage	4,672		—		4,672		4,536		—		4,536
Construction	1,784		—		1,784		1,206		—		1,206
Commercial and industrial	1,888		13,419		15,307		1,890		13,523		15,413
Small business loans	8,543		4,203		12,746		6,320		3,120		9,440
Leases, net	—		1,984		1,984		—		2,131		2,131
Total	$	18,639	$	19,606	$	38,245	$	14,989	$	18,774	$	33,763

(5) Allowance for Credit Losses

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

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

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Roll-Forward of ACL by Portfolio Segment

The following tables provide the activity of our allowance for credit losses for the three months ended March 31, 2024 and March 31, 2023 under the CECL model in accordance with ASC 326 (as adopted on January 1, 2023):


	Three Months Ended March 31, 2024
(dollars in thousands)	Beginning balance		Charge-offs		Recoveries		Provision (recovery of provision) for credit losses		Ending balance
Commercial mortgage	$	4,375	$	—	$	—	$	(196)	$	4,179
Home equity lines and loans	998		—		2		(42)		958
Residential mortgage	1,020		—		—		157		1,177
Construction	485		—		—		98		583
Commercial and industrial	4,518		(208)		2		771		5,083
Small business loans	7,005		(87)		3		884		7,805
Consumer	—		(1)		1		1		1
Leases	3,706		(2,148)		126		1,701		3,385
Total	$	22,107	$	(2,444)	$	134	$	3,374	$	23,171


	Three Months Ended March 31, 2023
(dollars in thousands)	Beginning Balance		Adjustment to initially apply ASU No. 2016-13 for CECL		Charge-offs		Recoveries		Provision (recovery of provision) for credit losses		Ending balance
Commercial mortgage	$	4,095	$	(526)	$	—	$	—	$	(94)	$	3,475
Home equity lines and loans	188		439		(33)		2		19		615
Residential mortgage	948		17		—		—		(97)		868
Construction	3,075		(1,763)		—		—		(193)		1,119
Commercial and industrial	4,012		(1,023)		—		39		(295)		2,733
Small business loans	4,909		1,110		—		—		297		6,316
Consumer	3		(3)		—		—		—		—
Leases	1,598		3,345		(1,464)		3		1,834		5,316
Total	$	18,828	$	1,596	$	(1,497)	$	44	$	1,471	$	20,442

Reconciliation of Provision for Credit Losses

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


	Three Months Ended March 31,
(dollars in thousands)	2024		2023
Provision for credit losses - funded	$	3,374	$	1,471
Recovery of provision for credit losses - unfunded	(508)		(72)
Total provision for credit losses	$	2,866	$	1,399

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Allowance Allocated by Portfolio Segment

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


	March 31, 2024
	Allowance for credit losses						Carrying value of loans and leases
(dollars in thousands)	Individually evaluated		Collectively evaluated		Total		Individually evaluated		Collectively evaluated		Total
Commercial mortgage	$	—	$	4,179	$	4,179	$	571	$	762,785	$	763,356
Home equity lines and loans	—		958		958		1,181		75,565		76,746
Residential mortgage	—		1,177		1,177		3,901		245,797		249,698
Construction	—		583		583		1,784		261,288		263,072
Commercial and industrial	4,061		1,022		5,083		15,307		312,841		328,148
Small business loans	4,402		3,403		7,805		12,746		133,858		146,604
Consumer	—		1		1		—		381		381
Leases, net	—		3,385		3,385		1,984		106,908		108,892
Total (1)	$	8,463	$	14,708	$	23,171	$	37,474	$	1,899,423	$	1,936,897

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


	December 31, 2023
	Allowance for credit losses						Carrying value of loans and leases
(dollars in thousands)	Individually evaluated		Collectively evaluated		Total		Individually evaluated		Collectively evaluated		Total
Commercial mortgage	$	—	$	4,375	$	4,375	$	—	$	737,863	$	737,863
Home equity lines and loans	—		998		998		1,037		75,250		76,287
Residential mortgage	—		1,020		1,020		3,750		243,128		246,878
Construction	—		485		485		1,206		245,234		246,440
Commercial and industrial	3,691		827		4,518		15,413		287,478		302,891
Small business loans	2,805		4,200		7,005		9,440		132,902		142,342
Consumer	—		—		—		—		389		389
Leases, net	—		3,706		3,706		2,131		119,501		121,632
Total (1)	$	6,496	$	15,611	$	22,107	$	32,977	$	1,841,745	$	1,874,722

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

Credit Quality Indicators

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

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

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

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

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

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

determine the allowance for credit losses at the dates indicated:


	March 31, 2024												Revolving Loans Converted to Term Loans		Revolving Loans		Total
	Term Loans
(dollars in thousands)	2024		2023		2022		2021		2020		Prior
Commercial mortgage
Pass/Watch	$	28,664	$	106,084	$	166,840	$	152,738	$	96,579	$	192,570	$	511	$	743	$	744,729
Special Mention	—		—		—		—		4,823		9,873		667		—		15,363
Substandard	—		200		—		571		—		2,493		—		—		3,264

Total	$	28,664	$	106,284	$	166,840	$	153,309	$	101,402	$	204,936	$	1,178	$	743	$	763,356
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Construction
Pass/Watch	$	24,052	$	74,841	$	77,792	$	20,778	$	24,823	$	4,353	$	123	$	25,066	$	251,828
Special Mention	—		—		—		1,352		638		4,329		—		3,140		9,459
Substandard	—		—		—		67		—		1,718		—		—		1,785

Total	$	24,052	$	74,841	$	77,792	$	22,197	$	25,461	$	10,400	$	123	$	28,206	$	263,072
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial and industrial
Pass/Watch	$	35,892	$	24,890	$	28,772	$	23,569	$	9,994	$	35,967	$	—	$	134,590	$	293,674
Special Mention	—		—		—		—		—		1,356		—		4,706		6,062
Substandard	—		—		3,940		2,906		—		6,886		—		14,680		28,412

Total	$	35,892	$	24,890	$	32,712	$	26,475	$	9,994	$	44,209	$	—	$	153,976	$	328,148
Current period gross charge-offs	$	—	$	(204)	$	—	$	—	$	—	$	—	$	—	$	(4)	$	(208)

Small business loans
Pass/Watch	$	8,549	$	30,066	$	28,585	$	35,029	$	11,274	$	7,382	$	—	$	12,552	$	133,437
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		86		2,482		5,897		2,804		—		—		1,898		13,167

Total	$	8,549	$	30,152	$	31,067	$	40,926	$	14,078	$	7,382	$	—	$	14,450	$	146,604
Current period gross charge-offs	$	—	$	—	$	—	$	(44)	$	—	$	—	$	—	$	(43)	$	(87)

Total by risk rating
Pass/Watch	$	97,157	$	235,881	$	301,989	$	232,114	$	142,670	$	240,272	$	634	$	172,951	$	1,423,668
Special Mention	—		—		—		1,352		5,461		15,558		667		7,846		30,884
Substandard	—		286		6,422		9,441		2,804		11,097		—		16,578		46,628

Total	$	97,157	$	236,167	$	308,411	$	242,907	$	150,935	$	266,927	$	1,301	$	197,375	$	1,501,180
Total current period gross charge-offs	$	—	$	(204)	$	—	$	(44)	$	—	$	—	$	—	$	(47)	$	(295)

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	December 31, 2023												Revolving Loans Converted to Term Loans		Revolving Loans		Total
	Term Loans
(dollars in thousands)	2023		2022		2021		2020		2019		Prior
Commercial mortgage
Pass/Watch	$	106,341	$	160,302	$	158,647	$	97,535	$	56,382	$	133,349	$	511	$	423	$	713,490
Special Mention	—		—		—		4,425		4,341		9,975		667		—		19,408
Substandard	200		—		571		—		1,635		2,233		—		326		4,965
Doubtful	—		—		—		—		—		—		—		—		—
Total	$	106,541	$	160,302	$	159,218	$	101,960	$	62,358	$	145,557	$	1,178	$	749	$	737,863
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Construction
Pass/Watch	$	67,776	$	88,737	$	21,793	$	27,336	$	2,307	$	2,093	$	123	$	25,976	$	236,141
Special Mention	—		—		1,329		—		511		4,329		—		2,924		9,093
Substandard	—		—		—		—		—		1,206		—		—		1,206
Doubtful	—		—		—		—		—		—		—		—		—
Total	$	67,776	$	88,737	$	23,122	$	27,336	$	2,818	$	7,628	$	123	$	28,900	$	246,440
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial and industrial
Pass/Watch	$	26,314	$	38,748	$	24,523	$	8,449	$	4,148	$	33,726	$	—	$	131,304	$	267,212
Special Mention	500		9		—		—		—		1,361		—		6,440		8,310
Substandard	—		—		2,906		—		300		9,469		—		14,694		27,369
Doubtful	—		—		—		—		—		—		—		—		—
Total	$	26,814	$	38,757	$	27,429	$	8,449	$	4,448	$	44,556	$	—	$	152,438	$	302,891
Current period gross charge-offs	$	(209)	$	(55)	$	—	$	(2)	$	—	$	—	$	—	$	—	$	(266)

Small business loans
Pass/Watch	$	35,764	$	26,621	$	37,278	$	11,687	$	6,672	$	920	$	—	$	12,507	$	131,449
Special Mention	—		—		—		909		—		—		—		314		1,223
Substandard	49		1,523		5,090		2,122		—		—		—		886		9,670
Doubtful	—		—		—		—		—		—		—		—		—
Total	$	35,813	$	28,144	$	42,368	$	14,718	$	6,672	$	920	$	—	$	13,707	$	142,342
Current period gross charge-offs	$	—	$	—	$	—	$	(11)	$	(912)	$	—	$	—	$	(565)	$	(1,488)

Total by risk rating
Pass/Watch	$	236,195	$	314,408	$	242,241	$	145,007	$	69,509	$	170,088	$	634	$	170,210	$	1,348,292
Special Mention	500		9		1,329		5,334		4,852		15,665		667		9,678		38,034
Substandard	249		1,523		8,567		2,122		1,935		12,908		—		15,906		43,210
Doubtful	—		—		—		—		—		—		—		—		—
Total	$	236,944	$	315,940	$	252,137	$	152,463	$	76,296	$	198,661	$	1,301	$	195,794	$	1,429,536
Total current period gross charge-offs	$	(209)	$	(55)	$	—	$	(13)	$	(912)	$	—	$	—	$	(565)	$	(1,754)

The Corporation had no loans with a risk rating of Doubtful included within recorded investment in loans and leases held for investment at March 31, 2024 and December 31, 2023.

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


	March 31, 2024												Revolving Loans		Total
	Term Loans
(dollars in thousands)	2024		2023		2022		2021		2020		Prior
Home equity lines and loans
Performing	$	122	$	340	$	788	$	311	$	347	$	4,152	$	69,025	$	75,085
Nonperforming	—												1,661		1,661
Total	$	122	$	340	$	788	$	311	$	347	$	4,152	$	70,686	$	76,746
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Residential mortgage (1)
Performing	$	7,247	$	49,114	$	149,606	$	21,692	$	6,430	$	11,708	$	—	$	245,797
Nonperforming	—		—		1,515		—		1,031		1,355		—		3,901
Total	$	7,247	$	49,114	$	151,121	$	21,692	$	7,461	$	13,063	$	—	$	249,698
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer
Performing	$	—	$	40	$	30	$	—	$	—	$	259	$	52	$	381
Nonperforming	—		—		—		—		—		—		—		—
Total	$	—	$	40	$	30	$	—	$	—	$	259	$	52	$	381
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	(1)	$	(1)

Leases, net
Performing	$	123	$	20,621	$	50,571	$	27,386	$	8,207	$	—	$	—	$	106,908
Nonperforming	—		285		1,081		408		210		—		—		1,984
Total	$	123	$	20,906	$	51,652	$	27,794	$	8,417	$	—	$	—	$	108,892
Current period gross charge-offs	$	—	$	(369)	$	(1,429)	$	(277)	$	(73)	$	—	$	—	$	(2,148)

Total by Payment Performance
Performing	$	7,492	$	70,115	$	200,995	$	49,389	$	14,984	$	16,119	$	69,077	$	428,171
Nonperforming	—		285		2,596		408		1,241		1,355		1,661		7,546
Total	$	7,492	$	70,400	$	203,591	$	49,797	$	16,225	$	17,474	$	70,738	$	435,717
Total current period gross charge-offs	$	—	$	(369)	$	(1,429)	$	(277)	$	(73)	$	—	$	(1)	$	(2,149)
(1) Excludes $13.1 million of loans at fair value.

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	December 31, 2023												Revolving Loans		Total
	Term Loans
(dollars in thousands)	2023		2022		2021		2020		2019		Prior
Home equity lines and loans
Performing	$	343	$	795	$	314	$	352	$	2,191	$	2,295	$	68,600	$	74,890
Nonperforming	—		—		—		—		—		—		1,397		1,397
Total	$	343	$	795	$	314	$	352	$	2,191	$	2,295	$	69,997	$	76,287
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	(33)	$	—	$	(54)	$	(87)

Residential mortgage (1)
Performing	$	48,576	$	154,219	$	22,237	$	6,260	$	456	$	11,380	$	—	$	243,128
Nonperforming	—		1,350		—		1,043		—		1,357		—		3,750
Total	$	48,576	$	155,569	$	22,237	$	7,303	$	456	$	12,737	$	—	$	246,878
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Consumer
Performing	$	39	$	35	$	—	$	—	$	32	$	234	$	49	$	389
Nonperforming	—		—		—		—		—		—		—		—
Total	$	39	$	35	$	—	$	—	$	32	$	234	$	49	$	389
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	(2)	$	(2)

Leases, net
Performing	$	23,054	$	55,940	$	30,876	$	9,718	$	—	$	—	$	—	$	119,588
Nonperforming	263		1,194		368		219		—		—		—		2,044
Total	$	23,317	$	57,134	$	31,244	$	9,937	$	—	$	—	$	—	$	121,632
Current period gross charge-offs	$	(128)	$	(2,165)	$	(1,450)	$	(290)	$	—	$	—	$	—	$	(4,033)

Total by Payment Performance
Performing	$	72,012	$	210,989	$	53,427	$	16,330	$	2,679	$	13,909	$	68,649	$	437,995
Nonperforming	263		2,544		368		1,262		—		1,357		1,397		7,191
Total	$	72,275	$	213,533	$	53,795	$	17,592	$	2,679	$	15,266	$	70,046	$	445,186
Total current period gross charge-offs	$	(128)	$	(2,165)	$	(1,450)	$	(290)	$	(33)	$	—	$	(56)	$	(4,122)

(1) Excludes $13.7 million of fair value loans

Modifications to Borrowers Experiencing Financial Difficulty

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

The following presents, by class of loans, information regarding accruing and nonaccrual modified loans to borrowers experiencing financial difficulty during the three months ended March 31, 2024. There were no modifications granted to debtors experiencing financial difficulty for the three months ended March 31, 2023.

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	Three Months Ended March 31, 2024
	Number of Loans	Amortized Cost Basis		% of Total Class of Financing Receivable		Related Reserve
(dollars in thousands)
Accruing Modified Loans to Borrowers Experiencing Financial Difficulty:
Small business loans	2	$	359	0.2	%	$	—
Commercial & industrial	2	1,097		0.3	%	—
Total	4	$	1,456			$	—
Nonaccrual Modified Loans to Borrowers Experiencing Financial Difficulty:
Small business loans	1	$	895	0.6	%	$	784

Total	1	$	895			$	784

The following presents, by class of loans, information regarding accruing and nonaccrual modified loans to borrowers experiencing financial difficulty during the three months ended March 31, 2024.

Three Months Ended March 31, 2024

Number of Loans

(dollars in thousands)

Financial Effect

Accruing Modified Loans to Borrowers Experiencing Financial Difficulty:

Small business loans

Extend maturity date

Commercial & industrial

Extend maturity date and allow additional lender funding

Total

Nonaccrual Modified Loans to Borrowers Experiencing Financial Difficulty:

Small business loans

Total

There were 5 and no modifications granted to borrowers experiencing financial difficulty for the three months ended March 31, 2024 and March 31, 2023, respectively. There were no loans that had a payment default during the three months ended March 31, 2024 and March 31, 2023 that were modified in the 12 months before default to borrowers experiencing financial difficulty. There were no commitments to lend additional funds to the borrowers experiencing financial difficulty that had modifications during the three months ended March 31, 2024 and March 31, 2023.

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

The Corporation’s short-term borrowings generally consist of federal funds purchased and short-term borrowings extended under agreements with the FHLB or other correspondent banks. The Corporation has three unsecured Federal funds borrowing facility with a correspondent bank for up to $49 million. Federal funds purchased generally represent one-day borrowings. The Corporation had $0 in Federal funds purchased at March 31, 2024 and December 31, 2023. The Corporation also has a facility with the Federal Reserve Bank discount window of $6.5 million. This facility is fully secured by investment securities. There were no borrowings under this at March 31, 2024 and December 31, 2023. The Corporation's facility with the Federal Reserve’s BTFP in the amount of $33 million expired in March 2024.

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


(dollars in thousands)	Maturity date	Interest rate	March 31, 2024		December 31, 2023
FHLB Open Repo Plus Weekly	06/10/2024	5.68%	$	84,789	$	104,792
FRB BTFP Advances	03/29/2024	4.76%	—		33,000
FHLB Mid-term Repo Fixed	9/30/2024	4.60%	3,432		3,432
FHLB Mid-term Repo Fixed	10/25/2024	5.03%	8,097		—
FHLB Mid-term Repo Fixed	1/27/2025	4.85%	8,000		—
FHLB Mid-term Repo Fixed	2/24/2025	5.35%	7,813		—
Total Short-Term Borrowings			$	112,131	$	141,224

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


(dollars in thousands)	Maturity date	Interest rate	March 31, 2024		December 31, 2023
FHLB Mid-term Repo Fixed	12/22/2025	4.23%	$	8,935	$	8,935
FHLB Mid-term Repo Fixed	10/14/2025	5.16%	9,492		9,492
FHLB Mid-term Repo Fixed	7/14/2026	4.57%	15,245		15,245
Total Long-Term Borrowings			$	33,672	$	33,672

The FHLB has also issued $156.0 million of letters of credit to the Corporation for the benefit of the Corporation’s public deposit funds and loan customers. These letters of credit expire throughout the remainder of 2024.

The Corporation has a maximum borrowing capacity with the FHLB of $656.0 million as of March 31, 2024 and $626.8 million as of December 31, 2023. All advances and letters of credit from the FHLB are secured by a blanket lien on non-pledged, mortgage-related loans and securities as part of the Corporation’s borrowing agreement with the FHLB.

(7) Servicing Assets

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

Residential Mortgage Loans

The related MSR asset is amortized over the period of the estimated future net servicing life of the underlying assets. MSRs are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the MSR. The Corporation serviced $932.5 million and $945.2 million of residential mortgage loans as of March 31, 2024 and December 31, 2023, respectively. During the three months ended March 31, 2024, the Corporation recognized servicing fee income of $586 thousand, compared to $636 thousand, during the three months ended March 31, 2023.

Changes in the MSR balance are summarized as follows:


	Three months ended March 31,
(dollars in thousands)	2024		2023
Balance at beginning of the period	$	8,622	$	9,942
Servicing rights capitalized	10		—
Amortization of servicing rights	(318)		(371)
Change in valuation allowance	—		2
Balance at end of the period	$	8,314	$	9,573

Activity in the valuation allowance for MSRs was as follows:


	Three months ended March 31,
(dollars in thousands)	2024		2023
Valuation allowance, beginning of period	$	—	$	(2)
Impairment	—		—
Recovery	—		2
Valuation allowance, end of period	$	—	$	—

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 March 31, 2024, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 8.29% and a discount rate equal to 9.50%. At December 31, 2023, the key assumptions used to determine the fair value of the Corporation’s MSRs included a lifetime constant prepayment rate equal to 8.57%

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and a discount rate equal to 9.50%. Due in part to market volatility as interest rates increased, the prepayment speed assumption has decreased from December 31, 2023 to March 31, 2024. As interest rates have started to increase and the number of mortgage refinancings have started to decline, model inputs have been adjusted to align the MSRs fair value with market conditions.

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


(dollars in thousands)	March 31, 2024			December 31, 2023
Fair value of residential mortgage servicing rights	$	10,973		$	11,221

Weighted average life (months)	28			28

Prepayment speed	8.29		%	8.57		%
Impact on fair value:
10% adverse change	$	(253)		$	(506)
20% adverse change	(496)			(973)

Discount rate	9.50		%	9.50		%
Impact on fair value:
10% adverse change	$	(404)		$	(415)
20% adverse change	(781)			(799)

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

SBA Loans

SBA loan servicing assets are amortized over the period of the estimated future net servicing life of the underlying assets. SBA loan servicing assets are evaluated quarterly for impairment based upon the fair value of the rights as compared to their amortized cost. Impairment is recognized on the income statement to the extent the fair value is less than the capitalized amount of the SBA loan servicing asset. The Corporation serviced $236.6 million and $225.8 million of SBA loans, as of March 31, 2024 and December 31, 2023, respectively.

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


	Three months ended March 31,
(dollars in thousands)	2024		2023
Balance at beginning of the period	$	3,127	$	2,404
Servicing rights capitalized	197		214
Amortization of servicing rights	(241)		(195)
Change in valuation allowance	176		129
Balance at end of the period	$	3,259	$	2,552

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


	Three months ended March 31,
(dollars in thousands)	2024		2023
Valuation allowance, beginning of period	$	(268)	$	(364)
Impairment	—		—
Recovery	176		129
Valuation allowance, end of period	$	(92)	$	(235)

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 March 31, 2024, the key assumptions used to determine the fair

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value of the Corporation’s SBA loan servicing rights included a lifetime constant prepayment rate equal to 15.21% and a discount rate equal to 13.93%. At December 31, 2023, the key assumptions used to determine the fair value of the Corporation’s SBA loan servicing rights included a lifetime constant prepayment rate equal to 14.70% and a discount rate equal to 14.66%.

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)	March 31, 2024			December 31, 2023
Fair value of SBA loan servicing rights	$	3,567		$	3,376

Weighted average life (years)	3.3			3.8

Prepayment speed	15.21		%	14.70		%
Impact on fair value:
10% adverse change	$	(143)		$	(125)
20% adverse change	(275)			(241)

Discount rate	13.93		%	14.66		%
Impact on fair value:
10% adverse change	$	(79)		$	(74)
20% adverse change	(155)			(145)

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

(8) Fair Value Measurements and Disclosures

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

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

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

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

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

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

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

Securities

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

Mortgage Loans Held for Sale

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

Mortgage Loans Held for Investment

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

Derivative Financial Instruments

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

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


	March 31, 2024
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets
Securities available for sale:
U.S. asset backed securities	$	19,153	$	—	$	19,153	$	—
U.S. government agency MBS	22,347		—		22,347		—
U.S. government agency CMO	23,119		—		23,119		—
State and municipal securities	35,731		—		35,731		—
U.S. Treasuries	30,318		30,318		—		—
Non-U.S. government agency CMO	13,061		—		13,061
Corporate bonds	7,267		—		7,267		—
Equity investments	2,092		—		2,092		—
Mortgage loans held for sale	29,124		—		29,124		—
Mortgage loans held for investment	13,139		—		13,139		—
Interest rate lock commitments	288		—		—		288
Forward commitments	—		—		—		—
Customer derivatives - interest rate swaps	3,758		—		3,758		—
Interest rate swaps	437		—		437		—
Total	$	199,834	$	30,318	$	169,228	$	288

Liabilities
Interest rate lock commitments	$	84	$	—	$	—	$	84

Customer derivatives - interest rate swaps	3,754		—		3,754		—
Risk Participation Agreements	5		—		5		—
Total	$	3,843	$	—	$	3,759	$	84

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	December 31, 2023
(dollars in thousands)	Total		Level 1		Level 2		Level 3
Assets
Securities available for sale:
U.S. asset backed securities	$	16,824	$	—	$	16,824	$	—
U.S. government agency MBS	22,634		—		22,634		—
U.S. government agency CMO	19,573		—		19,573		—
State and municipal securities	36,216		—		36,216		—
U.S. Treasuries	30,422		30,422		—		—
Non-U.S. government agency CMO	13,155		—		13,155		—
Corporate bonds	7,195		—		7,195		—
Equity investments	2,121		—		2,121		—
Mortgage loans held for sale	24,816		—		24,816		—
Mortgage loans held for investment	13,726		—		13,726		—
Interest rate lock commitments	214		—		—		214
Customer derivatives - interest rate swaps	3,528		—		3,528		—
Total	$	190,424	$	30,422	$	159,788	$	214

Liabilities
Interest rate lock commitments	$	17	$	—	$	—	$	17
Forward commitments	41		—		41		—
Customer derivatives - interest rate swaps	3,544		—		3,544		—
Risk Participation Agreements	11		—		11		—
Total	$	3,613	$	—	$	3,596	$	17

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


(dollars in thousands)	March 31, 2024		December 31, 2023
Mortgage servicing rights	$	8,314	$	8,621
SBA loan servicing rights	3,259		3,127
Individually evaluated loans (1)
Commercial and industrial	7,905		9,818
Small business loans	5,735		3,134
Total	$	25,213	$	24,700

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

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

(dollars in thousands)

Fair Value

Valuation Technique

Significant Unobservable Input

Range of Inputs

March 31, 2024

13,640

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

2%-33% discount

December 31, 2023

12,952

Appraisal of collateral

Management adjustments on appraisals for property type and recent activity

2%-33% discount

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

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Cash and Cash Equivalents

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

Loans Receivable

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

Servicing Assets

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

Individually Evaluated Loans

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

Accrued Interest Receivable and Payable

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

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

Subordinated Debt

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

Off-Balance Sheet Financial Instruments

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

Derivative Financial Instruments

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

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


		March 31, 2024				December 31, 2023
(dollars in thousands)	Fair Value Hierarchy Level	Carrying amount		Fair value		Carrying amount		Fair value
Financial assets:
Cash and cash equivalents	Level 1	$	23,027	$	23,027	$	56,697	$	56,697
Mortgage loans held for sale	Level 2	29,124		29,124		24,816		24,816
Loans receivable, net of the allowance for credit losses	Level 3	1,943,176		1,889,637		1,882,080		1,832,558
Mortgage loans held for investment	Level 2	13,139		13,139		13,726		13,726





Financial liabilities:
Deposits	Level 2	$	1,900,696	$	1,888,300	$	1,823,462	$	1,834,700
Borrowings	Level 2	145,803		159,800		174,896		176,400
Subordinated debentures	Level 2	49,867		49,721		49,836		50,223

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


	Three months ended March 31,
(dollars in thousands)	2024		2023
Balance at beginning of the period	$	214	$	87
Increase in value	74		52
Balance at end of the period	$	288	$	139

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

(dollars in thousands)

Fair Value

Valuation Technique

Significant Unobservable Input

Range of Inputs

Weighted Average

March 31, 2024

288

Market comparable pricing

Pull through

1 - 99%

79.83%

December 31, 2023

214

Market comparable pricing

Pull through

1 - 99%

79.48

(9) Derivative Financial Instruments

Risk Management Objective of Using Derivatives

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

Interest Rate Swaps

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

In June 2023, the Corporation entered into three interest rate swaps classified as cash flow hedges with notional amounts of $25 million each, to hedge the interest payments received on short term borrowings. Under the terms of the three swap agreements, the Corporation pays average fixed rates of 4.070%, 4.027% and 4.117%, and receives variable rates in return indexed to SOFR. The swaps mature between May, June, and December 2026. The Corporation performed an assessment of the hedge for effectiveness at the inception of the hedge and performs an assessment on a recurring basis and determined that the derivative currently is and is expected to be highly effective in offsetting changes in cash flows of the hedged item. For the three months ended March 31, 2024 and March 31, 2023, approximately $749 thousand and zero respectively, net of tax, is recorded in total comprehensive income as unrealized gains. This amount could differ from amounts actually recognized due to changes in interest rates, hedge de-designations and the addition of other hedges subsequent to March 31, 2024. At March 31, 2024 and December 31, 2023, the combined notional

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amount of the interest rate swaps was $75.0 million and $75.0 million and the fair value was an asset of $437 thousand and a liability of $539 thousand, respectively.

Mortgage Banking Derivatives

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

Customer Derivatives – Interest Rate Swaps

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

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


		March 31, 2024				December 31, 2023
(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	$	61,882	$	288	$	33,735	$	214
Negative fair values	Other liabilities	15,943		(84)		5,399		(17)
Total		$	77,825	$	204	$	39,134	$	197

Forward Commitments
Positive fair values	Other assets	$	—	$	—	$	—	$	—
Negative fair values	Other liabilities	—		—		4,250		(41)
Total		$	—	$	—	$	4,250	$	(41)

Customer Derivatives - Interest Rate Swaps
Positive fair values	Other assets	$	50,119	$	3,758	$	50,593	$	3,528
Negative fair values	Other liabilities	50,119		(3,754)		50,593		(3,544)
Total		$	100,238	$	4	$	101,186	$	(17)

Risk Participation Agreements
Positive fair values	Other assets	$	—	$	—	$	—	$	—
Negative fair values	Other liabilities	7,051		(5)		7,082		(11)
Total		$	7,051	$	(5)	$	7,082	$	(11)

Interest Rate Swaps
Positive fair values	Other assets	$	75,000	$	437	$	—	$	—
Negative fair values	Other liabilities	—		—		75,000		(539)
Total		$	75,000	$	437	$	75,000	$	(539)

Total derivative financial instruments		$	260,114	$	640	$	226,652	$	(410)

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

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


	Three months ended March 31,
(dollars in thousands)	2024		2023
Interest Rate Lock Commitments	$	7	$	(37)
Forward Commitments	41		—
Customer Derivatives - Interest Rate Swaps	21		(28)
Risk Participation Agreements	6		(4)
Interest Rate Swaps	976		—
Net fair value gains (losses) on derivative financial instruments	$	1,051	$	(69)

Net realized losses on derivative hedging activities were $19 thousand and $0 for the three months ended March 31, 2024 and 2023, respectively, and are included in non-interest income in the consolidated statements of income.

(10) Segments

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

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

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

Meridian’s mortgage banking segment (“Mortgage”) consists of 8 loan production offices throughout suburban Philadelphia and Maryland. The Mortgage segment originates 1 – 4 family residential mortgages and sells nearly all of its production to third party investors. The unit generates net interest income on the loans it originates and holds temporarily, then earns fee income (primarily gain on sales) at the time of the sale. The unit also recognizes income from document preparation fees, changes in portfolio pipeline fair values and net hedging gains (losses), if any.

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


	Segment Information
	Three Months Ended March 31, 2024								Three Months Ended March 31, 2023
(Dollars in thousands)	Bank		Wealth		Mortgage		Total		Bank		Wealth		Mortgage		Total
Net interest income	$	16,592	$	(6)	$	23	$	16,609	$	17,627	$	24	$	26	$	17,677
Provision for credit losses	2,866		—		—		2,866		1,399		—		—		1,399
Net interest income after provision	13,726		(6)		23		13,743		16,228		24		26		16,278

Non-interest Income
Mortgage banking income	88		—		3,546		3,634		58		—		3,214		3,272
Wealth management income	—		1,317		—		1,317		—		1,196		—		1,196
SBA loan income	986		—		—		986		713		—		—		713
Net change in fair values	28		—		(130)		(102)		(31)		—		78		47
Net gain on hedging activity	—		—		(19)		(19)		—		—		—		—
Other	772		—		1,396		2,168		689		—		721		1,410
Non-interest income	1,874		1,317		4,793		7,984		1,429		1,196		4,013		6,638
Non-interest expense	12,060		833		5,281		18,174		10,698		989		6,102		17,789
Income (loss) before income taxes	$	3,540	$	478	$	(465)	$	3,553	$	6,959	$	231	$	(2,063)	$	5,127

Total Assets	$	2,219,626	$	9,335	$	63,962	$	2,292,923	$	2,171,679	$	8,090	$	50,014	$	2,229,783

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

You should read the following discussion and analysis in conjunction with the unaudited consolidated interim financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and the related notes and the discussion under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the year ended December 31, 2023 included in Meridian Corporation’s Annual Report on Form 10-K filed with the SEC.

Forward-Looking Statements

Meridian Corporation may from time to time make written or oral “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to Meridian Corporation’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Meridian Corporation’s control). Numerous competitive, economic, regulatory, legal and technological factors, risks and uncertainties that could cause actual results to differ materially include, without limitation: credit losses and the credit risk of our commercial and consumer loan products; changes in the level of charge-offs and changes in estimates of the adequacy of the allowance for credit losses, or ACL; cyber-security concerns; rapid technological developments and changes; increased competitive pressures; changes in spreads on interest-earning assets and interest-bearing liabilities; changes in general economic conditions and conditions within the securities markets; unanticipated changes in our liquidity position; unanticipated changes in regulatory and governmental policies impacting interest rates and financial markets; legislation affecting the financial services industry as a whole, and Meridian Corporation, in particular; changes in accounting policies, practices or guidance; developments affecting the industry and the soundness of financial institutions and further disruption to the economy and U.S. banking system; among others, could cause Meridian Corporation’s financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in such forward-looking statements.

Meridian Corporation cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Meridian Corporation’s filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2023 and subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Meridian Corporation does not undertake to update any forward-looking statement whether written or oral, that may be made from time to time by Meridian Corporation or by or on behalf of Meridian Bank.

Critical Accounting Policies and Estimates

Our critical accounting policies are described in detail in the "Critical Accounting Policies" section within Item 7 of our 2023 Annual Form Form 10-K. The SEC defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. See Note 1, "Summary of Significant Accounting Policies" for additional information on the adoption of ASC 326, which changes the methodology under which management calculates its reserve for loans and leases, now referred to as the allowance for credit losses. Management considers the measurement of the allowance for credit losses to be a critical accounting policy.

Executive Overview

The following items highlight the Corporation’s changes in its financial condition as of March 31, 2024 compared to December 31, 2023 and the results of operations for the three months ended March 31, 2024 compared to the same period in 2023. More detailed information related to these highlights can be found in the sections that follow.

Bank Sector Considerations

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

As a commercial bank, the majority of Meridian's deposit base is comprised of business deposits (52%), with consumer deposits amounting to 14% at March 31, 2024. Municipal deposits (10%) and brokered deposits (24%) provide growth funding. Historically, business deposits lag loan fundings. A typical business relationship maintains operating accounts, investment accounts or sweep accounts and business owners may also have personal savings or wealth accounts. Deposit balances in business accounts have a tendency to be higher on average than consumer accounts. At March 31, 2024, 65% of business accounts and 89% of consumer accounts were fully insured by the FDIC. The municipal deposits are 100% collateralized and brokered deposits are 100% FDIC insured. The level of uninsured deposits for the entire deposit base was 19% at March 31, 2024.

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Meridian also maintains borrowing arrangements with various correspondent banks to meet short-term liquidity needs and has access to approximately $1.0 billion in liquidity from numerous sources including its borrowing capacity with the FHLB and other financial institutions, as well as funding through the CDARS program or through brokered CD arrangements. Management believes that the above sources of liquidity provide Meridian with the necessary resources to meet its short-term and long-term funding requirements.

Changes in Financial Condition - March 31, 2024 Compared to December 31, 2023

•Total assets increased $46.7 million, or 2.1%, to $2.3 billion as of March 31, 2024.

•Portfolio loans increased $61.6 million, or 3.3%, to $2.0 billion as of March 31, 2024.

•Mortgage loans held for sale increased $4.3 million, or 17.4%, to $29.1 million at March 31, 2024.

•Total deposits increased $77.2 million or 4.2% to $1.9 billion at March 31, 2024.

•Non-interest bearing deposits decreased $18.7 million, or 7.8%, to $220.6 million as of March 31, 2024.

•The Corporation returned $1.4 million of capital to Meridian shareholders during the three months ended March 31, 2024 through a $0.125 quarterly dividend.

Three Month Results of Operations - March 31, 2024 Compared to the Same Period in 2023

•Net income was $2.7 million, or $0.24 per diluted share, down $1.3 million, or 33.4%, driven by an increase in interest expense and the provision for credit losses, partially offset by increases in interest income and non-interest income.

•The return on average assets and return on average equity were 0.47% and 6.73%, respectively, for the first quarter 2024, compared to 0.78% and 10.65%, respectively, for the first quarter 2023.

•Net interest margin decreased to 3.09% from 3.61% due to the impact of deposit and borrowing repricing outpacing the repricing of interest earnings assets, mainly loans.

•On January 1, 2023, the Corporation adopted the new accounting standard, referred to as CECL, which transitioned from the incurred loss model based on historical loss experience and economic and market conditions to the expected loss model. Expected credit losses are estimated over the contractual term, adjusted for expected prepayments and recoveries, and take into account macroeconomic forecasts. The overall provision for credit losses increased $1.5 million when comparing the first quarter 2024 to the first quarter 2023. The increase was due to a $2.0 million increase in specific reserves, mainly on small business loans and existing non-accrual loans, combined with provisioning for loan growth and charge-offs, partially offset by a reduction of $508 thousand in the provision for unfunded loans.

•Non-interest income increased $1.3 million, or 20.3%, to $8.0 million driven by a $362 thousand increase in mortgage banking income, a $273 thousand increase in SBA loan income, a $121 thousand of an increase in wealth management fee income, and increase of $743 thousand in other income.

•Non-interest expense increased $385 thousand, or 2.2%, to $18.2 million due to increases of $675 thousand in professional fees and $385k in other expense, partially offset by a $488 thousand decrease in salaries and employee benefits.

Key Performance Ratios

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


	Three months ended March 31,
	2024			2023
Return on average assets, annualized	0.47		%	0.78		%
Return on average equity, annualized	6.73		%	10.65		%
Net interest margin (tax effected yield)	3.09		%	3.61		%
Basic earnings per share	$	0.24		$	0.36
Diluted earnings per share	$	0.24		$	0.34

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


(dollars in thousands, except per share amounts)	March 31, 2024			December 31, 2023
Book value per common share	$	14.30		$	14.13
Tangible book value per common share (1)	$	13.96		$	13.78
Allowance as a percentage of loans and leases held for investment	1.18		%	1.17		%
Allowance as a percentage of loans and leases held for investment (excl. loans at fair value and PPP loans) (1)	1.19		%	1.17		%
Tier I capital to risk weighted assets	7.65		%	7.90		%
Tangible common equity to tangible assets ratio (1)	6.82		%	6.87		%
Loans and other finance receivables, net of fees and costs	$	1,956,315		$	1,895,806

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Total assets	$	2,292,923	$	2,246,193
Total stockholders’ equity	$	159,936	$	158,022

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

Components of Net Income

Net income is comprised of five major elements:

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

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

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

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

•Income Taxes, which include state and federal jurisdictions.

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NET INTEREST INCOME

Net interest income is an integral source of the Corporation’s revenue. The table below present a summary for the three months ended March 31, 2024 and 2023, 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.

Analyses of Interest Rates and Interest Differential

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


	For the Three Months Ended March 31,
(dollars in thousands)	2024						2023
	Average Balance		Interest Income/ Expense		Yields/ Rates		Average Balance		Interest Income/ Expense		Yields/ Rates
Assets:
Cash and cash equivalents	$	21,985	$	299	5.47	%	$	19,314	$	215	4.51	%
Federal funds sold	74		1		5.44		204		2		3.98
Investment securities - taxable	129,660		1,251		3.88		114,378		959		3.40
Investment securities - tax exempt (1)	57,797		405		2.82		62,839		427		2.76
Loans held for sale	19,509		323		6.66		15,403		217		5.71
Loans held for investment (1)	1,944,187		35,018		7.24		1,783,322		29,202		6.64
Total loans	1,963,696		35,341		7.24		1,798,725		29,419		6.63
Total interest-earning assets	2,173,212		37,297		6.90	%	1,995,460		31,022		6.30	%
Noninterest earning assets	95,835						93,139
Total assets	$	2,269,047					$	2,088,599
Liabilities and stockholders' equity:
Interest-bearing demand deposits	$	139,225	$	1,367	3.95	%	$	232,089	$	1,855	3.24	%
Money market and savings deposits	773,123		7,855		4.09		648,911		4,477		2.80
Time deposits	677,920		8,170		4.85		582,534		5,115		3.56
Total interest - bearing deposits	1,590,268		17,392		4.40		1,463,534		11,447		3.17
Borrowings	196,909		2,435		4.97		100,054		1,237		5.01
Subordinated debentures	49,847		779		6.29		40,336		586		5.89
Total interest-bearing liabilities	1,837,024		20,606		4.51		1,603,924		13,270		3.36
Noninterest-bearing deposits	233,255						296,037
Other noninterest-bearing liabilities	38,946						35,459
Total liabilities	2,109,225						1,935,420
Total stockholders' equity	159,822						153,179
Total stockholders' equity and liabilities	$	2,269,047					$	2,088,599
Net interest income and spread (1)			$	16,691	2.39				$	17,752	2.94
Net interest margin (1)					3.09	%					3.61	%

(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 months ended March 31, 2024 as compared to the same period in 2023, allocated by rate and volume. Changes in interest income and/or expense attributable to both rate and volume have been allocated proportionately based on the relationship of the absolute dollar amount of the change in each category.


	Three Months Ended March 31,
	2024 Compared to 2023
(dollars in thousands)	Rate		Volume		Total
Interest income:
Cash and cash equivalents	$	52	$	32	$	84
Federal funds sold	—		(1)		(1)
Investment securities - taxable	155		137		292
Investment securities - tax exempt (1)	13		(35)		(22)
Loans held for sale	42		64		106
Loans held for investment (1)	3,057		2,759		5,816
Total loans	3,099		2,823		5,922
Total interest income	$	3,319	$	2,956	$	6,275
Interest expense:
Interest-bearing demand deposits	$	362	$	(850)	$	(488)
Money market and savings deposits	2,404		974		3,378
Time deposits	2,122		933		3,055
Total interest - bearing deposits	4,888		1,057		5,945
Borrowings	—		1,198		1,198
Subordinated debentures	47		146		193
Total interest expense	$	4,935	$	2,401	$	7,336
Interest differential	$	(1,616)	$	555	$	(1,061)

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

Three Months Ended March 31, 2024 Compared to the Same Period in 2023

For the three months ended March 31, 2024 as compared to the same period in 2023, tax-equivalent interest income increased $6.3 million as favorable rate and volume changes contributed $3.3 million, and $3.0 million, respectively, to interest income. The favorable change in rates led to increased yields on loans held for sale (up 95 basis points) and loans held for investment (up 60 basis points) that favorably impact interest income by $3.1 million, overall. The loans held for investment average balances increased $160.9 million, leading to a favorable volume impact on interest income of $2.8 million, while the increase in loans held for sale average balances of $4.1 million had an small but favorable impact to interest income of $64 thousand. Growth in the loans held for investment portfolio was led by average balance increases in commercial real estate ($179.0 million), residential real estate ($29.7 million), home equity loans ($15.3 million), commercial loans ($8.6 million), and SBA loans ($7.6 million).

On the funding side, overall interest expense increased $7.3 million, largely driven by the continuing impact that the Fed's rate hikes have had on the cost of deposits and borrowings. The cost of deposits were up across the board, leading to a $5.9 million increase to interest expense. The cost of interest-bearing demand deposits, money market and savings accounts and time deposits increased 71 basis points, 129 basis points and 129 basis points, respectively, while the cost of borrowings decreased slightly by 4 basis points. Money market/savings accounts were the largest drivers of the interest expense increase due to volume as average balances on such accounts increased $124.2 million, while time deposit average balances increased $95.4 million, and the average balances on interest-bearing demand deposits decreased $92.9 million, while borrowings increased $96.9 million on average.

Overall, the $1.1 million decrease in net interest income over this period was driven by rate changes as the cost of interest bearing liabilities outpaced the increase in the yield on interest earning assets.

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PROVISION FOR CREDIT LOSSES

Three Months Ended March 31, 2024 Compared to the Same Period in 2023

The overall provision for credit losses increased $1.5 million on a net basis for the three months ended March 31, 2024. The provision on funded loans increased $2.0 million over the three month comparable period in 2023 driven by an increase in specific reserves, mainly on small business loans and existing non-accrual loans, combined with provisioning for loan growth and charge-offs. The provision on unfunded loan commitments decreased over this period due to a decline in the baseline loss rate and certain macroeconomic factors.

Asset Quality Summary

The ratio of non-performing assets to total assets was 1.74% as of March 31, 2024, up from 1.58% reported as of December 31, 2023. Total non-performing loans of $38.2 million as of March 31, 2024, increased $4.5 million from $33.8 million as December 31, 2023. The changes were the result of risk rating downgrades of several SBA loans and small ticket equipment leases, partially offset by charge-offs as of March 31, 2024.

Meridian realized net charge-offs of 0.12% of total average loans for the three months ending March 31, 2024, which was up from 0.08% reported for the same period in 2023. Net charge-offs for the quarter ended March 31, 2024 were $2.3 million, compared to net charge-offs of $1.5 million for the quarter ended March 31, 2023. Net charge-offs for the current quarter comprised of $2.4 million in charge-offs, with $133 thousand in recoveries. A large percentage of charge-offs for the quarter ended March 31, 2024 continue to be from small ticket equipment leases, as the level of charge-offs in this portfolio increased by $684 thousand compared to the prior year comparable period, while we also realized $126 thousand of recoveries related to the equipment lease portfolio. There were also charge-offs of $87 thousand on SBA loans for the current quarter, while there were no SBA charge-offs from the prior year comparable period.

The ratio of allowance for credit losses to total loans held for investment, excluding loans at fair value and PPP loans (a non-GAAP measure, see reconciliation in the Appendix), was 1.19% as of March 31, 2024 and 1.17% as of December 31, 2023. As of March 31, 2024 there were specific reserves of $8.5 million against non-performing loans, an increase from $6.5 million as of December 31, 2023. During the quarter $1.6 million in specific reserves were established for SBA loan relationships along with smaller increases in specific reserves for other commercial loans.

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

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Nonperforming Assets and Related Ratios

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


(dollars in thousands)	March 31, 2024			December 31, 2023
Non-performing assets:
Nonaccrual loans:
Real estate loans:
Commercial mortgage	$	571		$	—
Home equity lines and loans	1,181			1,037
Residential mortgage	4,672			4,536
Construction	1,784			1,206
Total real estate loans	8,208			6,779
Commercial and industrial	15,307			15,413
Small business loans	12,746			9,440
Leases	1,984			2,131
Total nonaccrual loans	38,245			33,763
Other real estate owned	1,703			1,703
Total non-performing assets	$	39,948		$	35,466






Asset quality ratios:
Non-performing assets to total assets	1.74		%	1.58		%
Non-performing loans to:
Total loans and leases	1.93		%	1.76		%
Total loans held-for-investment	1.95		%	1.78		%
Total loans held-for-investment (excluding loans at fair value) (1)	1.97		%	1.79		%
Allowance for credit losses to (2):
Total loans and leases	1.17		%	1.15		%
Total loans held-for-investment	1.18		%	1.17		%
Total loans held-for-investment (excluding loans at fair value) (1)	1.19		%	1.17		%
Non-performing loans	60.59		%	65.48		%

Total loans and leases	$	1,985,439		$	1,920,622
Total loans and leases held-for-investment	1,956,315			1,895,806
Total loans and leases held-for-investment (excluding loans at fair value)	1,943,176			1,882,080
Allowance for credit losses	23,171			22,107

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

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NON-INTEREST INCOME

Three Months Ended March 31, 2024 Compared to the Same Period in 2023

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


	Quarter Ended
(Dollars in thousands)	March 31, 2024		March 31, 2023		$ Change		% Change
Mortgage banking income	$	3,634	$	3,272	$	362	11.1	%
Wealth management income	1,317		1,196		121		10.1	%
SBA loan income	986		713		273		38.3	%
Earnings on investment in life insurance	207		192		15		7.8	%
Net change in the fair value of derivative instruments	75		(69)		144		(208.7)	%
Net change in the fair value of loans held-for-sale	(2)		(1)		(1)		100.0	%
Net change in the fair value of loans held-for-investment	(175)		117		(292)		(249.6)	%
Net (loss) gain on hedging activity	(19)		—		(19)		#DIV/0!

Other	1,961		1,218		743		61.0	%
Total non-interest income	$	7,984	$	6,638	$	1,346	20.3	%

Total non-interest income increased $1.3 million due largely to improved income from our mortgage segment, despite the continued impact of the higher rate environment and a lack of housing inventory. Mortgage loan originations increased $4.0 million to $146.8 million when comparing the quarter ended March 31, 2024 to the quarter ended March 31, 2023. SBA loan income increased $273 thousand over this period as the value of SBA loans sold for the quarter-ended March 31, 2024 was $4.6 million, or 42.3%, higher than the quarter-ended March 31, 2023, the gross margin on sale was 8.1% for the quarter-ended March 31, 2024 compared to 7.7% for the quarter-ended March 31, 2023, helping to generate nearly $1 million in SBA loan income for the quarter.

The net change in the fair value of loans held-for-investment declined to a loss of $175 thousand for the quarter ended March 31, 2024, compared to a gain of $117 thousand for the comparable prior year quarter, due to the negative impact the rising interest rate environment had on the fair value of the loans in portfolio that are held at fair value. Other non-interest income increased due to an increase in FHLB stock income, increases in broker fees and other mortgage segment related income, partially offset by a decline in swap fee income as no new swaps were entered into in the current quarter.

NON-INTEREST EXPENSE

Three Months Ended March 31, 2024 Compared to the Same Period in 2023

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


	Quarter Ended
(Dollars in thousands)	March 31, 2024		March 31, 2023		$ Change		% Change
Salaries and employee benefits	$	10,573	$	11,061	$	(488)	(4.4)	%
Occupancy and equipment	1,233		1,244		(11)		(0.9)	%
Professional fees	1,498		823		675		82.0	%
Advertising and promotion	748		861		(113)		(13.1)	%
Data processing and software	1,532		1,432		100		7.0	%
Pennsylvania bank shares tax	274		245		29		11.8	%
Other	2,316		2,123		193		9.1	%
Total non-interest expense	$	18,174	$	17,789	$	385	2.2	%

Total non-interest expense increased $385 thousand, or 2.2%, largely attributable to an increase in professional fees, data processing and software expense, and other non-interest expense, partially offset by a decrease in salaries and employee benefits expense.

Professional fees increased $675 thousand over this period due to an increase in loan and lease workout expenses. Professional fees were also impacted by system conversion fees for a new loan servicing platform for our mortgage segment and other mortgage segment related consulting and legal expense. Data processing and software expense increased $100 thousand due to cybersecurity improvements, cloud-based costs, other software upgrades, and an increase in customer account volume, all as a result of growth.

Salaries and employee benefits decreased $488 thousand due largely to cost reduction efforts in the mortgage segment over the last few quarters combined with the impact of lower mortgage loan originations and sales volume. Other non-interest expense increased

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$193 thousand due largely to an increase in FDIC insurance expense, which reflected the new 2 basis point increase in assessment, and an increase in certain commercial and consumer related loan expenses due to portfolio growth.

INCOME TAX EXPENSE

Income tax expense for the three months ended March 31, 2024 was $877 thousand, as compared to $1.1 million for the same period in 2023. Our effective tax rate was 24.7% for the three months ended March 31, 2024 and 21.6% for the three months ended March 31, 2023. While income tax expense decreased primarily due to the decrease in income before income taxes, the effective tax rate increased slightly due to the impact of additional nondeductible expense, partially offset by an increase in tax-free bank owned life insurance income.

BALANCE SHEET ANALYSIS

As of March 31, 2024, total assets were $2.3 billion which increased $46.7 million, or 2.1%, from December 31, 2023. This growth in assets over the prior period was due primarily to loan portfolio growth, as detailed in the following table:


(Dollars in thousands)	March 31, 2024		December 31, 2023		$ Change		% Change
Mortgage loans held for sale	$	29,124	$	24,816	$	4,308	17.4	%
Real estate loans:
Commercial mortgage	763,356		737,863		25,493		3.5
Home equity lines and loans	76,746		76,287		459		0.6
Residential mortgage	262,837		260,604		2,233		0.9
Construction	263,072		246,440		16,632		6.7
Total real estate loans	1,366,011		1,321,194		44,817		3.4

Commercial and industrial	328,148		302,891		25,257		8.3
Small business loans	146,604		142,342		4,262		3.0
Consumer	381		389		(8)		(2.1)
Leases, net	108,892		121,632		(12,740)		(10.5)
Total portfolio loans and leases	$	1,950,036	$	1,888,448	$	61,588	3.3
Total loans and leases	$	1,979,160	$	1,913,264	$	65,896	3.4	%

Portfolio loans increased $61,588, to $2.0 billion as of March 31, 2024, from $1.9 billion as of December 31, 2023. Overall portfolio loan growth was 3.3% since December 31, 2023, or 13.0% on an annualized basis for 2024. Commercial real estate loans increased $25.5 million, or 3.5%, commercial and industrial loans increased $25.3 million, or 8.3%, and construction loans increased $16.6 million, or 6.7%.

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


(Dollars in thousands)	March 31, 2024		December 31, 2023		$ Change		% Change
Noninterest-bearing deposits	$	220,581	$	239,289	$	(18,708)	(7.8)	%
Interest-bearing deposits:
Interest-bearing demand deposits	121,204		150,898		(29,694)		(19.7)	%
Money market and savings deposits	797,525		747,803		49,722		6.6	%
Time deposits	761,386		685,472		75,914		11.1	%
Total interest-bearing deposits	$	1,680,115	$	1,584,173	$	95,942	6.1	%
Total deposits	$	1,900,696	$	1,823,462	$	77,234	4.2	%

Total deposits increased $77.2 million, or 4.2%, since December 31, 2023. Noninterest-bearing deposits and interest-bearing accounts decreased $18.7 million, and $29.7 million, respectively, during the period. This decline was largely due to customer preference for money market deposits which carry higher interest rates than interest-bearing demand deposits. Time deposits grew $75.9 million, or 11.1%, from retail and wholesale efforts as customers prefer the higher term interest rates. Included in time deposits as of March 31, 2024, and December 31, 2023, are $476.0 million and $429.9 million of brokered deposits, respectively, which comprise 26.3% and 21.9% of total deposits as of these dates.

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Capital

Consolidated stockholders’ equity of the Corporation was $159.9 million, or 7.0% of total assets as of March 31, 2024, as compared to $158.0 million, or 7.0% of total assets as of December 31, 2023. On April 25, 2024, the Board of Directors declared a quarterly cash dividend of $0.125 per common share payable May 20, 2024 to shareholders of record as of May 13, 2024.

The March 31, 2024 tangible common equity to tangible assets ratio (a non-GAAP measure) was 8.9% for the Bank, compared to 8.94% at December 31, 2023. Tangible book value per share (a non-GAAP measure) was $13.96 as of March 31, 2024, compared with $13.78 as of December 31, 2023. A reconciliation of these non-GAAP measures is below.

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


	Bank			Well-capitalized minimum
		March 31, 2024				December 31, 2023
Tier 1 leverage ratio		9.42	%	9.46	%		5.00	%
Common tier 1 risk-based capital ratio		9.87	%	10.10	%		6.50	%
Tier 1 risk-based capital ratio		9.87	%	10.10	%		8.00	%
Total risk-based capital ratio		10.95	%	11.17	%		10.00	%

Under the Community Bank Leverage Ratio framework, a community banking organization that is less than $10 billion in total consolidated assets, and has limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9% can elect to report a single regulatory capital ratio. The Corporation has elected to be measured under this framework for Bank capital adequacy and had ratios of 9.42% and 9.46% at March 31, 2024 and December 31, 2023, respectively. The Corporation is exempt from CBLR.

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

Liquidity

Management maintains liquidity to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Meridian’s foundation for liquidity is a stable and loyal customer deposit base, cash and cash equivalents, and a marketable investment portfolio that provides periodic cash flow through regular maturities and amortization or that can be used as collateral to secure funding.

In addition, Meridian maintains borrowing arrangements with various correspondent banks, the FHLB and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs and has access to approximately $1.0 billion in liquidity from these sources. Through its relationship at the Federal Reserve, Meridian had available credit of approximately $6.5 million at March 31, 2024. 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 March 31, 2024, Meridian’s maximum borrowing capacity with the FHLB was $656.0 million. At March 31, 2024, Meridian had borrowed $145.8 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $156.0 million against its available credit lines. At March 31, 2024, Meridian also had available $49.0 million of unsecured federal funds lines of credit with other financial institutions as well as $149.0 million of available short or long term funding through the CDARS program and $326.5 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 March 31, 2024, 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 $3.5 million and $7.0 million for the three months ended March 31, 2024 and 2023, respectively. The Banking Segment provided 99.6% and 135.7% of the Corporation’s pre-tax profit for the three months ended March 31, 2024, and 2023, respectively.

The Wealth Management Segment recorded income before tax of $478 thousand and $231 thousand for the three months ended March 31, 2024 and 2023, respectively. The increase in income in this segment was the result of improved market conditions over the period.

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The Mortgage Banking Segment recorded losses before tax of $465 thousand and $2.1 million for the three months ended March 31, 2024 and 2023, respectively. Mortgage Banking income and expenses related to loan originations and sales decreased due to lower origination volume in the higher rate environment. Originations have been significantly impacted by a lack of homes for sale.

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 March 31, 2024 were $540.3 million as compared to $517.7 million at December 31, 2023.

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 March 31, 2024 amounted to $10.9 million as compared to $10.9 million at December 31, 2023.

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 3 loans totaling $589 thousand for the three months ended March 31, 2024, while we did not repurchase any loans for the three months ended March 31, 2023.

Non-GAAP Financial Measures

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

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

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


(dollars in thousands, except share data)	March 31, 2024			December 31, 2023
Total stockholders' equity (GAAP)	$	159,936		$	158,022
Less: Goodwill and intangible assets	3,819			3,870
Tangible common equity (non-GAAP)	156,117			154,152

Total assets (GAAP)	2,292,923			2,246,193
Less: Goodwill and intangible assets	3,819			3,870
Tangible assets (non-GAAP)	$	2,289,104		$	2,242,323

Stockholders' equity to total assets (GAAP)	6.98		%	7.04		%
Tangible common equity to tangible assets (non-GAAP)	6.82		%	6.87		%

Shares outstanding	11,186			11,183

Book value per share (GAAP)	$	14.30		$	14.13
Tangible book value per share (non-GAAP)	$	13.96		$	13.78

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The following is a reconciliation of the allowance for credit losses to total loans held for investment ratio at March 31, 2024. This is considered a non-GAAP measure as the calculation excludes the impact of loans held for investment that are fair valued and the impact of PPP loans as these loan types are not included in the allowance for credit losses calculation.


(dollars in thousands)	March 31, 2024			December 31, 2023
Allowance for credit losses	$	23,171		$	22,107

Loans, net of fees and costs (GAAP)	1,956,315			1,895,806

Less: Loans fair valued	(13,139)			(13,726)
Loans, net of fees and costs, excluding loans at fair value (non-GAAP)	$	1,943,176		$	1,882,080

Allowance for credit losses, net of fees and costs (GAAP)	1.18		%	1.17		%
Allowance for credit losses, net of fees and costs, excluding loans at fair value (non-GAAP)	1.19		%	1.17		%

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Simulations of Net Interest Income

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

•The timing of changes in interest rates;

•Shifts or rotations in the yield curve;

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

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

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

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

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

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

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


	March 31,
Changes in Market Interest Rates	2024		2023
+300 basis points over next 12 months	1.30	%	1.58	%
+200 basis points over next 12 months	1.12	%	1.21	%
+100 basis points over next 12 months	0.73	%	0.76	%
No Change
-100 basis points over next 12 months	(1.85)	%	(1.80)	%
-200 basis points over next 12 months	(3.23)	%	(3.19)	%
-300 basis points over next 12 months	(4.68)	%	(4.67)	%

The above interest rate simulation suggests that the Corporation’s balance sheet is asset sensitive as of March 31, 2024. In its current position, the table indicates that net interest income will fluctuate between 0.73% and (1.85%) in an up or down 100 basis point environment over the next 12 months. The simulated exposure to a change in interest rates is manageable and well within policy guidelines. The results continue to drive our funding strategy of increasing relationship-based accounts (core deposits) and utilizing term deposits to fund short to medium duration assets.

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Simulation of economic value of equity

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


	March 31,
Changes in Market Interest Rates	2024		2023
+300 basis points	(5)	%	3	%
+200 basis points	(2)	%	4	%
+100 basis points	—	%	3	%
No Change
-100 basis points	(3)	%	(10)	%
-200 basis points	(10)	%	(25)	%
-300 basis points	(23)	%	(48)	%

This economic value of equity profile at March 31, 2024 suggests that we would experience a slightly negative effect from an increase or decrease in rates, and the impact would worsen as rates continued to move downward. While an instantaneous shift in interest rates is used in this analysis to provide an estimate of exposure, we believe that a gradual shift in interest rates would have a much more modest impact. Since economic value of equity measures the discounted present value of cash flows over the estimated lives of instruments, the change in economic value of equity does not directly correlate to the degree that earnings would be impacted over a shorter time horizon.

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

Management has and continues to employ strategies to mitigate risk in the Net Interest Income and Economic Value simulations.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, the Corporation’s CEO and CFO have concluded that the Corporation’s disclosure controls and procedures were effective as of March 31, 2024 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 March 31, 2024 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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PART II–OTHER INFORMATION

Item 1. Legal Proceedings.

None

Item 1A. Risk Factors.

There have been no material changes in the risk factors faced by the Corporation from those disclosed in the Corporation’s Annual

Report on Form 10-K for the year ended December 31, 2023.

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

None.

Item 3. Defaults upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.

EXHIBIT INDEX


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

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SIGNATURES

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


Date:	May 9, 2024	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)