# Meridian Corp (MRBK) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Meridian Corp's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1750735/000155837022003752/mrbk-20211231x10k.htm
Accession: 0001558370-22-003752
Filing date: 2022-03-16
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/MRBK/
All MD&A years: /company/MRBK/mda/
Next year: /company/MRBK/mda/fy2022/ (FY 2022)

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

Recent Market Conditions

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

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Critical Accounting Policies and Estimates

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

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

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

Provision and allowance for loan and lease losses

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

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

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

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

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

Overview

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

Net interest income

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

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

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​

Average balance sheet, interest and yield/rate analysis.

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","2021","\u200b","2020"],["\u200b","\u200b","\u200b","\u200b","Interest","\u200b","\u200b","\u200b","\u200b","\u200b","Interest","\u200b","\u200b"],["For the Year Ended December 31,","\u200b","Average","\u200b","Income/","\u200b","Yields/","\u200b","Average","\u200b","Income/","\u200b","Yields/"],["(dollars in thousands)","","Balance","","Expense","","rates","","Balance","","Expense","","rates"],["Assets","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest-earning assets","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Due from banks","\u200b","$","30,844","\u200b","\u200b","41","\u200b","0.13%","\u200b","$","9,351","\u200b","\u200b","31","\u200b","0.33%"],["Federal funds sold","\u200b","\u200b","17,823","\u200b","\u200b","7","\u200b","0.04%","\u200b","\u200b","17,795","\u200b","\u200b","38","\u200b","0.21%"],["Investment securities(1)","\u200b","\u200b","148,160","\u200b","\u200b","2,927","\u200b","2.01%","\u200b","\u200b","102,285","\u200b","\u200b","2,408","\u200b","2.35%"],["Loans held for sale","\u200b","\u200b","125,444","\u200b","\u200b","3,540","\u200b","2.82%","\u200b","\u200b","127,829","\u200b","\u200b","3,693","\u200b","2.89%"],["Loans held for investment(1)(2)","\u200b","\u200b","1,358,282","\u200b","\u200b","65,292","\u200b","4.81%","\u200b","\u200b","1,187,819","\u200b","\u200b","56,675","\u200b","4.77%"],["Total loans","\u200b","\u200b","1,483,726","\u200b","\u200b","68,832","\u200b","4.64%","\u200b","\u200b","1,315,648","\u200b","\u200b","60,368","\u200b","4.59%"],["Total interest-earning assets","\u200b","\u200b","1,680,553","\u200b","\u200b","71,807","\u200b","4.27%","\u200b","\u200b","1,445,079","\u200b","\u200b","62,845","\u200b","4.35%"],["Noninterest earning assets","\u200b","\u200b","48,015","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","41,400","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total assets","\u200b","$","1,728,568","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","$","1,486,479","\u200b","\u200b","\u200b","\u200b","\u200b"],["Liabilities and stockholders' equity","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest bearing liabilities","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest-bearing deposits","\u200b","$","257,950","\u200b","\u200b","880","\u200b","0.34%","\u200b","$","195,141","\u200b","\u200b","1,644","\u200b","0.84%"],["Money market and savings deposits","\u200b","\u200b","630,977","\u200b","\u200b","3,346","\u200b","0.53%","\u200b","\u200b","428,227","\u200b","\u200b","3,606","\u200b","0.84%"],["Time deposits","\u200b","\u200b","245,923","\u200b","\u200b","1,268","\u200b","0.52%","\u200b","\u200b","312,528","\u200b","\u200b","4,720","\u200b","1.51%"],["Total deposits","\u200b","\u200b","1,134,850","\u200b","\u200b","5,494","\u200b","0.48%","\u200b","\u200b","935,896","\u200b","\u200b","9,970","\u200b","1.07%"],["Total Borrowings","\u200b","\u200b","119,721","\u200b","\u200b","534","\u200b","0.45%","\u200b","\u200b","179,201","\u200b","\u200b","1,303","\u200b","0.73%"],["Subordinated Debentures","\u200b","\u200b","40,724","\u200b","\u200b","2,383","\u200b","5.85%","\u200b","\u200b","41,010","\u200b","\u200b","2,387","\u200b","5.73%"],["Total interest-bearing liabilities","\u200b","\u200b","1,295,295","\u200b","\u200b","8,411","\u200b","0.65%","\u200b","\u200b","1,156,107","\u200b","\u200b","13,660","\u200b","1.18%"],["Non-interest bearing deposits","\u200b","\u200b","258,298","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","190,209","\u200b","\u200b","\u200b","\u200b","\u200b"],["Other non-interest bearing liabilities","\u200b","\u200b","25,100","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","16,240","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total liabilities","\u200b","$","1,578,693","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","$","1,362,556","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total stockholders' equity","\u200b","\u200b","149,875","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","123,923","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total stockholders' equity and liabilities","\u200b","$","1,728,568","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","$","1,486,479","\u200b","\u200b","\u200b","\u200b","\u200b"],["Tax-equivalent net interest income / net interest spread","\u200b","\u200b","\u200b","\u200b","$","63,396","\u200b","3.62%","\u200b","\u200b","\u200b","\u200b","$","49,185","\u200b","3.17%"],["Tax-equivalent net interest margin","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","3.77%","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","3.40%"],["Tax-equivalent adjustment","\u200b","\u200b","\u200b","\u200b","\u200b","(285)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","(189)","\u200b","\u200b"],["Net interest income","\u200b","\u200b","\u200b","\u200b","$","63,111","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","$","48,996","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["(1)","Yields and net interest income and ratios are reflected on a tax-equivalent basis."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Average balances include non-accrual loans."]]
[[/GREPCENT_TABLE]]

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Rate/Volume Analysis

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

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

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

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

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","December 31, 2021 Compared to 2020"],["\u200b","Change in Interest Due to:"],["(dollars in thousands)","Rate","","Volume","","Total"],["Interest income:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Due from banks","$","(27)","\u200b","37","\u200b","10"],["Federal funds sold","\u200b","(31)","\u200b","0","\u200b","(31)"],["Investment securities(1)","\u200b","(399)","\u200b","918","\u200b","519"],["Loans held for sale","\u200b","(85)","\u200b","(68)","\u200b","(153)"],["Loans held for investment(1)","\u200b","492","\u200b","8,125","\u200b","8,617"],["Total loans","\u200b","407","\u200b","8,057","\u200b","8,464"],["Total interest income","$","(50)","\u200b","9,012","\u200b","8,962"],["Interest expense:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest bearing deposits","$","(1,179)","\u200b","415","\u200b","(764)"],["Money market and savings deposits","\u200b","(1,605)","\u200b","1,345","\u200b","(260)"],["Time deposits","\u200b","(2,608)","\u200b","(844)","\u200b","(3,452)"],["Total interest bearing deposits","\u200b","(5,392)","\u200b","916","\u200b","(4,476)"],["Total borrowings","\u200b","(415)","\u200b","(354)","\u200b","(769)"],["Subordinated debentures","\u200b","22","\u200b","(26)","\u200b","(4)"],["Total interest expense","\u200b","(5,784)","\u200b","535","\u200b","(5,249)"],["Interest differential","$","5,734","\u200b","8,476","\u200b","14,211"]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["(1)","Yields and net interest income are reflected on a tax-equivalent basis."]]
[[/GREPCENT_TABLE]]

​

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Provision for loan losses

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

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Non-interest income

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

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

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

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,"],["(dollars in thousands)","","2021","","2020"],["Non-interest income:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Mortgage banking income","\u200b","$","75,932","\u200b","\u200b","76,461"],["Wealth management income","\u200b","\u200b","4,801","\u200b","\u200b","3,854"],["SBA loan income","\u200b","\u200b","6,898","\u200b","\u200b","2,572"],["Earnings on investment in life insurance","\u200b","\u200b","365","\u200b","\u200b","279"],["Net change in the fair value of derivative instruments","\u200b","\u200b","(4,338)","\u200b","\u200b","4,975"],["Net change in the fair value of loans held-for-sale","\u200b","\u200b","(3,311)","\u200b","\u200b","3,847"],["Net change in the fair value of loans held-for-investment","\u200b","\u200b","(189)","\u200b","\u200b","323"],["Net loss on hedging activity","\u200b","\u200b","2,961","\u200b","\u200b","(9,400)"],["Net gain on sale of investment securities available-for-sale","\u200b","\u200b","435","\u200b","\u200b","1,345"],["Service charges","\u200b","\u200b","129","\u200b","\u200b","107"],["Other","\u200b","\u200b","4,305","\u200b","\u200b","2,555"],["Total non-interest income","\u200b","$","87,988","\u200b","\u200b","86,918"]]
[[/GREPCENT_TABLE]]

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Non-interest expense

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year Ended December 31,"],["(dollars in thousands)","","2021","","2020"],["Non-interest expenses:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Salaries and employee benefits","\u200b","$","78,866","\u200b","\u200b","72,147"],["Occupancy and equipment","\u200b","\u200b","4,545","\u200b","\u200b","4,292"],["Professional fees","\u200b","\u200b","3,558","\u200b","\u200b","3,113"],["Advertising and promotion","\u200b","\u200b","3,714","\u200b","\u200b","2,852"],["Data processing","\u200b","\u200b","2,150","\u200b","\u200b","1,913"],["Information technology","\u200b","\u200b","2,232","\u200b","\u200b","1,542"],["Pennsylvania bank shares tax","\u200b","\u200b","609","\u200b","\u200b","1,049"],["Other","\u200b","\u200b","8,053","\u200b","\u200b","6,168"],["Total non-interest expenses","\u200b","$","103,727","\u200b","\u200b","93,076"]]
[[/GREPCENT_TABLE]]

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

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

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

Income tax expense

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

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Balance Sheet Summary

Assets

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

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

Loans

Our loan portfolio is the largest category of our interest-earning assets. As of December 31, 2021 and 2020, our total loans amounted to $1.5 billion. Our loan portfolio is comprised of loans originated to be held in portfolio, as well as residential mortgage loans originated for sale.  Meridian engages in the origination of residential mortgages, most typically for 1-4 family dwellings, with the intention of the Corporation to principally sell substantially all of these loans in the secondary market to qualified investors. Our loans held in portfolio are originated by our commercial and consumer loan divisions. We have a strong credit culture that promotes diversity of lending products with a focus on commercial businesses. We have no particular credit concentration. Our commercial loans have been proactively managed in an effort to achieve a balanced portfolio with no unusual exposure to one industry.

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","","\u200b","\u200b","","% of","","\u200b","","% of"],["(dollars in thousands)","\u200b","2021","\u200b","Portfolio","\u200b","2020","\u200b","Portfolio"],["Mortgage loans held for sale","\u200b","$","80,882","\u200b","5.5%","\u200b","229,199","\u200b","15.1%"],["Real estate loans:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial mortgage","\u200b","\u200b","516,928","\u200b","35.2%","\u200b","485,103","\u200b","31.9%"],["Home equity lines and loans","\u200b","\u200b","52,299","\u200b","3.6%","\u200b","64,987","\u200b","4.3%"],["Residential mortgage","\u200b","\u200b","68,175","\u200b","4.6%","\u200b","52,454","\u200b","3.5%"],["Construction","\u200b","\u200b","160,905","\u200b","11.0%","\u200b","140,246","\u200b","9.2%"],["Total real estate loans","\u200b","\u200b","798,307","\u200b","54.4%","\u200b","742,790","\u200b","48.9%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial and industrial","\u200b","\u200b","293,771","\u200b","20.0%","\u200b","261,750","\u200b","17.2%"],["Small business loans","\u200b","\u200b","114,158","\u200b","7.8%","\u200b","49,542","\u200b","3.3%"],["Paycheck Protection Program loans (\"PPP\")","\u200b","\u200b","90,194","\u200b","6.1%","\u200b","203,543","\u200b","13.4%"],["Main Street Lending Program loans (\"MSLP\")","\u200b","\u200b","597","\u200b","0.0%","\u200b","580","\u200b","0.0%"],["Consumer","\u200b","\u200b","419","\u200b","0.0%","\u200b","511","\u200b","0.0%"],["Leases, net","\u200b","\u200b","88,242","\u200b","6.0%","\u200b","31,040","\u200b","2.0%"],["Total portfolio loans and leases","\u200b","\u200b","1,385,688","\u200b","94.5%","\u200b","1,289,756","\u200b","84.9%"],["Total loans and leases","\u200b","$","1,466,570","\u200b","100.0%","\u200b","1,518,955","\u200b","100.0%"]]
[[/GREPCENT_TABLE]]

​

​

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

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","12 Months","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["(dollars in thousands)","\u200b","or Less","\u200b","1 - 5 years","\u200b","5 - 15 years","\u200b","After 15 years","\u200b","Total"],["Mortgage loans held for sale","\u200b","$","\u2014","\u200b","\u2014","\u200b","235","\u200b","80,647","\u200b","80,882"],["Commercial mortgage","\u200b","\u200b","36,884","\u200b","115,865","\u200b","353,396","\u200b","10,783","\u200b","516,928"],["Home equity lines and loans","\u200b","\u200b","1,080","\u200b","4,401","\u200b","40,820","\u200b","5,998","\u200b","52,299"],["Residential mortgage","\u200b","\u200b","1,744","\u200b","\u2014","\u200b","1,830","\u200b","64,601","\u200b","68,175"],["Construction","\u200b","\u200b","69,664","\u200b","47,683","\u200b","43,175","\u200b","383","\u200b","160,905"],["Commercial and industrial","\u200b","\u200b","26,453","\u200b","107,032","\u200b","58,102","\u200b","102,184","\u200b","293,771"],["Small business loans","\u200b","\u200b","8","\u200b","3,577","\u200b","66,043","\u200b","44,530","\u200b","114,158"],["PPP loans","\u200b","\u200b","25,100","\u200b","65,094","\u200b","\u2014","\u200b","\u2014","\u200b","90,194"],["MSLP loans","\u200b","\u200b","\u2014","\u200b","597","\u200b","\u2014","\u200b","\u2014","\u200b","597"],["Consumer","\u200b","\u200b","5","\u200b","118","\u200b","146","\u200b","150","\u200b","419"],["Leases, net","\u200b","\u200b","1,140","\u200b","72,605","\u200b","14,497","\u200b","\u2014","\u200b","88,242"],["Total","\u200b","$","162,078","\u200b","416,972","\u200b","578,244","\u200b","309,276","\u200b","1,466,570"]]
[[/GREPCENT_TABLE]]

​

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Fixed","\u200b","Variable","\u200b","\u200b"],["(dollars in thousands)","\u200b","Rate","\u200b","Rate","\u200b","Total"],["Mortgage loans held for sale","\u200b","$","80,882","\u200b","\u2014","\u200b","80,882"],["Commercial mortgage","\u200b","\u200b","64,491","\u200b","415,553","\u200b","480,044"],["Home equity lines and loans","\u200b","\u200b","7,129","\u200b","44,090","\u200b","51,219"],["Residential mortgage","\u200b","\u200b","50,144","\u200b","16,287","\u200b","66,431"],["Construction","\u200b","\u200b","26,102","\u200b","65,139","\u200b","91,241"],["Commercial and industrial","\u200b","\u200b","44,438","\u200b","222,880","\u200b","267,318"],["Small business loans","\u200b","\u200b","218","\u200b","113,932","\u200b","114,150"],["PPP loans","\u200b","\u200b","65,094","\u200b","\u2014","\u200b","65,094"],["MSLP loans","\u200b","\u200b","\u2014","\u200b","597","\u200b","597"],["Consumer","\u200b","\u200b","346","\u200b","68","\u200b","414"],["Leases, net","\u200b","\u200b","87,102","\u200b","\u2014","\u200b","87,102"],["Total","\u200b","$","425,946","\u200b","878,546","\u200b","1,304,492"]]
[[/GREPCENT_TABLE]]

​

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

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

[[GREPCENT_TABLE]]
[["","\u25cf","Permanent \u2013 Investor Real Estate Loans"]]
[[/GREPCENT_TABLE]]

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

​

​

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[[GREPCENT_TABLE]]
[["","\u25cf","Construction Loans"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Residential construction loans to finance new construction and renovation of single and 1-4 family homes located within our market area"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Commercial construction loans for investment properties, generally with semi-permanent attributes"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","o","Construction loans for new, expanded or renovated operations for our owner occupied business clients"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Land Development Loans"]]
[[/GREPCENT_TABLE]]

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

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

Commercial and Industrial Loans

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

Small Business Loans

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

Paycheck Protection Program Loans / Main Street Lending Program Loans

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

Residential loans

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

Consumer and Personal Loans

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

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

Investments

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

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31, 2021"],["\u200b","\u200b","\u200b","\u200b","\u200b","Gross","\u200b","Gross","\u200b","\u200b","\u200b","# of Securities"],["\u200b","\u200b","Amortized","\u200b","unrealized","\u200b","unrealized","\u200b","Fair","\u200b","in unrealized"],["(dollars in thousands)","","cost","","gains","","losses","","value","\u200b","loss position"],["Securities available-for-sale:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["U.S. asset backed securities","\u200b","$","16,850","\u200b","55","\u200b","(68)","\u200b","16,837","\u200b","10"],["U.S. government agency mortgage-backed securities","\u200b","\u200b","9,749","\u200b","124","\u200b","(60)","\u200b","9,813","\u200b","3"],["U.S. government agency collateralized mortgage obligations","\u200b","\u200b","22,276","\u200b","358","\u200b","(253)","\u200b","22,381","\u200b","10"],["State and municipal securities","\u200b","\u200b","72,099","\u200b","1,379","\u200b","(496)","\u200b","72,982","\u200b","12"],["U.S. Treasuries","\u200b","\u200b","29,973","\u200b","1","\u200b","(246)","\u200b","29,728","\u200b","21"],["Non-U.S. government agency collateralized mortgage obligations","\u200b","\u200b","990","\u200b","\u2500","\u200b","(15)","\u200b","975","\u200b","1"],["Corporate bonds","\u200b","\u200b","6,450","\u200b","154","\u200b","(18)","\u200b","6,586","\u200b","5"],["Total securities available-for-sale","\u200b","$","158,387","\u200b","2,071","\u200b","(1,156)","\u200b","159,302","\u200b","62"],["Securities held-to-maturity:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["State and municipal securities","\u200b","\u200b","6,372","\u200b","219","\u200b","\u2500","\u200b","6,591","\u200b","\u2014"],["Total securities held-to-maturity","\u200b","$","6,372","\u200b","219","\u200b","\u2500","\u200b","6,591","\u200b","\u2014"]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31, 2020"],["\u200b","\u200b","\u200b","\u200b","\u200b","Gross","\u200b","Gross","\u200b","\u200b","\u200b","# of Securities"],["\u200b","\u200b","Amortized","\u200b","unrealized","\u200b","unrealized","\u200b","Fair","\u200b","in unrealized"],["(dollars in thousands)","","cost","","gains","","losses","","value","\u200b","loss position"],["Securities available-for-sale:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["U.S. asset backed securities","\u200b","$","25,303","\u200b","364","\u200b","(75)","\u200b","25,592","\u200b","8"],["U.S. government agency mortgage-backed securities","\u200b","\u200b","3,854","\u200b","192","\u200b","\u2014","\u200b","4,046","\u200b","\u2014"],["U.S. government agency collateralized mortgage obligations","\u200b","\u200b","23,010","\u200b","916","\u200b","(17)","\u200b","23,909","\u200b","1"],["State and municipal securities","\u200b","\u200b","63,848","\u200b","2,025","\u200b","(63)","\u200b","65,810","\u200b","3"],["Corporate bonds","\u200b","\u200b","4,200","\u200b","7","\u200b","(2)","\u200b","4,205","\u200b","2"],["Total securities available-for-sale","\u200b","$","120,215","\u200b","3,504","\u200b","(157)","\u200b","123,562","\u200b","14"],["Securities held-to-maturity:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["State and municipal securities","\u200b","\u200b","6,510","\u200b","347","\u200b","\u2014","\u200b","6,857","\u200b","\u2014"],["Total securities held-to-maturity","\u200b","$","6,510","\u200b","347","\u200b","\u2014","\u200b","6,857","\u200b","\u2014"]]
[[/GREPCENT_TABLE]]

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​

Asset Quality Summary

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

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

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

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

The Corporation continues to be diligent in its credit underwriting process and proactive with its loan review process, including the engagement of the services of an independent outside loan review firm, which helps identify developing credit issues. Proactive steps that are taken include the procurement of additional collateral (preferably outside the current

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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.

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","As of"],["\u200b","\u200b","December 31,","\u200b","December 31,"],["(dollars in thousands)","","2021","","2020"],["Non-performing assets:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Nonaccrual loans:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Real estate loans:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial mortgage","\u200b","$","\u2014","\u200b","\u200b","3,061"],["Home equity lines and loans","\u200b","\u200b","911","\u200b","\u200b","859"],["Residential mortgage","\u200b","\u200b","2,398","\u200b","\u200b","2,725"],["Total real estate loans","\u200b","$","3,309","\u200b","\u200b","6,645"],["Commercial and industrial","\u200b","\u200b","18,801","\u200b","\u200b","1,285"],["Small business loans","\u200b","\u200b","666","\u200b","\u200b","\u2014"],["Leases","\u200b","\u200b","212","\u200b","\u200b","\u2014"],["Total nonaccrual loans","\u200b","$","22,988","\u200b","\u200b","7,930"],["Total non-performing loans","\u200b","$","22,988","\u200b","\u200b","7,930"],["Total non-performing assets","\u200b","$","22,988","\u200b","\u200b","7,930"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Troubled debt restructurings:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["TDRs included in non-performing loans","\u200b","\u200b","361","\u200b","\u200b","244"],["TDRs in compliance with modified terms","\u200b","\u200b","3,446","\u200b","\u200b","3,362"],["Total TDRs","\u200b","$","3,807","\u200b","\u200b","3,606"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Asset quality ratios:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Non-performing assets to total assets","\u200b","\u200b","1.34%","\u200b","\u200b","0.46%"],["Non-performing loans to:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total loans and leases","\u200b","\u200b","1.57%","\u200b","\u200b","0.52%"],["Total loans held-for-investment","\u200b","\u200b","1.66%","\u200b","\u200b","0.62%"],["Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)","\u200b","\u200b","1.80%","\u200b","\u200b","0.74%"],["Allowance for loan and lease losses to:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total loans and leases","\u200b","\u200b","1.28%","\u200b","\u200b","1.17%"],["Total loans held-for-investment","\u200b","\u200b","1.35%","\u200b","\u200b","1.38%"],["Total loans held-for-investment (excluding loans at fair value and PPP loans) (1)","\u200b","\u200b","1.46%","\u200b","\u200b","1.65%"],["Non-performing loans","\u200b","\u200b","81.60%","\u200b","\u200b","224.04%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total loans and leases","\u200b","$","1,467,339","\u200b","\u200b","1,513,963"],["Total loans and leases held-for-investment","\u200b","$","1,386,457","\u200b","\u200b","1,284,764"],["Total loans and leases held-for-investment (excluding loans at fair value and PPP loans)","\u200b","$","1,280,591","\u200b","\u200b","1,072,727"],["Allowance for loan and lease losses","\u200b","$","18,758","\u200b","\u200b","17,767"]]
[[/GREPCENT_TABLE]]

​

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

​

44

Table of Contents

Allowance for Loan and Lease Losses

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","Balance,","\u200b","\u200b","\u200b","\u200b","Balance,","\u200b","\u200b"],["(dollars in thousands)","\u200b","\u200b","December 31, 2021","\u200b","%","\u200b","\u200b","December 31, 2020","\u200b","%"],["Commercial mortgage","\u200b","$","4,950","\u200b","26%","\u200b","$","7,451","\u200b","42%"],["Home equity lines and loans","\u200b","\u200b","224","\u200b","1%","\u200b","\u200b","434","\u200b","2%"],["Residential mortgage","\u200b","\u200b","283","\u200b","2%","\u200b","\u200b","385","\u200b","2%"],["Construction","\u200b","\u200b","2,042","\u200b","11%","\u200b","\u200b","2,421","\u200b","14%"],["Commercial and industrial","\u200b","\u200b","6,533","\u200b","35%","\u200b","\u200b","5,431","\u200b","31%"],["Small business loans","\u200b","\u200b","3,737","\u200b","20%","\u200b","\u200b","1,259","\u200b","7%"],["Consumer","\u200b","\u200b","3","\u200b","0%","\u200b","\u200b","4","\u200b","0%"],["Leases","\u200b","\u200b","986","\u200b","5%","\u200b","\u200b","382","\u200b","2%"],["Total","\u200b","$","18,758","\u200b","100%","\u200b","$","17,767","\u200b","100%"]]
[[/GREPCENT_TABLE]]

​

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","December 31, 2021","\u200b","\u200b","December 31, 2020"],["\u200b","\u200b","\u200b","\u200b","\u200b","% of","\u200b","Net Charge-","\u200b","\u200b","\u200b","\u200b","% of","\u200b","Net Charge-"],["\u200b","\u200b","\u200b","Net","\u200b","Total Net","\u200b","offs as a % of","\u200b","\u200b","Net","\u200b","Total Net","\u200b","offs as a % of"],["(dollars in thousands)","\u200b","\u200b","Charge-offs","\u200b","Charge-offs","\u200b","Average Loans","\u200b","\u200b","Charge-offs","\u200b","Charge-offs","\u200b","Average Loans"],["Commercial mortgage","\u200b","$","\u2014","\u200b","0.00%","\u200b","0.00%","\u200b","$","\u2014","\u200b","0.00%","\u200b","0.00%"],["Home equity lines and loans","\u200b","\u200b","1","\u200b","(1.27)%","\u200b","0.00%","\u200b","\u200b","(76)","\u200b","158.33%","\u200b","0.01%"],["Residential mortgage","\u200b","\u200b","5","\u200b","(6.33)%","\u200b","0.00%","\u200b","\u200b","7","\u200b","(14.58)%","\u200b","0.00%"],["Construction","\u200b","\u200b","\u2014","\u200b","0.00%","\u200b","0.00%","\u200b","\u200b","\u2014","\u200b","0.00%","\u200b","0.00%"],["Commercial and industrial","\u200b","\u200b","41","\u200b","(51.90)%","\u200b","0.00%","\u200b","\u200b","27","\u200b","(56.25)%","\u200b","0.00%"],["Small business loans","\u200b","\u200b","\u2014","\u200b","0.00%","\u200b","0.00%","\u200b","\u200b","\u2014","\u200b","0.00%","\u200b","0.00%"],["Consumer","\u200b","\u200b","4","\u200b","(5.06)%","\u200b","0.00%","\u200b","\u200b","(6)","\u200b","12.50%","\u200b","0.00%"],["Leases","\u200b","\u200b","(130)","\u200b","164.56%","\u200b","0.01%","\u200b","\u200b","\u2014","\u200b","0.00%","\u200b","0.00%"],["Total","\u200b","$","(79)","\u200b","100.00%","\u200b","0.01%","\u200b","$","(48)","\u200b","100.00%","\u200b","0.00%"]]
[[/GREPCENT_TABLE]]

​

Deposits and Equity

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

45

Table of Contents

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Year ended December 31, 2021","\u200b","Year ended December 31, 2020"],["\u200b","\u200b","\u200b","\u200b","\u200b","Weighted","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Weighted","\u200b","\u200b"],["\u200b","\u200b","Average","\u200b","average","\u200b","Percent of","\u200b","Average","\u200b","average","\u200b","Percent of"],["(dollars in thousands)","","amount","","rate paid","","total deposits","","amount","","rate paid","","total deposits"],["Non-interest bearing deposits","\u200b","$","258,298","\u200b","\u2014","\u200b","18.54%","\u200b","$","190,209","\u200b","\u2014","\u200b","16.89%"],["Interest bearing deposits","\u200b","\u200b","888,927","\u200b","0.48%","\u200b","63.81%","\u200b","\u200b","623,368","\u200b","0.84%","\u200b","55.36%"],["Time deposits","\u200b","\u200b","245,923","\u200b","0.52%","\u200b","17.65%","\u200b","\u200b","312,528","\u200b","1.51%","\u200b","27.75%"],["Total","\u200b","$","1,393,148","\u200b","0.48%","\u200b","100.00%","\u200b","$","1,126,105","\u200b","1.07%","\u200b","100.00%"]]
[[/GREPCENT_TABLE]]

​

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","Year ended December 31, 2021"],["\u200b","\u200b","\u200b","\u200b","Amount","\u200b","%"],["3 months or less","\u200b","\u200b","$","65,310","\u200b","36%"],["Over 3 months through 6 months","\u200b","\u200b","\u200b","1,807","\u200b","1%"],["Over 6 months through 12 months","\u200b","\u200b","\u200b","40,140","\u200b","22%"],["Over 12 months","\u200b","\u200b","\u200b","72,528","\u200b","40%"],["\u200b","Total","\u200b","$","179,785","\u200b","100%"]]
[[/GREPCENT_TABLE]]

​

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

Non-GAAP Financial Measures

​

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

​

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

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Reconciliation of tangible book value per common share at December 31:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","2021","\u200b","2020"],["Book value per common share","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","$","27.07","\u200b","$","23.08"],["Less: Impact of goodwill and intangible assets","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","0.70","\u200b","\u200b","0.73"],["Tangible book value per common share","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","$","26.37","\u200b","$","22.35"]]
[[/GREPCENT_TABLE]]

​

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

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Reconciliation of Allowance for Loan Losses / Total loans held for investment at December 31:","2021","\u200b","2020"],["Allowance for loan losses / Total loans held for investment","\u200b","1.35%","\u200b","\u200b","1.38%"],["Less: Impact of loans held for investment - fair valued","\u200b","0.02%","\u200b","\u200b","0.00%"],["Less: Impact of PPP loans","\u200b","0.09%","\u200b","\u200b","0.27%"],["Allowance for loan losses / Total loans held for investment (excl. loans at fair value and PPP loans)","\u200b","1.46%","\u200b","\u200b","1.65%"]]
[[/GREPCENT_TABLE]]

​

46

Table of Contents

​

Liquidity and Capital Resources

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

​

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

​

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

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

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

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

47

Table of Contents

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

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31, 2021"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","To Be Well Capitalized"],["\u200b","\u200b","Actual","\u200b","Under CBLR Framework"],["(dollars in thousands)","","Amount","","Ratio","","Amount","","Ratio"],["Tier 1 capital (to average assets)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Corporation","\u200b","$","160,379","\u200b","9.39%","\u200b","$","136,621","\u200b","8.00%"],["Bank","\u200b","\u200b","196,506","\u200b","11.51%","\u200b","\u200b","136,620","\u200b","8.00%"]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31, 2020"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","To Be Well Capitalized"],["\u200b","\u200b","Actual","\u200b","Under CBLR Framework"],["(dollars in thousands)","","Amount","","Ratio","","Amount","","Ratio"],["Tier 1 capital (to average assets)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Corporation","\u200b","$","134,564","\u200b","8.96%","\u200b","$","120,082","\u200b","8.00%"],["Bank","\u200b","\u200b","173,231","\u200b","11.54%","\u200b","\u200b","120,080","\u200b","8.00%"]]
[[/GREPCENT_TABLE]]

​

​

​

​