Meridian Corp (MRBK) FY 2023 MD&A

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

The following discussion is intended to assist in understanding the financial condition and results of operations of Meridian as of and for the year ended December 31, 2023. The information contained in this section should be read together with the December 31, 2023 audited Consolidated Financial Statements and the accompanying Notes included in Item 8. Financial Statements And Supplementary Data of this Form 10-K.

This section of this Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.

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.

Bank Sector Concerns

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.

Total balance sheet liquidity, which is derived from cash and investments, as well as salable commercial loans and residential mortgage loans held for sale, was $273.4 million at December 31, 2023. Meridian maintains a high-quality investment bond portfolio comprised of U.S Treasuries, government agencies, government agency mortgage-backed securities, and general obligation municipal securities with an average duration of 4.2 years. Meridian’s investment portfolio represented 8.2% of total assets at December 31, 2023.

Meridian also maintains borrowing arrangements with various correspondent banks to meet short-term liquidity needs and has access to approximately $987 million 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. In addition, the Bank is eligible to receive funds under the Bank Term Funding Program. Management believes that the above sources of liquidity provide Meridian with the necessary resources to meet its short-term and long-term funding requirements.

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 credit 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.

The JOBS Act permitted 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 were filed prior to this Annual Report, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period.

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 Note 1 - Summary of Significant Accounting Policies, to the Corporation’s Consolidated Financial Statements as of and for the years ended December 31, 2023 and 2022.

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Provision and allowance for credit losses

Beginning on January 1, 2023, we adopted ASC 326, which replaced the former incurred loss methodology with an expected credit loss methodology that requires consideration of a broader range of information to estimate expected credit losses over the lifetime of an asset. The ACL is a valuation reserve established and maintained by charges against operating income. It is an estimate of expected credit losses, measured over the contractual life of a loan, that considers historical loss experience, current conditions and forecasts of future economic conditions.

Management’s evaluation process used to determine the appropriateness of the ACL is complex and requires the use of estimates, assumptions and judgments which are inherently subject to high uncertainty. The evaluation process combines several factors: historical loan loss experience, managements ongoing review of lending policies and practices, experience and depth of staff, quality of the loan grading system, the fair value of underlying collateral, concentration of loans to specific borrowers or industries, existing economic conditions and forecasts, segment specific risks and other quantitative and qualitative factors which could affect future credit losses. Our reasonable and supportable forecast is for a period of four quarters. For periods beyond our one-year forecast, we revert to historical loss rates over one quarter. Because current economic conditions and forecasts can change and future events are inherently difficult to predict, the anticipated amount of estimated credit losses on loans and the appropriateness of the ACL could change significantly. It is challenging to estimate how potential changes in any one economic factor or input might affect the overall allowance because a wide variety of factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

Executive Overview

The following items highlight the Corporation’s changes in its financial condition as of December 31, 2023 compared to December 31, 2022 and the results of operations for the year ended December 31, 2023 compared to the same periods in 2022. More detailed information related to these highlights can be found in the sections that follow.

Changes in Financial Condition

•Total assets increased $184.0 million, or 8.9%, to $2.2 billion as of December 31, 2023.

•Portfolio loans, increased $152.9 million, or 8.8%, to $1.9 billion as of December 31, 2023,

Results of Operations

•Consolidated net income decreased $8.6 million, or 39.3%, driven by a lower level of non-interest revenue from mortgage banking activity, and a decline in net interest income after provision for credit losses, due to increased interest expense on deposits and an increase in the provision for credit losses.

•The return on average assets and return on average equity was 0.61% and 8.53%, respectively, for the year ended December 31, 2023, compared to 1.18% and 13.87%, respectively, for the year ended December 31, 2022.

•Provision for credit losses increased $4.3 million, or 173.9%, due to an increase in specific reserves on a commercial loan relationship and small business loans, combined with provisioning for loan growth and charge-offs.

Key Performance Ratios

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

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

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Components of Net Income

Net income is comprised of five major elements:

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

•Provision For 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.

NET INTEREST INCOME

Net interest income is an integral source of the Corporation’s income. The tables below present a summary for the years ended December 31, 2023 and 2022, 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 tables below present the major asset and liability categories on an average daily balance basis for the periods presented, along with interest income, interest expense and key rates and yields on a tax equivalent basis.

(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 year ended December 31, 2023 as compared to the year ended December 31, 2022, allocated by rate and volume. Changes in interest income and/or expense attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of the change in each category.

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

Interest income increased $47.9 million on a tax equivalent basis, year over year, due to a higher yield on earning assets, which increased 160 basis points, in addition to a higher level of average earning assets, which increased by $296.8 million. The average yield on loans held for investment increased 156 basis points and the yield on cash and investments increased 119 basis points in total, reflecting the impact on rates caused by the Federal Reserve’s monetary policy. Average total loans held for investment increased $314.1 million, most notably in commercial real estate and construction, commercial loans and small business loans, which increased $191.5 million on average, combined. Home equity loans and residential real estate loans held in portfolio increased $157.1 million on average, combined. Residential loans for sale decreased $21.0 million on average.

Interest expense increased $49.1 million, year over year, due primarily to market interest rate rises, as well as an increase of $221.2 million in average interest bearing deposits. Interest expense on deposits increased $42.4 million with the cost of interest-bearing deposits increasing 262 basis points to 3.81%. Total cost of deposits increased 227 basis points reflecting a decrease of $29.2 million in average non-interest bearing deposits. Interest expense on borrowings increased $6.4 million as the cost increased 199 basis points, and total average short-term borrowings increased $117.9 million.

Net interest margin decreased 63 basis points to 3.35% for the year ended December 31, 2023 from 3.98% for the year ended December 31, 2022, as the increase in yield on earnings assets was outpaced by the increase in costs of funds, impacted also by the $29.2 million decrease in average non-interest bearing deposits.

PROVISION FOR CREDIT LOSSES

The provision for credit losses was $6.8 million for the year ended December 31, 2023, compared to a $2.5 million provision for the year ended December 31, 2022. The provision for credit losses for the year ended December 31, 2023 was calculated under the current expected credit losses method, while the provision for the year ended December 31, 2022 was calculated under the incurred loss model, which impacts comparability. The overall provision for credit losses for 2023 is comprised of provisioning for funded loans as well as unfunded loan commitments. The increase in provision for funded loans was due to a $4.7 million increase in specific reserves on new, mainly small business loans, and existing non-accrual loans combined with provisioning for loan growth and charge-offs. $2.3 million of the increase in specific reserves related to a commercial loan relationship for which new information became available related to the value of the underlying collateral, and an estimate of disposition costs. This increase was partially offset by the impact of favorable changes in certain portfolio baseline loss rates and some macroeconomic factors underlying the funded loss model. The provision for unfunded loan commitments decreased $419 thousand during the year due to the impact of favorable changes in certain portfolio baseline loss rates and some macroeconomic factors underlying the unfunded loss model.

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NON-INTEREST INCOME

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

Total non-interest income decreased $9.8 million largely as a result of lower mortgage banking revenue. Mortgage banking income was down $8.8 million, due primarily to lower levels of mortgage loan originations as rising interest rates and lack of housing inventory has had a negative impact on mortgage banking activity throughout the year. Compounding the impact of the decline in mortgage banking income were net changes in the fair value of derivative instruments and loans held-for-sale, along with a decline in net gains on hedging activity that decreased $3.7 million, combined, year over year.

SBA loan sale income was relatively unchanged year-over-year, despite an increase of $9.1 million, or 12.0%, in the volume of loans sold in 2023 compared to 2022. The upward movement in interest rates during 2023 had a negative impact on gross margins on the SBA loan sales, which declined to 6.7% for all sales in 2023, compared to 7.4% in 2022.

The net change in the fair value of loans held-for-investment increased $2.5 million to a gain of $132 thousand for the year ended December 31, 2023, compared to a loss of $2.4 million for the comparable prior year, 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.

NON-INTEREST EXPENSE

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

Total non-interest expense decreased $4.3 million mainly due to a decrease in salaries and employee benefits expense at the mortgage segment, which recognized decreased fixed and variable compensation as the volume of loan originations and sales were both down year-over-year. Partially offsetting this decrease was an increase for the bank and wealth segments salaries & benefits as FTEs were up and a higher level of stock-based compensation expense.

Professional fees increased $677 thousand as we incurred OREO expense during the year to maintain the one property held, non-performing loan and lease workout expenses increased, and we also incurred system conversion fees for a new loan servicing platform for our mortgage segment. Advertising and promotion expense decreased $606 thousand as the result of a decline in mortgage related advertising expense and other promotional expense. Data processing and software expense increased $964 thousand as Meridian continued with the strategy to invest in technology that focuses on improving back-office efficiencies through automation and workflow processes. Data processing expense was up over the prior year due to an increase in customer account transaction volume.

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INCOME TAX EXPENSE

The following table presents income tax expense and related metrics for the periods indicated:

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 stock based compensation in 2023, partially offset by an increase in tax-free bank owned life insurance income.

The effective tax rate reflects the recognition of certain tax benefits in the financial statements including those benefits from tax-exempt interest income, federal low-income housing tax credits, and excess tax benefits from recognized stock compensation. These tax benefits are offset by the tax effect of stock-based compensation expense related to incentive stock options and a provision for state income tax expense.

We frequently analyze our projections of taxable income and make adjustments to our provision for income taxes accordingly.

Balance Sheet Summary

Assets

As of December 31, 2023, total assets were $2.2 billion which increased $184.0 million, or 8.9%, from December 31, 2022. This growth in assets over the prior period was due primarily to loan portfolio growth, as detailed in the following section.

Loans

Our loan portfolio is the largest category of our interest-earning assets. As of December 31, 2023 and 2022, our total loans and leases amounted to $1.9 billion, and $1.8 billion, respectively. 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.

The following table presents our loan and lease portfolio at the dates indicated:

Portfolio loans increased $152.9 million, or 8.8% to $1.9 billion as of December 31, 2023, from $1.7 billion as of December 31, 2022.

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The following table shows the amounts of loans outstanding as of December 31, 2023 which, based on remaining scheduled repayments of principal, are due in the periods indicated:

The amounts have been classified according to sensitivity to changes in interest rates for amounts due after one year, as of December 31, 2023. Variance rate loans are those loans with floating or adjustable interest rates.

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 33.8% of our total commercial real estate loan portfolio at December 31, 2023. The remaining commercial real estate loans are managed by our commercial real estate department which offer the following commercial real estate products:

•Permanent – Investor Real Estate Loans

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

•Construction Loans

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

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

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

•Land Development Loans

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

Our commercial real estate loans increased by $172.5 million, or 30.5%, to $737.9 million at December 31, 2023 from $565.4 million at December 31, 2022. Our total commercial real estate loan portfolio represented 38.6% and 32.2% of our total loan portfolio at December 31, 2023 and 2022, respectively. Construction loans decreased $25.5 million, or 9.4%, to $246.4 million at December 31, 2023 from $272.0 million at December 31, 2022. Construction loans represented 12.9% and 15.5% of our total loan portfolio at December 31, 2023 and 2022, 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 decreased $38.5 million, or 11.3%, to $302.9 million at December 31, 2023 from

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$341.4 million at December 31, 2022. Commercial and industrial loans overall represented 15.8% and 19.4% of our total loan portfolio at December 31, 2023 and 2022, 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 $6.2 million, or 4.5%, to $142.3 million at December 31, 2023 from $136.2 million at December 31, 2022. During 2023 we sold $85.0 million in SBA loans, an increase of $9.1 million, or 12.0%, from $75.9 million in SBA loans sold in 2022. The small business loans portfolio represented 7.4% and 7.7% of our total loan portfolio at December 31, 2023 and 2022, respectively.

Consumer and Personal Loans

Our consumer-lending department principally originates residential mortgage and home equity based products for our clients and prospects. These loans typically fund completely at closing. Additional products include smaller dollar personal loans and our student loan refinance product, designed to provide additional flexibility in repayment terms desired in the marketplace. Home equity lines and loans increased $16.9 million, or 28.4%, to $76.3 million at December 31, 2023 from $59.4 million at December 31, 2022, while residential mortgage loans increased by $38.8 million, or 17.5%, to $260.6 million at December 31, 2023 from $221.8 million at December 31, 2022. Overall the total consumer loan portfolio represented 17.6% and 16.0% of our total loan portfolio at December 31, 2023 and 2022, respectively.

Leases, net

Meridian Equipment Finance specializes in small ticket equipment leases for small and mid-sized businesses nationally and through a broad range of industries. The Bank’s credit risk generally results from the potential default of borrowers which may be driven by customer specific or broader industry related conditions. Leases decreased $17.4 million, or 12.5%, to $121.6 million at December 31, 2023 from $139.0 million at December 31, 2022.

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, 2023 our available-for-sale investment portfolio had a fair value of $146.0 million, with an effective tax equivalent yield of 3.15% and an estimated duration of approximately 4.2 years. The largest category of this investment portfolio, or 28.9%, consists of municipal securities, along with 24.8% in U.S. agency securities, and 20.8% in U.S. Treasury securities. The remainder of our available-for-sale 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 $2.1 million as of December 31, 2023 and 2022. As of December 31, 2023 we also had a held-to-maturity investment portfolio with amortized cost of $35.8 million.

The following table presents the amortized cost and fair value of securities at the dates indicated:

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Asset Quality Summary

The ratio of non-performing assets to total assets increased to 1.58% as of December 31, 2023, from 1.11% as of December 31, 2022. There was $1.7 million in other real estate property included in non-performing assets as of December 31, 2023 and 2022, related to a well secured residential property. Total non-performing loans were $33.8 million and $21.2 million as of December 31, 2023 and December 31, 2022, respectively. The increase in non-performing loans over the period was due to increases in non-performing small business loans, commercial loans, residential real estate loans and construction loans of $5.0 million, $2.9 million, $2.5 million, and $1.2 million, respectively.

Meridian realized net charge-offs of $5.6 million, or 0.30%, of total average loans for the year ended December 31, 2023, compared to net charge-offs of $2.4 million, or 0.15%, of total average loans for the year ended December 31, 2022. A majority of charge-offs for the year ended December 31, 2023 were from equipment leases, $4.0 million, and $1.5 million were from small business loans. The ratio of allowance for credit losses to total loans held for investment, excluding loans at fair value (a non-GAAP measure, see reconciliation in the Appendix), was 1.17% as of December 31, 2023 compared to 1.09% as of December 31, 2022.

As of December 31, 2023 there were specific reserves of $6.5 million against individually evaluated loans, an increase from $2.2 million as of December 31, 2022. The drivers of the increase related to a $2.3 million increase in a commercial loan relationship specific reserve for which new information became available related to the value of the underlying collateral, combined with the net impact of establishing $2.3 million in specific reserves on SBA loan relationships classified as non-performing, netted with the charge-off an SBA loan.

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.

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

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(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.

(2) The allowance for credit losses for the year ended December 31, 2023 was calculated under the current expected credit loss model, while the allowance for the year ended December 21, 2022 was calculated under the incurred loss model.

Allowance for Credit Losses

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

The following table provides information on net (charge-offs) and recoveries by loan category for the years ended:

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Deposits

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

Total deposits were $1.8 billion as of December 31, 2023, up $111.0 million, or 6.5%, from December 31, 2022. Non-interest bearing deposits decreased $62.4 million, or 20.7%, from December 31, 2022. Interest-bearing demand deposits decreased $68.9 million, or 31.4%, from December 31, 2022, while money market accounts/savings accounts increased $50.2 million, or 7.2%, from December 31, 2022. Certificates of deposits increased $192.1 million, or 38.9%, from December 31, 2022, as lower levels of core deposits, combined with continued loan growth year over year, led to the need to obtain more wholesale funding. Included in time deposits as of December 31, 2023, and December 31, 2022, are $429.9 million and $375.3 million of brokered deposits, respectively, which comprise 23.8% and 21.9% of total deposits as of these dates.

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

Equity

Consolidated stockholders’ equity of the Corporation was $158.0 million, or 7.0% of total assets as of December 31, 2023 as compared to $153.3 million, or 7.4% of total assets as of December 31, 2022. The increase in stockholders’ equity is the result of year-to-date net income of $13.2 million, and comprehensive income of $2.1 million, partially offset by dividends paid of $5.6 million, common stock repurchases of $4.3 million, and $1.0 million in stock-based compensation and stock options exercised. On February 28, 2023, the Corporation approved and declared a two-for-one stock split in the form of a 100% stock dividend, payable 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 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 effective February 28, 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.

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The tables below provides the non-GAAP reconciliation for the Corporation’s pre-tax, pre-provision income.

The table below provides the non-GAAP reconciliation for the Corporation’s tangible common equity ratio and tangible book value per common share.

The following is a reconciliation of the allowance for credit losses to total loans held for investment ratio at December 31, 2023. This is considered a non-GAAP measure as the calculation excludes the impact of loans held for investment that are fair valued as these loan types are not included in the allowance for credit losses calculation.

Liquidity

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

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comprised of SNCs, which have a national market and can be sold in a timely manner. Meridian’s available liquidity, which totaled $273.4 million at December 31, 2023, compared to $264.4 million at December 31, 2022, 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 FRB to meet short-term liquidity needs. Through its relationship at the FRB, Meridian had available credit of approximately $7.8 million at December 31, 2023. At December 31, 2023, Meridian had $33.0 million in 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, 2023, Meridian’s maximum borrowing capacity with the FHLB was $626.8 million. At December 31, 2023, Meridian had borrowed $141.9 million and the FHLB had issued letters of credit, on Meridian’s behalf, totaling $104.3 million against its available credit lines. At December 31, 2023, Meridian also had available $49.0 million of unsecured federal funds lines of credit with other financial institutions as well as $146.1 million of available short or long term funding through the CDARS program and $356.0 million of available short or long term funding through brokered CD arrangements. Management believes that Meridian has adequate resources to meet its short-term and long-term funding requirements.

Loan Commitments

At December 31, 2023, Meridian had $528.7 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, 2023 totaled $333.6 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, 2023, Meridian had a reserve for unfunded loan commitments of $1.0 million.

Capital Resources

Meridian meets the definition of “well capitalized” for regulatory purposes on December 31, 2023. 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 CBLR of between 8 and 10%. The Bank adopted this framework in 2020. 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’s CBLR was 9.46% and 9.95% as of December 31, 2023 and 2022, respectively, but reports all ratios for comparative purposes.

Tables presenting the Bank’s capital amounts and ratios as of December 31, 2023 and 2022 are included in Note 17 - Regulatory Matters.