What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-11 compared with 2022-05-09 · 189 added, 126 removed, 406 unchanged (44% of the section changed)

13 unchanged sentences

and similar expressions.

Although these statements reflect management’s good faith beliefs and projections, they are not guarantees of future performance and they may not prove true.

Although these statements reflect management’s good faith beliefs and projections, they are not guarantees of future performance and they may not

The beliefs, plans and objectives on which forward-looking statements are based involve risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements.

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In addition, the Bank owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership, a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland, and a 99.9% non-voting membership interest in MCC FUBT Fund, LC, an Ohio limited liability company formed for the purpose of acquiring, developing and operating low-income housing units in Allegany County, Maryland.

At March 31, 2022, the Corporation’s total assets were $1.8 billion, net loans were $1.2 billion, and deposits were $1.5 billion.

Shareholders’ equity at March 31, 2022 was $137.1 million.

At June 30, 2022, the Corporation’s total assets were $1.8 billion, net loans were $1.2 billion, and deposits were $1.5 billion.

Shareholders’ equity at June 30, 2022 was $132.9 million.

The Corporation maintains an Internet site at www.mybank.com on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.

SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data for the three month periods ended March 31, 2022 and 2021 and is qualified in its entirety by the detailed information and unaudited financial statements, including the notes thereto, included elsewhere in this quarterly report.

As of the three months ended

The following table sets forth certain selected financial data for the six month periods ended June 30, 2022 and 2021 and is qualified in its entirety by the detailed information and unaudited financial statements, including the notes thereto, included elsewhere in this quarterly report.

As of the six months ended

Per Share Data

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RESULTS OF OPERATIONS

Consolidated net income was $5.7 million for the first quarter of 2022 compared to $3.4 million for the first quarter of 2021.

Basic and diluted net income per share for the first quarter of 2022 were both $0.86, compared to basic and diluted net income per share of $0.49 for the first quarter of 2021.

The increase in earnings for the first quarter of 2022 was primarily driven by the reduction of $3.3 million in litigation settlement expenses recorded in the first quarter of 2021.

Additionally, we experienced an increase in net interest income, a credit to provision expense, stable non-interest income and reduced professional fees, marketing

expenses and telephone related expenses offset by increases to salaries and employee benefits and other real estate owned (“OREO”) expenses.

Net interest income, on a non-GAAP, fully tax equivalent (“FTE”) basis, increased by $1.1 million (8.9%) for the first quarter 2022 when compared to the first quarter of 2021.

This increase was driven by stable interest income and a 56% decrease in interest expense of $1.0 million.

Interest income on loans decreased $0.3 million due to a decrease in average loan balances of $33.9 million and a reduction of unearned fees, primarily related to Paycheck Protection Program (“PPP”) loan forgiveness during 2021.

Consolidated net income was $11.1 million for the first six months of 2022 compared to $7.8 million for the first six months of 2021.

Basic and diluted net income per share for the first six months of 2022 were both $1.68, compared to basic and diluted net income per share of $1.15 for the first six months of 2021.

The year over year increase was primarily driven by a $2.3 million increase in net interest income;

of which, $1.9 million resulted from the decrease in interest expense as costs of funds decreased by approximately 55%.

Additionally, comparative year-to-date income increased due to the $3.3 million in litigation settlement expense recognized in 2021.

Consolidated net income was $5.4 million for the second quarter of 2022, or $0.82 per diluted share, compared to $4.4 million, or $0.66 per diluted share, for the second quarter of 2021.

The increase in net income year over year was driven by an increase in net interest income of $1.2 million and reduced operating expenses of $0.4 million, offset by an increase in provision expense of $0.1 million, reduced other operating income, and a decrease of $0.3 million in gains from sales of mortgages.

Additionally, we experienced a decrease in gains from sales of available for sale investments and recognized an expense of $0.2 million in expense related to Other Real Estate Owned (“OREO”) in the second quarter 2022 compared to a gain on sale of OREO of $0.2 million in the second quarter of 2021.

The OREO expenses were attributable to one development project as we continue to work with the participation group to market and sell the commercial parcels.

Comparing the six months ended June 30, 2022 to the six months ended June 30, 2021, net interest income, on a non-GAAP, fully taxable equivalent (“FTE”) basis, increased by $2.3 million.

Interest income increased by $0.4 million and interest expense decreased by $1.9 million.

Interest income during the first six months of 2021 included $2.0 million in fees related to Paycheck Protection Program (“PPP”) loan forgiveness that were recognized during that period compared to $0.1 million for the six months ended June 30, 2022.

The yield on earning assets increased 10 basis points to 3.66% during the six months of 2022 compared to 3.56% during the same period of 2021, which correlated to the rising interest rate environment and new loans booked at higher rates.

Interest expense on deposits decreased $1.3 million while the average balances decreased $10.2 million and interest on long-term borrowings decreased $0.7 million relating to the prepayment of $70.0 million of Federal Home Loan Bank (“FHLB”) advances in the third quarter of 2021.

The decreased interest expense resulted in an overall decrease of 32 basis points on interest bearing liabilities.

To date, we have not experienced significant pressure on deposit pricing, but we expect to experience increasing rates the remainder of this year given the recent moves by the Federal Reserve.

The net interest margin for the six months ended June 30, 2022 was 3.46% compared to 3.13% for the six months ended June 30, 2021.

Net interest income, on a non-GAAP, FTE basis, increased by $1.2 million for the second quarter 2022 when compared to the second quarter of 2021.

This increase was driven by an increase of $0.3 million in interest income related to an overall increase of 15 basis points on interest earning assets despite a decline in average balances of $33.8 million.

Interest income on loans decreased $0.2 million due primarily to a reduction of fees related to PPP loan forgiveness recognized during 2021.

Investment income increased $0.6 million due to an increase in average balances related to the deployment of excess cash balances to purchase investment securities late in the fourth quarter of 2021 and early in the first quarter of 2022.

The reduction of interest expense resulted from the lowering of deposit rates throughout 2021, the declining balances in the higher cost CD portfolio and the prepayment of the Federal Home Loan Bank (“FHLB”) advances in 2021.

The net interest margin for the first quarter of 2022 was 3.40%, compared to 3.11% for the first quarter of 2021.

Other operating income, including gains, for the first quarter of 2022 decreased by approximately $0.5 million when compared to the same period of 2021.

An increase of $0.1 million in service charge and debit card income was offset by a decline of $0.1 million in trust and brokerage income due to the decline in the market value of assets under management during the first quarter of 2022, which was driven by the volatile stock market and the increase in interest rates during the quarter.

Net gains decreased $0.5 million when comparing the first quarter of 2022 to the first quarter of 2021.

This decrease was due to the slowing of refinance activity in the mortgage portfolio, which resulted in fewer gains on sales in 2022.

Non-GAAP, core operating expenses, exclusive of the $3.3 million in litigation settlement expense recorded in the first quarter of 2021, increased by $1.4 million when comparing the first quarter of 2022 to the first quarter of 2021.

This increase was driven by an increase in salaries and benefits of $0.9 million related in part to a reduction in deferred loan origination costs in 2021 (primarily related to PPP activities) and increased incentive pay, offset by a decline in life and health insurance related to reduced claims.

OREO expenses increased by $0.5 million due to an expense credit in the first quarter of 2021 related to gains on sales of properties.

Equipment and data processing fees also increased $0.3 million quarter over quarter.

These increases were offset by a decrease of $0.2 million in professional services and $0.1 million in telephone related expenses.

The provision for loan losses was a credit of $0.4 million for the quarter ended March 31, 2022 and an expense of $0.1 million for the quarter ended March 31, 2021.

The credit to provision expense recorded in the first quarter of 2022 was attributable to reductions in the qualitative factors, particularly related to the continued payment performance of previously modified loans that began performing in accordance with their original payment terms.

Net charge-offs of $0.2 million were recorded for the quarter ended March 31, 2022, compared to net charge offs of $42,000 for the same period of 2021.

The ratio of the ALL to loans outstanding, including PPP loan balances, was 1.29% at March 31, 2022 compared to 1.38% at December 31, 2021.

The ratio of ALL to loans outstanding, excluding PPP loan balances of $1.3 million and $7.7 million, respectively was 1.30% at March 31, 2022 and 1.39% at December 31, 2021, non-GAAP.

The effective income tax rates as a percentage of income for the three month periods ended March 31, 2022 and 2021 were 25.0% and 24.3%, respectively.

The slight increase in the tax rate for the 2022 period was primarily due to the reduction in tax exempt income as well as the reduction in tax credits related to the expiration of a low-income housing tax credit in June 2021.

A new 2021 investment in a low-income housing tax credit is expected to provide tax benefits later in 2022 and future years.

The reduction of $1.1 million in interest expense resulted from the lowering of deposit rates throughout 2021, the decline of $73.3 million of average balances in the higher cost CD portfolio and the prepayment of $70.0 million of FHLB advances in 2021.

The net interest margin for the second quarter of 2022 was 3.52%, compared to 3.15% for the second quarter of 2021.

Non-interest income for the six months ended June 30, 2022 decreased by approximately $0.8 million when compared to the same period of 2021.

This decrease was primarily due to the decrease in net gains on sales of residential mortgage loans of $0.8 million as refinance activity has slowed considerably in correlation with rising mortgage interest rates and due to management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio.

Other operating income, including gains, for the second quarter of 2022 decreased by approximately $0.3 million when compared with the same period of 2021.

Gains on sales of mortgage loans decreased by approximately $0.3 million related to the diminished refinance activity due to the rising interest rate environment and management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio.

Net gains on sales of investments decreased by approximately $0.2 million, which was partially offset by the increase of service charges on deposit accounts by approximately $0.1 million.

For the six months ended June 30, 2022, non-interest expenses decreased by $2.3 million in 2022 when compared to the six months ended June 30, 2021.

This decrease was attributable to the one-time litigation settlement expense of $3.3 million, and $1.2 million in legal expenses that were recognized in 2021 along with a $0.2 million reduction in telephone expense and a $0.2 million decline in investor relations costs.

These decreases were partially offset by year-over-year increases in salaries and employee benefits of $1.2 million, which was partially related to the reduction of employee wages associated with deferred loan costs and increases of $0.3 million in equipment expenses, $0.9 million in OREO expenses and $0.2 million in miscellaneous other expenses.

Other operating expenses decreased by $0.4 million when comparing the second quarter of 2022 to the second quarter of 2021.

This decrease was driven by a decrease in legal and professional fees of approximately $0.9 million and investor relations expense of approximately $0.2 million, which were partially offset by an increase in salaries and employee benefits of approximately $0.3 million and net OREO expenses of approximately $0.4 million.

The increase in OREO expenses was driven by expenses

attributable to one development project as we continue to work with the participation group to market and sell the commercial parcels and gains on sales of properties in 2021 that resulted in a net credit.

The provision for loan losses was $0.6 million for both the second quarter of 2022 and the second quarter of 2021.

The provision expense recorded in the second quarter of 2022 was attributable primarily to loan portfolio growth during the quarter and changes in the qualitative factors, particularly related to the current economic outlook.

Net charge-offs of $179,000 were recorded for the quarter ended June 30, 2022, compared to net charge offs of $67,000 for 2021.

The ratio of the ALL to loans outstanding was 1.28% at June 30, 2022, compared to 1.29% at March 31, 2022 and 1.38% at December 31, 2021.

The effective income tax rates as a percentage of income for the six months ended June 30, 2022 and June 30, 2021 were 24.5% and 25.2%, respectively.

The reduced tax rate for the six months ended June 30, 2022 when compared to the six months ended June 30, 2021 was related to an increased benefit at the holding company related to the fair value costs associated with the executive long term incentive plan payouts, and state tax treatment of the litigation settlement expenses.

The new low-income housing tax credit investment in 2021 is expected to begin generating tax credits in 2022 and should provide increased tax credits beginning in 2023 and beyond for the term of the tax credit.

Non-GAAP Financial Measures

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The following table presents a reconciliation of net income and basic and diluted earnings per share (as reported) to adjusted net income and adjusted basic and diluted earnings per share:

Three months ended March 31,

Six months ended June 30,

Three months ended June 30,

(in thousands, except for per share amount)

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This is a non-GAAP disclosure and management believes it is not materially different than the corresponding GAAP disclosure.

The tables below summarizes net interest income for the three month periods ended March 31, 2022 and 2021.

The tables below summarizes net interest income for the six and three month periods ended June 30, 2022 and 2021.

Non-GAAP - FTE

Six Months Ended

(dollars in thousands)

Interest income

Interest expense

Net interest income

Net interest margin %

Three Months Ended

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Net interest margin %

The following tables set forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the three month periods ended March 31, 2022 and 2021:

Six Months Ended

(dollars in thousands)

Investment Securities:

Federal funds sold

Interest-bearing deposits with other banks

Other interest earning assets

Total earning assets

Allowance for loan losses

Non-earning assets

Liabilities and Shareholders’ Equity

Interest-bearing demand deposits

Interest-bearing money markets

Savings deposits

Time deposits

Short-term borrowings

Long-term borrowings

Total interest-bearing liabilities

Non-interest-bearing deposits

Other liabilities

Shareholders’ Equity

Total Liabilities and Shareholders’ Equity

Net interest income and spread

Net interest margin

(1) The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2022 and 2021.

Non-GAAP interest income on a fully taxable equivalent was $477 and $473, respectively.

(2) Net interest margin is calculated as net interest income divided by average earning assets.

(3) The average yields on investments are based on amortized cost.

Comparing the six months ended June 30, 2022 to the six months ended June 30, 2021, net interest income, on a non-GAAP, FTE basis, increased by $2.3 million.

Interest income increased by $0.4 million and interest expense decreased by $1.9 million.

Interest income for the first six months of 2021 included $2.0 million in fees related to PPP loan forgiveness that were recognized during that period compared to $0.1 million for the six months ended June 30, 2022.

The yield on earning assets increased 10 basis points to 3.66% in 2022 compared to 3.56% in 2021 in correlation with the rising interest rate environment and new loans booked at higher rates.

The decreased interest expense resulted in an overall decrease of 32 basis points on interest bearing liabilities.

To date, we have not experienced significant pressure on deposit pricing, but we expect to experience increasing rates the remainder of this year given the recent moves by the Federal Reserve.

The net interest margin for the six months ended June 30, 2022 was 3.46% compared to 3.13% for the six months ended June 30, 2021.

Three Months Ended

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(3) The average yields on investments are based on amortized cost.

The stable interest income was driven by a reduction in interest and fees on loans related to reduced fees and average balances of $33.9 million, primarily PPP loans.

This decline was offset by increased interest income on the investment portfolio driven by an increase in average balances of $109.2 million.

The decrease in interest expense was driven by further reductions in deposit rates during 2021 and reducing the cost of interest-bearing deposits by 27 basis points and a decline in average balances of $11.6 million.

The prepayment of the $70.0 million of FHLB advances in 2021 also contributed to the reduced interest expense.

The following table sets forth an analysis of volume and rate changes in interest income and interest expense for our average interest-earning assets and average interest-bearing liabilities for the three month periods ended March 31, 2022 and 2021:

For the Three months ended March 31, 2022

compared to the three months ended March 31, 2021

Net interest income, on a non-GAAP, FTE basis, increased by $1.2 million for the second quarter 2022 when compared to the second quarter of 2021.

Interest income on loans decreased $0.2 million due primarily to a reduction of fees related to PPP loan forgiveness recognized during 2021.

The net interest margin for the second quarter of 2022 was 3.52%, compared to 3.15% for the second quarter of 2021.

For the Six months ended June 30, 2022

compared to the Six months ended June 30, 2021

(in thousands and tax equivalent basis)

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Net interest income

For the Three months ended June 30, 2022 compared to the Three months ended June 30, 2021

(in thousands and tax equivalent basis)

Interest Income:

Taxable Investments

Non-taxable Investments

Federal funds sold

Interest-bearing deposits

Other interest earning assets

Total interest income

Interest Expense:

Interest-bearing demand deposits

Interest-bearing money markets

Savings deposits

Time deposits

Short-term borrowings

Long-term borrowings

Total interest expense

Net interest income

(1) The change in interest income/expense due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

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Specific allocations have been made for impaired loans where management has determined that the collateral supporting the loans is not adequate to cover the loan balance, and the qualitative factors affecting the ALL have been adjusted based on the current economic environment and the characteristics of the loan portfolio.

The composition of other operating income for the three month periods ended March 31, 2022 and 2021 is illustrated in the following table:

The composition of other operating income for the six and three month periods ended June 30, 2022 and 2021 is illustrated in the following table:

Income as % of

Total Other Income

Six Months Ended

Three Months Ended

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Other Operating Expenses

The composition of other operating expenses for the three month periods ended March 31, 2022 and 2021 is illustrated in the following table:

The composition of other operating expenses for the six and three month periods ended June 30, 2022 and 2021 is illustrated in the following table:

Expense as % of

Total Other Operating Expenses

Six Months Ended

Three Months Ended

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FDIC premiums

Data processing

Occupancy expense of premises

Data processing expense

Marketing expense

Professional services

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Balance Sheet Overview

Total assets at March 31, 2022 increased to $1.8 billion, representing a $30.5 million increase since December 31, 2021.

During the first quarter of 2022, cash and interest-bearing deposits in other banks decreased by $39.6 million, the investment portfolio increased by $42.2 million and gross loans increased by $27.7 million.

Management made a strategic decision to deploy excess cash balances early in the first quarter of 2022 by purchasing approximately $50.0 million in short-term treasury bonds.

OREO balances remained stable during the first quarter although there continues to be interest in parcels of real estate that previously secured a large commercial participation loan.

We anticipate further reductions to OREO balances during 2022 as we consummate additional sale contracts.

Total liabilities increased by $35.3 million when compared to liabilities at December 31, 2021.

The increase in the first quarter of 2022 was attributable to core relationship deposit growth of $38.2 million.

Balances in short-term borrowings related to our Treasury Management product increased slightly by $1.2 million.

Total shareholders’ equity decreased by $4.8 million during the quarter, as net income of $5.7 million was offset by the payment of $1.0 million in dividends and the decline of $9.6 million in accumulated other comprehensive loss related to declining market values of our investment portfolio and pension plan assets.

Total assets at June 30, 2022 were $1.8 billion, representing a $7.9 million decrease since March 31, 2022 and a $22.6 million increase since December 31, 2021.

During the second quarter of 2022, cash and interest-bearing deposits in other banks decreased by $54.5 million, the investment portfolio decreased by $11.8 million and gross loans increased by $52.2 million.

Other assets including deferred taxes, premises and equipment and accrued interest receivable also increased collectively by $6.6 million.

Total liabilities at June 30, 2022 were $1.6 billion, representing a $3.7 million decrease since March 31, 2022 and a $31.6 million increase since December 31, 2021.

The increase in total liabilities was also attributable to the change in the market value of the pension plan assets of $9.4 million since December 31, 2021.

This decrease is related to the increasing rate environment and market volatility resulting in a pension plan liability of $4.6 million at June 30, 2022 compared to a pension plan asset of $4.8 million at December 31, 2021.

Total deposits decreased by $23.2 million since March 31, 2022 and increased by $15.0 million since December 31, 2021.

The decline in deposits during the second quarter is primarily attributable to reduced money market balances associated with one local municipality.

Short term borrowings increased $12.2 million since December 31, 2021, driven by $18.9 million in overnight borrowings, which were offset by a decrease in other short-term borrowings of $7.9 million during the quarter.

The increase in overnight borrowings at June 30, 2022 was primarily driven by the strong loan growth coupled with the decline in deposit balances during the second quarter and the timing difference associated with an expected loan pay-off.

Management plans to bring approximately $50.0 million in trust department money market accounts which had been placed off-balance sheet in 2021, back on-balance sheet in the third quarter.

Loan Portfolio

1 unchanged sentence

(dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

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Residential mortgage

*Includes $1.3 million of PPP loans at March 31, 2022 and $7.7 million at December 31, 2021

Outstanding loans of $1.2 billion at March 31, 2022 reflected an increase of $27.7 million during the first quarter of 2022.

Core commercial loan growth was offset slightly by PPP loan forgiveness.

Commercial real estate (:CRE”) loans increased by $16.8 million, acquisition and development (“A&D”) loans increased by $5.0 million and commercial and industrial loans increased by $14.0 million, as growth in core portfolio loans of $20.4 million was offset by $6.4 million of PPP loan forgiveness.

Residential mortgage loans decreased $5.0 million resulting from amortization of the portfolio as well as paydowns and payoffs.

The refinancing activity continued to slow in the first quarter and much of the production of residential mortgage loans was booked to the in-house portfolio.

The consumer loan portfolio decreased by $3.0 million.

Commercial loan production for the three months ended March 31, 2022 was approximately $68.1 million.

At March 31, 2022, unfunded, committed commercial construction loans totaled approximately $25.6 million.

Commercial amortization and payoffs were approximately $45.1 million through March 31, 2022, exclusive of PPP loans.

Consumer mortgage loan production for the first quarter of 2022 was approximately $20.5 million with the vast majority of this production being comprised of in-house mortgages.

The production and pipeline mix of in-house, portfolio loans and investor loans as of March 31, 2022 consisted of $13.4 million in portfolio loans and $1.0 million in investor loans.

Production levels have slowed for residential mortgages as compared to the first quarter of 2021 based on the long-term interest rate increases that have occurred during the fourth quarter of 2021 and into the first quarter of 2022.

Non-accrual loans totaled $2.3 million at March 31, 2022 compared to $2.5 million at December 31, 2021.

The slight decrease in non-accrual balances at March 31, 2022 was primarily related to $0.1 million of one commercial and industrial loan that paid off in the first quarter of 2022.

*Includes $0.8 million of PPP loans at June 30, 2022 and $7.7 million at December 31, 2021

Outstanding gross loans of $1.2 billion at June 30, 2022 reflected growth of $79.9 million for the first six months of 2022 and growth of $52.2 million for the second quarter of 2022.

Since December 31, 2021, commercial real estate (“CRE”) loans increased by $47.7 million, acquisition and development (“A&D”) loans decreased by $12.0 million and commercial and industrial loans increased by $44.6 million.

The growth in the commercial real estate and commercial and industrial portfolios is a result of expansion of relationships with existing clients as well as new commercial clients.

Residential mortgage loans increased $1.6 million related to the diminished refinance activity due to the rising interest rate environment and management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio.

The consumer loan portfolio decreased by $2.0 million due to amortization of the existing portfolio offsetting new production.

New commercial loan production for the three months ended June 30, 2022 was approximately $103.4 million.

At June 30, 2022, unfunded, committed commercial construction loans totaled approximately $34.9 million.

Commercial amortization and payoffs were approximately $47.7 million through June 30, 2022.

New consumer mortgage loan production for the second quarter of 2022 was approximately $15.1 million with most of this production being comprised of in-house mortgages.

The pipeline in-house, portfolio loans as of June 30, 2022 consisted of $13.5 million.

Production levels have slowed for residential mortgages as compared to the second quarter of 2021 because of the increasing interest rates for the first six months of 2022.

Non-accrual loans totaled $2.1 million at June 30, 2022 compared to $2.5 million at December 31, 2021.

The decrease in non-accrual balances at June 30, 2022 was primarily related to $0.2 million of principal pay-downs of residential mortgage and home equity loans.

Risk Elements of Loan Portfolio

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Allowance for loan losses to non-performing assets (as %)

Performing loans considered to be impaired (including performing troubled debt restructurings, or TDRs), as defined and identified by management, amounted to $2.9 million at March 31, 2022 and $3.0 million at December 31, 2021.

Performing loans considered to be impaired (including performing troubled debt restructurings, or TDRs), as defined and identified by management, amounted to $3.1 million at June 30, 2022 and $3.0 million at December 31, 2021.

Loans are identified as impaired when, based on current information and events, management determines that we will be unable to collect all amounts due according to contractual terms.

2 unchanged sentences

Specific allocations have been made where management believes there is insufficient collateral to repay the loan balance if liquidated and there is no secondary source of repayment available.

The following table presents the details of impaired loans that are TDRs by class at March 31, 2022 and December 31, 2021:

March 31, 2022

The following table presents the details of impaired loans that are TDRs by class at June 30, 2022 and December 31, 2021:

June 30, 2022

December 31, 2021

22 unchanged sentences

Total non-accrual

The level of TDRs was $3.2 million at March 31, 2022 compared to $3.3 million at December 31, 2021, with a slight reduction due to payments made during the first three months of 2022.

There were no new TDRs during the first three months of 2022.

The level of TDRs was $3.2 million at June 30, 2022 compared to $3.4 million at December 31, 2021, with a slight reduction due to payments made during the first six months of 2022.

There were no new TDRs during the first six months of 2022.

Allowance and Provision for Loan Losses

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This estimate is computed in a manner similar to the methodology described above, adjusted for the probability of actually funding the commitment.

The ALL decreased to $15.3 million at March 31, 2022 compared to $16.0 million at December 31, 2021.

The ratio of net charge offs to average loans for the quarter ended March 31, 2022 was an annualized 0.08%, compared to net charge offs to average loans of 0.01% for 2021.

The decline was primarily driven by increased charge-offs on our portfolio.

The ALL decreased to $15.7 million at June 30, 2022 compared to $16.0 million at December 31, 2021.

The ratio of year-to-date net charge offs to average loans for the six months ending June 30, 2022 was an annualized 0.07%, compared to net charge offs to average loans of 0.01% for 2021.

Our special assets team continues to aggressively collect on charged-off loans.

The ALL at March 31, 2022 is adequate to provide for probable credit losses inherent in our loan portfolio.

The ALL at June 30, 2022 is adequate to provide for probable credit losses inherent in our loan portfolio.

Amounts that will be recorded for the provision for loan losses in future periods will depend upon trends in the loan balances, including the composition of the loan portfolio, changes in loan quality and loss experience trends, potential recoveries on previously charged-off loans and changes in other qualitative factors.

Management also applies interest rate risk, collateral value and debt service sensitivity analyses to the Commercial real estate loan portfolio and obtains new appraisals on specific loans under defined parameters to assist in the determination of the periodic provision for loan losses.

The following table presents a summary of the activity in the ALL for the three months ended March 31:

The following table presents a summary of the activity in the ALL for the six months ended June 30:

(dollars in thousands)

Balance, January 1

Commercial real estate

Acquisition and development

7 unchanged sentences

Total recoveries

Net recoveries/(losses)

Provision/(credit) for loan losses

Provision for loan losses

Balance at end of period

6 unchanged sentences

Investment Securities

At March 31, 2022, the total amortized cost basis of the available-for-sale investment portfolio was $154.3 million, compared to a fair value of $143.6 million.

At June 30, 2022, the total amortized cost basis of the available-for-sale investment portfolio was $149.7 million, compared to a fair value of $132.9 million.

Unrealized gains and losses on securities available-for-sale are reflected in accumulated other comprehensive loss, a component of shareholders’ equity.

1 unchanged sentence

The following table presents the composition of our securities portfolio at amortized cost and fair values at the dates indicated:

March 31, 2022

June 30, 2022

December 31, 2021

17 unchanged sentences

Total fair value of investment securities available for sale decreased by $153.9 million since December 31, 2021 due to the transfer of investments from available-for-sale to held to maturity in the first quarter 2022.

At March 31, 2022, the securities classified as available-for-sale included a net unrealized loss of $10.6 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.

At June 30, 2022, the securities classified as available-for-sale included a net unrealized loss of $16.9 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.

The Corporation reassessed classification of certain investments and effective February 1, 2022, the Corporation transferred $139.0 million of callable agencies, obligation of state and political subdivisions, and collateralized mortgage obligations from available for sale to held to maturity securities.

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These Level 3 instruments are valued based on both observable and unobservable inputs derived from the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

Approximately $126.3 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $9.3 million at March 31, 2022.

Approximately $116.6 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $14.5 million at June 30, 2022.

The remaining $16.3 million of the securities available-for-sale represents the entire collateralized debt obligation (“CDO”) portfolio, which was valued using significant unobservable inputs (Level 3 assets).

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Net unrealized losses of $1.4 million represent non-credit related OTTI charges on seven of the securities, while $1.0 million of unrealized losses relates to two securities which have had no credit related OTTI.

The following table provides a summary of the trust preferred securities in the CDO portfolio and the credit status of these securities as of March 31, 2022:

Level 3 Investment Securities Available for Sale

(dollars in thousands)

Investment Description

First United Level 3 Investments

Security Credit Status

Preferred Term Security XVIII*

Preferred Term Security XVIII

Preferred Term Security XIX*

Preferred Term Security XXII*

Preferred Term Security XXIII

Total Level 3 Securities Available for Sale

*Security has been deemed other-than-temporarily impaired and loss has been recognized in accordance with ASC Section 320-10-35.

The terms of the debentures underlying trust preferred securities allow the issuer of the debentures to defer interest payments for up to 20 quarters, and, in such case, the terms of the related trust preferred securities allow their issuers to defer dividend payments for up to 20 quarters.

Some of the issuers of the trust preferred securities in our investment portfolio have defaulted and/or deferred payments ranging from 8.09% to 13.40% of the total collateral balances underlying the securities.

The securities were designed to include structural features that provide investors with credit enhancement or support to provide default protection by subordinated tranches.

These features include over-collateralization of the notes or subordination, excess interest or spread which will redirect funds in situations where collateral is insufficient, and a specified order of principal payments.

There are securities in our portfolio that are under-collateralized, which does represent additional stress on our tranche.

However, in these cases, the terms of the securities require excess interest to be redirected from subordinate tranches as credit support, which provides additional support to our investment.

The following table presents the composition of our deposits at the dates indicated:

(dollars in thousands)

March 31, 2022

June 30, 2022

December 31, 2021

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Total Deposits

Total deposits at March 31, 2022 increased by $38.2 million when compared to deposits at December 31, 2021.

During the first quarter of 2022, non-interest-bearing deposits increased by $29.3 million, driven by retail commercial account growth.

Traditional savings accounts increased by $14.8 million as we continued to see significant growth in our Prime Saver product, and total demand deposits increased by $56.4 million.

Total money market accounts decreased by $47.3 million as some of our municipal accounts are shifting balances to state offered account products paying higher rates.

Time deposits decreased by $14.9 million as we continued to hold rates low due to our higher cash balances.

Total deposits at June 30, 2022 increased $15.0 million when compared to deposits at December 31, 2021.

Non-interest-bearing deposits increased $26.1 million primarily related to the new commercial business gained during 2022.

Interest bearing demand deposits increased $71.4 million.

Traditional savings accounts increased $15.6 million.

Money market balances decreased $69.8 million driven by one local municipality opting to move their funds to a state-sponsored deposit account that offers a higher yield as well as a movement of balances to the trust department for higher rates, while maintaining the customer relationship.

Time deposits decreased $28.3 million related to maturing time deposits moving into other deposit products.

Borrowed Funds

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(in thousands)

Fed Funds Purchased, weighted average interest rate of 1.75% at June 30, 2022

Securities sold under agreements to repurchase

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Total long-term borrowings

Total short-term borrowings increased by $1.2 million during the first three months of 2022.

This increase was due to increased cash balances from existing Treasury Management accounts.

Short-term borrowings increased $12.2 million since December 31, 2021, driven by $18.9 million in overnight borrowings, which were offset by a decrease in other short-term borrowings of $6.7 million during the six months related to our Treasury Management customers utilizing their funds.

Liquidity Management

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A negative gap position would benefit us during a period of declining interest rates.

At March 31, 2022, we were asset sensitive.

At June 30, 2022, we were asset sensitive.

Our interest rate risk management goals are:

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To manage interest sensitivity risk, management formulates guidelines regarding asset generation and pricing, funding sources and pricing, and off-balance sheet commitments.

These guidelines are based on management’s outlook regarding future interest rate movements, the state of the regional and national economy, and other financial and business risk factors.

These guidelines are based on management’s outlook regarding future

interest rate movements, the state of the regional and national economy, and other financial and business risk factors.

Management uses computer simulations to measure the effect on net interest income of various interest rate scenarios.

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They do not necessarily indicate the long-term prospects or economic value of the institution.

Based on the simulation analysis performed at March 31, 2022 and December 31, 2021, management estimated the following changes in net interest income, assuming the indicated rate changes:

Based on the simulation analysis performed at June 30, 2022 and December 31, 2021, management estimated the following changes in net interest income, assuming the indicated rate changes:

(Dollars in thousands)

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Management believes that no material changes in our market risks, our procedures used to evaluate and mitigate those risks, or our actual or simulated sensitivity positions have occurred since December 31, 2021.

Our NII simulation analysis as of December 31, 2021 is included in Item 7 of Part II Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2021 under the heading “Market Risk and Interest Sensitivity.

Our NII simulation analysis as of December 31, 2021 is included in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2021 under the heading “Market Risk and Interest Sensitivity.

Impact of Inflation – Our assets and liabilities are primarily monetary in nature, and as such, future changes in prices do not affect the obligations to pay or receive fixed and determinable amounts of money.

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To the extent that deposits are not adequate to fund our capital requirements, we can rely on the funding sources identified above under the heading “Liquidity Management”.

At March 31, 2022, the Bank had $130.0 million available through unsecured lines of credit with correspondent banks, and approximately $187.5 million available through the FHLB.

At June 30, 2022, the Bank had $111.1 million available through unsecured lines of credit with correspondent banks, and approximately $189.8 million available through the FHLB.

Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future capital requirements.

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These regulations are used to evaluate capital adequacy and require an analysis of an institution’s asset risk profile and off-balance sheet exposures, such as unused loan commitments and stand-by letters of credit.

Based on capital ratios at March 31, 2022, the Bank was considered to be well-capitalized.

Based on capital ratios at June 30, 2022, the Bank was considered to be well-capitalized.

The following table presents the Bank’s capital ratios as of the dates indicated:

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Among these obligations are FHLB advances and junior subordinated debentures, operating lease agreements for banking and subsidiaries’ offices and for data processing and telecommunications equipment.

Comparing March 31, 2022 to December 31, 2021, short-term borrowings increased by $1.2 million during the first three months of 2022.

This increase was due to increased cash balances from existing Treasury Management accounts.

Comparing June 30, 2022 to December 31, 2021, short-term borrowings increased $12.2 million, driven by $18.9 million in overnight borrowings, which were offset by a decrease in other short-term borrowings of $6.7 million during the period related to our Treasury Management customers utilizing their funds.

Loan commitments are made to accommodate the financial needs of our customers.

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Standby letters of credit

The decrease of $4.8 million in commitments at March 31, 2022 when compared to December 31, 2021 was due to utilization of funds and balances moving to outstanding balances in the loan portfolio.

The increase of $10.0 million in commitments at June 30, 2022 when compared to December 31, 2021 was due to new business in construction commitments in the residential mortgage and commercial portfolios.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis