What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-09 · 143 added, 116 removed, 429 unchanged (38% of the section changed)

22 unchanged sentences

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, LLC, an Ohio limited liability company formed for the purpose of acquiring, developing and operating low-income housing units in Allegany County, Maryland.

At June 30, 2023, the Corporation’s total assets were $1.9 billion, net loans were $1.3 billion, and deposits were $1.6 billion.

Shareholders’ equity at June 30, 2023 was $155.2 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.

At September 30, 2023, the Corporation’s total assets were $1.9 billion, net loans were $1.4 billion, and deposits were $1.6 billion.

Shareholders’ equity at September 30, 2023 was $155.0 million.

We maintain an Internet site at www.mybank.com on which we make available, free of charge, First United Corporation’s 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 six month periods ended June 30, 2023 and 2022 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

The following table sets forth certain selected financial data for the nine-month periods ended September 30, 2023 and 2022 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 nine months ended

September 30,

Per Share Data

13 unchanged sentences

RESULTS OF OPERATIONS

Consolidated net income was $4.4 million for the second quarter of 2023, compared to $5.4 million for the second quarter of 2022 and $4.4 million for the first quarter of 2023.

Basic and diluted net income was $0.66 per share for the second quarter of 2023, compared to basic and diluted net income per share of $0.82 for the second quarter of 2022.

For the first quarter of 2023, basic net income was $0.66 per share and diluted net income was $0.65 per share.

The decrease in quarterly net income year-over-year was primarily driven by a $1.1 million increase in salaries and employee benefits due to an increase in health insurance costs related to unusually high claims, as well as increased salary expense for new hires, merit increases effective April 1, 2023, increased incentive compensation, and decreases in deferred loan costs due to decrease in loan reductions.

Data processing expenses increased by $0.1 million, FDIC premiums increased by $0.1 million and miscellaneous expenses increased by $0.7 million primarily attributable to increased pension plan of $0.3 million, check fraud related expenses of $0.2 million, and increases in membership dues and licenses, mortgage escrow, debit card expense, and miscellaneous loan fees, partially offset by decreases in personnel related expense and loan service fees.

An increase in net interest income of $0.2

million and a decrease in income tax expense of $0.3 million also partially offset the decrease.

The provision for credit losses was $0.4 million for the second quarter of 2023, compared to provision for loan loss of $0.6 million for the second quarter of 2022.

Year-to-date net income for the first six months of 2023 was $8.8 million compared to $11.1 million for the same period in 2022.

The year-over-year decrease was primarily driven by a $2.4 million in salaries and employee benefits due primarily to increased salary expense of $1.1 million related to new hires and merit increases effective April 1, 2023, increased health insurance costs of $0.8 million associated with unusually high claims and increased incentive payouts of $0.2 million.

Occupancy and equipment expense increased by $0.2 million, data processing expense increased by $0.3 million, and FDIC assessments increased by $0.1 million.

Other miscellaneous expenses, such as loan service fees, dues and licenses, check fraud expenses, employee benefit plan expense, and miscellaneous expenses increased by $1.1 million.

Provision for credit losses increased by $0.7 million when compared to the prior year period.

These increases were partially offset by an increase in net interest income of $1.4 million, gains on sales of mortgages of $0.1 million, service charges on deposit accounts of $0.1 million, and debit card income of $0.1 million.

Other operating income, including gains, for the second quarter of 2023 increased slightly by $0.1 million when compared to the same period of 2022.

Increases in service charges, debit card income, and gains on sales of mortgages were partially offset by decreases in wealth management income attributable to the decline in market values of assets under management.

Other operating income for the six months ended June 30, 2023 remained stable when compared to the same period of 2022.

This increase was primarily due to the increase in gains on sales of residential mortgage loans of $0.1 million, service charges on deposit accounts of $0.1 million, and debit card income of $0.1 million, which was partially offset by decreases in wealth management income attributable to the decline in market values of assets under management.

Operating expenses increased by $1.9 million when comparing the second quarter of 2023 to the second quarter of 2022.

This increase was primarily driven by a $1.1 million increase in salaries and employee benefits due to an increase in health insurance costs related to unusually high claims, as well as increased salary expense for new hires, merit increases effective April 1, 2023, and increased incentive compensation.

Data processing expenses increased by $0.1 million, FDIC premiums increased by $0.1 million and miscellaneous expenses increased by $0.7 million primarily attributable to increased employee benefit plan costs of $0.3 million, check fraud related expenses of $0.2 million, and increases in membership dues and licenses, mortgage escrow interest expense, debit card expense, and miscellaneous loan fees, partially offset by decreases in personnel related expense and loan service fees.

For the six months ended June 30, 2023, non-interest expenses increased by $3.9 million when compared to the six months ended June 30, 2022.

Salaries and employee benefits increased by $2.4 million year-over-year due primarily to increased salary expense of $1.1 million related to new hires and merit increases effective April 1, 2023, increased health insurance costs of $0.8 million associated with unusually high claims and increased incentive payouts of $0.2 million.

Consolidated net income was $4.5 million for the third quarter of 2023,compared to $6.9 million for the third quarter of 2022 and $4.4 million for the second quarter of 2023.

Basic and diluted net income was $0.67 per share for the third quarter of 2023, compared to basic and diluted net income of $1.04 per share for the third quarter of 2022 and $0.66 per share for the second quarter of 2023.

The decrease in quarterly net income, year-over-year, was primarily driven by a $1.3 million decrease in net interest income.

Interest expense increased by $6.1 million year-over-year, which was partially offset by an increase in interest income of $4.9 million.

The provision for credit losses was $0.3 million for the third quarter of 2023, compared to a credit to the provision of $0.1 million for the third quarter of 2022.

Salaries and employee benefits increased by $0.8 million due to an increase in health insurance costs related to unusually high claims, as well as increased salary expense for new hires, merit increases effective April 1, 2023, a one-time severance pay-out, and decreases in deferred loan costs, partially offset by decreases in incentives and stock compensation.

Data processing expenses increased by $0.1 million, Federal Deposit Insurance Corporation (“FDIC”) premiums increased by $0.1 million and miscellaneous expenses increased by $0.6 million primarily attributable to increased net periodic pension plan costs of

$0.3 million and check fraud related expenses of $0.3 million.

Check fraud has been on the rise throughout 2023 industry-wide.

During the third quarter, management implemented additional procedures to help mitigate this increased risk.

Net income for the first nine months of 2023 was $13.3 million, compared to $18.1 million for the same period in 2022, a $4.8 million decrease.

The year-over-year decrease was driven by an increase in total operating expenses of $6.4 million.

Salaries and employee benefits increased by $3.2 due primarily to increased salary expense of $1.9 million related to new hires, the competitive environment for labor and merit increases effective April 1, 2023, increased health insurance costs of $1.0 million associated with unusually high claims and decreases of $0.4 in deferred loan costs.

Occupancy and equipment expense increased by $0.2 million, data processing expense increased by $0.4 million due to planned implementation of new technology, and FDIC assessments increased by $0.2 million.

Other miscellaneous expenses, such as loan service fees, dues and licenses, check fraud expenses, employee benefit plan expense, and miscellaneous expenses, increased by $1.7 million and professional fees increased by $0.7 million due to the one-time $0.8 million cash receipt related to reimbursement of litigation expenses that was credited to expenses in 2022.

Provision for credit losses increased by $1.1 million when compared to prior year period.

These increases were partially offset by increases in net interest income of $0.2 million, gains on sales of mortgages of $0.3 million, service charges on deposit accounts of $0.2 million, and $0.1 million increase in miscellaneous income.

Income taxes were down by $2.2 million comparing the two periods.

Other operating income, including gains, for the third quarter of 2023 increased by $0.2 million when compared to the same period of 2022.

Increases in service charges, wealth management income, and gains on sales of mortgages were partially offset by a decrease in debit card income.

Other operating income for the nine months ended September 30, 2023 increased by $0.3 million when compared to the same period of 2022.

This increase was primarily due to the increase in gains on sales of mortgages of $0.3 million, service charges on deposit accounts of $0.2 million, and debit card income of $0.1 million, partially offset by a decrease of $0.1 million in wealth management income attributable to the decline in market values of assets under management.

Operating expenses increased by $2.5 million when comparing the third quarter of 2023 to the third quarter of 2022.

This increase was primarily driven by a $0.8 million increase in salaries and employee benefits due to an increase in health insurance costs related to unusually high claims, as well as increased salary expense for new hires, merit increases effective April 1, 2023, and reduced loan costs.

Legal and professional expenses increased by $0.7 million attributable to the one-time $0.8 million cash receipt related to reimbursement of litigation expenses that was credited to expense in 2022.

Miscellaneous expenses increased by $0.6 million due primarily to increases of $0.3 in check fraud related expenses and net periodic pension plan costs of $0.3 million.

Data processing expenses, FDIC premiums, and marketing expenses each increased by $0.1 million year over year.

For the nine months ended September 30, 2023, non-interest expenses increased by $6.4 million when compared to the nine months ended September 30, 2022.

Salaries and employee benefits increased by $3.2 million year-over-year due primarily to increased salary expense of $1.9 million related to new hires and merit increases effective April 1, 2023 and increased health insurance costs of $1.0 million associated with unusually high claims.

Occupancy and equipment expense increased by $0.2 million, data processing expense increased by $0.4 million, and FDIC assessments increased by $0.2 million.

5 unchanged sentences

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 June 30, 2023 and 2022.

Six Months Ended

The tables below summarize net interest income for the nine- and three-month periods ended September 30, 2023 and 2022.

Nine Months Ended

September 30,

(dollars in thousands)

5 unchanged sentences

Three Months Ended

September 30,

(dollars in thousands)

3 unchanged sentences

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 six- and three- month periods ended June 30 , 2023 and 2022:

Six Months Ended

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 nine- and three-month periods ended September 30, 2023 and 2022:

Nine Months Ended

September 30,

(dollars in thousands)

26 unchanged sentences

Three Months Ended

September 30,

(dollars in thousands)

25 unchanged sentences

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

Net interest income, on a non-GAAP, FTE basis, increased by $0.2 million for the second quarter of 2023 when compared to the second quarter of 2022.

This increase was driven by an increase of $5.2 million in interest income from an overall increase in yield of 86 basis points on interest earning assets and an increase in average balances of $152.7 million.

Net interest income, on a non-GAAP, FTE basis, decreased by $1.3 million for the third quarter of 2023 when compared to the third quarter of 2022.

This decrease was driven by an increase of $6.1 million in interest expense due to an increase of 175 basis points on interest paid on deposit accounts as well as an increase of $127.7 million in average balances of interest-bearing deposit accounts when compared to the same period of 2022.

Increased deposit pricing resulted from the continued pressure on deposits as well as a shift in the deposit portfolio mix from non-interest-bearing deposits to interest-bearing accounts including the Insured Cash Sweep (“ICS”) product to ensure full FDIC insurance coverage.

In August 2023, the Corporation obtained $30.0 million of brokered deposits to pre-fund the maturity of a $30.4 million brokered certificate of deposit that matured in September 2023.

Interest income increased by $4.9 million.

Interest income on loans increased by $4.0 million due to the increase of 76 basis points in overall yield on the loan portfolio as new loans were booked at higher rates as well as adjustable-rate loans repricing in correlation to the rising rate environment and an increase in average balances of $123.1 million.

Investment income increased by $0.2 million.

The increase of $5.0 million in interest expense was driven by an increase of 142 basis points on interest paid on deposit accounts as well as an increase of $126.1 million in average balances of interest-bearing deposit accounts when compared to the same period of 2022.

Increased deposit pricing is a result of the continued pressure on deposits as well as a shift in the deposit portfolio mix from non-interest-bearing deposits to interest-bearing accounts including the Insured Cash Sweep (“ICS”) product to ensure full FDIC insurance coverage.

The net interest margin for the three months ended June 30, 2023 was 3.26%, compared to 3.52% for the three months ended June 30, 2022.

Comparing the six months ended June 30, 2023 to the six months ended June 30, 2022, net interest income, on a non-GAAP, FTE basis, increased by $1.4 million.

Investment income decreased by $0.1 million as cashflow from the portfolio was used to fund higher yielding loans.

The net interest margin for the three months ended September 30, 2023 was 3.12%, compared to 3.66% for the three months ended September 30, 2022.

Comparing the nine months ended September 30, 2023 to the nine months ended September 30, 2022, net interest income, on a non-GAAP, FTE basis, increased by $0.1 million.

Interest income increased by $13.8 million and interest expense increased by $13.7 million.

The yield on earning assets increased 79 basis points to 4.45% in 2023 compared to 3.66% in 2022 in correlation with the rising interest rate environment and new loans booked at higher rates.

Interest expense on deposits increased $6.2 million while the average balances increased $100.0 million and interest on long-term borrowings increased $1.4 million relating to $80.0 million in Federal Home Loan Bank (“FHLB”) borrowings obtained during the first quarter of 2023 and an increase of interest rates on variable rate trust preferred borrowings.

The yield on earning assets increased 80 basis points to 4.54% during the first nine months of 2023 compared to 3.74% during the same period of 2022 in correlation with the rising interest rate environment and new loans booked at higher rates.

Interest expense on deposits increased $11.2 million while the average balances increased $108.4 million and interest on long-term borrowings increased $2.5 million related to $80.0 million in Federal Home Loan Bank (“FHLB”) borrowings obtained during the first quarter of 2023 and an increase in interest rates on variable rate trust preferred borrowings.

The increased interest expense resulted in an overall increase of 145 basis points on interest bearing liabilities.

The net interest margin for the six months ended June 30, 2023 was 3.39%, compared to 3.46% for the six months ended June 30, 2022.

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 six and three month periods ended June 30, 2023 and 2022:

For the Six months ended June 30, 2023

compared to the Six months ended June 30, 2022

The net interest margin for the nine months ended September 30, 2023 was 3.30% compared to 3.53% for the nine months ended September 30, 2022.

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 nine- and three-month periods ended September 30, 2023 and 2022:

For the Nine months ended September 30, 2023

compared to the Nine months ended September 30, 2022

(in thousands and tax equivalent basis)

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(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.

For the Three months ended June 30, 2023 compared to the Three months ended June 30, 2022

For the Three months ended September 30, 2023 compared to the Three months ended September 30, 2022

(in thousands and tax equivalent basis)

18 unchanged sentences

Provision for Credit Losses

Specific allocations have been made for 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 allowance for credit losses (“ACL”) and allowance for loan losses (“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 six and three month periods ended June 30, 2023 and 2022 is illustrated in the following table:

Specific allocations have been made for 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 esimated allowance for credit losses (“ACL”) and allowance for loan losses (“ALL”) have been adjusted based on the current economic environment and the characteristics of the loan portfolio.

Net provision expense was $1.2 million and $0.3 million for the nine-month and three-month periods ending September 30, 2023, respectively, compared to net provision expense/(credit) of $0.1 million and ($0.1) million for the nine-month and three-month periods ending September 30, 2022.

The increases in provision expense year-over-year were primarily driven by strong growth in our loan portfolio during 2023 as well as increases in qualitative risk factors related to increased economic uncertainty during 2023.

The composition of other operating income for the nine- and three-month periods ended September 30, 2023 and 2022 is illustrated in the following table:

Income as % of

2 unchanged sentences

Total Other Income

Six Months Ended

Nine Months Ended

Three Months Ended

September 30,

(in thousands)

6 unchanged sentences

Other Operating Expenses

The composition of other operating expenses for the six and three month periods ended June 30, 2023 and 2022 is illustrated in the following table:

The composition of other operating expenses for the nine- and three-month periods ended September 30, 2023 and 2022 is illustrated in the following table:

Expense as % of

2 unchanged sentences

Total Other Operating Expenses

Six Months Ended

Nine Months Ended

Three Months Ended

September 30,

(in thousands)

15 unchanged sentences

In arriving at this effective tax rate, however, no effect should be included for the tax related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect in reports for the interim period or for the fiscal year.

The effective income tax rates as a percentage of income for the six-month periods ended June 30, 2023 and June 30, 2022 were 24.0% and 24.5%, respectively.

The effective income tax rates as a percentage of income for the nine months ended September 30, 2023 and September 30, 2022 were 23.6% and 25.8%, respectively.

The decrease in the tax rate for the 2023 period was primarily related to a new low-income housing tax credit investment in 2022 that began generating tax credits during the fourth quarter of 2022.

This tax credit is expected to continue through 2032.

This tax credit will continue through 2032.

FINANCIAL CONDITION

Balance Sheet Overview

Total assets at June 30, 2023 were $1.9 billion, representing an $80.2 million increase since December 31, 2022.

During the first six months of 2023, cash and interest-bearing deposits in other banks increased by $14.2 million resulting from implementation of the contingency funding plan and obtaining $61.1 million of brokered certificates of deposit and $80.0 million in FHLB borrowings.

Implementing the contingency funding plan and the increase in on-balance sheet liquidity was a precautionary move given the market disruption associated with the volatile banking environment and the near-term uncertainties regarding growth in the deposit portfolio.

The increase in cash obtained from contingency funding was partially offset by the funding of loan growth during 2023.

The investment portfolio decreased by $10.7 million associated with normal principal amortization and gross loans increased by $70.5 million.

Other assets, including deferred taxes, premises and equipment, and accrued interest receivable,

increased by $4.0 million as pension assets increased by $0.6 million, equity investments increased by $0.7 million, and deferred tax assets increased by $1.2 million.

Total liabilities at June 30, 2023 were $1.8 billion, representing a $76.9 million increase since December 31, 2022.

Total assets at September 30, 2023 were $1.9 billion, representing an $80.0 million increase since December 31, 2022.

During the first nine months of 2023, cash and interest-bearing deposits in other banks increased by $6.3 million as a result of management’s strategic decision to obtain $61.1 million in brokered certificates of deposit and $80.0 million in FHLB borrowings during the first quarter of 2023 to strength on-balance sheet liquidity.

The increase in cash obtained from this strategic decision was partially offset by the funding of strong loan growth in 2023.

The investment portfolio decreased by $31.5 million since December 31, 2022.

Management elected to allow a $17.8 million non-rated municipal tax increment funding bond to be called at par to increase on-balance sheet liquidity to fund future loan growth.

Additional decreases in the investment portfolio were primarily associated with normal principal amortization.

Loans increased by $100.5 million since December 31, 2022 due primarily to growth in the commercial and consumer mortgage portfolios.

Other assets, including deferred taxes, premises and equipment, and accrued

interest receivable, increased by $2.1 million as deferred tax assets increased by $2.4 million, equity investments increased by $1.1 million, and pension assets decreased by $0.5 million.

Total liabilities at September 30, 2023 were $1.8 billion, representing a $76.9 million increase since December 31, 2022.

Total deposits increased by $4.3 million since December 31, 2022.

The increase in deposits during the first six months of 2023 was primarily attributable to $61.1 million in new brokered deposits, which was partially offset by a decrease of approximately $40.0 million in non-interest-bearing deposits due to a shift to interest bearing accounts, two large commercial customers having large deposit withdrawals totaling $39.5 million during 2023 to fund business activity, the effects of consumer and commercial spending and the competitive market for deposits.

Short term borrowings decreased by $14.5 million since December 31, 2022 due to municipalities utilizing cash in our treasury management product for normal spending.

Long term borrowings increased by $80.0 million in the first six months of 2023 when compared to December 31, 2022 due to the advance of $80.0 million in FHLB borrowings.

The addition of brokered deposits and the FHLB borrowings was a precautionary move as described above.

Total certificates of deposit increased by $100.5 million primarily due to an increase of $60.6 million in brokered certificates of deposits and $39.9 in retail certificates of deposit.

Interest-bearing demand deposits also increased by $54.1 million due to a shift in the deposit portfolio mix from non-interest-bearing deposits to interest-bearing accounts including the ICS product to ensure full FDIC insurance coverage as well as a new municipal customer bringing approximately $40.0 million new deposits during the year.

These increases were offset by decreases in non-interest-bearing deposits of $76.9 million and savings and money market accounts of $73.4 million.

Short term borrowings decreased by $11.2 million since December 31, 2022 primarily due to one municipal customer moving funds from an overnight investment product to a non-interest bearing deposit product in 2023.

Long term borrowings increased by $80.0 million in the first nine months of 2023 when compared to December 31, 2022 due to the acquisition of $80.0 million in FHLB borrowings.

Loan Portfolio

1 unchanged sentence

(dollars in thousands)

June 30, 2023

September 30, 2023

December 31, 2022

3 unchanged sentences

Residential mortgage

*Includes $0.1 million of Paycheck Protection Program loans at June 30, 2023 and $0.4 million at December 31, 2022

Outstanding loans of $1.4 billion at June 30, 2023 reflected growth of $70.5 million for the first six months of 2023.

Since December 31, 2022, commercial real estate loans increased by $24.7 million and acquisition and development loans increased by $8.4 million.

Commercial and industrial loans increased by $4.3 million since December 31, 2022.

Outstanding loans of $1.4 billion at September 30, 2023 reflected growth of $100.5 million for the first nine months of 2023.

Since December 31, 2022, commercial real estate loans increased by $32.5 million, acquisition and development loans increased by $9.2 million and commercial and industrial loans increased by $9.3 million.

Growth in the commercial portfolios was driven by increased activity with existing clients as well as cultivating new business relationships.

Residential mortgage loans increased by $31.1 million related to management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio.

Residential mortgage loans increased $47.3 million related to management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio.

The consumer loan portfolio increased slightly by $2.3 million.

New commercial loan production for the three months ended June 30, 2023 was approximately $67.6 million.

The pipeline of commercial loans as of June 30, 2023 was $22.5 million.

At June 30, 2023, unfunded, committed commercial construction loans totaled approximately $42.6 million.

Commercial amortization and payoffs were approximately $99.3 million through June 30, 2023 due primarily to pay-offs of short-term commercial loans as well as normal amortizations of the commercial loan portfolio.

New consumer mortgage loan production for the second quarter of 2023 was approximately $32.3 million, with most of this production comprised of in-house mortgages.

The pipeline of in-house, portfolio loans as of June 30, 2023, was $6.2 million.

The residential mortgage production level normalized in the second quarter of 2023 due to the increasing interest rates that occurred throughout 2022 and 2023.

Unfunded commitments related to residential construction loans totaled $21.0 million at June 30, 2023.

Management began shifting activity toward the secondary market in the second quarter of 2023 to reduce the need for additional funding.

Non-accrual loans totaled $3.0 million at June 30, 2023, compared to $3.5 million at December 31, 2022.

The decrease in non-accrual balances at June 30, 2023 was primarily driven by principal reductions in the residential mortgage portfolio.

Other real estate owned (“OREO”) balances increased by $0.1 million since December 31, 2022 due to the addition of a new OREO property during the second quarter of 2023, which was partially offset by sale of OREO held by the Bank at December 31, 2022.

New commercial loan production for the three months ended September 30, 2023 was approximately $40.3 million.

The pipeline of commercial loans as of September 30, 2023 was $41.7 million.

At September 30, 2023, unfunded, committed commercial construction loans totaled approximately $40.6 million.

Commercial amortization and payoffs were approximately $144.6 million through September 30, 2023 due primarily to pay-offs of short-term commercial loans as well as normal amortizations of the commercial loan portfolio.

New consumer mortgage loan production for the third quarter of 2023 was approximately $27.5 million, with most of this production comprised of in-house loans.

The pipeline of in-house, portfolio loans as of September 30, 2023, was $13.5 million.

The residential mortgage production level normalized in the third quarter of 2023 due to the increasing interest rates.

Unfunded commitments related to residential construction loans totaled $20.5 million on September 30, 2023.

Management began shifting more activity towards the secondary market in the second and third quarters to reduce the need for additional funding.

Non-accrual loans totaled $3.5 million at September 30, 2023 and December 31, 2022.

Other real estate owned (“OREO”) balances increased by $0.1 million since December 31, 2022 due to the addition of a new OREO property during the second quarter, which was partially offset by a sale of an OREO property held by the Bank at December 31, 2022.

Risk Elements of Loan Portfolio

2 unchanged sentences

(dollars in thousands)

September 30,

Non-accrual loans:

12 unchanged sentences

Non-performing assets to total assets (as %)

Allowance for credit losses to non-accrual loans (as %)

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

Allowance for credit/loan losses to non-accrual loans (as %)

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

Allowance for Credit Losses

12 unchanged sentences

Management enhances its calculation with the use of Moody’s economic forecast data to provide additional support to substantiate its ACL.

The following table presents a summary of the activity in the ACL and ALL for the six month periods ended June 30:

The following table presents a summary of the activity in the ACL and ALL for the nine-month periods ended September 30:

(dollars in thousands)

11 unchanged sentences

Total recoveries

Credit Loss Expense/(Credit)

Credit/loan loss expense

Balance at end of period

6 unchanged sentences

Investment Securities

At June 30, 2023, the total amortized cost basis of the available-for-sale investment portfolio was $146.5 million, compared to a fair value of $120.1 million.

At September 30, 2023, the total amortized cost basis of the available-for-sale investment portfolio was $144.5 million, compared to a fair value of $114.4 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:

June 30, 2023

September 30, 2023

December 31, 2022

16 unchanged sentences

Total held to maturity

Total fair value of investment securities available for sale decreased by $5.8 million since December 31, 2022 due to principal paydowns of the portfolio in the first six months of 2023 and declines in the fair value of investment securities of $2.4 million.

At June 30, 2023, the securities classified as available-for-sale included a net unrealized loss of $26.4 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.

Total fair value of investment securities available for sale decreased by $11.5 million since December 31, 2022 due to principal paydowns of the portfolio and declines in the fair value of investment securities of $5.8 million in the first nine months of 2023.

At September 30, 2023, the securities classified as available-for-sale included a net unrealized loss of $30.2 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.

As discussed in Note 6 to the consolidated financial statements presented elsewhere in this report, the Corporation measures fair market values based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures .

3 unchanged sentences

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 $105.9 million of the available for sale portfolio was valued using Level 2 pricing and had net unrealized losses of $21.8 million at June 30, 2023.

Approximately $99.6 million of the available for sale portfolio was valued using Level 2 pricing and had net unrealized losses of $26.3 million at September 30, 2023.

The remaining $14.8 million of the securities available for sale represents the entire collateralized debt obligation portfolio, which was valued using significant unobservable inputs (Level 3 assets).

3 unchanged sentences

(dollars in thousands)

June 30, 2023

September 30, 2023

December 31, 2022

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Total Deposits

Total deposits at June 30, 2023 increased by $9.2 million when compared to December 31, 2022.

During the first six months of 2023, non-interest-bearing deposits decreased by $40.0 million primarily due a shift in the deposit portfolio mix from non-interest-bearing deposits to interest-bearing accounts including the ICS product to ensure full FDIC insurance coverage, consumer and commercial spending and the competitive deposit market.

Interest bearing demand deposits increased by $65.5 million and traditional savings and money market accounts decreased by $103.0 million, which is primarily related to consumer spending habits during 2023, businesses utilizing cash, and two large customers reducing deposits by approximately $39.5 million for regular business purposes.

Total time deposits increased by $86.6 million.

This increase in time deposits was primarily driven by management’s decision to acquire $61.1 million in brokered deposits during the first quarter of 2023 due to the heightened uncertainty in the deposit market associated with the volatile banking environment as well as increased interest rates on a promotional nine-month CD product offered in early 2023.

The following table summarizes the percentage of deposits that are insured by deposit insurance or otherwise fully collateralized by securities compared to uninsured deposits as of June 30, 2023 and December 31, 2022.

June 30, 2023

Total deposits at September 30, 2023 increased by $4.3 million when compared to December 31, 2022.

In March 2023, the Corporation obtained $61.1 million in new brokered deposits.

In August 2023, the Corporation obtained $30.0 million of brokered deposits to pre-fund the maturity of a $30.4 million brokered certificate of deposit that matured in September 2023.

In addition, retail certificates of deposits increased by $39.9 million due primarily to promotional nine-month certificate of deposit product offered in 2023.

Interest-bearing demand deposits increased by $54.1 million due to a shift in the deposit portfolio mix from non-interest-bearing accounts to interest-bearing accounts including the ICS product to ensure full FDIC insurance coverage as well as a new municipal customer bringing approximately $40.0 million in new deposits during the year.

These increases were offset by decreases in non-interesting bearing deposits of $76.9 million, money market accounts of $27.0 million, and savings accounts of $46.3 million due to the shift to interest- bearing demand deposit accounts, two relationships having large deposit withdrawals totaling $39.5 million during 2023 to fund business activity, the effects of consumer and commercial spending and the competitive market for deposits.

September 30, 2023

December 31, 2022

(dollars in thousands)

Insured/collateralized deposits

Uninsured deposits

The following table summarizes the percentage of deposit balances from retail customers compared to business customers as of June 30, 2023 and December 31, 2022.

June 30, 2023

Insured deposits

Uninsured but collateralized deposits

Uninsured and uncollateralized deposits

The following table summarizes the percentage of deposit balances from retail customers compared to business customers as of September 30, 2023 and December 31, 2022.

September 30, 2023

December 31, 2022

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Deposit outflows experienced in late 2022 and January 2023 were due to the competitive pricing landscape and inflationary spending.

Changes in deposit levels were not directly related to the market disruptions during the first six months of 2023.

Changes in deposit levels were not directly related to the market disruptions during the first nine months of 2023.

Borrowed Funds

1 unchanged sentence

(in thousands)

September 30,

Securities sold under agreements to repurchase

3 unchanged sentences

Total long-term borrowings

Short term borrowings decreased $14.5 million since December 31, 2022, driven by the utilization of cash by municipalities in our Treasury Management product.

Short term borrowings decreased $11.2 million since December 31, 2022 primarily due to a municipal customer moving funds from an overnight investment product to a non-interest bearing deposit product in 2023.

During the first quarter of 2023, management implemented the Contingency Funding plan and borrowed $80.0 million from FHLB in two advances with 12- and 18- month maturities.

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Bank Term Funding Program – A Federal Reserve program collateralized by government agency securities, if needed.

The following table presents sources of liquidity available to the Corporation as of June 30, 2023.

The following table presents sources of liquidity available to the Corporation as of September 30, 2023.

(dollars in thousands)

7 unchanged sentences

Bank Term Funding Program*

*Bank Term Funding Program has been established and eligible securities with a total par balance of $87.3 million have been pledged to the program as of June 30, 2023

*Bank Term Funding Program has been established and eligible securities with a total par balance of $86.2 million have been pledged to the program as of September 30, 2023

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

At June 30, 2023, we were asset sensitive.

At September 30, 2023, we were asset sensitive.

Our interest rate risk management goals are:

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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 June 30, 2023 and December 31, 2022, management estimated the following changes in net interest income, assuming the indicated rate changes:

Based on the simulation analysis performed at September 30, 2023 and December 31, 2022, management estimated the following changes in net interest income, assuming the indicated rate changes:

(Dollars in thousands)

September 30,

+400 basis points

23 unchanged sentences

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 June 30, 2023, the Bank was considered to be well-capitalized.

Based on capital ratios at September 30, 2023, the Bank was considered to be well-capitalized.

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

September 30,

Total Capital (to risk-weighted assets)

2 unchanged sentences

Tier 1 Capital (to average assets)

As of June 30, 2023 and December 31, 2022, the Bank was considered “well capitalized” under the regulatory framework for prompt corrective action.

As of September 30, 2023 and December 31, 2022, the Bank was considered “well capitalized” under the regulatory framework for prompt corrective action.

We adopted CECL effective January 1, 2023 and elected not to implement the regulatory agencies’ capital transition and instead opted to record the impact to our capital ratios immediately upon implementation.

5 unchanged sentences

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 June 30, 2023 to December 31, 2022, short-term borrowings decreased $14.5 million, driven by a the utilization of cash balances by municipalities related to the overnight investments product.

Comparing September 30, 2023 to December 31, 2022, short-term borrowings decreased $11.2 million, driven by a the utilization of cash balances by municipalities related to the overnight investments product.

Long-term borrowings increased by $80.0 million during the quarter due to management’s decision to obtain $80 million in FHLB advances during the first quarter of 2023.

5 unchanged sentences

(in thousands)

September 30,

Residential mortgage - home equity

2 unchanged sentences

Standby letters of credit

The increase of $8.5 million in commitments at June 30, 2023 when compared to December 31, 2022 was due to new business in construction commitments in the commercial portfolio as well as new home equity lines of credit.

The increase of $7.4 million in commitments at September 30, 2023 when compared to December 31, 2022 was due to new business in construction commitments in the commercial portfolio as well as new home equity lines of credit.

Upon adoption of ASC 326 on January 1, 2023, the Corporation recorded an initial increase to the ACL for off-balance sheet exposures of $0.9 million.

Credit loss expense for off-balance sheet credit exposures totaled $0.1 million for the six-month period ended June 30, 2023.

Credit loss expense for off-balance sheet credit exposures was a credit of $14 thousand for the nine-month period ended September 30, 2023.

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