Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations of First United Corporation and its consolidated subsidiaries for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report, as well as the audited consolidated financial statements and related notes included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022.
Unless the context clearly suggests otherwise, references in this report to “us”, “we”, “our”, and “the Corporation” are to First United Corporation and its consolidated subsidiaries.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements do not represent historical facts, but are statements about management’s beliefs, plans and objectives about the future, as well as its assumptions and judgments concerning such beliefs, plans and objectives. These statements are evidenced by terms such as "anticipate," "estimate," "should," "expect," "believe," "intend," 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. 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. For a discussion of these risks and uncertainties, see the section of the periodic reports that First United Corporation files with the Securities and Exchange Commission entitled "Risk Factors".
FIRST UNITED CORPORATION
First United Corporation is a Maryland corporation chartered in 1985 and a financial holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956, as amended, that elected financial holding company status in 2021. The Corporation’s primary business is serving as the parent company of First United Bank & Trust, a Maryland trust company (the “Bank”), First United Statutory Trust I (“Trust I”) and First United Statutory Trust II (“Trust II” and together with Trust I, “the Trusts”), both Connecticut statutory business trusts. The Trusts were formed for the purpose of selling trust preferred securities that qualified as Tier 1 capital. The Bank has two consumer finance company subsidiaries- OakFirst Loan Center, Inc., a West Virginia corporation, and OakFirst Loan Center, LLC, a Maryland limited liability company – and two subsidiaries that it uses to hold real estate acquired through foreclosure or by deed in lieu of foreclosure – First OREO Trust, a Maryland statutory trust, and FUBT OREO I, LLC, a Maryland limited liability company. 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 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.
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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 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,
2023
2022
Per Share Data
Basic net income per common share
$
1.99
$
2.72
Diluted net income per common share
$
1.98
$
2.72
Basic book value per common share
$
23.08
$
19.83
Diluted book value per common share
$
23.03
$
19.80
Significant Ratios:
Return on Average Assets (a)
0.93
%
1.35
%
Return on Average Equity (a)
11.44
%
17.66
%
Average Equity to Average Assets
8.14
%
7.66
%
Capital Ratios:
Consolidated Total Capital (to risk weighted assets)
15.81
%
15.50
%
Consolidated Tier 1 Capital (to risk weighted assets)
14.60
%
14.40
%
Consolidated Common Equity Tier 1 Capital (to risk weighted assets)
12.60
%
12.36
%
Consolidated Tier 1 Capital (to average assets)
11.25
%
11.23
%
RESULTS OF OPERATIONS
Overview
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
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$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. 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.
Net Interest Income
Net interest income is our largest source of operating revenue. Net interest income is the difference between the interest that we earn on our interest-earning assets and the interest expense we incur on our interest-bearing liabilities. For analytical and discussion purposes, net interest income is adjusted to a fully tax equivalent (“FTE”) basis to facilitate performance comparisons between taxable and tax-exempt assets by increasing tax-exempt income by an amount equal to the federal income taxes that would have been paid if this income were taxable at the statutorily applicable rate. This is a non-GAAP disclosure and management believes it is not materially different than the corresponding GAAP disclosure.
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The tables below summarize net interest income for the nine- and three-month periods ended September 30, 2023 and 2022.
Non-GAAP
GAAP
Nine Months Ended
Nine Months Ended
September 30,
September 30,
(dollars in thousands)
2023
2022
2023
2022
Interest income
$
59,531
$
45,771
$
58,965
$
45,063
Interest expense
16,289
2,610
16,289
2,610
Net interest income
$
43,242
$
43,161
$
42,676
$
42,453
Net interest margin %
3.30
%
3.53
%
3.26
%
3.47
%
Three Months Ended
Three Months Ended
September 30,
September 30,
(dollars in thousands)
2023
2022
2023
2022
Interest income
$
21,276
$
16,416
$
21,164
$
16,185
Interest expense
7,180
1,044
7,180
1,044
Net interest income
$
14,096
$
15,372
$
13,984
$
15,141
Net interest margin %
3.12
%
3.66
%
3.09
%
3.61
%
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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,
2023
2022
Average
Average
Average
Average
(dollars in thousands)
Balance
Interest
Yield/Rate
Balance
Interest
Yield/Rate
Assets
Loans
$
1,320,674
$
50,323
5.09
%
$
1,203,650
$
39,399
4.38
%
Investment Securities:
Taxable
337,014
5,339
2.12
%
352,446
4,533
1.72
%
Non taxable
21,963
1,183
7.20
%
27,118
1,494
7.37
%
Total
358,977
6,522
2.43
%
379,564
6,027
2.12
%
Federal funds sold
66,708
2,502
5.01
%
47,173
308
0.87
%
Interest-bearing deposits with other banks
2,827
70
3.31
%
3,564
12
0.45
%
Other interest earning assets
3,643
114
4.18
%
1,027
25
3.25
%
Total earning assets
1,752,829
59,531
4.54
%
1,634,978
45,771
3.74
%
Allowance for loan losses
(16,311)
(15,611)
Non-earning assets
174,411
166,594
Total Assets
$
1,910,929
$
1,785,961
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits
$
358,883
$
3,375
1.26
%
$
296,069
$
369
0.17
%
Interest-bearing money markets
324,583
5,537
2.28
%
294,481
347
0.16
%
Savings deposits
227,179
189
0.11
%
249,596
70
0.04
%
Time deposits - Retail
134,732
1,750
1.74
%
143,734
711
0.66
%
Time deposits - Brokered
46,918
1,849
5.27
%
—
—
—
%
Short-term borrowings
51,780
93
0.24
%
62,175
86
0.18
%
Long-term borrowings
89,394
3,496
5.23
%
30,929
1,027
4.44
%
Total interest-bearing liabilities
1,233,469
16,289
1.77
%
1,076,984
2,610
0.32
%
Non-interest-bearing deposits
490,891
540,082
Other liabilities
31,108
32,057
Shareholders’ Equity
155,461
136,838
Total Liabilities and Shareholders’ Equity
$
1,910,929
$
1,785,961
Net interest income and spread
$
43,242
2.77
%
$
43,161
3.42
%
Net interest margin
3.30
%
3.53
%
(1) The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2023 and 2022. Non-GAAP interest income on a fully taxable equivalent was $566 and $708, 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.
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Three Months Ended
September 30,
2023
2022
(dollars in thousands)
Average
Balance
Interest
Average
Yield/Rate
Average
Balance
Interest
Average
Yield/Rate
Assets
Loans
$
1,363,821
$
18,071
5.26
%
$
1,240,706
$
14,073
4.50
%
Investment Securities:
Taxable
333,468
1,792
2.13
%
343,581
1,587
1.83
%
Non taxable
13,826
219
6.28
%
26,471
489
7.33
%
Total
347,294
2,011
2.30
%
370,052
2,076
2.23
%
Federal funds sold
75,404
1,093
5.75
%
52,019
251
1.91
%
Interest-bearing deposits with other banks
1,812
25
5.47
%
1,552
7
1.79
%
Other interest earning assets
4,771
76
6.32
%
1,026
9
3.48
%
Total earning assets
1,793,102
21,276
4.71
%
1,665,355
16,416
3.91
%
Allowance for loan losses
(17,110)
(15,715)
Non-earning assets
178,115
170,092
Total Assets
$
1,954,107
$
1,819,732
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits
$
368,409
$
1,354
1.46
%
$
305,608
$
187
0.24
%
Interest-bearing money markets
325,810
2,430
2.96
%
305,185
210
0.27
%
Savings deposits
209,070
54
0.10
%
253,576
34
0.05
%
Time deposits - retail
154,503
918
2.36
%
134,600
190
0.56
%
Time deposits - brokered
68,850
916
5.28
%
—
—
—
%
Short-term borrowings
49,190
33
0.27
%
66,172
47
0.28
%
Long-term borrowings
110,929
1,475
5.28
%
30,929
376
4.82
%
Total interest-bearing liabilities
1,286,761
7,180
2.21
%
1,096,070
1,044
0.38
%
Non-interest-bearing deposits
478,673
550,978
Other liabilities
32,327
37,499
Shareholders’ Equity
156,346
135,186
Total Liabilities and Shareholders’ Equity
$
1,954,107
$
1,819,733
Net interest income and spread
$
14,096
2.50
%
$
15,372
3.53
%
Net interest margin
3.12
%
3.66
%
(1) The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2023 and 2022. Non-GAAP interest income on a fully taxable equivalent was $111 and $232, 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.
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 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.
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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 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 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)
Volume
Rate
Net
Interest Income:
Loans
$
3,841
$
7,083
$
10,924
Taxable Investments
(199)
1,005
806
Non-taxable Investments
(283)
(28)
(311)
Federal funds sold
128
2,066
2,194
Interest-bearing deposits
(2)
60
58
Other interest earning assets
64
25
89
Total interest income
3,549
10,211
13,760
Interest Expense:
Interest-bearing demand deposits
79
2,927
3,006
Interest-bearing money markets
36
5,154
5,190
Savings deposits
(6)
125
119
Time deposits - Retail
(45)
1,084
1,039
Time deposits - Brokered
0
1,849
1,849
Short-term borrowings
(14)
21
7
Long-term borrowings
1,946
523
2,469
Total interest expense
1,996
11,683
13,679
Net interest income
$
1,553
$
(1,472)
$
81
(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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For the Three months ended September 30, 2023 compared to the Three months ended September 30, 2022
(in thousands and tax equivalent basis)
Volume
Rate
Net
Interest Income:
Loans
$
1,385
$
2,613
$
3,998
Taxable Investments
(46)
251
205
Non-taxable Investments
(232)
(39)
(270)
Federal funds sold
112
730
842
Interest-bearing deposits
1
18
18
Other interest earning assets
33
34
67
Total interest income
1,253
3,607
4,860
Interest Expense:
Interest-bearing demand deposits
38
1,129
1,167
Interest-bearing money markets
14
2,206
2,220
Savings deposits
(6)
27
20
Time deposits - Retail
28
700
728
Time deposits - Brokered
0
916
916
Short-term borrowings
(12)
(2)
(14)
Long-term borrowings
966
132
1,099
Total interest expense
1,028
5,108
6,136
Net interest income
$
225
$
(1,501)
$
(1,276)
(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.
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 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.
Other Income
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
Income as % of
Total Other Income
Total Other Income
Nine Months Ended
Three Months Ended
September 30,
September 30,
(in thousands)
2023
2022
2023
2022
Service charges on deposit accounts
$
1,631
12%
$
1,451
11%
$
569
12%
$
523
11%
Other service charges
706
5%
686
5%
230
5%
241
5%
Trust department
6,134
45%
6,238
46%
2,139
45%
2,005
44%
Debit card income
2,981
22%
2,922
22%
995
21%
1,053
23%
Bank owned life insurance
936
7%
891
7%
320
7%
302
7%
Brokerage commissions
800
6%
805
6%
245
5%
272
6%
Other income
350
3%
406
3%
218
5%
208
4%
$
13,538
100%
$
13,399
100%
$
4,716
100%
$
4,604
100%
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Other Operating Expenses
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
Expense as % of
Total Other Operating Expenses
Total Other Operating Expenses
Nine Months Ended
Three Months Ended
September 30,
September 30,
(in thousands)
2023
2022
2023
2022
Salaries and employee benefits
$
21,112
56%
$
17,891
57%
$
6,957
54%
$
6,130
59%
FDIC premiums
724
2%
479
2%
254
2%
150
2%
Equipment
3,168
8%
3,110
10%
1,029
8%
1,037
10%
Occupancy expense of premises
2,274
6%
2,172
7%
747
6%
734
7%
Data processing expense
2,926
8%
2,516
8%
1,011
8%
890
9%
Marketing expense
474
1%
409
1%
220
2%
152
1%
Professional services
1,530
4%
873
3%
490
4%
(211)
(2)%
Contract labor
471
1%
482
2%
173
1%
159
2%
Telephone
341
1%
365
1%
115
1%
112
1%
Other real estate owned
281
1%
375
1%
139
1%
128
1%
Investor relations
272
1%
258
1%
83
1%
39
0%
Contributions
217
1%
184
1%
74
1%
121
1%
Other
4,144
11%
2,425
8%
1,493
12%
888
10%
$
37,934
100%
$
31,539
100%
$
12,785
100%
$
10,329
100%
Provision for Income Taxes
In reporting interim financial information, income tax provisions should be determined under the procedures set forth in Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 740, Income Taxes (Section 740-270-30). This guidance provides that at the end of each interim period, an entity should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined should be used in providing for income taxes on a current year-to-date basis. The effective tax rate should reflect anticipated investment tax credits, capital gains rates, and other available tax planning alternatives. 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 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 will continue through 2032.
FINANCIAL CONDITION
Balance Sheet Overview
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
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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. 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
The following table presents the composition of our loan portfolio at the dates indicated:
(dollars in thousands)
September 30, 2023
December 31, 2022
Commercial real estate
$
491,284
36%
$
458,831
35.86%
Acquisition and development
79,796
6%
70,596
5.52%
Commercial and industrial *
254,650
18%
245,396
19.18%
Residential mortgage
491,686
36%
444,411
34.73%
Consumer
62,603
4%
60,260
4.71%
Total Loans
$
1,380,019
100%
$
1,279,494
100%
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 $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 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.
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Risk Elements of Loan Portfolio
The following table presents the risk elements of our loan portfolio at the dates indicated. Management is not aware of any potential problem loans other than those listed in this table or discussed below.
(dollars in thousands)
September 30,
2023
% of
Applicable
Portfolio
December 31,
2022
% of
Applicable
Portfolio
Non-accrual loans:
Commercial real estate
$
—
0.00%
$
145
0.03%
Acquisition and development
120
0.15%
146
0.21%
Residential mortgage
3,285
0.67%
3,204
0.72%
Consumer
74
0.12%
—
0.00%
Total non-accrual loans
$
3,479
0.25%
$
3,495
0.27%
Accruing Loans Past Due 90 days or more:
Residential mortgage
$
86
$
282
Consumer
59
25
Total loans past due 90 days or more
$
145
$
307
Total non-accrual and accruing loans past due 90 days or more
$
3,624
$
3,802
Other real estate owned
$
4,878
$
4,733
Total Non-performing assets
$
8,502
$
8,535
Non-accrual loans to total loans (as %)
0.25%
0.27%
Non-performing loans to total loans (as %)
0.26%
0.30%
Non-performing assets to total assets (as %)
0.44%
0.46%
Allowance for credit/loan losses to non-accrual loans (as %)
492.84%
418.77%
Allowance for credit/loan losses to non-performing assets (as %)
201.67%
171.48%
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Allowance for Credit Losses
The ACL represents an amount which, in management’s judgment, is adequate to absorb expected credit losses over the life of outstanding loans as of the balance sheet date based on the evaluation of current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience. The ACL is measured and recorded upon the initial recognition of a financial asset. The ACL is reduced by charge-offs, net of recoveries of previous losses, and is increased by a provision or decreased by a recovery for credit losses, which is recorded as a current period operating expense.
Determination of an appropriate ACL is inherently complex and requires the use of highly subjective estimates. The reasonableness of the ACL is reviewed quarterly by management.
Management believes it uses relevant information available to make determination about the ACL and that it has established the existing allowance in accordance with GAAP. However, the determination of the ACL requires significant judgment, and estimates of expected credit losses in the loan portfolio can vary from the amounts actually observed. While management uses available information to recognize expected credit losses, future additions to the ACL may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.
The ACL “base case” model is derived from various economic forecasts provided by widely recognized sources. Management evaluates the variability of market conditions by examining the peak and trough of economic cycles. These peaks and troughs are used to stress the base case model to develop a range of potential outcomes. Management then determines the appropriate reserve through an evaluation of these various outcomes relative to current economic conditions and known risks in the portfolio. 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 nine-month periods ended September 30:
(dollars in thousands)
2023
2022
Balance, January 1
$
14,636
$
15,955
Impact of CECL Adoption
2,066
—
Charge-offs:
Commercial real estate
(87)
—
Acquisition and development
—
(20)
Commercial and industrial
(301)
(134)
Residential mortgage
(55)
(34)
Consumer
(681)
(726)
Total charge-offs
(1,124)
(914)
Recoveries:
Commercial real estate
5
1
Acquisition and development
8
21
Commercial and industrial
176
92
Residential mortgage
56
172
Consumer
153
117
Total recoveries
398
403
Net losses
(726)
(511)
Credit/loan loss expense
1,170
97
Balance at end of period
$
17,146
$
15,541
Allowance for credit/loan losses to gross loans outstanding (as %)
1.24
%
1.22
%
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Net (Charge-offs)/Recoveries as a % of Average Applicable Portfolio
2023
2022
Commercial real estate
(0.02)%
0.00%
Acquisition and development
0.01%
0.00%
Commercial and industrial
(0.07)%
(0.02)%
Residential mortgage
0.00%
0.04%
Consumer
(1.15)%
(1.28)%
Investment Securities
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. The amortized cost basis of the held to maturity portfolio was $215.7 million, compared to a fair value of $176.8 million.
The following table presents the composition of our securities portfolio at amortized cost and fair values at the dates indicated:
September 30, 2023
December 31, 2022
Amortized
Fair Value
FV as %
Amortized
Fair Value
FV as %
(dollars in thousands)
Cost
(FV)
of Total
Cost
(FV)
of Total
Securities Available for Sale:
U.S. government agencies
$
11,020
$
9,360
9%
$
11,044
$
9,462
8%
Residential mortgage-backed agencies
42,073
33,369
29%
45,052
37,401
30%
Commercial mortgage-backed agencies
36,722
27,055
24%
37,393
30,732
23%
Collateralized mortgage obligations
24,223
18,987
17%
25,828
21,044
17%
Obligations of state and political subdivisions
10,832
10,066
9%
10,848
10,492
8%
Corporate bonds
1,000
749
1%
1,000
887
1%
Collateralized debt obligations
18,670
14,784
13%
18,664
15,871
13%
Total available for sale
$
144,540
$
114,370
100%
$
149,829
$
125,889
100%
Securities Held to Maturity:
U.S. treasuries
$
37,397
$
36,727
21%
$
37,204
$
35,611
18%
U.S. government agencies
67,944
53,533
30%
67,734
54,473
27%
Residential mortgage-backed agencies
30,336
25,841
15%
28,624
25,122
12%
Commercial mortgage-backed agencies
21,454
14,960
8%
22,389
17,821
9%
Collateralized mortgage obligations
53,994
41,880
24%
57,085
47,084
23%
Obligations of state and political subdivisions
4,603
3,885
2%
22,623
22,969
11%
Total held to maturity
$
215,728
$
176,826
100%
$
235,659
$
203,080
100%
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 . The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 3 prices or valuation techniques require inputs that are both significant to the valuation assumptions and are not readily observable in the market (i.e. supported with little or no market activity). 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.
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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). The $3.9 million in net unrealized losses associated with this portfolio relates to nine pooled trust preferred securities that comprise the collateralized debt obligation portfolio. Net unrealized losses of $2.4 million represent non-credit related impairment charges on seven of the securities, while $1.5 million of unrealized losses relates to two securities which have had no impairment-related charges.
Deposits
The following table presents the composition of our deposits at the dates indicated:
(dollars in thousands)
September 30, 2023
December 31, 2022
Balance
Percent
Balance
Percent
Non-interest-bearing demand deposits
$
429,691
27%
$
506,613
32%
Interest-bearing deposits:
Demand
381,782
24%
327,685
21%
Money Market
338,153
22%
365,192
23%
Savings deposits
204,389
13%
250,720
16%
Time deposits- retail
160,380
10%
120,523
8%
Time deposits- brokered
60,674
4%
—
0%
Total Deposits
$
1,575,069
100%
$
1,570,733
100%
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.
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 September 30, 2023 and December 31, 2022.
September 30, 2023
December 31, 2022
(dollars in thousands)
Balance
Percent
Balance
Percent
Insured deposits
$
1,185,432
75%
$
1,076,113
69%
Uninsured but collateralized deposits
204,746
13%
153,067
10%
Uninsured and uncollateralized deposits
184,891
12%
341,553
21%
$
1,575,069
100%
$
1,570,733
100%
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
(dollars in thousands)
Balance
Percent
Balance
Percent
Retail deposits
$
801,382
51%
$
855,014
54%
Business deposits
773,687
49%
715,719
46%
$
1,575,069
100%
$
1,570,733
100%
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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 nine months of 2023.
Borrowed Funds
The following table presents the composition of our borrowings at the dates indicated:
(in thousands)
September 30,
2023
December 31,
2022
Securities sold under agreements to repurchase
$
53,330
$
64,565
Total short-term borrowings
53,330
64,565
FHLB advances
$
80,000
$
—
Junior subordinated debt
30,929
30,929
Total long-term borrowings
$
110,929
$
30,929
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.
Liquidity Management
Liquidity is a financial institution’s capability to meet customer demands for deposit withdrawals while funding all credit-worthy loans. The factors that determine the institution’s liquidity are:
● Reliability and stability of core deposits;
● Cash flow structure and pledging status of investments; and
● Potential for unexpected loan demand.
We actively manage our liquidity position through regular meetings of a sub-committee of executive management, known as the Treasury Team, which looks forward 12 months at 30-day intervals. The measurement is based upon the projection of funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth. Monthly reviews by management and quarterly reviews by the Asset and Liability Committee under prescribed policies and procedures are designed to ensure that we will maintain adequate levels of available funds.
It is our policy to manage our affairs so that liquidity needs are fully satisfied through normal Bank operations. That is, the Bank will manage its liquidity to minimize the need to make unplanned sales of assets or to borrow funds under emergency conditions. The Bank will use funding sources where the interest cost is relatively insensitive to market changes in the short run (periods of one year or less) to satisfy operating cash needs. The remaining normal funding will come from interest-sensitive liabilities, either deposits or borrowed funds. When the marginal cost of needed wholesale funding is lower than the cost of raising this funding in the retail markets, the Corporation may supplement retail funding with external funding sources such as:
1. Unsecured Fed Funds lines of credit with upstream correspondent banks (M&T Bank, Pacific Coast Banker’s Bank, PNC Financial Services, Atlantic Community Bankers Bank and Community Bankers Bank).
2. Secured advances with the FHLB, which are collateralized by eligible one to four family residential mortgage loans, home equity lines of credit, commercial real estate loans.
3. Secured line of credit with the Fed Discount Window for use in borrowing funds up to 90 days, using municipal securities as collateral.
4. Brokered deposits, including CDs and money market funds, provide a method to generate deposits quickly. These deposits are strictly rate driven but often provide the most cost-effective means of funding growth.
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5. One Way Buy CDARS/ICS funding – a form of brokered deposits that has become a viable supplement to brokered deposits obtained directly.
6. 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 September 30, 2023.
(dollars in thousands)
Total Availability
Amount Used
Net Availability
Internal Sources
Excess cash
$
59,301
$
-
$
59,301
Unpledged securities
59,933
-
59,933
External Sources
Federal Reserve (discount window)
11,773
-
11,773
Correspondent unsecured lines of credit
105,000
-
105,000
FHLB
230,277
82,500
147,777
Bank Term Funding Program*
86,226
-
86,226
$
552,510
$
82,500
$
470,010
*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.
Due to the market disruption and uncertainties, management implemented the Liquidity Contingency Plan in the first quarter and believes that we have adequate liquidity available to respond to current and anticipated liquidity demands and is not aware of any trends or demands, commitments, events or uncertainties that are likely to materially affect our ability to maintain liquidity at satisfactory levels.
Market Risk and Interest Sensitivity
Our primary market risk is interest rate fluctuation. Interest rate risk results primarily from the traditional banking activities that we engage in, such as gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences affect the difference between the interest earned on our assets and the interest paid on our liabilities. Interest rate sensitivity refers to the degree that earnings will be impacted by changes in the prevailing level of interest rates. Interest rate risk arises from mismatches in the repricing or maturity characteristics between interest-bearing assets and liabilities. Management seeks to minimize fluctuating net interest margins, and to enhance consistent growth of net interest income through periods of changing interest rates. Management uses interest sensitivity gap analysis and simulation models to measure and manage these risks. The interest rate sensitivity gap analysis assigns each interest-earning asset and interest-bearing liability to a time frame reflecting its next repricing or maturity date. The differences between total interest-sensitive assets and liabilities at each time interval represent the interest sensitivity gap for that interval. A positive gap generally indicates that rising interest rates during a given interval will increase net interest income, as more assets than liabilities will reprice. A negative gap position would benefit us during a period of declining interest rates.
At September 30, 2023, we were asset sensitive.
Our interest rate risk management goals are:
● Ensure that the Board of Directors and senior management will provide effective oversight and ensure that risks are adequately identified, measured, monitored and controlled;
● Enable dynamic measurement and management of interest rate risk;
● Select strategies that optimize our ability to meet our long-range financial goals while maintaining interest rate risk within policy limits established by the Board of Directors;
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● Use both income and market value oriented techniques to select strategies that optimize the relationship between risk and return; and
● Establish interest rate risk exposure limits for fluctuation in net interest income (“NII”), net income and economic value of equity.
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. Management uses computer simulations to measure the effect on net interest income of various interest rate scenarios. Key assumptions used in the computer simulations include cash flows and maturities of interest rate sensitive assets and liabilities, changes in asset volumes and pricing, and management’s capital plans. This modeling reflects interest rate changes and the related impact on net interest income over specified periods.
We evaluate the effect of a change in interest rates of +/-100 basis points to +/-400 basis points on both NII and Net Portfolio Value (“NPV”) / Economic Value of Equity (“EVE”). We concentrate on NII rather than net income as long as NII remains the significant contributor to net income.
NII modeling allows management to view how changes in interest rates will affect the spread between the yield paid on assets and the cost of deposits and borrowed funds. Unlike traditional Gap modeling, NII modeling takes into account the different degree to which installments in the same repricing period will adjust to a change in interest rates. It also allows the use of different assumptions in a falling versus a rising rate environment. The period considered by the NII modeling is the next eight quarters.
NPV / EVE modeling focuses on the change in the market value of equity. NPV / EVE is defined as the market value of assets less the market value of liabilities plus/minus the market value of any off-balance sheet positions. By effectively looking at the present value of all future cash flows on or off the balance sheet, NPV / EVE modeling takes a longer-term view of interest rate risk. This complements the shorter-term view of the NII modeling.
Measures of NII at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.
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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,
2023
December 31,
2022
+400 basis points
$
5,058
$
1,112
+300 basis points
$
3,768
$
225
+200 basis points
$
2,502
$
173
+100 basis points
$
1,263
$
121
-100 basis points
$
(1,303)
$
(776)
-200 basis points
$
(3,288)
$
(3,165)
-300 basis points
$
(5,859)
$
(7,382)
-400 basis points
$
(9,425)
$
N/A
This estimate is based on assumptions that may be affected by unforeseeable changes in the general interest rate environment and any number of unforeseeable factors. Rates on different assets and liabilities within a single maturity category adjust to changes in interest rates to varying degrees and over varying periods of time. The relationships between lending rates and rates paid on purchased funds are not constant over time. Management can respond to current or anticipated market conditions by lengthening or shortening the Bank’s sensitivity through loan repricings or changing its funding mix. The rate of growth in interest-free sources of funds will influence the level of interest-sensitive funding sources. In addition, the absolute level of interest rates will affect the volume of earning assets and funding sources. As a result of these limitations, the interest-sensitive gap is only one factor to be considered in estimating the net interest margin.
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, 2022. Our NII simulation analysis as of December 31, 2022 is included in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2022 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. During inflationary periods, monetary assets lose value in terms of purchasing power and monetary liabilities have corresponding purchasing power gains. The concept of purchasing power is not an adequate indicator of the impact of inflation on financial institutions because it does not incorporate changes in our earnings.
Capital Resources
We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdrawal demands of the Bank’s customers, and satisfy our other monetary obligations. 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”.
In addition to operational requirements, the Bank is subject to risk-based capital regulations, which were adopted and are monitored by federal banking regulators. 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 September 30, 2023, the Bank was considered to be well-capitalized.
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The following table presents the Bank’s capital ratios as of the dates indicated:
September 30,
2023
December 31,
2022
Required for
Capital
Adequacy
Purposes
Required
to be Well
Capitalized
Total Capital (to risk-weighted assets)
14.12
%
14.37
%
8.00
%
10.00
%
Tier 1 Capital (to risk-weighted assets)
12.88
%
13.29
%
6.00
%
8.00
%
Common Equity Tier 1 Capital (to risk-weighted assets)
12.88
%
13.29
%
4.50
%
6.50
%
Tier 1 Capital (to average assets)
9.81
%
10.01
%
4.00
%
5.00
%
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.
Effective with the implementation of CECL, a $2.2 million, net of tax, adjustment was made to retained earnings. The adjustment did not have a material impact to our capital ratios.
Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
Contractual Obligations
The Corporation enters into contractual obligations in the normal course of business. 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 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.
Commitments
Loan commitments are made to accommodate the financial needs of our customers. Letters of credit commit us to make payments on behalf of customers when certain specified future events occur. The credit risks inherent in loan commitments and letters of credit are essentially the same as those involved in extending loans to customers, and these arrangements are subject to our normal credit policies. We are not a party to any other off-balance sheet arrangements.
Commitments to extend credit in the form of consumer, commercial and business at the dates indicated were as follows:
(in thousands)
September 30,
2023
December 31,
2022
Residential mortgage - home equity
$
72,739
$
70,845
Residential mortgage - construction
19,955
25,499
Commercial
171,636
153,235
Consumer - personal credit lines
4,220
4,323
Standby letters of credit
7,089
14,325
Total
$
275,639
$
268,227
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 was a credit of $14 thousand for the nine-month period ended September 30, 2023.
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