What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-08 compared with 2023-11-09 · 184 added, 240 removed, 332 unchanged (56% of the section changed)

6 unchanged sentences

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.

These statements are evidenced by terms such as "anticipate," "estimate," "should," “will”, "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

4 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 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.

At March 31, 2024, the Corporation’s total assets were $1.9 billion, net loans were $1.4 billion, and deposits were $1.6 billion.

Shareholders’ equity at March 31, 2024 was $165.5 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 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,

The following table sets forth certain selected financial data for the three-month periods ended March 31, 2024 and 2023 and is qualified in its entirety by the detailed information and unaudited financial statements, including the notes thereto, included elsewhere in this quarterly report.

As of the three months ended

Per Share Data

Basic net income per common share

Basic net income per common share (1) - non-GAAP

Diluted net income per common share

Diluted net income per common share (1) - non-GAAP

Basic book value per common share

2 unchanged sentences

Return on Average Assets (a)

Accelerated depreciation expense, net of tax

Adjusted Return on Average Assets (a) (1) (non-GAAP)

Return on Average Equity (a)

Accelerated depreciation expense, net of tax

Adjusted Return on Average Equity (a) (1) (non-GAAP)

Average Equity to Average Assets

5 unchanged sentences

RESULTS OF OPERATIONS

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.

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.

Consolidated net income was $3.7 million, inclusive of $0.4 million, net of tax, in accelerated depreciation expenses related to branch closures, for the first quarter of 2024.

This compares to $4.4 million for the first quarter of 2023.

Basic and diluted earnings per share were $0.56 for the first quarter of 2024 compared to basic earnings per share of $0.66 and diluted earnings per share of $0.65 for the first quarter of 2023.

The $0.7 million decrease in net income year over year was primarily driven by a $0.7 million decrease in net interest income and a $0.4 million increase in provision for credit losses.

Two large commercial relationships with combined loan balances of $12.1 million were moved to non-accrual status during the first quarter of 2024, which resulted in a reversal of $0.4 million in accrued interest income and fees during the quarter.

Additionally, year-over-year interest expense increased at a slightly faster pace than year-over-year interest income.

The provision for credit loss also increased year over year due to increased qualitative risk factors associated with the non-accrual loan balances.

Management is actively managing these credits, which we anticipate will lead

to normal collection procedures such as returning the credits to accrual or moving loans through the foreclosure process over the next year.

Other activity when comparing the first quarter of 2024 to the same period in 2023 was a $0.4 million increase in wealth management income due to improving market conditions and growth of new relationships and an increase in operating expenses of $0.2 million.

The provision for income tax expense was down $0.2 million when comparing the two quarters due to decreased net income before tax.

Other operating income, including net gains/(losses), for the first quarter of 2024 increased by $0.5 million when compared to the same period of 2023.

The growth was driven by an increase of $0.4 million in wealth management income due to improving market conditions and growth in new and existing customer relationships.

Operating expenses increased by $0.2 million in the first quarter of 2024 when compared to the first quarter of 2023.

The increase was largely driven by a $0.3 million increase in equipment and occupancy expense due to the accelerated depreciation expenses recognized in the first quarter of 2024 in conjunction with the branch closures in February 2024.

This increase was partially offset by a $0.1 million decrease in salaries and employee benefits year over year due to unusually high health insurance premiums recognized in the first quarter of 2023, offset by higher salaries and benefits associated with normal merit increases effective April 1, 2023.

Net Interest Income

3 unchanged sentences

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

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)

Interest income

Interest expense

Net interest income

Net interest margin %

The tables below summarize net interest income for the three month periods ended March 31, 2024 and 2023.

Three Months Ended

September 30,

(dollars in thousands)

(in thousands)

Interest income

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

Nine Months Ended

September 30,

(dollars in thousands)

Investment Securities:

Federal funds sold

Interest-bearing deposits with other banks

Other interest earning assets

Total earning assets

Allowance for loan losses

Non-earning assets

Liabilities and Shareholders’ Equity

Interest-bearing demand deposits

Interest-bearing money markets

Savings deposits

Time deposits - Retail

Time deposits - Brokered

Short-term borrowings

Long-term borrowings

Total interest-bearing liabilities

Non-interest-bearing deposits

Other liabilities

Shareholders’ Equity

Total Liabilities and Shareholders’ Equity

Net interest income and spread

Net interest margin

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

Three Months Ended

September 30,

(dollars in thousands)

(in thousands)

Investment Securities:

21 unchanged sentences

(1) The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2024 and 2023.

Non-GAAP interest income on a fully taxable equivalent was $111 and $232, respectively.

Non-GAAP interest income on a fully taxable equivalent for the three-month periods ended March 31, 2024 and 2023 was $57 and $227, 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.

Net interest income, on a non-GAAP, FTE basis, decreased by $0.9 million for the first quarter of 2024 when compared to the first quarter of 2023.

This decrease was driven by an increase of $4.8 million in interest expense due to an increase of 133 basis points on interest paid on deposit accounts.

The average balances decreased by $39.4 million when compared to the first quarter of 2023 due primarily to the increased deposit pricing pressures that began in the first quarter of 2023 as a result of the bank failures in March 2023 and liquidity fears in the market.

Interest income increased by $3.9 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.

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)

Interest Income:

Taxable Investments

Non-taxable Investments

Federal funds sold

Interest-bearing deposits

Other interest earning assets

Total interest income

Interest Expense:

Interest-bearing demand deposits

Interest-bearing money markets

Savings deposits

Time deposits - Retail

Time deposits - Brokered

Short-term borrowings

Long-term borrowings

Total interest expense

Net interest income

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

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

Interest income on loans increased by $3.8 million due to the increase of 59 basis points in overall yield on the loan portfolio, as new loans were booked at higher rates and adjustable-rate loans repriced in correlation to the rising rate environment and an increase in average balances of $128.3 million.

Investment income decreased by $0.4 million due to a decrease of $64.4 million in average balances related to the balance sheet restructuring of our investment portfolio in the fourth quarter of 2023 and the maturity of $30.0 million of U.S.

Treasury bonds.

The net interest margin for the three months ended March 31, 2024 was 3.12% compared to 3.53% for the three months ended March 31, 2023.

Excluding the reversal of $0.4 million of interest and fees on loans related to the movement of $12.1 million of loans to non-accrual, the net interest margin would have been 3.21%.

For the Three months ended March 31, 2024

compared to the Three months ended March 31, 2023

(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 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

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

Net provision expense was $0.9 million for the three month period ended March 31, 2024 compared to net provision expense of $0.5 million and three month period ended March 31, 2023.

The increased provision expense recorded in the 2024 period was primarily related to increases in qualitative risk factors of our commercial and industrial portfolio, as two large relationships moved to non-accrual status during the quarter.

The composition of other operating income for the three-month periods ended March 31, 2024 and 2023 is illustrated in the following table:

Income as % of

Total Other Income

Nine Months Ended

Three Months Ended

September 30,

(in thousands)

6 unchanged sentences

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

The composition of other operating expenses for the three month periods ended March 31, 2024 and 2023 is illustrated in the following table:

Expense as % of

Total Other Operating Expenses

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 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.

The effective income tax rates as a percentage of income for the three-month periods ended March 31, 2024 and March 31, 2023 were 23.9% and 23.6%, respectively.

Non-GAAP Financial Measures

The Corporation believes that certain non-GAAP financial measures are meaningful because they reflect adjustments commonly made by management, investors, regulators and analysts to evaluate performance trends and the adequacy of common equity.

This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for performance and financial condition measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

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

Three months ended March 31,

(in thousands, except for per share amount)

Net income - as reported

Accelerated depreciation expenses

Income tax effect of adjustments

Adjusted net income (non-GAAP)

Diluted earnings per share - as reported

Accelerated depreciation expenses

Income tax effect of adjustments

Adjusted basic and diluted earnings per share (non-GAAP)

Significant Ratios:

Return on Average Assets - as reported

Accelerated depreciation expenses

Income tax effect of adjustments

Adjusted Return on Average Assets (non-GAAP)

Return on Average Equity - as reported

Accelerated depreciation expenses

Income tax effect of adjustments

Adjusted Return on Average Equity (non-GAAP)

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

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.

Total assets at March 31, 2024 were $1.9 billion, representing a $7.1 million increase since December 31, 2023.

During the first quarter of 2024, cash and interest-bearing deposits in other banks increased by $37.2 million.

The investment portfolio decreased by $32.8 million due to the maturities of $30.0 million of U.S.

Treasury bonds during the quarter and normal principal amortization.

Gross loans increased by $5.7 million.

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

Total liabilities at March 31, 2024 were $1.7 billion, representing a $3.5 million increase since December 31, 2023.

Total deposits increased by $12.5 million when compared to December 31, 2023.

The increase in deposits was primarily attributable to the shift of $10.0 million in overnight investment sweep balances to the IntraFi Cash Service (“ICS”) product, as a result of management’s strategy to release pledging of investment securities for municipalities to increase available liquidity.

Short term borrowings increased by $34.1 million since December 31, 2023 due primarily to the Bank’s utilization of the FRB’s Bank Term Funding Program (“BTFP”) to obtain $40.0 million in borrowings during January 2024 at a rate of 4.87% with a one-year maturity.

There are no prepayment penalties associated with early payments on the BTFP borrowings.

Long-term borrowings decreased by $40.0 million in the first quarter of 2024 due to the repayment of $40.0 million in Federal Home Loan Bank (“FHLB”) borrowings that matured.

Loan Portfolio

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

(dollars in thousands)

September 30, 2023

(in thousands)

March 31, 2024

December 31, 2023

3 unchanged sentences

Residential mortgage

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.

Outstanding loans of $1.4 billion at March 31, 2024 reflected growth of $5.7 million for the first quarter of 2024.

Since December 31, 2023, commercial real estate loans decreased by $0.9 million and acquisition and development loans increased by $6.4 million.

Commercial and industrial loans increased by $0.1 million.

Residential mortgage loans increased by $2.1 million, offset by a decline of $2.1 million in the consumer loan portfolio related to new production offset by monthly amortization.

New commercial loan production for the three months ended March 31, 2024 was approximately $28.3 million.

The pipeline of commercial loans as of March 31, 2024 was $30.9 million.

At March 31, 2024, unfunded, committed commercial construction loans totaled approximately $8.2 million.

Commercial amortization and payoffs were approximately $35.5 million through March 31, 2024, 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 first quarter of 2024 was approximately $11.2 million, with most of this production comprised of in-house mortgages.

The pipeline of in-house, portfolio loans as of March 31, 2024 was $9.8 million.

The residential mortgage production level declined in the first quarter of 2024 due to the higher interest rates and seasonality of this line of business.

Unfunded commitments related to residential construction loans totaled $13.9 million at March 31, 2024.

Management chose to shift activity to the secondary market in the first quarter of 2024 to preserve liquidity.

Non-accrual loans totaled $16.0 million at March 31, 2024 compared to $4.0 million at December 31, 2023.

The increase in non-accrual balances at March 31, 2024 was related to two commercial and industrial loan relationships that were classified as substandard at December 31, 2023 and moved to non-accrual during the first quarter.

Management believes that these loans are marked appropriately, and our credit department is actively working with these borrowers on work-out plans.

The following table presents loans in our commercial real estate portfolio by industry type at March 31, 2024.

(in thousands)

Non-owner-occupied

Owner-occupied

Accommodations and food services

Administration and support, waste management, and remediation services

Agriculture, forestry, fishing and hunting

Arts, entertainment and recreation

Educational services

Finance and insurance

Health care and social assistance

Management of companies and enterprises

Manufacturing

Other services (except public services)

Professional, scientific and technical services

Public administration

Commercial rental properties

Residential rental properties

Student rental properties

Mixed use rental properties

Storage units

Real estate rental and leasing- other

Transportation and warehousing

Wholesale trade

Our loan portfolio does not consist of any loans secured by office buildings located in major metropolitan areas or that are over four stories or any retail properties rented to major big box retail tenants.

There have been no significant changes in our commercial real estate concentrations since December 31, 2023.

Risk Elements of Loan Portfolio

1 unchanged sentence

Management is not aware of any potential problem loans other than those listed in this table or discussed below.

(dollars in thousands)

September 30,

(in thousands)

Non-accrual loans:

1 unchanged sentence

Acquisition and development

Commercial and industrial

Residential mortgage

6 unchanged sentences

Total Non-performing assets

Individually evaluated loans without a valuation allowance

Individually evaluated loans with a valuation allowance

Total individually evaluated loans

Non-accrual loans to total loans (as %)

1 unchanged sentence

Non-performing assets to total 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 to non-accrual loans (as %)

Allowance for credit 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 nine-month periods ended September 30:

(dollars in thousands)

The following table presents a summary of the activity in the ACL for the three-month periods ended March 31:

(in thousands)

Balance, January 1

Impact of CECL Adoption

Commercial real estate

Acquisition and development

Commercial and industrial

8 unchanged sentences

Balance at end of period

Allowance for credit/loan losses to gross loans outstanding (as %)

Allowance for credit losses to gross loans outstanding (as %)

Net (Charge-offs)/Recoveries as a % of Average Applicable Portfolio

4 unchanged sentences

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.

At March 31, 2024, the total amortized cost basis of the available-for-sale investment portfolio was $116.8 million, compared to a fair value of $95.6 million.

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

The amortized cost basis of the held to maturity portfolio was $183.2 million, compared to a fair value of $152.2 million.

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

September 30, 2023

March 31, 2024

December 31, 2023

(dollars in thousands)

Securities Available for Sale:

(in thousands)

Available for Sale Securities:

government agencies

6 unchanged sentences

Total available for sale

Securities Held to Maturity:

Held to Maturity Securities:

government agencies

4 unchanged sentences

Total held to maturity

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.

Total fair value of investment securities available for sale decreased by $1.6 million since December 31, 2023 due primarily to principal paydowns of the portfolio.

At March 31, 2024, the securities classified as available-for-sale included a net unrealized loss of $21.2 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.

Total amortized cost of securities held to maturity decreased by $31.2 million since December 31, 2023 due primarily to the maturity of $30.0 million in U.S.

Treasury bonds and $1.2 million in other principal paydowns of the portfolio.

Proceeds from the maturities and principal paydowns were reinvested into cash at the Federal Reserve Bank of Richmond in anticipation of the $40.0 million maturing FHLB advance.

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.

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.

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.

Approximately $80.7 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $17.5 million at March 31, 2024.

The remaining $14.9 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 $3.8 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.

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

(dollars in thousands)

September 30, 2023

(in thousands)

March 31, 2024

December 31, 2023

5 unchanged sentences

Total Deposits

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

Total deposits at March 31, 2024 increased by $12.5 million when compared to December 31, 2023.

During the quarter, non-interest-bearing deposits decreased by $4.9 million.

Interest-bearing demand deposits increased by $26.9 million, primarily related to the shift of $10.0 million in overnight investment sweep balances into the ICS product to maintain insurance through the Federal Deposit Insurance Corporation due to management’s strategy to release pledging of investment securities for municipalities to increase available liquidity.

Money market accounts increased by $7.3 million due primarily to the expansion of current relationships and new relationships during the quarter.

Traditional savings accounts decreased by $2.4 million and time deposits decreased by $14.4 million.

The decrease in time deposits was primarily due to the maturing of a nine-month CD product that was offered by the Bank in 2023 at higher rates.

The Bank has worked closely with customers as these CDs mature to transition them to other deposit and wealth management products offered by the Bank.

March 31, 2024

December 31, 2023

(dollars in thousands)

(in thousands)

Insured deposits

1 unchanged sentence

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

The following table summarizes the percentage of deposit balances from retail customers compared to business customers as of March 31, 2024 and December 31, 2023.

March 31, 2024

December 31, 2023

(dollars in thousands)

(in thousands)

Retail deposits

Business deposits

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

1 unchanged sentence

(in thousands)

September 30,

Bank Term Funding Program

Securities sold under agreements to repurchase

3 unchanged sentences

Total long-term borrowings

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.

Short-term borrowings increased by $34.1 million as the Bank borrowed $40.0 million from the BTFP in January 2024, which was partially offset by a decrease of $5.9 million in other short-term borrowings related to the shift of $10.0 million from a large municipality to the ICS product.

Long-term borrowings decreased by $40.0 million as a $40.0 million FHLB advance matured in March 2024 and was fully repaid.

Liquidity Management

12 unchanged sentences

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:

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).

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, Community Bankers Bank and Zions National Bank).

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 unchanged sentences

One Way Buy CDARS/ICS funding – a form of brokered deposits that has become a viable supplement to brokered deposits obtained directly.

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)

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

The Bank obtained $40.0 million in funds through the BTFP in January 2024 at a fixed rate of 4.87%

The following table presents sources of liquidity available to the Corporation as of March 31, 2024.

(in thousands)

Total Availability

6 unchanged sentences

Bank Term Funding Program

*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.

12 unchanged sentences

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

At September 30, 2023, we were asset sensitive.

At March 31, 2024, we were asset sensitive.

Our interest rate risk management goals are:

22 unchanged sentences

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

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,

Based on the simulation analysis performed at March 31, 2024 and December 31, 2023, management estimated the following changes in net interest income, assuming the indicated rate changes:

(in thousands)

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

Based on capital ratios at March 31, 2024, 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 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.

As of both March 31, 2024 and December 31, 2023, the Bank was considered “well capitalized” under the regulatory framework for prompt corrective action.

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

2 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 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.

Comparing March 31, 2024 to December 31, 2023, short-term borrowings increased by $34.1 million as the Bank borrowed $40.0 million from the BTFP in January 2024, which was partially offset by a decrease of $4.9 million in other short-term borrowings due to fluctuations in municipal customer balances in overnight investment sweep products.

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

4 unchanged sentences

(in thousands)

September 30,

Residential mortgage - home equity

2 unchanged sentences

Standby letters 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 was a credit of $14 thousand for the nine-month period ended September 30, 2023.

The decrease of $9.0 million in commitments at March 31, 2024 when compared to December 31, 2023 was due to fluctuations in line of credit balances of commercial customers.

Credit loss expense for off-balance sheet credit exposures was a credit of $15 thousand for the three-month period ended March 31, 2024.

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