FIRST UNITED CORP/MD/ 10-Q

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, 2023. 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," “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 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 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. 39 Table of Contents SELECTED FINANCIAL DATA 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 ​ ​ ​ March 31, ​ ​ 2024 2023 Per Share Data ​ ​ ​ ​ ​ ​ ​ Basic net income per common share ​ $ 0.56 ​ $ 0.66 ​ Basic net income per common share (1) - non-GAAP ​ $ 0.62 ​ $ 0.66 ​ Diluted net income per common share ​ $ 0.56 ​ $ 0.65 ​ Diluted net income per common share (1) - non-GAAP ​ $ 0.62 ​ $ 0.65 ​ Basic book value per common share ​ $ 24.89 ​ $ 22.85 ​ Diluted book value per common share ​ $ 24.86 ​ $ 22.81 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Significant Ratios: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Return on Average Assets (a) ​ ​ 0.76 % ​ 0.94 % Accelerated depreciation expense, net of tax ​ ​ 0.09 ​ ​ — % Adjusted Return on Average Assets (a) (1) (non-GAAP) ​ ​ 0.85 % ​ 0.94 % ​ ​ ​ ​ ​ ​ ​ ​ Return on Average Equity (a) ​ ​ 9.07 % ​ 11.87 % Accelerated depreciation expense, net of tax ​ ​ 1.04 ​ ​ — % Adjusted Return on Average Equity (a) (1) (non-GAAP) ​ ​ 10.11 % ​ 11.87 % ​ ​ ​ ​ ​ ​ ​ ​ Average Equity to Average Assets ​ ​ 8.37 % ​ 7.90 % ​ ​ ​ ​ ​ ​ ​ ​ Capital Ratios: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Consolidated Total Capital (to risk weighted assets) ​ ​ 15.83 % ​ 16.15 % Consolidated Tier 1 Capital (to risk weighted assets) ​ ​ 14.58 % ​ 14.90 % Consolidated Common Equity Tier 1 Capital (to risk weighted assets) ​ ​ 12.60 % ​ 12.82 % Consolidated Tier 1 Capital (to average assets) ​ ​ 11.48 % ​ 11.47 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ RESULTS OF OPERATIONS Overview 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 40 Table of Contents 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 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. The tables below summarize net interest income for the three month periods ended March 31, 2024 and 2023. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP GAAP ​ ​ ​ ​ Three Months Ended Three Months Ended ​ ​ ​ ​ March 31, March 31, ​ (in thousands) ​ 2024 2023 2024 2023 Interest income ​ $ 21,955 ​ $ 18,056 ​ $ 21,898 ​ $ 17,829 ​ Interest expense ​ ​ 8,086 ​ ​ 3,311 ​ ​ 8,086 ​ ​ 3,311 ​ Net interest income ​ $ 13,869 ​ $ 14,745 ​ $ 13,812 ​ $ 14,518 ​ Net interest margin % ​ ​ 3.12 % ​ 3.53 % ​ 3.10 % ​ 3.48 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 41 Table of Contents The following tables set forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the three-month periods ended March 31, 2024 and 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Three Months Ended ​ ​ ​ March 31, ​ ​ ​ 2024 ​ 2023 ​ ​ ​ Average ​ ​ ​ Average ​ Average ​ ​ ​ Average ​ (in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans ​ $ 1,407,886 ​ $ 19,234 ​ 5.49 % $ 1,279,547 ​ $ 15,457 ​ 4.90 % Investment Securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ ​ 294,526 ​ ​ 1,744 ​ 2.38 % ​ 340,622 ​ ​ 1,768 ​ 2.11 % Non taxable ​ ​ 7,806 ​ ​ 94 ​ 4.84 % ​ 26,104 ​ ​ 484 ​ 7.52 % Total ​ ​ 302,332 ​ ​ 1,838 ​ 2.45 % ​ 366,726 ​ ​ 2,252 ​ 2.49 % Federal funds sold ​ ​ 63,843 ​ ​ 758 ​ 4.78 % ​ 40,092 ​ ​ 307 ​ 3.11 % Interest-bearing deposits with other banks ​ ​ 8,787 ​ ​ 31 ​ 1.42 % ​ 5,001 ​ ​ 26 ​ 2.11 % Other interest earning assets ​ ​ 5,107 ​ ​ 94 ​ 7.40 % ​ 1,632 ​ ​ 14 ​ 3.48 % Total earning assets ​ ​ 1,787,955 ​ ​ 21,955 ​ 4.94 % ​ 1,692,998 ​ ​ 18,056 ​ 4.33 % Allowance for loan losses ​ ​ (17,696) ​ ​ ​ ​ ​ ​ ​ (14,816) ​ ​ ​ ​ ​ ​ Non-earning assets ​ ​ 188,425 ​ ​ ​ ​ ​ ​ ​ 213,929 ​ ​ ​ ​ ​ ​ Total Assets ​ $ 1,958,684 ​ ​ ​ ​ ​ ​ $ 1,892,111 ​ ​ ​ ​ ​ ​ Liabilities and Shareholders’ Equity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing demand deposits ​ $ 348,998 ​ $ 1,441 ​ 1.66 % $ 353,072 ​ $ 888 ​ 1.02 % Interest-bearing money markets ​ ​ 322,965 ​ ​ 3,260 ​ 4.06 % ​ 340,128 ​ ​ 1,298 ​ 1.55 % Savings deposits ​ ​ 189,572 ​ ​ 48 ​ 0.10 % ​ 246,708 ​ ​ 79 ​ 0.13 % Time deposits - Retail ​ ​ 157,678 ​ ​ 1,118 ​ 2.85 % ​ 118,667 ​ ​ 281 ​ 0.96 % Time deposits - Brokered ​ ​ 30,000 ​ ​ 399 ​ 5.35 % ​ 10,180 ​ ​ 132 ​ 5.26 % Short-term borrowings ​ ​ 73,351 ​ ​ 461 ​ 2.53 % ​ 57,364 ​ ​ 31 ​ 0.22 % Long-term borrowings ​ ​ 103,017 ​ ​ 1,359 ​ 5.31 % ​ 43,373 ​ ​ 602 ​ 5.63 % Total interest-bearing liabilities ​ ​ 1,225,581 ​ ​ 8,086 ​ 2.65 % ​ 1,169,492 ​ ​ 3,311 ​ 1.15 % Non-interest-bearing deposits ​ ​ 534,412 ​ ​ ​ ​ ​ ​ ​ 545,215 ​ ​ ​ ​ ​ ​ Other liabilities ​ ​ 34,747 ​ ​ ​ ​ ​ ​ ​ 27,988 ​ ​ ​ ​ ​ ​ Shareholders’ Equity ​ ​ 163,944 ​ ​ ​ ​ ​ ​ ​ 149,416 ​ ​ ​ ​ ​ ​ Total Liabilities and Shareholders’ Equity ​ $ 1,958,684 ​ ​ ​ ​ ​ ​ $ 1,892,111 ​ ​ ​ ​ ​ ​ Net interest income and spread ​ ​ ​ ​ $ 13,869 ​ 2.29 % ​ ​ ​ $ 14,745 ​ 3.18 % Net interest margin ​ ​ ​ ​ ​ ​ ​ 3.12 % ​ ​ ​ ​ ​ ​ 3.53 % ​ (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 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. ​ 42 Table of Contents 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 $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%. ​ ​ The following table sets forth an analysis of volume and rate changes in interest income and interest expense for our average interest-earning assets and average interest-bearing liabilities for the three-month periods ended March 31, 2024 and 2023: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three months ended March 31, 2024 ​ ​ compared to the Three months ended March 31, 2023 (in thousands and tax equivalent basis) Volume Rate Net Interest Income: ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans ​ $ 1,572 ​ $ 2,205 ​ $ 3,777 Taxable Investments ​ ​ (243) ​ ​ 219 ​ ​ (24) Non-taxable Investments ​ ​ (344) ​ ​ (46) ​ ​ (390) Federal funds sold ​ ​ 185 ​ ​ 266 ​ ​ 451 Interest-bearing deposits ​ ​ 20 ​ ​ (15) ​ ​ 5 Other interest earning assets ​ ​ 30 ​ ​ 50 ​ ​ 80 Total interest income ​ ​ 1,220 ​ ​ 2,679 ​ ​ 3,899 Interest Expense: ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing demand deposits ​ ​ (10) ​ ​ 563 ​ ​ 553 Interest-bearing money markets ​ ​ (66) ​ ​ 2,028 ​ ​ 1,962 Savings deposits ​ ​ (18) ​ ​ (13) ​ ​ (31) Time deposits - Retail ​ ​ 94 ​ ​ 743 ​ ​ 837 Time deposits - Brokered ​ ​ 261 ​ ​ 6 ​ ​ 267 Short-term borrowings ​ ​ 9 ​ ​ 421 ​ ​ 430 Long-term borrowings ​ ​ 840 ​ ​ (83) ​ ​ 757 Total interest expense ​ ​ 1,110 ​ ​ 3,665 ​ ​ 4,775 Net interest income ​ $ 110 ​ $ (986) ​ $ (876) (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. ​ 43 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 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. ​ Other Income 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 ​ (in thousands) 2024 2023 Service charges on deposit accounts ​ $ 556 12% ​ $ 516 12% ​ Other service charges ​ ​ 215 ​ 4% ​ ​ 232 ​ 5% ​ Trust department ​ ​ 2,188 ​ 46% ​ ​ 1,970 ​ 46% ​ Debit card income ​ ​ 932 ​ 19% ​ ​ 955 ​ 22% ​ Bank owned life insurance ​ ​ 326 ​ 7% ​ ​ 305 ​ 7% ​ Brokerage commissions ​ ​ 495 ​ 10% ​ ​ 297 ​ 7% ​ Other income ​ ​ 81 ​ 2% ​ ​ 64 ​ 1% ​ ​ ​ $ 4,793 ​ 100% ​ $ 4,339 ​ 100% ​ ​ Other Operating Expenses 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 ​ (in thousands) 2024 2023 Salaries and employee benefits ​ $ 7,157 56% ​ $ 7,296 58% ​ FDIC premiums ​ ​ 269 ​ 2% ​ ​ 193 ​ 1% ​ Equipment ​ ​ 923 ​ 7% ​ ​ 780 ​ 6% ​ Occupancy expense of premises ​ ​ 954 ​ 8% ​ ​ 785 ​ 6% ​ Data processing expense ​ ​ 1,318 ​ 10% ​ ​ 1,306 ​ 10% ​ Marketing expense ​ ​ 134 ​ 1% ​ ​ 120 ​ 1% ​ Professional services ​ ​ 486 ​ 4% ​ ​ 494 ​ 4% ​ Contract labor ​ ​ 183 ​ 1% ​ ​ 134 ​ 1% ​ Telephone ​ ​ 109 ​ 1% ​ ​ 110 ​ 1% ​ Other real estate owned ​ ​ 86 ​ 1% ​ ​ 124 ​ 1% ​ Investor relations ​ ​ 53 ​ 0% ​ ​ 83 ​ 1% ​ Contributions ​ ​ 50 ​ 0% ​ ​ 64 ​ 1% ​ Other ​ ​ 1,159 ​ 9% ​ ​ 1,149 ​ 9% ​ ​ ​ $ 12,881 ​ 100% ​ $ 12,638 ​ 100% ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 44 Table of Contents 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 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. ​ 45 Table of Contents 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, ​ ​ 2024 ​ 2023 (in thousands, except for per share amount) ​ ​ ​ ​ ​ ​ Net income - as reported ​ $ 3,698 ​ $ 4,375 Adjustments: ​ ​ ​ ​ ​ ​ Accelerated depreciation expenses ​ ​ 562 ​ ​ — Income tax effect of adjustments ​ ​ (137) ​ ​ — Adjusted net income (non-GAAP) ​ $ 4,123 ​ $ 4,375 ​ ​ ​ ​ ​ ​ ​ Diluted earnings per share - as reported ​ $ 0.56 ​ $ 0.65 Adjustments: ​ ​ ​ ​ ​ ​ Accelerated depreciation expenses ​ ​ 0.08 ​ ​ — Income tax effect of adjustments ​ ​ (0.02) ​ ​ — Adjusted basic and diluted earnings per share (non-GAAP) ​ $ 0.62 ​ $ 0.65 ​ ​ ​ ​ ​ ​ ​ Significant Ratios: ​ ​ ​ ​ ​ ​ Return on Average Assets - as reported ​ ​ 0.76% ​ ​ 0.94% Accelerated depreciation expenses ​ ​ 0.12% ​ ​ — Income tax effect of adjustments ​ ​ (0.03%) ​ ​ — Adjusted Return on Average Assets (non-GAAP) ​ ​ 0.85% ​ ​ 0.94% ​ ​ ​ ​ ​ ​ ​ Return on Average Equity - as reported ​ ​ 9.07% ​ ​ 11.87% Accelerated depreciation expenses ​ ​ 1.38% ​ ​ — Income tax effect of adjustments ​ ​ (0.34%) ​ ​ — Adjusted Return on Average Equity (non-GAAP) ​ ​ 10.11% ​ ​ 11.87% ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ FINANCIAL CONDITION Balance Sheet Overview 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. ​ 46 Table of Contents Loan Portfolio The following table presents the composition of our loan portfolio at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) March 31, 2024 December 31, 2023 Commercial real estate ​ $ 492,819 35% ​ $ 493,703 35% Acquisition and development ​ ​ 83,424 ​ 6% ​ ​ 77,060 ​ 5% Commercial and industrial ​ ​ 274,722 ​ 19% ​ ​ 274,604 ​ 20% Residential mortgage ​ ​ 501,990 ​ 36% ​ ​ 499,871 ​ 36% Consumer ​ ​ 59,372 ​ 4% ​ ​ 61,429 ​ 4% Total Loans ​ $ 1,412,327 ​ 100% ​ $ 1,406,667 ​ 100% ​ ​ 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. ​ ​ 47 Table of Contents 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 ​ Multi-family ​ Total Accommodations and food services ​ $ 75,713 ​ $ 4,964 ​ $ — ​ $ 80,677 Administration and support, waste management, and remediation services ​ ​ — ​ ​ 1,450 ​ ​ — ​ ​ 1,450 Agriculture, forestry, fishing and hunting ​ ​ — ​ ​ 2,201 ​ ​ — ​ ​ 2,201 Arts, entertainment and recreation ​ ​ — ​ ​ 3,090 ​ ​ — ​ ​ 3,090 Construction ​ ​ 2,237 ​ ​ 6,219 ​ ​ 4 ​ ​ 8,460 Educational services ​ ​ — ​ ​ 938 ​ ​ — ​ ​ 938 Finance and insurance ​ ​ — ​ ​ 108 ​ ​ — ​ ​ 108 Health care and social assistance ​ ​ 4,773 ​ ​ 11,523 ​ ​ — ​ ​ 16,296 Management of companies and enterprises ​ ​ — ​ ​ 2,799 ​ ​ — ​ ​ 2,799 Manufacturing ​ ​ — ​ ​ 6,921 ​ ​ — ​ ​ 6,921 Other services (except public services) ​ ​ 2,271 ​ ​ 18,017 ​ ​ 317 ​ ​ 20,605 Professional, scientific and technical services ​ ​ — ​ ​ 2,450 ​ ​ — ​ ​ 2,450 Public administration ​ ​ 1,507 ​ ​ 1,055 ​ ​ — ​ ​ 2,562 Commercial rental properties ​ ​ 184,453 ​ ​ 77,872 ​ ​ — ​ ​ 262,325 Residential rental properties ​ ​ 507 ​ ​ 337 ​ ​ 26,416 ​ ​ 27,260 Student rental properties ​ ​ — ​ ​ — ​ ​ 4,761 ​ ​ 4,761 Mixed use rental properties ​ ​ 148 ​ ​ 238 ​ ​ 17,774 ​ ​ 18,160 Storage units ​ ​ 18,436 ​ ​ — ​ ​ — ​ ​ 18,436 Real estate rental and leasing- other ​ ​ 4,670 ​ ​ 3,478 ​ ​ 417 ​ ​ 8,565 Retail trade ​ ​ — ​ ​ 3,277 ​ ​ — ​ ​ 3,277 Transportation and warehousing ​ ​ — ​ ​ 511 ​ ​ — ​ ​ 511 Wholesale trade ​ ​ — ​ ​ 967 ​ ​ — ​ ​ 967 Total ​ $ 294,715 ​ $ 148,415 ​ $ 49,689 ​ $ 492,819 ​ ​ 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. ​ 48 Table of Contents 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. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) March 31, 2024 % of Applicable Portfolio December 31, 2023 % of Applicable Portfolio Non-accrual loans: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial real estate ​ $ 818 ​ 0.17% ​ $ 826 ​ 0.17% Acquisition and development ​ ​ 105 ​ 0.13% ​ ​ 113 ​ 0.15% Commercial and industrial ​ ​ 12,093 ​ 4.40% ​ ​ — ​ 0.00% Residential mortgage ​ ​ 2,863 ​ 0.57% ​ ​ 2,988 ​ 0.60% Consumer ​ ​ 128 ​ 0.22% ​ ​ 29 ​ 0.05% Total non-accrual loans ​ $ 16,007 ​ 1.13% ​ $ 3,956 ​ 0.28% Accruing Loans Past Due 90 days or more: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Residential mortgage ​ $ 76 ​ ​ ​ $ 459 ​ ​ Consumer ​ ​ 44 ​ ​ ​ ​ 84 ​ ​ Total loans past due 90 days or more ​ $ 120 ​ ​ ​ $ 543 ​ ​ Total non-accrual and accruing loans past due 90 days or more ​ $ 16,127 ​ ​ ​ $ 4,499 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other real estate owned ​ $ 4,402 ​ ​ ​ $ 4,493 ​ ​ Total Non-performing assets ​ $ 20,529 ​ ​ ​ $ 8,992 ​ ​ Individually evaluated loans without a valuation allowance ​ ​ 14,875 ​ ​ ​ ​ 2,963 ​ ​ Individually evaluated loans with a valuation allowance ​ ​ — ​ ​ ​ ​ — ​ ​ Total individually evaluated loans ​ $ 14,875 ​ ​ ​ $ 2,963 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-accrual loans to total loans (as %) ​ ​ 1.13% ​ ​ ​ ​ 0.28% ​ ​ Non-performing loans to total loans (as %) ​ ​ 1.14% ​ ​ ​ ​ 0.32% ​ ​ Non-performing assets to total assets (as %) ​ ​ 1.07% ​ ​ ​ ​ 0.47% ​ ​ Allowance for credit losses to non-accrual loans (as %) ​ ​ 112.34% ​ ​ ​ ​ 441.86% ​ ​ Allowance for credit losses to non-performing assets (as %) ​ ​ 87.59% ​ ​ ​ ​ 194.40% ​ ​ ​ ​ 49 Table of Contents ​ 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 for the three-month periods ended March 31: ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) 2024 2023 Balance, January 1 ​ $ 17,480 ​ $ 14,636 ​ Impact of CECL Adoption ​ ​ — ​ ​ 2,066 ​ Charge-offs: ​ ​ ​ ​ ​ ​ ​ Commercial and industrial ​ ​ (112) ​ ​ — ​ Residential mortgage ​ ​ — ​ ​ (6) ​ Consumer ​ ​ (506) ​ ​ (333) ​ Total charge-offs ​ ​ (618) ​ ​ (339) ​ Recoveries: ​ ​ ​ ​ ​ ​ ​ Commercial real estate ​ ​ 37 ​ ​ 5 ​ Acquisition and development ​ ​ 3 ​ ​ 5 ​ Commercial and industrial ​ ​ 31 ​ ​ 4 ​ Residential mortgage ​ ​ 18 ​ ​ 18 ​ Consumer ​ ​ 70 ​ ​ 62 ​ Total recoveries ​ ​ 159 ​ ​ 94 ​ Net losses ​ ​ (459) ​ ​ (245) ​ Credit/loan loss expense ​ ​ 961 ​ ​ 414 ​ Balance at end of period ​ $ 17,982 ​ $ 16,871 ​ ​ ​ ​ ​ ​ ​ ​ ​ Allowance for credit losses to gross loans outstanding (as %) ​ ​ 1.27 % ​ 1.31 % ​ 50 Table of Contents ​ ​ ​ ​ ​ ​ ​ Net (Charge-offs)/Recoveries as a % of Average Applicable Portfolio ​ ​ ​ ​ ​ ​ ​ ​ ​ 2024 ​ 2023 Commercial real estate ​ ​ 0.03% ​ ​ 0.00% Acquisition and development ​ ​ 0.01% ​ ​ 0.03% Commercial and industrial ​ ​ (0.12)% ​ ​ 0.01% Residential mortgage ​ ​ 0.01% ​ ​ 0.01% Consumer ​ ​ (2.89)% ​ ​ (1.79)% Total ​ ​ (0.13)% ​ ​ (0.08)% ​ Investment Securities 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, 2024 ​ December 31, 2023 ​ ​ Amortized ​ Fair Value ​ FV as % ​ Amortized ​ Fair Value ​ FV as % (in thousands) Cost (FV) of Total Cost (FV) of Total Available for Sale Securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. government agencies ​ $ 7,000 ​ $ 6,019 ​ 6% ​ $ 7,000 ​ $ 6,034 ​ 6% Residential mortgage-backed agencies ​ ​ 24,261 ​ ​ 19,854 ​ 21% ​ ​ 24,781 ​ ​ 20,563 ​ 21% Commercial mortgage-backed agencies ​ ​ 36,082 ​ ​ 27,916 ​ 28% ​ ​ 36,258 ​ ​ 28,417 ​ 29% Collateralized mortgage obligations ​ ​ 19,320 ​ ​ 15,889 ​ 17% ​ ​ 19,725 ​ ​ 16,356 ​ 17% Obligations of state and political subdivisions ​ ​ 10,481 ​ ​ 10,253 ​ 11% ​ ​ 10,486 ​ ​ 10,312 ​ 11% Corporate bonds ​ ​ 1,000 ​ ​ 763 ​ 1% ​ ​ 1,000 ​ ​ 778 ​ 1% Collateralized debt obligations ​ ​ 18,651 ​ ​ 14,886 ​ 16% ​ ​ 18,671 ​ ​ 14,709 ​ 15% Total available for sale ​ $ 116,795 ​ $ 95,580 ​ 100% ​ $ 117,921 ​ $ 97,169 ​ 100% Held to Maturity Securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. treasuries ​ $ 7,498 ​ $ 7,484 ​ 5% ​ $ 37,462 ​ $ 37,219 ​ 20% U.S. government agencies ​ ​ 68,085 ​ ​ 56,642 ​ 37% ​ ​ 68,014 ​ ​ 57,029 ​ 31% Residential mortgage-backed agencies ​ ​ 29,258 ​ ​ 25,883 ​ 17% ​ ​ 29,588 ​ ​ 26,717 ​ 14% Commercial mortgage-backed agencies ​ ​ 21,371 ​ ​ 15,788 ​ 10% ​ ​ 21,413 ​ ​ 16,052 ​ 9% Collateralized mortgage obligations ​ ​ 52,364 ​ ​ 42,348 ​ 28% ​ ​ 53,261 ​ ​ 43,288 ​ 24% Obligations of state and political subdivisions ​ ​ 4,605 ​ ​ 4,080 ​ 3% ​ ​ 4,604 ​ ​ 4,110 ​ 2% Total held to maturity ​ $ 183,181 ​ $ 152,225 ​ 100% ​ $ 214,342 ​ $ 184,415 ​ 100% ​ 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 51 Table of Contents 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 $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. Deposits The following table presents the composition of our deposits at the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) March 31, 2024 December 31, 2023 ​ ​ ​ Balance Percent ​ ​ Balance Percent Non-interest-bearing demand deposits ​ $ 422,759 27% ​ $ 427,670 27% Interest-bearing deposits: ​ ​ ​ ​ ​ ​ ​ ​ Demand ​ ​ 377,723 24% ​ ​ 350,860 23% Money Market ​ ​ 392,933 25% ​ ​ 385,649 25% Savings deposits ​ ​ 188,857 12% ​ ​ 191,265 12% Time deposits- retail ​ ​ 151,181 10% ​ ​ 165,533 11% Time deposits- brokered ​ ​ 30,000 2% ​ ​ 30,000 2% Total Deposits ​ $ 1,563,453 100% ​ $ 1,550,977 100% ​ 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. ​ 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 March 31, 2024 and December 31, 2023. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, 2024 ​ ​ December 31, 2023 (in thousands) ​ ​ Balance Percent ​ ​ Balance Percent Insured deposits ​ $ 1,198,898 77% ​ $ 1,175,812 76% Uninsured but collateralized deposits ​ ​ 81,271 5% ​ ​ 76,569 5% Uninsured and uncollateralized deposits ​ ​ 283,284 18% ​ ​ 298,596 19% ​ ​ $ 1,563,453 100% ​ $ 1,550,977 100% ​ ​ ​ 52 Table of Contents 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 (in thousands) ​ ​ Balance Percent ​ ​ Balance Percent Retail deposits ​ $ 763,657 49% ​ $ 748,295 53% Business deposits ​ ​ 799,796 51% ​ ​ 802,682 47% ​ ​ $ 1,563,453 100% ​ $ 1,550,977 100% ​ Borrowed Funds The following table presents the composition of our borrowings at the dates indicated: ​ ​ ​ ​ ​ ​ ​ (in thousands) March 31, 2024 December 31, 2023 Bank Term Funding Program ​ $ 40,000 ​ $ — Securities sold under agreements to repurchase ​ $ 39,494 ​ $ 45,418 Total short-term borrowings ​ ​ 79,494 ​ ​ 45,418 FHLB advances ​ ​ 40,000 ​ ​ 80,000 Junior subordinated debt ​ ​ 30,929 ​ ​ 30,929 Total long-term borrowings ​ $ 70,929 ​ $ 110,929 ​ 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 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, Community Bankers Bank and Zions National 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. 53 Table of Contents 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. 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. 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 ​ ​ Amount Used ​ ​ Net Availability Internal Sources ​ ​ ​ ​ ​ ​ ​ ​ ​ Excess cash ​ $ 79,521 ​ $ - ​ $ 79,521 Unpledged securities ​ ​ 35,757 ​ ​ - ​ ​ 35,757 External Sources ​ ​ ​ ​ ​ ​ ​ ​ ​ Federal Reserve (discount window) ​ ​ 31,776 ​ ​ - ​ ​ 31,776 Correspondent unsecured lines of credit ​ ​ 140,000 ​ ​ - ​ ​ 140,000 FHLB ​ ​ 235,475 ​ ​ 42,914 ​ ​ 192,561 Bank Term Funding Program ​ ​ 40,000 ​ ​ 40,000 ​ ​ - ​ ​ $ 562,529 ​ $ 82,914 ​ $ 479,615 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 March 31, 2024, 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; 54 Table of Contents ● 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; ● 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. ​ 55 Table of Contents 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) March 31, 2024 ​ December 31, 2023 +400 basis points ​ $ 3,074 ​ $ 4,464 +300 basis points ​ $ 3,378 ​ $ 3,353 +200 basis points ​ $ 2,992 ​ $ 2,255 +100 basis points ​ $ 1,466 ​ $ 1,155 -100 basis points ​ $ (1,576) ​ $ (1,280) -200 basis points ​ $ (4,016) ​ $ (3,102) -300 basis points ​ $ (6,021) ​ $ (5,249) -400 basis points ​ $ (8,501) ​ $ (8,086) ​ ​ 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, 2023. Our NII simulation analysis as of December 31, 2023 is included in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2023 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 March 31, 2024, the Bank was considered to be well-capitalized. ​ 56 Table of Contents The following table presents the Bank’s capital ratios as of the dates indicated: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ March 31, 2024 December 31, 2023 Required for Capital Adequacy Purposes Required to be Well Capitalized Total Capital (to risk-weighted assets) ​ 14.17 % 14.05 % 8.00 % 10.00 % Tier 1 Capital (to risk-weighted assets) ​ 12.92 % 12.81 % 6.00 % 8.00 % Common Equity Tier 1 Capital (to risk-weighted assets) ​ 12.92 % 12.81 % 4.50 % 6.50 % Tier 1 Capital (to average assets) ​ 10.08 % 9.92 % 4.00 % 5.00 % ​ 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 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 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. 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) March 31, 2024 December 31, 2023 Residential mortgage - home equity ​ $ 72,515 ​ $ 72,080 Residential mortgage - construction ​ ​ 13,815 ​ ​ 17,684 Commercial ​ ​ 154,146 ​ ​ 160,196 Consumer - personal credit lines ​ ​ 4,232 ​ ​ 4,186 Standby letters of credit ​ ​ 11,436 ​ ​ 11,037 Total ​ $ 256,144 ​ $ 265,183 ​ 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.