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Item 2. Management’s Discussion and Analysis

2025-05-07 compared with 2024-11-07 · 121 added, 262 removed, 371 unchanged (51% of the section changed)

11 unchanged sentences

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.

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 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.

2 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, 2024, the Corporation’s total assets were $1.9 billion, net loans were $1.4 billion, and deposits were $1.5 billion.

Shareholders’ equity at September 30, 2024 was $174.0 million.

At March 31, 2025, the Corporation’s total assets were $2.0 billion, net loans were $1.5 billion, and deposits were $1.6 billion.

Shareholders’ equity at March 31, 2025 was $183.7 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, 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 nine months ended

September 30,

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

Diluted book value per common share

Significant Ratios:

Return on Average Assets

Accelerated depreciation expense, net of tax

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

Return on Average Equity

Accelerated depreciation expense, net of tax

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

Average Equity to Average Assets

Bank Capital Ratios:

Consolidated Total Capital (to risk weighted assets)

Consolidated Tier 1 Capital (to risk weighted assets)

Consolidated Common Equity Tier 1 Capital (to risk weighted assets)

Consolidated Tier 1 Capital (to average assets)

(1) See reconciliation of this non-GAAP financial measure provided elsewhere herein.

RESULTS OF OPERATIONS

Consolidated net income was $5.8 million for the third quarter of 2024.

This compares to $4.5 million for the third quarter of 2023 and $4.9 million for the second quarter of 2024.

Basic and diluted net income was $0.89 per share for the third quarter of 2024, compared to basic and diluted net income of $0.67 per share for the third quarter of 2023 and $0.75 per share for the second quarter of 2024.

The $1.3 million increase in quarterly net income year over year was primarily driven by a $1.2 million increase in net interest income.

The increase in net interest income was related to the $3.0 million increase in interest on loans due to new loans being booked at higher rates and the repricing of adjustable-rate loans.

This increase was partially offset by the $0.9 million increase in interest paid on deposits due to continued competitive pricing pressures.

An increase of $0.4 million in interest expense on short-term borrowings related to the Bank Term Funding Program (“ BTFP”) was offset by the $0.5 million reduction in interest expense on long-term borrowings related to the repayment of $80.0 million of Federal Home Loan Bank (“FHLB”) advances in the first nine

months of 2024.

Comparing the third quarter of 2024 to the same period in 2023, other activity was a $0.2 million increase in wealth management income due to improving market conditions and growth of new relationships and a decrease in operating expenses of $0.5 million driven by reductions in check fraud related expenses, occupancy and equipment, data processing, and marketing expenses, partially offset by increased salaries and benefits.

The provision for income tax was up $0.6 million when comparing the two quarters due to increased net income before tax.

Year-to-date net income for the first nine months of 2024 was $14.4 million compared to $13.3 million for the same period in 2023.

The increased net income was driven by a year-over-year increase of $1.6 million in net interest income driven by a $9.3 million increase in interest income primarily related to increased interest and fees on loans, partially offset by a $7.7 million increase in interest expense due to continued pricing pressure on deposits and our use of the BTFP.

The increase in net interest income was partially offset by a $1.2 million increase in provision for credit losses driven by an increase in net charge-offs of $1.2 million, which was primarily due to a $1.1 million charge-off in the commercial and industrial portfolio related to one non-accrual credit where collateral was sold through a liquidation auction at depressed prices.

Operating income increased $0.9 million, primarily as the result of increased wealth management income.

Operating expenses decreased by $0.4 million and was driven by reductions in professional services, and pension benefits expense, a $0.5 million reduction in check fraud expense, and a reduction in other miscellaneous expenses, partially offset by a $0.4 million increase in salaries and benefits.

Other operating income, including net gains, for the third quarter of 2024 increased by $0.2 million when compared to the same period of 2023.

The increase was driven by an increase of $0.2 million in trust and brokerage income due to improving market conditions, increased annuity sales and growth in new and existing customer relationships.

Gains on sales of mortgages declined slightly when comparing the third quarter of 2024 to the same period of 2023 primarily due to reduced activity in the elevated interest rate environment.

Service charge income and debit card income remained stable.

Other operating income for the nine months ended September 30, 2024 increased by $0.9 million when compared to the same period of 2023.

This increase was primarily due to the $1.0 million increase in trust and brokerage income that resulted from improving market conditions, increased annuity sales and growth in new and existing customer relationships.

Service charge and debit card income were both stable when comparing the first nine months of 2024 to the same period of 2023.

Operating expenses decreased by $0.5 million in the third quarter of 2024 when compared to the third quarter of 2023.

The decrease was related to a $0.2 million decrease in occupancy, equipment and data processing expenses, a $0.3 million decrease in check fraud related expenses, and decreases in other miscellaneous expenses such as marketing, contributions, net other real estate owned (“OREO”) expenses, and pension benefit expenses.

These decreases were partially offset by a $0.2 million increase in salaries and benefits related to increased executive and employee incentive accruals, 401(k) plan expense and wellness costs offset by overall reduced salaries and wages.

For the nine months ended September 30, 2024, non-interest expenses decreased by $0.4 million when compared to the nine months ended September 30, 2023.

The decrease was primarily attributable to a $0.5 million decrease in check fraud expenses and decreases in professional services, equipment, net OREO expense, line rentals, pension benefit expenses, and other miscellaneous expenses such as marketing, contributions, contract labor, and investor relations.

These decreases were partially offset by increased occupancy, data processing expenses and salaries and benefits related to increased incentives, 401K expense, wellness expense and loan origination costs, offset by reductions in life and health insurance costs.

Consolidated net income was $5.8 million for the first quarter of 2025.

This compares to $3.7 million for the first quarter of 2024.

Basic net income was $0.90 per share and diluted net income was $0.89 per share for the first quarter of 2025, compared to basic and diluted net income of $0.56 per share for the first quarter of 2024.

The $2.1 million increase in quarterly net income when compared to the first quarter of 2024 was primarily driven by a $2.2 million increase in net interest income, a $0.3 million decrease in provision for credit loss, stable non-interest income, and a decrease in non-interest expense of $0.3 million, partially offset by an increase in income tax expense of $0.7 million.

Comparing the first quarter of 2025 to the same period of 2024, interest and fees on loans increased by $2.5 million resulting from new loans booked at higher rates, the repricing of adjustable-rate loans, and growth in our loan portfolio.

Interest expense remained stable when comparing year-over-year quarterly expense as reductions in the rate environment offset the increased funding.

Other operating income, including net gains, for the first quarter of 2025 was stable when compared to the same period of 2024.

Wealth management income increased by $0.1 million due to increased market values and growth in new and existing customer relationships.

This was offset by a decrease in brokerage commissions due to slower annuity sales comparing these quarters.

Operating expenses decreased by $0.3 million in the first quarter of 2025 when compared to the first quarter of 2024.

The decrease was largely driven by a $0.6 million decrease 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 decrease was partially offset by a $0.2 million increase in salaries and benefits primarily driven by increases in incentive pay and life and health insurance expenses due to increased claims.

Additionally, data processing expenses increased by $0.2 million in the first quarter of 2025 when compared to the first quarter of 2024, partially offset by a decrease in other miscellaneous expenses of $0.1 million due primarily to reduced net periodic pension costs and check fraud related costs.

Net Interest Income

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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 an 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.

For analytical and discussion purposes, net interest income is adjusted to a fully taxable 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 nine- and three-month periods ended September 30, 2024 and 2023.

Nine Months Ended

September 30,

(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, 2025 and 2024.

Three Months Ended

September 30,

(in thousands)

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Net interest margin %

The following tables set forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the nine- and three-month periods ended September 30, 2024 and 2023:

Nine Months Ended

September 30,

(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 - retail

Interest-bearing money markets - brokered

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 2024 and 2023.

Non-GAAP interest income on a fully taxable equivalent for the nine-month periods ended September 30, 2024 and 2023 was $176 and $566, 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:

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(1) The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2025 and 2024.

Non-GAAP interest income on a fully taxable equivalent for the three-month periods ended September 30, 2024 and 2023 was $61 and $112, respectively.

Non-GAAP interest income on a fully taxable equivalent for the three-month periods ended March 31, 2025 and 2024 was $49 and $57, 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, fully tax equivalent (“ FTE”) basis, increased by $1.2 million for the third quarter of 2024 when compared to the third quarter of 2023.

This increase was driven by a $2.0 million increase in interest income.

Interest income on loans increased by $3.0 million due to the increase in average balances of $69.7 million and a 58 basis point increase in the 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 elevated rate environment.

Investment income decreased by $0.3 million due to a decrease of $63.2 million in average balances related to the balance sheet restructuring of our investment portfolio in the fourth quarter of 2023 and the maturity of $37.5 million in U.S.

Treasury bonds in the first four months of 2024.

The overall yield on the investment portfolio increased by 14 basis points primarily driven by the increased rate on the trust preferred portfolio and the maturity and sale of lower rate investments.

Average cash balances declined by $42.0 million as cash from the investment portfolio and on balance sheet liquidity was shifted to fund higher yielding loans.

Interest expense increased by $0.8 million year over year due to an increase of 34 basis points on interest paid on deposit accounts.

The average deposit balances decreased by $7.4 million when compared to the third quarter of 2023 due primarily to the decrease of $13.1 million in retail time deposits, a $60.2 million decrease in brokered time deposits and a $32.3 million decrease in savings accounts, which was mostly offset by an increase of $96.6 million in money market accounts and a slight increase of $1.6 million in interest-bearing demand deposits.

Comparing the nine months ended September 30, 2024 to the nine months ended September 30, 2023, net interest income, on a non-GAAP, FTE basis, increased by $1.2 million.

Interest income increased by $8.9 million.

Average loan balances increased by $98.3 million and the overall yield increased by 61 basis points in correlation with the elevated rate environment as new loans were booked at higher rates as well as the repricing of adjustable-rate loans.

Interest expense on deposits increased by $6.5 million while the average deposit balances increased by $24.7 million, driven by increases of $77.7 million in money market balances and $13.7 million in retail time deposits, partially offset by decreases in savings balances of $44.1 million and brokered time deposits of $26.0 million.

Interest expense on short-term borrowings increased by $1.3 million due to the Bank’s utilization of the BTFP program since January 2024.

The increased interest expense resulted in an overall increase of 75 basis points on the cost of interest-bearing liabilities.

The net interest margin for the nine months ended September 30, 2024 was 3.34% compared to 3.30% for the nine months ended September 30, 2023.

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, 2024 and 2023:

For the nine months ended September 30, 2024

compared to the nine months ended September 30, 2023

(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- retail

Interest-bearing money markets- brokered

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, 2024 compared to the Three months ended September 30, 2023

Net interest income, on a non-GAAP, FTE basis, increased by $2.2 million for the first quarter of 2025 when compared to the first quarter of 2024.

This increase was driven by an increase of $2.2 million in interest income.

Interest income on loans increased by $2.5 million due to the increase of 46 basis points in overall yield on the loan portfolio as new loans were booked at higher rates during 2024, upward repricing of adjustable-rate loans, and an increase in average balances of $75.3 million.

Interest income on Federal funds sold decreased by $0.4 million due to a decrease of 105 basis points in average rates and a decrease of $22.1 million in average balances.

Interest expense in the first quarter of 2025 was stable when compared to the first quarter of 2024.

Interest expense paid on deposits increased by $0.4 million due to a $141.1 million increase in average balances, partially offset by a decrease of 12 basis points on the rate paid.

Interest paid on short-term borrowings decreased by $0.4 million for the first

quarter of 2025 when compared to the same period of 2024 due to the repayment of the $40.0 million from the Bank Term Funding Program late in the third quarter of 2024.

For the three months ended March 31, 2025

compared to the three months ended March 31, 2024

(in thousands and tax equivalent basis)

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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.

For the first nine months of 2024 and 2023, net provision expense was $2.4 million and $1.2 million, respectively.

For both of the third quarters ended September 30, 2024 and 2023, net provision expense was $0.3 million.

The increased provision expense recorded in 2024 was primarily related to an increases of $1.2 in net charge-offs, which was primarily due to a $1.1 million charge-off related to one non-accrual commercial and industrial loan relationship and was partially offset by improving qualitative risk factors of our loan portfolio.

The composition of other operating income for the nine- and three-month periods ended September 30, 2024 and 2023 is illustrated in the following table:

Income as % of

For the first three months of 2025 and 2024, net provision expense was $0.7 million and $0.9 million, respectively.

The decreased provision expense recorded in the first quarter of 2025 when compared to the same period in 2024 was primarily related to the $12.1 million in commercial loan balances moved to non-accrual in the first quarter of 2024.

The composition of other operating income for the three-month periods ended March 31, 2025 and 2024 is illustrated in the following table:

Income as % of

Total Other Income

Nine Months Ended

Three Months Ended

September 30,

(in thousands)

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Other Operating Expenses

The composition of other operating expenses for the nine- and three-month periods ended September 30, 2024 and 2023 is illustrated in the following table:

Expense as % of

The composition of other operating expenses for the three-month periods ended March 31, 2025 and 2024 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 month periods ended September 30, 2024 and September 30, 2023 were 24.6% 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 effective income tax rates as a percentage of income for the three-month periods ended March 31, 2025 and March 31, 2024 were 24.6% and 23.9%, respectively.

GAAP and Non-GAAP Financial Measures

The following tables sets forth certain selected financial data for the periods ended March 31, 2025 and 2024 under GAAP (as reported) and non-GAAP.

A non-GAAP financial measure is a numerical measure of historical or future financial performance, financial position or cash flows that excludes or includes amounts that are required to be disclosed in the most directly comparable measure calculated and presented in accordance with GAAP in the United States.

The Corporation’s management believes that the presentation of non-GAAP financial measures provides investors with a greater understanding of the Corporation’s operating results in addition to the results measured in accordance with GAAP.

While management uses these non-GAAP measures in its analysis of the Corporation’s performance, this information should not be viewed as a substitute for financial results determined in accordance with GAAP or considered to be more important than financial results determined in accordance with GAAP.

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 September 30,

Nine months ended September 30,

Three months ended March 31,

(in thousands, except for per share amount)

Per Share Data

Basic net income per common share

Basic net income per common share - non-GAAP

Diluted net income per common share

Diluted net income per common share - non-GAAP

Basic book value per common share

Diluted book value per common share

Net income - as reported

7 unchanged sentences

Significant Ratios:

Nine months ended September 30,

Three months ended March 31,

Return on Average Assets - as reported

8 unchanged sentences

Balance Sheet Overview

Total assets at September 30, 2024 were $1.9 billion, representing a $10.3 million increase since December 31, 2023.

During the first nine months of 2024, cash and interest-bearing deposits in other banks increased by $12.6 million.

The investment portfolio decreased by $44.3 million due to the maturities of $37.5 million of U.S.

Treasury bonds during the year and normal principal amortization of our mortgage-backed securities (“MBS”) portfolio.

Cash from the investment maturities was shifted to gross loans, which increased by $41.2 million and other real estate OREO decreased by $1.6 million due to sales of properties.

Pension assets increased by $5.1 million due to increased market values.

Deferred tax assets decreased by $1.8 million due to the increased fair values of available for sale securities and pension assets when compared to December 31, 2023.

Total liabilities at September 30, 2024 were $1.7 billion, representing a $1.8 million decrease since December 31, 2023.

Total deposits decreased by $10.6 million when compared to December 31, 2023 related to decreases in savings deposits of $14.8 million, non-interest-bearing demand deposits of $8.2 million, and retail time deposits of $23.7 million and the repayment of $30.0 million in brokered certificates of deposits, partially offset by increases in interest-bearing demand deposits of $31.6 million and money markets of $34.6 million.

Short-term borrowings increased by $4.8 million since December 31, 2023, which were comprised of $29.0 million in overnight borrowings from the Federal Reserve offset by a shift of approximately $22.0 million in overnight investment sweep balances to FDIC insured accounts as a result of management’s strategy to release pledging of investment securities for municipalities to provide additional liquidity.

Long-term borrowings increased by $10.0 million in the first nine months

of 2024 when compared to December 31, 2023.

Maturities of FHLB advances of $40.0 million in March and $40.0 million in September were fully repaid.

During the third quarter of 2024 and after the Federal Reserve announced that it would reduce rates by 50 basis points, management made the strategic decision to reduce funding costs and borrowed $90.0 million in three new FHLB advances with maturities of 12 and 18-months and a weighted average rate of 3.89%.

$41.1 million was utilized to prepay the principal and accrued interest of the BTFP borrowings at a rate of 4.87% that was scheduled to mature in January of 2025 and approximately $30.0 million was utilized to repay overnight borrowings related to the repayment of the September $40.0 million maturity.

The remainder is currently held in overnight cash investments.

Total assets at March 31, 2025 were $2.0 billion, representing a $6.7 million increase since December 31, 2024.

During the first quarter of 2025, cash and interest-bearing deposits in other banks increased by $6.1 million.

The investment portfolio increased by $5.2 million as bonds were purchased to gain yield before long-term rates decline.

Gross loans decreased slightly by $0.9 million.

While loan production was modest during the quarter, amortization and payoffs exceeded growth levels.

Pension assets decreased by $1.8 million due to decreased market values.

Total liabilities at March 31, 2025 were $1.8 billion, representing a $2.3 million increase since December 31, 2024.

Total deposits increased by $48.7 million when compared to December 31, 2024 related primarily to the $50.0 million in new brokered deposits that were obtained in January 2025 to fund the repayment of the $50.0 million in overnight borrowings outstanding at December 31, 2024.

Savings and money market accounts increased by $18.7 million and retail time deposits increased by $2.2 million.

Interest-bearing demand deposits, primarily our ICS product, decreased by $17.9 million and non-interest-bearing deposits decreased by $4.3 million due primarily to seasonal fluctuations in municipal deposit accounts and increased spending by businesses and consumers related to inflation, respectively.

Short-term borrowings decreased by $45.1 million primarily due to the repayment of $50.0 million in overnight borrowings outstanding at December 31, 2024, partially offset by increases in balances of the overnight investment sweep product.

Loan Portfolio

1 unchanged sentence

(in thousands)

September 30, 2024

March 31, 2025

December 31, 2024

3 unchanged sentences

Residential mortgage

Outstanding loans of $1.4 billion at September 30, 2024 reflected growth of $24.9 million since June 30, 2024 and $41.2 million for the first nine months of 2024.

Since December 31, 2023, commercial real estate loans increased by $9.1 million, acquisition and development loans increased by $15.8 million, commercial and industrial loans increased by $3.4 million, residential mortgage loans increased $19.3 million, and consumer loans decreased by $6.5 million.

New commercial loan production for the three months ended September 30, 2024 was approximately $52.1 million.

The pipeline of commercial loans at September 30, 2024 was $19.5 million.

At September 30, 2024, unfunded, committed commercial construction loans totaled approximately $8.3 million.

Commercial amortization and payoffs were approximately $92.8 million through September 30, 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 third quarter of 2024 was approximately $19.9 million, with most of this production comprised of mortgages to be held on balance sheet.

The pipeline of in-house, portfolio loans as of September 30, 2024 was $12.8 million.

The residential mortgage production level increased in the third quarter of 2024 due to the seasonality of this line of business, particularly construction lending.

Unfunded commitments related to residential construction loans totaled $11.9 million at September 30, 2024.

Non-accrual loans totaled $8.1 million at September 30, 2024 compared to $4.0 million at December 31, 2023.

The increase in non-accrual balances at September 30, 2024 was related to two commercial and industrial loan relationships totaling $12.1 million that were moved to non-accrual during the first quarter of 2024.

Subsequent to being moved to non-accrual, one of the borrowers sold a piece of collateral to reduce outstanding balances by approximately $5.5 million.

The Bank also recognized approximately $1.1 million in net charge-offs and $3.0 million in principal reductions on the other commercial and industrial credit from the liquidation of collateral at depressed prices.

The following table presents loans in our commercial real estate portfolio by industry type at September 30, 2024.

Outstanding loans of $1.5 billion at March 31, 2025 reflected a $0.9 million decrease since December 31, 2024.

Since December 31, 2024, commercial real estate loans increased by $6.4 million, acquisition and development loans decreased by $1.2 million, commercial and industrial loans decreased by $5.2 million, residential mortgage loans increased by $1.3 million, and consumer loans decreased by $2.2 million.

New commercial loan production for the three months ended March 31, 2025 was approximately $36.1 million.

The pipeline of commercial loans as of March 31, 2025 was $56.0 million.

Commercial amortization and payoffs were approximately $35.0 million through March 31, 2025, 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 2025 was approximately $11.4 million, with most of this production comprised of in-house mortgages.

The pipeline of in-house, portfolio loans as of March 31, 2025 was $10.9 million.

Non-accrual loans totaled $4.0 million at March 31, 2025 compared to $4.9 million at December 31, 2024.

The decrease in non-accrual balances at March 31, 2025 was related to principal reductions.

The following table presents loans in our commercial real estate portfolio by industry type at March 31, 2025.

(in thousands)

8 unchanged sentences

Health care and social assistance

Management of companies and enterprises

Manufacturing

16 unchanged sentences

(in thousands)

September 30,

Non-accrual loans:

5 unchanged sentences

Accruing Loans Past Due 90 days or more:

Commercial real estate

Residential mortgage

1 unchanged sentence

Total non-accrual and accruing loans past due 90 days or more

Repossessed assets

Other real estate owned

1 unchanged sentence

Individually evaluated loans without a valuation allowance

Individually evaluated loans with a valuation allowance

Total individually evaluated loans

5 unchanged sentences

Allowance for Credit Losses

The ACL represents an amount that, 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 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 provision 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 subjective estimates.

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 significant and 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.

Management believes that it uses relevant information available to make determinations 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.

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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 nine-month periods ended September 30, 2024 and 2023:

For the period ended March 31, 2025 the range of outcomes would produce a 16% reduction or a 63% increase in reserves based on the best-case and worst-case scenarios, respectively.

The following table presents a summary of the activity in the ACL for the three-month periods ended March 31, 2025 and 2024:

(in thousands)

Balance, January 1

Impact of CECL Adoption

Commercial real estate

Acquisition and development

Commercial and industrial

Residential mortgage

Total charge-offs

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Investment Securities

At September 30, 2024, the total amortized cost basis of the available-for-sale investment portfolio was $111.9 million compared to a fair value of $93.2 million.

At March 31, 2025, the total amortized cost basis of the available-for-sale investment portfolio was $119.8 million compared to a fair value of $100.0 million.

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

1 unchanged sentence

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

September 30, 2024

March 31, 2025

December 31, 2024

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Total held to maturity

Total fair value of investment securities available for sale decreased by $4.0 million since December 31, 2023 due primarily to principal paydowns of the portfolio.

At September 30, 2024, the securities classified as available-for-sale included a net unrealized loss of $18.8 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 $40.2 million since December 31, 2023 due primarily to the maturity of $37.5 million in U.S.

Treasury bonds and $2.7 million in other principal paydowns of the portfolio.

Proceeds from the maturities and principal paydowns were utilized for the repayment of FHLB advances.

Total fair value of investment securities available for sale increased by $5.5 million since December 31, 2024 as cash flow from the portfolio was reinvested into securities at higher yields and to maintain balances for liquidity.

At March 31, 2025, the securities classified as available-for-sale included a net unrealized loss of $19.8 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 $1.4 million since December 31, 2024 due primarily to principal paydowns of the portfolio.

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

The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).

Level 3 prices or valuation techniques require inputs that are both significant to the valuation assumptions and are not readily observable in the market (i.e.

supported with little or

no market activity).

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 $78.4 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $14.9 million at September 30, 2024.

Approximately $85.3 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $15.8 million at March 31, 2025.

The remaining $14.7 million of the available-for-sale securities represents the entire collateralized debt obligation portfolio, which was valued using significant unobservable inputs (Level 3 assets).

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(in thousands)

September 30, 2024

March 31, 2025

December 31, 2024

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Total Deposits

Total deposits at September 30, 2024 decreased by $10.6 million when compared to December 31, 2023.

Non-interest-bearing deposits decreased by $8.2 million.

Interest-bearing demand deposits increased by $31.6 million year-to-date, primarily related to the shift of approximately $22.0 million in overnight investment sweep balances into FDIC insured accounts due to management’s strategy to release pledging of investment securities for municipalities to provide additional liquidity as well as seasonal fluctuations in municipal deposit balances compared to December 2023.

Money market accounts increased by $34.6 million due primarily to the expansion of current relationships and new relationships during the first nine months.

Traditional savings accounts decreased by $14.8 million and time deposits decreased by $53.7 million.

The decrease in time deposits was due to a decrease of $23.7 million in retail CDs primarily related to maturities of a nine-month special CD promotion in 2023 and the maturity and repayment of $30.0 million in brokered CDs during the year.

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 September 30, 2024 and December 31, 2023.

September 30, 2024

Total deposits at March 31, 2025 increased by $48.7 million when compared to December 31, 2024 driven by the purchase of $50.0 million in brokered certificates of deposit with an average interest rate of 4.24% to fully repay the $50.0 million in overnight borrowings that were outstanding at December 31, 2024.

Savings and money market accounts increased by $18.7 million due primarily to the expansion of current and new relationships throughout the first three months of 2025.

Non-interest-bearing checking deposits decreased by $4.3 million and interest-bearing checking deposits decreased by $17.9 million due to seasonal fluctuations in municipal and commercial account balances and increased spending by businesses and consumers related to inflation.

Retail time deposits increased by $2.2 million since December 31, 2024.

March 31, 2025

December 31, 2024

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Uninsured and uncollateralized deposits

The following table summarizes the percentage of deposit balances from retail customers compared to business customers as of September 30, 2024 and December 31, 2023.

September 30, 2024

The following table summarizes the percentage of deposit balances from retail customers compared to business customers as of March 31, 2025 and December 31, 2024.

March 31, 2025

December 31, 2024

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(in thousands)

September 30,

Overnight borrowings from Federal Reserve Discount Window

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Total long-term borrowings

Short-term borrowings increased by $4.8 million when compared to December 31, 2023, which were comprised of $29.0 million in overnight borrowings from the Federal Reserve, offset by a shift of approximately $22.0 million in overnight investment sweep balances into FDIC insured accounts due to management’s strategy to release pledging of investment securities for municipalities to provide additional liquidity.

Long-term borrowings increased by $10.0 million in the first nine months of 2024 when compared to December 31, 2023.

Maturities of FHLB advances of $40.0 million in March and $40.0 million in September were fully repaid.

$41.1 million was utilized to prepay the principal and accrued interest of the BTFP borrowing at a rate of 4.87% that was scheduled to mature in January of 2025 and approximately $30.0 million was utilized to repay overnight borrowings related to the repayment of the September $40.0 million maturity.

The remainder is currently held in overnight cash investments.

Short-term borrowings decreased by $45.1 million as a result of the purchase of a $50.0 million brokered CD to fully repay the overnight borrowings outstanding at December 31, 2024, partially offset by increases in balances of the overnight investment sweep product.

There were no changes in long-term borrowings when comparing March 31, 2025 to December 31, 2024.

Liquidity Management

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● 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.

We actively manage our liquidity position through meetings of a sub-committee of executive management, 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.

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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.

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:

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, and commercial real estate loans.

Secured line of credit with the Fed Discount Window for use in borrowing funds up to 90 days, using municipal securities as collateral.

● Unsecured Fed Funds lines of credit with upstream correspondent banks (M&T Bank, Atlantic Community Bankers Bank, Community Bankers Bank, PNC Financial Services, Pacific Coast Banker’s Bank and Zions Bancorp).

● Secured advances with the FHLB of Atlanta, which are collateralized by eligible one-to-four family residential mortgage loans, home equity lines of credit, commercial real estate loans.

Cash and various securities may also be pledged as collateral.

● Secured line of credit with the Federal Reserve Discount Window for use in borrowing funds up to 90 days, using eligible investment securities as collateral.

● Brokered deposits, including CDs and money market funds, provide a method to generate deposits quickly.

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

The following table presents sources of liquidity available to the Corporation as of September 30, 2024.

The following table presents sources of liquidity available to the Corporation as of March 31, 2025.

(in thousands)

7 unchanged sentences

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

10 unchanged sentences

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

At September 30, 2024, we were asset sensitive.

At March 31, 2025, we were asset sensitive.

Our interest rate risk management goals are:

5 unchanged sentences

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

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

These guidelines are based on management’s outlook regarding future

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

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

14 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, 2024 and December 31, 2023, management estimated the following changes in net interest income, assuming the indicated rate changes:

Based on the simulation analysis performed at March 31, 2025 and December 31, 2024, management estimated the following changes in net interest income, assuming the indicated rate changes:

(in thousands)

September 30,

+400 basis points

6 unchanged sentences

-400 basis points

Due to the current rate environment and changes to prepayment speeds, the Corporation became slightly more asset sensitive as compared to December 31, 2024.

All changes in net interest income from our simulation analysis remains within our policy limits.

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.

16 unchanged sentences

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 both September 30, 2024 and December 31, 2023, the Bank was considered “well capitalized” under the regulatory framework for prompt corrective action.

As of both March 31, 2025 and December 31, 2024, the Bank was considered “well capitalized” under the regulatory framework for prompt corrective action.

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

1 unchanged sentence

The Corporation enters into contractual obligations in the normal course of business.

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

Comparing September 30, 2024 to December 31, 2023, short-term borrowings increased by $4.8 million as the Bank borrowed $29.0 million in overnight borrowings from the Federal Reserve, which was partially offset by a decrease of $24.2 million in other short-term borrowings due primarily to the shift of approximately $22.0 million in overnight investment sweep balances into the ICS product to release pledging of investment securities for municipalities to increase available liquidity.

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

Comparing March 31, 2025 to December 31, 2024, short-term borrowings decreased by $45.1 million primarily due to the repayment of $50.0 million in overnight borrowings outstanding at December 31, 2024, partially offset by increases in balances of the overnight investment sweep product.

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 decrease of $14.8 million in commitments at September 30, 2024 when compared to December 31, 2023 was due to businesses and consumers utilizing construction funding.

The decrease of $3.1 million in commitments at March 31, 2025 when compared to December 31, 2024 was due to businesses and consumers utilizing construction funding.

These balances shifted to loans outstanding.

For the nine-month periods ended September 30, 2024 and 2023, net credit loss expense for off-balance sheet exposures was a credit of approximately $17,000 and a credit of approximately $14,000, respectively.

For the third quarter of 2024 and 2023, net credit loss for off-balance sheet exposures was an expense of approximately $55,000 and a credit of approximately $104,000, respectively.

For the three-month periods ended March 31, 2025 and 2024, net credit loss expense for off-balance sheet exposures was a credit of approximately $1,000 and a credit of approximately $15,000, respectively.

Quantitative and Qualitative Disclosures about Market Risk

First United Corporation is a “smaller reporting company” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and, accordingly, is not required to include the information required by this item.

First United Corporation is a “smaller reporting company” as defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended, and, accordingly, is not required to include the information required by this item.

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