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Table of Contents

th

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

        For quarterly period ended June 30, 2024

    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

        For the transition period from _______________ to ________________

Commission file number 0-14237

First United Corporation

(Exact name of registrant as specified in its charter)

Maryland

    

52-1380770

(State or other jurisdiction of
incorporation or organization)

(I. R. S. Employer Identification No.)

 

19 South Second Street, Oakland, Maryland

21550-0009

(Address of principal executive offices)

(Zip Code)

(800) 470-4356

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

    

Trading Symbols

    

Name of each exchange on which registered

Common Stock

FUNC

Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated filer

Accelerated Filer 

Non-Accelerated filer

Smaller Reporting Company 

Emerging Growth Company 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standard provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:   6,465,601 shares of common stock, par value $0.01 per share, as of July 31, 2024.

Table of Contents

INDEX TO QUARTERLY REPORT

FIRST UNITED CORPORATION

Page

PART I. FINANCIAL INFORMATION

3

Item 1.

Financial Statements (unaudited)

3

Consolidated Statements of Financial Condition – June 30, 2024 and December 31, 2023

3

Consolidated Statements of Operations – for the six and three months ended June 30, 2024 and 2023

4

Consolidated Statements of Comprehensive Income – for the six and three months ended June 30, 2024 and 2023

6

Consolidated Statements of Changes in Shareholders’ Equity – for the six and three months ended June 30, 2024 and 2023

8

Consolidated Statements of Cash Flows – for the six months ended June 30, 2024 and 2023

9

Notes to Consolidated Financial Statements

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

47

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

68

Item 4.

Controls and Procedures

68

PART II. OTHER INFORMATION

69

Item 1.

Legal Proceedings

69

Item 1A.

Risk Factors

69

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

69

Item 3.

Defaults upon Senior Securities

69

Item 4.

Mine Safety Disclosures

69

Item 5.

Other Information

69

Item 6.

Exhibits

70

SIGNATURES

71

2

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

First United Corporation and Subsidiaries

Consolidated Statements of Financial Condition

(In thousands, except share data - Unaudited)

    

June 30,
2024

    

December 31,
2023

Assets

Cash and due from banks

$

43,635

$

48,343

Interest bearing deposits in banks

1,457

1,410

Cash and cash equivalents

45,092

49,753

Investment securities – available for sale (at fair value)

92,954

97,169

Investment securities – held to maturity, net of allowance for credit losses of $45 at June 30, 2024 and December 31, 2023 (fair value $143,030 at June 30, 2024 and $184,415 at December 31, 2023)

174,197

214,297

Restricted investment in bank stock, at cost

3,395

5,250

Loans held for sale

447

443

Loans

1,422,975

1,406,667

Unearned fees

(306)

(340)

Allowance for credit losses

(17,923)

(17,480)

Net loans

1,404,746

1,388,847

Premises and equipment, net

29,688

31,459

Goodwill and other intangibles

11,938

12,103

Bank owned life insurance

48,267

47,607

Deferred tax assets

11,214

11,133

Other real estate owned, net

2,978

4,493

Right of use assets

1,230

1,367

Pension asset

12,850

11,208

Accrued interest receivable

7,115

7,487

Other assets

22,488

23,244

Total Assets

$

1,868,599

$

1,905,860

Liabilities and Shareholders’ Equity

Liabilities:

Non-interest bearing deposits

$

423,970

$

427,670

Interest bearing deposits

1,113,101

1,123,307

Total deposits

1,537,071

1,550,977

Short-term borrowings

62,564

45,418

Long-term borrowings

70,929

110,929

Operating lease liability

1,412

1,556

SERP deferred compensation

9,979

9,777

Allowance for credit losses on off-balance sheet credit exposures

801

873

Accrued interest payable

1,352

612

Other liabilities

19,021

22,515

Dividends payable

1,293

1,330

Total Liabilities

1,704,422

1,743,987

Shareholders’ Equity:

Common Stock – par value $0.01 per share; Authorized 25,000,000 shares; issued and outstanding 6,465,601 shares at June 30, 2024 and 6,639,888 at December 31, 2023

65

66

Surplus

20,280

23,734

Retained earnings

179,892

173,900

Accumulated other comprehensive loss

(36,060)

(35,827)

Total Shareholders’ Equity

164,177

161,873

Total Liabilities and Shareholders’ Equity

$

1,868,599

$

1,905,860

See accompanying notes to the consolidated financial statements

3

Table of Contents

First United Corporation and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

Six Months Ended

June 30,

    

2024

    

2023

(Unaudited)

Interest income

Interest and fees on loans

$

39,439

$

32,224

Interest on investment securities

Taxable

3,441

3,547

Exempt from federal income tax

106

538

Total investment income

3,547

4,085

Other

2,025

1,492

Total interest income

45,011

37,801

Interest expense

Interest on deposits:

Savings

94

135

Interest-bearing transaction accounts

9,712

5,128

Time deposits

2,858

1,765

Total interest on Deposits

12,664

7,028

Interest on short-term borrowings

970

60

Interest on long-term borrowings

2,327

2,021

Total Interest Expense

15,961

9,109

Net Interest income

29,050

28,692

Credit loss expense - loans

2,212

848

Credit loss (credit)/expense - off-balance sheet credit exposures

(72)

90

Total credit loss expense

2,140

938

Net interest income after provision for credit losses

26,910

27,754

Other operating income

Net gains on sales of residential mortgage loans

141

140

Net gains

141

140

Other Income

Service charges on deposit accounts

1,112

1,062

Other service charges

440

476

Trust department

4,443

3,995

Debit card income

1,931

1,986

Bank owned life insurance

660

616

Brokerage commissions

857

555

Other

132

132

Total other income

9,575

8,822

Total other operating income

9,716

8,962

Other operating expenses

Salaries and employee benefits

14,413

14,166

FDIC premiums

554

470

Equipment expense

1,558

1,527

Occupancy expense of premises

1,606

1,527

Data processing expense

2,740

2,612

Marketing expense

318

280

Professional services

935

1,014

Contract labor

267

291

Telephone

212

226

Total OREO expense, net

100

142

Investor relations

144

206

Contributions

116

143

Other

2,282

2,545

Total other operating expenses

25,245

25,149

Income before income tax expense

11,381

11,567

Provision for income tax expense

2,769

2,778

Net Income

$

8,612

$

8,789

Basic net income per share

$

1.31

$

1.32

Diluted net income per share

$

1.31

$

1.31

Weighted average number of basic shares outstanding

6,585

6,689

Weighted average number of diluted shares outstanding

6,596

6,707

Dividends declared per common share

$

0.40

$

0.40

See accompanying notes to the consolidated financial statements

4

Table of Contents

First United Corporation and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

Three Months Ended

June 30,

    

2024

    

2023

(Unaudited)

Interest income

Interest and fees on loans

$

20,221

$

16,780

Interest on investment securities

Taxable

1,697

1,779

Exempt from federal income tax

53

268

Total investment income

1,750

2,047

Other

1,142

1,145

Total interest income

23,113

19,972

Interest expense

Interest on deposits:

Savings

46

56

Interest-bearing transaction accounts

5,011

2,941

Time deposits

1,341

1,353

Total interest on Deposits

6,398

4,350

Interest on short-term borrowings

509

29

Interest on long-term borrowings

968

1,419

Total Interest Expense

7,875

5,798

Net Interest income

15,238

14,174

Credit loss expense - loans

1,251

434

Credit loss credit - off-balance sheet credit exposures

(57)

(39)

Total credit loss expense/(credit)

1,194

395

Net interest income after provision for credit losses

14,044

13,779

Other operating income

Gains on sales of residential mortgage loans

59

86

Net gains

59

86

Other Income

Service charges on deposit accounts

556

546

Other service charges

225

244

Trust department

2,255

2,025

Debit card income

999

1,031

Bank owned life insurance

334

311

Brokerage commissions

362

258

Other

51

68

Total other income

4,782

4,483

Total other operating income

4,841

4,569

Other operating expenses

Salaries and employee benefits

7,256

6,870

FDIC premiums

285

277

Equipment

635

747

Occupancy

652

742

Data processing

1,422

1,306

Marketing

184

160

Professional services

449

520

Contract labor

84

157

Telephone

103

116

Total other real estate owned expenses, net

14

18

Investor relations

91

123

Contributions

66

79

Other

1,123

1,396

Total other operating expenses

12,364

12,511

Income before income tax expense

6,521

5,837

Provision for income tax expense

1,607

1,423

Net Income

$

4,914

$

4,414

Basic net income per common share

$

0.75

$

0.66

Diluted net income per common share

$

0.75

$

0.66

Weighted average number of basic shares outstanding

6,527

6,704

Weighted average number of diluted shares outstanding

6,537

6,718

Dividends declared per common share

$

0.20

$

0.20

See accompanying notes to the consolidated financial statements

5

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First United Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

Six Months Ended

June 30,

2024

2023

Comprehensive Income

(Unaudited)

Net Income

$

8,612

$

8,789

Other comprehensive loss, net of tax and reclassification adjustments:

Available for sale securities:

Unrealized holding losses on investments with credit related impairment

$

(633)

$

(1,408)

Reclassification adjustment for accretable yield realized in income

101

101

Other comprehensive loss on investments with credit related impairment

(734)

(1,509)

Unrealized holding losses on all other AFS investments

$

(1,341)

$

(881)

Other comprehensive loss on all other AFS investments

(1,341)

(881)

Held to Maturity Securities

Unrealized holding gains on securities transferred to held to maturity

$

$

Reclassification adjustment for amortization realized in income

(320)

(345)

Other comprehensive income on HTM investments

320

345

Cash flow hedges:

Unrealized holding gains on cash flow hedges

$

4

$

16

Other comprehensive income on cash flow hedges

4

16

Pension plan liability:

Unrealized holding gains on pension plan liability

$

951

$

105

Reclassification adjustment for amortization of unrecognized loss realized in income

(406)

(499)

Other comprehensive income on pension plan liability

1,357

604

SERP liability:

Unrealized holding gains on SERP liability

$

$

Reclassification adjustment for amortization of unrealized (gain)/loss realized in income

(78)

4

Other comprehensive income/(loss) on SERP liability

78

(4)

Other comprehensive loss before income tax

(316)

(1,429)

Income tax effect related to other comprehensive loss

83

345

Other comprehensive loss, net of tax

(233)

(1,084)

Comprehensive income

$

8,379

$

7,705

See accompanying notes to the consolidated financial statements

6

Table of Contents

First United Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

Three Months Ended

June 30,

    

2024

    

2023

Comprehensive Income

(Unaudited)

Net Income

$

4,914

$

4,414

Other comprehensive loss, net of tax and reclassification adjustments:

Available for sale securities:

Unrealized holding (losses)/gains on investments with credit related impairment

$

(843)

$

198

Reclassification adjustment for accretable yield realized in income

51

51

Other comprehensive (loss)/income on investments with credit related impairment

(894)

147

Unrealized holding losses on all other AFS investments

$

(717)

$

(2,221)

Other comprehensive loss on all other AFS investments

(717)

(2,221)

Held to Maturity Securities

Unrealized holding losses on securities transferred to held to maturity

Unrealized holding gains on HTM investments

$

$

Reclassification adjustment for amortization realized in income

(160)

(164)

Other comprehensive income on HTM investments

160

164

Cash flow hedges:

Unrealized holding (losses)/gains on cash flow hedges

$

(69)

$

204

Other comprehensive (loss)/income on cash flow hedges

(69)

204

Pension plan liability:

Unrealized holding losses on pension plan liability

$

(538)

$

(63)

Reclassification adjustment for amortization of unrecognized loss realized in income

(203)

(249)

Other comprehensive (loss)/income on pension plan liability

(335)

186

SERP liability:

Unrealized holding losses on SERP liability

$

$

Reclassification adjustment for amortization of unrealized loss realized in income

(39)

2

Other comprehensive income/(loss) on SERP liability

39

(2)

Other comprehensive loss before income tax

(1,816)

(1,522)

Income tax benefit related to other comprehensive income

478

369

Other comprehensive loss, net of tax

(1,338)

(1,153)

Comprehensive income

$

3,576

$

3,261

See accompanying notes to the consolidated financial statements

7

Table of Contents

First United Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except per share data)

    

Common
Stock

    

Surplus

    

Retained
Earnings

    

Accumulated
Other
Comprehensive
Loss

    

Total
Shareholders'
Equity

Balance at January 1, 2024

$

66

$

23,734

$

173,900

$

(35,827)

$

161,873

Net income

3,698

3,698

Other comprehensive income

1,105

1,105

Stock based compensation

57

57

Common stock issued - 8,757 shares

74

74

Common stock dividend declared - $0.20 per share

(1,326)

(1,326)

Balance at March 31, 2024

$

66

$

23,865

$

176,272

$

(34,722)

$

165,481

Net income

4,914

4,914

Other comprehensive loss

(1,338)

(1,338)

Stock based compensation

376

376

Common stock issued - 18,756 shares

70

70

Common stock repurchase - 201,800 shares

(1)

(4,031)

(4,032)

Common stock dividend declared - $0.20 per share

(1,294)

(1,294)

Balance at June 30, 2024

$

65

$

20,280

$

179,892

$

(36,060)

$

164,177

First United Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except per share data)

    

Common
Stock

    

Surplus

    

Retained
Earnings

    

Accumulated
Other
Comprehensive
Loss

    

Total
Shareholders'
Equity

Balance at January 1, 2023

$

67

$

24,409

$

166,343

$

(39,026)

$

151,793

Adoption of ASC 326- Financial Instruments- Credit Losses

(2,155)

(2,155)

Net income

4,375

4,375

Other comprehensive income

69

69

Stock based compensation

56

56

Common stock issued - 22,282 shares

64

64

Common stock dividend declared - $0.20 per share

(1,334)

(1,334)

Balance at March 31, 2023

$

67

$

24,529

$

167,229

$

(38,957)

$

152,868

Net income

4,414

4,414

Other comprehensive loss

(1,153)

(1,153)

Stock based compensation

298

298

Common stock issued - 18,416 shares

74

74

Common stock dividend declared - $0.20 per share

(1,345)

(1,345)

Balance at June 30, 2023

$

67

$

24,901

$

170,298

$

(40,110)

$

155,156

See accompanying notes to the consolidated financial statement

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First United Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

Six Months Ended

June 30,

    

2024

    

2023

(Unaudited)

Operating activities

Net income

$

8,612

$

8,789

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for credit losses

2,140

938

Depreciation

1,952

1,700

Stock based compensation

433

354

Gain on sales of other real estate owned

(126)

(36)

Write-downs of other real estate owned, net

(69)

Originations of loans held for sale

(4,100)

(1,337)

Proceeds from sales of loans held for sale

4,237

977

Gains from sales of loans held for sale

(141)

(140)

Net accretion of investment securities discounts and premiums- AFS

(48)

(25)

Net accretion of investment securities discounts and premiums- HTM

(317)

(405)

Amortization of intangible assets

165

165

Earnings on bank owned life insurance

(660)

(616)

Amortization of deferred loan (fees)/costs, net

(86)

27

Amortization of operating lease right of use asset

137

164

Decrease/(increase) in accrued interest receivable and other assets

1,326

(4,259)

Deferred tax (benefit)/expense

(81)

1,038

Operating lease liability

(144)

(186)

(Decrease)/increase in accrued interest payable and other liabilities

(2,548)

967

Net cash provided by operating activities

10,751

8,046

Investing activities

Proceeds from maturities/calls of investment securities - AFS

2,186

3,358

Proceeds from maturities/calls of investment securities - HTM

40,417

5,305

Proceeds from sales of other real estate owned

1,710

172

Net decrease/(increase) in restricted stock

1,855

(3,463)

Net increase in loans

(18,094)

(71,239)

Purchases of premises and equipment

(181)

(284)

Net cash provided by/(used in) by investing activities

27,893

(66,151)

Financing activities

Net (decrease)/increase in deposits

(13,906)

9,226

Issuance of common stock

144

138

Cash dividends paid on common stock

(2,657)

(2,536)

Net increase/(decrease) in short-term borrowings

17,146

(14,487)

Stock repurchase

(4,032)

Proceeds from long-term borrowings

80,000

Payments of long-term borrowings

(40,000)

Net cash (used in)/provided by financing activities

(43,305)

72,341

(Decrease)/increase in cash and cash equivalents

(4,661)

14,236

Cash and cash equivalents at beginning of the year

49,753

74,315

Cash and cash equivalents at end of period

$

45,092

$

88,551

Supplemental information

Interest paid

$

15,221

$

8,726

Taxes paid

$

923

$

2,550

Non-cash investing activities:

Transfers from loans to other real estate owned

$

69

$

176

See accompanying notes to the consolidated financial statements

9

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FIRST UNITED CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Basis of Presentation

The financial information is presented in accordance with generally accepted accounting principles and general practice for financial institutions in the United States of America (“GAAP”).  First United Corporation has prepared these unaudited condensed consolidated financial statements in accordance with GAAP for interim financial information, rules of the Securities and Exchange Commission that permit reduced disclosure for interim periods, and Article 8 of Regulation S-X.  Operating results for the six- and three-month periods ended June 30, 2024 are not necessarily indicative of the results that may be expected for the full year or for any future interim period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2023.

In preparing financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of financial statements.  In addition, these estimates and assumptions affect revenues and expenses in the financial statements and, as such, actual results could differ from those estimates.

Certain reclassifications have been made to prior year amounts to conform with current year classifications.  These reclassifications did not have a material impact on the Corporation’s consolidated financial condition or results of operations.  

In the opinion of management, all adjustments (all of which are of a normal recurring nature) that are necessary for a fair statement are reflected in the unaudited condensed consolidated financial statements. 

Principles of Consolidation

The consolidated financial statements include the accounts of First United Corporation, First United Bank & Trust (the “Bank”), First United Statutory Trust I, First United Statutory Trust II, OakFirst Loan Center, LLC, OakFirst Loan Center, Inc., First OREO Trust and FUBT OREO I, LLC. All significant inter-company accounts and transactions have been eliminated.

As used in these notes, the terms “the Corporation” “we”, “us”, and “our” refer to First United Corporation and, unless the context clearly requires otherwise, its consolidated subsidiaries.

The Corporation has evaluated events and transactions occurring subsequent to the statement of financial condition date of June 30, 2024 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

Newly Adopted Pronouncements in 2024

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, “Reference Rate Reform (Topic 848):  Facilitation of Reference Rate Reform on Financial Reporting.”  The amendments in ASU 2020-04 provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting.  The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from the London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks.  Modified contracts that meet certain scope guidance are eligible for relief from these modification accounting requirements in GAAP.  The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination.  The amendments in  ASU 2020-04 are effective for all entities between March 12, 2020 and December 31, 2022.  In December 2022, FASB issued ASU No. 2022-06: “Reference Rate Reform (Topic 848):  Deferral of the Sunset Date of Topic 848.”  The amendments in ASU 2020-06 defer the sunset date for applying the reference rate reform relief by two years to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

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The Corporation has identified all known LIBOR exposures, created a plan to address the exposures, and continues to communicate with all stakeholders to transition to alternative reference rates.  The Corporation had no financial instruments tied to LIBOR at June 30, 2024.   The implementation of ASU 2020-04 did not have a material impact on our financial statements.

Note 2 – Accounting Statements Issued but Not Yet Adopted

In November 2023, FASB issued ASU No. 2023-07, “Segment Reporting (Topic 280):  Improvement to Reportable Segment Disclosures.”  ASU 2023-07 expands segment disclosure requirements for public entities to require disclosure of significant segment expense and other segment items on an annual and interim basis and to provide in interim periods all disclosures about a reportable segment’s profit or loss and assets that are currently required annually.  ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within the fiscal years beginning after December 15, 2024.  Early adoption is permitted.  ASU 2023-07 is not expected to have a significant impact on our financial statements.

In December 2023, FASB issued ASU No. 2023-09, “Income Taxes (Topic 740):  Improvements to Income Tax Disclosures.”  ASU 2023-09 requires public business entities to disclose in their rate reconciliation table additional categories of information about Federal, state, and foreign income taxes and to provide more details about the reconciling items in some categories if items meet a quantitative threshold.  ASU 2023-09 also requires all entities to disclose income taxes paid, net of refunds, disaggregated by Federal, state, and foreign taxes for annual periods and to disaggregate the information by jurisdiction based on a quantitative threshold, among other things.  ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. ASU 2023-09 is not expected to have a significant impact on our financial statements.

In March 2024, FASB issued ASU No. 2024-01, “Compensation- Stock Compensation (Topic 718):  Scope Application of Profits Interest and Similar Awards.”  ASU 2024-01 provides an illustrative example that includes four fact patterns to demonstrate how an entity should apply the scope guidance in paragraph 718-10-15-3 to determine whether a profits interest award should be accounted for in accordance with Topic 718.   ASU 2024-01 is effective for fiscal years beginning after December 15, 2024.   ASU 2024-01 is not expected to have a significant impact on our financial statements.

Note 3 – Earnings Per Common Share

Basic earnings per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents. Diluted earnings per share is derived by dividing net income available to common shareholders by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents, such as restricted stock units (“RSUs”). There were no anti-dilutive shares outstanding at June 30, 2024 or 2023.

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The following table sets forth the calculation of basic and diluted earnings per common share for the six- and three-month periods ended June 30, 2024 and 2023:

Six months ended June 30,

2024

2023

    

    

Average

    

Per Share

    

    

Average

    

Per Share

(in thousands, except for per share amount)

Income

Shares

Amount

Income

Shares

Amount

Basic Earnings Per Share:

Net income

$

8,612

6,585

$

1.31

$

8,789

6,689

$

1.32

Diluted Earnings Per Share:

Restricted stock units

11

18

Net income

$

8,612

6,596

$

1.31

$

8,789

6,707

$

1.31

Three months ended June 30,

2024

2023

Average

Per Share

Average

Per Share

(in thousands, except for per share amount)

Income

Shares

Amount

Income

Shares

Amount

Basic Earnings Per Share:

Net income

$

4,914

6,527

$

0.75

$

4,414

6,704

$

0.66

Diluted Earnings Per Share:

Restricted stock units

10

11

Net income

$

4,914

6,537

$

0.75

$

4,414

6,718

$

0.66

Note 4 – Investments

The following tables show a comparison of amortized cost and fair values of investment securities at June 30, 2024 and December 31, 2023:

(in thousands)

    

Amortized
Cost

    

Gross
Unrealized
Gains

    

Gross
Unrealized
Losses

    

Allowance for Credit Losses

    

Estimated Fair Value

June 30, 2024

Available for Sale:

U.S. government agencies

$

7,000

$

$

965

$

$

6,035

Residential mortgage-backed agencies

23,825

4,542

19,283

Commercial mortgage-backed agencies

35,901

8,593

27,308

Collateralized mortgage obligations

18,927

3,478

15,449

Obligations of states and political subdivisions

10,476

309

10,167

Corporate bonds

1,000

263

737

Collateralized debt obligations

18,660

4,685

13,975

Total available for sale

$

115,789

$

$

22,835

$

$

92,954

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(in thousands)

    

Amortized
Cost

    

Gross
Unrecognized
Gains

    

Gross
Unrecognized
Losses

    

Estimated Fair Value

    

Allowance for Credit Losses

June 30, 2024

Held to Maturity:

U.S. government agencies

$

68,157

$

$

11,374

$

56,783

$

Residential mortgage-backed agencies

28,841

3,517

25,324

Commercial mortgage-backed agencies

21,223

5,715

15,508

Collateralized mortgage obligations

51,513

10,068

41,445

Obligations of states and political subdivisions

4,508

143

681

3,970

45

Total held to maturity

$

174,242

$

143

$

31,355

$

143,030

$

45

(in thousands)

    

Amortized
Cost

    

Gross
Unrealized
Gains

    

Gross
Unrealized
Losses

    

Allowance for Credit Losses

    

Estimated Fair Value

December 31, 2023

Available for Sale:

U.S. government agencies

$

7,000

$

$

966

$

$

6,034

Residential mortgage-backed agencies

24,781

4,218

20,563

Commercial mortgage-backed agencies

36,258

7,841

28,417

Collateralized mortgage obligations

19,725

3,369

16,356

Obligations of states and political subdivisions

10,486

15

189

10,312

Corporate bonds

1,000

222

778

Collateralized debt obligations

18,671

3,962

14,709

Total available for sale

$

117,921

$

15

$

20,767

$

$

97,169

(in thousands)

    

Amortized
Cost

    

Gross
Unrecognized
Gains

    

Gross
Unrecognized
Losses

    

Estimated Fair Value

    

Allowance for Credit Losses

December 31, 2023

Held to Maturity:

U.S. treasuries

$

37,462

$

$

243

$

37,219

$

U.S. government agencies

68,014

10,985

57,029

Residential mortgage-backed agencies

29,588

42

2,913

26,717

Commercial mortgage-backed agencies

21,413

5,361

16,052

Collateralized mortgage obligations

53,261

9,973

43,288

Obligations of states and political subdivisions

4,604

177

671

4,110

45

Total held to maturity

$

214,342

$

219

$

30,146

$

184,415

$

45

The Corporation utilizes FASB Accounting Standards Codification (“ASC”) Topic 326 to evaluate its available-for-sale (“AFS”) and held-to-maturity (“HTM”) debt security portfolio for expected credit losses.  For AFS debt securities in an unrealized loss position, the Corporation first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis.  If either criteria is met, the security’s amortized cost basis is written down to fair value through income.  For AFS debt securities that do not meet the aforementioned criteria, the Corporation evaluates whether the decline in fair value has resulted from credit losses or other factors.  In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors.  If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security.  If the present value of

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cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses (“ACL”) is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.  Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, as a non-credit-related impairment.

Changes in the ACL are recorded as a provision for (or reversal of) credit losses.  Losses are charged against the ACL when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met.  Any impairment not recorded through an allowance for credit loss is recognized in other comprehensive income as a non-credit-related impairment.

The Corporation has made the policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in other assets in the Consolidated Balance Sheets.  AFS debt securities are placed on non-accrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due.  Accrued interest receivable is reversed against interest income when a security is placed on non-accrual status.  Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable.

The Corporation separately evaluates its HTM investment securities for any credit losses.  The Corporation pools like securities and calculates expected credit losses through an estimate based on a security’s credit rating, which is recognized as part of the ACL for HTM securities and is included in the balance of HTM securities held to maturity on the Consolidated Balance Sheets.  If the Corporation determines that a security indicates evidence of deteriorated credit quality, the security is individually evaluated and a discounted cash flow analysis is performed and compared to the amortized cost basis.

The Corporation recorded ACL of approximately $45,000 as of June 30, 2024 and December 31, 2023, related to one bond in its HTM security portfolio.

14

Table of Contents

The following tables show the Corporation’s investment securities with gross unrealized and unrecognized losses and fair values at June 30, 2024 and December 31, 2023, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

Less than 12 months

12 months or more

(in thousands)

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

June 30, 2024

Available for Sale:

U.S. government agencies

$

$

$

6,035

$

965

2

Residential mortgage-backed agencies

19,283

4,542

3

Commercial mortgage-backed agencies

27,308

8,593

8

Collateralized mortgage obligations

15,449

3,478

9

Obligations of states and political subdivisions

2,205

30

3

5,041

279

4

Corporate Bonds

737

263

1

Collateralized debt obligations

13,975

4,685

9

Total available for sale

$

2,205

$

30

3

$

87,828

$

22,805

36

Less than 12 months

12 months or more

(in thousands)

    

Fair
Value

    

Unrecognized
Losses

    

Number of
Investments

    

Fair
Value

    

Unrecognized
Losses

    

Number of
Investments

June 30, 2024

Held to Maturity:

U.S. government agencies

$

$

$

56,783

$

11,374

9

Residential mortgage-backed agencies

3,923

15

2

21,320

3,502

35

Commercial mortgage-backed agencies

15,508

5,715

2

Collateralized mortgage obligations

41,445

10,068

8

Obligations of states and political subdivisions

2,198

681

1

Total held to maturity

$

3,923

$

15

2

$

137,254

$

31,340

55

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Less than 12 months

12 months or more

(in thousands)

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

December 31, 2023

Available for Sale:

U.S. government agencies

$

$

$

6,034

$

966

2

Residential mortgage-backed agencies

20,563

4,218

3

Commercial mortgage-backed agencies

28,417

7,841

8

Collateralized mortgage obligations

16,356

3,369

9

Obligations of states and political subdivisions

1,445

20

2

6,668

169

3

Corporate Bonds

778

222

1

Collateralized debt obligations

14,709

3,962

9

Total available for sale

$

1,445

$

20

2

$

93,525

$

20,747

35

Less than 12 months

12 months or more

(in thousands)

    

Fair
Value

    

Unrecognized
Losses

    

Number of
Investments

    

Fair
Value

    

Unrecognized
Losses

    

Number of
Investments

December 31, 2023

Held to Maturity:

U.S. treasuries

$

$

$

37,219

$

243

4

U.S. government agencies

57,029

10,985

9

Residential mortgage-backed agencies

22,613

2,913

35

Commercial mortgage-backed agencies

16,052

5,361

2

Collateralized mortgage obligations

43,288

9,973

8

Obligations of states and political subdivisions

2,205

671

1

Total held to maturity

$

$

$

178,406

$

30,146

59

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The amortized cost and estimated fair value of securities by contractual maturity at June 30, 2024 are shown in the following table. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

June 30, 2024

(in thousands)

    

Amortized
Cost

    

Fair
Value

Available for Sale:

Due in one year or less

$

2,670

$

2,670

Due after one year through five years

5,250

4,955

Due after five years through ten years

4,670

4,313

Due after ten years

24,546

18,976

37,136

30,914

Residential mortgage-backed agencies

23,825

19,283

Commercial mortgage-backed agencies

35,901

27,308

Collateralized mortgage obligations

18,927

15,449

Total available for sale

$

115,789

$

92,954

Held to Maturity:

Due after one year through five years

$

12,500

$

11,794

Due after five years through ten years

40,451

34,116

Due after ten years

19,714

14,843

72,665

60,753

Residential mortgage-backed agencies

28,841

25,324

Commercial mortgage-backed agencies

21,223

15,508

Collateralized mortgage obligations

51,513

41,445

Total held to maturity

$

174,242

$

143,030

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Note 5 – Loans and Related Allowance for Credit Losses

The following table summarizes the primary segments of the loan portfolio at June 30, 2024 and December 31, 2023:

(in thousands)

    

Commercial
Real Estate

    

Acquisition
and
Development

    

Commercial
and
Industrial

    

Residential
Mortgage

    

Consumer

    

Total

June 30, 2024

Individually evaluated for impairment

$

599

$

$

6,175

$

1,995

$

$

8,769

Collectively evaluated for impairment

500,417

88,214

259,496

509,114

56,965

1,414,206

Total loans

$

501,016

$

88,214

$

265,671

$

511,109

$

56,965

$

1,422,975

December 31, 2023

Individually evaluated for impairment

$

826

$

$

$

2,137

$

$

2,963

Collectively evaluated for impairment

492,877

77,060

274,604

497,734

61,429

1,403,704

Total loans

$

493,703

$

77,060

$

274,604

$

499,871

$

61,429

$

1,406,667

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans at June 30, 2024 and December 31, 2023:

(in thousands)

    

Current

    

30-59 Days
Past Due

    

60-89 Days
Past Due

    

90 Days+
Past Due

    

Total Past
Due and
Accruing

    

Non-
Accrual

    

Total Loans

June 30, 2024

Commercial real estate:

Non-owner-occupied

$

295,647

$

$

$

$

$

$

295,647

All other CRE

204,520

165

85

250

599

205,369

Acquisition and development:

1-4 family residential construction

17,489

17,489

All other A&D

70,628

97

70,725

Commercial and industrial

259,155

191

139

1

331

6,185

265,671

Residential mortgage:

Residential mortgage - term

444,814

44

1,028

484

1,556

2,339

448,709

Residential mortgage - home equity

61,740

436

81

14

531

129

62,400

Consumer

55,890

581

378

27

986

89

56,965

Total

$

1,409,883

$

1,417

$

1,711

$

526

$

3,654

$

9,438

$

1,422,975

December 31, 2023

Commercial real estate:

Non-owner-occupied

$

296,343

$

$

$

$

$

227

$

296,570

All other CRE

196,123

411

411

599

197,133

Acquisition and development:

1-4 family residential construction

18,224

18,224

All other A&D

58,723

113

58,836

Commercial and industrial

274,465

120

19

139

274,604

Residential mortgage:

Residential mortgage - term

433,878

130

717

384

1,231

2,720

437,829

Residential mortgage - home equity

61,021

520

158

75

753

268

62,042

Consumer

60,576

463

277

84

824

29

61,429

Total

$

1,399,353

$

1,644

$

1,171

$

543

$

3,358

$

3,956

$

1,406,667

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Non-accrual loans that have been subject to partial charge-offs totaled $1.1 million at June 30, 2024 and $0.1 million at December 31, 2023.  Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $1.5 million at June 30, 2024 and $1.8 million at December 31, 2023.  As a percentage of the loan portfolio, accruing loans past due 30 days or more was 0.26% at June 30, 2024 compared to 0.24% at December 31, 2023 and 0.18% as of June 30, 2023. 

The Corporation maintains an ACL at a level that management believes will be adequate to absorb expected credit losses associated with the Corporation’s financial instruments over the life of those instruments as of the balance sheet date.  The Corporation develops and documents a systematic ACL methodology based on the following portfolio segments: (i) commercial real estate; (ii) acquisition and development; (iii) commercial and industrial; (iv) residential mortgage; and (v) consumer.  The Corporation’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles.  The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL.

Commercial real estate loans are secured by commercial purpose real estate, including both owner occupied properties and properties obtained for investment purposes, such as hotels, strip malls and apartments.  Operations of the individual projects as well as global cash flows of the debtors are the primary source of repayment of these loans.  The condition of the local economy is an important indicator of risk, but there are more specific risks depending on the collateral type as well as the business.

Acquisition and development loans include both commercial and consumer.  Commercial loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes.  While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal.  The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer.  Consumer loans are made for the construction of residential homes for which a binding sales contract exists and generally are for a period of time sufficient to complete construction.  Residential construction loans to individuals generally provide for the payment of interest only during the construction phase.  Credit risk for residential real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for supply of the property being constructed.

Commercial and industrial loans are made to operating companies or manufacturers for the purpose of production, operating capacity, accounts receivable, inventory or equipment financing.  Cash flow from the operations of the borrower is the primary source of repayment for these loans.  The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower.  Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt.  These loans are also made to local municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and expansion, or to purchase new equipment.  The primary repayment source for local municipalities include the tax base of the municipality, specific revenue streams related to the infrastructure financed, and other business operations of the municipal authority.  The health and stability of state and local economies directly impacts each municipality’s tax basis and are important indicators of risk for this segment.  The ability of each municipality to increase taxes and fees to offset service requirements give this type of loan a very low risk profile in the continuum of the Corporation’s loan portfolio.

Residential mortgage loans are secured by first and junior liens such as home equity lines of credit and 1-4 family residential mortgages.  The primary source of repayment for these loans is the income of the borrower.  The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment.  The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to sell a property and satisfy debt.

Consumer loans are made to individuals and may be either secured by assets other than 1-4 family residences or unsecured.  This segment includes automobile loans and unsecured loans and lines of credit.  The primary source of repayment for these loans is the income and assets of the borrower.  The condition of the local economy, in particular the unemployment rate, is an important

19

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indicator of risk for this segment.  The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

The following table summarizes the primary segments of the ACL at June 30, 2024 and December 31, 2023, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment:

(in thousands)

    

Commercial
Real Estate

    

Acquisition
and
Development

    

Commercial
and
Industrial

    

Residential
Mortgage

    

Consumer

    

Total

June 30, 2024

Individually evaluated
for impairment

$

$

$

$

$

$

Collectively evaluated
for impairment

4,852

992

3,964

7,162

953

17,923

Total ACL

$

4,852

$

992

$

3,964

$

7,162

$

953

$

17,923

December 31, 2023

Individually evaluated
for impairment

$

$

$

$

$

$

Collectively evaluated
for impairment

5,120

940

3,717

6,774

929

17,480

Total ACL

$

5,120

$

940

$

3,717

$

6,774

$

929

$

17,480

Changes in the fair value of the types of collateral for individually evaluated loans are reported as provision for credit loss in the period of change.  The evaluation of the need and amount of a specific allocation of the ACL and whether a loan can be removed from impairment status is made on a quarterly basis.

The following tables present the amortized cost basis of collateral-dependent individually evaluated loans as of June 30, 2024 and December 31, 2023.

June 30, 2024

(in thousands)

    

Real Estate

Other Collateral

Non-Accrual Loans with No Allowance

Commercial real estate

$

599

$

$

599

Commercial and industrial

6,175

6,175

Residential mortgage

1,995

1,995

Total Loans

$

2,594

$

6,175

$

8,769

December 31, 2023

(in thousands)

    

Real Estate

Other Collateral

Non-Accrual Loans with No Allowance

Commercial real estate

$

826

$

$

826

Residential mortgage

2,137

2,137

Total Loans

$

2,963

$

$

2,963

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Table of Contents

The following tables present the activity in the ACL for the six- and three-month periods ended June 30, 2024 and 2023:

Six months ended (in thousands)

    

Commercial
Real Estate

    

Acquisition
and
Development

    

Commercial
and
Industrial

    

Residential
Mortgage

    

Consumer

    

Unallocated

    

Total

Beginning balance at January 1, 2024

$

5,120

$

940

$

3,717

$

6,774

$

929

$

$

17,480

Loan charge-offs

(1,230)

(45)

(824)

(2,099)

Recoveries collected

37

6

34

26

227

330

Credit loss (credit)/expense

(305)

46

1,443

407

621

2,212

ACL balance at June 30, 2024

$

4,852

$

992

$

3,964

$

7,162

$

953

$

$

17,923

Beginning balance at January 1, 2023 prior to adoption of ASC 326

$

6,345

$

979

$

2,845

$

3,160

$

877

$

430

$

14,636

Impact of adopting ASC 326

(1,143)

(15)

1,334

2,112

208

(430)

2,066

Loan charge-offs

(87)

(166)

(24)

(518)

(795)

Recoveries collected

5

7

9

36

93

150

Credit loss (credit)/expense

(174)

163

(473)

1,133

199

848

ACL balance at June 30, 2023

$

4,946

$

1,134

$

3,549

$

6,417

$

859

$

$

16,905

Three months ended (in thousands)

Commercial
Real Estate

Acquisition
and
Development

Commercial
and
Industrial

Residential
Mortgage

Consumer

Unallocated

Total

ACL balance at April 1, 2024

$

4,962

$

1,014

$

4,002

$

7,017

$

987

$

$

17,982

Loan charge-offs

(1,118)

(45)

(318)

(1,481)

Recoveries collected

3

3

9

157

172

Credit loss (credit)/expense

(110)

(25)

1,078

181

127

1,251

ACL balance at June 30, 2024

$

4,852

$

992

$

3,964

$

7,162

$

953

$

$

17,923

ACL balance at April 1, 2023

$

4,862

$

1,103

$

3,755

$

6,324

$

827

$

$

16,871

Loan Charge-offs

(87)

(166)

(18)

(185)

(456)

Recoveries collected

2

5

18

31

56

Credit loss expense/(credit)

171

29

(45)

93

186

434

ACL balance at June 30, 2023

$

4,946

$

1,134

$

3,549

$

6,417

$

859

$

$

16,905

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The Corporation’s methodology for estimating the ACL includes:

Segmentation.  The Corporation’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles.

Specific Analysis.  A specific reserve analysis is applied to certain individually evaluated loans.  These loans are evaluated quarterly generally based on collateral value, observable market value or the present value of expected future cash flows.  A specific reserve is established if the fair value is less than the loan balance.  A charge-off is recognized when the loss is quantifiable.  Individually evaluated loans not specifically analyzed reside in the Quantitative Analysis.

Quantitative Analysis.  The Corporation elected to use discounted cash flows.  Economic forecasts include but are not limited to unemployment, the Consumer Price Index, the Housing Affordability Index, and Gross State Product.  These forecasts are assumed to revert to the long term average and are utilized in the model to estimate the probability of default and the loss given default is the estimated loss rate, which varies over time.  The estimated loss rate is applied within the appropriate periods in the cash flow model to determine the net present value.  Net present value is also impacted by assumption related to the duration between default and recovery.  The reserve is based on the difference between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values.

Qualitative Analysis.  Based on management’s review and analysis of internal, external and model risks, management may adjust the model output.  Management reviews the peaks and troughs of the model’s calibrations, taking into account economic forecasts to develop guardrails that serve as the basis for determining the reasonableness of the model’s output and makes adjustments as necessary.  This process challenges unexpected variability resulting from outputs beyond the model’s calibrations that appear to be unreasonable.  Management also enhances the calculation through the use of Moody’s economic forecast data in its calculation. Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on management’s experience and perspective.

The ACL is based on estimates, and actual losses may vary from current estimates.  Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ACL that is representative of the risk found in the components of the portfolio at any given date.

Credit Quality Indicators:

The Corporation’s portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all.  The Corporation’s internal credit risk grading system is based on debt service coverage, collateral values and other subjective factors.  Mortgage and consumer loans are defaulted to pass grade until a loan migrates to past due status.  

The Corporation has a loan review policy and annual scope report that details the level of loan review for loans in a given year.  The annual loan review provides the Credit Risk Committee with an independent analysis of the following:  (i) credit quality of the loan portfolio; (ii) compliance with loan policy; (iii) adequacy of documentation in credit files; and (iv) validity of risk ratings.  

The Corporation’s internally assigned grades are as follows:

Pass-  The Corporation uses six grades of pass, including its watch rating.  Generally, a pass rating indicates that the loan is currently performing and is of high quality.

Special Mention- Assets with potential weaknesses that warrant management’s close attention and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.

Substandard-  Assets that are inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any.  Assets so classified have a well-defined weakness, or weaknesses that jeopardize the liquidation of

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the debt.  Such assets are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful- Assets with all weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions, and values, highly questionable and improbable.

Loss- Assets considered of such little value that its continuance on the books is not warranted.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

The ability of borrowers to repay commercial loans is dependent upon the success of their business and general economic conditions.  Due to the greater potential for loss within our commercial portfolio, we monitor the commercial loan portfolio through an internal risk rating system.  Loan risk ratings are assigned based upon the creditworthiness of the borrower and are reviewed on an ongoing basis according to our internal policies.  Loans rated special mention or substandard have potential or well-defined weaknesses not generally found in high quality, performing loans, and require attention from management to limit loss.

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Table of Contents

The following tabls present loan balances by year of origination and internally assigned risk rating for our portfolio segments as of dates presented:

(in thousands)

    

2024

    

2023

    

2022

    

2021

    

2020

    

2019 and Prior

    

Revolving

    

Total Portfolio Loans

June 30, 2024

Commercial real estate:

Non-owner-occupied

Pass

$

5,866

$

23,850

$

66,716

$

29,620

$

52,809

$

111,451

$

1,874

$

292,186

Special Mention

732

732

Substandard

2,729

2,729

Total non-owner occupied

5,866

23,850

66,716

29,620

53,541

114,180

1,874

295,647

Current period gross charge-offs

All other CRE

Pass

10,726

31,357

30,646

24,536

20,152

77,244

5,297

199,958

Special Mention

1,434

204

1,638

Substandard

3,491

282

3,773

Total all other CRE

10,726

31,357

30,646

25,970

20,356

80,735

5,579

205,369

Current period gross charge-offs

Acquisition and development:

1-4 family residential construction

Pass

1,325

13,866

2,298

17,489

Special Mention

Substandard

Total acquisition and development

1,325

13,866

2,298

17,489

Current period gross charge-offs

All other A&D

Pass

7,622

24,112

19,888

1,917

2,281

10,557

4,251

70,628

Special Mention

Substandard

97

97

Total all other A&D

7,622

24,112

19,888

1,917

2,281

10,654

4,251

70,725

Current period gross charge-offs

Commercial and industrial:

Pass

16,310

40,278

59,753

20,774

8,092

16,183

82,938

244,328

Special Mention

1,979

3,847

5,826

Substandard

4,079

1,142

6,584

765

2,947

15,517

Total commercial and industrial

16,310

40,278

63,832

21,916

16,655

16,948

89,732

265,671

Current period gross charge-offs

465

57

651

41

16

1,230

Residential mortgage:

Residential mortgage - term

Pass

16,831

57,219

97,006

84,619

37,150

146,885

2,186

441,896

Special Mention

40

40

Substandard

1,067

15

5,636

55

6,773

Total residential mortgage - term

16,831

57,219

97,006

85,726

37,165

152,521

2,241

448,709

Current period gross charge-offs

30

30

Residential mortgage - home equity

Pass

30

940

4,243

818

444

669

54,643

61,787

Special Mention

Substandard

36

14

563

613

Total residential mortgage - home equity

30

940

4,243

818

480

683

55,206

62,400

Current period gross charge-offs

15

15

Consumer:

Pass

5,990

14,615

8,324

4,804

1,592

18,632

2,791

56,748

Special Mention

Substandard

72

17

103

20

5

217

Total consumer

5,990

14,687

8,341

4,907

1,612

18,637

2,791

56,965

Current period gross charge-offs

96

174

60

15

11

468

824

Total Portfolio Loans

Pass

64,700

206,237

286,576

167,088

122,520

381,621

156,278

1,385,020

Special Mention

1,474

2,915

3,847

8,236

Substandard

72

4,096

2,312

6,655

12,737

3,847

29,719

Total Portfolio Loans

$

64,700

$

206,309

$

290,672

$

170,874

$

132,090

$

394,358

$

163,972

$

1,422,975

Current YTD Period:

Current period gross charge-offs

$

561

$

174

$

132

$

666

$

52

$

514

$

$

2,099

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Table of Contents

(in thousands)

    

2023

    

2022

    

2021

    

2020

    

2019

    

2018 and Prior

    

Revolving

    

Total Portfolio Loans

December 31, 2023

Commercial real estate:

Non-owner-occupied

Pass

$

23,511

$

65,878

$

30,332

$

54,270

$

40,575

$

65,134

$

1,138

$

280,838

Special Mention

4,331

4,331

Substandard

11,401

11,401

Total non-owner occupied

23,511

65,878

30,332

54,270

40,575

80,866

1,138

296,570

Current period gross charge-offs

87

87

All other CRE

Pass

30,130

27,379

27,042

20,691

22,879

60,054

4,495

192,670

Special Mention

644

644

Substandard

1,847

1,372

600

3,819

Total all other CRE

30,130

27,379

27,042

21,335

24,726

61,426

5,095

197,133

Current period gross charge-offs

Acquisition and development:

1-4 family residential construction

Pass

13,745

3,446

1,033

18,224

Special Mention

Substandard

Total acquisition and development

13,745

3,446

1,033

18,224

Current period gross charge-offs

All other A&D

Pass

12,184

25,099

2,966

3,046

1,301

9,946

4,181

58,723

Special Mention

Substandard

113

113

Total all other A&D

12,184

25,099

2,966

3,046

1,301

10,059

4,181

58,836

Current period gross charge-offs

Commercial and industrial:

Pass

52,004

66,559

24,387

11,753

8,872

10,052

78,992

252,619

Special Mention

558

558

Substandard

9,352

1,854

6,806

98

837

2,480

21,427

Total commercial and industrial

52,562

75,911

26,241

18,559

8,970

10,889

81,472

274,604

Current period gross charge-offs

100

103

35

166

19

423

Residential mortgage:

Residential mortgage - term

Pass

51,625

94,723

88,835

38,228

25,375

130,402

1,577

430,765

Special Mention

Substandard

138

929

17

98

5,825

57

7,064

Total residential mortgage - term

51,625

94,861

89,764

38,245

25,473

136,227

1,634

437,829

Current period gross charge-offs

13

13

Residential mortgage - home equity

Pass

1,127

4,657

864

475

286

489

53,467

61,365

Special Mention

Substandard

38

16

623

677

Total residential mortgage - home equity

1,127

4,657

864

513

286

505

54,090

62,042

Current period gross charge-offs

42

42

Consumer:

Pass

18,299

10,616

6,361

2,206

510

20,365

2,873

61,230

Special Mention

Substandard

14

35

113

23

6

2

6

199

Total consumer

18,313

10,651

6,474

2,229

516

20,367

2,879

61,429

Current period gross charge-offs

236

223

74

8

4

329

874

Total Portfolio Loans

Pass

202,625

298,357

180,787

130,669

99,798

296,442

147,756

1,356,434

Special Mention

558

644

4,331

5,533

Substandard

14

9,525

2,896

6,884

2,049

19,566

3,766

44,700

Total Portfolio Loans

$

203,197

$

307,882

$

183,683

$

138,197

$

101,847

$

320,339

$

151,522

$

1,406,667

Current YTD Period:

Current period gross charge-offs

$

336

$

326

$

109

$

174

$

4

$

490

$

$

1,439

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past.

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Table of Contents

The following tables present loan balances by year of origination segregated by performing and non-performing loans for the periods presented:

(in thousands)

    

2024

    

2023

    

2022

    

2021

    

2020

    

2019 and Prior

    

Revolving

    

Total Portfolio Loans

June 30, 2024

Commercial real estate:

Non-owner-occupied

Performing

$

5,866

$

23,850

$

66,716

$

29,620

$

53,541

$

114,180

$

1,874

$

295,647

Nonperforming

Total non-owner occupied

5,866

23,850

66,716

29,620

53,541

114,180

1,874

295,647

All other CRE

Performing

10,726

31,357

30,646

25,970

20,356

80,136

5,579

204,770

Nonperforming

599

599

Total all other CRE

10,726

31,357

30,646

25,970

20,356

80,735

5,579

205,369

Acquisition and development:

1-4 family residential construction

Performing

1,325

13,866

2,298

17,489

Nonperforming

Total acquisition and development

1,325

13,866

2,298

17,489

All other A&D

Performing

7,622

24,112

19,888

1,917

2,281

10,557

4,251

70,628

Nonperforming

97

97

Total all other A&D

7,622

24,112

19,888

1,917

2,281

10,654

4,251

70,725

Commercial and industrial:

Performing

16,310

40,278

59,753

20,819

16,655

16,947

88,723

259,485

Nonperforming

4,079

1,097

1

1,009

6,186

Total commercial and industrial

16,310

40,278

63,832

21,916

16,655

16,948

89,732

265,671

Residential mortgage:

Residential mortgage - term

Performing

16,831

57,219

97,006

85,596

37,012

150,011

2,211

445,886

Nonperforming

130

153

2,510

30

2,823

Total residential mortgage - term

16,831

57,219

97,006

85,726

37,165

152,521

2,241

448,709

Residential mortgage - home equity

Performing

30

940

4,243

818

444

669

55,113

62,257

Nonperforming

36

14

93

143

Total residential mortgage - home equity

30

940

4,243

818

480

683

55,206

62,400

Consumer:

Performing

5,990

14,669

8,324

4,846

1,612

18,617

2,791

56,849

Nonperforming

18

17

61

20

116

Total consumer

5,990

14,687

8,341

4,907

1,612

18,637

2,791

56,965

Total Portfolio Loans

Performing

64,700

206,291

286,576

169,586

131,901

391,117

162,840

1,413,011

Nonperforming

18

4,096

1,288

189

3,241

1,132

9,964

Total Portfolio Loans

$

64,700

$

206,309

$

290,672

$

170,874

$

132,090

$

394,358

$

163,972

$

1,422,975

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(in thousands)

    

2023

    

2022

    

2021

    

2020

    

2019

    

2018 and Prior

    

Revolving

    

Total Portfolio Loans

December 31, 2023

Commercial real estate:

Non-owner-occupied

Performing

$

23,511

$

65,878

$

30,332

$

54,270

$

40,575

$

80,639

$

1,138

$

296,343

Nonperforming

227

227

Total non-owner occupied

23,511

65,878

30,332

54,270

40,575

80,866

1,138

296,570

All other CRE

Performing

30,130

27,379

27,042

21,335

24,726

60,827

5,095

196,534

Nonperforming

599

599

Total all other CRE

30,130

27,379

27,042

21,335

24,726

61,426

5,095

197,133

Acquisition and development:

1-4 family residential construction

Performing

13,745

3,446

1,033

18,224

Nonperforming

Total acquisition and development

13,745

3,446

1,033

18,224

All other A&D

Performing

12,184

25,099

2,966

3,046

1,301

9,946

4,181

58,723

Nonperforming

113

113

Total all other A&D

12,184

25,099

2,966

3,046

1,301

10,059

4,181

58,836

Commercial and industrial:

Performing

52,562

75,911

26,241

18,559

8,970

10,889

81,472

274,604

Nonperforming

Total commercial and industrial

52,562

75,911

26,241

18,559

8,970

10,889

81,472

274,604

Residential mortgage:

Residential mortgage - term

Performing

51,625

94,722

89,629

38,245

25,375

133,526

1,603

434,725

Nonperforming

139

135

98

2,701

31

3,104

Total residential mortgage - term

51,625

94,861

89,764

38,245

25,473

136,227

1,634

437,829

Residential mortgage - home equity

Performing

1,127

4,657

864

475

286

488

53,802

61,699

Nonperforming

38

17

288

343

Total residential mortgage - home equity

1,127

4,657

864

513

286

505

54,090

62,042

Consumer:

Performing

18,304

10,616

6,405

2,229

516

20,367

2,879

61,316

Nonperforming

9

35

69

113

Total consumer

18,313

10,651

6,474

2,229

516

20,367

2,879

61,429

Total Portfolio Loans

Performing

203,188

307,708

183,479

138,159

101,749

316,682

151,203

1,402,168

Nonperforming

9

174

204

38

98

3,657

319

4,499

Total Portfolio Loans

$

203,197

$

307,882

$

183,683

$

138,197

$

101,847

$

320,339

$

151,522

$

1,406,667

Loan Modfications for Borrowers Experiencing Financial Difficulty

The Company evaluates all loan modifications according to the accounting guidance in ASU 2022-02 to determine if the modification results in a new loan or a continuation of the existing loan.  Loan modifications to borrowers experiencing financial difficulties that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, or combinations of the listed

27

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modifications.  Therefore, the disclosures related to loan restructurings are for modifications which have a direct impact on cash flows.

The Company may offer various types of modifications when restructuring a loan.  Commercial and industrial loans modified in a loan restructuring often involve temporary interest-only payments, term extensions, and converting credit lines to term loans.  Additonal collateral, a co-borrower, or a guarantor is often requested.

Commercial mortgage and construction loans modified in a loan restructuring often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor.  Construction loans modified in a loan restructuring may also involve extending the interest-only payment period.

Loans modified in a loan restructuring for the Company may have the financial effect of increasing the specific allowance associated with the loan.  An allowance for loans that have been modified in a loan restructuring is measured based on the present value of expected cash flows discounted at the loan’s effective interest rate or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent.  Management exercises significant judgment in developing these estimates.

Commercial and consumer loans modified in a loan restructuring are closely monitored for delinquency as an early indicator of possible future default.  If loans modified in a loan restructuring subsequently default, the Company evaluates the loan for possible further loss.  The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.

The following tables present the amortized cost basis as of June 30, 2024 and the financial effect of loans modified to borrowers experiencing financial difficulty during the six- and three-months ended June 30, 2024:

(in thousands)

Term Extension

Percentage of Total Loan Type

Weighted Average Term and Principal Payment Extension

Six months ended June 30, 2024

Owner-occupied commercial real estate

$

893

0.4%

12 months

Total

$

893

(in thousands)

Term Extension

Percentage of Total Loan Type

Weighted Average Term and Principal Payment Extension

Three months ended June 30, 2024

Owner-occupied commercial real estate

$

893

0.4%

12 months

Total

$

893

There were no loan modifications made to borrowers experiencing financial difficulty during the six- or three-month period ending June 30, 2023.

The Company monitors loan payments on performing and non-performing loans on an ongoing basis to determine if a loan is considered to have a payment default.  As of June 30, 2024, the loan that was modified in the second quarter has made all contractual payments.

If a modified loan over $0.1 million subsequently defaults and goes on non-accrual status, the Company individually evaluates the loan when performing its CECL estimate to calculate the ACL.  Upon determination that a modified loan (or a portion of a modified loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is charged off.  Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the ACL is adjusted by the same amount.

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Note 6 – Fair Value of Financial Instruments

The Corporation complies with the guidance of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements required under other accounting pronouncements. The Corporation also follows the guidance on matters relating to all financial instruments found in ASC Subtopic 825-10, Financial Instruments – Overall.

Fair value is defined as the price to sell an asset or to transfer a liability in an orderly transaction between willing market participants as of the measurement date. Fair value is best determined by values quoted through active trading markets. Active trading markets are characterized by numerous transactions of similar financial instruments between willing buyers and willing sellers. Because no active trading market exists for various types of financial instruments, many of the fair values disclosed were derived using present value discounted cash flows or other valuation techniques described below. As a result, the Corporation’s ability to actually realize these derived values cannot be assumed.

The Corporation measures fair values based on the fair value hierarchy established in ASC Paragraph 820-10-35-37. 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). The three levels of inputs that may be used to measure fair value under the hierarchy are as follows:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets and liabilities. This level is the most reliable source of valuation.

Level 2: Quoted prices that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability. Level 2 inputs include inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). It also includes inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated inputs). Several sources are utilized for valuing these assets, including a contracted valuation service, Standard & Poor’s evaluations and pricing services, and other valuation matrices.

Level 3: Prices or valuation techniques that require inputs that are both significant to the valuation assumptions and not readily observable in the market (i.e. supported with little or no market activity). Level 3 instruments are valued based on the best available data, some of which is internally developed, and consider risk premiums that a market participant would require.

The level established within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers in and out of Level 1, 2 or 3 are recorded at fair value at the beginning of the reporting period.

Investments – The investment portfolio is classified and accounted for based on the guidance of ASC Topic 320, Investments – Debt and Equity Securities.

The fair value of investments is determined using a market approach.  As of June 30, 2024, the U.S. Government agencies and treasuries, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisions bonds, excluding tax increment financing (“TIF”) bonds, were classified as Level 2 within the valuation hierarchy.  Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which the Corporation has historically transacted both purchases and sales of investment securities.  The TIF bonds and collateralized debt obligation (“CDO”) portfolio, which consists of pooled trust preferred securities issued by banks, thrifts, and insurance companies, are classified as Level 3 within the valuation hierarchy.  The CDO fair values are determined by a third party using a discounted cash flow model.

Derivative financial instruments (Cash flow hedge) – The Corporation’s open derivative positions are interest rate swap agreements. Those classified as Level 2 open derivative positions are valued using externally developed pricing models based on observable market inputs provided by a third party and validated by management.  The Corporation has considered counterparty credit risk in the valuation of its interest rate swap assets.

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Nonrecurring Basis  

Individually Evaluated Loans- Individual loans with borrowers experiencing financial difficulty and with a remaining principal balance of $0.1 million or more are evaluated for potential specific reserves and adjusted, if a shortfall exists, to fair value less costs to sell.  Fair value is measured based on the value of the underlying collateral securing the loan if repayment is expected solely from the sale of operation of the collateral or present value of estimated future cash flows discounted at the loan’s contractual interest rate if the loan is not determined to be collateral dependent.  

Fair value for individually evaluated loans is determined using several methods.  Generally, the fair value of real estate is determined based on appraisals by qualified licensed appraisals.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available.  These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualities such as location, size, and income production capacity relative to the subject property of the appraisal.  

Subsequent to the initial impairment date, existing individually evaluated loans are reevaluated quarterly for additional impairment and adjustments to fair value less costs to sell are made, where appropriate.  For individually evaluated loans, the first state of our impairment analysis involves inspection of the property in question to affirm the condition has not deteriorated since the previous impairment analysis date.  Management also engages in conversations with local real estate professionals and market participants to determine the likely marketing time and value range for the property.  The second state involves an assessment of current trends in the regional market.  After thorough consideration of these factors, management will order a new appraisal.

For non-individually evaluated loans, the fair value is determined by updating the present value of estimated future cash flows using the loan’s existing rate to reflect the payment schedule for the remaining life of the loan.

Equity Investment- Equity investments included in the table below are considered impaired with losses recognized on the income statement in net gains.  Fair value of the equity investment was based on an independent third party valuation report where the value was determined based on the revenue multiples of like kind information technology businesses.  These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

Other real estate owned – Other real estate owned included in the table below are considered impaired with specific write-downs. Fair value of other real estate owned was based on independent third party appraisals of the properties. These values were determined based on the sales prices of similar properties in the approximate geographic area. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

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For assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2024 and December 31, 2023 were as follows:

Fair Value Measurements
at June 30, 2024 Using

Quoted

Prices in

Significant

Assets

Active Markets

Other

Significant

Measured at

for Identical

Observable

Unobservable

Fair Value

Assets

Inputs

Inputs

(in thousands)

    

06/30/24

    

(Level 1)

    

(Level 2)

    

(Level 3)

Recurring:

Investment securities available-for-sale:

U.S. government agencies

$

6,035

$

6,035

Residential mortgage-backed agencies

$

19,283

$

19,283

Commercial mortgage-backed agencies

$

27,308

$

27,308

Collateralized mortgage obligations

$

15,449

$

15,449

Obligations of states and political subdivisions

$

10,167

$

10,167

Corporate bonds

$

737

$

737

Collateralized debt obligations

$

13,975

$

13,975

Financial derivatives

$

762

$

762

Non-recurring:

Individually evaluated loans, net

$

2,096

$

2,096

Equity Investment

$

3,551

$

3,551

Other real estate owned

$

2,698

$

2,698

Fair Value Measurements
at December 31, 2023 Using

Quoted

Prices in

Significant

Assets/(liabilities)

Active Markets

Other

Significant

Measured at

for Identical

Observable

Unobservable

Fair Value

Assets

Inputs

Inputs

(in thousands)

    

12/31/23

    

(Level 1)

    

(Level 2)

    

(Level 3)

Recurring:

Investment securities available-for-sale:

U.S. government agencies

$

6,034

$

6,034

Residential mortgage-backed agencies

$

20,563

$

20,563

Commercial mortgage-backed agencies

$

28,417

$

28,417

Collateralized mortgage obligations

$

16,356

$

16,356

Obligations of states and political subdivisions

$

10,312

$

10,312

Corporate bonds

$

778

778

Collateralized debt obligations

$

14,709

$

14,709

Financial derivatives

$

756

$

756

Non-recurring:

Individually evaluated loans, net

$

$

Equity investment

$

3,087

$

3,087

Other real estate owned

$

4,443

$

4,443

Individually evaluated loans had a net carrying amount of $8.8 million and $3.0 million with no valuation allowance at June 30, 2024 or December 31, 2023.

There were no transfers of assets between any of the fair value hierarchy for the six-month periods ended June 30, 2024 or 2023.

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For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2024 and December 31, 2023, the significant unobservable inputs used in the fair value measurements were as follows:

(in thousands)

    

Fair Value at
June 30,
2024

    

Valuation
Technique

    

Significant
Unobservable
Inputs

    

Significant
Unobservable
Input Value

Recurring:

Investment Securities – available for sale -CDO

$

13,975

Discounted Cash Flow

Discount Margin

Range of mid 400 to high 400

Non-recurring:

Individually Evaluated Loans, net

$

2,096

Market Comparable Properties

Marketability Discount

N/A

Equity Investment

$

3,551

Market Method

Revenue Multiples

2.8x

Other Real Estate Owned

$

2,698

Market Comparable Properties

Marketability Discount

5.0% to 15.0% (weighted avg 5.9%)

(in thousands)

    

Fair Value at
December 31,
2023

    

Valuation
Technique

    

Significant
Unobservable
Inputs

    

Significant
Unobservable
Input Value

Recurring:

Investment Securities – available for sale -CDO

$

14,709

Discounted Cash Flow

Discount Margin

Range of low to mid 500 and low to mid 600

Non-recurring:

Equity Investment

$

3,087

Market Method

Revenue Multiples

2.8x

Other Real Estate

$

4,443

Market Comparable Properties

Marketability Discount

5.0% to 15.0% (weighted avg 5.9%)

(1)Range would include discounts taken since appraisal and estimated values

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The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured on a recurring basis using Level 3 significant unobservable inputs for the six- and three-month periods ended June 30, 2024 and 2023:

Fair Value Measurements

Using Significant Unobservable Inputs

(Level 3)

Investment Securities

(in thousands)

    

Available for Sale

Beginning balance January 1, 2024

$

14,709

Total losses realized/unrealized:

Included in other comprehensive loss

(734)

Ending balance June 30, 2024

$

13,975

Fair Value Measurements

Using Significant Unobservable Inputs

(Level 3)

Investment Securities

(in thousands)

    

Available for Sale

Beginning balance January 1, 2023

$

15,871

Total losses realized/unrealized:

Included in other comprehensive loss

(1,766)

Ending balance June 30, 2023

$

14,105

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

(in thousands)

 Investment Securities
Available for Sale

Beginning balance April 1, 2024

$

14,886

Total losses realized/unrealized:

Included in other comprehensive loss

(911)

Ending balance June 30, 2024

$

13,975

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

(in thousands)

 Investment Securities
Available for Sale

Beginning balance April 1, 2023

$

14,114

Total losses realized/unrealized:

Included in other comprehensive loss

(9)

Ending balance June 30, 2023

$

14,105

There were no gains or losses included in earnings attributable to the change in realized/unrealized gains or losses related to the assets for the six- or three-month periods ended June 30, 2024 or 2023.

The disclosed fair values may vary significantly between institutions based on the estimates and assumptions used in the various valuation methodologies. The derived fair values are subjective in nature and involve uncertainties and significant judgment. Therefore, they cannot be determined with precision. Changes in the assumptions could significantly impact the derived estimates of fair value. Disclosure of non-financial assets such as buildings, as well as certain financial instruments such as leases is not required. Accordingly, the aggregate fair values presented do not represent the underlying value of the Corporation.

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Table of Contents

The following tables present fair value information about financial instruments, whether or not recognized in the Consolidated Statement of Financial Condition, for which it is practicable to estimate that value. The actual carrying amounts and estimated fair values of the Corporation’s financial instruments that are included in the Consolidated Statement of Financial Condition are as follows:

June 30, 2024

Fair Value Measurements

Quoted

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Carrying

Fair

Assets

Inputs

Inputs

(in thousands)

    

Amount

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Financial Assets:

Cash and due from banks

$

43,635

$

43,635

$

43,635

Interest bearing deposits in banks

1,457

1,457

1,457

Investment securities - AFS

92,954

92,954

$

78,979

$

13,975

Investment securities - HTM

174,197

143,030

141,259

1,771

Restricted bank stock

3,395

N/A

Loans, net

1,404,746

1,329,798

1,329,798

Financial derivatives

762

762

762

Accrued interest receivable

7,115

7,115

847

6,268

Financial Liabilities:

8

Deposits - non-maturity

1,378,674

1,378,674

1,378,674

Deposits - time deposits

158,397

155,969

155,969

Short-term borrowed funds

62,564

62,564

62,564

Long-term borrowed funds

70,929

70,939

70,939

Accrued interest payable

1,352

1,352

1,352

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December 31, 2023

Fair Value Measurements

Quoted

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Carrying

Fair

Assets

Inputs

Inputs

(in thousands)

    

Amount

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Financial Assets:

Cash and due from banks

$

48,343

$

48,343

$

48,343

Interest bearing deposits in banks

1,410

1,410

1,410

Investment securities - AFS

97,169

97,169

$

82,460

$

14,709

Investment securities - HTM

214,297

184,415

182,510

1,905

Restricted bank stock

5,250

N/A

Loans, net

1,388,847

1,319,456

1,319,456

Financial derivative

778

778

778

Accrued interest receivable

7,487

7,487

828

6,659

Financial Liabilities:

Deposits - non-maturity

1,355,444

1,355,444

1,355,444

Deposits - time deposits

195,533

193,337

193,337

Short-term borrowed funds

45,418

45,418

45,418

Long-term borrowed funds

110,929

110,809

110,809

Accrued interest payable

612

612

612

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Note 7 – Accumulated Other Comprehensive Loss

The following table presents the changes in each component of accumulated other comprehensive loss for the three-month periods ended June 30 2024, March 31, June 30, 2023 and March 31,2023:

Investment

securities-

with credit

Investment

related

securities-

Investment

impairment

all other

securities-

Cash Flow

Pension

(in thousands)

    

AFS

    

AFS

    

HTM

    

Hedge

    

Plan

    

SERP

    

Total

Accumulated OCL, net:

Balance - January 1, 2024

(2,482)

(13,217)

(5,201)

569

(14,263)

(1,233)

(35,827)

Other comprehensive income/(loss) before reclassifications

155

(459)

54

1,096

846

Amounts reclassified from accumulated other comprehensive income

(37)

118

149

29

259

Balance - March 31, 2024

$

(2,364)

$

(13,676)

$

(5,083)

$

623

$

(13,018)

$

(1,204)

$

(34,722)

Other comprehensive (loss)/income before reclassifications

(620)

(528)

(51)

(396)

(1,595)

Amounts reclassified from accumulated other comprehensive income

(40)

118

150

29

257

Balance - June 30, 2024

$

(3,024)

$

(14,204)

$

(4,965)

$

572

$

(13,264)

$

(1,175)

$

(36,060)

Accumulated OCL, net:

Balance - January 1, 2023

$

(1,711)

$

(16,380)

$

(5,703)

$

797

$

(16,603)

$

574

$

(39,026)

Other comprehensive (loss)/income before reclassifications

(1,180)

985

(138)

123

(210)

Amounts reclassified from accumulated other comprehensive income

(37)

133

184

(1)

279

Balance - March 31, 2023

$

(2,928)

$

(15,395)

$

(5,570)

$

659

$

(16,296)

$

573

$

(38,957)

Other comprehensive income/(loss) before reclassifications

111

(1,654)

150

(42)

(1,435)

Amounts reclassified from accumulated other comprehensive loss

(40)

129

195

(2)

282

Balance - June 30, 2023

$

(2,857)

$

(17,049)

$

(5,441)

$

809

$

(16,143)

$

571

$

(40,110)

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The following tables present the components of other comprehensive loss for the six- and three-month periods ended June 30, 2024 and 2023:

Before

Tax

Components of Other Comprehensive Loss

Tax

(Expense)

(in thousands)

    

Amount

    

Benefit

    

Net

For the six months ended June 30, 2024

Available for sale (AFS) securities with credit related impairment:

Unrealized holding losses

$

(633)

$

168

$

(465)

Less: accretable yield recognized in income

101

(24)

77

Net unrealized losses on investments with credit related impairment

(734)

192

(542)

Available for sale securities – all other:

Unrealized holding losses

(1,341)

354

(987)

Held to maturity securities:

Unrealized holding gains on securities transferred to held to maturity

Less: amortization recognized in income

(320)

84

(236)

Net unrealized gains on HTM securities

320

(84)

236

Cash flow hedges:

Unrealized holding gains

4

(1)

3

Pension Plan:

Unrealized net actuarial gain

951

(251)

700

Less: amortization of unrecognized loss

(406)

107

(299)

Net pension plan liability adjustment

1,357

(358)

999

SERP:

Unrealized net actuarial gain

Less: amortization of unrecognized loss

(78)

20

(58)

Net SERP liability adjustment

78

(20)

58

Other comprehensive loss

$

(316)

$

83

$

(233)

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Before

Tax

Components of Other Comprehensive Income

Tax

(Expense)

(in thousands)

    

Amount

    

Benefit

    

Net

For the six months ended June 30, 2023

Available for sale (AFS) securities with credit related impairment:

Unrealized holding losses

$

(1,408)

$

339

$

(1,069)

Less: accretable yield recognized in income

101

(24)

77

Net unrealized losses on investments with credit related impairment

(1,509)

363

(1,146)

Available for sale securities – all other:

Unrealized holding losses

(881)

212

(669)

Held to maturity securities:

Unrealized holding gains on securities transferred to held to maturity

Less: amortization recognized in income

(345)

83

(262)

Net unrealized gains on HTM securities

345

(83)

262

Cash flow hedges:

Unrealized holding gain

16

(4)

12

Pension Plan:

Unrealized net actuarial gain

105

(24)

81

Less: amortization of unrecognized loss

(499)

120

(379)

Net pension plan liability adjustment

604

(144)

460

SERP:

Unrealized net actuarial gain

Less: amortization of unrecognized gain

4

(1)

3

Net SERP liability adjustment

(4)

1

(3)

Other comprehensive loss

$

(1,429)

$

345

$

(1,084)

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Components of Other Comprehensive Loss
(in thousands)

Before
Tax
Amount

Tax
(Expense)
Benefit

Net

For the three months ended June 30, 2024

Available for sale (AFS) securities with credit related impairment:

Unrealized holding losses

$

(843)

$

223

$

(620)

Less: accretable yield recognized in income

51

(11)

40

Net unrealized losses on investments with credit related impairment

(894)

234

(660)

Available for sale securities – all other:

Unrealized holding losses

(717)

189

(528)

Held to maturity securities:

Unrealized holding gains

Less: amortization recognized in income

(160)

42

(118)

Net unrealized gains on HTM securities

160

(42)

118

Cash flow hedges:

Unrealized holding losses

(69)

18

(51)

Pension Plan:

Unrealized net actuarial loss

(538)

142

(396)

Less: amortization of unrecognized loss

(203)

53

(150)

Net pension plan liability adjustment

(335)

89

(246)

SERP:

Unrealized net actuarial loss

Less: amortization of unrecognized loss

(39)

10

(29)

Net SERP liability adjustment

39

(10)

29

Other comprehensive loss

$

(1,816)

$

478

$

(1,338)

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Components of Other Comprehensive Loss
(in thousands)

Before
Tax
Amount

Tax
(Expense)
Benefit

Net

For the three months ended June 30, 2023

Available for sale (AFS) securities with credit related impairment:

Unrealized holding gains

$

198

$

(87)

$

111

Less: accretable yield recognized in income

51

(11)

40

unrealized losses on investments with credit related impairment

147

(76)

71

Available for sale securities – all other:

Unrealized holding losses

(2,221)

567

(1,654)

Held to maturity securities:

Unrealized holding gains

Less: amortization recognized in income

(164)

35

(129)

Net unrealized gains on HTM securities

164

(35)

129

Cash flow hedges:

Unrealized holding gains

204

(54)

150

Pension Plan:

Unrealized net actuarial loss

(63)

21

(42)

Less: amortization of unrecognized loss

(249)

54

(195)

Net pension plan liability adjustment

186

(33)

153

SERP:

Unrealized net actuarial loss

Less: amortization of unrecognized loss

2

2

Net SERP liability adjustment

(2)

(2)

Other comprehensive loss

$

(1,522)

$

369

$

(1,153)

The following table presents the details of amounts reclassified from accumulated other comprehensive loss for the six- and three-month periods ended June 30, 2024 and 2023:

Amounts Reclassified from

Six Months Ended

Accumulated Other Comprehensive Loss

June 30,

Affected Line Item in the Statement

(in thousands)

    

2024

    

2023

    

Where Net Income is Presented

Net unrealized gains on available for sale investment securities with credit related impairment:

Accretable yield

$

101

$

101

Interest income on taxable investment securities

Taxes

(24)

(24)

Provision for income tax expense

$

77

$

77

Net of tax

Net unrealized losses on held to maturity securities:

Amortization

$

(320)

$

(345)

Interest income on taxable investment securities

Taxes

84

83

Provision for income tax expense

$

(236)

$

(262)

Net of tax

Net pension plan liability adjustment:

Amortization of unrecognized loss

$

(406)

$

(499)

Other Expense

Taxes

107

120

Provision for income tax expense

$

(299)

$

(379)

Net of tax

Net SERP liability adjustment:

Amortization of unrecognized (loss)/gain

$

(78)

$

4

Other Expense

Taxes

20

(1)

Provision for income tax expense

$

(58)

$

3

Net of tax

Total reclassifications for the period

(516)

(561)

Net of tax

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Amounts Reclassified from

Three Months Ended

Accumulated Other Comprehensive Loss

June 30,

Affected Line Item in the Statement

(in thousands)

2024

2023

Where Net Income is Presented

Net unrealized gains on available for sale investment securities with credit related impairment:

Accretable yield

$

51

$

51

Interest income on taxable investment securities

Taxes

(11)

(11)

Provision for income tax expense

$

40

$

40

Net of tax

Net unrealized losses on held to maturity securities:

Amortization

$

(160)

$

(164)

Interest income on taxable investment securities

Taxes

42

35

Provision for income tax expense

$

(118)

$

(129)

Net of tax

Net pension plan liability adjustment:

Amortization of unrecognized loss

$

(203)

$

(249)

Other expense

Taxes

53

54

Provision for income tax expense

$

(150)

$

(195)

Net of tax

Net SERP liability adjustment:

Amortization of unrecognized loss

$

(39)

$

2

Other expense

Taxes

10

Provision for income tax expense

$

(29)

$

2

Net of tax

Total reclassifications for the period

$

(257)

$

(282)

Net of tax

Note 8 - Equity Compensation Plan Information

At the 2018 Annual Meeting of Shareholders, First United Corporation’s shareholders approved the First United Corporation 2018 Equity Compensation Plan (the “Equity Plan”), which authorizes the issuance of up to 325,000 shares of common stock to employees, directors and qualifying consultants pursuant to stock options, stock appreciation rights, stock awards, dividend equivalents, and other stock-based awards.

The Corporation complies with the provisions of ASC Topic 718, Compensation-Stock Compensation, in measuring and disclosing stock compensation cost.  The measurement objective in ASC Paragraph 718-10-30-6 requires public companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The cost is recognized in expense over the period in which an employee is required to provide service in exchange for the award (the vesting period).

Pursuant to First United Corporation’s director compensation policy, each director receives an annual retainer of 1,000 shares of First United Corporation common stock, plus $15,000 to be paid, at the director’s election, in cash or additional shares of common stock.   In May 2024, a total of 14,325 fully vested shares of common stock were issued to directors, which had a grant date fair value of $21.94 per share.  In May 2023, a total of 16,931 fully vested shares of common stock were issued to directors, which had a grant date fair value of $13.23 per share.  In January 2023, a total of 333 fully vested shares of common stock were issued to a new director, which had a grant date fair value of $19.36 per share.  In October 2023, a total of 852 fully vested  shares of common stock were issued  to a new director  which had a grant date  fair value of $16.26  per  share.    Director stock compensation was $134,964 and $138,001 for the six-month periods ending June 30, 2024 and 2023, respectively. Director stock compensation expense was $73,027 and $62,500 for the three-month periods ended June 30, 2024 and 2023, respectively.  

Employee stock compensation expense was $5,757 and $7,104 for the six-month periods ended June 30, 2024 and 2023, respectively.  Employee stock compensation expense was $699 and $4,272 for the three-month periods ended June 30, 2024 and 2023, respectively.

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Restricted Stock Units

On March 26, 2020, pursuant to the Corporation’s Long Term Incentive Plan (the "LTIP"), which is a sub-plan of the Equity Plan, the Compensation Committee of First United Corporation’s Board of Directors (the "Compensation Committee") granted RSUs to the Corporation’s principal executive officer, its principal financial officer, and certain of its other executive officers. An RSU contemplates the issuance of shares of common stock of First United Corporation if and when the RSU vests.

The RSUs granted to each of the foregoing officers consist of (i) a performance vesting award for a three year performance period and (ii) a time-vesting award that will vest ratably over a three year period. Target performance levels were set based on the annual budget which supports the Corporation’s long-term objective of achieving high performance as compared to peers. Threshold performance is the minimum level of acceptable performance as defined by the Compensation Committee and maximum performance represented a level potentially achievable under ideal circumstances. Achievement of all threshold performance levels would result in each executive participant earning a payout at 50% of his or her respective target award opportunity. Achievement of all target performance levels would result in the executive participant earning the target award.  Achievement at or above all maximum performance levels would result in the executive participant earning 150% of the target opportunity. Actual results for any goal that falls between performance levels would be interpolated to calculate a proportionate award.

To receive any shares under an RSU, a grantee must be employed by the Corporation or one of its subsidiaries on the applicable vesting date, except that a grantee whose employment terminates prior to such vesting date due to death, disability or retirement will be entitled to a pro-rated portion of the shares subject to the RSUs, assuming that, in the case of performance-vesting RSUs, the performance goals had been met at their "target" levels.

In May 2021, RSUs relating to 7,389 performance vesting shares and 3,693 time vesting shares (target level) for plan year 2021 were granted, which had a grant date fair market value of $17.93 per share of common stock underlying each RSU.  The performance period for the performance-vesting RSUs was the three-year period ended December 31, 2023.  On March 9, 2024, it was determined that 7,389 performance-vesting RSUs failed to vest.  The time-vesting RSUs will vest ratably over a three year period beginning on May 5, 2022. On May 5, 2022, 1,230 shares of the 3,693 time-vesting RSUs were issued to participants.  On May 5, 2023, 1,230 additional shares of the 3,693 time-vesting RSUs were issued to participants.  On May 5, 2024, the remaining 1,233 shares of the 3,693 time-vesting RSUs were issued to participants.  Stock compensation expense was $7,365 and $33,142 for the six-month periods ended June 30, 2024 and 2023, respectively.  Stock compensation expense was $1,841 and $16,571 for the three-month periods ended June 30, 2024 and 2023, respectively.  All compensation expense related to the 2021 LTIP plans was recognized as of June 30, 2024.

In March 2022, RSUs relating to 8,096 performance vesting shares and 6,238 time vesting shares (target level) for plan year 2022 were granted, which had a grant date fair market value of $21.88 per share of common stock underlying each RSU.  The performance period for the performance-vesting RSUs is the three-year period ending December 31, 2024.  The time-vesting RSUs will vest ratably over a three year period beginning on March 9, 2023.  On March 9, 2023, 2,079 shares of the 6,238 time-vesting RSUs were issued to participants. On March 9, 2024, 2,079 additional shares of the 6,238 time-vesting RSUs were issued to participants.  Stock compensation expense was $55,290 for each of the six-month periods ended June 30, 2024 and 2023.  Stock compensation expense was $26,145 for both of the three-month periods ended June 30, 2024 and 2023. Unrecognized compensation expense as of June 30, 2024 related to unvested RSUs was $78,436.

In March 2023, RSUs relating to 10,214 performance vesting shares and 7,920 time vesting shares (target level) for plan year 2023 were granted, which had a grant date fair market value of $18.25 per share of common stock underlying each RSU.  The performance period for the performance-vesting RSUs is the three year period ending December 31, 2025.  The time-vesting RSUs will vest ratably over a three year period beginning on March 15, 2024.  On March 15, 2024, 2,639 shares of the 7,920 time-vesting RSUs were issued to participants.  Stock compensation expense was $55,170 and $27,585 for the six-month periods ended June 30, 2024 and 2023, respectively.  Stock compensation expense was $27,585 for both of the three-month periods ended June 30, 2024 and 2023.  Unrecognized compensation expense as of June 30, 2024 related to unvested RSUs was $193,094.

In May 2024, RSUs relating to 8,593 performance vesting shares and 6,662 time vesting shares (target level) for plan year 2024 were granted, which had a grant date fair market value of $22.26 per share of common stock underlying each RSU.  The performance period for the performance-vesting RSUs is the three year period ended December 31, 2026.  The time-vesting RSUs will vest ratably over a three year period beginning on May 20, 2025.  Stock compensation expense was $9,438 for the six- and

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three-month periods ended June 30, 2024.  Unrecognized compensation expense as of June 30, 2024 related to unvested RSUs was $330,330.

Note 9– Derivative Financial Instruments

As a part of managing interest rate risk, the Corporation entered into interest rate swap agreements to modify the re-pricing characteristics of certain interest-bearing liabilities. The Corporation has designated its interest rate swap agreements as cash flow hedges under the guidance of ASC Subtopic 815-30, Derivatives and Hedging – Cash Flow Hedges. Cash flow hedges have the effective portion of changes in the fair value of the derivative, net of taxes, recorded in net accumulated other comprehensive income.

In March 2016, the Corporation entered into four interest rate swap contracts totaling $30.0 million notional amount, hedging future cash flows associated with floating rate trust preferred debt. As of June 30, 2024, $15.0 million notional amount remains.   The interest rate swap creates an effective fixed interest rate of 4.6550% on the $15.0 million notional amount of the Corporation’s junior subordination debt until the interest rate swap’s maturity in March 2026.  The fair value of the interest rate swap contracts was $0.8 million at June 30, 2024 and December 31, 2023.

For the six- and three-month periods ended June 30, 2024, the Corporation recorded an increase in the value of the derivatives of $4,000 and the related deferred tax of $1 thousand and a decrease of $69,000 and the related deferred tax benefit of $18,000, respectively, in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges.  This compares to an increase of $16,000 and the related deferred tax of $4,000 and an increase of $204,000 and related deferred tax of $54,000 for the six- and three-months ended June 30, 2023, respectively.  ASC Subtopic 815-30 requires the net accumulated other comprehensive loss to be reclassified to earnings if the hedge becomes ineffective or is terminated. There was no hedge ineffectiveness recorded for any of the the six-month periods or three-month periods ended June 30, 2024 or 2023. The Corporation does not expect any material losses relating to these hedges to be reclassified into earnings within the next 12 months.

Interest rate swap agreements are entered into with counterparties that meet established credit standards and the Corporation believes that the credit risk inherent in these contracts is not significant as of June 30, 2024.

The table below discloses the impact of derivative financial instruments on the Corporation’s Consolidated Financial Statements for the six- and three-month periods ended June 30, 2024 and 2023.

Derivative in Cash Flow Hedging Relationships

Amount of gain or

(loss) recognized in

Amount of gain or

Amount of gain or

income or derivative

(loss) recognized in

(loss) reclassified from

(ineffective portion

OCI on derivative

accumulated OCI into

and amount excluded

(effective portion),

income (effective

from effectiveness

(in thousands)

    

net of tax

    

portion) (a)

    

testing) (b)

Interest rate contracts:

Six months ended:

June 30, 2024

$

3

$

$

June 30, 2023

12

Three months ended:

June 30, 2024

$

(51)

$

$

June 30, 2023

150

Notes:

(a)Reported as interest expense
(b)Reported as other income

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Note 10 – Regulatory Capital Requirements

The following table presents the Bank’s capital ratios as of June 30, 2024 and December 31, 2023.

    

June 30,
2024

    

December 31,
2023

    

Required for
Capital
Adequacy
Purposes

    

Required
to be Well
Capitalized

 

Total Capital (to risk-weighted assets)

14.41

%  

14.05

%  

8.00

%  

10.00

%

Tier 1 Capital (to risk-weighted assets)

13.16

%  

12.81

%  

6.00

%  

8.00

%

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

13.16

%  

12.81

%  

4.50

%  

6.50

%

Tier 1 Capital (to average assets)

10.47

%  

9.92

%  

4.00

%  

5.00

%

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

Note 11 – Deposits

The following table summarizes deposits at June 30, 2024 and December 31, 2023.

(in thousands)

    

June 30, 2024

    

December 31, 2023

Balance

Percent

Balance

Percent

Non-Interest-bearing deposits:

$

423,970

    

28%

$

427,670

28%

Interest-bearing deposits:

Demand

373,046

24%

350,860

22%

Money Market

401,628

26%

385,649

25%

Savings deposits

180,030

12%

191,265

12%

Time deposits- retail

143,397

9%

165,533

11%

Time deposits- brokered

15,000

1%

30,000

2%

Total Deposits

$

1,537,071

100%

$

1,550,977

100%

Note 12 – Borrowed Funds

The following is a summary of borrowings at June 30, 2024 and December 31, 2023:

(in thousands)

June 30,
2024

December 31,
2023

Short-term borrowings:

Securities sold under agreements to repurchase:

Outstanding at end of period

$

22,564

$

45,418

Weighted average interest rate at end of period

0.23%

0.27%

Maximum amount outstanding as of any month end

$

44,415

$

59,777

Average amount outstanding

$

39,625

$

50,498

Approximate weighted average rate during the period

0.27%

0.24%

Bank Term Funding Program, fixed rate of 4.87% at June 30, 2024

$

40,000

$

Long-term borrowings:

FHLB advances, bearing fixed interest rate of 4.53% at June 30, 2024 and rates ranging from 4.53% to 4.69% at December 31, 2023.

$

40,000

$

80,000

Junior subordinated debt, bearing variable interest rate of 8.35% at June 30, 2024 and 8.39% at December 31, 2023

30,929

30,929

Total borrowings outstanding

$

133,493

$

156,347

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Short-term borrowings increased by $17.1 million, as the Bank borrowed $40.0 million from the Bank Term Funding Program of the Board of Governors of the Federal Reserve System in January 2024, which was partially offset by a decrease of approximately $22.0 million in other short-term borrowings to the ICS deposit product as a result of management’s strategy to release pledging of investment securities for municipalities to increase available liquidity.

At June 30, 2024, the repurchase agreements were secured by $34.2 million in investment securities issued by government related agencies.  A minimum of 102% of fair value is pledged against account balances.

Long-term borrowings decreased by $40.0 million as a $40.0 million advance from the Federal Home Loan Bank matured in March 2024 and was fully repaid.

Note 13 – Segment Reporting

Currently, the Corporation conducts business in two operating segments:  (i) Community Banking; and (ii) Trust and Investment Services.  The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report.

Business activity for the operating segments are as follows:

Community Banking:  The Community Banking segment is conducted through the Bank and involves delivering a broad range of financial products and services, including various loan and deposit products, to consumer, business, and not-for-profit customers.  Parent company income and assets are included in the Community Banking segment, as the majority of parent company functions are related to this segment.  Major revenue sources include net interest income, gains on sales of mortgage loans, and service charges on deposit accounts.  Expenses include personnel, occupancy, marketing, equipment, and other expenses.  Non-cash charges other than depreciation of fixed assets were immaterial for the six- and three-month periods ended June 30, 2024 and 2023.

Trust and Investment Services:  The Trust and Investment Services segment is conducted through the Bank and offers corporate trustee services, trust and estate administration, IRA administration and custody services.  Revenues for this segment is generated from administration, service and custody fees, as well as management fees that are derived from Assets Under Management.  Expenses include personnel, occupancy, marketing, equipment, and other expenses.   Non-cash charges associated with amortization of intangibles were approximately $104,000 for both of the six-month periods ended June 30, 2024 and 2023 and $52,000 for both of the three-month periods ended June 30, 2024 and 2023.

Information for the operating segments for the six- and three-month periods ended June 30, 2024 and 2023 are presented in the following tables:

Six Months Ended

June 30, 2024

Trust and

Community

Investment

(in thousands)

Banking

Services

Total

Interest income

$

45,011

$

-

$

45,011

Interest expense

15,961

-

15,961

Credit loss expense

2,140

-

2,140

Non-interest income

4,417

5,299

9,716

Non-interest expense

22,609

2,636

25,245

Income before income taxes and intercompany fees

8,718

2,663

11,381

Intercompany management fee income (expense)

6

(6)

-

Income before income taxes

8,724

2,657

11,381

Income tax expense

2,210

559

2,769

Net income

$

6,514

$

2,098

$

8,612

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Six Months Ended

June 30, 2023

Trust and

Community

Investment

(in thousands)

Banking

Services

Total

Interest income

$

37,801

$

-

$

37,801

Interest expense

9,109

-

9,109

Credit loss expense

938

-

938

Non-interest income

4,411

4,551

8,962

Non-interest expense

22,562

2,587

25,149

Income before income taxes and intercompany fees

9,603

1,964

11,567

Intercompany management fee income (expense)

6

(6)

-

Income before income taxes

9,609

1,958

11,567

Income tax expense

2,367

411

2,778

Net income

$

7,242

$

1,547

$

8,789

Three Months Ended

June 30, 2024

Trust and

Community

Investment

(in thousands)

Banking

Services

Total

Interest income

$

23,113

$

-

$

23,113

Interest expense

7,875

-

7,875

Credit loss expense

1,194

-

1,194

Non-interest income

2,225

2,616

4,841

Non-interest expense

11,015

1,349

12,364

Income before income taxes and intercompany fees

5,254

1,267

6,521

Intercompany management fee income (expense)

3

(3)

-

Income before income taxes

5,257

1,264

6,521

Income tax expense

1,341

266

1,607

Net income

$

3,916

$

998

$

4,914

Three Months Ended

June 30, 2023

Trust and

Community

Investment

(in thousands)

Banking

Services

Total

Interest income

$

19,972

$

-

$

19,972

Interest expense

5,798

-

5,798

Credit loss credit

395

-

395

Non-interest income

2,286

2,283

4,569

Non-interest expense

11,177

1,334

12,511

Income before income taxes and intercompany fees

4,887

950

5,837

Intercompany management fee income (expense)

3

(3)

-

Income before income taxes

4,890

947

5,837

Income tax expense

1,224

199

1,423

Net income

$

3,666

$

748

$

4,414

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Total non-fiduciary assets of the trust and investment services segment were $0.7 million (including $0.6 million in intangible assets) at both June 30, 2024 and December 31, 2023.  All other assets (including goodwill of $11.0 million at June 30, 2024 and December 31, 2023 and other intangible assets of $0.4 million and $0.5 million at June 30, 2024 and December 31, 2023, respectively) were held by the community banking segment.

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 June 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 June 30, 2024 was $164.2 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.

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SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data for the six-month periods ended June 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 six months ended

June 30,

    

2024

    

2023

 

Per Share Data

Basic net income per common share

$

1.31

$

1.32

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

$

1.37

$

1.32

Diluted net income per common share

$

1.31

$

1.31

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

$

1.37

$

1.31

Basic book value per common share

$

25.39

$

23.12

Diluted book value per common share

$

25.34

$

23.07

Significant Ratios:

Return on Average Assets

0.89

%

0.95

%

Accelerated depreciation expense, net of tax

0.09

%

%

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

0.98

%

0.95

%

Return on Average Equity

10.51

%

11.43

%

Accelerated depreciation expense, net of tax

1.04

%

%

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

11.55

%

11.43

%

Average Equity to Average Assets

8.42

%

8.21

%

Bank Capital Ratios:

Consolidated Total Capital (to risk weighted assets)

14.41

%

14.05

%

Consolidated Tier 1 Capital (to risk weighted assets)

13.16

%

12.81

%

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

13.16

%

12.81

%

Consolidated Tier 1 Capital (to average assets)

10.47

%

9.92

%

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

RESULTS OF OPERATIONS

Overview

Consolidated net income was $4.9 million for the second quarter of 2024.   This compares to $4.4 million for the second quarter of 2023.  Consolidated net income for the first quarter of 2024 was $3.7 million, which was inclusive of $0.4 million, net of tax, in accelerated depreciation expense related to branch closures.  Basic and diluted earnings per share were $0.75 for the second quarter of 2024 compared to $0.66 per share for the second quarter of 2023 and $0.56 per share for the first quarter of 2024.

The $0.5 million increase in quarterly net income year over year was primarily driven by a $1.1 million increase in net interest income, which was offset slightly by an increase of $0.8 million in provision expense.  The increase in net interest income was primarily related to the $3.4 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 $2.0 million increase in interest paid on deposits due to continued competitive pricing pressures.  An increase of $0.5 million in short-term borrowings related to the FRB’s Bank Term Funding Program (“BTFP”) was offset by the reduction in long-term borrowings related to the repayment of the $40.0 million Federal Home

48

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Loan Bank (“FHLB”) advance in the first quarter of 2024.  The year-over-year increase in provision for credit losses was primarily driven by increased charge-offs in the commercial and industrial portfolio related to one non-accrual credit where collateral was sold through a liquidation auction at depressed prices.   The charge-off was partially offset by continued lower historical losses and improving qualitative factors related to the reduction of non-accrual balances.  Comparing the second quarter of 2024 to the same period in 2023, other activity included a $0.3 million increase in wealth management income due to improving market conditions and growth of new relationships and a decrease in operating expenses of $0.1 million.   The provision for income tax was up $0.2 million when comparing the two quarters due to increased income before tax.

Comparing the six months ended June 30, 2024 to the six months ended June 30, 2023, net interest income, on a non-GAAP,  fully tax equivalent (“FTE”) basis, was stable.  Interest income increased by $6.9 million.   Average loan balances increased by $112.9 million and the overall yield increased by 61 basis points in correlation with the rising rate environment and new loans booked at higher rates as well as the repricing of adjustable-rate loans.  Interest expense on deposits increased by $5.6 million, while the average deposit balances increased by $42.5 million, driven by increases of $77.9 million in money market balances and $27.4 million in retail time deposits, partially offset by decreases in savings balances of $50.1 million.  Interest expense on short-term borrowings increased by $0.9 million due to the Bank’s utilization of the BTFP in January 2024.  The increased interest expense resulted in an overall increase of 99 basis points on interest bearing liabilities.  The net interest margin for the six months ended June 30, 2024 was 3.31% compared to 3.39% for the six months ended June 30, 2023.

Other operating income, including net gains, for the second quarter of 2024 increased by $0.3 million when compared to the same period of 2023.  The growth was driven by an increase of $0.3 million in wealth management 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 second quarter of 2024 to the same time period of 2023 primarily due to reduced activity in the elevated interest rate environment.  Other operating income on service charges and debit card income remained stable.

Other operating income for the six months ended June 30, 2024 increased by $0.8 million when compared to the same period of 2023.  This increase was primarily due to the $0.8 million increase in wealth management income due to 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 six months of 2024 to the six months of 2023.

Operating expenses decreased by $0.1 million in the second quarter of 2024 when compared to the second quarter of 2023.  The decrease was related to a $0.2 million decrease in equipment and occupancy expenses resulting from branch closures in late 2023 and a $0.2 million decrease in check fraud related expenses.   These decreases were partially offset by a $0.4 million increase in salaries related to increased health insurance claims, higher salaries and benefits associated with normal merit increases effective April 1, 2024, and reduced loan origination costs due to lower loan production.  Other increases in data processing and marketing expenses were offset by decreases in professional services, contract labor, telephone and other miscellaneous expenses.

For the six months ended June 30, 2024, non-interest expenses increased by $0.1 million when compared to the six months ended June 30, 2023.  Increases in salaries and employee benefits of $0.2 million due to normal merit increases effective April 1, 2024, and increases in FDIC premiums, data processing, equipment and occupancy were offset by decreases in professional services, contract labor, investor relations and other miscellaneous expenses such as pension related expenses, check fraud and membership dues and licenses.  

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

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The tables below summarize net interest income for the six- and three-month periods ended June 30, 2024 and 2023.

Non-GAAP

GAAP

Six Months Ended

Six Months Ended

June 30,

June 30,

(in thousands)

    

2024

    

2023

    

2024

    

2023

    

Interest income

$

45,126

$

38,253

$

45,011

$

37,801

Interest expense

15,961

9,109

15,961

9,109

Net interest income

$

29,165

$

29,144

$

29,050

$

28,692

Net interest margin %

3.31

%

3.39

%

3.29

%

3.34

%

Three Months Ended

Three Months Ended

June 30,

June 30,

(dollars in thousands)

2024

2023

2024

2023

Interest income

$

23,171

$

20,197

$

23,113

$

19,972

Interest expense

7,875

5,798

7,875

5,798

Net interest income

$

15,296

$

14,399

$

15,238

$

14,174

Net interest margin %

3.49

%

3.26

%

3.47

%

3.21

%

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

Six Months Ended

June 30,

2024

2023

Average

Average

Average

Average

(in thousands)

    

Balance

    

Interest

    

Yield/Rate

    

Balance

    

Interest

    

Yield/Rate

 

Assets

Loans

$

1,411,619

$

39,471

5.62

%

$

1,298,743

$

32,251

5.01

%

Investment Securities:

Taxable

281,524

3,441

2.46

%

338,817

3,547

2.11

%

Non taxable

7,803

189

4.87

%

26,099

963

7.44

%

Total

289,327

3,630

2.52

%

364,916

4,510

2.49

%

Federal funds sold

65,251

1,795

5.53

%

62,361

1,409

4.56

%

Interest-bearing deposits with other banks

1,352

49

7.29

%

3,342

45

2.72

%

Other interest earning assets

4,248

181

8.57

%

3,069

38

2.56

%

Total earning assets

1,771,797

45,126

5.12

%

1,732,431

38,253

4.45

%

Allowance for loan losses

(17,940)

(15,905)

Non-earning assets

201,873

172,461

Total Assets

$

1,955,730

$

1,888,987

Liabilities and Shareholders’ Equity

Interest-bearing demand deposits

$

361,358

$

2,937

1.63

%

$

365,491

$

2,021

1.11

%

Interest-bearing money markets - Retail

392,164

6,774

3.47

%

314,246

3,107

1.99

%

Interest-bearing money markets - Brokered

55

1

3.66

%

Savings deposits

186,280

94

0.10

%

236,383

135

0.12

%

Time deposits - Retail

152,049

2,134

2.82

%

124,684

832

1.35

%

Time deposits - Brokered

27,198

724

5.35

%

35,771

933

5.26

%

Short-term borrowings

72,626

970

2.69

%

52,332

60

0.23

%

Long-term borrowings

86,973

2,327

5.38

%

77,338

2,021

5.27

%

Total interest-bearing liabilities

1,278,703

15,961

2.51

%

1,206,245

9,109

1.52

%

Non-interest-bearing deposits

478,655

497,226

Other liabilities

33,624

30,497

Shareholders’ Equity

164,748

155,019

Total Liabilities and Shareholders’ Equity

$

1,955,730

$

1,888,987

Net interest income and spread

$

29,165

2.61

%

$

29,144

2.93

%

Net interest margin

3.31

%

3.39

%

(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 six-month periods ended June 30, 2024 and 2023 was $116 and $452, respectively.
(2)Net interest margin is calculated as net interest income divided by average earning assets.
(3)The average yields on investments are based on amortized cost.

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Table of Contents

Three Months Ended

June 30,

2024

2023

(dollars in thousands)

Average
Balance

Interest

Average
Yield/Rate

Average
Balance

Interest

Average
Yield/Rate

Assets

Loans

$

1,415,353

$

20,237

5.75

%

$

1,317,728

$

16,794

5.11

%

Investment Securities:

Taxable

268,522

1,697

2.54

%

337,032

1,779

2.12

%

Non taxable

7,800

95

4.90

%

26,093

479

7.36

%

Total

276,322

1,792

2.61

%

363,125

2,258

2.49

%

Federal funds sold

66,658

1,037

6.26

%

84,629

1,102

5.22

%

Interest-bearing deposits with other banks

2,194

18

3.30

%

1,735

19

4.46

%

Other interest earning assets

3,390

87

10.32

%

4,490

24

2.23

%

Total earning assets

1,763,917

23,171

5.28

%

1,771,707

20,197

4.57

%

Allowance for loan losses

(18,184)

(16,982)

Non-earning assets

198,749

175,369

Total Assets

$

1,944,482

$

1,930,094

Liabilities and Shareholders’ Equity

Interest-bearing demand deposits

$

369,835

$

1,496

1.63

%

$

377,773

$

1,132

1.20

%

Interest-bearing money markets - Retail

400,747

3,514

3.53

%

304,322

1,809

2.38

%

Interest-bearing money markets - Brokered

111

1

3.62

%

Savings deposits

182,988

46

0.10

%

226,172

56

0.10

%

Time deposits - retail

146,420

1,016

2.79

%

130,634

552

1.69

%

Time deposits - brokered

24,396

325

5.36

%

61,081

801

5.26

%

Short-term borrowings

71,900

509

2.85

%

47,356

29

0.25

%

Long-term borrowings

70,929

968

5.49

%

110,929

1,419

5.13

%

Total interest-bearing liabilities

1,267,326

7,875

2.50

%

1,258,267

5,798

1.85

%

Non-interest-bearing deposits

479,232

484,952

Other liabilities

32,884

31,517

Shareholders’ Equity

165,040

155,358

Total Liabilities and Shareholders’ Equity

$

1,944,482

$

1,930,094

Net interest income and spread

$

15,296

2.78

%

$

14,399

2.72

%

Net interest margin

3.49

%

3.26

%

(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 June 30, 2024 and 2023 was $58 and $225, respectively.

(2)Net interest margin is calculated as net interest income divided by average earning assets.
(3)The average yields on investments are based on amortized cost.

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Table of Contents

Net interest income, on a non-GAAP, FTE basis, increased by $0.9 million for the second quarter of 2024 when compared to the second quarter of 2023.  This increase was driven by a $3.0 million increase in interest income.   Interest income on loans increased by $3.4 million due to the increase in average balances of $97.6 million and a 64 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 rising rate environment.   Investment income decreased by $0.5 million due to a decrease of $86.8 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 12 basis points primarily driven by the increased rate on the trust preferred portfolio and the maturity and sale of lower rate investments.   Interest expense increased by $2.1 million year over year due to an increase of 70 basis points on interest paid on deposit accounts.   The average deposit balances increased by $24.5 million when compared to the second quarter of 2023 due primarily to the increase of $96.4 million in money market account, which was partially offset by decreases of $43.2 million and $36.7 million in average savings deposits and average time deposits, respectively.    

Comparing the six months ended June 30, 2024 to the six months ended June 30, 2023, net interest income, on a non-GAAP, FTE basis, was stable.  Interest income increased by $6.9 million.   Average loan balances increased by $112.9 million and the overall yield increased by 61 basis points in correlation with the rising rate environment and new loans booked at higher rates as well as the repricing of adjustable-rate loans.  Interest expense on deposits increased by $5.6 million while the average deposit balances increased by $42.5 million, driven by increases of $77.9 million in money market balances and $27.4 million in retail time deposits, partially offset by decreases in savings balances of $50.1 million.  Interest expense on short-term borrowings increased by $0.9 million due to the Bank’s utilization of the BTFP in January 2024.  The increased interest expense resulted in an overall increase of 99 basis points on interest bearing liabilities.  The net interest margin for the six months ended June 30, 2024 was 3.31% compared to 3.39% for the six months ended June 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 six- and three-month periods ended June 30, 2024 and 2023:

For the six months ended June 30, 2024

compared to the six months ended June 30, 2023

(in thousands and tax equivalent basis)

    

Volume

    

Rate

    

Net

Interest Income:

Loans

$

2,828

$

4,392

$

7,220

Taxable Investments

(604)

498

(106)

Non-taxable Investments

(681)

(93)

(774)

Federal funds sold

66

320

386

Interest-bearing deposits

(27)

31

4

Other interest earning assets

15

128

143

Total interest income

1,597

5,276

6,873

Interest Expense:

Interest-bearing demand deposits

(23)

939

916

Interest-bearing money markets- retail

775

2,892

3,667

Interest-bearing money markets- brokered

1

0

1

Savings deposits

(30)

(11)

(41)

Time deposits - retail

185

1,117

1,302

Time deposits - brokered

(225)

16

(209)

Short-term borrowings

23

887

910

Long-term borrowings

254

52

306

Total interest expense

960

5,892

6,852

Net interest income

$

637

$

(616)

$

21

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

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Table of Contents

For the Three months ended June 30, 2024 compared to the Three months ended June 30, 2023

(in thousands and tax equivalent basis)

Volume

Rate

Net

Interest Income:

Loans

$

1,247

$

2,196

$

3,443

Taxable Investments

(363)

281

(82)

Non-taxable Investments

(337)

(47)

(384)

Federal funds sold

(235)

170

(65)

Interest-bearing deposits

5

(6)

(1)

Other interest earning assets

(6)

69

63

Total interest income

311

2,663

2,974

Interest Expense:

Interest-bearing demand deposits

(24)

388

364

Interest-bearing money markets- retail

574

1,131

1,705

Interest-bearing money markets- brokered

1

0

1

Savings deposits

(11)

1

(10)

Time deposits - retail

67

397

464

Time deposits - brokered

(482)

6

(476)

Short-term borrowings

15

465

480

Long-term borrowings

(513)

62

(451)

Total interest expense

(373)

2,450

2,077

Net interest income

$

684

$

213

$

897

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

Provision for Credit Losses

Specific allocations have been made for loans where management has determined that the collateral supporting the loans is not adequate to cover the loan balance, and the qualitative factors affecting the 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 six months of 2024 and 2023, net provision expense was $2.1 million and $0.9 million, respectively.  For the second quarters of 2024 and 2023, net provision expense was $1.2 million and $0.4 million, respectively.  The increased provision expense recorded in 2024 was primarily related to $1.1 million in charge-offs related to one non-accrual commercial and industrial loan relationship and was partially offset by improving qualitative risk factors of our loan portfolio.

Other Income

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

Income as % of

Income as % of

Total Other Income

Total Other Income

Six Months Ended

Three Months Ended

June 30,

June 30,

(in thousands)

    

2024

    

2023

    

2024

    

2023

Service charges on deposit accounts

$

1,112

    

12%

$

1,062

    

12%

$

556

    

12%

$

546

    

12%

Other service charges

440

5%

476

5%

225

5%

244

6%

Trust department

4,443

46%

3,995

46%

2,255

47%

2,025

45%

Debit card income

1,931

20%

1,986

23%

999

21%

1,031

23%

Bank owned life insurance

660

7%

616

7%

334

7%

311

7%

Brokerage commissions

857

9%

555

6%

362

7%

258

6%

Other income

132

1%

132

1%

51

1%

68

1%

$

9,575

100%

$

8,822

100%

$

4,782

100%

$

4,483

100%

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Table of Contents

Other Operating Expenses

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

Expense as % of

Expense as % of

Total Other Operating Expenses

Total Other Operating Expenses

Six Months Ended

Three Months Ended

June 30,

June 30,

(in thousands)

    

2024

    

2023

    

2024

    

2023

Salaries and employee benefits

$

14,413

    

57%

$

14,166

    

56%

$

7,256

    

59%

$

6,870

    

55%

FDIC premiums

554

2%

470

2%

285

2%

277

2%

Equipment

1,558

6%

1,527

6%

635

5%

747

6%

Occupancy expense of premises

1,606

6%

1,527

6%

652

5%

742

6%

Data processing expense

2,740

11%

2,612

10%

1,422

11%

1,306

10%

Marketing expense

318

1%

280

1%

184

1%

160

1%

Professional services

935

4%

1,014

4%

449

4%

520

4%

Contract labor

267

1%

291

1%

84

1%

157

1%

Telephone

212

1%

226

1%

103

1%

116

1%

Other real estate owned

100

0%

142

1%

14

0%

18

0%

Investor relations

144

1%

206

1%

91

1%

123

1%

Contributions

116

1%

143

1%

66

1%

79

1%

Other

2,282

9%

2,545

10%

1,123

9%

1,396

12%

$

25,245

100%

$

25,149

100%

$

12,364

100%

$

12,511

100%

Provision for Income Taxes

In reporting interim financial information, income tax provisions should be determined under the procedures set forth in Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 740, Income Taxes (Section 740-270-30). This guidance provides that at the end of each interim period, an entity should make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. The rate so determined should be used in providing for income taxes on a current year-to-date basis. The effective tax rate should reflect anticipated investment tax credits, capital gains rates, and other available tax planning alternatives. In arriving at this effective tax rate, however, no effect should be included for the tax related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect in reports for the interim period or for the fiscal year.

The effective income tax rates as a percentage of income for the six month periods ended June 30, 2024 and June 30, 2023 were 24.3% and 24.0%, 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.

55

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 June 30,

Six months ended June 30,

2024

2023

2024

2023

(in thousands, except for per share amount)

Net income - as reported

$

4,914

$

4,414

$

8,612

$

8,789

Adjustments:

Accelerated depreciation expenses

562

Income tax effect of adjustments

(137)

Adjusted net income (non-GAAP)

$

4,914

$

4,414

$

9,037

$

8,789

Diluted earnings per share - as reported

$

0.75

$

0.66

$

1.31

$

1.31

Adjustments:

Accelerated depreciation expenses

0.08

Income tax effect of adjustments

(0.02)

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

$

0.75

$

0.66

$

1.37

$

1.31

Significant Ratios:

Six months ended June 30,

Return on Average Assets - as reported

0.89%

0.95%

Accelerated depreciation expenses

0.12%

Income tax effect of adjustments

(0.03%)

Adjusted Return on Average Assets (non-GAAP)

0.98%

0.95%

Return on Average Equity - as reported

10.51%

11.43%

Accelerated depreciation expenses

1.38%

Income tax effect of adjustments

(0.34%)

Adjusted Return on Average Equity (non-GAAP)

11.55%

11.43%

FINANCIAL CONDITION

Balance Sheet Overview

Total assets at June 30, 2024 were $1.9 billion, representing a $37.3 million decrease since December 31, 2023.  During the first six months of 2024, cash and interest-bearing deposits in other banks decreased by $4.7 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. Gross loans increased by $16.3 million and other real estate owned (“OREO”) decreased by $1.5 million due to sales of OREO properties.  Other assets, including deferred taxes, premises and equipment, and accrued interest receivable, decreased by $2.7 million.  

Total liabilities at June 30, 2024 were $1.7 billion, representing a $39.6 million decrease since December 31, 2023.  Total deposits decreased by $13.9 million when compared to December 31, 2023.  The decrease in deposits was attributable to decreases in savings deposits of $11.2 million, and retail time deposits of $22.1 million, as well as the repayment of $15.0 million in brokered certificates of deposits, partially offset by increases in demand deposits of $22.2 million and money markets of $16.0 million.  Short-term borrowings increased by $17.1 million since December 31, 2023 due to the Bank’s utilization of the BTFP to obtain $40.0 million in borrowings during January 2024 at a rate of 4.87% with a one-year maturity.   The increase from the BTFP funding was partially offset by the shift of approximately $22.0 million in overnight investment sweep balances to the ICS product as a result of management’s strategy to release pledging of investment securities for municipalities to increase available liquidity.  Long-term borrowings decreased by $40.0 million in the first six month of 2024 when compared to December 31, 2023 due to the repayment of $40.0 million in FHLB borrowings at its maturity in the first quarter of 2024.  

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Table of Contents

Loan Portfolio

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

(in thousands)

    

June 30, 2024

    

December 31, 2023

Commercial real estate

$

501,016

    

35%

$

493,703

    

35%

Acquisition and development

88,214

6%

77,060

5%

Commercial and industrial

265,671

19%

274,604

20%

Residential mortgage

511,109

36%

499,871

36%

Consumer

56,965

4%

61,429

4%

Total Loans

$

1,422,975

100%

$

1,406,667

100%

Outstanding loans of $1.4 billion at June 30, 2024 reflected growth of $16.3 million for the first six months of 2024.  Since December 31, 2023, commercial real estate loans increased by $7.3 million and acquisition and development loans increased by $11.2 million. Commercial and industrial loans decreased by $8.9 million, driven by the repayment of $5.5 million of a non-accrual loan late in second quarter and the $1.1 million charge-off of a non-accrual equipment loan.  Residential mortgage loans increased by $11.2 million and consumer loans decreased by $4.5 million.

New commercial loan production for the three months ended June 30, 2024 was approximately $36.9 million.  The $64.9 million in the pipeline of commercial loans was robust as of June 30, 2024.  At June 30, 2024, unfunded, committed commercial construction loans totaled approximately $12.6 million. Commercial amortization and payoffs were approximately $51.6 million through June 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 second quarter of 2024 was approximately $19.1 million, with most of this production comprised of portfolio mortgages.  The pipeline of in-house, portfolio loans as of June 30, 2024 was $19.4 million.  The residential mortgage production level increased in the second quarter of 2024 due to the seasonality of this line of business, particularly construction lending.  Unfunded commitments related to residential construction loans totaled $13.5 million at June 30, 2024.  

Non-accrual loans totaled $9.4 million at June 30, 2024 compared to $4.0 million at December 31, 2023.  The increase in non-accrual balances at June 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.  The reduction in non-accrual balances during the second quarter of 2024 is related to a borrower’s decision to sell a piece of collateral and reduce outstanding balances by approximately $5.5 million and the charge-off of $1.1 million on another commercial and industrial credit.

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Table of Contents

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

(in thousands)

Non-owner-occupied

Owner-occupied

Multi-family

Total

Accommodations and food services

$

75,083

$

4,704

$

$

79,787

Administration and support, waste management, and remediation services

1,437

1,437

Agriculture, forestry, fishing and hunting

2,201

2,201

Arts, entertainment and recreation

4,552

4,552

Construction

2,067

5,912

8

7,987

Educational services

917

917

Finance and insurance

108

108

Health care and social assistance

6,599

11,631

18,230

Management of companies and enterprises

2,770

2,770

Manufacturing

6,536

6,536

Other services (except public services)

2,250

17,496

314

20,060

Professional, scientific and technical services

2,502

2,502

Public administration

1,492

1,024

2,516

Commercial rental properties

184,705

85,046

269,751

Residential rental properties

502

136

28,428

29,066

Student rental properties

2,734

2,734

Mixed use rental properties

145

537

17,640

18,322

Storage units

18,237

18,237

Real estate rental and leasing- other

4,561

3,280

411

8,252

Retail trade

6

3,766

3,772

Transportation and warehousing

473

473

Wholesale trade

806

806

Total

$

295,647

$

155,834

$

49,535

$

501,016

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.

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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)

    

June 30,
2024

    

% of
Applicable
Portfolio

    

December 31,
2023

    

% of
Applicable
Portfolio

Non-accrual loans:

Commercial real estate

$

599

0.12%

$

826

0.17%

Acquisition and development

97

0.11%

113

0.15%

Commercial and industrial

6,185

2.33%

0.00%

Residential mortgage

2,468

0.48%

2,988

0.60%

Consumer

89

0.16%

29

0.05%

Total non-accrual loans

$

9,438

0.66%

$

3,956

0.28%

Accruing Loans Past Due 90 days or more:

Commercial and industrial

$

1

$

Residential mortgage

498

459

Consumer

27

84

Total loans past due 90 days or more

$

526

$

543

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

$

9,964

$

4,499

Other real estate owned

$

2,978

$

4,493

Total Non-performing assets

$

12,942

$

8,992

Individually evaluated loans without a valuation allowance

$

8,616

$

2,963

Individually evaluated loans with a valuation allowance

153

Total individually evaluated loans

$

8,769

$

2,963

Non-accrual loans to total loans (as %)

0.66%

0.28%

Non-performing loans to total loans (as %)

0.70%

0.32%

Non-performing assets to total assets (as %)

0.69%

0.47%

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

189.90%

441.86%

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

138.49%

194.40%

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Allowance for Credit Losses

The ACL represents an amount which, in management’s judgment, is adequate to absorb expected credit losses over the life of outstanding loans as of the balance sheet date based on the evaluation of current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience.  The ACL is measured and recorded upon the initial recognition of a financial asset.  The ACL is reduced by charge-offs, net of recoveries of previous losses, and is increased by a provision or decreased by a 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 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 six-month periods ended June 30, 2024 and 2023:

(in thousands)

    

2024

    

2023

 

Balance, January 1

$

17,480

$

14,636

Impact of CECL Adoption

2,066

Charge-offs:

Commercial real estate

(87)

Commercial and industrial

(1,230)

(166)

Residential mortgage

(45)

(24)

Consumer

(824)

(518)

Total charge-offs

(2,099)

(795)

Recoveries:

Commercial real estate

37

5

Acquisition and development

6

7

Commercial and industrial

34

9

Residential mortgage

26

36

Consumer

227

93

Total recoveries

330

150

Net losses

(1,769)

(645)

Credit/loan loss expense

2,212

848

Balance at end of period

$

17,923

$

16,905

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

1.26

%  

1.25

%

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

2024

2023

Commercial real estate

0.01%

(0.04)%

Acquisition and development

0.01%

0.02%

Commercial and industrial

(0.89)%

(0.13)%

Residential mortgage

(0.01)%

0.01%

Consumer

(2.02)%

(1.40)%

Total

(0.25)%

(0.10)%

Investment Securities

At June 30, 2024, the total amortized cost basis of the available-for-sale investment portfolio was $115.8 million compared to a fair value of $93.0 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 $174.2 million compared to a fair value of $143.0 million.

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

June 30, 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

$

6,035

6%

$

7,000

$

6,034

6%

Residential mortgage-backed agencies

23,825

19,283

21%

24,781

20,563

21%

Commercial mortgage-backed agencies

35,901

27,308

29%

36,258

28,417

29%

Collateralized mortgage obligations

18,927

15,449

17%

19,725

16,356

17%

Obligations of state and political subdivisions

10,476

10,167

11%

10,486

10,312

11%

Corporate bonds

1,000

737

1%

1,000

778

1%

Collateralized debt obligations

18,660

13,975

15%

18,671

14,709

15%

Total available for sale

$

115,789

$

92,954

100%

$

117,921

$

97,169

100%

Held to Maturity Securities:

U.S. treasuries

$

$

0%

$

37,462

$

37,219

20%

U.S. government agencies

68,157

56,783

40%

68,014

57,029

31%

Residential mortgage-backed agencies

28,841

25,324

17%

29,588

26,717

14%

Commercial mortgage-backed agencies

21,223

15,508

11%

21,413

16,052

9%

Collateralized mortgage obligations

51,513

41,445

29%

53,261

43,288

24%

Obligations of state and political subdivisions

4,508

3,970

3%

4,604

4,110

2%

Total held to maturity

$

174,242

$

143,030

100%

$

214,342

$

184,415

100%

Total fair value of investment securities available for sale decreased by $4.2 million since December 31, 2023 due primarily to principal paydowns of the portfolio.  At June 30, 2024, the securities classified as available-for-sale included a net unrealized loss of $22.8 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 $40.1 million since December 31, 2023 due primarily to the maturity of $37.5 million in U.S. Treasury bonds and $2.6 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

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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 $79.0 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $18.2 million at June 30, 2024. The remaining $14.0 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 $4.7 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)

    

June 30, 2024

    

December 31, 2023

Balance

Percent

Balance

Percent

Non-interest-bearing demand deposits

$

423,970

    

28%

$

427,670

27%

Interest-bearing deposits:

Demand

373,046

24%

350,860

23%

Money Market

401,628

26%

385,649

25%

Savings deposits

180,030

12%

191,265

12%

Time deposits- retail

143,397

9%

165,533

11%

Time deposits- brokered

15,000

1%

30,000

2%

Total Deposits

$

1,537,071

100%

$

1,550,977

100%

Total deposits at June 30, 2024 decreased by $13.9 million when compared to December 31, 2023. Non-interest-bearing deposits decreased by $3.7 million.  Interest-bearing demand deposits increased by $22.2 million, primarily related to the shift of approximately $22.0 million in overnight investment sweep balances into the ICS product due to management’s strategy to release pledging of investment securities for municipalities to increase available liquidity.  Money market accounts increased by $16.0 million due primarily to the expansion of current relationships and new relationships during the first six months.  Traditional savings accounts decreased by $11.3 million and time deposits decreased by $37.1 million.  The decrease in time deposits was due to a decrease of $22.1 million in retail Certificates of Deposit (“CDs”) related to maturities of a nine-month special CD promotion in 2023 and the maturity and repayment of a $15.0 million brokered CD.  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 June 30, 2024 and December 31, 2023.

June 30, 2024

December 31, 2023

(in thousands)

Balance

Percent

Balance

Percent

Insured deposits

$

1,192,648

78%

$

1,175,812

76%

Uninsured but collateralized deposits

65,235

4%

76,569

5%

Uninsured and uncollateralized deposits

279,188

18%

298,596

19%

$

1,537,071

100%

$

1,550,977

100%

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

June 30, 2024

December 31, 2023

(in thousands)

Balance

Percent

Balance

Percent

Retail deposits

$

760,735

49%

$

748,295

48%

Business deposits

776,336

51%

802,682

52%

$

1,537,071

100%

$

1,550,977

100%

Borrowed Funds

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

(in thousands)

    

June 30,
2024

    

December 31,
2023

Bank Term Funding Program

$

40,000

$

Securities sold under agreements to repurchase

$

22,564

$

45,418

Total short-term borrowings

62,564

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 $17.1 million as the Bank borrowed $40.0 million from the BTFP in January 2024, partially offset by a decrease of approximately $22.0 million in other short-term borrowings due primarily to management’s strategic decision to shift municipal customers into the ICS deposit product.  Long-term borrowings decreased by $40.0 million as a $40.0 million FHLB advance matured in March 2024 and was fully repaid utilizing proceeds from lower yielding investment maturities.

Liquidity Management

Liquidity is a financial institution’s capability to meet customer demands for deposit withdrawals while funding all credit-worthy loans. The factors that determine the institution’s liquidity are:

Reliability and stability of core deposits;
Cash flow structure and pledging status of investments; and
Potential for unexpected loan demand.

We actively manage our liquidity position through regular meetings of a sub-committee of executive management, known as the Treasury Team, which looks forward 12 months at 30-day intervals. The measurement is based upon the projection of funds sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth. Monthly reviews by management and quarterly reviews by the Asset and Liability Committee under prescribed policies and procedures are designed to ensure that we will maintain adequate levels of available funds.

It is our policy to manage our affairs so that liquidity needs are fully satisfied through normal Bank operations. That is, the Bank will manage its liquidity to minimize the need to make unplanned sales of assets or to borrow funds under emergency conditions. The Bank will use funding sources where the interest cost is relatively insensitive to market changes in the short run (periods of one year or less) to satisfy operating cash needs. The remaining normal funding will come from interest-sensitive liabilities, either deposits or borrowed funds. When the marginal cost of needed wholesale funding is lower than the cost of raising this funding in the retail markets, the Corporation may supplement retail funding with external funding sources such as:

1.Unsecured Fed Funds lines of credit with upstream correspondent banks (M&T Bank, Pacific Coast Banker’s Bank, PNC Financial Services,  Atlantic Community Bankers Bank, 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, and commercial real estate loans.

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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 June 30, 2024.

(in thousands)

Total Availability

Amount Used

Net Availability

Internal Sources

Excess cash

$

25,003

$

-

$

25,003

Unpledged securities

36,492

-

36,492

External Sources

Federal Reserve (discount window)

29,748

-

29,748

Correspondent unsecured lines of credit

140,000

-

140,000

FHLB

253,300

42,914

210,386

Bank Term Funding Program

40,000

40,000

-

$

524,543

$

82,914

$

441,629

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 June 30, 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;

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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.

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Based on the simulation analysis performed at June 30, 2024 and December 31, 2023, management estimated the following changes in net interest income, assuming the indicated rate changes:

(in thousands)

    

June 30,
2024

December 31,
2023

+400 basis points

$

2,619

$

4,464

+300 basis points

$

3,047

$

3,353

+200 basis points

$

2,785

$

2,255

+100 basis points

$

1,712

$

1,155

-100 basis points

$

(1,855)

$

(1,280)

-200 basis points

$

(3,789)

$

(3,102)

-300 basis points

$

(5,635)

$

(5,249)

-400 basis points

$

(8,076)

$

(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.  

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

    

June 30,
2024

    

December 31,
2023

    

Required for
Capital
Adequacy
Purposes

    

Required
to be Well
Capitalized

 

Total Capital (to risk-weighted assets)

14.41

%  

14.05

%  

8.00

%  

10.00

%

Tier 1 Capital (to risk-weighted assets)

13.16

%  

12.81

%  

6.00

%  

8.00

%

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

13.16

%  

12.81

%  

4.50

%  

6.50

%

Tier 1 Capital (to average assets)

10.47

%  

9.92

%  

4.00

%  

5.00

%

As of both June 30, 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 June 30, 2024 to December 31, 2023, short-term borrowings increased by $17.1 million as the Bank borrowed $40.0 million from the BTFP in January 2024, which was partially offset by a decrease of $22.9 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.

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)

    

June 30,
2024

    

December 31,
2023

Residential mortgage - home equity

$

73,655

$

72,080

Residential mortgage - construction

13,753

17,684

Commercial

148,664

160,196

Consumer - personal credit lines

4,247

4,186

Standby letters of credit

11,320

11,037

Total

$

251,639

$

265,183

The decrease of $13.5 million in commitments at June 30, 2024 when compared to December 31, 2023 was due to businesses utilizing construction funding.  These balances shifted to loans outstanding.

For the six-month periods ended June 30, 2024 and 2023, net credit loss expense for off-balance sheet exposures was a credit of approximately $72,000 and an expense of approximately $90,000, respectively.  For the second quarter of 2024 and 2023, net credit loss for off-balance sheet exposures was a credit of approximately $57,000 and a credit of approximately $39,000, respectively.

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Item 3. 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.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act with the Securities and Exchange Commission (the “SEC”), such as this Quarterly Report, is recorded, processed, summarized and reported within the periods specified in those rules and forms, and that such information is accumulated and communicated to our management, including First United Corporation’s principal executive officer (“PEO”) and its principal financial officer (“PFO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of these disclosure controls as of June 30, 2024 was carried out under the supervision and with the participation of management, including the PEO and the PFO. Based on that evaluation, management, including the PEO and the PFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the six months ended June 30, 2024, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in Item 1A of Part I of First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2023. Management does not believe that any material changes in our risk factors have occurred since they were last disclosed.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following tables summarizes stock repurchases for the three-months ended June 30, 2024:

Issuer Purchases of Equity Securities

Period

Total Number of Shares (or Units) Purchased

Average Price Paid per Share (or Unit)

Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs

Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)

742,902

April 2024

$

742,902

May 2024

201,800

19.99

201,800

541,102

June 2024

541,102

Total

201,800

$

19.99

201,800

541,102

Note:

(1)All shares were purchased in open-market transactions pursuant to First United Corporation’s stock repurchase program that was effective on August 18, 2023.  The program authorizes the repurchase of up to 825,000 shares of common stock of First United Corporation.  The program authorizes the repurchases to be conducted through open market or private transactions at such times, in such amounts, and, within certain limits, at such prices per transaction as the Chairman and Chief Executive Officer of First United Corporation determines to be appropriate.  The program was publicly announced on August 21, 2023.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

During the three months ended June 30, 2024, none of First United Corporation’s directors or officers informed First United Corporation of their adoption, modification, or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Item 408 of the SEC’s Regulation S-K.

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Item 6. Exhibits

The exhibits filed or furnished with this quarterly report are listed in the following Exhibit Index.

Exhibit

    

Description

31.1

Certifications of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)

31.2

Certifications of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith)

32

Certification of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act (furnished herewith)

101.INS

Inline XBRL Instance Document (filed herewith)

101.SCH

Inline XBRL Taxonomy Extension Schema (filed herewith)

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith)

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase (filed herewith)

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase (filed herewith)

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase (filed herewith)

104

The cover page of First United Corporation’s Quarterly Report on Form 10Q for the quarter ended June 30, 2024 formatted in Inline XBRL, included within the Exhibit 101 attachments (filed herewith).

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FIRST UNITED CORPORATION

Date: August 7, 2024

/s/ Carissa L. Rodeheaver

Carissa L. Rodeheaver, CPA

Chairman of the Board, President and Chief Executive Officer

(Principal Executive Officer)

Date: August 7, 2024

/s/ Tonya K. Sturm

Tonya K. Sturm, Senior Vice President,

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

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