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.
INDEX TO QUARTERLY REPORT
FIRST UNITED CORPORATION
Page
PART I. FINANCIAL INFORMATION
3
Item 1.
Financial Statements (unaudited)
Consolidated Statements of Financial Condition – June 30, 2024 and December 31, 2023
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
PART II. OTHER INFORMATION
69
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
70
SIGNATURES
71
2
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
See accompanying notes to the consolidated financial statements
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
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
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
660
616
Brokerage commissions
857
555
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
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
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
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
Three Months Ended
20,221
16,780
1,697
1,779
53
268
1,750
2,047
1,142
1,145
23,113
19,972
46
56
5,011
2,941
1,341
1,353
6,398
4,350
509
29
968
1,419
7,875
5,798
15,238
14,174
1,251
434
Credit loss credit - off-balance sheet credit exposures
(57)
(39)
Total credit loss expense/(credit)
1,194
395
14,044
13,779
Gains on sales of residential mortgage loans
59
86
556
546
225
244
2,255
999
1,031
334
311
362
258
51
4,782
4,483
4,841
4,569
7,256
6,870
285
277
Equipment
635
747
Occupancy
652
742
Data processing
1,422
1,306
Marketing
184
160
449
520
84
157
103
Total other real estate owned expenses, net
14
18
91
123
79
1,123
1,396
12,364
12,511
6,521
5,837
1,607
1,423
4,914
4,414
Basic net income per common share
0.75
0.66
Diluted net income per common share
6,527
6,704
6,537
6,718
0.20
5
Consolidated Statements of Comprehensive Income
(In thousands)
Comprehensive Income
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
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
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
16
Other comprehensive income on cash flow hedges
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)
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
Other comprehensive loss, net of tax
(233)
(1,084)
Comprehensive income
8,379
7,705
Unrealized holding (losses)/gains on investments with credit related impairment
(843)
198
Other comprehensive (loss)/income on investments with credit related impairment
(894)
147
(717)
(2,221)
Unrealized holding losses on securities transferred to held to maturity
Unrealized holding gains on HTM investments
(160)
(164)
164
Unrealized holding (losses)/gains on cash flow hedges
(69)
204
Other comprehensive (loss)/income on cash flow hedges
Unrealized holding losses on pension plan liability
(538)
(63)
(203)
(249)
Other comprehensive (loss)/income on pension plan liability
(335)
186
Unrealized holding losses on SERP liability
Reclassification adjustment for amortization of unrealized loss realized in income
39
(2)
(1,816)
(1,522)
Income tax benefit related to other comprehensive income
478
369
(1,338)
(1,153)
3,576
3,261
7
Consolidated Statements of Changes in Shareholders’ Equity
CommonStock
RetainedEarnings
AccumulatedOtherComprehensiveLoss
TotalShareholders'Equity
Balance at January 1, 2024
Net income
3,698
Other comprehensive income
1,105
Stock based compensation
57
Common stock issued - 8,757 shares
74
Common stock dividend declared - $0.20 per share
(1,326)
Balance at March 31, 2024
23,865
176,272
(34,722)
165,481
Other comprehensive loss
376
Common stock issued - 18,756 shares
Common stock repurchase - 201,800 shares
(1)
(4,031)
(4,032)
(1,294)
Balance at June 30, 2024
Balance at January 1, 2023
67
24,409
166,343
(39,026)
151,793
Adoption of ASC 326- Financial Instruments- Credit Losses
(2,155)
4,375
Common stock issued - 22,282 shares
64
(1,334)
Balance at March 31, 2023
24,529
167,229
(38,957)
152,868
298
Common stock issued - 18,416 shares
(1,345)
Balance at June 30, 2023
24,901
170,298
(40,110)
155,156
See accompanying notes to the consolidated financial statement
Consolidated Statements of Cash Flows
Operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
Depreciation
1,952
1,700
433
354
Gain on sales of other real estate owned
(126)
(36)
Write-downs of other real estate owned, net
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
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
Decrease/(increase) in accrued interest receivable and other assets
1,326
(4,259)
Deferred tax (benefit)/expense
(81)
1,038
(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
138
Cash dividends paid on common stock
(2,657)
(2,536)
Net increase/(decrease) in short-term borrowings
17,146
(14,487)
Stock repurchase
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
74,315
Cash and cash equivalents at end of period
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
176
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.
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.
11
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,
Average
Per Share
(in thousands, except for per share amount)
Income
Shares
Amount
Basic Earnings Per Share:
Diluted Earnings Per Share:
Restricted stock units
Three months ended June 30,
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)
AmortizedCost
GrossUnrealizedGains
GrossUnrealizedLosses
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
12
GrossUnrecognizedGains
GrossUnrecognizedLosses
Held to Maturity:
68,157
11,374
56,783
28,841
3,517
25,324
21,223
5,715
15,508
51,513
10,068
41,445
4,508
681
3,970
45
Total held to maturity
174,242
31,355
143,030
December 31, 2023
966
6,034
24,781
4,218
20,563
36,258
7,841
28,417
19,725
3,369
16,356
10,486
15
189
10,312
222
778
18,671
3,962
14,709
117,921
20,767
U.S. treasuries
37,462
243
37,219
68,014
10,985
57,029
29,588
42
2,913
26,717
21,413
5,361
16,052
53,261
9,973
43,288
4,604
177
671
4,110
214,342
219
30,146
184,415
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
13
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.
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
FairValue
UnrealizedLosses
Number ofInvestments
2,205
30
5,041
279
Corporate Bonds
1
87,828
22,805
36
UnrecognizedLosses
3,923
21,320
3,502
35
2,198
137,254
31,340
55
1,445
20
6,668
169
93,525
20,747
22,613
178,406
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.
Due in one year or less
2,670
Due after one year through five years
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
12,500
11,794
40,451
34,116
19,714
14,843
72,665
60,753
17
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:
CommercialReal Estate
AcquisitionandDevelopment
CommercialandIndustrial
ResidentialMortgage
Consumer
Total
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
265,671
511,109
826
2,137
2,963
492,877
77,060
274,604
497,734
61,429
1,403,704
493,703
499,871
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:
Current
30-59 DaysPast Due
60-89 DaysPast Due
90 Days+Past Due
Total PastDue andAccruing
Non-Accrual
Total Loans
Commercial real estate:
Non-owner-occupied
295,647
All other CRE
204,520
85
250
205,369
Acquisition and development:
1-4 family residential construction
17,489
All other A&D
70,628
97
70,725
Commercial and industrial
259,155
191
139
331
6,185
Residential mortgage:
Residential mortgage - term
444,814
44
1,028
484
2,339
448,709
Residential mortgage - home equity
61,740
436
81
531
129
62,400
55,890
581
378
986
89
1,409,883
1,417
1,711
526
3,654
9,438
296,343
227
296,570
196,123
411
197,133
18,224
58,723
113
58,836
274,465
120
19
433,878
130
717
384
1,231
2,720
437,829
61,021
158
75
753
62,042
60,576
463
824
1,399,353
1,644
1,171
543
3,956
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
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:
Individually evaluatedfor impairment
Collectively evaluatedfor impairment
4,852
992
3,964
7,162
953
17,923
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.
Real Estate
Other Collateral
Non-Accrual Loans with No Allowance
Commercial real estate
Residential mortgage
2,594
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)
Unallocated
Beginning balance at January 1, 2024
Loan charge-offs
(1,230)
(45)
(824)
(2,099)
Recoveries collected
37
34
26
330
Credit loss (credit)/expense
(305)
1,443
407
621
ACL balance at June 30, 2024
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
(87)
(166)
(24)
(518)
(795)
93
150
(174)
163
(473)
1,133
199
ACL balance at June 30, 2023
4,946
1,134
3,549
6,417
859
16,905
Three months ended (in thousands)
ACL balance at April 1, 2024
4,962
4,002
7,017
987
17,982
(1,118)
(318)
(1,481)
(110)
1,078
181
127
ACL balance at April 1, 2023
4,862
1,103
3,755
6,324
827
16,871
Loan Charge-offs
(18)
(185)
(456)
31
Credit loss expense/(credit)
171
21
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
22
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.
23
The following tabls present loan balances by year of origination and internally assigned risk rating for our portfolio segments as of dates presented:
2022
2021
2020
2019 and Prior
Revolving
Total Portfolio Loans
Pass
5,866
23,850
66,716
29,620
52,809
111,451
1,874
292,186
Special Mention
732
Substandard
2,729
Total non-owner occupied
53,541
114,180
Current period gross charge-offs
10,726
31,357
30,646
24,536
20,152
77,244
5,297
199,958
1,434
1,638
3,491
282
3,773
Total all other CRE
25,970
20,356
80,735
5,579
1,325
13,866
2,298
Total acquisition and development
7,622
24,112
19,888
1,917
2,281
10,557
4,251
Total all other A&D
10,654
Commercial and industrial:
16,310
40,278
59,753
20,774
8,092
16,183
82,938
244,328
1,979
3,847
5,826
4,079
6,584
765
2,947
15,517
Total commercial and industrial
63,832
21,916
16,655
16,948
89,732
465
651
41
16,831
57,219
97,006
84,619
37,150
146,885
441,896
40
1,067
5,636
6,773
Total residential mortgage - term
85,726
37,165
152,521
2,241
4,243
818
444
669
54,643
61,787
563
613
Total residential mortgage - home equity
480
683
55,206
Consumer:
5,990
14,615
8,324
4,804
1,592
18,632
2,791
56,748
72
217
Total consumer
14,687
8,341
4,907
1,612
18,637
96
174
468
64,700
206,237
286,576
167,088
122,520
381,621
156,278
1,385,020
1,474
2,915
8,236
4,096
2,312
6,655
12,737
29,719
206,309
290,672
170,874
132,090
394,358
163,972
Current YTD Period:
561
666
52
514
2,099
24
2019
2018 and Prior
23,511
65,878
30,332
54,270
40,575
65,134
1,138
280,838
4,331
11,401
80,866
87
30,130
27,379
27,042
20,691
22,879
60,054
4,495
192,670
644
1,847
1,372
600
3,819
21,335
24,726
61,426
5,095
13,745
3,446
1,033
12,184
25,099
2,966
3,046
1,301
9,946
4,181
10,059
52,004
66,559
24,387
11,753
8,872
10,052
78,992
252,619
558
9,352
1,854
6,806
98
837
2,480
21,427
52,562
75,911
26,241
18,559
8,970
10,889
81,472
166
423
51,625
94,723
88,835
38,228
25,375
130,402
1,577
430,765
5,825
7,064
94,861
89,764
38,245
25,473
136,227
1,634
1,127
4,657
864
475
286
489
53,467
61,365
38
623
677
513
505
54,090
18,299
10,616
6,361
2,206
510
20,365
2,873
61,230
18,313
10,651
6,474
2,229
516
20,367
2,879
236
223
329
874
202,625
298,357
180,787
130,669
99,798
296,442
147,756
1,356,434
5,533
9,525
2,896
6,884
2,049
19,566
3,766
44,700
203,197
307,882
183,683
138,197
101,847
320,339
151,522
336
326
109
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.
25
The following tables present loan balances by year of origination segregated by performing and non-performing loans for the periods presented:
Performing
Nonperforming
80,136
204,770
20,819
16,947
88,723
259,485
1,097
1,009
6,186
85,596
37,012
150,011
2,211
445,886
153
2,510
2,823
55,113
62,257
14,669
4,846
18,617
56,849
61
206,291
169,586
131,901
391,117
162,840
1,413,011
1,288
3,241
1,132
9,964
80,639
60,827
196,534
94,722
89,629
133,526
1,603
434,725
2,701
3,104
488
53,802
61,699
288
343
18,304
6,405
61,316
203,188
307,708
183,479
138,159
101,749
316,682
151,203
1,402,168
3,657
319
4,499
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
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:
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
Three months ended June 30, 2024
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.
28
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.
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.
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 Measurementsat June 30, 2024 Using
Quoted
Prices in
Significant
Active Markets
Measured at
for Identical
Observable
Unobservable
Fair Value
Inputs
06/30/24
(Level 1)
(Level 2)
(Level 3)
Recurring:
Investment securities available-for-sale:
Financial derivatives
762
Non-recurring:
Individually evaluated loans, net
2,096
Equity Investment
3,551
Other real estate owned
2,698
Fair Value Measurementsat December 31, 2023 Using
Assets/(liabilities)
12/31/23
756
Equity investment
3,087
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.
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:
Fair Value atJune 30,2024
ValuationTechnique
SignificantUnobservableInputs
SignificantUnobservableInput Value
Investment Securities – available for sale -CDO
Discounted Cash Flow
Discount Margin
Range of mid 400 to high 400
Individually Evaluated Loans, net
Market Comparable Properties
Marketability Discount
N/A
Market Method
Revenue Multiples
2.8x
Other Real Estate Owned
5.0% to 15.0% (weighted avg 5.9%)
Fair Value atDecember 31,2023
Range of low to mid 500 and low to mid 600
Other Real Estate
32
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
Investment Securities
Available for Sale
Beginning balance January 1, 2024
Total losses realized/unrealized:
Included in other comprehensive loss
Ending balance June 30, 2024
Beginning balance January 1, 2023
15,871
(1,766)
Ending balance June 30, 2023
14,105
Fair Value MeasurementsUsing Significant Unobservable Inputs(Level 3)
Investment SecuritiesAvailable for Sale
Beginning balance April 1, 2024
14,886
(911)
Beginning balance April 1, 2023
14,114
(9)
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.
33
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:
Carrying
Fair
Value
Financial Assets:
Investment securities - AFS
78,979
Investment securities - HTM
141,259
1,771
Restricted bank stock
Loans, net
1,329,798
847
6,268
Financial Liabilities:
Deposits - non-maturity
1,378,674
Deposits - time deposits
158,397
155,969
Short-term borrowed funds
Long-term borrowed funds
70,939
82,460
182,510
1,905
1,319,456
Financial derivative
828
6,659
1,355,444
195,533
193,337
110,809
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
related
impairment
all other
Cash Flow
Pension
AFS
HTM
Hedge
Plan
SERP
Accumulated OCL, net:
Balance - January 1, 2024
(2,482)
(13,217)
(5,201)
569
(14,263)
(1,233)
Other comprehensive income/(loss) before reclassifications
155
(459)
54
1,096
846
Amounts reclassified from accumulated other comprehensive income
(37)
118
149
259
Balance - March 31, 2024
(2,364)
(13,676)
(5,083)
(13,018)
(1,204)
Other comprehensive (loss)/income before reclassifications
(620)
(528)
(51)
(396)
(1,595)
(40)
257
Balance - June 30, 2024
(3,024)
(14,204)
(4,965)
572
(13,264)
(1,175)
Balance - January 1, 2023
(1,711)
(16,380)
(5,703)
797
(16,603)
574
(1,180)
985
(138)
(210)
133
Balance - March 31, 2023
(2,928)
(15,395)
(5,570)
659
(16,296)
573
111
(1,654)
(42)
(1,435)
Amounts reclassified from accumulated other comprehensive loss
195
Balance - June 30, 2023
(2,857)
(17,049)
(5,441)
809
(16,143)
571
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
(Expense)
Benefit
Net
For the six months ended June 30, 2024
Available for sale (AFS) securities with credit related impairment:
Unrealized holding losses
168
(465)
Less: accretable yield recognized in income
77
Net unrealized losses on investments with credit related impairment
192
(542)
Available for sale securities – all other:
(987)
Held to maturity securities:
Less: amortization recognized in income
(236)
Net unrealized gains on HTM securities
(84)
Unrealized holding gains
Pension Plan:
Unrealized net actuarial gain
(251)
700
Less: amortization of unrecognized loss
107
(299)
Net pension plan liability adjustment
(358)
SERP:
(58)
Net SERP liability adjustment
(20)
58
Components of Other Comprehensive Income
For the six months ended June 30, 2023
339
(1,069)
363
(1,146)
(669)
(262)
(83)
262
Unrealized holding gain
(379)
460
Less: amortization of unrecognized gain
(3)
Components of Other Comprehensive Loss(in thousands)
BeforeTaxAmount
Tax(Expense)Benefit
For the three months ended June 30, 2024
(11)
234
(118)
Unrealized net actuarial loss
(150)
(246)
(29)
(10)
For the three months ended June 30, 2023
unrealized losses on investments with credit related impairment
(76)
567
(129)
(35)
(54)
(195)
(33)
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
Accumulated Other Comprehensive Loss
Affected Line Item in the Statement
Where Net Income is Presented
Net unrealized gains on available for sale investment securities with credit related impairment:
Accretable yield
Interest income on taxable investment securities
Taxes
Net of tax
Net unrealized losses on held to maturity securities:
Amortization
Net pension plan liability adjustment:
Amortization of unrecognized loss
Other Expense
Net SERP liability adjustment:
Amortization of unrecognized (loss)/gain
Total reclassifications for the period
(516)
(561)
Other expense
(257)
(282)
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.
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
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
income or derivative
(loss) reclassified from
(ineffective portion
OCI on derivative
accumulated OCI into
and amount excluded
(effective portion),
income (effective
from effectiveness
net of tax
portion) (a)
testing) (b)
Interest rate contracts:
Six months ended:
June 30, 2023
Three months ended:
Notes:
43
Note 10 – Regulatory Capital Requirements
The following table presents the Bank’s capital ratios as of June 30, 2024 and December 31, 2023.
Required forCapitalAdequacyPurposes
Requiredto be WellCapitalized
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
Common Equity Tier 1 Capital (to risk-weighted assets)
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.
Balance
Percent
Non-Interest-bearing deposits:
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
Time deposits- retail
143,397
9%
165,533
11%
Time deposits- brokered
15,000
1%
30,000
2%
Total Deposits
100%
Note 12 – Borrowed Funds
The following is a summary of borrowings at June 30, 2024 and December 31, 2023:
Short-term borrowings:
Securities sold under agreements to repurchase:
Outstanding at end of period
22,564
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
0.24%
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.
Junior subordinated debt, bearing variable interest rate of 8.35% at June 30, 2024 and 8.39% at December 31, 2023
30,929
Total borrowings outstanding
133,493
156,347
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:
Trust and
Community
Banking
Services
-
Credit loss expense
Non-interest income
4,417
5,299
Non-interest expense
22,609
2,636
Income before income taxes and intercompany fees
8,718
2,663
Intercompany management fee income (expense)
(6)
Income before income taxes
8,724
2,657
Income tax expense
2,210
559
6,514
2,098
4,411
4,551
22,562
2,587
9,603
1,964
9,609
1,958
2,367
7,242
1,547
2,225
2,616
11,015
1,349
5,254
1,267
5,257
1,264
266
3,916
998
Credit loss credit
2,286
2,283
11,177
4,887
950
4,890
947
1,224
3,666
748
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 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.
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
Per Share Data
Basic net income per common share (1) - non-GAAP
1.37
Diluted net income per common share (1) - non-GAAP
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
Return on Average Equity
10.51
11.43
1.04
Adjusted Return on Average Equity (1) (non-GAAP)
11.55
Average Equity to Average Assets
8.42
8.21
Bank Capital Ratios:
Consolidated Total Capital (to risk weighted assets)
Consolidated Tier 1 Capital (to risk weighted assets)
Consolidated Common Equity Tier 1 Capital (to risk weighted assets)
Consolidated Tier 1 Capital (to average assets)
(1) See reconciliation of this non-GAAP financial measure provided elsewhere herein.
RESULTS OF OPERATIONS
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
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.
49
The tables below summarize net interest income for the six- and three-month periods ended June 30, 2024 and 2023.
Non-GAAP
GAAP
45,126
38,253
Net interest income
29,165
29,144
Net interest margin %
3.31
3.39
3.29
3.34
(dollars in thousands)
23,171
20,197
15,296
14,399
3.49
3.26
3.47
3.21
50
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:
Interest
Yield/Rate
1,411,619
39,471
5.62
1,298,743
32,251
5.01
Investment Securities:
281,524
2.46
338,817
2.11
Non taxable
7,803
4.87
26,099
963
7.44
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
7.29
3,342
2.72
Other interest earning assets
4,248
8.57
3,069
2.56
Total earning assets
1,771,797
5.12
1,732,431
4.45
Allowance for loan losses
(17,940)
(15,905)
Non-earning assets
201,873
172,461
1,955,730
1,888,987
Interest-bearing demand deposits
361,358
2,937
1.63
365,491
1.11
Interest-bearing money markets - Retail
392,164
314,246
3,107
1.99
Interest-bearing money markets - Brokered
3.66
186,280
0.10
236,383
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
72,626
2.69
52,332
0.23
86,973
5.38
77,338
5.27
Total interest-bearing liabilities
1,278,703
2.51
1,206,245
1.52
Non-interest-bearing deposits
478,655
497,226
33,624
30,497
Shareholders’ Equity
164,748
155,019
Net interest income and spread
2.61
2.93
Net interest margin
AverageBalance
AverageYield/Rate
1,415,353
20,237
5.75
1,317,728
16,794
5.11
268,522
2.54
337,032
2.12
7,800
95
4.90
26,093
479
7.36
276,322
1,792
363,125
2,258
66,658
1,037
6.26
84,629
1,102
5.22
2,194
3.30
1,735
4.46
3,390
10.32
4,490
2.23
1,763,917
5.28
1,771,707
4.57
(18,184)
(16,982)
198,749
175,369
1,944,482
1,930,094
369,835
1,496
377,773
1.20
400,747
3,514
3.53
304,322
1,809
2.38
3.62
182,988
226,172
Time deposits - retail
146,420
1,016
2.79
130,634
552
1.69
Time deposits - brokered
24,396
325
5.36
61,081
71,900
2.85
47,356
0.25
5.49
5.13
1,267,326
2.50
1,258,267
1.85
479,232
484,952
32,884
31,517
165,040
155,358
2.78
(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.
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:
compared to the six months ended June 30, 2023
(in thousands and tax equivalent basis)
Volume
Rate
Interest Income:
2,828
4,392
7,220
Taxable Investments
(604)
498
(106)
Non-taxable Investments
(681)
(93)
(774)
386
Interest-bearing deposits
(27)
128
1,597
5,276
6,873
Interest Expense:
(23)
939
916
Interest-bearing money markets- retail
775
2,892
3,667
Interest-bearing money markets- brokered
0
(30)
(41)
185
1,117
1,302
(225)
(209)
887
910
254
306
Total interest expense
960
5,892
6,852
637
For the Three months ended June 30, 2024 compared to the Three months ended June 30, 2023
1,247
2,196
3,443
(363)
281
(82)
(337)
(47)
(384)
(235)
170
(65)
63
2,974
388
364
1,131
1,705
397
464
(482)
(476)
(513)
62
(451)
(373)
2,450
2,077
684
213
897
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.
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
Total Other Income
5%
6%
46%
47%
45%
20%
23%
21%
7%
Other income
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
Total Other Operating Expenses
57%
56%
59%
55%
10%
4%
0%
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.
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:
Net income - as reported
Adjustments:
Accelerated depreciation expenses
562
Income tax effect of adjustments
(137)
Adjusted net income (non-GAAP)
9,037
Diluted earnings per share - as reported
0.08
(0.02)
Adjusted basic and diluted earnings per share (non-GAAP)
Return on Average Assets - as reported
0.89%
0.95%
0.12%
(0.03%)
Adjusted Return on Average Assets (non-GAAP)
0.98%
Return on Average Equity - as reported
10.51%
11.43%
1.38%
(0.34%)
Adjusted Return on Average Equity (non-GAAP)
11.55%
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.
Loan Portfolio
The following table presents the composition of our loan portfolio at the dates indicated:
35%
Acquisition and development
19%
36%
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.
The following table presents loans in our commercial real estate portfolio by industry type at June 30, 2024.
Owner-occupied
Multi-family
Accommodations and food services
75,083
4,704
79,787
Administration and support, waste management, and remediation services
1,437
Agriculture, forestry, fishing and hunting
2,201
Arts, entertainment and recreation
4,552
Construction
2,067
5,912
7,987
Educational services
917
Finance and insurance
108
Health care and social assistance
6,599
11,631
18,230
Management of companies and enterprises
2,770
Manufacturing
6,536
Other services (except public services)
2,250
17,496
314
20,060
Professional, scientific and technical services
2,502
Public administration
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
Mixed use rental properties
145
537
17,640
18,322
Storage units
18,237
Real estate rental and leasing- other
4,561
3,280
8,252
Retail trade
3,772
Transportation and warehousing
473
Wholesale trade
806
155,834
49,535
Our loan portfolio does not consist of any loans secured by office buildings located in major metropolitan areas or that are over four stories or any retail properties rented to major big box retail tenants. There have been no significant changes in our commercial real estate concentrations since December 31, 2023.
Risk Elements of Loan Portfolio
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.
% ofApplicablePortfolio
Non-accrual loans:
0.17%
0.11%
0.15%
2.33%
0.00%
2,468
0.48%
2,988
0.60%
0.16%
0.05%
Total non-accrual loans
0.66%
0.28%
Accruing Loans Past Due 90 days or more:
459
Total loans past due 90 days or more
Total non-accrual and accruing loans past due 90 days or more
Total Non-performing assets
12,942
8,992
Individually evaluated loans without a valuation allowance
8,616
Individually evaluated loans with a valuation allowance
Total individually evaluated loans
Non-accrual loans to total loans (as %)
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%
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:
Balance, January 1
Impact of CECL Adoption
Charge-offs:
Total charge-offs
Recoveries:
Total recoveries
Net losses
(1,769)
(645)
Credit/loan loss expense
Balance at end of period
Allowance for credit losses to gross loans outstanding (as %)
1.26
1.25
Net (Charge-offs)/Recoveries as a % of Average Applicable Portfolio
0.01%
(0.04)%
0.02%
(0.89)%
(0.13)%
(0.01)%
(2.02)%
(1.40)%
(0.25)%
(0.10)%
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:
Amortized
FV as %
Cost
(FV)
of Total
Available for Sale Securities:
29%
17%
Obligations of state and political subdivisions
15%
Held to Maturity Securities:
40%
31%
14%
3%
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
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:
Non-interest-bearing demand deposits
27%
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.
Insured deposits
1,192,648
78%
1,175,812
76%
Uninsured but collateralized deposits
65,235
76,569
Uninsured and uncollateralized deposits
279,188
18%
298,596
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.
Retail deposits
760,735
49%
748,295
48%
Business deposits
776,336
51%
802,682
52%
Borrowed Funds
The following table presents the composition of our borrowings at the dates indicated:
Bank Term Funding Program
Securities sold under agreements to repurchase
Total short-term borrowings
FHLB advances
Junior subordinated debt
Total long-term borrowings
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:
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:
The following table presents sources of liquidity available to the Corporation as of June 30, 2024.
Total Availability
Amount Used
Net Availability
Internal Sources
Excess cash
25,003
Unpledged securities
36,492
External Sources
Federal Reserve (discount window)
29,748
Correspondent unsecured lines of credit
140,000
FHLB
253,300
42,914
210,386
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:
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.
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:
+400 basis points
2,619
4,464
+300 basis points
3,047
3,353
+200 basis points
2,785
+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.
The following table presents the Bank’s capital ratios as of the dates indicated:
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:
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
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.
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.
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
May 2024
201,800
19.99
541,102
June 2024
Note:
Item 3. Defaults upon Senior Securities
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.
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)
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).
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.
Date: August 7, 2024
/s/ Carissa L. Rodeheaver
Carissa L. Rodeheaver, CPA
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Tonya K. Sturm
Tonya K. Sturm, Senior Vice President,
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)