# First United Corp: Form 10-Q for the period ended Mar 31, 2023

- Company: [First United Corp](/companies/func.md) (CIK 763907)
- Form: 10-Q
- Filed: 2023-05-12
- Accepted by EDGAR: May 12, 2023, 20:02 ET
- Period: 2023-03-31
- Accession: 0001558370-23-009593
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/763907/000155837023009593/func-20230331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/763907/000155837023009593/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-01-01 to 2023-03-31 | $3.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-01-01 to 2023-03-31 | $1.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-01-01 to 2023-03-31 | $4.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.65 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-01-01 to 2023-03-31 | $0.66 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-01-01 to 2023-03-31 | 6,697,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2023-01-01 to 2023-03-31 | $3.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2023-01-01 to 2023-03-31 | $112.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2023-01-01 to 2023-03-31 | $1.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2023-03-31 | $155.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-03-31 | $1.94bn | us-gaap:Assets |
| Total liabilities | at 2023-03-31 | $1.78bn | us-gaap:Liabilities |
| Long-term debt | at 2023-03-31 | $110.9m | us-gaap:LongTermDebt |
| Short-term borrowings | at 2023-03-31 | $52.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2023-03-31 | $152.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 55,721 characters.

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, 2022.

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," "expect," "believe," "intend," and similar expressions. Although these statements reflect management’s good faith beliefs and projections, they are not guarantees of future performance and they may not prove true. The beliefs, plans and objectives on which forward-looking statements are based involve risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. For a discussion of these risks and uncertainties, see the section of the periodic reports that First United Corporation files with the Securities and Exchange Commission entitled "Risk Factors".

FIRST UNITED CORPORATION

First United Corporation is a Maryland corporation chartered in 1985 and a financial holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956, as amended, that elected financial holding company status in 2021. The Corporation’s primary business is serving as the parent company of First United Bank & Trust, a Maryland trust company (the “Bank”), First United Statutory Trust I (“Trust I”) and First United Statutory Trust II (“Trust II” and together with Trust I, “the Trusts”), both Connecticut statutory business trusts, and First United Legacy Advisors, LLC, a Maryland limited liability company (“FULA”). The Trusts were formed for the purpose of selling trust preferred securities that qualified as Tier 1 capital. FULA was formed to provide investment advice and related services, but it is not yet active. 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 (“Limited Mews”), 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 (the “MCC Fund”).

At March 31, 2023, the Corporation’s total assets were $1.9 billion, net loans were $1.3 billion, and deposits were $1.6 billion. Shareholders’ equity at March 31, 2023 was $152.9 million.

The Corporation maintains an Internet site at www.mybank.com on which it makes available, free of charge, its 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 three month periods ended March 31, 2023 and 2022 and is qualified in its entirety by the detailed information and unaudited financial statements, including the notes thereto, included elsewhere in this quarterly report.

| ​ ​ ​ ​ Per Share Data | ​ ​ ​ ​ | ​ ​ ​ As of the three months ended March 31, 2023 ​ ​ ​ | ​ ​ ​ ​ ​ 2022 ​ ​ ​ |
| --- | --- | --- | --- |
| Basic net income per common share | ​ | $0.66 ​ | $0.86 ​ |
| Diluted net income per common share | ​ | $0.65 ​ | $0.86 ​ |
| Basic book value per common share | ​ | $22.85 ​ | $20.22 ​ |
| Diluted book value per common share | ​ | $22.81 ​ | $20.19 ​ |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ |
| Significant Ratios: | ​ | ​ ​ ​ | ​ ​ ​ |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ |
| Return on Average Assets (a) | ​ | ​ 0.94% | ​ 1.31% |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ |
| Return on Average Equity (a) | ​ | ​ 11.87% | ​ 16.49% |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ |
| Average Equity to Average Assets | ​ | ​ 7.90% | ​ 7.94% |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ |
| Capital Ratios: | ​ | ​ ​ ​ | ​ ​ ​ |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ |
| Consolidated Total Capital (to risk weighted assets) | ​ | ​ 16.15% | ​ 15.67% |
| Consolidated Tier 1 Capital (to risk weighted assets) | ​ | ​ 14.90% | ​ 14.52% |
| Consolidated Common Equity Tier 1 Capital (to risk weighted assets) | ​ | ​ 12.82% | ​ 12.42% |
| Consolidated Tier 1 Capital (to average assets) | ​ | ​ 11.47% | ​ 10.94% |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ |

RESULTS OF OPERATIONS

#### Overview

Consolidated net income was $4.4 million for the first quarter of 2023 compared to $5.7 million for the first quarter of 2022 and $7.0 million for the fourth quarter of 2022. Basic net income was $0.66 per share and diluted net income was $0.65 per share for the first quarter of 2023, compared to basic and diluted net income per share of $0.86 for the first quarter of 2022.

The decrease in net income year-over-year was primarily driven by a $1.3 million increase in salaries and employee benefits due to an increase in health insurance costs related to increased claims, as well as increased salary expense for new hires, merit increases effective April 1, 2022, and increased incentive compensation. Provision for credit losses increased by $1.0 million due to increased qualitative factors related to the potential impact of inflation and rising rates on the cash flows of borrowers. Data processing expenses increased by $0.1 million, equipment and occupancy expenses increased by $0.1 million and miscellaneous expenses increased by $0.5 million primarily due to increased pension costs. These increases were partially offset by an increase in net interest income of $1.2 million and a decrease in income tax expense of $0.5 million.

Other operating income, including gains, for the first quarter of 2023 was stable when compared to the same period of 2022. Increases in service charges and debit card income were offset by a decrease in wealth management income attributable to the decline in market values of assets under management.

Operating expenses increased by $2.1 million when comparing the first quarter of 2023 to the first quarter of 2022. This increase was driven largely by a $1.3 million increase in salaries and employee benefits attributable to increased salary expense related to new hires and merit increases effective April 1, 2022, increased health insurance costs associated with unusually high claims and increased incentive payouts. Occupancy, equipment and data processing expenses increased $0.3 million. Other miscellaneous expenses increased $0.5 million due to increases in charitable contributions, consulting fees, Visa processing fees, continuing education fees, mileage reimbursements, fraud related expense, and pension costs, offset by slight reductions in contract labor, legal and professional, telephone expense, investor relations, debit card expense, and miscellaneous loan fees.

The effective income tax rates as a percentage of income for the three-month period ended March 31, 2023 and March 31, 2022 were 23.6% and 25.0%, respectively. The decrease in the tax rate for the period was primarily related to a new low-income housing tax credit investment in 2022 that began generating tax credits during the fourth quarter of 2022 and will continue to generate tax credits in 2023 and future years.

#### Net Interest Income

Net interest income is our largest source of operating revenue. Net interest income is the difference between the interest that we earn on our interest-earning assets and the interest expense we incur on our interest-bearing liabilities. For analytical and discussion purposes, net interest income is adjusted to a FTE basis to facilitate performance comparisons between taxable and tax-exempt assets by increasing tax-exempt income by an amount equal to the federal income taxes that would have been paid if this income were taxable at the statutorily applicable rate. This is a non-GAAP disclosure and management believes it is not materially different than the corresponding GAAP disclosure.

The tables below summarizes net interest income for the three month periods ended March 31, 2023 and 2022.

*(dollars in thousands)*

| ​ ​ ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ Non-GAAP ​ Three Months Ended ​ March 31, ​ 2023 | ​ ​ ​ 2022 | ​ ​ ​ GAAP Three Months Ended March 31, 2023 | ​ ​ ​ ​ ​ ​ 2022 |
| --- | --- | --- | --- | --- | --- |
| Interest income | ​ | $18,056 ​ | $14,388 ​ | $17,829 ​ | $14,147 ​ |
| Interest expense | ​ | ​ 3,311 ​ | ​ 806 ​ | ​ 3,311 ​ | ​ 806 ​ |
| Net interest income | ​ | $14,745 ​ | $13,582 ​ | $14,518 ​ | $13,341 ​ |
| Net interest margin % | ​ | ​ 3.53% | ​ 3.40% | ​ 3.48% | ​ 3.34% |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ | ​ ​ ​ |

The following tables set forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the three month period ended March 31 , 2023 and 2022:

*(dollars in thousands)*

| ​ ​ ​ ​ ​ Assets | ​ ​ ​ ​ ​ ​ | ​ ​ Three Months Ended March 31, 2023 Average Balance ​ ​ | ​ ​ ​ | ​ ​ ​ Interest ​ ​ | ​ ​ ​ | ​ ​ ​ Average ​ Yield/Rate ​ ​ | ​ ​ 2022 Average Balance ​ ​ | ​ ​ ​ | ​ ​ ​ Interest ​ ​ | ​ ​ ​ | ​ ​ ​ ​ ​ Average ​ Yield/Rate ​ ​ |
| --- | --- | --- | --- | --- | --- | ---: | --- | --- | --- | --- | ---: |
| Loans | ​ | $1,279,547 | ​ | $15,457 | ​ | 4.90% | $1,168,803 | ​ | $12,450 | ​ | 4.32% |
| Investment Securities: | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Taxable | ​ | ​ 340,622 | ​ | ​ 1,768 | ​ | 2.11% | ​ 363,155 | ​ | ​ 1,406 | ​ | 1.57% |
| Non taxable | ​ | ​ 26,104 | ​ | ​ 484 | ​ | 7.52% | ​ 28,022 | ​ | ​ 505 | ​ | 7.31% |
| Total | ​ | ​ 366,726 | ​ | ​ 2,252 | ​ | 2.49% | ​ 391,177 | ​ | ​ 1,911 | ​ | 1.98% |
| Federal funds sold | ​ | ​ 40,092 | ​ | ​ 307 | ​ | 3.11% | ​ 53,321 | ​ | ​ 18 | ​ | 0.14% |
| Interest-bearing deposits with other banks | ​ | ​ 5,001 | ​ | ​ 26 | ​ | 2.11% | ​ 5,255 | ​ | ​ 1 | ​ | 0.08% |
| Other interest earning assets | ​ | ​ 1,632 | ​ | ​ 14 | ​ | 3.48% | ​ 1,029 | ​ | ​ 8 | ​ | 3.15% |
| **Total earning assets** | **​** | **​** 1,692,998 | ​ | ​ 18,056 | ​ | 4.33% | **​** 1,619,585 | ​ | ​ 14,388 | ​ | 3.60% |
| Allowance for loan losses | ​ | ​ (14,816) | ​ | ​ ​ | ​ | ​ ​ | ​ (15,900) | ​ | ​ ​ | ​ | ​ ​ |
| Non-earning assets | ​ | ​ 213,929 | ​ | ​ ​ | ​ | ​ ​ | ​ 165,549 | ​ | ​ ​ | ​ | ​ ​ |
| **Total Assets** | **​** | **$1,892,111** | **​** | **​** ​ | ​ | ​ ​ | **$1,769,234** | **​** | **​** ​ | ​ | ​ ​ |
| **Liabilities and Shareholders’ Equity** | **​** | **​** ​ | ​ | ​ ​ | ​ | ​ ​ | **​** ​ | ​ | ​ ​ | ​ | ​ ​ |
| Interest-bearing demand deposits | ​ | $353,072 | ​ | $888 | ​ | 1.02% | $284,799 | ​ | $89 | ​ | 0.13% |
| Interest-bearing money markets | ​ | ​ 340,128 | ​ | ​ 1,298 | ​ | 1.55% | ​ 295,923 | ​ | ​ 63 | ​ | 0.09% |
| Savings deposits | ​ | ​ 246,708 | ​ | ​ 79 | ​ | 0.13% | ​ 243,919 | ​ | ​ 18 | ​ | 0.03% |
| Time deposits - Retail | ​ | ​ 118,667 | ​ | ​ 281 | ​ | 0.96% | ​ 154,811 | ​ | ​ 305 | ​ | 0.80% |
| Time deposits - Brokered | ​ | ​ 10,180 | ​ | ​ 132 | ​ | 5.26% | ​ — | ​ | ​ — | ​ | —% |
| Short-term borrowings | ​ | ​ 57,364 | ​ | ​ 31 | ​ | 0.22% | ​ 59,555 | ​ | ​ 18 | ​ | 0.12% |
| Long-term borrowings | ​ | ​ 43,373 | ​ | ​ 602 | ​ | 5.63% | ​ 30,929 | ​ | ​ 313 | ​ | 4.10% |
| **Total interest-bearing liabilities** | **​** | ​ 1,169,492 | ​ | ​ 3,311 | ​ | 1.15% | ​ 1,069,936 | ​ | ​ 806 | ​ | 0.31% |
| Non-interest-bearing deposits | ​ | ​ 545,215 | ​ | ​ ​ | ​ | ​ ​ | ​ 530,672 | ​ | ​ ​ | ​ | ​ ​ |
| Other liabilities | ​ | ​ 27,988 | ​ | ​ ​ | ​ | ​ ​ | ​ 28,109 | ​ | ​ ​ | ​ | ​ ​ |
| Shareholders’ Equity | ​ | ​ 149,416 | ​ | ​ ​ | ​ | ​ ​ | ​ 140,517 | ​ | ​ ​ | ​ | ​ ​ |
| **Total Liabilities and Shareholders’ Equity** | **​** | **$1,892,111** | **​** | **​** ​ | ​ | ​ ​ | **$1,769,234** | ​ | **​** ​ | ​ | ​ ​ |
| Net interest income and spread | ​ | ​ ​ | ​ | **$14,745** | **​** | 3.18% | ​ ​ | **​** | **$13,582** | ​ | 3.29% |
| Net interest margin | ​ | ​ ​ | ​ | ​ ​ | ​ | 3.53% | ​ ​ | ​ | ​ ​ | **​** | 3.40% |

(1) The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2023 and 2022. Non-GAAP interest income on a fully taxable equivalent was $227 and $242, respectively.

(2) Net interest margin is calculated as net interest income divided by average earning assets.

(3) The average yields on investments are based on amortized cost.

Net interest income, on a non-GAAP, FTE basis, increased by $1.2 million for the first quarter of 2023 when compared to the first quarter of 2022. This increase was driven by an increase of $3.7 million in interest income from an overall increase in yield of 73 basis points on interest earning assets and an increase in average balances of $73.4 million. Interest income on loans increased by $3.0 million due to the increase of 58 basis points in overall yield on the loan portfolio as new loans were booked at higher rates as well as adjustable-rate loans repricing in correlation to the rising rate environment and an increase in average balances of $110.7 million. Investment income increased by $0.3 million. The increase of $2.5 million in interest expense was driven by the increase of 82 basis points on interest paid on deposit accounts as well as an increase of $89.3 million in average balances of interest-bearing deposit accounts when compared to 2022. Increased deposit pricing is a result of the continued pressure on deposits as well as a shift of balances from non-interest-bearing deposits to the interest bearing Insured Cash Sweep (“ICS”) product to ensure full FDIC insurance coverage.

The following table sets forth an analysis of volume and rate changes in interest income and interest expense for our average interest-earning assets and average interest-bearing liabilities for the three month periods ended March 31, 2023 and 2022:

*(in thousands and tax equivalent basis)*

| ​ ​ ​ Interest Income: | ​ ​ ​ ​ | ​ ​ For the Three months ended March 31, 2023 compared to the three months ended March 31, 2022 Volume ​ ​ | ​ ​ | ​ ​ Rate ​ ​ | ​ ​ | ​ ​ Net ​ ​ |
| --- | --- | --- | --- | --- | --- | --- |
| Loans | ​ | $1,196 | ​ | $1,811 | ​ | $3,007 |
| Taxable Investments | ​ | ​ (88) | ​ | ​ 450 | ​ | ​ 362 |
| Non-taxable Investments | ​ | ​ (35) | ​ | ​ 14 | ​ | ​ (21) |
| Federal funds sold | ​ | ​ (5) | ​ | ​ 294 | ​ | ​ 289 |
| Interest-bearing deposits | ​ | ​ 0 | ​ | ​ 25 | ​ | ​ 25 |
| Other interest earning assets | ​ | ​ 5 | ​ | ​ 1 | ​ | ​ 6 |
| Total interest income | ​ | ​ 1,073 | ​ | ​ 2,595 | ​ | ​ 3,668 |
| Interest Expense: | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Interest-bearing demand deposits | ​ | ​ 22 | ​ | ​ 777 | ​ | ​ 799 |
| Interest-bearing money markets | ​ | ​ 10 | ​ | ​ 1,226 | ​ | ​ 1,236 |
| Savings deposits | ​ | ​ 0 | ​ | ​ 61 | ​ | ​ 61 |
| Time deposits - Retail | ​ | ​ (72) | ​ | ​ 48 | ​ | ​ (24) |
| Time deposits - Brokered | ​ | ​ 0 | ​ | ​ 132 | ​ | ​ 132 |
| Short-term borrowings | ​ | ​ (1) | ​ | ​ 14 | ​ | ​ 13 |
| Long-term borrowings | ​ | ​ 128 | ​ | ​ 162 | ​ | ​ 290 |
| Total interest expense | ​ | ​ 87 | ​ | ​ 2,420 | ​ | ​ 2,507 |
| Net interest income | ​ | $986 | ​ | $175 | ​ | $1,161 |

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

#### Provision for Credit Losses

Specific allocations have been made for loans where management has determined that the collateral supporting the loans is not adequate to cover the loan balance, and the qualitative factors affecting the ACL/ALL have been adjusted based on the current economic environment and the characteristics of the loan portfolio.

#### Other Income

The composition of other operating income for the three month periods ended March 31, 2023 and 2022 is illustrated in the following table:

*(in thousands)*

| ​ ​ ​ ​ ​ | ​ ​ ​ ​ ​ | ​ ​ Income as % of Total Other Income Three Months Ended March 31, 2023 | ​ | ​ | ​ | ​ ​ 2022 | ​ | ​ |
| --- | --- | --- | --- | ---: | --- | --- | --- | ---: |
| Service charges on deposit accounts | ​ | $516 |  | 12% | ​ | $465 |  | 10% |
| Other service charges | ​ | ​ 232 | ​ | 5% | ​ | ​ 213 | ​ | 5% |
| Trust department | ​ | ​ 1,970 | ​ | 46% | ​ | ​ 2,189 | ​ | 50% |
| Debit card income | ​ | ​ 955 | ​ | 22% | ​ | ​ 886 | ​ | 20% |
| Bank owned life insurance | ​ | ​ 305 | ​ | 7% | ​ | ​ 292 | ​ | 7% |
| Brokerage commissions | ​ | ​ 297 | ​ | 7% | ​ | ​ 220 | ​ | 5% |
| Other income | ​ | ​ 64 | ​ | 1% | ​ | ​ 117 | ​ | 3% |
| ​ | ​ | $4,339 | ​ | 100% | ​ | $4,382 | ​ | 100% |

#### Other Operating Expenses

The composition of other operating expenses for the three month periods ended March 31, 2023 and 2022 is illustrated in the following table:

*(in thousands)*

| ​ ​ ​ ​ ​ | ​ ​ ​ ​ ​ | ​ ​ Expense as % of Total Other Operating Expenses Three Months Ended March 31, 2023 | ​ | ​ | ​ | ​ ​ 2022 | ​ | ​ |
| --- | --- | --- | --- | ---: | --- | --- | --- | ---: |
| Salaries and employee benefits | ​ | $7,290 |  | 57% | ​ | $5,968 |  | 56% |
| FDIC premiums | ​ | ​ 193 | ​ | 2% | ​ | ​ 174 | ​ | 2% |
| Equipment | ​ | ​ 1,092 | ​ | 9% | ​ | ​ 1,044 | ​ | 10% |
| Occupancy expense of premises | ​ | ​ 785 | ​ | 6% | ​ | ​ 727 | ​ | 7% |
| Data processing expense | ​ | ​ 969 | ​ | 8% | ​ | ​ 821 | ​ | 8% |
| Marketing expense | ​ | ​ 117 | ​ | 1% | ​ | ​ 106 | ​ | 1% |
| Professional services | ​ | ​ 518 | ​ | 3% | ​ | ​ 520 | ​ | 5% |
| Contract labor | ​ | ​ 139 | ​ | 1% | ​ | ​ 165 | ​ | 1% |
| Telephone | ​ | ​ 110 | ​ | 1% | ​ | ​ 114 | ​ | 1% |
| Other real estate owned | ​ | ​ 124 | ​ | 1% | ​ | ​ 95 | ​ | 1% |
| Investor relations | ​ | ​ 57 | ​ | 1% | ​ | ​ 96 | ​ | 1% |
| Contributions | ​ | ​ 64 | ​ | 1% | ​ | ​ 21 | ​ | 0% |
| Other | ​ | ​ 1,180 | ​ | 9% | ​ | ​ 729 | ​ | 7% |
| ​ | ​ | $12,638 | ​ | 100% | ​ | $10,580 | ​ | 100% |
| ​ | ​ | ​ ​ | ​ | ​ | ​ | ​ ​ | ​ | ​ |

#### Provision for Income Taxes

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

FINANCIAL CONDITION

#### Balance Sheet Overview

Total assets at March 31, 2023 were $1.9 billion, representing a $89.3 million increase since December 31, 2022. During the first quarter of 2023, cash and interest-bearing deposits in other banks increased by $81.6 million as a result of the implementation of the contingency funding plan and obtaining $61.1 million of brokered certificates of deposit and $80.0 million in FHLB borrowings. Implementing the contingency funding plan and the increase in on-balance sheet liquidity was a precautionary move given the market disruptions associated with the volatile banking environment and the near-term uncertainties regarding growth in the deposit portfolio. The investment portfolio decreased by $4.5 million associated with normal principal amortization and gross loans increased by $9.6 million. Other assets, including deferred taxes, premises and equipment, and accrued interest receivable, remained stable.

Total liabilities at March 31, 2023 were $1.8 billion, representing an $88.2 million increase since December 31, 2022. Total deposits increased by $20.6 million since December 31, 2022. The increase in deposits during the first quarter was primarily attributable to $61.1 million in new brokered deposits, which was partially offset by a decrease of approximately $38.1 million in non-interest deposits from a shift to interest bearing accounts, the effects of consumer and commercial spending and the competitive market for deposits. Short term borrowings decreased by $12.5 million since December 31, 2022 due to municipalities in our Treasury management product utilizing cash for normal spending. Long term borrowings increased by $80.0 million in the first quarter of 2023 when compared to December 31, 2022 due to the acquisition of $80.0 million in FHLB borrowings related to the implementation of our Contingency Funding Plan.

#### Loan Portfolio

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

*(dollars in thousands)*

| ​ | ​ | ​ ​ March 31, 2023 | ​ | ​ | ​ | ​ ​ December 31, 2022 | ​ | ​ |
| --- | --- | --- | --- | ---: | --- | --- | --- | ---: |
| Commercial real estate | ​ | $453,356 |  | 35% | ​ | $458,831 |  | 36% |
| Acquisition and development | ​ | ​ 76,980 | ​ | 6% | ​ | ​ 70,596 | ​ | 6% |
| Commercial and industrial \* | ​ | ​ 241,959 | ​ | 19% | ​ | ​ 245,396 | ​ | 19% |
| Residential mortgage | ​ | ​ 456,198 | ​ | 35% | ​ | ​ 444,411 | ​ | 35% |
| Consumer | ​ | ​ 60,587 | ​ | 5% | ​ | ​ 60,260 | ​ | 5% |
| Total Loans | ​ | $1,289,080 | ​ | 100% | ​ | $1,279,494 | ​ | 100% |

\*Includes $0.3 million of PPP loans at March 31, 2023 and $0.4 million at December 31, 2022

Outstanding loans of $1.3 billion at March 31, 2023 reflected growth of $9.6 million for the first quarter of 2023. Since December 31, 2022, commercial real estate loans decreased by $5.5 million and acquisition and development loans increased by $6.4 million. Commercial and industrial loans decreased by $3.4 million since December 31, 2022, primarily due to seasonal fluctuations of floor plan lending. Residential mortgage loans increased $11.8 million related to management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio. The consumer loan portfolio increased slightly by $0.3 million.

New commercial loan production for the three months ended March 31, 2023 was approximately $52.8 million. The pipeline of commercial loans as of March 31, 2023 was $42.3 million. At March 31, 2023, unfunded, committed commercial construction loans totaled approximately $42.6 million. Commercial amortization and payoffs were approximately $38.9 million through March 31, 2023 due primarily to pay-offs of short-term commercial loans as well as normal amortizations of the commercial loan portfolio.

New consumer mortgage loan production for the first quarter of 2023 was approximately $19.0 million, with most of this production comprised of in-house mortgages. The pipeline of in-house, portfolio loans as of March 31, 2023, was $20.3 million. The residential mortgage production level normalized in the first quarter of 2023 due to the increasing interest rates that occurred throughout 2022 and 2023.

Non-accrual loans totaled $3.3 million at March 31, 2023 compared to $3.5 million at December 31, 2022. The decrease in non-accrual balances at March 31, 2023 was related to principal reductions. OREO balances decreased by $0.1 million since December 31, 2022 due to sales of OREO properties.

#### 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.

*(dollars in thousands)*

| ​ Non-accrual loans: | ​ ​ | ​ ​ March 31, 2023 ​ ​ | ​ ​ | ​ % of Applicable Portfolio ​ | ​ ​ | ​ ​ December 31, 2022 ​ ​ | ​ ​ | ​ % of Applicable Portfolio ​ |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Commercial real estate | ​ | $85 | ​ | 0.02% | ​ | $145 | ​ | 0.03% |
| Acquisition and development | ​ | ​ 135 | ​ | 0.18% | ​ | ​ 146 | ​ | 0.21% |
| Residential mortgage | ​ | ​ 3,016 | ​ | 0.66% | ​ | ​ 3,204 | ​ | 0.72% |
| Consumer | ​ | ​ 22 | ​ | 0.04% | ​ | ​ — | ​ | 0.00% |
| Total non-accrual loans | ​ | $3,258 | ​ | 0.25% | ​ | $3,495 | ​ | 0.27% |
| Accruing Loans Past Due 90 days or more: | ​ | ​ ​ | ​ | ​ | ​ | ​ ​ | ​ | ​ |
| Residential mortgage | ​ | ​ 46 | ​ | ​ | ​ | ​ 282 | ​ | ​ |
| Consumer | ​ | ​ 41 | ​ | ​ | ​ | ​ 25 | ​ | ​ |
| Total loans past due 90 days or more | ​ | $87 | ​ | ​ | ​ | $307 | ​ | ​ |
| Total non-accrual and accruing loans past due 90 days or more | ​ | $3,345 | ​ | ​ | ​ | $3,802 | ​ | ​ |
| ​ | ​ | ​ ​ | ​ | ​ | ​ | ​ ​ | ​ | ​ |
| Other real estate owned | ​ | $4,598 | ​ | ​ | ​ | $4,733 | ​ | ​ |
| Total Non-performing assets | ​ | $7,943 | ​ | ​ | ​ | $8,535 | ​ | ​ |
| ​ | ​ | ​ ​ | ​ | ​ | ​ | ​ ​ | ​ | ​ |
| Non-accrual loans to total loans (as %) | ​ | ​ 0.25% | ​ | ​ | ​ | ​ 0.27% | ​ | ​ |
| Non-performing loans to total loans (as %) | ​ | ​ 0.26% | ​ | ​ | ​ | ​ 0.30% | ​ | ​ |
| Non-performing assets to total assets (as %) | ​ | ​ 0.41% | ​ | ​ | ​ | ​ 0.46% | ​ | ​ |
| Allowance for credit losses to non-accrual loans (as %) | ​ | ​ 517.83% | ​ | ​ | ​ | ​ 418.77% | ​ | ​ |
| Allowance for credit losses to non-performing assets (as %) | ​ | ​ 212.40% | ​ | ​ | ​ | ​ 171.48% | ​ | ​ |

#### Allowance for Credit Losses

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

Determination of an appropriate ACL is inherently complex and requires the use of highly subjective estimates. The reasonableness of the ACL is reviewed quarterly by management.

Management believes it uses relevant information available to make determination about the ACL and that it has established the existing allowance in accordance with GAAP. However, the determination of the ACL requires significant judgment, and estimates of expected credit losses in the loan portfolio can vary from the amounts actually observed. While management uses available information to recognize expected credit losses, future additions to the ACL may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.

The ACL “base case” model is derived from various economic forecasts provided by widely recognized sources. Management evaluates the variability of market conditions by examining the peak and trough of economic cycles. These peaks and torughs 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.

The following table presents a summary of the activity in the ACL and ALL for the three months ended March 31:

*(dollars in thousands)*

| ​ | ​ | ​ ​ ​ 2023 | ​ ​ ​ 2022 |
| --- | --- | --- | --- |
| Balance, January 1 | ​ | $14,636 ​ | $15,955 ​ |
| Impact of CECL Adoption | ​ | ​ 2,066 ​ | ​ — ​ |
| Charge-offs: | ​ | ​ ​ ​ | ​ ​ ​ |
| Commercial real estate | ​ | ​ — ​ | ​ — ​ |
| Acquisition and development | ​ | ​ — ​ | ​ — ​ |
| Commercial and industrial | ​ | ​ — ​ | ​ (48) ​ |
| Residential mortgage | ​ | ​ (6) ​ | ​ (9) ​ |
| Consumer | ​ | ​ (333) ​ | ​ (246) ​ |
| Total charge-offs | ​ | ​ (339) ​ | ​ (303) ​ |
| Recoveries: | ​ | ​ ​ ​ | ​ ​ ​ |
| Commercial real estate | ​ | ​ 5 ​ | ​ 1 ​ |
| Acquisition and development | ​ | ​ 5 ​ | ​ 18 ​ |
| Commercial and industrial | ​ | ​ 4 ​ | ​ 3 ​ |
| Residential mortgage | ​ | ​ 18 ​ | ​ 15 ​ |
| Consumer | ​ | ​ 62 ​ | ​ 22 ​ |
| Total recoveries | ​ | ​ 94 ​ | ​ 59 ​ |
| Net losses | ​ | ​ (245) ​ | ​ (244) ​ |
| Credit Loss Expense/(Credit) | ​ | ​ 414 ​ | ​ (419) ​ |
| Balance at end of period | ​ | $16,871 ​ | $15,292 ​ |
| ​ | ​ | ​ ​ ​ | ​ ​ ​ |
| Allowance for credit/loan losses to gross loans outstanding (as %) | ​ | ​ 1.31% | ​ 1.29% |

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

| ​ ​ ​ | ​ ​ ​ | ​ ​ 2023 | ​ ​ | ​ ​ ​ | ​ ​ 2022 | ​ ​ |
| --- | --- | --- | ---: | --- | --- | ---: |
| Commercial real estate | ​ | ​ | 0.00% | ​ | ​ | 0.00% |
| Acquisition and development | ​ | ​ | 0.03% | ​ | ​ | 0.06% |
| Commercial and industrial | ​ | ​ | 0.01% | ​ | ​ | (0.10)% |
| Residential mortgage | ​ | ​ | 0.01% | ​ | ​ | 0.01% |
| Consumer | ​ | ​ | (1.79)% | ​ | ​ | (1.42)% |
| ​ | ​ | ​ | ​ | ​ | ​ | ​ |

#### Investment Securities

At March 31, 2023, the total amortized cost basis of the available-for-sale investment portfolio was $148.2 million, compared to a fair value of $124.0 million. Unrealized gains and losses on securities available-for-sale are reflected in accumulated other comprehensive loss, a component of shareholders’ equity. The amortized cost basis of the held to maturity portfolio was $233.1 million, compared to a fair value of $204.5 million.

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

*(dollars in thousands)*

| ​ ​ ​ Securities Available for Sale: | ​ ​ ​ ​ | ​ ​ March 31, 2023 Amortized Cost ​ ​ | ​ ​ ​ | ​ ​ Fair Value (FV) ​ ​ | ​ ​ ​ | ​ FV as % of Total ​ | ​ ​ ​ ​ | ​ ​ December 31, 2022 Amortized Cost ​ ​ | ​ ​ ​ | ​ ​ Fair Value (FV) ​ ​ | ​ ​ ​ | ​ FV as % of Total ​ |
| --- | --- | --- | --- | --- | --- | ---: | --- | --- | --- | --- | --- | ---: |
| U.S. government agencies | ​ | $11,036 | ​ | $9,653 | ​ | 9% | ​ | $11,044 | ​ | $9,462 | ​ | 8% |
| Residential mortgage-backed agencies | ​ | ​ 44,224 | ​ | ​ 37,281 | ​ | 30% | ​ | ​ 45,052 | ​ | ​ 37,401 | ​ | 30% |
| Commercial mortgage-backed agencies | ​ | ​ 37,151 | ​ | ​ 30,494 | ​ | 25% | ​ | ​ 37,393 | ​ | ​ 30,732 | ​ | 23% |
| Collateralized mortgage obligations | ​ | ​ 25,322 | ​ | ​ 20,977 | ​ | 17% | ​ | ​ 25,828 | ​ | ​ 21,044 | ​ | 17% |
| Obligations of state and political subdivisions | ​ | ​ 10,842 | ​ | ​ 10,629 | ​ | 9% | ​ | ​ 10,848 | ​ | ​ 10,492 | ​ | 8% |
| Corporate bonds | ​ | ​ 1,000 | ​ | ​ 830 | ​ | 1% | ​ | ​ 1,000 | ​ | ​ 887 | ​ | 1% |
| Collateralized debt obligations | ​ | ​ 18,661 | ​ | ​ 14,114 | ​ | 11% | ​ | ​ 18,664 | ​ | ​ 15,871 | ​ | 13% |
| Total available for sale | ​ | $148,236 | ​ | $123,978 | ​ | 100% | ​ | $149,829 | ​ | $125,889 | ​ | 100% |
| **Securities Held to Maturity:** | **​** | **​** ​ | ​ | **​** ​ | ​ | ​ | ​ | **​** ​ | ​ | **​** ​ | ​ | ​ |
| U.S. treasuries | **​** | $37,268 | ​ | $36,023 | ​ | 18% | ​ | $37,204 | ​ | $35,611 | ​ | 18% |
| U.S. government agencies | ​ | ​ 67,803 | ​ | ​ 56,828 | ​ | 28% | ​ | ​ 67,734 | ​ | ​ 54,473 | ​ | 27% |
| Residential mortgage-backed agencies | ​ | ​ 27,624 | ​ | ​ 24,586 | ​ | 13% | ​ | ​ 28,624 | ​ | ​ 25,122 | ​ | 12% |
| Commercial mortgage-backed agencies | ​ | ​ 21,635 | ​ | ​ 17,069 | ​ | 8% | ​ | ​ 22,389 | ​ | ​ 17,821 | ​ | 9% |
| Collateralized mortgage obligations | ​ | **​** 56,128 | ​ | **​** 47,099 | ​ | 23% | ​ | **​** 57,085 | ​ | **​** 47,084 | ​ | 23% |
| Obligations of state and political subdivisions | ​ | ​ 22,625 | ​ | ​ 22,936 | ​ | 10% | ​ | ​ 22,623 | ​ | ​ 22,969 | ​ | 11% |
| Total held to maturity | ​ | $233,083 | ​ | $204,541 | ​ | 100% | ​ | $235,659 | ​ | $203,080 | ​ | 100% |

Total fair value of investment securities available for sale decreased by $1.9 million since December 31, 2022 due to principal paydowns of the portfolio in the first quarter of 2023. At March 31, 2023, the securities classified as available-for-sale included a net unrealized loss of $24.3 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.

As discussed in Note 6 to the consolidated financial statements presented elsewhere in this report, the Corporation measures fair market values based on the fair value hierarchy established in ASC Topic 820, *Fair Value Measurements and Disclosures*. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 3 prices or valuation techniques require inputs that are both significant to the valuation assumptions and are not readily observable in the market (i.e. supported with little or no market activity). 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 $109.9 million of the available for sale portfolio was valued using Level 2 pricing and had net unrealized losses of $21.1 million at March 31, 2023. The remaining $14.1 million of the securities available for sale represents the entire collateralized debt obligation (“CDO”) portfolio, which was valued using significant unobservable inputs (Level 3 assets). The $4.5 million in net unrealized losses associated with this portfolio relates to nine pooled trust preferred securities that comprise the CDO portfolio. Net unrealized losses of $3.3 million represent non-credit related OTTI charges on seven of the securities, while $1.2 million of unrealized losses relates to two securities which have had no OTTI related charges.

#### Deposits

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

*(dollars in thousands)*

| ​ ​ | ​ ​ | ​ ​ March 31, 2023 ​ ​ | ​ ​ | ​ ​ | ​ ​ | ​ ​ December 31, 2022 ​ ​ | ​ ​ | ​ ​ |
| --- | --- | --- | --- | ---: | --- | --- | --- | ---: |
| Non-interest-bearing demand deposits | ​ | $468,554 |  | 30% | ​ | $506,613 | ​ | 32% |
| ​ | ​ | ​ ​ | ​ | ​ | ​ | ​ ​ | ​ | ​ |
| Interest-bearing deposits: | ​ | ​ ​ | ​ | ​ | ​ | ​ ​ | ​ | ​ |
| Demand | ​ | ​ 362,585 | ​ | 23% | ​ | ​ 327,685 | ​ | 21% |
| Money Market | ​ | ​ 339,163 | ​ | 21% | ​ | ​ 365,192 | ​ | 23% |
| Savings deposits | ​ | ​ 242,441 | ​ | 15% | ​ | ​ 250,720 | ​ | 16% |
| Time deposits- retail | ​ | ​ 117,461 | ​ | 7% | ​ | ​ 120,523 | ​ | 8% |
| Time deposits- brokered | ​ | ​ 61,081 | ​ | 4% | ​ | ​ — | ​ | 0% |
| Total Deposits | ​ | $1,591,285 | ​ | 100% | ​ | $1,570,733 | ​ | 100% |

Total deposits at March 31, 2023 increased by $20.6 million when compared to December 31, 2022. In 2023, non-interest-bearing deposits decreased by $38.1 million primarily due to the shift of balances into interest bearing accounts to ensure full FDIC coverage through the ICS product, consumer and commercial spending and the competitive deposit market. Interest bearing demand deposits increased by $34.9 million and traditional savings and money market accounts decreased by $34.3 million. Total time deposits increased by $58.0 million. This increase in time deposits was primarily driven by management’s decision to acquire $61.1 million in brokered deposits during the first quarter of 2023 as a result of the market disruption.

The following table summarizes the percentage of deposits that are insured by deposit insurance or otherwise fully collateralized by securities compared to uninsured deposits as of March 31, 2023 and December 31, 2022.

*(dollars in thousands)*

| ​ ​ | ​ ​ ​ | ​ ​ March 31, 2023 ​ Balance | ​ ​ | ​ Percent | ​ ​ ​ | ​ ​ December 31, 2022 ​ Balance | ​ ​ | ​ Percent |
| --- | --- | ---: | --- | ---: | --- | ---: | --- | ---: |
| Insured/collateralized deposits | ​ | $1,125,896 | ​ | 71% | ​ | $1,118,190 | ​ | 71% |
| Uninsured deposits | ​ | ​ 465,389 | ​ | 29% | ​ | ​ 452,543 | ​ | 29% |
| ​ | ​ | $1,591,285 | ​ | 100% | ​ | $1,570,733 | ​ | 100% |

The following table summarizes the percentage of deposit balances from retail customers compared to business customers as of March 31, 2023 and December 31, 2022.

*(dollars in thousands)*

| ​ ​ | ​ ​ ​ | ​ ​ March 31, 2023 ​ Balance | ​ ​ | ​ Percent | ​ ​ ​ | ​ December 31, 2022 ​ | ​ Balance | ​ ​ | ​ Percent |
| --- | --- | ---: | --- | ---: | --- | --- | ---: | --- | ---: |
| Retail deposits | ​ | $820,063 | ​ | 52% | ​ | ​ | 855,014 | ​ | 55% |
| Business deposits | ​ | ​ 771,222 | ​ | 48% | ​ | ​ | 715,719 | ​ | 45% |
| ​ | ​ | $1,591,285 | ​ | 100% | ​ | ​ | 1,570,733 | ​ | 100% |

Deposit outflows experienced in the latter half of 2022 and in January 2023 were due to the competitive pricing landscape and inflationary spending. Changes in deposit levels were not directly related to recent market disruptions.

#### Borrowed Funds

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

*(in thousands)*

| ​ | ​ | ​ ​ March 31, 2023 | ​ | ​ ​ December 31, 2022 |
| --- | --- | ---: | --- | ---: |
| Securities sold under agreements to repurchase | ​ | $52,030 | ​ | $64,565 |
| Total short-term borrowings | ​ | ​ 52,030 | ​ | ​ 64,565 |
| FHLB advances | ​ | $80,000 | ​ | $— |
| Junior subordinated debt | ​ | ​ 30,929 | ​ | ​ 30,929 |
| Total long-term borrowings | ​ | $110,929 | ​ | $30,929 |

Short term borrowings decreased $12.5 million since December 31, 2022, driven by the utilization of cash by municipalities in our Treasury Management product.

Long-term borrowings increased by $80.0 million due to management’s decision to implement the Contingency Funding plan in regards to the recent market disruption. Two new borrowings totaling $80.0 million in FHLB advances were obtained in the first quarter of 2023.

#### Liquidity Management

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

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

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

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

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

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

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

4\. Brokered deposits, including CDs and money market funds, provide a method to generate deposits quickly. These deposits are strictly rate driven but often provide the most cost-effective means of funding growth.

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

6\. Bank Term Funding Program – A Federal Reserve program collateralized by government agency securities, if needed.

The following table presents sources of liquidity available to the Company as of March 31, 2023.

*(dollars in thousands)*

| ​ Internal Sources | ​ ​ ​ | ​ ​ ​ Total Availability ​ ​ | ​ ​ ​ Amount Used ​ ​ | ​ ​ ​ Net Availability ​ ​ |
| --- | --- | --- | --- | --- |
| Excess cash | ​ | $132,928 | $- | $132,928 |
| Unpledged securities | ​ | ​ 146,508 | ​ - | ​ 146,508 |
| **External Sources** | ​ | ​ ​ | ​ ​ | ​ ​ |
| Federal Reserve (discount window) | ​ | ​ 9,788 | ​ - | ​ 9,788 |
| Correspondent unsecured lines of credit | ​ | ​ 105,000 | ​ - | ​ 105,000 |
| FHLB | ​ | ​ 199,327 | ​ 82,500 | ​ 116,827 |
| Bank Term Funding Program\* | ​ | ​ - | ​ - | ​ - |
| ​ | ​ | $593,551 | $82,500 | $511,051 |
| \*Bank Term Funding Program ("BTFP") has been established and can be utilized if needed. $122 million available for BTFP included in unpledged above. |  |  |  |  |
| ​ | ​ | ​ ​ | ​ ​ | ​ ​ |

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 recent market disruption, management implemented the Liquidiity Contingency Plan and believes that we have adequate liquidity available to respond to current and anticipated liquidity demands and is not aware of any trends or demands, commitments, events or uncertainties that are likely to materially affect our ability to maintain liquidity at satisfactory levels.

#### Market Risk and Interest Sensitivity

Our primary market risk is interest rate fluctuation. Interest rate risk results primarily from the traditional banking activities that we engage in, such as gathering deposits and extending loans. Many factors, including economic and financial conditions, movements in interest rates and consumer preferences affect the difference between the interest earned on our assets and the interest paid on our liabilities. Interest rate sensitivity refers to the degree that earnings will be impacted by changes in the prevailing level of interest rates. Interest rate risk arises from mismatches in the repricing or maturity characteristics between interest-bearing assets and liabilities. Management seeks to minimize fluctuating net interest margins, and to enhance consistent growth of net interest income through periods of changing interest rates. Management uses interest sensitivity gap analysis and simulation models to measure and manage these risks. The interest rate sensitivity gap analysis assigns each interest-earning asset and interest-bearing liability to a time frame reflecting its next repricing or maturity date. The differences between total interest-sensitive assets and liabilities at each time interval represent the interest sensitivity gap for that interval. A positive gap generally indicates that rising interest rates during a given interval will increase net interest income, as more assets than liabilities will reprice. A negative gap position would benefit us during a period of declining interest rates.

At March 31, 2023, we were asset sensitive.

Our interest rate risk management goals are:

- Ensure that the Board of Directors and senior management will provide effective oversight and ensure that risks are adequately identified, measured, monitored and controlled;
- Enable dynamic measurement and management of interest rate risk;
- Select strategies that optimize our ability to meet our long-range financial goals while maintaining interest rate risk within policy limits established by the Board of Directors;
- Use both income and market value oriented techniques to select strategies that optimize the relationship between risk and return; and
- Establish interest rate risk exposure limits for fluctuation in net interest income (“NII”), net income and economic value of equity.

To manage interest sensitivity risk, management formulates guidelines regarding asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These guidelines are based on management’s outlook regarding future interest rate movements, the state of the regional and national economy, and other financial and business risk factors. Management uses computer simulations to measure the effect on net interest income of various interest rate scenarios. Key assumptions used in the computer simulations include cash flows and maturities of interest rate sensitive assets and liabilities, changes in asset volumes and pricing, and management’s capital plans. This modeling reflects interest rate changes and the related impact on net interest income over specified periods.

We evaluate the effect of a change in interest rates of +/-100 basis points to +/-400 basis points on both NII and Net Portfolio Value (“NPV”) / Economic Value of Equity (“EVE”). We concentrate on NII rather than net income as long as NII remains the significant contributor to net income.

NII modeling allows management to view how changes in interest rates will affect the spread between the yield paid on assets and the cost of deposits and borrowed funds. Unlike traditional Gap modeling, NII modeling takes into account the different degree to which installments in the same repricing period will adjust to a change in interest rates. It also allows the use of different assumptions in a falling versus a rising rate environment. The period considered by the NII modeling is the next eight quarters.

NPV / EVE modeling focuses on the change in the market value of equity. NPV / EVE is defined as the market value of assets less the market value of liabilities plus/minus the market value of any off-balance sheet positions. By effectively looking at the present value of all future cash flows on or off the balance sheet, NPV / EVE modeling takes a longer-term view of interest rate risk. This complements the shorter-term view of the NII modeling.

Measures of NII at risk produced by simulation analysis are indicators of an institution’s short-term performance in alternative rate environments. These measures are typically based upon a relatively brief period, usually one year. They do not necessarily indicate the long-term prospects or economic value of the institution.

Based on the simulation analysis performed at March 31, 2023 and December 31, 2022, management estimated the following changes in net interest income, assuming the indicated rate changes:

*(Dollars in thousands)*

| ​ | ​ | ​ ​ March 31, 2023 | ​ ​ | ​ ​ December 31, 2022 |
| --- | --- | ---: | --- | ---: |
| +400 basis points | ​ | $8,897 | ​ | $1,112 |
| +300 basis points | ​ | $5,954 | ​ | $225 |
| +200 basis points | ​ | $3,957 | ​ | $173 |
| +100 basis points | ​ | $2,004 | ​ | $121 |
| -100 basis points | ​ | $(2,248) | ​ | $(776) |
| -200 basis points | ​ | $(5,144) | ​ | $(3,165) |

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, 2022. Our NII simulation analysis as of December 31, 2022 is included in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 2022 under the heading “Market Risk and Interest Sensitivity.

*Impact of Inflation –* Our assets and liabilities are primarily monetary in nature, and as such, future changes in prices do not affect the obligations to pay or receive fixed and determinable amounts of money. During inflationary periods, monetary assets lose value in terms of purchasing power and monetary liabilities have corresponding purchasing power gains. The concept of purchasing power is not an adequate indicator of the impact of inflation on financial institutions because it does not incorporate changes in our earnings.

#### Capital Resources

We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdrawal demands of the Bank’s customers, and satisfy our other monetary obligations. To the extent that deposits are not adequate to fund our capital requirements, we can rely on the funding sources identified above under the heading “Liquidity Management”.

In addition to operational requirements, the Bank is subject to risk-based capital regulations, which were adopted and are monitored by federal banking regulators. These regulations are used to evaluate capital adequacy and require an analysis of an institution’s asset risk profile and off-balance sheet exposures, such as unused loan commitments and stand-by letters of credit. Based on capital ratios at March 31, 2023, the Bank was considered to be well-capitalized. We adopted CECL effective January 1, 2023 and elected to implement the regulatory agencies’ capital transition entirely upon implementation.

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

| ​ ​ | ​ | ​ ​ March 31, 2023 | ​ ​ December 31, 2022 | ​ ​ Required for Capital Adequacy Purposes | ​ ​ Required to be Well Capitalized |
| --- | --- | ---: | ---: | ---: | ---: |
| Total Capital (to risk-weighted assets) | ​ | 14.25% | 14.37% | 8.00% | 10.00% |
| Tier 1 Capital (to risk-weighted assets) | ​ | 13.00% | 13.29% | 6.00% | 8.00% |
| Common Equity Tier 1 Capital (to risk-weighted assets) | ​ | 13.00% | 13.29% | 4.50% | 6.50% |
| Tier 1 Capital (to average assets) | ​ | 10.00% | 10.01% | 4.00% | 5.00% |

As of March 31, 2023 and December 31, 2022, the Bank was considered “well capitalized” under the regulatory framework for prompt corrective action. We adopted CECL effective January 1, 2023 and elected not to implement the regulatory agencies’ capital transition and instead opted to record the impact to ouc capital ratios immediately upon implementation.

Effective with the implementation of CECL, a $2.2 million, net of tax, adjustment was made to retained earnings. The adjustment did not have a material impact to our capital ratios.

#### Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

### Contractual Obligations

The Corporation enters into contractual obligations in the normal course of business. Among these obligations are FHLB advances and junior subordinated debentures, operating lease agreements for banking and subsidiaries’ offices and for data processing and telecommunications equipment. Comparing March 31, 2023 to December 31, 2022, short-term borrowings decreased $12.5 million, driven by a the utilization of cash balances by municipalities related to the overnight investments product. Long-term borrowings increased by $80.0 million during the quarter due to management’s decision to obtain $80 million in FHLB advances during the first quarter of 2023.

### Commitments

Loan commitments are made to accommodate the financial needs of our customers. Letters of credit commit us to make payments on behalf of customers when certain specified future events occur. The credit risks inherent in loan commitments and letters of credit are essentially the same as those involved in extending loans to customers, and these arrangements are subject to our normal credit policies. We are not a party to any other off-balance sheet arrangements.

Commitments to extend credit in the form of consumer, commercial and business at the dates indicated were as follows:

*(in thousands)*

| ​ | ​ | ​ ​ March 31, 2023 | ​ | ​ ​ December 31, 2022 |
| --- | --- | --- | --- | --- |
| Residential Mortgage - home equity | ​ | $72,623 | ​ | $70,845 |
| Residential Mortgage - construction | ​ | ​ 21,776 | ​ | ​ 25,499 |
| Commercial | ​ | ​ 172,944 | ​ | ​ 153,235 |
| Consumer - personal credit lines | ​ | ​ 4,334 | ​ | ​ 4,323 |
| Standby letters of credit | ​ | ​ 6,979 | ​ | ​ 14,325 |
| Total | ​ | $278,656 | ​ | $268,227 |

The increase of $10.4 million in commitments at March 31, 2023 when compared to December 31, 2022 was due to new business in construction commitments in the commercial portfolio as well as new home equity lines of credit.

Upon adoption of ASC 326 on January 1, 2023, the Company recorded an initial increase to the ACL for off-balance sheet exposures of $0.9 million. Credit loss expense for off-balance sheet credit exposures totaled $0.1 million for the period ending March 31, 2023.

## Market risk

As filed, 379 characters.

The information required by this item is included in Item 2 of Part I of this report under the caption “*Market Risk and Interest Sensitivity”* and in Item 7 of Part II of First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2022 under the heading “Market Risk and Interest Sensitivity” both of which are incorporated in this Item 3 by reference.

## Controls and procedures

As filed, 2,287 characters.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 with 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 March 31, 2023 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 three months ended March 31, 2023, 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.

## Risk factors

As filed, 1,964 characters.

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, 2022. Management does not believe that any material changes in our risk factors have occurred since they were last disclosed except as follows:

### Risks Related to First United Corporation and its Affiliates

**We could be materially and adversely impacted by recent negative developments affecting the banking industry, including recent bank failures and concerns regarding liquidity, which have eroded customer confidence in the banking system.**

Recent events impacting the banking industry, including the high-profile failures or instability of certain banking institutions, have resulted in general uncertainty and eroded confidence in the safety, soundness, and financial strength of the financial services industry. In particular, the bank failures highlighted the potential serious impact of a financial institution unable to meet withdrawal requests by depositors. These developments have resulted in a growing concern about liquidity in the banking industry, access to and volatile capital markets and reduced stock valuations for certain financial institutions. Similar future events, including additional bank failures or bank instability, could directly or indirectly adversely impact the Corporation’s own liquidity, access to capital markets, stock price, financial condition and/or results of operations. Further, these recent events may also result in greater regulatory scrutiny and enforcement, additional and more stringent laws and regulations for the financial services industry, increased FDIC deposit insurance premiums or special FDIC assessments, and/or higher capital ratio requirements, any of which could have a material adverse effect on the Corporation’s business, financial condition and results of operation.

Filed May 12, 2023.
Source: SEC EDGAR, the filing index for accession 0001558370-23-009593. Last ingested by Listed: Oct 24, 2026, 14:54 ET. No prices; not investment advice.