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What changed in FIRST UNITED CORP/MD/'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of FIRST UNITED CORP/MD/'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+320 added−269 removedSource: 10-K (2024-03-15) vs 10-K (2023-03-24)

Top changes in FIRST UNITED CORP/MD/'s 2023 10-K

320 paragraphs added · 269 removed · 194 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

44 edited+6 added−10 removed89 unchanged
Biggest changeIn those instances in which we are unable to accommodate customers’ needs, we attempt to arrange for those services to be provided by other financial services providers with which we have a relationship. 6 Tae of Contents The following tables set forth deposit data for the Maryland and West Virginia Counties in which the Bank maintains offices as of June 30, 2022, the most recent date for which comparative information is available. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Offices ​ Deposits ​ Market ​ (in Market) (in thousands) Share Allegany County, Maryland: ​ ​ ​ ​ ​ ​ ​ Manufacturers & Traders Trust Company ​ 5 ​ $ 255,963 ​ 32.83% First United Bank & Trust ​ 3 ​ ​ 216,975 ​ 27.83% Truist Bank ​ 3 ​ ​ 202,271 ​ 25.94% Standard Bank, PaSB ​ 2 ​ ​ 88,190 ​ 11.31% Somerset Trust Commpany ​ 2 ​ ​ 16,279 ​ 2.09% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Frederick County, Maryland: ​ ​ ​ ​ ​ ​ ​ PNC Bank NA ​ 13 ​ $ 1,913,260 ​ 26.68% Truist Bank ​ 10 ​ ​ 1,303,594 ​ 18.18% Bank Of America NA ​ 4 ​ ​ 810,325 ​ 11.30% Manufacturers & Traders Trust Company ​ 6 ​ ​ 541,046 ​ 7.55% Acnb Bank ​ 5 ​ ​ 479,118 ​ 6.68% Capital One NA ​ 2 ​ ​ 450,992 ​ 6.29% Sandy Spring Bank ​ 3 ​ ​ 434,102 ​ 6.05% Woodsboro Bank ​ 6 ​ ​ 384,320 ​ 5.36% Middletown Valley Bank ​ 4 ​ ​ 333,429 ​ 4.65% First United Bank & Trust ​ 4 ​ ​ 247,416 ​ 3.45% Wells Fargo Bank NA ​ 1 ​ ​ 167,740 ​ 2.34% Fulton Bank National Association ​ 1 ​ ​ 52,436 ​ 0.73% WesBanco Bank, Inc. ​ 1 ​ ​ 47,821 ​ 0.67% Woodforest National Bank ​ 1 ​ ​ 4,613 ​ 0.07% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Garrett County, Maryland: ​ ​ ​ ​ ​ ​ ​ First United Bank & Trust ​ 5 ​ $ 434,536 ​ 59.75% Manufacturers & Traders Trust Company ​ 2 ​ ​ 124,960 ​ 17.18% Clear Mountain Bank ​ 1 ​ ​ 72,167 ​ 9.92% Truist Bank ​ 2 ​ ​ 62,946 ​ 8.66% Somerset Trust Company ​ 1 ​ ​ 23,925 ​ 3.29% Miners & Merchants Bank ​ 1 ​ ​ 8,709 ​ 1.20% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Washington County, Maryland: ​ ​ ​ ​ ​ ​ ​ Truist Bank ​ 6 ​ $ 792,834 ​ 23.36% Fulton Bank National Association ​ 6 ​ ​ 668,989 ​ 19.71% Manufacturers & Traders Trust Company ​ 9 ​ ​ 606,656 ​ 17.88% Middletown Valley Bank ​ 3 ​ ​ 437,757 ​ 12.90% PNC Bank NA ​ 3 ​ ​ 367,702 ​ 10.83% First United Bank & Trust ​ 4 ​ ​ 153,248 ​ 4.52% United Bank ​ 2 ​ ​ 131,148 ​ 3.86% CNB Bank, Inc. ​ 3 ​ ​ 128,432 ​ 3.79% Orrstown Bank ​ 1 ​ ​ 48,155 ​ 1.42% Bank of Charles Town ​ 1 ​ ​ 30,608 ​ 0.90% Ameriserv Financial Bank ​ 1 ​ ​ 20,799 ​ 0.61% Jefferson Security Bank ​ 1 ​ ​ 7,483 ​ 0.22% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ ​ 7 Tae of Contents ​ ​ ​ ​ ​ ​ ​ ​ Berkeley County, West Virginia: ​ ​ ​ ​ ​ ​ ​ United Bank ​ 4 ​ $ 526,263 ​ 27.45% Truist Bank 4 ​ 403,487 21.05% City National Bank of West Virginia ​ 4 ​ ​ 249,231 ​ 13.00% Summit Community Bank, Inc. ​ 3 ​ ​ 176,389 ​ 9.20% First United Bank & Trust ​ 3 ​ ​ 166,173 ​ 8.67% Jefferson Security Bank ​ 2 ​ ​ 148,180 ​ 7.72% CNB Bank, Inc. ​ 3 ​ ​ 122,736 ​ 6.40% Bank of Charles Town ​ 2 ​ ​ 120,718 ​ 6.30% Woodforest National Bank ​ 1 ​ ​ 4,069 ​ 0.21% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Harrison County, West Virginia: ​ ​ ​ ​ ​ ​ ​ Truist Bank ​ 3 ​ $ 584,165 ​ 27.09% WesBanco Bank, Inc. ​ 1 ​ ​ 306,828 ​ 14.23% The Huntington National Bank ​ 2 ​ ​ 305,873 ​ 14.18% MVB Bank, Inc. ​ 3 ​ ​ 299,849 ​ 13.90% JP Morgan Chase Bank, NA ​ 6 ​ ​ 290,514 ​ 13.47% Harrison County Bank ​ 4 ​ ​ 147,566 ​ 6.84% City National Bank of West Virginia ​ 2 ​ ​ 59,126 ​ 2.74% Peoples Bank ​ 1 ​ ​ 37,992 ​ 1.76% Clear Mountain Bank ​ 1 ​ ​ 29,742 ​ 1.38% BC Bank, Inc. ​ 1 ​ ​ 24,500 ​ 1.14% West Union Bank ​ 1 ​ ​ 22,198 ​ 1.03% Summit Community Bank, Inc. ​ 1 ​ ​ 21,505 ​ 1.00% Freedom Bank, Inc ​ 1 ​ ​ 18,444 ​ 0.86% First United Bank & Trust ​ 1 ​ ​ 8,236 ​ 0.38% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Mineral County, West Virginia: ​ ​ ​ ​ ​ ​ ​ First United Bank & Trust ​ 2 ​ $ 119,927 ​ 38.76% Manufacturers & Traders Trust Company ​ 2 ​ ​ 68,998 ​ 22.30% Truist Bank ​ 1 ​ ​ 65,789 ​ 21.26% Grant County Bank ​ 1 ​ ​ 40,844 ​ 13.20% FNB Bank, Inc. ​ 1 ​ ​ 13,883 ​ 4.48% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Monongalia County, West Virginia: ​ ​ ​ ​ ​ ​ ​ MVB Bank, Inc. ​ 2 ​ $ 1,564,571 ​ 33.12% United Bank ​ 6 ​ ​ 1,215,804 ​ 25.75% The Huntington National Bank ​ 6 ​ ​ 586,726 ​ 12.42% Truist Bank ​ 3 ​ ​ 349,204 ​ 7.39% Clear Mountain Bank ​ 3 ​ ​ 340,982 ​ 7.22% WesBanco Bank, Inc. ​ 3 ​ ​ 241,465 ​ 5.11% PNC Bank NA ​ 2 ​ ​ 183,707 ​ 3.89% First United Bank & Trust ​ 4 ​ ​ 140,734 ​ 2.98% Citizens Bank of Morgantown, Inc. ​ 1 ​ ​ 38,759 ​ 0.82% First Exchange Bank ​ 1 ​ ​ 35,764 ​ 0.76% Summit Community Bank, Inc. ​ 1 ​ ​ 12,292 ​ 0.26% JP Morgan Chase Bank, NA ​ 1 ​ ​ 10,016 ​ 0.21% City National Bank of West Virginia ​ 1 ​ ​ 3,453 ​ 0.07% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ ​ 8 Tae of Contents For further information about competition in our market areas, see the Risk Factor entitled “ We operate in a competitive environment, and our inability to effectively compete could adversely and materially impact our financial condition and results of operations ” in Item 1A of Part I of this annual report.
Biggest changeIn those instances in which we are unable to accommodate customers’ needs, we attempt to arrange for those services to be provided by other financial services providers with which we have a relationship. ​ 6 ​ Table of Contents ​ ​ The following tables set forth deposit data for the Maryland and West Virginia Counties in which the Bank maintains offices as of June 30, 2023, the most recent date for which comparative information is available. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Offices ​ Deposits ​ Market ​ (in Market) (in thousands) Share Allegany County, Maryland: ​ ​ ​ ​ ​ ​ ​ Manufacturers & Traders Trust Company ​ 5 ​ $ 251,493 ​ 31.82% First United Bank & Trust ​ 3 ​ ​ 220,832 ​ 27.94% Truist Bank ​ 3 ​ ​ 210,264 ​ 26.60% Dollar Bank, Federal Savings Bank ​ 2 ​ ​ 75,600 ​ 9.56% Somerset Trust Company ​ 2 ​ ​ 32,295 ​ 4.08% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Frederick County, Maryland: ​ ​ ​ ​ ​ ​ ​ PNC Bank NA ​ 13 ​ $ 1,736,987 ​ 26.42% Truist Bank ​ 10 ​ ​ 1,179,142 ​ 17.93% Bank Of America NA ​ 4 ​ ​ 796,096 ​ 12.11% Manufacturers & Traders Trust Company ​ 6 ​ ​ 520,131 ​ 7.91% Sandy Spring Bank ​ 3 ​ ​ 462,455 ​ 7.03% Woodsboro Bank ​ 5 ​ ​ 382,066 ​ 5.81% Capital One, NA ​ 2 ​ ​ 373,274 ​ 5.68% Middletown Valley Bank ​ 4 ​ ​ 346,755 ​ 5.27% ACNB Bank ​ 4 ​ ​ 321,095 ​ 4.88% First United Bank & Trust ​ 4 ​ ​ 205,475 ​ 3.13% Wells Fargo Bank NA ​ 1 ​ ​ 163,221 ​ 2.48% Fulton Bank National Association ​ 1 ​ ​ 39,282 ​ 0.60% WesBanco Bank, Inc. ​ 1 ​ ​ 38,762 ​ 0.59% Presidential Bank, FSB ​ 1 ​ ​ 6,755 ​ 0.10% Woodforest National Bank ​ 1 ​ ​ 3,292 ​ 0.06% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Garrett County, Maryland: ​ ​ ​ ​ ​ ​ ​ First United Bank & Trust ​ 5 ​ $ 617,916 ​ 68.06% Manufacturers & Traders Trust Company ​ 2 ​ ​ 118,849 ​ 13.09% Clear Mountain Bank ​ 1 ​ ​ 73,259 ​ 8.07% Truist Bank ​ 1 ​ ​ 67,228 ​ 7.40% Somerset Trust Company ​ 1 ​ ​ 23,815 ​ 2.62% Miners & Merchants Bank ​ 1 ​ ​ 6,876 ​ 0.76% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Washington County, Maryland: ​ ​ ​ ​ ​ ​ ​ Truist Bank ​ 5 ​ $ 710,137 ​ 21.70% Fulton Bank National Association ​ 6 ​ ​ 622,767 ​ 19.03% Manufacturers & Traders Trust Company ​ 9 ​ ​ 589,355 ​ 18.01% Middletown Valley Bank ​ 3 ​ ​ 475,267 ​ 14.52% PNC Bank NA ​ 3 ​ ​ 344,013 ​ 10.51% First United Bank & Trust ​ 4 ​ ​ 151,841 ​ 4.64% CNB Bank, Inc. ​ 3 ​ ​ 139,552 ​ 4.26% United Bank ​ 2 ​ ​ 127,026 ​ 3.88% Orrstown Bank ​ 1 ​ ​ 49,463 ​ 1.51% Bank of Charles Town ​ 1 ​ ​ 33,444 ​ 1.02% Ameriserv Financial Bank ​ 1 ​ ​ 17,218 ​ 0.53% Jefferson Security Bank ​ 1 ​ ​ 6,442 ​ 0.20% Farmers and Merchants Trust Company of Chambersburg ​ 1 ​ ​ 6,153 ​ 0.19% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ 7 ​ Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Berkeley County, West Virginia: ​ ​ ​ ​ ​ ​ ​ United Bank ​ 4 ​ $ 494,548 ​ 26.97% Truist Bank 3 ​ 380,686 20.76% City National Bank of West Virginia ​ 4 ​ ​ 235,097 ​ 12.82% Summit Community Bank, Inc. ​ 3 ​ ​ 181,210 ​ 9.88% First United Bank & Trust ​ 3 ​ ​ 151,393 ​ 8.26% Jefferson Security Bank ​ 2 ​ ​ 143,803 ​ 7.84% CNB Bank, Inc. ​ 3 ​ ​ 130,447 ​ 7.11% Bank of Charles Town ​ 2 ​ ​ 111,907 ​ 6.10% Woodforest National Bank ​ 1 ​ ​ 4,374 ​ 0.26% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Harrison County, West Virginia: ​ ​ ​ ​ ​ ​ ​ Truist Bank ​ 3 ​ $ 563,939 ​ 26.60% MVB Bank, Inc. ​ 2 ​ ​ 345,424 ​ 16.29% The Huntington National Bank ​ 3 ​ ​ 315,065 ​ 14.86% WesBanco Bank, Inc. ​ 5 ​ ​ 305,449 ​ 14.41% JP Morgan Chase Bank, NA ​ 1 ​ ​ 253,060 ​ 11.94% Harrison County Bank ​ 4 ​ ​ 140,313 ​ 6.62% City National Bank of West Virginia ​ 2 ​ ​ 52,885 ​ 2.49% Clear Mountain Bank ​ 1 ​ ​ 30,707 ​ 1.45% BC Bank, Inc. ​ 1 ​ ​ 27,055 ​ 1.28% West Union Bank ​ 1 ​ ​ 24,796 ​ 1.17% Summit Community Bank ​ 1 ​ ​ 21,568 ​ 1.02% Peoples Bank ​ 1 ​ ​ 17,090 ​ 0.81% Freedom Bank, Inc ​ 1 ​ ​ 16,681 ​ 0.79% First United Bank & Trust ​ 1 ​ ​ 6,235 ​ 0.27% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Mineral County, West Virginia: ​ ​ ​ ​ ​ ​ ​ First United Bank & Trust ​ 2 ​ $ 118,018 ​ 36.64% Manufacturers & Traders Trust Company ​ 2 ​ ​ 78,816 ​ 24.47% Truist Bank ​ 1 ​ ​ 67,279 ​ 20.89% Grant County Bank ​ 1 ​ ​ 39,482 ​ 12.26% FNB Bank, Inc. ​ 1 ​ ​ 18,470 ​ 5.74% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Monongalia County, West Virginia: ​ ​ ​ ​ ​ ​ ​ MVB Bank, Inc. ​ 2 ​ $ 1,269,013 ​ 29.70% United Bank ​ 6 ​ ​ 1,038,394 ​ 24.30% The Huntington National Bank ​ 6 ​ ​ 635,131 ​ 14.87% Clear Mountain Bank ​ 3 ​ ​ 352,898 ​ 8.26% Truist Bank ​ 3 ​ ​ 330,870 ​ 7.74% WesBanco Bank, Inc. ​ 3 ​ ​ 195,767 ​ 4.58% PNC Bank NA ​ 2 ​ ​ 191,859 ​ 4.49% First United Bank & Trust ​ 4 ​ ​ 122,948 ​ 2.88% Citizens Bank of Morgantown, Inc. ​ 1 ​ ​ 41,348 ​ 0.97% Summit Community Bank, Inc. ​ 1 ​ ​ 39,412 ​ 0.92% First Exchange Bank ​ 2 ​ ​ 35,999 ​ 0.84% JP Morgan Chase Bank, NA ​ 1 ​ ​ 15,898 ​ 0.37% City National Bank of West Virginia ​ 1 ​ ​ 2,979 ​ 0.08% Source: FDIC Deposit Market Share Report ​ ​ ​ ​ ​ ​ ​ ​ ​ 8 ​ Table of Contents ​ For further information about competition in our market areas, see the Risk Factor entitled “ We operate in a competitive environment, and our inability to effectively compete could adversely and materially impact our financial condition and results of operations ” in Item 1A of Part I of this annual report.
Qualified mortgages that that are not “higher-priced” are afforded a safe harbor presumption of compliance with the ability to repay rules, while qualified mortgages that are “higher-priced” garner a rebuttable presumption of compliance with the ability to repay rules.
Qualified mortgages that are not “higher-priced” are afforded a safe harbor presumption of compliance with the ability to repay rules, while qualified mortgages that are “higher-priced” garner a rebuttable presumption of compliance with the ability to repay rules.
Enforcement actions may include the appointment of a conservator or receiver, the issuance of a cease and desist order, the termination of deposit insurance, the imposition of civil money penalties on the institution, its directors, officers, employees and institution-affiliated parties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the removal of or restrictions on directors, officers, employees and institution-affiliated parties, and the enforcement of any such mechanisms through restraining orders or other court actions.
Enforcement actions may include the appointment of a conservator or receiver, the issuance of a cease and desist order, the termination of deposit insurance, the imposition of civil money penalties on the institution, its directors, officers, employees and institution-affiliated parties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the removal of or additions to restrictions on directors, officers, employees and institution-affiliated parties, and the enforcement of any such mechanisms through restraining orders or other court actions.
As a publicly-traded company whose common stock, par value $.01 per share (the “Common Stock”), is registered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and listed on The NASDAQ Global Select Market, the Corporation is also subject to regulation and supervision by the SEC and The NASDAQ Stock Market, LLC (“NASDAQ”).
As a publicly-traded company whose common stock, par value $0.01 per share (the “Common Stock”), is registered under Section 12(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and listed on The NASDAQ Global Select Market, the Corporation is also subject to regulation and supervision by the SEC and The NASDAQ Stock Market, LLC (“NASDAQ”).
The increased assessment is expected to improve the likelihood that the DIF reserve ratio would reach the statutory minimum of 1.35% by the statutory deadline prescribed under the FDIC’s amended restoration plan. The FDIC is authorized to conduct examinations of and require reporting by FDIC-insured institutions.
The increased assessment was expected to improve the likelihood that the DIF reserve ratio would reach the statutory minimum of 1.35% by the statutory deadline prescribed under the FDIC’s amended restoration plan. The FDIC is authorized to conduct examinations of and require reporting by FDIC-insured institutions.
Because the Corporation is a bank holding company, it is viewed as a source of financial and managerial strength for any controlled depository institutions, like the Bank. 9 Tae of Contents In addition, under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), depository institutions insured by the FDIC can be held liable for any losses incurred by, or reasonably anticipated to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default.
Because the Corporation is a bank holding company, it is viewed as a source of financial and managerial strength for any controlled depository institutions, like the Bank. 9 ​ Table of Contents ​ In addition, under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”), depository institutions insured by the FDIC can be held liable for any losses incurred by, or reasonably anticipated to be incurred by, the FDIC in connection with (i) the default of a commonly controlled FDIC-insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default.
Residential construction loans are usually granted based upon “as completed” appraisals and are secured by the property under construction. Site inspections are performed to determine pre-specified stages of completion before loan proceeds are disbursed. These loans typically have maturities of six to 12 months and may have a fixed or variable rate.
Residential construction loans are usually granted based upon “as completed” appraisals and are secured by the property under construction. Site inspections are performed to determine pre-specified stages of completion before loan proceeds are disbursed. These loans typically have maturities of six to twelve months and may have a fixed or variable rate.
Permanent financing for individuals offered by the Bank includes fixed and variable rate loans with five, seven or 10-year adjustable rate mortgages. A variety of other consumer loans are also offered to customers, including indirect and direct auto loans, student loans, and other secured and unsecured lines of credit and term loans.
Permanent financing for individuals offered by the Bank includes fixed and variable rate loans with five, seven or ten-year adjustable rate mortgages. A variety of other consumer loans are also offered to customers, including indirect and direct auto loans, student loans, and other secured and unsecured lines of credit and term loans.
ITEM 1. BUSINESS General First United Corporation is a Maryland corporation chartered in 1985 and a bank 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 2022.
ITEM 1. BUSINESS General First United Corporation is a Maryland corporation chartered in 1985 and a bank 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 4 Tae of Contents frequency of this ongoing analysis depends upon the size and complexity of the credit and collateral that secures the loan. It is also the Bank’s general policy to obtain personal guarantees from the principals of the commercial loan borrowers.
The 4 ​ Table of Contents ​ frequency of this ongoing analysis depends upon the size and complexity of the credit and collateral that secures the loan. It is also the Bank’s general policy to obtain personal guarantees from the principals of the commercial loan borrowers.
Federal Banking Regulation Federal banking regulators, such as the Federal Reserve and the FDIC, may prohibit the institutions over which they have supervisory authority from engaging in activities or investments that the agencies believe are unsafe or unsound banking practices.
Federal Banking Regulation Federal banking regulators, such as the FRB and the FDIC, may prohibit the institutions over which they have supervisory authority from engaging in activities or investments that the agencies believe are unsafe or unsound banking practices.
Banking Products and Services The Bank operates 26 banking offices, one customer service center and 34 Automated Teller Machines (“ATMs”) in Allegany County, Frederick County, Garrett County, and Washington County in Maryland, and in Mineral County, Berkeley County, Monongalia County and Harrison County in West Virginia.
Banking Products and Services The Bank operates 26 banking offices, one customer service center and 33 Automated Teller Machines (“ATMs”) in Allegany County, Frederick County, Garrett County, and Washington County in Maryland, and in Mineral County, Berkeley County, Monongalia County and Harrison County in West Virginia.
During the term of that agreement, which is typically 180 days but can be extended at the discretion of the Federal Reserve, the Corporation would be prohibited from commencing any additional activity or acquiring control or shares of any company that would otherwise be permissible for a financial holding company under Section 4(k) of the BHC Act.
During the term of that agreement, which is typically 180 days but can be extended at the discretion of the FRB, the Corporation would be prohibited from commencing any additional activity or acquiring control or shares of any company that would otherwise be permissible for a financial holding company under Section 4(k) of the BHC Act.
In view of changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the Federal Reserve, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or their effect on our businesses and earnings.
In view of changing conditions in the national economy and in the money markets, as well as the effect of actions by monetary and fiscal authorities, including the FRB, no prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or their effect on our businesses and earnings.
Among other things, loans to and other transactions with insiders are subject to restrictions and heightened disclosure, directors and certain committees of the Board must satisfy certain independence requirements, the Corporation must comply with certain 15 Tae of Contents enhanced corporate governance requirements, and various issuances of securities by the Corporation require shareholder approval.
Among other things, loans to and other transactions with insiders are subject to restrictions and heightened disclosure, directors and certain committees of the Board must satisfy certain independence requirements, the Corporation must comply with certain enhanced corporate governance requirements, and various issuances of securities by the Corporation require shareholder approval.
Governmental Monetary and Credit Policies and Economic Controls The earnings and growth of the banking industry and ultimately of the Bank are affected by the monetary and credit policies of governmental authorities, including the Federal Reserve. An important function of the Federal Reserve is to regulate the national supply of bank credit in order to control recessionary and inflationary pressures.
Governmental Monetary and Credit Policies and Economic Controls The earnings and growth of the banking industry and ultimately of the Bank are affected by the monetary and credit policies of governmental authorities, including the FRB. An important function of the FRB is to regulate the national supply of bank credit in order to control recessionary and inflationary pressures.
The Bank also offers the Certificate of Deposit Account Registry Service ® , or CDARS ® , program to municipalities, businesses, and consumers through which the Bank provides access to multi-million-dollar certificates of deposit and the Insured Cash Sweep ® , or ICS ® , program to municipalities, businesses, and consumers through which the Bank provides access to multi-million-dollar savings and demand deposits.
The Bank also offers the Certificate of Deposit Account Registry Service ® , or CDARS ® , program to municipalities, businesses, and consumers through which the Bank provides access to multi-million-dollar certificates of deposit and the IntraFi Cash Service ® , or ICS ® , program to municipalities, businesses, and consumers through which the Bank provides access to multi-million-dollar savings and demand deposits.
In addition, if the Federal Reserve believes that a bank holding company’s activities, assets or affiliates represent a significant risk to the financial safety, soundness or stability of a controlled bank, then the Federal Reserve could require the bank holding company to terminate the activities, liquidate the assets or divest the affiliates.
In addition, if the FRB believes that a bank holding company’s activities, assets or affiliates represent a significant risk to the financial safety, soundness or stability of a controlled bank, then the FRB could require the bank holding company to terminate the activities, liquidate the assets or divest the affiliates.
Under Federal Reserve policy, the Corporation is expected to act as a source of strength to the Bank, and the Federal Reserve may charge the Corporation with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank when required.
Under FRB policy, the Corporation is expected to act as a source of strength to the Bank, and the FRB may charge the Corporation with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank when required.
If the Corporation were to fail to correct that condition by the expiration of the agreement’s term, then the Federal Reserve could order the Corporation to divest its ownership of the Bank or, alternatively, terminate all financial holding company activities.
If the Corporation were to fail to correct that condition by the expiration of the agreement’s term, then the FRB could order the Corporation to divest its ownership of the Bank or, alternatively, terminate all financial holding company activities.
“Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized.
“Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator. 12 ​ Table of Contents ​ The appropriate federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized.
These standards include internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. An institution that fails to meet those standards may be required by the agency to develop a plan acceptable to meet the standards.
These standards include internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. An institution that fails to meet those standards may be 10 ​ Table of Contents ​ required by the agency to develop a plan acceptable to meet the standards.
All non-bank subsidiaries of the Corporation are subject to examination by the FRB, and, as affiliates of the Bank, are subject to examination by the FDIC and the Maryland Commissioner.
All non-bank subsidiaries of the Corporation are subject to examination by the FRB, and, as affiliates of the Bank, are subject to examination by the FDIC and the Maryland OFR.
If the Bank were to fail to meet either of these requirements, then the Corporation would be required to enter into an agreement with the Federal Reserve that would address the remediation of the condition that led to the failure.
If the Bank were to fail to meet either of these requirements, then the Corporation would be required to enter into an agreement with the FRB that would address the remediation of the condition that led to the failure.
Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open market operations in U.S. Government securities, changes in the federal funds rate, changes in the discount rate of member bank borrowings, and changes in reserve requirements against member bank deposits.
Among the instruments of monetary policy used by the FRB to implement these objectives are open market operations in U.S. Government securities, changes 15 ​ Table of Contents ​ in the federal funds rate, changes in the discount rate of member bank borrowings, and changes in reserve requirements against member bank deposits.
The monetary policies of the Federal Reserve authorities have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have such an effect in the future.
The monetary policies of the FRB authorities have had a significant effect on the operating results of commercial banks in the past and are expected to continue to have such an effect in the future.
Failure to submit or implement such a plan 10 Tae of Contents may subject the institution to regulatory sanctions. We believe that the Bank meets substantially all standards that have been adopted. FDICIA also imposes capital standards on insured depository institutions.
Failure to submit or implement such a plan may subject the institution to regulatory sanctions. We believe that the Bank meets substantially all standards that have been adopted. FDICIA also imposes capital standards on insured depository institutions.
At December 31, 2022 and 2021, the total market value of assets under the supervision of the Bank’s Trust Department was approximately $1.0 billion and $1.1 billion, respectively.
At December 31, 2023 and 2022, the total market value of assets under the supervision of the Bank’s Trust Department was approximately $1.5 billion and $1.0 billion, respectively.
The Bank is a Maryland trust company subject to the banking laws of Maryland and to regulation by the Office of the Maryland Commissioner of Financial Regulation (the “Maryland Commissioner”), who is required by statute to make at least one examination in each calendar year (or at 18-month intervals if the Maryland Commissioner determines that an examination is unnecessary in a particular calendar year).
The Bank is a Maryland trust company subject to the banking laws of Maryland and to regulation by the Maryland Department of Labor’s Office of Financial Regulation (the “Maryland OFR”), who is required by statute to make at least one examination in each calendar year (or at 18-month intervals if the Maryland OFR determines that an examination is unnecessary in a particular calendar year).
As of December 31, 2022, the Bank and the Corporation were “well capitalized” based on the aforementioned ratios. Liquidity Requirements Historically, the regulation and monitoring of bank liquidity has been addressed as a supervisory matter, without required formulaic measures.
As of December 31, 2023, the Bank was “well capitalized” based on the aforementioned ratios. Liquidity Requirements Historically, the regulation and monitoring of bank liquidity has been addressed as a supervisory matter, without required formulaic measures.
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 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.
An allowance for loan losses (“ALL”) is maintained to provide for probable losses from our lending activities. A complete discussion of the factors considered in determination of the ALL is included in Item 7 of Part II of this report.
An allowance for credit losses (“ACL”) is maintained to provide for probable losses from our lending activities. A complete discussion of the factors considered in determination of the ACL is included in Item 7 of Part II of this report.
At December 31, 2022, we had total assets of $1.8 billion, net loans of $1.3 billion and deposits of $1.6 billion. Shareholders’ equity at December 31, 2022 was $151.8 million.
At December 31, 2023, we had total assets of $1.9 billion, net loans of $1.4 billion and deposits of $1.6 billion. Shareholders’ equity at December 31, 2023 was $161.9 million.
Lenders may verify covered borrower status using a DOD database or information provided by credit bureaus. We believe that we are in compliance with the revised rule. Cybersecurity We rely on electronic communications and information systems to conduct our operations and store sensitive data.
Lenders may verify covered borrower status using a DOD database or information provided by credit bureaus. We believe that we are in compliance with the revised rule.
As of December 31, 2022, the Bank had $140.0 million available through unsecured lines of credit with correspondent banks, $9.6 million available through a secured line of credit with the Federal Reserve Discount Window and approximately $195.3 million available through the Federal Home Loan Bank of Atlanta (“FHLB”).
As of December 31, 2023, the Bank had $140.0 million available through unsecured lines of credit with correspondent banks, $12.2 million available through a secured line of credit with the Federal Reserve Discount Window, $69.5 million available through the FFB’s Bank Term Funding Program (“BTFP”), and approximately $145.4 million available through the Federal Home Loan Bank of Atlanta (“FHLB”).
The FDI Act provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice. 12 Tae of Contents The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.
The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with the supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.
Mortgage Lending and Servicing The Bank’s mortgage lending and servicing activities are subject to various laws and regulations that are enforced by the federal banking regulators and the CFPB, such as the Truth in Lending Act, the Real Estate Settlement Procedures Act, and various rules adopted thereunder, including those relating to consumer disclosures, appraisal requirements, mortgage originator compensation, prohibitions on mandatory arbitration provisions under certain circumstances, and the obligation to credit payments and provide payoff statements within certain time periods and provide certain notices prior to interest rate and payment adjustments. 14 Tae of Contents The Bank is required to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms.
The Dodd-Frank Act has increased, and will likely continue to increase, our regulatory compliance burdens and costs and may restrict the financial products and services that we offer to our customers in the future. 14 ​ Table of Contents ​ Mortgage Lending and Servicing The Bank’s mortgage lending and servicing activities are subject to various laws and regulations that are enforced by the federal banking regulators and the CFPB, such as the Truth in Lending Act, the Real Estate Settlement Procedures Act, and various rules adopted thereunder, including those relating to consumer disclosures, appraisal requirements, mortgage originator compensation, prohibitions on mandatory arbitration provisions under certain circumstances, and the obligation to credit payments and provide payoff statements within certain time periods and provide certain notices prior to interest rate and payment adjustments.
In addition, OakFirst Loan Center, Inc. is subject to licensing and regulation by the West Virginia Division of Banking, and OakFirst Loan Center, LLC is subject to licensing and regulation by the Maryland Commissioner.
In addition, OakFirst Loan Center, Inc. is subject to licensing and regulation by the West Virginia Division of Banking, and OakFirst Loan Center, LLC is subject to licensing and regulation by the Maryland OFR. Regulation of Bank Holding Companies The Corporation and its affiliates are subject to the provisions of Section 23A and Section 23B of the Federal Reserve Act.
In addition, the rule revised the treatment of certain acquisition, development, or construction exposures. As of December 31, 2022, we were in compliance with the applicable requirements.
In addition, the rule revised the treatment of certain acquisition, development, or construction exposures.
Additional information about our capital ratios is contained in “Consolidated Balance Sheet Review” section of Item 7 of Part II of this annual report under the heading “Capital Resources”. 11 Tae of Contents Prompt Corrective Action The Federal Deposit Insurance Act (“FDI Act”) requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements.
Prompt Corrective Action The Federal Deposit Insurance Act (“FDI Act”) requires, among other things, the federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements.
The Trusts were formed for the purpose of selling trust preferred securities that qualified as Tier 1 capital. FULA was formed for the purpose of providing investment advice and related services, but it is not yet active.
The Trusts were formed for the purpose of selling trust preferred securities that qualified as Tier 1 capital.
Bank Secrecy Act/Anti-Money Laundering The Bank Secrecy Act (“BSA”), which is intended to require financial institutions to develop policies, procedures, and practices to prevent and deter money laundering, mandates that every national bank have a written, board-approved program that is reasonably designed to assure and monitor compliance with the BSA. 13 Tae of Contents The program must, at a minimum: (i) provide for a system of internal controls to assure ongoing compliance; (ii) provide for independent testing for compliance; (iii) designate an individual responsible for coordinating and monitoring day-to-day compliance; and (iv) provide training for appropriate personnel.
The termination of deposit insurance for our bank subsidiary would have a material adverse effect on our earnings, operations and financial condition. 13 ​ Table of Contents ​ Bank Secrecy Act/Anti-Money Laundering The Bank Secrecy Act (“BSA”), which is intended to require financial institutions to develop policies, procedures, and practices to prevent and deter money laundering, mandates that every national bank have a written, board-approved program that is reasonably designed to assure and monitor compliance with the BSA.
Information about our income from and assets related to our banking business may be found in the Consolidated Statements of Financial Condition and the Consolidated Statements of Income and the related notes thereto included in Item 8 of Part II of this annual report. 5 Tae of Contents Wealth Management The Bank’s Trust Department offers a full range of trust services, including personal trust, investment agency accounts, charitable trusts, retirement accounts including IRA roll-overs, 401(k) accounts and defined benefit plans, estate administration and estate planning.
Wealth Management The Bank’s Trust Department offers a full range of trust services, including personal trust, investment agency accounts, charitable trusts, retirement accounts including IRA roll-overs, 401(k) accounts and defined benefit plans, estate administration and estate planning.
During 2021, the Bank was an active participant in selling qualifying residential mortgage loans to the secondary market outlet due to the low fixed rate environment. During 2022, residential mortgage loans at higher rates were booked as in-house portfolio loans.
During 2022, residential mortgage loans at higher rates were booked as in-house portfolio loans. During the latter half of 2023, the Bank made the strategic decision to shift the lending of residential mortgage loans to the secondary market.
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Both programs are FDIC-insured. In addition, we offer our commercial customers packages which include Treasury Management, Cash Sweep and various checking opportunities.
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In addition, we offer our commercial customers packages which include Treasury Management, Cash Sweep and various checking opportunities. 5 ​ Table of Contents ​ Information about our income from and assets related to our banking business may be found in the Consolidated Statements of Financial Condition and the Consolidated Statements of Income and the related notes thereto included in Item 8 of Part II of this annual report.
Removed
If and when FULA becomes active, management anticipates that its activities will be regulated by the SEC under the federal Investment Advisers Act of 1940, as amended. Regulation of Bank Holding Companies The Corporation and its affiliates are subject to the provisions of Section 23A and Section 23B of the Federal Reserve Act.
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As of December 31, 2023, we were in compliance with the applicable requirements. 11 ​ Table of Contents ​ Additional information about our capital ratios is contained in “Consolidated Balance Sheet Review” section of Item 7 of Part II of this annual report under the heading “Capital Resources”.
Removed
The termination of deposit insurance for our bank subsidiary would have a material adverse effect on our earnings, operations and financial condition.
Added
The FDI Act provides that an institution may be reclassified if the appropriate federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.
Removed
The Dodd-Frank Act has increased, and will likely continue to increase, our regulatory compliance burdens and costs and may restrict the financial products and services that we offer to our customers in the future.
Added
The program must, at a minimum: (i) provide for a system of internal controls to assure ongoing compliance; (ii) provide for independent testing for compliance; (iii) designate an individual responsible for coordinating and monitoring day-to-day compliance; and (iv) provide training for appropriate personnel.
Removed
We employ an in-depth approach that leverages people, processes, and technology to manage and maintain cybersecurity controls. In addition, we employ a variety of preventative and detective tools to monitor, block, and provide alerts regarding suspicious activity, as well as to report on any suspected advanced persistent threats.
Added
The Bank is required to make a reasonable and good faith determination based on verified and documented information that a consumer applying for a mortgage loan has a reasonable ability to repay the loan according to its terms.
Removed
Notwithstanding the strength of our defensive measures, the threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. The federal banking regulators have adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of a financial institution’s board of directors.
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EMPLOYEES At December 31, 2023, we employed 338 individuals, of whom 304 were full-time employees.
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These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial products and services.
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The federal banking regulators expect financial institutions to establish lines of defense and to ensure that their risk management processes address the risk posed by compromised customer credentials, and also expect financial institutions to maintain sufficient business continuity planning processes to ensure rapid recovery, resumption and maintenance of the institution's operations after a cyberattack.
Removed
If we fail to meet the expectations set forth in this regulatory guidance, then we could be subject to various regulatory actions and we may be required to devote significant resources to any required remediation efforts.
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SEASONALITY Management does not believe that our business activities are seasonal in nature. Deposit and loan demand may vary depending on local and national economic conditions, but variations will not have a material impact on our planning or policy-making strategies. EMPLOYEES At December 31, 2022, we employed 336 individuals, of whom 298 were full-time employees.

Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeThese and other factors may impact specific categories of the portfolio differently, and management cannot predict the effect these factors may have on any specific category. ​ 19 Tae of Contents Impairment of investment securities, goodwill and other intangible assets, or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations. ​ In assessing whether the impairment of investment securities is other-than-temporary, management considers the length of time and extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability to retain our investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value in the near term. ​ Under current accounting standards, goodwill and other intangible assets are subject to impairment tests on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying amount.
Biggest changeThe investment portfolio’s performance, including the existence of unrealized and unrecognized losses in the portfolio, also may create reputational risk for us, particularly in conjunction with the conditions of the banking industry generally, that could result in deposit outflows or reduced access to funding, or negatively impact our ability to attract and retain prospective customers. ​ Impairment of goodwill and other intangible assets or deferred tax assets could require charges to earnings, which could result in a negative impact on our results of operations. ​ Under current accounting standards, goodwill and other intangible assets are subject to impairment tests on at least an annual basis or more frequently if an event occurs or circumstances change that reduce the fair value of a reporting unit below its carrying amount.
Acquiring another business would generally involve risks commonly associated with acquisitions, including: ​ ● increased capital needs; ● increased and new regulatory and compliance requirements; ● implementation or remediation of controls, procedures and policies with respect to the acquired business; ● diversion of management time and focus from operation of our then-existing business to acquisition-integration challenges; ● coordination of product, sales, marketing and program and systems management functions; ● transition of the acquired business’s users and customers onto our systems; ● retention of employees from the acquired business; ● integration of employees from the acquired business into our organization; ● integration of the acquired business’s accounting, information management, human resources and other administrative systems and operations with ours; ● potential liability for activities of the acquired business prior to the acquisition, including violations of law, commercial disputes and tax and other known and unknown liabilities; ● potential increased litigation or other claims in connection with the acquired business, including claims brought by regulators, terminated employees, customers, former stockholders, vendors, or other third parties; and ● potential goodwill impairment. ​ Our failure to execute our acquisition strategy could adversely affect our business, results of operations, financial condition and future prospects risks of unknown or contingent liabilities. ​ New lines of business, products or services may subject us to additional risks. ​ From time to time, we implement new lines of business or offer new products and services within existing lines of business.
Acquiring another business would generally involve risks commonly associated with acquisitions, including: ​ ● increased capital needs; ● increased and new regulatory and compliance requirements; ● implementation or remediation of controls, procedures and policies with respect to the acquired business; ● diversion of management time and focus from operation of our then-existing business to acquisition-integration challenges; ● coordination of product, sales, marketing and program and systems management functions; ● transition of the acquired business’s users and customers onto our systems; ● retention of employees from the acquired business; ● integration of employees from the acquired business into our organization; ● integration of the acquired business’s accounting, information management, human resources and other administrative systems and operations with ours; ● potential liability for activities of the acquired business prior to the acquisition, including violations of law, commercial disputes and tax and other known and unknown liabilities; ● potential increased litigation or other claims in connection with the acquired business, including claims brought by regulators, terminated employees, customers, former stockholders, vendors, or other third parties; and ● potential goodwill impairment. ​ Our failure to execute our acquisition strategy could adversely affect our business, results of operations, financial condition and future prospects risks of unknown or contingent liabilities. ​ 27 ​ Table of Contents ​ New lines of business, products or services may subject us to additional risks. ​ From time to time, we implement new lines of business or offer new products and services within existing lines of business.
Moreover, if the Corporation or its independent registered public accounting firm were to identify a material weakness or significant deficiency in any of those control systems, our reputation could be harmed and investors could lose confidence in us, which could cause the market price of the Corporation’s stock to decline and/or limit the trading market for the shares of the Common Stock. ​ We may not be able to keep pace with developments in technology. ​ We use various technologies in conducting our businesses, including telecommunication, data processing, computers, automation, internet-based banking, and debit cards.
Moreover, if the Corporation or its independent registered public accounting firm were to identify a material weakness in any of those control systems, our reputation could be harmed and investors could lose confidence in us, which could cause the market price of the Corporation’s stock to decline and/or limit the trading market for the shares of the Common Stock. ​ We may not be able to keep pace with developments in technology. ​ We use various technologies in conducting our businesses, including telecommunication, data processing, computers, automation, internet-based banking, and debit cards.
At December 31, 2022, our CRE concentrations were below the heightened risk management thresholds set forth in this guidance. ​ The Bank may experience loan losses in excess of its allowance for loan losses, which would reduce our earnings. ​ The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loans being made, the creditworthiness of the borrowers over the term of the loans and, in the case of collateralized loans, the value and marketability of the collateral for the loans.
At December 31, 2023, our CRE concentrations were below the heightened risk management thresholds set forth in this guidance. ​ The Bank may experience loan losses in excess of its allowance for credit losses, which would reduce our earnings. ​ The risk of credit losses on loans varies with, among other things, general economic conditions, the type of loans being made, the creditworthiness of the borrowers over the term of the loans and, in the case of collateralized loans, the value and marketability of the collateral for the loans.
Material additions to the ALL could result in a material decrease in our net income and capital; and could have a material adverse effect on our financial condition. ​ We depend on the accuracy and completeness of information about customers and counterparties, and inaccurate, incomplete or misleading information provided to us by these persons could cause us to suffer losses. ​ In deciding whether to extend credit or enter into other transactions, we rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information.
Material additions to the ACL could result in a material decrease in our net income and capital; and could have a material adverse effect on our financial condition. ​ We depend on the accuracy and completeness of information about customers and counterparties, and inaccurate, incomplete or misleading information provided to us by these persons could cause us to suffer losses. ​ In deciding whether to extend credit or enter into other transactions, we rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information.
Even if a substantial number of sales do not occur within a short period of time, the mere existence of this “market overhang” could have a negative impact on the market for the common stock and our ability to raise capital in the future. ​ The Corporation’s ability to pay dividends on the common stock is subject to the terms of the outstanding TPS Debentures, which prohibit the Corporation from paying dividends during an interest deferral period. ​ In March 2004, the Corporation issued approximately $30.9 million, in the aggregate, of junior subordinated debentures (“TPS Debentures”) to the Trusts in connection with the Trusts’ sales to third party investors of $30.0 million, in the aggregate, in mandatorily redeemable preferred capital securities.
Even if a substantial number of sales do not occur within a short period of time, the mere existence of this “market overhang” could have a negative impact on the market for the common stock and our ability to raise capital in the future. ​ 29 ​ Table of Contents ​ The Corporation’s ability to pay dividends on the common stock is subject to the terms of the outstanding TPS Debentures, which prohibit the Corporation from paying dividends during an interest deferral period. ​ In March 2004, the Corporation issued approximately $30.9 million, in the aggregate, of junior subordinated debentures (“TPS Debentures”) to the Trusts in connection with the Trusts’ sales to third party investors of $30.0 million, in the aggregate, in mandatorily redeemable preferred capital securities.
Despite our ongoing investments in security resources, talent, and business practices, we are unable to assure that any security measures will be effective. 23 Tae of Contents ​ If our systems and infrastructure were to be breached, compromised, damaged, or disrupted, or if we were to experience a loss of our confidential information or that of our clients or teammates, we could be subject to serious negative consequences, including disruption of our operations, damage to our reputation, a loss of trust in us on the part of our clients, vendors or other counterparties, client or teammate attrition, reimbursement or other costs, increased compliance costs, significant litigation exposure and legal liability, or regulatory fines, penalties or intervention.
Despite our ongoing investments in security resources, talent, and business practices, we are unable to assure that any security measures will be effective. ​ If our systems and infrastructure were to be breached, compromised, damaged, or disrupted, or if we were to experience a loss of our confidential information or that of our clients or teammates, we could be subject to serious negative consequences, including disruption of our operations, damage to our reputation, a loss of trust in us on the part of our clients, vendors or other counterparties, client or teammate attrition, reimbursement or other costs, increased compliance costs, significant litigation exposure and legal liability, or regulatory fines, penalties or intervention.
The issuance of additional equity securities to fund our capital needs could dilute existing stockholders. ​ A material weakness or significant deficiency in our disclosure or internal controls could have an adverse effect on us. ​ The Corporation is required by the Sarbanes-Oxley Act of 2002 to establish and maintain disclosure controls and procedures and internal control over financial reporting.
The issuance of additional equity securities to fund our capital needs could dilute existing stockholders. ​ A material weakness in our disclosure or internal controls could have an adverse effect on us. ​ The Corporation is required by the Sarbanes-Oxley Act of 2002 to establish and maintain disclosure controls and procedures and internal control over financial reporting.
Maryland banking laws provide that the Maryland Commissioner must approve certain acquisitions of the common stock of the Corporation and/or the Bank, and these laws impose penalties on persons who effect such acquisitions without approval, including a five year voting prohibition. ​ 28 Tae of Contents Although these provisions do not preclude a sale or takeover, they may have the effect of discouraging, delaying or deferring a sale, tender offer, or takeover attempt that a shareholder might consider in his or her best interest, including those attempts that might result in a premium over the market price for the common stock.
Maryland banking laws provide that the Maryland Commissioner must approve certain acquisitions of the common stock of the Corporation and/or the Bank, and these laws impose penalties on persons who effect such acquisitions without approval, including a five year voting prohibition. ​ Although these provisions do not preclude a sale or takeover, they may have the effect of discouraging, delaying or deferring a sale, tender offer, or takeover attempt that a shareholder might consider in his or her best interest, including those attempts that might result in a premium over the market price for the common stock.
A deferred tax asset is reduced by a valuation allowance if, based on the weight of the evidence available, both negative and positive, including the recent trend of quarterly earnings, the Company determines that it is more likely than not that some portion or all of the total deferred tax asset will not be realized.
A deferred tax asset is reduced by a valuation allowance if, based on the weight of the evidence available, both negative and positive, including the recent trend of quarterly earnings, the Corporation determines that it is more likely than not that some portion or all of the total deferred tax asset will not be realized.
Failure to successfully manage these risks in the development and implementation of new lines of business, new products or services and/or new technologies could have a material adverse effect on our business, financial condition and results of operations. ​ 25 Tae of Contents Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks. ​ Many companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosure.
Failure to successfully manage these risks in the development and implementation of new lines of business, new products or services and/or new technologies could have a material adverse effect on our business, financial condition and results of operations. ​ Increasing scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks. ​ Many companies are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosure.
In addition, a deferral election will require the Trusts to likewise defer the payment of quarterly dividends on their related trust preferred securities. ​ 27 Tae of Contents Applicable banking and Maryland laws impose additional restrictions on the ability of the Corporation and the Bank to pay dividends and make other distributions on their capital securities, and, in any event, the payment of dividends is at the discretion of the boards of directors of the Corporation and the Bank. ​ In the past, the Corporation has funded dividends on its capital securities using cash received from the Bank, and this will likely be the case for the foreseeable future.
In addition, a deferral election will require the Trusts to likewise defer the payment of quarterly dividends on their related trust preferred securities. ​ Applicable banking and Maryland laws impose additional restrictions on the ability of the Corporation and the Bank to pay dividends and make other distributions on their capital securities, and, in any event, the payment of dividends is at the discretion of the boards of directors of the Corporation and the Bank. ​ In the past, the Corporation has funded dividends on its capital securities using cash received from the Bank, and this will likely be the case for the foreseeable future.
Financial institutions, including the Bank, have experienced distributed denial-of-service attacks, a sophisticated and targeted attack intended to disable or degrade internet service or to sabotage systems. ​ We and others in our industry are regularly the subject of attempts by attackers to gain unauthorized access to our networks, systems, and data, or to obtain, change, or destroy confidential data (including personal identifying information of individuals) through a variety of means, including computer viruses, malware, business email compromise, and phishing.
Financial institutions, including the Bank, have experienced distributed denial-of-service attacks, a sophisticated and targeted attack intended to disable or degrade internet service or to sabotage systems. ​ We and others in our industry are regularly the subject of attempts by attackers to gain unauthorized access to our networks, systems, and data, or to obtain, change, or destroy confidential data (including personal identifying information of individuals) through a variety of means, including computer viruses, malware, business email compromise, and 25 ​ Table of Contents ​ phishing.
The Maryland Business Combination Act generally prohibits, subject to certain limited exceptions, corporations from being involved in any “business combination” (defined as a variety of transactions, including a merger, consolidation, share exchange, asset transfer or issuance or reclassification of equity securities) with any “interested shareholder” for a period of five years following the most recent date on which the interested shareholder became an interested shareholder.
The Maryland Business Combination Act generally prohibits, subject to certain limited exceptions, corporations from being involved in 30 ​ Table of Contents ​ any “business combination” (defined as a variety of transactions, including a merger, consolidation, share exchange, asset transfer or issuance or reclassification of equity securities) with any “interested shareholder” for a period of five years following the most recent date on which the interested shareholder became an interested shareholder.
If management’s assumptions and judgments prove to be incorrect and the ALL is inadequate to absorb future losses, or if the bank regulatory authorities require us to increase the ALL as a part of its examination process, our earnings and capital could be significantly and adversely affected.
If management’s assumptions and judgments prove to be incorrect and the ACL is inadequate to absorb future losses, or if the bank regulatory authorities require us to increase the ACL as a part of its examination process, our earnings and capital could be significantly and adversely affected.
Included in that total is $2.9 million of state net operating loss carryforwards (“NOLs”) associated with separate company tax filings of the Corporation, which we do not expect to use and, thus, we have established a $2.9 million valuation allowance.
Included in that total is $2.8 million of state net operating loss carryforwards (“NOLs”) associated with separate company tax filings of the Corporation, which we do not expect to use and, thus, we have established a $2.8 million valuation allowance.
Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs. ​ 26 Tae of Contents Risks Relating to First United Corporation’s Securities ​ The shares of Common Stock are not insured. ​ The shares of the Common Stock are not deposits and are not insured against loss by the FDIC or any other governmental or private agency. ​ The shares of Common Stock are not heavily traded. ​ Shares of the Common Stock are listed on the NASDAQ Global Select Market but are not heavily traded.
Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit and reputational risks and costs. ​ Risks Relating to First United Corporation’s Securities ​ The shares of Common Stock are not insured. ​ The shares of the Common Stock are not deposits and are not insured against loss by the FDIC or any other governmental or private agency. ​ The shares of Common Stock are not heavily traded. ​ Shares of the Common Stock are listed on the NASDAQ Global Select Market but are not heavily traded.
Although management continually monitors our loan portfolio and makes determinations with respect to the ALL, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to our non-performing or performing loans.
Although management continually monitors our loan portfolio and makes determinations with respect to the ACL, future adjustments may be necessary if economic conditions differ substantially from the assumptions used or adverse developments arise with respect to our non-performing or performing loans.
In October 2022, the FDIC finalized a rule to increase the assessment rate by two basis points beginning in the first quarter of 2023. The increase in the assessment rate for banks is intended to increase the Deposit Insurance Fund reserve ratio to 1.35%.
In October 2022, the FDIC finalized a rule to increase the assessment rate by two basis points beginning in the first quarter of 2023. The increase in the assessment rate for banks is intended to increase the Deposit Insurance Fund (“DIF)” reserve ratio to 1.35%.
Based upon such factors, management makes various assumptions and judgments about the ultimate collectability of the loan portfolio and provides the ALL based upon a percentage of the outstanding balances and for specific loans when their ultimate collectability is considered questionable.
Based upon such factors, management makes various assumptions and judgments about the ultimate collectability of the loan portfolio and provides the ACL based upon a percentage of the outstanding balances and for specific loans when their ultimate collectability is considered questionable.
Accordingly, a decline in local economic conditions would likely have an adverse impact on our financial condition and results of 17 Tae of Contents operations, and the impact on us would likely be greater than the impact felt by larger financial institutions whose loan portfolios are geographically diverse.
Accordingly, a decline in local economic conditions would likely have an adverse impact on our financial condition and results of operations, and the impact on us would likely be greater than the impact felt by larger financial institutions whose loan portfolios are geographically diverse.
Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs.
If we are required to rely more heavily on more expensive funding sources to support future growth, then our revenues may not increase proportionately to cover our costs.
These factors are influenced by both the pricing and mix of our interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by such external factors as the local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the Federal Reserve Board of Governors, and market interest rates. ​ Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates.
These factors are influenced by both the pricing and mix of our interest-earning assets and our interest-bearing liabilities which, in turn, are impacted by such external factors as the local economy, competition for loans and deposits, the monetary policy of the Federal Open Market Committee of the FRB, and market interest rates. ​ Different types of assets and liabilities may react differently, and at different times, to changes in market interest rates.
Management of the Bank maintains an ALL based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality.
Management of the Bank maintains an ACL based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality.
We have customers who operate in carbon-intensive industries like oil and gas that are exposed to climate risks, such as those risks related to the transition to a less carbon-dependent economy, as well as customers who operate in low-carbon industries that may be subject to risks associated with new technologies.
We have customers who operate in carbon-intensive industries like oil and gas that are exposed to climate risks, such as those risks 28 ​ Table of Contents ​ related to the transition to a less carbon-dependent economy, as well as customers who operate in low-carbon industries that may be subject to risks associated with new technologies.
It is not possible to predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our future 21 Tae of Contents business and earnings prospects.
It is not possible to predict what changes, if any, will be made to existing federal and state legislation and regulations or the effect that such changes may have on our future business and earnings prospects.
Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on our business, financial condition and results of operations. ​ Our accounting estimates and risk management processes rely on analytical and forecasting models, the inadequacy of which could have a material adverse effect on our financial condition and/or results of operations. ​ The processes we use to estimate our allowance for loan losses and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical and forecasting models.
Reliance on inaccurate or misleading financial statements, credit reports or other financial information could have a material adverse impact on our business, financial condition and results of operations. ​ 19 ​ Table of Contents ​ Our accounting estimates and risk management processes rely on analytical and forecasting models, the inadequacy of which could have a material adverse effect on our financial condition and/or results of operations. ​ The processes we use to estimate our ACL and to measure the fair value of financial instruments, as well as the processes used to estimate the effects of changing interest rates and other market measures on our financial condition and results of operations, depends upon the use of analytical and forecasting models.
Compliance with any such change may impact our business operations. ​ The CFPB has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers.
Compliance with any such change may impact our business operations. ​ The Consumer Financial Protection Bureau (“CFPB”) has broad rulemaking authority to administer and carry out the provisions of the Dodd-Frank Act with respect to financial institutions that offer covered financial products and services to consumers.
Our financial flexibility 16 Tae of Contents will be severely constrained and/or our cost of funds will increase if we are unable to maintain our access to funding or if financing necessary to accommodate future growth is not available at favorable interest rates.
Our financial flexibility could be severely constrained and/or our cost of funds could increase if we are unable to maintain our access to funding or if financing necessary to accommodate future growth is not available at favorable interest rates.
Moreover, our ability to utilize our net operating loss carryforwards to offset future taxable income may be significantly limited if we experience an “ownership change,” as determined under Section 382 of the Code.
Moreover, our ability to utilize our net operating loss carryforwards to offset future taxable income may be significantly limited if we experience an “ownership change,” as determined under Section 382 of the Internal Revenue Code of 1986, as amended (“the Code”).
As a result of these and/or other financial institution failures, we may be required to pay significantly higher premiums than the levels currently imposed, as well as additional special assessments or taxes, which could adversely affect earnings.
We anticipate that the FDIC will impose special assessments on all banks to replenish the DIF. As a result of these and/or other financial institution failures, we may be required to pay significantly higher premiums than the levels currently imposed, as well as additional special assessments or taxes, which could adversely affect earnings.
The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations. ​ The market value of our investments could decline. ​ At December 31, 2022, investment securities in our investment portfolio having a cost basis of $149.8 million and a market value of $125.9 million were classified as available-for-sale pursuant to FASB Accounting Standards Codification (“ASC”) Topic 320, Investments – Debt and Equity Securities , relating to accounting for investments.
The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our financial condition and results of operations. ​ Our investment securities are subject to market risk and credit risk that may have an adverse impact on our financial condition and results of operation. ​ At December 31, 2023, investment securities in our investment portfolio having a cost basis of $117.9 million and a market value of $97.2 million were classified as available-for-sale pursuant to FASB Accounting Standards Codification (“ASC”) Topic 320, Investments – Debt and Equity Securities , relating to accounting for investments.
As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates.
This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates.
A key component of our business strategy is to rely on our reputation for customer service and knowledge of 24 Tae of Contents local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas.
A key component of our business strategy is to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current market and contiguous areas. As such, we strive to conduct our business in a manner that enhances our reputation.
In addition, our implementation of certain new technologies, such as those related to artificial intelligence, automation and algorithms, in our business processes may have unintended consequences due to their limitations or our failure to use them effectively.
In addition, our implementation of certain new technologies, such as those related to artificial intelligence, automation and algorithms, in our business processes may have unintended consequences due to their limitations or our failure to use them effectively. In addition, cloud technologies are also critical to the operation of our systems, and our reliance on cloud technologies is growing.
In developing and marketing new lines of business and/or new products and services we invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible.
Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible.
The Corporation is subject to supervision by the Federal Reserve. The Bank is subject to supervision and periodic examination by the Maryland Commissioner of Financial Regulation, the West Virginia Division of Banking, and the FDIC.
The Corporation is subject to supervision by the FRB. The Bank 22 ​ Table of Contents ​ is subject to supervision and periodic examination by the Maryland OFR of Financial Regulation, the West Virginia Division of Banking, and the FDIC.
Any increase in our ALL or expenses incurred to determine the appropriate level of the ALL may have a material adverse effect on our financial condition and results of operations. ​ The Bank’s lending activities subject the Bank to the risk of environmental liabilities. ​ A significant portion of the Bank’s loan portfolio is secured by real property.
Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations. ​ The Bank’s lending activities subject the Bank to the risk of environmental liabilities. ​ A significant portion of the Bank’s loan portfolio is secured by real property.
If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures.
If the models we use for interest rate risk and asset-liability management are inadequate, we may incur increased or unexpected losses upon changes in market interest rates or other market measures. If the models we use for estimating our expected credit losses are inadequate, the ACL may not be sufficient to support future charge-offs.
Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology driven products and services or be successful in marketing these products and services to our customers.
We may not be able to effectively implement new technology driven products and services or be successful in marketing these products and services to our customers.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. Our future success depends, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations.
Our future success depends, in part, on our ability to address the needs of our customers by using technology to provide products and services 24 ​ Table of Contents ​ that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements.
Competition for qualified personnel in the financial services industry is intense, and there can be no assurance that we will be successful in attracting and retaining such personnel. Our current executive officers provide valuable services based on their many years of experience and in-depth knowledge of the banking industry and the market areas we serve.
Competition for qualified personnel in the financial services industry is intense, and there can be no assurance that we will be successful in attracting and retaining such personnel.
As a result, and despite the enactment of the LIBOR Act, for the most commonly used LIBOR settings, the use or selection of a successor rate could expose us to risks associated with disputes and litigation with our customers and counterparties and other market participants in connection with implementing LIBOR fallback provision. ​ The majority of our business is concentrated in Maryland and West Virginia, much of which involves real estate lending, so a decline in the real estate and credit markets could materially and adversely impact our financial condition and results of operations. ​ Most of the Bank’s loans are made to borrowers located in Western Maryland and Northeastern West Virginia, and many of these loans, including construction and land development loans, are secured by real estate.
A rapid increase or decrease in interest rates could adversely affect our results of operations and financial performance. ​ 18 ​ Table of Contents ​ The majority of our business is concentrated in Maryland and West Virginia, much of which involves real estate lending, so a decline in the real estate and credit markets could materially and adversely impact our financial condition and results of operations. ​ Most of the Bank’s loans are made to borrowers located in Western Maryland and Northeastern West Virginia, and many of these loans, including construction and land development loans, are secured by real estate.
At December 31, 2022, we had recorded goodwill and other intangible assets of $12.4 million, representing approximately 8.2% of shareholders’ equity.
At December 31, 2023, we had recorded goodwill and other intangible assets of $12.1 million, representing approximately 7.5% of shareholders’ equity. ​ At December 31, 2023, our net deferred tax assets were valued at $11.1 million.
Promptly following these events, the federal banking regulators announced that the FDIC will use funds from the Deposit Insurance Fund to ensure that all depositors of the two failed institutions are made whole, at no cost to taxpayers. We anticipate that the FDIC will impose special assessments on all banks to replenish the Deposit Insurance Fund.
In early March 2023, the FDIC was appointed receiver for two banks, in each case due primarily to liquidity concerns at those institutions. Promptly following these events, the federal banking regulators announced that the FDIC will use funds from the DIF to ensure that all depositors of the two failed institutions are made whole, at no cost to taxpayers.
Although the Treasury, the FDIC and the FRB have announced a program to provide up to $25 billion of loans to financial institutions secured by certain of such government-backed agency securities held by financial institutions to mititgate the risk of potential losses on the sale of such instruments, widespread demands for customer withdrawals or other liquidity needs of financial institutions for immediate liquidity might exceed the capacity of such program. ​ 20 Tae of Contents In addition to the risk that occurrence of such events could adversely impact our ability to engage in routine funding transactions, they could also lead to losses or defaults by us or by other institutions, either of which could have a material adverse effect on our business, results of operations and financial condition. ​ Increases in FDIC insurance premiums may have a material adverse effect on our results of operations. ​ In general, we are unable to control the amount of preimums that are required to be paid for FDIC insurance.
In January 2024, prior to these announcements by the FRB, the Corporation borrowed $40.0 million through the BTFP at an interest rate of 4.87% and a maturity date in January 2025. ​ In addition to the risk that occurrence of such events could adversely impact our ability to engage in routine funding transactions, they could also lead to losses or defaults by us or by other institutions, either of which could have a material adverse effect on our business, results of operations and financial condition. ​ Increases in FDIC insurance premiums may have a material adverse effect on our results of operations. ​ In general, we are unable to control the amount of premiums that are required to be paid for FDIC insurance.
In that case, our profitability would be adversely affected. ​ Interest rates and other economic conditions will impact our results of operations. ​ Our net income depends primarily upon our net interest income. Net interest income is the difference between interest income earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and borrowed funds.
Net interest income is the difference between interest income earned on loans, investments and other interest-earning assets and the interest expense incurred on deposits and borrowed funds.
For instance, we recently formed First United Legacy Advisors for the purpose of engaging in the business of providing investment advisory and related services. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed.
There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services we invest significant time and resources.
We have been required to dedicate significant personnel resources to address the compliance burdens imposed by the CFBP’s adoption of various rules, and the adoption of additional rules in the future would likely require us to dedicate even more resources. ​ Bank regulators and other regulations, including the Basel III Capital Rules, may require higher capital levels, impacting our ability to pay dividends or repurchase our stock. ​ The capital standards to which we are subject, including the standards created by the Basel III Capital Rules, may materially limit our ability to use our capital resources and/or could require us to raise additional capital by issuing additional shares of Common Stock or other equity securities.
Such obligations may include restricting the sharing of information contained in a consumer report, notifying consumers when such reports are used to make an adverse decision, and, in the context of completing employee background checks, providing a notice containing certain disclosures to the consumer and obtaining their consent. ​ Bank regulators and other regulations, including the Basel III Capital Rules, may require higher capital levels, impacting our ability to pay dividends or repurchase our stock. ​ The capital standards to which we are subject, including the standards created by the Basel III Capital Rules, may materially limit our ability to use our capital resources and/or could require us to raise additional capital by issuing additional shares of Common Stock or other equity securities.
Removed
A rapid increase or decrease in interest rates could adversely affect our results of operations and financial performance. ​ Changes to LIBOR may adversely impact the value of, and the return on, our loans, investment securities and derivatives which are indexed to LIBOR. ​ We have certain loans, investment securities, interest rate swaps and long-term debt indexed to LIBOR to calculate the loan interest rate.
Added
In that case, our profitability would be adversely affected. ​ We may need to raise capital in the future, and such capital may not be available when needed or at all. ​ We may need to raise capital in the future to provide it with sufficient capital resources and liquidity to meet our commitments and business needs including complying with new regulatory capital rules, particularly if our asset quality or earnings were to deteriorate significantly.
Removed
On July 27, 2017, the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR to the LIBOR administrator after 2021. The announcement also indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021.
Added
Our ability to raise capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial condition. Economic conditions and the loss of confidence in financial institutions may limit access to certain customary sources of capital, and increase our cost of raising capital.
Removed
The Adjustable Interest Rate Act (“the LIBOR ACT”), enacted in March 2022, provides a statutory framework to replace U.S. dollar LIBOR with a benchmark rate based on the Secured Overnight Financing Rate (“SOFR”) for contracts governed by U.S. law that have no or ineffective fallbacks, and in December 2022, the Federal Reserve Board adopted related implementing rules.
Added
No assurance can be given that such capital will be available on acceptable terms or 16 ​ Table of Contents ​ at all.
Removed
Although governmental authorities have endeavored to facilitate an orderly discontinuation of LIBOR, no assurance can be provided that this aim will be achieved or that the use, level, and volatility of LIBOR or other interest rates or the value of LIBOR-based securities will not be adversely affected.
Added
Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of depositors, investors or counterparties participating in the capital markets may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity.
Removed
If the models we use for estimating our expected credit losses are inadequate, the allowance for credit losses may not be sufficient to 18 Tae of Contents support future charge-offs.
Added
Moreover, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would have to compete with those institutions for investors.
Removed
Any such failure in our analytical or forecasting models could have a material adverse effect on our business, financial condition and results of operations. ​ A new accounting standard will likely require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations. ​ The FASB has adopted a new accounting standard that was originally effective for the Corporation and the Bank beginning with our first full fiscal year after December 15, 2019.
Added
An inability to raise additional capital on acceptable terms as and when needed could have a materially adverse effect on our business, financial condition and results of operations. ​ Our inability to generate liquidity in a timely manner may adversely impact our ability to satisfy obligations associated with our financing, our operations and other components of our business. ​ Timely access to liquidity is essential to our business, and being able to meet obligations as they come due and pay deposits when they are withdrawn is critical to ongoing operations.
Removed
In November 2019, the FASB approved a delay of the required implementation date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities, including the Corporation, resulting in a required implementation date for the Corporation of January 1, 2023.
Added
If we are unable to meet our payment obligations on a daily basis, we may be subject to being placed into receivership, regardless of our capital levels.
Removed
This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses.
Added
Our primary sources of liquidity consist of cash and cash balances due from correspondent banks, excess reserves at the Federal Reserve, loan repayments, federal funds sold and other short-term investments, maturities and monetization of investment securities, cash provided by operating activities and new core deposits into the Bank.
Removed
This standard will change the current method of providing allowances for loan losses that are probable, which would likely require us to increase our ALL, and to greatly increase the types of data we would need to collect and review to determine the appropriate level of the ALL.
Added
Our ability to obtain or liquidate these primary sources of liquidity may be impacted by adverse economic conditions resulting from dynamic, complex, and other foreseen and unforeseen inter-related factors and events in the economic environment.
Removed
See the discussion under the heading “Estimates and Critical Accounting Policies – Goodwill” in Item 7 of Part II of this annual report for further information. ​ At December 31, 2022, our net deferred tax assets were valued at $10.6 million.
Added
If we were to rely on sales proceeds from the sale of investment securities within our portfolio in order to satisfy our obligations, we may be adversely impacted by our ability to transact and settle such sales. Sales of investment securities in an unrealized loss position would negatively affect our earnings and regulatory capital.
Removed
In early March 2023, the FDIC was appointed receiver for two banks, in each case due primarily to liquidity concerns at those institutions.
Added
In addition, in order to monetize our held-to-maturity (“HTM”) securities, we expect to rely on pledging those securities for secured funding, and our liquidity may be impaired if we are unable to timely pledge those or any other securities due to lack of available funding, operational impediments or otherwise.
Removed
In addition, cloud technologies are also critical to the operation of our systems, and our reliance on cloud 22 Tae of Contents technologies is growing.
Added
Our industry is susceptible to the negative impact of limited access to short-term and/or long-term sources of funds, which could result in a liquidity shortfall and/or impact our liquidity coverage ratio and could have an adverse effect on our operations, financial condition and earnings. ​ Our inability to access sources of financing at terms that are favorable to us may result in an adverse effect on our business, financial condition, and results of operations. ​ Our liquidity could be adversely affected by any inability to access the debt or equity capital markets, liquidity or volatility in those capital markets, the decrease in value of eligible collateral or increased collateral requirements (including as a result of credit concerns for short-term borrowings), changes to our relationships with our funding providers based on real or perceived changes in our risk profile, prolonged federal government shutdowns or changes in regulations.
Added
Additionally, our liquidity may be negatively impacted by the unwillingness or inability of the Federal Reserve to act as a lender of last resort. ​ Our ability to raise additional financing depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities and on our financial condition and performance.
Added
Accordingly, we may be unable to raise additional financing if needed or on acceptable terms. ​ ​ 17 ​ Table of Contents ​ The value of real estate collateral may fluctuate significantly resulting in an under-collateralized loan portfolio. ​ The market value of real estate, particularly real estate held for investment, can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located.
Added
If the value of the real estate serving as collateral for the Corporation’s loan portfolio were to decline materially, a significant part of the Corporation’s loan portfolio could become under-collateralized.
Added
If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, then, in the event of foreclosure, we may not be able to realize the amount of collateral that we anticipated at the time of originating the loan.
Added
This could have a material adverse effect on the Corporation’s provision for credit losses and the Corporation’s operating results and financial condition. ​ The Corporation is subject to lending risk, and the impacts of interest rate changes could adversely impact the Corporation. ​ There are inherent risks associated with the Corporation’s lending activities.
Added
These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Corporation operates.
Added
Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. ​ A substantial portion of the Corporation’s loan portfolio is comprised of residential and commercial real estate loans.

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Item 2. Properties

Properties — owned and leased real estate

1 edited+0 added−0 removed1 unchanged
Biggest changeTotal rent expense on the leased offices and properties was $0.4 million in 2022. ​ ITEM 3. LEGAL PROCEEDINGS None ​ ITEM 4. MINE SAFETY DISCLOSURES Not applicable. ​ 29 Tae of Contents PART II
Biggest changeTotal rent expense on the leased offices and properties was $0.5 million in 2023. In November 2023, the Corporation announced the closure of four of its leased banking offices. ​ ITEM 3. LEGAL PROCEEDINGS None ​ ITEM 4. MINE SAFETY DISCLOSURES Not applicable. ​ 33 ​ Table of Contents ​ PART II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

3 edited+1 added−0 removed3 unchanged
Biggest changeIssuer Repurchases Neither First United Corporation nor any of its affiliated purchasers (as defined in Rule 10b-18 promulgated under the Exchange Act) purchased any shares of Common Stock during the three-month period ended December 31, 2022. ​ Equity Compensation Plan Information Pursuant to the SEC’s Regulation S-K Compliance and Disclosure Interpretation 106.01, the information required by this Item pursuant to Item 201(d) of Regulation S-K relating to securities authorized for issuance under the Corporation’s equity compensation plans is located in Item 12 of Part III of this annual report and is incorporated herein by reference. ​ ITEM 6. [Reserved] ​ ​ 30 Tae of Contents
Biggest changeIssuer Repurchases Pursuant to the SEC’s Regulation S-K Compliance and Disclosure Interpretation 106.01, the information required by this Item pursuant to Item 201(d) of Regulation S-K relating to securities authorized for issuance under the Corporation’s equity compensation plans is located in Item 12 of Part III of this annual report and is incorporated herein by reference. ​ ​ ​ ​ ​ ​ ​ ​ Issuer Purchases of Equity Securities ​ Period Total Number of Shares (or Units) Purchased (1) ​ 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 ​ ​ ​ ​ ​ ​ 805,702 (1) October 2023 40,300 $ 16.35 40,300 765,402 ​ November 2023 11,500 ​ 17.30 11,500 753,902 ​ December 2023 11,000 ​ 18.69 11,000 742,902 ​ Total 62,800 $ 16.79 62,800 742,902 ​ (1) All shares were purchased in open-market transactions pursuant to First United Corporation's stock repurchase plan that was initially adopted effective August 18, 2023.
A complete discussion of these and other dividend restrictions is contained in Item 1A of Part I of this annual report under the heading “ Risks Relating to First United Corporation’s Securities ” and in Note 4 to the Consolidated Financial Statements, both of which are incorporated herein by reference.
A complete discussion of these and other dividend restrictions is contained in Item 1A of Part I of this annual report under the heading “ Risks Relating to First United Corporation’s Securities ” and in Note 3 to the Consolidated Financial Statements, both of which are incorporated herein by reference.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Shares of the Corporation’s common stock are listed on the NASDAQ Global Select Market under the symbol “FUNC”. As of February 28, 2023, the issued and outstanding shares of Common Stock were held by 1,327 shareholders of record.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Shares of the Corporation’s common stock are listed on the NASDAQ Global Select Market under the symbol “FUNC”. As of February 29, 2024, thres issued and outstanding shares of Common Stock were held by 1,315 shareholders of record.
Added
The plan authorized the repurchase of up to 825,000 shares of common stock of First United Corporation. The plan authorizes the repurchases to be conducted through open market or private transactions at such times and in such amounts per transaction as the Chairman and Chief Executive Officer of First United Corporation determines to be appropriate. ​ ​ ​

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

96 edited+77 added−53 removed20 unchanged
Biggest changeTime deposits decreased by $42.7 million related to maturing balances moving to more liquid accounts, or brokerage investment accounts, due to the rising deposit rates as well as municipal funds moving to higher yielding State funding alternatives. ​ Borrowed Funds The following shows the composition of our borrowings at December 31: ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) 2022 2021 Securities sold under agreements to repurchase ​ $ 64,565 ​ $ 57,699 ​ Total short-term borrowings ​ $ 64,565 ​ $ 57,699 ​ Junior subordinated debentures ​ $ 30,929 ​ $ 30,929 ​ Total long-term borrowings ​ $ 30,929 ​ $ 30,929 ​ Total borrowings ​ $ 95,494 ​ $ 88,628 ​ Average balance (from Table 1) ​ $ 94,111 ​ $ 135,037 ​ ​ The following is a summary of short-term borrowings at December 31 with original maturities of less than one year: ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 Securities sold under agreements to repurchase: ​ ​ ​ ​ ​ ​ ​ Outstanding at end of year ​ $ 64,565 ​ $ 57,699 ​ Weighted average interest rate at year end ​ ​ 0.12% ​ ​ 0.15% ​ Maximum amount outstanding as of any month end ​ $ 75,912 ​ $ 72,396 ​ Average amount outstanding ​ ​ 63,182 ​ ​ 57,697 ​ Approximate weighted average rate during the year ​ ​ 0.12% ​ ​ 0.15% ​ ​ Total borrowings increased by $6.9 million, or 7.7%, in 2022 when compared to 2021 due to increased balances in our existing accounts in our Treasury Management product.
Biggest changeThese increases were offset by decreases in non-interest-bearing deposits of $78.9 million and savings accounts of $59.5 million due to the shift to interest-bearing demand deposit accounts, two relationships having large, planned deposit withdrawals totaling $39.5 million during 2023 to fund business activity, the effects of consumer and commercial spending and the competitive market for deposits. ​ 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 December 31, 2023 and December 31, 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2023 ​ December 31, 2022 (in thousands) ​ ​ Balance ​ Percent ​ ​ Balance ​ Percent Insured deposits ​ $ 1,212,934 ​ 78% ​ $ 1,076,113 ​ 69% Uninsured but collateralized deposits ​ ​ 116,723 ​ 8% ​ ​ 153,067 ​ 10% Uninsured and uncollateralized deposits ​ ​ 221,320 ​ 14% ​ ​ 341,553 ​ 21% ​ ​ $ 1,550,977 ​ 100% ​ $ 1,570,733 ​ 100% ​ The following table summarizes the percentage of deposit balances from retail customers compared to business customers as of December 31, 2023 and December 31, 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ December 31, 2023 ​ December 31, 2022 (in thousands) ​ ​ Balance ​ Percent ​ ​ Balance ​ Percent Retail deposits ​ $ 820,954 ​ 53% ​ $ 855,014 ​ 54% Business deposits ​ ​ 730,023 ​ 47% ​ ​ 715,719 ​ 46% ​ ​ $ 1,550,977 ​ 100% ​ $ 1,570,733 ​ 100% ​ 56 ​ Table of Contents ​ Borrowed Funds The following shows the composition of our borrowings at December 31: ​ ​ ​ ​ ​ ​ ​ (in thousands) 2023 2022 Securities sold under agreements to repurchase ​ $ 45,418 ​ $ 64,565 Total short-term borrowings ​ $ 45,418 ​ $ 64,565 ​ ​ ​ ​ ​ ​ ​ Long-term FHLB advances ​ $ 80,000 ​ $ — Junior subordinated debentures ​ $ 30,929 ​ $ 30,929 Total long-term borrowings ​ $ 110,929 ​ $ 30,929 ​ ​ ​ ​ ​ ​ ​ Total borrowings ​ $ 156,347 ​ $ 95,494 ​ ​ ​ ​ ​ ​ ​ Average balance (from Table 1) ​ $ 142,239 ​ $ 94,111 ​ The following is a summary of short-term borrowings at December 31 with original maturities of less than one year: ​ ​ ​ ​ ​ ​ ​ (in thousands) 2023 2022 Securities sold under agreements to repurchase: ​ ​ ​ ​ ​ ​ Outstanding at end of year ​ $ 45,418 ​ $ 64,565 Weighted average interest rate at year end ​ ​ 0.27% ​ ​ 0.12% Maximum amount outstanding as of any month end ​ $ 59,777 ​ $ 75,912 Average amount outstanding ​ ​ 50,498 ​ ​ 63,182 Approximate weighted average rate during the year ​ ​ 0.24% ​ ​ 0.12% ​ Short-term borrowings decreased by $19.1 million when compared to December 31, 2022.
Overview First United Corporation is a bank holding company that, through the Bank and its non-bank subsidiaries, provides an array of financial products and services primarily to customers in four Western Maryland counties and four Northeastern West Virginia counties.
Overview First United Corporation is a financial holding company that, through the Bank and its non-bank subsidiaries, provides an array of financial products and services primarily to customers in four Western Maryland counties and four Northeastern West Virginia counties.
The transferred occurred at fair value. The related unrealized loss of $8.4 million included in other comprehensive loss remained in other comprehensive loss, to be amortized out of other comprehensive loss with an offsetting entry to interest income as a yield adjustment over the remaining term of the securities. No gain or loss was recorded at the time of transfer.
The transfer occurred at fair value. The related unrealized loss of $8.4 million included in other comprehensive loss remained in other comprehensive loss, to be amortized out of other comprehensive loss with an offsetting entry to interest income as a yield adjustment over the remaining term of the securities. No gain or loss was recorded at the time of transfer.
Cash and various securities may also be pledged as collateral. ● Secured line of credit with the Federal Reserve Discount Window for use in borrowing funds up to 90 days, using municipal securities as collateral. ● Brokered deposits, including CDs and money market funds, provide a method to generate deposits quickly.
Cash and various securities may also be pledged as collateral. ● Secured line of credit with the Federal Reserve Discount Window for use in borrowing funds up to 90 days, using municipal and corporate securities as collateral. ● Brokered deposits, including CDs and money market funds, provide a method to generate deposits quickly.
See Note 11 to the Consolidated Financial Statements presented elsewhere in this annual report for further details about our borrowings and additional borrowing capacity, which is incorporated herein by reference. Off-Balance Sheet Arrangements In the normal course of business, to meet the financing needs of its customers, the Bank is a party to financial instruments with off-balance sheet risk.
See Note 10 to the Consolidated Financial Statements presented elsewhere in this annual report for further details about our borrowings and additional borrowing capacity, which is incorporated herein by reference. Off-Balance Sheet Arrangements In the normal course of business, to meet the financing needs of its customers, the Bank is a party to financial instruments with off-balance sheet risk.
(3) Net interest margin is calculated as net interest income divided by average earning assets. (4) The average yields on investments are based on amortized cost. The following table sets forth an analysis of volume and rate changes in interest income and interest expense of our average interest-earning assets and average interest-bearing liabilities for 2022 and 2021.
(3) Net interest margin is calculated as net interest income divided by average earning assets. (4) The average yields on investments are based on amortized cost. The following table sets forth an analysis of volume and rate changes in interest income and interest expense of our average interest-earning assets and average interest-bearing liabilities for 2023 and 2022.
Changes in the allocation over time reflect changes in the composition of the loan portfolio risk profile and refinements to the methodology of determining the ALL. Specific allocations in any particular category may be reallocated in the future as needed to reflect current conditions. Accordingly, the entire ALL is considered available to absorb losses in any category.
Changes in the allocation over time reflect changes in the composition of the loan portfolio risk profile and refinements to the methodology of determining the ACL. Specific allocations in any particular category may be reallocated in the future as needed to reflect current conditions. Accordingly, the entire ACL is considered available to absorb losses in any category.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto for the years ended December 31, 2022 and 2021, which are included in Item 8 of Part II of this annual report.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and notes thereto for the years ended December 31, 2023 and 2022, which are included in Item 8 of Part II of this annual report.
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 December 31, 2022, we were asset sensitive.
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 December 31, 2023, we were asset sensitive.
We have policies and procedures designed to mitigate credit risk and to maintain the quality of our loan portfolio. These policies include underwriting standards for new credits as well as continuous monitoring and reporting policies for asset quality and the adequacy of the ALL.
We have policies and procedures designed to mitigate credit risk and to maintain the quality of our loan portfolio. These policies include underwriting standards for new credits as well as continuous monitoring and reporting policies for asset quality and the adequacy of the ACL.
We also have made unsecured consumer loans to qualified 40 Tae of Contents borrowers meeting our underwriting standards. Additional information about our loans and underwriting policies can be found in Item 1 of Part I of this annual report under the heading “Banking Products and Services”. The following table sets forth the composition of our loan portfolio.
We also have made unsecured consumer loans to qualified borrowers meeting our underwriting standards. Additional information about our loans and underwriting policies can be found in Item 1 of Part I of this annual report under the heading “Banking Products and Services”. The following table sets forth the composition of our loan portfolio.
Capital The Corporation’s and the Bank’s capital ratios are strong, and both institutions are considered to be well-capitalized by applicable regulatory measures Adoption of New Accounting Standards and Effects of New Accounting Pronouncements Note 1 to the Consolidated Financial Statements discusses new accounting pronouncements that, when adopted, could affect our future consolidated financial statements.
Capital The Corporation’s and the Bank’s capital ratios are strong, and both institutions are considered to be well-capitalized by applicable regulatory measures 37 ​ Table of Contents ​ Adoption of New Accounting Standards and Effects of New Accounting Pronouncements Note 1 to the Consolidated Financial Statements discusses new accounting pronouncements that, when adopted, could affect our future consolidated financial statements.
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 use the same credit policies in making commitments and conditional obligations as we do for on-balance sheet instruments.
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 use the same credit policies in making commitments and conditional obligations 57 ​ Table of Contents ​ as we do for on-balance sheet instruments.
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. ​ 54 Tae of Contents
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. ​
Excess cash balances during 2022 were invested at the Fed Funds rate, which also positively affected interest income for the year ended December 31, 2022 when compared to 2021. Increases in loan interest income stemmed from the growth of core loans in 2022.
Excess cash balances during 2023 were invested at the Fed Funds rate, which also positively affected interest income for the year ended December 31, 2023 when compared to 2022. Increases in loan interest income stemmed from the growth of core loans at higher rates in 2023.
The increase in net charge-offs was primarily related to increased charge-offs in our consumer loan portfolio. Our special assets team continues to effectively collect on charged-off loans, resulting in ongoing overall low charge-off ratios. Accruing loans past due 30 days or more decreased to 0.16%, compared to 0.31% at December 31, 2021.
The increase in net charge-offs was primarily related to increased charge-offs in our commercial loan portfolio. Our special assets team continues to effectively collect on charged-off loans, resulting in ongoing overall low charge-off ratios. ​ Accruing loans past due 30 days or more increased to 0.24%, compared to 0.16% at December 31, 2022.
Management also applies interest rate risk, collateral value and debt service sensitivity analyses to the CRE loan portfolio and obtains new appraisals on specific loans under defined parameters to assist in the determination of the periodic provision for loan losses. ​ 46 Tae of Contents The following table presents the activity in the ALL by major loan category for the past two years.
Management also applies interest rate risk, collateral value and debt service sensitivity analyses to the CRE loan portfolio and obtains new appraisals on specific loans under defined parameters to assist in the determination of the periodic provision for credit losses. ​ 51 ​ Table of Contents ​ The following table presents a summary of the activity in the ACL and ALL by major loan category for the past two years.
The mix for each year is illustrated below. ​ ​ ​ ​ ​ ​ ​ Year End Percentage of Total Assets ​ 2022 2021 Cash and cash equivalents ​ 4% ​ 7% Net loans ​ 68% ​ 66% Investments ​ 20% ​ 20% ​ ​ The year-end total liability mix has remained consistent during the two-year period as illustrated below. ​ ​ ​ ​ ​ ​ ​ ​ Year End Percentage of Total Liabilities ​ 2022 2021 Total deposits ​ 93% ​ 93% Total borrowings ​ 6% ​ 6% ​ Loan Portfolio The Bank is actively engaged in originating loans to customers primarily in Allegany County, Frederick County, Garrett County, and Washington County in Maryland, and in Berkeley County, Mineral County, Monongalia County, and Harrison County in West Virginia; and the surrounding regions of West Virginia and Pennsylvania.
The mix for each year is illustrated below. ​ ​ ​ ​ ​ ​ ​ Year End Percentage of Total Assets ​ 2023 2022 Cash and cash equivalents ​ 3% ​ 4% Net loans ​ 73% ​ 68% Investments ​ 16% ​ 20% ​ ​ The year-end total liability mix has remained relatively consistent during the two-year period as illustrated below. ​ ​ ​ ​ ​ ​ ​ ​ Year End Percentage of Total Liabilities ​ 2023 2022 Total deposits ​ 89% ​ 93% Total borrowings ​ 9% ​ 6% ​ Loan Portfolio The Bank is actively engaged in originating loans to customers primarily in Allegany County, Frederick County, Garrett County, and Washington County in Maryland, and in Berkeley County, Mineral County, Monongalia County, and Harrison County in West Virginia; and the surrounding regions of West Virginia and Pennsylvania.
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 $110.0 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $21.2 million at December 31, 2022.
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 $82.5 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $16.8 million at December 31, 2023.
At December 31, 2022, the Corporation’s total risk-based capital ratio was 16.12% and the Bank’s total risk-based capital ratio was 14.37%, both of which were well above the regulatory minimum of 8%. The total risk-based capital ratios of the Corporation and the Bank at December 31, 2021 were 15.89% and 14.97%, respectively.
At December 31, 2023, the Corporation’s total risk-based capital ratio was 15.64% and the Bank’s total risk-based capital ratio was 14.05%, both of which were well above the regulatory minimum of 8%. The total risk-based capital ratios of the Corporation and the Bank at December 31, 2022 were 16.12% and 14.37%, respectively.
The remaining $15.9 million of the securities available-for-sale represents the entire collateralized debt obligation (“CDO”) portfolio, which was valued using significant unobservable inputs, or Level 3 pricing. The $2.8 million in net unrealized losses associated with the CDO portfolio relates to nine pooled trust preferred securities that comprise the CDO portfolio.
The remaining $14.7 million of the securities available-for-sale represents the entire collateralized debt obligation (“CDO”) portfolio, which was valued using significant unobservable inputs, or Level 3 pricing. The $4.0 million in net unrealized losses associated with the CDO portfolio relates to nine pooled trust preferred securities that comprise the CDO portfolio.
Non-GAAP interest income on an FTE basis for the years ended December 31, 2022 and 2021 were $940, and $939, respectively. (2) The average balances of non-accrual loans for the years ended December 31, 2022 and 2021, which were reported in the average loan balances for these years, were $2,120 and $6,041, respectively.
Non-GAAP interest income on an FTE basis for the years ended December 31, 2023 and 2022 were $626 and $940, respectively. (2) The average balances of non-accrual loans for the years ended December 31, 2023 and 2022, which were reported in the average loan balances for these years, were $3,171 and $2,120, respectively.
The net interest margin, on an FTE basis, increased to 3.56% for the year ended December 31, 2022 from 3.28% for the year ended December 31, 2021. ​ Comparing the year ended December 31, 2022 with the year ended December 31, 2021, interest income increased by $4.2 million .
The net interest margin, on an FTE basis, decreased to 3.26% for the year ended December 31, 2023 from 3.56% for the year ended December 31, 2022. ​ Comparing the year ended December 31, 2023 with the year ended December 31, 2022, interest income increased by $18.4 million.
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. 53 Tae of Contents In order to manage interest sensitivity risk, management formulates guidelines regarding asset generation and pricing, funding sources and pricing, and off-balance sheet commitments.
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.
Provision for Loan Losses The provision for loan losses was a credit of $0.6 million for the year ended December 31, 2022 and a credit of $0.8 million for the year ended December 31, 2021. Net charge-offs of $0.7 million were recorded for the year ended December 31, 2022, compared to net recoveries of $0.3 million for 2021.
Provision for Credit Losses The provision for credit losses was $1.6 million for the year ended December 31, 2023 and a credit of $0.6 million for the year ended December 31, 2022. Net charge-offs of $0.9 million were recorded for the year ended December 31, 2023, compared to net charge-offs of $0.7 million for 2022.
(See Note 1 to the Consolidated Financial Statements.) On an on-going basis, management evaluates estimates and bases 32 Tae of Contents those estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. 36 ​ Table of Contents ​ (See Note 1 to the Consolidated Financial Statements.) On an on-going basis, management evaluates estimates and bases those estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Interest and fees on loans increased by $1.5 million investment income increased by of $2.4 million. The increase in interest on loans was primarily due to an increase of $49.4 million in average loan balance in 2022 compared to 2021.
Interest and fees on loans increased by $15.1 million investment income increased by of $0.2 million. The increase in interest on loans was primarily due to an increase of $116.7 million in average loan balance in 2023 compared to 2022.
The net interest margin for the year ended December 31, 2022 was 3.56% compared to 3.28% for the year ended December 31, 2021. ​ Comparing the year ended December 31, 2022 with the year ended December 31, 2021, interest income increased by $4.2 million. Interest and fees on loans increased by $1.5 million and investment income increased by $2.4 million.
The net interest margin was 3.26% in 2023 compared to 3.56% in 2022. ​ Comparing the year ended December 31, 2023 with the year ended December 31, 2022, interest income increased by $18.4 million. Interest and fees on loans increased by $15.1 million and investment income increased by $0.2 million.
The valuation allowance was $2.9 million and $3.0 million at December 31, 2022 and 2021, respectively.
The valuation allowance was $2.8 million and $2.9 million at December 31, 2023 and 2022, respectively.
The ratio of the ALL to loans outstanding was 1.14% at December 31, 2022 compared to 1.38% at December 31, 2021.
The ratio of the ACL to loans outstanding was 1.24% at December 31, 2023 compared to an ALL 1.14% at December 31, 2022.
The ratio of the ALL to loans outstanding was 1.14% at December 31, 2022 compared to 1.38% at December 31, 2021. The ratio of net charge-offs to average loans for the year ended December 31, 2022 was an annualized 0.06%, compared to net recoveries to average loans of 0.02% for the year ended December 31, 2021.
The ratio of the ACL to loans outstanding was 1.24% at December 30, 2023 and 1.14% at December 31, 2022. ​ The ratio of net charge-offs to average loans for the year ended December 31, 2023 was an annualized 0.07%, compared to of 0.06% for the year ended December 31, 2022.
Actual results may differ from these estimates under different assumptions or conditions. The Company identifies the following critical accounting policies may affect our more significant judgments and estimates used in the preparation of the Consolidated Financial Statements. Allowance for Loan Losses One of our most important accounting policies is that related to the monitoring of the loan portfolio.
Actual results may differ from these estimates under different assumptions or conditions. The Corporation identifies the following critical accounting policies may affect our more significant judgments and estimates used in the preparation of the Consolidated Financial Statements.
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.
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.
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.
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.
Liquidity Sources As of December 31, 2022, the Corporation had approximately $140.0 million in unsecured lines of credit with its correspondent banks, $9.6 million available through a secured line of credit with the Federal Reserve Discount Window, and approximately $195.3 million of secured borrowings with the FHLB. Additionally, the Corporation has access to the brokered certificates of deposit market.
Liquidity Sources As of December 31, 2023, the Corporation had approximately $140.0 million in unsecured lines of credit with its correspondent banks, $12.2 million available through a secured line of credit with the Federal Reserve Discount Window, and approximately $145.4 million of secured borrowings with the FHLB.
Based on the simulation analysis performed at December 31, 2022 and 2021, management estimated the following changes in net interest income, assuming the indicated rate changes: ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 +400 basis points ​ $ 1,112 ​ $ 4,072 +300 basis points ​ $ 225 ​ $ 3,233 +200 basis points ​ $ 173 ​ $ 2,315 +100 basis points ​ $ 121 ​ $ 1,160 -100 basis points ​ $ (776) ​ $ (3,110) -200 basis points ​ $ (3,165) ​ ​ N/A -300 basis points ​ $ (7,382) ​ ​ N/A ​ 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.
They do not necessarily indicate the long-term prospects or economic value of the institution. 60 ​ Table of Contents ​ Based on the simulation analysis performed at December 31, 2023 and 2022, management estimated the following changes in net interest income, assuming the indicated rate changes: ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) 2023 2022 +400 basis points ​ $ 4,464 ​ $ 1,112 +300 basis points ​ $ 3,353 ​ $ 225 +200 basis points ​ $ 2,255 ​ $ 173 +100 basis points ​ $ 1,155 ​ $ 121 -100 basis points ​ $ (1,280) ​ $ (776) -200 basis points ​ $ (3,102) ​ $ (3,165) -300 basis points ​ $ (5,249) ​ $ (7,382) -400 basis points ​ $ (8,086) ​ $ N/A ​ 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.
Summary of Loan Portfolio The following table presents the composition of our loan portfolio as of December 31 for the past two years: ​ ​ ​ ​ ​ ​ ​ ​ (In millions) 2022 2021 Commercial real estate ​ $ 458.8 ​ $ 374.3 ​ Acquisition and development ​ ​ 70.6 ​ ​ 128.1 ​ Commercial and industrial * ​ ​ 245.4 ​ ​ 181.0 ​ Residential mortgage ​ ​ 444.4 ​ ​ 404.7 ​ Consumer ​ ​ 60.3 ​ ​ 65.6 ​ Total Loans ​ $ 1,279.5 ​ $ 1,153.7 ​ ​ *Includes PPP loans of $0.4 million and $7.7 million at December 31, 2022 and December 31, 2021, respectively. ​ Outstanding loans of $1.3 billion at December 31, 2022 reflected an increase of $125.8 million during 2022.
Summary of Loan Portfolio The following table presents the composition of our loan portfolio as of December 31 for the past two years: ​ ​ ​ ​ ​ ​ ​ (In millions) 2023 2022 Commercial real estate ​ $ 493.7 ​ $ 458.8 Acquisition and development ​ ​ 77.1 ​ ​ 70.6 Commercial and industrial ​ ​ 274.6 ​ ​ 245.4 Residential mortgage ​ ​ 499.9 ​ ​ 444.4 Consumer ​ ​ 61.4 ​ ​ 60.3 Total Loans ​ $ 1,406.7 ​ $ 1,279.5 45 ​ Table of Contents ​ Outstanding loans of $1.4 billion at December 31, 2023 reflected growth of $127.2 million in 2023.
We generally require collateral or other security to support the financial 51 Tae of Contents instruments with credit risk. The amount of collateral or other security is determined based on management’s credit evaluation of the counterparty. We evaluate each customer’s creditworthiness on a case-by-case basis.
We generally require collateral or other security to support the financial instruments with credit risk. The amount of collateral or other security is determined based on management’s credit evaluation of the counterparty. We evaluate each customer’s creditworthiness on a case-by-case basis. Loan commitments and letters of credit totaled $232.3 million and $11.0 million, respectively, at December 31, 2023.
At December 31, 2022, the Bank had $140.0 million available through unsecured lines of credit with correspondent banks, $9.6 million available through a secured line of credit with the Federal Reserve Discount Window and approximately $195.3 million available through the FHLB.
At December 31, 2023, the Bank had $140.0 million available through unsecured lines of credit with correspondent banks, $12.2 million available through a secured line of credit with the Federal Reserve Discount Window and approximately $145.4 million available through the FHLB. Additionally, we had $69.5 million available through the Federal Reserve’s BTFP.
The yield on earning assets increased 22 basis points to 3.85% in 2022 compared to 3.63% in 2021 in correlation with an increase in average earning assets as well as the rising interest rate environment and new loans booked at higher rates.
This increase was partially offset by an increase of $18.4 million in interest income. The yield on earning assets increased 78 basis points to 4.63% in 2023 compared to 3.85% in 2022 in correlation with the rising interest rate environment, new loans booked at higher rates as well as adjustable rate loans repricing.
Analysis of Activity in the Allowance for Loan Losses ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended December 31, (In thousands) 2022 2021 Balance, January 1 ​ $ 15,955 ​ $ 16,486 Charge-offs: ​ ​ ​ ​ ​ ​ Commercial real estate ​ ​ — ​ ​ (14) Acquisition and development ​ ​ (20) ​ ​ (85) Commercial and industrial ​ ​ (134) ​ ​ (2) Residential mortgage ​ ​ (46) ​ ​ (141) Consumer ​ ​ (921) ​ ​ (396) Total charge-offs ​ ​ (1,121) ​ ​ (638) Recoveries: ​ ​ ​ ​ ​ ​ Commercial real estate ​ ​ 1 ​ ​ — Acquisition and development ​ ​ 22 ​ ​ 175 Commercial and industrial ​ ​ 93 ​ ​ 513 Residential mortgage ​ ​ 184 ​ ​ 66 Consumer ​ ​ 145 ​ ​ 170 Total recoveries ​ ​ 445 ​ ​ 924 Net credit (losses)/recoveries ​ ​ (676) ​ ​ 286 Credit for loan losses ​ ​ (643) ​ ​ (817) Balance at end of period ​ $ 14,636 ​ $ 15,955 ​ ​ ​ ​ ​ ​ ​ Allowance for loan losses to total loans (as %) ​ ​ 1.14% ​ ​ 1.38% ​ ​ ​ ​ ​ ​ ​ Net (Charge-offs)/Recoveries as a % of Average Applicable Portfolio ​ ​ ​ ​ ​ ​ ​ ​ 2022 2021 Commercial real estate ​ ​ 0.0% ​ ​ (0.0%) Acquisition and development ​ ​ 0.0% ​ ​ 0.1% Commercial and industrial ​ ​ (0.0%) ​ ​ 0.2% Residential mortgage ​ ​ 0.0% ​ ​ (0.0%) Consumer ​ ​ (1.3%) ​ ​ (0.4%) ​ ​ 47 Tae of Contents The following presents management’s allocation of the ALL by major loan category in comparison to that loan category’s percentage of total loans.
Analysis of Activity in the Allowance for Credit/Loan Losses ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended December 31, (in thousands) 2023 2022 Balance, January 1 ​ $ 14,636 ​ $ 15,955 Impact of CECL Adoption ​ ​ 2,066 ​ ​ — Charge-offs: ​ ​ ​ ​ ​ ​ Commercial real estate ​ ​ (87) ​ ​ — Acquisition and development ​ ​ — ​ ​ (20) Commercial and industrial ​ ​ (423) ​ ​ (134) Residential mortgage ​ ​ (55) ​ ​ (46) Consumer ​ ​ (874) ​ ​ (921) Total charge-offs ​ ​ (1,439) ​ ​ (1,121) Recoveries: ​ ​ ​ ​ ​ ​ Commercial real estate ​ ​ 7 ​ ​ 1 Acquisition and development ​ ​ 11 ​ ​ 22 Commercial and industrial ​ ​ 186 ​ ​ 93 Residential mortgage ​ ​ 73 ​ ​ 184 Consumer ​ ​ 240 ​ ​ 145 Total recoveries ​ ​ 517 ​ ​ 445 Net credit losses ​ ​ (922) ​ ​ (676) Provision/credit for credit/loan losses ​ ​ 1,700 ​ ​ (643) Balance at end of period ​ $ 17,480 ​ $ 14,636 ​ ​ ​ ​ ​ ​ ​ Allowance for credit/loan losses to total loans (as %) ​ ​ 1.24% ​ ​ 1.14% ​ ​ ​ ​ ​ ​ ​ Net (Charge-offs)/Recoveries as a % of Average Applicable Portfolio ​ ​ ​ ​ ​ ​ ​ ​ 2023 2022 Commercial real estate ​ ​ 0.0% ​ ​ 0.0% Acquisition and development ​ ​ 0.0% ​ ​ 0.0% Commercial and industrial ​ ​ (0.1%) ​ ​ (0.0%) Residential mortgage ​ ​ 0.0% ​ ​ 0.0% Consumer ​ ​ (1.0%) ​ ​ (1.3%) ​ ​ 52 ​ Table of Contents ​ The following presents management’s allocation of the ACL by major loan category in comparison to that loan category’s percentage of total loans.
See the discussion under “Income Taxes” in Note 14 to the Consolidated Financial Statements presented elsewhere in this annual report for a detailed analysis of our deferred tax assets and liabilities. Our effective tax rate was 24.5% in 2022 and 24.9% in 2021.
See the discussion under “Income Taxes” in Note 13 to the Consolidated Financial Statements presented elsewhere in this annual report for a detailed analysis of our deferred tax assets and liabilities. Our effective income tax rates as a percentage of income for the years ended December 31, 2023 and December 31, 2022 were 22.7% and 24.5%, respectively.
Loan commitments and letters of credit totaled $253.9 million and $14.3 million, respectively, at December 31, 2022. Management does not believe that any of the foregoing arrangements have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Management does not believe that any of the foregoing arrangements have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. We are not a party to any other off-balance sheet arrangements.
The ratio of ALL to loans outstanding, excluding PPP loan balances of $0.4 million and $7.7 million, was 1.14% and 1.39% at December 31, 2022 and 2021, respectively, non-GAAP. ​ Other operating income, including net gains on sales of mortgage loans and sales of investment securities, decreased by approximately $2.7 million when compared to 2021.
The ratio of the ACL to loans outstanding was 1.24% at December 31, 2023 compared to 1.14% at December 31, 2022. ​ Other operating income, including net losses/gains on sales of mortgage loans and sales of investment securities, decreased by approximately $3.6 million when compared to 2022.
Allocation of the Allowance for Loan Losses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended December 31, (In thousands) 2022 % of Total Loans 2021 % of Total Loans Commercial real estate ​ $ 6,345 ​ 43% ​ $ 6,032 ​ 38% Acquisition and development ​ ​ 979 ​ 7% ​ ​ 2,615 ​ 16% Commercial and industrial ​ ​ 2,845 ​ 19% ​ ​ 2,460 ​ 15% Residential mortgage ​ ​ 3,160 ​ 22% ​ ​ 3,484 ​ 22% Consumer ​ ​ 877 ​ 6% ​ ​ 934 ​ 6% Unallocated ​ ​ 430 ​ 3% ​ ​ 430 ​ 3% Total ​ $ 14,636 ​ 100% ​ $ 15,955 ​ 100% ​ Investment Securities The following table sets forth the composition of our investment securities portfolio by major category as of the indicated dates: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, ​ ​ 2022 ​ 2021 ​ (In thousands) Amortized Cost Fair Value (FV) ​ FV As % of Total Amortized Cost Fair Value (FV) FV As % of Total Securities Available-for-Sale: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. government agencies ​ $ 11,044 ​ $ 9,462 ​ 8% ​ $ 69,602 ​ $ 67,169 ​ 23% ​ Residential mortgage-backed agencies ​ ​ 45,052 ​ ​ 37,401 ​ 30% ​ ​ 49,630 ​ ​ 48,661 ​ 17% ​ Commercial mortgage-backed agencies ​ ​ 37,393 ​ ​ 30,732 ​ 23% ​ ​ 51,694 ​ ​ 50,868 ​ 19% ​ Collateralized mortgage obligations ​ ​ 25,828 ​ ​ 21,044 ​ 17% ​ ​ 93,018 ​ ​ 90,077 ​ 31% ​ Obligations of states and political subdivisions ​ ​ 10,848 ​ ​ 10,492 ​ 8% ​ ​ 12,439 ​ ​ 12,804 ​ 4% ​ Corporate bonds ​ ​ 1,000 ​ ​ 887 ​ 1% ​ ​ ​ ​ ​ ​ ​ ​ ​ Collateralized debt obligations ​ ​ 18,664 ​ ​ 15,871 ​ 13% ​ ​ 18,609 ​ ​ 17,192 ​ 6% ​ Total available for sale ​ $ 149,829 ​ $ 125,889 ​ 100% ​ $ 294,992 ​ $ 286,771 ​ 100% ​ Securities Held to Maturity: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. treasuries ​ $ 37,204 ​ $ 35,611 ​ 18% ​ $ — ​ $ — ​ 0% ​ U.S. government agencies ​ ​ 67,734 ​ ​ 54,473 ​ 27% ​ ​ — ​ ​ — ​ 0% ​ Residential mortgage-backed agencies ​ ​ 28,624 ​ ​ 25,122 ​ 12% ​ ​ 30,634 ​ ​ 30,847 ​ 47% ​ Commercial mortgage-backed agencies ​ ​ 22,389 ​ ​ 17,821 ​ 9% ​ ​ 5,456 ​ ​ 5,601 ​ 9% ​ Collateralized mortgage obligations ​ ​ 57,085 ​ ​ 47,084 ​ 23% ​ ​ — ​ ​ — ​ 0% ​ Obligations of states and political subdivisions ​ ​ 22,623 ​ ​ 22,969 ​ 11% ​ ​ 20,169 ​ ​ 28,921 ​ 44% ​ Total held to maturity ​ $ 235,659 ​ $ 203,080 ​ 100% ​ $ 56,259 ​ $ 65,369 ​ 100% ​ ​ 48 Tae of Contents The fair value of investment securities available for sale decreased by $160.9 million since December 31, 2021 due to the transfer of investments from available for sale to held to maturity in the first quarter 2022.
Allocation of the Allowance for Credit/Loan Losses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended December 31, (in thousands) 2023 % of Total Loans 2022 % of Total Loans Commercial real estate ​ $ 5,120 ​ 29% ​ $ 6,345 ​ 43% Acquisition and development ​ ​ 940 ​ 5% ​ ​ 979 ​ 7% Commercial and industrial ​ ​ 3,717 ​ 21% ​ ​ 2,845 ​ 19% Residential mortgage ​ ​ 6,774 ​ 39% ​ ​ 3,160 ​ 22% Consumer ​ ​ 929 ​ 6% ​ ​ 877 ​ 6% Unallocated ​ ​ — ​ 0% ​ ​ 430 ​ 3% Total ​ $ 17,480 ​ 100% ​ $ 14,636 ​ 100% ​ 53 ​ Table of Contents ​ Investment Securities The following table sets forth the composition of our investment securities portfolio by major category as of the indicated dates: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, ​ ​ 2023 ​ 2022 (in thousands) Amortized Cost Fair Value (FV) ​ FV As % of Total Amortized Cost Fair Value (FV) FV As % of Total Securities Available-for-Sale: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. government agencies ​ $ 7,000 ​ $ 6,034 ​ 6% ​ $ 11,044 ​ $ 9,462 ​ 8% Residential mortgage-backed agencies ​ ​ 24,781 ​ ​ 20,563 ​ 21% ​ ​ 45,052 ​ ​ 37,401 ​ 30% Commercial mortgage-backed agencies ​ ​ 36,258 ​ ​ 28,417 ​ 29% ​ ​ 37,393 ​ ​ 30,732 ​ 23% Collateralized mortgage obligations ​ ​ 19,725 ​ ​ 16,356 ​ 17% ​ ​ 25,828 ​ ​ 21,044 ​ 17% Obligations of states and political subdivisions ​ ​ 10,486 ​ ​ 10,312 ​ 11% ​ ​ 10,848 ​ ​ 10,492 ​ 8% Corporate bonds ​ ​ 1,000 ​ ​ 778 ​ 1% ​ ​ 1,000 ​ ​ 887 ​ 1% Collateralized debt obligations ​ ​ 18,671 ​ ​ 14,709 ​ 15% ​ ​ 18,664 ​ ​ 15,871 ​ 13% Total available for sale ​ $ 117,921 ​ $ 97,169 ​ 100% ​ $ 149,829 ​ $ 125,889 ​ 100% Securities Held to Maturity: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. treasuries ​ $ 37,462 ​ $ 37,219 ​ 20% ​ $ 37,204 ​ $ 35,611 ​ 18% U.S. government agencies ​ ​ 68,014 ​ ​ 57,029 ​ 31% ​ ​ 67,734 ​ ​ 54,473 ​ 27% Residential mortgage-backed agencies ​ ​ 29,588 ​ ​ 26,717 ​ 14% ​ ​ 28,624 ​ ​ 25,122 ​ 12% Commercial mortgage-backed agencies ​ ​ 21,413 ​ ​ 16,052 ​ 9% ​ ​ 22,389 ​ ​ 17,821 ​ 9% Collateralized mortgage obligations ​ ​ 53,261 ​ ​ 43,288 ​ 24% ​ ​ 57,085 ​ ​ 47,084 ​ 23% Obligations of states and political subdivisions ​ ​ 4,604 ​ ​ 4,110 ​ 2% ​ ​ 22,623 ​ ​ 22,969 ​ 11% Total held to maturity ​ $ 214,342 ​ $ 184,415 ​ 100% ​ $ 235,659 ​ $ 203,080 ​ 100% ​ Total AFS and HTM securities totaled $311.5 million at December 31, 2023, representing a $50.1 million decrease compared to December 31, 2022.
This is a non-GAAP disclosure and it is not materially different than the corresponding GAAP disclosure. ​ 33 Tae of Contents The table below summarizes net interest income for 2022 and 2021. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ GAAP ​ Non-GAAP - FTE (Dollars in thousands) 2022 2021 2022 2021 Interest income ​ $ 62,422 ​ $ 58,256 ​ $ 63,362 ​ $ 59,195 Interest expense ​ ​ 4,789 ​ ​ 5,714 ​ ​ 4,789 ​ ​ 5,714 Net interest income ​ $ 57,633 ​ $ 52,542 ​ $ 58,573 ​ $ 53,481 Net interest margin % ​ ​ 3.50% ​ ​ 3.22% ​ ​ 3.56% ​ ​ 3.28% ​ Net interest income, on a non-GAAP, FTE basis, increased by $5.1 million (9.5%) during the year ended December 31, 2022 when compared to the year ended December 31, 2021, driven by a $4.2 million (7.0%) increase in interest income and a decrease in interest expense of $0.9 million (16.2%).
This is a non-GAAP disclosure and it is not materially different than the corresponding GAAP disclosure. ​ The table below summarizes net interest income for 2023 and 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ GAAP ​ Non-GAAP - FTE (in thousands) 2023 2022 2023 2022 Interest income ​ $ 81,156 ​ $ 62,422 ​ $ 81,783 ​ $ 63,362 Interest expense ​ ​ 24,286 ​ ​ 4,789 ​ ​ 24,286 ​ ​ 4,789 Net interest income ​ $ 56,870 ​ $ 57,633 ​ $ 57,497 ​ $ 58,573 Net interest margin % ​ ​ 3.22% ​ ​ 3.50% ​ ​ 3.26% ​ ​ 3.56% ​ Net interest income, on a non-GAAP, FTE basis, decreased by $1.1 million (1.8%) during the year ended December 31, 2023 when compared to the year ended December 31, 2022, driven by a $19.5 million (407.1%) increase in interest expense, which was partially offset by an increase in interest income of $18.4 million (29.1%).
Capital Resources We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdraw 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 below under the heading “Liquidity Management”.
To the extent that deposits are not adequate to fund our capital requirements, we can rely on the funding sources identified below under the heading “Liquidity Management”.
Our policy for recognizing interest income on impaired loans does not differ from our overall policy for interest recognition. 42 Tae of Contents The following sets forth the amounts of non-accrual, past-due and restructured loans for the past two years: Risk Elements of Loan Portfolio ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, (In thousands) 2022 2021 Non-accrual loans: ​ ​ ​ ​ ​ ​ Commercial real estate ​ $ 145 ​ $ 81 Acquisition and development ​ ​ 146 ​ ​ 390 Commercial and industrial ​ ​ — ​ ​ 90 Residential mortgage ​ ​ 3,204 ​ ​ 1,901 Total non-accrual loans ​ $ 3,495 ​ $ 2,462 Accruing Loans Past Due 90 days or more: ​ ​ ​ ​ ​ ​ Residential mortgage ​ ​ 282 ​ ​ 148 Consumer ​ ​ 25 ​ ​ 152 Total accruing loans past due 90 days or more ​ $ 307 ​ $ 300 Total non-accrual and past due 90 days or more ​ $ 3,802 ​ $ 2,762 Restructured Loans (TDRs): ​ ​ ​ ​ ​ ​ Performing ​ $ 2,751 ​ $ 2,997 Non-accrual (included above) ​ ​ 277 ​ ​ 300 Total TDRs ​ $ 3,028 ​ $ 3,297 Other Real Estate Owned ​ $ 4,733 ​ $ 4,477 Total Non-performing assets ​ $ 8,535 ​ $ 7,239 Impaired loans without a valuation allowance ​ $ 6,153 ​ $ 5,248 Impaired loans with a valuation allowance ​ ​ 345 ​ ​ 480 Total impaired loans ​ $ 6,498 ​ $ 5,728 Valuation allowance related to impaired loans ​ $ 26 ​ $ 64 ​ ​ ​ ​ ​ ​ ​ Non-accrual loans to total loans (as %) ​ ​ 0.27% ​ ​ 0.21% Non-performing loans to total loans (as %) ​ ​ 0.30% ​ ​ 0.24% Non-performing assets to total assets (as %) ​ ​ 0.46% ​ ​ 0.42% Allowance for loan losses to non-accrual loans (as %) ​ ​ 418.77% ​ ​ 648.05% Allowance for loan losses to non-performing assets (as %) ​ ​ 171.48% ​ ​ 220.40% ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 43 Tae of Contents The following table sets forth the percent applicable by portfolio for non-accrual loans for the past two years: Non-Accrual Loans as a % of Applicable Portfolio ​ ​ ​ ​ ​ ​ ​ ​ ​ 2022 2021 Commercial real estate ​ ​ 0.0% ​ ​ 0.0% Acquisition and development ​ ​ 0.2% ​ ​ 0.3% Commercial and industrial ​ ​ 0.0% ​ ​ 0.0% Residential mortgage ​ ​ 0.7% ​ ​ 0.5% Consumer ​ ​ 0.0% ​ ​ 0.0% ​ We would have recognized $0.2 million in interest income for the year ended December 31, 2022 had our non-accrual loans been current and performing in accordance with their terms.
Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. 48 ​ Table of Contents ​ The following sets forth the amounts of non-accrual, past-due and modified loans for the past two years: Risk Elements of Loan Portfolio ​ ​ ​ ​ ​ ​ ​ ​ ​ At December 31, (in thousands) 2023 2022 Non-accrual loans: ​ ​ ​ ​ ​ ​ Commercial real estate ​ $ 826 ​ $ 145 Acquisition and development ​ ​ 113 ​ ​ 146 Residential mortgage ​ ​ 2,988 ​ ​ 3,204 Consumer ​ ​ 29 ​ ​ — Total non-accrual loans ​ $ 3,956 ​ $ 3,495 Accruing Loans Past Due 90 days or more: ​ ​ ​ ​ ​ ​ Residential mortgage ​ $ 459 ​ $ 282 Consumer ​ ​ 84 ​ ​ 25 Total accruing loans past due 90 days or more ​ $ 543 ​ $ 307 Total non-accrual and past due 90 days or more ​ $ 4,499 ​ $ 3,802 Modified Loans: ​ ​ ​ ​ ​ ​ Performing ​ $ — ​ $ 2,751 Non-accrual (included above) ​ ​ — ​ ​ 277 Total modified loans ​ $ — ​ $ 3,028 Other Real Estate Owned ​ $ 4,493 ​ $ 4,733 Total Non-performing assets ​ $ 8,992 ​ $ 8,535 Individually evaluated loans without a valuation allowance ​ $ 2,963 ​ $ 6,153 Individually evaluated loans with a valuation allowance ​ ​ — ​ ​ 345 Total individually evaluated loans ​ $ 2,963 ​ $ 6,498 ​ ​ ​ ​ ​ ​ ​ Non-accrual loans to total loans (as %) ​ ​ 0.28% ​ ​ 0.27% Non-performing loans to total loans (as %) ​ ​ 0.32% ​ ​ 0.30% Non-performing assets to total assets (as %) ​ ​ 0.47% ​ ​ 0.46% Allowance for credit losses to non-accrual loans (as %) ​ ​ 441.86% ​ ​ 418.77% Allowance for credit losses to non-performing assets (as %) ​ ​ 194.40% ​ ​ 171.48% ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 49 ​ Table of Contents ​ The following table sets forth the percent applicable by portfolio for non-accrual loans for the past two years: Non-Accrual Loans as a % of Applicable Portfolio ​ ​ ​ ​ ​ ​ ​ ​ ​ 2023 2022 Commercial real estate ​ ​ 0.2% ​ ​ 0.0% Acquisition and development ​ ​ 0.1% ​ ​ 0.2% Commercial and industrial ​ ​ 0.0% ​ ​ 0.0% Residential mortgage ​ ​ 0.6% ​ ​ 0.7% Consumer ​ ​ 0.0% ​ ​ 0.0% ​ We would have recognized $0.4 million in interest income for the year ended December 31, 2023 had our non-accrual loans been current and performing in accordance with their terms.
The transfer of these securities was completed in an effect to mitigate further decline in fair market value value in a rising rate environment. Management’s assessment of the potential included lower yielding bonds and the risk of extension in an up 300 basis point shock.
The transfer of these securities was completed in an effect to mitigate further decline in fair market value value in a rising rate environment.
At December 31, 2022, we had additional borrowing capacity with the FHLB totaling $195.3 million, an additional $140.0 million of unused lines of credit with various financial institutions, and $9.6 million of an unused secured line of credit with the Federal Reserve Bank.
At December 31, 2023, we had additional borrowing capacity with the FHLB totaling $145.4 million, an additional $140.0 million of unused lines of credit with various financial institutions, and $12.2 million of an unused secured line of credit with the Federal Reserve Discount Window. Additionally, we had $69.5 million available through the Federal Reserve’s BTFP.
As discussed in Note 20 to the Consolidated Financial Statements presented elsewhere in this report, we measure fair market values based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures .
Management’s assessment of the potential included lower yielding bonds and the risk of extension in an up 300 basis point shock. 54 ​ Table of Contents ​ As discussed in Note 19 to the Consolidated Financial Statements presented elsewhere in this report, we measure fair market values based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures .
We evaluate the effect of a change in interest rates of -300 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.
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 -400 basis points to +400 basis points on both NII and Net Portfolio Value (“NPV”) / Economic Value of Equity (“EVE”).
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.
In January 2024, the Company borrowed $40.0 million from the Bank Term Funding Program to enhance on-balance sheet liquidity. ​ 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.
The consumer loan portfolio decreased by $5.4 million due to amortization and payoffs of the existing portfolio slightly offset by new production. ​ Net interest income, on a non-GAAP, fully-taxable equivalent (“FTE”) basis, increased by $5.1 million. Interest income increased by $4.2 million and interest expense decreased by $0.9 million.
The consumer loan portfolio increased slightly by $1.2 million. ​ Net interest income, on a non-GAAP, fully-taxable equivalent (“FTE”) basis, decreased by $1.1 million in 2023 compared to 2022. Interest expense on deposits increased by $16.0 million due to an increase in balances of $102.3 million and an increase in yield of 141 basis points.
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.
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.
Average rates paid on deposit accounts decreased slightly in 2022 compared to 2021, which was offset by the growth of $26.1 million in interest-bearing deposits during the year. ​ As shown below, the composition of total interest income between 2022 and 2021 remained relatively stable. ​ ​ ​ ​ ​ ​ ​ ​ % of Total Interest Income ​ 2022 2021 Interest and fees on loans ​ 87% ​ 91% Interest on investment securities ​ 12% ​ 8% Other ​ 1% ​ 1% ​ 34 Tae of Contents The following table sets forth the average balances, net interest income and expense, and average yields and rates for our interest-earning assets and interest-bearing liabilities for 2022 and 2021: Distribution of Assets, Liabilities and Shareholders’ Equity Interest Rates and Interest Differential – Tax Equivalent Basis ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended December 31 ​ ​ 2022 ​ 2021 ​ (Dollars in thousands) Average Balance Interest Average Yield/ Rate Average Balance Interest Average Yield/ Rate Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans ​ $ 1,223,388 ​ $ 54,513 ​ 4.46 % $ 1,173,966 ​ $ 53,040 ​ 4.52 % Investment Securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ ​ 348,516 ​ ​ 6,252 ​ 1.79 % ​ 272,305 ​ ​ 3,912 ​ 1.44 % Non taxable ​ ​ 26,952 ​ ​ 1,981 ​ 7.35 % ​ 25,463 ​ ​ 1,928 ​ 7.57 % Total ​ ​ 375,468 ​ ​ 8,233 ​ 2.19 % ​ 297,768 ​ ​ 5,840 ​ 1.96 % Federal funds sold ​ ​ 44,207 ​ ​ 555 ​ 1.26 % ​ 150,556 ​ ​ 178 ​ 0.12 % Interest-bearing deposits with other banks ​ ​ 3,061 ​ ​ 24 ​ 0.78 % ​ 4,040 ​ ​ 2 ​ 0.05 % Other interest earning assets ​ ​ 1,027 ​ ​ 37 ​ 3.60 % ​ 2,969 ​ ​ 135 ​ 4.55 % Total earning assets ​ ​ 1,647,151 ​ ​ 63,362 ​ 3.85 % ​ 1,629,299 ​ ​ 59,195 ​ 3.63 % Allowance for loan losses ​ ​ (15,568) ​ ​ ​ ​ ​ ​ ​ (16,825) ​ ​ ​ ​ ​ ​ Non-earning assets ​ ​ 170,128 ​ ​ ​ ​ ​ ​ ​ 152,674 ​ ​ ​ ​ ​ ​ Total Assets ​ $ 1,801,711 ​ ​ ​ ​ ​ ​ $ 1,765,148 ​ ​ ​ ​ ​ ​ Liabilities and Shareholders’ Equity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing demand deposits ​ $ 301,183 ​ $ 855 ​ 0.28 % $ 214,510 ​ $ 553 ​ 0.26 % Interest-bearing money markets ​ ​ 312,978 ​ ​ 1,256 ​ 0.40 % ​ 341,677 ​ ​ 436 ​ 0.13 % Savings deposits ​ ​ 250,624 ​ ​ 154 ​ 0.06 % ​ 223,114 ​ ​ 81 ​ 0.04 % Time deposits ​ ​ 138,865 ​ ​ 961 ​ 0.69 % ​ 198,280 ​ ​ 2,403 ​ 1.21 % Short-term borrowings ​ ​ 63,182 ​ ​ 112 ​ 0.18 % ​ 57,697 ​ ​ 86 ​ 0.15 % Long-term borrowings ​ ​ 30,929 ​ ​ 1,451 ​ 4.69 % ​ 77,340 ​ ​ 2,155 ​ 2.79 % Total interest-bearing liabilities ​ ​ 1,097,761 ​ ​ 4,789 ​ 0.44 % ​ 1,112,618 ​ ​ 5,714 ​ 0.51 % Non-interest-bearing deposits ​ ​ 533,096 ​ ​ ​ ​ ​ ​ ​ 491,967 ​ ​ ​ ​ ​ ​ Other liabilities ​ ​ 33,169 ​ ​ ​ ​ ​ ​ ​ 28,013 ​ ​ ​ ​ ​ ​ Shareholders’ Equity ​ ​ 137,685 ​ ​ ​ ​ ​ ​ ​ 132,550 ​ ​ ​ ​ ​ ​ Total Liabilities and Shareholders’ Equity ​ $ 1,801,711 ​ ​ ​ ​ ​ ​ $ 1,765,148 ​ ​ ​ ​ ​ ​ Net interest income and spread ​ ​ ​ ​ $ 58,573 ​ 3.41 % ​ ​ ​ $ 53,481 ​ 3.12 % Net interest margin ​ ​ ​ ​ ​ ​ ​ 3.56 % ​ ​ ​ ​ ​ ​ 3.28 % Notes: (1) The above table reflects the average rates earned or paid stated on an FTE basis assuming a tax rate of 21% for 2022 and 2021.
The increased interest expense resulted in an overall increase of 151 basis points on interest bearing liabilities. ​ ​ 38 ​ Table of Contents ​ As shown below, the composition of total interest income between 2023 and 2022 remained relatively stable. ​ ​ ​ ​ ​ ​ ​ ​ % of Total Interest Income ​ 2023 2022 Interest and fees on loans ​ 86% ​ 87% Interest on investment securities ​ 10% ​ 12% Other ​ 5% ​ 1% ​ The following table sets forth the average balances, net interest income and expense, and average yields and rates for our interest-earning assets and interest-bearing liabilities for 2023 and 2022: Distribution of Assets, Liabilities and Shareholders’ Equity Interest Rates and Interest Differential – Tax Equivalent Basis ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Years Ended December 31 ​ ​ 2023 ​ 2022 ​ (in thousands) Average Balance Interest Average Yield/ Rate Average Balance Interest Average Yield/ Rate Assets ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Loans ​ $ 1,340,118 ​ $ 69,631 ​ 5.20 % $ 1,223,388 ​ $ 54,513 ​ 4.46 % Investment Securities: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Taxable ​ ​ 335,888 ​ ​ 7,173 ​ 2.14 % ​ 348,516 ​ ​ 6,252 ​ 1.79 % Non taxable ​ ​ 18,471 ​ ​ 1,279 ​ 6.92 % ​ 26,952 ​ ​ 1,981 ​ 7.35 % Total ​ ​ 354,359 ​ ​ 8,452 ​ 2.39 % ​ 375,468 ​ ​ 8,233 ​ 2.19 % Federal funds sold ​ ​ 65,131 ​ ​ 3,409 ​ 5.23 % ​ 44,207 ​ ​ 555 ​ 1.26 % Interest-bearing deposits with other banks ​ ​ 2,585 ​ ​ 93 ​ 3.60 % ​ 3,061 ​ ​ 24 ​ 0.78 % Other interest earning assets ​ ​ 4,048 ​ ​ 198 ​ 4.89 % ​ 1,027 ​ ​ 37 ​ 3.60 % Total earning assets ​ ​ 1,766,241 ​ ​ 81,783 ​ 4.63 % ​ 1,647,151 ​ ​ 63,362 ​ 3.85 % Allowance for loan losses ​ ​ (16,561) ​ ​ ​ ​ ​ ​ ​ (15,568) ​ ​ ​ ​ ​ ​ Non-earning assets ​ ​ 199,474 ​ ​ ​ ​ ​ ​ ​ 170,128 ​ ​ ​ ​ ​ ​ Total Assets ​ $ 1,949,154 ​ ​ ​ ​ ​ ​ $ 1,801,711 ​ ​ ​ ​ ​ ​ Liabilities and Shareholders’ Equity ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Interest-bearing demand deposits ​ $ 362,070 ​ $ 4,814 ​ 1.33 % $ 301,183 ​ $ 855 ​ 0.28 % Interest-bearing money markets ​ ​ 333,274 ​ ​ 8,672 ​ 2.60 % ​ 312,978 ​ ​ 1,256 ​ 0.40 % Savings deposits ​ ​ 219,516 ​ ​ 240 ​ 0.11 % ​ 250,624 ​ ​ 154 ​ 0.06 % Time deposits - Retail ​ ​ 141,921 ​ ​ 2,872 ​ 2.02 % ​ 138,865 ​ ​ 961 ​ 0.69 % Time deposits - Brokered ​ ​ 49,209 ​ ​ 2,600 ​ 5.28 % ​ — ​ ​ — ​ — % Short-term borrowings ​ ​ 47,968 ​ ​ 147 ​ 0.31 % ​ 63,182 ​ ​ 112 ​ 0.18 % Long-term borrowings ​ ​ 94,271 ​ ​ 4,941 ​ 5.24 % ​ 30,929 ​ ​ 1,451 ​ 4.69 % Total interest-bearing liabilities ​ ​ 1,248,229 ​ ​ 24,286 ​ 1.95 % ​ 1,097,761 ​ ​ 4,789 ​ 0.44 % Non-interest-bearing deposits ​ ​ 512,496 ​ ​ ​ ​ ​ ​ ​ 533,096 ​ ​ ​ ​ ​ ​ Other liabilities ​ ​ 32,320 ​ ​ ​ ​ ​ ​ ​ 33,169 ​ ​ ​ ​ ​ ​ Shareholders’ Equity ​ ​ 156,109 ​ ​ ​ ​ ​ ​ ​ 137,685 ​ ​ ​ ​ ​ ​ Total Liabilities and Shareholders’ Equity ​ $ 1,949,154 ​ ​ ​ ​ ​ ​ $ 1,801,711 ​ ​ ​ ​ ​ ​ Net interest income and spread ​ ​ ​ ​ $ 57,497 ​ 2.68 % ​ ​ ​ $ 58,573 ​ 3.41 % Net interest margin ​ ​ ​ ​ ​ ​ ​ 3.26 % ​ ​ ​ ​ ​ ​ 3.56 % Notes: (1) The above table reflects the average rates earned or paid stated on an FTE basis assuming a tax rate of 21% for 2023 and 2022.
There was also a Maryland state interest expense carryforward of $3.1 million, for which a deferred tax asset of $0.2 million has been recorded.
This tax credit will continue through 2032. ​ At December 31, 2023, the Corporation had Maryland Net Operating Losses (“NOLs”) of $39.1 million for which a deferred tax asset of $2.6 million has been recorded. There was also a Maryland state interest expense carryforward of $3.5 million, for which a deferred tax asset of $0.2 million has been recorded.
Non-accrual loans totaled $3.5 million at December 31, 2022 compared to $2.5 million at December 31, 2021. The increase in non-accrual balances at December 31, 2022 was primarily related to one residential real estate loan of $1.5 million added to non-accrual in 2022. This was partially offset by reductions in principal balance of existing non-accrual loans.
Non-accrual loans totaled $4.0 million at December 31, 2023 compared to $3.5 million at December 31, 2022. The increase in non-accrual balances at December 31, 2023 was primarily related to two commercial real estate loans with a combined balance of $0.8 million added to non-accrual in 2023.
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.
In order 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.
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.
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.
Management will continue to closely monitor interest rates within the context of its overall asset-liability management process. See the discussion under the heading “Interest Rate Sensitivity” in this Item 7 for further information on this topic.
See the discussion under the heading “Interest Rate Sensitivity” in this Item 7 for further information on this topic.
OREO balances increased by $0.3 million due to foreclosure activity in 2022. Other assets, including deferred taxes, premises and equipment, and accrued interest receivable, increased by $3.4 million. Total liabilities increased by $101.4 million since December 31, 2021. Non-interest bearing deposits increased by $5.0 million.
Investment in FHLB stock increased by $4.2 million during the year related to the borrowings obtained in the first quarter. Other assets, including OREO, deferred taxes, premises and equipment, and accrued interest receivable, increased by $3.5 million. Total liabilities increased by $47.6 million since December 31, 2022. Total deposits decreased by $19.8 million during the year.
All non-accrual loans are considered to be impaired. Interest payments received on non-accrual loans are applied as a reduction of the loan principal balance. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Interest payments received on non-accrual loans are applied as a reduction of the loan principal balance.
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.
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.
The ALL reflects a level commensurate with the risk inherent in our loan portfolio. ​ 36 Tae of Contents Other Operating Income The following table shows the major components of other operating income for the past two years, exclusive of net gains, and the percentage changes during these years: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (Dollars in thousands) 2022 2021 % Change Service charges on deposit accounts ​ $ 1,981 ​ $ 1,771 ​ 11.86% Other service charges ​ ​ 925 ​ ​ 909 ​ 1.76% Trust department income ​ ​ 8,244 ​ ​ 8,650 ​ (4.69)% Debit card income ​ ​ 3,958 ​ ​ 3,644 ​ 8.62% Bank owned life insurance ​ ​ 1,196 ​ ​ 1,176 ​ 1.70% Brokerage commissions ​ ​ 1,049 ​ ​ 1,082 ​ (3.05)% Insurance reimbursement ​ ​ — ​ ​ 1,375 ​ (100.00)% Other income ​ ​ 525 ​ ​ 912 ​ (42.43)% Total other operating income ​ $ 17,878 ​ $ 19,519 ​ (8.41)% ​ Other operating income, exclusive of gains, decreased $1.6 million during the year ended December 31, 2022 when compared to the same period of 2021.
Our CECL methodology introduced a modified discounted cash flow methodology based on expected cash flow changes in the future. ​ 40 ​ Table of Contents ​ Other Operating Income The following table shows the major components of other operating income for the past two years, exclusive of net gains, and the percentage changes during these years: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) 2023 2022 % Change Service charges on deposit accounts ​ $ 2,198 ​ $ 1,981 ​ 10.95% Other service charges ​ ​ 929 ​ ​ 925 ​ 0.43% Trust department income ​ ​ 8,282 ​ ​ 8,244 ​ 0.46% Debit card income ​ ​ 4,101 ​ ​ 3,958 ​ 3.61% Bank owned life insurance ​ ​ 1,261 ​ ​ 1,196 ​ 5.43% Brokerage commissions ​ ​ 1,160 ​ ​ 1,049 ​ 10.58% Other income ​ ​ 400 ​ ​ 525 ​ (23.81)% Total other operating income ​ $ 18,331 ​ $ 17,878 ​ 2.53% ​ Other operating income, exclusive of gains, increased $0.5 million during the year ended December 31, 2023 when compared to the same period of 2022.
NII modeling allows management to view how changes in interest rates will affect the spread between the yield earned 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.
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 earned on assets and the cost of deposits and borrowed funds.
The decrease at the Bank was primarily due to dividend funding to the Corporation. At December 31, 2022, the most recent notification from the regulators categorizes the Corporation and the Bank as “well capitalized” under the regulatory framework for prompt corrective action.
At December 31, 2023, the most recent notification from the regulators categorizes the Corporation and the Bank as “well capitalized” under the regulatory framework for prompt corrective action. See Note 3 to the Consolidated Financial Statements presented elsewhere in this annual report for additional information regarding regulatory capital ratios.
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.
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.
The ALL at December 31, 2022 is adequate to provide for probable losses inherent in our loan portfolio.
This was partially offset by reductions in principal balance of existing non-accrual loans. ​ The ACL at December 31, 2023 is adequate to provide for probable losses inherent in our loan portfolio.
Net unrealized losses of $1.7 million represent non-credit related other than temporary impairment (“OTTI”) charges on seven of the securities while $1.1 million of unrealized losses relates to two securities which have had no credit related OTTI. 49 Tae of Contents The following table sets forth the contractual or estimated maturities of the components of our investment securities portfolio as of December 31, 2022 and the weighted average yields on a tax-equivalent basis.
The following table sets forth the contractual or estimated maturities of the components of our investment securities portfolio as of December 31, 2023 and the weighted average yields on a tax-equivalent basis.
Net charge-offs of $0.7 million were recorded for the year ended December 31, 2022, compared to net recoveries of $0.3 million for 2021. The ratio of the ALL to loans outstanding, including Paycheck Protection Program (“PPP”) loan balances, was 1.14% at December 31, 2022 compared to 1.38% at December 31, 2021.
Net charge-offs of $0.9 million were recorded for the year ended December 31, 2023, compared to $0.7 million for 2022.
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.
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 59 ​ Table of Contents ​ be impacted by changes in the prevailing level of interest rates.
The rate earned on the loan portfolio remained stable when comparing the year ended December 31, 2022 to the year ended December 31, 2021. Total deposits at December 31, 2022 increased by $101.4 million when compared to deposits at December 31, 2021. Non-interest-bearing deposits increased by $5.0 million.
The rate earned on the loan portfolio increased by 74 basis points when comparing the year ended December 31, 2023 to the year ended December 31, 2022. Total deposits at December 31, 2023 decreased by $19.8 million when compared to December 31, 2022. In March 2023, the Corporation obtained $61.1 million in new brokered deposits.
At December 31, 2022, the securities classified as available for sale included a net unrealized loss of $24.0 million, which represents the difference between the fair value and the amortized cost of securities in the portfolio The Corporation reassessed the classification of certain investments and, effective February 1, 2022, the Corporation transferred $139.0 million of callable agencies, obligation of state and political subdivisions, and collateralized mortgage obligations from available for sale to held to maturity securities.
Proceeds from sales and principal amortization during 2023 were used primarily to enhance on-balance sheet liquidity and to fund loan growth throughout the year. ​ The Corporation reassessed the classification of certain investments and, effective February 1, 2022, the Corporation transferred $139.0 million of callable agencies, obligation of state and political subdivisions, and collateralized mortgage obligations from available for sale to held to maturity securities.
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.
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. 58 ​ Table of Contents ​ It is our policy to manage our affairs so that liquidity needs are fully satisfied through normal Bank operations.
These decreases were partially offset by a net increase in service charge, debit card and other income of $0.2 million. ​ Other operating expenses decreased $4.6 million compared to the year ended December 31, 2021.
This loss was partially offset by a $0.2 million in increases in service charges on deposit accounts, $0.1 million increase in wealth management income, and $0.3 million increase in gains on sales of residential mortgages. ​ Other operating expenses increased $7.1 million compared to the year ended December 31, 2022.
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 meetings of a sub-committee of executive management, which looks forward 12 months at 30-day intervals.
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.
The ALL is also discussed below in Item 7 under the heading “Allowance for Loan Losses” and in Note 6 to the Consolidated Financial Statements.
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 ACL is also discussed below in Item 7 under the heading “Allowance for Credit Losses” and in Note 5 to the Consolidated Financial Statements.
Commercial and industrial loans increased by $64.4 million for the year, primarily in new floor plan business, new commercial clients and continued expansion of existing client relationships. Residential mortgage loans increased $39.7 million related to management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio.
Residential mortgage loans increased $55.5 million related to management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio during the first half of 2023. The consumer loan portfolio increased slightly by $1.2 million. ​ New commercial loan production for the year ended December 31, 2023 was approximately $197.0 million.
We are not a party to any other off-balance sheet arrangements. See Note 19 to the Consolidated Financial Statements presented elsewhere in this annual report for additional information on these arrangements.
See Note 18 to the Consolidated Financial Statements presented elsewhere in this annual report for additional information on these arrangements. Capital Resources We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdraw demands of the Bank’s customers, and satisfy our other monetary obligations.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

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Biggest changeITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, the Corporation is not required to provide the information contemplated by this item. See Item 7 of Part II of this report under the heading “Market Risk and Interest Sensitivity” for a discussion of the Corporation’s primary market risk. ​ 55 Tae of Contents
Biggest changeITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, the Corporation is not required to provide the information contemplated by this item. See Item 7 of Part II of this report under the heading “Market Risk and Interest Sensitivity” for a discussion of the Corporation’s primary market risk. ​ 61 ​ Table of Contents ​

Other FUNC 10-K year-over-year comparisons