First United (FUNC) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and management's discussion and analysis for the interim period Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including statements of financial condition, operations, comprehensive income, changes in equity, and cash flows, for the periods ended June 30, 2025 and 2024 Consolidated Statements of Financial Condition The statements show growth in total assets, net loans, and deposits, reflecting increased shareholders' equity Key Financial Condition Metrics | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | | :--------------------------------- | :----------------------------- | :------------------------------- | :-------------------- | | Total Assets | $2,007,471 | $1,973,022 | $34,449 | | Net Loans | $1,482,904 | $1,462,181 | $20,723 | | Total Deposits | $1,614,207 | $1,574,829 | $39,378 | | Total Liabilities | $1,816,324 | $1,793,727 | $22,597 | | Total Shareholders' Equity | $191,147 | $179,295 | $11,852 | Consolidated Statements of Operations Net income significantly increased for both three and six months ended June 30, 2025, driven by higher net interest income and reduced credit loss expense Consolidated Operations Summary (6 Months) | Metric (in thousands, except per share) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | YoY Change (6 Months) | | :-------------------------------------- | :--------------------------- | :--------------------------- | :-------------------- | | Total Interest Income | $48,933 | $45,011 | $3,922 | | Total Interest Expense | $16,210 | $15,961 | $249 | | Net Interest Income | $32,723 | $29,050 | $3,673 | | Total Credit Loss Expense | $1,516 | $2,140 | $(624) | | Net Income | $11,790 | $8,612 | $3,178 | | Basic Net Income Per Share | $1.82 | $1.31 | $0.51 | | Diluted Net Income Per Share | $1.81 | $1.31 | $0.50 | | Dividends Declared Per Share | $0.44 | $0.40 | $0.04 | Consolidated Operations Summary (3 Months) | Metric (in thousands, except per share) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | YoY Change (3 Months) | | :-------------------------------------- | :--------------------------- | :--------------------------- | :-------------------- | | Total Interest Income | $24,871 | $23,113 | $1,758 | | Total Interest Expense | $8,164 | $7,875 | $289 | | Net Interest Income | $16,707 | $15,238 | $1,469 | | Total Credit Loss Expense | $860 | $1,194 | $(334) | | Net Income | $5,984 | $4,914 | $1,070 | | Basic Net Income Per Share | $0.92 | $0.75 | $0.17 | | Diluted Net Income Per Share | $0.92 | $0.75 | $0.17 | | Dividends Declared Per Share | $0.22 | $0.20 | $0.02 | Consolidated Statements of Comprehensive Income Comprehensive income substantially increased for both three and six months ended June 30, 2025, primarily due to positive other comprehensive income Consolidated Comprehensive Income (6 Months) | Metric (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | YoY Change (6 Months) | | :-------------------- | :--------------------------- | :--------------------------- | :-------------------- | | Net Income | $11,790 | $8,612 | $3,178 | | Other Comprehensive Income/(Loss), net of tax | $2,271 | $(233) | $2,504 | | Comprehensive Income | $14,061 | $8,379 | $5,682 | Consolidated Comprehensive Income (3 Months) | Metric (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | YoY Change (3 Months) | | :-------------------- | :--------------------------- | :--------------------------- | :-------------------- | | Net Income | $5,984 | $4,914 | $1,070 | | Other Comprehensive Income/(Loss), net of tax | $2,382 | $(1,338) | $3,720 | | Comprehensive Income | $8,366 | $3,576 | $4,790 | Consolidated Statements of Changes in Shareholders' Equity Total shareholders' equity increased significantly in 2025, driven by net income and positive other comprehensive income, contrasting with 2024 Shareholders' Equity Changes | Metric (in thousands) | June 30, 2025 | June 30, 2024 | | :-------------------- | :------------ | :------------ | | Balance at January 1 | $179,295 | $161,873 | | Net Income | $11,790 | $8,612 | | Other Comprehensive Income/(Loss) | $2,271 | $(233) | | Stock Based Compensation | $495 | $433 | | Common Stock Issued | $150 | $144 | | Common Stock Repurchase | $0 | $(4,032) | | Dividends Declared | $(2,854) | $(2,620) | | Balance at June 30 | $191,147 | $164,177 | Consolidated Statements of Cash Flows Net cash from operating activities decreased in 2025, while investing activities shifted to cash usage, and financing activities provided significant net cash inflow Consolidated Cash Flow Activities | Cash Flow Activity (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :-------------------------------- | :--------------------------- | :--------------------------- | | Net Cash Provided by Operating Activities | $7,960 | $10,751 | | Net Cash (Used in)/Provided by Investing Activities | $(29,398) | $27,893 | | Net Cash Provided by/(Used in) Financing Activities | $22,224 | $(43,305) | | Increase/(Decrease) in Cash and Cash Equivalents | $786 | $(4,661) | | Cash and Cash Equivalents at End of Period | $79,113 | $45,092 | Notes to Consolidated Financial Statements This section provides detailed disclosures and explanations for the figures presented in the consolidated financial statements, covering various accounting and financial aspects Note 1 – Basis of Presentation Financial statements are prepared under GAAP, consolidating First United Corporation and its subsidiaries, with management estimates affecting reported amounts - The consolidated financial statements include First United Corporation, First United Bank & Trust, First United Statutory Trust I & II, OakFirst Loan Center, LLC & Inc., First OREO Trust, and FUBT OREO I, LLC. All significant inter-company accounts and transactions have been eliminated[25] Note 2 – Accounting Statements Issued but Not Yet Adopted The Corporation is preparing to adopt new FASB ASUs on Income Tax Disclosures and Expense Disaggregation, neither expected to significantly impact financial statements - ASU No. 2023-09, "Income Taxes (Topic 740): Improvements to Income Tax Disclosures," effective for annual periods beginning after December 15, 2024, will require additional categories of information in rate reconciliation tables and disaggregated income taxes paid. The Corporation will adopt this ASU in its annual report for the period ending December 31, 2025, and does not believe it will have a significant impact[27] - ASU No. 2024-03, "Income Statement- Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses," effective for annual periods beginning after December 15, 2026, will require disaggregated disclosure of income statement expenses in tabular format. This ASU is not expected to have a significant impact on the financial statements[28][29] Note 3 – Earnings Per Share Basic and diluted earnings per share calculations are detailed, showing an increase year-over-year for both three and six months ended June 30, 2025 Earnings Per Share (6 Months) | Metric (in thousands, except per share) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :-------------------------------------- | :--------------------------- | :--------------------------- | | Net Income | $11,790 | $8,612 | | Basic Earnings Per Share | $1.82 | $1.31 | | Diluted Earnings Per Share | $1.81 | $1.31 | | Weighted Average Basic Shares Outstanding | 6,482 | 6,585 | | Weighted Average Diluted Shares Outstanding | 6,498 | 6,596 | Earnings Per Share (3 Months) | Metric (in thousands, except per share) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | | :-------------------------------------- | :--------------------------- | :--------------------------- | | Net Income | $5,984 | $4,914 | | Basic Earnings Per Share | $0.92 | $0.75 | | Diluted Earnings Per Share | $0.92 | $0.75 | | Weighted Average Basic Shares Outstanding | 6,489 | 6,527 | | Weighted Average Diluted Shares Outstanding | 6,506 | 6,537 | Note 4 – Investments This note details the investment securities portfolio, distinguishing AFS and HTM categories, with an ACL of $59 thousand for one HTM municipal bond Investment Securities Portfolio | Investment Category (in thousands) | Amortized Cost (June 30, 2025) | Fair Value (June 30, 2025) | Gross Unrealized Losses (June 30, 2025) | | :--------------------------------- | :----------------------------- | :------------------------- | :-------------------------------------- | | Available for Sale: | | | | | U.S. treasuries | $3,865 | $4,014 | $0 | | U.S. government agencies | $7,000 | $6,229 | $771 | | Residential mortgage-backed agencies | $24,915 | $21,265 | $3,669 | | Commercial mortgage-backed agencies | $38,217 | $30,151 | $8,066 | | Collateralized mortgage obligations | $20,171 | $17,468 | $2,718 | | Obligations of states and political subdivisions | $8,557 | $8,303 | $254 | | Corporate bonds | $1,000 | $911 | $89 | | Collateralized debt obligations | $18,738 | $15,241 | $3,497 | | Total Available for Sale | $122,463 | $103,582 | $19,064 | | Held to Maturity: | | | | | U.S. government agencies | $68,447 | $59,304 | $9,143 | | Residential mortgage-backed agencies | $33,363 | $30,392 | $3,003 | | Commercial mortgage-backed agencies | $21,042 | $15,648 | $5,394 | | Collateralized mortgage obligations | $47,751 | $39,287 | $8,464 | | Obligations of states and political subdivisions | $4,407 | $3,865 | $715 | | Total Held to Maturity | $175,010 | $148,496 | $26,719 | - At June 30, 2025 and December 31, 2024, the Corporation recorded an Allowance for Credit Losses (ACL) of approximately $59 thousand related to one municipal bond in its Held-to-Maturity (HTM) security portfolio[39] - At June 30, 2025, AFS investment securities with an aggregate fair value of $85.2 million and HTM investment securities with an aggregate book value of $166.6 million were pledged as collateral[43] Note 5 – Loans and Related Allowance for Credit Losses This note provides a comprehensive overview of the Corporation's loan portfolio, its segmentation, credit quality indicators, and the methodology for calculating the Allowance for Credit Losses (ACL) Loan Portfolio Composition and Aging The loan portfolio increased to $1.502 billion at June 30, 2025, with decreases in non-accrual loans and accruing loans past due 30 days or more Loan Portfolio Composition | Loan Segment (in thousands) | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Commercial Real Estate | $550,717 | $526,364 | | Acquisition and Development | $98,937 | $95,314 | | Commercial and Industrial | $281,484 | $287,534 | | Residential Mortgage | $521,968 | $518,815 | | Consumer | $49,375 | $52,766 | | Total Loans | $1,502,481| $1,480,793 | Loan Portfolio Aging | Loan Status (in thousands) | June 30, 2025 | December 31, 2024 | | :------------------------- | :------------ | :---------------- | | Current | $1,494,680 | $1,471,129 | | 30-59 Days Past Due | $1,507 | $1,058 | | 60-89 Days Past Due | $1,947 | $2,757 | | 90 Days+ Past Due | $535 | $918 | | Non-Accrual Loans | $3,812 | $4,931 | | Total Loans | $1,502,481| $1,480,793 | - Accruing loans past due 30 days or more constituted 0.27% of the loan portfolio at June 30, 2025, a decrease from 0.32% at December 31, 2024[45] Allowance for Credit Losses (ACL) Methodology and Activity The ACL increased to $19.044 million at June 30, 2025, calculated using systematic methodology, specific analysis, and quantitative analysis with economic forecasts - The Corporation's ACL methodology includes segmentation by homogeneous loan types, specific analysis for individually evaluated loans (generally based on collateral value or discounted cash flows), and quantitative analysis using discounted cash flows with economic forecasts (e.g., unemployment, CPI, Housing Affordability Index, Gross State Product)[59][60] Allowance for Credit Losses by Segment | ACL Segment (in thousands) | June 30, 2025 | December 31, 2024 | | :------------------------- | :------------ | :---------------- | | Commercial Real Estate | $6,166 | $5,272 | | Acquisition and Development | $1,043 | $909 | | Commercial and Industrial | $4,226 | $4,205 | | Residential Mortgage | $6,902 | $7,010 | | Consumer | $707 | $774 | | Total ACL | $19,044 | $18,170 | Allowance for Credit Losses Activity | ACL Activity (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :-------------------------- | :--------------------------- | :--------------------------- | | Beginning Balance | $18,170 | $17,480 | | Loan Charge-offs | $(778) | $(2,099) | | Recoveries Collected | $267 | $330 | | Credit Loss Expense | $1,385 | $2,212 | | Ending Balance | $19,044 | $17,923 | Credit Quality Indicators and Loan Modifications The Corporation uses internal credit risk grading and monitors loan modifications, with $898 thousand in loans modified in H1 2025, all post-modification payments made - The Corporation's internal credit risk grading system includes 'Pass' (high quality, performing), 'Special Mention' (potential weaknesses), 'Substandard' (inadequately protected, jeopardized liquidation), 'Doubtful' (highly questionable collection), and 'Loss' (worthless asset)[66][67][68][69] Loan Modifications by Type | Loan Type (in thousands) | 6 Months Ended June 30, 2025 (Term Extension) | Percentage of Total Loan Type | | :----------------------- | :-------------------------------------------- | :---------------------------- | | Owner-occupied commercial real estate | $874 | 0.38% | | Commercial and industrial | $24 | 0.01% | | Total | $898 | | - Borrowers for whom loan modifications were made in the six-month period ended June 30, 2025, have made all contractual payments[80] Note 6 – Fair Value of Financial Instruments This note outlines fair value measurements using a three-level hierarchy, with most recurring investment securities classified as Level 2, and CDOs, equity, OREO as Level 3 - The fair value hierarchy consists of Level 1 (unadjusted quoted prices in active markets for identical assets/liabilities), Level 2 (quoted prices not active, or observable inputs directly or indirectly), and Level 3 (unobservable inputs significant to valuation assumptions)[83][84][85] Fair Value Measurements | Asset Category (in thousands) | Fair Value (June 30, 2025) | Level 1 | Level 2 | Level 3 | | :---------------------------- | :------------------------- | :------ | :------ | :------ | | Recurring: | | | | | | U.S. treasuries | $4,014 | | $4,014 | | | U.S. government agencies | $6,229 | | $6,229 | | | Residential mortgage-backed agencies | $21,265 | | $21,265 | | | Commercial mortgage-backed agencies | $30,151 | | $30,151 | | | Collateralized mortgage obligations | $17,468 | | $17,468 | | | Obligations of states and political subdivisions | $8,303 | | $8,303 | | | Corporate bonds | $911 | | $911 | | | Collateralized debt obligations | $15,241 | | | $15,241 | | Equity investments not held for trading with readily determinable fair values | $1,008 | $1,008 | | | | Financial derivatives | $266 | | $266 | | | Non-recurring: | | | | | | Equity investment | $4,088 | | | $4,088 | | Other real estate owned | $176 | | | $176 | - There were no transfers of assets between any of the fair value hierarchy levels for the six- or three-month periods ended June 30, 2025 or 2024[95] Note 7 – Accumulated Other Comprehensive Loss Accumulated OCL decreased significantly to $(27.977 million) at June 30, 2025, driven by positive other comprehensive income from AFS securities and pension adjustments Accumulated Other Comprehensive Loss Components | Component (in thousands) | Balance - January 1, 2025 | Balance - June 30, 2025 | Change | | :----------------------- | :------------------------ | :---------------------- | :----- | | Investment securities with credit related impairment AFS | $(2,592) | $(2,295) | $297 | | Investment securities- all other AFS | $(13,792) | $(12,079) | $1,713 | | Investment securities- HTM | $(4,696) | $(4,463) | $233 | | Cash Flow Hedge | $372 | $223 | $(149) | | Pension Plan | $(9,723) | $(9,546) | $177 | | SERP | $183 | $183 | $0 | | Total Accumulated OCL | $(30,248) | $(27,977) | $2,271 | Other Comprehensive Income/(Loss) by Component | Component of OCI (in thousands) | 6 Months Ended June 30, 2025 (Net of Tax) | 6 Months Ended June 30, 2024 (Net of Tax) | | :------------------------------ | :---------------------------------------- | :---------------------------------------- | | AFS securities with credit related impairment | $297 | $(542) | | AFS securities – all other | $1,713 | $(987) | | HTM securities | $233 | $236 | | Cash flow hedges | $(149) | $3 | | Pension Plan | $177 | $999 | | SERP | $0 | $58 | | Total Other Comprehensive Income/(Loss) | $2,271 | $(233) | Note 8 – Equity Compensation Plan Information This note details equity compensation plans, including stock awards and RSUs, providing recognized compensation expense and unrecognized expense for unvested RSUs - The First United Corporation 2018 Equity Compensation Plan authorizes the issuance of up to 325,000 shares of common stock[105] Equity Compensation Expense | Compensation Type (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :------------------------------- | :--------------------------- | :--------------------------- | | Director Stock Compensation | $166 | $135 | | Employee Stock Compensation | $19 | $6 | | RSU Compensation Expense (2022 grant) | $26 | $55 | | RSU Compensation Expense (2023 grant) | $55 | $55 | | RSU Compensation Expense (2024 grant) | $57 | $9 | | RSU Compensation Expense (2025 grant) | $45 | $0 | - Unrecognized compensation expense related to RSUs that have not vested was $82.755 thousand (2023 grant), $217.074 thousand (2024 grant), and $361.176 thousand (2025 grant) as of June 30, 2025[116][117][118] Note 9 – Derivative Financial Instruments The Corporation uses interest rate swaps as cash flow hedges, with $15.0 million notional amount remaining, creating an effective fixed rate of 4.66% on junior subordinated debt - The Corporation uses interest rate swap agreements as cash flow hedges to modify the repricing characteristics of certain interest-bearing liabilities[119] - As of June 30, 2025, $15.0 million notional amount of interest rate swap contracts remain, creating an effective fixed interest rate of 4.66% on junior subordinated debt until March 2026[120] Fair Value of Interest Rate Swap Contracts | Metric (in thousands) | June 30, 2025 | December 31, 2024 | | :-------------------- | :------------ | :---------------- | | Fair Value of Interest Rate Swap Contracts | $266 | $455 | Note 10 – Regulatory Capital Requirements The Bank remains 'well capitalized' at June 30, 2025, with all capital ratios exceeding required thresholds for capital adequacy and well-capitalized status Regulatory Capital Ratios | Capital Ratio | June 30, 2025 | December 31, 2024 | Required for Capital Adequacy | Required to be Well Capitalized | | :----------------------------------- | :------------ | :---------------- | :---------------------------- | :------------------------------ | | Total Capital (to risk-weighted assets) | 14.99 % | 14.59 % | 8.00 % | 10.00 % | | Tier 1 Capital (to risk-weighted assets) | 13.74 % | 13.35 % | 6.00 % | 8.00 % | | Common Equity Tier 1 Capital (to risk-weighted assets) | 13.74 % | 13.35 % | 4.50 % | 6.50 % | | Tier 1 Capital (to average assets) | 10.87 % | 10.70 % | 4.00 % | 5.00 % | - As of June 30, 2025, the Bank was considered "well capitalized" under the regulatory framework for prompt corrective action[125] Note 11 – Deposits Total deposits increased by $39.4 million to $1.614 billion at June 30, 2025, driven by brokered time deposits and money market accounts Deposit Composition | Deposit Type (in thousands) | June 30, 2025 (Balance) | June 30, 2025 (Percent) | December 31, 2024 (Balance) | December 31, 2024 (Percent) | | :-------------------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Non-Interest-bearing deposits | $425,784 | 26% | $426,737 | 27% | | Interest-bearing deposits: | | | | | | Demand | $347,752 | 22% | $386,803 | 25% | | Money market-retail | $476,917 | 30% | $447,149 | 28% | | Money market-brokered | $6 | 0% | $1 | 0% | | Savings deposits | $166,637 | 10% | $170,972 | 11% | | Time deposits-retail | $147,111 | 9% | $143,167 | 9% | | Time deposits-brokered | $50,000 | 3% | $0 | 0% | | Total Deposits | $1,614,207 | 100% | $1,574,829 | 100% | - In January 2025, $50.0 million in brokered time deposits were obtained to fund the repayment of overnight borrowings[204] Note 12 – Borrowed Funds Total borrowings decreased by $14.455 million to $171.883 million at June 30, 2025, primarily due to reduced overnight borrowings Borrowed Funds Outstanding | Borrowing Type (in thousands) | June 30, 2025 | December 31, 2024 | | :---------------------------- | :------------ | :---------------- | | Short-term borrowings: | | | | Securities sold under agreements to repurchase | $21,812 | $15,409 | | Overnight borrowings | $29,142 | $50,000 | | Total Short-term Borrowings | $50,954 | $65,409 | | Long-term borrowings: | | | | FHLB advances | $90,000 | $90,000 | | Junior subordinated debt | $30,929 | $30,929 | | Total Long-term Borrowings| $120,929 | $120,929 | | Total Borrowings Outstanding| $171,883 | $186,338 | - At June 30, 2025, repurchase agreements were secured by $28.3 million in investment securities issued by government-related agencies[129] Note 13 – Segment Reporting The Corporation operates in Community Banking and Wealth Management segments, both showing increased net income for the six months ended June 30, 2025 - The Corporation's two primary operating segments are Community Banking and Wealth Management[130] Segment Net Income (6 Months) | Segment (in thousands) | Net Income (6 Months Ended June 30, 2025) | Net Income (6 Months Ended June 30, 2024) | | :--------------------- | :---------------------------------------- | :---------------------------------------- | | Community Banking | $9,612 | $6,513 | | Wealth Management | $2,178 | $2,099 | | Total | $11,790 | $8,612 | Segment Net Income (3 Months) | Segment (in thousands) | Net Income (3 Months Ended June 30, 2025) | Net Income (3 Months Ended June 30, 2024) | | :--------------------- | :---------------------------------------- | :---------------------------------------- | | Community Banking | $4,919 | $3,915 | | Wealth Management | $1,065 | $999 | | Total | $5,984 | $4,914 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial performance and condition, highlighting key drivers, trends, and balance sheet analysis Introduction This introduction sets the context for Management's Discussion and Analysis, reviewing material changes and significant factors affecting financial condition and results - The discussion and analysis reviews material changes and significant factors affecting the financial condition and results of operations of First United Corporation and its consolidated subsidiaries[147] Forward-Looking Statements This section clarifies that the report contains forward-looking statements, which involve risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements about management's beliefs, plans, and objectives, which are not guarantees of future performance and involve risks and uncertainties[149] First United Corporation (Company Overview) First United Corporation, a Maryland financial holding company, reported total assets of $2.0 billion, net loans of $1.5 billion, and deposits of $1.6 billion at June 30, 2025 - First United Corporation is a Maryland financial holding company, parent to First United Bank & Trust and other subsidiaries[150] Key Financial Metrics | Metric (in billions) | June 30, 2025 | | :------------------- | :------------ | | Total Assets | $2.0 | | Net Loans | $1.5 | | Deposits | $1.6 | | Shareholders' Equity | $0.1911 | Results of Operations Net income significantly increased for Q2 and H1 2025, driven by higher net interest income and reduced credit loss expense, partially offset by rising operating expenses Overview Consolidated net income increased to $6.0 million for Q2 2025 and $11.8 million for H1 2025, primarily due to increased net interest income and decreased credit loss expense Consolidated Net Income and EPS (Q2) | Metric (in millions, except per share) | Q2 2025 | Q2 2024 | YoY Change (Q2) | | :------------------------------------- | :------ | :------ | :-------------- | | Net Income | $6.0 | $4.9 | $1.1 | | Basic EPS | $0.92 | $0.75 | $0.17 | | Diluted EPS | $0.92 | $0.75 | $0.17 | Consolidated Net Income and EPS (6 Months) | Metric (in millions, except per share) | 6 Months 2025 | 6 Months 2024 | YoY Change (6 Months) | | :------------------------------------- | :------------ | :------------ | :-------------------- | | Net Income | $11.8 | $8.6 | $3.2 | | Basic EPS | $1.82 | $1.31 | $0.51 | | Diluted EPS | $1.81 | $1.31 | $0.50 | - The $1.1 million increase in quarterly net income was primarily driven by a $1.5 million increase in net interest income, a $0.3 million decrease in provision for credit loss, and a $0.2 million increase in non-interest income, partially offset by increases in non-interest expense of $0.6 million and income tax expense of $0.4 million[154] Net Interest Income Net interest income increased by $1.5 million for Q2 2025 and $3.7 million for H1 2025 (FTE basis), driven by loan growth and repricing, with net interest margin at 3.61% for H1 2025 Net Interest Income and Margin (6 Months, FTE) | Metric (in thousands, FTE basis) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | YoY Change | | :------------------------------- | :--------------------------- | :--------------------------- | :--------- | | Interest Income | $49,036 | $45,126 | $3,910 | | Interest Expense | $16,210 | $15,961 | $249 | | Net Interest Income | $32,826 | $29,165 | $3,661 | | Net Interest Margin % | 3.61 % | 3.31 % | 0.30 % | Net Interest Income and Margin (3 Months, FTE) | Metric (in thousands, FTE basis) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | YoY Change | | :------------------------------- | :--------------------------- | :--------------------------- | :--------- | | Interest Income | $24,925 | $23,171 | $1,754 | | Interest Expense | $8,164 | $7,875 | $289 | | Net Interest Income | $16,761 | $15,296 | $1,465 | | Net Interest Margin % | 3.65 % | 3.49 % | 0.16 % | - Interest and fees on loans increased by $2.1 million in Q2 2025 compared to Q2 2024, driven by repricing of adjustable-rate loans and $74.1 million growth in average loan balances[168] Provision for Credit Losses Net provision expense for credit losses decreased to $1.5 million for H1 2025 and $0.9 million for Q2 2025, primarily due to prior year charge-offs Net Provision Expense for Credit Losses (6 Months) | Metric (in millions) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :------------------- | :--------------------------- | :--------------------------- | | Net Provision Expense | $1.5 | $2.1 | | YoY Change | $(0.6) | | Net Provision Expense for Credit Losses (Q2) | Metric (in millions) | Q2 2025 | Q2 2024 | | :------------------- | :------ | :------ | | Net Provision Expense | $0.9 | $1.2 | | YoY Change | $(0.3)| | - The decreased provision expense in the first six months of 2025 was primarily related to $1.1 million in charge-offs on a non-accrual commercial loan relationship that occurred in 2024[173] Other Income Other operating income increased by $0.2 million in Q2 2025 and $0.3 million for H1 2025, driven by higher wealth management income and gains on residential mortgage sales Other Operating Income (6 Months) | Other Income Category (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | YoY Change | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------- | | Service charges on deposit accounts | $1,124 | $1,112 | $12 | | Trust department | $4,709 | $4,443 | $266 | | Debit card income | $1,904 | $1,931 | $(27) | | Bank owned life insurance | $690 | $660 | $30 | | Brokerage commissions | $791 | $857 | $(66) | | Total Other Income | $9,762 | $9,575 | $187 | Other Operating Income (3 Months) | Other Income Category (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | YoY Change | | :----------------------------------- | :--------------------------- | :--------------------------- | :--------- | | Service charges on deposit accounts | $577 | $556 | $21 | | Trust department | $2,386 | $2,255 | $131 | | Debit card income | $983 | $999 | $(16) | | Bank owned life insurance | $349 | $334 | $15 | | Brokerage commissions | $370 | $362 | $8 | | Total Other Income | $4,940 | $4,782 | $158 | - The increase in other operating income was driven by a $0.1 million increase in wealth management income (Q2) and $0.2 million (6 months) reflecting higher market valuations and expanded client relationships, and a $0.1 million increase in gains on sales of residential mortgages[156][157] Other Operating Expenses Total other operating expenses increased by $0.6 million in Q2 2025 and $0.3 million for H1 2025, driven by OREO expenses, data processing, and professional services Other Operating Expenses (6 Months) | Expense Category (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | YoY Change | | :------------------------------ | :--------------------------- | :--------------------------- | :--------- | | Salaries and employee benefits | $14,650 | $14,413 | $237 | | Equipment expense | $1,143 | $1,558 | $(415) | | Occupancy expense of premises | $1,364 | $1,606 | $(242) | | Data processing expense | $3,103 | $2,740 | $363 | | Other real estate owned expense, net | $300 | $100 | $200 | | Total Other Operating Expenses | $25,550 | $25,245 | $305 | Other Operating Expenses (3 Months) | Expense Category (in thousands) | 3 Months Ended June 30, 2025 | 3 Months Ended June 30, 2024 | YoY Change | | :------------------------------ | :--------------------------- | :--------------------------- | :--------- | | Salaries and employee benefits | $7,319 | $7,256 | $63 | | Equipment expense | $565 | $635 | $(70) | | Occupancy expense of premises | $675 | $652 | $23 | | Data processing expense | $1,600 | $1,422 | $178 | | Other real estate owned expense, net | $208 | $14 | $194 | | Total Other Operating Expenses | $12,974 | $12,364 | $610 | - For the six months ended June 30, 2025, non-interest expense increased by $0.3 million, partially offset by a $0.7 million decrease in occupancy and equipment expenses related to accelerated depreciation expense recognized in Q1 2024 due to branch closures[159] Provision for Income Taxes The provision for income taxes is based on the estimated effective tax rate, which was 24.7% for the six-month period ended June 30, 2025 - The effective income tax rates as a percentage of income for the six-month periods ended June 30, 2025 and June 30, 2024 were 24.7% and 24.3%, respectively[178] GAAP and Non-GAAP Financial Measures This section presents GAAP and non-GAAP financial measures, with non-GAAP adjustments primarily related to accelerated depreciation expenses in 2024 Selected GAAP and Non-GAAP Financial Measures (6 Months) | Metric (in thousands, except per share) | 6 Months Ended June 30, 2025 (GAAP) | 6 Months Ended June 30, 2024 (GAAP) | 6 Months Ended June 30, 2024 (Non-GAAP) | | :-------------------------------------- | :---------------------------------- | :---------------------------------- | :------------------------------------ | | Net Income | $11,790 | $8,612 | $9,037 | | Diluted EPS | $1.81 | $1.31 | $1.37 | | Return on Average Assets | 1.20% | 0.89% | 0.98% | | Return on Average Equity | 12.78% | 10.51% | 11.55% | - Non-GAAP adjustments for 2024 primarily relate to accelerated depreciation expenses and their income tax effect, which increased adjusted net income and diluted EPS compared to GAAP figures[180] Financial Condition This section analyzes the balance sheet, loan and investment portfolios, deposits, borrowings, liquidity, market risk, and capital resources, showing overall growth and strong capital Balance Sheet Overview Total assets increased by $34.4 million to $2.0 billion at June 30, 2025, driven by gross loans and investment portfolio growth, with increased deposits and decreased short-term borrowings Balance Sheet Summary | Metric (in millions) | June 30, 2025 | December 31, 2024 | Change | | :------------------- | :------------ | :---------------- | :----- | | Total Assets | $2.0 | $1.97 | $0.034 | | Gross Loans | $1.502 | $1.481 | $0.021 | | Investment Portfolio | $0.278 | $0.270 | $0.008 | | Total Liabilities | $1.816 | $1.794 | $0.022 | | Total Deposits | $1.614 | $1.575 | $0.039 | | Short-term Borrowings | $0.051 | $0.065 | $(0.014) | - Total assets increased by $34.4 million to $2.0 billion at June 30, 2025, from December 31, 2024, primarily due to a $21.7 million increase in gross loans and a $9.6 million increase in the investment portfolio[181][182] Loan Portfolio The total loan portfolio increased by $21.7 million to $1.502 billion at June 30, 2025, with growth in commercial real estate and residential mortgages, and decreased non-accrual loans Loan Portfolio Composition and Changes | Loan Type (in thousands) | June 30, 2025 | December 31, 2024 | Change | | :----------------------- | :------------ | :---------------- | :----- | | Commercial real estate | $550,717 | $526,364 | $24,353| | Acquisition and development | $98,937 | $95,314 | $3,623 | | Commercial and industrial | $281,484 | $287,534 | $(6,050)| | Residential mortgage | $521,968 | $518,815 | $3,153 | | Consumer | $49,375 | $52,766 | $(3,391)| | Total Loans | $1,502,481| $1,480,793 | $21,698| - New commercial loan production for Q2 2025 was approximately $65.1 million, with a pipeline of $32.3 million and unfunded commitments of $47.0 million[184] - Non-accrual loans totaled $3.8 million at June 30, 2025, a decrease from $4.9 million at December 31, 2024, primarily due to principal reductions and a payoff of a residential mortgage loan[186] Risk Elements of Loan Portfolio Risk elements show decreased non-accrual loans and improved ACL coverage ratios at June 30, 2025, indicating stronger credit quality Loan Portfolio Risk Elements | Risk Element (in thousands) | June 30, 2025 | December 31, 2024 | | :-------------------------- | :------------ | :---------------- | | Total non-accrual loans | $3,812 | $4,931 | | Accruing Loans Past Due 90 days or more | $535 | $918 | | Total non-accrual and accruing loans past due 90 days or more | $4,347 | $5,849 | | Total non-performing assets | $10,184 | $11,713 | | Non-accrual loans to total loans (%) | 0.25% | 0.33% | | Non-performing loans to total loans (%) | 0.29% | 0.39% | | Allowance for credit losses to non-accrual loans (%) | 499.58% | 368.49% | | Allowance for credit losses to non-performing assets (%) | 187.00% | 155.13% | Allowance for Credit Losses The ACL increased to $19.044 million at June 30, 2025, reflecting credit loss expense partially offset by net charge-offs, with stress testing providing a range of outcomes Allowance for Credit Losses Activity and Ratios | ACL Activity (in thousands) | 6 Months Ended June 30, 2025 | 6 Months Ended June 30, 2024 | | :-------------------------- | :--------------------------- | :--------------------------- | | Balance, January 1 | $18,170 | $17,480 | | Total charge-offs | $(778) | $(2,099) | | Total recoveries | $267 | $330 | | Net losses | $(511) | $(1,769) | | Credit loss expense | $1,385 | $2,212 | | Balance at end of period| $19,044 | $17,923 | | ACL to gross loans outstanding (%) | 1.27 % | 1.26 % | - The ACL "base case" model is derived from economic forecasts and stress-tested to develop a range of potential outcomes, which for the period ended June 30, 2025, would produce a 15% reduction or a 58% increase in reserves based on best-case and worst-case scenarios, respectively[194] Investment Securities AFS investment securities fair value increased by $9.1 million to $103.6 million at June 30, 2025, with a net unrealized loss of $18.9 million in the AFS portfolio Investment Securities Portfolio Summary | Investment Category (in thousands) | Amortized Cost (June 30, 2025) | Fair Value (June 30, 2025) | Amortized Cost (Dec 31, 2024) | Fair Value (Dec 31, 2024) | | :--------------------------------- | :----------------------------- | :------------------------- | :---------------------------- | :------------------------ | | Available for Sale: | | | | | | Total available for sale | $122,463 | $103,582 | $116,114 | $94,494 | | Held to Maturity: | | | | | | Total held to maturity | $175,010 | $148,496 | $175,556 | $144,760 | - At June 30, 2025, the securities classified as available-for-sale included a net unrealized loss of $18.9 million[199] - Approximately $88.3 million of the available-for-sale portfolio was valued using Level 2 pricing, and $15.2 million (collateralized debt obligations) was valued using Level 3 inputs, with $3.5 million in net unrealized losses[203] Deposits Total deposits increased by $39.4 million to $1.614 billion at June 30, 2025, driven by brokered time deposits and money market accounts, with 76% insured Deposit Composition by Type | Deposit Type (in thousands) | June 30, 2025 (Balance) | June 30, 2025 (Percent) | December 31, 2024 (Balance) | December 31, 2024 (Percent) | | :-------------------------- | :---------------------- | :---------------------- | :-------------------------- | :-------------------------- | | Non-Interest-bearing deposits | $425,784 | 26% | $426,737 | 27% | | Interest-bearing deposits: | | | | | | Demand | $347,752 | 22% | $386,803 | 25% | | Money market-retail | $476,917 | 30% | $447,149 | 28% | | Money market-brokered | $6 | 0% | $1 | 0% | | Savings deposits | $166,637 | 10% | $170,972 | 11% | | Time deposits-retail | $147,111 | 9% | $143,167 | 9% | | Time deposits-brokered | $50,000 | 3% | $0 | 0% | | Total Deposits | $1,614,207 | 100% | $1,574,829 | 100% | - In January 2025, $50.0 million in brokered time deposits were obtained to fund the repayment of overnight borrowings[204] Deposit Insurance Coverage | Deposit Category (in thousands) | June 30, 2025 (Balance) | June 30, 2025 (Percent) | | :------------------------------ | :---------------------- | :---------------------- | | Insured deposits | $1,232,329 | 76% | | Uninsured and fully collateralized deposits | $77,317 | 5% | | Uninsured and uncollateralized deposits | $304,561 | 19% | | Retail deposits | $796,108 | 49% | | Business deposits | $818,099 | 51% | Borrowed Funds Total short-term borrowings decreased by $14.5 million to $50.954 million at June 30, 2025, primarily due to reduced overnight borrowings Borrowed Funds Composition | Borrowing Type (in thousands) | June 30, 2025 | December 31, 2024 | | :---------------------------- | :------------ | :---------------- | | Overnight borrowings from Federal Reserve Discount Window | $0 | $50,000 | | Overnight borrowings from Zions Bank | $29,142 | $0 | | Securities sold under agreements to repurchase | $21,812 | $15,409 | | Total Short-term Borrowings | $50,954 | $65,409 | | FHLB advances | $90,000 | $90,000 | | Junior subordinated debt | $30,929 | $30,929 | | Total Long-term Borrowings| $120,929 | $120,929 | Liquidity Management The Corporation manages liquidity to meet demands, with $653.3 million in available sources and $527.3 million net availability at June 30, 2025 - The Corporation's liquidity management policy aims to fully satisfy liquidity needs through normal Bank operations, minimizing unplanned asset sales or emergency borrowings[211] Available Liquidity Sources | Liquidity Source (in thousands) | Total Availability | Amount Used | Net Availability | | :------------------------------ | :----------------- | :---------- | :--------------- | | Internal Sources: | | | | | Excess cash | $51,753 | $0 | $51,753 | | Unpledged securities | $30,804 | $0 | $30,804 | | External Sources: | | | | | Federal Reserve (discount window) | $88,378 | $0 | $88,378 | | Correspondent unsecured lines of credit | $140,000 | $29,142 | $110,858 | | FHLB | $342,381 | $96,921 | $245,460 | | Total | $653,316 | $126,063| $527,253 | Market Risk and Interest Sensitivity The Corporation is asset sensitive, meaning rising interest rates would generally increase net interest income, with NII simulation showing potential increases with rising rates - The Corporation's primary market risk is interest rate fluctuation, managed through interest sensitivity gap analysis and simulation models[215] - At June 30, 2025, the Corporation was asset sensitive, indicating that rising interest rates would generally increase net interest income[216] Estimated Change in Net Interest Income (Interest Rate Sensitivity) | Interest Rate Change (basis points) | Estimated Change in Net Interest Income (June 30, 2025, in thousands) | | :---------------------------------- | :-------------------------------------------------------------------- | | +400 | $5,917 | | +300 | $5,508 | | +200 | $4,401 | | +100 | $2,468 | | -100 | $(2,974) | | -200 | $(5,475) | | -300 | $(8,341) | | -400 | $(11,738) | Capital Resources The Bank remains 'well capitalized' at June 30, 2025, with all capital ratios exceeding required thresholds, including Total Capital at 14.99% and Tier 1 Capital at 10.87% Regulatory Capital Ratios | Capital Ratio | June 30, 2025 | December 31, 2024 | Required for Capital Adequacy | Required to be Well Capitalized | | :----------------------------------- | :------------ | :---------------- | :---------------------------- | :------------------------------ | | Total Capital (to risk-weighted assets) | 14.99 % | 14.59 % | 8.00 % | 10.00 % | | Tier 1 Capital (to risk-weighted assets) | 13.74 % | 13.35 % | 6.00 % | 8.00 % | | Common Equity Tier 1 Capital (to risk-weighted assets) | 13.74 % | 13.35 % | 4.50 % | 6.50 % | | Tier 1 Capital (to average assets) | 10.87 % | 10.70 % | 4.00 % | 5.00 % | - As of June 30, 2025, the Bank was considered "well capitalized" under the regulatory framework for prompt corrective action[230] Contractual Obligations, Commitments and Off-Balance Sheet Arrangements Commitments to extend credit increased by $19.4 million to $287.3 million at June 30, 2025, driven by new commercial loan commitments, with $131 thousand net credit loss expense for off-balance sheet exposures Commitments to Extend Credit | Commitment Type (in thousands) | June 30, 2025 | December 31, 2024 | | :----------------------------- | :------------ | :---------------- | | Residential mortgage - home equity | $72,219 | $70,894 | | Residential mortgage - construction | $9,970 | $13,138 | | Commercial | $184,571 | $163,079 | | Consumer - personal credit lines | $4,276 | $4,224 | | Standby letters of credit | $16,261 | $16,522 | | Total | $287,297 | $267,857 | - The increase of $19.4 million in commitments at June 30, 2025, was due to new commercial loan commitments, including unfunded commercial real estate construction commitments ($11.5 million) and unfunded revolving commercial and industrial commitments ($10.6 million)[233] - Net credit loss expense for off-balance sheet exposures was approximately $131 thousand for the six-month period ended June 30, 2025, compared to a credit of $(72 thousand) in the prior year[233](index=233&ty