Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

        For quarterly period ended SeptemberJune 30, 20212022

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

        For the transition period from _______________ to ________________

Commission file number 0-14237

First United Corporation

(Exact name of registrant as specified in its charter)

Maryland

    

52-1380770

(State or other jurisdiction of
incorporation or organization)

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

 

19 South Second Street, Oakland, Maryland

21550-0009

(Address of principal executive offices)

(Zip Code)

(800) 470-4356

(Registrant’s telephone number, including area code)

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

Title of each class

    

Trading Symbols

    

Name of each exchange on which registered

Common Stock

FUNC

Nasdaq Stock Market

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

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

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

Large Accelerated filer

Accelerated Filer 

Non-Accelerated filer

Smaller Reporting Company 

Emerging Growth Company 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,177,9416,656,395 shares of common stock, par value $.01 per share, as of OctoberJuly 31, 20212022.

Table of Contents

INDEX TO QUARTERLY REPORT

FIRST UNITED CORPORATION

Page

PART I. FINANCIAL INFORMATION

3

Item 1.

Financial Statements (unaudited)

3

Consolidated StatementStatements of Financial Condition – SeptemberJune 30, 20212022 and December 31, 20202021

3

Consolidated StatementStatements of Operations – for the threesix and ninethree months ended SeptemberJune 30, 20212022 and 20202021

4

Consolidated StatementStatements of Comprehensive Loss(Loss)/Income – for the threesix and ninethree months ended SeptemberJune 30, 20212022 and 2020

6

Consolidated Statement of Changes in Shareholders’ Equity – for three and nine months ended September 30, 2021 and 2020

8

Consolidated StatementStatements of Changes in Shareholders’ Equity – for three months ended June 30, 2022 and 2021

10

Consolidated Statements of Cash Flows – for the ninesix months ended SeptemberJune 30, 20212022 and 20202021

911

Notes to Consolidated Financial Statements

1012

Item 2.

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

4546

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

7166

Item 4.

Controls and Procedures

7167

PART II. OTHER INFORMATION

7268

Item 1.

Legal Proceedings

7268

Item 1A.

Risk Factors

7268

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

7268

Item 3.

Defaults upon Senior Securities

7268

Item 4.

Mine Safety Disclosures

7268

Item 5.

Other Information

7268

Item 6.

Exhibits

7369

SIGNATURES

7470

2

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

First United Corporation and Subsidiaries

Consolidated StatementStatements of Financial Condition

(In thousands, except share data - Unaudited)

    

September 30,
2021

    

December 31,
2020

Assets

Cash and due from banks

$

129,062

$

146,673

Interest bearing deposits in banks

5,876

2,759

Cash and cash equivalents

134,938

149,432

Investment securities – available for sale (at fair value)

235,564

226,885

Investment securities – held to maturity (fair value $71,707 at September 30, 2021 and $77,612 at December 31, 2020)

61,979

68,263

Restricted investment in bank stock, at cost

1,029

4,468

Loans held for sale

348

3,546

Loans

1,161,868

1,167,812

Unearned fees

(1,171)

(1,730)

Allowance for loan losses

(16,906)

(16,486)

Net loans

1,143,791

1,149,596

Premises and equipment, net

35,213

36,863

Goodwill

11,004

11,004

Bank owned life insurance

44,851

43,974

Deferred tax assets

7,946

7,972

Other real estate owned, net

6,663

9,386

Operating lease asset

2,331

2,408

Accrued interest receivable and other assets

22,899

19,617

Total Assets

$

1,708,556

$

1,733,414

Liabilities and Shareholders’ Equity

Liabilities:

Non-interest bearing deposits

$

491,441

$

420,427

Interest bearing deposits

953,053

1,001,939

Total deposits

1,444,494

1,422,366

Short-term borrowings

72,396

49,160

Long-term borrowings

30,929

100,929

Operating lease liability

2,854

2,958

Accrued interest payable and other liabilities

23,103

26,044

Dividends payable

993

910

Total Liabilities

1,574,769

1,602,367

Shareholders’ Equity:

Common Stock – par value $0.01 per share; Authorized 25,000,000 shares; issued and outstanding 6,617,941 shares at September 30, 2021 and 6,992,911 at December 31, 2020

66

70

Surplus

23,522

30,149

Retained earnings

138,931

129,691

Accumulated other comprehensive loss

(28,732)

(28,863)

Total Shareholders’ Equity

133,787

131,047

Total Liabilities and Shareholders’ Equity

$

1,708,556

$

1,733,414

    

June 30,
2022

    

December 31,
2021

Assets

Cash and due from banks

$

20,108

$

109,823

Interest bearing deposits in banks

1,543

5,897

Cash and cash equivalents

21,651

115,720

Investment securities – available for sale (at fair value)

132,867

286,771

Investment securities – held to maturity (fair value $220,301 at June 30, 2022 and $65,369 at December 31, 2021)

240,588

56,259

Restricted investment in bank stock, at cost

1,026

1,029

Loans held for sale

67

Loans

1,233,613

1,153,687

Unearned fees

(104)

(292)

Allowance for loan losses

(15,737)

(15,955)

Net loans

1,217,772

1,137,440

Premises and equipment, net

35,305

34,697

Goodwill and other intangibles

11,947

12,052

Bank owned life insurance

45,739

45,150

Deferred tax assets

13,653

6,857

Other real estate owned, net

4,517

4,477

Right of use assets

2,075

2,247

Pension asset

4,765

Accrued interest receivable

5,055

4,821

Other assets

20,260

17,486

Total Assets

$

1,752,455

1,729,838

Liabilities and Shareholders’ Equity

Liabilities:

Non-interest bearing deposits

$

527,761

$

501,627

Interest bearing deposits

956,593

967,747

Total deposits

1,484,354

1,469,374

Short-term borrowings

69,914

57,699

Long-term borrowings

30,929

30,929

Operating lease liability

2,570

2,761

SERP deferred compensation

10,452

10,395

Pension Liability

4,669

Accrued interest payable and other liabilities

15,676

15,787

Dividends payable

999

993

Total Liabilities

1,619,563

1,587,938

Shareholders’ Equity:

Common Stock – par value $0.01 per share; Authorized 25,000,000 shares; issued and outstanding 6,656,395 shares at June 30, 2022 and 6,620,955 at December 31, 2021

67

66

Surplus

24,105

23,661

Retained earnings

154,636

145,487

Accumulated other comprehensive loss

(45,916)

(27,314)

Total Shareholders’ Equity

132,892

141,900

Total Liabilities and Shareholders’ Equity

$

1,752,455

$

1,729,838

See accompanying notes to the consolidated financial statements

3

Table of Contents

First United Corporation and Subsidiaries

Consolidated StatementStatements of Operations

(In thousands, except per share data)

Six Months Ended

June 30,

    

2022

    

2021

(Unaudited)

Interest income

Interest and fees on loans

$

25,293

$

25,829

Interest on investment securities

Taxable

2,946

1,984

Exempt from federal income tax

561

543

Total investment income

3,507

2,527

Other

78

142

Total interest income

28,878

28,498

Interest expense

Interest on deposits:

Savings

36

46

Interest-bearing transaction accounts

319

636

Time deposits

521

1,463

Total interest on Deposits

876

2,145

Interest on short-term borrowings

39

50

Interest on long-term borrowings

651

1,304

Total Interest Expense

1,566

3,499

Net Interest income

27,312

24,999

Provision for loan losses

205

665

Net interest income after provision for loan losses

27,107

24,334

Other operating income

Net gains on investments, available for sale

3

154

Net gains on sale of residential mortgage loans

28

860

Net gains on disposal of fixed assets

34

16

Net gains

65

1,030

Other Income

Service charges on deposit accounts

928

817

Other service charges

445

432

Trust department

4,233

4,275

Debit card income

1,869

1,723

Bank owned life insurance

589

579

Brokerage commissions

533

625

Other

198

612

Total other income

8,795

9,063

Total other operating income

8,860

10,093

Other operating expenses

Salaries and employee benefits

11,761

10,495

FDIC premiums

329

366

Equipment expense

2,073

1,805

Occupancy expense of premises

1,438

1,418

Data processing expense

1,626

1,601

Marketing expense

257

279

Professional services

1,084

2,661

Contract labor

323

333

Telephone

253

483

Losses/(gains) on sales and write downs of other real estate owned, net

247

(610)

Investor relations

219

430

Settlement expense

3,300

Contributions

63

50

Other

1,542

1,348

Total other operating expenses

21,215

23,959

Income before income tax expense

14,752

10,468

4

Table of Contents

Nine Months Ended

September 30,

    

2021

    

2020

(Unaudited)

Interest income

Interest and fees on loans

$

39,496

$

39,192

Interest on investment securities

Taxable

2,864

3,612

Exempt from federal income tax

809

809

Total investment income

3,673

4,421

Other

239

360

Total interest income

43,408

43,973

Interest expense

Interest on deposits

2,877

4,997

Interest on short-term borrowings

67

68

Interest on long-term borrowings

1,840

2,463

Total interest expense

4,784

7,528

Net interest income

38,624

36,445

Provision for loan losses

68

4,981

Net interest income after provision for loan losses

38,556

31,464

Other operating income

Net gains on investments, available for sale

154

622

Net gains on investments, held to maturity

(54)

60

Gains on sale of residential mortgage loans

996

1,480

Gains/(losses) on disposal of fixed assets

16

(151)

Net gains

1,112

2,011

Other Income

Service charges on deposit accounts

1,292

1,439

Other service charges

664

517

Trust department

6,441

5,355

Debit card income

2,623

2,052

Bank owned life insurance

877

961

Brokerage commissions

854

713

Other

835

374

Total other income

13,586

11,411

Total other operating income

14,698

13,422

Other operating expenses

Salaries and employee benefits

16,214

16,244

FDIC premiums

575

404

Equipment

2,837

2,871

Occupancy

2,102

2,200

Data processing

2,420

3,155

Marketing

408

405

Professional services

3,276

2,506

Contract labor

486

480

Line rentals

606

654

Other real estate owned

(460)

3

Investor relations

546

1,160

Settlement expense

3,300

FHLB prepayment penalty

2,368

Other

2,308

2,890

Total other operating expenses

36,986

32,972

Income before income tax expense

16,268

11,914

Provision for income tax expense

4,047

2,629

Net Income

$

12,221

$

9,285

Basic net income per share

$

1.81

$

1.32

Diluted net income per share

$

1.81

$

1.32

Weighted average number of basic shares outstanding

6,741

7,008

Weighted average number of diluted shares outstanding

6,746

7,019

Dividends declared per common share

$

0.45

$

0.39

Provision for income tax expense

3,609

2,635

Net Income

$

11,143

$

7,833

Basic net income per share

$

1.68

$

1.15

Diluted net income per share

$

1.68

$

1.15

Weighted average number of basic shares outstanding

6,639

6,803

Weighted average number of diluted shares outstanding

6,649

6,808

Dividends declared per common share

$

0.30

$

0.30

See accompanying notes to the consolidated financial statements

45

Table of Contents

First United Corporation and Subsidiaries

Consolidated StatementStatements of Operations

(In thousands, except per share data)

Three Months Ended

June 30,

    

2022

    

2021

(Unaudited)

Interest income

Interest and fees on loans

$

12,861

$

13,097

Interest on investment securities

Taxable

1,540

994

Exempt from federal income tax

279

268

Total investment income

1,819

1,262

Other

51

77

Total interest income

14,731

14,436

Interest expense

Interest on deposits:

Savings

18

21

Interest-bearing transaction accounts

167

293

Time deposits

216

685

Total interest on Deposits

401

999

Interest on short-term borrowings

21

26

Interest on long-term borrowings

338

648

Total Interest Expense

760

1,673

Net Interest income

13,971

12,763

Provision for loan losses

624

555

Net interest income after provision for loan losses

13,347

12,208

Other operating income

Net gains on investments, available for sale

154

Gains on sale of residential mortgage loans

7

272

Gains on disposal of fixed assets

6

16

Net gains

13

442

Other Income

Service charges on deposit accounts

463

412

Other service charges

232

221

Trust department

2,044

2,034

Debit card income

983

913

Bank owned life insurance

297

293

Brokerage commissions

313

357

Other

81

91

Total other income

4,413

4,321

Total other operating income

4,426

4,763

Other operating expenses

Salaries and employee benefits

5,793

5,507

FDIC premiums

155

183

Equipment

1,029

954

Occupancy

711

693

Data processing

805

875

Marketing

151

133

Professional services

564

1,491

Contract labor

158

185

Line rentals

139

268

Losses/(gains) on sales and write downs of other real estate owned, net

152

(198)

Investor relations

123

306

Contributions

42

27

Other

815

608

Total other operating expenses

10,637

11,032

Income before income tax expense

7,136

5,939

Provision for income tax expense

1,708

1,536

6

Table of Contents

Three Months Ended

September 30,

    

2021

    

2020

(Unaudited)

Interest income

Interest and fees on loans

$

13,667

$

12,940

Interest on investment securities

Taxable

880

960

Exempt from federal income tax

266

276

Total investment income

1,146

1,236

Other

97

77

Total interest income

14,910

14,253

Interest expense

Interest on deposits

732

1,515

Interest on short-term borrowings

17

19

Interest on long-term borrowings

536

817

Total interest expense

1,285

2,351

Net interest income

13,625

11,902

Provision for loan losses

(597)

160

Net interest income after provision for loan losses

14,222

11,742

Other operating income

Net gains on investments, available for sale

575

Net gains on investments, held to maturity

(54)

Gains on sale of residential mortgage loans

136

734

Gains on disposal of fixed assets

(133)

Net gains

82

1,176

Other Income

Service charges on deposit accounts

475

447

Other service charges

232

195

Trust department

2,166

1,871

Debit card income

900

738

Bank owned life insurance

298

373

Brokerage commissions

229

234

Other

223

120

Total other income

4,523

3,978

Total other operating income

4,605

5,154

Other operating expenses

Salaries and employee benefits

5,719

5,378

FDIC premiums

209

201

Equipment

1,032

978

Occupancy

684

707

Data processing

819

1,130

Marketing

129

122

Professional services

615

602

Contract labor

153

180

Line rentals

123

216

Other real estate owned

150

6

Investor relations

116

54

FHLB prepayment penalty

2,368

Other

910

966

Total other operating expenses

13,027

10,540

Income before income tax expense

5,800

6,356

Provision for income tax expense

1,412

1,396

Net Income

$

4,388

$

4,960

Basic net income per common share

$

0.66

$

0.70

Diluted net income per common share

$

0.66

$

0.70

Weighted average number of basic shares outstanding

6,617

6,988

Weighted average number of diluted shares outstanding

6,624

6,993

Dividends declared per common share

$

0.15

$

0.13

Net Income

$

5,428

$

4,403

Basic net income per common share

$

0.82

$

0.66

Diluted net income per common share

$

0.82

$

0.66

Weighted average number of basic shares outstanding

6,650

6,609

Weighted average number of diluted shares outstanding

6,661

6,615

Dividends declared per common share

$

0.15

$

0.15

See accompanying notes to the consolidated financial statements

57

Table of Contents

First United Corporation and Subsidiaries

Consolidated StatementStatements of Comprehensive (Loss)/Income

(In thousands)

Nine Months Ended

September 30,

2021

2020

Comprehensive Income

(Unaudited)

Net Income

$

12,221

$

9,285

Other comprehensive income, net of tax and reclassification adjustments:

Net unrealized gains/(losses) on investments with OTTI

2,286

(1,025)

Net unrealized (losses)/gains on all other AFS securities

(3,799)

1,336

Net unrealized gains on HTM securities

110

548

Net unrealized gains/(losses) on cash flow hedges

450

(972)

Net unrealized gains on pension

919

131

Net unrealized gains on SERP

165

102

Other comprehensive income, net of tax

131

120

Comprehensive income

$

12,352

$

9,405

Six Months Ended

June 30,

2022

2021

Comprehensive (Loss)/Income

(Unaudited)

Net Income

$

11,143

$

7,833

Other comprehensive (loss)/income, net of tax and reclassification adjustments:

Available for sale securities:

Unrealized holding (losses)/gains on investments with OTTI

$

(654)

$

2,523

Reclassification adjustment for accretable yield realized in income

101

101

Other comprehensive (loss)/income on investments with OTTI

(755)

2,422

Unrealized holding losses on all other AFS investments

$

(16,203)

$

(4,327)

Unrealized holding losses on securities transferred from available for sale to held to maturity

8,328

Reclassification adjustment for gains realized in income

3

154

Other comprehensive losses on all other AFS investments

(7,878)

(4,481)

Held to Maturity Securities

Unrealized holding losses on securities transferred to held to maturity

$

(8,328)

$

Reclassification adjustment for amortization realized in income

(324)

(108)

Other comprehensive (losses)/income on HTM investments

(8,004)

108

Cash flow hedges:

Unrealized holding gains on cash flow hedges

$

1,088

$

507

Reclassification adjustment for gains realized in income

Other comprehensive income on cash flow hedges

1,088

507

Pension plan liability:

Unrealized holding (losses)/gains on pension plan liability

$

(10,542)

$

1,090

Reclassification adjustment for amortization of unrecognized loss realized in income

(558)

(744)

Other comprehensive (loss)/income on pension plan liability

(9,984)

1,834

SERP liability:

Unrealized holding losses on SERP liability

$

$

Reclassification adjustment for amortization of unrealized loss realized in income

(135)

(150)

Other comprehensive income on SERP liability

135

150

Other comprehensive (losses)/gains before income tax

(25,398)

540

Income tax benefit/(expense) related to other comprehensive income

6,796

(145)

Other comprehensive (loss)/income, net of tax

(18,602)

395

Comprehensive (loss)/income

$

(7,459)

$

8,228

See accompanying notes to the consolidated financial statements

8

Table of Contents

First United Corporation and Subsidiaries

Consolidated Statements of Comprehensive (Loss)/Income

(In thousands)

Three Months Ended

September 30,

    

2021

    

2020

Comprehensive Income (in thousands)

(Unaudited)

Net Income

$

4,388

$

4,960

Other comprehensive income, net of tax and reclassification adjustments:

Net unrealized gains on investments with OTTI

513

481

Net unrealized losses on all other AFS securities

(518)

(656)

Net unrealized gains on HTM securities

31

54

Net unrealized gains on cash flow hedges

79

72

Net unrealized (losses)/gains on pension

(424)

1,647

Net unrealized gains on SERP

55

34

Other comprehensive (loss)/income, net of tax

(264)

1,632

Comprehensive income

$

4,124

$

6,592

Three Months Ended

June 30,

    

2022

    

2021

Comprehensive (Loss)/Income (in thousands)

(Unaudited)

Net Income

$

5,428

$

4,403

Other comprehensive (loss)/income, net of tax and reclassification adjustments:

Available for sale securities:

Unrealized holding (losses)/gains on investments with OTTI

$

(795)

$

2,160

Reclassification adjustment for accretable yield realized in income

51

51

Other comprehensive(loss)/income on investments with OTTI

(846)

2,109

Unrealized holding (losses)/gains on all other AFS investments

$

(5,359)

$

2,778

Reclassification adjustment for gains realized in income

154

Other comprehensive (losses)/gains on all other AFS investments

(5,359)

2,624

Held to Maturity Securities

Unrealized holding losses on securities transferred to held to maturity

$

$

Unrealized holding losses on HTM investments

Reclassification adjustment for amortization realized in income

(230)

(46)

Other comprehensive income on HTM investments

230

46

Cash flow hedges:

Unrealized holding gains/(loss) on cash flow hedges

$

249

$

(47)

Reclassification adjustment for gains realized in income

Other comprehensive income/(loss) on cash flow hedges

249

(47)

Pension plan liability:

Unrealized holding (losses)/gains on pension plan liability

$

(6,922)

$

1,280

Reclassification adjustment for amortization of unrecognized loss realized in income

(279)

(372)

Other comprehensive (losses)/income on pension plan liability

(6,643)

1,652

SERP liability:

Unrealized holding losses on SERP liability

$

$

Reclassification adjustment for amortization of unrealized loss realized in income

(67)

(73)

Other comprehensive income on SERP liability

67

73

Other comprehensive (losses)/income before income tax

(12,302)

6,457

Income tax benefit/(expense) related to other comprehensive income

3,293

(1,727)

Other comprehensive (loss)/income, net of tax

(9,009)

4,730

Comprehensive (loss)/income

$

(3,581)

$

9,133

See accompanying notes to the consolidated financial statements

69

Table of Contents

First United Corporation and Subsidiaries

Consolidated StatementStatements of Changes in Shareholders’ Equity

(In thousands, except per share data)

    

Common
Stock

    

Surplus

    

Retained
Earnings

    

Accumulated
Other
Comprehensive
Loss

    

Total
Shareholders'
Equity

    

Common
Stock

    

Surplus

    

Retained
Earnings

    

Accumulated
Other
Comprehensive
Loss

    

Total
Shareholders'
Equity

Balance at January 1, 2021

$

70

$

30,149

$

129,691

$

(28,863)

$

131,047

Balance at January 1, 2022

$

66

$

23,661

$

145,487

$

(27,314)

$

141,900

Net income

3,430

3,430

5,715

5,715

Other comprehensive loss

(4,335)

(4,335)

(9,593)

(9,593)

Stock based compensation

50

50

(4)

(4)

Common stock issued - 2,956 shares

46

46

Common stock issued - 15,456 shares

55

55

Common stock dividend declared - $0.15 per share

(1,049)

(1,049)

(995)

(995)

Balance at March 31, 2021

$

70

$

30,245

$

132,072

$

(33,198)

$

129,189

Net income

4,403

4,403

Other comprehensive income

4,730

4,730

Stock based compensation

296

296

Common stock issued - 3,261 shares

56

56

Common stock repurchase - 400,000 shares

(4)

(7,175)

(7,179)

Common stock dividend declared - $0.15 per share

(939)

(939)

Balance at June 30, 2021

$

66

$

23,422

$

135,536

$

(28,468)

$

130,556

Balance at March 31, 2022

$

66

$

23,712

$

150,207

$

(36,907)

$

137,078

Net income

4,388

4,388

5,428

5,428

Other comprehensive loss

(264)

(264)

(9,009)

(9,009)

Stock based compensation

43

43

1

339

340

Common stock issued - 3,337 shares

57

57

Common stock issued - 18,416 shares

54

54

Common stock dividend declared -
$0.15 per share

(993)

(993)

(999)

(999)

Balance at September 30, 2021

$

66

$

23,522

$

138,931

$

(28,732)

$

133,787

Balance at June 30, 2022

$

67

$

24,105

$

154,636

$

(45,916)

$

132,892

See accompanying notes to the consolidated financial statements

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First United Corporation and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity

(In thousands, except per share data)

    

Common
Stock

    

Surplus

    

Retained
Earnings

    

Accumulated
Other
Comprehensive
Loss

    

Total
Shareholders'
Equity

    

Common
Stock

    

Surplus

    

Retained
Earnings

    

Accumulated
Other
Comprehensive
Loss

    

Total
Shareholders'
Equity

Balance at January 1, 2020

$

71

$

32,359

$

119,481

$

(25,971)

$

125,940

Balance at January 1, 2021

$

70

$

30,149

$

129,691

$

(28,863)

$

131,047

Net income

1,755

1,755

3,430

3,430

Other comprehensive loss

(5,632)

(5,632)

(4,335)

(4,335)

Stock based compensation

98

98

50

50

Common stock issued - 2,167 shares

52

52

Stock repurchase - 145,291 shares

(1)

(2,753)

(2,754)

Common stock dividend declared - $0.13 per share

(910)

(910)

Balance at March 31, 2020

$

70

$

29,756

$

120,326

$

(31,603)

$

118,549

Common stock issued - 2,956 shares

46

46

Common stock dividend declared - $0.15 per share

(1,049)

(1,049)

Balance at March 31, 2021

$

70

$

30,245

$

132,072

$

(33,198)

$

129,189

Net income

2,570

2,570

4,403

4,403

Other comprehensive income

4,120

4,120

4,730

4,730

Stock based compensation

71

71

296

296

Common stock issued - 3,465 shares

47

47

Common stock dividend declared - $0.13 per share

(904)

(904)

Balance at June 30, 2020

$

70

$

29,874

$

121,992

$

(27,483)

$

124,453

Net income

4,960

4,960

Other comprehensive income

1,632

1,632

Stock based compensation

52

52

Common stock issued - 4,245 shares

49

49

Common stock dividend declared -
$0.13 per share

(909)

(909)

Balance at September 30, 2020

$

70

$

29,975

$

126,043

$

(25,851)

$

130,237

Common stock issued - 3,261 shares

56

56

Common stock repurchase - 400,000 shares

(4)

(7,175)

(7,179)

Common stock dividend declared - $0.15 per share

(939)

(939)

Balance at June 30, 2021

$

66

$

23,422

$

135,536

$

(28,468)

$

130,556

See accompanying notes to the consolidated financial statements

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First United Corporation and Subsidiaries

Consolidated StatementStatements of Cash Flows

(In thousands)

Nine Months Ended

September 30,

    

2021

    

2020

(Unaudited)

Operating activities

Net income

$

12,221

$

9,285

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

Provision for loan losses

68

4,981

Depreciation

2,453

2,463

Stock based compensation

445

221

Gains on sales of other real estate owned

(594)

(93)

Write-(ups)\downs of other real estate owned

(160)

102

Originations of loans held for sale

(23,618)

(54,039)

Proceeds from sale of loans held for sale

27,758

52,057

Gains from sale of loans held for sale

(942)

(1,480)

(Gains)/losses on disposal of fixed assets

(16)

151

Net amortization of investment securities discounts and premiums- AFS

790

212

Net amortization of investment securities discounts and premiums- HTM

276

225

Gains on sales/calls of investment securities – AFS

(154)

(622)

Losses/(gains) on investment securities – HTM

54

(60)

Earnings on Bank owned life insurance

(877)

(961)

Amortization of deferred loan fees

(3,228)

(1,908)

Operating lease asset

77

216

Increase in accrued interest receivable and other assets

(1,638)

(2,624)

Deferred tax (benefit)/expense

(48)

Operating lease liability

(104)

(228)

Increase in accrued interest payable and other liabilities

(2,326)

(96)

Net cash provided by operating activities

10,437

7,802

Investing activities

Proceeds from maturities/calls of investment securities - AFS

40,045

40,572

Proceeds from maturities/calls of investment securities - HTM

12,286

43,226

Proceeds from sales of investment securities - AFS

13,687

30,831

Purchases of investment securities - AFS

(65,101)

(92,440)

Purchases of investment securities - HTM

(6,332)

(18,633)

Proceeds from sales of other real estate owned

3,477

514

Proceeds from disposal of fixed assets

39

728

Net decrease/(increase) in restricted stock

3,439

(53)

Net decrease/(increase) in loans

67,908

(139,367)

Purchases of loans

(58,943)

Purchases of premises and equipment

(826)

(1,322)

Net cash provided by/(used in) investing activities

9,679

(135,944)

Financing activities

Net increase in deposits

22,128

235,253

Issuance of common stock

103

148

Cash dividends on common stock

(2,898)

(2,739)

Net increase in short-term borrowings

23,236

3,861

Stock repurchase

(7,179)

(2,754)

Net decrease in long-term borrowings

(70,000)

Net cash (used in)/provided by financing activities

(34,610)

233,769

(Decrease)/increase in cash and cash equivalents

(14,494)

105,627

Cash and cash equivalents at beginning of the year

149,432

49,979

Cash and cash equivalents at end of period

$

134,938

$

155,606

Supplemental information

Interest paid

$

5,033

$

7,610

Taxes paid

$

4,637

$

625

Non-cash investing activities:

Transfers from loans to other real estate owned

$

$

183

Six Months Ended

June 30,

    

2022

    

2021

(Unaudited)

Operating activities

Net income

$

11,143

$

7,833

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

Provision for loan losses

205

665

Depreciation

1,645

1,632

Stock based compensation

336

402

Gains on sales of other real estate owned

(596)

Write-downs of other real estate owned

(160)

Originations of loans held for sale

(1,043)

(20,744)

Proceeds from sale of loans held for sale

1,138

23,707

Gains from sale of loans held for sale

(28)

(860)

Gains on disposal of fixed assets

(34)

(16)

Net amortization of investment securities discounts and premiums- AFS

100

516

Net (accretion)/amortization of investment securities discounts and premiums- HTM

(405)

168

Amortization of intangible assets

105

Gains on sales/calls of investment securities – AFS

(3)

(154)

Earnings on bank owned life insurance

(589)

(579)

Amortization of deferred loan fees

(123)

(1,979)

Amortization of operating lease right of use asset

172

(6)

Increase in accrued interest receivable and other assets

1,300

(502)

Deferred tax benefit

(6,796)

(22)

Operating lease liability

(191)

(13)

Increase/(decrease) in accrued interest payable and other liabilities

3,527

(2,670)

Net cash provided by operating activities

10,459

6,622

Investing activities

Proceeds from maturities/calls of investment securities - AFS

9,583

27,285

Proceeds from maturities/calls of investment securities - HTM

7,571

8,744

Proceeds from sales of investment securities - AFS

1,023

13,687

Purchases of investment securities - AFS

(12,892)

(58,516)

Purchases of investment securities - HTM

(52,459)

(6,332)

Proceeds from sales of other real estate owned

3,386

Proceeds from disposal of fixed assets

37

Net decrease in restricted stock

3

810

Net (increase)/decrease in loans

(80,454)

45,193

Purchases of loans

(20,100)

Purchases of premises and equipment

(2,256)

(741)

Net cash (used in)/provided by investing activities

(129,844)

13,416

Financing activities

Net increase in deposits

14,980

33,745

Issuance of common stock

109

46

Cash dividends paid on common stock

(1,988)

(1,906)

Net increase in short-term borrowings

12,215

246

Stock repurchase

(7,179)

Net cash provided by financing activities

25,316

24,952

(Decrease)/increase in cash and cash equivalents

(94,069)

44,990

Cash and cash equivalents at beginning of the year

115,720

149,432

Cash and cash equivalents at end of period

$

21,651

$

194,422

Supplemental information

Interest paid

$

1,667

$

3,561

Taxes paid

$

3,758

$

3,487

Non-cash investing activities:

Transfers from loans to other real estate owned

$

40

$

Transfers from securities available for sale to held to maturity

$

139,036

$

See accompanying notes to the consolidated financial statements

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FIRST UNITED CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Basis of Presentation

The accompanying unauditedfinancial information is presented in accordance with generally accepted accounting principles and general practice for financial institutions in the United States of America (“U.S. GAAP”).  In preparing financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of financial statements.  In addition, these estimates and assumptions affect revenues and expenses in the financial statements and as such, actual results could differ from those estimates.  

Principles of Consolidation

The consolidated financial statements include the accounts of First United Corporation, and its consolidated subsidiaries, includingthe Bank, First United Bank &Statutory Trust (the “Bank”)I, First United Statutory Trust II, OakFirst Loan Center, LLC, Oakfirst Loan Center, Inc., First OREO Trust and FUBT OREO I, LLC. All significant inter-company accounts and transactions have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, as required by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 270, Interim Reporting, and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all the information and footnotes required for annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, consisting of normal recurring items, have been included. eliminated.

Certain prior period balances have been reclassified to conform to the current period presentation. Operating results for the threesix and ninethree month periods ended SeptemberJune 30, 20212022 are not necessarily indicative of the results that may be expected for the full year or for any future interim period. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020.2021.

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

The Corporation has evaluated events and transactions occurring subsequent to the statement of financial condition date of SeptemberJune 30, 20212022 and through the date these consolidated financial statements were issued, for items that should potentially be recognizedof potential recognition or disclosed in these financial statements.disclosure.

Note 2 – COVID-19

The COVID-19 pandemic has adversely impacted our business and financial results and that of many of our customers, and the ultimate impact will depend on future developments, which are highly uncertain, cannot be predicted, and are largely outside of our control, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic. The COVID-19 pandemic has created extensive disruptions to the global and U.S. economies and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including closures of businesses and schools, fiscal and monetary stimulus, and legislation designed to deliver financial aid and other relief. While the scope, duration, and full effects of COVID-19 are not fully known, the pandemic and the efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted market interest rates, increased economic and market uncertainty, and disrupted trade and supply chains.

Congress, the President, and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion legislative package, was signed into law at the end of March 2020. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors, such as by providing funds for loans under the Paycheck Protection Program (the “PPP”) administered by the Small Business Administration (the “SBA”). Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to trouble debt restructurings (“TDRs”) for a limited period of time to account for the effects of COVID-19. Additionally, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) was enacted on December 27, 2020 and provided for a second round of PPP loans. The PPP Extension Act of 2021, which was enacted on March 30, 2021, extended the PPP application deadline to May 31, 2021 and provided the SBA with additional time to process applications through June 30, 2021.  Also, the Consolidated Appropriations Act (the “CAA”) passed on December 27, 2020, which, among other things, extended the provisions of Section 4013 of the CARES Act to January 1, 2022. The Federal Reserve’s actions have included cutting the federal funds rate 150 basis points and targeting a 0 to 25 basis point rate. In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act as well as other legislative and regulatory relief efforts are expected to have a material impact on the Corporation’s operations.  

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During the first nine months of 2021, we continued to assist our business customers with the PPP loan forgiveness process and to originate additional PPP loans through the third round of funding. We remained diligent in protecting our associates and customers from the lingering effects of the pandemic, delaying opening our lobbies until April 1, 2021.  During the third quarter, we made the decision to reclose our lobbies as COVID cases increased in most of our markets and staffing was at reduced levels.  Many of our sales and support employees continue to work remotely as we have adjusted to a hybrid work environment.  We have continued to monitor our market areas, maintaining travel protocols and utilizing safety precautions while continuing to provide full banking services to our customers.

Paycheck Protection Program

The Corporation continues to actively participate in the PPP.  On January 19, 2021, the SBA implemented a third round of funding for PPP loans.  

During 2020, the Corporation originated a total of $148.5 million in PPP loans under the first and second rounds of funding, consisting of 1,174 loans with an average loan size of $162 thousand.  During 2021, the Corporation originated a total of $66.1 million in PPP loans under the third round of funding, consisting of 870 loans with an average loan size of $80 thousand.

Net PPP origination fees recognized in the first nine months of 2021 were $3.2 million due to amortization and forgiveness, compared to $2.4 million in 2020.

During 2020, 290 PPP loans, totaling $34.5 million were forgiven, resulting in 885 loans with a remaining balance of $114.0 million at December 31, 2020.   During the first nine months of 2021, an additional 1,384 PPP loans originated under all three rounds, with an aggregate principal balance of $150.0 million, were forgiven, resulting in 371 loans with a total remaining balance of $30.3 million at September 30, 2021.

Of the 2,046 PPP loans originated by the Corporation since the PPP’s inception, 1,675 loans, totaling $184.9 million, have been forgiven through the end of third quarter 2021, representing 86% of the number of loans originated and 82% of originated principal balances.

COVID Modifications

While the COVID-19 pandemic has had an impact on most industries, some have been more affected than others.  In accordance with Section 4013 of the CARES Act and related regulatory pronouncements, we have not accounted for modifications of loans affected by the pandemic as troubled debt restructurings (“TDRs”) nor have we designated them as past due or nonaccrual.  

As of October 15, 2021, modified loans not treated as TDRs consisted of 11 commercial loans relating to real estate rental, food services and health care sectors and one mortgage loan, with an aggregate balance of $9.9 million.  These loans are scheduled to return to contractual payment terms within the next quarter.

Note 32 – Earnings Per Common Share

Basic earnings per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents. Diluted earnings per share is derived by dividing net income available to common shareholders by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents, such as restricted stock units (“RSUs”). At September 30, 2021, there were RSUs relating to 7,073 time-vested shares of common stock outstanding. There were 0 anti-dilutive shares outstanding at SeptemberJune 30, 20212022 or 2020.2021.

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The following table sets forth the calculation of basic and diluted earnings per common share for the six and three month periods ended June 30, 2022 and 2021:

Six months ended June 30,

2022

2021

    

    

Average

    

Per Share

    

    

Average

    

Per Share

(in thousands, except for per share amount)

Income

Shares

Amount

Income

Shares

Amount

Basic Earnings Per Share:

Net income

$

11,143

6,639

$

1.68

$

7,833

6,803

$

1.15

Diluted Earnings Per Share:

Restricted stock units

10

5

Net income

$

11,143

6,649

$

1.68

$

7,833

6,808

$

1.15

Three months ended June 30,

2022

2021

Average

Per Share

Average

Per Share

(in thousands, except for per share amount)

Income

Shares

Amount

Income

Shares

Amount

Basic Earnings Per Share:

Net income

$

5,428

6,650

$

0.82

$

4,403

6,609

$

0.66

Diluted Earnings Per Share:

Restricted stock units

11

6

Net income

$

5,428

6,661

$

0.82

$

4,403

6,615

$

0.66

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Note 3 – Investments

The following table shows a comparison of amortized cost and fair values of investment securities at June 30, 2022 and December 31, 2021:

(in thousands)

    

Amortized
Cost

    

Gross
Unrealized
Gains

    

Gross
Unrealized
Losses

    

Fair
Value

    

OTTI
in AOCL

June 30, 2022

Available for Sale:

U.S. government agencies

$

11,060

$

$

1,145

$

9,915

$

Residential mortgage-backed agencies

47,086

5,840

41,246

Commercial mortgage-backed agencies

36,498

4,502

31,996

Collateralized mortgage obligations

27,095

2,945

24,150

Obligations of states and political subdivisions

8,341

43

61

8,323

Corporate bonds

1,000

21

979

Collateralized debt obligations

18,640

2,382

16,258

(1,415)

Total available for sale

$

149,720

$

43

$

16,896

$

132,867

$

(1,415)

(in thousands)

    

Amortized
Cost

    

Gross
Unrecognized
Gains

    

Gross
Unrecognized
Losses

    

Fair
Value

    

OTTI
in AOCL

June 30, 2022

Held to Maturity:

U.S. treasuries

$

37,076

$

$

1,226

$

35,850

$

U.S. government agencies

67,596

8,749

58,847

Residential mortgage-backed agencies

27,996

3

2,282

25,717

Commercial mortgage-backed agencies

25,440

1

2,996

22,445

Collateralized mortgage obligations

59,951

5,658

54,293

Obligations of states and political subdivisions

22,529

1,107

487

23,149

Total held to maturity

$

240,588

$

1,111

$

21,398

$

220,301

$

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(in thousands)

    

Amortized
Cost

    

Gross
Unrealized
Gains

    

Gross
Unrealized
Losses

    

Fair
Value

    

OTTI
in AOCL

December 31, 2021

Available for Sale:

U.S. government agencies

$

69,602

$

66

$

2,499

$

67,169

$

Residential mortgage-backed agencies

49,630

969

48,661

Commercial mortgage-backed agencies

51,694

175

1,001

50,868

Collateralized mortgage obligations

93,018

84

3,025

90,077

Obligations of states and political subdivisions

12,439

371

6

12,804

Collateralized debt obligations

18,609

112

1,529

17,192

(660)

Total available for sale

$

294,992

$

808

$

9,029

$

286,771

$

(660)

(in thousands)

    

Amortized
Cost

    

Gross
Unrecognized
Gains

    

Gross
Unrecognized
Losses

    

Fair
Value

    

OTTI
in AOCL

December 31, 2021

Held to Maturity:

Residential mortgage-backed agencies

$

30,634

$

649

$

436

$

30,847

$

Commercial mortgage-backed agencies

5,456

145

5,601

Obligations of states and political subdivisions

20,169

8,752

28,921

Total held to maturity

$

56,259

$

9,546

$

436

$

65,369

$

The Corporation reassessed classification of certain investments and, effective February 1, 2022, the Corporation transferred $139.0 million of callable agencies, obligations of state and political subdivisions, and collateralized mortgage obligations from available for sale to held to maturity securities.  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.  NaN gain or loss was recorded at the time of transfer.

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The following table shows the Corporation’s investment securities with gross unrealized and unrecognized losses and fair values at June 30, 2022 and December 31, 2021, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

Less than 12 months

12 months or more

(in thousands)

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

June 30, 2022

Available for Sale:

U.S. government agencies

$

8,481

580

2

1,435

565

1

Residential mortgage-backed agencies

25,523

2,957

3

15,723

2,883

2

Commercial mortgage-backed agencies

18,648

2,527

6

13,348

1,975

3

Collateralized mortgage obligations

15,997

1,827

9

8,152

1,118

1

Obligations of states and political subdivisions

5,598

61

6

Collateralized debt obligations

6,492

128

4

9,766

2,254

5

Corporate Bonds

979

21

1

Total available for sale

$

81,718

$

8,101

31

$

48,424

$

8,795

12

Less than 12 months

12 months or more

(in thousands)

    

Fair
Value

    

Unrecognized
Losses

    

Number of
Investments

    

Fair
Value

    

Unrecognized
Losses

    

Number of
Investments

June 30, 2022

Held to Maturity:

U.S. treasuries

$

35,850

1,226

4

$

$

U.S. government agencies

58,847

$

8,749

9

Residential mortgage-backed agencies

18,356

829

31

7,264

1,453

3

Commercial mortgage-backed agencies

20,443

2,996

3

Collateralized mortgage obligations

54,293

5,658

8

Obligations of states and political subdivisions

2,379

487

1

Total held to maturity

$

190,168

$

19,945

56

$

7,264

$

1,453

3

16

Table of Contents

Less than 12 months

12 months or more

(in thousands)

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

December 31, 2021

Available for Sale:

U.S. government agencies

$

23,577

$

122

3

$

33,972

$

2,377

6

Residential mortgage-backed agencies

29,507

257

3

19,154

712

2

Commercial mortgage-backed agencies

32,177

787

4

5,211

214

1

Collateralized mortgage obligations

24,322

649

5

43,076

2,376

5

Obligations of states and political subdivisions

3,046

6

1

Collateralized debt obligations

10,468

1,529

5

Total available for sale

$

112,629

$

1,821

16

$

111,881

$

7,208

19

Less than 12 months

12 months or more

(in thousands)

    

Fair
Value

    

Unrecognized
Losses

    

Number of
Investments

    

Fair
Value

    

Unrecognized
Losses

    

Number of
Investments

December 31, 2021

Held to Maturity:

Residential mortgage-backed agencies

$

7,395

$

291

6

$

2,782

$

145

1

Total held to maturity

$

7,395

$

291

6

$

2,782

$

145

1

Management systematically evaluates securities for impairment on a quarterly basis. Based upon application of Accounting Standards Codification (“ASC”) Topic 320 (Section 320-10-35), management must assess whether (a) the Corporation has the intent to sell the security and (b) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery. If neither applies, then declines in the fair value of securities below their cost that are considered other-than-temporary declines are split into two components. The following tables set forthfirst is the calculationloss attributable to declining credit quality. Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made. The second component consists of basicall other losses. The other losses are recognized in other comprehensive income. In estimating other than temporary impairment (“OTTI”) charges, management considers (1) the length of time and diluted earnings per common sharethe extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the security, (4) changes in the rating of a security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future. Due to the duration and the significant market value decline in the pooled trust preferred securities held in our portfolio, we performed more extensive testing on these securities for the nine and three months periods ended September 30, 2021 and 2020:purposes of evaluating whether or not an OTTI has occurred.

Nine months ended September 30,

2021

2020

    

    

Average

    

Per Share

    

    

Average

    

Per Share

(in thousands, except for per share amount)

Income

Shares

Amount

Income

Shares

Amount

Basic Earnings Per Share:

Net income

$

12,221

6,741

$

1.81

$

9,285

7,008

$

1.32

Diluted Earnings Per Share:

Net income

$

12,221

6,746

$

1.81

$

9,285

7,019

$

1.32

17

Table of Contents

The following table presents a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses that have been recognized in earnings for the trust preferred securities held in the CDO portfolio during the six and three month periods ended June 30, 2022 and 2021 that the Corporation does not intend to sell:

Six Months Ended

June 30,

(in thousands)

    

2022

    

2021

Balance of credit-related OTTI at January 1

$

2,043

$

2,244

Reduction for increases in cash flows expected to be collected

(101)

(101)

Balance of credit-related OTTI at June 30

$

1,942

$

2,143

Three Months Ended

June 30,

(in thousands)

2022

2021

Balance of credit-related OTTI at April 1

$

1,993

$

2,194

Reduction for increases in cash flows expected to be collected

(51)

(51)

Balance of credit-related OTTI at June 30

$

1,942

$

2,143

The amortized cost and estimated fair value of securities by contractual maturity at June 30, 2022 are shown in the following table. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

Three months ended September 30,

2021

2020

Average

Per Share

Average

Per Share

(in thousands, except for per share amount)

Income

Shares

Amount

Income

Shares

Amount

Basic Earnings Per Share:

Net income

$

4,388

6,617

$

0.66

$

4,960

6,988

$

0.70

Diluted Earnings Per Share:

Net income

$

4,388

6,624

$

0.66

$

4,960

6,993

$

0.70

June 30, 2022

(in thousands)

    

Amortized
Cost

    

Fair
Value

Available for Sale:

Due after one year through five years

$

8,365

$

8,099

Due after five years through ten years

5,556

5,195

Due after ten years

25,120

22,181

39,041

35,475

Residential mortgage-backed agencies

47,086

41,246

Commercial mortgage-backed agencies

36,498

31,996

Collateralized mortgage obligations

27,095

24,150

Total available for sale

$

149,720

$

132,867

Held to Maturity:

Due after one year through five years

$

49,576

$

47,528

Due after five years through ten years

23,748

20,999

Due after ten years

$

53,877

$

49,319

127,201

117,846

Residential mortgage-backed agencies

27,996

25,717

Commercial mortgage-backed agencies

25,440

22,445

Collateralized mortgage obligations

59,951

54,293

Total held to maturity

$

240,588

$

220,301

1218

Table of Contents

Note 4 – Investments

The following table shows a comparison of amortized cost and fair values of investment securities at September 30, 2021 and December 31, 2020:

(in thousands)

    

Amortized
Cost

    

Gross
Unrealized
Gains

    

Gross
Unrealized
Losses

    

Fair
Value

    

OTTI
in AOCL

September 30, 2021

Available for Sale:

U.S. government agencies

$

55,527

$

235

$

2,028

$

53,734

$

Residential mortgage-backed agencies

30,936

21

603

30,354

Commercial mortgage-backed agencies

55,980

224

695

55,509

Collateralized mortgage obligations

70,766

104

1,791

69,079

Obligations of states and political subdivisions

9,402

394

9,796

Collateralized debt obligations

18,586

95

1,589

17,092

(715)

Total available for sale

$

241,197

$

1,073

$

6,706

$

235,564

$

(715)

Held to Maturity:

Residential mortgage-backed agencies

$

32,113

$

882

$

394

$

32,601

$

Commercial mortgage-backed agencies

9,697

335

10,032

Obligations of states and political subdivisions

20,169

8,905

29,074

Total held to maturity

$

61,979

$

10,122

$

394

$

71,707

$

December 31, 2020

Available for Sale:

U.S. government agencies

$

75,856

$

899

$

322

$

76,433

$

Residential mortgage-backed agencies

22,999

100

22,899

Commercial mortgage-backed agencies

32,549

529

36

33,042

Collateralized mortgage obligations

70,372

266

1

70,637

Obligations of states and political subdivisions

10,144

470

10,614

Collateralized debt obligations

18,544

5,284

13,260

(3,839)

Total available for sale

$

230,464

$

2,164

$

5,743

$

226,885

$

(3,839)

Held to Maturity:

Residential mortgage-backed agencies

$

34,597

$

1,173

$

38

$

35,732

$

Commercial mortgage-backed agencies

11,716

587

12,303

Collateralized mortgage obligations

1,348

58

1,406

Obligations of states and political subdivisions

20,602

7,569

28,171

Total held to maturity

$

68,263

$

9,387

$

38

$

77,612

$

13

Table of Contents

The following table shows the Corporation’s investment securities with gross unrealized losses and fair values at September 30, 2021 and December 31, 2020, aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position:

Less than 12 months

12 months or more

(in thousands)

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

    

Fair
Value

    

Unrealized
Losses

    

Number of
Investments

September 30, 2021

Available for Sale:

U.S. government agencies

$

$

$

34,325

$

2,028

6

Residential mortgage-backed agencies

20,582

603

2

Commercial mortgage-backed agencies

41,647

480

5

7,725

215

1

Collateralized mortgage obligations

65,329

1,791

8

Collateralized debt obligations

10,397

1,589

5

Total available for sale

$

127,558

$

2,874

15

$

52,447

$

3,832

12

Held to Maturity:

Residential mortgage-backed agencies

8,500

394

3

Total held to maturity

$

8,500

$

394

3

$

$

December 31, 2020

Available for Sale:

U.S. government agencies

$

39,611

$

322

7

$

$

Residential mortgage-backed agencies

22,899

100

2

Commercial mortgage-backed agencies

16,034

36

1

Collateralized mortgage obligations

39,628

1

4

Collateralized debt obligations

13,260

5,284

9

Total available for sale

$

118,172

$

459

14

$

13,260

$

5,284

9

Held to Maturity:

Residential mortgage-backed agencies

$

2,973

$

38

1

$

$

Total held to maturity

$

2,973

$

38

1

$

$

Management systematically evaluates securities for impairment on a quarterly basis. Based upon application of accounting guidance for subsequent measurement in ASC Topic 320 (ASC Section 320-10-35), management assesses whether (a) the Corporation has the intent to sell a security being evaluated and (b) it is more likely than not that the Corporation will be required to sell the security prior to the anticipated recovery of any decline in fair value. If neither applies, then any decline in the fair value below the security’s cost that is considered an other-than-temporary decline is split into two components. The first component is the loss attributable to declining credit quality. Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made. The second component consists of all other losses, which are recognized in other comprehensive loss. In estimating other than temporary impairment (“OTTI”) losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the fair value of the security, (4) changes in the rating of the security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest or principal payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future. Management also monitors cash flow projections for securities that are considered beneficial interests under the guidance of ASC Subtopic 325-40, Investments – Other – Beneficial Interests in Securitized Financial Assets, (ASC Section 325-40-35).

Management believes that the valuation of certain securities is a critical accounting policy that requires significant estimates in preparation of the Corporation’s consolidated financial statements. Management utilizes an independent third party to prepare both the impairment valuations and fair value determinations for the Corporation’s collateralized debt obligation (“CDO”) portfolio consisting of pooled trust preferred securities. See Note 7 for a discussion of the methodology used by management to determine the fair values of these securities. Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that there were no securities that had credit-related OTTI charges during the first nine months of 2021 or 2020.

14

Table of Contents

The Corporation believes that the investment securities that were in an unrealized loss position at September 30, 2021 do not represent other-than-temporary impairment. The Corporation does not intend to sell, nor is it anticipated that the Corporation will be required to sell, any of its impaired investment securities at a loss.

The following tables present a cumulative roll-forward of the amount of non-cash OTTI charges related to credit losses that have been recognized in earnings for the trust preferred securities held in the CDO portfolio during the nine and three month periods ended September 30, 2021 and 2020 that the Corporation does not intend to sell:

Nine Months Ended

September 30,

(in thousands)

    

2021

    

2020

Balance of credit-related OTTI at January 1

$

2,244

$

2,446

Reduction for increases in cash flows expected to be collected

(151)

(151)

Balance of credit-related OTTI at September 30

$

2,093

$

2,295

Three Months Ended

September 30,

(in thousands)

2021

2020

Balance of credit-related OTTI at July 1

$

2,143

$

2,345

Reduction for increases in cash flows expected to be collected

(50)

(50)

Balance of credit-related OTTI at September 30

$

2,093

$

2,295

The amortized cost and estimated fair value of securities by contractual maturity at September 30, 2021 are shown in the following table. Actual maturities may differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

September 30, 2021

(in thousands)

    

Amortized
Cost

    

Fair
Value

Contractual Maturity

Available for Sale:

Due after one year through five years

$

4,404

$

4,466

Due after five years through ten years

10,057

10,198

Due after ten years

69,054

65,958

83,515

80,622

Residential mortgage-backed agencies

30,936

30,354

Commercial mortgage-backed agencies

55,980

55,509

Collateralized mortgage obligations

70,766

69,079

Total available for sale

$

241,197

$

235,564

Held to Maturity:

Due after ten years

$

20,169

$

29,074

Residential mortgage-backed agencies

32,113

32,601

Commercial mortgage-backed agencies

9,697

10,032

Collateralized mortgage obligations

Total held to maturity

$

61,979

$

71,707

15

Table of Contents

Note 54 – Loans and Related Allowance for Loan Losses

The following table summarizes the primary segments of the loan portfolio at SeptemberJune 30, 20212022 and December 31, 2020:2021:

(in thousands)

    

Commercial
Real Estate

    

Acquisition
and
Development

    

Commercial
and
Industrial

    

Residential
Mortgage

    

Consumer

    

Total

    

Commercial
Real Estate

    

Acquisition
and
Development

    

Commercial
and
Industrial

    

Residential
Mortgage

    

Consumer

    

Total

September 30, 2021

June 30, 2022

Individually evaluated for impairment

$

7,343

$

842

$

$

2,985

$

18

$

11,188

$

2,267

$

599

$

$

2,384

$

33

$

5,283

Collectively evaluated for impairment

364,442

131,414

195,758

402,900

56,166

1,150,680

419,675

115,516

225,640

403,909

63,590

1,228,330

Total loans

$

371,785

$

132,256

$

195,758

$

405,885

$

56,184

$

1,161,868

$

421,942

$

116,115

$

225,640

$

406,293

$

63,623

$

1,233,613

December 31, 2020

December 31, 2021

Individually evaluated for impairment

$

3,330

$

842

$

$

3,185

$

102

$

7,459

$

2,365

$

629

$

90

$

2,644

$

$

5,728

Collectively evaluated for impairment

365,846

116,119

266,745

375,985

35,658

1,160,353

371,926

127,448

180,886

402,042

65,657

1,147,959

Total loans

$

369,176

$

116,961

$

266,745

$

379,170

$

35,760

$

1,167,812

$

374,291

$

128,077

$

180,976

$

404,686

$

65,657

$

1,153,687

The commercial and industrial portfolio in the table above includes $30.3$0.8 million and $114.0$7.7 million of PPPPaycheck Protection Program (“PPP”) loans at SeptemberJune 30, 20212022 and December 31, 2020,2021, respectively, which are 100% guaranteed by the SBA, and 0 allowance for loan loss (“ALL”) has been assigned to them.

The following table presents the classes of the loan portfolio summarized by the aggregate Passpass and the criticized categories of Special Mentionspecial mention and Substandardsubstandard within the internal risk rating system at SeptemberJune 30, 20212022 and December 31, 2020:2021:

(in thousands)

    

Pass

    

Special
Mention

    

Substandard

    

Total

September 30, 2021

Commercial real estate

Non owner-occupied

$

172,977

$

13,054

$

6,209

$

192,240

All other CRE

171,556

1,407

6,582

179,545

Acquisition and development

1-4 family residential construction

20,321

20,321

All other A&D

111,496

439

111,935

Commercial and industrial

178,724

6,087

10,947

195,758

Residential mortgage

Residential mortgage - term

338,745

6,282

345,027

Residential mortgage - home equity

60,141

717

60,858

Consumer

56,056

128

56,184

Total

$

1,110,016

$

20,548

$

31,304

$

1,161,868

December 31, 2020

Commercial real estate

Non owner-occupied

$

178,670

$

5,526

$

6,322

$

190,518

All other CRE

166,504

5,664

6,490

178,658

Acquisition and development

1-4 family residential construction

18,920

18,920

All other A&D

97,648

17

376

98,041

Commercial and industrial

245,185

8,867

12,693

266,745

Residential mortgage

Residential mortgage - term

309,177

283

6,117

315,577

Residential mortgage - home equity

62,804

789

63,593

Consumer

35,648

3

109

35,760

Total

$

1,114,556

$

20,360

$

32,896

$

1,167,812

16

Table of Contents

The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and non-accrual loans at September 30, 2021 and December 31, 2020:

(in thousands)

    

Current

    

30-59 Days
Past Due

    

60-89 Days
Past Due

    

90 Days+
Past Due

    

Total Past
Due and
Accruing

    

Non-
Accrual

    

Total Loans

September 30, 2021

Commercial real estate

Non owner-occupied

$

187,770

$

$

$

$

$

4,470

$

192,240

All other CRE

178,880

118

118

547

179,545

Acquisition and development

1-4 family residential construction

20,321

20,321

All other A&D

111,540

395

111,935

Commercial and industrial

195,383

375

375

195,758

Residential mortgage

Residential mortgage - term

342,242

76

975

154

1,205

1,580

345,027

Residential mortgage - home equity

60,149

213

65

278

431

60,858

Consumer

55,794

304

33

35

372

18

56,184

Total

$

1,152,079

$

1,086

$

1,073

$

189

$

2,348

$

7,441

$

1,161,868

December 31, 2020

Commercial real estate

Non owner-occupied

$

190,510

$

$

$

$

$

8

$

190,518

All other CRE

177,360

408

408

890

178,658

Acquisition and development

1-4 family residential construction

18,920

18,920

All other A&D

97,660

5

10

15

366

98,041

Commercial and industrial

266,708

37

37

266,745

Residential mortgage

Residential mortgage - term

312,500

63

670

710

1,443

1,634

315,577

Residential mortgage - home equity

63,036

80

63

143

414

63,593

Consumer

35,473

230

26

4

260

27

35,760

Total

$

1,162,167

$

823

$

759

$

724

$

2,306

$

3,339

$

1,167,812

The current status of commercial and industrial loans includes $30.3 million and $114.0 million of PPP loans at September 30, 2021 and December 31, 2020, respectively.

Non-accrual loans that have been subject to partial charge-offs totaled $0.5 million at September 30, 2021 and $0.4 million at December 31, 2020.  Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $0.2 million at September 30, 2021 and $0.4 million at December 31, 2020.  Foreclosure and repossession activities were temporarily suspended as a result of COVID-19 but resumed during the third quarter 2021. Management continues to conform to federal and state mandates relative to the foreclosure processes for both Federal Backed and Non-Federal Backed mortgages.  As a percentage of the loan portfolio, accruing loans past due 30 days or more decreased to 0.20%, including PPP loans, or 0.21% excluding PPP loans, compared to 0.20% at December 31, 2020. 

17

Table of Contents

The following table summarizes the primary segments of the ALL at September 30, 2021 and December 31, 2020, segregated by the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment:

(in thousands)

    

Commercial
Real Estate

    

Acquisition
and
Development

    

Commercial
and
Industrial

    

Residential
Mortgage

    

Consumer

    

Unallocated

    

Total

September 30, 2021

Individually evaluated
for impairment

$

187

$

$

$

16

$

2

$

$

205

Collectively evaluated
for impairment

$

6,539

$

2,910

$

2,400

$

3,582

$

840

$

430

$

16,701

Total ALL

$

6,726

$

2,910

$

2,400

$

3,598

$

842

$

430

$

16,906

December 31, 2020

Individually evaluated
for impairment

$

4

$

13

$

$

40

$

$

$

57

Collectively evaluated
for impairment

$

5,539

$

2,326

$

2,584

$

5,110

$

370

$

500

$

16,429

Total ALL

$

5,543

$

2,339

$

2,584

$

5,150

$

370

$

500

$

16,486

The evaluation of the need and amount of a specific allocation of the ALL and whether a loan can be removed from impairment status is made on a quarterly basis.

18

Table of Contents

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and those for which a specific allowance was not required at September 30, 2021 and December 31, 2020:

Impaired Loans with
Specific Allowance

Impaired
Loans with
No Specific
Allowance

Total Impaired Loans

(in thousands)

    

Recorded
Investment

    

Related
Allowances

    

Recorded
Investment

    

Recorded
Investment (1)

    

Unpaid
Principal
Balance

September 30, 2021

Commercial real estate

Non owner-occupied

$

1,715

$

187

$

2,863

$

4,578

$

4,578

All other CRE

2,765

2,765

2,765

Acquisition and development

1-4 family residential construction

245

245

245

All other A&D

597

597

1,806

Commercial and industrial

2,214

Residential mortgage

Residential mortgage – term

261

10

2,293

2,554

2,615

Residential mortgage – home equity

46

6

385

431

450

Consumer

18

2

18

20

Total impaired loans

$

2,040

$

205

$

9,148

$

11,188

$

14,693

December 31, 2020

Commercial real estate

Non owner-occupied

$

111

$

4

$

8

$

119

$

119

All other CRE

3,211

3,211

3,211

Acquisition and development

1-4 family residential construction

266

266

266

All other A&D

276

13

300

576

1,724

Commercial and industrial

2,214

Residential mortgage

Residential mortgage – term

936

34

1,910

2,846

3,031

Residential mortgage – home equity

76

6

339

415

447

Consumer

26

26

51

Total impaired loans

$

1,399

$

57

$

6,060

$

7,459

$

11,063

(1)Recorded investment consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and cost.

(in thousands)

    

Pass

    

Special
Mention

    

Substandard

    

Total

June 30, 2022

Commercial real estate

Non owner-occupied

$

212,939

$

6,438

$

12,308

$

231,685

All other CRE

183,562

2,304

4,391

190,257

Acquisition and development

1-4 family residential construction

24,247

24,247

All other A&D

91,493

375

91,868

Commercial and industrial

206,035

4,940

14,665

225,640

Residential mortgage

Residential mortgage - term

340,549

5,853

346,402

Residential mortgage - home equity

59,219

672

59,891

Consumer

63,411

212

63,623

Total

$

1,181,455

$

13,682

$

38,476

$

1,233,613

December 31, 2021

Commercial real estate

Non owner-occupied

$

173,299

$

12,987

$

6,077

$

192,363

All other CRE

174,395

2,357

5,176

181,928

Acquisition and development

1-4 family residential construction

19,924

19,924

All other A&D

107,532

218

403

108,153

Commercial and industrial

161,429

5,071

14,476

180,976

Residential mortgage

Residential mortgage - term

338,832

5,624

344,456

Residential mortgage - home equity

59,533

697

60,230

Consumer

65,557

100

65,657

Total

$

1,100,501

$

20,633

$

32,553

$

1,153,687

19

Table of Contents

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

The increase of $6.3 million in the substandard category was related to one large relationship in the nursing care sector that was downgraded from special mention in the first quarter of 2022.  This relationship continues to perform according to its contractual terms and is not considered impaired.

The following tables presenttable presents the activity inclasses of the ALL forloan portfolio summarized by the nineaging categories of performing loans and three month periods ended Septembernon-accrual loans at June 30, 20212022 and 2020:December 31, 2021:

(in thousands)

    

Commercial
Real Estate

    

Acquisition
and
Development

    

Commercial
and
Industrial

    

Residential
Mortgage

    

Consumer

    

Unallocated

    

Total

ALL balance at January 1, 2021

$

5,543

$

2,339

$

2,584

$

5,150

$

370

$

500

$

16,486

Charge-offs

(85)

(141)

(266)

(492)

Recoveries

172

511

49

112

844

Provision

1,183

484

(695)

(1,460)

626

(70)

68

ALL balance at September 30, 2021

$

6,726

$

2,910

$

2,400

$

3,598

$

842

$

430

$

16,906

ALL balance at January 1, 2020

$

2,882

$

3,674

$

1,341

$

3,828

$

312

$

500

$

12,537

Charge-offs

(1,144)

(232)

(108)

(274)

(1,758)

Recoveries

69

29

149

66

116

429

Provision

2,343

(136)

926

1,621

227

4,981

ALL balance at September 30, 2020

$

5,294

$

2,423

$

2,184

$

5,407

$

381

$

500

$

16,189

(in thousands)

Commercial
Real Estate

Acquisition
and
Development

Commercial
and
Industrial

Residential
Mortgage

Consumer

Unallocated

Total

ALL balance at July 1, 2021

$

5,675

$

2,500

$

2,944

$

4,859

$

590

$

500

$

17,068

Charge-offs

(4)

(59)

(91)

(154)

Recoveries

62

473

20

34

589

Provision

1,051

352

(1,017)

(1,222)

309

(70)

(597)

ALL balance at September 30, 2021

$

6,726

$

2,910

$

2,400

$

3,598

$

842

$

430

$

16,906

ALL balance at July 1, 2020

$

4,527

$

4,498

$

1,997

$

5,106

$

386

$

500

$

17,014

Charge-offs

(1,113)

(10)

(51)

(1,174)

Recoveries

3

7

133

18

28

189

Provision

764

(969)

54

293

18

160

ALL balance at September 30, 2020

$

5,294

$

2,423

$

2,184

$

5,407

$

381

$

500

$

16,189

(in thousands)

    

Current

    

30-59 Days
Past Due

    

60-89 Days
Past Due

    

90 Days+
Past Due

    

Total Past
Due and
Accruing

    

Non-
Accrual

    

Total Loans

June 30, 2022

Commercial real estate

Non owner-occupied

$

231,596

$

$

89

$

$

89

$

$

231,685

All other CRE

190,191

66

190,257

Acquisition and development

1-4 family residential construction

24,247

24,247

All other A&D

91,493

375

91,868

Commercial and industrial

224,113

39

1,488

1,527

225,640

Residential mortgage

Residential mortgage - term

342,616

73

2,119

254

2,446

1,340

346,402

Residential mortgage - home equity

59,321

178

53

4

235

335

59,891

Consumer

63,295

153

75

67

295

33

63,623

Total

$

1,226,872

$

443

$

3,824

$

325

$

4,592

$

2,149

$

1,233,613

December 31, 2021

Commercial real estate

Non owner-occupied

$

192,363

$

$

$

$

$

$

192,363

All other CRE

181,847

81

181,928

Acquisition and development

1-4 family residential construction

19,924

19,924

All other A&D

107,763

390

108,153

Commercial and industrial

180,676

132

78

210

90

180,976

Residential mortgage

Residential mortgage - term

340,429

159

2,222

148

2,529

1,498

344,456

Residential mortgage - home equity

59,485

238

104

342

403

60,230

Consumer

65,208

268

29

152

449

65,657

Total

$

1,147,695

$

797

$

2,433

$

300

$

3,530

$

2,462

$

1,153,687

The ALL is based on estimates,Non-accrual loans that have been subject to partial charge-offs totaled $1.3 million at June 30, 2022 and actual losses may vary from current estimates.  Management believes that$0.5 million at December 31, 2021.  Loans secured by 1-4 family residential real estate properties in the granularityprocess of foreclosure totaled $0.1 million at June 30, 2022 and $0.2 million at December 31, 2021.   As a percentage of the homogeneous poolsloan portfolio, accruing loans past due 30 days or more increased to 0.37% compared to 0.19% at March 31, 2022 and the related historical loss ratios and other qualitative factors,0.31% as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of the portfolio at any given date.December 31, 2021.   

20

Table of Contents

The following tables presenttable summarizes the average recorded investment in impairedprimary segments of the ALL at June 30, 2022 and December 31, 2021, segregated by the amount required for loans by classindividually evaluated for impairment and related interest income recognizedthe amount required for the periods indicated:loans collectively evaluated for impairment:

Nine months ended

For the year ended

Nine months ended

September 30, 2021

December 31, 2020

September 30, 2020

(in thousands)

    

Average
investment

    

Interest income
recognized on
an accrual basis

    

Interest income
recognized on
a cash basis

Average
investment

Average
investment

    

Interest income
recognized on
an accrual basis

    

Interest income
recognized on
a cash basis

Commercial real estate

Non owner-occupied

$

3,518

$

9

$

$

131

$

134

$

6

$

All other CRE

2,984

95

3,203

3,201

109

Acquisition and development

1-4 family residential construction

256

9

278

282

9

All other A&D

599

9

6,709

8,243

9

1

Commercial and industrial

16

16

Residential mortgage

Residential mortgage – term

2,642

56

5

2,593

2,531

62

Residential mortgage – home equity

449

604

651

3

Consumer

17

20

18

Total

$

10,465

$

178

$

5

$

13,554

$

15,076

$

195

$

4

Three months ended

Three months ended

September 30, 2021

September 30, 2020

(in thousands)

Average
investment

Interest income
recognized on
an accrual basis

Interest income
recognized on
a cash basis

Average
investment

Interest income
recognized on
an accrual basis

Interest income
recognized on
a cash basis

Commercial real estate

Non owner-occupied

$

4,631

$

3

$

$

127

$

3

$

All other CRE

2,787

26

3,278

36

Acquisition and development

1-4 family residential construction

249

3

276

3

All other A&D

602

3

8,158

3

Commercial and industrial

18

Residential mortgage

Residential mortgage – term

2,500

17

2,565

19

Residential mortgage – home equity

451

474

Consumer

9

33

Total

$

11,229

$

52

$

$

14,929

$

64

$

(in thousands)

    

Commercial
Real Estate

    

Acquisition
and
Development

    

Commercial
and
Industrial

    

Residential
Mortgage

    

Consumer

    

Unallocated

    

Total

June 30, 2022

Individually evaluated
for impairment

$

$

$

$

29

$

33

$

$

62

Collectively evaluated
for impairment

$

6,220

$

2,172

$

2,830

$

3,083

$

940

$

430

$

15,675

Total ALL

$

6,220

$

2,172

$

2,830

$

3,112

$

973

$

430

$

15,737

December 31, 2021

Individually evaluated
for impairment

$

$

$

28

$

36

$

$

$

64

Collectively evaluated
for impairment

$

6,032

$

2,615

$

2,432

$

3,448

$

934

$

430

$

15,891

Total ALL

$

6,032

$

2,615

$

2,460

$

3,484

$

934

$

430

$

15,955

The Bank modifies loan terms inevaluation of the normal courseneed and amount of business. Among other reasons, modifications might be made in an effort to retaina specific allocation of the loan relationship, to remain competitive in the current interest rate environment and/or to re-amortize or extend the loan’s term to better match the loan’s payment stream with the borrower’s cash flow. A modified loan is considered to be a TDR when the modification occurs in connection with a determination by the Bank that the borrower is troubled (i.e., experiencing financial difficulties). In decidingALL and whether to modify a loan the Bank evaluates the probability that the borrower willcan be in payment defaultremoved from impairment status is made on any of its debt obligations in the foreseeable future without modification. To make this determination, the Bank performs a global financial review of the borrower and loan guarantors to assess their current abilities to meet their financial obligations.quarterly basis.

21

Table of Contents

Section 4013 of the CARES Act allows financial institutions to suspend application of certain current TDRs accounting guidance under ASC 310-40The following table presents impaired loans by class, segregated by those for loan modifications related to the COVID-19 pandemic made between March 1, 2020which a specific allowance was required and the earlier of January 1,those for which a specific allowance was not required at June 30, 2022 or 60 days after the end of the COVID-19 national emergency, provided certain criteria are met. This relief can be applied to loan modifications for borrowers that defer or delay the payment of principal or interest, or change the interest rate on the loan and that were not more than 30 days past due as of December 31, 2019. In April 2020, federal and state banking regulators issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus to provide further interpretation of when a borrower is experiencing financial difficulty, specifically indicating that if the modification is either short-term (i.e., up to nine months) or mandated by a federal or state government in response to the COVID-19 pandemic, the borrower is not experiencing financial difficulty under ASC 310-40. The Corporation continues to prudently work with borrowers negatively impacted by the COVID-19 pandemic while managing credit risks and recognizing appropriate allowance for credit losses on its loan portfolio. See Note 2 to the financial statements included elsewhere in this report for additional information.

There were 14 loans totaling $3.8 million and $4.0 million that were classified as TDRs at September 30, 2021 and December 31, 2020, respectively.  The following tables present the volume and recorded investment in TDRs at the times they were modified, by class and type of modification that occurred during the periods indicated:2021:

Temporary Rate
Modification

Extension of Maturity

Modification of Payment
and Other Terms

Impaired Loans with
Specific Allowance

Impaired
Loans with
No Specific
Allowance

Total Impaired Loans

(in thousands)

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

    

Recorded
Investment

    

Related
Allowances

    

Recorded
Investment

    

Recorded
Investment (1)

    

Unpaid
Principal
Balance

Nine months ended September 30, 2021

June 30, 2022

Commercial real estate

Non owner-occupied

$

1

$

109

$

$

$

$

103

$

103

$

103

All other CRE

2,164

2,164

2,164

Acquisition and development

1-4 family residential construction

224

224

224

All other A&D

1

202

375

375

1,584

Commercial and industrial

Residential mortgage

Residential mortgage – term

1

215

270

29

1,779

2,049

2,108

Residential mortgage – home equity

335

335

335

Consumer

33

33

33

33

Total

$

3

$

526

$

Total impaired loans

$

303

$

62

$

4,980

$

5,283

$

6,551

December 31, 2021

Commercial real estate

Non owner-occupied

$

$

$

106

$

106

$

106

All other CRE

2,259

2,259

2,259

Acquisition and development

1-4 family residential construction

239

239

239

All other A&D

390

390

1,599

Commercial and industrial

90

28

90

2,304

Residential mortgage

Residential mortgage – term

344

31

1,897

2,241

2,302

Residential mortgage – home equity

46

5

357

403

422

Consumer

Total impaired loans

$

480

$

64

$

5,248

$

5,728

$

9,231

Temporary Rate
Modification

Extension of Maturity

Modification of Payment
and Other Terms

(in thousands)

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Nine months ended September 30, 2020

Commercial real estate

Non owner-occupied

$

$

$

All other CRE

1

2,226

Acquisition and development

1-4 family residential construction

All other A&D

2

430

Commercial and industrial

Residential mortgage

Residential mortgage – term

1

46

2

457

3

356

Residential mortgage – home equity

Consumer

Total

1

$

46

4

$

887

4

$

2,582

(1)Recorded investment consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal and unamortized deferred loan origination fees and cost.

Loans that are collectively evaluated for impairment are analyzed with general allowances being made as appropriate. For general allowances, historical loss trends are used in the estimation of losses in the current portfolio. These historical loss amounts are modified by other qualitative factors.

The classes described above, which are based on the Federal call code assigned to each loan, provide the starting point for the ALL analysis. Management tracks the historical net charge-off activity (full and partial charge-offs, net of full and partial recoveries) at the call code level. A historical charge-off factor is calculated utilizing a defined number of consecutive historical quarters. Consumer pools currently utilize a rolling twelve quarters, while Commercial pools currently utilize a rolling eight quarters.

Management supplements the historical charge-off factor with a number of additional qualitative factors that are likely to cause estimated credit losses associated with the existing loan pools to differ from historical loss experience. The additional factors, which are evaluated quarterly and updated using information obtained from internal, regulatory, and governmental sources, are:  (a) national and local economic trends and conditions; (b) levels of and trends in delinquency rates and non-accrual loans; (c) trends in volumes and terms of loans; (d) effects of changes in lending policies; (e) experience, ability, and depth of lending staff; (f) value of underlying collateral; and (g) concentrations of credit from a loan type, industry and/or geographic standpoint.

22

Table of Contents

DuringManagement reviews the nine month period ended September 30, 2021, there were 0 new TDRsloan portfolio on a quarterly basis using a defined, consistently applied process to make appropriate and 3 existing TDRstimely adjustments to the ALL. When information confirms all or part of specific loans to be uncollectible, these amounts are promptly charged off against the ALL. Residential mortgage and consumer loans are charged off after they are 120 days contractually past due. All other loans are charged off based on an evaluation of the facts and circumstances of each individual loan. When the Bank believes that had reached their modification maturity date and was re-modified.its ability to collect is solely dependent on the liquidation of the collateral, a full or partial charge-off is recorded promptly to bring the recorded investment to an amount that the Bank believes is supported by an ability to collect on the collateral. The Bank had 0 significant commitments to lend additional funds to TDRs.

During the nine month period ended September 30, 2020, there were 0 new TDRs but 9 existing TDRscircumstances that had reached their modification maturity dates were re-modified.  These modifications did notmay impact the ALL.  DuringBank’s decision to charge-off all or a portion of a loan include default or non-payment by the nine months ended September 30, 2021borrower, scheduled foreclosure actions, and/or prioritization of the Bank’s claim in bankruptcy. There may be circumstances where due to pending events, the Bank will place a specific allocation of the ALL on a loan for which a partial charge-off has been previously recognized. This specific allocation may be either charged-off or removed depending upon the outcome of the pending event. Full or partial charge-offs are not recovered until full principal and 2020, there were 0 payment defaults.interest on the loan have been collected, even if a subsequent appraisal supports a higher value. In most cases, loans with partial charge-offs remain in non-accrual status. Both full and partial charge-offs reduce the recorded investment of the loan and the ALL and are considered to be charge-offs for purposes of all credit loss metrics and trends, including the historical rolling charge-off rates used in the determination of the ALL.

The following tables present the volumeactivity in the ALL for the six and recorded investment in TDRs at the times they were modified, by classthree month periods ended June 30, 2022 and type of modification that occurred during the periods indicated:2021:

(in thousands)

    

Commercial
Real Estate

    

Acquisition
and
Development

    

Commercial
and
Industrial

    

Residential
Mortgage

    

Consumer

    

Unallocated

    

Total

ALL balance at January 1, 2022

$

6,032

$

2,615

$

2,460

$

3,484

$

934

$

430

$

15,955

Charge-offs

(52)

(33)

(545)

(630)

Recoveries

1

20

9

101

76

207

Provision

187

(463)

413

(440)

508

205

ALL balance at June 30, 2022

$

6,220

$

2,172

$

2,830

$

3,112

$

973

$

430

$

15,737

ALL balance at January 1, 2021

$

5,543

$

2,339

$

2,584

$

5,150

$

370

$

500

$

16,486

Charge-offs

(81)

(82)

(175)

(338)

Recoveries

110

38

29

78

255

Provision

132

132

322

(238)

317

665

ALL balance at June 30, 2021

$

5,675

$

2,500

$

2,944

$

4,859

$

590

$

500

$

17,068

Temporary Rate
Modification

Extension of Maturity

Modification of Payment
and Other Terms

(in thousands)

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Three months ended September 30, 2021

Commercial real estate

Non owner-occupied

$

$

$

All other CRE

Acquisition and development

1-4 family residential construction

All other A&D

1

202

Commercial and industrial

Residential mortgage

Residential mortgage – term

1

215

Residential mortgage – home equity

Consumer

Total

$

2

$

417

$

Temporary Rate
Modification

Extension of Maturity

Modification of Payment
and Other Terms

(in thousands)

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Three months ended September 30, 2020

Commercial real estate

Non owner-occupied

$

$

$

All other CRE

Acquisition and development

1-4 family residential construction

All other A&D

1

213

Commercial and industrial

Residential mortgage

Residential mortgage – term

1

227

1

111

Residential mortgage – home equity

Consumer

Total

$

2

$

440

1

$

111

(in thousands)

Commercial
Real Estate

Acquisition
and
Development

Commercial
and
Industrial

Residential
Mortgage

Consumer

Unallocated

Total

ALL balance at April 1, 2022

$

5,922

$

2,542

$

2,513

$

2,945

$

940

$

430

$

15,292

Charge-offs

(4)

(24)

(299)

(327)

Recoveries

2

6

86

54

148

Provision

298

(372)

315

105

278

624

ALL balance at June 30, 2022

$

6,220

$

2,172

$

2,830

$

3,112

$

973

$

430

$

15,737

ALL balance at April 1, 2021

$

5,404

$

2,423

$

2,831

$

5,028

$

368

$

500

$

16,554

Charge-offs

(95)

(95)

Recoveries

9

2

12

31

54

Provision

271

68

111

(181)

286

555

ALL balance at June 30, 2021

$

5,675

$

2,500

$

2,944

$

4,859

$

590

$

500

$

17,068

DuringThe ALL is based on estimates, and actual losses may vary from current estimates.  Management believes that the three month period ended September 30, 2021, there were 0 new TDRsgranularity of the homogeneous pools and 2 existing TDRsthe related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that had reached their modification maturity dates and were re-modified. The Bank had 0 significant commitments to lend additional funds to TDR borrowers.  is representative of the risk found in the components of the portfolio at any given date.

23

Table of Contents

During the three month period ended Sept 30, 2020, there were 0 new TDRs but 2 existing TDRs that had reached their modification maturity dates were re-modified.  These re-modifications did not impact the ALL.  During the three months ended September 30, 2021 and 2020, there were 0 payment defaults under TDRs.

The following table presents the average recorded investment in impaired loans by class and related interest income recognized for the periods indicated:

Six months ended

Six months ended

June 30, 2022

June 30, 2021

(in thousands)

    

Average
investment

    

Interest income
recognized on
an accrual basis

    

Interest income
recognized on
a cash basis

Average
investment

    

Interest income
recognized on
an accrual basis

    

Interest income
recognized on
a cash basis

Commercial real estate

Non owner-occupied

$

105

$

6

$

$

3,165

$

6

$

All other CRE

2,211

45

3,058

69

Acquisition and development

1-4 family residential construction

231

7

259

6

All other A&D

382

599

6

Commercial and industrial

45

Residential mortgage

Residential mortgage – term

2,166

24

5

2,672

39

5

Residential mortgage – home equity

376

454

Consumer

11

17

Total

$

5,527

$

82

$

5

$

10,224

$

126

$

5

Three months ended

Three months ended

June 30, 2022

June 30, 2021

(in thousands)

Average
investment

Interest income
recognized on
an accrual basis

Interest income
recognized on
a cash basis

Average
investment

Interest income
recognized on
an accrual basis

Interest income
recognized on
a cash basis

Commercial real estate

Non owner-occupied

$

105

$

3

$

$

4,689

$

3

$

All other CRE

2,188

22

2,982

34

Acquisition and development

1-4 family residential construction

228

3

255

3

All other A&D

378

611

3

Commercial and industrial

Residential mortgage

Residential mortgage – term

2,130

12

2,585

19

Residential mortgage – home equity

363

474

Consumer

17

11

Total

$

5,409

$

40

$

$

11,607

$

62

$

In the normal course of business, the Bank modifies loan terms for various reasons. These reasons may include as a retention strategy to compete in the current interest rate environment, and to re-amortize or extend a loan term to better match the loan’s payment stream with the borrower’s cash flows. A modified loan is considered to be a troubled debt restructuring (a “TDR”) when the Bank has determined that the borrower is troubled (i.e. experiencing financial difficulties) and a concession has been granted. The Bank evaluates the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. To make this determination, the Bank performs a global financial review of the borrower and loan guarantors to assess their current ability to meet their financial obligations.

When the Bank restructures a loan to a troubled borrower, the loan terms (i.e. interest rate, payment, amortization period and/or maturity date) are modified in such a way to enable the borrower to cover the modified debt service payments based on current financials and cash flow adequacy. If a borrower’s hardship is thought to be temporary, then modified terms are only offered for that

24

Table of Contents

time period. Where possible, the Bank obtains additional collateral and/or secondary payment sources at the time of the restructure in order to put the Bank in the best possible position if the borrower is not able to meet the modified terms. To date, the Bank has not forgiven any principal as a restructuring concession. The Bank will not offer modified terms if it believes that modifying the loan terms will only delay an inevitable permanent default.

All loans designated as TDRs are considered impaired loans and may be in either accruing or non-accruing status. If the loan was accruing at the time of the modification, then it continues to be in accruing status subsequent to the modification. Non-accrual TDRs may return to accruing status when there has been sufficient payment performance for a period of at least six months. TDRs are considered to be in payment default if, subsequent to modification, the loans are transferred to non-accrual status or to foreclosure. A loan may be removed from being reported as a TDR in the calendar year following the modification if the interest rate at the time of modification was consistent with the interest rate for a loan with comparable credit risk and the loan has performed according to its modified terms for at least six months. Further, a loan that has been removed from TDR reporting status and has been subsequently re-modified at standard market terms, may be removed from impaired status as well.

The volume, type and performance of TDR activity is considered in the assessment of the local economic trend qualitative factor used in the determination of the ALL for loans that are evaluated collectively for impairment.

There were 12 loans totaling $3.2 million and $3.3 million that were classified as TDRs at June 30, 2022 and December 31, 2021, respectively.  The following table presents the volume and recorded investment in TDRs at the times they were modified, by class and type of modification that occurred during the periods indicated.

During the six month period ended June 30, 2022, there were no new TDRs and no existing TDRs that were re-modified. The Bank had no significant commitments to lend additional funds to TDRs.  During the six month period ended June 30, 2021, there were no new TDRs and one existing TDR that had reached its modification maturity date was re-modified.  These modifications did not impact the ALL.  During the six month periods ended June 30, 2022 and 2021, there were 0 payment defaults.

Temporary Rate
Modification

Extension of Maturity

Modification of Payment
and Other Terms

(in thousands)

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Six months ended June 30, 2021

Commercial real estate

Non owner-occupied

$

1

$

109

$

All other CRE

Acquisition and development

1-4 family residential construction

All other A&D

Commercial and industrial

Residential mortgage

Residential mortgage – term

Residential mortgage – home equity

Consumer

Total

$

1

$

109

$

25

Table of Contents

The following table presents the volume and recorded investment in TDRs at the times they were modified, by class and type of modification that occurred during the periods indicated.

During the three month period ended June 30, 2022, there were no new TDRs and no existing TDRs that were re-modified. The Bank had no significant commitments to lend additional funds to TDR borrowers.  During the three month period ended June 30, 2021, there were no new TDRs and one existing TDR that had reached its modification maturity date was re-modified.  These re-modifications did not impact the ALL.  During the three months ended June 30, 2022 and 2021, there were 0 payment defaults under TDRs.

Temporary Rate
Modification

Extension of Maturity

Modification of Payment
and Other Terms

(in thousands)

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Number of
Contracts

Recorded
Investment

Three months ended June 30, 2021

Commercial real estate

Non owner-occupied

$

1

$

109

$

All other CRE

Acquisition and development

1-4 family residential construction

All other A&D

Commercial and industrial

Residential mortgage

Residential mortgage – term

Residential mortgage – home equity

Consumer

Total

$

1

$

109

$

Note 65 - Other Real Estate Owned, net

The following table presents the components of other real estate owned (“OREO”) at SeptemberJune 30, 20212022 and December 31, 2020:2021:

(in thousands)

    

September 30,
2021

    

December 31,
2020

    

June 30,
2022

    

December 31,
2021

Commercial real estate

$

900

$

945

Acquisition and development

5,763

8,441

$

4,477

$

4,477

Residential mortgage

40

Total OREO, net

$

6,663

$

9,386

$

4,517

$

4,477

The following table presents the activity in the OREO valuation allowance for the ninesix and three month periods ended SeptemberJune 30, 20212022 and 2020:2021:

Nine Months Ended

Three Months Ended

Six Months Ended

Three Months Ended

September 30,

September 30,

June 30,

June 30,

(in thousands)

    

2021

    

2020

2021

2020

    

2022

    

2021

2022

2021

Balance beginning of period

$

1,010

$

1,790

$

543

$

1,734

$

453

$

1,010

$

453

$

1,004

Fair value adjustment

(160)

102

63

(160)

(164)

Sales of OREO

(396)

(261)

(89)

(166)

(307)

(297)

Balance at end of period

$

454

$

1,631

$

454

$

1,631

$

453

$

543

$

453

$

543

26

Table of Contents

The following table presents the components of OREO (income)/expenses, net, for the ninesix and three month periods ended SeptemberJune 30, 20212022 and 2020:2021:

Nine Months Ended

Three Months Ended

Six Months Ended

Three Months Ended

September 30,

September 30,

June 30,

June 30,

(in thousands)

    

2021

    

2020

2021

2020

    

2022

    

2021

2022

2021

(Gains)/losses on sale of real estate, net

$

(594)

$

(93)

$

2

$

(72)

Gains on sale of real estate, net

$

$

(596)

$

$

(105)

Fair value adjustment, net

(160)

102

63

(160)

(164)

Expenses, net

345

117

150

52

249

195

153

72

Rental and other income

(51)

(123)

(2)

(37)

(2)

(49)

(1)

(1)

Total OREO (income)/expense, net

$

(460)

$

3

$

150

$

6

Total OREO expenses/(income), net

$

247

$

(610)

$

152

$

(198)

Note 76 – Fair Value of Financial Instruments

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

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

The Corporation measures fair values based on the fair value hierarchy established in ASC Paragraph 820-10-35-37. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1

24

Table of Contents

measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs that may be used to measure fair value under the hierarchy are as follows:

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

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

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

The level established within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Management believes that the Corporation’s valuation techniques Transfers in and out of Level 1, 2 or 3 are appropriate and consistent with the techniques used by other market participants. However, the use of different methodologies and assumptions could result in a different estimate ofrecorded at fair valuesvalue at the beginning of the reporting date. The valuation techniques used by the Corporation to measure, on a recurring basis and on a non-recurring basis, the fair value of assets as of September 30, 2021 are discussed in the paragraphs that follow.period.

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

27

Table of Contents

The fair value of investments available-for-sale is determined using a market approach. As of SeptemberAt June 30, 2022 and December 31, 2021, the U.S. Government agencies and treasuries, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisionsmunicipal bonds excluding the tax increment financing (“TIF”) bonds, weresegments are classified as Level 2 within the valuation hierarchy. Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which the Corporation haswe have historically transacted both purchases and sales of investment securities. The TIF bonds were classified as Level 3 within the valuation hierarchy as they are not openly traded.

The CDO segment, which consists of pooled trust preferred securities issued by banks, thrifts and insurance companies, is classified as Level 3 within the valuation hierarchy. At September 30, 2021, the Corporation owned 9 trust preferred securities with an amortized cost of $18.6 million and a fair value of $17.1 million. As of September 30, 2021, the market for these securities was not active and the markets for similar securities were also not active. Recent developments in the credit markets have had a negative impact on the market for CDOs. Specifically, as COVID-19 developed, which led to deteriorating performance of credit instruments, investors became less willing to buy a range of structured credit products. The result was massive spread-widening across a wide range of credit instruments, and for CDO bonds in particular. At present, we believe that it is not currently economically feasible to form new CDOs or restructure existing CDOs, as the market for CDO bonds has effectively disappeared. The market values for these securities or any securities other than those issued or guaranteed by the U.S. Department of the Treasury are depressed relative to historical levels. Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue. Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at September 30, 2021, (b) an income valuation approach technique (i.e. present value) that maximizes the use of relevant observable inputs and minimizes the use of unobservable inputs will be equally or more representative of fair value than a market approach, and (c) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.

25

Table of Contents

Management uses an independent third party to prepare both the evaluations of OTTI as well as the fair value determinations for its CDO portfolio. Management believes that the valuations are adequately reflected at September 30, 2021.

The approach used by the third party to determine fair value involved several steps, which included detailed credit and structural evaluation of each piece of collateral in each bond, projection of default, recovery and prepayment/amortization probabilities for each piece of collateral in the bond, and discounted cash flow modeling. The discount rate methodology used by the third party combines a baseline current market yield for comparable corporate and structured credit products with adjustments based on evaluations of the differences found in structure and risks associated with actual and projected credit performance of each CDO being valued. Currently, the only active and liquid trading market that exists is for stand-alone trust preferred securities, with a limited market for highly-rated CDO securities that are more senior in the capital structure than the securities in the CDO portfolio. Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments.

At September 30, 2021, these conditions had a minimal impact on the trust preferred bonds, although there has been a significant effect on several asset classes in the equity and fixed income markets related to COVID-19. Management will continue to review assumptions as they relate to the impact of COVID-19 during the remainder of the year.

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

Impaired loans – Fair valueLoans included in the table below are those that are considered impaired with a specific allocation or with partial charge-offs, based upon the guidance of the collateral dependent loans isloan impairment subsection of the Receivables Topic, ASC Section 310-10-35, under which the Corporation has measured impairment generally based on the loan’s observable market price or the fair value of the collateral (less estimated selling costs). Collateral may be real estate and/or business assets such as equipment, inventory and/or accounts receivable. Theloan’s collateral. Fair value consists of business equipment, inventorythe loan balance less its valuation allowance and accounts receivable collateral is generally determined based on eitherindependent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

Equity Investment- Equity investments included in the table below are considered impaired with losses recognized on the income statement in net bookgains.  Fair value of the business’ financial statements or evaluations/appraisals obtained by the Bank.   If necessary, these values may be discountedequity investment was based on management’s review and analysis.  Appraised and reported values may be discounted based on management’s historical experience, changes in market conditions froman independent third-party valuation report where the time of valuation, and/or management’s expertise and knowledge of the client and client’s business. Collateral dependent loans are reviewed and evaluated on at least a quarterly basis for additional individual reserve and adjusted accordingly,value was determined based on the factors identified above.

revenue multiples of like kind information technology businesses.  These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

Other real estate owned – OREO included in the table below are considered impaired with specific write-downs. OREO is adjusted to fairFair value upon acquisitionof other real estate owned was based on independent third-party appraisals of the real estate collateral. Subsequently, OREO is carried atproperties. These values were determined based on the lowersales prices of carrying value or fair value. The estimated fair value for OREOsimilar properties in the approximate geographic area. These assets are included inas Level 3 fair values based upon the lowest level of input that is determined by independent market based appraisals and other available market information, less costssignificant to sell, that may be reduced further based on market expectations or an executed sales agreement. If the fair value of the collateral deteriorates subsequent to initial recognition, the Corporation records the OREO as a nonrecurring Level 3 adjustment. Valuation techniques are consistent with those techniques applied in prior periods.

measurements.

2628

Table of Contents

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2021 and December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:

(in thousands)

    

Fair Value at
September 30,
2021

    

Valuation
Technique

    

Significant
Unobservable
Inputs

    

Significant
Unobservable
Input Value

Recurring:

Investment Securities – available for sale

$

17,092

Discounted Cash Flow

Discount Rate

4.50%

Non-recurring:

Impaired Loans

$

2,002

Market Comparable Properties

Marketability Discount

10.0% - 15.0% (1) (weighted avg 10.5%)

Other Real Estate Owned

$

349

Market Comparable Properties

Marketability Discount

15.0%

(in thousands)

    

Fair Value at
December 31,
2020

    

Valuation
Technique

    

Significant
Unobservable
Inputs

    

Significant
Unobservable
Input Value

Recurring:

Investment Securities – available for sale

$

13,260

Discounted Cash Flow

Discount Rate

5.50%

Non-recurring:

Impaired Loans

$

1,465

Market Comparable Properties

Marketability Discount

10.0% - 15.0% (1) (weighted avg 12.5%)

Other Real Estate Owned

$

913

Market Comparable Properties

Marketability Discount

15.0%

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

27

Table of Contents

For assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at SeptemberJune 30, 20212022 and December 31, 20202021 were as follows:

Fair Value Measurements
at September 30, 2021 Using

Fair Value Measurements
at June 30, 2022 Using

Quoted

Quoted

Prices in

Significant

Prices in

Significant

Assets/(liabilities)

Active Markets

Other

Significant

Assets/(liabilities)

Active Markets

Other

Significant

Measured at

for Identical

Observable

Unobservable

Measured at

for Identical

Observable

Unobservable

Fair Value

Assets

Inputs

Inputs

Fair Value

Assets

Inputs

Inputs

(in thousands)

    

09/30/21

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

06/30/22

    

(Level 1)

    

(Level 2)

    

(Level 3)

Recurring:

Investment securities available-for-sale:

U.S. government agencies

$

53,734

$

53,734

$

9,915

$

9,915

Residential mortgage-backed agencies

$

30,354

$

30,354

$

41,246

$

41,246

Commercial mortgage-backed agencies

$

55,509

$

55,509

$

31,996

$

31,996

Collateralized mortgage obligations

$

69,079

$

69,079

$

24,150

$

24,150

Obligations of states and political subdivisions

$

9,796

$

9,796

$

8,323

$

8,323

Corporate bonds

$

979

$

979

Collateralized debt obligations

$

17,092

$

17,092

$

16,258

$

16,258

Financial derivatives

$

(727)

$

(727)

$

635

$

635

Non-recurring:

Impaired loans

$

2,002

$

2,002

Impaired loans, net

$

337

$

337

Equity Investment

$

590

$

590

Other real estate owned

$

349

$

349

$

$

Fair Value Measurements
at December 31, 2020 Using

Fair Value Measurements
at December 31, 2021 Using

Quoted

Quoted

Prices in

Significant

Prices in

Significant

Assets/(liabilities)

Active Markets

Other

Significant

Assets/(liabilities)

Active Markets

Other

Significant

Measured at

for Identical

Observable

Unobservable

Measured at

for Identical

Observable

Unobservable

Fair Value

Assets

Inputs

Inputs

Fair Value

Assets

Inputs

Inputs

(in thousands)

    

12/31/20

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

12/31/21

    

(Level 1)

    

(Level 2)

    

(Level 3)

Recurring:

Investment securities available-for-sale:

U.S. government agencies

$

76,433

$

76,433

$

67,169

$

67,169

Residential mortgage-backed agencies

$

22,899

$

22,899

$

48,661

$

48,661

Commercial mortgage-backed agencies

$

33,042

$

33,042

$

50,868

$

50,868

Collateralized mortgage obligations

$

70,637

$

70,637

$

90,077

$

90,077

Obligations of states and political subdivisions

$

10,614

$

10,614

$

12,804

$

12,804

Collateralized debt obligations

$

13,260

$

13,260

$

17,192

$

17,192

Financial derivatives

$

(1,320)

$

(1,320)

$

(453)

$

(453)

Non-recurring:

Impaired loans

$

1,465

$

1,465

Impaired loans, net

$

408

$

408

Equity investment

$

590

$

590

Other real estate owned

$

913

$

913

$

349

$

349

At June 30, 2022, the fair value of impaired loans with a valuation allowance or partial charge-off was $0.8 million, net of valuation allowances of $61,811 and partial charge-offs of $1.3 million.  During the six months ended June 30, 2022, changes to the valuation allowance or additional charge off activity was recorded on loans with a net balance of approximately $0.3 million.  At December 31, 2021, the fair value of impaired loans with a valuation allowance or charge-off was $1.0 million, net of valuation allowances of $64,700 and charge-offs of $1.3 million. During the year ended December 31, 2021, changes to the valuation allowance or additional charge off activity was recorded on loans with a net balance of approximately $0.4 million.

29

Table of Contents

There were 0 transfers of assets between any of the fair value hierarchy for the nine and threesix month periods ended SeptemberJune 30, 2022 or 2021.

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2022 and December 31, 2021, or 2020.the significant unobservable inputs used in the fair value measurements were as follows:

(in thousands)

    

Fair Value at
June 30,
2022

    

Valuation
Technique

    

Significant
Unobservable
Inputs

    

Significant
Unobservable
Input Value

Recurring:

Investment Securities – available for sale -CDO

$

16,258

Discounted Cash Flow

Discount Margin

Range of low to mid 300 and mid 400

Non-recurring:

Impaired Loans, net

$

337

Market Comparable Properties

Marketability Discount

10.0% - 15.0% (1) (weighted avg 14.2%)

Equity Investment

$

590

Market Method

Revenue Multiples

2.8x

(in thousands)

    

Fair Value at
December 31,
2021

    

Valuation
Technique

    

Significant
Unobservable
Inputs

    

Significant
Unobservable
Input Value

Recurring:

Investment Securities – available for sale -CDO

$

17,192

Discounted Cash Flow

Discount Rate

Libor + 3.25%

Non-recurring:

Impaired Loans, net

$

408

Market Comparable Properties

Marketability Discount

10.0% - 15.0% (1) (weighted avg 13.2%)

Equity Investment

$

590

Market Method

Revenue Multiples

2.8x

Other Real Estate Owned

$

349

Market Comparable Properties

Marketability Discount

15.0%

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

2830

Table of Contents

The following tables show a reconciliation of the beginning and ending balances for fair valued assets measured on a recurring basis using Level 3 significant unobservable inputs for the ninesix and three month periods ended SeptemberJune 30, 20212022 and 2020:2021:

Fair Value Measurements

Fair Value Measurements

Using Significant Unobservable Inputs

Using Significant Unobservable Inputs

(Level 3)

(Level 3)

Investment Securities

Investment Securities

(in thousands)

    

Available for Sale

    

Available for Sale

Beginning balance January 1, 2021

$

13,260

Beginning balance January 1, 2022

$

17,192

Total losses realized/unrealized:

Included in other comprehensive income

3,832

Ending balance September 30, 2021

$

17,092

Included in other comprehensive loss

(934)

Ending balance June 30, 2022

$

16,258

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

(in thousands)

 Investment Securities
Available for Sale

 Investment Securities
Available for Sale

Beginning balance July 1, 2021

$

16,230

Beginning balance April 1, 2022

$

17,319

Total gains realized/unrealized:

Included in other comprehensive income

862

(1,061)

Ending balance September 30, 2021

$

17,092

Ending balance June 30, 2022

$

16,258

Fair Value Measurements

Fair Value Measurements

Using Significant Unobservable Inputs

Using Significant Unobservable Inputs

(Level 3)

(Level 3)

Investment Securities

Investment Securities

(in thousands)

    

Available for Sale

    

Available for Sale

Beginning balance January 1, 2020

$

14,354

Beginning balance January 1, 2021

$

13,260

Total losses realized/unrealized:

Included in other comprehensive loss

(1,594)

2,970

Ending balance September 30, 2020

$

12,760

Ending balance June 30, 2021

$

16,230

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)

(in thousands)

 Investment Securities
Available for Sale

 Investment Securities
Available for Sale

Beginning balance July 1, 2020

$

11,952

Beginning balance April 1, 2021

$

13,649

Total losses realized/unrealized:

Included in other comprehensive income

808

2,581

Ending balance September 30, 2020

$

12,760

Ending balance June 30, 2021

$

16,230

There were 0 gains or losses included in earnings attributable to the change in realized/unrealized gains or losses related to the assets for the ninesix and three month periods ended SeptemberJune 30, 20212022 or 2020.2021.

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

2931

Table of Contents

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

September 30, 2021

Fair Value Measurements

June 30, 2022

Fair Value Measurements

Quoted

Quoted

Prices in

Significant

Prices in

Significant

Active Markets

Other

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

for Identical

Observable

Unobservable

Carrying

Fair

Assets

Inputs

Inputs

Carrying

Fair

Assets

Inputs

Inputs

(in thousands)

    

Amount

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Amount

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Financial Assets:

Cash and due from banks

$

129,062

$

129,062

$

129,062

$

20,108

$

20,108

$

20,108

Interest bearing deposits in banks

5,876

5,876

5,876

1,543

1,543

1,543

Investment securities - AFS

235,564

235,564

$

218,472

$

17,092

132,867

132,867

$

116,609

$

16,258

Investment securities - HTM

61,979

71,707

42,633

29,074

240,588

220,301

195,613

24,688

Restricted bank stock

1,029

N/A

1,026

N/A

Loans, net

1,143,791

1,135,878

1,135,878

1,217,772

1,159,687

1,159,687

Financial derivatives

635

635

635

Accrued interest receivable

5,034

5,034

948

4,086

5,055

5,055

945

4,110

Financial Liabilities:

Deposits - non-maturity

1,270,342

1,270,342

1,270,342

1,349,440

1,349,440

1,349,440

Deposits - time deposits

174,152

175,298

175,298

134,914

135,048

135,048

Financial derivatives

727

727

727

Short-term borrowed funds

72,396

72,396

72,396

69,914

69,914

69,914

Long-term borrowed funds

30,929

30,980

30,980

30,929

30,967

30,967

Accrued interest payable

142

142

142

92

92

92

Off balance sheet financial instruments

December 31, 2020

Fair Value Measurements

December 31, 2021

Fair Value Measurements

Quoted

Quoted

Prices in

Significant

Prices in

Significant

Active Markets

Other

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

for Identical

Observable

Unobservable

Carrying

Fair

Assets

Inputs

Inputs

Carrying

Fair

Assets

Inputs

Inputs

(in thousands)

    

Amount

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Amount

    

Value

    

(Level 1)

    

(Level 2)

    

(Level 3)

Financial Assets:

Cash and due from banks

$

146,673

$

146,673

$

146,673

$

109,823

$

109,823

$

109,823

Interest bearing deposits in banks

2,759

2,759

2,759

5,897

5,897

5,897

Investment securities - AFS

226,885

226,885

$

213,625

$

13,260

286,771

286,771

$

269,579

$

17,192

Investment securities - HTM

68,263

77,612

49,442

28,170

56,259

65,369

36,448

28,921

Restricted bank stock

4,468

N/A

1,029

1,029

1,029

Loan held for sale

67

67

67

Loans, net

1,149,596

1,150,186

1,150,186

1,137,440

1,122,671

1,122,671

Accrued interest receivable

6,241

6,241

907

5,334

4,821

4,821

4,821

Financial Liabilities:

Deposits - non-maturity

1,194,140

1,194,140

1,194,140

1,306,145

1,306,145

1,306,145

Deposits - time deposits

228,226

231,241

231,241

163,229

163,961

163,961

Financial derivative

1,320

1,320

1,320

Financial derivatives

453

453

453

Short-term borrowed funds

49,160

49,160

49,160

57,699

57,699

57,699

Long-term borrowed funds

100,929

104,825

104,825

30,929

31,085

31,085

Accrued interest payable

391

391

391

137

137

137

Off balance sheet financial instruments

3032

Table of Contents

Note 87 – Accumulated Other Comprehensive Loss

The following table presents the changes in each component of accumulated other comprehensive loss for the 12 months ended December 31, 2020,2021, and the three months ended March 31, 2021, the three months ended2022 and June 30, 2021, and the three months ended September 30, 2021:2022:

Investment

Investment

Investment

Investment

securities-

securities-

Investment

securities-

securities-

Investment

with OTTI

all other

securities-

Cash Flow

Pension

with OTTI

all other

securities-

Cash Flow

Pension

(in thousands)

    

AFS

    

AFS

    

HTM

    

Hedge

    

Plan

    

SERP

    

Total

    

AFS

    

AFS

    

HTM

    

Hedge

    

Plan

    

SERP

    

Total

Accumulated OCL, net:

Balance - January 1, 2020

$

(2,542)

$

(853)

$

(899)

$

(85)

$

(20,417)

$

(1,175)

$

(25,971)

Balance - January 1, 2021

$

(3,277)

$

(25)

$

(315)

$

(954)

$

(22,630)

$

(1,662)

$

(28,863)

Other comprehensive income/(loss) before reclassifications

(587)

1,291

(869)

(3,262)

(625)

(4,052)

2,475

(5,611)

635

3,431

(521)

409

Amounts reclassified from accumulated other comprehensive loss

(148)

(463)

584

1,049

138

1,160

(147)

(113)

181

1,091

128

1,140

Balance - December 31, 2020

$

(3,277)

$

(25)

$

(315)

$

(954)

$

(22,630)

$

(1,662)

$

(28,863)

Balance - December 31, 2021

$

(949)

$

(5,749)

$

(134)

$

(319)

$

(18,108)

$

(2,055)

$

(27,314)

Other comprehensive income/(loss) before reclassifications

266

(5,202)

405

(139)

(4,670)

103

(1,843)

(6,100)

614

(2,651)

(9,877)

Amounts reclassified from accumulated other comprehensive loss

(37)

45

272

55

335

(37)

(2)

69

204

50

284

Balance - March 31, 2021

$

(3,048)

$

(5,227)

$

(270)

$

(549)

$

(22,497)

$

(1,607)

$

(33,198)

Balance - March 31, 2022

$

(883)

$

(7,594)

$

(6,165)

$

295

$

(20,555)

$

(2,005)

$

(36,907)

Other comprehensive income/(loss) before reclassifications

1,581

2,034

(34)

938

4,519

(582)

(3,924)

182

(5,069)

(9,393)

Amounts reclassified from accumulated other comprehensive loss

(37)

(113)

34

272

55

211

(37)

168

204

49

384

Balance - June 30, 2021

$

(1,504)

$

(3,306)

$

(236)

$

(583)

$

(21,287)

$

(1,552)

$

(28,468)

Other comprehensive
income/(loss) before
reclassifications

550

(518)

79

(697)

(586)

Amounts reclassified from
accumulated other
comprehensive loss

(37)

31

273

55

322

Balance - September 30, 2021

$

(991)

$

(3,824)

$

(205)

$

(504)

$

(21,711)

$

(1,497)

$

(28,732)

Balance - June 30, 2022

$

(1,502)

$

(11,518)

$

(5,997)

$

477

$

(25,420)

$

(1,956)

$

(45,916)

3133

Table of Contents

The following tables present the components of other comprehensive income/(loss) for the six and three month periods ended June 30, 2022 and 2021:

Before

Tax

Components of Other Comprehensive Loss

Tax

(Expense)

(in thousands)

    

Amount

    

Benefit

    

Net

For the six months ended June 30, 2022

Available for sale (AFS) securities with OTTI:

Unrealized holding losses

$

(654)

$

175

$

(479)

Less: accretable yield recognized in income

101

(27)

74

Net unrealized losses on investments with OTTI

(755)

202

(553)

Available for sale securities – all other:

Unrealized holding losses

(16,203)

4,336

(11,867)

Unrealized holding losses on securities transferred from available for sale to held to maturity

8,328

(2,228)

6,100

Less: gains recognized in income

3

(1)

2

Net unrealized losses on all other AFS securities

(7,878)

2,109

(5,769)

Held to maturity securities:

Unrealized holding losses on securities transferred to held to maturity

(8,328)

2,228

(6,100)

Less: amortization recognized in income

(324)

87

(237)

Net unrealized losses on HTM securities

(8,004)

2,141

(5,863)

Cash flow hedges:

Unrealized holding gains

1,088

(292)

796

Pension Plan:

Unrealized net actuarial loss

(10,542)

2,822

(7,720)

Less: amortization of unrecognized loss

(558)

150

(408)

Net pension plan liability adjustment

(9,984)

2,672

(7,312)

SERP:

Unrealized net actuarial loss

Less: amortization of unrecognized loss

(135)

36

(99)

Net SERP liability adjustment

135

(36)

99

Other comprehensive loss

$

(25,398)

$

6,796

$

(18,602)

34

Table of Contents

The following tables present the components of other comprehensive income/(loss) for the nine and three month periods ended September 30, 2021 and 2020:

Before

Tax

Components of Other Comprehensive Income

Tax

(Expense)

(in thousands)

    

Amount

    

Benefit

    

Net

For the nine months ended September 30, 2021

Available for sale (AFS) securities with OTTI:

Unrealized holding gains

$

3,274

$

(877)

$

2,397

Less: accretable yield recognized in income

151

(40)

111

Net unrealized gains on investments with OTTI

3,123

(837)

2,286

Available for sale securities – all other:

Unrealized holding losses

(5,035)

1,349

(3,686)

Less: gains recognized in income

154

(41)

113

Net unrealized losses on all other AFS securities

(5,189)

1,390

(3,799)

Held to maturity securities:

Unrealized holding gains

Less: losses recognized in income

(54)

14

(40)

Less: amortization recognized in income

(96)

26

(70)

Net unrealized gains on HTM securities

150

(40)

110

Cash flow hedges:

Unrealized holding gains

615

(165)

450

Pension Plan:

Unrealized net actuarial gain

139

(37)

102

Less: amortization of unrecognized loss

(1,116)

299

(817)

Net pension plan liability adjustment

1,255

(336)

919

SERP:

Unrealized net actuarial loss

Less: amortization of unrecognized loss

(226)

���

60

(166)

Less: amortization of prior service costs

1

1

Net SERP liability adjustment

225

(60)

165

Other comprehensive income

$

179

$

(48)

$

131

Before

Tax

Components of Other Comprehensive Income

Tax

(Expense)

(in thousands)

    

Amount

    

Benefit

    

Net

For the six months ended June 30, 2021

Available for sale (AFS) securities with OTTI:

Unrealized holding gains

$

2,523

$

(676)

$

1,847

Less: gains recognized in income

Less: accretable yield recognized in income

101

(27)

74

Net unrealized gains on investments with OTTI

2,422

(649)

1,773

Available for sale securities – all other:

Unrealized holding losses

(4,327)

1,159

(3,168)

Less: gains recognized in income

154

(41)

113

Net unrealized losses on all other AFS securities

(4,481)

1,200

(3,281)

Held to maturity securities:

Unrealized holding gains

Less: amortization recognized in income

(108)

29

(79)

Net unrealized gains on HTM securities

108

(29)

79

Cash flow hedges:

Unrealized holding gains

507

(136)

371

Pension Plan:

Unrealized net actuarial gain

1,090

(291)

799

Less: amortization of unrecognized loss

(744)

200

(544)

Less: amortization of prior service costs

Net pension plan liability adjustment

1,834

(491)

1,343

SERP:

Unrealized net actuarial loss

Less: amortization of unrecognized loss

(150)

40

(110)

Net SERP liability adjustment

150

(40)

110

Other comprehensive income

$

540

$

(145)

$

395

3235

Table of Contents

Before

Tax

Components of Other Comprehensive Income

Tax

(Expense)

(in thousands)

    

Amount

    

Benefit

    

Net

For the nine months ended September 30, 2020

Available for sale (AFS) securities with OTTI:

Unrealized holding losses

$

(1,249)

$

335

$

(914)

Less: accretable yield recognized in income

151

(40)

111

Net unrealized losses on investments with OTTI

(1,400)

375

(1,025)

Available for sale securities – all other:

Unrealized holding gains

2,446

(655)

1,791

Less: gains recognized in income

622

(167)

455

Net unrealized gains on all other AFS securities

1,824

(488)

1,336

Held to maturity securities:

Unrealized holding gains

Less: gains recognized in income

60

(16)

44

Less: amortization recognized in income

(809)

217

(592)

Net unrealized gains on HTM securities

749

(201)

548

Cash flow hedges:

Unrealized holding losses

(1,335)

363

(972)

Pension Plan:

Unrealized net actuarial loss

(895)

240

(655)

Less: amortization of unrecognized loss

(1,074)

288

(786)

Net pension plan liability adjustment

179

(48)

131

SERP:

Unrealized net actuarial loss

Less: amortization of unrecognized loss

(141)

38

(103)

Less: amortization of prior service costs

2

(1)

1

Net SERP liability adjustment

139

(37)

102

Other comprehensive income

$

156

$

(36)

$

120

Components of Other Comprehensive Loss
(in thousands)

Before
Tax
Amount

Tax
(Expense)
Benefit

Net

For the three months ended June 30, 2022

Available for sale (AFS) securities with OTTI:

Unrealized holding losses

$

(795)

$

213

$

(582)

Less: accretable yield recognized in income

51

(14)

37

Net unrealized losses on investments with OTTI

(846)

227

(619)

Available for sale securities – all other:

Unrealized holding losses

(5,359)

1,435

(3,924)

Unrealized holding losses on securities transferred from available for sale to held to maturity

Less: gains recognized in income

Net unrealized losses on all other AFS securities

(5,359)

1,435

(3,924)

Held to maturity securities:

Unrealized holding gains

Less: amortization recognized in income

(230)

62

(168)

Net unrealized gains on HTM securities

230

(62)

168

Cash flow hedges:

Unrealized holding gains

249

(67)

182

Pension Plan:

Unrealized net actuarial loss

(6,922)

1,853

(5,069)

Less: amortization of unrecognized loss

(279)

75

(204)

Net pension plan liability adjustment

(6,643)

1,778

(4,865)

SERP:

Unrealized net actuarial loss

Less: amortization of unrecognized loss

(67)

18

(49)

Net SERP liability adjustment

67

(18)

49

Other comprehensive loss

$

(12,302)

$

3,293

$

(9,009)

3336

Table of Contents

Components of Other Comprehensive Loss
(in thousands)

Before
Tax
Amount

Tax
(Expense)
Benefit

Net

For the three months ended September 30, 2021

Available for sale (AFS) securities with OTTI:

Unrealized holding gains

$

751

$

(201)

$

550

Less: accretable yield recognized in income

50

(13)

37

Net unrealized gains on investments with OTTI

701

(188)

513

Available for sale securities – all other:

Unrealized holding losses

(708)

190

(518)

Less: gains recognized in income

Net unrealized gains on all other AFS securities

(708)

190

(518)

Held to maturity securities:

Unrealized holding gains

Less: losses recognized in income

(54)

14

(40)

Less: amortization recognized in income

12

(3)

9

Net unrealized gains on HTM securities

42

(11)

31

Cash flow hedges:

Unrealized holding gains

108

(29)

79

Pension Plan:

Unrealized net actuarial loss

(951)

254

(697)

Less: amortization of unrecognized loss

(372)

99

(273)

Net pension plan liability adjustment

(579)

155

(424)

SERP:

Less: amortization of unrecognized loss

(76)

20

(56)

Less: amortization of prior service costs

1

1

Net SERP liability adjustment

75

(20)

55

Other comprehensive loss

$

(361)

$

97

$

(264)

Components of Other Comprehensive Income
(in thousands)

Before
Tax
Amount

Tax
(Expense)
Benefit

Net

For the three months ended June 30, 2021

Available for sale (AFS) securities with OTTI:

Unrealized holding gains

$

2,160

$

(579)

$

1,581

Less: accretable yield recognized in income

51

(14)

37

Net unrealized gains on investments with OTTI

2,109

(565)

1,544

Available for sale securities – all other:

Unrealized holding gains

2,778

(744)

2,034

Less: gains recognized in income

154

(41)

113

Net unrealized gains on all other AFS securities

2,624

(703)

1,921

Held to maturity securities:

Less: amortization recognized in income

(46)

12

(34)

Net unrealized gains on HTM securities

46

(12)

34

Cash flow hedges:

Unrealized holding losses

(47)

13

(34)

Pension Plan:

Unrealized net actuarial gain

1,280

(342)

938

Less: amortization of unrecognized loss

(372)

100

(272)

Less: amortization of prior service costs

Net pension plan liability adjustment

1,652

(442)

1,210

SERP:

Unrealized net actuarial loss

Less: amortization of unrecognized loss

(73)

18

(55)

Net SERP liability adjustment

73

(18)

55

Other comprehensive income

$

6,457

$

(1,727)

$

4,730

3437

Table of Contents

Components of Other Comprehensive Income
(in thousands)

Before
Tax
Amount

Tax
(Expense)
Benefit

Net

For the three months ended September 30, 2020

Available for sale (AFS) securities with OTTI:

Unrealized holding gains

$

708

$

(190)

$

518

Less: accretable yield recognized in income

50

(13)

37

Net unrealized losses on investments with OTTI

658

(177)

481

Available for sale securities – all other:

Unrealized holding losses

(321)

86

(235)

Less: gains recognized in income

575

(154)

421

Net unrealized gains on all other AFS securities

(896)

240

(656)

Held to maturity securities:

Less: amortization recognized in income

(74)

20

(54)

Net unrealized gains on HTM securities

74

(20)

54

Cash flow hedges:

Unrealized holding gains

90

(18)

72

Pension Plan:

Unrealized net actuarial gain

1,891

(506)

1,385

Less: amortization of unrecognized loss

(358)

96

(262)

Net pension plan liability adjustment

2,249

(602)

1,647

SERP:

Less: amortization of unrecognized loss

(47)

13

(34)

Less: amortization of prior service costs

1

(1)

Net SERP liability adjustment

46

(12)

34

Other comprehensive income

$

2,221

$

(589)

$

1,632

35

Table of Contents

The following table presents the details of amounts reclassified from accumulated other comprehensive loss for the ninesix and three month periods ended SeptemberJune 30, 20212022 and 2020:2021:

Amounts Reclassified from

Nine Months Ended

Six Months Ended

Accumulated Other Comprehensive Loss

September 30,

Affected Line Item in the Statement

June 30,

Affected Line Item in the Statement

(in thousands)

    

2021

    

2020

    

Where Net Income is Presented

    

2022

    

2021

    

Where Net Income is Presented

Net unrealized gains on available for sale investment securities with OTTI:

Accretable yield

$

151

$

151

Interest income on taxable investment securities

$

101

$

101

Interest income on taxable investment securities

Taxes

(40)

(40)

Provision for income tax expense

(27)

(27)

Provision for income tax expense

$

111

$

111

Net of tax

$

74

$

74

Net of tax

Net unrealized gains on available for sale investment securities - all others:

Gains recognized

$

154

$

622

Net gains

$

3

$

154

Net gains

Taxes

(41)

(167)

Provision for income tax expense

(1)

(41)

Provision for income tax expense

$

113

$

455

Net of tax

$

2

$

113

Net of tax

Net unrealized losses on held to maturity securities:

Amortization

$

(96)

$

(809)

Interest income on taxable investment securities

$

(324)

$

(108)

Interest income on taxable investment securities

(Losses)/gains recognized

(54)

60

Net gains

Taxes

40

201

Provision for income tax expense

87

29

Provision for income tax expense

$

(110)

$

(548)

Net of tax

$

(237)

$

(79)

Net of tax

Net pension plan liability adjustment:

Amortization of unrecognized loss

$

(1,116)

$

(1,074)

Other Expense

$

(558)

$

(744)

Other Expense

Taxes

299

288

Provision for income tax expense

150

200

Provision for income tax expense

$

(817)

$

(786)

Net of tax

$

(408)

$

(544)

Net of tax

Net SERP liability adjustment:

Amortization of unrecognized loss

$

(226)

$

(141)

Other Expense

$

(135)

$

(150)

Other Expense

Amortization of prior service costs

1

2

Salaries and employee benefits

Taxes

60

37

Provision for income tax expense

36

40

Provision for income tax expense

$

(165)

$

(102)

Net of tax

$

(99)

$

(110)

Net of tax

Total reclassifications for the period

$

(868)

$

(870)

Net of tax

$

(668)

$

(546)

Net of tax

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Amounts Reclassified from

Three Months Ended

Accumulated Other Comprehensive Loss

September 30,

Affected Line Item in the Statement

(in thousands)

2021

2020

Where Net Income is Presented

Net unrealized gains on available for sale investment securities with OTTI:

Accretable Yield

$

50

$

50

Interest income on taxable investment securities

Taxes

(13)

(13)

Provision for income tax expense

$

37

$

37

Net of tax

Net unrealized gains on available for sale investment securities - all others:

Gains recognized

$

$

575

Net gains

Taxes

(154)

Provision for income tax expense

$

$

421

Net of tax

Net unrealized losses on held to maturity securities:

Amortization

$

12

$

(74)

Interest income on taxable investment securities

Losses recognized

(54)

Net gains

Taxes

11

20

Provision for income tax expense

$

(31)

$

(54)

Net of tax

Net pension plan liability adjustment:

Amortization of unrecognized loss

$

(372)

$

(358)

Other expense

Amortization of prior service costs

Salaries and employee benefits

Taxes

99

96

Provision for income tax expense

$

(273)

$

(262)

Net of tax

Net SERP liability adjustment:

Amortization of unrecognized loss

$

(76)

$

(47)

Other expense

Amortization of prior service costs

1

1

Salaries and employee benefits

Taxes

20

12

Provision for income tax expense

$

(55)

$

(34)

Net of tax

Total reclassifications for the period

$

(322)

$

108

Net of tax

Amounts Reclassified from

Three Months Ended

Accumulated Other Comprehensive Loss

June 30,

Affected Line Item in the Statement

(in thousands)

2022

2021

Where Net Income is Presented

Net unrealized gains on available for sale investment securities with OTTI:

Accretable Yield

$

51

$

51

Interest income on taxable investment securities

Taxes

(14)

(14)

Provision for income tax expense

$

37

$

37

Net of tax

Net unrealized gains on available for sale investment securities - all others:

Gains recognized

$

$

154

Net gains

Taxes

(41)

Provision for income tax expense

$

$

113

Net of tax

Net unrealized losses on held to maturity securities:

Amortization

$

(230)

$

(46)

Interest income on taxable investment securities

Taxes

62

12

Provision for income tax expense

$

(168)

$

(34)

Net of tax

Net pension plan liability adjustment:

Amortization of unrecognized loss

$

(279)

$

(372)

Other expense

Taxes

75

100

Provision for income tax expense

$

(204)

$

(272)

Net of tax

Net SERP liability adjustment:

Amortization of unrecognized loss

$

(67)

$

(73)

Other expense

Taxes

18

18

Provision for income tax expense

$

(49)

$

(55)

Net of tax

Total reclassifications for the period

$

(384)

$

(211)

Net of tax

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Note 98 – Employee Benefit Plans

The following tables present the components of the net periodic pension plan cost for First United Corporation’s noncontributory Defined Benefit Pension Plan (the “Pension Plan”) and the Bank’s Defined Benefit Supplemental Executive Retirement Plan (“Defined Benefit SERP”) for the periods indicated:

Nine Months Ended

Three Months Ended

Six Months Ended

Three Months Ended

Pension Plan

September 30,

September 30,

June 30,

June 30,

(in thousands)

    

2021

    

2020

    

2021

    

2020

    

2022

    

2021

    

2022

    

2021

Service cost

$

117

$

169

$

39

$

57

$

28

$

78

$

14

$

39

Interest cost

1,066

1,219

355

406

768

711

384

355

Expected return on assets

(2,677)

(2,661)

(892)

(887)

(1,905)

(1,785)

(953)

(892)

Amortization of net actuarial loss

1,116

1,074

372

358

558

744

279

372

Net pension credit included in employee benefits and other expense

$

(378)

$

(199)

$

(126)

$

(66)

$

(551)

$

(252)

$

(276)

$

(126)

Nine Months Ended

Three Months Ended

Defined Benefit SERP

September 30,

September 30,

(in thousands)

    

2021

    

2020

    

2021

    

2020

Service cost

$

104

$

93

$

35

$

31

Interest cost

179

201

60

67

Amortization of recognized loss

226

141

75

47

Amortization of prior service cost

(1)

(2)

(1)

Net Defined Benefit SERP expense included in employee benefits and other expense

$

508

$

433

$

170

$

144

At June 30, 2022, the market value of the pension plan decreased $9.4 million since December 31, 2021. This decrease is related to the increasing rate environment and market volatility resulting in a pension plan liability of $4.6 million at June 30, 2022 compared to a pension plan asset of $4.8 million at December 31, 2021.

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Six Months Ended

Three Months Ended

Defined Benefit SERP

June 30,

June 30,

(in thousands)

    

2022

    

2021

    

2022

    

2021

Service cost

$

83

$

69

$

42

$

34

Interest cost

143

119

71

59

Amortization of recognized loss

135

151

67

76

Amortization of prior service cost

(1)

Net Defined Benefit SERP expense included in employee benefits and other expense

$

361

$

338

$

180

$

169

The service cost component of net periodic benefit cost is included in salaries and benefits and all other components of net periodic benefit cost are included in other expense in the Consolidated Statement of Operations for the Pension Plan and the Defined Benefit SERP.

The Pension Plan is a noncontributory defined benefit pension plan that covers our employees who were hired prior to the freeze and others who were grandfathered into the plan. The benefits are based on years of service and the employees’ compensation during the last five years of employment.  

Effective April 30, 2010, the Pension Plan was amended, resulting in a “soft freeze”, the effect of which prohibits new entrants into the plan and ceases crediting of additional years of service after that date. Effective January 1, 2013, the Pension Plan was amended to unfreeze it for those employees for whom the sum of their (a) ages, at their closest birthday plus (b) years of service for vesting purposes equals 80 or greater. The “soft freeze” continues to apply to all other plan participants. Pension benefits for these participants are managed through discretionary contributions to the First United Corporation 401(k) Profit Sharing Plan (the “401(k) Plan”).

The Bank established the Defined Benefit SERP in 2001 as an unfunded supplemental executive retirement plan. The Defined Benefit SERP is available only to a select group of management or highly compensated employees to provide supplemental retirement benefits in excess of limits imposed on qualified plans by federal tax law. Concurrent with the establishment of the Defined Benefit SERP, the Bank acquired Bank Owned Life Insurance (“BOLI”) policies on the senior management personnel and officers of the Bank. The benefits resulting from the favorable tax treatment accorded the earnings on the BOLI policies are intended to provide a source of funds for the future payment of the Defined Benefit SERP benefits as well as other employee benefit costs.

The benefit obligation activity for both the Pension Plan and the Defined Benefit SERP was calculated using an actuarial measurement date of January 1. Plan assets and the benefit obligations were calculated using an actuarial measurement date of December 31.

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The Corporation will assess the need for future annual contributions to the pension plan based upon its funded status and an evaluation of the future benefits to be provided thereunder. NaN contributions were made to the Pension Plan during the first ninesix months of 2021 and a contribution of $1.0 million was made during the first nine months of 2020.2022 or 2021. The Corporation expects to fund the annual projected benefit payments for the Defined Benefit SERP from operations.

On January 9, 2015, First United Corporation and members of management who do not participate in the Defined Benefit SERP entered into participation agreements under the Deferred Compensation Plan, each styled as a Defined Contribution SERP Agreement (the “Contribution Agreement”). Pursuant to each Contribution Agreement, First United Corporation agreed, for each Plan Year (as defined in the Deferred Compensation Plan) in which it determines that it has been Profitable (as defined in the Contribution Agreement), to make a discretionary contribution to the participant’s Employer Account in an amount equal to 15% of the participant’s base salary level for such Plan Year, with the first Plan Year being the year ending December 31, 2015. The Contribution Agreement provides that the participant will become 100% vested in the amount maintained in his or her Employer Account upon the earliest to occur of the following events: (a) Normal Retirement (as defined in the Contribution Agreement); (b)  Separation from Service (as defined in the Contribution Agreement) following a Change of Control (as defined in the Deferred Compensation Plan) and subsequent Triggering Event (as defined in the Contribution Agreement); (c) Separation from Service due to a Disability (as defined in the Contribution Agreement); (d) with respect to a particular award of Employer Contribution Credits, the participant’s completion of 2 consecutive Years of Service (as defined in the Contribution Agreement) immediately following the Plan Year for which such award was made; or (e) death. Notwithstanding the foregoing, however, a participant will

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lose entitlement to the amount maintained in his or her Employer Account in the event employment is terminated for Cause (as defined in the Contribution Agreement). In addition, the Contribution Agreement conditions entitlement to the amounts held in the Employer Account on the participant (1) refraining from engaging in Competitive Employment (as defined in the Contribution Agreement) for three years following his or her Separation from Service, (2) refraining from injurious disclosure of confidential information concerning the Corporation, and (3) remaining available, at the First United Corporation’s reasonable request, to provide at least six hours of transition services per month for 12 months following his or her Separation from Service (except in the case of death or Disability), except that only item (2) will apply in the event of a Separation from Service following a Change of Control and subsequent Triggering Event.

In January 2019, the Board approved discretionary contributions to four participants totaling $123,179. The contributions had a two year vesting period that ended on December 31, 2020. In January 2020, the Board of Directors of First United Corporation approved discretionary contributions to 4 participants totaling $126,058. The Corporation recorded $47,271 of related compensation expense for the first nine months of 2021 and 2020.  The Corporation recorded $15,757 for the third quarters of 2021 and 2020 related to these contributions. In January 2021, the Board of Directors approved discretionary contributions to 3 participants totaling $101,257. The Corporation recorded $37,971$25,314 of related compensation expense for the first ninesix months of 2022 and 2021 andrelated to these contributions. The Corporation recorded $12,657 of related compensation expense for the thirdsecond quarter of 2022 and 2021 related to these contributions. In January 2022, the Board of Directors approved discretionary contributions to 3 participants totaling $103,689. The Corporation recorded $25,922 of related compensation expense for the first six months of 2022 related to these contributions. The Corporation recorded $12,961 of related compensation expense for the second quarter of 2022 related to these contributions. Each discretionary contribution has a two year vesting period.

Note 109 - Equity Compensation Plan Information

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

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

Pursuant to First United Corporation’s director compensation policy, each director receives an annual retainer of 1,000 shares of First United Corporation common stock, plus $10,000 to be paid, at the director’s election, in cash or additional shares of common stock. In June 2020,January 2021, a total of 13,1601,202 fully vested shares of common stock were issued to 2 new directors, which had a grant date fair market value of $14.52 per share. In July 2020, a total of 916 fully vested shares of common stock were issued to a new director, which had a grant date fair market value of $11.22$16.66 per share.  In May 2021, a total of 12,726 fully vested shares of common stock were issued to directors, which had a grant date fair value of $18.50 per share.  In May 2022, a total of 14,940 fully vested shares of common stock were issued to directors, which had a grant date fair value of $18.92 per share.  Director stock compensation expense was $191,717

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$125,588 for the ninesix months ended SeptemberJune 30, 20212022 and $158,795$132,860 for the ninesix months ended SeptemberJune 30, 2020. 2021.  Director stock compensation expense was $58,857$66,730 for the three months ended September 30, 2021second quarter of 2022 and $52,114$62,644 for the three months ended September 30, 2020.second quarter of 2021.

Restricted Stock Units

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

The RSUs granted to each of the foregoing officers consist of (a) a performance vesting award for a three year performance period ending December 31, 2021,and (b) a performance vesting award for a three year performance period ending December 31, 2022, and (c) a time-vesting award that will vest ratably over a three year period beginning on March 26, 2021.period. Target performance levels were set based on the annual budget which supports the Corporation’s long-term objective of achieving high performance as compared to peers. Threshold performance is the minimum level of acceptable performance as defined by the Committee and maximum performance represented a level potentially achievable under ideal circumstances. Achievement of the threshold performance level would result in each executive participant earning a payout at 50% of his or her respective target award opportunity. Achievement of the target performance level would result in the executive participant earning the target award and achievement at or above the maximum performance level would result in the executive participant earning 150% of the target opportunity. Actual results for any goal that

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falls between performance levels would be interpolated to calculate a proportionate award. For the performance period ending December 31, 2021, the RSUs’ performance goal is based on earnings per share for the year ending December 31, 2021. For the performance period ending December 31, 2022, the RSUs’RSUs performance goals are based on earnings per share for the year ending December 31, 2022 and growth in tangible book value per share during the performance period. The threshold, targetFor the performance period ending December 31, 2023, the RSUs performance goals are based on earnings per share for the year ending December 31, 2023 and maximumgrowth in tangible book value per share during the performance levels for these grants will be disclosed pursuant to Item 402 of Regulation S-K following the conclusion of the applicable performance period.

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

In the first quarter of 2020, RSUs were granted relating to 19,9349,791 performance vesting shares (target level) for 2019 LTIP plan for the performance period ending December 31, 2021 and 10,143 performance vesting shares and 5,070 time vesting shares (target level) were granted,for 2020 LTIP plan for the performance period ending December 31, 2022, which had a grant date fair market value of $12.54 per share of common stock underlying each RSU.  The 2020 plan has a performance period for the performance-vesting RSUs of three years ending December 31, 2022 and the time-vesting RSUs will vest ratably over a three year period that began on March 26, 2021.  On March 26, 2021, 1,690 of the 5,070 time vesting shares were issued to participants.  On March 26, 2022, 1,688  shares of the 3,380 remaining time vesting shares were issued to participants.  Stock compensation expense was $78,381$42,024 and $93,727$52,254 for the first nine months of 2021six month periods ended June 30, 2022 and 2020, respectively.2021.  Stock compensation expense was $26,127$15,896 and $31,243$26,127 for the three month periods ended September 30,second quarter of 2022 and 2021, and 2020.respectively.  Unrecognized compensation expense at SeptemberJune 30, 20212022 related to unvested RSUs was $110,173.$47,687.

In May 2021, RSUs relating to 7,389 performance vesting shares and 3,693 time vesting shares (target level) for plan year 2021 were granted, which had a grant date fair market value of $17.93 per share of common stock underlying each RSU.  The performance period for the performance-vesting RSUs is the three year period ending December 31, 2023.  The time-vesting RSUs will vest ratably over a three year period beginningthat began on May 5, 2022. On May 5, 2022, 1,230 shares of the 3,693 time-vesting RSUs were issued to participants.  Stock compensation expense was $27,619$33,142 and $11,048 for the nine month periods ended September 30, 2021.first six months of 2022 and 2021, respectively.  Stock compensation expense was $16,571 and $11,048 for the three months ended September 30, 2021.second quarter of 2022 and 2021, respectively.  Unrecognized compensation expense as of SeptemberJune 30, 20212022 related to unvested units was $171,235.$121,522.

In March 2022, RSUs relating to 8,096 performance vesting shares and 6,238 time vesting shares (target level) for plan year 2022 were granted, which had a grant date fair market value of $21.88 per share of common stock underlying each RSU.  The performance period for the performance-vesting RSUs is the three year period ending December 31, 2024.  The time-vesting RSUs will vest ratably over a three year period beginning on March 9, 2023. Stock compensation expense was $26,145 for the six and three month periods ended June 30, 2022.  Unrecognized compensation expense as of June 30, 2022 related to unvested units was $287,598.

Note 1110 – Derivative Financial Instruments

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

In March 2016, the Corporation entered into 4 interest rate swap contracts totaling $30.0 million notional amount, hedging future cash flows associated with floating rate trust preferred debt. As of June 30, 2022, $20.0 million notional amount remains.

The fair value of the interest rate swap contracts was $0.6 million and $(0.5) million at June 30, 2022 and December 31, 2021, respectively.

For the six months ended June 30, 2022, the Corporation recorded an increase in the value of the derivatives of $1.1 million and the related deferred tax of $0.3 million in net accumulated other comprehensive loss to reflect the effective portion of cash flow

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In March 2016, the Corporation entered into 4 interest rate swap contracts totaling $30.0 million notional amount, hedging future cash flows associated with floating rate trust preferred debt. These contracts included a three year $5.0 million contract that matured on September 17, 2019, a five year $5.0 million contract that matured on March 17, 2021, a seven year $5.0 million contract that matures on March 17, 2023 and a 10 year $15.0 million contract that matures on March 17, 2026. As of September 30, 2021, $20.0 million notional amount remains.

The fair value of the interest rate swap contracts was $(727) thousand and $(1.3) million at September 30, 2021 and December 31, 2020, respectively.

hedges. For the ninethree months ended SeptemberJune 30, 2021,2022, the Corporation recorded an increase in the value of the derivatives of $594 thousand$0.2 million and the related deferred tax of $62 thousand$0.1 million in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges. ASC Subtopic 815-30 requires the net accumulated other comprehensive loss to be reclassified to earnings if the hedge becomes ineffective or is terminated. There was 0no hedge ineffectiveness recorded for the six or three months ended SeptemberJune 30, 2021.2022. The Corporation does not expect any material losses relating to these hedges to be reclassified into earnings within the next 12 months.

Interest rate swap agreements are entered into with counterparties that meet established credit standards and the Corporation believes that the credit risk inherent in these contracts is not significant as of SeptemberJune 30, 2021.2022.

The table below discloses the impact of derivative financial instruments on the Corporation’s Consolidated Financial Statements for the ninesix and three month periods ended SeptemberJune 30, 20212022 and 2020.2021.

Derivative in Cash Flow Hedging Relationships

Amount of gain or

Amount of gain or

(loss) recognized in

(loss) recognized in

Amount of gain or

income or derivative

Amount of gain or

income or derivative

Amount of gain or

(loss) reclassified from

(ineffective portion

Amount of gain or

(loss) reclassified from

(ineffective portion

(loss) recognized in

accumulated OCI into

and amount excluded

(loss) recognized in

accumulated OCI into

and amount excluded

OCI on derivative

income (effective

from effectiveness

OCI on derivative

income (effective

from effectiveness

(in thousands)

    

(effective portion)

    

portion) (a)

    

testing) (b)

    

(effective portion)

    

portion) (a)

    

testing) (b)

Interest rate contracts:

Nine months ended:

September 30, 2021

$

450

$

$

September 30, 2020

(972)

Six months ended:

June 30, 2022

$

796

$

$

June 30, 2021

371

Three months ended:

September 30, 2021

$

79

$

$

September 30, 2020

72

June 30, 2022

$

182

$

$

June 30, 2021

(34)

Notes:

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

Note 1211 – Revenue Recognition

ASC Topic 606- Revenue from Contracts with Customers,606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. ASC Topic 606 does applyis applicable to noninterest revenue streams such as wealth management, including trust and brokerage services, service charges on deposit accounts, interchange fee income – debit card income and gains/losses on OREO sales. Noninterest revenue streams that are within the scopein-scope of ASC Topic 606 are discussed below.

Wealth Management – Trust and Brokerage

Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Corporation’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. Optional services such as real estate

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sales and tax return preparation services are also available to existing trust and asset management customers. The Corporation’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Corporation’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the

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period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Corporation’s performance obligation is satisfied, and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Interchange Fees – Debit and Credit Card IncomeOther Service Charges

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income,loan servicing fees and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Corporation’s debit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a CorporationBank cardholder uses a non-Corporationnon-Bank ATM or a non-Corporationnon-Bank cardholder uses a CorporationBank ATM.  Merchant services income mainly representsLoan servicing fees chargedare comprised of fees earned on servicing of loan portfolios sold to merchants to process their debit and credit card transactions, in addition to account management fees.the secondary market.  Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services.   The Corporation’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion.

Interchange Fees – Debit and Credit Card Income

Debit and credit card income is primarily comprised of interchange fees earned whenever the Corporation’s debit cards are processed through card payment networks such as Visa. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Payment is typically received immediately or in the following month.

The following presents noninterest income, segregated by revenue streams that are within and outside the scope of ASC Topic 606, for the ninesix and three month periods ended SeptemberJune 30, 20212022 and SeptemberJune 30, 2020:2021:

Nine Months Ended

Three Months Ended

Six Months Ended

Three Months Ended

September 30,

September 30,

June 30,

June 30,

(in thousands)

    

2021

2020

2021

2020

    

2022

2021

2022

2021

Noninterest income

In-scope of Topic 606:

Service charges on deposit accounts

$

1,292

$

1,439

$

475

$

447

$

928

$

817

$

463

$

412

Other service charges

664

517

232

195

445

432

232

221

Trust department

6,441

5,355

2,166

1,871

4,233

4,275

2,044

2,034

Debit card income

2,623

2,052

900

738

1,869

1,723

983

913

Brokerage commissions

854

713

229

234

533

625

313

357

Noninterest income (in-scope of Topic 606)

11,874

10,076

4,002

3,485

8,008

7,872

4,035

3,937

Noninterest income (out-of-scope of Topic 606)

1,712

1,335

521

493

787

1,191

378

384

Total Noninterest Income

$

13,586

$

11,411

$

4,523

$

3,978

$

8,795

$

9,063

$

4,413

$

4,321

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Note 1312 – Regulatory Capital Requirements

The following table presents our capital ratios for the nine months ended Septemberas of June 30, 2022 and December 31, 2021.

    

September 30,
2021

    

December 31,
2020

    

Required for
Capital
Adequacy
Purposes

    

Required
to be Well
Capitalized

 

    

June 30,
2022

    

December 31,
2021

    

Required for
Capital
Adequacy
Purposes

    

Required
to be Well
Capitalized

 

Total Capital (to risk-weighted assets)

Consolidated

15.51

%  

16.08

%  

8.00

%  

10.00

%

First United Bank & Trust

14.64

%  

15.50

%  

8.00

%  

10.00

%

14.64

%  

14.97

%  

8.00

%  

10.00

%

Tier 1 Capital (to risk-weighted assets)

Consolidated

14.26

%  

14.83

%  

6.00

%  

8.00

%

First United Bank & Trust

13.39

%  

14.25

%  

6.00

%  

8.00

%

13.46

%  

13.72

%  

6.00

%  

8.00

%

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

Consolidated

12.15

%  

12.61

%  

4.50

%  

6.50

%

First United Bank & Trust

13.39

%  

14.25

%  

4.50

%  

6.50

%

13.46

%  

13.72

%  

4.50

%  

6.50

%

Tier 1 Capital (to average assets)

Consolidated

10.33

%  

10.36

%  

4.00

%  

5.00

%

First United Bank & Trust

9.59

%  

9.81

%  

4.00

%  

5.00

%

10.40

%  

10.00

%  

4.00

%  

5.00

%

As of SeptemberJune 30, 2022 and December 31, 2021, the Bank and the Corporation werewas considered “well capitalized” under the regulatory framework for prompt corrective action.   The ratios at the Bank and Consolidated levels were negatively impacted primarily due to the increased funding from the Bank to the holding company related to the settlement expenses and the stock repurchase program.  The decrease at the Corporation level is related to the stock repurchase of 400,000 shares of common stock and the reduction to capital.

First United Corporation’s stock repurchase plan was initially adopted effective January 27, 2021, which authorized the repurchase of up to 400,000 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.  

On April 16, 2021, First United Corporation entered into a Stock Purchase Agreement with Driver Opportunity Partners I LP (“Driver Partners”) under which, pursuant to the foregoing stock repurchase program.  First United Corporation agreed to repurchase 360,737 shares of its common stock held by Driver Partners at a purchase price of $18.00 per share.

Note 14 – Assets and Liabilities Subject to Enforceable Master Netting Arrangements

Interest Rate Swap Agreements

The Corporation has entered into interest rate swap agreements to modify the re-pricing characteristics of certain interest-bearing liabilities as a part of managing interest rate risk. The swap agreements have been designated as cash flow hedges, and accordingly, the fair value of the interest rate swap contracts is reported in Other Assets or Other Liabilities on the Consolidated Statement of Financial Condition. The swap agreements were entered into with a third-party financial institution. The Corporation is party to master netting arrangements with its financial institution counterparty; however, the Corporation does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, in the form of cash and investment securities, are pledged by the Corporation as the counterparty with net liability positions in accordance with contract thresholds. See Note 12 to the Consolidated Financial Statements for more information.

Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”)

The Bank enters into agreements under which it sells interests in U.S. government agency securities to certain customers subject to an obligation to repurchase, and on the part of the customers to resell, such interests. Under these arrangements, the Bank may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the

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BankNote 13 – Borrowed Funds

The following is a summary of short-term borrowings with original maturities of less than one year:

(Dollars in thousands)

Six Months
Ended
June 30, 2022

Year Ended
December 31, 2021

Overnight borrowings, weighted average interest rate of 1.75% at June 30, 2022

$

18,900

$

Securities sold under agreements to repurchase:

Outstanding at end of period

$

51,014

$

57,699

Weighted average interest rate at end of period

0.14%

0.15%

Maximum amount outstanding as of any month end

$

62,023

$

72,396

Average amount outstanding

$

59,710

$

57,697

Approximate weighted average rate during the period

0.12%

0.15%

Short-term borrowings increased $12.2 million since December 31, 2021, driven by $18.9 million in overnight borrowings, which were offset by a decrease in other short-term borrowings of $6.7 million during the six months related to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Consolidated Statement of Financial Condition, while the securities underlyingour Treasury Management customers utilizing their funds.

At June 30, 2022, the repurchase agreements remainwere secured by $69.5 million in the respective investment securities asset accounts. There is no offsetting or nettingissued by government related agencies.  A minimum of the investment securities assets with the repurchase agreement liabilities. In addition, as the Bank does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements. The right102% of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Bank be in default (i.e. fails to repurchase the U.S. securities on the maturity date of the agreement). The investment security collateral, maintained at 102% of the borrowing, is held by a third party financial institution in the counterparty’s custodial account.

The following table presents the assets and liabilities subject to an enforceable master netting arrangement or repurchase agreements at September 30, 2021 and December 31, 2020.

Net Amounts

Gross Amounts

Gross

Gross

of (Assets)/

Not Offset in the

Amounts of

Amounts

Liabilities

Statement of Condition

Recognized

Offset in the

Presented in

Cash

(Assets)/

Statement of

the Statement

Financial

Collateral

Net

(in thousands)

    

Liabilities

    

Condition

    

of Condition

    

Instruments

    

Pledged

    

Amount

September 30, 2021

Interest Rate Swap Agreements

$

727

$

$

727

$

(727)

$

2,000

$

Repurchase Agreements

$

72,396

$

$

72,396

$

(72,396)

$

$

December 31, 2020

Interest Rate Swap Agreements

$

1,320

$

$

1,320

$

(1,320)

$

$

Repurchase Agreements

$

49,160

$

$

49,160

$

(49,160)

$

$

pledged against account balances.

Note 1514 – Adoption of NewRecent Accounting Standards and Effects of NewPronouncements

Recently issued but not yet effective Accounting Pronouncements

In June 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchases financial assets with credit deterioration since their origination. The new model referred to as current expected credit losses (“CECL”) model, will

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apply to: (a) financial assets subject to credit losses and measured at amortized cost; and (b) certain off-balance sheet credit exposures. This includes loans, held to maturity debt securities, loan commitments, financial guarantees and net investments in leases as well as reinsurance and trade receivables. The estimate of expected credit losses should consider historical information, current information, and supportable forecasts, including estimates of prepayments. ASU 2016-13 was originally effective for SEC filers for annual periods beginning after December 15, 2019, and interim periods within those annual periods. 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 Securities and Exchange Commission, including the Corporation, resulting in a required implementation date for the Corporation of January 1, 2023.

Management has formed a focus group consisting of multiple members from areas, including credit, finance, loan servicing, reporting, and information systems. The Corporation is completing its data and model validation analyses, with parallel processing of our existing allowance for loan losses model with the CECL model to follow. The Corporation is currently evaluating the provisions of ASU No. 2016-13 to determine the potential impact the new standard will have on the financial condition or results of operations.

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848).”  The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendment only applies to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of the reference rate reform. The ASU is effective as of March 12, 2020 and through December 31, 2022. The Corporation is in the process of evaluating the impact of this standard on the loan portfolio, investment portfolio, long term debt and interest rate swaps, but believes that its adoption will not have a material impact on the Corporation’s financial condition or results of operations.

44

In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.TableASU 2022-02 made certain targeted amendments specific to troubled debt restructurings (TDRs) by creditors and vintage disclosure related to gross write-offs. Upon adoption, the Corporation will be required to apply the loan and refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of Contentsan existing loan, rather than applying the recognition and measurement guidance for TDRs.The ASU also requires companies to disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within scope of Subtopic 326-20.ASU 2022-02 is effective March 31, 2023, for entities that have adopted ASU 2016-13, otherwise effective date is the same as ASU 2016-13. The Corporation’s current plan is to adopt ASU 2016-13 effective January 1, 2023 at which time it will also implement ASU 2022-02.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION

The following discussion and analysis is intended as a review of material changes in and significant factors affecting the financial condition and results of operations of First United Corporation and its consolidated subsidiaries for the periods indicated. This discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto contained in Item 1 of Part I of this report, as well as the audited consolidated financial statements and related notes included in First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020.2021.

Unless the context clearly suggests otherwise, references in this report to “us”, “we”, “our”, and “the Corporation” are to First United Corporation and its consolidated subsidiaries.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements do not represent historical facts, but are statements about management’s beliefs, plans and objectives about the future, as well as its assumptions and judgments concerning such beliefs, plans and objectives. These statements are evidenced by terms such as "anticipate," "estimate," "should," "expect," "believe," "intend," and similar expressions. Although these statements reflect management’s good faith beliefs and projections, they are not guarantees of future performance and they may not

46

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prove true. The beliefs, plans and objectives on which forward-looking statements are based involve risks and uncertainties that could cause actual results to differ materially from those addressed in the forward-looking statements. For a discussion of these risks and uncertainties, see the section of the periodic reports that First United Corporation files with the Securities and Exchange Commission entitled "Risk Factors", including the risk factor set forth in First United Corporation’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2020 entitled, “The outbreak of the recent coronavirus (‘COVID-19’), or an outbreak of another highly infectious or contagious disease, could adversely affect the Corporation’s business, financial condition and results of operations.” and any updates thereto that might be contained in subsequent reports filed by First United Corporation. The risks and uncertainties associated with the COVID-19 pandemic and its impact on the Corporation will depend on, among other things, the length of time that the pandemic continues; the duration of  the potential imposition of further restrictions on travel in the future; the effect of the pandemic on the global, national, and local economies and on the businesses of our borrowers and their ability to make payments on their obligations; the remedial actions and stimulus measures adopted by federal, state, and local governments; and the inability of employees to work due to illness, quarantine, or government mandates..

FIRST UNITED CORPORATION

First United Corporation is a Maryland corporation chartered in 1985 and a bankfinancial 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.  The Corporation’s primary business is serving as the parent company of First United Bank & Trust, a Maryland trust company (the “Bank”), First United Statutory Trust I (“Trust I”) and First United Statutory Trust II (“Trust II” and together with Trust I, the “Trusts”), both Connecticut statutory business trusts. The Trusts were formed for the purpose of selling trust preferred securities that qualified as Tier 1 capital. The Bank has two consumer finance company subsidiaries - OakFirst Loan Center, Inc., a West Virginia corporation, and OakFirst Loan Center, LLC, a Maryland limited liability company - and two subsidiaries that it uses to hold real estate acquired through foreclosure or by deed in lieu of foreclosure - First OREO Trust, a Maryland statutory trust, and FUBT OREO I, LLC, a Maryland limited liability company. In addition, the Bank owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership, a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland, and a 99.9% non-voting membership interest in MCC FUBT Fund, LC, an Ohio limited liability company formed for the purpose of acquiring, developing and operating low-income housing units in Allegany County, Maryland.

At SeptemberJune 30, 2021,2022, the Corporation’s total assets were $1.7$1.8 billion, net loans were $1.1$1.2 billion, and deposits were $1.4$1.5 billion. Shareholders’ equity at SeptemberJune 30, 20212022 was $133.8$132.9 million.

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The Corporation maintains an Internet site at www.mybank.com on which it makes available, free of charge, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to the foregoing as soon as reasonably practicable after these reports are electronically filed with, or furnished to, the SEC.

COVID-19

The COVID-19 pandemic has adversely impacted our business and financial results and that of many of our customers, and the ultimate impact will depend on future developments, which are highly uncertain, cannot be predicted, and are largely outside of our control, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic. The COVID-19 pandemic has created extensive disruptions to the global and U.S. economies and to the lives of individuals throughout the world. Governments, businesses, and the public are taking unprecedented actions to contain the spread of COVID-19 and to mitigate its effects, including closures of businesses and schools, fiscal and monetary stimulus, and legislation designed to deliver financial aid and other relief. While the scope, duration, and full effects of COVID-19 are not fully known, the pandemic and the efforts to contain it have disrupted global economic activity, adversely affected the functioning of financial markets, impacted market interest rates, increased economic and market uncertainty, and disrupted trade and supply chains.

Congress, the President, and the FRB have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), a $2 trillion legislative package, was signed into law at the end of March 2020. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors, such as by providing funds for loans under the Paycheck Protection Program (the “PPP”) administered by the Small Business Administration (the “SBA”). Section 4013 of the CARES Act, “Temporary Relief from Troubled Debt Restructurings,” provides banks the option to temporarily suspend certain requirements under U.S. GAAP related to trouble debt restructurings (“TDRs”) for a limited period of time to account for the effects of COVID-19. Additionally, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “Economic Aid Act”) was enacted on December 27, 2020 and provided for a second round of PPP loans. The PPP Extension Act of 2021, which was enacted on March 30, 2021, extended the PPP application deadline to May 31, 2021 and provided the SBA with additional time to process applications through June 30, 2021.  Also, the Consolidated Appropriations Act (the “CAA”) passed on December 27, 2020, which, among other things, extended the provisions of Section 4013 of the CARES Act to January 1, 2022. The Federal Reserve’s actions have included cutting the federal funds rate 150 basis points and targeting a 0 to 25 basis point rate. In addition to the general impact of the COVID-19 pandemic, certain provisions of the CARES Act as well as other legislative and regulatory relief efforts are expected to have a material impact on the Corporation’s operations.  

During the first nine months of 2021, we continued to assist our business customers with the PPP loan forgiveness process and to originate additional PPP loans through the third round of funding. We remained diligent in protecting our associates and customers from the lingering effects of the pandemic, delaying opening our lobbies until April 1, 2021.  During the third quarter, we made the decision to reclose our lobbies as COVID cases increased in most of our markets and staffing was at reduced levels.  Many of our sales and support employees continue to work remotely as we have adjusted to a hybrid work environment.  We have continued to monitor our market areas, maintaining travel protocols and utilizing safety precautions while continuing to provide full banking services to our customers.

The Corporation continues to actively participate in the PPP.  On January 19, 2021, the SBA implemented a third round of funding for PPP loans.  

During 2020, the Corporation originated a total of $148.5 million in PPP loans under the first and second rounds of funding, consisting of 1,174 loans with an average loan size of $162 thousand.  During 2021, the Corporation originated a total of $66.1 million in PPP loans under the third round of funding, consisting of 870 loans with an average loan size of $80 thousand.

Net PPP origination fees recognized in the first nine months of 2021 were $3.2 million due to amortization and forgiveness, compared to $2.4 million in 2020.

During 2020, 290 PPP loans, totaling $34.5 million were forgiven, resulting in 885 loans with a remaining balance of $114.0 million at December 31, 2020.   During the first nine months of 2021, an additional 1,384 PPP loans originated under all three rounds, with an aggregate principal balance of $150.0 million, were forgiven, resulting in 371 PPP loans with a total remaining balance of $30.3 million at September 30, 2021.

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Of the 2,046 PPP loans originated by the Corporation since the PPP’s inception, 1,675 loans, totaling $184.9 million, have been forgiven through the end of third quarter 2021, representing 86% of the number of loans originated and 82% of originated principal balances.

COVID Modifications

While the COVID-19 pandemic has had an impact on most industries, some have been more affected than others.  In accordance with Section 4013 of the CARES Act and related regulatory pronouncements, we have not accounted for modifications of loans affected by the pandemic as troubled debt restructurings (“TDRs”) nor have we designated them as past due or nonaccrual.  

As of October 15, 2021, modified loans not treated as TDRs consisted of eleven commercial loans relating to real estate rental, food services and health care sectors and one mortgage loan, with an aggregate balance of $9.9 million.  These loans are scheduled to return to contractual payment terms within the next quarter.

Liquidity Sources

Management has reviewed its Liquidity Contingency Funding Plan in preparation of funding needs as it relates to the COVID-19 pandemic. As of September 30, 2021, the Corporation had approximately $130.0 million in unsecured lines of credit with its correspondent banks, $1.0 million with the Federal Reserve Discount Window, and approximately $189.0 million of secured borrowings with the Federal Home Loan Bank of Atlanta (“FHLB”). Additionally, the Corporation has access to the brokered certificates of deposit market.

The Corporation was eligible to access the FRB’s Paycheck Protection Program Liquidity Facility (“PPPLF”), a source providing funding using PPP loans as collateral at 100% value.  The Corporation did not use this program, which expired on July 31, 2021.

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.

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SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data for the ninesix month periods ended SeptemberJune 30, 20212022 and 20202021 and is qualified in its entirety by the detailed information and unaudited financial statements, including the notes thereto, included elsewhere in this quarterly report.

As of the nine months ended

September 30,

    

2021

    

2020

 

Per Share Data

Basic net income per common share (1) - as reported

$

1.81

$

1.32

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

2.45

1.32

Diluted net income per common share (1) - as reported

$

1.81

$

1.32

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

2.45

1.32

Basic book value per common share (1) - as reported

$

20.22

$

18.63

Diluted book value per common share (1) - as reported

$

20.19

$

18.62

Significant Ratios:

Return on Average Assets (a) (1) - as reported

0.92

%

0.79

%

Settlement and FHLB expenses, net of income tax

0.33

%

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

1.25

%

0.79

%

Return on Average Equity (a) (1) - as reported

12.45

%

9.87

%

Settlement and FHLB expenses, net of income tax

4.43

%

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

16.88

%

9.87

%

Average Equity to Average Assets

10.70

%

10.61

%

Capital Ratios:

Consolidated Total Capital (to risk weighted assets)

15.51

%

16.14

%

Consolidated Tier 1 Capital (to risk weighted assets)

14.26

%

14.89

%

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

12.15

%

12.59

%

Consolidated Tier 1 Capital (to average assets)

10.33

%

10.37

%

(1) See reconciliation of this non-GAAP financial measure provided elsewhere herein associated with settlement expenses incurred during the first quarter of 2021 and prepayment penalties incurred during the third quarter of 2021.

As of the six months ended

June 30,

    

2022

    

2021

 

Per Share Data

Basic net income per common share (1) - as reported

$

1.68

$

1.15

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

$

1.68

$

1.52

Diluted net income per common share (1) - as reported

$

1.68

$

1.15

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

$

1.68

$

1.52

Basic book value per common share - as reported

$

20.22

$

19.74

Diluted book value per common share - as reported

$

20.19

$

19.72

Significant Ratios:

Return on Average Assets (a) (1) - as reported

1.26

%

0.88

%

Settlement expenses, net of income tax

0.30

%

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

1.26

%

1.18

%

Return on Average Equity (a) (1) - as reported

16.32

%

12.21

%

Settlement expenses, net of income tax

2.64

%

Income tax effect of adjustment

1.13

%

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

16.32

%

15.98

%

Average Equity to Average Assets

7.75

%

7.29

%

Capital Ratios:

Consolidated Total Capital (to risk weighted assets)

15.56

%

15.80

%

Consolidated Tier 1 Capital (to risk weighted assets)

14.41

%

14.55

%

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

12.35

%

12.37

%

Consolidated Tier 1 Capital (to average assets)

11.23

%

9.94

%

(1) See reconciliation of this non-GAAP financial measure provided elsewhere herein associated with settlement expenses incurred during the first quarter of 2021.

Note: (a) Annualized

RESULTS OF OPERATIONS

Overview

Consolidated net income for the nine months ended September 30, 2021 was $12.2 million, inclusive of litigation settlement expenses of $3.3 million and FHLB prepayment penalties of $2.4 million, compared to $9.3$11.1 million for the ninefirst six months ended September 30, 2020.of 2022 compared to $7.8 million for the first six months of 2021.  Basic and diluted net income per share for the first ninesix months of 20212022 were both $1.81, a 37.1% increase when$1.68, compared to basic and diluted net income per share of $1.32 for the same period of 2020.

The increase in earnings$1.15 for the first ninesix months of 20212021. The year over year increase was attributable to anprimarily driven by a $2.3 million increase in net interest income; of which, $1.9 million resulted from the decrease in interest expense as costs of funds decreased by approximately 55%.  Additionally, comparative year-to-date income of $2.2 million, reduced provision expense of $4.9 million and an increase in other operating income, including gains on sales of mortgage loans and securities’ of $1.3 million.  These changes were partially offset by an increase in other operating expenses of $4.0 million, inclusive ofincreased due to the $3.3 million in litigation settlement expenses and the $2.4 million FHLB prepayment penalty.    expense recognized in 2021.

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Consolidated net income was $5.4 million for the second quarter of 2022, or $0.82 per diluted share, compared to $4.4 million, or $0.66 per diluted share, for the second quarter of 2021.  The increase in net income year over year was driven by an increase in net interest income of $1.2 million and reduced operating expenses of $0.4 million, offset by an increase in provision expense of $0.1 million, reduced other operating income, and a decrease of $0.3 million in gains from sales of mortgages.  Additionally, we experienced a decrease in gains from sales of available for sale investments and recognized an expense of $0.2 million in expense related to Other Real Estate Owned (“OREO”) in the second quarter 2022 compared to a gain on sale of OREO of $0.2 million in the second quarter of 2021.  The OREO expenses were attributable to one development project as we continue to work with the participation group to market and sell the commercial parcels.

Comparing the six months ended June 30, 2022 to the six months ended June 30, 2021, net interest income, on a non-GAAP, fully taxable equivalent (“FTE”) basis, increased by $2.3 million.  Interest income increased by $0.4 million and interest expense decreased by $1.9 million.  Interest income during the first six months of 2021 included $2.0 million in fees related to Paycheck Protection Program (“PPP”) loan forgiveness that were recognized during that period compared to $0.1 million for the six months ended June 30, 2022.  The yield on earning assets increased 10 basis points to 3.66% during the six months of 2022 compared to 3.56% during the same period of 2021, which correlated to the rising interest rate environment and new loans booked at higher rates.  Interest expense on deposits decreased $1.3 million while the average balances decreased $10.2 million and interest on long-term borrowings decreased $0.7 million relating to the prepayment of $70.0 million of Federal Home Loan Bank (“FHLB”) advances in the third quarter of 2021.  The decreased interest expense resulted in an overall decrease of 32 basis points on interest bearing liabilities.  To date, we have not experienced significant pressure on deposit pricing, but we expect to experience increasing rates the remainder of this year given the recent moves by the Federal Reserve.  The net interest margin for the six months ended June 30, 2022 was 3.46% compared to 3.13% for the six months ended June 30, 2021.  

Net interest income, on a non-GAAP, FTE basis, increased by $2.2$1.2 million (5.9%) duringfor the nine months ended September 30, 2021second quarter 2022 when compared to the nine months ended September 30, 2020second quarter of 2021.  This increase was driven by a $2.7an increase of $0.3 million (36.5%) decrease in interest expense, partially offset by a decrease in interest income related to an overall increase of $0.515 basis points on interest earning assets despite a decline in average balances of $33.8 million. Interest income on loans decreased $0.2 million due primarily to a reduction of fees related to PPP loan forgiveness recognized during 2021.  Investment income increased $0.6 million due to an increase in average balances related to the deployment of excess cash balances to purchase investment securities late in the fourth quarter of 2021 and early in the first quarter of 2022.  The decreasereduction of $1.1 million in interest expense resulted from proactive efforts to reduce the costlowering of funds by further reductions todeposit rates on deposit accounts throughout 2021, the runoffdecline of $73.3 million of average balances in the time deposits of $100,000 or more, including brokered deposits,higher cost CD portfolio and the expiration of empowered rates on money market accounts.  The prepayment of the$70.0 million of FHLB advances in the third quarter should significantly reduce interest expense in the fourth quarter and future years.2021. The net interest margin, on an FTE basis, declined to 3.21% for the nine months ended September 30, 2021 compared to 3.43% for the same period of 2020.  Excluding the average balance of PPP loans of $100.6 million and interest and fees of $4.0 million, the net interest margin for the nine months ended September 2021second quarter of 2022 was 3.07%.3.52%, compared to 3.15% for the second quarter of 2021.  

Other operatingNon-interest income including net gains on sales of mortgage loans and sales of investment securities, increased $1.3 million for the ninesix months ended SeptemberJune 30, 2021 when compared to the nine months ended September 30, 2020.  Gains on the sale of mortgage loans to the secondary market2022 decreased $0.5by approximately $0.8 million due to refinancing activity occurring at a slower pace than the pace experienced in 2020. Trust and brokerage income increased $1.2 million year-over-year due to growth in new client relationships and assets under management.  Debit card income increased $0.6 million for the nine months ended September 30, 2021 when compared to the same period of 20202021.  This decrease was primarily due to growththe decrease in deposit relationshipsnet gains on sales of residential mortgage loans of $0.8 million as refinance activity has slowed considerably in correlation with rising mortgage interest rates and increased customer usagedue to management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio.  

Other operating income, including gains, for the second quarter of our electronic services. Other income increased $0.52022 decreased by approximately $0.3 million due primarilywhen compared with the same period of 2021.  Gains on sales of mortgage loans decreased by approximately $0.3 million related to the receiptdiminished refinance activity due to the rising interest rate environment and management’s strategic decision to book new mortgage loans at higher rates to our in-house portfolio. Net gains on sales of insurance proceedsinvestments decreased by approximately $0.2 million, which was partially offset by the increase of service charges on deposit accounts by approximately $0.1 million.

For the six months ended June 30, 2022, non-interest expenses decreased by $2.3 million in 2022 when compared to the six months ended June 30, 2021.   This decrease was attributable to the one-time litigation settlement expense of $3.3 million, and $1.2 million in legal expenses that were recognized in 2021 along with a $0.2 million reduction in telephone expense and a $0.2 million decline in investor relations costs. These decreases were partially offset by year-over-year increases in salaries and employee benefits of $1.2 million, which was partially related to litigation claims recordedthe reduction of employee wages associated with deferred loan costs and increases of $0.3 million in the first quarter of 2021. Service charge income remained stable when comparing the first nine months of 2021 to the same time period of 2020.equipment expenses, $0.9 million in OREO expenses and $0.2 million in miscellaneous other expenses.  

Other operating expenses increased $4.0decreased by $0.4 million forwhen comparing the nine months ended September 30, 2021 when comparedsecond quarter of 2022 to the same periodsecond quarter of 2020.2021.  This increasedecrease was driven by $3.3 million of litigation settlement expenses recordeda decrease in the first quarter of 2021 and a $2.4 million penalty on the prepayment of $70.0 million FHLB advances in the third quarter of 2021.  Salaries and benefits remained stable when compared to the first nine months of 2020, as increases in salaries, incentive pay and stock compensation were offset by decreases in pension and life and health insurance costs, a $0.3 million offset in salary expense from deferred loan origination costs primarily attributable to PPP loans and $0.1 million of reduced executive equity compensation due to a timing difference in long-term incentive grants.  Federal Deposit Insurance Corporation premiums increased slightly by $0.2 million due to credits received on quarterly assessments in 2020. Equipment, occupancy and technology expenses decreased $0.9 million when compared to the first nine months of 2020 as we began to realize cost savings from our core processor related to a new contract negotiated in the fourth quarter of 2020. Other real estate owned (“OREO”) expenses were a net credit in the first nine months of 2021 due to $0.8 million in gains attributable to the sale of OREO properties.  Professional services increased $0.8 million as a result of increased legal and professional fees related to shareholder litigation early in 2021,of approximately $0.9 million and investor relations expense of approximately $0.2 million, which were partially offset by decreased investor relations expenses.

The provision for loan losses was $0.1 million for the nine months ended September 30, 2021 and $5.0 million for the nine months ended September 30, 2020.  The higher provision expense recorded in the first nine months of 2020 was driven by an increase in the qualitative factors reflecting the uncertaintysalaries and employee benefits of the economic environment related to the COVID-19 pandemic. Net recoveries of $0.4 million were recorded for the nine months ended September 30, 2021, compared to net charge offs of $1.3 million for the same period of 2020. The ratio of the ALL to loans outstanding, including PPP loan balances, was 1.46% at September 30, 2021 compared to 1.36% at September 30, 2020 and 1.41% at December 31, 2020.  The ALL to loans outstanding, excluding PPP loan balances of $30.3approximately $0.3 million and $148.9 million, was 1.49% at September 30, 2021 and 1.55% at September 30, 2020 and December 31, 2020, non-GAAP.

Consolidated net income was $4.4 million for the third quarterOREO expenses of 2021 compared to $5.0 million for the third quarter of 2020.  Basic and diluted net income per share for the third quarter of 2021 were both $0.66, a 5.7% decrease when compared to basic and diluted net income per share of $0.70 for the third quarter of 2020.  The decline in earnings in the third quarter of 2021 was due to an increase in net interest income, a credit to provision expense, and increased wealth management income, offset by increased non-interest expenses, including the prepayment penalty of $2.4 million on FHLB borrowings.

Net interest income, on a non-GAAP, FTE basis, increased by $1.7 million (14.2%) for the third quarter 2021 when compared to the third quarter of 2020.  This increase resulted from an increase in interest income of $0.7 million and a decrease in interest expense of $1.1approximately $0.4 million.  The increase in interest income on loansOREO expenses was a result of increased interest on consumer loans related to the purchase of a loan pool in the second quarter as well as an increase in the unearned fees related to the PPP forgiveness duringdriven by expenses

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attributable to one development project as we continue to work with the quarter.  participation group to market and sell the commercial parcels and gains on sales of properties in 2021 that resulted in a net credit.

The reductionprovision for loan losses was $0.6 million for both the second quarter of interest2022 and the second quarter of 2021.  The provision expense resulted from the further reduction of deposit rates earlyrecorded in the thirdsecond quarter of 2022 was attributable primarily to loan portfolio growth during the quarter and the declining balanceschanges in the higher cost CD portfolio.qualitative factors, particularly related to the current economic outlook.  Net charge-offs of $179,000 were recorded for the quarter ended June 30, 2022, compared to net charge offs of $67,000 for 2021. The prepaymentratio of the FHLB advances should positively impact interest expense for the remainder of 2021 and future years.  The weighted rate on the $70.0 million FHLB long-term borrowingsALL to loans outstanding was 1.90%.  The net interest margin for the third quarter of 2021 was 3.38%,1.28% at June 30, 2022, compared to 3.12% for the third quarter of 2020.  Excluding the average balance of PPP loans of $48.5 million1.29% at March 31, 2022 and interest and fees of $1.4 million, the net interest margin for the third quarter of 2021 was 3.12%.1.38% at December 31, 2021.  

Other operating income, including gains, for the third quarter of 2021 decreased by approximately $0.6 million when compared to the same period of 2020.  Service charge income remained stable during the third quarter of 2021 when compared to the third quarter of 2020.  Trust and brokerage income increased $0.3 million due to increased production and market values on assets under management.  Net gains decreased $1.1 million when comparing the third quarter of 2021 to the third quarter of 2020.  This decrease was due to the slowing of refinancing activity in the mortgage portfolio, which resulted in less gains on sales as well as no sales activity in the investment portfolio during the third quarter of 2021.  Bank Owned Life Insurance (“BOLI”) income decreased by $0.1 million when comparing the third quarter of 2021 to the third quarter of 2020 due to the receipt of policy proceeds in the third quarter of 2020.

Other operating expenses increased by $2.5 million when comparing the third quarter of 2021 to the third quarter of 2020.  This increase was driven by an increase in salaries and benefits of $0.3 million related to a reduction in deferred loan origination costs in 2021 (primarily related to PPP activities) and the $2.4 million prepayment penalties incurred in connection with the prepayment of the FHLB advances.  As noted above, the prepayment was a strategic decision to use $70.0 million of cash for the purpose of reducing the cost of funds for the remainder of 2021 and future years.  Occupancy, equipment and technology service expenses were stable during the third quarter of 2021 when compared to the third quarter of 2020.  Investor relations and professional services costs were also stable during the third quarter of 2021 when compared to the third quarter of 2020.  Other miscellaneous expenses, such as Visa processing fees, contract labor, schools and seminars, dues and licenses, in-house training, trust department expense, debit card expense and other personnel related expenses, declined.  The decreases were offset by increases in marketing, contributions and consulting expenses.  

The effective income tax rates as a percentage of income for the nine-month periodssix months ended SeptemberJune 30, 2022 and June 30, 2021 were 24.5% and 2020 were 24.9% and 22.1%25.2%, respectively.  The increase in thereduced tax rate for the first ninesix months ofended June 30, 2022 when compared to the six months ended June 30, 2021 was primarily duerelated to an increased benefit at the reduction in tax exempt income as well as the reduction in tax creditsholding company related to the expirationfair value costs associated with the executive long term incentive plan payouts, and state tax treatment of athe litigation settlement expenses. The new low-income housing tax credit in June 2021.  A new 2021 investment in low-income housing2021 is expected to providebegin generating tax benefitscredits in 2022 and beyond.should provide increased tax credits beginning in 2023 and beyond for the term of the tax credit.

Non-GAAP Financial Measures

The Corporation believes that certain non-GAAP financial measures are meaningful because they reflect adjustments commonly made by management, investors, regulators and analysts to evaluate performance trends and the adequacy of common equity. This non-GAAP disclosure has limitations as an analytical tool, should not be viewed as a substitute for performance and financial condition measures determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of results as reported under GAAP, nor is it necessarily comparable to non-GAAP performance measures that may be presented by other companies.

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The following table presents a reconciliation of net income and basic and diluted earnings per share (as reported) to adjusted net income and adjusted basic and diluted earnings per share excluding settlement and prepayment penalty expense:share:

Nine months ended September 30,

    

2021

    

2020

(in thousands, except for per share amount)

Net income - as reported

$

12,221

$

9,285

Adjustments:

Settlement expense

3,300

FHLB penalty

2,368

Income tax effect of adjustment

(1,313)

Adjusted net income (non-GAAP)

$

16,576

$

9,285

Basic and Diluted earnings per share - as reported

$

1.81

$

1.32

Adjustments:

Settlement expense

0.47

FHLB penalty

0.35

Income tax effect of adjustment

(0.18)

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

$

2.45

$

1.32

The following table presents a reconciliation of basic and diluted book value per share (as reported) to adjusted basic and diluted book value per share excluding settlement expense:

Nine months ended September 30,

    

2021

2020

(in thousands, except for per share amount)

Basic book value per share

Equity

133,787

130,237

Outstanding shares

6,618

6,984

Basic book value per share

$

20.22

$

18.63

Diluted book value per share

Equity

133,787

130,237

Outstanding shares

6,625

6,989

Diluted book value per share

$

20.19

$

18.62

Six months ended June 30,

Three months ended June 30,

    

2022

    

2021

2022

2021

(in thousands, except for per share amount)

Net income - as reported

$

11,143

$

7,833

$

5,428

$

4,403

Adjustments:

Settlement expense

3,300

Income tax effect of adjustment

(735)

Adjusted net income (non-GAAP)

$

11,143

$

10,398

$

5,428

$

4,403

Basic and Diluted earnings per share - as reported

$

1.68

$

1.15

$

0.82

$

0.66

Adjustments:

Settlement expense

0.47

Income tax effect of adjustment

(0.10)

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

$

1.68

$

1.52

$

0.82

$

0.66

Significant Ratios:

Return on Average Assets (1) - as reported

1.26%

0.88%

Settlement expenses, net of income tax effect

0.30%

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

1.26%

1.18%

Return on Average Equity (1) - as reported

16.32%

12.21%

Settlement expenses, net of income tax effect

3.77%

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

16.32%

15.98%

Net Interest Income

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

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The tables below summarizes net interest income for the ninesix and three month periods ended SeptemberJune 30, 20212022 and 2020.2021.

GAAP

Non-GAAP - FTE

GAAP

Non-GAAP - FTE

Nine Months Ended

Nine Months Ended

Six Months Ended

Six Months Ended

September 30,

September 30,

June 30,

June 30,

(dollars in thousands)

    

2021

    

2020

    

2021

    

2020

    

2022

    

2021

    

2022

    

2021

Interest income

$

43,408

$

43,973

$

44,113

$

44,651

$

28,878

$

28,498

$

29,355

$

28,971

Interest expense

4,784

7,528

4,784

7,528

1,566

3,499

1,566

3,499

Net interest income

$

38,624

$

36,445

$

39,329

$

37,123

$

27,312

$

24,999

$

27,789

$

25,472

Net interest margin %

3.16

%

3.37

%

3.21

%

3.43

%

3.40

%

3.07

%

3.46

%

3.13

%

Three Months Ended

Three Months Ended

Three Months Ended

Three Months Ended

September 30,

September 30,

June 30,

June 30,

(dollars in thousands)

2021

2020

2021

2020

2022

2021

2022

2021

Interest income

$

14,910

$

14,253

$

15,142

$

14,481

$

14,731

$

14,436

$

14,967

$

14,670

Interest expense

1,285

2,351

1,285

2,351

760

1,673

760

1,673

Net interest income

$

13,625

$

11,902

$

13,857

$

12,130

$

13,971

$

12,763

$

14,207

$

12,997

Net interest margin %

3.32

%

3.06

%

3.38

%

3.12

%

3.46

%

3.10

%

3.52

%

3.15

%

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Table of Contents

The following tables set forth the average balances, net interest income and expense, and average yields and rates of our interest-earning assets and interest-bearing liabilities for the ninesix and three month periods ended SeptemberJune 30, 20212022 and 2020:2021:

Nine Months Ended

Six Months Ended

September 30,

June 30,

2021

2020

2022

2021

Average

Average

Average

Average

Average

Average

Average

Average

(dollars in thousands)

    

Balance

    

Interest

    

Yield/Rate

    

Balance

    

Interest

    

Yield/Rate

 

    

Balance

    

Interest

    

Yield/Rate

    

Balance

    

Interest

    

Yield/Rate

 

Assets

Loans

$

1,179,205

$

39,562

4.49

%

$

1,136,473

$

39,231

4.61

%

$

1,184,804

$

25,326

4.31

%

$

1,187,760

$

25,873

4.39

%

Investment Securities:

Taxable

267,899

2,864

1.43

%

197,186

3,612

2.45

%

356,878

2,946

1.66

%

264,525

1,984

1.51

%

Non taxable

25,487

1,448

7.60

%

26,335

1,448

7.34

%

27,447

1,005

7.38

%

25,698

972

7.63

%

Total

293,386

4,312

1.96

%

223,521

5,060

3.02

%

384,325

3,951

2.07

%

290,223

2,956

2.05

%

Federal funds sold

156,504

128

0.11

%

79,228

182

0.31

%

44,689

57

0.26

%

155,009

63

0.08

%

Interest-bearing deposits with other banks

3,419

1

0.06

%

889

9

1.37

%

4,487

5

0.21

%

2,980

1

0.07

%

Other interest earning assets

3,622

110

4.07

%

4,451

169

5.06

%

1,028

16

3.14

%

4,054

78

3.88

%

Total earning assets

1,636,136

44,113

3.60

%

1,444,562

44,651

4.13

%

1,619,333

29,355

3.66

%

1,640,026

28,971

3.56

%

Allowance for loan losses

(16,924)

(15,049)

(15,558)

(16,582)

Non-earning assets

154,464

146,213

172,839

152,853

Total Assets

$

1,773,676

$

1,575,726

$

1,776,614

$

1,776,297

Liabilities and Shareholders’ Equity

Interest-bearing demand deposits

$

211,005

$

460

0.29

%

$

177,848

$

531

0.40

%

$

291,220

$

182

0.13

%

$

208,930

$

347

0.33

%

Interest-bearing money markets

340,322

367

0.14

%

305,714

1,207

0.53

%

289,377

137

0.10

%

344,100

288

0.17

%

Savings deposits

218,605

63

0.04

%

172,735

136

0.10

%

247,573

36

0.03

%

212,342

46

0.04

%

Time deposits:

Less than $100k

100,777

979

1.30

%

111,757

1,310

1.57

%

$100k or more

108,195

1,008

1.25

%

129,290

1,813

1.87

%

Time deposits

148,377

521

0.71

%

221,414

1,464

1.33

%

Short-term borrowings

55,151

67

0.16

%

43,895

68

0.21

%

60,144

39

0.13

%

50,670

50

0.20

%

Long-term borrowings

92,980

1,840

2.65

%

100,929

2,463

3.26

%

30,929

651

4.24

%

100,929

1,304

2.61

%

Total interest-bearing liabilities

1,127,035

4,784

0.57

%

1,042,168

7,528

0.96

%

1,067,620

1,566

0.30

%

1,138,385

3,499

0.62

%

Non-interest-bearing deposits

488,870

362,547

541,992

481,803

Other liabilities

26,850

45,572

29,337

26,704

Shareholders’ Equity

130,921

125,439

137,665

129,405

Total Liabilities and Shareholders’ Equity

$

1,773,676

$

1,575,726

$

1,776,614

$

1,776,297

Net interest income and spread

$

39,329

3.03

%

$

37,123

3.17

%

$

27,789

3.36

%

$

25,472

2.94

%

Net interest margin

3.21

%

3.43

%

3.46

%

3.13

%

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Table of Contents

(1)The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 20212022 and 2020.2021. Non-GAAP interest income on a fully taxable equivalent was $705$477 and $678,$473, respectively.
(2)Net interest margin is calculated as net interest income divided by average earning assets.
(3)The average yields on investments are based on amortized cost.

NetComparing the six months ended June 30, 2022 to the six months ended June 30, 2021, net interest income, on a non-GAAP, FTE basis, increased by $2.2$2.3 million.  Interest income increased by $0.4 million (5.9%)and interest expense decreased by $1.9 million.  Interest income for the first six months of 2021 included $2.0 million in fees related to PPP loan forgiveness that were recognized during that period compared to $0.1 million for the ninesix months ended SeptemberJune 30, 2021 when2022.  The yield on earning assets increased 10 basis points to 3.66% in 2022 compared to 3.56% in 2021 in correlation with the nine months ended September 30, 2020 driven by a $2.7rising interest rate environment and new loans booked at higher rates.  Interest expense on deposits decreased $1.3 million (36.5%) decrease inwhile the average balances decreased $10.2 million and interest expense, partially offset by a decrease in interest income of $0.5 million.  The decrease in interest expense resulted from proactive effortson long-term borrowings decreased $0.7 million relating to reduce the cost of funds by further reductions to rates on deposit accounts throughout 2021, the runoff of balances in the time deposits of $100,000 or more, including brokered deposits, and the expiration of empowered rates on money market accounts.  The prepayment of the$70.0 million of FHLB advances in the third quarter should significantly reduceof 2021.  The decreased interest expense resulted in an overall decrease of 32 basis points on interest bearing liabilities.  To date, we have not experienced significant pressure on deposit pricing, but we expect to experience increasing rates the fourth quarter and future years.remainder of this year given the recent moves by the Federal Reserve.  The net interest margin, on an FTE basis, declined to 3.21% for the nine months ended September 30, 2021 compared to 3.43% for the same period of 2020.  Excluding the average balances of PPP loans of $100.6 million and interest and fees of $4.0 million, the net interest margin for the ninesix months ended September 2021June 30, 2022 was 3.07%.3.46% compared to 3.13% for the six months ended June 30, 2021.  

Three Months Ended

June 30,

2022

2021

(dollars in thousands)

Average
Balance

Interest

Average
Yield/Rate

Average
Balance

Interest

Average
Yield/Rate

Assets

Loans

$

1,200,651

$

12,876

4.30

%

$

1,173,007

$

13,119

4.49

%

Investment Securities:

Taxable

350,602

1,540

1.76

%

273,196

994

1.46

%

Non taxable

26,879

500

7.46

%

25,325

480

7.60

%

Total

377,481

2,040

2.17

%

298,521

1,474

1.98

%

Federal funds sold

36,151

39

0.43

%

174,346

39

0.09

%

Interest-bearing deposits with other banks

3,728

4

0.43

%

3,288

%

Other interest earning assets

1,026

8

3.13

%

3,654

38

4.17

%

Total earning assets

1,619,037

14,967

3.71

%

1,652,816

14,670

3.56

%

Allowance for loan losses

(15,221)

(16,758)

Non-earning assets

166,785

147,763

Total Assets

$

1,770,601

$

1,783,821

Liabilities and Shareholders’ Equity

Interest-bearing demand deposits

$

298,571

$

93

0.12

%

$

214,310

$

175

0.33

%

Interest-bearing money markets

282,083

74

0.11

%

328,100

118

0.14

%

Savings deposits

251,187

18

0.03

%

221,614

21

0.04

%

Time deposits

142,013

216

0.61

215,349

685

1.28

%

Short-term borrowings

60,727

21

0.14

%

51,035

26

0.20

%

Long-term borrowings

30,929

338

4.38

%

100,929

648

2.57

%

Total interest-bearing liabilities

1,065,510

760

0.29

%

1,131,337

1,673

0.59

%

Non-interest-bearing deposits

539,488

498,130

Other liabilities

30,564

27,085

Shareholders’ Equity

136,039

127,269

Total Liabilities and Shareholders’ Equity

$

1,771,601

$

1,783,821

Net interest income and spread

$

14,207

3.42

%

$

12,997

2.97

%

Net interest margin

3.52

%

3.15

%

(1)The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2022 and 2021. Non-GAAP interest income on a fully taxable equivalent was $236 and $234, respectively.
(2)Net interest margin is calculated as net interest income divided by average earning assets.

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Table of Contents

The decrease in interest income was driven by a slight increase in interest and fees on loans offset by reduced income on the investment portfolio. While the average balance of the investment portfolio increased by $69.9 million, bonds at higher yielding rates were called and replaced with lower yielding investments, resulting in a decrease in average yield on the investment portfolio of 106 basis points. The increase in the average balance of investments is due to a strategic decision in December 2020 to invest $70.0 million of excess cash into the investment portfolio. Significantly higher cash levels invested at an average yield on Fed Funds of 0.11% for the first nine months of 2021, compared to 0.31% for the first nine months of 2020, also negatively impacted the margin for the first nine months of 2021. The increase in average balance of loans of $42.7 million, driven by PPP loans and the purchase of a $20.0 million consumer loan pool during the second quarter of 2021, offset the declining yield in the portfolio.  Interest and fees on loans increased slightly when comparing the first nine months of 2021 to the first nine months of 2020. The average balances of PPP loans of approximately $100.6 million generated $3.2 million of interest and fees but had a negative impact on the margin. The average loan yield was also negatively impacted by the low-rate environment, which resulted in loan production and loans repricing at lower rates. These factors resulted in a decrease of approximately 12 basis points in average loan yield when compared to the nine months ended September 30, 2020.

The decrease in interest expense of $2.7 million, despite an increase in average interest-bearing liabilities of $84.9 million, was a direct result of a reduction in the cost of deposits of 27 basis points, a 5 basis point decrease in the cost of our short-term borrowings and a 61 basis point decrease in the cost of long-term borrowings. The decrease in the rate on long-term borrowings was primarily due to the restructuring of three long-term Federal Home Loan Bank advances late in the fourth quarter of 2020 that resulted in a reduced weighted average rate of 80 basis points on the $70.0 million portfolio. The rate on the long-term borrowings will be reduced further as the $70.0 million of FHLB advances were repaid late in the third quarter of 2021.  These advances had a weighted rate of 1.90%.  The average balance on our interest-bearing money market accounts increased $34.6 million, while the rate on these accounts decreased by 39 basis points.   Average growth of $126.3 million in our non-interest-bearing accounts benefited our overall cost of deposits.

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

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Table of Contents

Three Months Ended

September 30,

2021

2020

(dollars in thousands)

Average
Balance

Interest

Average
Yield/Rate

Average
Balance

Interest

Average
Yield/Rate

Assets

Loans

$

1,162,374

$

13,689

4.67

%

$

1,198,888

$

12,950

4.30

%

Investment Securities:

Taxable

274,648

880

1.27

%

194,722

960

1.96

%

Non taxable

25,073

476

7.54

%

27,049

494

7.26

%

Total

299,721

1,356

1.79

%

221,771

1,454

2.61

%

Federal funds sold

159,444

65

0.16

%

119,039

28

0.09

%

Interest-bearing deposits with other banks

4,283

%

1,157

2

0.73

%

Other interest earning assets

2,772

32

4.64

%

4,468

47

4.15

%

Total earning assets

1,628,594

15,142

3.69

%

1,545,323

14,481

3.73

%

Allowance for loan losses

(17,597)

(17,252)

Non-earning assets

157,806

153,846

Total Assets

$

1,768,803

$

1,681,917

Liabilities and Shareholders’ Equity

Interest-bearing demand deposits

$

215,085

$

113

0.21

%

$

195,363

$

190

0.39

%

Interest-bearing money markets

332,889

79

0.09

%

332,012

330

0.40

%

Savings deposits

230,925

17

0.03

%

182,733

35

0.08

%

Time deposits:

Less than $100k

89,723

253

1.12

%

111,647

435

1.55

%

$100k or more

94,770

270

1.13

%

121,986

525

1.71

%

Short-term borrowings

63,968

17

0.11

%

45,719

19

0.17

%

Long-term borrowings

77,342

536

2.75

%

100,929

817

3.22

%

Total interest-bearing liabilities

1,104,702

1,285

0.46

%

1,090,389

2,351

0.86

%

Non-interest-bearing deposits

503,006

407,334

Other liabilities

27,143

56,091

Shareholders’ Equity

133,952

128,103

Total Liabilities and Shareholders’ Equity

$

1,768,803

$

1,681,917

Net interest income and spread

$

13,857

3.23

%

$

12,130

2.87

%

Net interest margin

3.38

%

3.12

%

(1)The above table reflects the average rates earned or paid stated on an FTE basis assuming a 21% tax rate for 2021 and 2020. Non-GAAP interest income on a fully taxable equivalent was $232 and $228, respectively.

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

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

Net interest income, on a non-GAAP, FTE basis, increased by $1.7$1.2 million (14.2%) for the thirdsecond quarter 20212022 when compared to the thirdsecond quarter of 2020.2021.  This increase resulted fromwas driven by an increase of $0.3 million in interest income related to an overall increase of 15 basis points on interest earning assets despite a decline in average balances of $33.8 million. Interest income on loans decreased $0.2 million due primarily to a reduction of fees related to PPP loan forgiveness recognized during 2021.  Investment income increased $0.6 million due to an increase in interest income of $0.7 million and a decrease in interest expense of $1.1 million.  

The increase in interest income on loans was a result of increased interest on consumer loansaverage balances related to the deployment of excess cash balances to purchase of a loan poolinvestment securities late in the secondfourth quarter as well as an increaseof 2021 and early in the unearned fees related to the PPP forgiveness during the quarter.first quarter of 2022.  The reduction of $1.1 million in interest expense resulted from the further reductionlowering of deposit rates early inthroughout 2021, the third quarter and the decliningdecline of $73.3 million of average balances in the higher cost CD portfolio.  Theportfolio and the prepayment of the$70.0 million of FHLB advances should positively impact interest expense for the remainder of 2021 and future years.  The weighted rate on the $70.0 million FHLB long-term borrowings was 1.90%.in 2021. The net interest margin for the thirdsecond quarter of 20212022 was 3.38%3.52%, compared to 3.12%3.15% for the thirdsecond quarter of 2020.  Excluding the average balance of PPP loans of $48.5 million and interest and fees of $1.4 million, the net interest margin for the third quarter of 2021 was 3.12%.2021.  

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Table of Contents

Participation in the PPP, with an average outstanding loan balance of $48.5 million and an interest rate of 1.0%, negatively impacted the margin for the third quarter of 2021 by 6 basis points.  However, deferred fees of approximately $1.3 million recognized during the third quarter of 2021 positively impacted the margin by 32 basis points, with a net positive impact of 26 basis points.  Continued elevated cash levels have also negatively impacted the margin.

The decrease in interest expense of $1.1 million, despite an increase in average interest-bearing liabilities of $14.3 million, was a direct result of a reduction in the cost of deposits of 25 basis points, a 6 basis point decrease in the cost of our short-term borrowings and a 47 basis point decrease in the cost of long-term borrowings. The decrease in the rate on long-term borrowings is primarily due to the restructuring of three long-term FHLB advances late in the fourth quarter of 2020 that resulted in a reduced weighted average rate of 80 basis points on the $70.0 million portfolio. The rate on the long-term borrowings will be reduced further as the $70.0 million of FHLB advances were repaid late in the third quarter of 2021.  These advances had a weighted rate of 1.90%.  The average balance on our interest-bearing money market accounts remained stable, while the rate on these accounts decreased by 31 basis points.   Average growth of $95.7 million in our non-interest-bearing accounts benefited our overall cost of deposits as well as the overall reduction to rates on all deposit products in the third quarter.

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Table of Contents

The following table sets forth an analysis of volume and rate changes in interest income and interest expense for our average interest-earning assets and average interest-bearing liabilities for the ninesix and three month periods ended SeptemberJune 30, 20212022 and 2020:2021:

For the Nine months ended September 30, 2021

For the Six months ended June 30, 2022

compared to the Nine months ended September 30, 2020

compared to the Six months ended June 30, 2021

(in thousands and tax equivalent basis)

    

Volume

    

Rate

    

Net

    

Volume

    

Rate

    

Net

Interest Income:

Loans

$

1,477

$

(1,146)

$

331

$

(65)

$

(482)

$

(547)

Taxable Investments

1,299

(2,047)

(748)

697

265

962

Non-taxable Investments

(47)

47

0

67

(34)

33

Federal funds sold

180

(234)

(54)

(44)

38

(6)

Interest-bearing deposits

26

(34)

(8)

1

3

4

Other interest earning assets

(31)

(28)

(59)

(59)

(3)

(62)

Total interest income

2,904

(3,442)

(538)

597

(213)

384

Interest Expense:

Interest-bearing demand deposits

99

(170)

(71)

136

(301)

(165)

Interest-bearing money markets

138

(978)

(840)

(47)

(104)

(151)

Savings deposits

34

(107)

(73)

7

(17)

(10)

Time deposits less than $100K

(129)

(202)

(331)

Time deposits $100K or more

(296)

(509)

(805)

Time deposits

(486)

(457)

(943)

Short-term borrowings

18

(19)

(1)

9

(20)

(11)

Long-term borrowings

(194)

(429)

(623)

(914)

261

(653)

Total interest expense

(330)

(2,414)

(2,744)

(1,295)

(638)

(1,933)

Net interest income

$

3,234

$

(1,028)

$

2,206

$

1,892

$

425

$

2,317

For the Three months ended September 30, 2021 compared to the Three months ended September 30, 2020

(in thousands and tax equivalent basis)

Volume

Rate

Net

Interest Income:

Loans

$

(393)

$

1,132

$

739

Taxable Investments

392

(472)

(80)

Non-taxable Investments

(36)

18

(18)

Federal funds sold

9

28

37

Interest-bearing deposits

6

(8)

(2)

Other interest earning assets

(18)

3

(15)

Total interest income

(40)

701

661

Interest Expense:

Interest-bearing demand deposits

19

(96)

(77)

Interest-bearing money markets

1

(252)

(251)

Savings deposits

10

(28)

(18)

Time deposits less than $100K

(85)

(97)

(182)

Time deposits $100K or more

(116)

(139)

(255)

Short-term borrowings

8

(10)

(2)

Long-term borrowings

(190)

(91)

(281)

Total interest expense

(353)

(713)

(1,066)

Net interest income

$

313

$

1,414

$

1,727

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Table of Contents

For the Three months ended June 30, 2022 compared to the Three months ended June 30, 2021

(in thousands and tax equivalent basis)

Volume

Rate

Net

Interest Income:

Loans

$

310

$

(553)

$

(243)

Taxable Investments

283

263

546

Non-taxable Investments

30

(10)

20

Federal funds sold

(31)

31

0

Interest-bearing deposits

0

4

4

Other interest earning assets

(27)

(3)

(30)

Total interest income

565

(268)

297

Interest Expense:

Interest-bearing demand deposits

70

(152)

(82)

Interest-bearing money markets

(16)

(28)

(44)

Savings deposits

3

(6)

(3)

Time deposits

(235)

(234)

(469)

Short-term borrowings

5

(10)

(5)

Long-term borrowings

(450)

140

(310)

Total interest expense

(623)

(290)

(913)

Net interest income

$

1,188

$

22

$

1,210

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

57

Table of Contents

Provision for Loan Losses

The provision for loan losses was $0.1 million for the nine months ended September 30, 2021 and $5.0 million for the nine months ended September 30, 2020.  The higher provision expense recorded in the first nine months of 2020 was driven by an increase in the qualitative factors reflecting the uncertainty of the economic environment related to the COVID-19 pandemic. Net recoveries of $0.4 million were recorded for the nine months ended September 30, 2021, compared to net charge offs of $1.3 million for the same period of 2020. The ratio of the ALL to loans outstanding, including PPP loan balances, was 1.46% at September 30, 2021 compared to 1.36% at September 30, 2020 and 1.41% at December 31, 2020.  The ALL to loans outstanding, excluding PPP loan balances of $30.3 million and $148.9 million, was 1.49% at September 30, 2021 and 1.55% at September 30, 2020 and December 31, 2020, non-GAAP.  Specific allocations have been made for impaired loans where management has determined that the collateral supporting the loans is not adequate to cover the loan balance, and the qualitative factors affecting the ALL have been adjusted based on the current economic environment and the characteristics of the loan portfolio.

Other Income

The composition of other operating income for the ninesix and three month periods ended SeptemberJune 30, 20212022 and 20202021 is illustrated in the following table:

Income as % of

Income as % of

Total Other Income

Total Other Income

Nine Months Ended

Three Months Ended

September 30,

September 30,

(in thousands)

    

2021

    

2020

    

2021

    

2020

Service charges on deposit accounts

$

1,292

    

10%

$

1,439

    

13%

$

475

    

10%

$

447

    

11%

Other service charges

664

5%

517

5%

232

5%

195

5%

Trust department

6,441

47%

5,355

47%

2,166

48%

1,871

47%

Debit card income

2,623

19%

2,052

18%

900

20%

738

19%

Bank owned life insurance

877

7%

961

8%

298

7%

373

9%

Brokerage commissions

854

6%

713

6%

229

5%

234

6%

Other income

835

6%

374

3%

223

5%

120

3%

$

13,586

100%

$

11,411

100%

$

4,523

100%

$

3,978

100%

Income as % of

Income as % of

Total Other Income

Total Other Income

Six Months Ended

Three Months Ended

June 30,

June 30,

(in thousands)

    

2022

    

2021

    

2022

    

2021

Service charges on deposit accounts

$

928

    

11%

$

817

    

9%

$

463

    

11%

$

412

    

10%

Other service charges

445

5%

432

5%

232

5%

221

5%

Trust department

4,233

48%

4,275

47%

2,044

46%

2,034

47%

Debit card income

1,869

21%

1,723

19%

983

22%

913

21%

Bank owned life insurance

589

7%

579

6%

297

7%

293

7%

Brokerage commissions

533

6%

625

7%

313

7%

357

8%

Other income

198

2%

612

7%

81

2%

91

2%

$

8,795

100%

$

9,063

100%

$

4,413

100%

$

4,321

100%

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Table of Contents

Other Operating Expenses

The composition of other operating expenses for the ninesix and three month periods ended SeptemberJune 30, 20212022 and 20202021 is illustrated in the following table:

Expense as % of

Expense as % of

Expense as % of

Expense as % of

Total Other Operating Expenses

Total Other Operating Expenses

Total Other Operating Expenses

Total Other Operating Expenses

Nine Months Ended

Three Months Ended

Six Months Ended

Three Months Ended

September 30,

September 30,

June 30,

June 30,

(in thousands)

    

2021

    

2020

    

2021

    

2020

    

2022

    

2021

    

2022

    

2021

Salaries and employee benefits

$

16,214

    

44%

$

16,244

    

49%

$

5,719

    

44%

$

5,378

    

51%

$

11,761

    

55%

$

10,495

    

44%

$

5,793

    

54%

$

5,507

    

50%

FDIC premiums

575

2%

404

1%

209

2%

201

2%

329

2%

366

1%

155

2%

183

1%

Equipment

2,837

8%

2,871

9%

1,032

8%

978

9%

2,073

10%

1,805

8%

1,029

10%

954

9%

Occupancy

2,102

6%

2,200

7%

684

5%

707

7%

Data processing

2,420

6%

3,155

10%

819

6%

1,130

11%

Marketing

408

1%

405

1%

129

1%

122

1%

Occupancy expense of premises

1,438

7%

1,418

6%

711

7%

693

6%

Data processing expense

1,626

8%

1,601

7%

805

8%

875

8%

Marketing expense

257

1%

279

1%

151

1%

133

1%

Professional services

3,276

9%

2,506

8%

615

5%

602

6%

1,084

5%

2,661

11%

564

5%

1,491

14%

Contract labor

486

1%

480

1%

153

1%

180

2%

323

2%

333

1%

158

2%

185

2%

Line rentals

606

2%

654

2%

123

1%

216

2%

Telephone

253

1%

483

2%

139

1%

268

2%

Other real estate owned

(460)

(1)%

3

0%

150

1%

6

0%

247

1%

(610)

(3)%

152

1%

(198)

(2)%

Investor relations

546

1%

1,160

3%

116

1%

54

0%

219

1%

430

2%

123

1%

306

3%

Settlement expense

3,300

9%

0%

0%

0%

0%

3,300

14%

0%

0%

FHLB prepayment penalty

2,368

6%

0%

2,368

18%

0%

Contributions

63

0%

50

0%

42

0%

27

0%

Other

2,308

6%

2,890

9%

910

7%

966

9%

1,542

7%

1,348

6%

815

8%

608

6%

$

36,986

100%

$

32,972

100%

$

13,027

100%

$

10,540

100%

$

21,215

100%

$

23,959

100%

$

10,637

100%

$

11,032

100%

Provision for Income Taxes

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

The effective income tax rate as a percentage of income increased to 24.9% at September 30, 2021 from 22.1% at September 30, 2020 primarily due to a reduction in tax exempt income and the reduction in low income housing tax credits that expired in June 2021.  A new investment in a low income housing tax credit will reduce the effective tax rate beginning in 2022 and future years.

FINANCIAL CONDITION

Balance Sheet Overview

Total assets at SeptemberJune 30, 2021 decreased to $1.72022 were $1.8 billion, representing a $24.9$7.9 million decrease since March 31, 2022 and a $22.6 million increase since December 31, 2020.2021.  During the first nine monthssecond quarter of 2021,2022, cash and interest-bearing deposits in other banks decreased by $14.5$54.5 million, the investment portfolio increaseddecreased by $2.4$11.8 million and gross loans increased by $52.2 million.  Other assets including deferred taxes, premises and equipment and accrued interest receivable also increased collectively by $6.6 million.  

Total liabilities at June 30, 2022 were $1.6 billion, representing a $3.7 million decrease since March 31, 2022 and a $31.6 million increase since December 31, 2021.  The increase in total liabilities was also attributable to the change in the market value of the pension plan assets of $9.4 million since December 31, 2021.  This decrease is related to the increasing rate environment and market volatility resulting in a pension plan liability of $4.6 million at June 30, 2022 compared to a pension plan asset of $4.8 million at December 31, 2021. Total deposits decreased by $5.9 million.$23.2 million since March 31, 2022 and increased by $15.0 million since December 31, 2021.  The decline in deposits during the second quarter is primarily attributable to reduced money market balances associated with one local municipality.  Short term borrowings increased $12.2 million since December 31, 2021, driven by $18.9 million in overnight borrowings, which were offset by a decrease in cash was due primarily toother short-term borrowings of $7.9 million during the strategic decision to deploy $39.0 million of cash to purchase a pool of mortgage loans for the purpose of offsetting mortgage portfolio balances that have been declining due to continued refinancing activity.  Management also used $70.0 million to prepay FHLB advances.  Although the Bank recorded $2.4 million in penalties in connection with the FHLP prepayments, management anticipates that the resulting reduction in interest expense for the remainder of 2021 and in future years will offset the penalty and have a significant impact on the cost of funds.  OREO balances decreased $2.7 million due to the sale of a parcel of real estatequarter.  

5956

Table of Contents

securing a large commercial participationThe increase in overnight borrowings at June 30, 2022 was primarily driven by the strong loan growth coupled with the decline in deposit balances during the second quarter and the timing difference associated with an expected loan pay-off.  Management plans to bring approximately $50.0 million in trust department money market accounts which had been placed off-balance sheet in 2021, back on-balance sheet in the first quarter of 2021 and the additional sales of undeveloped lots.  We anticipate further reduction to OREO balances over the next quarter as we consummate additional sales contracts.

Total liabilities decreased by $27.6 million when compared to liabilities at December 31, 2020.  The decrease in the first nine months of 2021 was attributable to deposit growth of $22.1 million due to stimulus programs and to growth in core relationships, increased balances in short-term borrowings related to our Treasury Management product, offset by the prepayment of $70.0 million in FHLB long-term borrowings. Total shareholders’ equity increased slightly during the first nine months of 2021, as net income of $12.2 million was offset by the repurchase of $7.2 million (400,000 shares) of First United Corporation common stock.third quarter.

Loan Portfolio

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

(dollars in thousands)

    

September 30, 2021

    

December 31, 2020

    

June 30, 2022

    

December 31, 2021

Commercial real estate

$

371,785

    

32%

$

369,176

    

32%

$

421,942

    

34%

$

374,291

    

32%

Acquisition and development

132,256

11%

116,961

10%

116,115

10%

128,077

11%

Commercial and industrial

195,758

17%

266,745

23%

Commercial and industrial *

225,640

18%

180,976

16%

Residential mortgage

405,885

35%

379,170

32%

406,293

33%

404,686

35%

Consumer

56,184

5%

35,760

3%

63,623

5%

65,657

6%

Total Loans

$

1,161,868

100%

$

1,167,812

100%

$

1,233,613

100%

$

1,153,687

100%

*Includes $0.8 million of PPP loans at June 30, 2022 and $7.7 million at December 31, 2021

Outstanding gross loans of $1.2 billion at SeptemberJune 30, 20212022 reflected a declinegrowth of $5.9$79.9 million duringfor the first ninesix months of 2022 and growth of $52.2 million for the second quarter of 2022.  Since December 31, 2021, which was primarily attributable to growth in our mortgage loan portfolio due to the purchase of a $39.0 million loan pool, offset by a decline of portfolio balances.  This loan pool consisted of individual  adjustable and fixed rate residential mortgage loans.  Core commercial loan growth was offset by PPP loan forgiveness.  Commercial real estate (“CRE”) loans increased by $2.6$47.7 million, acquisition and development (“A&D”) loans increaseddecreased by $15.3$12.0 million and commercial and industrial (“C&I”) loans decreasedincreased by $71.0 million, as$44.6 million.  The growth in core portfolio loansthe commercial real estate and commercial and industrial portfolios is a result of $12.7 million was offset by PPP loan forgiveness.expansion of relationships with existing clients as well as new commercial clients.   Residential mortgage loans increased $26.7$1.6 million related to the diminished refinance activity due to the purchase of a pool of 1-4 family residential loans, offset by the continued refinancing activity. Given the current lowrising interest rate environment customers appearand management’s strategic decision to be seeking longer-term, fixed-rate loans and we continued to use the secondary market rather than hold these longer-term fixed ratebook new mortgage loans in theat higher rates to our in-house portfolio. The consumer loan portfolio increaseddecreased by $20.4$2.0 million due to amortization of the purchase of a pool of consumer loans in the second quarter of 2021 as an effort to deploy excess cash into higher yielding, short-term assets.  existing portfolio offsetting new production.

CommercialNew commercial loan production for the first ninethree months of 2021ended June 30, 2022 was approximately $147.9 million, with $46.7 million originated during the third quarter, exclusive of PPP loan production. PPP loan production was approximately $66.1 million for the first nine months of 2021.103.4 million.  At SeptemberJune 30, 2021,2022, unfunded, committed commercial construction loans totaled approximately $26.6$34.9 million. Commercial amortization and payoffs were approximately $117.3$47.7 million through SeptemberJune 30, 2021, exclusive of PPP. 2022.

ConsumerNew consumer mortgage loan production for the second quarter of 2022 was approximately $89.6$15.1 million through September 30, 2021.with most of this production being comprised of in-house mortgages.  The production and pipeline mix of in-house, portfolio loans and investor loans remained strong as of SeptemberJune 30, 2021, with those loans totaling $20.0 million, consisting2022 consisted of $16.0 million in portfolio loans and $4.0 million in investor loans. At the end of$13.5 million. Production levels have slowed for residential mortgages as compared to the second quarter of 2021 management implemented special promotionsbecause of the increasing interest rates for residential mortgage products to shift production towards portfolio loans and utilize excess cash balances.the first six months of 2022.

Non-accrual loans totaled $7.4$2.1 million at SeptemberJune 30, 20212022 compared to $3.3$2.5 million at December 31, 2020.2021.  The  increasedecrease in the non-accrual balancebalances at SeptemberJune 30, 20212022 was dueprimarily related to the movement$0.2 million of two hospitality loans, totaling approximately $4.0 million, to non-accrual status during the first quarterprincipal pay-downs of 2021.  These loans suffered reduced cash flows due to the impact of the COVID-19 pandemic, received modificationsresidential mortgage and were classified as substandard at December 31, 2020.  These loans have returned to their contractual payment terms but will remain on non-accrual status until they pay full contractual payments for six months.home equity loans.  

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Risk Elements of Loan Portfolio

The following table presents the risk elements of our loan portfolio at the dates indicated. Management is not aware of any potential problem loans other than those listed in this table or discussed below.

(dollars in thousands)

    

September 30,
2021

    

% of
Applicable
Portfolio

    

December 31,
2020

    

% of
Applicable
Portfolio

    

June 30,
2022

    

% of
Applicable
Portfolio

    

December 31,
2021

    

% of
Applicable
Portfolio

Non-accrual loans:

Commercial real estate

$

5,017

1.35%

$

898

0.24%

$

66

0.02%

$

81

0.02%

Acquisition and development

395

0.30%

366

0.31%

375

0.32%

390

0.30%

Commercial and industrial

0.00%

90

0.05%

Residential mortgage

2,011

0.50%

2,048

0.54%

1,675

0.41%

1,901

0.47%

Consumer

18

0.03%

27

0.08%

33

0.05%

0.00%

Total non-accrual loans

$

7,441

0.64%

$

3,339

0.29%

$

2,149

0.17%

$

2,462

0.21%

Accruing Loans Past Due 90 days or more:

Acquisition and development

10

Residential mortgage

154

710

$

258

$

148

Consumer

35

4

67

152

Total loans past due 90 days or more

$

189

$

724

$

325

$

300

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

$

7,630

$

4,063

$

2,474

$

2,762

Restructured Loans (TDRs):

Performing

$

3,475

$

3,657

$

3,134

$

2,997

Non-accrual (included above)

284

301

289

300

Total TDRs

$

3,759

$

3,958

$

3,423

$

3,297

Other real estate owned

$

6,663

$

9,386

$

4,517

$

4,477

Total Non-performing assets

$

6,991

$

7,239

Impaired loans without a valuation allowance

$

9,148

$

6,060

4,980

5,248

Impaired loans with a valuation allowance

2,040

1,399

303

480

Total impaired loans

$

11,188

$

7,459

$

5,283

$

5,728

Valuation allowance related to impaired loans

$

205

$

57

$

62

$

64

Non-accrual loans to total loans (as %)

0.17%

0.21%

Non-performing loans to total loans (as %)

0.20%

0.24%

Non-performing assets to total assets (as %)

0.40%

0.42%

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

732.29%

648.05%

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

225.10%

220.40%

Performing loans considered to be impaired (including performing troubled debt restructurings, or TDRs), as defined and identified by management, amounted to $7.6$3.1 million at SeptemberJune 30, 20212022 and $4.1$3.0 million at December 31, 2020.2021. Loans are identified as impaired when, based on current information and events, management determines that we will be unable to collect all amounts due according to contractual terms. These loans consist primarily of A&D loans and CRE loans. The fair values are generally determined based upon independent third-party appraisals of the collateral or discounted cash flows based upon the expected proceeds. Specific allocations have been made where management believes there is insufficient collateral to repay the loan balance if liquidated and there is no secondary source of repayment available.

Loans that have been modified in reliance on Section 4013 of the CARES Act and the guidance issued thereunder are not treated as TDRs. Information about these loans can be found in Notes 2 and 5 to the consolidated financial statements presented in Item 1 of Part I of this report.

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The following table presents the details of impaired loans that are TDRs by class at SeptemberJune 30, 20212022 and December 31, 2020:2021:

September 30, 2021

December 31, 2020

June 30, 2022

December 31, 2021

Number of

Recorded

Number of

Recorded

Number of

Recorded

Number of

Recorded

(dollars in thousands)

    

Contracts

    

Investment

    

Contracts

    

Investment

    

Contracts

    

Investment

    

Contracts

    

Investment

Performing

Commercial real estate

Non owner-occupied

2

$

215

2

$

224

1

103

1

$

106

All other CRE

1

2,110

1

2,208

2

2,098

2

2,178

Acquisition and development

1-4 family residential construction

1

245

1

266

1

224

1

239

All other A&D

1

202

1

210

Commercial and industrial

Residential mortgage

Residential mortgage – term

7

703

7

749

11

709

6

474

Residential mortgage – home equity

Consumer

Total performing

12

$

3,475

12

$

3,657

15

$

3,134

10

$

2,997

Non-accrual

Commercial real estate

Non owner-occupied

$

$

$

$

All other CRE

Acquisition and development

1-4 family residential construction

All other A&D

Commercial and industrial

Residential mortgage

Residential mortgage – term

2

284

2

301

2

289

2

300

Residential mortgage – home equity

Consumer

Total non-accrual

2

284

2

301

2

289

2

300

Total TDRs

14

$

3,759

14

$

3,958

17

$

3,423

12

$

3,297

The level of TDRs was $3.8$3.2 million at SeptemberJune 30, 20212022 compared to $4.0$3.4 million at December 31, 2020,2021, with a slight reduction due to payments made during the first ninesix months of 2021.2022. There were no new TDRs during the first ninesix months of 2021.2022.

Allowance and Provision for Loan Losses

The ALL is maintained to absorb probable incurred credit losses from the loan portfolio. The ALL is based on management’s continuing evaluation of the quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.

The ALL is also based on estimates, and actual losses will vary from current estimates. These estimates are reviewed quarterly, and as adjustments, either positive or negative, become necessary, a corresponding increase or decrease is made in the ALL. The methodology used to determine the adequacy of the ALL is consistent with prior years. An estimate for probable losses related to unfunded lending commitments, such as letters of credit and binding but unfunded loan commitments is also prepared. This estimate is computed in a manner similar to the methodology described above, adjusted for the probability of actually funding the commitment.  The ALL decreased to $15.7 million at June 30, 2022 compared to $16.0 million at December 31, 2021.

The ratio of year-to-date net charge offs to average loans for the six months ending June 30, 2022 was an annualized 0.07%, compared to net charge offs to average loans of 0.01% for 2021.  Our special assets team continues to aggressively collect on charged-off loans.

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The following table presents a summary of the activity in the ALL for the nine months ended September 30:

(dollars in thousands)

    

2021

    

2020

 

Balance, January 1

$

16,486

$

12,537

Charge-offs:

Acquisition and development

(85)

(1,144)

Commercial and industrial

(232)

Residential mortgage

(141)

(108)

Consumer

(266)

(274)

Total charge-offs

(492)

(1,758)

Recoveries:

Commercial real estate

69

Acquisition and development

172

29

Commercial and industrial

511

149

Residential mortgage

49

66

Consumer

112

116

Total recoveries

844

429

Net recoveries/(credit charge-offs)

352

(1,329)

Provision for loan losses

68

4,981

Balance at end of period

$

16,906

$

16,189

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

1.46

%  

1.36

%

Net recoveries/(credit charge-offs) to average loans outstanding during the period, annualized (as %)

0.04

%  

(0.16)

%

The ALL increased to $16.9 million at September 30, 2021 compared to $16.5 million at December 31, 2020.  The provision for loan losses was $0.1 million for the nine months ended September 30, 2021 and $5.0 million for the nine months ended September 30, 2020.  The higher provision expense recorded in the first nine months of 2020 was driven by an increase in the qualitative factors reflecting the uncertainty of the economic environment related to the COVID-19 pandemic. Net recoveries of $0.4 million were recorded for the nine months ended September 30, 2021, compared to net charge offs of $1.3 million for the same period of 2020. The ratio of the ALL to loans outstanding, including PPP loan balances, was 1.46% at September 30, 2021 compared to 1.36% at September 30, 2020 and 1.41% at December 31, 2020.  The ALL to loans outstanding, excluding PPP loan balances of $30.3 million and $148.9 million, was 1.49% at September 30, 2021 and 1.55% at September 30, 2020 and December 31, 2020, non-GAAP.

The ratio of net recoveries to average loans for the nine months ended September 30, 2021 was an annualized 0.04%, compared to net charge offs to average loans of 0.16% for the nine months ended September 30, 2020.  The CRE portfolio did not have any charge offs or recoveries in the first nine months of 2021, compared to an annualized net recovery rate of 0.03% as of September 30, 2020. The A&D loans had an annualized net recovery rate of 0.01% as of September 30, 2021, compared to a net charge-off rate of 1.21% as of September 30, 2020. The decrease is related to a $1.10 million charge off on a non-accrual loan in 2020, which subsequently moved to OREO.  The C&I portfolio had net recoveries to average loans of 0.06% as of September 30, 2021, compared to net charge-offs of 0.06% as of September 30, 2020. The residential mortgage ratios were a net charge-off rate of 0.01% as of September 30, 2021 and 2020.  The consumer loan ratios were net charge-off rates of 0.02% and 0.59% as of September 30, 2021 and September 30, 2020, respectively. Our special assets team continues to aggressively collect on charged-off loans.

Management believes that the ALL at SeptemberJune 30, 2021 was2022 is adequate to provide for probable credit losses inherent in our loan portfolio. Amounts that will be recorded for the provision for loan losses in future periods will depend upon trends in the loan balances, including the composition of the loan portfolio, changes in loan quality and loss experience trends, potential recoveries on previously charged-off loans and changes in other qualitative factors. Management also applies interest rate risk, collateral value and debt service sensitivity analyses to the Commercial real estate loan portfolio and obtains new appraisals on specific loans under defined parameters to assist in the determination of the periodic provision for loan losses.

63

TableThe following table presents a summary of Contentsthe activity in the ALL for the six months ended June 30:

(dollars in thousands)

    

2022

    

2021

 

Balance, January 1

$

15,955

$

16,486

Charge-offs:

Commercial real estate

(81)

Acquisition and development

Commercial and industrial

(52)

(82)

Residential mortgage

(33)

(175)

Consumer

(545)

Total charge-offs

(630)

(257)

Recoveries:

Commercial real estate

1

110

Acquisition and development

20

38

Commercial and industrial

9

29

Residential mortgage

101

78

Consumer

76

Total recoveries

207

255

Net losses

(423)

(2)

Provision for loan losses

205

665

Balance at end of period

$

15,737

$

17,149

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

1.28

%  

1.49

%

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

2022

2021

Commercial real estate

0.00%

(0.02)%

Acquisition and development

(0.07)%

0.97%

Commercial and industrial

(0.23)%

0.04%

Residential mortgage

0.02%

0.03%

Consumer

0.45%

0.48%

Investment Securities

At SeptemberJune 30, 2021,2022, the total amortized cost basis of the available-for-sale investment portfolio was $241.2$149.7 million, compared to a fair value of $235.6$132.9 million. Unrealized gains and losses on securities available-for-sale are reflected in accumulated other comprehensive loss, a component of shareholders’ equity. The amortized cost basis of the held to maturity portfolio was $62.0$240.6 million, compared to a fair value of $71.7$220.3 million.

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Table of Contents

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

September 30, 2021

December 31, 2020

June 30, 2022

December 31, 2021

Amortized

Fair Value

FV as % 

Amortized

Fair Value

FV as % 

Amortized

Fair Value

FV as % 

Amortized

Fair Value

FV as % 

(dollars in thousands)

    

Cost

    

(FV)

    

of Total

    

Cost

    

(FV)

    

of Total

    

Cost

    

(FV)

    

of Total

    

Cost

    

(FV)

    

of Total

Securities Available-for-Sale:

Securities Available for Sale:

U.S. government agencies

$

55,527

$

53,734

23%

$

75,856

$

76,433

34%

$

11,060

$

9,915

8%

$

69,602

$

67,169

23%

Residential mortgage-backed agencies

30,936

30,354

13%

22,999

22,899

10%

47,086

41,246

31%

49,630

48,661

17%

Commercial mortgage-backed agencies

55,980

55,509

24%

32,549

33,042

14%

36,498

31,996

24%

51,694

50,868

19%

Collateralized mortgage obligations

70,766

69,079

29%

70,372

70,637

31%

27,095

24,150

18%

93,018

90,077

31%

Obligations of state and political subdivisions

9,402

9,796

4%

10,144

10,614

5%

8,341

8,323

6%

12,439

12,804

4%

Corporate bonds

1,000

979

1%

Collateralized debt obligations

18,586

17,092

7%

18,544

13,260

6%

18,640

16,258

12%

18,609

17,192

6%

Total available for sale

$

241,197

$

235,564

100%

$

230,464

$

226,885

100%

$

149,720

$

132,867

100%

$

294,992

$

286,771

100%

Securities Held to Maturity:

U.S. treasuries

$

37,076

$

35,850

16%

$

$

U.S. government agencies

67,596

58,847

27%

Residential mortgage-backed agencies

$

32,113

$

32,601

45%

$

34,597

$

35,732

46%

27,996

25,717

12%

30,634

30,847

47%

Commercial mortgage-backed agencies

9,697

10,032

14%

11,716

12,303

16%

25,440

22,445

10%

5,456

5,601

9%

Collateralized mortgage obligations

0%

1,348

1,406

2%

59,951

54,293

25%

Obligations of state and political subdivisions

20,169

29,074

41%

20,602

28,171

36%

22,529

23,149

10%

20,169

28,921

44%

Total held to maturity

$

61,979

$

71,707

100%

$

68,263

$

77,612

100%

$

240,588

$

220,301

100%

$

56,259

$

65,369

100%

Total fair value of investment securities available-for-sale increasedavailable for sale decreased by $8.7$153.9 million since December 31, 2020.2021 due to the transfer of investments from available-for-sale to held to maturity in the first quarter 2022.  At SeptemberJune 30, 2021,2022, the securities classified as available-for-sale included a net unrealized loss of $5.6$16.9 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.

The Corporation reassessed 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 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.  The transfer of these securities was completed in an effort to mitigate further decline in fair market value in a rising rate environment.  Management’s assessment of the portfolio included lower yielding bonds and the risk of extension in an up 300 basis point shock.

As discussed in Note 76 to the consolidated financial statements presented elsewhere in this report, the Corporation measures fair market values based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 3 prices or valuation techniques require inputs that are both significant to the valuation assumptions and are not readily observable in the market (i.e. supported with little or no market activity). These Level 3 instruments are valued based on both observable and unobservable inputs derived from the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

Approximately $218.5$116.6 million of the available-for-sale portfolio was valued using Level 2 pricing and had net unrealized losses of $4.1$14.5 million at SeptemberJune 30, 2021.2022. The remaining $17.1$16.3 million of the securities available-for-sale represents the entire collateralized debt obligation (“CDO”) portfolio, which was valued using significant unobservable inputs (Level 3 assets). The $1.5$2.4 million in net unrealized losses associated with this portfolio relates to nine pooled trust preferred securities that comprise the CDO portfolio. Net unrealized losses of $0.7$1.4 million represent non-credit related OTTI charges on seven of the securities, while $0.8$1.0 million of unrealized losses relates to two securities which have had no credit related OTTI.

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The following table provides a summary of the trust preferred securities in the CDO portfolio and the credit status of these securities as of September 30, 2021:

Level 3 Investment Securities Available for Sale

(dollars in thousands)

Investment Description

First United Level 3 Investments

Security Credit Status

Deferrals/

Collateral

Number of

Defaults

Support

Performing

Fair

Unrealized

Lower

as % of

as % of

Issuers/

Amortized

Market

Gain/

Credit

Original

Original

Performing

Collateral

Performing

Total

Deal

    

Class

    

Cost

    

Value

    

(Loss)

    

Rating

    

Collateral

    

Collateral

    

Collateral

    

Support

    

Collateral

    

Issuers

Preferred Term Security XVIII*

C

$

1,894

$

1,522

$

(372)

C

676,565

14.82%

268,049

21,124

7.88%

40 / 56

Preferred Term Security XVIII

C

2,717

2,283

(434)

C

676,565

14.82%

268,049

21,124

7.88%

40 / 56

Preferred Term Security XIX*

C

1,842

1,860

18

C

700,535

6.57%

412,787

30,381

7.36%

47 / 52

Preferred Term Security XIX*

C

1,102

1,116

14

C

700,535

6.57%

412,787

30,381

7.36%

47 / 52

Preferred Term Security XIX*

C

2,554

2,604

50

C

700,535

6.57%

412,787

30,381

7.36%

47 / 52

Preferred Term Security XIX*

C

1,103

1,116

13

C

700,535

6.57%

412,787

30,381

7.36%

47 / 52

Preferred Term Security XXII*

C-1

1,599

1,491

(108)

C

1,386,600

9.59%

624,548

82,765

13.25%

58 / 72

Preferred Term Security XXII*

C-1

3,997

3,728

(269)

C

1,386,600

9.59%

624,548

82,765

13.25%

58 / 72

Preferred Term Security XXIII

C-1

1,778

1,372

(406)

C

1,467,000

12.95%

658,365

76,775

11.66%

70 / 82

Total Level 3 Securities Available for Sale

$

18,586

$

17,092

$

(1,494)

*Security has been deemed other-than-temporarily impaired and loss has been recognized in accordance with ASC Section 320-10-35.

The terms of the debentures underlying trust preferred securities allow the issuer of the debentures to defer interest payments for up to 20 quarters, and, in such case, the terms of the related trust preferred securities allow their issuers to defer dividend payments for up to 20 quarters. Some of the issuers of the trust preferred securities in our investment portfolio have defaulted and/or deferred payments ranging from 6.57% to 14.82% of the total collateral balances underlying the securities. The securities were designed to include structural features that provide investors with credit enhancement or support to provide default protection by subordinated tranches. These features include over-collateralization of the notes or subordination, excess interest or spread which will redirect funds in situations where collateral is insufficient, and a specified order of principal payments. There are securities in our portfolio that are under-collateralized, which does represent additional stress on our tranche. However, in these cases, the terms of the securities require excess interest to be redirected from subordinate tranches as credit support, which provides additional support to our investment.

Management systematically evaluates securities for impairment on a quarterly basis. Based upon application of ASC Topic 320 (Section 320-10-35), management must assess whether (a) the Corporation has the intent to sell the security and (b) it is more likely than not that the Corporation will be required to sell the security prior to its anticipated recovery. If neither applies, then declines in the fair value of securities below their cost that are considered other-than-temporary declines are split into two components. The first is the loss attributable to declining credit quality. Credit losses are recognized in earnings as realized losses in the period in which the impairment determination is made. The second component consists of all other losses. The other losses are recognized in other comprehensive income. In estimating OTTI charges, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) adverse conditions specifically related to the security, an industry, or a geographic area, (3) the historic and implied volatility of the security, (4) changes in the rating of a security by a rating agency, (5) recoveries or additional declines in fair value subsequent to the balance sheet date, (6) failure of the issuer of the security to make scheduled interest payments, and (7) the payment structure of the debt security and the likelihood of the issuer being able to make payments that increase in the future. Due to the duration and the significant market value decline in the pooled trust preferred securities held in our portfolio, we performed more extensive testing on these securities for purposes of evaluating whether or not an OTTI has occurred.

The market for these securities as of September 30, 2021 was not active and markets for similar securities were also not active. The inactivity was evidenced first by a significant widening of the bid-ask spread in the brokered markets in which these securities trade and then by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive, as no new CDOs have been issued since 2007. There are currently very few market participants who are willing to effect transactions in these securities. The market values for these securities, or any securities other than those issued or guaranteed by the U.S. Department of the Treasury (the “Treasury”), are very depressed relative to historical levels. Therefore, in the current market, a low market price for a particular bond may only provide evidence of stress in the credit markets in general rather than being an indicator of credit problems with a particular issue. Given the conditions in the current debt markets and the absence of observable transactions in the secondary and new issue markets, management has determined that (a) the few observable transactions and market quotations that are available are not reliable for the purpose of obtaining fair value at September 30, 2021, (b) an income valuation

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approach technique (i.e. present value) that maximizes the use of relevant unobservable inputs and minimizes the use of observable inputs will be equally or more representative of fair value than a market approach, and (c) the CDO segment is appropriately classified within Level 3 of the valuation hierarchy because management determined that significant adjustments were required to determine fair value at the measurement date.

Management uses an independent third party to prepare both the evaluations of OTTI and the fair value determinations for the CDO portfolio. Management does not believe that there were any material differences in the OTTI evaluations and pricing between December 31, 2020 and September 30, 2021.

The approach used by the third party to determine fair value involved several steps, which included detailed credit and structural evaluation of each piece of collateral in each bond, projection of default, recovery and prepayment/amortization probabilities for each piece of collateral in the bond, and discounted cash flow modeling. The discount rate methodology used by the third party combines a baseline current market yield for comparable corporate and structured credit products with adjustments based on evaluations of the differences found in structure and risks associated with actual and projected credit performance of each CDO being valued. Currently, the only active and liquid trading market that exists is for stand-alone trust preferred securities, with a limited market for highly-rated CDO securities that are more senior in the capital structure than the securities in the CDO portfolio. Therefore, adjustments to the baseline discount rate are also made to reflect the additional leverage found in structured instruments.

Based upon a review of credit quality and the cash flow tests performed by the independent third party, management determined that no securities had credit-related OTTI during the first nine months of 2021.  Additionally, there has been no change in the performing collateral, no decline in the percentage of deferrals/defaults to original collateral, and increases in collateral support for each of the positions held by the Corporation.

Deposits

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

(dollars in thousands)

    

September 30, 2021

    

December 31, 2020

Non-interest bearing demand deposits:

    

    

Retail

$

491,441

34%

$

420,427

30%

Interest-bearing deposits:

Demand

212,385

15%

201,571

14%

Money Market:

Retail

333,113

23%

376,096

26%

Savings deposits

233,403

16%

196,046

14%

Time deposits less than $100,000:

Retail

74,166

5%

88,728

6%

Time deposits $100,000 or more:

Retail

99,986

7%

139,498

10%

Total Deposits

$

1,444,494

100%

$

1,422,366

100%

(dollars in thousands)

    

June 30, 2022

    

December 31, 2021

Non-interest-bearing demand deposits

$

527,761

    

36%

$

501,627

34%

Interest-bearing deposits:

Demand

299,532

20%

228,175

16%

Money Market

269,994

18%

339,748

23%

Savings deposits

252,153

17%

236,595

16%

Time deposits

134,914

9%

163,229

11%

Total Deposits

$

1,484,354

100%

$

1,469,374

100%

Total deposits at SeptemberJune 30, 20212022 increased by $22.1$15.0 million when compared to deposits at December 31, 2020.  During the first nine months of 2021, non-interest-bearing2021.  Non-interest-bearing deposits increased by $71.0$26.1 million driven by retail andprimarily related to the new commercial account growth partially attributable to government stimulus programs.business gained during 2022.  Interest bearing demand deposits increased $71.4 million.  Traditional savings accounts increased $15.6 million.  Money market balances decreased $69.8 million driven by $37.4 millionone local municipality opting to move their funds to a state-sponsored deposit account that offers a higher yield as we continuedwell as a movement of balances to see significant growth in our Prime Saver product, and total demand deposits increased by $10.8 million. Total money market accounts decreased by $43.0 million due primarily to management’s decision to sweep approximately $70.0 million of wealth management money market funds off balance sheet in the first quarter of 2021. These funds can be readily shifted back to in-house money market accounts should liquidity needs arise intrust department for higher rates, while maintaining the future.customer relationship.  Time deposits decreased by $54.1$28.3 million primarily inrelated to maturing time deposits over $100,000, due to repayment of a $10.0 million brokered CD in May 2021 and as we continued to reduce pricing on single-service relationships and municipal bids.moving into other deposit products.

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Borrowed Funds

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

(in thousands)

    

September 30,
2021

    

December 31,
2020

    

June 30,
2022

    

December 31,
2021

Fed Funds Purchased, weighted average interest rate of 1.75% at June 30, 2022

$

18,900

$

Securities sold under agreements to repurchase

$

72,396

$

49,160

$

51,014

$

57,699

Total short-term borrowings

72,396

49,160

69,914

57,699

FHLB advances

$

$

70,000

Junior subordinated debt

30,929

30,929

30,929

30,929

Total long-term borrowings

$

30,929

$

100,929

$

30,929

$

30,929

TotalShort-term borrowings increased $12.2 million since December 31, 2021, driven by $18.9 million in overnight borrowings, which were offset by a decrease in other short-term borrowings increased by $23.2of $6.7 million during the first ninesix months of 2021. This increase was duerelated to increased cash balances from our existing accounts. Long-term borrowings decreased $70.0 million as management made the strategic decision to deploy excess cash and prepay the FHLB advances during the third quarter.  Treasury Management customers utilizing their funds.

Liquidity Management

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

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

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

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

1.Unsecured Fed Funds lines of credit with upstream correspondent banks (M&T Bank, Pacific Coast Banker’s Bank, PNC Financial Services, Atlantic Community Bankers Bank, Community Bankers Bank and Zions National Bank).
2.Secured advances with the FHLB, which are collateralized by eligible one to four family residential mortgage loans, home equity lines of credit, commercial real estate loans, various securities and pledged cash.
3.Secured line of credit with the Fed Discount Window for use in borrowing funds up to 90 days, using municipal securities as collateral.
4.Brokered deposits, including CDs and money market funds, provide a method to generate deposits quickly. These deposits are strictly rate driven but often provide the most cost-effective means of funding growth.
5.One Way Buy CDARS/ICS funding – a form of brokered deposits that has become a viable supplement to brokered deposits obtained directly.
6.Federal Reserve PPPLF – provides funding and uses SBA PPP loans as collateral at 100% value.  This program expired on July 31, 2021.

Management believes that we have adequate liquidity available to respond to current and anticipated liquidity demands and is not aware of any trends or demands, commitments, events or uncertainties that are likely to materially affect our ability to maintain liquidity at satisfactory levels.

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Market Risk and Interest Sensitivity

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

At SeptemberJune 30, 2021,2022, we were asset sensitive.

Our interest rate risk management goals are:

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

In order toTo 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

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interest rate movements, the state of the regional and national economy, and other financial and business risk factors. Management uses computer simulations to measure the effect on net interest income of various interest rate scenarios. Key assumptions used in the computer simulations include cash flows and maturities of interest rate sensitive assets and liabilities, changes in asset volumes and pricing, and management’s capital plans. This modeling reflects interest rate changes and the related impact on net interest income over specified periods.

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

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

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

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

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Based on the simulation analysis performed at SeptemberJune 30, 20212022 and December 31, 2020,2021, management estimated the following changes in net interest income, assuming the indicated rate changes:

(Dollars in thousands)

    

September 30,
2021

December 31,
2020

    

June 30,
2022

December 31,
2021

+400 basis points

$

3,598

$

5,124

$

963

$

4,072

+300 basis points

$

2,896

$

4,067

$

825

$

3,233

+200 basis points

$

2,097

$

2,897

$

677

$

2,315

+100 basis points

$

1,022

$

1,527

$

492

$

1,160

-100 basis points

$

(2,952)

$

(2,174)

$

(3,060)

$

(3,110)

This estimate is based on assumptions that may be affected by unforeseeable changes in the general interest rate environment and any number of unforeseeable factors. Rates on different assets and liabilities within a single maturity category adjust to changes in interest rates to varying degrees and over varying periods of time. The relationships between lending rates and rates paid on purchased funds are not constant over time. Management can respond to current or anticipated market conditions by lengthening or shortening the Bank’s sensitivity through loan repricings or changing its funding mix. The rate of growth in interest-free sources of funds will influence the level of interest-sensitive funding sources. In addition, the absolute level of interest rates will affect the volume of earning assets and funding sources. As a result of these limitations, the interest-sensitive gap is only one factor to be considered in estimating the net interest margin.

Management believes that no material changes in our market risks, our procedures used to evaluate and mitigate those risks, or our actual or simulated sensitivity positions have occurred since December 31, 2020.2021. Our NII simulation analysis as of December 31, 20202021 is included in Item 7 of Part II Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, 20202021 under the heading “Market Risk and Interest Sensitivity.

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

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Capital Resources

We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdrawal demands of the Bank’s customers, and satisfy our other monetary obligations. To the extent that deposits are not adequate to fund our capital requirements, we can rely on the funding sources identified above under the heading “Liquidity Management”. At SeptemberJune 30, 2021,2022, the Bank had $130.0$111.1 million available through unsecured lines of credit with correspondent banks, $1.0 million available through a secured line of credit with the Fed Discount Window and approximately $189.0$189.8 million available through the FHLB. Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future capital requirements.

In addition to operational requirements, the Bank and First United Corporation areis subject to risk-based capital regulations, which were adopted and are monitored by federal banking regulators. These regulations are used to evaluate capital adequacy and require an analysis of an institution’s asset risk profile and off-balance sheet exposures, such as unused loan commitments and stand-by letters of credit.  Based on capital ratios at SeptemberJune 30, 2021, both2022, the Bank and First United Corporation arewas considered to be well-capitalized.

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

    

September 30,
2021

    

December 31,
2020

    

Required for
Capital
Adequacy
Purposes

    

Required
to be Well
Capitalized

 

    

June 30,
2022

    

December 31,
2021

    

Required for
Capital
Adequacy
Purposes

    

Required
to be Well
Capitalized

 

Total Capital (to risk-weighted assets)

Consolidated

15.51

%  

16.08

%  

8.00

%  

10.00

%

First United Bank & Trust

14.64

%  

15.50

%  

8.00

%  

10.00

%

14.64

%  

14.97

%  

8.00

%  

10.00

%

Tier 1 Capital (to risk-weighted assets)

Consolidated

14.26

%  

14.83

%  

6.00

%  

8.00

%

First United Bank & Trust

13.39

%  

14.25

%  

6.00

%  

8.00

%

13.46

%  

13.72

%  

6.00

%  

8.00

%

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

Consolidated

12.15

%  

12.61

%  

4.50

%  

6.50

%

First United Bank & Trust

13.39

%  

14.25

%  

4.50

%  

6.50

%

13.46

%  

13.72

%  

4.50

%  

6.50

%

Tier 1 Capital (to average assets)

Consolidated

10.33

%  

10.36

%  

4.00

%  

5.00

%

First United Bank & Trust

9.59

%  

9.81

%  

4.00

%  

5.00

%

10.40

%  

10.00

%  

4.00

%  

5.00

%

The minimum capital level requirements applicable to the Company and the Bank are:  (1) a common equity Tier 1 capital ratio of 4.5%; (2) a Tier 1 capital ratio of 6%; (3) a total capital ratio of 8%; and (4) a Tier 1 leverage ratio of 4%.  The rules also establish a “capital conservation buffer” of 2.5% above the regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital.  An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses to executive officers if its capital level falls below the buffer amount.  These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

Contractual Obligations

The Corporation enters into contractual obligations in the normal course of business. Among these obligations are FHLB advances and junior subordinated debentures, operating lease agreements for banking and subsidiaries’ offices and for data processing and telecommunications equipment.  Comparing SeptemberJune 30, 20212022 to December 31, 2020,2021, short-term borrowings increased $12.2 million, driven by $23.2$18.9 million in overnight borrowings, which were offset by a decrease in other short-term borrowings of $6.7 million during the first nine months of 2021. This increase was dueperiod  related to increased cash balances from our existing accounts. Long-term borrowings decreased $70.0 million as management made the strategic decision to deploy excess cash and prepay the FHLB advances during the third quarter.  Treasury Management customers utilizing their funds.

Commitments

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

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

(in thousands)

    

September 30,
2021

    

December 31,
2020

    

June 30,
2022

    

December 31,
2021

Residential Mortgage - home equity

$

64,316

$

59,615

$

68,811

$

66,874

Residential Mortgage - construction

21,210

12,220

22,552

18,657

Commercial

139,233

125,294

140,935

136,897

Consumer - personal credit lines

4,654

4,314

4,509

4,551

Standby letters of credit

16,731

17,675

15,922

15,711

Total

$

246,144

$

219,118

$

252,729

$

242,690

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The increase of $27.0$10.0 million in commitments at SeptemberJune 30, 20212022 when compared to December 31, 20202021 was due to continued demand for consumernew business in construction commitments in the residential mortgage and commercial construction funding during the first nine months of 2021. Management will continue to monitor these balances.portfolios.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The information required by this item is included in Item 2 of Part I of this report under the caption “Market Risk and Interest Sensitivity” and in Item 7 of Part II of First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 20202021 under the heading “Market Risk and Interest Sensitivity” both of which are incorporated in this Item 3 by reference.

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Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 with the SEC, such as this Quarterly Report, is recorded, processed, summarized and reported within the periods specified in those rules and forms, and that such information is accumulated and communicated to our management, including First United Corporation’s principal executive officer (“PEO”) and its principal financial officer (“PFO”), as appropriate, to allow for timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

An evaluation of the effectiveness of these disclosure controls as of SeptemberJune 30, 20212022 was carried out under the supervision and with the participation of management, including the PEO and the PFO. Based on that evaluation, management, including the PEO and the PFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the ninesix months ended SeptemberJune 30, 2021,2022, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

The risks and uncertainties to which our financial condition and operations are subject are discussed in detail in Item 1A of Part I of First United Corporation’s Annual Report on Form 10-K for the year ended December 31, 2020.2021. Management does not believe that any material changes in our risk factors have occurred since they were last disclosed except as follows.

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

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

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Item 6. Exhibits

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

Exhibit

    

Description

31.1

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

31.2

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

32

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

101.INS

Inline XBRL Instance Document (filed herewith)

101.SCH

Inline XBRL Taxonomy Extension Schema (filed herewith)

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith)

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase (filed herewith)

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase (filed herewith)

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase (filed herewith)

104

The cover page of First United Corporation’s Quarterly Report on Form 10Q for the quarter ended September 30, 2021March 31, 2022 formatted in Inline XBRL, included within the Exhibit 101 attachments (filed herewith).

* Portions of the exhibit have been omitted pursuant to Item 601(b)(10)(vi) of Regulation S-K.

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SIGNATURES

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

FIRST UNITED CORPORATION

Date: November 9, 2021August 11, 2022

/s/ Carissa L. Rodeheaver

Carissa L. Rodeheaver, CPA

Chairman of the Board, President and Chief Executive Officer

(Principal Executive Officer)

Date: November 9, 2021August 11, 2022

/s/ Tonya K. Sturm

Tonya K. Sturm, Senior Vice President,

Chief Financial Officer

(Principal Financial Officer and Principal Accounting Officer)

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