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 ~~September 30, 2022~~March 31, 2023

◻ 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: ~~6,656,390~~6,688,710 shares of common stock, par value $.01 per share, as of ~~October 31, 2022~~April 30, 2023.

Table of Contents

INDEX TO QUARTERLY REPORT

FIRST UNITED CORPORATION


		Page
PART I. FINANCIAL INFORMATION		3
Item 1.	Financial ~~Statements~~Statemets (unaudited)	3
	Consolidated Statements of Financial Condition – ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022	3
	Consolidated Statements of Operations – for the ~~nine and~~ three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021~~2022	4
	Consolidated Statements of Comprehensive Income/(Loss)~~/Income~~ – for the ~~nine and~~ three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~	85
	Consolidated Statements of Changes in Shareholders’ Equity – for ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021~~2022	106
	Consolidated Statements of Cash Flows – for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021~~2022	127
	Notes to Consolidated Financial Statements	138
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4741
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6758
Item 4.	Controls and Procedures	6858

PART II. OTHER INFORMATION		6959
Item 1.	Legal Proceedings	6959
Item 1A.	Risk Factors	6959
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6959
Item 3.	Defaults upon Senior Securities	6959
Item 4.	Mine Safety Disclosures	6959
Item 5.	Other Information	6959
Item 6.	Exhibits	7060
SIGNATURES		7161

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

First United Corporation and Subsidiaries

Consolidated Statements of Financial Condition

(In thousands, except share data - Unaudited)



	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022

Assets
Cash and due from banks	$	28,888	$	109,823	$	154,022	$	72,720
Interest bearing deposits in banks		1,868		5,897		1,873		1,595
Cash and cash equivalents		30,756		115,720		155,895		74,315
Investment securities – available for sale (at fair value)		128,039		286,771		123,978		125,889
Investment securities – held to maturity (fair value $205,745 at September 30, 2022 and $65,369 at December 31, 2021)		238,445		56,259
Investment securities – held to maturity (fair value $204,541 at March 31, 2023 and $203,080 at December 31, 2022)						233,083		235,659
Restricted investment in bank stock, at cost		1,027		1,029		4,490		1,027
Loans held for sale		—		67		184		—
Loans		1,277,924		1,153,687		1,289,080		1,279,494
Unearned fees		(210)		(292)		(257)		(174)
Allowance for loan losses		(15,541)		(15,955)
Allowance for credit losses						(16,871)		(14,636)
Net loans		1,262,173		1,137,440		1,271,952		1,264,684
Premises and equipment, net		35,022		34,697		34,207		34,948
Goodwill and other intangibles		11,895		12,052		12,350		12,433
Bank owned life insurance		46,041		45,150		46,652		46,346
Deferred tax assets		16,180		6,857		11,356		10,605
Other real estate owned, net		4,733		4,477		4,598		4,733
Right of use assets		1,987		2,247		2,072		1,898
Trust receivable						1,970		8,244
Pension asset		—		4,765		8,416		8,001
Accrued interest receivable		5,157		4,821		6,519		6,051
Other assets		22,187		17,486		19,720		13,336
Total Assets	$	1,803,642		1,729,838	$	1,937,442		1,848,169
Liabilities and Shareholders’ Equity
Liabilities:
Non-interest bearing deposits	$	474,444	$	501,627	$	468,554	$	506,613
Interest bearing deposits		1,036,674		967,747		1,122,731		1,064,120
Total deposits		1,511,118		1,469,374		1,591,285		1,570,733
Short-term borrowings		89,726		57,699		52,030		64,565
Long-term borrowings		30,929		30,929		110,929		30,929
Operating lease liability		2,472		2,761		2,536		2,373
SERP deferred compensation		10,481		10,395		7,227		7,194
Pension Liability		7,652		—
Allowance for credit losses on off-balance sheet credit exposures						1,128		133
Accrued interest payable and other liabilities		18,221		15,787		18,105		19,250
Dividends payable		999		993		1,334		1,199
Total Liabilities		1,671,598		1,587,938		1,784,574		1,696,376
Shareholders’ Equity:
Common Stock – par value $0.01 per share; Authorized 25,000,000 shares; issued and outstanding 6,659,390 shares at September 30, 2022 and 6,620,955 at December 31, 2021		67		66
Common Stock – par value $0.01 per share; Authorized 25,000,000 shares; issued and outstanding 6,688,710 shares at March 31, 2023 and 6,666,428 at December 31, 2022						67		67
Surplus		24,238		23,661		24,529		24,409
Retained earnings		160,573		145,487		167,229		166,343
Accumulated other comprehensive loss		(52,834)		(27,314)		(38,957)		(39,026)
Total Shareholders’ Equity		132,044		141,900		152,868		151,793
Total Liabilities and Shareholders’ Equity	$	1,803,642	$	1,729,838	$	1,937,442	$	1,848,169

See accompanying notes to the consolidated financial statements

Table of Contents

First United Corporation and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share data)

Nine Months Ended

September 30,

2022

2021

(Unaudited)
Interest income

Interest and fees on loans

$
39,351

$
39,496
Interest on investment securities

Taxable

4,533

2,864
Exempt from federal income tax

834

809
Total investment income

5,367

3,673
Other

345

239
Total interest income

45,063

43,408
Interest expense

Interest on deposits:

Savings

70

63
Interest-bearing transaction accounts

716

827
Time deposits

711

1,987
Total interest on Deposits

1,497

2,877
Interest on short-term borrowings

86

67
Interest on long-term borrowings

1,027

1,840
Total Interest Expense

2,610

4,784
Net Interest income

42,453

38,624
Provision for loan losses

97

68
Net interest income after provision for loan losses

42,356

38,556
Other operating income

Net gains on investments, available for sale

3

154
Net gains/(losses) on investments, held to maturity

93

(54)
Net gains on sale of residential mortgage loans

31

996
Net gains on disposal of fixed assets

34

16
Net gains

161

1,112
Other Income

Service charges on deposit accounts

1,451

1,292
Other service charges

686

664
Trust department

6,238

6,441
Debit card income

2,922

2,623
Bank owned life insurance

891

877
Brokerage commissions

805

854
Other

406

431
Total other income

13,399

13,182
Total other operating income

13,560

14,294
Other operating expenses

Salaries and employee benefits

17,891

16,214
FDIC premiums

479

575
Equipment expense

3,110

2,837
Occupancy expense of premises

2,172

2,102
Data processing expense

2,516

2,420
Marketing expense

409

408
Professional services

873

2,872
Contract labor

482

486
Telephone

365

606
Losses/(gains) on sales and write downs of other real estate owned, net

375

(460)
Investor relations

258

546
Settlement expense

—

3,300
FHLB prepayment penalty

—

2,368
Contributions

184

105
Other

2,437

2,203

~~Table of Contents~~


					Three Months Ended
					March 31,
					2023		2022

					(Unaudited)
Interest income
Interest and fees on loans					$	15,444	$	12,432
Interest on investment securities
Taxable						1,768		1,406
Exempt from federal income tax						270		282
Total investment income						2,038		1,688
Other						347		27
Total interest income						17,829		14,147
Interest expense
Interest on deposits:
Savings						79		18
Interest-bearing transaction accounts						2,186		152
Time deposits						413		305
Total interest on Deposits						2,678		475
Interest on short-term borrowings						31		18
Interest on long-term borrowings						602		313
Total Interest Expense						3,311		806
Net Interest income						14,518		13,341
Credit loss expense/(credit) - loans						414		(419)
Credit loss expense/(credit) - off-balance sheet credit exposures						129		(2)
Credit loss expense/(credit)						543		(421)
Net interest income after provision for credit losses						13,975		13,762
Other operating income
Net gains on investments, available for sale						—		3
Net gains on sale of residential mortgage loans						54		21
Net gains on disposal of fixed assets						—		28
Net gains						54		52
Other Income
Service charges on deposit accounts						516		465
Other service charges						232		213
Trust department						1,970		2,189
Debit card income						955		886
Bank owned life insurance						305		292
Brokerage commissions						297		220
Other						64		117
Total other income						4,339		4,382
Total other operating income						4,393		4,434
Other operating expenses
Salaries and employee benefits						7,290		5,968
FDIC premiums						193		174
Equipment expense						1,092		1,044
Occupancy expense of premises						785		727
Data processing expense						969		821
Marketing expense						117		106
Professional services						518		520
Contract labor						139		165
Telephone						110		114
Losses on sales and write downs of other real estate owned, net						124		95
Investor relations						57		96
Contributions						64		21
Other						1,180		729
Total other operating expenses		31,551		36,582		12,638		10,580
Income before income tax expense		24,365		16,268		5,730		7,616
Provision for income tax expense		6,286		4,047		1,355		1,901
Net Income	$	18,079	$	12,221	$	4,375	$	5,715
Basic net income per share	$	2.72	$	1.81	$	0.66	$	0.86
Diluted net income per share	$	2.72	$	1.81	$	0.65	$	0.86
Weighted average number of basic shares outstanding		6,645		6,741		6,675		6,628
Weighted average number of diluted shares outstanding		6,655		6,746		6,697		6,636
Dividends declared per common share	$	0.45	$	0.45	$	0.20	$	0.15

See accompanying notes to the consolidated financial statements

Table of Contents

~~First United Corporation and Subsidiaries~~

~~Consolidated Statements of Operations~~

~~(In thousands, except per share data)~~

Three Months Ended

September 30,

2022

2021

(Unaudited)
Interest income

Interest and fees on loans

$
14,058

$
13,667
Interest on investment securities

Taxable

1,587

880
Exempt from federal income tax

273

266
Total investment income

1,860

1,146
Other

267

97
Total interest income

16,185

14,910
Interest expense

Interest on deposits:

Savings

34

17
Interest-bearing transaction accounts

397

192
Time deposits

190

523
Total interest on Deposits

621

732
Interest on short-term borrowings

47

17
Interest on long-term borrowings

376

536
Total Interest Expense

1,044

1,285
Net Interest income

15,141

13,625
Provision for loan losses

(108)

(597)
Net interest income after provision for loan losses

15,249

14,222
Other operating income

Net gains on investments, held to maturity

93

(54)
Gains on sale of residential mortgage loans

3

136
Net gains

96

82
Other Income

Service charges on deposit accounts

523

475
Other service charges

241

232
Trust department

2,005

2,166
Debit card income

1,053

900
Bank owned life insurance

302

298
Brokerage commissions

272

229
Other

208

223
Total other income

4,604

4,523
Total other operating income

4,700

4,605
Other operating expenses

Salaries and employee benefits

6,130

5,719
FDIC premiums

150

209
Equipment

1,037

1,032
Occupancy

734

684
Data processing

890

819
Marketing

152

129
Professional services

(211)

615
Contract labor

159

153
Line rentals

112

123
Losses on sales and write downs of other real estate owned, net

128

150
Investor relations

39

116
Contributions

121

55
FHLB prepayment penalty

—

2,368
Other

895

855
Total other operating expenses

10,336

13,027
Income before income tax expense

9,613

5,800
Provision for income tax expense

2,677

1,412

~~Table of Contents~~

Net Income

$
6,936

$
4,388
Basic net income per common share

$
1.04

$
0.66
Diluted net income per common share

$
1.04

$
0.66
Weighted average number of basic shares outstanding

6,658

6,617
Weighted average number of diluted shares outstanding

6,669

6,624
Dividends declared per common share

$
0.15

$
0.15

~~See accompanying notes to the consolidated financial statements~~

~~Table of Contents~~

First United Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income/(Loss)~~/Income~~

(In thousands)



	Nine Months Ended				Three Months Ended
	September 30,				March 31,
	2022		2021		2023		2022

Comprehensive (Loss)/Income	(Unaudited)
Comprehensive Income/(Loss)					(Unaudited)
Net Income	$	18,079	$	12,221	$	4,375	$	5,715
Other comprehensive (loss)/income, net of tax and reclassification adjustments:
Other comprehensive income/(loss), net of tax and reclassification adjustments:
Available for sale securities:
Unrealized holding (losses)/gains on investments with OTTI	$	(853)	$	3,274	$	(1,606)	$	141
Reclassification adjustment for accretable yield realized in income		152		151		50		50
Other comprehensive (loss)/income on investments with OTTI		(1,005)		3,123		(1,656)		91

Unrealized holding losses on all other AFS investments	$	(22,971)	$	(5,035)
Unrealized holding gains/(losses) on all other AFS investments					$	1,340	$	(10,844)
Unrealized holding losses on securities transferred from available for sale to held to maturity		8,328		—		—		8,328
Reclassification adjustment for gains realized in income		3		154		—		3
Other comprehensive losses on all other AFS investments		(14,646)		(5,189)
Other comprehensive income/(losses) on all other AFS investments						1,340		(2,519)

Held to Maturity Securities
Unrealized holding losses on securities transferred to held to maturity	$	(8,328)	$	—	$	—	$	(8,328)
Reclassification adjustment for gains/(losses) realized in income		93		(54)
Reclassification adjustment for amortization realized in income		(644)		(96)		(181)		(94)
Other comprehensive (losses)/income on HTM investments		(7,777)		150
Other comprehensive income/(losses) on HTM investments						181		(8,234)

Cash flow hedges:
Unrealized holding gains on cash flow hedges	$	1,622	$	615
Reclassification adjustment for gains realized in income		—		—
Other comprehensive income on cash flow hedges		1,622		615
Unrealized holding (losses)/gains on cash flow hedges					$	(188)	$	839
Reclassification adjustment for (losses)/gains realized in income						—		—
Other comprehensive (loss)/income on cash flow hedges						(188)		839

Pension plan liability:
Unrealized holding (losses)/gains on pension plan liability	$	(14,079)	$	139
Unrealized holding gains/(losses) on pension plan liability					$	168	$	(3,620)
Reclassification adjustment for amortization of unrecognized loss realized in income		(837)		(1,116)		(250)		(279)
Other comprehensive (loss)/income on pension plan liability		(13,242)		1,255
Other comprehensive income/(loss) on pension plan liability						418		(3,341)

SERP liability:
Unrealized holding losses on SERP liability	$	—	$	—	$	—	$	(68)
Reclassification adjustment for amortization of unrealized loss realized in income		(203)		(225)		2		—
Other comprehensive income on SERP liability		203		225
Other comprehensive (loss)/income on SERP liability						(2)		68

Other comprehensive (losses)/gains before income tax		(34,845)		179
Income tax benefit/(expense) related to other comprehensive income		9,325		(48)
Other comprehensive gains/(losses) before income tax						93		(13,096)
Income tax (expense)/benefit related to other comprehensive income						(24)		3,503

Other comprehensive (loss)/income, net of tax		(25,520)		131
Comprehensive (loss)/income	$	(7,441)	$	12,352
Other comprehensive income/(loss), net of tax						69		(9,593)
Comprehensive income/(loss)					$	4,444	$	(3,878)

See accompanying notes to the consolidated financial statements

Table of Contents

~~First United Corporation and Subsidiaries~~

~~Consolidated Statements of Comprehensive (Loss)/Income~~

~~(In thousands)~~

Three Months Ended

September 30,

2022

2021
Comprehensive Income (in thousands)

(Unaudited)
Net Income

$
6,936

$
4,388
Other comprehensive (loss)/income, net of tax and reclassification adjustments:

Available for sale securities:

Unrealized holding (losses)/gains on investments with OTTI

$
(199)

$
751
Reclassification adjustment for accretable yield realized in income

51

50
Other comprehensive(loss)/income on investments with OTTI

(250)

701

Unrealized holding losses on all other AFS investments

$
(6,768)

$
(708)
Reclassification adjustment for gains realized in income

—

—
Other comprehensive losses on all other AFS investments

(6,768)

(708)

Held to Maturity Securities

Unrealized holding losses on securities transferred to held to maturity

$
—

$
—
Reclassification adjustment for gains realized in income

93

(54)
Reclassification adjustment for amortization realized in income

(320)

12
Other comprehensive income on HTM investments

227

42

Cash flow hedges:

Unrealized holding gains on cash flow hedges

$
534

$
108
Reclassification adjustment for gains realized in income

—

—
Other comprehensive income on cash flow hedges

534

108

Pension plan liability:

Unrealized holding losses on pension plan liability

$
(3,537)

$
(951)
Reclassification adjustment for amortization of unrecognized loss realized in income

(279)

(372)
Other comprehensive losses on pension plan liability

(3,258)

(579)

SERP liability:

Unrealized holding losses on SERP liability

$
—

$
—
Reclassification adjustment for amortization of unrealized loss realized in income

(68)

(75)
Other comprehensive income on SERP liability

68

75

Other comprehensive losses before income tax

(9,447)

(361)
Income tax benefit related to other comprehensive income

2,529

97

Other comprehensive loss, net of tax

(6,918)

(264)
Comprehensive income

$
18

$
4,124

~~See accompanying notes to the consolidated financial statements~~

~~Table of Contents~~

First United Corporation and Subsidiaries

Consolidated Statements of Changes in Shareholders’ Equity

(In thousands, except per share data)

Common
Stock

Surplus

Retained
Earnings

Accumulated
Other
Comprehensive
Loss

Total
Shareholders'
Equity
Balance at January 1, 2022

$
66

$
23,661

$
145,487

$
(27,314)

$
141,900
Net income

5,715

5,715
Other comprehensive loss

(9,593)

(9,593)
Stock based compensation

(4)

(4)
Common stock issued - 15,456 shares

55

55
Common stock dividend declared - $0.15 per share

(995)

(995)
Balance at March 31, 2022

$
66

$
23,712

$
150,207

$
(36,907)

$
137,078
Net income

5,428

5,428
Other comprehensive loss

(9,009)

(9,009)
Stock based compensation

1

339

340
Common stock issued - 18,416 shares

54

54
Common stock dividend declared - $0.15 per share

(999)

(999)
Balance at June 30, 2022

$
67

$
24,105

$
154,636

$
(45,916)

$
132,892
Net income

6,936

6,936
Other comprehensive loss

(6,918)

(6,918)
Stock based compensation

80

80
Common stock issued - 4,563 shares

53

53
Common stock dividend declared -
$0.15 per share

(999)

(999)
Balance at September 30, 2022

$
67

$
24,238

$
160,573

$
(52,834)

$
132,044


	Common Stock		Surplus		Retained Earnings		Accumulated Other Comprehensive Loss		Total Shareholders' Equity
Balance at January 1, 2023	$	67	$	24,409	$	166,343	$	(39,026)	$	151,793
Adoption of ASC 326- Financial Instruments- Credit Losses						(2,155)				(2,155)
Net income						4,375				4,375
Other comprehensive income								69		69
Stock based compensation				56						56
Common stock issued - 22,282 shares				64						64
Common stock dividend declared - $0.20 per share						(1,334)				(1,334)
Balance at March 31, 2023	$	67	$	24,529	$	167,229	$	(38,957)	$	152,868

~~Table of Contents~~

First United Corporation and Subsidiaries

Consolidated Statements 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
Net income						4,388				4,388
Other comprehensive loss								(264)		(264)
Stock based compensation				43						43
Common stock issued - 3,337 shares				57						57
Common stock dividend declared - $0.15 per share						(993)				(993)
Balance at September 30, 2021	$	66	$	23,522	$	138,931	$	(28,732)	$	133,787
Balance at March 31, 2022											$	66	$	23,712	$	150,207	$	(36,907)	$	137,078

See accompanying notes to the consolidated financial statements

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First United Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)


	Nine Months Ended				Three Months Ended
	September 30,				March 31,
	2022		2021		2023		2022

	(Unaudited)				(Unaudited)
Operating activities
Net income	$	18,079	$	12,221	$	4,375	$	5,715
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		97		68
Provision/(credit) for credit/loan losses						543		(421)
Depreciation		2,475		2,453		853		820
Stock based compensation		415		389		56		(4)
Gains on sales of other real estate owned		—		(594)		(36)		—
Write-downs of other real estate owned		—		(160)		32		—
Originations of loans held for sale		(1,156)		(23,618)		(552)		(963)
Proceeds from sale of loans held for sale		1,254		27,758		422		911
Gains from sale of loans held for sale		(31)		(996)		(54)		(21)
Gains on disposal of fixed assets		(34)		(16)		—		(28)
Net (accretion)/ amortization of investment securities discounts and premiums- AFS		100		790		(15)		83
Net (accretion)/amortization of investment securities discounts and premiums- HTM		(625)		276
Net accretion of investment securities discounts and premiums- HTM						(200)		(165)
Amortization of intangible assets		157		—		83		52
Gains on sales/calls of investment securities – AFS		(3)		(154)		—		(3)
Losses/(gains) on investment securities – HTM		(93)		54
Earnings on bank owned life insurance		(891)		(877)		(306)		(292)
Amortization of deferred loan fees		(123)		(3,228)
Amortization of deferred loan costs/(fees), net						12		(113)
Amortization of operating lease right of use asset		260		77		82		86
Increase in accrued interest receivable and other assets		(651)		(1,638)
Deferred tax benefit		(9,322)		(48)
Decrease in accrued interest receivable and other assets						542		105
Deferred tax (benefit)/expense						(934)		549
Operating lease liability		(289)		(104)		(93)		(95)
Increase/(decrease) in accrued interest payable and other liabilities		9,106		(2,216)
Decrease in accrued interest payable and other liabilities						(1,300)		(3,141)
Net cash provided by operating activities		18,725		10,437		3,510		3,075
Investing activities
Proceeds from maturities/calls of investment securities - AFS		12,153		40,045		1,609		5,063
Proceeds from maturities/calls of investment securities - HTM		13,254		12,286		2,776		3,260
Proceeds from sales of investment securities - AFS		1,023		13,687		—		1,023
Purchases of investment securities - AFS		(17,652)		(65,101)		—		(12,892)
Purchases of investment securities - HTM		(55,686)		(6,332)		—		(49,456)
Proceeds from sales of other real estate owned		—		3,477		139		—
Proceeds from disposal of fixed assets		37		39		—		30
Net decrease in restricted stock		2		3,439
Net (increase)/decrease in loans		(124,963)		67,908
Purchases of loans		—		(58,943)
Net (increase)/decrease in restricted stock						(3,463)		3
Net increase in loans						(9,761)		(28,030)
Purchases of premises and equipment		(2,803)		(826)		(112)		(126)
Net cash (used in)/provided by investing activities		(174,635)		9,679
Net cash used in by investing activities						(8,812)		(81,125)
Financing activities
Net increase in deposits		41,744		22,128		20,552		38,181
Issuance of common stock		162		103		64		55
Cash dividends paid on common stock		(2,987)		(2,898)		(1,199)		(993)
Net increase in short-term borrowings		32,027		23,236
Stock repurchase		—		(7,179)
Net decrease in long-term borrowings		—		(70,000)
Net(decrease)/increase in short-term borrowings						(12,535)		1,203
Proceeds from long-term borrowings						80,000		—
Net cash provided by/(used in) financing activities		70,946		(34,610)		86,882		38,446
Decrease in cash and cash equivalents		(84,964)		(14,494)
Increase/(decrease) in cash and cash equivalents						81,580		(39,604)
Cash and cash equivalents at beginning of the year		115,720		149,432		74,315		115,720
Cash and cash equivalents at end of period	$	30,756	$	134,938	$	155,895	$	76,116
Supplemental information
Interest paid	$	2,655	$	5,033	$	2,989	$	840
Taxes paid	$	5,248	$	4,637	$	90	$	2,568
Non-cash investing activities:
Transfers from loans to other real estate owned	$	256	$	—
Transfers from securities available for sale to held to maturity	$	139,036	$	—	$	—	$	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 financial information is presented in accordance with generally accepted accounting principles and general practice for financial institutions in the United States of America (“GAAP”). The Company has prepared these unaudited condensed consolidated financial statements in accordance with GAAP for interim financial information, SEC rules that permit reduced disclosure for interim periods, and Article 10 of Regulation S-X. Certain reclassifications have been made to prior year amounts to conform with current year classifications. These reclassifications did not have a material impact on the Corporation’s consolidated financial condition or results of operations. Operating results for the three month period ended March 31, 2023 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, 2022.

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.

In the opinion of management, all adjustments (all of which are of a normal recurring nature) that are necessary for a fair statement are reflected in the unaudited condensed consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of First United Corporation, First United Bank & Trust (the “Bank”), First United Statutory Trust I, First United Statutory Trust II, OakFirst Loan Center, LLC, Oakfirst Loan Center, Inc., First OREO Trust and FUBT OREO I, LLC. All significant inter-company accounts and transactions have been eliminated.

Certain prior period balances have been reclassified to conform to the current period presentation. Operating results for the nine and three month periods ended September 30, 2022 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, 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 ~~September 30, 2022~~March 31, 2023 and through the date these consolidated financial statements were issued, for items of potential recognition or disclosure.

Newly Adopted Pronouncements in 2023

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, universally referred to as CECL. The amendments in the ASU, among other things, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied previously are still permitted, although the inputs to those techniques changed to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on purchased financial assets with credit deterioration. For periodic report filers that are smaller reporting companies, such as the Company, this standard (Topic 326) was effective as of January 1, 2023.

As part of its process of adopting the CECL accounting method, management implemented a third party software solution and determined the appropriate loan segments, methodologies, model assumptions and qualitative components. Our CECL model includes portfolio loan segmentation based upon similar risk characteristics and both a quantitative and qualitative component of the calculation which incorporates a forecasting component of certain economic variables. Our implementation plan also includes the assessment and documentation of appropriate processes, policies and internal controls. Management had a third party independent consultant review and validate our CECL model.

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In addition, Topic 326 amends the accounting for credit losses on certain debt securities. The Company did not record any ACL on its debt securities as a result of adopting Topic 326.

The ultimate impact of adopting Topic 326, and at each subsequent reporting period, is highly dependent on credit quality, macroeconomic forecasts and conditions, compensation of our loan portfolio, and other management judgments. The Company adopted Topic 326 using the modified retrospective method. Results beginning after January 1, 2023 are presented under Topic 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. We made the accounting policy election to not measure an ACL for accrued interest receivables for loans and securities. Accrued interest deemed uncollectible will be written off through interest income.

The following table illustrates the day-one impact of adopting Topic 326.


		January 1, 2023
(Dollars in thousands)		As Reported Under Topic 326		Pre Topic 326		Impact of Topic 326 Adoption
Assets
Allowance for credit losses on loans
Commercial real estate	$	5,202	$	6,345	$	(1,143)
Acquisition and development		964		979		(15)
Commercial and industrial		4,179		2,845		1,334
Residentail mortgage		5,272		3,160		2,112
Consumer		1,085		877		208
Unallocated		-		430		(430)
Allowance for Credit Losses on Loans	$	16,702	$	14,636	$	2,066
Assets:
Investment securities- available for sale (at fair value)	$	125,889	$	125,889	$	-
Investment securities- held to maturity		245,659		245,659		-
Total loans held for investments, net		1,262,792		1,264,858		(2,066)
Net deferred tax asset		11,381		10,605		776
Liabilities:
Life-of-loss reserve on unfunded loan commitments	$	998	$	133	$	865
Equity:
Retained earnings	$	149,638	$	151,793	$	(2,155)

In connection with our adoption of Topic 326, we made changes to our loan portfolio segments to align with the methodology of CECL. Refer to Note 5, Loans and Related Allowance for Credit Losses, for further discussion of these portfolio segments. The adoption of Topic 326 resulted in a Day 1 adjustment of $2.9 million to our ACL, including an increase of $2.0 million to the ACL for loans and $0.9 million to the ACL for unfunded commitments. The Company did not record any ACL on its available-for-sale or held-to-maturity investments upon adoption of ASC 326. Our Company recorded a net decrease to retained earnings of $2.2 million as of January 1, 2023 for the cumulative effect of adopting Topic 326.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02, which eliminates the troubled debt restructuring (TDR) accounting model for creditors that have adopted Topic 326, “Financial Instruments – Credit Losses.” Due to the removal of the TDR accounting model, all loan modifications were evaluated to determine if they resulted in a new loan or a continuation of the existing loan. The amendments in this ASU also required that entities disclose current-period gross chare-offs by year of origination for loans and leases. The amendments in this ASU were effective January 1, 2023. This change did not have a material effect on our consolidated financial statements. Refer to Note 5, Loans and Related Allowance for Credit Losses for disclosures for debtors experiencing financial difficulty and for vintage disclosures related to gross charge-offs by loan segment by year of origination.

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Allowance for Credit Losses Policy

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

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

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

The adoption of CECL accounting did not result in a significant change to any other credit risk management and monitoring processes, including identification of past due or delinquent borrowers, nonaccrual practices, assessment of modified loans, or charge-off policy.

The Company’s methodology for estimating the ACL includes:

Segmentation. The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly in economic cycles.

Specific Analysis. A specific reserve analysis is applied to certain individually evaluated loans. These loans are evaluated quarterly generally based on collateral value, observable market value or the present value of expected future cash flows. A specific reserve is established if the fair value is less than the loan balance. A charge-off is recognized when the loss is quantifiable. Individually evaluated loans not specifically analyzed reside in the Quantitative Analysis.

Quantitative Analysis. The Company elected to use Discounted Cash Flow (“DCF”). Economic forecasts include but are not limited to unemployment, the Consumer Price Index, the Housing Affordability Index and Gross State Product. These forecasts are assumed to revert to the long term average and are utilized in the model to estimate the probability of default and loss given default through regression. Model assumptions include, but are not limited to the discount rate, prepayments and curtailments. The product of the probability of default and the loss given default is the estimated loss rate, which varies over time. The estimated loss rate is applied within the appropriate periods in the cash flow model to determine net present value. Net present value is also impacted by assumptions related to the duration between default and recovery. The reserve is based on the differences between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values.

Qualitative Analysis. Based on management’s review and analysis of internal, external and model risks, management may adjust the model output. Management reviews the peaks and troughs of the model’s calibration, taking into account economic forecasts to develop guardrails that serve as the basis for determining the reasonableness of the model’s output and makes adjustments as necessary. This process challenges unexpected variability resulting from outputs beyond the model’s calibration that appear to be unreasonable. Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on mangement’s experience and perspective.

Loan Commitments and Allowance for Credit Loss on Off-Balance Sheet Credit Exposures

Financial instruments include off-balance sheet credit instruments such as commitments to make loans and commercial letters of credit issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

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The Company records a reserve for unfunded commitments (“RUC”) on off-balance sheet credit exposures through a charge to provision for credit loss expense in the Company’s Consolidated Statement of Income. The RUC on off-balance sheet credit exopsures is estimated by loan segment at each balance sheet date under the CECL model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in the RUC on the Company’s Consolidated Balance Sheet.

Loan Restructurings

In situations where, for economic or legal reasons related to a borrower’s financial condition, management may grant a concession to the borrower that it would not otherwise consider, the related loan is classified as a restructured loan. Management strives to identify borrowers in financial difficulty early and work with them to modify the loan to more affordable terms before their loan reaches nonaccrual status. These modified terms that result in a direct change in the timing or amount of contractual cash flows have historically included interest only periods, extended amortization periods beyond what management would typically offer for a similar loan or a below market interest rate when compared to management’s underwriting standards for a similar loan type. These concessions are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. In cases where borrowers are granted new terms that provide for a reduction of interest, management measures any impairment on the restructuring as noted above for loans experiencing financial difficulty.

Allowance for Credit Losses – Available-for-Sale and Held-to-Maturity Securities

The Company utilizes ASC 326 to evaluate its available-for-sale (“AFS”) and held-to-maturity (“HTM”) debt security portfolio for expected credit losses. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criterion is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for that credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, as a non-credit-related impairment.

The Company adopted ASC 326 using the prospective transition approach for debt securities for which other than temporary impairment (“OTTI”) had been recognized prior to January 1, 2023, such as AFS collateralized debt obligations. As a result, the amortized cost basis for such debt securities remained the same before and after the effective date of ASC 326. The effective interest rate on these debt securities was not changed. Amounts previously written recognized in OCI as of January 1, 2023 relating to improvements in cash flows expected to be collected are accreted into income over the remaining life of the asset. Recoveries of amounts previously written off relating to improvements in cash flows after January 1, 2023 are recorded in earnings when received.

The entire amount of an impairment loss is recognized in earnings only when: 1) the Company intends to sell the security or; 2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis; or 3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in eanings, with the remaining portion being recognized in shareholders’ equity as comprehensive income, net of deferred taxes.

Changes in the allowance for credit losses are not recorded as a provision for (or credit to) credit losses. Losses are charged against the allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Any impairment not recorded through the an allowance for credit loss is recognized in other comprehensive income as a non-credit-related impairment.

We have made a policy election to exclude accrued interest form the amortized cost basis of AFS debt securities and report accrued interest separately on the Consolidated Balance Sheet. AFS debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed

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against interest income when a security is placed on nonaccrual status. Accordingly, we do not recognized an allowance for credit loss against accrued interest receivable.

The Company separately evaluates its HTM investment securities for any credit losses. The Company pools like securiites and calculates expected credit losses through an estimate based on a security’s credit rating, which is recognized as part of the allowance for credit losses for held-to-maturity securities and included in the balance of investment securities held-to-maturity on the Consolidated Balance Sheets. If the Company determines that a security indicates evidence of deteriorated credit quality, the security is individually-evaluated and a discounted cash flow analysis is performed and compared to the armotized cost basis.

Note 2 – Accounting Statements Issued but Not Yet Adopted

In March 2020, the FASB issued ASU No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of Reference Rate Reform on Financial Reporting.” The amendments in this ASU provide optional guidance for a limited period of time to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The amendments provide optional expedients and exceptions for applying GAAP to loan and lease agreements, derivative contracts, and other transactions affected by the anticipated transition away from the London Interbank Offered Rate (“LIBOR”) toward new interest rate benchmarks. Modified contracts that meet certain scope guidance are eligible for relief from these modification accounting requirements in GAAP. The optional guidance generally allows for the modified contract to be accounted for as a continuation of the existing contract and does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. The amendments in this ASU are effective for all entities between March 12, 2020 and December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06: “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.” The amendments in this ASU defer the sunset date for applying the reference rate reform relief by two years to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.

Note 3 – Earnings Per Common Share

Basic earnings per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period and does not include the effect of any potentially dilutive common stock equivalents. Diluted earnings per share is derived by dividing net income available to common shareholders by the weighted-average number of shares outstanding, adjusted for the dilutive effect of outstanding common stock equivalents, such as restricted stock units (“RSUs”). There were no anti-dilutive shares outstanding at ~~September 30, 2022~~March 31, 2023 or ~~2021.~~2022.

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The following table sets forth the calculation of basic and diluted earnings per common share for the three month periods ended March 31, 2023 and 2022:


	Three months ended March 31,
	2023					2022
			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	$	4,375	6,675	$	0.66	$	5,715	6,628	$	0.86

Diluted Earnings Per Share:

Restricted stock units			22					8

Net income	$	4,375	6,697	$	0.65	$	5,715	6,636	$	0.86

Note 4 – Investments

The following ~~table sets forth the calculation~~tables show a comparison of ~~basic~~amortized cost and ~~diluted earnings per common share for the nine~~fair values of investment securities at March 31, 2023 and ~~three month periods ended September 30, 2022 and 2021:~~December 31, 2022:

Nine months ended September 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

$
18,079

6,645

$
2.72

$
12,221

6,741

$
1.81

Diluted Earnings Per Share:

Restricted stock units

10

5

Net income

$
18,079

6,655

$
2.72

$
12,221

6,746

$
1.81

Three months ended September 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

$
6,936

6,658

$
1.04

$
4,388

6,617

$
0.66

Diluted Earnings Per Share:

Restricted stock units

11

7

Net income

$
6,936

6,669

$
1.04

$
4,388

6,624

$
0.66



(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Credit Losses		Estimated Fair Value
March 31, 2023
Available for Sale:
U.S. government agencies	$	11,036	$	—	$	1,383	$	—	$	9,653
Residential mortgage-backed agencies		44,224		—		6,943		—		37,281
Commercial mortgage-backed agencies		37,151		—		6,657		—		30,494
Collateralized mortgage obligations		25,322		—		4,345		—		20,977
Obligations of states and political subdivisions		10,842		31		244		—		10,629
Corporate bonds		1,000		—		170		—		830
Collateralized debt obligations		18,661		—		4,547		—		14,114
Total available for sale	$	148,236	$	31	$	24,289	$	—	$	123,978

(in thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Estimated Fair Value		Allowance for Credit Losses
March 31, 2023
Held to Maturity:
U.S. treasuries	$	37,268	$	—	$	1,245	$	36,023	$	—
U.S. government agencies		67,803		—		10,975		56,828		—
Residential mortgage-backed agencies		27,624		1		3,039		24,586		—
Commercial mortgage-backed agencies		21,635		—		4,566		17,069		—
Collateralized mortgage obligations		56,128		—		9,029		47,099		—
Obligations of states and political subdivisions		22,625		845		534		22,936		—
Total held to maturity	$	233,083	$	846	$	29,388	$	204,541	$	—

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~~Note 3 – Investments~~

~~The following tables show a comparison of amortized cost and fair values of investment securities at September 30, 2022 and December 31, 2021:~~

(in thousands)

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

OTTI
in AOCL
September 30, 2022

Available for Sale:

U.S. government agencies

$
11,052

$
—

$
1,605

$
9,447

$
—
Residential mortgage-backed agencies

45,899

—

8,165

37,734

—
Commercial mortgage-backed agencies

37,766

—

6,155

31,611

—
Collateralized mortgage obligations

26,336

—

4,635

21,701

—
Obligations of states and political subdivisions

11,208

1

465

10,744

—
Corporate bonds

1,000

—

80

920

—
Collateralized debt obligations

18,648

—

2,766

15,882

(1,664)
Total available for sale

$
151,909

$
1

$
23,871

$
128,039

$
(1,664)

(in thousands)

Amortized
Cost

Gross
Unrecognized
Gains

Gross
Unrecognized
Losses

Fair
Value

OTTI
in AOCL
September 30, 2022

Held to Maturity:

U.S. treasuries

$
37,140

$
—

$
1,727

$
35,413

$
—
U.S. government agencies

67,665

—

12,853

54,812

—
Residential mortgage-backed agencies

29,536

1

3,920

25,617

—
Commercial mortgage-backed agencies

23,018

—

4,378

18,640

—
Collateralized mortgage obligations

58,462

—

9,622

48,840

—
Obligations of states and political subdivisions

22,624

504

705

22,423

—
Total held to maturity

$
238,445

$
505

$
33,205

$
205,745

$
—

~~Table of Contents~~


(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCL		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		OTTI in AOCL
December 31, 2021
December 31, 2022
Available for Sale:
U.S. government agencies	$	69,602	$	66	$	2,499	$	67,169	$	—	$	11,044	$	—	$	1,582	$	9,462	$	—
Residential mortgage-backed agencies		49,630		—		969		48,661		—		45,052		—		7,651		37,401		—
Commercial mortgage-backed agencies		51,694		175		1,001		50,868		—		37,393		—		6,661		30,732		—
Collateralized mortgage obligations		93,018		84		3,025		90,077		—		25,828		—		4,784		21,044		—
Obligations of states and political subdivisions		12,439		371		6		12,804		—		10,848		4		360		10,492		—
Corporate Bonds												1,000		—		113		887		—
Collateralized debt obligations		18,609		112		1,529		17,192		(660)		18,664		—		2,793		15,871		(1,695)
Total available for sale	$	294,992	$	808	$	9,029	$	286,771	$	(660)	$	149,829	$	4	$	23,944	$	125,889	$	(1,695)

(in thousands)	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value		OTTI in AOCL		Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value		OTTI in AOCL
December 31, 2021
December 31, 2022
Held to Maturity:
U.S. treasuries											$	37,204	$	—	$	1,593	$	35,611	$	—
U.S. government agencies												67,734		—		13,261		54,473		—
Residential mortgage-backed agencies	$	30,634	$	649	$	436	$	30,847	$	—		28,624		1		3,503		25,122		—
Commercial mortgage-backed agencies		5,456		145		—		5,601		—		22,389		—		4,568		17,821		—
Collateralized mortgage obligations												57,085		—		10,001		47,084		—
Obligations of states and political subdivisions		20,169		8,752		—		28,921		—		22,623		946		600		22,969		—
Total held to maturity	$	56,259	$	9,546	$	436	$	65,369	$	—	$	235,659	$	947	$	33,526	$	203,080	$	—

The Corporation reassessed the classification of certain investments and, effective February 1, 2022, 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. No gain or loss was recorded at the time of transfer.

1614

Table of Contents

The following table shows the Corporation’s investment securities with gross unrealized and unrecognized losses and fair values at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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					Less than 12 months					12 months or more
(in thousands)	Fair Value		Unrealized Losses		Number of Investments	Fair Value		Unrealized Losses		Number of Investments	Fair Value		Unrealized Losses		Number of Investments	Fair Value		Unrealized Losses		Number of Investments
September 30, 2022
March 31, 2023
Available for Sale:
U.S. government agencies	$	8,145		907	2		1,302		698	1	$	—	$	—	—	$	9,653	$	1,383	3
Residential mortgage-backed agencies		15,945		3,065	2		21,788		5,100	3		—		—	—		37,281		6,943	5
Commercial mortgage-backed agencies		13,915		2,182	6		17,697		3,973	4		1,796		102	1		28,698		6,555	8
Collateralized mortgage obligations		13,352		2,860	8		8,349		1,775	2		—		—	—		20,977		4,345	10
Obligations of states and political subdivisions		10,048		465	9		—		—	—		3,240		158	2		3,882		86	2
Corporate Bonds		920		80	1		—		—	—		—		—	—		830		170	1
Collateralized debt obligations		6,464		152	4		9,418		2,614	5		—		—	—		14,114		4,547	9
Total available for sale	$	68,789	$	9,711	32	$	58,554	$	14,160	15	$	5,036	$	260	3	$	115,435	$	24,029	38

	Less than 12 months					12 months or more					Less than 12 months					12 months or more
(in thousands)	Fair Value		Unrecognized Losses		Number of Investments	Fair Value		Unrecognized Losses		Number of Investments	Fair Value		Unrecognized Losses		Number of Investments	Fair Value		Unrecognized Losses		Number of Investments
September 30, 2022
March 31, 2023
Held to Maturity:
U.S. treasuries	$	35,413		1,727	4	$	—	$	—	—	$	—		—	—	$	36,023	$	1,245	4
U.S. government agencies		54,811	$	12,853	9		—		—	—		—		—	—		56,828		10,975	9
Residential mortgage-backed agencies		18,794		1,992	33		6,730		1,928	3		3,122		81	2		21,374		2,958	33
Commercial mortgage-backed agencies		18,640		4,378	3		—		—	—		—		—	—		17,069		4,566	2
Collateralized mortgage obligations		48,840		9,622	8		—		—	—		2,550		137	1		44,549		8,892	7
Obligations of states and political subdivisions		2,162		705	1		—		—	—		—		—	—		2,337		534	1
Total held to maturity	$	178,660	$	31,277	58	$	6,730	$	1,928	3	$	5,672		218	3	$	178,180	$	29,170	56

~~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) issued by the Financial Accounting Standards Board (the “FASB”), 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 other than temporary impairment (“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.

~~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 nine and three month periods ended September 30, 2022 and 2021 that the Corporation does not intend to sell:

Nine Months Ended

September 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

(152)

(151)
Balance of credit-related OTTI at September 30

$
1,891

$
2,093

Three Months Ended

September 30,
(in thousands)

2022

2021
Balance of credit-related OTTI at July 1

$
1,942

$
2,143
Reduction for increases in cash flows expected to be collected

(51)

(50)
Balance of credit-related OTTI at September 30

$
1,891

$
2,093

The amortized cost and estimated fair value of securities by contractual maturity at September 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.

September 30, 2022
(in thousands)

Amortized
Cost

Fair
Value
Available for Sale:

Due after one year through five years

$
8,364

$
7,865
Due after five years through ten years

6,197

5,572
Due after ten years

27,347

23,556

41,908

36,993
Residential mortgage-backed agencies

45,899

37,734
Commercial mortgage-backed agencies

37,766

31,611
Collateralized mortgage obligations

26,336

21,701
Total available for sale

$
151,909

$
128,039
Held to Maturity:

Due after one year through five years

$
49,640

$
46,582
Due after five years through ten years

32,986

26,924
Due after ten years

44,803

39,142

127,429

112,648
Residential mortgage-backed agencies

29,536

25,617
Commercial mortgage-backed agencies

23,018

18,640
Collateralized mortgage obligations

58,462

48,840
Total held to maturity

$
238,445

$
205,745

1915

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, 2022
Available for Sale:
U.S. government agencies	$	4,598	$	402	1	$	4,865	$	1,180	2
Residential mortgage-backed agencies		—		—	—		37,401		7,651	5
Commercial mortgage-backed agencies		4,044		455	3		26,688		6,206	6
Collateralized mortgage obligations		1,600		210	5		19,444		4,574	5
Obligations of states and political subdivisions		8,906		360	7		—		—	—
Corporate Bonds		887		113	1		—		—	—
Collateralized debt obligations		—		—	—		15,871		2,793	9
Total available for sale	$	20,035	$	1,540	17	$	104,269	$	22,404	27


	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, 2022
Held to Maturity:
U.S. treasuries	$	—	$	—	—	$	35,611	$	1,593	4
U.S. government agencies		38,883		9,617	7		15,591		3,644	2
Residential mortgage-backed agencies		16,893		1,425	29		8,138		2,078	7
Commercial mortgage-backed agencies		17,821		4,568	3		—		—	—
Collateralized mortgage obligations		47,083		10,001	8		—		—	—
Obligations of states and political subdivisions		2,269		600	1		—		—	—
Total held to maturity	$	122,949	$	26,211	48	$	59,340	$	7,315	13

The Company utilizes ASC 326 to evaluate its available-for sale (“AFS”) and held-to-maturity (“HTM”) debt security portfolio for expected credit losses. For AFS debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either criteria is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income, as a non-credit-related impairment.

The entire amount of an impairment loss is recognized in earnings only when: 1) the Company intends to sell the security; or 2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis; or 3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders’ equity as comprehensive income, net of deferred taxes.

Table of Contents

~~Note 4 – Loans and Related Allowance~~Changes in the allowance for ~~Loan~~credit losses are recorded as a provision for (or reversal of) credit losses. Losses

~~The following table summarizes~~ are charged against the ~~primary segments~~allowance when management believes the uncollectibility of an AFS security is confirmed or when either of the ~~loan portfolio at September 30, 2022 and December 31, 2021:~~criteria regarding intent or requirement to sell is met. Any impairment not recorded through an allowance for credit loss is recognized in other comprehensive income as a non-credit-related impairment.

(in thousands)

Commercial
Real Estate

Acquisition
and
Development

Commercial
and
Industrial

Residential
Mortgage

Consumer

Total
September 30, 2022

Individually evaluated for impairment

$
2,223

$
369

$
—

$
2,376

$
45

$
5,013
Collectively evaluated for impairment

435,750

82,738

269,004

424,717

60,702

1,272,911
Total loans

$
437,973

$
83,107

$
269,004

$
427,093

$
60,747

$
1,277,924
December 31, 2021

Individually evaluated for impairment

$
2,365

$
629

$
90

$
2,644

$
—

$
5,728
Collectively evaluated for impairment

371,926

127,448

180,886

402,042

65,657

1,147,959
Total loans

$
374,291

$
128,077

$
180,976

$
404,686

$
65,657

$
1,153,687

The Company has made the policy election to exclude accrued interest from the amortized cost basis of available-for-sale debt securities and report accrued interest separately in other assets in the Consolidated Balance Sheets. Available-for-sale debt securities are placed on nonaccrual status when we no longer expect to receive all contractual amounts due, which is generally at 90 days past due. Accrued interest receivable is reversed against interest income when a security is placed on nonaccrual status. Accordingly, we do not recognize an allowance for credit loss against accrued interest receivable.

The ~~commercial~~Company separately evaluates its HTM investment securities for any credit losses. The Company pools like securities and ~~industrial portfolio~~calculates expected credit losses through an estimate based on a security’s credit rating, which is recognized as part of the allowance for credit losses for held-to-maturity securities and is included in the ~~table above includes $0.4 million~~balance of investment securities held to maturity on the Consolidated Balance Sheets. If the Company determines that a security indicates evidence of deteriorated credit quality, the security is individually evaluated and ~~$7.7 million~~a discounted cash flow analysis is performed and compared to the amortized cost bais.

As of ~~Paycheck Protection Program (“PPP”) loans at September 30, 2022 and December~~March 31, ~~2021, respectively, which are 100% guaranteed by~~2023, the ~~SBA, and~~Company recorded no ~~allowance for loan loss (“ALL”) has been assigned~~ACL related to ~~them.~~its AFS or HTM security portfolio.

The following table presents ~~the classes~~a cumulative roll-forward of the ~~loan~~amount of non-cash OTTI charges related to credit losses that have been previously recognized in earnings for the trust preferred securities held in the CDO portfolio ~~summarized by~~during the ~~aggregate pass~~three month periods ended March 31, 2023 and 2022 that the ~~criticized categories of special mention and substandard within the internal risk rating system at September 30, 2022 and December 31, 2021:~~Corporation does not intend to sell:

(in thousands)

Pass

Special
Mention

Substandard

Total
September 30, 2022

Commercial real estate

Non owner-occupied

$
223,907

$
6,371

$
12,114

$
242,392
All other CRE

188,707

2,278

4,596

195,581
Acquisition and development

1-4 family residential construction

23,926

—

—

23,926
All other A&D

59,029

—

152

59,181
Commercial and industrial

244,883

4,589

19,532

269,004
Residential mortgage

Residential mortgage - term

360,669

—

5,217

365,886
Residential mortgage - home equity

60,561

—

646

61,207
Consumer

60,557

—

190

60,747
Total

$
1,222,239

$
13,238

$
42,447

$
1,277,924
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


	Three Months Ended
	March 31,
(in thousands)	2023		2022
Balance of credit-related OTTI at January 1	$	1,841	$	2,043
Reduction for increases in cash flows expected to be collected		(50)		(50)
Balance of credit-related OTTI at March 31	$	1,791	$	1,993

2017

Table of Contents

~~Management further monitors~~The amortized cost and estimated fair value of securities by contractual maturity at March 31, 2023 are shown in the ~~performance and credit quality~~following table. Actual maturities may differ from contractual maturities because the issuers of the ~~loan portfolio by analyzing~~securities may have the ~~age of the portfolio as determined by the length of time a recorded payment is past due.~~

~~The increase of $9.9 million in the substandard category was related~~right to one large relationship in the nursing care sector that was downgraded from special mention in the first quarter of 2022 and one large relationship in the airline sector that was added to the substandard portfolio in the third quarter of 2022. These relationships continue to perform according to their contractual terms and are not considered impaired.

~~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, 2022 and December 31, 2021:~~call or prepay obligations with or without call or prepayment penalties.

(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, 2022

Commercial real estate

Non owner-occupied

$
242,304

$
—

$
—

$
88

$
88

$
—

$
242,392
All other CRE

195,518

—

—

—

—

63

195,581
Acquisition and development

1-4 family residential construction

23,926

—

—

—

—

—

23,926
All other A&D

58,945

69

15

—

84

152

59,181
Commercial and industrial

268,900

104

—

—

104

—

269,004
Residential mortgage

Residential mortgage - term

362,110

29

1,961

429

2,419

1,357

365,886
Residential mortgage - home equity

60,553

233

71

23

327

327

61,207
Consumer

60,325

297

52

29

378

44

60,747
Total

$
1,272,581

$
732

$
2,099

$
569

$
3,400

$
1,943

$
1,277,924
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



	March 31, 2023
(in thousands)	Amortized Cost		Fair Value
Available for Sale:
Due in one year or less	$	340	$	340
Due after one year through five years		11,956		11,151
Due after five years through ten years		1,895		1,729
Due after ten years		27,348		22,006
		41,539		35,226
Residential mortgage-backed agencies		44,224		37,281
Commercial mortgage-backed agencies		37,151		30,494
Collateralized mortgage obligations		25,322		20,977
Total available for sale	$	148,236	$	123,978
Held to Maturity:
Due in one year or less	$	29,813	$	28,847
Due after one year through five years		19,955		18,674
Due after five years through ten years		33,058		28,028
Due after ten years		44,870		40,238
		127,696		115,787
Residential mortgage-backed agencies		27,624		24,586
Commercial mortgage-backed agencies		21,635		17,069
Collateralized mortgage obligations		56,128		47,099
Total held to maturity	$	233,083	$	204,541

Non-accrual loans that have been subject to partial charge-offs totaled $0.2 million at September 30, 2022 and $0.5 million at December 31, 2021. There were no loans secured by 1-4 family residential real estate properties in the process of foreclosure at September 30, 2022 compared to $0.2 million of such loans at December 31, 2021. As a percentage of the loan portfolio, accruing loans past due 30 days or more decreased to 0.27% compared to 0.37% at June 30, 2022 and 0.31% as of December 31, 2021.

~~Table of Contents~~

The following table summarizes the primary segments of the ALL at September 30, 2022 and December 31, 2021, 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, 2022

Individually evaluated
for impairment

$
—

$
—

$
—

$
26

$
4

$
—

$
30
Collectively evaluated
for impairment

$
6,356

$
1,499

$
3,402

$
2,951

$
873

$
430

$
15,511
Total ALL

$
6,356

$
1,499

$
3,402

$
2,977

$
877

$
430

$
15,541
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 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.~~

~~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, 2022 and December 31, 2021:

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, 2022

Commercial real estate

Non owner-occupied

$
—

$
—

$
102

$
102

$
102
All other CRE

—

—

2,121

2,121

2,121
Acquisition and development

1-4 family residential construction

—

—

217

217

217
All other A&D

—

—

152

152

261
Commercial and industrial

—

—

—

—

—
Residential mortgage

Residential mortgage – term

264

26

1,786

2,050

2,091
Residential mortgage – home equity

—

—

326

326

326
Consumer

23

4

22

45

45
Total impaired loans

$
287

$
30

$
4,726

$
5,013

$
5,163
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

~~(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.

~~Table of Contents~~

Management reviews the loan portfolio on a quarterly basis using a defined, consistently applied process to make appropriate and timely 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 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 circumstances that may impact the Bank’s decision to charge-off all or a portion of a loan include default or non-payment by the borrower, 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 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 activity in the ALL for the nine and three month periods ended September 30, 2022 and 2021:~~

Nine months ended (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

—

(20)

(134)

(34)

(726)

—

(914)
Recoveries

1

21

92

172

117

—

403
Provision

323

(1,117)

984

(645)

552

—

97
ALL balance at September 30, 2022

$
6,356

$
1,499

$
3,402

$
2,977

$
877

$
430

$
15,541
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

Three months ended (in thousands)

Commercial
Real Estate

Acquisition
and
Development

Commercial
and
Industrial

Residential
Mortgage

Consumer

Unallocated

Total
ALL balance at July 1, 2022

$
6,220

$
2,172

$
2,830

$
3,112

$
973

$
430

$
15,737
Charge-offs

—

(20)

(82)

(1)

(181)

—

(284)
Recoveries

—

1

83

71

41

—

196
Provision

136

(654)

571

(205)

44

—

(108)
ALL balance at September 30, 2022

$
6,356

$
1,499

$
3,402

$
2,977

$
877

$
430

$
15,541
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

2418

Table of Contents

Note 5 – Loans and Related Allowance for Credit Losses

The ~~ALL is based on estimates, and actual losses may vary from current estimates. Management believes that~~following table summarizes the ~~granularity~~primary segments of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ALL that is representative of the risk found in the components of theloan portfolio at ~~any given date.~~March 31, 2023 and December 31, 2022:



(in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Residential Mortgage		Consumer		Total
March 31, 2023
Individually evaluated for impairment	$	—	$	—	$	—	$	2,299	$	—	$	2,299
Collectively evaluated for impairment		453,356		76,980		241,959		453,899		60,587		1,286,781
Total loans	$	453,356	$	76,980	$	241,959	$	456,198	$	60,587	$	1,289,080
December 31, 2022
Individually evaluated for impairment	$	2,262	$	356	$	—	$	3,880	$	—	$	6,498
Collectively evaluated for impairment		456,569		70,240		245,396		440,531		60,260		1,272,996
Total loans	$	458,831	$	70,596	$	245,396	$	444,411	$	60,260	$	1,279,494

The following table presents the ~~average recorded investment in impaired~~classes of the loan portfolio summarized by the aging categories of performing loans ~~by class~~ and ~~related interest income recognized for the periods indicated:~~non-accrual loans at March 31, 2023 and December 31, 2022:


	Nine months ended						Nine months ended
	September 30, 2022						September 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		Current		30-59 Days Past Due		60-89 Days Past Due		90 Days+ Past Due		Total Past Due and Accruing		Non- Accrual		Total Loans
Commercial real estate
March 31, 2023
Commercial real estate:
Non owner-occupied	$	104	$	9	$	—	$	3,518	$	9	$	—	$	267,244	$	—	$	—	$	—	$	—	$	85	$	267,329
All other CRE		2,189		67		—		2,984		95		—		186,027		—		—		—		—		—		186,027
Acquisition and development
Acquisition and development:
1-4 family residential construction		228		10		—		256		9		—		19,938		—		—		—		—		—		19,938
All other A&D		325		—		—		599		9		—		56,907		—		—		—		—		135		57,042
Commercial and industrial		23		—		—		—		—		—		241,940		19		—		—		19		—		241,959
Residential mortgage
Residential mortgage – term		2,138		36		15		2,642		56		5
Residential mortgage – home equity		364		—		—		449		—		—
Residential mortgage:
Residential mortgage - term														392,659		1,031		157		26		1,214		2,678		396,551
Residential mortgage - home equity														58,934		345		10		20		375		338		59,647
Consumer		19		—		—		17		—		—		60,021		463		40		41		544		22		60,587
Total	$	5,390	$	122	$	15	$	10,465	$	178	$	5	$	1,283,670	$	1,858	$	207	$	87	$	2,152	$	3,258	$	1,289,080
December 31, 2022
Commercial real estate:
Non owner-occupied													$	269,971	$	—	$	—	$	—	$	—	$	87	$	270,058
All other CRE														188,715		—		—		—		—		58		188,773
Acquisition and development:
1-4 family residential construction														19,637		—		—		—		—		—		19,637
All other A&D														50,813		—		—		—		—		146		50,959
Commercial and industrial														245,342		54		—		—		54		—		245,396
Residential mortgage:
Residential mortgage - term														380,502		31		722		239		992		2,893		384,387
Residential mortgage - home equity														59,223		399		48		43		490		311		60,024
Consumer														59,789		363		83		25		471		—		60,260
Total													$	1,273,992	$	847	$	853	$	307	$	2,007	$	3,495	$	1,279,494

Three months ended

Three months ended

September 30, 2022

September 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

$
103

$
3

$
—

$
4,631

$
3

$
—
All other CRE

2,143

22

—

2,787

26

—
Acquisition and development

1-4 family residential construction

221

3

—

249

3

—
All other A&D

264

—

—

602

3

—
Commercial and industrial

—

—

—

—

—

—
Residential mortgage

Residential mortgage – term

2,049

12

10

2,500

17

—
Residential mortgage – home equity

331

—

—

451

—

—
Consumer

39

—

9

—

—
Total

$
5,150

$
40

$
10

$
11,229

$
52

$
—

Table of Contents

Non-accrual loans that have been subject to partial charge-offs totaled $0.2 million at March 31, 2023 and $0.1 million at December 31, 2022. Loans secured by 1-4 family residential real estate properties in the process of foreclosure totaled $2.0 million at March 31, 2023. There were no loans subject to foreclosure at December 31, 2022. As a percentage of the loan portfolio, accruing loans past due 30 days or more was 0.17% at March 31, 2023 compared to 0.16% at December 31, 2022 and 0.19% as of March 31, 2022.

InEffective January 1, 2023, the ~~normal course~~Company adopted the accounting guidance in ASU No. 2022-02, which eliminates the recognition and measurement of ~~business,~~troubled debt restructurings (TDRs). Due to the ~~Bank modifies~~removal of the TDR designation, the Company evaluates all loan ~~terms~~restructurings according to the accounting guidance for ~~various reasons. These reasons~~loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a direct change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the above. Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows.

A loan that is considered a restructured loan may ~~include~~be subject to the individually evaluated loan analysis if the commitment is $0.1 million or greater; otherwise, the restructured loan remains in the appropriate segment in the ACL model and associated reserves are adjusted based on changes in the discounted cash flows resulting from the modification of the restructured loan. For a discussion with respect to reserve calculations regarding individually evaluated loans, refer to the “Nonrecurring Loans” section in Note 6, Fair Value Measurements. There were no loan modifications made to borrowers facing financial difficulties in the period ending March 31, 2023.

The Company maintains an ACL at a level determined to be adequate to absorb expected credit losses associated with the Company’s financial instruments over the life of those instruments as of the balance sheet date. The Company develops and documents a ~~retention strategy~~systematic ACL methodology based on the following portfolio segments: 1) commercial real estate, 2) acquisition and development, 3) commercial and industrial, 4) residential mortgage, and 5) consumer. The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to ~~compete~~economic cycles. The segmentation in the current expected credit losses (“CECL”) model is different from the segmentation in the Incurred Loss model. The following is a discussion of the key risks by portfolio segment that management assesses in preparing the ACL.

Commercial Real Estate- loans are secured by commercial purpose real estate, including both owner occupied properties and investment properties, for various purposes such as hotels, strip malls and apartments. Operations of the individual projects as well as global cash flows of the debtors are the primary source of repayment of these loans. The condition of the local economy is an important indicator of risk, but there are more specific risks depending on the collateral type as well as the business.

Acquisition and Development- loans include both commercial and consumer. Commercial loans are made to finance construction of buildings or other structures, as well as to finance the acquisition and development of raw land for various purposes. While the risk of these loans is generally confined to the construction period, if there are problems, the project may not be completed, and as such, may not provide sufficient cash flow on its own to service the debt or have sufficient value in a liquidation to cover the outstanding principal. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the type of project and the experience and resources of the developer. Consumer loans are made for the construction of residential homes for which a binding sales contract exists and generally are for a period of time sufficient to complete construction. Residential construction loans to individuals generally provide for the payment of interest ~~rate environment,~~only during the construction phase. Credit risk for residential real estate construction loans can arise from construction delays, cost overruns, failure of the contractor to complete the project to specifications and economic conditions that could impact demand for supply of the property being constructed.

Commercial and Industrial- loans are made to ~~re-amortize~~operating companies or ~~extend a loan term to better match~~manufacturers for the ~~loan’s payment stream with~~purpose of production, operating capacity, accounts receivable, inventory or equipment financing. Cash flow from the ~~borrower’s cash flows. A modified loan is considered to be a troubled debt restructuring (a “TDR”) when the Bank has determined that~~operations of the borrower is ~~troubled (i.e. experiencing financial difficulties)~~the primary source of repayment for these loans. The condition of the local economy is an important indicator of risk, but there are also more specific risks depending on the industry of the borrower. Collateral for these types of loans often do not have sufficient value in a distressed or liquidation scenario to satisfy the outstanding debt. These loans are also made to local municipalities for various purposes including refinancing existing obligations, infrastructure up-fit and ~~a concession has been granted.~~expansion, or to purchase new equipment. The ~~Bank evaluates~~primary repayment source for local municipalities include the ~~probability that~~tax base of the ~~borrower will be in payment default on any~~municipality, specific revenue streams related to the infrastructure financed, and other business operations of ~~its debt in~~ the ~~foreseeable future without~~municipal authority. The health and stability of state and local

2520

Table of Contents

~~modification. To make~~economies directly impacts each municipality’s tax basis and are important indicators of risk for this ~~determination,~~segment. The ability of each municipality to increase taxes and fees to offset service requirements give this type of loan a very low risk profile in the ~~Bank performs a global financial review~~continuum of the ~~borrower~~Company’s loan portfolio.

Residential mortgage- loans are secured by first and ~~loan guarantors to assess their current ability to meet their financial obligations.~~

~~When~~second liens such as home equity lines of credit and 1-4 family residential mortgages. The primary source of repayment for these loans is 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 time period. Where possible, the Bank obtains additional collateral and/or secondary payment sources at the timeincome of the ~~restructure~~borrower. The condition of the local economy, in ~~order~~particular the unemployment rate, is an important indicator of risk for this segment. The state of the local housing market can also have a significant impact on this segment because low demand and/or declining home values can limit the ability of borrowers to ~~put the Bank in the best possible position if the borrower is not able~~sell a property and satisfy debt.

Consumer- loans are made 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~~individuals and may be in either ~~accruing~~secured by assets other than 1-4 family residences or ~~non-accruing status. If~~unsecured. This segment includes automobile loans and unsecured loans and lines of credit. The primary source of repayment for these loans is the ~~loan was accruing at the time~~income and assets of the ~~modification, then it continues~~borrower. The condition of the local economy, in particular the unemployment rate, is an important indicator of risk for this segment. The value of the collateral, if there is any, is less likely to be a source of repayment due to less certain collateral values.

The following table summarizes the primary segments of the ACL at March 31, 2023 and ALL at December 31, 2022, 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
March 31, 2023
Individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Collectively evaluated for impairment	$	4,862	$	1,103	$	3,755	$	6,324	$	827	$	—	$	16,871
Total ACL	$	4,862	$	1,103	$	3,755	$	6,324	$	827	$	—	$	16,871
December 31, 2022
Individually evaluated for impairment	$	—	$	—	$	—	$	26	$	—	$	—	$	26
Collectively evaluated for impairment	$	6,345	$	979	$	2,845	$	3,134	$	877	$	430	$	14,610
Total ALL	$	6,345	$	979	$	2,845	$	3,160	$	877	$	430	$	14,636

Changes in ~~accruing status subsequent to~~ the ~~modification. Non-accrual TDRs may return to accruing status when there has been sufficient payment performance~~fair value of the types of collateral for aindividually evaluated loans are reported as provision for credit loss in the period of ~~at least six months. TDRs are considered to be in payment default if, subsequent to modification,~~change. The evaluation of the ~~loans are transferred to non-accrual status or to foreclosure. A~~need and amount of a specific allocation of the ACL and whether a loan ~~may~~can be removed from ~~being reported as~~impairment status is made on 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 $3.1 million and $3.3 million that were classified as TDRs at September 30, 2022 and December 31, 2021, respectively. During the nine month period ended September 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 nine month period ended September 30, 2021, there were no new TDRs and three existing TDRs that had reached their modification maturity date and were re-modified. These modifications did not impact the ALL. During the nine month periods ended September 30, 2022 and 2021, there were no payment defaults.

quarterly basis.

The following table presents the ~~volume and recorded investment in TDRs at the times they were modified,~~amortized cost basis of collateral-dependent individually evaluated loans as of March 31, 2023.


	March 31, 2023
(dollars in thousands)	Real Estate		Non-Accrual Loans with No Allowance
Commercial real estate	$	—	$	—
Acquisition and development		—		—
Commercial and industrial		—		—
Residential mortgage		2,299		2,299
Consumer		—		—
Total Loans	$	2,299	$	2,299

Table of Contents

The following table presents impaired loans by class, segregated by those for which a specific allowance was required and ~~type of modification that occurred during the periods indicated.~~those for which a specific allowance was not required at December 31, 2022:


	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
December 31, 2022
Commercial real estate
Non owner-occupied	$	—	$	—	$	187	$	187	$	—
All other CRE		—		—		2,075		2,075		—
Acquisition and development
1-4 family residential construction		—		—		210		210		—
All other A&D		—		—		146		146		109
Commercial and industrial		—		—		—		—		—
Residential mortgage
Residential mortgage – term		345		26		3,225		3,570		41
Residential mortgage – home equity		—		—		310		310		—
Consumer		—		—		—		—		—
Total impaired loans	$	345	$	26	$	6,153	$	6,498	$	150

(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.

The following tables present the activity in the ACL and ALL for the three month period ended March 31, 2023 and 2022:



Three months ended (in thousands)	Commercial Real Estate		Acquisition and Development		Commercial and Industrial		Residential Mortgage		Consumer		Unallocated		Total
Beginning balance at January 1, 2023 prior to adoption of ASC 326	$	6,345	$	979	$	2,845	$	3,160	$	877	$	430	$	14,636
Impact of adopting ASC 326		(1,143)		(15)		1,334		2,112		208		(430)		2,066
Credit Loss Expense		(345)		134		(428)		1,040		13		—		414
Loan Charge-offs		—		—		—		(6)		(333)		—		(339)
Recoveries collected		5		5		4		18		62		—		94
ACL balance at March 31, 2023	$	4,862	$	1,103	$	3,755	$	6,324	$	827	$	—	$	16,871
ALL balance at January 1, 2022	$	6,032	$	2,615	$	2,460	$	3,484	$	934	$	430	$	15,955
Provision		(111)		(91)		98		(545)		230		—		(419)
Loan Charge-offs		—		—		(48)		(9)		(246)		—		(303)
Recoveries collected		1		18		3		15		22		—		59
ALL balance at March 31, 2022	$	5,922	$	2,542	$	2,513	$	2,945	$	940	$	430	$	15,292

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, 2021

Commercial real estate

Non owner-occupied

—

$
—

1

$
109

—

$
—
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

—

$
—

3

$
526

—

$
—

Table of Contents

The Company’s methodology for estimating the ACL includes:

Segmentation. The Company’s loan portfolio is segmented by homogeneous loan types that behave similarly to economic cycles.

Specific Analysis. A specific reserve analysis is applied to certain individually evaluated loans. These loans are evaluated quarterly generally based on collateral value, observable market value or the present value of expected future cash flows. A specific reserve is established if the fair value is less than the loan balance. A charge-off is recognized when the loss is quantifiable. Individually evaluated loans not specifically analyszed reside in the Quantitative Analysis.

Quantitative Analysis. The Company elected to use Discounted Cash Flow (“DCF”). Economic forecasts include but are not limited to unemployment, the Consumer Price Index, the Housing Affordability Index, and Gross State Product. These forecasts are assumed to revert to the long term average and are utilized in the model to estimate the probability of default and the loss given default is the estimated loss rate, which varies over time. The estimated loss rate is applied within the appropriate periods in the cash flow model to determine the net present value. Net present value is also impacted by assumption related to the duration between default and recovery. The reserve is based on the difference between the summation of the principal balances taking amortized costs into consideration and the summation of the net present values.

Qualitative Analysis. Based on management’s review and analysis of internal, external and model risks, management may adjust the model output. Management reviews the peaks and troughs of the model’s calibrations, taking into account economic forecasts to develop guardrails that serve as the basis for determining the reasonableness of the model’s output and makes adjustments as necessary. This process challenges unexpected variability resulting from outputs beyond the model’s calibrations that appear to be unreasonable. Additionally, management may adjust the economic forecast if it is incompatible with known market conditions based on management’s experience and perspective.

The ACL is based on estimates, and actual losses may vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an ACL that is representative of the risk found in the components of the portfolio at any given date.

Table of Contents

The following table presents loan balances by year of origination and internally assigned risk rating for our portfolio segments as of dates presented:


(in thousands)	2023		2022		2021		2020		2019		2018 and Prior		Revolving		Total Portfolio Loans
March 31, 2023
Commercial real estate:
Non owner-occupied
Pass	$	694	$	66,354	$	31,448	$	48,257	$	40,497	$	60,520	$	1,558	$	249,328
Special Mention		—		—		—		—		—		6,236		—		6,236
Substandard		—		—		—		—		—		11,765		—		11,765
Total non-owner occupied		694		66,354		31,448		48,257		40,497		78,521		1,558		267,329
Current period gross charge-offs		—		—		—		—		—		—		—		—
All other CRE
Pass		2,220		25,934		26,430		22,074		26,326		73,298		4,133		180,415
Special Mention		—		—		1,101		—		—		—		—		1,101
Substandard		—		—		—		—		2,380		1,532		599		4,511
Total all other CRE		2,220		25,934		27,531		22,074		28,706		74,830		4,732		186,027
Current period gross charge-offs		—		—		—		—		—		—		—		—
Acquisition and development:
1-4 family residential construction
Pass		880		16,576		1,148		—		—		202		1,132		19,938
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total acquisition and development		880		16,576		1,148		—		—		202		1,132		19,938
Current period gross charge-offs		—		—		—		—		—		—		—		—
All other A&D
Pass		3,932		22,754		4,482		9,288		1,387		12,946		2,118		56,907
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		135		—		135
Total all other A&D		3,932		22,754		4,482		9,288		1,387		13,081		2,118		57,042
Current period gross charge-offs		—		—		—		—		—		—		—		—
Commercial and industrial:
Pass		12,709		75,378		28,492		14,767		11,648		13,811		60,526		217,331
Special Mention		—		—		2,339		—		—		337		2,374		5,050
Substandard		—		8,923		77		7,122		154		911		2,391		19,578
Total commercial and industrial		12,709		84,301		30,908		21,889		11,802		15,059		65,291		241,959
Current period gross charge-offs		—		—		—		—		—		—		—		—
Residential mortgage:
Residential mortgage - term
Pass		11,844		69,800		91,693		42,233		26,887		145,350		2,105		389,912
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		932		15		234		5,415		43		6,639
Total residental mortgage - term		11,844		69,800		92,625		42,248		27,121		150,765		2,148		396,551
Current period gross charge-offs		—		—		—		—		—		6		—		6
Residential mortgage - home equity
Pass		658		5,410		931		523		316		553		50,617		59,008
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		43		—		58		538		639
Total residental mortgage - home equity		658		5,410		931		566		316		611		51,155		59,647
Current period gross charge-offs		—		—		—		—		—		—		—		—
Consumer:
Pass		5,519		14,850		9,006		3,355		1,215		23,813		2,617		60,375
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		17		151		25		8		6		5		212
Total consumer		5,519		14,867		9,157		3,380		1,223		23,819		2,622		60,587
Current period gross charge-offs		46		105		177		1		—		4		—		333
Total Portfolio Loans
Pass		38,456		297,056		193,630		140,497		108,276		330,493		124,806		1,233,214
Special Mention		—		—		3,440		—		—		6,573		2,374		12,387
Substandard		—		8,940		1,160		7,205		2,776		19,822		3,576		43,479
Total Portfolio Loans	$	38,456	$	305,996	$	198,230	$	147,702	$	111,052	$	356,888	$	130,756	$	1,289,080
Current YTD Period:
Current period gross charge-offs		46		105		177		1		—		10		—		339

Table of Contents


(in thousands)	2022		2021		2020		2019		2018		2017 and Prior		Revolving		Total Portfolio Loans
December 31, 2022
Commercial real estate:
Non owner-occupied
Pass	$	67,429	$	31,710	$	48,421	$	41,221	$	19,414	$	42,069	$	1,570	$	251,834
Special Mention		—		—		—		—		—		6,289		—		6,289
Substandard		—		—		—		—		—		11,935		—		11,935
Total non-owner occupied		67,429		31,710		48,421		41,221		19,414		60,293		1,570		270,058
Current period gross charge-offs		—		—		—		—		—		—		—		—
All other CRE
Pass		24,655		26,947		22,906		27,213		8,873		67,691		4,790		183,075
Special Mention		—		1,111		—		—		—		—		—		1,111
Substandard		—		—		—		3,006		—		357		1,224		4,587
Total all other CRE		24,655		28,058		22,906		30,219		8,873		68,048		6,014		188,773
Current period gross charge-offs		—		—		—		—		—		—		—		—
Acquisition and development:
1-4 family residential construction
Pass		15,629		1,453		151		—		—		210		2,194		19,637
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		—		—		—
Total acquisition and development		15,629		1,453		151		—		—		210		2,194		19,637
Current period gross charge-offs		—		—		—		—		—		20		—		20
All other A&D
Pass		18,733		4,979		9,755		1,408		558		12,961		2,419		50,813
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		—		—		—		146		—		146
Total all other A&D		18,733		4,979		9,755		1,408		558		13,107		2,419		50,959
Current period gross charge-offs		—		—		—		—		—		—		—		—
Commercial and industrial:
Pass		83,608		30,451		15,982		12,707		5,013		9,528		63,668		220,957
Special Mention		—		2,555		—		—		—		338		2,134		5,027
Substandard		8,923		—		7,167		173		634		311		2,204		19,412
Total commercial and industrial		92,531		33,006		23,149		12,880		5,647		10,177		68,006		245,396
Current period gross charge-offs		—		97		34		3		—		—		—		134
Residential mortgage:
Residential mortgage - term
Pass		64,930		93,665		42,784		27,120		14,132		133,397		2,306		378,334
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		16		237		143		5,634		23		6,053
Total residental mortgage - term		64,930		93,665		42,800		27,357		14,275		139,031		2,329		384,387
Current period gross charge-offs		—		—		—		—		—		28		—		28
Residential mortgage - home equity
Pass		5,739		957		538		328		97		478		51,232		59,369
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		—		44		—		21		40		550		655
Total residental mortgage - home equity		5,739		957		582		328		118		518		51,782		60,024
Current period gross charge-offs		—		—		—		—		12		6		—		18
Consumer:
Pass		16,748		10,495		3,845		1,596		687		24,096		2,654		60,121
Special Mention		—		—		—		—		—		—		—		—
Substandard		—		92		27		9		7		—		4		139
Total consumer		16,748		10,587		3,872		1,605		694		24,096		2,658		60,260
Current period gross charge-offs		36		494		18		37		11		40		—		636
Total Portfolio Loans
Pass		297,471		200,657		144,382		111,593		48,774		290,430		130,833		1,224,140
Special Mention		—		3,666		—		—		—		6,627		2,134		12,427
Substandard		8,923		92		7,254		3,425		805		18,423		4,005		42,927
Total Portfolio Loans	$	306,394	$	204,415	$	151,636	$	115,018	$	49,579	$	315,480	$	136,972	$	1,279,494
Current YTD Period:
Current period gross charge-offs	$	36	$	591	$	52	$	40	$	23	$	94	$	—	$	836

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.

Table of Contents

The following tables present loan balances by year of origination segregated by performing and non-performing loans for the periods presented:


(in thousands)	2023		2022		2021		2020		2019		2018 and Prior		Revolving		Total Portfolio Loans
March 31, 2023
Commercial real estate:
Non owner-occupied
Performing	$	694	$	66,354	$	31,448	$	48,257	$	40,497	$	78,436	$	1,558		267,244
Nonperforming		—		—		—		—		—		85		—		85
Total non-owner occupied		694		66,354		31,448		48,257		40,497		78,521		1,558		267,329
All other CRE
Performing		2,220		25,934		27,531		22,074		28,706		74,830		4,732		186,027
Nonperforming		—		—		—		—		—		—		—		—
Total all other CRE		2,220		25,934		27,531		22,074		28,706		74,830		4,732		186,027
Acquisition and development:
1-4 family residential construction
Performing		880		16,576		1,148		—		—		202		1,132		19,938
Nonperforming		—		—		—		—		—		—		—		—
Total acquisition and development		880		16,576		1,148		—		—		202		1,132		19,938
All other A&D
Performing		3,932		22,754		4,482		9,288		1,387		12,946		2,118		56,907
Nonperforming		—		—		—		—		—		135		—		135
Total all other A&D		3,932		22,754		4,482		9,288		1,387		13,081		2,118		57,042
Commercial and industrial:
Performing		12,709		84,301		30,908		21,889		11,802		15,059		65,291		241,959
Nonperforming		—		—		—		—		—		—		—		—
Total commercial and industrial		12,709		84,301		30,908		21,889		11,802		15,059		65,291		241,959
Residential mortgage:
Residential mortgage - term
Performing		11,844		69,800		92,625		42,248		26,887		148,332		2,111		393,847
Nonperforming		—		—		—		—		234		2,433		37		2,704
Total residental mortgage - term		11,844		69,800		92,625		42,248		27,121		150,765		2,148		396,551
Residential mortgage - home equity
Performing		658		5,410		931		523		316		552		50,899		59,289
Nonperforming		—		—		—		43		—		59		256		358
Total residental mortgage - home equity		658		5,410		931		566		316		611		51,155		59,647
Consumer:
Performing		5,519		14,867		9,157		3,380		1,223		23,757		2,621		60,524
Nonperforming		—		—		—		—		—		62		1		63
Total consumer		5,519		14,867		9,157		3,380		1,223		23,819		2,622		60,587
Total Portfolio Loans
Performing		38,456		305,996		198,230		147,659		110,818		354,114		130,462		1,285,735
Nonperforming		—		—		—		43		234		2,774		294		3,345
Total Portfolio Loans	$	38,456	$	305,996	$	198,230	$	147,702	$	111,052	$	356,888	$	130,756	$	1,289,080

Table of Contents

During the three month period ended September 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 September 30, 2021, there were no new TDRs and two existing TDRs that had reached their modification maturity date were re-modified. These re-modifications did not impact the ALL. During the three months ended September 30, 2022 and 2021, there were no payment defaults under TDRs.

~~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.~~

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

—

$
—


(in thousands)	2022		2021		2020		2019		2018		2017 and Prior		Revolving		Total Portfolio Loans
December 31, 2022
Commercial real estate:
Non owner-occupied
Performing	$	67,429	$	31,710	$	48,421	$	41,221	$	19,414	$	60,206	$	1,570		269,971
Nonperforming		—		—		—		—		—		87		—		87
Total non-owner occupied		67,429		31,710		48,421		41,221		19,414		60,293		1,570		270,058
All other CRE
Performing		24,655		28,058		22,906		30,219		8,873		67,990		6,014		188,715
Nonperforming		—		—		—		—		—		58		—		58
Total all other CRE		24,655		28,058		22,906		30,219		8,873		68,048		6,014		188,773
Acquisition and development:
1-4 family residential construction
Performing		15,629		1,453		151		—		—		210		2,194		19,637
Nonperforming		—		—		—		—		—		—		—		—
Total acquisition and development		15,629		1,453		151		—		—		210		2,194		19,637
All other A&D
Performing		18,733		4,979		9,755		1,408		558		12,962		2,419		50,814
Nonperforming		—		—		—		—		—		145		—		145
Total all other A&D		18,733		4,979		9,755		1,408		558		13,107		2,419		50,959
Commercial and industrial:
Performing		92,531		33,006		23,149		12,880		5,647		10,177		68,006		245,396
Nonperforming		—		—		—		—		—		—		—		—
Total commercial and industrial		92,531		33,006		23,149		12,880		5,647		10,177		68,006		245,396
Residential mortgage:
Residential mortgage - term
Performing		64,930		93,665		42,800		27,120		14,198		136,228		2,313		381,254
Nonperforming		—		—		—		237		77		2,803		16		3,133
Total residental mortgage - term		64,930		93,665		42,800		27,357		14,275		139,031		2,329		384,387
Residential mortgage - home equity
Performing		5,739		957		538		328		115		478		51,515		59,670
Nonperforming		—		—		44		—		3		40		267		354
Total residental mortgage - home equity		5,739		957		582		328		118		518		51,782		60,024
Consumer:
Performing		16,748		10,581		3,872		1,605		694		24,077		2,658		60,235
Nonperforming		—		6		—		—		—		19		—		25
Total consumer		16,748		10,587		3,872		1,605		694		24,096		2,658		60,260
Total Portfolio Loans
Performing		306,394		204,409		151,592		114,781		49,499		312,328		136,689		1,275,692
Nonperforming		—		6		44		237		80		3,152		283		3,802
Total Portfolio Loans	$	306,394	$	204,415	$	151,636	$	115,018	$	49,579	$	315,480	$	136,972	$	1,279,494

Note 56 - Other Real Estate Owned, net

The following table presents the components of other real estate owned (“OREO”) at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021:~~2022:

(in thousands)

September 30,
2022

December 31,
2021
Acquisition and development

$
4,670

$
4,477
Residential mortgage

63

—
Total OREO, net

$
4,733

$
4,477

~~The following table presents the activity in the OREO valuation allowance for the nine and three month periods ended September 30, 2022 and 2021:~~


	Nine Months Ended				Three Months Ended
	September 30,				September 30,
(in thousands)	2022		2021		2022		2021		March 31, 2023		December 31, 2022
Balance beginning of period	$	453	$	1,010	$	453	$	543
Fair value adjustment		—		(160)		—		—
Sales of OREO		—		(396)		—		(89)
Balance at end of period	$	453	$	454	$	453	$	454
Acquisition and development									$	4,598	$	4,670
Residential mortgage										—		63
Total OREO, net									$	4,598	$	4,733

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The following table presents the activity in the OREO valuation allowance for the three month period ended March 31, 2023 and 2022:


	Three Months Ended
	March 31,
(in thousands)	2023		2022
Balance beginning of period	$	453	$	453
Fair value adjustment		32		—
Sales of OREO		(148)		—
Balance at end of period	$	337	$	453

The following table presents the components of OREO (income)/expenses, net, for the ~~nine and~~ three month periods ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


	Nine Months Ended				Three Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
(in thousands)	2022		2021		2022		2021		2023		2022
Gains on sale of real estate, net	$	—	$	(594)	$	—	$	2	$	(36)	$	—
Fair value adjustment, net		—		(160)		—		—		32		—
Expenses, net		378		345		129		150		129		96
Rental and other income		(3)		(51)		(1)		(2)		(1)		(1)
Total OREO expenses/(income), net	$	375	$	(460)	$	128	$	150
Total OREO expenses, net									$	124	$	95

Note 67 – Fair Value of Financial Instruments

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

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

The Corporation measures fair values based on the fair value hierarchy established in ASC Paragraph 820-10-35-37. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs that may be used to measure fair value under the hierarchy are as follows:

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

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

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the best available data, some of which is internally developed, and consider risk premiums that a market participant would require.

The level established within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers in and out of Level 1, 2 or 3 are recorded at fair value at the beginning of the reporting period.

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

~~Table of Contents~~

The fair value of investments is determined using a market approach. As of ~~September 30, 2022,~~March 31, 2023, the U.S. Government agencies and treasuries, residential and commercial mortgage-backed securities, collateralized mortgage obligations, and state and political subdivisions bonds, excluding the tax increment financing (“TIF”) bonds, were classified as Level 2 within the valuation hierarchy. Their fair values were determined based upon market-corroborated inputs and valuation matrices, which were obtained through third party data service providers or securities brokers through which the Corporation has historically transacted both purchases and sales of investment securities. The TIF bonds and collateralized debt obligation (“CDO”) portfolio, which consists of pooled trust preferred securities issued by banks, thrifts, and insurance companies, are classified as Level 3 within the valuation hierarchy. The CDO fair values are determined by a third party using a discounted cash flow model.

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

~~Impaired~~Nonrecurring Basis –

Individually Evaluated Loans- Individual loans ~~– Loans included in the table below are those that are considered impaired~~ with borrowers experiencing financial difficulty and with a remaining principal balance of $0.1 million or more are evaluated for potential specific ~~allocation or with partial charge-offs,~~reserves and adjusted, if a shortfall exists, to fair value less costs to sell. Fair value is measured based ~~upon~~on the ~~guidance~~value of the ~~loan impairment subsection~~value of the ~~Receivables~~ ~~Topic, ASC Section 310-10-35, under which~~underlying collateral securing the ~~Corporation has measured impairment generally based on~~loan if repayment is expected solely from the sale of operation of the collateral or present value of estimated future cash flows discounted at the loan’s contractual interest rate if the loan is not determined to be collateral dependent.

Fair value for individually evaluated loans is determined using several methods. Generally, the fair value of ~~the loan’s collateral. Fair value consists of the loan balance less its valuation allowance and~~real estate is ~~generally~~ determined based on ~~independent third-party~~ appraisals by qualified licensed appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. These routine adjustments are made to adjust the value of a specific property relative to comparable properties for variations in qualitities such as location, size, and income production capacity relative to the subject property of the ~~collateral or discounted cash flows based upon~~appraisal.

Subsequent to the ~~expected proceeds. These assets~~initial impairment date, existing individually evaluated loans are ~~included as Level 3~~reevaluated quarterly for additional impairment and adjustments to fair ~~values based upon~~value less costs to sell are made, where appropriate. For individually evaluated loans, the ~~lowest level~~first state of ~~input that is significant~~our impairment analysis involves inspection of the property in question to affirm the condition has not deteriorated since the previous impairment analysis date. Management also engages in conversations with local real estate professionals and market participants to determine the likely marketing time and value range for the property. The second state involves an assessment of current trends in the regional market. After thorough consideration of these factors, management will order a new appraisal.

For non-individually evaluated loans, the fair value ~~measurements.~~is determined by updating the present value of estimated future cash flows using the loan’s existing rate to reflect the payment schedule for the remaining life of the loan.

Equity Investment- Equity investments included in the table below are considered impaired with losses recognized on the income statement in net gains. Fair value of the equity investment was based on an independent third-party valuation report where the value was determined based on the revenue multiples of like kind information technology businesses. ~~These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.~~

~~Other real estate owned~~ – OREO included in the table below are considered impaired with specific write-downs. Fair value of other real estate owned was based on independent third-party appraisals of the properties. These values were determined based on the sales prices of similar properties in the approximate geographic area. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

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Other real estate owned – OREO included in the table below are considered impaired with specific write-downs. Fair value of other real estate owned was based on independent third-party appraisals of the properties. These values were determined based on the sales prices of similar properties in the approximate geographic area. These assets are included as Level 3 fair values based upon the lowest level of input that is significant to the fair value measurements.

For assets measured at fair value on a recurring and non-recurring basis, the fair value measurements by level within the fair value hierarchy used at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 were as follows:



			Fair Value Measurements at September 30, 2022 Using							Fair Value Measurements at March 31, 2023 Using
			Quoted							Quoted
			Prices in	Significant						Prices in	Significant
	Assets		Active Markets	Other		Significant		Assets		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)	09/30/22		(Level 1)	(Level 2)		(Level 3)		03/31/23		(Level 1)	(Level 2)		(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. government agencies	$	9,447		$	9,447			$	9,653		$	9,653
Residential mortgage-backed agencies	$	37,734		$	37,734			$	37,281		$	37,281
Commercial mortgage-backed agencies	$	31,611		$	31,611			$	30,494		$	30,494
Collateralized mortgage obligations	$	21,701		$	21,701			$	20,977		$	20,977
Obligations of states and political subdivisions	$	10,744		$	10,744			$	10,629		$	10,629
Corporate bonds	$	920		$	920			$	830		$	830
Collateralized debt obligations	$	15,882				$	15,882	$	14,114				$	14,114
Financial derivatives	$	1,171		$	1,171			$	880		$	880
Non-recurring:
Impaired loans, net	$	128				$	128
Equity Investment	$	1,052				$	1,052	$	1,796				$	1,796
Other real estate owned	$	—				$	—



			Fair Value Measurements at December 31, 2021 Using							Fair Value Measurements at December 31, 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)	12/31/21		(Level 1)	(Level 2)		(Level 3)		12/31/22		(Level 1)	(Level 2)		(Level 3)
Recurring:
Investment securities available-for-sale:
U.S. government agencies	$	67,169		$	67,169			$	9,462		$	9,462
Residential mortgage-backed agencies	$	48,661		$	48,661			$	37,401		$	37,401
Commercial mortgage-backed agencies	$	50,868		$	50,868			$	30,732		$	30,732
Collateralized mortgage obligations	$	90,077		$	90,077			$	21,044		$	21,044
Obligations of states and political subdivisions	$	12,804		$	12,804			$	10,492		$	10,492
Corporate bonds								$	887			887
Collateralized debt obligations	$	17,192				$	17,192	$	15,871				$	15,871
Financial derivatives	$	(453)		$	(453)			$	1,068		$	1,068
Non-recurring:
Impaired loans, net	$	408				$	408	$	211				$	211
Equity investment	$	590				$	590	$	1,796				$	1,796
Other real estate owned	$	349				$	349	$	—				$	—

At ~~September 30, 2022, the fair value of impaired~~March 31, 2023, individually evaluated loans with a valuation allowance or partial charge-off was $0.5 million, net of valuation allowances of $29,781 and partial charge-offs of $0.1 million. During the nine months ended September 30, 2022, changes to the valuation allowance or additional charge off activity was recorded on loans withhad a net ~~balance~~carrying amount of ~~approximately $0.1 million. At December 31, 2021, the fair value of impaired loans~~$2.3 million with ano 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.allowance.

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At December 31, 2022, 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, 2022, changes to the valuation allowance or additional charge off activity was recorded on loans with a net balance of approximately $0.4 million.

There were no transfers of assets between any of the fair value hierarchy for the ~~nine~~three month periods ended ~~September 30, 2022~~March 31, 2023 or ~~2021.~~2022.

For Level 3 assets and liabilities measured at fair value on a recurring and non-recurring basis as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the significant unobservable inputs used in the fair value measurements were as follows:

(in thousands)

Fair Value at
September 30,
2022

Valuation
Technique

Significant
Unobservable
Inputs

Significant
Unobservable
Input Value

Fair Value at
March 31,
2023

Valuation
Technique

Significant
Unobservable
Inputs

Significant
Unobservable
Input Value

Recurring:

Investment Securities – available for sale -CDO

15,882

Discounted Cash Flow

Discount Margin

Range of low to mid 300 and low to high 400

14,114

Discounted Cash Flow

Discount Margin

Range of low to mid 500 and low to high 700

Non-recurring:

Impaired Loans, net

128

Market Comparable Properties

Marketability Discount

N/A

Individually Evaluated Loans, net

Market Comparable Properties

Marketability Discount

N/A

Equity Investment

1,052

Market Method

Revenue Multiples

2.8x

2,161

Market Method

Revenue Multiples

2.8x

Other Real Estate Owned

Market Comparable Properties

Marketability Discount

N/A

(in thousands)

Fair Value at
December 31,
2021

Valuation
Technique

Significant
Unobservable
Inputs

Significant
Unobservable
Input Value

Fair Value at
December 31,
2022

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%

15,871

Discounted Cash Flow

Discount Rate

Range of low to mid
300 and low to high 400

Non-recurring:

Impaired Loans, net

408

Market Comparable Properties

Marketability Discount

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

211

Market Comparable Properties

Marketability Discount

10.0% - 15.0%

Equity Investment

590

Market Method

Revenue Multiples

2.8x

1,796

Market Method

Revenue Multiples

2.8x

Other Real Estate Owned

349

Market Comparable Properties

Marketability Discount

15.0%

Market Comparable Properties

Marketability Discount

N/A

(1)

Range would include discounts taken since appraisal and estimated values

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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 ~~nine and~~ three month ~~periods~~period ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


	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, 2022	$	17,192
Beginning balance January 1, 2023			$	15,871
Total losses realized/unrealized:
Included in other comprehensive loss		(1,310)		(1,757)
Ending balance September 30, 2022	$	15,882
Ending balance March 31, 2023			$	14,114

Fair Value Measurements
Using Significant Unobservable Inputs
(Level 3)
(in thousands)

Investment Securities
Available for Sale
Beginning balance July 1, 2022

$
16,258
Total gains realized/unrealized:

Included in other comprehensive income

(376)
Ending balance September 30, 2022

$
15,882

Fair Value Measurements

Using Significant Unobservable Inputs

(Level 3)

Investment Securities
(in thousands)

Available for Sale
Beginning balance January 1, 2021

$
13,260
Total losses realized/unrealized:

Included in other comprehensive loss

3,832
Ending balance September 30, 2021

$
17,092


			Fair Value Measurements
			Using Significant Unobservable Inputs
			(Level 3)
	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)		Investment Securities
(in thousands)	Investment Securities Available for Sale		Available for Sale
Beginning balance July 1, 2021	$	16,230
Beginning balance January 1, 2022			$	17,192
Total losses realized/unrealized:
Included in other comprehensive income		862
Ending balance September 30, 2021	$	17,092
Included in other comprehensive loss				127
Ending balance March 31, 2022			$	17,319

There were no gains or losses included in earnings attributable to the change in realized/unrealized gains or losses related to the assets for the ~~nine and~~ three month periods ended ~~September 30, 2022~~March 31, 2023 or ~~2021.~~2022.

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.

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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, 2022				Fair Value Measurements						March 31, 2023				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	$	28,888	$	28,888	$	28,888					$	154,022	$	154,022	$	154,022
Interest bearing deposits in banks		1,868		1,868		1,868						1,873		1,873		1,873
Investment securities - AFS		128,039		128,039			$	112,157	$	15,882		123,978		123,978			$	109,864	$	14,114
Investment securities - HTM		238,445		205,745				185,484		20,261		233,083		205,745				185,484		20,261
Restricted bank stock		1,027		N/A								4,490		N/A
Loans held for sale												184		184						184
Loans, net		1,262,173		1,186,783						1,186,783		1,271,952		1,184,033						1,184,033
Financial derivatives		1,171		1,171				1,171				880		880				880
Accrued interest receivable		5,157		5,157				751		4,406		6,519		6,519				1,103		5,416
Financial Liabilities:
Deposits - non-maturity		1,386,816		1,386,816				1,386,816				1,412,743		1,412,743				1,412,743
Deposits - time deposits		124,302		124,217				124,217				178,542		178,399				178,399
Short-term borrowed funds		89,726		89,726				89,726				52,030		52,030				52,030
Long-term borrowed funds		30,929		30,928				30,928				110,929		110,929				110,929
Accrued interest payable		104		104				104				473		473				473
Off balance sheet financial instruments		—		—		—

December 31, 2021

Fair Value Measurements

Quoted

Prices in

Significant

Active Markets

Other

Significant

for Identical

Observable

Unobservable

Carrying

Fair

Assets

Inputs

Inputs
(in thousands)

Amount

Value

(Level 1)

(Level 2)

(Level 3)
Financial Assets:

Cash and due from banks

$
109,823

$
109,823

$
109,823

Interest bearing deposits in banks

5,897

5,897

5,897

Investment securities - AFS

286,771

286,771

$
269,579

$
17,192
Investment securities - HTM

56,259

65,369

36,448

28,921
Restricted bank stock

1,029

1,029

1,029

Loan held for sale

67

67

67
Loans, net

1,137,440

1,122,671

1,122,671
Accrued interest receivable

4,821

4,821

4,821

Financial Liabilities:

Deposits - non-maturity

1,306,145

1,306,145

1,306,145

Deposits - time deposits

163,229

163,961

163,961

Financial derivatives

453

453

453

Short-term borrowed funds

57,699

57,699

57,699

Long-term borrowed funds

30,929

31,085

31,085

Accrued interest payable

137

137

137


	December 31, 2022				Fair Value Measurements
					Quoted
					Prices in		Significant
					Active Markets		Other		Significant
					for Identical		Observable		Unobservable
	Carrying		Fair		Assets		Inputs		Inputs
(in thousands)	Amount		Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets:
Cash and due from banks	$	72,720	$	72,720	$	72,720
Interest bearing deposits in banks		1,595		1,595		1,595
Investment securities - AFS		125,889		125,889			$	110,018	$	15,871
Investment securities - HTM		235,659		203,080				182,380		20,700
Restricted bank stock		1,027		N/A
Loan held for sale		—		—
Loans, net		1,264,684		1,177,702						1,177,702
Financial derivative		1,068		1,068				1,068
Accrued interest receivable		6,051		6,051				6,051
Financial Liabilities:
Deposits - non-maturity		1,450,210		1,450,210				1,450,210
Deposits - time deposits		120,523		120,083				120,083
Financial derivatives		—		—				—
Short-term borrowed funds		64,565		64,565				64,565
Long-term borrowed funds		30,929		30,909				30,909
Accrued interest payable		151		151				151

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Note 78 – 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, ~~2021~~2022 and the three month ~~periods~~period ended March 31, ~~2022, June 30, 2022 and September 30, 2022:~~2023:


	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, 2021	$	(3,277)	$	(25)	$	(315)	$	(954)	$	(22,630)	$	(1,662)	$	(28,863)
Balance - January 1, 2022															$	(949)	$	(5,749)	$	(134)	$	(319)	$	(18,108)	$	(2,055)	$	(27,314)
Other comprehensive income/(loss) before reclassifications		2,475		(5,611)		—		635		3,431		(521)		409		(614)		(10,629)		(6,120)		1,116		684		2,430		(13,133)
Amounts reclassified from accumulated other comprehensive loss		(147)		(113)		181		—		1,091		128		1,140		(148)		(2)		551		—		821		199		1,421
Balance - December 31, 2021	$	(949)	$	(5,749)	$	(134)	$	(319)	$	(18,108)	$	(2,055)	$	(27,314)
Balance - December 31, 2022															$	(1,711)	$	(16,380)	$	(5,703)	$	797	$	(16,603)	$	574	$	(39,026)
Other comprehensive income/(loss) before reclassifications		103		(1,843)		(6,100)		614		(2,651)		—		(9,877)		(1,180)		985		—		(138)		123		—		(210)
Amounts reclassified from accumulated other comprehensive loss		(37)		(2)		69		—		204		50		284		(37)		—		133		—		184		(1)		279
Balance - March 31, 2022	$	(883)	$	(7,594)	$	(6,165)	$	295	$	(20,555)	$	(2,005)	$	(36,907)
Other comprehensive income/(loss) before reclassifications		(582)		(3,924)		—		182		(5,069)		—		(9,393)
Amounts reclassified from accumulated other comprehensive loss		(37)		—		168		—		204		49		384
Balance - June 30, 2022	$	(1,502)	$	(11,518)	$	(5,997)	$	477	$	(25,420)	$	(1,956)	$	(45,916)
Other comprehensive income/(loss) before reclassifications		(146)		(4,957)		—		392		(2,592)		—		(7,303)
Amounts reclassified from accumulated other comprehensive loss		(37)		—		167		—		205		50		385
Balance - September 30, 2022	$	(1,685)	$	(16,475)	$	(5,830)	$	869	$	(27,807)	$	(1,906)	$	(52,834)
Balance - March 31, 2023															$	(2,928)	$	(15,395)	$	(5,570)	$	659	$	(16,296)	$	573	$	(38,957)

The following tables present the components of other comprehensive income/(loss) for the three month period ended March 31, 2023 and 2022:


	Before		Tax
Components of Other Comprehensive Income	Tax		(Expense)
(in thousands)	Amount		Benefit		Net
For the three months ended March 31, 2023
Available for sale (AFS) securities with OTTI:
Unrealized holding losses	$	(1,606)	$	426	$	(1,180)
Less: accretable yield recognized in income		50		(13)		37
Net unrealized losses on investments with OTTI		(1,656)		439		(1,217)
Available for sale securities – all other:
Unrealized holding gains		1,340		(355)		985
Held to maturity securities:
Unrealized holding losses on securities transferred to held to maturity		—		—		—
Less: amortization recognized in income		(181)		48		(133)
Net unrealized gains on HTM securities		181		(48)		133
Cash flow hedges:
Unrealized holding losses		(188)		50		(138)
Pension Plan:
Unrealized net actuarial gain		168		(45)		123
Less: amortization of unrecognized loss		(250)		66		(184)
Net pension plan liability adjustment		418		(111)		307
SERP:
Unrealized net actuarial loss		—		—		—
Less: amortization of unrecognized gain		2		(1)		1
Net SERP liability adjustment		(2)		1		(1)
Other comprehensive income	$	93	$	(24)	$	69

Table of Contents

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

Before

Tax

Components of Other Comprehensive Loss

Tax

(Expense)

(in thousands)

Amount

Benefit

Net
For the nine months ended September 30, 2022

Available for sale (AFS) securities with OTTI:

Unrealized holding losses

$
(853)

$
228

$
(625)
Less: accretable yield recognized in income

152

(41)

111
Net unrealized losses on investments with OTTI

(1,005)

269

(736)
Available for sale securities – all other:

Unrealized holding losses

(22,971)

6,147

(16,824)
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

(14,646)

3,920

(10,726)
Held to maturity securities:

Unrealized holding losses on securities transferred to held to maturity

(8,328)

2,228

(6,100)
Less: gains recognized in income

93

(25)

68
Less: amortization recognized in income

(644)

172

(472)
Net unrealized losses on HTM securities

(7,777)

2,081

(5,696)
Cash flow hedges:

Unrealized holding gains

1,622

(434)

1,188
Pension Plan:

Unrealized net actuarial loss

(14,079)

3,767

(10,312)
Less: amortization of unrecognized loss

(837)

224

(613)
Net pension plan liability adjustment

(13,242)

3,543

(9,699)
SERP:

Unrealized net actuarial loss

—

—

—
Less: amortization of unrecognized loss

(203)

54

(149)
Net SERP liability adjustment

203

(54)

149
Other comprehensive loss

$
(34,845)

$
9,325

$
(25,520)


	Before		Tax
Components of Other Comprehensive Loss	Tax		(Expense)
(in thousands)	Amount		Benefit		Net
For the three months ended March 31, 2022
Available for sale (AFS) securities with OTTI:
Unrealized holding gains	$	141	$	(38)	$	103
Less: accretable yield recognized in income		50		(13)		37
Net unrealized gains on investments with OTTI		91		(25)		66
Available for sale securities – all other:
Unrealized holding losses		(10,844)		2,901		(7,943)
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		(2,519)		674		(1,845)
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		(94)		25		(69)
Net unrealized loss on HTM securities		(8,234)		2,203		(6,031)
Cash flow hedges:
Unrealized holding gains		839		(225)		614
Pension Plan:
Unrealized net actuarial loss		(3,620)		969		(2,651)
Less: amortization of unrecognized loss		(279)		75		(204)
Net pension plan liability adjustment		(3,341)		894		(2,447)
SERP:
Less: amortization of unrecognized loss		(68)		18		(50)
Less: amortization of prior service costs		—		—		—
Net SERP liability adjustment		68		(18)		50
Other comprehensive loss	$	(13,096)	$	3,503	$	(9,593)

~~Table of Contents~~

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: gains 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

~~Table of Contents~~

Components of Other Comprehensive Loss
(in thousands)

Before
Tax
Amount

Tax
(Expense)
Benefit

Net
For the three months ended September 30, 2022

Available for sale (AFS) securities with OTTI:

Unrealized holding losses

$
(199)

$
53

$
(146)
Less: accretable yield recognized in income

51

(14)

37
Net unrealized losses on investments with OTTI

(250)

67

(183)
Available for sale securities – all other:

Unrealized holding losses

(6,768)

1,811

(4,957)
Less: gains recognized in income

—

—

—
Net unrealized losses on all other AFS securities

(6,768)

1,811

(4,957)
Held to maturity securities:

Unrealized holding gains

—

—

—
Less: gains recognized in income

93

(25)

68
Less: amortization recognized in income

(320)

85

(235)
Net unrealized gains on HTM securities

227

(60)

167
Cash flow hedges:

Unrealized holding gains

534

(142)

392
Pension Plan:

Unrealized net actuarial loss

(3,537)

945

(2,592)
Less: amortization of unrecognized loss

(279)

74

(205)
Net pension plan liability adjustment

(3,258)

871

(2,387)
SERP:

Unrealized net actuarial loss

—

—

—
Less: amortization of unrecognized loss

(68)

18

(50)
Net SERP liability adjustment

68

(18)

50
Other comprehensive loss

$
(9,447)

$
2,529

$
(6,918)

~~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 losses on all other AFS securities

(708)

190

(518)
Held to maturity securities:

Unrealized holding gains

—

—

—
Less: gains 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)
Less: amortization of prior service costs

—

—

—
Net pension plan liability adjustment

(579)

155

(424)
SERP:

Unrealized net actuarial loss

—

—

—
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)

Table of Contents

The following table presents the details of amounts reclassified from accumulated other comprehensive loss for the ~~nine and~~ three month ~~periods~~period ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:


Amounts Reclassified from	Nine Months Ended					Three Months Ended
Accumulated Other Comprehensive Loss	September 30,				Affected Line Item in the Statement	March 31,				Affected Line Item in the Statement
(in thousands)	2022		2021		Where Net Income is Presented	2023		2022		Where Net Income is Presented
Net unrealized gains on available for sale investment securities with OTTI:
Accretable yield	$	152	$	151	Interest income on taxable investment securities	$	50	$	50	Interest income on taxable investment securities
Taxes		(41)		(40)	Provision for income tax expense		(13)		(13)	Credit for income tax expense
	$	111	$	111	Net of tax	$	37	$	37	Net of tax
Net unrealized gains on available for sale investment securities - all others:
Gains recognized	$	3	$	154	Net gains	$	—	$	3	Net gains
Taxes		(1)		(41)	Provision for income tax expense		—		(1)	Provision for income tax expense
	$	2	$	113	Net of tax	$	—	$	2	Net of tax
Net unrealized losses on held to maturity securities:
Amortization	$	(644)	$	(96)	Interest income on taxable investment securities	$	(181)	$	(94)	Interest income on taxable investment securities
Gains/(losses) recognized		93		(54)	Net gains/(losses)
Taxes		147		40	Provision for income tax expense		48		25	Provision for income tax expense
	$	(404)	$	(110)	Net of tax	$	(133)	$	(69)	Net of tax
Net pension plan liability adjustment:
Amortization of unrecognized loss	$	(837)	$	(1,116)	Other Expense	$	(250)	$	(279)	Other Expense
Taxes		224		299	Provision for income tax expense		66		75	Provision for income tax expense
	$	(613)	$	(817)	Net of tax	$	(184)	$	(204)	Net of tax
Net SERP liability adjustment:
Amortization of unrecognized loss	$	(203)	$	(226)	Other Expense
Amortization of prior service costs		—		1	Salaries and employee benefits
Amortization of unrecognized gain/(loss)						$	2	$	(68)	Other Expense
Taxes		54		60	Provision for income tax expense		(1)		18	(Credit)/provision for income tax expense
	$	(149)	$	(165)	Net of tax	$	1	$	(50)	Net of tax
Total reclassifications for the period	$	(1,053)	$	(868)	Net of tax	$	(279)	$	(284)	Net of tax

~~Table of Contents~~

Amounts Reclassified from

Three Months Ended

Accumulated Other Comprehensive Loss

September 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

$
50

Interest income on taxable investment securities
Taxes

(14)

(13)

Provision for income tax expense

$
37

$
37

Net of tax
Net unrealized losses on held to maturity securities:

Amortization

$
(320)

$
12

Interest income on taxable investment securities
Gains/(losses) recognized

93

(54)

Net gains/(losses)
Taxes

60

11

Provision for income tax expense

$
(167)

$
(31)

Net of tax
Net pension plan liability adjustment:

Amortization of unrecognized loss

$
(279)

$
(372)

Other expense
Amortization of prior service costs

—

—

Salaries and employee benefits
Taxes

74

99

Provision for income tax expense

$
(205)

$
(273)

Net of tax
Net SERP liability adjustment:

Amortization of unrecognized loss

$
(68)

$
(76)

Other expense
Amortization of prior service costs

—

1

Salaries and employee benefits
Taxes

18

20

Provision for income tax expense

$
(50)

$
(55)

Net of tax
Total reclassifications for the period

$
(385)

$
(322)

Net of tax

~~Note 8 – 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
Pension Plan

September 30,

September 30,
(in thousands)

2022

2021

2022

2021
Service cost

$
42

$
117

$
14

$
39
Interest cost

1,152

1,066

384

355
Expected return on assets

(2,858)

(2,677)

(953)

(892)
Amortization of net actuarial loss

837

1,116

279

372
Net pension credit included in employee benefits and other expense

$
(827)

$
(378)

$
(276)

$
(126)

The market value of the pension plan decreased $12.5 million during the first nine months of 2022. This decrease was due to the increasing rate environment and market volatility, which resulted in a pension plan liability of $7.7 million at September 30, 2022 compared to a pension plan asset of $4.8 ~~million at December 31, 2021.~~

~~Table of Contents~~

Nine Months Ended

Three Months Ended
Defined Benefit SERP

September 30,

September 30,
(in thousands)

2022

2021

2022

2021
Service cost

$
124

$
104

$
41

$
35
Interest cost

215

179

72

60
Amortization of recognized loss

203

226

68

75
Amortization of prior service cost

—

(1)

—

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

$
542

$
508

$
181

$
170

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.

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. No contributions were made to the Pension Plan during the first nine months of 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

~~Table of Contents~~

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 2021, the Board of Directors approved discretionary contributions to three participants totaling $101,257. The Corporation recorded $37,971 of related compensation expense for the first nine months of 2022 and 2021 related to these contributions. The Corporation recorded $12,657 of related compensation expense for the third quarter of 2022 and 2021 related to these contributions. In January 2022, the Board of Directors approved discretionary contributions to three participants totaling $103,689. The Corporation recorded $38,883 of related compensation expense for the first nine months of 2022 and $12,961 of related compensation expense for the third quarter of 2022 related to these contributions. Each discretionary contribution has a two year vesting period.

Note 9 - 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~~$15,000 to be paid, at the director’s election, in cash or additional shares of common stock. In January 2021, a total of 1,202 fully vested shares were issued to two new directors, which had a grant date fair market value of $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. In January 2023, a total of 333 fully vested shares of common stock were issued to a new director, which had a grant date fair value of $19.36 per share. Director stock compensation expense was ~~$196,254~~$75,501 for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~$191,717~~$58,858 for the ~~nine~~three months ended ~~September 30, 2021. Director stock compensation expense was $70,666 for the third quarter~~March 31, 2022.

Table of ~~2022 and $58,857 for the third quarter of 2021.~~Contents

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 and (b) a time-vesting award that will vest ratably over a three year period. Target performance levels were set based on the annual budget which supports the Corporation’s long-term objective of achieving high performance as compared to peers. Threshold performance is the minimum level of acceptable performance as defined by the 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

~~Table of Contents~~

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 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. For 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 growth in tangible book value per share during the performance period. For the performance period ending December 31, 2024, the RSUs performance goals are based on earnings per share for the year ending December 31, 2024 and growth in tangible book value per share during the 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 9,791 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) 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 9, 2022, 14,688 shares of the 2019 LTIP performance plan were issued at maximum performance level. On March 8, 2023, 15,216 shares relating to the 2020 performance plan (maximum level) were issued. On March 26, 2021, 1,690 of the 5,070 time vesting shares were issued to participants. On March ~~26,~~28, 2022, 1,688 shares of the 3,380 remaining time vesting shares were issued to participants. InOn March 26, 2023, 1,692 shares of the ~~third quarter of 2022, it was projected that the growth metric will not be met at 50%; therefore, the stock compensation expense was adjusted accordingly.~~remaining time vesting shares were issued to participants. Stock compensation expense was ~~($5,299) and $78,381~~$15,896 for the ~~nine month periods~~three months ended ~~September 30, 2022 and 2021. Stock compensation expense was ($37,091)~~March 31, 2023 and $26,127 for the ~~third quarter of 2022 and 2021, respectively. Unrecognized~~three month period ended March 31, 2022. All compensation expense ~~at September 30, 2022~~ related to ~~unvested RSUs~~the 2019 LTIP was ~~$21,195.~~recognized as of March 31, 2022. All compensation expense related to the 2020 LTIP plans has been recognized as of March 31, 2023.

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 ~~that began~~beginning 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 ~~$49,714 and $27,619 for the first nine months of 2022 and 2021, respectively. Stock compensation expense was~~ $16,571 for both of the ~~third quarter of 2022~~three month periods ended March 31, 2023 and ~~2021, respectively.~~2022. Unrecognized compensation expense as of ~~September 30, 2022~~March 31, 2023 related to unvested units was ~~$104,951.~~$71,809.

In March 2022, RSUs relating to 8,096 performance vesting shares and 6,238 time vesting shares (target level) for plan year 2022 were granted, which had a grant date fair market value of $21.88 per share of common stock underlying each RSU. The performance period for the performance-vesting RSUs is the three year period ending December 31, 2024. The time-vesting RSUs will vest ratably over a three year period beginning on March 9, 2023. On March 9, 2023 2,079 shares of the 6,238 time-vesting RSUs were issued to participants. Stock compensation expense was ~~$52,290 and~~ $26,145 for the ~~nine and~~ three ~~month periods~~months ended ~~September 30, 2022, respectively.~~March 31, 2023. Unrecognized compensation expense as of ~~September 30, 2022~~March 31, 2023 related to unvested units was ~~$261,453.~~$209,162.

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In March 2023, RSUs relating to 10,214 performance vesting shares and 7,920 time vesting shares (target level) for plan year 2023 were granted, which had a grant date fair market value of $18.25 per share of common stock underlying each RSU. The performance period for the performance-vesting RSUs is the three year period ending December 31, 2025. The time-vesting RSUs will vest ratably over a three year period beginning on March 15, 2024. Unrecognized compensation expense as of March 31, 2023 related to unvested units was $331,018.

Note 10 – Derivative Financial Instruments

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

In March 2016, the Corporation entered into four interest rate swap contracts totaling $30.0 million notional amount, hedging future cash flows associated with floating rate trust preferred debt. As of ~~September 30, 2022, $20.0~~March 31, 2023, $15.0 million notional amount remains.

The fair value of the interest rate swap contracts was ~~$1.2~~$0.9 million and ~~$(0.5)~~$1.1 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

~~Table of Contents~~

For the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, the Corporation recorded an ~~increase~~decrease in the value of the derivatives of $1.6 million and the related deferred tax of $0.5 million in net accumulated other comprehensive loss to reflect the effective portion of cash flow hedges. For the three months ended September 30, 2022, the Corporation recorded an increase in the value of the derivatives of $0.5$0.2 million and the related deferred tax of $0.1 million in net accumulated other comprehensive ~~loss~~income 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 no hedge ineffectiveness recorded for the ~~six or~~ three months ended ~~September 30, 2022.~~March 31, 2023. The Corporation does not expect any material losses relating to these hedges to be reclassified into earnings within the next 12 months.

Interest rate swap agreements are entered into with counterparties that meet established credit standards and the Corporation believes that the credit risk inherent in these contracts is not significant as of ~~September 30, 2022.~~March 31, 2023.

The table below discloses the impact of derivative financial instruments on the Corporation’s Consolidated Financial Statements for the ~~nine and~~ three month periods ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

Derivative in Cash Flow Hedging Relationships

Amount of gain or

(loss) recognized in

Amount of gain or

Amount of gain or

income or derivative

(loss) recognized in

(loss) reclassified from

(ineffective portion

OCI on derivative

accumulated OCI into

and amount excluded

(effective portion),

income (effective

from effectiveness
(in thousands)

net of tax

portion) (a)

testing) (b)
Interest rate contracts:

Nine months ended:

September 30, 2022

$
1,188

$
—

$
—
September 30, 2021

450

—

—
Three months ended:

September 30, 2022

$
392

$
—

$
—
September 30, 2021

79

—

—


Derivative in Cash Flow Hedging Relationships
					Amount of gain or
					(loss) recognized in
	Amount of gain or		Amount of gain or		income or derivative
	(loss) recognized in		(loss) reclassified from		(ineffective portion
	OCI on derivative		accumulated OCI into		and amount excluded
	(effective portion),		income (effective		from effectiveness
(in thousands)	net of tax		portion) (a)		testing) (b)
Interest rate contracts:
Three months ended:
March 31, 2023	$	(138)	$	—	$	—
March 31, 2022		614		—		—

Notes:

(a)

Reported as interest expense

(b)

Reported as other income

~~Note 11 – Revenue Recognition~~

ASC Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. ASC Topic 606 is 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 in-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 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.

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Note 11 – Regulatory Capital Requirements

The following table presents our capital ratios as of March 31, 2023 and December 31, 2022.


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

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

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

~~Service Charges on Deposit Accounts~~Note 12 – Deposits

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 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.

~~Other Service Charges~~

Fees, exchange, and other service charges are primarily comprised of ATM fees, loan servicing fees and other service charges. ATM fees are primarily generated when a Bank cardholder uses a non-Bank ATM or a non-Bank cardholder uses a Bank ATM. Loan servicing fees are comprised of fees earned on servicing of loan portfolios sold to 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~~table summarizes deposits as of March 31, 2023 and ~~outside the scope of ASC Topic 606, for the nine and three month periods ended September 30, 2022 and September 30, 2021:~~

December 31, 2022.

Nine Months Ended

Three Months Ended

September 30,

September 30,
(in thousands)

2022

2021

2022

2021
Noninterest income

In-scope of Topic 606:

Service charges on deposit accounts

$
1,451

$
1,292

$
523

$
475
Other service charges

686

664

241

232
Trust department

6,238

6,441

2,005

2,166
Debit card income

2,922

2,623

1,053

900
Brokerage commissions

805

854

272

229
Noninterest income (in-scope of Topic 606)

12,102

11,874

4,094

4,002
Noninterest income (out-of-scope of Topic 606)

1,297

1,308

510

521
Total Noninterest Income

$
13,399

$
13,182

$
4,604

$
4,523


(dollars in thousands)	March 31, 2023			December 31, 2022

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

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


	March 31, 2023			December 31, 2022
(dollars in thousands)		Balance	Percent		Balance	Percent
Insured/collateralized deposits	$	1,125,896	71%	$	1,118,190	71%
Uninsured deposits		465,389	29%		452,543	29%
	$	1,591,285	100%	$	1,570,733	100%

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


	March 31, 2023			December 31, 2022
(dollars in thousands)		Balance	Percent		Balance	Percent
Retail deposits	$	820,063	52%	$	855,014	54%
Business deposits		771,222	48%		715,719	46%
	$	1,591,285	100%	$	1,570,733	100%

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

Note 13 – Borrowed Funds

The following is a summary of borrowings:



(Dollars in thousands)	Three Months Ended March 31, 2023		Year Ended December 31, 2022
Securities sold under agreements to repurchase:
Outstanding at end of period	$	52,030	$	64,565
Weighted average interest rate at end of period		0.22%		0.12%
Maximum amount outstanding as of any month end	$	53,892	$	75,912
Average amount outstanding	$	57,364	$	63,182
Approximate weighted average rate during the period		0.22%		0.12%
FHLB advances, bearing fixed interest at rates ranging from 4.53% to 4.69% at March 31, 2023	$	80,000	$	-
Junior subordinated debt, bearing variable interest rate of 7.66% at March 31, 2023 and 7.49% at December 31, 2022	$	30,929	$	30,929

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

At March 31, 2023, the repurchase agreements were secured by $67.3 million in investment securities issued by government related agencies. A minimum of 102% of fair value is pledged against account balances.

Long-term borrowings increased by $80.0 million due to management’s decision to implement the contingency funding plan in regards to the market disruption. Two new borrowings totaling $80.0 million with maturities of 12 and 18 months in FHLB advances were obtained in the first quarter.

Note 14 – Segment Reporting

Currently, the Company conducts business in two operating segments: (i) Community Banking and (ii) Trust and Investment Services. The accounting policies of the segments are the same as those described in the summary of significant accounting policies provided earlier in this report.

Business activity for the operating segments are as follows:

Community Banking: The Community Banking segment is conducted through the Bank and involves delivering a broad range of financial products and services, including various loan and deposit products, to consumer, business, and not-for-profit customers. Parent company income and assets are included in the Community Banking segment, as the majority of parent company functions are related to this segment. Major revenue sources include net interest income, gains on sales of mortgage loans, and service charges on deposit accounts. Expenses include personnel, occupancy, marketing, equipment, and other expenses. Non-cash charges other than depreciation of fixed assets were immaterial for the three months ended March 31, 2023 and 2022.

Trust and Investment Services: The Trust and Investment Services segment is conducted through the Bank and offers corporate trustee services, trust and estate administration, IRA administration and custody services. Revenues for this segment is generated from administration, service and custody fees, as well as management fees that are derived from Assets Under Management. Expenses include personnel, occupancy, marketing, equipment, and other expenses. Non-cash charges associated with amortization of intangibles were approximately $52,000 thousand for the three months ended March 31, 2023 and 2022.

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~~Note 12 – Regulatory Capital Requirements~~

~~The following table presents our capital ratios as of September 30, 2022 and December 31, 2021.~~

September 30,
2022

December 31,
2021

Required for
Capital
Adequacy
Purposes

Required
to be Well
Capitalized

Total Capital (to risk-weighted assets)

First United Bank & Trust

14.49
%
14.97
%
8.00
%
10.00
%
Tier 1 Capital (to risk-weighted assets)

First United Bank & Trust

13.36
%
13.72
%
6.00
%
8.00
%
Common Equity Tier 1 Capital (to risk-weighted assets)

First United Bank & Trust

13.36
%
13.72
%
4.50
%
6.50
%
Tier 1 Capital (to average assets)

First United Bank & Trust

10.33
%
10.00
%
4.00
%
5.00
%

~~As of September 30, 2022 and December 31, 2021, the Bank was considered “well capitalized” under the regulatory framework for prompt corrective action.~~

~~Note 13 – Borrowed Funds~~Information for the operating segments for the periods indicated are presented in the following tables:


		Three Months Ended
		March 31, 2023
				Trust and
		Community		Investment
(in thousands)		Banking		Services		Total
Interest income	$	17,829	$	-	$	17,829
Interest expense		3,311		-		3,311
Credit loss expense		543		-		543
Non-interest income		2,125		2,268		4,393
Non-interest expense		11,385		1,253		12,638
Income before income taxes and intercompany fees		4,715		1,015		5,730
Intercompany management fee income (expense)		3		(3)		-
Income before income taxes		4,718		1,012		5,730
Income tax expense		1,143		212		1,355
Net income	$	3,575	$	800	$	4,375

		Three Months Ended
		March 31, 2022
				Trust and
		Community		Investment
(in thousands)		Banking		Services		Total
Interest income	$	14,147	$	-	$	14,147
Interest expense		806		-		806
Credit for loan losses		(421)		-		(421)
Non-interest income		2,025		2,409		4,434
Non-interest expense		9,377		1,203		10,580
Income before income taxes and intercompany fees		6,410		1,206		7,616
Intercompany management fee income (expense)		3		(3)		-
Income before income taxes		6,413		1,203		7,616
Income tax expense		1,647		254		1,901
Net income	$	4,766	$	949	$	5,715

~~The following is a summary~~Total non-fiduciary assets of ~~short-term borrowings with original maturities~~the trust and investment services segment were $0.9 million (including $0.8 million in intangible assets) as of ~~less than one year:~~March 31, 2023 and $1.1 million (including $1.0 million in intangible assets) as of March 31, 2022. All other assets were allocated to the Community Banking segment.

(Dollars in thousands)

Nine Months
Ended
September 30, 2022

Year Ended
December 31, 2021
Overnight borrowings, weighted average interest rate of 3.25% at September 30, 2022

$
20,000

$
—
Securities sold under agreements to repurchase:

Outstanding at end of period

$
69,726

$
57,699
Weighted average interest rate at end of period

0.13%

0.15%
Maximum amount outstanding as of any month end

$
75,912

$
72,396
Average amount outstanding

$
60,839

$
57,697
Approximate weighted average rate during the period

0.12%

0.15%

Short term borrowings increased $32.0 million since December 31, 2021, driven by $20.0 million in overnight borrowings and an increase in our overnight investments Treasury product of $12.0 million during the quarter. The increase in overnight borrowings at September 30, 2022 was primarily driven by the strong loan growth and a timing delay of the receipt of deposit funding from a large customer driven transaction. These funds were received shortly after quarter end and subsequently repaid the $20.0 million in overnight borrowings in full.

At September 30, 2022, the repurchase agreements were secured by $85.4 million in investment securities issued by government related agencies. A minimum of 102% of fair value is pledged against account balances.

~~Note 14 – Recent Accounting Pronouncements~~

~~Recently issued but not yet effective Accounting Pronouncements~~

~~In June 2016, 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~~

~~Table of Contents~~

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 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.

~~In March 2022, the FASB issued ASU 2022-02,~~ ~~Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.~~ASU 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 an 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, ~~2021.~~2022.

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

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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

~~Table of Contents~~

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

FIRST UNITED CORPORATION

First United Corporation is a Maryland corporation chartered in 1985 and a financial holding company registered with the Board of Governors of the Federal Reserve System (the “FRB”) under the Bank Holding Company Act of 1956, as ~~amended.~~amended, that elected financial holding company status in 2021. The Corporation’s primary business is serving as the parent company of First United Bank & Trust, a Maryland trust company (the “Bank”), First United Statutory Trust I (“Trust I”) and First United Statutory Trust II (“Trust II” and together with Trust I, ~~the “Trusts”~~“the Trusts”), both Connecticut statutory business ~~trusts.~~trusts, and First United Legacy Advisors, LLC, a Maryland limited liability company (“FULA”). The Trusts were formed for the purpose of selling trust preferred securities that qualified as Tier 1 capital. FULA was formed to provide investment advice and related services, but it is not yet active. The Bank has two consumer finance company ~~subsidiaries -~~subsidiaries- OakFirst Loan Center, Inc., a West Virginia corporation, and OakFirst Loan Center, LLC, a Maryland limited liability company -– and two subsidiaries that it uses to hold real estate acquired through foreclosure or by deed in lieu of foreclosure -– First OREO Trust, a Maryland statutory trust, and FUBT OREO I, LLC, a Maryland limited liability company. In addition, the Bank owns 99.9% of the limited partnership interests in Liberty Mews Limited Partnership, a Maryland limited partnership formed for the purpose of acquiring, developing and operating low-income housing units in Garrett County, Maryland (“Limited Mews”), and a 99.9% non-voting membership interest in MCC FUBT Fund, ~~LC,~~LLC, an Ohio limited liability company formed for the purpose of acquiring, developing and operating low-income housing units in Allegany County, ~~Maryland.~~Maryland (the “MCC Fund”).

At ~~September 30, 2022,~~March 31, 2023, the Corporation’s total assets were ~~$1.8~~$1.9 billion, net loans were $1.3 billion, and deposits were ~~$1.5~~$1.6 billion. Shareholders’ equity at ~~September 30, 2022~~March 31, 2023 was ~~$132.0~~$152.9 million.

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

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SELECTED FINANCIAL DATA

The following table sets forth certain selected financial data for the ~~nine~~three month periods ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ 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,

2022

2021

Per Share Data

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

$
2.72

$
1.81

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

$
2.72

$
2.45

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

$
2.72

$
1.81

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

$
2.72

$
2.45

Basic book value per common share - as reported

$
19.83

$
20.22

Diluted book value per common share - as reported

$
19.80

$
20.19

Significant Ratios:

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

1.35
%

0.92
%
Settlement and FHLB expenses, net of income tax

—

0.33
%
Adjusted Return on Average Assets (a) (1) (non-GAAP)

1.35
%

1.25
%

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

17.66
%

12.45
%
Settlement and FHLB expenses, net of income tax

—

4.43
%
Adjusted Return on Average Equity (a) (1) (non-GAAP)

17.66
%

16.88
%

Average Equity to Average Assets

7.66
%

10.70
%

Capital Ratios:

Consolidated Total Capital (to risk weighted assets)

15.50
%

15.51
%
Consolidated Tier 1 Capital (to risk weighted assets)

14.40
%

14.26
%
Consolidated Common Equity Tier 1 Capital (to risk weighted assets)

12.36
%

12.15
%
Consolidated Tier 1 Capital (to average assets)

11.23
%

10.33
%

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

~~Note:~~ ^(a)~~Annualized~~


	As of the three months ended
	March 31,
	2023			2022
Per Share Data
Basic net income per common share	$	0.66		$	0.86
Diluted net income per common share	$	0.65		$	0.86
Basic book value per common share	$	22.85		$	20.22
Diluted book value per common share	$	22.81		$	20.19


Significant Ratios:

Return on Average Assets (a)		0.94	%		1.31	%

Return on Average Equity (a)		11.87	%		16.49	%

Average Equity to Average Assets		7.90	%		7.94	%

Capital Ratios:

Consolidated Total Capital (to risk weighted assets)		16.15	%		15.67	%
Consolidated Tier 1 Capital (to risk weighted assets)		14.90	%		14.52	%
Consolidated Common Equity Tier 1 Capital (to risk weighted assets)		12.82	%		12.42	%
Consolidated Tier 1 Capital (to average assets)		11.47	%		10.94	%

RESULTS OF OPERATIONS

Overview

Consolidated net income was ~~$18.1~~$4.4 million for the first ~~nine months~~quarter of ~~2022~~2023 compared to ~~$12.2~~$5.7 million for the first ~~nine months~~quarter of ~~2021. The year-over-year increase~~2022 and $7.0 million for the fourth quarter of 2022. Basic net income was ~~primarily due to a $3.8 million increase in~~$0.66 per share and diluted net ~~interest~~ income as a result of a $1.7 million increase in interest income and a $2.2 million decrease in interest expense. Additionally, non-interest expense decreased significantly due to our payment of $3.3 million in litigation settlement expenses duringwas $0.65 per share for the first quarter of ~~2021~~2023, compared to basic and ~~a $2.4 million FHLB prepayment penalty~~diluted net income per share of $0.86 for the ~~early repayment of debt recognized in the third~~first quarter of ~~2021.~~2022.

~~Table of Contents~~

~~Consolidated net income was $6.9 million for the third quarter of 2022, or $1.04 per diluted share, compared to $4.4 million, or $0.66 per diluted share, for the third quarter of 2021.~~ The ~~year over year increase~~decrease in net income year-over-year was primarily driven by a $1.3 million increase in salaries and employee benefits due to an increase in health insurance costs related to increased claims, as well as increased salary expense for new hires, merit increases effective April 1, 2022, and increased incentive compensation. Provision for credit losses increased by $1.0 million due to increased qualitative factors related to the potential impact of inflation and rising rates on the cash flows of borrowers. Data processing expenses increased by $0.1 million, equipment and occupancy expenses increased by $0.1 million and miscellaneous expenses increased by $0.5 million primarily due to increased pension costs. These increases were partially offset by an increase in net interest income of ~~$1.5~~$1.2 million and ~~reduced operating expenses of $2.7 million primarily offset by the $2.4 million FHLB prepayment penalty in the third quarter of 2021, offset by an~~a decrease in ~~credit to provision~~income tax expense of $0.5 ~~million, reduced other operating income, and a decrease of $0.1 million in gains from sales of mortgages.~~

~~Comparing the nine months ended September 30, 2022, to the nine months ended September 30, 2021, net interest income, on a non-GAAP, fully taxable equivalent (“FTE”) basis, increased by $3.8~~ million. Interest income increased by $1.6 million and interest expense decreased by $2.2 million. Interest income for the 2021 period included $3.2 million in fees related to PPP loan forgiveness. The yield on earning assets increased 14 basis points to 3.74% in 2022 compared to 3.60% in 2021 in correlation with the rising interest rate environment and new loans booked at higher rates. Interest expense on deposits decreased $1.4 million while the average balance of deposits increased $5.0 million and interest on long-term borrowings decreased $0.8 million related 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 25 basis points on interest bearing liabilities. We anticipate increased margin pressure in the remaining quarter of 2022 due to increasing deposit pricing demands in our market areas. The net interest margin for the nine months ended September 30, 2022, was 3.53% compared to 3.21% for the nine months ended September 30, 2021.

Net interest income, on a non-GAAP, FTE basis, increased by $1.5 million for the third quarter of 2022 when compared to the third quarter of 2021. This increase was driven by an increase of $1.3 million in interest income from an overall increase in yield of 22 basis points on interest earning assets and an increase in average balances of $36.8 million. Interest income on loans increased $0.4 million due primarily to continued growth in our commercial loan portfolio, increased rates on new loans booked and adjustable-rate loans repricing related to the current rising rate environment. Investment income increased $0.7 million primarily due to an increase in average balances of $70.3 million and an increase of 44 basis points in yield 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 reduction of $0.2 million in interest expense was driven primarily by the decline of $49.9 million of average balances in the higher cost CD portfolio and the prepayment of $70.0 million of FHLB advances in 2021. The net interest margin for the third quarter of 2022 was 3.66%, compared to 3.38% for the third quarter of 2021.

Non-interest income for the nine months ended September 30, 2022 decreased by approximately $0.1 million when compared to the same period of 2021. This decrease was primarily due to the decrease in net gains from the sale of residential mortgage loans of $1.0 million as refinance activity has slowed considerably and due 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 ~~third~~first quarter of ~~2022 increased by approximately $0.1 million~~2023 was stable when compared to the same period of ~~2021. Increased net gains on investments of $0.1 million,~~2022. Increases in service charges and debit card income ~~of $0.2 million and brokerage commissions and service charges of $0.1 million~~ were offset by ~~reductions on gains on the sale of mortgage loans of $0.1 million due to management’s decision to book loans to the portfolio~~a decrease in ~~light of the rising interest rate environment Trust department~~wealth management income also decreased $0.2 million as a result of the volatile market and the impact of the rising rate environment on the market value of the assets under management. Assets under management in the trust department were $1.3 billion at September 30, 2022.

~~For the nine months ended September 30, 2022, non-interest expenses decreased by $5.0 million when compared to the nine months ended September 30, 2021. This decrease was primarily~~ attributable to the ~~one-time litigation settlement expense~~decline in market values of $3.3 million recorded in the first quarter of 2021, and $2.4 million in prepayment penalties that were recognized in 2021. The decrease from these one-time expenses was partially offset by a $1.7 million increase in salaries and employee benefits as a result of increased incentives of $1.3 million, stock compensation expense of $0.1 million and reduced deferred loan costs of $0.8 million, which were partially offset by reductions in life and health and pension related expenses.

Operating expenses decreased by $2.7 million when comparing the third quarter of 2022 to the third quarter of 2021. This decrease was driven largely by a decrease of $2.4 million of expense for prepayment penalties related to the repayment of $70.0 million in FHLB debt in 2021 and a reduction of legal expenses of $0.8 million related to the reimbursement of certain litigation expenses in 2021. These decreases were partially offset by an increase of $0.4 million in salaries and employee benefits from increased incentives, part-time salaries and stock compensation expense, partially offset by decreases in 401(k) plan expense. assets under management.

5043

Table of Contents

~~The provision for loan losses was a credit of $0.1~~Operating expenses increased by $2.1 million ~~for~~when comparing the ~~third~~first quarter of ~~2022 compared~~2023 to ~~a credit of $0.6 million for~~ the ~~third~~first quarter of ~~2021. The credit to the provision expense recorded~~2022. This increase was driven largely by a $1.3 million increase in ~~the third quarter of 2022 was primarily~~salaries and employee benefits attributable to ~~the continuation of payments of loans previously modified~~increased salary expense related to new hires and merit increases effective April 1, 2022, increased health insurance costs associated with unusually high claims and increased incentive payouts. Occupancy, equipment and data processing expenses increased $0.3 million. Other miscellaneous expenses increased $0.5 million due to ~~uncertainties~~increases in charitable contributions, consulting fees, Visa processing fees, continuing education fees, mileage reimbursements, fraud related to COVID-19. Net charge-offs of $88,000 were recorded for the quarter ended September 30, 2022, compared to net recoveries of $0.4 million for 2021. The ratio of the ALL to loans outstanding was 1.22% at September 30, 2022, compared to 1.28% at June 30, 2022expense, and ~~1.38% at December 31, 2021.~~ pension costs, offset by slight reductions in contract labor, legal and professional, telephone expense, investor relations, debit card expense, and miscellaneous loan fees.

The effective income tax rates as a percentage of income for the ~~nine months~~three-month period ended ~~September 30,~~March 31, 2023 and March 31, 2022 were 23.6% and ~~September 30, 2021 were 25.8% and 24.9%~~25.0%, respectively. The ~~increased~~decrease in the tax rate for the ~~nine months ended September 30, 2022, when compared to the nine months ended September 30, 2021,~~period was primarily related to ~~state tax treatment of litigation settlement expenses in 2021. A~~a new low-income housing tax credit investment in ~~2021 is expected to begin~~2022 that began generating tax credits during the fourth quarter of 2022 and ~~should provide increased~~will continue to generate tax credits ~~beginning~~ in 2023 and ~~beyond for the term of the tax credit.~~future years.

~~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.

~~Table of Contents~~

~~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:~~

Nine months ended September 30,

Three months ended September 30,

2022

2021

2022

2021
(in thousands, except for per share amount)

Net income - as reported

$
18,079

$
12,221

$
6,936

$
4,388
Adjustments:

Settlement expense

—

3,300

—

—
FHLB penalty

—

2,368

—

2368
Income tax effect of adjustment

—

(1,313)

—

(578)
Adjusted net income (non-GAAP)

$
18,079

$
16,576

$
6,936

$
6,178

Basic and Diluted earnings per share - as reported

$
2.72

$
1.81

$
1.04

$
0.66
Adjustments:

Settlement expense

—

0.47

—

—
FHLB penalty

—

0.35

—

0.35
Income tax effect of adjustment

—

(0.18)

—

(0.08)
Adjusted basic and diluted earnings per share (non-GAAP)

$
2.72

$
2.45

$
1.04

$
0.93

Significant Ratios:

Return on Average Assets (1) - as reported

1.35%

0.88%

Settlement, FHLB and contribution expenses, and insurance reimbursement income, net of income tax effect

—

0.23%

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

1.35%

1.11%

Return on Average Equity (1) - as reported

17.66%

12.21%

Settlement, FHLB and contribution expenses, and insurance reimbursement income, net of income tax effect

—

2.90%

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

17.66%

15.11%

Net Interest Income

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

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


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

5244

Table of Contents

~~The tables below summarizes net interest income for the nine and three month periods ended September 30, 2022 and 2021.~~

GAAP

Non-GAAP - FTE

Nine Months Ended

Nine Months Ended

September 30,

September 30,

(dollars in thousands)

2022

2021

2022

2021

Interest income

$
45,063

$
43,408

$
45,771

$
44,113

Interest expense

2,610

4,784

2,610

4,784

Net interest income

$
42,453

$
38,624

$
43,161

$
39,329

Net interest margin %

3.47
%

3.16
%

3.53
%

3.21
%

Three Months Ended

Three Months Ended

September 30,

September 30,

(dollars in thousands)

2022

2021

2022

2021

Interest income

$
16,185

$
14,910

$
16,416

$
15,142

Interest expense

1,044

1,285

1,044

1,285

Net interest income

$
15,141

$
13,625

$
15,372

$
13,857

Net interest margin %

3.61
%

3.32
%

3.66
%

3.38
%

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 ~~nine and~~ three month ~~periods~~period ended ~~September 30, 2022~~March 31 , 2023 and ~~2021:~~2022:


	Nine Months Ended												Three Months Ended
	September 30,												March 31,
	2022						2021						2023						2022
	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	$	1,203,650	$	39,399	4.38	%	$	1,179,205	$	39,562	4.49	%	$	1,279,547	$	15,457	4.90	%	$	1,168,803	$	12,450	4.32	%
Investment Securities:
Taxable		352,446		4,533	1.72	%		267,899		2,864	1.43	%		340,622		1,768	2.11	%		363,155		1,406	1.57	%
Non taxable		27,118		1,494	7.37	%		25,487		1,448	7.60	%		26,104		484	7.52	%		28,022		505	7.31	%
Total		379,564		6,027	2.12	%		293,386		4,312	1.96	%		366,726		2,252	2.49	%		391,177		1,911	1.98	%
Federal funds sold		47,173		308	0.87	%		156,504		128	0.11	%		40,092		307	3.11	%		53,321		18	0.14	%
Interest-bearing deposits with other banks		3,564		12	0.45	%		3,419		1	0.06	%		5,001		26	2.11	%		5,255		1	0.08	%
Other interest earning assets		1,027		25	3.25	%		3,622		110	4.07	%		1,632		14	3.48	%		1,029		8	3.15	%
Total earning assets		1,634,978		45,771	3.74	%		1,636,136		44,113	3.60	%		1,692,998		18,056	4.33	%		1,619,585		14,388	3.60	%
Allowance for loan losses		(15,611)						(16,924)						(14,816)						(15,900)
Non-earning assets		166,594						154,464						213,929						165,549
Total Assets	$	1,785,961					$	1,773,676					$	1,892,111					$	1,769,234
Liabilities and Shareholders’ Equity
Interest-bearing demand deposits	$	296,069	$	369	0.17	%	$	211,005	$	460	0.29	%	$	353,072	$	888	1.02	%	$	284,799	$	89	0.13	%
Interest-bearing money markets		294,481		347	0.16	%		340,322		367	0.14	%		340,128		1,298	1.55	%		295,923		63	0.09	%
Savings deposits		249,596		70	0.04	%		218,605		63	0.04	%		246,708		79	0.13	%		243,919		18	0.03	%
Time deposits		143,734		711	0.66	%		208,972		1,987	1.27	%
Time deposits - Retail														118,667		281	0.96	%		154,811		305	0.80	%
Time deposits - Brokered														10,180		132	5.26	%		—		—	—	%
Short-term borrowings		62,175		86	0.18	%		55,151		67	0.16	%		57,364		31	0.22	%		59,555		18	0.12	%
Long-term borrowings		30,929		1,027	4.44	%		92,980		1,840	2.65	%		43,373		602	5.63	%		30,929		313	4.10	%
Total interest-bearing liabilities		1,076,984		2,610	0.32	%		1,127,035		4,784	0.57	%		1,169,492		3,311	1.15	%		1,069,936		806	0.31	%
Non-interest-bearing deposits		540,082						488,870						545,215						530,672
Other liabilities		32,057						26,850						27,988						28,109
Shareholders’ Equity		136,838						130,921						149,416						140,517
Total Liabilities and Shareholders’ Equity	$	1,785,961					$	1,773,676					$	1,892,111					$	1,769,234
Net interest income and spread			$	43,161	3.42	%			$	39,329	3.03	%			$	14,745	3.18	%			$	13,582	3.29	%
Net interest margin					3.53	%					3.21	%					3.53	%					3.40	%

~~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 ~~2022~~2023 and ~~2021.~~2022. Non-GAAP interest income on a fully taxable equivalent was ~~$708~~$227 and ~~$705,~~$242, respectively.

(2)

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

(3)

The average yields on investments are based on amortized cost.

Comparing the nine months ended September 30, 2022 to the nine months ended September 30, 2021, net interest income, on a non-GAAP, FTE basis, increased by $3.8 million. Interest income increased by $1.7 million and interest expense decreased by $2.2 million. Interest income for the 2021 period included $3.2 million in fees related to PPP loan forgiveness. The yield on earning assets increased 14 basis points to 3.74% in the 2022 period compared to 3.60% in the 2021 period in correlation with the rising interest rate environment and new loans booked at higher rates. Interest expense on deposits decreased $1.4 million while the average balance of deposits increased $5.0 million and interest on long-term borrowings decreased $0.8 million related to the prepayment of $70.0 million of FHLB advances in the third quarter of 2021. The decreased interest expense resulted in an overall decrease of 25 basis points on interest bearing liabilities. We anticipate increased margin pressure in the fourth quarter of 2022 due to increasing deposit pricing demands in our market areas. The net interest margin for the nine months ended September 30, 2022, was 3.53% compared to 3.21% for the nine months ended September 30, 2021.

Three Months Ended

September 30,

2022

2021

(dollars in thousands)

Average
Balance

Interest

Average
Yield/Rate

Average
Balance

Interest

Average
Yield/Rate

Assets

Loans

$
1,240,706

$
14,073

4.50
%
$
1,162,374

$
13,689

4.67
%
Investment Securities:

Taxable

343,581

1,587

1.83
%

274,648

880

1.27
%
Non taxable

26,471

489

7.33
%

25,073

476

7.54
%
Total

370,052

2,076

2.23
%

299,721

1,356

1.79
%
Federal funds sold

52,019

251

1.91
%

159,444

65

0.16
%
Interest-bearing deposits with other banks

1,552

7

1.79
%

4,283

—

—
%
Other interest earning assets

1,026

9

3.48
%

2,772

32

4.64
%
Total earning assets

1,665,355

16,416

3.91
%

1,628,594

15,142

3.69
%
Allowance for loan losses

(15,715)

(17,597)

Non-earning assets

170,092

157,806

Total Assets

$
1,819,732

$
1,768,803

Liabilities and Shareholders’ Equity

Interest-bearing demand deposits

$
305,608

$
187

0.24
%
$
215,085

$
113

0.21
%
Interest-bearing money markets

305,185

210

0.27
%

332,889

79

0.09
%
Savings deposits

253,576

34

0.05
%

230,925

17

0.03
%
Time deposits

134,600

190

0.56
%

184,493

523

1.12
%
Short-term borrowings

66,172

47

0.28
%

63,968

17

0.11
%
Long-term borrowings

30,929

376

4.82
%

77,342

536

2.75
%
Total interest-bearing liabilities

1,096,070

1,044

0.38
%

1,104,702

1,285

0.46
%
Non-interest-bearing deposits

550,978

503,006

Other liabilities

37,499

27,143

Shareholders’ Equity

135,186

133,952

Total Liabilities and Shareholders’ Equity

$
1,819,733

$
1,768,803

Net interest income and spread

$
15,372

3.53
%

$
13,857

3.23
%
Net interest margin

3.66
%

3.38
%

~~(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 $231 and $232 respectively.

~~(2)~~

~~Net interest margin is calculated as net interest income divided by average earning assets.~~

~~Table of Contents~~

~~(3)~~

~~The average yields on investments are based on amortized cost.~~

Net interest income, on a non-GAAP, FTE basis, increased by ~~$1.5~~$1.2 million for the ~~third~~first quarter of ~~2022~~2023 when compared to the ~~third~~first quarter of ~~2021.~~2022. This increase was driven by an increase of ~~$1.3~~$3.7 million in interest income from an overall increase in yield of 2273 basis points on interest earning assets and an increase in average balances of ~~$36.8~~$73.4 million. Interest income on loans increased ~~$0.4~~by $3.0 million due ~~primarily~~ to ~~continued growth~~the increase of 58 basis points in ~~our commercial~~overall yield on the loan portfolio ~~increased rates on~~as new loans were booked ~~and~~at higher rates as well as adjustable-rate loans repricing ~~related~~in correlation to the ~~current~~ rising rate ~~environment. Investment income increased $0.7 million primarily due to~~environment and an increase in average balances of ~~$70.3 million and an~~$110.7 million. Investment income increased by $0.3 million. The increase of 44 basis points in yield 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 reduction of $0.2$2.5 million in interest expense was driven ~~primarily~~ by the ~~decline~~increase of ~~$49.9~~82 basis points on interest paid on deposit accounts as well as an increase of $89.3 million ofin average balances ~~in the higher cost CD portfolio and the prepayment~~ of ~~$70.0 million of FHLB advances in 2021. The net interest margin for the third quarter of 2022 was 3.66%~~interest-bearing deposit accounts when compared to ~~3.38% for~~2022. Increased deposit pricing is a result of the ~~third quarter~~continued pressure on deposits as well as a shift of ~~2021.~~ balances from non-interest-bearing deposits to the interest bearing Insured Cash Sweep (“ICS”) product to ensure full FDIC insurance coverage.

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 ~~nine and~~ three month periods ended ~~September 30, 2022~~March 31, 2023 and ~~2021:~~2022:

For the Nine months ended September 30, 2022

compared to the Nine months ended September 30, 2021
(in thousands and tax equivalent basis)

Volume

Rate

Net
Interest Income:

Loans

$
823

$
(986)

$
(163)
Taxable Investments

907

762

1,669
Non-taxable Investments

93

(47)

46
Federal funds sold

(90)

270

180
Interest-bearing deposits

0

11

11
Other interest earning assets

(79)

(6)

(85)
Total interest income

1,654

4

1,658
Interest Expense:

Interest-bearing demand deposits

185

(276)

(91)
Interest-bearing money markets

(48)

28

(20)
Savings deposits

9

(2)

7
Time deposits

(621)

(655)

(1,276)
Short-term borrowings

8

11

19
Long-term borrowings

(1,233)

420

(813)
Total interest expense

(1,700)

(474)

(2,174)
Net interest income

$
3,354

$
478

$
3,832

~~Table of Contents~~


							For the Three months ended March 31, 2023
	For the Three months ended September 30, 2022 compared to the Three months ended September 30, 2021						compared to the three months ended March 31, 2022
(in thousands and tax equivalent basis)	Volume		Rate		Net		Volume		Rate		Net
Interest Income:
Loans	$	915	$	(531)	$	384	$	1,196	$	1,811	$	3,007
Taxable Investments		219		488		707		(88)		450		362
Non-taxable Investments		26		(13)		13		(35)		14		(21)
Federal funds sold		(43)		229		186		(5)		294		289
Interest-bearing deposits		0		7		7		0		25		25
Other interest earning assets		(20)		(3)		(23)		5		1		6
Total interest income		1,097		177		1,274		1,073		2,595		3,668
Interest Expense:
Interest-bearing demand deposits		48		26		74		22		777		799
Interest-bearing money markets		(6)		137		131		10		1,226		1,236
Savings deposits		2		15		17		0		61		61
Time deposits		(140)		(193)		(333)
Time deposits - Retail								(72)		48		(24)
Time deposits - Brokered								0		132		132
Short-term borrowings		1		29		30		(1)		14		13
Long-term borrowings		(319)		159		(160)		128		162		290
Total interest expense		(414)		173		(241)		87		2,420		2,507
Net interest income	$	1,511	$	4	$	1,515	$	986	$	175	$	1,161

(1)

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

Provision for ~~Loan~~Credit Losses

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 ACL/ALL have been adjusted based on the current economic environment and the characteristics of the loan portfolio.

Other Income

The composition of other operating income for the ~~nine and~~ three month periods ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ is illustrated in the following table:


	Income as % of						Income as % of						Income as % of
	Total Other Income						Total Other Income						Total Other Income
	Nine Months Ended						Three Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
(in thousands)	2022			2021			2022			2021			2023			2022
Service charges on deposit accounts	$	1,451	11%	$	1,292	10%	$	523	11%	$	475	10%	$	516	12%	$	465	10%
Other service charges		686	5%		664	5%		241	5%		232	5%		232	5%		213	5%
Trust department		6,238	46%		6,441	49%		2,005	44%		2,166	48%		1,970	46%		2,189	50%
Debit card income		2,922	22%		2,623	20%		1,053	23%		900	20%		955	22%		886	20%
Bank owned life insurance		891	7%		877	7%		302	7%		298	7%		305	7%		292	7%
Brokerage commissions		805	6%		854	6%		272	6%		229	5%		297	7%		220	5%
Other income		406	3%		431	3%		208	4%		223	5%		64	1%		117	3%
	$	13,399	100%	$	13,182	100%	$	4,604	100%	$	4,523	100%	$	4,339	100%	$	4,382	100%

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Other Operating Expenses

The composition of other operating expenses for the ~~nine and~~ three month periods ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ is illustrated in the following table:

Expense as % of

Expense as % of

Total Other Operating Expenses

Total Other Operating Expenses

Nine Months Ended

Three Months Ended

September 30,

September 30,
(in thousands)

2022

2021

2022

2021
Salaries and employee benefits

$
17,891

56%

$
16,214

44%

$
6,130

59%

$
5,719

44%
FDIC premiums

479

2%

575

2%

150

2%

209

2%
Equipment

3,110

10%

2,837

8%

1,037

10%

1,032

8%
Occupancy expense of premises

2,172

7%

2,102

6%

734

7%

684

5%
Data processing expense

2,516

8%

2,420

7%

890

9%

819

6%
Marketing expense

409

1%

408

1%

152

1%

129

1%
Professional services

873

2%

2,872

8%

(211)

(2)%

615

5%
Contract labor

482

2%

486

1%

159

2%

153

1%
Telephone

365

1%

606

2%

112

1%

123

1%
Other real estate owned

375

1%

(460)

(1)%

128

1%

150

1%
Investor relations

258

1%

546

1%

39

0%

116

1%
Settlement expense

—

0%

3,300

9%

—

0%

—

0%
FHLB prepayment penalty

—

0%

2,368

6%

—

0%

2,368

18%
Contributions

184

1%

105

0%

121

1%

55

0%
Other

2,437

8%

2,203

6%

895

9%

855

7%

$
31,551

100%

$
36,582

100%

$
10,336

100%

$
13,027

100%


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

Provision for Income Taxes

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

FINANCIAL CONDITION

Balance Sheet Overview

Total assets at ~~September 30, 2022~~March 31, 2023 were ~~$1.8~~$1.9 billion, representing a ~~$51.2 million increase since June 30, 2022 and a $73.8~~$89.3 million increase since December 31, ~~2021.~~2022. During the ~~third~~first quarter of ~~2022,~~2023, cash and interest-bearing deposits in other banks increased by ~~$9.1~~$81.6 million as a result of the implementation of the contingency funding plan and obtaining $61.1 million of brokered certificates of deposit and $80.0 million in FHLB borrowings. Implementing the contingency funding plan and the increase in on-balance sheet liquidity was a precautionary move given the market disruptions associated with the volatile banking environment and the near-term uncertainties regarding growth in the deposit portfolio. The investment portfolio decreased by ~~$7.0~~$4.5 million associated with normal principal amortization and gross loans increased by ~~$44.3~~$9.6 million. Other assets, including deferred taxes, premises and equipment, and accrued interest receivable, ~~also increased collectively by $4.7 million.~~remained stable.

Total liabilities at ~~September 30, 2022~~March 31, 2023 were ~~$1.7~~$1.8 billion, representing ~~a $52.0 million increase since June 30, 2022 and a $83.7~~an $88.2 million increase since December 31, ~~2021.~~2022. Total deposits increased by ~~$26.8 million since June 30, 2022 and increased by $41.8~~$20.6 million since December 31, ~~2021.~~2022. The increase in deposits during the ~~third~~first quarter was primarily attributable to ~~management’s decision to bring approximately $50.0~~$61.1 million in ~~trust department money market accounts back on-balance sheet as well as an increase in municipal deposit balances,~~new brokered deposits, which was partially offset by a ~~$53.3~~decrease of approximately $38.1 million ~~reduction~~ in ~~non-interest-bearing~~non-interest deposits ~~during~~from a shift to interest bearing accounts, the ~~quarter. This decrease resulted from local businesses utilizing cash balances~~effects of consumer and commercial spending and the competitive market for ~~large asset purchases as well as re-allocations of funds into higher yielding investment alternatives.~~deposits. Short term borrowings ~~increased $32.0~~decreased by $12.5 million since December 31, 2022 due to municipalities in our Treasury management product utilizing cash for normal spending. Long term borrowings increased by $80.0 million in the first

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quarter of 2023 when compared to December 31, ~~2021, driven by $20.0~~2022 due to the acquisition of $80.0 million in ~~overnight~~FHLB borrowings ~~and an increase in~~related to the implementation of our overnight investments Treasury product of $12.0 million during the quarter. The increase in overnight borrowings at September 30, 2022 was primarily driven by the strong loan growth and a timing delay of the receipt of deposit funding from a sale of a large local business. These funds were received shortly after quarter end and were subsequently used to repay the $20.0 million in overnight borrowings in full.Contingency Funding Plan.

Loan Portfolio

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


(dollars in thousands)	September 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
Commercial real estate	$	437,973	34%	$	374,291	32%	$	453,356	35%	$	458,831	36%
Acquisition and development		83,107	7%		128,077	11%		76,980	6%		70,596	6%
Commercial and industrial *		269,004	21%		180,976	16%		241,959	19%		245,396	19%
Residential mortgage		427,093	33%		404,686	35%		456,198	35%		444,411	35%
Consumer		60,747	5%		65,657	6%		60,587	5%		60,260	5%
Total Loans	$	1,277,924	100%	$	1,153,687	100%	$	1,289,080	100%	$	1,279,494	100%

*Includes ~~$0.4~~$0.3 million of PPP loans at ~~September 30, 2022~~March 31, 2023 and ~~$7.7~~$0.4 million at December 31, ~~2021~~2022

Outstanding ~~gross~~ loans of $1.3 billion at ~~September 30, 2022~~March 31, 2023 reflected growth of ~~$124.2~~$9.6 million for the first ~~nine months of 2022 and growth of $44.3 million for the third~~ quarter of ~~2022.~~2023. Since December 31, ~~2021,~~2022, commercial real estate ~~(“CRE”)~~loans decreased by $5.5 million and acquisition and development loans increased by ~~$63.7 million, acquisition~~$6.4 million. Commercial and ~~development (“A&D”)~~industrial loans decreased by ~~$45.0~~$3.4 million ~~and commercial and industrial loans increased by $88.0 million. The growth in the CRE and commercial and industrial portfolios resulted from the~~since December 31, 2022, primarily due to seasonal fluctuations of ~~expansion of relationships with existing clients as well as new commercial clients.~~floor plan lending. Residential mortgage loans increased ~~$22.4~~$11.8 million related to ~~the diminished 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. The consumer loan portfolio ~~decreased~~increased slightly by ~~$4.9 million due to amortization of the existing portfolio offsetting new production.~~$0.3 million.

New commercial loan production for the three months ended ~~September 30, 2022,~~March 31, 2023 was approximately $~~114.2~~52.8 million. The pipeline of commercial loans as of March 31, 2023 was $42.3 million. At ~~September 30, 2022,~~March 31, 2023, unfunded, committed commercial construction loans totaled approximately ~~$41.1~~$42.6 million. Commercial amortization and payoffs were approximately ~~$95.5~~$38.9 million through ~~September 30, 2022.~~March 31, 2023 due primarily to pay-offs of short-term commercial loans as well as normal amortizations of the commercial loan portfolio.

New consumer mortgage loan production for the ~~third~~first quarter of ~~2022~~2023 was approximately ~~$30.0~~$19.0 million, with most of this production ~~being~~ comprised of in-house mortgages. The pipeline of in-house, portfolio loans as of ~~September 30, 2022 consisted of $16.1~~March 31, 2023, was $20.3 million. ~~Production levels have slowed for~~The residential ~~mortgages when compared to~~mortgage production level normalized in the ~~third~~first quarter of ~~2021 because of~~2023 due to the increasing interest rates ~~for the first nine months of 2022.~~that occurred throughout 2022 and 2023.

Non-accrual loans totaled ~~$1.9~~$3.3 million at ~~September 30, 2022~~March 31, 2023 compared to ~~$2.5~~$3.5 million at December 31, ~~2021.~~2022. The decrease in non-accrual balances at ~~September 30, 2022~~March 31, 2023 was ~~primarily~~ related to ~~$0.6~~principal reductions. OREO balances decreased by $0.1 million since December 31, 2022 due to sales of ~~principal pay-downs of residential mortgage and home equity loans and the movement of $0.2 million in acquisition and development loans to other real estate owned.~~ OREO properties.

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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, 2022		% of Applicable Portfolio	December 31, 2021		% of Applicable Portfolio	March 31, 2023		% of Applicable Portfolio	December 31, 2022		% of Applicable Portfolio
Non-accrual loans:
Commercial real estate	$	63	0.01%	$	81	0.02%	$	85	0.02%	$	145	0.03%
Acquisition and development		152	0.18%		390	0.30%		135	0.18%		146	0.21%
Commercial and industrial		—	0.00%		90	0.05%
Residential mortgage		1,684	0.39%		1,901	0.47%		3,016	0.66%		3,204	0.72%
Consumer		44	0.07%		—	0.00%		22	0.04%		—	0.00%
Total non-accrual loans	$	1,943	0.15%	$	2,462	0.21%	$	3,258	0.25%	$	3,495	0.27%
Accruing Loans Past Due 90 days or more:
Commercial real estate	$	88		$	—
Residential mortgage		452			148			46			282
Consumer		29			152			41			25
Total loans past due 90 days or more	$	569		$	300		$	87		$	307
Total non-accrual and accruing loans past due 90 days or more	$	2,512		$	2,762		$	3,345		$	3,802
Restructured Loans (TDRs):
Performing	$	2,815		$	2,997
Non-accrual (included above)		284			300
Total TDRs	$	3,099		$	3,297

Other real estate owned	$	4,733		$	4,477		$	4,598		$	4,733
Total Non-performing assets	$	7,245		$	7,239		$	7,943		$	8,535
Impaired loans without a valuation allowance		4,726			5,248
Impaired loans with a valuation allowance		287			480
Total impaired loans	$	5,013		$	5,728
Valuation allowance related to impaired loans	$	30		$	64

Non-accrual loans to total loans (as %)		0.15%			0.21%			0.25%			0.27%
Non-performing loans to total loans (as %)		0.20%			0.24%			0.26%			0.30%
Non-performing assets to total assets (as %)		0.40%			0.42%			0.41%			0.46%
Allowance for loan losses to non-accrual loans (as %)		799.85%			648.05%
Allowance for loan losses to non-performing assets (as %)		214.51%			220.40%
Allowance for credit losses to non-accrual loans (as %)								517.83%			418.77%
Allowance for credit losses to non-performing assets (as %)								212.40%			171.48%

Performing loans considered to be impaired (including performing troubled debt restructurings, or TDRs), as defined and identified by management, amounted to $3.1 million at September 30, 2022 and $3.0 million at December 31, 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.

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~~The following table presents the details of impaired loans that are TDRs by class at September 30, 2022 and December 31, 2021:~~

September 30, 2022

December 31, 2021

Number of

Recorded

Number of

Recorded
(dollars in thousands)

Contracts

Investment

Contracts

Investment
Performing

Commercial real estate

Non owner-occupied

1

102

1

$
106
All other CRE

2

2,059

2

2,178
Acquisition and development

1-4 family residential construction

1

217

1

239
All other A&D

—

—

—

—
Commercial and industrial

—

—

—

—
Residential mortgage

Residential mortgage – term

6

437

6

474
Residential mortgage – home equity

—

—

—

—
Consumer

—

—

—

—
Total performing

10

$
2,815

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

300
Residential mortgage – home equity

—

—

—
Consumer

—

—

—

—
Total non-accrual

2

284

2

300
Total TDRs

12

$
3,099

12

$
3,297

The level of TDRs was $3.1 million at September 30, 2022 compared to $3.3 million at December 31, 2021, with a slight reduction due to payments made during the first nine months of 2022. There were no new TDRs during the first nine months of 2022.

Allowance ~~and Provision~~ for ~~Loan~~Credit Losses

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

Determination of an appropriate ACL is inherently complex and requires the use of highly subjective estimates. The reasonableness of the ~~portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of non-performing loans.~~

~~The ALL~~ACL 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 $15.5 million at September 30, 2022 compared to $16.0 million at December 31, 2021.by management.

The ratio of year-to-date net charge offs to average loans for the nine months ending September 30, 2022 was an annualized 0.06%, compared to net recoveries to average loans of 0.04% for the same period of 2021. Our special assets team continues to aggressively collect on charged-off loans.

~~Table of Contents~~

Management believes it uses relevant information available to make determination about the ACL and that it has established the ~~ALL at September 30, 2022 is adequate to provide for probable credit losses inherent~~existing allowance 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 inaccordance with GAAP. However, the determination of the ~~periodic provision for~~ACL requires significant judgment, and estimates of expected credit losses in the loan ~~losses.~~portfolio can vary from the amounts actually observed. While management uses available information to recognize expected credit losses, future additions to the ACL may be necessary based on changes in the loans comprising the portfolio, changes in the current and forecasted economic conditions, changes to the interest rate environment which may directly impact prepayment and curtailment rate assumptions, and changes in the financial condition of borrowers.

The ACL “base case” model is derived from various economic forecasts provided by widely recognized sources. Management evaluates the variability of market conditions by examining the peak and trough of economic cycles. These peaks and torughs are used to stress the base case model to develop a range of potential outcomes. Management then determines the appropriate reserve through an evaluation of these various outcomes relative to current economic conditions and known risks in the portfolio.

The following table presents a summary of the activity in the ACL and ALL for the ~~nine~~three months ended ~~September 30:~~March 31:


(dollars in thousands)	2022			2021			2023			2022
Balance, January 1	$	15,955		$	16,486		$	14,636		$	15,955
Impact of CECL Adoption								2,066			—
Charge-offs:
Commercial real estate								—			—
Acquisition and development		(20)			(85)			—			—
Commercial and industrial		(134)			—			—			(48)
Residential mortgage		(34)			(141)			(6)			(9)
Consumer		(726)			(266)			(333)			(246)
Total charge-offs		(914)			(492)			(339)			(303)
Recoveries:
Commercial real estate		1			—			5			1
Acquisition and development		21			172			5			18
Commercial and industrial		92			511			4			3
Residential mortgage		172			49			18			15
Consumer		117			112			62			22
Total recoveries		403			844			94			59
Net losses		(511)			352			(245)			(244)
Provision for loan losses		97			68
Credit Loss Expense/(Credit)								414			(419)
Balance at end of period	$	15,541		$	16,906		$	16,871		$	15,292

Allowance for loan losses to gross loans outstanding (as %)		1.22	%		1.46	%
Allowance for credit/loan losses to gross loans outstanding (as %)								1.31	%		1.29	%

Table of Contents


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

		2022		2021			2023		2022
Commercial real estate			0.00%		0.00%			0.00%		0.00%
Acquisition and development			0.00%		0.09%			0.03%		0.06%
Commercial and industrial			(0.02)%		0.29%			0.01%		(0.10)%
Residential mortgage			0.04%		(0.03)%			0.01%		0.01%
Consumer			(1.28)%		(0.45)%			(1.79)%		(1.42)%

Investment Securities

At ~~September 30, 2022,~~March 31, 2023, the total amortized cost basis of the available-for-sale investment portfolio was ~~$151.9~~$148.2 million, compared to a fair value of ~~$128.0~~$124.0 million. Unrealized gains and losses on securities available-for-sale are reflected in accumulated other comprehensive loss, a component of shareholders’ equity. The amortized cost basis of the held to maturity portfolio was ~~$238.4~~$233.1 million, compared to a fair value of ~~$205.7~~$204.5 million.

~~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, 2022					December 31, 2021					March 31, 2023					December 31, 2022
	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:
U.S. government agencies	$	11,052	$	9,447	8%	$	69,602	$	67,169	23%	$	11,036	$	9,653	9%	$	11,044	$	9,462	8%
Residential mortgage-backed agencies		45,899		37,734	29%		49,630		48,661	17%		44,224		37,281	30%		45,052		37,401	30%
Commercial mortgage-backed agencies		37,766		31,611	25%		51,694		50,868	19%		37,151		30,494	25%		37,393		30,732	23%
Collateralized mortgage obligations		26,336		21,701	17%		93,018		90,077	31%		25,322		20,977	17%		25,828		21,044	17%
Obligations of state and political subdivisions		11,208		10,744	8%		12,439		12,804	4%		10,842		10,629	9%		10,848		10,492	8%
Corporate bonds		1,000		920	1%		—		—	—		1,000		830	1%		1,000		887	1%
Collateralized debt obligations		18,648		15,882	12%		18,609		17,192	6%		18,661		14,114	11%		18,664		15,871	13%
Total available for sale	$	151,909	$	128,039	100%	$	294,992	$	286,771	100%	$	148,236	$	123,978	100%	$	149,829	$	125,889	100%
Securities Held to Maturity:
U.S. treasuries	$	37,140	$	35,413	17%	$	—	$	—	—	$	37,268	$	36,023	18%	$	37,204	$	35,611	18%
U.S. government agencies		67,665		54,812	27%		—		—	—		67,803		56,828	28%		67,734		54,473	27%
Residential mortgage-backed agencies		29,536		25,617	13%		30,634		30,847	47%		27,624		24,586	13%		28,624		25,122	12%
Commercial mortgage-backed agencies		23,018		18,640	9%		5,456		5,601	9%		21,635		17,069	8%		22,389		17,821	9%
Collateralized mortgage obligations		58,462		48,840	24%		—		—	—		56,128		47,099	23%		57,085		47,084	23%
Obligations of state and political subdivisions		22,624		22,423	10%		20,169		28,921	44%		22,625		22,936	10%		22,623		22,969	11%
Total held to maturity	$	238,445	$	205,745	100%	$	56,259	$	65,369	100%	$	233,083	$	204,541	100%	$	235,659	$	203,080	100%

Total fair value of investment securities available for sale decreased by ~~$158.7~~$1.9 million since December 31, ~~2021~~2022 due to principal paydowns of the ~~transfer of investments from available-for-sale to held to maturity~~portfolio in the first quarter ~~2022.~~of 2023. At ~~September 30, 2022,~~March 31, 2023, the securities classified as available-for-sale included a net unrealized loss of ~~$23.9~~$24.3 million, which represents the difference between the fair value and amortized cost of securities in the portfolio.

The Corporation reassessed the classification of certain investments and effective February 1, 2022, the Corporation transferred $139.0 million of callable agencies, obligation of state and political subdivisions, and collateralized mortgage obligations from available for sale to held to maturity securities. 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 6 to the consolidated financial statements presented elsewhere in this report, the Corporation measures fair market values based on the fair value hierarchy established in ASC Topic 820, Fair Value Measurements and Disclosures. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Level 3 prices or valuation techniques require inputs that are both significant to the valuation assumptions and are not readily observable in the market (i.e. supported with little or no market activity). These Level 3 instruments are valued based on both observable and unobservable inputs derived from the best available data, some of which is internally developed, and considers risk premiums that a market participant would require.

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Approximately ~~$112.2~~$109.9 million of the available for sale portfolio was valued using Level 2 pricing and had net unrealized losses of $21.1 million at ~~September 30, 2022.~~March 31, 2023. The remaining ~~$15.9~~$14.1 million of the securities available for sale represents the entire collateralized debt obligation (“CDO”) portfolio, which was valued using significant unobservable inputs (Level 3 assets). The ~~$2.8~~$4.5 million in net unrealized losses associated with this portfolio relates to nine pooled trust preferred securities that comprise the CDO portfolio. Net unrealized losses of ~~$1.7~~$3.3 million represent non-credit related ~~other than temporary impairment (“OTTI”)~~OTTI charges on seven of the securities, while ~~$1.1~~$1.2 million of unrealized losses relates to two securities which have had no ~~credit~~OTTI related ~~OTTI.~~charges.

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Deposits

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


(dollars in thousands)	September 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022

Non-interest-bearing demand deposits	$	474,444	32%	$	501,627	34%	$	468,554	30%	$	506,613	32%

Interest-bearing deposits:
Demand		304,110	20%		228,175	16%		362,585	23%		327,685	21%
Money Market		352,757	23%		339,748	23%		339,163	21%		365,192	23%
Savings deposits		255,505	17%		236,595	16%		242,441	15%		250,720	16%
Time deposits		124,302	8%		163,229	11%
Time deposits- retail								117,461	7%		120,523	8%
Time deposits- brokered								61,081	4%		—	0%
Total Deposits	$	1,511,118	100%	$	1,469,374	100%	$	1,591,285	100%	$	1,570,733	100%

Total deposits at ~~September 30, 2022~~March 31, 2023 increased ~~$41.7~~by $20.6 million when compared to ~~deposits at~~ December 31, ~~2021. Non-interest-bearing~~2022. In 2023, non-interest-bearing deposits decreased ~~$27.2~~by $38.1 million primarily due to the shift of balances into interest bearing accounts to ensure full FDIC coverage through the ICS product, consumer and commercial spending and the competitive deposit ~~relationships moving deposits off-balance sheet to higher yielding deposit products.~~market. Interest bearing demand deposits increased ~~$75.9~~by $34.9 million and traditional savings and money market accounts decreased by $34.3 million. Total time deposits increased ~~$18.9~~by $58.0 million. ~~Money market balances increased $13.0 million,~~This increase in time deposits was primarily driven ~~primarily~~ by management’s decision to ~~bring trust department money~~acquire $61.1 million in brokered deposits during the first quarter of 2023 as a result of the market accounts back on-balance sheet in the third quarter, offset by the outflow of municipal balances into a higher rate state funding facility. Time deposits decreased $38.9 million related to maturing balances moving to more liquid accounts in anticipation of rising deposit rates as well as municipal funds moving to higher yielding alternatives.disruption.


	March 31, 2023			December 31, 2022
(dollars in thousands)		Balance	Percent		Balance	Percent
Insured/collateralized deposits	$	1,125,896	71%	$	1,118,190	71%
Uninsured deposits		465,389	29%		452,543	29%
	$	1,591,285	100%	$	1,570,733	100%

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


	March 31, 2023			December 31, 2022
(dollars in thousands)		Balance	Percent		Balance	Percent
Retail deposits	$	820,063	52%		855,014	55%
Business deposits		771,222	48%		715,719	45%
	$	1,591,285	100%		1,570,733	100%

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Borrowed Funds

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


(in thousands)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Fed Funds Purchased, weighted average interest rate of 3.25% at September 30, 2022	$	20,000	$	—
Securities sold under agreements to repurchase	$	69,726	$	57,699	$	52,030	$	64,565
Total short-term borrowings		89,726		57,699		52,030		64,565
FHLB advances					$	80,000	$	—
Junior subordinated debt		30,929		30,929		30,929		30,929
Total long-term borrowings	$	30,929	$	30,929	$	110,929	$	30,929

Short term borrowings ~~increased $32.0~~decreased $12.5 million since December 31, 2021, driven by $20.0 million in overnight borrowings and an increase in our overnight investments Treasury product of $12.0 million during the third quarter of 2022. The increase in overnight borrowings at September 30, 2022, ~~was primarily~~ driven by the ~~strong loan growth and a timing delay~~utilization of cash by municipalities in our Treasury Management product.

Long-term borrowings increased by $80.0 million due to management’s decision to implement the ~~receipt of deposit funding from a large customer driven transaction. These funds were received shortly after quarter end and subsequently were repaid~~Contingency Funding plan in regards to the ~~$20.0~~recent market disruption. Two new borrowings totaling $80.0 million in ~~overnight borrowings~~FHLB advances were obtained in ~~full.~~the first quarter of 2023.

Liquidity Management

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

●

Reliability and stability of core deposits;

●

Cash flow structure and pledging status of investments; and

●

Potential for unexpected loan demand.

We actively manage our liquidity position through regular meetings of a sub-committee of executive management, known as the Treasury Team, which looks forward 12 months at 30-day intervals. The measurement is based upon the projection of funds

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sold or purchased position, along with ratios and trends developed to measure dependence on purchased funds and core growth. Monthly reviews by management and quarterly reviews by the Asset and Liability Committee under prescribed policies and procedures are designed to ensure that we will maintain adequate levels of available funds.

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

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

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.~~loans.

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

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

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

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

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


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

Management is not aware of any demands, commitments, events or uncertainties that are likely to materially affect our ability to meet our future capital requirements

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

Market Risk and Interest Sensitivity

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

At ~~September 30, 2022,~~March 31, 2023, we were asset sensitive.

Our interest rate risk management goals are:

●

Ensure that the Board of Directors and senior management will provide effective oversight and ensure that risks are adequately identified, measured, monitored and controlled;

●

Enable dynamic measurement and management of interest rate risk;

●

Select strategies that optimize our ability to meet our long-range financial goals while maintaining interest rate risk within policy limits established by the Board of Directors;

●

Use both income and market value oriented techniques to select strategies that optimize the relationship between risk and return; and

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●

Establish interest rate risk exposure limits for fluctuation in net interest income (“NII”), net income and economic value of equity.

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

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

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

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

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

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Based on the simulation analysis performed at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, management estimated the following changes in net interest income, assuming the indicated rate changes:


(Dollars in thousands)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
+400 basis points	$	12,983	$	4,072	$	8,897	$	1,112
+300 basis points	$	9,738	$	3,233	$	5,954	$	225
+200 basis points	$	6,521	$	2,315	$	3,957	$	173
+100 basis points	$	3,298	$	1,160	$	2,004	$	121
-100 basis points	$	(3,437)	$	(3,110)	$	(2,248)	$	(776)
-200 basis points	$	(6,940)		N/A	$	(5,144)	$	(3,165)

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

Management believes that no material changes in our market risks, our procedures used to evaluate and mitigate those risks, or our actual or simulated sensitivity positions have occurred since December 31, ~~2021.~~2022. Our NII simulation analysis as of December 31, ~~2021~~2022 is included in Item 7 of Part II of our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 under the heading “Market Risk and Interest Sensitivity.

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

Capital Resources

We require capital to fund loans, satisfy our obligations under the Bank’s letters of credit, meet the deposit withdrawal demands of the Bank’s customers, and satisfy our other monetary obligations. To the extent that deposits are not adequate to fund our capital requirements, we can rely on the funding sources identified above under the heading “Liquidity Management”. At September 30, 2022, the Bank had $110.0 million available through unsecured lines of credit with correspondent banks, $7.4 million available through a secured line of credit with the Fed Discount Window and approximately $179.3 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 is subject to risk-based capital regulations, which were adopted and are monitored by federal banking regulators. These regulations are used to evaluate capital adequacy and require an analysis of an institution’s asset risk profile and off-balance sheet exposures, such as unused loan commitments and stand-by letters of credit. Based on capital ratios at ~~September 30, 2022,~~March 31, 2023, the Bank was considered to be well-capitalized. We adopted CECL effective January 1, 2023 and elected to implement the regulatory agencies’ capital transition entirely upon implementation.

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


	September 30, 2022		December 31, 2021		Required for Capital Adequacy Purposes		Required to be Well Capitalized		March 31, 2023		December 31, 2022		Required for Capital Adequacy Purposes		Required to be Well Capitalized
Total Capital (to risk-weighted assets)									14.25	%	14.37	%	8.00	%	10.00	%
First United Bank & Trust	14.49	%	14.97	%	8.00	%	10.00	%
Tier 1 Capital (to risk-weighted assets)									13.00	%	13.29	%	6.00	%	8.00	%
First United Bank & Trust	13.36	%	13.72	%	6.00	%	8.00	%
Common Equity Tier 1 Capital (to risk-weighted assets)									13.00	%	13.29	%	4.50	%	6.50	%
First United Bank & Trust	13.36	%	13.72	%	4.50	%	6.50	%
Tier 1 Capital (to average assets)									10.00	%	10.01	%	4.00	%	5.00	%
First United Bank & Trust	10.33	%	10.00	%	4.00	%	5.00	%

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

Contractual Obligations, Commitments and Off-Balance Sheet Arrangements

Contractual Obligations

The Corporation enters into contractual obligations in the normal course of business. Among these obligations are FHLB advances and junior subordinated debentures, operating lease agreements for banking and subsidiaries’ offices and for data processing and telecommunications equipment. Comparing ~~September 30, 2022~~March 31, 2023 to December 31, ~~2021,~~2022, short-term borrowings ~~increased $32.0~~decreased $12.5 million, driven by ~~$20.0 million in~~a the utilization of cash balances by municipalities related to the overnight investments product. Long-term borrowings ~~and an increase of $12.0~~increased by $80.0 million during the ~~period related~~quarter due to ~~our overnight investments Treasury product.~~management’s decision to obtain $80 million in FHLB advances during the first quarter of 2023.

Commitments

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

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


(in thousands)	September 30, 2022		December 31, 2021		March 31, 2023		December 31, 2022
Residential Mortgage - home equity	$	70,095	$	66,874	$	72,623	$	70,845
Residential Mortgage - construction		22,682		18,657		21,776		25,499
Commercial		160,504		136,897		172,944		153,235
Consumer - personal credit lines		4,375		4,551		4,334		4,323
Standby letters of credit		16,040		15,711		6,979		14,325
Total	$	273,696	$	242,690	$	278,656	$	268,227

The increase of ~~$31.0~~$10.4 million in commitments at ~~September 30, 2022~~March 31, 2023 when compared to December 31, ~~2021~~2022 was due to new business in construction commitments in the ~~residential mortgage and~~ commercial ~~portfolios.~~portfolio as well as new home equity lines of credit.

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

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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, ~~2021~~2022 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 ~~September 30, 2022~~March 31, 2023 was carried out under the supervision and with the participation of management, including the PEO and the PFO. Based on that evaluation, management, including the PEO and the PFO, has concluded that our disclosure controls and procedures are, in fact, effective at the reasonable assurance level.

During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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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, ~~2021.~~2022. Management does not believe that any material changes in our risk factors have occurred since they were last disclosed except as ~~follows.~~follows:

Risks Related to First United Corporation and its Affiliates

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

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

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~~March 31, ~~2022~~2023 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.

7060

Table of Contents

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 10, 2022~~May 12, 2023	/s/ Carissa L. Rodeheaver
	Carissa L. Rodeheaver, CPA
	Chairman of the Board, President and Chief Executive Officer
	(Principal Executive Officer)


Date: ~~November 10, 2022~~May 12, 2023	/s/ Tonya K. Sturm
	Tonya K. Sturm, Senior Vice President,
	Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

7161

Net Income	$	6,936	$	4,388
Basic net income per common share	$	1.04	$	0.66
Diluted net income per common share	$	1.04	$	0.66
Weighted average number of basic shares outstanding		6,658		6,617
Weighted average number of diluted shares outstanding		6,669		6,624
Dividends declared per common share	$	0.15	$	0.15


	Nine months ended September 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	$	18,079	6,645	$	2.72	$	12,221	6,741		$	1.81

Diluted Earnings Per Share:

Restricted stock units			10					5

Net income	$	18,079	6,655	$	2.72	$	12,221	6,746		$	1.81



	Three months ended September 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	$	6,936	6,658	$	1.04	$	4,388	6,617	$	0.66

Diluted Earnings Per Share:

Restricted stock units			11					7

Net income	$	6,936	6,669	$	1.04	$	4,388	6,624	$	0.66



(in thousands)	Pass		Special Mention		Substandard		Total
September 30, 2022
Commercial real estate
Non owner-occupied	$	223,907	$	6,371	$	12,114	$	242,392
All other CRE		188,707		2,278		4,596		195,581
Acquisition and development
1-4 family residential construction		23,926		—		—		23,926
All other A&D		59,029		—		152		59,181
Commercial and industrial		244,883		4,589		19,532		269,004
Residential mortgage
Residential mortgage - term		360,669		—		5,217		365,886
Residential mortgage - home equity		60,561		—		646		61,207
Consumer		60,557		—		190		60,747
Total	$	1,222,239	$	13,238	$	42,447	$	1,277,924
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



Nine months ended (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		—		(20)		(134)		(34)		(726)		—		(914)
Recoveries		1		21		92		172		117		—		403
Provision		323		(1,117)		984		(645)		552		—		97
ALL balance at September 30, 2022	$	6,356	$	1,499	$	3,402	$	2,977	$	877	$	430	$	15,541
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


	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, 2021
Commercial real estate
Non owner-occupied	—	$	—	1	$	109	—	$	—
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	—	$	—	3	$	526	—	$	—



Components of Other Comprehensive Loss (in thousands)	Before Tax Amount		Tax (Expense) Benefit		Net
For the three months ended September 30, 2022
Available for sale (AFS) securities with OTTI:
Unrealized holding losses	$	(199)	$	53	$	(146)
Less: accretable yield recognized in income		51		(14)		37
Net unrealized losses on investments with OTTI		(250)		67		(183)
Available for sale securities – all other:
Unrealized holding losses		(6,768)		1,811		(4,957)
Less: gains recognized in income		—		—		—
Net unrealized losses on all other AFS securities		(6,768)		1,811		(4,957)
Held to maturity securities:
Unrealized holding gains		—		—		—
Less: gains recognized in income		93		(25)		68
Less: amortization recognized in income		(320)		85		(235)
Net unrealized gains on HTM securities		227		(60)		167
Cash flow hedges:
Unrealized holding gains		534		(142)		392
Pension Plan:
Unrealized net actuarial loss		(3,537)		945		(2,592)
Less: amortization of unrecognized loss		(279)		74		(205)
Net pension plan liability adjustment		(3,258)		871		(2,387)
SERP:
Unrealized net actuarial loss		—		—		—
Less: amortization of unrecognized loss		(68)		18		(50)
Net SERP liability adjustment		68		(18)		50
Other comprehensive loss	$	(9,447)	$	2,529	$	(6,918)


	Nine Months Ended				Three Months Ended
Pension Plan	September 30,				September 30,
(in thousands)	2022		2021		2022		2021
Service cost	$	42	$	117	$	14	$	39
Interest cost		1,152		1,066		384		355
Expected return on assets		(2,858)		(2,677)		(953)		(892)
Amortization of net actuarial loss		837		1,116		279		372
Net pension credit included in employee benefits and other expense	$	(827)	$	(378)	$	(276)	$	(126)


	Nine Months Ended				Three Months Ended
Defined Benefit SERP	September 30,				September 30,
(in thousands)	2022		2021		2022		2021
Service cost	$	124	$	104	$	41	$	35
Interest cost		215		179		72		60
Amortization of recognized loss		203		226		68		75
Amortization of prior service cost		—		(1)		—		—
Net Defined Benefit SERP expense included in employee benefits and other expense	$	542	$	508	$	181	$	170



(Dollars in thousands)	Nine Months Ended September 30, 2022		Year Ended December 31, 2021
Overnight borrowings, weighted average interest rate of 3.25% at September 30, 2022	$	20,000	$	—
Securities sold under agreements to repurchase:
Outstanding at end of period	$	69,726	$	57,699
Weighted average interest rate at end of period		0.13%		0.15%
Maximum amount outstanding as of any month end	$	75,912	$	72,396
Average amount outstanding	$	60,839	$	57,697
Approximate weighted average rate during the period		0.12%		0.15%


	As of the nine months ended
	September 30,
	2022			2021
Per Share Data
Basic net income per common share (1) - as reported	$	2.72		$	1.81
Basic net income per common share (1) - non-GAAP	$	2.72		$	2.45
Diluted net income per common share (1) - as reported	$	2.72		$	1.81
Diluted net income per common share (1) - non-GAAP	$	2.72		$	2.45
Basic book value per common share - as reported	$	19.83		$	20.22
Diluted book value per common share - as reported	$	19.80		$	20.19


Significant Ratios:

Return on Average Assets (a) (1) - as reported		1.35	%		0.92	%
Settlement and FHLB expenses, net of income tax		—			0.33	%
Adjusted Return on Average Assets (a) (1) (non-GAAP)		1.35	%		1.25	%

Return on Average Equity (a) (1) - as reported		17.66	%		12.45	%
Settlement and FHLB expenses, net of income tax		—			4.43	%
Adjusted Return on Average Equity (a) (1) (non-GAAP)		17.66	%		16.88	%

Average Equity to Average Assets		7.66	%		10.70	%

Capital Ratios:

Consolidated Total Capital (to risk weighted assets)		15.50	%		15.51	%
Consolidated Tier 1 Capital (to risk weighted assets)		14.40	%		14.26	%
Consolidated Common Equity Tier 1 Capital (to risk weighted assets)		12.36	%		12.15	%
Consolidated Tier 1 Capital (to average assets)		11.23	%		10.33	%


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


	GAAP						Non-GAAP - FTE
	Nine Months Ended						Nine Months Ended
	September 30,						September 30,
(dollars in thousands)	2022			2021			2022			2021
Interest income	$	45,063		$	43,408		$	45,771		$	44,113
Interest expense		2,610			4,784			2,610			4,784
Net interest income	$	42,453		$	38,624		$	43,161		$	39,329
Net interest margin %		3.47	%		3.16	%		3.53	%		3.21	%

	Three Months Ended							Three Months Ended
	September 30,						September 30,
(dollars in thousands)		2022			2021			2022			2021
Interest income	$	16,185		$	14,910		$	16,416		$	15,142
Interest expense		1,044			1,285			1,044			1,285
Net interest income	$	15,141		$	13,625		$	15,372		$	13,857
Net interest margin %		3.61	%		3.32	%		3.66	%		3.38	%


	For the Nine months ended September 30, 2022
	compared to the Nine months ended September 30, 2021
(in thousands and tax equivalent basis)	Volume		Rate		Net
Interest Income:
Loans	$	823	$	(986)	$	(163)
Taxable Investments		907		762		1,669
Non-taxable Investments		93		(47)		46
Federal funds sold		(90)		270		180
Interest-bearing deposits		0		11		11
Other interest earning assets		(79)		(6)		(85)
Total interest income		1,654		4		1,658
Interest Expense:
Interest-bearing demand deposits		185		(276)		(91)
Interest-bearing money markets		(48)		28		(20)
Savings deposits		9		(2)		7
Time deposits		(621)		(655)		(1,276)
Short-term borrowings		8		11		19
Long-term borrowings		(1,233)		420		(813)
Total interest expense		(1,700)		(474)		(2,174)
Net interest income	$	3,354	$	478	$	3,832


	September 30, 2022			December 31, 2021
	Number of	Recorded		Number of	Recorded
(dollars in thousands)	Contracts	Investment		Contracts	Investment
Performing
Commercial real estate
Non owner-occupied	1		102	1	$	106
All other CRE	2		2,059	2		2,178
Acquisition and development
1-4 family residential construction	1		217	1		239
All other A&D	—		—	—		—
Commercial and industrial	—		—	—		—
Residential mortgage
Residential mortgage – term	6		437	6		474
Residential mortgage – home equity	—		—	—		—
Consumer	—		—	—		—
Total performing	10	$	2,815	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		300
Residential mortgage – home equity	—			—		—
Consumer	—		—	—		—
Total non-accrual	2		284	2		300
Total TDRs	12	$	3,099	12	$	3,297